**SECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549**

 

**FORM 10-K**

 

**For Annual andTransition Reports to Section 13 or 15(d) of theSecurities Exchange Act of 1934**

 

**(Mark one)**

 

| **ý**                                                                                                                      |   | **Annual  Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of  1934.**                       |
|---------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                            |   |                                                                                                                   |
| **For the calendar year ended December 31, 2003**                                                                          |
|                                                                                                                            |   |                                                                                                                   |
| **or**                                                                                                                          |
|                                                                                                                            |   |                                                                                                                   |
| **o**                                                                                                                           |   | **Transition  report pursuant to Section 13 or 15(d) of the Securities Exchange Act of  1934  (No fee required)** |
|                                                                                                                            |   |                                                                                                                   |
| **For the transition period  from         to      ** |
|                                                                                                                            |   |                                                                                                                   |
| **Commission file number 0-28362**                                                                                              |

 

**ClearComm, L.P.**

(Exact Name of Registrant as Specified in its Charter)

 

| **Delaware**                                                    |   | **66-0514434**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or Other Jurisdiction of  Incorporation or Organization) |   | (I.R.S. Employer  Identification No.) |
|                                                            |   |                                  |
| **268 Muñoz Rivera Ave.  Suite 2206**                      |   |                                  |
| **San Juan, Puerto Rico**                                       |   | **00918-1929**                        |
| (Address of Principal Executive Offices)                        |   | (Zip Code)                            |

 

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

 

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

 

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

 

**Units of LimitedPartnership Interest**

(Title of class)

 

Indicate by checkmark whether the registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.   Yes  o   No  ý

 

Registrant’sfinancial statements for calendar year 2001 are restated and unaudited.  See Note 2.

 

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

 

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

 

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

 

Documents incorporated byreference.          None.

 

 

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**ClearComm, L.P.**

 

**CLEARCOMM, L.P. ( THE “PARTNERSHIP”) RESTATEDITS CONSOLIDATED FINANCIAL STATEMENTS FOR THE CALENDAR YEAR ENDEDDECEMBER 31, 2001, AS DESCRIBED IN NOTE 2 TO THE CONSOLIDATED FINANCIALSTATEMENTS INCLUDED AS PART OF THIS ANNUAL REPORT ON FORM 10-K.  OUR PRIOR INDEPENDENT ACCOUNTANTS, ARTHURANDERSEN LLP, ARE NOT ABLE TO REISSUE THEIR REPORT RELATING TO THEPARTNERSHIP’S FINANCIAL STATEMENTS FOR 2001 OR TO AUDIT THE RESTATEMENTADJUSTMENTS DESCRIBED IN NOTE 2 BECAUSE THEY CEASED OPERATIONS IN2002.   THE PARTNERSHIP BELIEVES THATTHE EFFECT OF THE ADJUSTMENTS MADE IN THE RESTATED FINANCIAL STATEMENTS, ANDTHE NATURE OF THE ACCOUNTING ISSUES ADDRESSED BY THOSE ADJUSTMENTS, DO NOT HAVEA MATERIAL EFFECT ON THE PARTNERSHIP’S FINANCIAL POSITION AS A WHOLE OR ON THEPARTNERSHIP’S INVESTORS, CREDITORS, SUPPLIERS, EMPLOYEES OR CUSTOMERS.  THEREFORE, THE PARTNERSHIP BELIEVES THAT ARE-AUDIT OF THE PARTNERSHIP’S 2001 CONSOLIDATED FINANCIAL STATEMENTS ISUNNECESSARY.  ACCORDINGLY, OURCONSOLIDATED FINANCIAL STATEMENTS FOR THE CALENDAR YEAR ENDED DECEMBER 31,2001 ARE RESTATED AND UNAUDITED.  OURAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE CALENDAR YEARS ENDEDDECEMBER 31, 2003 AND 2002 ARE INCLUDED AS PART OF THIS ANNUAL REPORT ONFORM 10-K.**

 

**THE RESTATEMENTS OF THE PARTNERSHIP’SCONSOLIDATED FINANCIAL STATEMENTS FOR THE CALENDAR YEAR ENDED DECEMBER 31,2001 ARE DESCRIBED IN DETAIL WITHIN ITEM 7, “MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” AND WITHIN THEPARTNERSHIP’S AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES,INCLUDING NOTE 2, INCLUDED AS PART OF THIS ANNUAL REPORT ON FORM 10-K.**

 

TABLE OF CONTENTS

 
|       | Part I   |                                                                                        |   |
|------------|----------|---------------------------------------------------------------------------------------------|--------|
|       |     |                                                                                        |   |
| Item 1.    |     | Business                                                                                    |   |
| Item 2.    |     | Properties                                                                                  |   |
| Item 3.    |     | Legal Proceedings                                                                           |   |
| Item 4.    |     | Submission of Matters to a Vote of Security  Holders                                        |   |
|       |     |                                                                                        |   |
|       | 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 |     |

 

2

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**Part I**

 

**FORWARD-LOOKING STATEMENTS**

#####  

This Form 10-K andfuture filings by the Partnership on Form 10-Q and Form 8-K and future oral andwritten statements by the Partnership may include certain forward-lookingstatements, including (without limitation) statements with respect toanticipated future operating and financial performance, growth opportunitiesand growth rates, acquisition and divestitive opportunities, and other similar forecastsand 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 futureperformance, outcomes and results may differ materially from those expressed inforward-looking statements made by the Partnership as a result of a number ofimportant factors.  Examples of thesefactors include, without limitation, rapid technological developments andchanges in the telecommunications industry; ongoing deregulation (and theresulting likelihood of significantly increased price and product/servicecompetition) in the telecommunications industry as a result of theTelecommunications Act of 1996 and other similar federal and state legislationand the federal and state rules and regulations enacted pursuant to thatlegislation; regulatory limitations on the Partnership’s ability to compete inthe telecommunications services industry; and continuing consolidation in thetelecommunications services industry. In addition to these factors, actual future performance, outcomes andresults may differ materially because of other, more general, factorsincluding, without limitation, general industry and market conditions andgrowth rates, domestic and international economic conditions, governmental andpublic policy changes and the continued availability of financing in theamounts, at the terms and on the conditions necessary to support thePartnership’s future business.

 

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

 

**General**

 

ClearComm, L.P., aDelaware limited partnership (the “Partnership”), was formed onJanuary 24, 1995 under the name PCS 2000, L.P., to own and operatebroadband personal communications services (“PCS”) licenses to be acquired inauctions conducted by the Federal Communications Commission (the “FCC”).  The Partnership competed for PCS licenses infrequency Block C, set aside for “designated entities” (“Entrepreneurs”) thatmet certain financial and equity structure requirements and that qualify forcertain benefits under rules, regulations and policies of the FCC and relatedstatutory provisions (“FCC Rules”).

 

The Partnership,through its majority-owned subsidiary, NewComm Wireless Services, Inc.(“NewComm”), owns and operates a state-of-the-art PCS network in Puerto Rico(the “Puerto Rico Network”).  ThePartnership directly or indirectly through NewComm owns two 15 MHz C-Block PCSlicenses covering the entire island of Puerto Rico (the “Puerto Rico Licenses”)and four 15 MHz licenses in California (the “California Licenses,” and togetherwith the Puerto Rico Licenses, the “Licenses”).   The California Licenses have been sold and consummation of thetransaction is conditioned to FCC approval.

 

The Agreement ofLimited Partnership of the Partnership (the “Partnership Agreement”) providesthat the Partnership will terminate on December 31, 2005. The Partnershipwill dissolve on such date (unless terminated earlier or unless the PartnershipAgreement is amended to change such date).

 

**ThePuerto Rico Network**

 

The Partnership startedbuilding its Puerto Rico Network during the first quarter of 1999 and the systemcommenced commercial operations on September 24, 1999.  The Partnership was the fifth entrant intothe Puerto Rico wireless telecommunications market.  It currently provides wireless coverage in the areas where 95% ofthe Puerto Rico wireless traffic occurs and expanding.  The Partnership has established points ofsale in all major shopping districts and has over 250 points of sale throughoutPuerto Rico.  The Partnership believesthat it currently has approximately 13% of the Puerto Rico wireless market.

 

To build and operate itsPuerto Rico network, the Partnership entered into an agreement, datedFebruary 4, 1999 (the “TLD Agreement”) with Telefónica Larga Distancia dePuerto Rico, Inc. (“TLD”).  TLD is awholly owned subsidiary of Telefónica Internacional, S.A. which is a member ofthe Telefónica, S.A. group (Ticker: TEF) (the “Telefónica Group”), Spain’slargest traded company and one of the world’s largest telecommunicationcompanies.  Telefónica Móviles (Ticker:TEM), the wireless communications affiliate of Telefónica, currently hasapproximately 32 million subscribers worldwide.  Pursuant to the terms of the TLD Agreement, the Partnershiptransferred the

 

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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% ofNewComm’s equity.  The Note cannot beconverted, however, until the FCC authorizes TEM to hold more than a 25% equityinterest in NewComm.  NewComm and TEMentered into a management agreement whereby TEM provides day-to-day managementservices for NewComm, subject to the supervision of NewComm’s Board.  Pursuant to a certain Stock PurchaseAgreement dated as of March 12, 2002, by and between the Partnership andTLD, the Partnership has agreed to sell 0.2% control interest at market valueto TEM.  The transfer of this controlinterest and validity of the agreement is subject to FCC approval. As part ofthe requirements of the Stock Purchase Agreement, TEM (and TelefónicaInternacional, S.A., its parent company) have agreed to issue their corporateguarantee as collateral for long-term financing of NewComm of approximately$110M.  Together with the Stock PurchaseAgreement and as part of the transaction a Shareholders’ Agreement and a SaleAgreement were executed between the parties. The Shareholders’ Agreement provides for a great number of general andspecific protections and rights for the Partnership as a minority shareholder inNewComm.  The Sale Agreement providesfor a convenient exit for the Partnership from NewComm.  Under the Joint Venture Agreement thePartnership’s principal means of exiting from NewComm was by exercisingRegistration Rights against TEM.  Due toTelefónica’s re-organization and new market conditions, the possibility ofpublicly registering an exclusive wireless service company limited to thePuerto Rico market is very unlikely. However, under the Sale Agreement, the Partnership can force the sale ofNewComm to TEM and/or third parties.

 

The Sale Agreementprovides that since May 12, 2003, either party (ClearComm or TLD) maytrigger a shareholder obligation to sell NewComm.  Within 30 days of a notice of sale, TEM (or ClearComm as the casemay be) would have the right to purchase ClearComm’s (or TEM’s) interest.  The purchase price to be paid at that timewould be based on a valuation performed by an internationally recognizedinvestment-banking firm selected by both parties.  If TEM does not exercise its right to buy out ClearComm’sinterest, TEM is bound together with ClearComm to proceed with the salesprocess to attempt a sale of NewComm. TEM and ClearComm are bound to accept the highest price proposed by aninterested 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.  At the closing of the sale the Management Agreement and theTechnology Transfer Agreement originally held by TLD (and assigned to TEM) willterminate without compensation, and no premium for controlling interest ordiscount for holding a minority interest in NewComm will apply.

 

The Sale Agreementshall continue in full force and effect even if the Stock Purchase Agreementwith TEM, for whatever reason, does not close.

 

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

 

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

 

**ThePuerto Rico Market**

 

The Partnershipbelieves that 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, whichincludes Hewlett-Packard Company, Microsoft Corporation, BASF Corporation,Colgate-Palmolive, Johnson & Johnson, Amgen, Pharmacia, and PfizerPharmaceutical.  Along with itsU.S.-linked stability, Puerto Rico offers the advantage of emerging market typegrowth 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 ofthe Partnership’s PCS business in Puerto Rico will depend upon its ability tocompete with the two cellular operators and three operating PCS providers,potential competition from two other PCS licensees and potential futurewireless communications providers in the Puerto Rico market.  All wireless operators compete in theoptimization of their networks to provide a better service for theircustomers.  The Partnership also facescompetition from other existing communications technologies such asconventional mobile telephone service, specialized mobile radio (“SMR”) andenhanced specialized mobile radio (“ESMR”). As wireless use increases, PCS competes more directly with traditionallandline telephone service providers and other technologies including mobilesatellite systems.  In addition, theavailability of new spectrum and resale of existing spectrum and the entry ofnew participants may result in increased competition in the Puerto Ricomarket.  At the end of 2003, Puerto Ricohad a wireless market penetration of approximately 34.5% while the UnitedStates mainland ended the same year with an approximate market penetration of54%.  The latest market researchreflects that Puerto Rico should attain a market penetration of 48% by the endof 2005.

 

4

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**Markets**

 

The followingtable sets forth as of December 31, 2003, with respect to each Market inwhich the Partnership owns a PCS license, the estimated persons of population(“POPs”).

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

 

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*                                         Basedon the Paul Kagan 1998 PCS Atlas and Databook.

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

***                           Basedon US Census Bureau 2000 figures.

 

**InternetSurfing Stores of Puerto Rico, Inc**

 

On April 16,2002, ClearComm, L.P. entered into a Shareholders’ Agreement to form a jointventure with eMilios International, L.L.C., a Florida limited liabilitycompany, to promote and establish in Puerto Rico the eMilios concept (describedbelow).  The joint venture was formed undera Puerto Rico corporation named Internet Surfing Stores of Puerto Rico, Inc.(“ISS”).  The Partnership owns 49% andeMilios International owns 51% of ISS.

 

The eMiliosconcept involves internet communication galleries that are geared towardseducating people in the use of computers and the internet, and acts as acommunication and recreational center as well. The broadband connectivity that is offered at eMilios allows the storesto efficiently offer internet communications and also access to a great varietyof interactive 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 commitment ofthe Partnership to ISS is $1 million and eMilios International has committed$500,000 in cash plus trade-name, systems, software, and technology know-howequivalent to $500,000.  The Partnershipis responsible 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 investment has an exit mechanism whereby at any time after 2003,ClearComm can force the acquisitions of its shares in ISS or the sale of thewhole company.

 

**Regulation**

 

Overview

 

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

 

PCS is aradio-based transmission technology, which, like cellular technology, uses thesame frequencies repeatedly in a multiple-transmitter cell design.  PCS is a digital technology, capable ofnumerous advanced service features, including caller-ID, voice-prompting,voice-recognition, scrambled (secure) calling, message and image delivery,intelligent 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 wirelessbanking services in October of 2000. The Partnership also pioneered in the Puerto Rico market short textmessaging services from its handsets in October of 2001.  An average of 300,000 text messages permonth are being sent by subscribers from their handsets.

 

FrequencyBlocks

 

The FCC dividedPCS into six frequency blocks, designated Blocks A through F, such that thereare six overlapping licenses in

 

5

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each market ineach geographic area of the country. Blocks A, B and C are 30 MHz blocks, and Blocks D, E and F are 10 MHzblocks.  The FCC has created new C2blocks of 15 MHz in certain markets including Puerto Rico and California.

 

EntrepreneurClasses and Economic Preferences

 

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

 

Small Businesseswere entitled 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 $51.3M exclusively in connection with the Puerto Rico License.

 

Build-OutRequirements

 

The Partnershiphas complied with its build out requirements for the Puerto Rico Licenses andthe California Licenses.

 

Employees

 

The Partnership,including its majority owned subsidiary NewComm, had approximately 250employees at the end of 2003.

 

AvailableInformation

 

We file annualreports on form 10-K, quarterly reports on Form 10Q, current reports on Form8-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 at1800-SEC-0330.  The SEC maintains anInternet site (www.sec.gov) that contains reports, proxy and informationstatements, and other information regarding issuers that file electronicallywith the SEC.

 

**ITEM2****.  PROPERTIES**

 

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

 

In connection with theCalifornia Licenses, the Partnership leases sites where its network equipmentand antennas are located.

 

**ITEM3****.  LEGAL PROCEEDINGS**

 

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

 

**ITEM4****.  SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

None.

 

6

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**Part II**

 

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

 

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

 

As ofDecember 31, 2003, the General Partner holds one general partnershipinterest, and approximately 1,600 investors hold an aggregate of 2,906.1 Unitsof limited partnership interest.  Thereare 3.3 Units held as treasury.

 

There have been no cashdistributions to the Investors to date. The following summary of certain allocation provisions of the PartnershipAgreement is entirely qualified by reference to the Partnership Agreement,which was previously attached as an Exhibit to the Partnership’s Form 10-K,filed March 31, 1997.  As a generalrule, the General Partner shall cause the Partnership to make distributions, ifany, of cash flow received from operations of the Partnership which the GeneralPartner, in its sole discretion, determines to distribute to Investors (“CashFlow”).  All distributions will be made75% to the Investors and 25% to the General Partner.  Distributions to the Investors shall be made in proportion to thenumber of Units held by each Investor on the last day of the calendar quarterto which such distribution relates.

 

The availability of CashFlow for distribution to the Investors is dependent upon the Partnershipearning more than its expenses.  Noassurance can be given that income in any year will be sufficient to generateCash Flow for distribution to the Investors or that there will not be cashdeficits. Further, because operating expenses are subject to increases, andincreases in revenue from Partnership operations may be subject to marketlimitations, income from the Partnership in any year may not be sufficient togenerate Cash Flow.

 

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

 

The Partnership mayrealize net proceeds (that is, proceeds available after the payment of certainfees and expenses including payments to the General Partner or its affiliates)from a Capital Transaction.  No assurancecan be given, however, as to the availability of a Capital Transaction or theamount of net cash proceeds therefrom. Any amounts received by the Partnership which constitute amounts derivedfrom a Capital Transaction, will be treated as being received from operationsof the Partnership and will be distributed to Investors only if the GeneralPartner determines to do so.

 

**ITEM6****.  SELECTEDFINANCIAL DATA**

 

The followingtable summarizes selected consolidated financial data of the Partnership fromthe period from January 1, 1999 to December 31, 1999, fromJanuary 1, 2000 to December 31, 2000, from January 1, 2001 toDecember 31, 2001 from January 1, 2002 to December 31, 2002, andfrom January 1, 2003 to December 31, 2003.  This information should be read in conjunction with thePartnership’s audited consolidated financial statements and related notesthereto and management discussion contained herein.  The financial statements for the calendar years 2001 and 2000,which were audited by Arthur Andersen, LLP, the predecessor independentaccountants, are restated.  Thefinancial statements for the calendar years ended December 31, 2001 andDecember 31, 2000 are considered unaudited.  (See Item 7 and Note 2 to the Partnership’s audited consolidatedfinancial statements attached to this Annual Report on Form 10-K.)

 

7

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**Statementsof Operations Data**

 
|                                                    |   | **December  31,  2003** |            | **December  31,  2002** |       | **December  31,  2001(1)** |       | **December  31,  2000(1)** |            | **December  31,  1999(2)** |       |
|---------------------------------------------------------|--------|-------------------------|-----------------|-------------------------|------------|----------------------------|------------|----------------------------|-----------------|----------------------------|------------|
| **Revenues:**                                           |   |                    | ** **      |                    | ** ** |                       | ** ** |                       | ** **      |                       | ** ** |
| **Service  revenues**                                   |   | **$**                   | **101,557,423** | ** **              | **$**      | **99,779,656**             | ** ** | **$**                      | **112,025,407** | ** **                 | **$**      | **79,906,400** | ** ** | **$** | **4,950,769** | ** ** |
| **Handsets  and accessories sales**                     |   | **7,336,689**           | ** **      | **8,177,441**           | ** ** | **11,710,520**             | ** ** | **12,104,805**             | ** **      | **2,357,790**              | ** ** |
|                                                    |   |                    | ** **      |                    | ** ** |                       | ** ** |                       | ** **      |                       | ** ** |
| **Total  Revenues**                                     |   | **108,894,112**         | ** **      | **107,957,097**         | ** ** | **123,735,927**            | ** ** | **92,011,205**             | ** **      | **7,308,559**              | ** ** |
| **Expenses:**                                           |   |                    | ** **      |                    | ** ** |                       | ** ** |                       | ** **      |                       | ** ** |
| **Operating  expenses**                                 |   | **100,086,717**         | ** **      | **103,734,297**         | ** ** | **119,309,062**            | ** ** | **112,939,103**            | ** **      | **25,114,638**             | ** ** |
|                                                    |   |                    | ** **      |                    | ** ** |                       | ** ** |                       | ** **      |                       | ** ** |
| **Income  (loss) from operations**                      |   | **8,807,395**           | ** **      | **4,222,800**           | ** ** | **4,426,865**              | ** ** | **(20,927,898**            | **)**           | **(17,806,079**            | **)**      |
|                                                    |   |                    | ** **      |                    | ** ** |                       | ** ** |                       | ** **      |                       | ** ** |
| **Interest  expense**                                   |   | **(13,312,468**         | **)**           | **(16,212,644**         | **)**      | **(20,172,216**            | **)**      | **(11,141,769**            | **)**           | **(2,263,002**             | **)**      |
|                                                    |   |                    | ** **      |                    | ** ** |                       | ** ** |                       | ** **      |                       | ** ** |
| **Depreciation  and amortization**                      |   | **(17,272,191**         | **)**           | **(14,171,258**         | **)**      | **(17,631,238**            | **)**      | **(20,458,500**            | **)**           | **(2,957,683**             | **)**      |
|                                                    |   |                    | ** **      |                    | ** ** |                       | ** ** |                       | ** **      |                       | ** ** |
| **Loss  before other income (expense)**                 |   | **(21,777,264**         | **)**           | **(26,161,102**         | **)**      | **(33,376,589**            | **)**      | **(52,528,167**            | **)**           | **(23,026,764**            | **)**      |
| **Other  Income (expense)**                             |   |                    | ** **      |                    | ** ** |                       | ** ** |                       | ** **      |                       | ** ** |
|                                                    |   |                    | ** **      |                    | ** ** |                       | ** ** |                       | ** **      |                       | ** ** |
| **Gain on  sale of investment in stock of subsidiary**  |   | **—**              | ** **      | **13,000,000**          | ** ** | **—**                 | ** ** | **—**                 | ** **      | **—**                 | ** ** |
|                                                    |   |                    | ** **      |                    | ** ** |                       | ** ** |                       | ** **      |                       | ** ** |
| **Equity in  net loss of subsidiary**                   |   | **(140,608**            | **)**           | **(114,746**            | **)**      | **—**                 | ** ** | **—**                 | ** **      | **—**                 | ** ** |
|                                                    |   |                    | ** **      |                    | ** ** |                       | ** ** |                       | ** **      |                       | ** ** |
| **Interest  income**                                    |   | **213,369**             | ** **      | **249,661**             | ** ** | **548,002**                | ** ** | **490,309**                | ** **      | **832,006**                | ** ** |
|                                                    |   |                    | ** **      |                    | ** ** |                       | ** ** |                       | ** **      |                       | ** ** |
| **Gain on  sale of Visalia-Porterville license**        |   | **—**              | ** **      | **—**              | ** ** | **4,814,337**              | ** ** | **—**                 | ** **      | **—**                 | ** ** |
| **Other**                                               |   | **337**                 | ** **      | **1,113**               | ** ** | **—**                 | ** ** | **—**                 | ** **      | **—**                 | ** ** |
| **Loss on  write-off of inventories**                   |   | **(4,742,559**          | **)**           | **—**              | ** ** | **—**                 | ** ** | **—**                 | ** **      | **—**                 | ** ** |
| **Write-off  of discount on note payable to FCC**       |   | **(3,913,661**          | **)**           | **—**              | ** ** | **—**                 | ** ** | **—**                 | ** **      | **—**                 | ** ** |
|                                                    |   |                    | ** **      |                    | ** ** |                       | ** ** |                       | ** **      |                       | ** ** |
| **Net loss**                                            |   | **$**                   | **(30,360,386** | **)**                   | **$**      | **(13,025,074**            | **)**      | **$**                      | **(28,014,250** | **)**                      | **$**      | **(52,037,858** | **)** | **$** | **(22,194,758** | **)** |
|                                                    |   |                    | ** **      |                    | ** ** |                       | ** ** |                       | ** **      |                       | ** ** |
| **Net loss  attributable to General Partner**           |   | **$**                   | **(30,360,386** | **)**                   | **$**      | **(13,025,074**            | **)**      | **$**                      | **(28,014,250** | **)**                      | **$**      | **(25,765,959** | **)** | **$** | **(5,548,690** | **)** |
|                                                    |   |                    | ** **      |                    | ** ** |                       | ** ** |                       | ** **      |                       | ** ** |
| **Net loss  attributable to Limited Partners**          |   | **$**                   | **—**      | ** **              | **$**      | **—**                 | ** ** | **$**                      | **—**      | ** **                 | **$**      | **(26,271,898** | **)** | **$** | **(16,646,068** | **)** |
|                                                    |   |                    | ** **      |                    | ** ** |                       | ** ** |                       | ** **      |                       | ** ** |
| **Net loss  per unit attributable to Limited Partners** |   | **$**                   | **—**      | ** **              | **$**      | **—**                 | ** ** | **$**                      | **—**      | ** **                 | **$**      | **(9,035** | **)** | **$** | **(5,725** | **)** |

 

----

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

** **

**(2)           Audited by other independent publicaccountants.**

 

8

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**Balance Sheets Data**

 
|                                                                                                                                  |   | **December  31,  2003** |            | **December  31,  2002** |            | **December  31,  2001(1)** |       | **December  31,  2000 (1)** |            | **December  31,  1999 (2)** |            |
|---------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|-----------------|-------------------------|-----------------|----------------------------|------------|-----------------------------|-----------------|-----------------------------|-----------------|
| **ASSETS:**                                                                                                                           |   |                    | ** **      |                    | ** **      |                       | ** ** |                        | ** **      |                        | ** **      |
| **Cash and  cash equivalents**                                                                                                        |   | **$**                   | **1,007,353**   | ** **              | **$**           | **22,709,786**             | ** ** | **$**                       | **10,241,902**  | ** **                  | **$**           | **9,338,798** | ** ** | **$** | **6,546,305** | ** ** |
| **Cash in  escrow account**                                                                                                           |   | **1,500,000**           | ** **      | **—**              | ** **      | **—**                 | ** ** | **—**                  | ** **      | **—**                  | ** **      |
| **Accounts  receivable, net**                                                                                                         |   | **12,297,162**          | ** **      | **11,594,949**          | ** **      | **19,099,986**             | ** ** | **20,049,769**              | ** **      | **3,244,067**               | ** **      |
| **Accounts  receivable, other**                                                                                                       |   | **7,457,028**           | ** **      | **6,483,255**           | ** **      | **—**                 | ** ** | **—**                  | ** **      | **—**                  | ** **      |
| **Insurance  claim receivable**                                                                                                       |   | **—**              | ** **      | **270,002**             | ** **      | **1,496,324**              | ** ** | **1,256,285**               | ** **      | **—**                  | ** **      |
| **Interest  receivable**                                                                                                              |   | **14,000**              | ** **      | **8,000**               | ** **      | **2,000**                  | ** ** | **—**                  | ** **      | **—**                  | ** **      |
| **Inventories**                                                                                                                       |   | **3,908,736**           | ** **      | **10,461,112**          | ** **      | **10,305,254**             | ** ** | **12,977,164**              | ** **      | **9,201,823**               | ** **      |
| **Prepaid  expenses**                                                                                                                 |   | **672,406**             | ** **      | **625,610**             | ** **      | **652,279**                | ** ** | **751,603**                 | ** **      | **1,406,684**               | ** **      |
| **Investment  in Securities**                                                                                                         |   | **7,338,288**           | ** **      | **10,000,000**          | ** **      | **—**                 | ** ** | **—**                  | ** **      | **—**                  | ** **      |
| **Investment  in Subsidiary**                                                                                                         |   | **397,980**             | ** **      | **277,254**             | ** **      | **—**                 | ** ** | **—**                  | ** **      | **—**                  | ** **      |
| **PCS  licenses, net**                                                                                                                |   | **57,517,974**          | ** **      | **57,517,974**          | ** **      | **57,517,974**             | ** ** | **64,838,452**              | ** **      | **67,543,320**              | ** **      |
| **Deferred  financing costs**                                                                                                         |   | **774,363**             | ** **      | **901,235**             | ** **      | **906,731**                | ** ** | **1,730,047**               | ** **      | **—**                  | ** **      |
| **Note  receivable from officer**                                                                                                     |   | **100,000**             | ** **      | **100,000**             | ** **      | **100,000**                | ** ** | **—**                  | ** **      | **—**                  | ** **      |
| **Property  and equipment, net**                                                                                                      |   | **90,753,422**          | ** **      | **101,931,922**         | ** **      | **102,095,953**            | ** ** | **97,002,140**              | ** **      | **89,200,611**              | ** **      |
|                                                                                                                                  |   |                    | ** **      |                    | ** **      |                       | ** ** |                        | ** **      |                        | ** **      |
|                                                                                                                                  |   | **183,738,712**         |            | **$**                   | **222,881,099** | ** **                 | **$**      | **202,418,403**             | ** **      | **$**                       | **207,944,258** | ** ** | **$** | **177,142,810** | ** ** |
|                                                                                                                                  |   |                    | ** **      |                    | ** **      |                       | ** ** |                        | ** **      |                        | ** **      |
| **LIABILITIES  AND PARTNERS’ CAPITAL (DEFICIT):**                                                                                |   |                    | ** **      |                    | ** **      |                       | ** ** |                        | ** **      |                        | ** **      |
| **Accounts  payable and accrued Liabilities**                                                                                         |   | **$**                   | **40,224,333**  | ** **              | **$**           | **47,022,094**             | ** ** | **$**                       | **41,642,052**  | ** **                  | **$**           | **45,743,223** | ** ** | **$** | **107,245,472** | ** ** |
| **Notes  payable — short-term**                                                                                                  |   | **113,816,297**         | ** **      | **82,647,544**          | ** **      | **133,321,837**            | ** ** | **121,000,000**             | ** **      | **—**                  | ** **      |
| **Notes  payable — long-term**                                                                                                   |   | **117,390,809**         | ** **      | **150,505,987**         | ** **      | **81,723,962**             | ** ** | **72,456,233**              | ** **      | **59,114,678**              | ** **      |
|                                                                                                                                  |   |                    | ** **      |                    | ** **      |                       | ** ** |                        | ** **      |                        | ** **      |
| **Unitholders’  capital (deficit) 2,906.1 Units in 2003, 2002, 2001, 2000, and 1999, and 1  general Partnership interest ** |   | **(87,692,727**         | **)**           | **(57,294,526**         | **)**           | **(54,269,448**            | **)**      | **(31,255,198**             | **)**           | **10,782,660**              | ** **      |
|                                                                                                                                  |   |                    | ** **      |                    | ** **      |                       | ** ** |                        | ** **      |                        | ** **      |
|                                                                                                                                  |   | **$**                   | **183,738,712** |                    | **$**           | **222,881,099**            | ** ** | **$**                       | **202,418,403** | ** **                  | **$**           | **207,944,258** | ** ** | **$** | **177,142,810** | ** ** |
|                                                                                                                                  |   |                    |            |                    |            |                       |       |                        |            |                        |            |   |   |   |   |   |
| **BOOK VALUE  PER UNIT**                                                                                                              |   | **$**                   | **(30,165)**    |                    | **$**           | ** (19,708)**         |       | **$**                       | **(18,668)**    |                        | **$**           | **(10,751)** |   | **$** | **3,708** |   |

 

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

 

(2)           Audited by other independent public accountants.

 

9

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

 

**Introduction**

 

The Partnershipwas formed in January 1995 and is managed by its General Partner, SuperTelCommunications Corp.  The Partnershipwas organized to acquire, own, consult and operate personal communicationservices (PCS) licenses in the Block C band and to take advantage of thebenefits that the FCC has set aside for Entrepreneurs.  The Partnership owns the Puerto Rico Licenses,which consist of two 15 MHz PCS licenses covering Puerto Rico, and theCalifornia Licenses, which consist of four 15 MHz PCS licenses covering theCalifornia cities of Eureka, Redding, Modesto, and Merced.

 

On August 28, 2000,the Partnership entered into a Purchase 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 thePartnership entered into a Purchase and Sale Agreement with Metro PCS pursuantto which the Partnership sold all of its remaining California Licenses.  The sale is pending FCC approval and theprice of this transaction cannot be disclosed until after FCC approval andclosing of the transaction.

 

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, itsrevenues had consisted of interest income only.  Since the Partnership commenced commercial operations in 1999,the comparisons presented below may not be indicative of future operations.

 

The Partnershipestablished its Puerto Rico network by forming a wholly owned subsidiary,NewComm, on January 29, 1999.  OnFebruary 4, 1999, the Partnership and NewComm entered into an agreementwith TLD, whereby the Partnership contributed its two Puerto Rico Licenses toNewComm and TLD provided NewComm a $19,960,000 loan to develop the Puerto RicoLicenses.  TLD’s loan is pursuant to asecured convertible promissory note (the “Note”) which is convertible into49.9% of NewComm’s equity.  The Notehowever, cannot be converted until the FCC authorizes TLD to hold more than a25% equity interest in NewComm.

 

The Partnership hasagreed to sell shares in NewComm to TEM in sufficient amount to provide TEMwith an additional 0.2% share interest in NewComm, enabling TEM to have a totalof 50.1% control interest in NewComm. The transaction involves a Stock Purchase Agreement, a ShareholdersAgreement, and a Sale Agreement.  Asummary of the terms of the sale and these agreements is provided below.

 

**TheStock Purchase Agreement**

 

The purchase price forthe 0.2% share interest in NewComm shall 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. At such time, ClearComm and TLD will select an internationallyrecognized investment-banking firm who will perform a valuation of the sharesto be sold.  The investment banker willhave an agreed upon period of time to prepare the valuation of the shares.  After delivery of the valuation, a closingwill occur.

 

The investment bankingfirm will use a combination of various methodologies for its valuation, thatinclude:  discounted cash flows,comparable transactions and trading prices of comparable transactions, and tradingprices of comparable publicly held companies and in the application of suchmethodologies shall use acceptable industry standards.  Payment shall be in cash.

 

**The Shareholders Agreement**

 

In consideration of thesale of a controlling interest in NewComm a new Shareholders Agreement shallbecome effective upon the closing of the Stock Purchase Agreement.  The Shareholders Agreement shall 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,ClearComm will have approval rights for a great number of actions that have theintent of protecting the Partnership’s then minority interest in NewComm, someof which are as follows: any transaction between NewComm and a shareholder oran affiliate of such shareholder, other than the Management Agreement and theTechnology Transfer Agreement; the annual strategic business plan and operatingbudgets for each calendar year and any variations or modifications whichindividually or in the aggregate exceed ten percent of the operating budget forsuch annual period; the appointment of the general manager, the director offinance and all directors of each division of NewComm, as well as thecompensation of each such person, consent to which shall not be unreasonablywithheld; the engagement of a new marketing consultant and the employment ofmarketing strategies, promotions, advertising and product development differentfrom those in effect on the date hereof, consent to which shall notunreasonably be withheld; any modification to the Certificate of Incorporationor Bylaws of NewComm that would have an adverse effect on any rights granted toa shareholder thereunder or under applicable law; and any amendments ormodifications to the Management Agreement or the Technology Transfer Agreementin effect as of the Effective Date.  ClearCommwill have the right to appoint four directors and TEM five directors.

 

10

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**The Sale Agreement**

 

The new SaleAgreement provides that ClearComm (or TEM) may trigger a shareholder obligationto sell NewComm.  Within 30 days of anotice of sale, TEM (or ClearComm as the case may be) would have the right topurchase ClearComm’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 one under the StockPurchase Agreement.

 

If TEM does not exerciseits right to buy out ClearComm’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 priceproposed by an interested buyer, which price must be payable in cash or freelytradable securities, or a combination thereof, and which must be for a pricenot less than the valuation prepared by the investment banker.

 

Some additional pointsare that at the closing of the sale of NewComm the Management Agreement and theTechnology Transfer Agreement held by TLD 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.

 

**Project Finance 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.   The Project Finance Facility will consistof five-year term credit, with a balloon payment at the end of the term.

 

An agreementrestructuring Lucent’s outstanding debt has been attained and it was executedon June 4, 2003.  The nowoutstanding debt to Lucent is $48.5M and is payable over a six-year period at8% annual interest rate.  OnJune 20, 2003, an agreement restructuring Alcatel’s debt wasexecuted.  Alcatel’s credit is now $2.5Mat 6.5% payable over a three year period. Also, by means of letter from TLD (and its parent, TelefónicaInternacional, S.A., and its affiliate, TEM), TLD has agreed to issue acorporate guarantee to serve as collateral for a $110M bank loan.

 

**California Licenses**

 

Since January 2002the Partnership has had a wireless DSL network in place throughout in certainareas within California in compliance with the FCC build out requirements.  The California Licenses were sold onNovember 26, 2003 to Metro PCS.  Thistransaction is pending FCC approval.

 

**Critical Accounting Policies**

 

The consolidatedfinancial statements are prepared in accordance with accounting principlesgenerally accepted in the United States, which require the Partnership to makeestimates and assumptions.  ThePartnership has no off-balance sheet arrangements and believes that of itssignificant accounting policies (see Note 4 to the consolidated financialstatements), the following may involve a higher degree of judgment andcomplexity.

 

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

 

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

 

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

 

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

 

11

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obsolete handset accessories tonet realizable value.  As an inducementto obtain new customers, the Partnership may sell handsets to customers for aprice that is less than cost.  UntilDecember 31, 2002, the loss on such sales was recognized at the time ofsale.  We continue to monitor thedepletion of our current inventory levels.

 

Effective January 1, 2003 wechanged our method to account for the loss on sale of handsets to customers,from the recognition of such loss at the time of sale, to the establishment ofan inventory reserve to account for that loss at the end of each accountingperiod.

 

*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 thefuture cash flows expected to result from the use of the asset and its eventualdisposition must be made.  If the sum ofthe future cash flows (undiscounted and without interest charges) is less thanthe carrying amount of the asset, an impairment loss is recognized.  The impairment loss, if any, is determinedbased on projected discounted future operating cash flows using a discount ratereflecting the Partnership’s average cost of funds.  No impairment loss was recognized during 2003 and 2002.  If the estimates used to measure impairmentare insufficient for any reason, our net income or loss would be reduced or increased,respectively.

 

*Valuation of Intangibles (PCS Licenses)*–**Because of the adoption by thePartnership of  SFAS 142 (Goodwill andother Intangible assets) imposed by the FASB for calendar years commencingafter December 31, 2001, PCS Licenses are no longer amortized and insteadthey are subject to periodic impairment testing.  Based on analysis of future cash flows and other relatedvariables, we determined that no impairment adjustment was necessary for the yearsended December 31, 2003 and 2002. We will perform the impairment test at least every quarter or as soon asanything comes to our attention that could cause us to believe that therecorded balance of the PCS Licenses may be affected.  If the estimates used to measure impairment are insufficient forany reason, our net income or loss would be reduced or increased, respectively.

 

RevenueRecognition

 

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

 

**Restatement of Financial Statements**

 

Managementrestated the Partnership’s financial statements for 2001, as described in Note2 to the audited consolidated financial statements included as part of thisAnnual Report on Form 10-K.  Our priorindependent accountants are not able to reissue their report relating to thePartnership’s financial statements for 2001 or to audit the restatementadjustments described in Note 2 because they ceased operations in 2002.  Our successor independent accountants,Kevane Soto Pasarell Grant Thornton LLP have not audited such year and do notissue an opinion on the financial statements for the calendar year endedDecember 31, 2001.  Our successorindependent accountants have only audited our financial statements for the calendaryears ended December 31, 2003 and 2002 and have issued the IndependentAuditor’s report included herein.

 

Accordingly,our financial statements for the calendar year ended December 31, 2001 arerestated and unaudited.

 

**Impact of Unaudited Financial Statements**

 

As explainedabove and in Note 2 to the audited consolidated financial statements for thecalendar years ended December 31, 2003 and 2002, our consolidated financialstatements for the calendar year ended December 31, 2001 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 2001consolidated financial statements is unnecessary.  Accordingly, our consolidated financial statements for thecalendar year ended December 31, 2001 are restated and unaudited.  Our audited consolidated financialstatements for the calendar years ended December 31, 2003 and 2002 areincluded as part of this Annual Report on Form 10-K.

 

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

 

12

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

 

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

 

The Partnership’srevenues for the year ended December 31, 2003, which amounted to$108,894,112 ($107,957,097 in 2002), included $101,557,423 ($99,799,656 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 isprimarily due to an increment during 2003 of the subscriber base.  The decrease in handset and accessoriesrevenues is related to a reduction in the retail pricing of handsets.  The Partnership’s operations are notmaterially effected by inflationary increases. Any inflationary impact on the cost of products and services offered bythe Partnership’s subsidiary, NewComm, is offset by pricing adjustments to theretail prices of handsets, accessories, and various offers available to thecustomers.

 

***Expenses***

 

Operating 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 are due to reclassification of accounts at the subsidiary level and arenot related to actual variations in such accounts.  The decrease in expenses during 2003, as compared to 2002, isprimarily associated with an overall decrease in operating expenses of $3.6Mresulting from cost control management implemented at 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$13M gain on the sale of stock. Accordingly, the operational loss for 2002 was $26M.  The net loss of $30,360,386 for 2003includes nonrecurring losses amounting to $8.6M, 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 compared to the adjusted $26M in 2002. Therefore, the net loss for 2003 shows a reduction of approximately $4Mwhich is directly proportional to the reduction in operating expenses as describedabove.

 

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 and 14to the accompanying consolidated financial statements) and to downward trendsof interest rates in the markets.  In2003, the Partnership had interest income of $213,369, as compared to$249,661in 2002.

 

***Liquidityand Capital Resources***

 

As of December 31,2003, the Partnership had cash and cash equivalents amounting to$1,007,353.  In addition, thePartnership has $1,500,000 in escrow which resulted from an option to purchasethe California Licenses by an independent group of investors as described in Item7.

 

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 DivisionMultiple Access (“CDMA”) protocol. The total cost was approximately $125 million.  On June 4, 2003, Lucent’s outstandingdebt was restructured at a six-year term with an interest rate of eight percent(8%) annually.  As of December 31,2003, $48,470,205 was outstanding under this financing agreement (refer to Note14(a) to the accompanying consolidated financial statements).

 

Alcatel USA InternationalMarketing, Inc. (“Alcatel”) was contracted to build part of the CDMA network.On June 20, 2003, NewComm and Alcatel entered into Amendment No. 2 toPromissory Agreement and Note dated as of December 28, 2001.  By means of this Amendment, the principalowed to Alcatel by NewComm was reduced to $5.4 million at 6.5% annual interestrate with a three year term amortization.

 

In addition, at December31, 2003, the Partnership owes the United States Federal governmentapproximately $42.7 million plus accrued interest at 6.5% in connection withthe acquisition of its Puerto Rico PCS licenses.  In accordance to industry practices the note payable was recordednet of a discount that has been amortized in prior years.  Due to the refinancing of the debt that isexpected to be completed before June 2004, the discount balance of $3,913,661as of December 31, 2003 was written off and reflected as interest expense inthe other expenses section of the accompanying statement of operations. (Referto Note 14(c) to the accompanying consolidated financial statements).

 

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 March2004.  On January 1, 2004, this securedpromissory note was amended to be due in December 2004, and to bear interest at1%.  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% over90-day LIBOR.  The Bridge Loan is nowguaranteed by TISA and was extended again until June 23, 2004.  It is expected that the bridge loan will bereplaced with a permanent Project Finance Facility of approximately $110million.

 

The Partnership, by meansof Syncom, 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 solda portion 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 ithas obtained 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 toconvert its debt to 49.9% of NewComm, and the 0.2% control stock sale isconsummated, ClearComm will own 38.3% of New Comm equity.

 

As a result of therestructuring of its FCC debt in June 1998, the Partnership has nooutstanding debt on its California Licenses, which consist of 15MHz ofbandwidth covering an approximate population of 1.1 million people in Eureka,Redding, Merced, and Modesto, all within the state of California.  The California Licenses were sold to MetroPCS on November 26, 2003, but the transaction is pending FCC approval.

 

The Partnershipanticipates that earnings and cash distributions derived from its Puerto RicoNetwork once it matures, interim and permanent financing and, if necessary,additional capital calls from its Investors or accessing the public capitalmarkets, should provide it with the liquidity to meet its obligations.

 

**Results of Operations - 2002 Compared to 2001**

 

The Partnership’srevenues for the year ended December 31, 2002, which amounted to $107,957,097($123,735,927 in 2001), included $99,779,656 ($112,025,407) in service revenuesand $ 8,177,441($11,710,520 in 2001) in handset and accessories sales generatedfrom NewComm’s wireless operations.  Theincrease in service revenues is primarily due to an increase in the wirelesscustomer base during 2002 as compared to 2001.

 

***Expenses***

 

Operating expenses forthe year ended December 31, 2002 totaled $103,734,297, as compared to$119,309,062for the same period in 2001. During 2002, the Partnership’s expenses included $ 20,297,712($32,583,589 for 2001) in costs of handset and accessories,  $15,662,484 ($13,884,281 for 2001) insalaries and benefits, $ 9,915,770 ($12,307,559 for 2001) for legal andprofessional services, $14,171,258 ($17,631,238 for 2001) in depreciation andamortization, $9,858,591 ($10,585,296 for 2001) in provision for doubtfulaccounts, $41,933,202 ($42,466,975 for 2001) in interconnection, networkmaintenance, sales commissions, advertising, rent, taxes, management fees tothe general partner and other expenses, and $ 5,808,374 ($7,481,362 for 2001)for services rendered by related parties. The increase in expenses during 2002, as compared to 2001 is primarilyassociated with an increase in NewComm’s head count and operating expensesneeded to expand NewComm’s operations and its market share.  The increase in operating expenses wasoffset by a decrease in the provision for doubtful accounts of $1.3 millionduring 2002, as compared to 2001, due to better collection efforts.  Depreciation and amortization expensedecreased after the handsets rented to customers were fully depreciated inMay 2002.

 

Net losses of $13,025,074for 2002 and $28,014,250 for 2001, reflect the costs of entering the PuertoRico market and meeting the competition of existing cellular and PCS operatorsin order to develop a subscriber base. To meet competition, a significant subsidy is granted in the sale ofhandsets and accessories, on which a negative margin of $12,120,271 wasgenerated during 2002 ($20,873,069 in 2001). In addition, salaries, sales commissions and advertising expensesamounting to $28,365,576 ($32,306,687 in 2001) have been required to penetratethe market and serve the established subscriber base.

 

Interest expense for theyear ended December 31, 2002, totaled $16,212,644 as compared to$20,172,216 for the same period in 2001. The decrease in interest expense during 2002 is primarily attributableto the FCC Note, the TLD notes, the Note Payable to Lucent, and the Bridge LoanFacility (refer to Notes 12 and 14 to the accompanying consolidated financialstatements).  In 2002, the Partnershiphad interest income of $249,661, as compared to $548,002 in 2001.

 

**Results of Operations - 2001 Compared to 2000**

 

ThePartnership’s revenues for the year ended December 31, 2001, which amounted to$123,735,927 ($92,011,205 in 2000), included $112,025,407 ($79,906,400) inservice revenues and $11,710,520 ($12,104,805 in 2000) in handset andaccessories sales generated from NewComm’s wireless operations.  The increase in service revenues isprimarily due to an increase in the wireless customer base during 2001 ascompared to 2000.

 

***Expenses***

 

Operatingexpenses for the year ended December 31, 2001 totaled $119,309,062, as comparedto $112,939,103 for the same period in 2000. During 2001, the Partnership’s expenses included $32,583,589($32,309,660 for 2000) in costs of handset and accessories,  $13,884,281 ($10,747,715 for 2000) in salariesand benefits, $ 12,307,559 ($5,928,431 for 2000) for legal and professionalservices, $17,631,238 ($20,458,500 for 2000) in depreciation and amortization,$10,585,296 ($17,716,025 for 2000) in provision for doubtful accounts,$42,466,975 ($39,044,977 for 2000) in interconnection, network maintenance,sales commissions, advertising, rent, taxes, management fees to the generalpartner and other expenses, and $7,481,362 ($7,062,610 for 2000) for servicesrendered by related parties.  Theincrease in expenses during 2001, as compared to 2000 is primarily associatedwith an increase in NewComm’s head count and operating expenses needed toexpand NewComm’s operations and its market share.  The increase in operating expenses was offset by a decrease inthe provision for doubtful accounts of $7,130,729 during 2001, as compared to2000, due to better collection efforts. Depreciation and amortization expense decreased after the handsetsrented to customers were fully depreciated in May 2001.

 

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

 

Interestexpense for the year ended December 31, 2001, totaled $20,172,216, as comparedto $11,141,769 for the same period in 2000. The increase in interest expense during 2001 is primarily attributableto the FCC Note, the TLD notes, the Note Payable to Lucent, and the Bridge LoanFacility (refer to Notes 12 and 14 to the accompanying consolidated financialstatements).  In 2001, the Partnershiphad interest income of $548,002, as compared to $490,309 in 2000.

 

**ITEM7A****.  QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

The Partnership’sexposure to market risk through derivative financial instruments and otherfinancial instruments is not material because the Partnership does not usederivative financial instruments and does not have foreign currency exchangerisks.  The Partnership invests cashbalances in excess of operating requirements in short-term money marketfunds.  As of December 31, 2003,the Partnership had cash equivalents and short-term investments of $1,007,353consisting of cash and highly liquid, short-term investments in money marketfunds.

 

The Partnership’s cashand cash equivalents will increase or decrease by an immaterial amount ifmarket interest rates increase or decrease, and therefore, its exposure tointerest rate changes has been immaterial. The Partnership’s loans payable to the FCC have a fixed interest rate of6.5% and therefore 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  issuancebut can be extended for periods of six months, thereafter.  Lucent’s debt was restructured onJune 4, 2003 to a six-year term credit facility with an interest rate ofeight percent (8%) annually.  As ofDecember  2003, the outstanding principal balance owed to Lucent was $48.5Million.  The Bridge Loan bears aninterest rate of 0.75% over 90-day LIBOR and is now guaranteed by TISA.  As part of this arrangement ClearComm agreedto pay an annual fee of 2% over half of this guarantee (or $30 million), orprovide an equivalent cash collateral to the Banks.  This loan guarantee fee is not due until the sale of thePartnership’s interest in NewComm.  TheBridge Loan Facility has been extended again to June 30, 2004.

 

13

----

 

**ITEM 8****.  FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

 
| ClearComm, L.P.                                                                                                                                                |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                           |
| Report of Independent Public Accountants —  December 31, 2003, 2002 (Audited), and 2001 (Restated and Unaudited)                                     |
|                                                                                                                                                           |
| Consolidated Balance Sheets - December 31,  2003, 2002 (Audited),  and 2001  (Restated and Unaudited)                                                |
|                                                                                                                                                           |
| Consolidated Statements of Operations for the years  ended - December 31, 2003, 2002 (Audited), and 2001 (Restated and  Unaudited)                        |
|                                                                                                                                                           |
| Consolidated Statements of Changes in Partners’  Deficit for the years ended - December 31, 2003, 2002 (Audited), and  2001 (Restated and Unaudited) |
|                                                                                                                                                           |
| Consolidated Statements of Cash Flows for the years  ended - December 31, 2003, 2002 (Audited), and 2001 (Restated and  Unaudited)                        |
|                                                                                                                                                           |
| Notes to Consolidated Financial Statements                                                                                                                     |
|                                                                                                                                                           |
| SuperTel  Communications Corp.                                                                                                                                 |
|                                                                                                                                                           |
| Report  of Independent Public Accountants – December 31, 2003, 2002 and 2001                                                                         |
|                                                                                                                                                           |
| Balance Sheets - December 31, 2003,  2002 and 2001                                                                                                        |
|                                                                                                                                                           |
| Statements  of Income and Accumulated Deficit for the years ended December 31, 2003,  2002 and 2001                                                       |
|                                                                                                                                                           |
| Statements of Cash Flows for  the years ended December 31, 2003, 2002 and 2001                                                                            |
|                                                                                                                                                           |
| Notes to Financial  Statements                                                                                                                                 |

 

All financial schedules havebeen omitted because they are not applicable or because the informationrequired is included in the financial statements or notes thereto.

 

14

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**Reportof Independent Public Accountants**

 

To the Partners of

 

**  CLEARCOMM L.P.:**

 

We have audited the accompanying consolidatedbalance sheets of **CLEARCOMM L.P. (a Delaware Limited Partnership) ANDSUBSIDIARY (“the Partnership”)** as of December 31, 2003 and2002, and the related consolidated statements of operations, changes inpartners’ 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 opinion on these financialstatements based on our audit.  Theconsolidated financial statements of the Partnership as of and for the yearended December 31, 2001, were previously presented as audited financialstatements by other auditors who, subsequent to the date April 16, 2002,of their auditors’ opinion, have ceased operations and whose report included anexplanatory paragraph that described certain uncertainties regarding the Partnership’sability to continue as a going concern. These other auditors expressed their opinion prior to the restatementdiscussed in Note 2.

 

We conductedour audits in accordance with auditing standards generally accepted in theUnited States of America.  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In ouropinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of **ClearComm,L.P. and Subsidiary**as of December 31, 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.

 

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

 

As discussedin Note 2 to the accompanying consolidated financial statements, thePartnership has restated its consolidated financial statements as of and forthe year ended December 31, 2001 (presented herein as restated), all ofwhich were previously audited by other independent accountants who have ceasedoperations.  We performed no auditingprocedures with respect to the consolidated financial statements as of and forthe year ended December 31, 2001 (presented herein as unaudited), and weexpress no opinion on such financial statements.

 

As discussed in Note 4(f), effective January1, 2003, the Partnership changed its method of accounting for the amount of lossincurred on the sale of handsets to customers. In addition, and as discussed in Note 4(i), effective January 1,2002, the Partnership changed its method for assessing the recoverability ofits intangible assets.

 
| /s/ Kevane  Soto Pasarell Grant Thornton LLP |   |
|----------------------------------------------|--------|
|                                         |
| San Juan,  Puerto Rico,                      |
|   March  15, 2004.                 |

 

15

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**ClearComm,L.P.**

**ConsolidatedBalance Sheets**

**December 31,2003, 2002, and 2001**

 
|                                                                                                                      |   | **2003**     |        | **2002**     |   | **(Restated  and  Unaudited)  2001** |   |
|---------------------------------------------------------------------------------------------------------------------------|--------|--------------|-------------|--------------|--------|--------------------------------------|--------|
|                                                                                                                      |   |         |        |         |   |                                 |   |
| **CURRENT ASSETS:**                                                                                                       |   |         |        |         |   |                                 |   |
| Cash and cash equivalents                                                                                                 |   | $            | 1,007,353   |         | $      | 22,709,786                           |   | $ | 10,241,902 |   |
| Cash in escrow account                                                                                                    |   | 1,500,000    |        | —       |   | —                               |   |
| Accounts receivable, net of allowance for  doubtful accounts of $15,032,114, $18,627,970,  $18,404,570, respectively |   | 12,297,162   |        | 11,594,949   |   | 19,099,986                           |   |
| Accounts receivable, other                                                                                                |   | 7,457,028    |        | 6,483,255    |   | —                               |   |
| Insurance claims receivable                                                                                               |   | —       |        | 270,002      |   | 1,496,324                            |   |
| Interest receivable                                                                                                       |   | 14,000       |        | 8,000        |   | 2,000                                |   |
| Inventories, net                                                                                                          |   | 3,908,736    |        | 10,461,112   |   | 10,305,254                           |   |
| Prepaid expenses                                                                                                          |   | 672,406      |        | 625,610      |   | 652,279                              |   |
|                                                                                                                      |   |         |        |         |   |                                 |   |
| Total current assets                                                                                                      |   | 26,856,685   |        | 52,152,714   |   | 41,797,745                           |   |
|                                                                                                                      |   |         |        |         |   |                                 |   |
| **INVESTMENT IN SECURITIES**                                                                                              |   | 7,338,288    |        | 10,000,000   |   | —                               |   |
|                                                                                                                      |   |         |        |         |   |                                 |   |
| **INVESTMENT IN 49% SUBSIDIARY, AT EQUITY,  net**                                                                         |   | 397,980      |        | 277,254      |   | —                               |   |
|                                                                                                                      |   |         |        |         |   |                                 |   |
| **PCS LICENSES**                                                                                                          |   | 57,517,974   |        | 57,517,974   |   | 57,517,974                           |   |
|                                                                                                                      |   |         |        |         |   |                                 |   |
| **DEFERRED FINANCING COSTS**                                                                                              |   | 774,363      |        | 901,235      |   | 906,731                              |   |
|                                                                                                                      |   |         |        |         |   |                                 |   |
| **NOTE RECEIVABLE FROM OFFICER**                                                                                          |   | 100,000      |        | 100,000      |   | 100,000                              |   |
|                                                                                                                      |   |         |        |         |   |                                 |   |
| **PROPERTY AND EQUIPMENT, net**                                                                                           |   | 90,753,422   |        | 101,931,922  |   | 102,095,953                          |   |
|                                                                                                                      |   |         |        |         |   |                                 |   |
| Total assets                                                                                                              |   | $            | 183,738,712 |         | $      | 222,881,099                          |   | $ | 202,418,403 |   |
|                                                                                                                      |   |         |        |         |   |                                 |   |
| **LIABILITIES AND PARTNERS’ DEFICIT**                                                                                |   |         |        |         |   |                                 |   |
|                                                                                                                      |   |         |        |         |   |                                 |   |
| **CURRENT LIABILITIES:**                                                                                                  |   |         |        |         |   |                                 |   |
| Current portion of notes payable                                                                                          |   | $            | 48,003,652  |         | $      | 22,647,544                           |   | $ | 73,321,837 |   |
| Bridge Loan Facility                                                                                                      |   | 61,000,000   |        | 60,000,000   |   | 60,000,000                           |   |
| Accounts payable and accrued liabilities                                                                                  |   | 23,631,877   |        | 23,430,433   |   | 27,868,715                           |   |
| Accounts payable to related parties                                                                                       |   | 16,592,457   |        | 16,700,443   |   | 8,705,353                            |   |
| Option deposit – PCS Licenses                                                                                        |   | 1,500,000    |        | —       |   | —                               |   |
| Accrued interest                                                                                                          |   | 921,904      |        | 4,977,700    |   | 3,517,319                            |   |
| Deferred income                                                                                                           |   | 2,390,750    |        | 1,913,514    |   | 1,550,665                            |   |
|                                                                                                                      |   |         |        |         |   |                                 |   |
| Total current liabilities                                                                                                 |   | 154,040,640  |        | 129,669,634  |   | 174,963,889                          |   |
|                                                                                                                      |   |         |        |         |   |                                 |   |
| **LONG-TERM NOTES PAYABLE**,  net of current portion                                                                      |   | 117,390,809  |        | 150,505,987  |   | 81,723,962                           |   |
|                                                                                                                      |   |         |        |         |   |                                 |   |
| Total liabilities                                                                                                         |   | 271,431,449  |        | 280,175,621  |   | 256,687,851                          |   |
|                                                                                                                      |   |         |        |         |   |                                 |   |
| **PARTNERS’ DEFICIT:**                                                                                               |   |         |        |         |   |                                 |   |
| Limited partners’ capital (2,907.1 units issued  and outstanding)                                                    |   | 73,039,616   |        | 73,039,616   |   | 73,039,616                           |   |
| General partner’s capital                                                                                            |   | 100,000      |        | 100,000      |   | 100,000                              |   |
| Other comprehensive loss                                                                                                  |   | (37,827      | )           | —       |   | —                               |   |
| Accumulated losses                                                                                                        |   | (160,794,526 | )           | (130,434,138 | )      | (127,409,064                         | )      |
|                                                                                                                      |   |         |        |         |   |                                 |   |
| Total partners’ deficit                                                                                              |   | (87,692,737  | )           | (57,294,522  | )      | (54,269,448                          | )      |
|                                                                                                                      |   |         |        |         |   |                                 |   |
| Total liabilities and partners’ deficit                                                                              |   | $            | 183,738,712 |         | $      | 222,881,099                          |   | $ | 202,418,403 |   |

 

The accompanying notes are anintegral part of these consolidated statements.

 

16

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**ClearComm, L.P.**

 

**ConsolidatedStatements of Operations for the years ended**

**December 31,2003, 2002, 2001**

 
|                                                   |   | **2003**    |        | **2002**    |   | **(Restated  and  Unaudited)****2001** |   |
|--------------------------------------------------------|--------|-------------|-------------|-------------|--------|----------------------------------------|--------|
| **REVENUES:**                                          |   |        |        |        |   |                                   |   |
| Service revenues                                       |   | $           | 101,557,423 |        | $      | 99,779,656                             |   | $ | 112,025,407 |   |
| Handset and accessories sales                          |   | 7,336,689   |        | 8,177,441   |   | 11,710,520                             |   |
|                                                   |   |        |        |        |   |                                   |   |
| Total revenue                                          |   | 108,894,112 |        | 107,957,097 |   | 123,735,927                            |   |
|                                                   |   |        |        |        |   |                                   |   |
| **OPERATING EXPENSES:**                                |   |        |        |        |   |                                   |   |
| Cost of handsets and accessories sold                  |   | 22,523,576  |        | 20,297,712  |   | 32,583,589                             |   |
| Salaries and benefits                                  |   | 15,169,673  |        | 15,662,484  |   | 13,884,281                             |   |
| Provision for doubtful accounts                        |   | 8,907,241   |        | 9,854,591   |   | 10,585,296                             |   |
| Salesmen and dealers commissions                       |   | 8,375,695   |        | 4,241,827   |   | 8,079,290                              |   |
| Advertising expense                                    |   | 7,353,590   |        | 8,461,265   |   | 10,343,116                             |   |
| Rent expense                                           |   | 6,755,926   |        | 7,766,611   |   | 7,976,654                              |   |
| Network operation and maintenance expense              |   | 5,559,349   |        | 8,057,442   |   | —                                 |   |
| Taxes, other than income                               |   | 4,945,218   |        | 1,262,577   |   | 3,089,172                              |   |
| Interconnection expense                                |   | 4,245,415   |        | 4,916,771   |   | 3,478,164                              |   |
| Services rendered by related parties                   |   | 4,090,826   |        | 6,070,538   |   | 7,620,289                              |   |
| Legal and professional services                        |   | 2,682,232   |        | 9,915,770   |   | 12,307,559                             |   |
| Other expenses                                         |   | 9,477,976   |        | 7,226,709   |   | 9,361,652                              |   |
|                                                   |   |        |        |        |   |                                   |   |
| Total operating expenses                               |   | 100,086,717 |        | 103,734,297 |   | 119,309,062                            |   |
|                                                   |   |        |        |        |   |                                   |   |
| **INCOME FROM OPERATIONS**                             |   | 8,807,395   |        | 4,222,800   |   | 4,426,865                              |   |
|                                                   |   |        |        |        |   |                                   |   |
| **INTEREST EXPENSE**                                   |   | (13,312,468 | )           | (16,212,644 | )      | (20,172,216                            | )      |
|                                                   |   |        |        |        |   |                                   |   |
| **DEPRECIATION AND AMORTIZATION**                      |   | (17,272,191 | )           | (14,171,258 | )      | (17,631,238                            | )      |
|                                                   |   |        |        |        |   |                                   |   |
| **LOSS BEFORE OTHER INCOME (EXPENSE)**                 |   | (21,777,264 | )           | (26,161,102 | )      | (33,376,589                            | )      |
|                                                   |   |        |        |        |   |                                   |   |
| **OTHER INCOME (EXPENSE):**                            |   |        |        |        |   |                                   |   |
| Gain on sale of investment in stock of subsidiary      |   | —      |        | 13,000,000  |   | —                                 |   |
| Equity in net loss of 49% owned subsidiary             |   | (140,608    | )           | (114,746    | )      | —                                 |   |
| Interest income                                        |   | 213,369     |        | 249,661     |   | 548,002                                |   |
| Gain on sale of Visalia-Porterville license            |   | —      |        | —      |   | 4,814,337                              |   |
| Loss on write-off of inventories                       |   | (4,742,559  | )           | —      |   | —                                 |   |
| Write-off of discount on note payable to FCC           |   | (3,913,661  | )           | —      |   | —                                 |   |
| Other                                                  |   | 337         |        | 1,113       |   | —                                 |   |
|                                                   |   |        |        |        |   |                                   |   |
| **NET LOSS**                                           |   | $           | (30,360,386 | )           | $      | (13,025,074                            | )      | $ | (28,014,250 | ) |
|                                                   |   |        |        |        |   |                                   |   |
| **NET LOSS ATTRIBUTABLE TO GENERAL PARTNER**           |   | $           | (30,360,386 | )           | $      | (13,025,074                            | )      | $ | (28,014,250 | ) |
|                                                   |   |        |        |        |   |                                   |   |
| **NET LOSS ATTRIBUTABLE TO LIMITED PARTNERS**          |   | $           | —      |        | $      | —                                 |   | $ | — |   |
|                                                   |   |        |        |        |   |                                   |   |
| **NET LOSS PER UNIT ATTRIBUTABLE TO LIMITED PARTNERS** |   | $           | —      |        | $      | —                                 |   | $ | — |   |

 

The accompanying notes are anintegral part of these consolidated statements.

 

17

----

 

**ClearComm, L.P.**

 

**Consolidated Statements of Changes inPartners’ (Deficit) for the years ended**

**December 31, 2003, 2002, 2001**

 
|                                                  |   |       |   |       |   | **General  Partner** |        | **Accumulated  Other  Comprehensive  Loss** |   | **Total**   |   |
|-------------------------------------------------------|--------|------------|--------|------------|--------|----------------------|-------------|---------------------------------------------|--------|-------------|--------|
|                                                  |   |       |
| **Limited  Partners**                                 |
| **Units**                                             |   | **Amount** |
|                                                  |   |       |   |       |   |                 |        |                                        |   |        |   |
| **BALANCES**, December  31, 2000*                     |   | 2,907.1    |   | $          | — |                 | $           | (31,255,198                                 | )      | $           | — |   | $ | (31,255,198 | ) |
|                                                  |   |       |   |       |   |                 |        |                                        |   |        |   |
| **DILUTION GAIN***                                    |   | —     |   | 3,750,000  |   | 1,250,000            |        | —                                      |   | 5,000,000   |   |
|                                                  |   |       |   |       |   |                 |        |                                        |   |        |   |
| **NET LOSS - 2001***                                  |   | —     |   | (3,750,000 | )      | (24,264,250          | )           | —                                      |   | (28,014,250 | )      |
|                                                  |   |       |   |       |   |                 |        |                                        |   |        |   |
| **BALANCES**, December  31, 2001*                     |   | 2,907.1    |   | —     |   | (54,269,448          | )           | —                                      |   | (54,269,448 | )      |
|                                                  |   |       |   |       |   |                 |        |                                        |   |        |   |
| **DILUTION GAIN**                                     |   | —     |   | 7,500,000  |   | 2,500,000            |        | —                                      |   | 10,000,000  |   |
|                                                  |   |       |   |       |   |                 |        |                                        |   |        |   |
| **NET LOSS – 2002**                              |   | —     |   | (7,500,000 | )      | (5,525,074           | )           | —                                      |   | (13,025,074 | )      |
|                                                  |   |       |   |       |   |                 |        |                                        |   |        |   |
| **BALANCES**, December  31, 2002                      |   | 2,907.1    |   | —     |   | (57,294,522          | )           | —                                      |   | (57,294,522 | )      |
|                                                  |   |       |   |       |   |                 |        |                                        |   |        |   |
| **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                      |   | 2,907.1    |   | —     |   | $                    | (87,654,908 | )                                           | $      | (37,827     | )      | $ | (87,692,735 | ) |
|                                                       |        |            |        |            |        |                      |             |                                             |        |             |        |  |  |  |  |

 

Annual comprehensive income (loss) for theyears ended December 31, 2003 and 2002 amounted to ($1,734,924) and$2,051,065,respectively.

 

----

*              Restated and Unaudited

 

The accompanying notes are anintegral part of these consolidated statements.

 

18

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**ClearComm,L.P.**

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

**December 31,2003, 2002, 2001**

** **
|                                                                                            |   | **2003**    |        | **2002**    |   | **(Restated  and  Unaudited)  2001** |   |
|-------------------------------------------------------------------------------------------------|--------|-------------|-------------|-------------|--------|--------------------------------------|--------|
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                                       |   |        |        |        |   |                                 |   |
| Net loss                                                                                        |   | $           | (30,360,386 | )           | $      | (13,025,074                          | )      | $ | (28,014,250 | ) |
| Adjustments to reconcile net loss to net  cash provided by (used in) operating activities– |   |        |        |        |   |                                 |   |
| Depreciation and amortization                                                                   |   | 17,050,319  |        | 13,958,465  |   | 17,631,238                           |   |
| Equity in losses of unconsolidated  subsidiary                                                  |   | 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   |        | —      |   | —                               |   |
| Inventory Reserve                                                                               |   | 4,742,559   |        | —      |   | —                               |   |
| Bad debt expense                                                                                |   | 8,907,241   |        | 9,854,591   |   | 10,585,296                           |   |
| Gain from sale of Visalia-Porterville  license                                                  |   | —      |        | —      |   | (4,814,337                           | )      |
| Proceeds from sale of Visalia-Porterville  license                                              |   | —      |        | —      |   | 9,500,000                            |   |
| Changes in operating assets and  liabilities–                                              |   |        |        |        |   |                                 |   |
| Increase in interest receivable                                                                 |   | (4,000      | )           | (6,000      | )      | —                               |   |
| Increase in accounts receivable, before  write-offs                                             |   | (10,660,227 | )           | (8,833,805  | )      | (9,635,513                           | )      |
| Increase in accounts receivable due from officer                                                |   | —      |        | —      |   | (102,000                             | )      |
| Decrease (increase) in insurance claims  receivable                                             |   | 270,002     |        | 1,226,322   |   | (240,039                             | )      |
| Decrease (increase) in inventories                                                              |   | 1,809,817   |        | (155,858    | )      | 2,671,910                            |   |
| Decrease (increase) in prepaid expenses                                                         |   | (46,796     | )           | 26,673      |   | 922,640                              |   |
| Decrease (increase) accounts payable and  accrued liabilities                                   |   | 201,443     |        | (3,798,100  | )      | 344,453                              |   |
| Increase (decrease) in accounts payable to  related parties                                     |   | (32,986     | )           | 3,826,632   |   | 6,663,586                            |   |
| Increase in accrued interest                                                                    |   | (978,843    | )           | 6,516,694   |   | 4,175,492                            |   |
| (Decrease) increase in deferred income                                                          |   | 477,236     |        | 362,848     |   | (269,518                             | )      |
| Total adjustments                                                                               |   | 28,416,121  |        | 26,694,040  |   | 37,433,208                           |   |
| Net cash provided by (used in) operating  activities                                            |   | (1,944,265  | )           | 13,668,966  |   | 9,418,958                            |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                                       |   |        |        |        |   |                                 |   |
| Redemption of investment securities                                                             |   | 2,616,584   |        | —      |   | —                               |   |
| Payment for the purchase of investment securities                                               |   | —      |        | (10,000,000 | )      | —                               |   |
| Acquisition of property and equipment                                                           |   | (5,864,516  | )           | (13,794,432 | )      | (8,207,046                           | )      |
| Payment for the investment in subsidiary                                                        |   | (261,334    | )           | (392,000    | )      | —                               |   |
| Payments for deferred financing costs                                                           |   | (95,000     | )           | (207,297    | )      | —                               |   |
| Net cash used in investing activities                                                           |   | (3,604,266  | )           | (24,393,729 | )      | (8,207,046                           | )      |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                                       |   |        |        |        |   |                                 |   |
| Proceeds from sale of shares of NewComm                                                         |   | $           | —      |        | $      | 10,000,000                           |   | $ | 5,000,000 |   |
| Proceeds from issuance of note payable to Telefonica Moviles                                    |   | 5,493,642   |        | —      |   | —                               |   |
| Proceeds from extension of note payable to ABN/AMRO                                             |   | 1,000,000   |        | —      |   | —                               |   |
| Proceeds from issuance of notes payable to TLD                                                  |   | —      |        | 18,960,080  |   | 4,990,000                            |   |
| Payment of note payable to Lucent                                                               |   | (11,102,065 | )           | —      |   | (8,298,808                           | )      |
| Payment of note payable to Alcatel                                                              |   | (2,900,000  | )           | (5,767,433  | )      | (2,000,000                           | )      |
| Payment of notes payable to FCC                                                                 |   | (8,645,479  | )           | —      |   | —                               |   |
| Net cash provided by (used in) financing activities                                             |   | (16,153,902 | )           | 23,192,647  |   | (308,808                             | )      |
| **NET INCREASE IN CASH AND CASH EQUIVALENTS**                                                   |   | (21,702,433 | )           | 12,467,884  |   | 903,104                              |   |
| **CASH AND CASH EQUIVALENTS**, beginning of year                                                |   | 22,709,786  |        | 10,241,902  |   | 9,338,798                            |   |
| **CASH AND CASH EQUIVALENTS**, end of year                                                      |   | $           | 1,007,353   |        | $      | 22,709,786                           |   | $ | 10,241,902 |   |
|                                                                                            |   |        |        |        |   |                                 |   |
| **SUPPLEMENTAL DISCLOSURES OF CASH FLOWS  INFORMATION:**                                        |   |        |        |        |   |                                 |   |
| **INTEREST PAID**                                                                               |   | $           | 11,887,096  |        | $      | 6,314,000                            |   | $ | 12,279,000 |   |

 

The accompanying notes are anintegral part of these consolidated statements.

 

19

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**ClearComm,L.P.**

 

**Notesto Consolidated Financial Statements**

**December 31,2003, December 31, 2002 (Audited), and December 31, 2001 (Restated andUnaudited)**

 

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

 

ClearComm, L.P. (thePartnership) was organized on January 24, 1995, under the laws of thestate of Delaware.  The Partnership wascreated to file applications with the Federal Communications Commission (FCC) underpersonal communications service (PCS) frequency Block C, originally restrictedto minorities, small businesses and designated entities, to become a providerof broadband PCS.  The Partnership isscheduled to terminate on December 31, 2005, or earlier, upon theoccurrence of certain specific events as detailed in the Partnership Agreement.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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.

 

As of December 31, 2003and 2002, common stockholders of NewComm (Class A and Class C) and theirpercentages of ownership were:

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

 

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

 

The Partnership’spreviously issued consolidated financial statements as of and for the yearended December 31, 2001 have been restated to correct the accounting forcertain items, as described below:

 

20

----

 

(a)          Minorityinterest liability – During the year ended December 31, 2001 an outsidegroup invested $15 million in NewComm. At December 31, 2001, the stockholders’ deficit of NewComm was$77.5 million.  In the event ofliquidation and if there are available funds, this new investor acquired aliquidation preference, but otherwise, there is no entity nor investorguarantee concerning the return of the amounts invested.  Therefore, the presentation in theconsolidated balance sheets of a minority interest liability of $13,362,939 in2001, was incorrect.  This amountrepresents the gross amount of the new investments, reduced by the proportionaland time dated accumulated share in the operating losses of NewComm ($1,637,061in 2001).

 

(b)         Thegain resulting from the new minority interest investment in the Partnership’ssubsidiary, NewComm — This issue is closely allied to the preceding issueconcerning the minority interest liability.  Since there is no existing minority interest liability, then, atthe level of the Partnership, there is a gain resulting from the investment inNewComm by the new investors.  The gainis an equity gain since the Partnership’s participation in the stockholders’deficit of NewComm has been reduced from 100% to 95.08% in 2001, which gain hasbeen presented as a dilution gain in the accompanying restated and unauditedfinancial statements as of and for the year ended December 31, 2001.

 

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

 

(c)          Allocationof operating losses to the Partnership’s limited partners - The consolidatedfinancial statements for the year 2001 indicated a negative capital balance forthe limited partners of $32.5 million. By definition, their participation in operating losses is limited to theamount of capital invested.  The presentationof a negative capital balance for the limited partners was restated by areclassification to the general partner of the balance amount of lossesallocated to the limited partners in excess of the amount of theirinvestment.  This reclassification hadno effect on the financial position or the results of operations of the Partnership.

 

The effect of thecorrections to the Partnership’s consolidated financial statements as of andfor the year ended December 31, 2001, is summarized as follows:

 

21

----

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

 
|                                                           |   | **As  originally presented**    |   | **As  restated (unaudited)**    |   |
|----------------------------------------------------------------|--------|---------------------------------|--------|---------------------------------|--------|
|                                                           |   | **(all  amounts in $millions)** |   | **(all  amounts in $millions)** |   |
| **Statements of Changes in  Partner’s Capital (Deficit)** |   | **Limited  Partner**            |   | **General  Partner**            |   | **Total** |   | **Limited  Partner** |   | **General  Partner** |   | **Total** |   |
|                                                           |   |                            |   |                            |   |   |   |   |   |   |   |   |   |
| Balances at December 31,  2000                                 |   | $                               | (12.5  | )                               | $      | (28.5 | ) | $ | (41.0 | ) | $ | — |   | $ | (31.2 | ) | $ | (31.2 | ) |
|                                                           |   |                            |   |                            |   |   |   |   |   |   |   |   |   |
| Net loss - 2001                                                |   | (20.0                           | )      | (6.6                            | )      | (26.6 | ) | (3.8 | ) | (24.2 | ) | (28.0 | ) |
|                                                           |   |                            |   |                            |   |   |   |   |   |   |   |   |   |
| Dilution gain                                                  |   | —                          |   | —                          |   | — |   | 3.8 |   | 1.2 |   | 5.0 |   |
|                                                           |   |                            |   |                            |   |   |   |   |   |   |   |   |   |
| Balances at December 31,  2001                                 |   | $                               | (32.5  | )                               | $      | (35.1 | ) | $ | (67.6 | ) | $ | — |   | $ | (54.2 | ) | $ | (54.2 | ) |

 

22

----

 

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

 

The accompanyingconsolidated financial statements have been prepared on a going concern basis,which contemplates the realization of assets and the satisfaction ofliabilities in the normal course of business. The Partnership commenced operations in September 1999 and hasincurred net losses of approximately $30.4 million in 2003, $13.0 million in2002 and $28.0 million in 2001.  It alsohas a working capital deficiency and a stockholders’ deficit of $127 million,and $87.7 million, respectively, as of December 31, 2003.  The Partnership is likely to continueincurring losses until such time as its subscriber base generates revenue in excessof the Partnership’s expenses. Development of a significant subscriber base is likely to take time,during which the Partnership must finance its operations by means other thanits revenues.

 

As part of theagreement with TLD, the Partnership entered into a contract with LucentTechnologies, Inc. (“Lucent”) that requires Lucent to build a network that usesCode Division Multiple Access (“CDMA”) protocol.  The Partnership has incurred approximately $119 million in theconstruction of this network.  During2000, the Partnership’s management and Lucent agreed on formally extending thepayment of up to $61 million of the total amount of network construction costs,at the time, under a formal financial agreement.  On June 4, 2003, the Partnership entered into a SeniorCredit Agreement with Lucent, which extends the maturity date of the $61million to September 30, 2009, with interest at 8% annually.  See Note 14(a).

 

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

 

DuringNovember 2000, the Partnership entered into a $60 million bridge loanagreement (the “Bridge Loan Facility”) with a commercial bank (originally, twocommercial banks).  The Bridge LoanFacility is guaranteed by Telefónica Internacional, S.A. (“TISA”), and amaturity date has been fixed at December 31, 2003.  By means of letter agreement between andamongst ClearComm, Telefónica Móviles S.A. (TEM) and Telefónica, S.A. (TEF),the latter two have agreed to issue a corporate guarantee to cover therefinancing of this Bridge Loan and $42.6 million owed to the FCC.  This arrangement provides for noamortization of principal until the fifth anniversary of the facility and issubject to the FCC issuing an approval order authorizing the sale to TLD of a..2% ownership interest in NewComm. ClearComm has filed for such approval and expects said order to beissued before the end of 2004.  During2003, NewComm received and additional $1 million advance under the terms ofthis facility.

 

During 2003,the Partnership received $5,493,642 in advances from Telefónica Moviles S.A.,to comply with the payment requirements on the FCC debt.  See Note 12 (b).

 

Managementbelieves that the Partnership has complied with all the requirements forobtaining the permanent financing arrangements discussed above and believesthat taking into consideration the cash and cash equivalents on hand,anticipated growth in revenues, vendor financing and this permanent financingwill be adequate to fund its operations, at a minimum, through the end of2004.  However, in the absence ofimproved operating results and cash flows, and the closing of this contemplatedpermanent financing, the Partnership may face problems to fund its operationsand meet its obligations.  Because ofthe existence of these matters, substantial doubt exists as to thePartnership’s ability to continue as a going concern.  The accompanying financial statements do not include anyadjustments that might result should, for whatever reason, the Partnership beunable to meet its obligations on a timely basis.

 

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

 

The followingsummarizes the most significant accounting policies followed in the preparationof the accompanying financial statements:

 

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

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

 

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

ThePartnership classifies its securities as available-for-sale.  The securities consist of income funds,which are stated at fair value, with net unrealized gains or losses (none) onthe securities recorded as accumulated other comprehensive income (loss) inpartners’ capital.  Realized gains andlosses are included in earnings and are calculated using the specificidentification method for determining the cost of the securities.

 

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

ThePartnership’s investment in Internet Surfing Store of Puerto Rico, Inc. (“ISS”)is accounted for under the equity method of accounting whereby the investmentis carried at the cost of acquisition adjusted for the Partnership’s share ofISS’s earnings or losses since the date of acquisition.

 

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

ThePartnership follows the provisions of Statement of Financial AccountingStandards (SFAS) No. 130 Reporting Comprehensive Income.  Comprehensive income represents operationalnet income plus all other changes in net assets from non-owner sources.  SFAS No. 130 requires presentation ofcomprehensive income and its components in the financial statements.

 

During theyear ended December 31, 2003 the Partnership comprehensive loss was limited toits investment in available-for-sale securities. During the year endedDecember 31, 2002 the Partnership did not report any comprehensive income(loss) since there were no unrealized holding gains or losses from itssecurities classified as available-for-sale.

 

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

Allowance fordoubtful accounts provides for estimated losses on accounts receivable.  The allowance is established based upon areview of the aggregate accounts, loss experience, economic conditions andother pertinent factors.  Account lossesare charged and recoveries are credited to the allowance for doubtfulaccounts.  The collection policies andprocedures of the Partnership vary by credit class and prior payment history ofsubscribers.

 

**(f)****            Inventories**–

ThePartnership maintains inventories of wireless handsets and accessories held forsale to customers.  Inventories arerecorded at the lower of average cost (which approximates first-in, first-out)or market (which approximates replacement cost from suppliers).  As an inducement to obtain new customers,the Partnership may sell handsets to customers for a price that is less thancost.  The loss on such sales isrecognized at the time of sale in accordance with practice in the industry.

 

EffectivelyJanuary 1, 2003 the Partnership changed its method to account for the loss onsale of handsets to customers, from the recognition of such loss at the time ofsale, to the establishment of an inventory reserve to account for that loss atthe end of each accounting period. Management believes that this new method better matches costs andrevenues.

 

In accordancewith Accounting Principle Board Opinion No. 20, Accounting Changes”, the changein accounting method explained above, requires the determination of thecumulative effect, as if the newly adopted method had been applied during allperiod affected.  In this specificsituation, the retroactive application and determination of pro-formainformation is impracticable, because the effects are not determinable, sinceit requires assumptions about management’s intent in prior period, andsignificant management’s estimates.  Theeffect of the change on net income for the year ended December 31, 2003 was$4,742,559.

 

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

Representsdebt financing costs capitalized and amortized as interest expense over theterms of the underlying obligations.

 

**(h)****         PCSlicenses**–

This amountrepresents costs primarily incurred to acquire Federal Communications Commission(FCC) licenses to provide wireless services. The licenses expire in January 2007 unless renewed.  However, FCC rules provide for renewalexpectancy provisions.  The Partnershipexpects to exercise the renewal provisions. To this date, no PCS Services havebeen offered by the Partnership in the geographical areas covered by theCalifornia licenses.  See Note 10.

 

The PuertoRico licenses were being amortized over a time period of twenty years [see Note4 (i)].  The Partnership capitalized theinterest related to the debt pertaining to the Puerto Rico licenses during thedevelopment stage, which amounted to $12,174,000.  However, such capitalization was discontinued inSeptember 1999 when the commercial operations started.

 

Effective withthe adoption of Statement of Financial Accounting Standards (SFAS) No. 142 onJanuary 1, 2002, these licenses costs, no longer being amortized, aresubject to impairment testing.

 

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

 

Effective January 1,2002, the Partnership adopted SFAS No. 142, “Goodwill and Other IntangibleAssets” which established new standards related to how acquired goodwill andother intangible assets are to be recorded upon their acquisition, as well ashow they are to be accounted for after they have been initially recognized inthe financial statements.

 

Effective withthe adoption of this standard, the Partnership reassessed the useful lives ofpreviously recognized intangible assets, which consist primarily of FCC licensesthat provide the Partnership with exclusive rights to utilize a certain radiofrequency spectrum to provide wireless communications services.  While FCC licenses are issued for only afixed period of time, generally ten years, such licenses are subject to renewalby the FCC.  Renewals of FCC licenseshave occurred routinely and at a nominal cost. Moreover, the Partnership has determined that there are currently nolegal, regulatory, contractual, competitive, economic or other factors thatlimit the useful lives of its FCC licenses. As a result, the FCC licenses will be treated as an indefinite-livedintangible asset under the provisions of SFAS No. 142 and will not be amortizedbut rather will be tested for impairment annually or when events and circumstanceswarrant.

 

23

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ThePartnership completed the transition impairment test of its indefinite-livedintangible assets for the year ended December 31, 2002 and determined thatno impairment existed. The Partnership utilized 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 valued of free cashflow attributable to the licenses).  Asa result of adopting SFAS No. 142, approximately $2.6 million of licensesamortization was not recognized in 2002.

 

ThePartnership has elected to test for the FCC license impairment as of December31st of each year.  ThePartnership has completed its 2003 testing and has determined that there hasbeen no license impairment.

 

Pro-formaresults of operations for the year ended December 31, 2001, presentedexclusive of amortization expense recognized in that year related to licensesno longer being amortized follows:

 
| Net loss after  amortization of licenses |   | $         | 28,014,250 |   |
|------------------------------------------|--------|-----------|------------|--------|
| Amortization of licenses                 |   | 2,634,815 |       |
|                                     |   |      |       |
| Proforma net loss                        |   | $         | 25,379,435 |   |

 

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

Property andequipment are recorded at cost.  Majorreplacements and improvements are capitalized while general repairs and maintenanceare charged to expense as incurred.

 

Depreciationis computed using the straight-line method over the estimated useful life ofthe asset commencing from the time it is placed into service or the term of thelease, if shorter, for leasehold 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.

 

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

ThePartnership capitalizes certain direct development costs associated withinternal use software, including external direct cost of materials andservices, and internal payroll costs for employees devoting time to softwaredevelopment.  These costs are includedin property and equipment and are amortized beginning when the software issubstantially ready for use.  Costsincurred during the preliminary project stage, as well as maintenance andtraining costs are expensed as incurred. The Partnership also capitalizes initial operating-system software costsand amortizes them over its useful life.

 

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

ThePartnership continually****evaluates its long-lived assets todetermine whether current events and circumstances warrant adjustment of thecarrying values or amortization periods. The Partnership measures impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable.  In performing the reviewfor recoverability, an estimate of the future cash flows expected to resultfrom the use of the asset 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 2003, 2002 and 2001.

 

**(m)****      Revenuerecognition**–

ThePartnership earns service revenues by providing access to its wireless network(access revenue) and for usage of its wireless system (airtime revenue).  Access revenue is billed in advance andrecognized ratably over the service period. Airtime revenue, including roaming revenue and long-distance revenue,for postpaid customers is billed in arrears based on minutes used and isrecognized when the service is rendered. Prepaid airtime sold to customers is recorded as deferred revenues priorto the commencement of services, and revenue is recognized when airtime is usedor expires.  Access and airtime providedare billed throughout the month according to the bill cycle in which aparticular subscriber is placed.  As aresult of bill cycle cut-off times, the Partnership is required to make estimatesfor service revenues earned but not yet billed at the end of each month.  These estimates are based primarily uponactual and historical minutes of use. The Partnership defers revenue based on an estimate of the portion ofminutes expected to be utilized prior to expiration.  The Partnership’s estimate of expected future revenue isprimarily based on historical experience as to minutes of use.

 

Roamingrevenues include revenues from certain customers who roam outside theirselected home coverage area, referred to as “incollect” roaming revenues, andrevenues from other wireless carriers for roaming by their customers on thePartnership’s network, referred to as “outcollect” roaming revenues.

 

24

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The Partnershipoffers enhanced services including caller ID, call waiting, call forwarding,three-way calling, no answer/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 and optionalservices may be bundled with package rate plans or sold separately.  Revenue for enhanced services and optionalfeatures is recognized as earned.

 

Equipmentsales consist principally of revenues from the sale of wireless mobiletelephone handsets and accessories to new and existing customers and to agentsand other third-party distributors.  Therevenue and related expenses associated with the sale of wireless handsets andaccessories are recognized when the products are delivered and accepted by the customer,at this is considered to be a separate earnings process from the sale ofwireless services.

 

**(n)****         Advertisingcosts**–

ThePartnership expenses production costs of print, radio and televisionadvertisements and other advertising costs as such costs are incurred.

 

**(o)****          Loyaltypoints program –**

In October2003, the Partnership commenced an innovative Loyalty Points Program (the“Program”) for its customers.  Thenumber of points that each customer could win is based on three parameters, (i)spending on Partnership’s services; (ii) time as a customer, (iii) and paymentcharacteristics.  Points accumulated canonly be redeemed for handsets and accessories.

 

Because theProgram is in its early stages, and due to the peculiarities of the wirelesstelecommunications market in Puerto Rico, the Partnership determined aredemption percentage of 15% to compute the end-of-year estimated liability forawards redemption.  This percentage ofredemption will be re-evaluated every quarter commencing in 2004.  The Partnership charges the cost ofoperating the program to selling expenses and the estimated cost of awardredemption to the cost of products available for redemption.

 

**(p)****          Incometaxes**–

Under U.S. taxrules the partnership is not subject to income tax; however, and only forPuerto Rico tax purposes, the Partnership accounts for income taxes inaccordance with the asset and liability method of accounting for income taxesprescribed by the Statement of Financial Accounting Standards No. 109,Accounting for Income Taxes.  Under theasset and liability method of Statement No. 109, deferred tax assets andliabilities are recognized for the future tax consequences attributable todifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax bases and operating losscarry-forwards.

 

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

The carryingamount of the Partnership’s financial instruments (excluding notes payable andthe Bridge Loan Facility):  cash,accounts receivable, accounts payable and accrued liabilities, are consideredreasonable estimates of fair value due to the short period to maturity.

 

Managementbelieves, based on current interest rates, that the fair value of its notes andthe Bridge Loan Facility approximates the carrying amount.

 

**(r)****          Concentrationof credit risk:**

Financialinstruments that potentially expose the Partnership to concentration of creditrisk include cash and accounts receivable. The Partnership maintains its deposit accounts with several high qualityfinancial institutions.  The fundsdeposited in these institutions are insured by the Federal Deposit InsuranceCorporation for aggregate customer balances up to $100,000.  While the Partnership attempts to limit anyfinancial exposure, its deposit balances may, at times, exceed federallyinsured limits.  The Partnership has notexperienced any losses on such accounts.

 

ThePartnership performs ongoing credit evaluations of its customers’ financialcondition and generally does not require collateral for accounts receivablearising during the normal course of doing business.  Concentration of credit risk is limited due to the large numberof customers comprising the Partnership’s customer base, but is highlydependent on the strong competition among the companies who provide personalcommunication services in Puerto Rico. No customer accounted for more than 10% of revenues in the yearspresented.

 

ThePartnership relies on local and long-distance telephone companies and othercompanies to provide certain communication services.  Although management believes alternative telecommunicationsfacilities could be found in a timely manner, any disruption of these servicescould potentially have an adverse impact on operating results.

 

ThePartnership relies on roaming agreements with other wireless carriers to permitthe Partnership’s customers to use their networks in areas not covered by thePartnership’s networks.  If theseproviders decide not to continue those agreements due to a change in ownershipor other circumstances, this could cause a loss of service in certain areas andpossible loss of customers.

 

ThePartnership’s inventories are currently acquired from only a few sources.  If the suppliers are unable to meet thePartnership’s needs as it continues to sell service and handsets, delays andincreased costs or losses of potential customers could result, which wouldadversely affect operating results.

 

**(s)****          Useof estimates**–

In preparingfinancial statements in conformity with accounting principles generallyaccepted in the United States of America, management is required to makeestimates and assumptions that affect the reported amounts of assets,liabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements, and the reported amounts of revenues and expensesduring the reporting periods.  The mostsignificant estimates relate to allowance for uncollectible accountsreceivable, depreciation, and intangible asset valuation and useful lives.  These estimates may be adjusted as morecurrent information becomes available, and any adjustment could besignificant.  Actual results coulddiffer from those amounts.

 

**(t)****            Reclassification**–

Certainamounts in the 2002 and 2001 financial statements have been reclassified toconform to the 2003 financial statement presentation.

 

In theaccompanying consolidated statement of operations for the year endedDecember 31, 2002, the Partnership classified various expense amounts as“Network operation and maintenance expense” which in the year 2001 weredistributed to other various expense accounts. The Partnership cannot determine the reclassifications and groupingsneeded to present this same expense classification in the restated andunaudited statements of operations for the year ended December 31, 2001.

 

25

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

 

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

 

**(b)****         **InApril 2002, the FASB issued SFAS No. 145, ***Rescission of FASB No. 4, 44 and 64, Amendment of SFAS No.13, and Technical Corrections***. SFAS No. 145 rescinds SFAS No. 4, ***Reporting Gains and Losses from Extinguishment of Debt*** –***an amendment of APB Opinion No. 30***,  which required all gains and losses fromextinguishments of debt to be aggregated and, if material, classified as anextraordinary item, net of related income tax effect. As a result, the criteriain Opinion 30 will now be used to classify those gains and losses.  SFAS No. 145 becomes effective for financialstatements issued on or after May 15, 2002.Requirements and guidance ofSFAS No. 145 were applied in connection with the write-off of the FCC debtdiscount.  Please refer to Note 14 (c).

 

**(c)****         **InJune 2002, the FASB issued SFAS No. 146, ***Accounting for Costs Associated with Exit or Disposal Activities***.  SFAS No. 146 requires that a liability for acost associated with an exit or disposal activity to be recognized and measuredinitially at fair value only when the liability is incurred.  SFAS No. 146 also establishes that fairvalue is the objective for initial measurement of the liability.  SFAS No. 146 applies to costs associatedwith an exit activity but does not involve an entity newly acquired in abusiness combination or with a disposal activity covered by SFAS No. 144.  SFAS No. 146 does not apply to costsassociated with a retirement covered by SFAS No. 143.  SFAS No. 146 became effective for exit or disposal activitiesthat were initiated after December 31, 2002.  The implementation of SFAS No. 146 did not have a material effecton the Partnership’s consolidated financial position or results fromoperations.

 

**(d)****         **InDecember 2002, the FASB issued Interpretation No. 45 (FIN 45),“Guarantor’s Accounting and Disclosure Requirements for Guarantees, IncludingIndirect Guarantees of Indebtedness of Others”.  For a guarantee subject to FASB Interpretation No. 45, aguarantor is required to:

 

•                  Measure andrecognize the fair value of the guarantee at inception (for many guarantees,fair value will be determined using a present value method); and

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

 

The disclosurerequirement of this Interpretation is effective for financial statements forfiscal years ending after December 15, 2002; it did not have any effect onthe Partnership’s financial statements. The initial recognition and measurement provisions are effectiveprospectively for guarantees issued or modified on or after January 1,2003, which did not have any effect on the Partnership’s financial statements.

 

**(e)****         **InJanuary 2003, the FASB issued FASB Interpretation No. 46, “Consolidationof Variable Interest Entities” (“FIN 46”). Fin 46 clarifies the application of Accounting Research Bulletin No. 51,“Consolidated Financial Statements” and provides guidance on the identificationof entities (“variable interest entities” or “VIE’s”) for which control isachieved through means other than through voting rights and how to determinewhen and which business enterprise should consolidate the VIE.  This new model for consolidation applies toan entity which either (1) the equity investors (if any) do not have acontrolling financial interest of (2) the equity  investment at risk is insufficient to finance that entity’sactivities without receiving additional subordinated financial support fromother parties.  In December 2003, theFASB issued a revision of the interpretation No. 46 to defer theimplementation, classify some of its provisions and to exempt certain entitiesfrom its requirements.  Management doesnot expect that the application of this standard will have any effect on thePartnership’s consolidated results of operations or financial condition.

 

26

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

 

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

The activity in the accounts receivable customers’ allowance fordoubtful accounts during the years ended December 31, was as follows:

 
|                                  |   |        |       |       |   | **Unaudited** |   |
|---------------------------------------|--------|-------------|------------|------------|--------|---------------|--------|
|                                  |   | **2003**    |       | **2002**   |   | **2001**      |   |
| Beginning balance                     |   | $           | 18,627,970 |       | $      | 18,404,570    |   | $ | 18,341,025 |   |
| Provision for doubtful  accounts      |   | 8,540,283   |       | 9,854,591  |   | 10,585,296    |   |
| Accounts receivable  written off, net |   | (12,136,139 | )          | (9,631,191 | )      | (10,521,751   | )      |
|                                  |   |        |       |       |   |          |   |
| Ending balance                        |   | $           | 15,032,114 |       | $      | 18,627,970    |   | $ | 18,404,570 |   |

 

**(b)  Accounts receivable others**–

Accounts receivable, others, represents mainly balances due from othercommunication providers with which the Company has interconnectionagreements.  At year-end, thePartnership established an allowance for doubtful accounts for the accountsreceivable, others, amounting to $366,958 that was included as part of theprovision for doubtful accounts in the accompanying statements of operations.

 

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

Inventories at December 31, consist of:

 
|                                    |   |       |      |       |   | **Unaudited** |   |
|-----------------------------------------|--------|------------|-----------|------------|--------|---------------|--------|
|                                    |   | **2003**   |      | **2002**   |   | **2001**      |   |
| Handsets                                |   | $          | 8,386,968 |       | $      | 10,036,851    |   | $ | 9,172,681 |   |
| Accessories and other                   |   | 264,327    |      | 424,261    |   | 1,132,573.0   |   |
| Total inventories                       |   | 8,651,295  |      | 10,461,112 |   | 10,305,254    |   |
|                                    |   |       |      |       |   |          |   |
| Reserve for losses on sale  of handsets |   | (4,742,559 | )         | —     |   | —        |   |
|                                    |   |       |      |       |   |          |   |
| Net inventories                         |   | $          | 3,908,736 |       | $      | 10,461,112    |   | $ | 10,305,254 |   |

 

**(8)****         Investmentin securities:**

 

As of December 31,2003 the Partnership had invested in mutual funds with a cost of $7,376,115($10 million cost and fair value at December 31, 2002).  The fair value of such funds as ofDecember 31, 2003 amounted to $7,338,288, therefore, the Partnershiprecognized a comprehensive loss resulting from the unrealized holding loss oninvestment of $37,827.

 

**(9)****         Investmentin subsidiary:**

 

During the year endedDecember 31, 2002, the Partnership acquired a 49% interest in InternetSurfing Stores of Puerto Rico, Inc., (ISS), a company which is engaged in thedevelopment of internet surfing galleries, targeted to the segment ofpopulation that does not own computers. Total amount invested during the years ended December 31, 2003 and 2002amounted to $262,334 and $392,000, respectively.  The Partnership’s investment in this company is accounted for onthe equity method of accounting.  Equityin losses for the years ended December 31, 2003 and 2002 amounted to $140,608and $114,746, respectively.

 

27

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The results of operationsand financial position of the Partnership’s equity investment are summarizedbelow:

 

**Condensed balancesheets information (as of December 31, 2003 and 2002):**

 
|                          |   | **2003** |     | **2002** |   |
|-------------------------------|--------|----------|----------|----------|--------|
| Current assets                |   | $        | 14,367   |     | $      | 9,028 |   |
| Non-current assets            |   | 396,486  |     | 390,596  |   |
| Total assets                  |   | $        | 410,853  |     | $      | 399,624 |   |
| Liabilities                   |   | $        | 73,922   |     | $      | 31,576 |   |
| Equity                        |   | (481,775 | )   | 368,048  |   |
| Total liabilities and  equity |   | $        | (410,853 | )   | $      | 399,624 |   |

 

**Condensed statements of operationsinformation (for the years ended December 31, 2003 and 2002):**

** **
|      |   | **2003** |     | **2002** |   |
|-----------|--------|----------|----------|----------|--------|
| Net sales |   | $        | 170,757  |     | $      | 16,221 |   |
| Net loss  |   | $        | (286,955 | )        | $      | (234,175 | ) |

 

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

 

PCS licensesat December 31, consist of:

** **
|                                 |   |       |       |       |   | **Unaudited** |   |
|--------------------------------------|--------|------------|------------|------------|--------|---------------|--------|
|                                 |   | **2003**   |       | **2002**   |   | **2001**      |   |
|                                 |   |       |       |       |   |          |   |
| 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 |   | 10,767,525    |   |
|                                 |   |       |       |       |   |          |   |
| Total                                |   | $          | 57,517,974 |       | $      | 57,517,974    |   | $ | 57,517,974 |   |

 

Each of the Partnership’sC-Block licenses is subject to an FCC requirement that the Partnershipconstructs network facilities that offer coverage to at least one-third of thepopulation in the market covered by such license, within five years followingthe grant of the applicable license and to at least two-thirds of thepopulation within ten years following the grant.  Although the Partnership’s build-out plan calls for it to exceedthese minimum requirements, failure to comply with these requirements couldresult in the revocation of the related licenses of the imposition of fines onthe Partnership by the FCC.  ThePartnership has complied with the build-out requirements for the CaliforniaLicenses.

 

28

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

 

Property andequipment at December 31, consist of:

 
|                                                                               |   | **Estimated  Useful Lives  (In Years)** |   | **2003**    |        | **2002**    |   | **Unaudited  2001** |   |
|------------------------------------------------------------------------------------|--------|-----------------------------------------|--------|-------------|-------------|-------------|--------|---------------------|--------|
| Network infrastructure  equipment                                                  |   | 10                                      |   | $           | 119,201,947 |        | $      | 113,011,633         |   | $ | 106,982,181 |   |
| Leasehold improvements                                                             |   | 5                                       |   | 5,126,022   |        | 4,906,427   |   | 4,373,540           |   |
| Furniture and fixtures                                                             |   | 5                                       |   | 24,499      |        | 23,964      |   | —              |   |
| Computer and office  equipment                                                     |   | 5                                       |   | 18,373,984  |        | 12,991,121  |   | 6,934,298           |   |
| Vehicles                                                                           |   | 5                                       |   | 665,682     |        | 706,639     |   | 706,639             |   |
| Network infrastructure  equipment located in California, not yet placed in service |   |                                    |   | —      |        | 185,967     |   | —              |   |
| California equipment                                                               |   | 10                                      |   | 185,967     |        | —      |   | —              |   |
|                                                                               |   |                                    |   |        |        |        |   |                |   |
| Total                                                                              |   |                                    |   | 143,578,101 |        | 131,825,751 |   | 118,996,658         |   |
|                                                                               |   |                                    |   |        |        |        |   |                |   |
| Less: accumulated  depreciation and amortization                                   |   |                                    |   | (52,908,766 | )           | (35,890,721 | )      | (21,932,257         | )      |
|                                                                               |   |                                    |   |        |        |        |   |                |   |
| Total                                                                              |   |                                    |   | 90,669,335  |        | 95,935,030  |   | 97,064,401          |   |
|                                                                               |   |                                    |   |        |        |        |   |                |   |
| Network under construction                                                         |   |                                    |   | 84,087      |        | 5,996,892   |   | 5,031,552           |   |
|                                                                               |   |                                    |   |        |        |        |   |                |   |
| Property and equipment,  net                                                       |   |                                    |   | $           | 90,753,422  |        | $      | 101,931,922         |   | $ | 102,095,953 |   |

 

**(12)****               Short-termnotes payable:**

 

**(a)****          Bridgeloan facility-**

 

DuringNovember 2000, the Partnership entered into a $60 million financingagreement (the “Bridge Loan Facility”) with ABN-AMRO and BBVA (the “Bank”) withvarying favorable short-term interest rates. This financing has been extended several times and is now guaranteed byTISA, and its maturity date has been extended to June 30, 2004.  The interest rate at December 31, 2003was 1.98%.  During 2003 the Partnershipreceived an additional $1 million advance under this financing facility.  On December 18, 2003, the applicableinterest margin was reduced to LIBOR plus 0.40% for the period commencingJanuary 2004, and ending the date that the loan would be repaid in full.

 

**(b)****          Notespayable to Telefónica Móviles, S.A.-**

 

On April 28,2003 the Partnership received the principal sum of $1,831,214 from TelefónicaMóviles, S.A. (TEM), a Spanish Corporation, and affiliated company throughcommon management.  The agreementprovides for the principal amount to bear interest at a floating rate of onepercent (1.00%) per annum over the 90 day LIBOR rate.  Accrued interest shall be payable in arrears every sixmonths.  During July and October 2003the Partnership received additional advances of $1,831,214 under the same termsas the original one.  These funds havebeen used to pay the quarterly principal and interest payments of the FCC debt.

 

Principal andinterest on these notes, which are unsecured, shall be payable in full withinsix months from the date of issuance; however, such maturity date can beautomatically extended for periods of six months, thereafter.

 

On January 29,2004, the Partnership received an additional advance from TEM in the amount of$1,831,214, with the same terms and conditions mentioned above.

 

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

 

Accountspayable and accrued liabilities at December 31, consist of:

 
|                                            |   |      |       |      |       | **Unaudited** |       |
|-------------------------------------------------|--------|-----------|------------|-----------|------------|---------------|------------|
|                                            |   | **2003**  |       | **2002**  |       | **2001**      |       |
|                                            |   |      | ** ** |      | ** ** |          | ** ** |
| Trade                                           |   | $         | 16,456,872 |      | $          | 17,609,462    |       | $ | 15,457,177 |   |
| Network construction costs                      |   | 59,339    |       | 483,211   |       | 1,881,734     |       |
| Other accounts payable and accrued  liabilities |   | 7,486,096 |       | 5,337,760 |       | 10,529,804    |       |
|                                            |   |      |       |      |       |          |       |
| Total                                           |   | $         | 24,002,307 |      | $          | 23,430,433    |       | $ | 27,868,715 |   |

 

The payment terms with Lucent for amounts classified as networkconstruction costs, require payment on due dates ranging from 60 to 365 daysafter an invoice has been submitted to the Partnership.

 

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

 

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

During 2000,the Partnership’s management and Lucent agreed on formally extending thepayment of up to $61.0 million of the total amount due under the networkconstruction payable.  The financingagreement was restructured as a Promissory Note on September 26, 2001,with a principal sum of $60.5 million plus interest, due March 15,2002.  The interest rate on thePromissory Note was 14%, which increased to 16% if the promissory note was notsatisfied by March 15, 2002.  ThePartnership was then given an extension on March 8, 2002 by****meansof an Allonge Letter.  The latter cameabout as a result of the signing of the Stock Purchase Agreement with TLD(refer to Note 1) which agreement reduced the interest rate to 8%.

 

DuringJune 2003 the Partnership and Lucent entered into a Senior CreditAgreement which refinanced the balance of the existing promissory note balance.  The interest rate remained at 8% per annumand the maturity date was extended to September 2009; also the Partnershipwas required to make two principal payments of $5,551,032 each, during 2003.

 

As ofDecember 31, 2003, $51,470,204 was outstanding under this financingagreement.  The note payable isguaranteed by a security agreement covering most of the Partnership’s assets,as defined.

 

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

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

 

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

•                  Final maturity date will be December 20, 2005.

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

 

• Within three business days afterJune 20, 2003 - $2,000,000 for principal.

 

• On June 20, 2003, $337,372 foraccrued interest.

 

• Within three business days afterJune 20, 2003 - $184,118 for outstanding invoices.

 

As ofDecember 31, 2003, $4,536,029 was outstanding under this financingagreement.

 

**(c)****          FCCnotes –**

Originally, the Partnership had approximately $51,340,000 in long-termdebt related to the PCS licenses granted to the Partnership by the FCC.  This debt consists of notes payable bearinginterest at 6.5% and guaranteed by the PCS licenses obtained.  In accordance with industry practice, thePartnership recorded the PCS licenses and the related debt at their net presentvalue, based on the Partnership’s estimate of borrowing costs for debt similarto that issued by the FCC.  The discountrate used by the Partnership was 12.82%. These notes are payable to the FCC as follows:

 

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

 

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

 

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

 

As of December31, 2003, management from the Partnership, TEM and TEF believe that they haveenough and strong evidence that the refinancing of the Bridge Loan and the FCCdebt will be done before the end of 2004. The most important issue that has to be completed before the refinancingcan be done is the approval by the FCC of the conversion of the TLD Notes (see(d) below).  In the opinion ofmanagement, the approval by the FCC is in its final stage, and is expected tobe completed not later than June 2004. After the approval by the FCC, the refinancing of the debts will nottake more than six months, as established by letter of agreements between thePartnership, TEM and TEF.

 

Because of theevidence available, Partnership’s management adjusted the balance as ofDecember 31, 2003 of the FCC debt discount, which amounted to $3,913,661.  Following SFAS No. 145, “Rescission of FASFStatements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and TechnicalCorrections”, the loss resulting from the adjustment of the FCC debt discounthas been reflected as interest expense in the other expenses section of theaccompanying statement of operations.

 

**(d)****          TLDnotes –**

Originally,the Partnership had a secured promissory note (the “Promissory Note”) payableto TLD amounting to $19,960,000, which bore interest at the floating rate ofthe 90-day LIBOR rate plus 1-1/2% and the balance of $24,852,533 was due inMarch 2004.  The principal amountof the Promissory Note, as amended, shall be converted into NewComm’s shares ofcommon stock, as follows:  (i)  shares of NewComm’s Class A common stock inan amount equal to thirty-three and one third percent (33-1/3%) of NewComm’sissued and outstanding Class A common stock held by ClearComm, and (ii) sharesof NewComm’s Class B common stock in an amount equal to forty-nine point sevenpercent (49.7%) of all issued and outstanding shares of Class A common stock ofNewComm (including the Class A common stock issued to TLD upon conversion ofthe Promissory Note).  Upon the issuanceof the FCC approval, TLD shall surrender the Promissory Note to NewComm, dulyendorsed for cancellation, and NewComm shall issue (I) the certificatesevidencing the number of shares of Class A common stock and Class B commonstock into which the Promissory Note is convertible, as set forth herein, and(II) a promissory note in a principal amount equal to the accrued interest onthe Promissory Note as of such date (the “Interest Note”).  The promissory note will be non-interestbearing and the principal amount may be converted into additional shares ofNewComm’s stock.  Because ofrestrictions in the PCS licenses, the Promissory Note cannot be converted intoshares of NewComm until such time as the FCC may authorize TLD to hold morethan a 25% equity interest in NewComm. On January 1, 2004, this secured promissory was amended to be due inDecember 2004, and to bear interest at 1%.

 

During 2001,the parties amended the Joint Venture Agreement to eliminate TLD’s option toacquire a majority interest in NewComm from ClearComm, and revised thePromissory Note and corresponding unexecuted Interest Note to eliminate thePartnership’s conversion rights under the latter instrument.

 

DuringNovember and December 2000, and May 2001, TLD loaned $14,970,000to the Partnership and the Partnership issued three convertible unsecured promissorynotes payable to TLD for the principal amount of $4,990,000 each.  The convertible promissory notes bearinterest at .75% over the 180-day LIBOR (Notes one and two) and 1.50% over the90-day LIBOR (Note three).  Theprincipal amounts of the promissory notes are each convertible into 29.34shares of the Partnership’s Class A common stock at any time prior to theirrespective maturity dates of November 2, 2005, December 15, 2005 andMay 1, 2006.

 

DuringMay and December 2002, TLD loaned and the Partnership issued twoadditional unsecured promissory notes for $9.0 million and $9.9 million,respectively, convertible into 57.24 shares of the Partnership’s Class A commonstock, with maturity dates of May 20, 2007 and December 27, 2007,respectively.  These convertiblepromissory notes bear interest at .25% over the 180-day LIBOR (Note four) and..25% over the 90-day LIBOR (Note five).

 

On September26, 2003, and as part of a corporate reorganization, TLD transferred all ofNewComm’s notes to TLD 1, which in turn merged with Móviles 1, surviving TLD 1,which was later dissolved resulting in TEM Puerto Rico, Inc., becoming theholder of all the secured and convertible promissory notes previously owned byTLD.

 

AtDecember 31, 2003, future principal installments (after renegotiatedterms) on these notes payables were as follows:

 
| **Year ending  December 31,** |   | **Lucent** |       | **Alcatel** |   | **FCC**     |   | **TEM-PR**  |       | **Total**   |   |
|------------------------------------|--------|------------|------------|-------------|--------|-------------|--------|-------------|------------|-------------|--------|
|                               |   |       |       |        |   |        |   |        |       |        |   |
| 2004                               |   | $          | 3,000,000  |        | $      | 2,075,000   |   | $           | 12,197,270 |        | $      | 25,237,740 |   | $ | 42,510,010 |   |
| 2005                               |   | 6,000,000  |       | 2,461,029   |   | 13,009,628  |   | 11,103,713  |       | 32,574,370  |   |
| 2006                               |   | 6,000,000  |       | —      |   | 13,876,090  |   | 5,472,704   |       | 25,348,794  |   |
| 2007                               |   | 8,500,000  |       | —      |   | 3,611,088   |   | 19,386,353  |       | 31,497,441  |   |
| 2008                               |   | 10,000,000 |       | —      |   | —      |   | —      |       | 10,000,000  |   |
| Thereafter                         |   | 17,970,204 |       | —      |   | —      |   | —      |       | 17,970,204  |   |
|                               |   |       |       |        |   |        |   |        |       |        |   |
|                               |   | 51,470,204 |       | 4,536,029   |   | 42,694,076  |   | 61,200,510  |       | 159,900,819 |   |
| Less current  portion              |   | (3,000,000 | )          | (2,075,000  | )      | (12,197,270 | )      | (25,237,740 | )          | (42,510,010 | )      |
|                               |   |       |       |        |   |        |   |        |       |        |   |
| Long-term  portion                 |   | $          | 48,470,204 |        | $      | 2,461,029   |   | $           | 30,496,806 |        | $      | 35,962,770 |   | $ | 117,390,809 |   |

 

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

 

**(a)****         **NewCommentered into a management agreement with TLD whereby TLD has agreed to combineits experience, know-how, synergies and resources in the development,preparation and implementation of NewComm’s business policies and organizationin all major areas of operations.  Aspart of this management agreement, TLD agreed to advise NewComm in 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.  NewCommis responsible 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 requires NewComm to pay an annual fee (payable quarterlyin arrears) based on the highest of 9% of Partnership’s earnings beforeinterest, taxes, depreciation and amortization (“EBITDA”) as of the end of theprevious year or $750,000.  The initialterm of this management agreement is five years beginning in February 4,1999, and is automatically renewable.  During2002 the agreement was amended and as a result, this fee is now payable to TEM.

 

In December2003, TLD and TISA subscribed an agreement whereby the Management Agreement wastransferred to TEM with retroactive effect as of January 1, 2002, since TEM havebeen providing such services since that date.

 

**(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.

 

**(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 the fee.  The initial term of this agreement is fiveyears and is automatically renewable. On January 1, 2000, the technology transfer agreement was transferred toTEM.

 

**(d)****         **Atentode Puerto Rico, Inc., a related entity, provides NewComm call center services,including customer service and others based on arranged rates.

 

**(e)****         **ThePartnership agreement, as amended, provides for payment of a management fee toits General Partner (SuperTel), equal to the reasonable costs of operating thebusiness of the Partnership, plus 10% of such aggregate amount, which fee shallbe payable monthly, on the first day of each month during the year.  Expenses reimbursed include, but are notlimited to, compensation costs, and expenses incurred by officers, directors,and employees in the performance of their duties.  In connection with this agreement, the General Partner billed thepartnership approximately $282,280 and $262,164 during the years endedDecember 31, 2003 and 2002, respectively, in connection with theseservices.

 

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

 

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

 

Total amountscharged by related parties during the years ended December 31, 2003, 2002and 2001 for the above agreements and other charges amounted to $4,165,826,$6,070,538, and $7,620,289, respectively.

 

Accountspayable to related parties as of December 31, consist of:

 
|                                                            |   |      |       |      |      | **Unaudited** |   |
|-----------------------------------------------------------------|--------|-----------|------------|-----------|-----------|---------------|--------|
|                                                            |   | **2003**  |       | **2002**  |      | **2001**      |   |
|                                                            |   |      |       |      |      |          |   |
| TLD                                                             |   | $         | 9,608,940  |      | 9,784,125 |          | *      |   |
| TEM (TISA in 2001)                                              |   | 4,675,006 |       | 3,221,142 |      | *             |   |
| Atento de  Puerto Rico, Inc.                                    |   | 567,802   |       | 800,099   |      | *             |   |
| Telefónica  Móviles y Soluciones y Aplicaciones, S.A. |   | 1,740,709 |       | 2,895,077 |      | *             |   |
|                                                            |   |      |       |      |      |          |   |
|                                                            |   | $         | 16,592,457 |      | $         | 16,700,443    |   | $ | 8,705,353 |   |
|                                                                 |        |           |            |           |           |               |        |  |  |  |

 

----

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

 

29

----

 

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

 

In October 1999, NewComm established a defined contributionretirement plan (1165e Plan) covering all employees who have at least threemonths of service and are at least 21 years old.  Participants may contribute from one to ten percent of theircompensation, as defined, up to a maximum of $8,000.  NewComm contributes 66% of the aggregate participantcontributions up to a maximum of six percent of the participant’scompensation.  Contributions for theyears ended December 31, 2003, 2002 and 2001 amounted to $219,621,$164,410 and $166,950, respectively.

 

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

 

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

 

(i)             ThePartnership is committed under various operating lease agreements for itsoffice space as well as various sites for communication equipment and storesunder different terms and conditions. Minimum annual rental commitments at December 31, 2003 are asfollows:

 
| **Year ending  December 31,** |   | **Amount** |      |
|------------------------------------|--------|------------|-----------|
|                               |   |       |      |
| 2004                               |   |       | $         | 5,514,524 |   |
| 2005                               |   |       | 2,796,289 |   |
| 2006                               |   |       | 991,878   |   |
| 2007                               |   |       | 550,097   |   |
| 2008                               |   |       | 376,759   |   |
|                               |   |       |      |   |
| Total                              |   |       | $         | 10,229,547 |   |

 

Rent expense for the years ended December 31, 2003, 2002 and 2002was $6,755,330, $7,766,611, and $7,976,654, respectively.

 

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

 

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

 

•                  Licensing agreement – for the use ofthe SCL 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 –for the maintenance of the SCL software application and related consultingservices.  The agreement is for threeyears and the monthly fee is based on pre-determined rates and hours incurred.

 

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

 

As ofDecember 31, 2003 and 2002 the Partnership had an outstanding balance of$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, 2003 and 2002 was $1,723,820 and$2,895,078, respectively.

 

**(c)****         **ThePartnership entered into an agreement with Brightstar Corp. (“Brightstar”) forthe selling, distribution and administration of its inventories.  Brightstar will sublease NewComm warehousepremises located in Caguas, Puerto Rico, for a fixed monthly fee.  The service cost that Brightstar will chargeNewComm is based on established rates depending on the inventory costs (asdescribed in Section 3.7 of the agreement). The agreement was signed in October 2003, valid for two years, and shallbe automatically extended for two additional years.

 

30

----

 

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

 

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

 

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

 

(g)         Duringthe year ended December 31, 2003, the Partnership entered into a serviceagreement with Telecommunication Systems, Inc. (TCS), whereby TCS agreed toprovide software maintenance services in the areas of “assistance requestmanagement” (ARM) and product updates and upgrades.  Services include: call receipt and routing, service restoration,problem resolution of reported conditions, on-site assistance, software updatesand upgrades, hardware maintenance and hardware upgrades.  This service agreement is on a year-to yearbasis for a fixed annual fee of $299,450.

 

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

 

The Partnership is thedefendant in several legal cases related to former employees, arising in theordinary course of business.  In theopinion of management, after consultation with legal counsel, the ultimatedisposition of these matters will not have a material adverse effect on thePartnership’s financial position and results of operations.

 

**(19)     Partners’capital:**

 

At December 31, 20032002 and 2001, the limited partners’ capital consisted of 2,907.1 unitsdistributed among approximately 1,600 limited partners.

 

The Partnership Agreementprovides that the Partnership may sell additional limited partnership interestsafter 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, the operating losses of thePartnership will be allocated first to the partners as necessary to offset anyprofits previously allocated to them until each partner has cumulative lossesequal to cumulative profits previously allocated to each partner, and second,75% to the limited partners in accordance with the number of units held by eachlimited partner and 25% to the General Partner.   However, any losses that would have the effect of causing orincreasing a partners’ capital account deficit will be allocated first, prorata to the other partners in accordance with their respective share ofpartnership distributions, and second, when such allocations can be madewithout increasing a partner’s capital account deficit, to the General Partner.

 

31

----

 

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

 

ThePartnership, as a United States limited partnership, is not subject to federalincome tax and the tax affect of its activities flow–through to the partners.  For U.S. tax purposes the Partnership’s taxlosses have been passed through to the limited partners to the extent of theirinvestment.  The Partnership is subjectto Puerto Rico income tax as a regular corporation.

 

For PuertoRico tax purposes the Partnership has net operating loss carryforwards totalingapproximately $5.6 million, available to reduce future taxable income.  The loss carryforwards expire in fiscalyears 2003 through 2010.

 

NewComm hasnet operating loss carryforwards totaling approximately $150 million availableto reduce future taxable income.  Theloss carryforwards expire in fiscal years 2006 through 2010.

 

AtDecember 31, 2002 the deferred tax asset resulting from future income taxbenefits of the available operating losses was approximately $31 million, atthe lower tax bracket.  A valuationallowance for the same amount has been established due to the uncertainty as tothe realization of the tax benefit of such operating losses.

 

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

 

During theyears ended December 31, 2003 and 2002, the Partnership had the followingnon-cash investing and financing activities:

 

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

 

b.              Interestfor the years ended December 31, 2003 and 2002, amounting to $1,036,383and $1,113,724, respectively, was capitalized as part of the TLD long-termdebt.

 

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

 

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

 

The amountpresented as dilution gain in the accompanying statements of changes inPartners’ deficit represents the effect of investments made by an outsideminority interest investor during the years 2002 and 2001 ($10 million and $5million, respectively).  The equity gainis the effect of the reduction of the Partnership’s participation in the stockholders’deficit of NewComm, allocated to the limited partners and the General Partner,based on their percentage of participation, 75% and 25%, respectively.

 

## **(23)     Quarterlyfinancial information for 2003 and 2002 unaudited, and for 2001 restated andunaudited:**

##  

Certain unauditedquarterly financial information for the years 2003 and 2002 and restated andunaudited quarterly financial information for the year 2001follows:

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

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

 

As discussedin Note 4(f) to the accompanying consolidated financial statements, effectiveJanuary 1, 2003 the Partnership changed its method to account for the loss onsale of handsets to customers.  Thequarterly unaudited consolidated financial information for the year endedDecember 31, 2003 was adjusted accordingly.

 

As discussed in Note 2 tothe accompanying consolidated financial statements, the Partnership hasrestated its consolidated financial statements as of and for the year endedDecember 31, 2001.  The adjustmentsand reclassifications made as part of the restatements of the consolidatedfinancial statements were also adjusted into the quarterly restated andunaudited financial information for the year 2001.

 

As discussedin Note 4(i) to the accompanying consolidated financial statements, thePartnership adopted SFAS 142 “Goodwill and other Intangibles Assets” onJanuary 1, 2002.  The quarterlyunaudited consolidated financial information for the year endedDecember 31, 2002 was adjusted accordingly.

 

32

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**Report****of Independent Public Accountants**

 

# To the Board of Directorsof

#  

SuperTelCommunications Corp.:

 

We haveaudited the accompanying balance sheet of **SuperTel Communications Corp.**as ofDecember 31, 2003 and 2002, and the related statements of income andaccumulated deficit, and cash flows for the years then ended.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits.  The financial statements of **SuperTelCommunications Corp.** as of and for the year ended December 31,2001, were audited by other auditors who have ceased operations and whosereport dated April 16, 2002, expressed an unqualified opinion on those statements.

 

We conductedour audits in accordance with auditing standards generally accepted in theUnited States of America.  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion.

 

In ouropinion, the financial statements referred to above present fairly, in allmaterial respects, the financial position of **SuperTel Communications Corp**.as of December 31, 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,                          |
| March 15,  2004                                 |

 

33

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**SuperTel Communications Corp.**

 

**BalanceSheets****—December 31, 2003, 2002, 2001**

 
|                                                                                                          |   | **2003** |       | **2002** |       | **2001** |       |
|---------------------------------------------------------------------------------------------------------------|--------|----------|------------|----------|------------|----------|------------|
| **CURRENT ASSETS:**                                                                                           |   |     |       |     |       |     |       |
| Cash                                                                                                          |   | $        | 2,188      |     | $          | 63,853   |       | $ | 3,707 |   |
| Accounts receivable from  affiliated company                                                                  |   | 154,934  |       | 136,154  |       | 137,538  |       |
| Prepaid income tax                                                                                            |   | —   |       | —   |       | 2,760    |       |
|                                                                                                          |   |     |       |     |       |     |       |
| Total current assets                                                                                          |   | 157,122  |       | 200,007  |       | 144,005  |       |
|                                                                                                          |   |     |       |     |       |     |       |
| Investment in partnership  at equity, net                                                                     |   | —   |       | —   |       | —   |       |
|                                                                                                          |   |     |       |     |       |     |       |
| Total assets                                                                                                  |   | $        | 157,122    |     | $          | 200,007  |       | $ | 144,005 |   |
|                                                                                                          |   |     |       |     |       |     |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                |   |     | ** ** |     | ** ** |     | ** ** |
|                                                                                                          |   |     |       |     |       |     |       |
| **CURRENT  LIABILITIES:**                                                                                     |   |     |       |     |       |     |       |
| Accounts payable                                                                                              |   | $        | 6,000      |     | $          | 69,900   |       | $ | 37,731 |   |
| Income tax payable                                                                                            |   | 6,415    |       | 4,647    |       | —   |       |
|                                                                                                          |   |     |       |     |       |     |       |
| Total current liabilities                                                                                     |   | 12,415   |       | 74,547   |       | 37,731   |       |
|                                                                                                          |   |     |       |     |       |     |       |
| **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  |       |
| Accumulated deficit                                                                                           |   | (5,039   | )          | (24,286  | )          | (43,472  | )          |
|                                                                                                          |   |     |       |     |       |     |       |
| Total stockholders’ equity                                                                               |   | 144,707  |       | 125,460  |       | 106,274  |       |
|                                                                                                          |   |     |       |     |       |     |       |
| Total liabilities and  stockholders’ equity                                                              |   | $        | 157,122    |     | $          | 200,007  |       | $ | 144,005 |   |

 

The accompanying notes are anintegral part of these balance sheets.

 

34

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**SuperTelCommunications Corp.**

 

**Statementsof Income and Accumulated Deficit**

**Forthe Years Ended December 31, 2003, 2002, 2001**

 
|                                        |   | **2003** |    | **2002** |   | **2001** |   |
|---------------------------------------------|--------|----------|---------|----------|--------|----------|--------|
|                                        |   |     |    |     |   |     |   |
| **REVENUES:**                               |   |     |    |     |   |     |   |
| Management fees                             |   | $        | 282,280 |     | $      | 262,164  |   | $ | 138,927 |   |
|                                        |   |     |    |     |   |     |   |
| **EXPENSES:**                               |   |     |    |     |   |     |   |
| Directors’ fees                        |   | 250,000  |    | 218,750  |   | 117,194  |   |
| Other general and  administrative expenses  |   | 6,618    |    | 19,581   |   | 9,103    |   |
|                                        |   |     |    |     |   |     |   |
| Total administrative  expenses              |   | 256,618  |    | 238,331  |   | 126,297  |   |
|                                        |   |     |    |     |   |     |   |
| **INCOME  BEFORE PROVISION FOR INCOME TAX** |   | 25,662   |    | 23,833   |   | 12,630   |   |
|                                        |   |     |    |     |   |     |   |
| Provision for income tax                    |   | 6,415    |    | 4,647    |   | —   |   |
|                                        |   |     |    |     |   |     |   |
| **NET  INCOME**                             |   | 19,247   |    | 19,186   |   | 12,630   |   |
|                                        |   |     |    |     |   |     |   |
| **ACCUMULATED  DEFICIT, beginning of year** |   | (24,286  | )       | (43,472  | )      | (56,102  | )      |
|                                        |   |     |    |     |   |     |   |
| **ACCUMULATED  DEFICIT, end of year**       |   | $        | (5,039  | )        | $      | (24,286  | )      | $ | (43,472 | ) |

 

The accompanying notes are an integral part of thesestatements.

 

35

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**SuperTelCommunications Corp.**

 

**Statementsof Cash Flows**

**Forthe Years Ended December 31, 2003, 2002, 2001**

 
|                                                                                     |   | **2003** |   | **2002** |   | **2001** |   |
|------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                                                                     |   |     |   |     |   |     |   |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                               |   |     |   |     |   |     |   |
| Net income                                                                               |   | $        | 19,247 |     | $      | 19,186   |   | $ | 12,630 |   |
|                                                                                     |   |     |   |     |   |     |   |
| Adjustments to reconcile  income to net cash provided (used in) by operating activities- |   |     |   |     |   |     |   |
| (Increase) decrease in  accounts receivable from affiliated company                      |   | (18,780  | )      | 1,384    |   | (48,926  | )      |
| Decrease in prepaid  expenses                                                            |   | —   |   | 2,760    |   | —   |   |
| (Decrease) increase in  accounts payable                                                 |   | (63,900  | )      | 32,169   |   | 7,987    |   |
| Increase in income tax  payable                                                          |   | 1,768    |   | 4,647    |   | —   |   |
|                                                                                     |   |     |   |     |   |     |   |
| Total adjustments                                                                        |   | (80,912  | )      | 40,960   |   | (40,939  | )      |
|                                                                                     |   |     |   |     |   |     |   |
| **NET CASH  PROVIDED BY (USED IN) OPERATING ACTIVITIES AND INCREASE (DECREASE) IN CASH** |   | (61,665  | )      | 60,146   |   | (28,309  | )      |
|                                                                                     |   |     |   |     |   |     |   |
| **CASH,  beginning of year**                                                             |   | 63,853   |   | 3,707    |   | 32,016   |   |
|                                                                                     |   |     |   |     |   |     |   |
| **CASH, end  of year**                                                                   |   | $        | 2,188  |     | $      | 63,853   |   | $ | 3,707 |   |

 

The accompanying notes are an integral part of these statements.

 

36

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**SuperTelCommunications Corp.**

 

**Notesto Financial Statements**

**December 31,2003, 2002, 2001**

 

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

 

SuperTel CommunicationsCorp. (the Company) was organized on June 7, 1996, under the laws of theCommonwealth of Puerto Rico.  TheCompany was created to serve as general partner (the General Partner) ofClearComm, L.P. (the Partnership).

 

Most of theCompany’s transactions are related to the administration of the Partnership, alimited partnership organized on January 24, 1995, under the laws of theState of Delaware, for which the Company has served as General Partner sinceJune 18, 1996.  The Partnership isscheduled to terminate on December 31, 2005, or earlier upon the occurrenceof certain specific events as detailed in the Partnership agreement. OnJanuary 22, 1997, the Partnership was granted the PCS Block C licenses forPuerto Rico and certain western states of the United States.  On February 4, 1999, the Partnershipentered into an agreement with Telefónica Larga Distancia de Puerto Rico, Inc.(TLD); several of the 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 NewComm Wireless Services, Inc.(NewComm), a newly organized Puerto Rico corporation owned by the Partnership,in exchange for all of NewComm’s issued and outstanding common stock.  Subsequently, the Partnership sold part ofits investment in NewComm, and as of December 31, 2003 and 2002, thePartnership owned 76.89% of NewComm’s issued and outstanding common stock.

 

•                  TLD lentapproximately $20 million to NewComm by means of a secured convertiblepromissory note payable (the Promissory Note). Payment of the Promissory Note is collateralized through the provisionsof a separate agreement pursuant to which a security interest is 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 convertedto a certain number of shares of NewComm’s common stock corresponding toapproximately 49.9% of NewComm’s.  OnMarch 12, 2002, the Partnership agreed to sell an additional 0.2% of itsshares in NewComm to TLD to bring TLD’s ownership to 50.1%; this transaction issubject to a third party valuation of NewComm’s stock and approval by the FCCpermission for which has been formally requested.

 

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

 

In September 1999,NewComm commenced providing PCS services in Puerto Rico.  The Company is entitled to 25% of alldistributions made by the Partnership.

 

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

 

Thefollowing summarizes the most significant accounting policies followed in thepreparation of the accompanying financial statements:

 

**Use ofestimates**–

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States requires management to make estimatesand assumptions 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.

 

**Revenuerecognition**–

Managementservice revenues are recognized on a monthly basis as services are provided.

 

**Investmentin Partnership**–

The Company 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 accompanyingstatement of operations.  (See Note 3).

 

37

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**Incometaxes-**

Inaccounting for income taxes, the Company uses the asset and liability approachthat requires the recognition of deferred tax liabilities and assets for theexpected future tax consequences of temporary differences between the carryingamounts and the tax bases of assets and liabilities.  A valuation allowance is recognized for ay deferred tax asset forwhich, based on management’s evaluation, it is more likely than not (alikelihood of more than 50%) that some portion of the deferred tax asset willnot be realized.

 

**(3)****          Investmentin the Partnership:**

 

Originally, the Companyacquired 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 written-down to zero.  As ofDecember 31, 2003 and 2002, the Company’s share of the undistributedlosses of the Partnership amounted to approximately $33.4 million and $33million, respectively.  The Companywould have to first recover its share of the Partnership undistributed lossesbefore it could pick-up any share of the Partnership’s gains.

 

**(4)****          Relatedparty transactions:**

 

ClearComm’s partnershipagreement, as amended, provides for payment of a management fee to its GeneralPartner (the Company), equal to the reasonable costs of operating the businessof the Partnership, plus 10% of such aggregate amount, which fee shall bepayable monthly, on the first day of each month during the year.  Expenses reimbursed include, but are notlimited to, compensation costs, and expenses incurred by to officers,directors, and employees in the performance of their duties.  During 2003 and 2002, management fees billedto ClearComm amounted to $282,280 and $262,164, respectively.

 

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

 

**(5)****          Preferredstock:**

 

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

 

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

 

From time to time theCompany 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 Company or the Partnership will have a materialadverse effect on the Company’s or the Partnership’s business or financialcondition.

 

**ITEM 9****. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL DISCLOSURE**

 

None.

 

**ITEM 9A****. CONTROLSAND PROCEDURES**

 

The Company’s management,including its President and Chief Financial Officer, have conducted anevaluation of the effectiveness of the Company’s disclosure controls andprocedures as defined 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 (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 been no significant changes ininternal controls, or in factors that could significantly affect internalcontrols, subsequent to the date the President and Chief Financial Officercompleted their evaluation.

 

##### **ITEM 10****.  DIRECTORS ANDEXECUTIVE OFFICERS**

#####  

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

 

38

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*Fred H. Martinez, Director and Chairman of the Board*, age 59, 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 Rico IncomeTax Bureau, member of the Governor’s Economic Advisory Council, chairman,Committee on Section 936, Government of Puerto Rico, assistant secretaryof the treasury, Internal Revenue, Puerto Rico Treasury Department (1978-1979), president, Tax Committee, Puerto Rico Chamber of Commerce (1978-1979).  In 1993 he was chairman of the board of theSolid Wastes Management Authority, Government of Puerto Rico.  Mr. Martinez has extensive experiencein contract negotiations, corporate and tax law, and in directing majorinstitutions.  He holds a BS in Economicsfrom Villanova University (1967), an LLB (law) from the University of PuertoRico (1971), and an LLM (taxation) from Georgetown University (1972).

 

*Javier O. Lamoso, President,*age 39, has had extensive experience in thetelecommunications industry and has been responsible for developing,negotiating and overseeing numerous strategic operational, economic andpolitical aspects of the cellular telephone industry, including cell-siteacquisition, environmental impacts, leasing contractual arrangements andinter-company relations with other operating telecommunications organizations,including interexchange carriers and local telephone companies.  Since 2002, Mr. Lamoso has been a member andofficer of the Board of Directors of the Young Presidents’ Organization, PuertoRico 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 1987Mr. Lamoso held a non-legal position in the corporate finance departmentof Simpson, Thacher & Bartlett, and was involved with the 1987 successfulexternal debt restructuring of Chile. He holds a BA in Political Science/ Economics from Fordham University(1986), and a JD in law from the University of Puerto Rico (1990).

 

*Gary H. Arizala, Director*, age 65, is an entrepreneur and successfulbusinessman.  Mr. Arizala has experiencein the cellular telephone industry serving as chairman of United CellularAssociates from 1988 to the present and of Aikane Cellular from 1991 to thepresent.  In these capacities hedirected the executive committee activities to oversee the development of theME-3 RSA cellular telephone system which was successfully acquired by Telephone& Data Systems in early 1994.  In1972 Mr. Arizala founded Alphabetland Preschool and Kindergarten, which heowns and operates.  Alphabetlandprovides high-quality childcare and preschool education services to 350 to 400families annually through four child care centers located on Oahu, Hawaii, andemploys approximately 60 people.  From1963 to 1971, Mr. Arizala was an assistant civil engineer with the State ofCalifornia responsible for utilities relocation for the State WaterProject.  His duties included negotiatingplans and agreements with Southern California Edison, Southern California Gas,the United State Forest Service among other major private and publicagencies.  He is on the GuardianAdvisory Council of the National Federation of Independent Businesses HawaiiChapter, and an active member of the Chamber of Commerce and Small BusinessHawaii organizations.  Mr. Arizala holdsa BS in Civil Engineering from the University of Hawaii (1963).  Unfortunately, Mr. Arizala died on March 21,2004.

 

*Margaret W. Minnich, Director*, age 50, 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 several privately-heldcompanies and a private foundation. From 1992 to the present, she has worked for The California WellnessFoundation and since December 1997 is serving as Vice President of Financeand Chief Financial Officer, and is responsible for all financial reporting,accounting, budgeting and tax functions including investment performance andasset allocation review of a $900 million investment portfolio, and managingcash flow for an annual budget exceeding $45 million.  From 1984 through 1990, Ms. Minnich held several key positionswith MICOM Communications Corporation, including manager of financial planningwhere she directed all accounting and financial functions.  From 1981 to 1984, Ms. Minnich was a senioraccountant with Ernst & Young, Los Angeles, specializing in electronics,aerospace and heavy industry fields. Ms. Minnich is a member of the California Society of Certified PublicAccountants and Southern California Association for Philanthropy.  She holds a BA in Philosophy from theUniversity of Southern California (1978) and an MBA in accounting from USC(1981).

 

*Lawrence Odell, Director and Secretary*, age 55, is the co-managing partner ofPuerto Rico’s third largest law firm with substantial expertise in the fieldsof corporate finance, 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) fromthe Inter-American University of Puerto Rico, and a LL.M. in labor law from NewYork University (1975).  Mr. Odell hasserved in the capacity of secretary for several major corporations, includingBuenos Aires Embotelladora, S.A. (BAESA).

 

*James T. Perry, Director*, age 71, is a successful entrepreneur and businessmanwith substantial experience in the real estate and retail foods industries.Since 1993, Mr. Perry has purchased and sold a two-way radio license, and hasbeen involved in several wireless communication partnerships.  From 1987 to 1993, he was general partner ofTelenode Rincon, the original owner and developer of the RSA cellular telephonesystem for PR-1, which was successfully acquired by Cellular Communications,Inc., as well as managing other cellular telephone and telecommunicationsholdings.  From 1959 to 1975, Mr. Perrywas the president 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 Saint Louis,Missouri, and was responsible for all operations of this successful business.Mr. Perry served in the U.S. Army in Korea, and has taken extensive courses inthe fields of general business and real estate.  From 1988 to 1992 he was vice president of the Ronald McDonaldChildren’s Charities, and from 1980 to 1984 he

 

39

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

 

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

######  

Based solely upon areview of any Forms 3, 4 and 5 and any amendments thereto furnished to theRegistrant pursuant 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 anyForm 3, 4 or 5 relating to the Registrant for 2003.

 

##### **ITEM 11****.  EXECUTIVE COMPENSATION**

#####  

The Partnership ismanaged by the General Partner’s Board of Directors and executive officers ofthe General 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. Other than the President, no executive officer of the General Partnerreceived compensation of $100,000 or more in 2003.

 

**SUMMARY COMPENSATION TABLE**

 

 
|                               |   | **Annual  Compensation** |   | **Long-Term  Compensation  Awards** |   |         |   |
|------------------------------------|--------|--------------------------|--------|------------------------------------------|--------|--------------|--------|
| **Name & Principal  Position** |   | **Fiscal  Year**         |   | **Compensation  ($)**                    |   | **Bonus($)** |   | **Other  Annual  Compensation  ($)(1)** |   | **Securities  Underlying  Options/SAR’s** |   | **All Other  Compensations  ($)** |   |
| Javier Lamoso, President           |   | 2003                     |   | $                                        | 76,931 |         | $      | 0 |   | $ | 185,000 |   | 0 |   | $ | 0 |   |
| and Director                       |   | 2002                     |   | $                                        | 75,200 |         | $      | 0 |   | $ | 203,750 |   | 0 |   | $ | 0 |   |
|                               |   | 2001                     |   | $                                        | 75,200 |         | $      | 0 |   | 122,500 |   | 0 |   | $ | 0 |   |

 

----

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

 

On August 30,2001, the Partnership loaned $100,000 to Javier Lamoso.  Mr. Lamoso signed a promissory note wherebyhe promised to pay the $100,000 plus six percent (6%) annual interest rate, onthe earlier of August 30, 2005 or on the date of termination of hisemployment with the Partnership.

 

**ITEM12.**** 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, 2003, information with respect to beneficialownership of the Partnership’s Units by: (i) all persons known to the GeneralPartner to be the beneficial owner of 5.0% or more thereof; (ii) each Directorof the General Partner; (iii) each of the executive officers of the GeneralPartner; and (iv) all executive officers and Directors as a group of theGeneral Partner.  All persons listedhave sole voting and investment power with respect to their Units, unlessotherwise indicated.

 

40

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

 

----

* Less than1.0%.

 

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

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

(3)          Mr. Arizala is a Director.

(4)          Ms. Minnich is a Director.

(5)          Mr. Perry is a Director.

(6)   Mr. Odell is a Director and Secretary of theGeneral Partner.  Mr. Martínez and Mr.Odell are trustees of Martínez Odell & Calabria Pension Fund, which owns2.4 Units reflected in the table.

 

##### **ITEM 13****.  CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

#####  

###### **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 the Partnership.  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 2003 and 2002was approximately $282,000 and $262,000, respectively.  The management fee is paid on a monthlybasis.

 

###### **Other Relationships and Transactions**

######  

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

 

**ITEM14****,  PRINCIPALACCOUNTING FEES AND SERVICES**

 

**(1)**Audit Fees:

Aggregate feesbilled in connection with the audits of the financial statements for the yearsended December 31, 2003 and 2002 amounted to $95,999 and $125,786, respectively.

 

Aggregate feesbilled in connection with the review of quarterly financial informationamounted to $27,610 for the year ended December 31, 2003.

 

**(2)**Audit-RelatedFees:

None.

 

**(3)**Tax Fees:

Aggregate feesbilled in connection with tax and related consulting services for the yearsended December 31, 2003 and 2002 amounted to $20,323 and $3,500, respectively.

 

**(4)**All OtherFees:

None

 

**(5)**On June 11, 2003 after a series of prior oral consultations, the Partnership'sAudit Committee approved the engagement of Kevane Soto Pasarell Grant ThorntonLLP ("Kevane") to replace the Partnership's former independentaccountant, Deloitte & Touche.  Onthe same date, the Partnership hired Kevane as its independent account.

 

**(6)**Kevane has reported to the Partnership that more than50 percent of the audit work on the Partnership's financial statements for themost recent fiscal year was performed by its full-time, permanent employees.

 

**ITEM15****. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K**

 

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

 

(1) Financial Statements

 
| ClearComm, L.P.                                                                                                                                                   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                              |
| Report of Independent Public Accountants —  December 31, 2003 and 2002 (Audited), and 2001 (Restated and Unaudited)                                     |
|                                                                                                                                                              |
| Consolidated Balance Sheets - December 31, 2003  and 2002 (Audited), and 2001 (Restated and Unaudited)                                                       |
|                                                                                                                                                              |
| Consolidated Statements of Operations for the years  ended - December 31, 2003 and 2002 (Audited), and 2001 (Restated and  Unaudited)                        |
|                                                                                                                                                              |
| Consolidated Statements of Changes in Partners’  Deficit for the years ended - December 31, 2003 and 2002 (Audited), and  2001 (Restated and Unaudited) |
|                                                                                                                                                              |
| Consolidated Statements of Cash Flows for the years  ended - December 31, 2003 and 2002 (Audited), and 2001 (Restated and  Unaudited)                        |

 

41

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| Notes to Consolidated Financial Statements                                                               |
|----------------------------------------------------------------------------------------------------------|
|                                                                                                     |
| SuperTel Communications Corp.                                                                            |
|                                                                                                     |
| Report  of Independent Public Accountants – December 31, 2003, 2002 and 2001                   |
|                                                                                                     |
| Balance Sheets - December 31, 2003,  2002 and 2001                                                  |
|                                                                                                     |
| Statements  of Income and Accumulated Deficit for the years ended December 31, 2003,  2002 and 2001 |
|                                                                                                     |
| Statements of Cash Flows for  the years ended December 31, 2003, 2002 and 2001                      |
|                                                                                                     |
| Notes to Financial  Statements                                                                           |

 

(2) Financial StatementSchedules - None.

 

(3) Exhibits- None.

 

(b) Reports onForm 8-K

 

A report on Form 8-K wasfiled on June 11, 2003

 

(c) PrincipalOfficer Certifications – Exhibits 31 and 32.

 

42

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**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

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

 

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.

 
| **Signature**              |   | **Capacity  in Which Signed**       |   | **Date**       |
|----------------------------|--------|-------------------------------------|--------|----------------|
|                       |   |                                |   |           |
| /s/ Fred H.  Martínez |   | Director and  Chairman of the Board |   | April 14, 2004 |
| Fred H.  Martínez     |   |                                |   |           |
|                       |   |                                |   |           |
| /s/ Javier  O. Lamoso      |   | Director and  President             |   | April 14, 2004 |
| Javier O.  Lamoso          |   |                                |   |           |
|                       |   |                                |   |           |
| /s/ Margaret  W. Minnich   |   | Director                            |   | April 14, 2004 |
| Margaret W.  Minnich       |   |                                |   |           |
|                       |   |                                |   |           |
| /s/ Lawrence  Odell        |   | Director                            |   | April 14, 2004 |
| Lawrence  Odell            |   |                                |   |           |
|                       |   |                                |   |           |
| /s/ James T.  Perry        |   | Director                            |   | April 14, 2004 |
| James T.  Perry            |   |                                |   |           |

 

43

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