**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

**FORM 10-K**

 

**For Annual and Transition Reportsto 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,  2004**                                                                                                                       |
| ** **                                                                                                                                                                    |
| **or**                                                                                                                                                                        |
| ** **                                                                                                                                                                    | ** **                                                                                                                |
| **o**                                                                                                                                                                         | **Transition report pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934 (No fee required)** |
| ** **                                                                                                                                                                    |
| **For the transition period from              to             ** |
| ** **                                                                                                                                                                    |
| **Commission file number 0-28362**                                                                                                                                            |

 

**ClearComm, L.P.**

(Exact Name of Registrant as Specified in its Charter)

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

 

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

 

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

 

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

 

**Units of Limited Partnership Interest**

(Title of class)

 

Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes  ý  No  o

 

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

 

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

 

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

 

Documents incorporatedby reference.          **None**.

 

 

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**ClearComm, L.P.**

 

TABLE OF CONTENTS

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

 

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##### **Part I**

 

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

 

This Form 10-K and future filings by thePartnership 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 divestiture opportunities, and other similarforecasts and statements of expectation. Words such as “expects,” “anticipates,”“intends,” “plans,” “believes,” “seeks,” “estimates,” and “should,” andvariations of these words and similar expressions, are intended to identifythese forward-looking statements. Forward-looking statements by the Partnership are based on estimates,projections, beliefs and assumptions of management and are not guarantees offuture performance. The Partnership disclaims any obligation to update orrevise any forward-looking statement based on the occurrence of future events,the receipt of new information, or otherwise.

 

Actual future performance, outcomes and results maydiffer materially from those expressed in forward-looking statements made bythe Partnership as a result of a number of important factors.  Examples of these factors include, withoutlimitation, rapid technological developments and changes in thetelecommunications industry; ongoing deregulation (and the resulting likelihoodof significantly increased price and product/service competition) in thetelecommunications industry as a result of the Telecommunications Act of 1996and other similar federal and state legislation and the federal and state rules andregulations enacted pursuant to that legislation; regulatory limitations on thePartnership’s ability to compete in the telecommunications services industry;and continuing consolidation in the telecommunications services industry.  In addition to these factors, actual futureperformance, outcomes and results may differ materially because of other, moregeneral, factors including, without limitation, general industry and marketconditions and growth rates, domestic and international economic conditions,governmental and public policy changes and the continued availability offinancing in the amounts, at the terms and on the conditions necessary tosupport the Partnership’s future business.

 

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

#####  

**General**

 

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

 

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

 

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

 

**NewComm**

 

In August 2004,the Partnership retained the services of a consulting firm (other than itsexternal auditors) to audit the operations and performance of NewComm under themanagement of Telefónica Moviles, S.A. (“TEM”). The results

 

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

 

**The Puerto Rico Network**

 

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

 

To build and operate itsPuerto Rico network, the Partnership entered into an agreement, dated February 4,1999 (the “TLD Agreement”) with Telefónica Larga Distancia de Puerto Rico, Inc.(“TLD”).  TLD is a wholly ownedsubsidiary of Telefónica Internacional, S.A. which is a member of theTelefónica, S.A. group (Ticker: TEF) (the “Telefónica Group”), Spain’s largesttraded company and one of the world’s largest telecommunication companies.  Telefónica Móviles (Ticker: TEM), thewireless communications affiliate of Telefónica, currently has approximately 32million subscribers worldwide.  Pursuantto the terms of the TLD Agreement, the Partnership transferred the Puerto RicoLicenses (including its related debt) and associated business plans and studiesto NewComm.  TLD provided NewComm a loanof approximately $19.96 million and received a secured convertible promissorynote (the “Note”) which entitles TLD to select a director for one of the fiveNewComm board of director seats (the “Board”). The Note was assigned to TEM on September 23, 2003.  The Note is convertible into 49.9% of NewComm’sequity.  The Note cannot be convertedwithout FCC authorization.  NewComm andTEM entered into a management agreement whereby TEM provided day-to-daymanagement services for NewComm, subject to the supervision of NewComm’sBoard.  Pursuant to a certain StockPurchase Agreement dated as of March 12, 2002, by and between thePartnership and TLD, the Partnership had agreed to sell 0.2% control interestat market value to TEM.  The transfer ofthis control interest was approved by the FCC during 2004. As part of therequirements of the Stock Purchase Agreement, TEM (and TelefónicaInternacional, S.A., its parent company) had agreed to issue their corporateguarantee as collateral for long-term financing of NewComm of approximately$110 million.  Together with the StockPurchase Agreement and as part of the transaction a Shareholders’ Agreement anda Sale Agreement were executed between the parties.  The Shareholders’ Agreement provides for agreat number of general and specific protections and rights for the Partnershipas a minority shareholder in NewComm. The Sale Agreement provides for a convenient exit for the Partnershipfrom NewComm.  Under the Joint VentureAgreement the Partnership’s principal means of exiting from NewComm was byexercising Registration Rights against TEM. Due to Telefónica’s re-organization and new market conditions, thepossibility of publicly registering an exclusive wireless service companylimited to the Puerto Rico market is very unlikely.  However, under the Sale Agreement, thePartnership can force the sale of NewComm to TEM and/or third parties.

 

The Sale Agreement provides that from and after May 12,2003, either party (the Partnership or TLD) may trigger a shareholderobligation to sell NewComm.  Within 30days of a notice of sale, TEM (or the Partnership as the case may be) wouldhave the right to purchase the Partnership’s (or TEM’s) interest.  The purchase price to be paid at that timewould be based on a valuation performed by an internationally recognizedinvestment-banking firm selected by both parties.  If TEM does not exercise its right to buy outthe Partnership’s interest, TEM is bound, together with the Partnership, toproceed with the sales process to attempt a sale of NewComm.  TEM and the Partnership are bound to acceptthe highest price proposed by an interested buyer, which price must be payablein cash or freely tradable securities, or a combination thereof, and which mustbe for a price not less than the valuation prepared by the investmentbanker.  At the closing of the sale the ManagementAgreement and the Technology Transfer Agreement originally held by TLD (andassigned to TEM) will terminate without compensation, and no premium forcontrolling interest or discount for holding a minority interest in NewCommwill apply.

 

The Sale Agreement will continue in full force andeffect even if the Stock Purchase Agreement with TEM, for whatever reason, doesnot close.  The Stock Purchase Agreementand the Sale Agreement are currently subject to arbitration proceedings thatwere filed by TEM upon TEM’s termination as manager of NewComm. See LegalProceedings section below.

 

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

 

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

 

**ThePuerto Rico Market**

 

The Partnership believes that the Puerto Rico marketprovides many unique advantages for telecommunications companies.  Puerto Rico is politically stable, as it hasbeen a territory of the United States for over 100 years and its economy isfully integrated with that of the United States mainland.  It has the Caribbean’s best-educated, mostskilled labor force and the most sophisticated manufacturing and transportationinfrastructure.  Puerto Rico has a solidbase of major manufacturers, which includes Hewlett-Packard Company, MicrosoftCorporation, BASF Corporation, Colgate-Palmolive, Johnson & Johnson,Amgen, Pharmacia, and Pfizer Pharmaceutical. Along with its U.S.-linked stability, Puerto Rico offers the advantageof emerging market type growth and significant cash based economy.  The Partnership believes that current percapita income and consumption in Puerto Rico, combined with continued economicgrowth will support continued demand for high quality telephone services, whichNewComm is offering.

 

**Competitionin Puerto Rico**

 

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

 

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**Markets**

 

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

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

 

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*                                         Basedon US Census Bureau 2000 figures.

 

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

 

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

 

The eMilios concept involves internet communicationgalleries that are geared towards educating people in the use of computers andthe internet, and acts as a communication and recreational center as well.  The broadband connectivity that is offered ateMilios allows the stores to efficiently offer internet communications and alsoaccess to a great variety of interactive content, such as cyber games, as wellas software and tools for free lancers and small business entities.  The service is provided and collected with aproprietary smart card and software application.  The Partnership is responsible for themanagement and day to day operations of ISS. ISS opened its first store with 48 computer stations on October 23,2002.  A second store with 40 computerstations was inaugurated on January 11, 2003 to serve the western part ofPuerto Rico. The Partnership has decided to concentrate its operations on theSan Juan area and decided to close the store located in Mayaguez effective December 31,2004.  As a result, the Partnership haswritten down its investment in the subsidiary by $165,306 to reflect thechange.  The investment has an exitmechanism whereby at any time after 2003, the Partnership can force theacquisitions of its shares in ISS or the sale of the whole company.

 

**Regulation**

 

Overview

 

In 1993, Congress adopted the Omnibus BudgetReconciliation Act of 1993 (the “Reconciliation Act”) which, among otherthings, mandated auctions for the award of certain FCC licenses, including PCSlicenses.  Pursuant to authority grantedto the FCC by the Reconciliation Act, the FCC awarded PCS licenses through aprocess of competitive bidding auctions in which there were multipleapplications for the same license (the “Auctions”).

 

PCS is a radio-based transmission technology, which,like cellular technology, uses the same frequencies repeatedly in amultiple-transmitter cell design.  PCS isa digital technology, capable of numerous advanced service features, includingcaller-ID, voice-prompting, voice-recognition, scrambled (secure) calling,message and image delivery, intelligent call transfer and follow-me calling,single number service (the same number can be assigned to multiple PCStelephones in different locations) and auto-trace of crank callers. ThePartnership has been offering E-mail and internet access from its handsetssince June of 2000.  The Partnershipbegan offering wireless banking services in October of 2000.  The Partnership also pioneered in the PuertoRico market short text messaging services from its handsets in October of2001.  An average of 600,000 textmessages per month is being sent by subscribers from their handsets.

 

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Frequency Blocks

 

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

 

EntrepreneurClasses and Economic Preferences

 

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

 

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

 

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

 

Build-OutRequirements

 

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

 

Employees

 

The Partnership, including its majority ownedsubsidiary NewComm, had approximately 378 employees at the end of 2004. On November of2004, approximately 35 employees were terminated as part of an organizationalrestructuring plan.

 

Available Information

 

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

 

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

 

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

 

The Partnership leases office space in Hato Rey andGuaynabo, Puerto Rico.  In connectionwith the Partnership’s Puerto Rico Network, NewComm leases sites where itstelephone switching equipment, relay stations and other equipment are located,as well as sites and kiosks in malls and shopping centers where it sells itsservices to the public.

 

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

#####  

In August 2004,the Partnership retained the services of a consulting firm (other than itsexternal auditors) to audit the operations and performance of NewComm under themanagement of TEM.  The results of theaudit were reported to the Board of Directors of NewComm on September 30,2004, with the conclusion that TEM had not performed adequately.  Under the Partnership’s direction, the Boardof Directors of NewComm terminated TEM as the Manager of NewComm under theManagement Agreement on October 28, 2004.

 

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

 

##### From time to time the Partnership is involved in litigation arisingfrom the ordinary course of business, some of which is ongoing.  The General Partner does not believe that anylitigation involving the Partnership will have a material adverse effect on thePartnership’s business or financial condition.

 

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**Part II**

 

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

 

There is no trading market for the Units, and it isunlikely that a trading market will exist at any time in the future.  Any transfer of the Units is severelyrestricted by certain conditions outlined in the Partnership Agreement, andrequires the consent of the Partnership’s General Partner, SuperTelCommunications Corp., which can be withheld in the General Partner’s solereasonable discretion.

 

Duringthe months of May and June of 2004, the Partnership conducted avoluntary tender offer program to all partners holding less than 2 Units.  The program was available to over 1,100partners.  The price per Unit offered was$8,500.00. A total of 130 Unit-holders tendered their Units, amounting toapproximately 140 Units re-purchased and representing approximately a 5%reduction of outstanding partnership Units.

 

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

 

There have been no cash distributions to the Investorsto date.  The following summary ofcertain allocation provisions of the Partnership Agreement is entirelyqualified by reference to the Partnership Agreement, which was previouslyattached as an Exhibit to the Partnership’s Form 10-K, filed March 31,1997.  As a general rule, the GeneralPartner shall cause the Partnership to make distributions, if any, of cash flowreceived from operations of the Partnership which the General Partner, in itssole discretion, determines to distribute to Investors (“Cash Flow”).  All distributions will be made 75% to theInvestors and 25% to the General Partner. Distributions to the Investors shall be made in proportion to the numberof Units held by each Investor on the last day of the calendar quarter to whichsuch distribution relates.

 

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

 

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

 

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

 

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

 

The following table summarizes selected consolidatedfinancial data of the Partnership from the period from January 1, 2002 to December 31,2002, from January 1, 2003 to December 31, 2003 and from January 1,2004 to December 31, 2004.  Thisinformation should be read in conjunction with the Partnership’s auditedconsolidated financial statements and related notes thereto and managementdiscussion contained herein.

 

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**Statements of Operations Data**

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

 

10

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**BalanceSheets Data**

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

 

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

 

**Introduction**

 

The Partnership was formed in January 1995 and ismanaged by its General Partner, SuperTel Communications Corp.  The Partnership was organized to acquire,own, consult and operate personal communication services (PCS) licenses in theBlock C band and to take advantage of the benefits that the FCC has set asidefor Entrepreneurs.  The Partnership isthe controlling entity of NewComm, which in turn owns and operates two 15 MHzPCS licenses covering Puerto Rico (“the Puerto Rico Licenses”).

 

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

 

On November 26, 2003, the Partnership enteredinto a Purchase and Sale Agreement with Metro PCS pursuant to which thePartnership sold all of its remaining California Licenses.  The sale was approved by the FCC and thelicenses were transferred to Metro PCS on April 15, 2004 for a $10,900,000cash payment.  The Partnership has noother licenses in California.

 

The Partnership commenced commercial operations of itsPCS network in Puerto Rico on September 24, 1999, when it began offeringwireless services in Puerto Rico to the public. Prior to that date, its revenues had consisted of interest incomeonly.  Since the Partnership commencedcommercial operations in 1999, the comparisons presented below may not beindicative of future operations.

 

The Partnership established its Puerto Rico network byforming a wholly owned subsidiary, NewComm, on January 29, 1999.  On February 4, 1999, the Partnership andNewComm entered into an agreement with TLD, whereby the Partnership contributedits two Puerto Rico Licenses to NewComm and TLD provided NewComm a $19,960,000loan to develop the Puerto Rico Licenses. TLD’s loan is pursuant to a secured convertible promissory note (the “Note”)which is convertible into 49.9% of NewComm’s equity.  The Note could not be converted without FCCauthorization, which was granted in 2004.

 

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

 

**The Stock Purchase Agreement**

 

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

 

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

 

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**The Shareholders Agreement**

 

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

 

In addition to the above, the Partnership will haveapproval rights with respect to a number of NewComm’s actions including thefollowing: any transaction between NewComm and a shareholder or an affiliate ofsuch shareholder, other than the Management Agreement and the TechnologyTransfer Agreement; the annual strategic business plan and operating budgetsfor each calendar year and any variations or modifications which individuallyor in the aggregate exceed 10 percent of the operating budget for such annualperiod; the appointment of the general manager, the director of finance and alldirectors of each division of NewComm, as well as the compensation of each suchperson, consent to which shall not be unreasonably withheld; the engagement ofa new marketing consultant and the employment of marketing strategies, promotions,advertising and product development different from those in effect on the datehereof, consent to which shall not unreasonably be withheld; any modificationto the Certificate of Incorporation or Bylaws of NewComm that would have anadverse effect on any rights granted to a shareholder thereunder or underapplicable law; and any amendments or modifications to the Management Agreementor the Technology Transfer Agreement in effect as of the Effective Date.  The Partnership will have the right toappoint four directors and TEM will have the right to appoint five directors.

 

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**The Sale Agreement**

 

The new Sale Agreement provides that the Partnership(or TEM) may trigger a shareholder obligation to sell NewComm.  Within 30 days of a notice of sale, TEM (or thePartnership as the case may be) would have the right to purchase thePartnership’s (or TEM’s) interest.  Thepurchase price to be paid at that time would be based on a valuation performedby the investment-banking firm that prepared the valuation under the StockPurchase Agreement.

 

If TEM does not exercise its right to buy out thePartnership’s interest, the shareholders will be bound to proceed with thesales process to attempt a sale of NewComm. All shareholders are bound to cooperate and undertake all that isnecessary in that effort.  Further, theshareholders are bound to accept the highest price proposed by an interestedbuyer, which price must be payable in cash or freely tradable securities, or acombination thereof, and which must be for a price not less than the valuationprepared by the investment banker.

 

Some additional points are that at the closing of thesale of NewComm the Management Agreement and the Technology Transfer Agreementheld now by TEM will terminate.  Also, nopremium for controlling interest or discount for holding a minority interest inNewComm will apply.

 

The Sale Agreement shall continue in full force andeffect even if the Stock Purchase Agreement with TEM, for whatever reason, doesnot close.

 

**Project Finance Facility**

 

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

 

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

 

**California Licenses**

 

On August 28, 2000, the Partnership entered intoa Purchase and Sale Agreement with Leap Wireless International (“Leap Wireless”),pursuant to which the Partnership sold the Visalia-Porterville license to LeapWireless in exchange for a $9,500,000 cash payment.  The sale was approved by the FCC and closedon June 8, 2001.

 

On November 26, 2003, the Partnership enteredinto a Purchase and Sale Agreement with Metro PCS pursuant to which thePartnership sold all of its remaining California Licenses.  The sale was approved by the FCC and thelicenses were transferred to Metro PCS on April 15, 2004 for a $10,900,000cash payment.  The Partnership has no otherlicenses in California.

 

**CriticalAccounting Policies**

 

The consolidated financial statements are prepared inaccordance with accounting principles generally accepted in the United States,which require the Partnership to make estimates and assumptions.  The Partnership has no off-balance sheetarrangements and believes that of its significant accounting policies (see Note3 to the consolidated financial statements), the following may involve a higherdegree of judgment and complexity.

 

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

 

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

 

*Allowancefor Doubtful Accounts* - Estimates used in determining ourprovision for doubtful accounts are based on our historical collectionexperience, current trends, credit policy and a percentage of our accountsreceivable by aging category.  Indetermining these percentages, we look at historical write-offs of ourreceivables and our history is limited. We also look at current trends in the credit quality of our customerbase as well as changes in the credit policies. Under NewComm’s credit policy, customers who do not meet certain creditcriteria are required to make a deposit ranging from $70 to $250 that could becredited against future billings, to control credit exposure.  If the estimates are insufficient for anyreason, our operating income, earnings before interest, taxes, depreciation andamortization (“EBITDA”) and available cash would be reduced.

 

*Write-downof Refurbished and Excess or Obsolete Inventories* - Wecurrently have written-down refurbished handset inventories to the lower ofcost or market value (which approximates cost to refurbish or replace thehandsets).  We currently havewritten-down excess or

 

15

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

 

Effective January 1,2003 we changed our method to account for the loss on sale of handsets tocustomers, from the recognition of such loss at the time of sale, to theestablishment of an inventory reserve to account for that loss at the end ofeach accounting period.

 

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

 

*Valuationof Intangibles (PCS Licenses) –*Because of the adoption bythe Partnership of SFAS 142 (Goodwill and other Intangible assets) imposed bythe FASB for calendar years commencing after December 31, 2001, PCSLicenses are no longer amortized and instead they are subject to periodicimpairment testing.  Based on analysis offuture cash flows and other related variables, we determined that no impairmentadjustment was necessary for the years ended December 31, 2004, 2003 and2002.  We will perform the impairmenttest at least every quarter or as soon as anything comes to our attention thatcould cause us to believe that the recorded balance of the PCS Licenses may beaffected.  If the estimates used tomeasure impairment are insufficient for any reason, our net income or losswould be reduced or increased, respectively.

 

RevenueRecognition

 

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

 

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

 

The Partnership’s Consolidatedrevenues for the year ended December 31, 2004, which amounted to$105,001,936 ($108,894,112 in 2003), included $100,336,047 ($101,557,423 in2003) in service revenues and $4,665,889 ($7,336,689 in 2003) in handset and accessories sales generated fromNewComm’s wireless operations. The 36% decrease in handsets and accessoriesrevenues is mainly due to handset unit pricing adjustments.  The 1% decrease in service revenues isrelated to a reduction of the subscriber base which was mostly offset by airtimeconsumption of existing customers and to a shifting of the customer base fromprepaid customers to contract customers. The Partnership’s operations are not materially affected by inflationaryincreases.  Any inflationary impact onthe cost of products and services offered by the Partnership’s subsidiary,NewComm, is offset by pricing adjustments to the retail prices of handsets,accessories, and various offers available to the customers.

 

***Expenses***

 

Consolidated Operating expenses for the year ended December 31,2004 totaled $107,644,333, as compared to $100,086,717 for the same period in2003, as shown on the following table:

 

16

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

 

The increase in expensesof 8% during 2004, as compared to 2003, is mainly due to the increase in theprovision for doubtful accounts which resulted in additional $6 millionreserves and is directly related to the full implementation of the new billingsand collections software migration.  Theincrease in salesmen and dealers commissions is related to the shifting duringthe year from prepaid customer accounts to contract customers that triggershigher commissions.  The 19% decrease innetwork operation and maintenance expense is related to operationalefficiencies obtain at the subsidiary level and to the sale of 12 networktowers to a third party during the fourth quarter of 2004 as explained in Note11 of the combined financial statements.

 

Net losses of $30,129,143 for 2004 and $30,360,386 for2003 reflect the costs of competing in the Puerto Rico market against existingand new cellular and PCS operators in order to continue to develop and maintaina strong subscriber base.  Such lossesinclude certain non recurring other income and expense items.  For instance, the loss before other incomeand expenses for 2004 totaled $29.9 million compared to $21.8 million in2003.  The 37% increase in said losses isprimarily attributed to the $6 million increase in the provision for doubtfulaccounts and the $3.8 million decrease in total revenues netted by a 29%reduction in the interest expense account.

 

Interest expense for the year ended December 31,2004, totaled $9,470,793 as compared to $13,312,468 for the same period in2003.  The decrease in interest expenseduring 2004 is primarily attributable to the restructuring of the Partnership’sNotes Payable (refer to Notes 12, 14 and 15 to the accompanying consolidatedfinancial statements) and to downward trends of interest rates in themarkets.  In 2004, the Partnership hadinterest income of $126,827, as compared to $213,369 in 2003.

 

***Liquidityand Capital Resources***

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

The Partnership anticipates that earnings and cashdistributions derived from its Puerto Rico Network once it matures, interim andpermanent financing and, if necessary, additional capital calls from itsInvestors or accessing the public capital markets, should provide it with theliquidity to meet its obligations

 

**Resultsof Operations - 2003 Compared to 2002**

 

The Partnership’s Consolidated revenues for the yearended December 31, 2003, which amounted to $108,894,112 ($107,957,097 in2002), included $101,557,423 ($99,799,656 in 2002) in service revenues and$7,336,689 ($8,177,441 in 2002) in handset and accessories sales generated fromNewComm’s wireless operations.  Theincrease in service revenues is primarily due to an increase during 2003 of thesubscriber base.  The decrease in handsetand accessories revenues is related to a reduction in the retail pricing ofhandsets.

 

***Expenses***

 

Consolidated Operating expenses for the year ended December 31,2003 totaled $100,086,717, as compared to $103,734,297 for the same period in2002.  During 2003, the Partnership’sexpenses included  $ 22,523,576($20,297,712 for 2002) in costs of handset and accessories, $ 15,169,673($15,662,484 for 2002) in salaries and benefits, $ 2,682,232 ($9,915,770 for2002) for legal and professional services, $17,272,191 ($14,171,258 for 2002)in depreciation and amortization, $8,907,241 ($9,854,591 for 2002) in provisionfor doubtful accounts, $46,713,169 ($41,933,902 for 2002) in interconnection,network maintenance, sales commissions, advertising, rent, taxes and otherexpenses, $4,165,826 ($5,808,374 for 2002) for services rendered by relatedparties and $ 282,280 ($262,164 for 2002) for management fees paid to thegeneral partner. Variances in expenses such as legal and professional andservices rendered by related parties

 

18

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

 

Net losses of $30,360,386 for 2003 and $13,025,074 for2002, reflect the costs of competing in the Puerto Rico market against existingand new cellular and PCS operators in order to continue to develop and maintaina strong subscriber base.  The increaseof the net loss as compared to the prior year is primarily due to the fact thatthe 2002 loss was reduced by a $13 million gain on the sale of stock.  Accordingly, the operational loss for 2002was $26 million.  The net loss of$30,360,386 for 2003 includes nonrecurring losses amounting to $8.6 million,such as the loss of $4,742,559 on the write off of inventory and the $3,913,661write-off of the discount on note payable to the FCC which resulted from thedebt restructuring which should be finalized during 2004. Therefore, theadjusted net loss for 2003 would be $21.8 million compared to the adjusted $26million in 2002.  Therefore, the net lossfor 2003 shows a reduction of approximately $4 million which is directlyproportional to the reduction in operating expenses as described above.

 

Interest expense for the year ended December 31,2003, totaled $13,312,468 as compared to $16,212,644 for the same period in2002.  The decrease in interest expenseduring 2003 is primarily attributable to the restructuring of the Partnership’sNotes Payable (refer to Notes 12, 14 and 15 to the accompanying consolidatedfinancial statements) and to downward trends of interest rates in themarkets.  In 2003, the Partnership hadinterest income of $213,369, as compared to $249,661 in 2002.

 

**ContractualObligations**

 

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

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

 

----

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

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

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

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

 

**ITEM 7A.**** QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

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

 

19

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is not material becausethe Partnership does not use derivative financial instruments and does not haveforeign currency exchange risks.  ThePartnership invests cash balances in excess of operating requirements in short-termmoney market funds.  As of December 31,2004, the Partnership had cash equivalents and short-term investments of$10,612,430 consisting of cash and highly liquid, short-term investments inmoney market funds.

 

The Partnership’s cash and cash equivalents willincrease or decrease by an immaterial amount if market interest rates increaseor decrease, and therefore, its exposure to interest rate changes has beenimmaterial.  The Partnership’s loanspayable to the FCC have a fixed interest rate of 6.5% and therefore are notexposed to interest rate risks.  The TLDNote relating to indebtedness of NewComm bears interest at the floating rate ofthe 90-day LIBOR plus 1% and is due six months from date of issuance butcan be extended for periods of six months, thereafter.  Lucent’s debt was restructured on June 4,2003 to a six-year term credit facility with an interest rate of eight percent(8%) annually.  As of December 2004,the outstanding principal balance owed to Lucent was $48.5  million. The Bridge Loan bears an interest rate of 0.75% over 90-day LIBORand is now guaranteed by TISA.  As partof this arrangement the Partnership agreed to pay an annual fee of 2% over halfof this guarantee (or $30 million), or provide an equivalent cash collateral tothe Banks.  This loan guarantee fee isnot due until the sale of the Partnership’s interest in NewComm.  The Bridge Loan Facility has been extendedagain to April 30, 2005, with the option to extend by one or moreadditional periods of 30 days with the lender’s prior consent.

 

20

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##### ** **

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

#####  

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

 

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

 

21

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**Report of Independent PublicAccountants**

 

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

 

 

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

 

Weconducted our audits in accordance with auditing standards generally acceptedin the United States of America as establish by the Auditing Standards Board ofthe American Institute of Certified Public Accountants.  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes consideration of internal control over financialreporting as a basis for designing audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for ouropinion.

 

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, 2004,2003 and 2002, and the results of their operations and their cash flows for theyears then ended in conformity with accounting principles generally accepted inthe United States of America.

 

Theaccompanying consolidated financial statements have been prepared assuming thatthe Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Companyhas suffered recurring operating losses, has a working capital deficit and apartners’ capital deficit, and has not yet obtained permanent financing for thecost of its network and its working capital needs which matters raisesubstantial doubt about its ability to continue as a going concern.  Management’s plans in regard to these mattersare also described in Note 2.  Theconsolidated financial statements do not include any adjustments that mightresult from the outcome of this uncertainty.

 

Asdiscussed in Note 3(h), effective January 1, 2003, the Company changed itsmethod of accounting for the amount of loss incurred on the sale of handsets tocustomers.  In addition, and as discussedin Note 3(k), effective January 1, 2002, the Company changed its methodfor assessing the recoverability of its intangible assets.

 

 

San Juan, Puerto Rico,   February 9, 2005.

 

22

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**ClearComm,L.P.**

**Consolidated Balance Sheets**

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

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

 

The accompanying notesare an integral part of these consolidated statements.

 

23

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**ClearComm,L.P.**

 

**Consolidated Statements ofOperations fo****r the years ended**

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

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

 

The accompanying notesare an integral part of these consolidated statements.

 

24

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**ClearComm,L.P.**

 

**Consolidated Statements of Changes in Pa****rtners’ (Deficit) for the years ended**

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

 
| ** **                                             | ** ** | ** **           | ** ** | ** **  | ** ** | ** **        | ** **  | **Other**    | ** ** | ** **  | ** ** |
|--------------------------------------------------------|------------|----------------------|------------|-------------|------------|-------------------|-------------|--------------|------------|-------------|------------|
| ** **                                             | ** ** | **Limited Partners** | ** ** | **General** | ** ** | **Comprehensive** | ** **  | ** **   | ** ** |
| ** **                                             | ** ** | **Units**            | ** ** | **Amount**  | ** ** | **Partner**       | ** **  | **Loss**     | ** ** | **Total**   | ** ** |
| ** **                                             | ** ** | ** **           | ** ** | ** **  | ** ** | ** **        | ** **  | ** **   | ** ** | ** **  | ** ** |
| **BALANCES,** December 31,  2001                  |       | 2,906.1              |       | $           | —     |              | $           | (54,269,448  | )          | $           | —     |   | $ | (54,269,448 | ) |
|                                                   |       |                 |       |        |       |              |        |         |       |        |       |
| **DILUTION GAIN**                                      |       |                 |       | 7,500,000   |       | 2,500,000         |        | —       |       | 10,000,000  |       |
| ** **                                             |       |                 |       |        |       |              |        | —       |       |        |       |
| **NET LOSS - 2002**                                    |       | —               |       | (7,500,000  | )          | (5,525,074        | )           | —       |       | (13,025,074 | )          |
|                                                   |       |                 |       |        |       |              |        |         |       |        |       |
| **BALANCES,**December 31,  2002                   |       | 2,906.1              |       | —      |       | (57,294,522       | )           | —       |       | (57,294,522 | )          |
|                                                   |       |                 |       |        |       |              |        |         |       |        |       |
| **COMPREHENSIVE LOSS:**                                |       |                 |       |        |       |              |        |         |       |        |       |
| ** **                                             |       |                 |       |        |       |              |        |         |       |        |       |
| **Net loss for the year**                              |       | —               |       | —      |       | (30,360,386       | )           | —       |       | (30,360,386 | )          |
| ** **                                             |       |                 |       |        |       |              |        |         |       |        |       |
| **Unrealized holding loss in investment securities**   |       | —               |       | —      |       | —            |        | (37,827      | )          | (37,827     | )          |
| ** **                                             |       |                 |       |        |       |              |        |         |       |        |       |
| **Net comprehensive loss**                             |       | —               |       | —      |       | (30,360,386       | )           | (37,827      | )          | (30,398,213 | )          |
| ** **                                             |       |                 |       |        |       |              |        |         |       |        |       |
| **BALANCES,**December 31,  2003                   |       | 2,906.1              |       | —      |       |              | (87,654,908 | )            |       | (37,827     | )          |   | (87,692,735 | ) |
|                                                   |       |                 |       |        |       |              |        |         |       |        |       |
| **Net loss for the year**                              |       | —               |       | —      |       | (30,129,143       | )           | —       |       | (30,129,143 | )          |
| ** **                                             |       |                 |       |        |       |              |        |         |       |        |       |
| **Realized holding loss in investment in  securities** |       | —               |       | —      |       | —            |        | 37,827       |       | 37,827      |       |
| ** **                                             |       |                 |       |        |       |              |        |         |       |        |       |
| **Reacquired partner’s units**                    |       | (140.90              | )          | —      |       | (1,197,640        | )           | —       |       | (1,197,640  | )          |
|                                                   |       |                 |       |        |       |              |        |         |       |        |       |
| **BALANCES,**December 31,  2004                   |       | 2,765.20             |       | $           | —     |              | $           | (118,981,691 | )          | $           | —     |   | $ | (118,981,691 | ) |
|                                                        |            |                      |            |             |            |                   |             |              |            |             |            |  |  |  |  |  |  |

 

The accompanying notesare an integral part of these consolidated statements.

 

25

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**ClearComm,L.P.**

**Consolidated Statements of CashFlows fo****r the years ended**

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

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

 

The accompanying notesare an integral part of these consolidated statements.

 

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**ClearComm, L.P.**

 

**Notes to Consolidated FinancialStatemen****ts**

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

 

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

 

The Reporting Entity for purposes of these financialstatements is ClearComm, L.P., a Delaware limited partnership (the “Partnership”),together with its subsidiary Newcomm Wireless Services, Inc., a Puerto Ricocorporation (“NewComm” and, together with the Partnership, the “Company”).

 

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

 

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

 

On February 4,1999, the Partnership entered into an agreement (the Joint Venture Agreement)with Telefónica Larga Distancia de Puerto Rico, Inc. (“TLD”) to jointlydevelop and operate certain PCS licenses in Puerto Rico.  Some relevant provisions of this agreementare the following:

 

•                  The Partnership transferred all ofits Puerto Rico licenses including its related debt with the FCC (thePartnership’s contribution) to its subsidiary NewComm, a newly organized PuertoRico corporation owned by the Partnership, in exchange for all of NewComm’sissued and outstanding common stock. Subsequently, the Partnership sold part of its investment in NewComm,and since December 31, 2002, the Partnership owned 76.89% of NewComm’sissued and outstanding common stock.

 

•                  TLD lent approximately $20 million toNewComm by means of a secured convertible promissory note payable (thePromissory Note).  Payment of thePromissory Note is collateralized through the provisions of a separateagreement pursuant to which a security interest was imposed upon NewComm’sassets and a pledge and guaranty agreement issued by the Partnership.

 

•                  Once certain regulatory and otherrequirements are met, the Promissory Note may be converted into a certainnumber of shares of NewComm’s common stock corresponding to approximately 49.9%of NewComm.  On March 12, 2002, thePartnership agreed to sell an additional 0.2% of its shares in NewComm to TLDto bring TLD’s (now assigned to TELEFONICA MOBILES, S.A. or TEM) ownership to50.1%; this transaction is subject to a third party valuation of NewComm’sstock and approval by the FCC.  During2004, the Partnership and TLD received the approval from the FCC, but theconversion and additional sale of participation has not been consummated.

 

•                  NewComm and TLD entered into certainmanagement and technology transfer agreements. These agreements were terminated effective October 28, 2004.

 

•                  The Partnership and TLD entered intoShareholders and Sale Agreements.  TheShareholders’ agreement provides for general and specific protections andrights for the Partnership as a minority shareholder in

 

27

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

 

•                  In August 2004, the Partnershipretained the services of a consulting firm (other than its external auditors),to audit the operations and performance of NewComm under the management ofTEM.  The results of the audit werereported to the Board of Directors of NewComm on September 30, 2004, withthe conclusion that TEM had not performed adequately.  Under the Partnership’s direction, the Boardof Directors of NewComm terminated TEM as manager under the managementagreement on October 28, 2004. TEM has alleged unlawful and wrongfultermination of the Technology and Management Agreements.  The Partnership, on behalf of NewComm, isproactively seeking compensation for damages caused by whatthe Partnership believes was TEM’s nonperformance and breach of the Technologyand Management Agreements.

 

•                  The Partnership and TLD’s saleagreement shall continue in full force and effect even if the Stock Purchaseagreement (“SPA”) with TEM, for whatever reason, does not close.  Notwithstanding, the SPA and the saleagreement are subject to the arbitration proceedings that were filed by TEMupon their termination as manager of NewComm.

 

TheCompany commenced commercial operations in September 1999, providingcommunications services to its customers. Prior to that date, it was on its development stage.

 

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

 

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

 

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

 

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

 

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

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

 

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

 

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

 

28

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

 

Aspart of the agreement with TLD, NewComm entered into a contract with LucentTechnologies, Inc. (“Lucent”) that requires Lucent to build a network thatuses Code Division Multiple Access (“CDMA”) protocol. NewComm has incurredapproximately $119 million in the construction of this network.  During 2000, NewComm’s management and Lucentagreed on formally extending the payment of up to $61 million of the totalamount of network construction costs, at the time, under a formal financialagreement.  On June 4, 2003, NewCommentered into a Senior Credit Agreement with Lucent, which extends the maturitydate of the $61 million to September 30, 2009, with interest at 8%annually.  See Note 15(a).

 

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

 

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

 

During2004 and 2003, NewComm received $5,493,642 each year in advances fromTelefónica Móviles, S.A., to comply with the payment requirements on the FCCdebt.  See Note 14.

 

Managementbelieves that the Company has complied with all the requirements for obtainingthe permanent financing arrangements discussed above and believes that cash andcash equivalents on hand, anticipated growth in revenues, vendor financing and thispermanent financing will be adequate to fund its operations, at a minimum,through the end of 2005.  However, in theabsence of improved operating results and cash flows, and the closing of thiscontemplated permanent financing, the Company may face liquidity problems tofund its operations and meet its obligations. However, and because of the existence of these matters, substantialdoubt exists as to the Company’s ability to continue operating as a goingconcern.  The accompanying financialstatements do not include any adjustments that might result should permanentlong-term financing not be obtained.

 

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

 

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

 

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

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

 

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

TheCompany classifies its securities as available-for-sale.  The securities consist of income funds, which

 

29

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are stated at fair value, withnet unrealized gains or losses on the securities recorded as accumulated othercomprehensive income (loss) in partners’ capital.  Realized gains and losses are included inearnings and are calculated using the specific identification method fordetermining 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**–

TheCompany follows the provisions of Statement of Financial Accounting Standards(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.

 

Duringthe year ended December 31, 2003, the Company’s comprehensive loss waslimited to its investment in available-for-sale securities. This loss wasrealized during the year ended December 31, 2004, when the securities wereredeemed.

 

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

For the purpose of the statement of cash flows, theCompany considers all highly liquid investment instruments purchased withmaturity at acquisition of three months or less to be cash equivalents.

 

**(f)****             Accountsreceivable**–

Accountsreceivable consist principally of trade accounts receivable from customers andare generally unsecured and due within 30 days. Credit losses relating to these receivables consistently have beenwithin management’s expectations. Expected credit losses are recorded as an allowance for doubtfulaccounts.

 

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

Allowancefor doubtful accounts provides for estimated losses on accountsreceivable.  The allowance is establishedbased upon a review of the aggregate accounts, historical write-off experience,economic condition, aging of the accounts receivable balances, and otherpertinent factors.  Account losses arecharged and recoveries are credited to the allowance for doubtful accounts.  The collection policies and procedures of theCompany vary by credit class and prior payment history of subscribers.

 

**(h)****          Inventories**–

TheCompany 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, theCompany may sell handsets to customers for a price that is less than cost.  The loss on such sales is recognized at the timeof sale in accordance with practice in the industry.

 

EffectivelyJanuary 1, 2003, the Company 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.

 

Inaccordance with Accounting Principle Board Opinion No. 20, “AccountingChanges”, the change in accounting method explained above, requires thedetermination of the cumulative effect, as if the newly adopted method had beenapplied during all periods affected.  Inthis specific situation, the retroactive application and determination ofpro-forma information is impracticable, because the effects are notdeterminable, since it requires assumptions about management’s intent in priorperiod, and significant management estimates. The effect of the change on net income for the year ended December 31,2003 was $4,742,559.

 

30

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Allowancefor inventory losses provides for estimated losses on inventory forobsolescence and for the lower of cost or market method.  The allowance is established based upon areview of existing array of inventory models, the average selling pricesaggregate accounts and other pertinent factors. Account losses are charged to the inventory reserve accounts.

 

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

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

 

**(j)****             PCSlicenses**–

Thisamount represents costs primarily incurred to acquire Federal CommunicationsCommission (FCC) licenses to provide wireless services.  The licenses expire in January 2007unless renewed.  However, FCC rules providefor renewal expectancy provisions.  The Companyexpects to exercise the renewal provisions.

 

ThePuerto Rico licenses were being amortized over a time period of twentyyears.  The Company 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 discontinuedin September 1999 when the commercial operations started.

 

Effectivewith the adoption of Statement of Financial Accounting Standards (SFAS) No. 142on January 1, 2002, these licenses costs, no longer being amortized, aresubject to impairment testing (See note 3 (k)).

 

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

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

 

Effectivewith the adoption of this standard, the Company reassessed the useful lives ofpreviously recognized intangible assets, which consist primarily of FCClicenses that provide the Company with exclusive rights to utilize a certainradio frequency spectrum to provide wireless communications services.  While FCC licenses are issued for only a fixedperiod of time, generally ten years, such licenses are subject to renewal bythe FCC.  Renewals of FCC licenses haveoccurred routinely and at a nominal cost. Moreover, the Company has determined that there are currently no legal,regulatory, contractual, competitive, economic or other factors that limit theuseful lives of its FCC licenses.  As aresult, the FCC licenses will be treated as an indefinite-lived intangibleasset under the provisions of SFAS No. 142 and will not be amortized butrather will be tested for impairment annually or when events and circumstanceswarrant.

 

TheCompany has elected to test for the FCC license impairment as of December 31stof each year.  The Company utilizes afair value approach, incorporating discounted cash flows, to complete thetest.  The discounted cash flow modelestimates the required resources and eventual returns from the build-out of anoperational network and acquisition of customers, starting with only FCClicenses.  In this matter, the cash flowsare isolated as specifically pertaining to the FCC licenses (present value offree cash flow attributable to the licenses).

 

TheCompany has completed its 2004 testing and has determined that there has beenno license impairment.

 

**(l)****             Propertyand equipment**–

Propertyand equipment are recorded at cost. Major replacements and improvements are capitalized while generalrepairs and maintenance are 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

 

31

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improvements.  Upon retirement or sale, the cost of theasset disposed of and the related accumulated depreciation are removed from theaccounts and any resulting gain or loss is credited or charged to income.

 

**(m)****       Softwarecapitalization**–

TheCompany capitalizes certain direct development costs associated with internaluse software, including external direct cost of materials and services, andinternal payroll costs for employees devoting time to softwaredevelopment.  These costs are included inproperty 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 Company also capitalizes initial operating-system software costs andamortizes them over its useful life.

 

**(n)****         ****Accounting for impairmentof long-lived assets******–

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

 

**(o)****          ****Revenue recognition******–

TheCompany 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 billing cycle in which aparticular subscriber is placed.  As aresult of billing cycle cut-off times, the Company is required to make estimatesfor service revenues earned but not yet billed at the end of each month.

 

Theseestimates are based primarily upon actual and historical minutes of use.  The Company defers revenue based on anestimate of the portion of minutes expected to be utilized prior toexpiration.  The Company’s estimate ofexpected future revenue is primarily based on historical experience as tominutes 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 theCompany’s network, referred to as “outcollect” roaming revenues.

 

TheCompany offers enhanced services including caller ID, call waiting, callforwarding, three-way calling, no answer/busy transfer, text messaging andvoice mail.  Generally, these enhancedfeatures generate additional revenues through monthly subscription fees orincreased wireless usage through utilization of these features.  Other optional services, such as unlimitedmobile-to mobile calling, roadside assistance and handset insurance, may alsobe provided for a monthly fee.  Theseenhanced features and optional services may be bundled with package rate plansor sold separately.  Revenue for enhancedservices and optional features 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 thecustomer, at this is considered to be a separate earnings

 

32

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process from the sale of wirelessservices.

 

**(p)****          ****Loyalty points program******–

In October 2003,the Company commenced a Loyalty Points Program (the “Program”) for itscustomers. The Company determined a redemption percentage of 15% to compute theend-of-year estimated liability for awards redemption. This percentage ofredemption was re-evaluated during the year and remained the same.  The Company charged the cost of operating theprogram to selling expenses and the estimated cost of award redemption to thecost of products available for redemption.

 

EffectiveDecember 31, 2004, the loyalty points program was eliminated and as aconsequence, management has determined that all accumulated points have to beredeemed over a period of 24 months or, otherwise, will be lost.

 

**(q)****          ****Advertising costs******–

TheCompany expenses production costs of print, radio and television advertisementsand other advertising costs as such costs are incurred.

 

**(r)****          ****Income taxes******–

UnderU.S. tax rules the Partnership is not subject to income tax; however, andonly for Puerto Rico tax purposes, the Partnership and NewComm accounts forincome taxes in accordance with the asset and liability method of accountingfor income taxes prescribed 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.

 

**(s)****          ****Fair value of financialinstruments******–

Thecarrying amount of the Company’s financial instruments (excluding notes payableand the 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.

 

**(t)****             Concentrationof credit risk:**

Financialinstruments that potentially expose the Company to concentration of credit riskinclude cash and accounts receivable. The Company 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 Company attempts to limit anyfinancial exposure, its deposit balances may, at times, exceed federallyinsured limits.  The Company has notexperienced any losses on such accounts.

 

TheCompany 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 dueto the large number of customers comprising the Company’s customer base, but ishighly dependent on the strong competition among the companies who providepersonal communication services in Puerto Rico. No customer accounted for more than 10% of revenues in the yearspresented.

 

TheCompany relies on local and long-distance telephone companies and othercompanies to provide certain communication services.  Although management believes alternativetelecommunications facilities could be found in a timely manner, any disruptionof these services could potentially have an adverse impact on operatingresults.

 

TheCompany relies on roaming agreements with other wireless carriers to permit theCompany’s customers to use their networks in areas not covered by the Company’snetworks.  If these providers

 

33

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decide not to continue thoseagreements due to a change in ownership or other circumstances, this couldcause a loss of service in certain areas and possible loss of customers.

 

TheCompany’s inventories are currently acquired from only a few sources.  If the suppliers are unable to meet theCompany’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.

 

**(u)****          Useof estimates**–

Inpreparing financial statements in conformity with accounting principlesgenerally accepted in the United States of America, management is required tomake estimates 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 could differfrom those amounts.

 

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

TheCompany follows the provisions of SFAS No. 13 and SFAS 98, “Accounting forLeases” to account for the sale and leaseback of equipment during theyear.  Based on the provisions of thisstatement, any profit or loss resulting from the sale of the equipment isdeferred and amortized over the lease term. On the other hand, since the leaseback was considered to be a capitallease, the related equipment is capitalized and amortized over its estimatedlife.  See Note 11.

 

**(w)****         Leaseholdrights**–

The networkcommunication transmission space acquired during 2004, as part of the sale andleaseback transaction of 12 towers, has been capitalized as leasehold rightsand amortized over the 10-year period of the lease contract, using thestraight-line method.  See Note 11.

 

**(x)****           Deferredrevenue**–

Deferredrevenue represents up-front payments on a portion of the airtime usage chargedto customers recorded as revenue when earned. It also includes the profitresulting from the sale and leaseback transaction that is being amortized overthe 10-year period of the lease contract, under the straight-line method.

 

**(y)****           Reclassification**–

Certainamounts in the 2003 and 2002 financial statements have been reclassified toconform to the 2004 and 2003 financial statement presentation.

 

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

 

a)              In January 2003,the FASB issued FASB Interpretation No. 46, “Consolidation of VariableInterest Entities” (“FIN 46”). FIN 46 clarifies the application of AccountingResearch Bulletin No. 51, “Consolidated Financial Statements” and providesguidance on the identification of entities for which control is achievedthrough means other than through voting rights (“variable interest entities” or“VIE’s”) and how to determine when and which business enterprise shouldconsolidate the VIE.  This new model forconsolidation applies to an entity which either (1) the equity investors(if any) do not have a controlling financial interest or (2) the equityinvestment at risk is insufficient to finance that entity’s activities withoutreceiving additional subordinated financial support from other parties.

 

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

 

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

 

34

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mandatory redeemable financialinstruments, (2) obligations to repurchase the issuer’s equity shares bytransferring assets, and (3) obligations to issue a variable number ofshares.  With limited exceptions, FAS-150is effective for financial instruments entered into or modified after May 31,2003, and otherwise is effective at the beginning of the first interim periodbeginning after June 15, 2003.  TheCompany does not expect that the adoption of FAS-150 will have a materialimpact on its consolidated results of operations and financial position.

 

c)              In April 2003,the Financial Accounting Standards Board issued Statement of FinancialAccounting Standards No. 149 (FAS-149), Amendment of Statement 133on Derivative Instruments and Hedging Activities.  FAS-149 amends and clarifies accountingfor derivative instruments, including certain derivative instruments embeddedin other contracts, and for hedging activities under FAS 133, Accounting forDerivative Instruments and Hedging Activities. FAS-149 is effective for contracts entered into or modified after June 30,2003.  The Company does not expect thatthe adoption of FAS-149 will have an impact on its consolidated resultsof operations and financial position.

 

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

 

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

 

**(a)****         ****Accounts receivable customers** –

The activity in the accounts receivable customers’allowance for doubtful accounts during the years ended December 31, was asfollows:

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

 

**(b)****         ****Accounts receivable others** –

Accountsreceivable others represent mainly balances due from other communicationproviders with which the Company has interconnection agreements and to balancesdue from external dealers for either cellular units sold or deposits receivedfrom customers.  At year-end, the Companyestablished an allowance for doubtful accounts for the accounts receivable,others, amounting to $276,641 and $366,958 in 2004 and 2003, respectively, thatwas included as part of the provision for doubtful accounts in the accompanyingstatements of operations.

 

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

 

Inventories at December 31 consist of:

 

35

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

 

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

 

As of December 31,2003, the Company had invested in mutual funds with a cost of $7,376,116.  The fair value of such funds as of December 31,2003 amounted to $7,338,288; therefore, the Company recognized a comprehensiveloss resulting from the unrealized holding loss on investment of $37,827.  The investments were redeemed during 2004.

 

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

 

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

 

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

 

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

 

**Condensedbalance sheets information (as of December 31, 2004, 2003 and 2002):**

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

 

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**Condensed statements of operations information (for the yearsended December 31, 2004, 2003 and 2002):**

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

 

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

 

PCSlicenses at December 31 consist of:

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

 

Each of the Company’sC-Block licenses is subject to an FCC requirement that the Company constructsnetwork facilities that offer coverage to at least one-third of the populationin the market covered by such license, within five years following the grant ofthe applicable license and to at least two-thirds of the population within tenyears following the grant.  Although theCompany’s build-out plan calls for it to exceed these minimum requirements,failure to comply with these requirements could result in the revocation of therelated licenses of the imposition of fines on the Company by the FCC.

 

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

 

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

 

Propertyand equipment at December 31 consist of:

 

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

 

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

 

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

 

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

 

DuringNovember 2000, NewComm entered into a $60 million bridge loan agreement(the “Bridge Loan Facility”) with ABN-AMRO and BBVA (the “Bank”) with interestat 1.5% over 90-day LIBOR, which expired on March 15, 2001, and wasextended until June 22, 2001, with interest at 2.50% over 90-dayLIBOR.  The Bridge Loan Facility was thenextended until March 17, 2002, with interest at .75% over 90-dayLIBOR.  The Bridge Loan Facility isguaranteed by TISA and is 100% issued by ABN-AMRO, and its maturity date hasbeen extended to April 30, 2005, with the option to extend by one or moreadditional periods of 30 days with the lender’s prior consent.  During 2003, NewComm received an additional$1 million advance under the terms of this facility.  On December 18, 2003, the applicableinterest margin was reduced to LIBOR plus 0.40%, for the period commencing January 2004.

 

Thisbridge loan agreement includes various affirmative and negative covenants.  As of December 31, 2004, NewComm was incompliance with the requirements under such covenants.

 

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

 

Accountspayable and accrued liabilities at December 31 consist of:

 

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

 

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

 

During2003, NewComm received the principal sum of $5,493,642 from Telefónica Móviles,S.A., (TEM) a Spanish corporation and affiliated company through commonmanagement.  During January, April andJuly 2004, NewComm received additional advances from Telefónica Móviles,S.A. in the amount of $1,831,214 each, with the same terms and conditions.

 

Theagreement provides for the principal amount to bear interest at a floating rateof one percent (1.00%) per annum over the 90 day LIBOR rate.  Accrued interest shall be payable in arrearsevery six months.  Principal and intereston these notes, which are unsecured, shall be payable in full within six monthsfrom the date of issuance; however, such maturity date can be automatically extendedfor periods of six months, thereafter.

 

Thesefunds have been used to pay the quarterly principal and interest payments ofthe FCC debt.

 

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

 

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

During2000, NewComm’s management and Lucent agreed on formally extending the paymentof up to $61.0 million of the total amount due under the network constructionpayable.  The financing agreement wasrestructured as a Promissory Note on September 26, 2001, with a principalsum of $60.5 million plus interest, due March 15, 2002.  The interest rate on the Promissory Note was14%, which increased to 16% if the promissory note was not satisfied by March 15,2002.  NewComm was then given anextension on March 8, 2002 by****means of anAllonge Letter.  The letter came about asa result of the signing of the Stock Purchase Agreement with TLD (refer to Note1) which agreement reduced the interest rate to 8%.

 

DuringJune 2003, NewComm and Lucent entered into a Senior Credit Agreement whichrefinanced the balance of the existing promissory note balance.  The interest rate remained at 8% per annumand the maturity date was extended to September 2009.  As part of the refinancing agreement, NewCommwas required to make two principal payments of $5,551,032 each, made during thefirst quarter of 2004.

 

Thenote payable is guaranteed by a security agreement covering most of NewComm’sassets, as defined.

 

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

 

TheSenior Credit Agreement with Lucent includes various affirmative, negative andfinancial covenants.  As of December 31,2004, NewComm was in compliance with the requirements under such covenants.

 

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

On December 18,2001, NewComm had outstanding invoices, payables, and past due interest due toAlcatel totaling $14,361,732.  In May 2002NewComm paid Alcatel $6,000,000 of which $5,437,184 was applied to theprincipal balance. As per agreement the annual interest rate was fixed at8%.  During June 2003, thepromissory agreement and note was amended as follows:

 

39

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

•                  Final maturity date will be December 20, 2005.

 

NewComm made the following payments as a result of theamendment:

 

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

 

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

 

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

 

Duringthe year ended December 31, 2004, NewComm paid the amount of $2,075,000 inprincipal payments.

 

Theloan agreement with Alcatel includes various affirmative and negativecovenants.  As of December 31, 2004,NewComm was in compliance with the requirements under such covenants.

 

**(c)****          FCCnotes –**

Originally, the Company had approximately $51,340,000in long-term debt related to the PCS licenses granted to the Company by theFCC.  This debt consists of notes payablebearing interest at 6.5% and guaranteed by the PCS licenses obtained.  In accordance with industry practice, theCompany recorded the PCS licenses and the related debt at their net presentvalue, based on the Company’s estimate of borrowing costs for debt similar to thatissued by the FCC.  The discount rateused by the Company was 12.82%.  Thesenotes are payable to the FCC as follows:

 

•                  Quarterly interest payments of$834,268 through April 2003.

 

•                  Quarterly principal and interestpayments of $3,669,768 from April 2003 through January 2007. (Thesequarterly payments have been made from funds loaned by TEM).

 

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

 

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

 

Becauseof the evidence available as of December 31, 2003, the Company’s managementadjusted the balance as of that date of the FCC debt discount, which amountedto $3,913,661.  Following SFAS No. 145,“Rescission of FASB Statements No 4, 44 and 64, Amendment of FASB Statement No. 13,and Technical Corrections”, the loss resulting from the adjustment of the FCCdebt discount has been reflected as interest expense in the other expenses section ofthe accompanying statement of operations.

 

**(d)****          TLDnotes –**

Originally,the Company had a secured promissory note (the “Promissory Note”) payable toTLD amounting to $19,960,000, which bore interest at the floating rate of the 90-dayLIBOR rate plus 1-1/2% and the balance of $24,852,533 was due in March 2004.  The principal amount of the Promissory Note,as amended, shall be converted into NewComm’s shares of common stock, asfollows:  (i) shares of NewComm’s Class A common stock in an amount equal tothirty-three and one third percent (33-1/3%) of NewComm’s issued andoutstanding Class A common stock held by ClearComm, and (ii) sharesof NewComm’s Class B common stock in an amount equal to forty-nine pointseven percent (49.7%) of all

 

40

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issuedand outstanding shares of Class A common stock of NewComm (including the Class Acommon stock issued to TLD upon conversion of the Promissory Note).  Upon the issuance of the FCC approval, TLDshall surrender the Promissory Note to NewComm, duly endorsed for cancellation,and NewComm shall issue (I) the certificates evidencing the number of shares ofClass A common stock and Class B common stock into which thePromissory Note is convertible, as set forth herein, and (II) a promissory notein a principal amount equal to the accrued interest on the Promissory Note asof such date (the “Interest Note”).  Thepromissory note will be non-interest bearing and the principal amount may beconverted into additional shares of NewComm’s stock.  Because of restrictions in the PCS licenses,the Promissory Note cannot be converted into shares of NewComm until such timeas the FCC may authorize TLD to hold more than a 25% equity interest inNewComm.  On January 1, 2004, thissecured promissory was amended to be due in December 2004, and to bearinterest at 1%.  During 2004, the FCCissued its approval for the conversion, but none of the events that weresupposed to take place have occurred.

 

During2001, the parties amended the Joint Venture Agreement to eliminate TLD’s optionto acquire a majority interest in NewComm from the Partnership, and revised thePromissory Note and corresponding unexecuted Interest Note to eliminate theCompany’s conversion rights under the latter instrument.

 

DuringNovember and December 2000, and May 2001, TLD loaned $14,970,000to the Company and the Company issued three convertible unsecured promissorynotes payable to TLD for the principal amount of $4,990,000 each.  The convertible promissory notes bear interestat .75% over the 180-day LIBOR (Notes one and two) and 1.50% over the 90-dayLIBOR (Note three).  The principalamounts of the promissory notes are each convertible into 29.34 shares ofNewComm’s Class A common stock at any time prior to their respectivematurity dates of November 2, 2005, December 15, 2005 and May 1,2006.

 

DuringMay and December 2002, TLD loaned and the Company issued twoadditional unsecured promissory notes for $9.0 million and $9.9 million,respectively, convertible into 57.24 shares of NewComm’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 September 26,2003, and as part of a corporate reorganization, TLD transferred all of NewComm’snotes to TLD 1, which in turn merged with Móviles 1, surviving TLD 1, which waslater dissolved resulting in TEM Puerto Rico, Inc., becoming the holder ofall the secured and convertible promissory notes previously owned by TLD.

 

At December 31,2004, future principal installments (after renegotiated terms) on these notespayables were as follows:

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

 

----

**(*)** Includes principal balance and accrued interest.

 

41

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**(16)****              Relatedparty transactions:**

 

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

 

In December 2003,TLD and TISA entered into an agreement whereby the Management Agreement wastransferred to TEM with retroactive effect as of January 1, 2002, sinceTEM have been providing such services since that date.

 

TheManagement Agreement was terminated effective October 28, 2004.

 

**(b)****         **Also,NewComm entered into a services agreement with TLD, whereby TLD agreed toprovide support to NewComm in the areas of legal consultation, managementinformation systems and general services. This services agreement is on a year-to-year basis and requires annualpayment to TLD of approximately $200,000. During 2004, the service agreement was amended to eliminate the legalconsultation services provided by TLD to NewComm.

 

**(c)****         **Inaddition, NewComm originally entered into a technology transfer agreement withTISA, whereby TISA granted NewComm the right to use, during the term of thisagreement, all patents, trademarks, processes, planning resources, designs and,in general, all other intellectual property belonging to TISA (collectively,the “Technology”), which is deemed necessary for the efficient operation anddevelopment of the business of NewComm. NewComm shall pay TISA all costs incurred, directly, or indirectly byvirtue of granting NewComm the right to utilize the Technology.  In consideration for the right to use theTechnology, NewComm shall pay an annual fee (payable quarterly in arrears)equal to one percent (1%) of NewComm’s gross revenues as of the end of theprevious year.  NewComm shall beresponsible for all taxes, withholdings or similar deductions due on thefee.  The initial term of this agreementis five years and is automatically renewable. On January 1, 2000, the technology transfer agreement wastransferred to TEM.

 

TheTechnology Transfer Agreement was terminated effective October 28, 2004.

 

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

 

**(e)****         **ThePartnership Agreement, as amended, provides for payment of a management fee toits General Partner (SuperTel), equal to the reasonable costs of operating thebusiness of the Partnership, plus 10% of such aggregate amount, which fee shallbe payable monthly, on the first day of each month during the year.  Expenses reimbursed include, but are notlimited to, compensation costs, and expenses incurred by officers, directors,and employees in the performance of their duties.  In connection with this agreement, theGeneral Partner billed the partnership approximately $288,000, $282,280 and$262,164 during the years ended December 31, 2004, 2003 and 2002,respectively, in connection with these services.  As of December 31, 2004, 2003 and 2002,the Partnership owes its General Partner approximately $185,000, $155,000 and136,000, respectively related to management fees.

 

42

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

 

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

 

Totalamounts charged by related parties during the years ended December 31,2004, 2003 and 2002 for the above agreements and other charges amounted to$5,466,626, $4,090,826 and $6,070,538, respectively.

 

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

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

 

**(17)****               Definedcontribution plan:**

 

In October 1999,NewComm established a defined contribution retirement plan (1165e Plan)covering all employees who have at least three months of service and are atleast 21 years old.  Participants maycontribute from one to ten percent of their compensation, as defined, up to amaximum of $8,000.  NewComm contributes66% of the aggregate participant contributions up to a maximum of six percentof the participant’s compensation. Contributions for the years ended December 31, 2004, 2003 and 2002amounted to $195,345, $219,621 and $164,410, respectively.

 

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

 

**(a)**          **C****ommitments –**

 

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

 

43

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

 

Rentexpense for the years ended December 31, 2004, 2003 and 2002 was $6,929,312,$6,755,926 and $7,766,611, respectively.

 

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

 

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

 

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

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

 

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

 

44

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•      Licensingagreement – for the use of the SCL software, specially designed for companiesengaged in the operation of mobile communication.  The total cost of the software for phase IV,capitalized during 2003, amounted to $973,735.

 

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

 

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

 

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

 

(v)         The Companyentered into an agreement with Brightstar Corp. (“Brightstar”) for the selling,distribution and administration of its inventories.  The contract was terminated effective January 31,2005, by mutual agreement.  Thewarehousing and logistic functions are now performed under the Company’smanagement.

 

(vi)               The Company entered into an Interconnection Agreement with Puerto RicoTelephone Company, 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.

 

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

 

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

 

(ix)                 During the year ended December 31, 2003, the Company entered into aservice agreement with Telecommunication Systems, Inc. (TCS), whereby TCSagreed to provide software maintenance services in the areas of “assistancerequest management” (ARM) and product updates and upgrades.  Services include: call receipt and routing,service restoration, problem resolution of reported conditions, on-siteassistance, software updates and upgrades, hardware maintenance and hardwareupgrades.  This service agreement is on ayear-to year basis for a fixed annual fee of $299,450.

 

(x)                    The Company entered into an agreement with Lucent Technologies for theoperation and maintenance of the CDMA Network. The agreement was signed on March 1, 2004, valid for two years andshall be automatically renewed by mutual agreement of the parties.  This service agreement is for a fixed monthlyfee of $125,750.

 

(xi)                 In addition, the Company maintains other agreements with various serviceproviders for periods ranging

 

45

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

 

**(b)**          **Legalcontingencies****–**

 

TheCompany is a defendant in a lawsuit brought by Atento de Puerto Rico, Inc.(Atento) alleging breach of contract, damages, and collection of amounts forservices rendered.  The plaintiff isseeking $665,540 ($484,212 of this amount was owed and accrued by The Companyas of December 31, 2004) for services already rendered and $1,760,000 forbreach of contract.  The case is in itsearly stages and no outcome can be predicted.

 

TheCompany is also the defendant in several legal cases related to formeremployees, arising in the ordinary course of business.  In the opinion of management, afterconsultation with legal counsel, the ultimate disposition of these matters willnot have a material adverse effect on the Company’s financial position andresults of operations.

 

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

 

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

 

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, theoperating losses of the Partnership will be allocated first to the partners asnecessary to offset any profits previously allocated to them until each partnerhas cumulative losses equal to cumulative profits previously allocated to eachpartner, and second, 75% to the limited partners in accordance with the numberof units held by each limited partner and 25% to the General Partner.   However, any losses that would have theeffect of causing or increasing a partners’ capital account deficit will beallocated first, pro rata to the other partners in accordance with their respectiveshare of partnership distributions, and second, when such allocations can bemade without increasing a partner’s capital account deficit, to the GeneralPartner.

 

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

 

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

 

ThePartnership, as a United States limited partnership, is not subject to federalincome tax and the tax affect of its activities flow–through to thepartners.  For U.S. tax purposes thePartnership’s tax losses have been passed through to the limited partners tothe extent of their investment.  ThePartnership is subject to Puerto Rico income tax as a regular corporation.

 

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

 

NewCommhas net operating loss carryforwards totaling approximately $182 millionavailable to reduce future taxable income. The loss carryforwards expire in fiscal years 2006 through 2010.

 

At December 31,2004 the deferred tax asset resulting from future income tax benefits of theavailable operating losses was approximately $48 million, at the lower taxbracket.  A valuation allowance for thesame amount has been established due to the uncertainty as to the realizationof the tax benefit of such operating losses.

 

46

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

 

Duringthe years ended December 31, 2004, 2003 and 2002, the Company had thefollowing non-cash investing and financing activities:

 

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

 

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

 

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

 

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

 

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

 

Theamount presented as dilution gain in the accompanying statements of changes inPartners’ deficit represents the effect of investments made by an outsideminority interest investor during the year 2002 ($10 million).  The equity gain is the effect of thereduction of the Partnership’s participation in the stockholders’ deficit ofNewComm, allocated to the limited partners and the General Partner, based ontheir percentage of participation, 75% and 25%, respectively.

 

## **(23)****             ****Quarterly financialinformation for 2004, 2003 and 2002****:**

##  

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

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

 

47

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| ** **                                             | ** ** | **2003**  | ** **  |
|--------------------------------------------------------|------------|-----------|-------------|
| ** **                                             | ** ** | **March** | ** **  | **June** | ** ** | **September** | ** ** | **December** | ** ** |
|                                                   |       |      |        |   |   |   |   |   |   |
| **Revenues**                                           |       | $         | 26,294,881  |   | $ | 27,796,305 |   | $ | 26,719,677 |   | $ | 28,083,249 |   |
| ** **                                             |       |      |        |   |   |   |   |   |   |
| **Operating income**                                   |       | $         | 2,658,790   |   | $ | 688,432 |   | $ | 3,836,544 |   | $ | 1,623,629 |   |
| ** **                                             |       |      |        |   |   |   |   |   |   |
| **Net income (loss)**                                  |       | $         | (14,067,360 | ) | $ | 6,805,295 |   | $ | (8,814,069 | ) | $ | (14,284,252 | ) |
| ** **                                             |       |      |        |   |   |   |   |   |   |
| **Net income (loss) attributable to General  Partner** |       | $         | (14,067,360 | ) | $ | 1,701,324 |   | $ | (3,710,098 | ) | $ | (14,284,252 | ) |
| ** **                                             |       |      |        |   |   |   |   |   |   |
| **Net income (loss) attributable to Limited  Partner** |       | $         | —      |   | $ | 5,103,971 |   | $ | (5,103,971 | ) | $ | — |   |
|                                                   |       |      |        |   |   |   |   |   |   |
| ** **                                             | ** ** | **2002**  | ** **  |
| ** **                                             | ** ** | **March** | ** **  | **June** | ** ** | **September** | ** ** | **December** | ** ** |
|                                                   |       |      |        |   |   |   |   |   |   |
| **Revenues**                                           |       | $         | 27,980,361  |   | $ | 33,519,358 |   | $ | 26,209,320 |   | $ | 20,248,058 |   |
| ** **                                             |       |      |        |   |   |   |   |   |   |
| **Operating (loss) income**                            |       | $         | 2,612,416   |   | $ | 1,454,412 |   | $ | 691,941 |   | $ | (539,969 | ) |
| ** **                                             |       |      |        |   |   |   |   |   |   |
| **Net income (loss)**                                  |       | $         | (5,680,363  | ) | $ | 7,185,858 |   | $ | (5,902,572 | ) | $ | (8,627,994 | ) |
| ** **                                             |       |      |        |   |   |   |   |   |   |
| **Net income (loss) attributable to General  Partner** |       | $         | (5,680,363  | ) | $ | 1,796,465 |   | $ | (513,182 | ) | $ | (8,627,994 | ) |
| ** **                                             |       |      |        |   |   |   |   |   |   |
| **Net income (loss) attributable to Limited  Partner** |       | $         | —      |   | $ | 5,389,393 |   | $ | (5,389,390 | ) | $ | — |   |

 

Asdiscussed in Note 3(h) to the accompanying consolidated financialstatements, effective January 1, 2003, the Company changed its method toaccount for the loss on sale of handsets to customers.  The quarterly unaudited consolidatedfinancial information for the year ended December 31, 2003, was adjustedaccordingly.

 

Asdiscussed in Note 3(k) to the accompanying consolidated financial statements,the Company adopted SFAS 142 “Goodwill and other Intangibles Assets” on January 1,2002.  The quarterly unauditedconsolidated financial information for the year ended December 31, 2002,was adjusted accordingly.

 

48

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# **Report of Independent PublicAccountants**

#  

# To the Board of Directors of

#  

SuperTel Communications Corp.:

 

Wehave audited the accompanying balance sheets of **SuperTelCommunications Corp.**(“SuperTel”) as of December 31, 2004, 2003and 2002, and the related statements of income and accumulated earnings(deficit), and cash flows for the years then ended.  These financial statements are theresponsibility of SuperTel’s management. Our responsibility is to express anopinion on these financial statements based on our audits.

 

Weconducted our audit in accordance with auditing standards generally accepted inthe United States of America as established by the Auditing Standards Board ofthe American Institute of Certified Public Accountants.  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes consideration of internal control over financialreporting as a basis for designing audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on theeffectiveness of SuperTel’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

In ouropinion, the financial statements referred to above present fairly, in allmaterial respects, the financial position of **SuperTelCommunications Corp**. as of December 31, 2004, 2003 and 2002,and the results of its operations and its cash flows for the years then ended inconformity with accounting principles generally accepted in the United Statesof America.

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

 

49

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**SuperTelCommunications Corp.**

 

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

 
| ** **                                                                                                   | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **CURRENT ASSETS:**                                                                                          |       |     |       |     |       |     |       |
| Cash                                                                                                         |       | $        | 83,905     |     | $          | 2,188    |       | $ | 63,853 |   |
| Accounts receivable from affiliated company                                                                  |       | 178,756  |       | 154,934  |       | 136,154  |       |
|                                                                                                         |       |     |       |     |       |     |       |
| Total current assets                                                                                         |       | 262,661  |       | 157,122  |       | 200,007  |       |
|                                                                                                         |       |     |       |     |       |     |       |
| Investment in partnership at equity, net                                                                     |       | —   |       | —   |       | —   |       |
|                                                                                                         |       |     |       |     |       |     |       |
| Total assets                                                                                                 |       | $        | 262,661    |     | $          | 157,122  |       | $ | 200,007 |   |
|                                                                                                         |       |     |       |     |       |     |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                |       |     |       |     |       |     |       |
|                                                                                                         |       |     |       |     |       |     |       |
| **CURRENT LIABILITIES:**                                                                                     |       |     |       |     |       |     |       |
| Accounts payable                                                                                             |       | $        | 94,650     |     | $          | 6,000    |       | $ | 69,900 |   |
| Income tax payable                                                                                           |       | 3,743    |       | 6,415    |       | 4,647    |       |
|                                                                                                         |       |     |       |     |       |     |       |
| Total current liabilities                                                                                    |       | 98,393   |       | 12,415   |       | 74,547   |       |
|                                                                                                         |       |     |       |     |       |     |       |
| **STOCKHOLDERS’ EQUITY:**                                                                               |       |     |       |     |       |     |       |
| Preferred stock, no par value, 1,000 shares  authorized, non-voting, none issued                             |       | —   |       | —   |       | —   |       |
| Common stock, no par value, $1 stated value, 84,100  shares authorized, 1,000 shares issued and outstanding, |       | 1,000    |       | 1,000    |       | 1,000    |       |
| Common stock Class A-1, no par value,  restricted, non-voting shares 15,900 authorized, none issued     |       | —   |       | —   |       | —   |       |
| Additional paid-in capital                                                                                   |       | 148,746  |       | 148,746  |       | 148,746  |       |
| Retained Earnings (accumulated deficit)                                                                      |       | 14,522   |       | (5,039   | )          | (24,286  | )          |
|                                                                                                         |       |     |       |     |       |     |       |
| Total stockholders’ equity                                                                              |       | 164,268  |       | 144,707  |       | 125,460  |       |
|                                                                                                         |       |     |       |     |       |     |       |
| Total liabilities and stockholders’ equity                                                              |       | $        | 262,661    |     | $          | 157,122  |       | $ | 200,007 |   |

 

The accompanying notesare an integral part of these balance sheets.

 

50

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**SuperTelCommunications Corp.**

 

**Statements of Income and RetainedEarnings (Accumulated Deficit****)**

**For theYears Ended December 31, 2004, 2003, 2002**

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

 

The accompanying notesare an integral part of these statements.

 

51

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**SuperTelCommunications Corp.**

 

**Statements of Cash Flows**

**For theYears Ended December 31, 2004, 2003, 2002**

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

 

The accompanying notesare an integral part of these statements.

 

52

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**SuperTelCommunications Corp.**

 

**Notes to Financial Statements**

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

 

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

 

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

 

Mostof SuperTel’s transactions are related to the administration of ClearComm, alimited partnership organized on January 24, 1995 under the laws of theState of Delaware, for which SuperTel has served as General Partner since June 18,1996.  The Partnership is scheduled toterminate on December 31, 2005, or earlier upon the occurrence of certainspecific events as detailed in the Partnership agreement.  SuperTel, as General Partner of thePartnership, is considering alternatives to dissolution, including an extensionof the Partnership’s termination date. On January 22, 1997, thePartnership was granted the PCS Block C licenses for Puerto Rico and certainwestern states of the United States.  On February 4,1999, the Partnership entered into an agreement with Telefónica Larga Distanciade Puerto Rico, Inc. (TLD); several of the relevant provisions of thisagreement are the following:

 

•                  The Partnership transferred all ofits Puerto Rico licenses including its related debt with the FCC (thePartnership’s contribution) to NewComm Wireless Services, Inc. (“NewComm”),a newly organized Puerto Rico corporation owned by the Partnership, in exchangefor all of NewComm’s issued and outstanding common stock.  Subsequently, the Partnership sold part ofits investment in NewComm, and as of December 31, 2004 and 2003, thePartnership owned 76.89% of NewComm’s issued and outstanding common stock.

 

•                  TLD lent approximately $20 million toNewComm by means of a secured convertible promissory note payable (thePromissory Note).  Payment of thePromissory Note is collateralized through this provision of a separate agreementpursuant to which a security interest was imposed upon NewComm’s assets and apledge and guaranty agreement issued by the Partnership.

 

•                  Once certain regulatory and otherrequirements are met, the Promissory Note may be converted into certain numberof shares of NewComm’s common stock corresponding to approximately 49.9% ofNewComm.  On March 12, 2002, thePartnership agreed to sell an additional 0.2% of its shares in NewComm to TLDto bring TLD’s (now assigned to Telefonica Moviles, S.A. or TEM) ownership to50.1%; this transaction will be consummated after a third party valuation ofNewComm’s stocks and should be subject to the approval from the FCC. During2004, the Partnership and TLD received the approval from the FCC, but theconversion and additional sale of participation has not been consummated.

 

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

 

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

 

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

 

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

 

53

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

 

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

 

**Use of estimates –**

The preparation offinancial statements in conformity with accounting principles generally acceptedin the United States requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

 

**Revenue recognition –**

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

 

**Investment in Partnership –**

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

 

**Income taxes-**

In accounting for incometaxes, SuperTel uses the asset and liability approach that requires therecognition of deferred tax liabilities and assets for the expected future taxconsequences of temporary differences between the carrying amounts and the taxbases of assets and liabilities.  Avaluation allowance is recognized for any deferred tax asset for which, basedon management’s evaluation, it is more likely than not (a likelihood of morethan 50%) that some portion of the deferred tax asset will not be realized.

 

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

 

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

 

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

 

ClearComm’s partnershipagreement, as amended, provides for payment of a management fee to its GeneralPartner (SuperTel), equal to the reasonable costs of operating the business ofthe Partnership, plus 10% of such aggregate amount, which fee shall be payablemonthly, on the first day of each month during the year.  Expenses reimbursed include, but are notlimited to, compensation costs and expenses incurred by officers, directors,and employees in the performance of their duties.  During 2004, 2003 and 2002, management feesbilled to ClearComm amounted to $287,499, $282,280 and $262,164, respectively.

 

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

 

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

 

SuperTel is authorizedto issue 1,000 shares of restricted, non-voting, preferred stock without par value.  The preferred shares are divided intoclasses, from A to J with 100 shares of each class and upon their issuance,SuperTel has the option to redeem them at their issuance price plus accrueddividends.  At December 31, 2004,2003 and 2002, none of the preferred shares had been issue.

 

54

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

 

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

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

 

None.

 

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

 

The Partnership’s management, including its Presidentand Chief Financial Officer, have conducted an evaluation of the effectivenessof the Partnership’s and Subsidiary’s disclosure controls and procedures asdefined in Exchange Act Rules 13a-14(c) and 15d-14(c) asof a date 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 AND EXECUTIVE OFFICERS**

#####  

SuperTel Communications Corp. was incorporated inPuerto Rico in June 1996 for the purpose of acting as the general partner(the “General Partner”) of the Partnership. SuperTel was structured to ensure that the Partnership would receive themaximum benefits eligible to Entrepreneurs. The Partnership has no employees and is managed and controlled by theBoard of Directors and executive officers of the General Partner.

 

55

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*Fred H. Martinez, Director and Chairman of theBoard*, age 60,has been chairman of the board of trustees of the University of Puerto Ricofrom 1993 to 1999.  Mr. Martinez isco-managing partner of Puerto Rico’s third largest law firm.  During 1977 to 1979, Mr. Martinez wasdirector of the Puerto Rico Income Tax Bureau, member of the Governor’sEconomic Advisory Council, chairman of the Committee on Section 936,Government of Puerto Rico, assistant secretary of the treasury, InternalRevenue, Puerto Rico Treasury Department (1978- 1979), president of theTax 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 experience incontract 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, Director and President,*age 40, has had extensive experience inthe telecommunications industry and has been responsible for developing,negotiating and overseeing numerous strategic operational, economic andpolitical aspects of the cellular telephone industry, including cell-site acquisition,environmental impacts, leasing contractual arrangements and inter-companyrelations with other operating telecommunications organizations, includinginterexchange carriers and local telephone companies.  Since 2002, Mr. Lamoso has been a memberand officer of the Board of Directors of the Young Presidents’ Organization,Puerto Rico Chapter.  Until 1994, Mr. Lamosoacted as counsel to the Puerto Rico Cable Operators Association in variousmatters, which include the negotiation of rates and levies and the drafting ofnew legislation.  From 1986 to 1987 Mr. Lamosoheld a non-legal position in the corporate finance department of Simpson,Thacher & Bartlett, and was involved with the successful external debtrestructuring of Chile in 1987.  He holdsa BA in Political Science/ Economics from Fordham University (1986), and a JDin law from the University of Puerto Rico (1990).

 

*Margaret W. Minnich, Director*, age 51, has held management andsupervisory positions in finance and accounting over a 20-year period inthe non-profit, manufacturing and public accounting field.  In the past, she has been a member of theboard of several privately-held companies and a private foundation.  From 1992 to the present, she has worked forThe California Wellness Foundation and since December 1997 has served asVice President of Finance and Chief Financial Officer, and is responsible forall financial reporting, accounting, budgeting and tax functions includinginvestment performance and asset allocation review of a $900 million investmentportfolio, and managing cash flow for an annual budget exceeding $45million.  From 1984 through 1990, Ms. Minnichheld several key positions with MICOM Communications Corporation, includingmanager of financial planning where she directed all accounting and financialfunctions.  From 1981 to 1984, Ms. Minnichwas a senior accountant with Ernst & Young, Los Angeles, specializingin electronics, aerospace and heavy industry fields.  Ms. Minnich is a member of theCalifornia Society of Certified Public Accountants and Southern CaliforniaAssociation for Philanthropy.  She holdsa BA in Philosophy from the University of Southern California (1978) and an MBAin accounting from USC (1981).

 

*Lawrence Odell, Director and Secretary*, age 56, 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) from theInter-American University of Puerto Rico, and a LL.M. in labor law from NewYork University (1975).  Mr. Odellhas served in the capacity of secretary for several major corporations,including Buenos Aires Embotelladora, S.A. (BAESA).

 

*James T.Perry, Director*, age 72, is a successful entrepreneur andbusinessman with substantial experience in the real estate and retail foodsindustries. Since 1993, Mr. Perry has purchased and sold a two-way radiolicense, and has been involved in several wireless communicationpartnerships.  From 1987 to 1993, he wasgeneral partner of Telenode Rincon, the original owner and developer of the RSAcellular telephone system for PR-1, which was successfully acquired byCellular Communications, Inc., as well as managing other cellulartelephone and telecommunications holdings. From 1959 to 1975, Mr. Perry was the president and/or owner ofseveral successful licensed real estate firms including United Realty Group,Milwaukee, the largest black-owned real estate firm in Wisconsin, and Perry andSherard Realty, Milwaukee, which specialized in rehabilitating and sellingbetween 75 to 100 properties per year utilizing a staff of approximately 30people.  From 1975 to 1992, Mr. Perryowned and operated a McDonald’s franchise in Saint Louis, Missouri, and wasresponsible for all operations of this successful business. Mr. Perryserved in the U.S. Army in Korea, and has taken extensive courses in the fieldsof general business and real estate. From 1988 to 1992 he was vice president of the Ronald McDonald Children’sCharities, and from 1980 to 1984 he served as a member of the McDonald’sAdvertising Committee.  His membershipsinclude the board of directors of the Skinker DeBaliviere Business

 

56

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Association, HamiltonCommunity Schools, Saint Louis, and the admissions committee of the MilwaukeeBoard of Realtors.  He is a pastpresident of the Urban Brokers Association, and a director of the MultipleListing Service.

 

*EdileenSalicrup, Chief Financial Officer*, age 41, has been engagedin the telecommunications industry since 1992 when she joined the internationalaccounting firm Arthur Andersen, LLP and was in charge of the Telefónica Groupaccount after 5 years as a Certified Public Accountant in the Tax Division ofDeloitte and Touche, LLP.  Mrs. Salicrupjoined the Partnership as an Independent Contractor on September 1999 tothe present and as CFO is currently in charge of accounting, taxation andfinancial matters of the Partnership and its General Partner and oversees andintegrates the financial operations of the Partnerships subsidiaries.  Mrs. Salicrup is an active member of thePuerto Rico Society of Certified Public Accountants and the American Instituteof Certified Public Accountants.  She hasbeen an instructor for the Puerto Rico Society of CPA’s in taxation matters.

 

Section 16(a) BeneficialOwnership Reporting Compliance

 

Based solely upon a review of any Forms 3, 4 and 5 andany amendments thereto furnished to the Registrant pursuant to Rule 16a-3(e) ofthe Rules of the Securities and Exchange Commission, the Registrant is notaware of any failure of any officer or director of the General Partner orbeneficial owner of more than ten percent of the Units to timely file with theSecurities and Exchange Commission any Form 3, 4 or 5 relating to theRegistrant for 2003.

 

Codes of Ethics

 

The Partnership has adopted a code of ethics thatapplies to all of its directors, officers, employees, and representatives.  The Partnership will provide to any personwithout charge, upon written request sent to the Partnership’s principalexecutive office, a copy of such code of ethics. 

 

Audit CommitteeFinancial Expert

 

The Board of Directors of the Partnership’s GeneralPartner has determined that the Partnership does not have an audit committeefinancial expert, as such term is defined in Item 401(h)(2) of RegulationS-K, serving on its audit committee. Nevertheless, the board members currently serving on the audit committeepossess (i) an understanding of generally accepted accounting principlesand financial statements, (ii) the ability to assess the general applicationof such principles in connection with the accounting for estimates, accrualsand reserves, (iii) an understanding of internal control over financialreporting, and (iv) an understanding of audit committee functions.

 

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

#####  

The Partnership is managed by the General Partner’sBoard of Directors and executive officers of the General Partner.  The Partnership reimburses the GeneralPartner for all reasonable expenses incurred by it in connection with managingthe Partnership, including salaries and expenses of the General Partner’semployees who manage the Partnership.

 

The following Summary Compensation Table sets forthcertain information concerning the cash and non-cash compensation earned by orawarded to the chief executive officer of the Partnership’s GeneralPartner.  Other than the President, noexecutive officer of the General Partner received compensation of $100,000 ormore in 2004.

 

57

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**SUMMARY COMPENSATION TABLE**

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

 

----

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

 

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

 

**ITEM 12.****  SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS AND MANAGEMENT**

 

Exclusive management and control of the Partnership’sbusiness is vested in the General Partner. The Partnership has one administrative employee and is managed andcontrolled by the Board of Directors and executive officers of the GeneralPartner.  The General Partner owns 100%of the Partnership’s general partnership interest.  The shares of General Partner are held bycertain individuals and Puerto Rico trusts.

 

The following table sets forth, as of December 31,2004, information with respect to beneficial ownership of the Partnership’sUnits by: (i) all persons known to the General Partner to be thebeneficial owner of 5.0% or more thereof; (ii) each Director of theGeneral 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 listed havesole voting and investment power with respect to their Units, unless otherwiseindicated.

 

58

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

 

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* Lessthan 1.0%.

 

(1)          Mr. Martínez is Chairman of the Board ofDirectors of the General Partner.  Mr. Martínezand Mr. Lawrence Odell are Trustees of Martinez Odell & CalabriaPension Fund, which owns 2.4 Units reflected in the table.

(2)          Mr. Lamoso is President of the General Partnerand a member of the Board of Directors.

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

(4)          Mr. Perry is a Director.

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

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

 

##### **ITEM 13.**** CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

#####  

**GeneralPartnership Interest**

 

SuperTel contributed $100,000, which entitled it toreceive 100% of the Partnership’s general partner interest.  The general partner interest entitles theGeneral Partner to 25% of the equity of the Partnership.  See Item 5.

 

**ManagementFee**

 

The Partnership Agreement provides that the GeneralPartner is entitled to a management fee for all reasonable operating expenses,plus 10% of such expenses.  The totalmanagement fee for 2004 and 2003 was approximately $287,000 and $282,000,respectively.  The management fee is paidon a monthly basis.

 

**OtherRelationships and Transactions**

 

Mr. Martínez and Mr. Odell are partners ofMartínez, Odell & Calabria, a law firm, which provides legal servicesto the General Partner and the Partnership.

 

**ITEM 14****,  PRINCIPAL ACCOUNTING FEES AND SERVICES**

 

(a)** **AuditFees:

Aggregatefees billed in connection with the audits of the financial statements for theyears ended December 31, 2004 and 2003 amounted to $120,801 and $95,999,respectively.

 

Aggregatefees billed in connection with the review of quarterly financial informationamounted to $41,245 for the year ended December 31, 2004 and  $27,610 for the year ended December 31,2003.

 

(b)** **Audit-RelatedFees:

None.

 

(c)** **TaxFees:

Aggregatefees billed in connection with tax and related consulting services for theyears ended December 31, 2004 and 2003 amounted to $31,216 and $20,323,respectively.

 

59

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(d)** **AllOther Fees:

None

 

**ITEM 15.****  EXHIBITS, FINANCIAL STATEMENT SCHEDULES ANDREPORTS 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, 2004, 2003 and 2002                                     |   |
|                                                                                                                       |   |
| Consolidated Balance Sheets  - December 31, 2004, 2003 and 2002                                                       |   |
|                                                                                                                       |   |
| Consolidated  Statements of Operations for the years ended - December 31, 2004, 2003  and 2002                        |   |
|                                                                                                                       |   |
| Consolidated  Statements of Changes in Partners’ Deficit for the years ended - December 31,  2004, 2003 and 2002 |   |
|                                                                                                                       |   |
| Consolidated  Statements of Cash Flows for the years ended - December 31, 2004, 2003  and 2002                        |   |

 

60

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| Notes to  Consolidated Financial Statements                                                              |   |
|----------------------------------------------------------------------------------------------------------|--------|
|                                                                                                     |   |
| SuperTel Communications  Corp.                                                                           |   |
|                                                                                                     |   |
| Report of  Independent Public Accountants – December 31, 2004, 2003 and 2002                   |   |
|                                                                                                     |   |
| Balance  Sheets - December 31, 2004, 2003 and 2002                                                  |   |
|                                                                                                     |   |
| Statements of  Income and Accumulated Deficit for the years ended December 31, 2004,  2003 and 2002 |   |
|                                                                                                     |   |
| Statements of Cash Flows for  the years ended December 31, 2004, 2003 and 2002                      |   |
|                                                                                                     |   |
| Notes to Financial  Statements                                                                           |   |

 

(2) Financial Statement Schedules - None.

 

(3) Exhibits- None.

 

(b) Reports on Form 8-K

 

None

 

(c) PrincipalOfficer Certifications – Exhibits 31 and 32.

 

61

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**SIGNATURES**

 

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

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

 

 

Pursuant to the requirements of the Securities ExchangeAct of 1934, this report has been signed below by the following persons onbehalf of the registrant and in the capacities and on the dates indicated.

 
| **Signature**              | ** ** | **Capacity in Which Signed**        | ** ** | **Date**            |
|----------------------------|------------|-------------------------------------|------------|---------------------|
|                       |       |                                |       |                |
| /s/ Fred H.  Martínez |       | Director and  Chairman of the Board |       | March 29, 2005 |
| Fred H. Martínez      |       |                                |       |                |
|                       |       |                                |       |                |
| /s/ Javier O.  Lamoso      |       | Director and  President             |       | March 29, 2005 |
| Javier O. Lamoso           |       |                                |       |                |
|                       |       |                                |       |                |
| /s/ Margaret W.  Minnich   |       | Director                            |       | March 29, 2005 |
| Margaret W.  Minnich       |       |                                |       |                |
|                       |       |                                |       |                |
| /s/ Lawrence  Odell        |       | Director                            |       | March 29, 2005 |
| Lawrence Odell             |       |                                |       |                |
|                       |       |                                |       |                |
| /s/ James T.  Perry        |       | Director                            |       | March 29, 2005 |
| James T. Perry             |       |                                |       |                |

 

62

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