** **

**UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

 

**FORM 10-Q**

 

**QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d) OF**

**THE SECURITIESEXCHANGE ACT OF 1934**

 

**For the quarterly period ended June 30, 2003**

 

**Commission File Number**

**000-30761**

 

**UbiquiTel Inc.**

(Exact name ofCo-Registrant as specified in its charter)

 

| **Delaware**                                          |   | **23-3017909**                        |
|-------------------------------------------------------|--------|---------------------------------------|
| (State of  incorporation)                             |   | (I.R.S. Employer  Identification No.) |
|                                                  |   |                                  |
| **One West Elm Street, Suite 400,  Conshohocken, PA** |   | **19428**                             |
| (Address of principal  executive office)              |   | (Zip code)                            |

 

Co-Registrant’s telephonenumber:  **(610) 832-3300**

 

CommissionFile Number

**333-39950**

 

**UbiquiTel Operating Company**

(Exactname of Co-Registrant as specified in its charter)

 

| **Delaware**                                         |   | **23-3024747**                       |
|------------------------------------------------------|--------|--------------------------------------|
| (State of incorporation)                             |   | (I.R.S. Employer Identification No.) |
|                                                 |   |                                 |
| **One West Elm Street, Suite 400, Conshohocken, PA** |   | **19428**                            |
| (Address of principal executive office)              |   | (Zip code)                           |

 

Co-Registrant’stelephone number:  **(610) 832-3300**

 

 

Indicate by check mark whether eachof the co-registrants (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that each co-registrant was required tofile such reports), and (2) has been subject to such filing requirements forthe past 90 days.

Yes ý    No o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act).

Yes o    No ý

 

There were 90,578,480 shares of common stock, $0.0005 par value, of UbiquiTel Inc. outstanding at August 13,2003.

 

There were 1,000 shares of common stock, $0.01 par value, of UbiquiTelOperating Company outstanding at August13, 2003, all of which were owned by UbiquiTel Inc.

 

 

----

 

**UbiquiTel Inc. and Subsidiaries**

 

**Form 10-Q for the Quarter Ended June 30, 2003**

 

 

**INDEX**

 
|                       |                                                                                              |   |
|----------------------------|---------------------------------------------------------------------------------------------------|--------|
| PART I.                    | FINANCIAL INFORMATION                                                                             |   |
|                       |                                                                                              |   |
| Item 1.                    | Financial Statements                                                                              |   |
|                       | Consolidated Balance Sheets  as of June 30, 2003 and December 31, 2002                            |   |
|                       | Consolidated  Statements of Operations for the three and six months ended June 30, 2003 and  2002 |   |
|                       | Consolidated  Statements of Cash Flows for the six months ended June 30, 2003 and 2002            |   |
|                       | Notes to  Consolidated Financial Statements                                                       |   |
|                       |                                                                                              |   |
| Item  2.                   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations       |   |
|                       |                                                                                              |   |
| Item  3.                   | Quantitative  and Qualitative Disclosures About Market Risk                                       |   |
|                       |                                                                                              |   |
| Item 4.                    | Controls and Procedures                                                                           |   |
|                       |                                                                                              |   |
| PART II. OTHER INFORMATION |                                                                                              |
|                       |                                                                                              |   |
| Item 1.                    | Legal  Proceedings                                                                                |   |
|                       |                                                                                              |   |
| Item  2.                   | Changes  in Securities and Use of Proceeds                                                        |   |
|                       |                                                                                              |   |
| Item 3.                    | Defaults Upon  Senior Securities                                                                  |   |
|                       |                                                                                              |   |
| Item  4.                   | Submission  of Matters to a Vote of Security Holders                                              |   |
|                       |                                                                                              |   |
| Item 5.                    | Other  Information                                                                                |   |
|                       |                                                                                              |   |
| Item 6.                    | Exhibits and  Reports on Form 8-K                                                                 |   |
|                       |                                                                                              |   |
| Signatures                 |                                                                                              |   |

 

 

 

2

----

 

**ExplanatoryNote:**

 

                The Consolidated FinancialStatements included herein are that of UbiquiTel Inc. (“UbiquiTel”).  The Co-Registrants are UbiquiTel andUbiquiTel Operating Company (“Operating Company”), which is a wholly-ownedsubsidiary of UbiquiTel and the issuer of 14% senior subordinated discountnotes due 2010, 14% senior discount notes due 2010 and 14% Series B seniordiscount notes due 2008 (collectively, the “Notes”).  UbiquiTel has provided a full, unconditional, joint and severalguaranty of Operating Company’s obligations under the Notes.  UbiquiTel has no operations separate fromits investment in Operating Company.  Pursuantto Rule 12h-5 of the Securities Exchange Act, no separate financial statementsand other disclosures concerning Operating Company other than narrativedisclosures set forth in Note 6 to the Consolidated Financial Statements havebeen presented herein. As used herein and except as the context otherwise mayrequire, the “Company,” “we,” “us,” “our” or “UbiquiTel” means, collectivelyUbiquiTel, Operating Company and their consolidated subsidiary, UbiquiTelLeasing Company.

 

 

3

**PART I. FINANCIAL INFORMATION**

# ** **

**Item 1.  Financial Statements**

 

# **UbiquiTelInc. and Subsidiaries**

# **ConsolidatedBalance Sheets**

# **(Unaudited)**

# **(InThousands, Except Per Share Data)**

 
|                                                                                                                                                                        |   | **June 30,  2003** |    | **December  31, 2002** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|---------|------------------------|--------|
| **ASSETS**                                                                                                                                                                  |   |               |    |                   |   |
| CURRENT ASSETS:                                                                                                                                                             |   |               |    |                   |   |
| Cash and cash equivalents                                                                                                                                                   |   | $                  | 57,646  |                   | $      | 73,481 |   |
| Restricted cash                                                                                                                                                             |   | 2,419              |    | 2,408                  |   |
| Accounts receivable, net of allowance for doubtful accounts of $3,132  atJune 30, 2003 and $4,343 at December 31, 2002                                                      |   | 17,350             |    | 21,762                 |   |
| Inventory                                                                                                                                                                   |   | 2,225              |    | 2,751                  |   |
| Prepaid expenses and other assets                                                                                                                                           |   | 14,392             |    | 15,380                 |   |
| Income tax receivable                                                                                                                                                       |   | 705                |    | 8,784                  |   |
| Total current assets                                                                                                                                                        |   | 94,737             |    | 124,566                |   |
| PROPERTY AND EQUIPMENT, NET                                                                                                                                                 |   | 266,279            |    | 275,588                |   |
| CONSTRUCTION IN PROGRESS                                                                                                                                                    |   | 5,753              |    | 8,117                  |   |
| DEFERRED FINANCING COSTS, NET                                                                                                                                               |   | 9,744              |    | 12,717                 |   |
| GOODWILL                                                                                                                                                                    |   | 38,138             |    | 38,138                 |   |
| INTANGIBLE ASSETS, NET                                                                                                                                                      |   | —             |    | 2,753                  |   |
| OTHER INTANGIBLES, NET                                                                                                                                                      |   | 71,021             |    | 73,174                 |   |
| OTHER LONG-TERM ASSETS                                                                                                                                                      |   | 3,673              |    | 3,774                  |   |
| Total assets                                                                                                                                                                |   | $                  | 489,345 |                   | $      | 538,827 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                               |   |               |    |                   |
| CURRENT LIABILITIES:                                                                                                                                                        |   |               |    |                   |   |
| Accounts payable                                                                                                                                                            |   | $                  | 8,414   |                   | $      | 11,209 |   |
| Accrued expenses                                                                                                                                                            |   | 22,927             |    | 23,681                 |   |
| Accrued compensation and benefits                                                                                                                                           |   | 2,179              |    | 2,547                  |   |
| Deferred revenue                                                                                                                                                            |   | 10,693             |    | 9,252                  |   |
| Interest payable                                                                                                                                                            |   | 1,573              |    | 1,923                  |   |
| Current portion of long-term debt                                                                                                                                           |   | 478                |    | 683                    |   |
| Other                                                                                                                                                                       |   | 7,974              |    | 7,379                  |   |
| Total current liabilities                                                                                                                                                   |   | 54,238             |    | 56,674                 |   |
| LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, EXCLUDING CURRENT  MATURITIES                                                                                                 |   | 397,739            |    | 457,038                |   |
| OTHER LONG-TERM LIABILITIES                                                                                                                                                 |   | 3,851              |    | 3,506                  |   |
| Total long-term liabilities                                                                                                                                                 |   | 401,590            |    | 460,544                |   |
| Total liabilities                                                                                                                                                           |   | 455,828            |    | 517,218                |   |
| COMMITMENTS AND CONTINGENCIES                                                                                                                                               |   |               |    |                   |   |
| STOCKHOLDERS’ EQUITY:                                                                                                                                                  |   |               |    |                   |   |
| Preferred stock, par value $0.001 per share; 10,000 shares authorized;  0 shares issued andoutstanding at June 30, 2003 and December  31, 2002                              |   | —             |    | —                 |   |
| Common stock, par value $0.0005 per share; 240,000 shares authorized;  90,578 and 81,432shares issued and outstanding at June 30, 2003  and December 31, 2002, respectively |   | 45                 |    | 41                     |   |
| Additional paid-in-capital                                                                                                                                                  |   | 299,842            |    | 295,236                |   |
| Accumulated deficit                                                                                                                                                         |   | (266,370           | )       | (273,668               | )      |
| Total stockholders’ equity                                                                                                                                             |   | 33,517             |    | 21,609                 |   |
| Total liabilities and stockholders’ equity                                                                                                                             |   | $                  | 489,345 |                   | $      | 538,827 |   |

 

 

*Theaccompanying notes are an integral part of these consolidated financialstatements.*

 

4

----

 

**UbiquiTelInc. and Subsidiaries**

# **ConsolidatedStatements of Operations**

**(Unaudited)**

**(InThousands, Except Per Share Data)**

 
|                                                                                |   | **Three  Months Ended June 30,** |   | **Six Months  Ended June 30,** |   |
|-------------------------------------------------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                                                                                |   | **2003**                         |   | **2002**                       |   | **2003** |   | **2002** |   |
| REVENUES:                                                                           |   |                             |   |                           |   |   |   |   |   |
| Service revenue                                                                     |   | $                                | 63,428 |                           | $      | 51,806 |   | $ | 119,672 |   | $ | 95,356 |   |
| Equipment revenue                                                                   |   | 2,618                            |   | 1,798                          |   | 4,857 |   | 4,333 |   |
| Total revenues                                                                      |   | 66,046                           |   | 53,604                         |   | 124,529 |   | 99,689 |   |
| COSTS AND EXPENSES:                                                                 |   |                             |   |                           |   |   |   |   |   |
| Cost of service and operations (exclusiveof depreciation  as shown separatelybelow) |   | 31,557                           |   | 36,405                         |   | 60,958 |   | 66,042 |   |
| Cost of products sold                                                               |   | 9,504                            |   | 8,223                          |   | 18,805 |   | 17,842 |   |
| Selling and marketing                                                               |   | 12,079                           |   | 12,242                         |   | 24,160 |   | 24,688 |   |
| General and administrative expensesexcluding  non-cash compensationcharges          |   | 7,748                            |   | 6,498                          |   | 15,222 |   | 12,566 |   |
| Non-cash compensation for general andadministrative  matters                        |   | 16                               |   | 95                             |   | 110 |   | 189 |   |
| Depreciation and amortization                                                       |   | 10,610                           |   | 13,376                         |   | 23,658 |   | 23,732 |   |
| Total costs and expenses                                                            |   | 71,514                           |   | 76,839                         |   | 142,913 |   | 145,059 |   |
| OPERATING LOSS                                                                      |   | (5,468                           | )      | (23,235                        | )      | (18,384 | ) | (45,370 | ) |
| INTEREST INCOME                                                                     |   | 144                              |   | 498                            |   | 337 |   | 969 |   |
| INTEREST EXPENSE                                                                    |   | (7,031                           | )      | (11,371                        | )      | (17,158 | ) | (22,282 | ) |
| GAIN ON DEBT RETIREMENTS                                                            |   | 3,854                            |   | —                         |   | 42,872 |   | — |   |
| OTHER INCOME                                                                        |   | —                           |   | 74                             |   | — |   | 74 |   |
| INCOME (LOSS) BEFORE INCOME TAXES                                                   |   | (8,501                           | )      | (34,034                        | )      | 7,667 |   | (66,609 | ) |
| INCOME TAX (EXPENSE) BENEFIT                                                        |   | (402                             | )      | 2,961                          |   | (369 | ) | 5,791 |   |
| NET INCOME (LOSS)                                                                   |   | $                                | (8,903 | )                              | $      | (31,073 | ) | $ | 7,298 |   | $ | (60,818 | ) |
|                                                                                |   |                             |   |                           |   |   |   |   |   |
| NET INCOME (LOSS) PER SHARE:                                                        |   |                             |   |                           |   |   |   |   |   |
| BASIC                                                                               |   | $                                | (0.11  | )                              | $      | (0.38 | ) | $ | 0.09 |   | $ | (0.75 | ) |
| DILUTED                                                                             |   | $                                | (0.11  | )                              | $      | (0.38 | ) | $ | 0.08 |   | $ | (0.75 | ) |
|                                                                                |   |                             |   |                           |   |   |   |   |   |
| WEIGHTED AVERAGE SHARES OUTSTANDING:                                                |   |                             |   |                           |   |   |   |   |   |
| BASIC                                                                               |   | 82,527                           |   | 81,116                         |   | 82,037 |   | 81,116 |   |
| DILUTED                                                                             |   | 82,527                           |   | 81,116                         |   | 93,383 |   | 81,116 |   |

 

 

*Theaccompanying notes are an integral part of these consolidated financialstatements*.

 

5

----

**UbiquiTelInc. and Subsidiaries**

# **ConsolidatedStatements of Cash Flows**

**(Unaudited)**

**(InThousands)**

 
|                                                                                                |   | **Six Months Ended  June 30, 2003** |   | **Six Months Ended********June 30, 2002** |   |
|-----------------------------------------------------------------------------------------------------|--------|-------------------------------------|--------|-------------------------------------------|--------|
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                               |   |                                |   |                                      |   |
| Net income (loss)                                                                                   |   | $                                   | 7,298  |                                      | $      | (60,818 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by  (used in) operating activities: |   |                                |   |                                      |   |
| Amortization of deferred financing costs                                                            |   | 1,612                               |   | 1,727                                     |   |
| Amortization of intangible assets                                                                   |   | 4,906                               |   | 7,374                                     |   |
| Depreciation                                                                                        |   | 18,752                              |   | 16,358                                    |   |
| Loss on sale of equipment                                                                           |   | 31                                  |   | —                                    |   |
| Interest accrued on discount notes                                                                  |   | 8,965                               |   | 13,379                                    |   |
| Non-cash compensation from stock options granted to employees                                       |   | 110                                 |   | 189                                       |   |
| Deferred income taxes                                                                               |   | —                              |   | (1,572                                    | )      |
| Gain on debt retirements                                                                            |   | (42,872                             | )      | —                                    |   |
| Changes in operating assets and liabilities exclusive of acquisitions  and capital expenditures:    |   |                                |   |                                      |   |
| Accounts receivable                                                                                 |   | 4,412                               |   | (1,270                                    | )      |
| Inventory                                                                                           |   | 526                                 |   | 2,511                                     |   |
| Prepaid expenses and other assets                                                                   |   | 1,089                               |   | (5,300                                    | )      |
| Income tax receivable                                                                               |   | 8,079                               |   | —                                    |   |
| Accounts payable and accrued expenses                                                               |   | (2,437                              | )      | 10,838                                    |   |
| Net cash provided by (used in) operating activities                                                 |   | 10,471                              |   | (16,584                                   | )      |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                               |   |                                |   |                                      |   |
| Capital expenditures                                                                                |   | (7,110                              | )      | (34,589                                   | )      |
| Change in restricted cash                                                                           |   | (11                                 | )      | (45                                       | )      |
| Net cash used in investing activities                                                               |   | (7,121                              | )      | (34,634                                   | )      |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                               |   |                                |   |                                      |   |
| Drawings under senior secured credit facility                                                       |   | —                              |   | 30,000                                    |   |
| Repayments under senior secured credit facility                                                     |   | (15,000                             | )      | —                                    |   |
| Proceeds from issuance of senior unsecured Series B discount notes                                  |   | 10,914                              |   | —                                    |   |
| Cash payments for purchase and exchange of senior subordinated  discountnotes                       |   | (10,701                             | )      | —                                    |   |
| Financing costs                                                                                     |   | (4,173                              | )      | —                                    |   |
| Proceeds from issuance of common stock                                                              |   | 32                                  |   | —                                    |   |
| Proceeds from exercise of stock options and warrants                                                |   | 127                                 |   | —                                    |   |
| Repayment of capital lease obligations and other long-term liabilities                              |   | (384                                | )      | (399                                      | )      |
| Net cash provided by (used in) financing activities                                                 |   | (19,185                             | )      | 29,601                                    |   |
| NET DECREASE IN CASH AND CASH EQUIVALENTS                                                           |   | (15,835                             | )      | (21,617                                   | )      |
| CASH AND CASH EQUIVALENTS, beginning of period                                                      |   | 73,481                              |   | 124,744                                   |   |
| CASH AND CASH EQUIVALENTS, end of period                                                            |   | $                                   | 57,646 |                                      | $      | 103,127 |   |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                                   |   |                                |   |                                      |   |
| Cash paid for interest                                                                              |   | $                                   | 6,581  |                                      | $      | 6,987 |   |
| Cash paid for taxes                                                                                 |   | 279                                 |   | —                                    |   |
| SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING  ACTIVITIES:                            |   |                                |   |                                      |   |
| Network assets acquired but not yet paid                                                            |   | —                              |   | 1,500                                     |   |

 

 

*The accompanying notes are anintegral part of these consolidated financial statements.*

 

6

----

**UbiquiTelInc. and Subsidiaries**

# **Notesto Consolidated Financial Statements**

**(Unaudited)**

 

**1.     SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

 

**Basis of Presentation of UnauditedInterim Financial Information**

 

The consolidated financial information as of June 30,2003 and for the three and six months ended June 30, 2003 and 2002 isunaudited, but has been prepared in accordance with generally accepted accountingprinciples for interim financial information and Article 10 of RegulationS-X.  Accordingly, they do not includeall the information and footnotes required by generally accepted accountingprinciples.  In the opinion ofmanagement, the interim data includes all adjustments, consisting only ofnormal recurring adjustments, that are considered necessary for a fairpresentation of the Company’s interim results. Operating results for the three and six months ended June 30, 2003 arenot necessarily indicative of results that may be expected for the entireyear.  This financial information shouldbe read in conjunction with the audited financial statements and notes theretofor the year ended December 31, 2002 of UbiquiTel which are included in its andOperating Company’s Joint Annual Report on Form 10-K for the year endedDecember 31, 2002.

 

**Principles of Consolidation and Useof Estimates**

 

Theaccompanying financial statements include the accounts of UbiquiTel Inc. andits subsidiaries (see Note 2).  Allsignificant intercompany balances and transactions have been eliminated.

 

The preparation of financial statements in conformitywith generally accepted accounting principles requires management to makeestimates and assumptions.  Theseestimates and assumptions affect the reported amounts of assets and liabilitiesand disclosure of contingent assets and liabilities at the date of thefinancial statements.  These assumptionsalso affect the reported amounts of revenue and expenses during the reportingperiods.  Actual results could differfrom those estimates and assumptions.

# ** **

### **SprintAgreements**

 

The Company presently has approximately $7.5 millionunder dispute with Sprint for charges that it believes are contractuallyincorrect and is engaged in discussions with Sprint to attempt to resolve thesedisputed items. The Company has fully reserved the amount under dispute withSprint. If the disputed item or items are settled in the Company’s favor, itsexpenses would be reduced.  If theCompany is unable to resolve these disputed items favorably for it, the Companymay be required to pay the invoiced amounts, which will reduce its cash andliquidity.

 

# **Stock-BasedCompensation**

 

At June 30, 2003, UbiquiTel had two stock-basedemployee compensation plans, an equity incentive plan and an employee stockpurchase plan, which was suspended effective with the offering period beginningJanuary 1, 2003.  The Company accountsfor those plans in accordance with Accounting Principles Board (“APB”) OpinionNo. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”), and relatedinterpretations. Based on the additional disclosure requirements of Statementof Financial Accounting Standards (“SFAS”) No. 148, “Accounting for Stock-BasedCompensation—Transition and Disclosure—an amendment of FASB Statement No. 123”(“SFAS No. 148”), the following table illustrates the effect on net income andearnings per share if the Company had applied the fair value recognitionprovisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFASNo. 123”).

 

7

----

 
|                                                                                                                  |   | **Three  Months Ended June 30,**             |   | **Six Months  Ended June 30,** |   |
|-----------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------|--------|--------------------------------|--------|
|                                                                                                                  |   | **2003**                                     |   | **2002**                       |   | **2003** |   | **2002** |   |
|                                                                                                                  |   | **(In Thousands, Except Per Share Amounts)** |   |
|                                                                                                                  |   |                                         |   |
| Net income (loss), as reported                                                                                        |   | $                                            | (8,903 | )                              | $      | (31,073 | ) | $ | 7,298 |   | $ | (60,818 | ) |
| Add: Stock-based employee compensation included in reported net income  (loss), net of related tax                    |   | 16                                           |   | 95                             |   | 110 |   | 189 |   |
| Deduct: Total stock-based employee compensation expense determined  under fair value-based method, net of related tax |   | (491                                         | )      | (679                           | )      | (1,099 | ) | (1,346 | ) |
| Pro forma net income (loss)                                                                                           |   | $                                            | (9,378 | )                              | $      | (31,657 | ) | $ | 6,309 |   | $ | (61,975 | ) |
|                                                                                                                  |   |                                         |   |                           |   |   |   |   |   |
| Basic net income (loss) per share:                                                                                    |   |                                         |   |                           |   |   |   |   |   |
| As reported                                                                                                           |   | $                                            | (0.11  | )                              | $      | (0.38 | ) | $ | 0.09 |   | $ | (0.75 | ) |
| Pro forma                                                                                                             |   | $                                            | (0.11  | )                              | $      | (0.39 | ) | $ | 0.08 |   | $ | (0.76 | ) |
|                                                                                                                  |   |                                         |   |                           |   |   |   |   |   |
| Diluted net income (loss) per share:                                                                                  |   |                                         |   |                           |   |   |   |   |   |
| As reported                                                                                                           |   | $                                            | (0.11  | )                              | $      | (0.38 | ) | $ | 0.08 |   | $ | (0.75 | ) |
| Pro forma                                                                                                             |   | $                                            | (0.11  | )                              | $      | (0.39 | ) | $ | 0.07 |   | $ | (0.76 | ) |

 

**Intangible Assets**

 

Intangibleassets represented the estimated value of acquired subscriber bases for VIAWireless and the Spokane market at the dates of acquisition.  Intangible assets were $0 and $2.8 million,net of accumulated amortization expense of $19.1 million and $16.3 million asof June 30, 2003 and December 31, 2002, respectively, and were amortized on astraight-line basis over a period of 20 months to five years. The VIA Wirelessand Spokane market subscriber bases acquired were initially being amortizedover 36 months and 60 months, respectively, which represented the estimatedaverage lives of a subscriber in these respective markets. Effective April 1,2002, however, the Company changed the amortization periods of the VIA Wirelessand Spokane market subscriber bases to 20 months and 33 months, respectively,resulting from higher customer turnover in these markets. As of March 31, 2003,the VIA Wireless subscriber base was fully amortized and as of December 31,2002, the Spokane market subscriber base was fully amortized. Amortization expensefor intangible assets was $0 and approximately $3.8 million for the threemonths ended June 30, 2003 and 2002, respectively, and approximately $2.8million and $5.2 million for the six months ended June 30, 2003 and 2002,respectively.

 

**Otherintangible assets were $71.0 million and $73.2 million, net of accumulatedamortization expense of $8.1 million and $5.9 million as of June 30, 2003 andDecember 31, 2002, respectively.  Otherintangible assets represent the estimated value of VIA Wireless’ Sprint PCSmanagement agreement.  Amortizationexpense for other intangible assets was approximately $1.1 million for thethree months ended June 30, 2003 and 2002 and approximately $2.2 million forthe six months ended June 30, 2003 and 2002.**

** **

**Estimatedfuture amortization expense of intangible assets for the next five years atJune 30, 2003 is as follows:**

 

| **Years Ending December 31,** |   | **(In  Thousands)** |   |
|-------------------------------|--------|---------------------|--------|
|                          |   |                |   |
| 2003 (remaining)              |   | $                   | 2,152  |   |
| 2004                          |   |                | 4,304  |   |
| 2005                          |   |                | 4,304  |   |
| 2006                          |   |                | 4,304  |   |
| 2007                          |   |                | 4,304  |   |

 

8

----

 

**Recent Accounting Pronouncements**

 

In May 2003, the Financial Accounting Standards Board(“FASB”) issued SFAS No. 150, “Accounting for Certain Financial Instrumentswith Characteristics of Both Liabilities and Equity” (“SFAS No. 150”).  The Statement establishes standards for howcertain financial instruments with characteristics of both liabilities andequity must be classified and measured. SFAS No. 150 requires that a financial instrument that is within itsscope be classified as a liability, or an asset in some circumstances.  Many of those instruments were previouslyclassified as equity.  The Statement iseffective for financial instruments entered into or modified after May 31, 2003and is otherwise effective at the beginning of the first interim periodbeginning after June 15, 2003. The Company does not have any financialinstruments with characteristics of both liabilities and equity.

 

In April 2003, the FASB issued SFAS No. 149,“Amendment of Statement 133 on Derivative Instruments and Hedging Activities”(“SFAS No. 149”).  SFAS No. 149 amendsand clarifies the accounting guidance on derivative instruments (includingcertain derivative instruments embedded in other contracts) and hedgingactivities that fall within the scope of SFAS No. 133, “Accounting forDerivative Instruments and Hedging Activities.”  SFAS No. 149 also amends certain other existing pronouncements,which will result in more consistent reporting of contracts that arederivatives in their entirety or that contain embedded derivatives that warrantseparate accounting.  This Statement iseffective for contracts entered into or modified after June 30, 2003, withcertain exceptions, and for hedging relationships designated after June 30,2003.  The Company has not yetdetermined the impact this issue will have on the Company’s financial position,results of operations or cash flows.

 

In June 2002, the FASB issued SFAS No. 146,“Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS No.146”).  SFAS No. 146 provides newguidance on the recognition of costs associated with exit or disposalactivities.  The Statement requirescompanies to recognize costs associated with exit or disposal activities whenthey are incurred rather than at the date of commitment to an exit or disposalplan. SFAS No. 146 supercedes previous accounting guidance provided by EmergingIssues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for CertainEmployee Termination Benefits and Other Costs to Exit an Activity (includingCertain Costs Incurred in a Restructuring)” (“EITF 94-3”). EITF 94-3 requiredrecognition of costs at the date of commitment to an exit or disposal plan.SFAS No. 146 is to be applied prospectively to exit or disposal activities initiatedafter December 31, 2002.  The adoptionof SFAS No. 146 did not have a material impact on the Company’s financialposition, results of operations or cash flows.

 

In April 2002, the FASB issued SFAS No. 145,“Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB StatementNo. 13, and Technical Corrections” (“SFAS No. 145”). Among other things, thisStatement rescinds FASB Statement No. 4, “Reporting Gains and Losses fromExtinguishment of Debt,” which required all gains and losses from extinguishmentof debt to be aggregated and, if material, classified as an extraordinary item,net of related income tax effect. As a result, the criteria in APB Opinion No.30, “Reporting the Results of Operations—Reporting the Effects of Disposal of aSegment of a Business, and Extraordinary, Unusual and Infrequently OccurringEvents and Transactions,” will now be used to classify those gains and losses.The Company’s adoption of SFAS No. 145 on January 1, 2003 did not have amaterial impact on the Company’s financial position, results of operations orcash flows.

 

In June 2001, the FASB issued SFAS No. 143,“Accounting for Asset Retirement Obligations” (“SFAS No. 143”).  This Statement requires entities to recordthe fair value of a liability for an asset retirement obligation in the periodin which it is incurred and capitalize that amount as part of the book value ofthe long-lived asset. Over time, the liability is accreted to its present valueeach period, and the capitalized cost is depreciated over the useful life ofthe related asset. Upon settlement of the liability, an entity either settlesthe obligation for its recorded amount or incurs a gain or loss uponsettlement. This Statement is effective for financial statements for fiscalyears beginning after June 15, 2002.

 

9

----

 

The Company’s network is primarily located on leasedproperty and the Company has certain legal obligations, principally related toits tower leases, which fall within the scope of SFAS No. 143. These legalobligations primarily include certain obligations to remediate leased land onwhich the Company’s tower assets are located. In conjunction with the adoptionof SFAS No. 143 effective January 1, 2003, the Company did not recordasset retirement obligations for network infrastructure assets subject to theprovisions of this Statement as the fair value of the obligations could notreasonably be estimated. The Company has very limited experience in removingtower assets, many of which are co-located, and in remediating leased land. Inaddition, the Company does not intend to remove tower assets from their currentlocations. Based on the Company’s history and current industry trends, it isnot probable that any sites will be removed in the foreseeable future andrequire remediation. Therefore, sufficient information to estimate a range ofpotential settlement dates is not available. In accordance with SFASNo. 143, the Company did not recognize a liability as of January 1, 2003and will not recognize a liability until such information becomes known.

 

In January 2003, the FASB issued FASB InterpretationNo. 46, “Consolidation of Variable Interest Entities—An Interpretation ofAccounting Research Bulletin (ARB) No. 51” (“FIN 46”). This interpretationclarifies how to identify variable interest entities and how a company shouldassess its interests in a variable interest entity to decide whether toconsolidate the entity. FIN 46 applies to variable interest entities createdafter January 31, 2003, in which a company obtains an interest after that date.Also, FIN 46 applies in the first fiscal quarter or interim period beginningafter June 15, 2003, to variable interest entities in which a company holds avariable interest that it acquired before February 1, 2003. The Company doesnot have any ownership in variable interest entities.

 

In November 2002, the FASB issued FASB InterpretationNo. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness of Others.” This interpretationexpands the disclosures to be made by a guarantor about its obligations undercertain guarantees and requires that, at the inception of a guarantee, aguarantor recognize a liability for the fair value of the obligation undertakenin issuing the guarantee. The disclosure requirements are effectiveimmediately.  As disclosed in Note 6 tothe Consolidated Financial Statements, UbiquiTel has fully and unconditionallyguaranteed Operating Company’s obligations under its 14% senior subordinateddiscount notes, 14% senior discount notes and 14% Series B senior discountnotes. The initial recognition and measurement provisions of thisinterpretation are effective for guarantees issued or modified after December31, 2002. The adoption of the initial recognition and measurement provisions ofthis interpretation did not have a material effect on the Company’s financialposition, results of operations or cash flows.

 

In November 2002, the EITF issued EITF Issue No.02-16, “Accounting by a Customer (Including a Reseller) for CertainConsideration Received from a Vendor” (“EITF 02-16”). Among other items, EITF02-16 requires that consideration received from a vendor be presumed to be areduction of the cost of the vendor’s products or services. This presumptioncan be overcome if the consideration can be shown to represent either a paymentfor assets or services delivered to the vendor or a reimbursement of costsincurred by the reseller to sell the vendor’s products. This treatment iseffective for arrangements entered into or modified on or after January 1,2003. The adoption of EITF 02-16 did not have a material effect on theCompany’s financial position, results of operations or cash flows.

 

In November 2002, the EITF issued EITF Issue No.00-21, “Accounting for Multiple-Element Revenue Arrangements” (“EITF 00-21”).EITF 00-21 addresses the determination of whether an arrangement involving morethan one deliverable contains more than one unit of accounting and how therelated revenues should be measured and allocated to the separate units ofaccounting, i.e., the delivery or performance of multiple products, services,and/or rights to use assets. In applying this guidance, separate contracts withthe same party, entered into at or near the same time, will be presumed to be apackage, and the consideration will be measured and allocated to the separateunits based on their relative fair values. EITF 00-21 will apply to revenuearrangements entered into after June 30, 2003; however, upon adoption, the EITFallows the guidance to be applied on a retroactive basis, with the change, ifany, reported as a cumulative effect of accounting change in the consolidatedstatements of operations.

 

10

----

 

The Company adopted this new accounting guidanceeffective July 1, 2003 and it did not have a material impact on the Company’sfinancial position, results of operations or cash flows.

 

**Reclassifications**

 

Certain prior year amounts have been reclassified toconform with current year presentation.

 

**2. ORGANIZATION, NATURE OF BUSINESSAND LIQUIDITY**

 

**Organization and Nature of Business**

 

UbiquiTel Inc. and Subsidiaries (“UbiquiTel” orthe “Company”) was formed for the purpose of becoming the exclusive provider ofSprint Personal Communications Services (“PCS”) in certain defined midsizemarkets in the western and midwestern United States.

 

In October 1998, UbiquiTel L.L.C. (a Washingtonstate limited liability company), whose sole member was The Walter Group, enteredinto an agreement with Sprint PCS for no consideration given for the exclusiverights to market Sprint’s 100% digital, 100% PCS products and services to theapproximately one million residents in the Reno/Tahoe, Nevada market.UbiquiTel L.L.C. had no financial transactions from its inception(August 24, 1998) to September 29, 1999. On September 29, 1999,UbiquiTel Inc. (formerly “UbiquiTel Holdings, Inc.”) was incorporatedin Delaware. On November 1, 1999, the Company entered into a founders’agreement and issued common stock to a group of five shareholders including TheWalter Group. In November 1999, UbiquiTel L.L.C. assigned all of itsmaterial contracts, including the rights to the Sprint PCS agreements, toUbiquiTel. On December 28, 1999, UbiquiTel  amended its agreementwith Sprint PCS to expand the Company’s markets to the northern California,Spokane/Montana, southern Idaho/Utah/Nevada and southern Indiana/Kentuckymarkets, which together with the Reno/Tahoe markets, contain approximately7.7 million residents.

 

On November 9, 1999, UbiquiTel Operating Company(a Delaware corporation, formerly a Delaware limited liability company)(“Operating Company”), was formed to serve as the operating company forUbiquiTel Inc. Also, on March 17, 2000, UbiquiTel Leasing Company (aDelaware corporation) was formed to serve as the leasing company forUbiquiTel Inc.

 

On February 22, 2001, UbiquiTel entered into a mergeragreement for the acquisition of VIA Wireless LLC, a California limitedliability company and PCS affiliate of Sprint (“VIA Wireless”). Upon theclosing of the merger agreement, as amended and restated, on August 13, 2001,VIA Wireless became a wholly owned subsidiary of UbiquiTel through a series ofmergers and related transactions. VIA Wireless was the exclusive provider ofSprint PCS digital wireless services to the central valley of California, whichcovers approximately 3.4 million residents. On February 21, 2001, inconnection with the acquisition, UbiquiTel amended its agreement with Sprint PCSto expand its markets to include the six VIA Wireless basic trading areas(BTAs) included under VIA Wireless’ former affiliation agreement with SprintPCS, including Bakersfield, Fresno, Merced, Modesto, Stockton and Visalia,California, which went into effect at the closing of the acquisition.  On December 31, 2001, through a series ofmergers, certain corporate members of VIA Wireless merged into the soleremaining member, VIA Holding Inc., which had become a wholly owned subsidiaryof Operating Company effective immediately after the acquisition of VIAWireless in August 2001, and which, along with VIA Wireless LLC, has since beenmerged into UbiquiTel Operating Company.

 

The consolidated financial statements contain thefinancial information of UbiquiTel Inc. and its subsidiaries, UbiquiTelOperating Company and UbiquiTel Leasing Company.

 

11

----

 

**Liquidity**

 

**Through June 30, 2003, theCompany has principally relied on the proceeds from equity and debt financings,and to a lesser extent revenues, as the primary sources of capital. Completionof the Company’s PCS network has required substantial capital and as of June30, 2003, the Company had an accumulated deficit of $266.4 million.**

 

As of June 30, 2003, the Company had approximately$60.1 million in cash, cash equivalents and restricted cash, working capitalwas approximately $40.5 million and the Company’s unused revolving line ofcredit was approximately $50.0 million. In June 2003, the Company announced thatit entered into a definitive sale and lease-back agreement for the sale of 100wireless communication tower sites located in the central valley of Californiaand the lease-back of space on those sites. The Company expects to receive $11.5 million in cash for the sale of thetowers and related assets, and will lease back space on the tower sites atagreed upon rates for an initial term of 10 years.  The assets sale is subject to customary closing conditions, includingcertain due diligence matters and the receipt of third-party consents, and isexpected to close during the three months ended September 30, 2003. In earlyAugust 2003, the Company announced that it had amended its management agreementwith Sprint PCS to remove the build-out requirement for the state of Montana,thereby reducing the Company’s projected capital expenditures and operatingexpenses to launch this market by approximately $25.0 million.  In addition, in early August 2003, SprintPCS announced that it had entered into a reseller agreement with QwestCommunications allowing Qwest to provide wireless voice and data services tonew and existing customers in Qwest’s service areas using Sprint’s network andthe network of affiliates of Sprint who overlap with Qwest’s service areas. Qwesthas approximately 30,000 to 40,000 customers in portions of the Company’sservice areas in Washington, Idaho and Utah and the Company anticipatesreceiving additional incremental revenue from Qwest for customers who useUbiquiTel’s network under this reseller arrangement.  Management believes cashand cash equivalents and cash availability under the Company’s senior securedcredit facility, combined with cash flow from operations, are expected to besufficient to fund any operating losses and working capital, to meet capitalexpenditure needs and to service debt requirements through June 30, 2004 andinto the foreseeable future. Due to a number of factors, including improvingoperating performance and the elimination of the Montana build-out requirementand the Qwest reseller arrangement described above, the Company expects toattain positive cash flow from operations less capital expenditures in 2004 andbeyond.

 

While management does not anticipate the need to raiseadditional capital to meet the Company’s operating or capital expenditurerequirements in the foreseeable future, the Company’s funding status isdependent on a number of factors influencing projections of operating cashflows, including those related to gross new customer additions, customer turnover,revenues, marketing costs, bad debt expense and roaming revenue.  Should actual results differ significantlyfrom these assumptions, the Company’s liquidity position could be adverselyaffected and the Company could be in a position that would require it to raiseadditional capital which may not be available or may not be available onacceptable terms.

 

Inaddition, Operating Company’s ability to borrow funds under the senior securedcredit facility’s $50.0 million revolving line of credit is subject tocontinued compliance with restrictive covenants under the senior secured creditfacility (see Note 5) and will be restricted unless the cash balance (asdefined in the credit facility) is less than $25.0 million at the time ofborrowing. The Company presently is in compliance with all financial andoperational covenants relating to the senior secured credit facility; however,there is uncertainty as to the Company’s ability to continue to comply withsuch financial and operating covenants over the next twelve months. Should theCompany determine that it may not be able to meet, or has not met, covenantrequirements, the Company would seek modifications to, or waivers of, itscovenant requirements; however, receipt of such modifications or waivers is notguaranteed.

 

If the Company’s business does not generate theresults required by the covenants in the senior secured credit facility, itsability to make borrowings under the revolving line of credit could berestricted or terminated and the

 

12

----

 

credit facility could be declared in default.  Additionally, if the Company fails to makean interest or principal payment when due on any of the Company’s seniorsecured credit facility, senior discount notes, Series B senior discount notesand senior subordinated discount notes, it could trigger cross-defaultprovisions on the other long-term debt agreements.  If the Company’s long-term debt agreements are declared in default,the creditors under these agreements may demand immediate payment of theoutstanding indebtedness.

 

**3. BASIC AND DILUTED NET INCOME(LOSS) PER SHARE**

 

The Company computes net income (loss) per commonshare in accordance with SFAS No. 128, “Earnings per Share” (“SFAS No.128”).  Under the provisions ofSFAS No. 128, basic net income (loss) per common share is computed bydividing the net income (loss) available to common shareholders for the periodby the weighted average number of shares of common stock outstanding.   In accordance with SFAS No. 128,incremental potential common shares from stock options  and warrants are excluded in the calculationof diluted loss per share when the effect would be antidilutive.  Accordingly, the number of weighted averageshares outstanding as well as the amount of net loss per share are the same forbasic and diluted per share calculations for the three month period ended June30, 2003 and the three and six month periods ended June 30, 2002, reflected inthe accompanying financial statements.

 

The calculations for basic and diluted net income(loss) per share were as follows:

 
|                                                |   | **Three  Months Ended June 30,**             |   | **Six Months  Ended June 30,** |   |
|-----------------------------------------------------|--------|----------------------------------------------|--------|--------------------------------|--------|
|                                                |   | **2003**                                     |   | **2002**                       |   | **2003** |   | **2002** |   |
|                                                |   | **(In Thousands, Except Per Share Amounts)** |   |
| Basic                                               |   |                                         |   |                           |   |   |   |   |   |
| Net income (loss)                                   |   | $                                            | (8,903 | )                              | $      | (31,073 | ) | $ | 7,298 |   | $ | (60,818 | ) |
| Average common shares outstanding                   |   | 82,527                                       |   | 81,116                         |   | 82,037 |   | 81,116 |   |
| Basic                                               |   | $                                            | (0.11  | )                              | $      | (0.38 | ) | $ | 0.09 |   | $ | (0.75 | ) |
|                                                |   |                                         |   |                           |   |   |   |   |   |
| Diluted                                             |   |                                         |   |                           |   |   |   |   |   |
| Net income (loss)                                   |   | $                                            | (8,903 | )                              | $      | (31,073 | ) | $ | 7,298 |   | $ | (60,818 | ) |
| Average common shares outstanding                   |   | 82,527                                       |   | 81,116                         |   | 82,037 |   | 81,116 |   |
| Effect of:                                          |   |                                         |   |                           |   |   |   |   |   |
| Dilutive options                                    |   | —                                       |   | —                         |   | 607 |   | — |   |
| Dilutive securities                                 |   | —                                       |   | —                         |   | 10,739 |   | — |   |
| Average common shares outstanding assuming dilution |   | 82,527                                       |   | 81,116                         |   | 93,383 |   | 81,116 |   |
| Diluted                                             |   | $                                            | (0.11  | )                              | $      | (0.38 | ) | $ | 0.08 |   | $ | (0.75 | ) |

 

The following table summarizes the securitiesoutstanding, which are excluded from the income (loss) per share calculation,when amounts would have an antidilutive effect.

 
|          |   | **Three  Months Ended June 30,** |   | **Six Months  Ended June 30,** |   |
|---------------|--------|----------------------------------|--------|--------------------------------|--------|
|          |   | **2003**                         |   | **2002**                       |   | **2003** |   | **2002** |   |
| Stock options |   | 5,198,300                        |   | 5,571,000                      |   | 5,198,300 |   | 5,571,000 |   |
| Warrants      |   | 5,665,844                        |   | 3,665,183                      |   | 5,665,844 |   | 3,665,183 |   |
| Total         |   | 10,864,144                       |   | 9,236,183                      |   | 10,864,144 |   | 9,236,183 |   |

 

**4. PROPERTY AND EQUIPMENT**

 

Property and equipment consisted of the following (inthousands): 

 

13

----

 

|                            |   | **June 30,  2003** |    | **December  31, 2002** |   |
|---------------------------------|--------|--------------------|---------|------------------------|--------|
| Network  equipment              |   | $                  | 319,354 |                   | $      | 310,709 |   |
| Vehicles                        |   | 1,280              |    | 1,268                  |   |
| Furniture and office  equipment |   | 11,580             |    | 10,855                 |   |
| Leasehold  improvements         |   | 3,755              |    | 3,727                  |   |
| Land                            |   | 130                |    | 130                    |   |
| Buildings                       |   | 4,670              |    | 4,670                  |   |
|                            |   | 340,769            |    | 331,359                |   |
| Accumulated  depreciation       |   | (74,490            | )       | (55,771                | )      |
| Property and  equipment, net    |   | $                  | 266,279 |                   | $      | 275,588 |   |

 

Depreciation expense was approximately $9.5 millionand $8.5 million for the three months ended June 30, 2003 and 2002,respectively, and approximately $18.7 million and $16.4 million for the sixmonths ended June 30, 2003 and 2002, respectively.

 

**5.     LONG-TERMDEBT AND CAPITAL LEASE OBLIGATIONS**

 

Long-term debt and capital lease obligationsoutstanding as of June 30, 2003 and December 31, 2002 were as follows (inthousands): 

 

|                                                                              |   | **June 30,  2003** |    | **December  31, 2002** |   |
|-----------------------------------------------------------------------------------|--------|--------------------|---------|------------------------|--------|
| Senior secured  credit facility                                                   |   | $                  | 230,000 |                   | $      | 245,000 |   |
| Building  mortgage and other long-term liabilities                                |   | 3,551              |    | 3,653                  |   |
| Capital lease  obligations                                                        |   | 282                |    | 564                    |   |
| Senior discount  notes                                                            |   | 48,180             |    | —                 |   |
| Less: Discount                                                                    |   | (10,340            | )       | —                 |   |
| Series B senior  discount notes                                                   |   | 14,515             |    | —                 |   |
| Less: Discount                                                                    |   | (3,116             | )       | —                 |   |
| Less: Detachable  warrants                                                        |   | (4,103             | )       | —                 |   |
| Senior  subordinated discount notes                                               |   | 100,380            |    | 300,000                |   |
| Less: Discount                                                                    |   | (21,567            | )       | (79,865                | )      |
| Less: Detachable  warrants                                                        |   | (3,631             | )       | (11,631                | )      |
| Subtotal                                                                          |   | 354,151            |    | 457,721                |   |
| Future cash  flows associated with senior  discount notes for interest and other  |   | 44,066             |    | —                 |   |
| Total long-term  debt and capital lease obligations                               |   | 398,217            |    | 457,721                |   |
| Less: Current  maturities                                                         |   | 478                |    | 683                    |   |
| Total long-term  debt and capital lease obligations, excluding current maturities |   | $                  | 397,739 |                   | $      | 457,038 |   |

 

The interest rates for the senior secured creditfacility ranged from 4.6% to 6.2% during the six months ended June 30, 2003.

 

On April 11, 2000, Operating Company issued 14% seniorsubordinated discount notes. See Note 6 for additional information.

 

On March 31, 2000, Operating Company entered into a$250.0 million senior secured credit facility with Paribas, as administrativeagent, and certain banks and other financial institutions as parties thereto,which was guaranteed by UbiquiTel.  Thecredit facility consisted of a revolving loan of up to $55.0 million, a termloan A of $120.0 million and a term loan B of $75.0 million. The Company’sobligations under the credit agreement are secured by all of the Company’sassets. On March 1, 2001, Operating Company and Paribas and the other lendersunder the senior secured credit facility entered into a second amendment andconsent to the credit agreement, whereby the lenders increased the $250.0million credit facility by $50.0 million to $300.0 million, and approvedUbiquiTel’s acquisition of VIA Wireless. The additional borrowing increased the term loan B to $125.0 million.Operating Company fully drew down the term loans according to a mandatory drawdown schedule during the years ended December 31, 2002, 2001 and 2000. Asdescribed below, the credit facility was reduced to $280.0 million in February2003. In conjunction with the closing inMarch 2000, the increase of the facility in March 2001, an

 

14

----

 

amendment executed in July 2002and an amendment executed in February 2003, Operating Company incurredfinancing fees of approximately $11.6 million which are being amortizedover the term of the credit facility.

 

The revolving loan and term loan A will mature inOctober 2007 and the term loan B will mature in October 2008.  The term loans A and B are required to berepaid beginning in June 2004 in fourteen and eighteen consecutive quarterlyinstallments, respectively. The amount of each of the quarterly consecutiveinstallments increases incrementally in accordance with the credit facilityagreement.  The amount that can beborrowed and outstanding under the revolving loan reduces in seven quarterlyreductions of approximately $6.9 million beginning in December 2005and a final reduction of approximately $1.9 million in September 2007.Effective March 1, 2003, Operating Company can voluntarily prepay the termloans without a prepayment premium.

 

Operating Company may borrow funds as either a baserate loan with an interest rate of prime plus 2.00% for the revolving loan andterm loan A and prime plus 2.50% for term loan B or a Eurodollar Loan with aninterest rate of the London interbank offered rate, commonly referred to asLIBOR, plus 3.25% for the revolving loan and term loan A and LIBOR plus 4.25%for term loan B.  In addition, an unusedcredit facility fee of 0.75% will be charged quarterly on the average unusedportion of the facility.

 

The Company has a mortgage relating to a building andland with a balance of approximately $3.6 million at June 30, 2003. Themortgage carries a fixed interest rate of 6.99% and is payable in monthlyinstallments of approximately $37,000. The mortgage is due to be repaid in full by April 2015.

 

In July 2002, the Company entered into an amendment toits senior secured credit facility. The amendment primarily adjusted certainfinancial covenants, provided for new financial covenants regarding minimumcash balances and minimum consolidated EBITDA (each as defined in the creditfacility), and imposed additional conditions on the availability of drawingsunder the revolving line of credit. The Company must meet the followingfinancial and operating covenants: minimum levels for subscribers, revenues,cash balances and network coverage, and maximum capital spending limits; andmust achieve financial ratios including total debt to adjusted EBITDA andsenior debt to adjusted EBITDA (each as defined in the credit facility).Beginning with the three months ending June 30, 2004, the Company also mustachieve minimum EBITDA and meet additional financial ratios including interestcoverage to EBITDA, total debt to EBITDA and senior debt to EBITDA (each asdefined in the credit facility), among other restrictions. Beginning with the threemonths ending March 31, 2006, the Company also must maintain a fixed chargecoverage ratio (as defined in the credit facility). As of June 30, 2003, theCompany was in compliance with all financial and operational covenantsassociated with its senior secured credit facility, 14% senior subordinateddiscount notes, 14% senior discount notes and 14% Series B senior discountnotes.

 

In February 2003, Operating Company consummatedcertain transactions which reduced its long-term debt outstanding and relatedfuture minimum annual principal payments due on the amounts outstanding underthe senior secured credit facility and the 14% senior subordinated discountnotes.  See Note 6 for additionalinformation.  The Company accounted forthese transactions in accordance with SFAS No. 15, “Accounting by Debtorsand Creditors for Troubled Debt Restructurings” (“SFAS No. 15”), and EITF IssueNo. 02-04, “Determining Whether a Debtor’s Modification or Exchange ofDebt Instruments Is Within the Scope of FASB Statement No. 15” (“EITF02-04”). Also in February 2003, Operating Company and the lenders under thesenior secured credit facility amended the credit facility to gain the lenders’consent to the transactions described above, which terms included a $15.0million partial prepayment against the outstanding $245.0 million principalbalance of term loans as of December 31, 2002 and the reduction of the unused$55.0 million revolving line of credit to $50.0 million.

 

In a series of transactions during the three monthsended June 30, 2003, Operating Company purchased a portion of its aggregateprincipal amount of outstanding 14% senior subordinated discount notes andissued additional 14% Series B senior discount notes and detachable warrants.  See Note 6 for additional information.

 

15

----

 

**6.**** WHOLLY-OWNED OPERATING SUBSIDIARY AND DEBTRETIREMENTS**

 

On April 11, 2000, Operating Company issued 14% seniorsubordinated discount notes (the “Existing Notes”) with a maturity value of$300.0 million and warrants to purchase 3,579,000 shares of common stock ofUbiquiTel at an exercise price of $11.37 per share under Section 4(2) of theSecurities Act of 1933.  In August 2000,the Existing Notes and warrants were registered with the Securities andExchange Commission.  The Existing Noteswere issued at a discount and generated approximately $152.3 million in grossproceeds.  The value assigned from theproceeds to the warrants was approximately $15.9 million.  The proceeds have been used to fund capitalexpenditures relating to the network build-out and operating losses. TheExisting Notes have a ten-year maturity and will accrete in value untilApril 15, 2005 at an interest rate of 14%.  Interest will become payable semiannually beginning on October 15,2005.  The Existing Notes that remainoutstanding will be redeemable on or after April 15, 2005.

 

The indenture governing theExisting Notes contains customary covenants, including covenants limitingindebtedness, dividends and distributions on, and redemptions and repurchasesof, capital stock and other similar payments, the acquisition and dispositionof assets, and transactions with affiliates or related persons.  The indenture governing the Existing Notesprovides for customary events of default, including cross defaults, judgmentdefaults and events of bankruptcy.

 

UbiquiTel has fully and unconditionally guaranteedOperating Company’s obligations under the Existing Notes. UbiquiTel has noindependent assets or operations separate from its investment in OperatingCompany.

 

In February 2003, Operating Company consummatedcertain transactions which reduced its long-term debt outstanding and relatedfuture minimum annual principal payments due under the senior secured creditfacility and the Existing Notes. Operating Company consummated a privateplacement exchange of $48.2 million aggregate principal amount of its new 14%senior discount notes due May 15, 2010 (“New Notes”) and $9.6 million in cashfor $192.7 million aggregate principal amount of its outstanding Existing Notesdue April 15, 2010.  Additionally,Operating Company consummated a related new financing, in a private placementoffering, of $12.8 million aggregate principal amount of Series B seniordiscount notes due 2008 (“Series B Notes”) in which Operating Company receivedcash proceeds of $9.6 million to fund the cash portion of the exchange. Underthe new financing, the Company issued detachable warrants to purchase up toapproximately 9.6 million shares of its common stock at an exercise price of$0.01 per share.  Three directors of theCompany or their affiliates participated in the private placement offering forconsideration of approximately $3.3 million, and were issued approximately $4.4million aggregate principal amount of Series B Notes and approximately 3.3million detachable warrants, which became exercisable upon shareholder approvalon May 16, 2003 in accordance with Nasdaq Marketplace Rule 4350(i)(1)(A). TheCompany wrote off approximately $2.9 million in deferred financing fees relatedto the original issuance of the Existing Notes and the Company incurredestimated fees and expenses of approximately $3.8 million in connection withthe issuance of the New Notes, which reduced the gain resulting from theprivate placement exchange, and the Company incurred estimated expenses ofapproximately $0.4 million in connection with the issuance of the Series BNotes. The Company recognized a gain of $39.0 million as a result of theprivate placement exchange.

 

As a condition to these transactions, OperatingCompany’s senior lenders required Operating Company to prepay $15.0 million ofits outstanding term loans under its senior secured credit facility, therebyreducing the outstanding term loans under the senior secured credit facility to$230.0 million. In addition, the $55.0 million unused revolving line of creditwas permanently reduced by $5.0 million to $50.0 million.

 

The Company followed the provisions of SFAS No. 15 andEITF 02-04 in recording these transactions. These provisions require that the carrying value of the New Notes berecorded at the total future cash payments

 

16

----

 

(principal and interest) specified by the New Notes;therefore, the New Notes were classified on the Company’s balance sheet aslong-term liabilities and were valued at $81.9 million as of the transactiondate.  As a result, no interest expenserelated to the New Notes will be recognized in future periods.

 

The following table presents the aggregate gain recognizedin the transactions during the three months ended March 31, 2003 (in thousands,except per share data):

 

| Principal amount  of senior subordinated discount notes exchanged        |   | $       | 192,720 |   |
|--------------------------------------------------------------------------|--------|---------|---------|--------|
| Unamortized  discount on senior subordinated discount notes              |   | (48,214 | )       |
| Unamortized  discount on detachable warrants                             |   | (7,306  | )       |
| Unamortized  deferred financing costs                                    |   | (2,859  | )       |
| Carrying value  of debt exchanged                                        |   | 134,341 |    |
| Maximum future  cash principal payments for senior discount notes issued |   | (48,180 | )       |
| Maximum future cash  interest payments for senior discount notes issued  |   | (33,726 | )       |
| Cash payments  for amount of debt exchanged                              |   | (9,636  | )       |
| Estimated direct  expenses of exchange transaction                       |   | (3,781  | )       |
| Aggregate gain  from exchange transaction                                |   | $       | 39,018  |   |
| Aggregate gain  per share — Basic                                   |   | $       | 0.48    |   |
| Aggregate gain  per share — Diluted                                 |   | $       | 0.43    |   |

 

As a result of these transactions, the Company reducedoverall debt by approximately $146.7 million aggregate principal amount ($113.8million aggregate accreted value) and cash interest requirements byapproximately $9.7 million in 2005 and approximately $19.3 million beginning in2006, providing cumulative savings of approximately $243.0 million.

 

The New Notes havesubstantially the same terms as the Existing Notes, except they rank senior inright of payment to the Existing Notes, they mature on May 15, 2010, thirtydays after the maturity of the Existing Notes, and they are not subject to theblocking rights of Operating Company’s senior lenders in the event of defaultwith respect to the debt under Operating Company’s senior secured creditfacility.  Like the Existing Notes, theNew Notes will accrete in value until April 15, 2005 and interest thereon willbecome payable semiannually beginning on October 15, 2005. The New Notes are redeemableand are governed by an indenture substantially the same as the indenturegoverning the Existing Notes, except that the indenture for the New Notescontains, among other things, a “basket” permitting up to $10 million ofrestricted payments. UbiquiTel has fully and unconditionally guaranteedOperating Company’s obligations under the New Notes.

 

The Series B Notes rank pari passu in right of paymentto the New Notes and senior to the Existing Notes and contain customarycovenants and terms.  The Series B Notesmature in 2008 and, like the New Notes, are not subject to the blocking rightsof Operating Company’s senior lenders in the event of default with respect tothe debt under Operating Company’s senior secured credit facility.  Like the Existing Notes and New Notes, theSeries B Notes will accrete in value until April 15, 2005 and interest thereonwill become payable semiannually beginning on October 15, 2005. UbiquiTel hasfully and unconditionally guaranteed Operating Company’s obligations under theSeries B Notes.

 

Additionally, in a series of transactions during thethree months ended June 30, 2003, Operating Company received cash proceeds ofapproximately $1.3 million, of which $1.1 million were used by OperatingCompany to fund open market purchases of $6.9 million aggregate principalamount ($5.3 million aggregate accreted value) of Existing Notes, and issuedapproximately $1.7 million aggregate principal amount of additional Series BNotes.  Under these private placementsales, the Company issued detachable warrants to purchase up to approximately1.3 million shares of its common stock at an exercise price of $0.01 per share.Three directors of UbiquiTel or their affiliates participated in the privateplacement sales for aggregate consideration of approximately $0.4 million, andwere issued approximately $0.6 million aggregate principal amount of Series BNotes and approximately 0.4 million

 

17

----

 

detachable warrants. In connection with these transactions, the Companywrote off approximately $0.1 million in deferred financing fees and $0.3million in unamortized discount on detachable warrants related to the originalissuance of the Existing Notes, which reduced the gain resulting from the openmarket purchases.  The Company recordeda gain of approximately $3.9 million during the three months ended June 30,2003.

 

No related income tax effect is reflected on the gainfrom the private placement exchange or the open market purchases, as theCompany expects to utilize a portion of its net operating loss carryforwards tooffset any resulting taxable income. Prior to the exchange, the net operatingloss carryforwards expected to be utilized had a corresponding valuationallowance applied to reduce their carrying value to zero.

 

**Item 2.Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

 

**Forward-Looking Statements**

 

This Joint Quarterly Report on Form 10-Q includesforward-looking statements that involve known and unknown risks, uncertaintiesand other factors.  Our actual resultscould differ materially from the results anticipated in these forward-lookingstatements.   Investors are referred tothe documents filed by UbiquiTel and/or Operating Company with the Securities andExchange Commission, specifically the most recent filings which identifyimportant risk factors that could cause actual results to differ from thosecontained in the forward-looking statements, including, but not limited to:

 
| • |   | UbiquiTel’s dependence on  its affiliation with Sprint PCS;                                                                          |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                      |
| • |   | the competitiveness of  and changes in Sprint’s pricing plans, products and services;                                                |
|   |   |                                                                                                                                      |
| • |   | increased competition  in UbiquiTel’s markets;                                                                                       |
|   |   |                                                                                                                                      |
| • |   | rates of penetration in  the wireless industry;                                                                                           |
|   |   |                                                                                                                                      |
| • |   | the potential to  experience a high rate of customer turnover;                                                                            |
|   |   |                                                                                                                                      |
| • |   | Sprint PCS’ credit  policies;                                                                                                        |
|   |   |                                                                                                                                      |
| • |   | customer quality;                                                                                                                         |
|   |   |                                                                                                                                      |
| • |   | changes in Sprint’s fee  structure with UbiquiTel;                                                                                   |
|   |   |                                                                                                                                      |
| • |   | UbiquiTel’s reliance on  the timeliness, accuracy and sufficiency of financial and other data and  information received from Sprint; |
|   |   |                                                                                                                                      |
| • |   | the ability of Sprint  PCS to provide back office, customer care and other services;                                                      |
|   |   |                                                                                                                                      |
| • |   | anticipated future  losses;                                                                                                               |
|   |   |                                                                                                                                      |
| • |   | UbiquiTel’s debt level;                                                                                                              |
|   |   |                                                                                                                                      |
| • |   | adequacy of bad debt  and other reserves;                                                                                                 |
|   |   |                                                                                                                                      |
| • |   | the marketability,  liquidity and price volatility of UbiquiTel’s common stock;                                                      |

 

18

----

 
| • |   | UbiquiTel’s ability to  manage anticipated growth and rapid expansion; |
|--------|--------|-----------------------------------------------------------------------------|
|   |   |                                                                        |
| • |   | changes in population;                                                      |
|   |   |                                                                        |
| • |   | changes or advances in  technology; and                                     |
|   |   |                                                                        |
| • |   | general economic and business  conditions.                                  |

 

These and other applicable risks are described underthe caption “Business3⁄4Risk Factors” and elsewhere inUbiquiTel’s and Operating Company’s Joint Annual Report on Form 10-K for thefiscal year ended December 31, 2002 filed with the Securities and ExchangeCommission, and under the caption “Liquidity and Capital Resources—Factors ThatMay Affect Operating Results and Liquidity” and elsewhere in this Item 2. We assumeno obligation to publicly update or revise any forward-looking statement madein this report, whether as a result of new information, future events, changesin assumptions or otherwise, after the date of this report.  All written or oral forward-lookingstatements attributable to us are expressly qualified in their entirety bythese cautionary statements.

 

**Use ofCertain Terms**

 

During the three months ended June 30, 2003, weinitiated a reseller program with Virgin Mobile USA in our markets, pursuant towhich Virgin Mobile began reselling wireless services to its customers on apre-paid basis using our network in our markets.  As of June 30, 2003, we had approximately 2,100 resellersubscribers and approximately 291,800 subscribers excluding resellers, for atotal subscriber base of 293,900.  Inthis “Item 2. Management’s Discussion and Analysis of Financial Condition andResults of Operations,” unless the context indicates otherwise, all referencesto “subscribers” or “customers” and other operating metrics mean subscribers orcustomers excluding resellers.

 

### **Overview**

 

In October 1998, UbiquiTel L.L.C., a limitedliability company whose sole member was The Walter Group, entered into amanagement agreement with Sprint PCS whereby it became the PCS affiliate ofSprint with the exclusive right to provide 100% digital, 100% PCS servicesunder the Sprint and Sprint PCS brand names in the Reno/Tahoe market. InNovember 1999, UbiquiTel L.L.C. assigned the management and relatedagreements to UbiquiTel Inc. UbiquiTel L.L.C. had no operations orfinancial transactions prior to the assignment of these agreements toUbiquiTel. In December 1999, we expanded our management agreement withSprint PCS to include additional markets in the western and midwestern UnitedStates for markets under the agreement with a total of 7.7 millionresidents.

 

Until June 30, 2000, we were a development stagecompany with very limited operations and revenues, significant losses andsubstantial capital requirements. In April 2000, we acquired Sprint PCS’Spokane, Washington PCS network and related assets for $35.5 million incash. We completed our initial public offering of common stock in 2000 in whichwe sold 13,280,000 shares for gross proceeds of approximately$106.2 million. We launched our markets during the periodNovember 2000 through June 2001.

 

In February 2001, we entered into a merger agreementto acquire another PCS affiliate of Sprint, VIA Wireless LLC, the exclusiveSprint PCS provider to the central valley of California market. We completedthe mergers and related transactions in August 2001, issuing 16.4 millionshares of common stock to the former VIA Wireless owners, assumingapproximately $80.1 million of debt and incurring transaction costs ofapproximately $10.7 million. In October 2001, we sold VIA Wireless’ CaliforniaPCS licenses to VoiceStream Wireless for $50.0 million in cash, resulting innet debt assumed in the VIA Wireless acquisition of $30.1 million. Concurrentlywith the acquisition, we amended our Sprint PCS management agreement to includethe central valley of California

 

19

----

 

market with a total of 3.4 million residents, bringingour licensed resident population under the agreement to approximately 11.1million.

 

In August 2003, we amended our management agreementwith Sprint to eliminate the obligation to build out the state of Montana,thereby reducing our licensed resident population to approximately 10.0million.

 

As of June 30, 2003, we had approximately 291,800subscribers excluding resellers and approximately 2,100 reseller subscribers,for a total subscriber base of approximately 293,900.  Our network covered approximately 7.8 million residents whichrepresented approximately 78% of the licensed population in our markets.

 

From our inception on September 29, 1999 throughJune 30, 2003, we have incurred losses of approximately $266.4 million. Weexpect to continue to incur net losses through at least 2005. From ourinception through June 30, 2003, we have used approximately $347.3 millionin cash for operating activities and capital expenditures, exclusive ofapproximately $79.6 million worth of network equipment acquired as part ofthe Spokane market and VIA Wireless purchases. We also expect to continue touse cash for operating activities and capital expenditures through at least2003. At June 30, 2003, we had approximately $60.1 million of cash, cashequivalents and restricted cash and an unused revolving line of credit ofapproximately $50.0 million. We believe we have sufficient cash and cashequivalents to fund capital expenditures, including the completion of ourbuild-out, working capital requirements and operating losses until we generatepositive cash flow.

 

As a PCS affiliate of Sprint, we do not own thelicenses to operate our network and instead pay Sprint PCS for the use of itslicenses. Under our management agreement with Sprint PCS, Sprint PCS isentitled to receive 8.0% of all collected revenue from Sprint PCS subscribersbased in our markets and fees from wireless service providers other than SprintPCS when their subscribers roam into our network. We are entitled to 100% ofrevenues collected from the sale of handsets and accessories from our storesand on roaming revenues received when Sprint PCS customers from a differentterritory make a wireless call on our PCS network. We are responsible forbuilding, owning and managing the portion of the Sprint PCS network located inour markets under the Sprint and Sprint PCS brand names. Our results ofoperations are dependent on Sprint PCS’ network and, to a lesser extent, on thenetworks of other affiliates of Sprint PCS.

 

As a PCS affiliate of Sprint, we purchase a full suiteof support services from Sprint PCS. We have access to these services duringthe term of our management agreement unless Sprint PCS provides us at leastnine months’ advance notice of its intention to terminate any particularservice. We are purchasing customer billing and collections, customer care,subscriber activation including credit verification, handset logistics, networkoperations control center monitoring, national platform interconnectivity,voice mail, directory assistance and operator services, long distance androaming clearinghouse services. If Sprint PCS significantly increases theamount it charges us for any of these services or requires us to purchaseadditional services, our operating expenses will increase and our operatingincome and available cash would be reduced. If Sprint PCS terminates any ofthese services, our operations may be interrupted or restricted.

 

**Critical Accounting Policies**

 

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

 

***Revenue Recognition:***

 

We recognize revenues when services have been renderedor products have been delivered, the price to the buyer is fixed anddeterminable, and collectibility is reasonably assured. We record servicerevenues, consisting of

 

20

----

 

subscriber revenues, reseller revenues, Sprint PCStravel revenues and non-Sprint PCS roaming revenues, and equipment revenuesconsisting of sales of handsets and accessories. Subscriber revenues consist ofmonthly recurring service charges and monthly non-recurring charges for local,long distance, travel and roaming airtime usage in excess of the pre-subscribedusage plan received from our subscribers, cancellation and late fee revenuesand surcharges, less reductions for billing adjustments and credits. Ourrevenue recognition policies are consistent with the guidance in StaffAccounting Bulletin No. 101, “Revenue Recognition in FinancialStatements,” promulgated by the Securities and Exchange Commission.

 

We recognize service revenue from our subscribers asthey use the service. We pro-rate access revenue over the billing period andrecord airtime usage in excess of the pre-subscribed usage plan. Oursubscribers pay an activation fee to us when they initiate service. We deferactivation fee revenue and direct customer activation costs on a straight-linebasis over the average life of our subscribers, which is estimated to be30 months. Direct customer activation costs in excess of activation feerevenue are recognized immediately.  Forthe three months ended June 30, 2003 and 2002, we recognized approximately $1.2million and $0.7 million, respectively, of activation fee revenue and for thesix months ended June 30, 2003 and 2002, we recognized approximately $2.3million and $1.2 million, respectively, of activation fee revenue. We havedeferred approximately $6.7 million and $6.4 million of activation fee revenueand related costs as of June 30, 2003 and December 31, 2002, respectively, tofuture periods.

 

During the three months ended June 30, 2003, weinitiated the reseller program with Virgin Mobile USA.  We record reseller revenues as Virgin MobileUSA customers use our PCS network.  Forthe three and six months ended June 30, 2003, we recorded approximately $11,000in reseller revenues.

 

We record Sprint PCS travel revenue on a per-minuterate or on a per kilobyte rate when a Sprint PCS or reseller subscriber basedoutside our markets uses our network. We earned approximately $10.8 million and$14.2 million of Sprint PCS travel revenue for the three months ended June 30,2003 and 2002, respectively, and approximately $21.1 million and $23.7 millionof Sprint PCS travel revenue for the six months ended June 30, 2003 and 2002,respectively. We record non-Sprint PCS roaming revenue when a non-Sprint PCSsubscriber uses our network. We earned approximately $3.1 million and $1.1million of non-Sprint PCS roaming revenue for the three months ended June 30,2003 and 2002, respectively, and approximately $6.0 million and $1.7 million ofnon-Sprint PCS roaming revenue for the six months ended June 30, 2003 and 2002,respectively.

 

Equipment revenue consists of proceeds from sales ofhandsets and accessories which are recorded at the time of sale. Revenues fromsales of handsets and accessories represent a separate earnings process fromservice revenues because sales of handsets and accessories do not requirecustomers to subscribe to wireless services. We account for rebates, discountsand other sales incentives as a reduction to revenue.

 

We participate in the Sprint national and regionaldistribution programs in which national retailers such as Radio Shack, Best Buyand Costco sell Sprint PCS products and services. In order to facilitate thesale of Sprint PCS products and services, national retailers purchase wirelesshandsets from Sprint for resale and receive compensation from Sprint for SprintPCS products and services sold. For industry competitive reasons, Sprintsubsidizes the price of these handsets by selling the handsets at a price belowcost. Under our Sprint PCS agreements, when a national retailer sells a handsetpurchased from Sprint to a subscriber in our markets, we are obligated toreimburse Sprint for the handset subsidy. We do not receive any revenues fromsales of handsets and accessories by national retailers. For a new subscriberactivation and a handset upgrade to an existing subscriber, we include thesehandset subsidy charges in cost of products sold in the consolidated statementsof operations. Handset subsidy charges included in cost of products sold forthe three months ended June 30, 2003 and 2002 were approximately $3.4 millionand $2.4 million, respectively, and approximately $7.3 million and $5.2 millionfor the six months ended June 30, 2003 and 2002, respectively.

 

21

----

 

***Revenue and Cost Data Provided by Sprint PCS:***

 

We place substantial reliance on the timeliness,accuracy and sufficiency of certain revenue, accounts receivable and cost dataprovided by Sprint which we use in the preparation of our financial statementsand financial disclosures. The data provided by Sprint is the primary sourcefor our recognition of service revenue and a significant portion of our sellingand marketing and cost of service and operations expenses. At times, we havebeen invoiced by Sprint for charges that we believe to be contractuallyincorrect. We review all charges from Sprint and dispute certain of thesecharges based upon our interpretation of our agreements with Sprint PCS and areattempting to work with Sprint to improve the process. We presently haveapproximately $7.5 million under dispute with Sprint for charges that webelieve are contractually incorrect and are engaged in discussions with Sprintto attempt to resolve these disputed items. When Sprint does not notify us timely for charges that we have incurredor when we are invoiced for charges that we believe to be incorrect, we recordestimates primarily based on our historical trends and our estimate for theamount which we believe we will remit to Sprint after the disputed item or itemshave been settled. We have fully reserved the amount under dispute with Sprint.If the disputed item or items are settled in our favor, our expenses would bereduced. If we are unable to resolve these disputed items favorably for us, wemay be required to pay the invoiced amounts, which will reduce our cash andliquidity.

 

***Valuation of Accounts Receivable and Inventories:***

 

Reserve for Doubtful Accounts - Estimates are used indetermining our allowance for bad debt and are based both on our historicalcollection experience, current trends and credit policy and on a percentage ofour accounts receivables by aging category. In determining these percentages,we look at historical write-offs of our receivables and our history is limited.We also look at current trends in the credit quality of our customer base andchanges in the credit policies. Under the Sprint PCS service plans, customerswho do not meet certain credit criteria can nevertheless select any planoffered subject to an account spending limit, referred to as ASL, to controlcredit exposure. Account spending limits range from $125 to $200 depending onthe credit quality of the customer. Prior to May 2001, all of these customerswere required to make a deposit ranging from $125 to $200 that could be creditedagainst future billings. During the period from May 2001 to February 2002, thedeposit requirement was eliminated on all credit classes (“NDASL”). Were-implemented deposit requirements for all new sub-prime subscribers on theClear Pay program in late February 2002. If these estimates are insufficient for any reason, our operating incomeand available cash would be reduced.

 

Reserve for Obsolete/Excess Inventory - We record areserve for obsolete or excess handset and accessories inventory for models andaccessories that are no longer manufactured, for defective models andaccessories that have been returned by customers and for second generationhandsets and accessories. With the migration to the third generation (“1XRTT”)network in the third quarter of 2002, we have discontinued purchasing secondgeneration handsets and accessories.  Ifthe estimate of obsolete inventory is understated, our operating income wouldbe reduced.

 

***Long-Lived Assets and Goodwill:***

 

Effective January 1, 2002, we adopted Statement ofFinancial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairmentor Disposal of Long-Lived Assets” (“SFAS No. 144”), and SFAS No. 142, “Goodwilland Other Intangible Assets” (“SFAS No. 142”). SFAS No. 144 requires thatlong-lived assets be reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable. Recoverability is assessed based on the future cash flows expectedto result from the use of the asset and its eventual disposition. If the sum ofthe undiscounted cash flows is less than the carrying value of the asset, animpairment loss is recognized. Any impairment loss, if indicated, is measuredas the amount by which the carrying amount of the asset exceeds the fair valueof the asset. SFAS No. 142 requires that goodwill and certain intangibleassets resulting from business combinations entered into prior to June 30,2001 no longer be amortized,

 

22

----

 

but instead be reviewed for recoverability, and thatannual tests for impairment of goodwill and intangible assets that haveindefinite useful lives be performed. SFAS No. 142 also requires interimtests when an event has occurred that more likely than not has reduced the fairvalue of such assets.  We will assess onan annual basis the fair values of the reporting unit housing the goodwill andintangibles and, if necessary, assess on an annual basis for any impairment. Anywrite-offs would result in a charge to earnings and a reduction in equity inthe period taken. As of October 31, 2002, we completed our annualimpairment review and determined that no impairment charge was required.  Management does not believe that anysignificant changes have occurred since year end and thus no write-offs havebeen made. Management will continue to monitor any triggering events andperform re-evaluations, as necessary.

 

Purchase price accounting requires extensive use ofaccounting estimates and judgments to allocate the purchase price to the fairmarket value of the assets and liabilities purchased. In our recording of thepurchase of VIA Wireless, we engaged a nationally recognized valuation expertto assist us in determining the fair value of these assets and liabilities. Includedin the asset valuation for this purchase was the valuation of three intangibleassets: the VIA Wireless subscriber base, the right to be the exclusiveprovider of Sprint PCS services in the markets in which VIA Wireless operatedand the California PCS licenses subsequently sold to VoiceStream Wireless. Forthe subscriber base a useful life of 20 months has been assigned effectiveApril 1, 2002. For the period from the date of acquisition(August 13, 2001) to March 31, 2002, the subscriber base was amortizedusing a useful life of 36 months. As of March 31, 2003, the VIA Wirelesssubscriber base was fully amortized. For the right to provide service under theSprint PCS management agreement, a useful life of 18 years has beenassigned. In April 2000, we acquired the Spokane, Washington market fromSprint PCS. Included in the asset valuation for this purchase was the SprintPCS customer base for this market. For the subscriber base a useful life of33 months has been assigned effective April 1, 2002. For the periodfrom the date of acquisition in April 2000 to March 31, 2002, thesubscriber base was amortized using a useful life of 60 months. As ofDecember 31, 2002, the Spokane market subscriber base was fully amortized. VIAWireless’ Sprint PCS management agreement will be amortized over its estimateduseful life of 18 years.

 

***Income Taxes:***

 

As part of the process of preparing our consolidatedfinancial statements, we are required to estimate our taxes in each of thejurisdictions of operation.  This processinvolves management estimating the actual current tax expense together withassessing temporary differences resulting from differing treatment of items fortax and accounting purposes. These differences result in deferred tax assetsand liabilities, which are included within the consolidated balancesheets.  We then must assess thelikelihood that the deferred tax assets will be recovered from future taxableincome and, to the extent recovery is not likely, we must establish a valuationallowance. Future taxable income depends on the ability to generate income inexcess of allowable deductions.  To theextent we establish a valuation allowance or increase this allowance in aperiod, an expense is recorded within the tax provision in the consolidatedstatement of operations.  Significantmanagement judgment is required in determining our provision for income taxes,deferred tax assets and liabilities and any valuation allowance recordedagainst net deferred tax assets. In the event that actual results differ fromthese estimates or we adjust these estimates in future periods, we may need toestablish a valuation allowance that could materially impact our financialcondition and results of operations.

 

**RecentAccounting Pronouncements**

 

In May 2003, the Financial Accounting Standards Board(“FASB”) issued SFAS No. 150, “Accounting for Certain Financial Instrumentswith Characteristics of Both Liabilities and Equity” (“SFAS No. 150”).  The Statement establishes standards for howcertain financial instruments with characteristics of both liabilities andequity must be classified and measured. SFAS No. 150 requires that a financial instrument that is within itsscope be classified as a liability, or an asset in some circumstances.  Many of those instruments were previouslyclassified

 

23

----

 

as equity.  The Statement iseffective for financial instruments entered into or modified after May 31, 2003and is otherwise effective at the beginning of the first interim periodbeginning after June 15, 2003. We do not have any financial instruments withcharacteristics of both liabilities and equity.

 

In April 2003, the FASB issued SFAS No. 149,“Amendment of Statement 133 on Derivative Instruments and Hedging Activities”(“SFAS No. 149”).  SFAS No. 149 amendsand clarifies the accounting guidance on derivative instruments (includingcertain derivative instruments embedded in other contracts) and hedgingactivities that fall within the scope of SFAS No. 133, “Accounting for DerivativeInstruments and Hedging Activities.” SFAS No. 149 also amends certain other existing pronouncements, whichwill result in more consistent reporting of contracts that are derivatives intheir entirety or that contain embedded derivatives that warrant separateaccounting.  This Statement is effectivefor contracts entered into or modified after June 30, 2003, with certainexceptions, and for hedging relationships designated after June 30, 2003.  We have not yet determined the impact thisissue will have on our financial position, results of operations or cash flows.

 

In June 2002, the FASB issued SFAS No. 146,“Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS No.146”).  SFAS No. 146 provides newguidance on the recognition of costs associated with exit or disposalactivities.  The Statement requirescompanies to recognize costs associated with exit or disposal activities whenthey are incurred rather than at the date of commitment to an exit or disposalplan. SFAS No. 146 supercedes previous accounting guidance provided by EmergingIssues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for CertainEmployee Termination Benefits and Other Costs to Exit an Activity (includingCertain Costs Incurred in a Restructuring)” (“EITF 94-3”). EITF 94-3 requiredrecognition of costs at the date of commitment to an exit or disposal plan.SFAS No. 146 is to be applied prospectively to exit or disposal activitiesinitiated after December 31, 2002.  Ouradoption of SFAS No. 146 did not have a material impact on our financialposition, results of operations or cash flows.

 

In April 2002, the FASB issued SFAS No. 145,“Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB StatementNo. 13, and Technical Corrections” (“SFAS No. 145”). Among other things, thisStatement rescinds FASB Statement No. 4, “Reporting Gains and Losses fromExtinguishment of Debt,” which required all gains and losses fromextinguishment of debt to be aggregated and, if material, classified as anextraordinary item, net of related income tax effect. As a result, the criteriain APB Opinion No. 30, “Reporting the Results of Operations—Reporting theEffects of Disposal of a Segment of a Business, and Extraordinary, Unusual andInfrequently Occurring Events and Transactions,” will now be used to classifythose gains and losses. Our adoption of SFAS No. 145 on January 1, 2003 did nothave a material impact on our financial position, results of operations or cashflows.

 

In June 2001, the FASB issued SFAS No. 143,“Accounting for Asset Retirement Obligations” (“SFAS No. 143”).  This Statement requires entities to recordthe fair value of a liability for an asset retirement obligation in the periodin which it is incurred and capitalize that amount as part of the book value ofthe long-lived asset. Over time, the liability is accreted to its present valueeach period, and the capitalized cost is depreciated over the useful life ofthe related asset. Upon settlement of the liability, an entity either settlesthe obligation for its recorded amount or incurs a gain or loss uponsettlement. This Statement is effective for financial statements for fiscalyears beginning after June 15, 2002.

 

Our network is primarily located on leased propertyand we have certain legal obligations, principally related to our tower leases,which fall within the scope of SFAS No. 143. These legal obligationsprimarily include certain obligations to remediate leased land on which ourtower assets are located. In conjunction with the adoption of SFAS No. 143effective January 1, 2003, we did not record asset retirement obligationsfor network infrastructure assets subject to the provisions of this Statementas the fair value of the obligations could not reasonably be estimated. We havevery limited experience in removing tower assets, many of which are co-located,and in remediating leased land. In addition, we do not intend to remove towerassets from their current locations. Based on

 

24

----

 

our history and current industry trends, it is not probable that anysites will be removed in the foreseeable future and require remediation.Therefore, sufficient information to estimate a range of potential settlementdates is not available. In accordance with SFAS No. 143, we did notrecognize a liability as of January 1, 2003 and will not recognize a liabilityuntil such information becomes known.

 

In January 2003, the FASB issued FASB InterpretationNo. 46, “Consolidation of Variable Interest Entities—An Interpretation ofAccounting Research Bulletin (ARB) No. 51” (“FIN 46”). This interpretationclarifies how to identify variable interest entities and how a company shouldassess its interests in a variable interest entity to decide whether toconsolidate the entity. FIN 46 applies to variable interest entities createdafter January 31, 2003, in which a company obtains an interest after that date.Also, FIN 46 applies in the first fiscal quarter or interim period beginningafter June 15, 2003, to variable interest entities in which a company holds avariable interest that it acquired before February 1, 2003. We do not have anyownership in variable interest entities.

 

In November 2002, the FASB issued FASB InterpretationNo. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness of Others.” This interpretationexpands the disclosures to be made by a guarantor about its obligations undercertain guarantees and requires that, at the inception of a guarantee, aguarantor recognize a liability for the fair value of the obligation undertakenin issuing the guarantee. The disclosure requirements are effectiveimmediately.  As disclosed in Note 6 tothe Consolidated Financial Statements, UbiquiTel has fully and unconditionallyguaranteed Operating Company’s obligations under its 14% senior subordinateddiscount notes, 14% senior discount notes and 14% Series B senior discountnotes. The initial recognition and measurement provisions of thisinterpretation are effective for guarantees issued or modified after December31, 2002. The adoption of the initial recognition and measurement provisions ofthis interpretation did not have a material effect on our financial position,results of operations or cash flows.

 

In November 2002, the EITF issued EITF Issue No.02-16, “Accounting by a Customer (Including a Reseller) for CertainConsideration Received from a Vendor” (“EITF 02-16”). Among other items, EITF02-16 requires that consideration received from a vendor be presumed to be areduction of the cost of the vendor’s products or services. This presumptioncan be overcome if the consideration can be shown to represent either a paymentfor assets or services delivered to the vendor or a reimbursement of costsincurred by the reseller to sell the vendor’s products. This treatment iseffective for arrangements entered into or modified on or after January 1,2003. The adoption of EITF 02-16 did not have a material effect on ourfinancial position, results of operations or cash flows.

 

In November 2002, the EITF issued EITF Issue No.00-21, “Accounting for Multiple-Element Revenue Arrangements” (“EITF 00-21”).EITF 00-21 addresses the determination of whether an arrangement involving morethan one deliverable contains more than one unit of accounting and how therelated revenues should be measured and allocated to the separate units ofaccounting, i.e., the delivery or performance of multiple products, services,and/or rights to use assets. In applying this guidance, separate contracts withthe same party, entered into at or near the same time, will be presumed to be apackage, and the consideration will be measured and allocated to the separateunits based on their relative fair values. EITF 00-21 will apply to revenuearrangements entered into after June 30, 2003; however, upon adoption, the EITFallows the guidance to be applied on a retroactive basis, with the change, ifany, reported as a cumulative effect of accounting change in the consolidatedstatements of operations. We adopted this new accounting guidance effectiveJuly 1, 2003 and it did not have a material impact on our financial position,results of operations or cash flows.

 

**Resultsof Operations**

 

We provide certain financial measures that arecalculated in accordance with accounting principles generally accepted in theUnited States (GAAP) and adjustments to GAAP (non-GAAP) to assess our financialperformance.  In addition, we usecertain non-financial terms that are not measures of financial performanceunder GAAP.  Terms such as customeradditions and churn are terms used in the wireless communicationsindustry.  The non-GAAP

 

25

----

 

financial measures of average revenue per user, cashcost per user and cost per gross addition reflect standard measures ofliquidity, profitability or performance. The non-financial terms and the non-GAAP measures reflect wirelesscommunications industry conventions and are commonly used by the investmentcommunity for comparability purposes. The non-GAAP measures included in this report are reconciled in“Liquidity and Capital Resources—Reconciliation of non-GAAP financialmeasures.”

### ** **

### ***Analysis of the three months ended June 30, 2003compared to the three months ended June 30, 2002***

 

# ***Customer Net Additions***

 

As of June 30, 2003, we provided personalcommunications services to approximately 291,800 customers compared toapproximately 217,800 customers as of June 30, 2002.  During the three months ended June 30, 2003, we added 17,600 netadditions compared to 15,700 net additions for the prior period.  The increase in net customers acquired wasprimarily attributable to the decrease in churn, which is described below.

 

# ***Churn***

 

Churn is the monthly rate of customer turnover forsubscribers expressed as the percentage of customers of the beginning customerbase that both voluntarily and involuntarily discontinued service during theperiod.  Churn is computed by dividingthe number of customers that discontinued service during the month, net of 30 dayreturns, by the beginning customer base for the period.  Churn for the three months ended June 30,2003 was approximately 2.9% compared to 4.1% for the three months ended June30, 2002.  The decrease in churn wasprimarily the result of an improvement in the credit quality of the overallcustomer base. At June 30, 2003, the overall mix of our customer base was 73%prime, 19% sub-prime with deposits and 8% sub-prime without deposits. At June30, 2002, the overall mix of our customer base was 65% prime, 9% sub-prime withdeposits and 26% sub-prime without deposits.

 

***Average Revenue Per User (ARPU)***

 

Average revenue per user (ARPU) summarizes the averagemonthly service revenue per customer, excluding roaming revenue. ARPU iscomputed by dividing subscriber revenue by the average subscribers for theperiod. During the three months ended June 30, 2003 and 2002, our ARPU wasapproximately $58 and $58, respectively. ARPU for the three months ended June30, 2003 included $1 due to a one-time revenue adjustment from Sprint PCS torecognize an E911 monthly surcharge that was applied to each of our customer’sinvoices.  Higher monthly access chargesand the impact of the one-time revenue adjustment were offset by a decrease in overagecharges attributable to a higher mix of customers on large anytime minutes rateplans and lower cancellation fees resulting from lower customer churn.

 

***Cash Cost Per User (CCPU)***

 

Cash cost per user summarizes the average monthly cashcosts to provide digital wireless mobility communications services percustomer.  CCPU is computed by dividingthe sum of cost of service and operations and general and administrativeexpenses by the average subscribers for the period.  During the three months ended June 30, 2003 and 2002, our CCPUwas approximately $46 and $69, respectively. The decrease in CCPU primarily resulted from decreases in networkoperating, Sprint PCS travel and bad debt expense on a per subscriberbasis.  The decrease in networkoperating expense reflects the continuing benefits of scale resulting from theincrease in the subscriber base and a reduction in interconnection rates, thedecrease in Sprint PCS travel expense was primarily due to the reduction in thereciprocal roaming rate with Sprint PCS from $0.10 per minute during 2002 to$0.058 per minute effective January 1, 2003, and the decrease in bad debtexpense was primarily attributable to the improvement in the credit quality ofour subscriber base, tighter credit policies, the re-instatement of deposits inlate February 2002, and higher recoveries of previously written-off customeraccount balances.

 

26

----

 

***Cost Per Gross Addition (CPGA)***

 

Cost per grossaddition (CPGA) summarizes the average cost to acquire new customers during theperiod. CPGA is computed by adding the income statement components of sellingand marketing and the cost of products sold, and reducing that amount by theequipment revenue recorded.  That netamount is then divided by the gross customers acquired during the period.  CPGA was approximately $452 for the threemonths ended June 30, 2003 which is comparable to approximately $456 for thethree months ended June 30, 2002.

 
|   |   | ***Revenues***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| • |   | *Subscriber Revenue*.  Subscriber  revenue during the three months ended June 30, 2003 and 2002 was  approximately $49.5 million and $36.5 million, respectively. Subscriber  revenue consists of monthly recurring service charges and monthly  non-recurring charges for local, long distance, travel and roaming airtime  usage in excess of the pre-subscribed usage plan received from our  subscribers, cancellation and late fee revenues, surcharges, less reductions  for billing adjustments and billing corrections.  Our customers’ charges are dependent on their rate plans, based  on the number of minutes and data usage included in their plans. These plans  generally reflect the terms of national plans offered by Sprint PCS. The  increase in subscriber revenue was primarily attributable to the increase in  our subscriber base and a one-time revenue adjustment of $0.9 million from  Sprint PCS to recognize an E911 monthly surcharge that was applied to each of  our customer’s invoices. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| • |   | *Reseller  Revenue*.  Reseller revenue is generated when a  reseller subscriber uses our PCS network.   Reseller revenues were approximately $11,000 and $0 for the three  months ended June 30, 2003 and 2002, respectively, and were generated under  the reseller agreement with Virgin Mobile USA.  In the future, we anticipate receiving additional incremental  revenue from Qwest for customers who use our network under the Qwest reseller  agreement that Sprint announced in early August 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| • |   | *Sprint PCS Travel Revenue*.  Travel  revenue is generated on a per-minute rate when a Sprint PCS subscriber based  outside our markets uses our network.   An additional long distance rate per minute is generated when that  customer initiates a call from our network to call outside the local calling  area. The travel and long distance rates for 2002 were $0.10 per minute and  approximately $0.02 per minute, respectively. Effective January 1, 2003, the  travel rate per minute and the long distance rate per minute were reduced to  approximately $0.058 per minute and $0.015 per minute, respectively.                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   | During the three months  ended June 30, 2003, our network captured approximately 157.2 million of  system travel minutes with approximately 65% of those minutes generating long  distance charges which resulted in approximately $10.8 million in travel  revenue. During the three months ended June 30, 2002, our network captured  approximately 110.4 million of system travel minutes with approximately  67% of those minutes generating long distance charges which resulted in  approximately $14.2 million in travel revenue. The decrease in Sprint  PCS travel revenue was primarily due to the increase in travel and long  distance minutes of use offset by the decrease in the reciprocal Sprint PCS  travel rate and long distance rate per minute.                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| • |   | *Non-Sprint PCS Roaming Revenue*.   Non-Sprint PCS roaming revenue is generated when a non-Sprint PCS  subscriber uses our network.  We  earned approximately $3.1 million in non-Sprint PCS roaming revenue during  the three months ended June 30, 2003 compared to approximately $1.1 million  during the three months ended June 30, 2002.  Non-Sprint PCS roaming minutes increased from 5.3 million during  the three months ended June 30, 2002 to 21.7 million during the three months  ended June 30, 2003. The increase in roaming minutes represented a $3.6 million  increase in revenue, and the decrease in the average non-Sprint                                                                                                                                                                                                                                                                                                                                                                                 |

 

27

----

 
|   |   | PCS roaming revenue  rate we receive from other carriers represented a $1.7 million reduction of  roaming revenue.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| • |   | *Equipment Revenue*.  Equipment  revenue is generated from the sale of handsets and accessories and is  recorded at the time of sale. We record and retain 100% of the revenue from  the sale of handsets and accessories, net of rebates, discounts and other  sales incentives, as equipment revenue.   The amounts recorded during the three months ended June 30, 2003 and  2002 from equipment revenue totaled approximately $2.6 million and $1.8  million, respectively, and the increase was primarily due to an increase in  gross customer additions offset by an increase in equipment promotions and  discounts in order to acquire more customers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   | ***Cost of Service and Operations***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| • |   | *Network Operations Expenses*.  Network  operations expenses include radio communications site lease costs, utilities,  network control maintenance, network control site leases, engineering  personnel, transport facilities and interconnect charges, and totaled  approximately $17.2 million during the three months ended June 30, 2003  compared to approximately $17.6 million during the three months ended  June 30, 2002. The decrease in network operations expenses was primarily  attributable to lower interconnect and telecommunications charges.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| • |   | *Sprint  PCS Travel Expense*.  We pay Sprint PCS travel fees on a per-minute rate when our customers use the  Sprint PCS network outside our markets and incur additional long distance  fees when our customer calls long distance originating in a Sprint PCS or PCS  affiliate of Sprint territory. During the three months ended June 30, 2003,  our customers generated approximately 98.3 million of travel minutes  with approximately 64% of those minutes generating long distance charges  which resulted in approximately $6.8 million in travel fees. During the  three months ended June 30, 2002, our customers generated approximately  55.8 million of travel minutes with approximately 67% of those minutes  generating long distance charges which resulted in approximately  $6.6 million in travel fees. The increase in travel expense was  attributable to the 42.5 million minutes of use increase from the three  months ended June 30, 2002 to the three months ended June 30, 2003, which  accounted for approximately $4.9 million in additional expense, offset  by positive variances of approximately $4.3 million resulting from the  changes in the reciprocal rate received from Sprint PCS and $0.4 million  attributable to the reduction of the long distance rate per minute. As  discussed above, the per minute rate we pay Sprint PCS when customers from  our markets roam onto Sprint PCS’ or another Sprint PCS affiliate’s network  and the long distance rate per minute of use both decreased in 2003 as  compared to 2002. For the year ended December 31, 2003, we expect an increase  in travel fees resulting from increasing subscriber levels in our markets to  be partially offset by the lower per minute travel and long distance rates  paid to Sprint PCS. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| • |   | *Non-Sprint  PCS Roaming Expense*. We pay roaming fees to other wireless providers when our customers  use their network. During the three months ended June 30, 2003, our customers  generated approximately 2.1 million of roaming minutes resulting in  approximately $0.6 million in roaming fees. During the three months  ended June 30, 2002, our customers generated approximately 1.8 million  of roaming minutes resulting in approximately $0.5 million in roaming fees.  The increase in roaming expense of approximately $0.1 million was  attributable to the increase in roaming minutes offset by a decrease in the  average non-Sprint PCS roaming revenue rate paid to other carriers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| • |   | *Bad Debt Expense.*   Bad debt expense during the three months ended June 30, 2003 and 2002  was approximately $1.5 million and approximately $7.3 million,  respectively.  The decrease in bad  debt expense was primarily attributable to the improvement in the credit  quality of our customer base, tighter credit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |

 

28

----

 
|   |   | policies, the  re-instatement of deposits in late February 2002, and higher recoveries of  previously written-off customer account balances.                                                                                                                                                                                                                                                                                                                                                                       |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| • |   | *Operating Expenses. *Operating  expenses during the three months ended June 30, 2003 and 2002 were  approximately $5.5 million and $4.4 million, respectively. Operating expenses  included fees we paid to Sprint PCS for the use of their support services,  including billing and collections services and customer care. The increase in  operating expenses was primarily attributable to the increase in our  subscriber base, in addition to increases in fees charged by Sprint for their  services. |

 

***Cost of Products Sold***

 

The cost ofproducts sold included the costs of handsets and accessories and totaledapproximately $9.5 million and $8.2 million during the three months ended June30, 2003 and 2002, respectively.  Thecost of handsets normally exceeds the sales price because we subsidize the costof handsets to subscribers, consistent with industry practice. The increase incost of products sold was primarily attributable to the increase in gross salesduring the three months ended June 30, 2003 as compared to the three months endedJune 30, 2002. Handset subsidies on units sold by third parties totaledapproximately $3.4 million and $2.4 million for the three months ended June 30,2003 and 2002, respectively.

 

***Selling and Marketing***

 

Selling expensesrelate to our distribution channels, sales representatives, sales supportpersonnel, retail stores, advertising programs and commissions.  We incurred expenses of approximately $12.1million and $12.2 million during the three months ended June 30, 2003 and 2002,respectively.  The decrease in sellingand marketing expenses was primarily attributable to lower advertising costs.

 

***General and Administrative***

 

We incurredgeneral and administrative expenses (excluding non-cash compensation expenses)totaling approximately $7.7 million and $6.5 million during the three monthsended June 30, 2003 and 2002, respectively. General and administrative expenses included approximately $4.0 millionand $2.6 million of management fee expense (defined as 8% of collectedrevenues) paid to Sprint PCS during the three months ended June 30, 2003 and2002, respectively. The increase in general and administrative expenses wasattributable to the increase in management fee expense resulting from theincrease in our subscriber base, offset by other expense savings ofapproximately $0.2 million.

 

***Non-Cash Compensation for General and Administrative Matters***

 

During the threemonths ended June 30, 2003 and 2002, non-cash compensation for general andadministrative matters totaled approximately $16,000 and $0.1 million,respectively.  We apply the provisionsof Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued toEmployees,” and related interpretations in accounting for our equity incentiveplan.  Unearned stock optioncompensation is recorded for the difference between the exercise price and thefair market value of our stock at the date of grant and is recognized asnon-cash stock option compensation expense in the period in which the relatedservices are rendered.

 

***Depreciation and Amortization***

 

Depreciation andamortization expense for the three months ended June 30, 2003 and 2002 totaledapproximately $10.6 million and $13.4 million, respectively.  We depreciate our property and equipmentusing the straight-line method over four to 10 years.  A building acquired as part of the VIAWireless acquisition is being

 

29

----

 

depreciated using the straight-line method over 30 years. Amortizationof intangible assets with finite useful lives is over 20 months to 18years.  The decrease in depreciation andamortization expense was primarily due to the decrease in amortization expenseattributable to the Spokane market and VIA Wireless subscriber bases, whichwere fully amortized as of December 31, 2002 and March 31, 2003, respectively,partially offset by an increase in depreciation expense.

 

***Interest Income***

 

For the threemonths ended June 30, 2003 and 2002, interest income was approximately $0.1million and $0.5 million, respectively. The interest income was generated from cash, cash equivalents andrestricted cash balances.  The decreasein interest income was primarily due to lower levels of cash, cash equivalentsand restricted cash combined with lower interest rates during the three monthsended June 30, 2003 than during the three months ended June 30, 2002.

 

***Interest Expense***

 

Interest expensetotaled approximately $7.0 million during the three months ended June 30, 2003.We accrue interest at a rate of 14% per annum on our senior subordinateddiscount notes due 2010 and 14% per annum on our Series B senior discount notesdue 2008.  Interest on our seniorsecured credit facility was accrued at the London interbank offered rate, basedon contracts ranging from 30 to 180 days. During the three months ended June30, 2002, interest expense was approximately $11.4 million. The decrease ininterest expense was primarily due to lower debt levels during the three monthsended June 30, 2003 than during the three months ended June 30, 2002 as aresult of the debt-for-debt exchange offer consummated in February 2003 and theopen market purchases of 14% senior subordinated discount notes during thethree months ended June 30, 2003, partially offset by the interest expenseattributable to the Series B senior discount notes issued in February 2003 andduring the three months ended June 30, 2003.

 

Interest expensealso included the amortized amount of deferred financing fees relating to oursenior secured credit facility, senior subordinated discount notes and Series Bsenior discount notes.

## ** **

## ***Gain onDebt Retirements***

 

In a series of transactions during the three monthsended June 30, 2003, we received cash proceeds of approximately $1.3 million,of which $1.1 million was used to fund open market purchases of $6.9 million aggregateprincipal amount ($5.3 million aggregate accreted value) of outstanding 14%senior subordinated discount notes due April 15, 2010 (“Existing Notes”), andwe issued approximately $1.7 million aggregate principal amount of additional14% Series B senior discount notes. Under these private placement sales, we issued detachable warrants topurchase up to approximately 1.3 million shares of common stock at an exerciseprice of $0.01 per share.  We wrote offapproximately $0.1 million in deferred financing fees and $0.3 million inunamortized discount on detachable warrants related to the original issuance ofthe Existing Notes, which reduced the gain resulting from the open marketpurchases.  We recorded a gain ofapproximately $3.9 million during the three months ended June 30, 2003.

 

## ***IncomeTaxes***

 

For the three months ended June 30, 2003 and 2002, werecognized an income tax expense of $0.4 million and an income tax benefit of$3.0 million, respectively. The $0.4 million income tax expense recorded duringthe three months ended June 30, 2003 represents a deferred tax adjustment toestablish a valuation allowance against our deferred tax assets since we are nolonger able to reasonably estimate the period of reversal, if any, for deferredtax liabilities related to taxable goodwill as the result of the adoption ofSFAS No. 142, “Goodwill and Other Intangible

 

30

----

 

Assets.” Approximately $2.2 million of the tax benefitrecorded during the three months ended June 30, 2002 was monetized during thethree months ended June 30, 2003 due to the receipt of a federal income taxrefund. The refund was the result of carrying back 2002 net operating lossesfrom our wholly owned VIA Holding subsidiary (which has since been merged intoOperating Company) to realize a federal income tax refund for taxes that hadbeen previously paid by one of the acquired VIA Wireless member companies.  The remaining $0.8 million tax benefitrecorded during the three months ended June 30, 2002 was due to consolidatednet operating loss carryforwards that reduced the net deferred tax liability onour consolidated balance sheet.

 

## ***NetLoss***

 

For the threemonths ended June 30, 2003 and 2002, our net loss was approximately $8.9million and $31.1 million, respectively. The decrease in net loss was primarilydue to the increase in revenues resulting from the increase in our subscriberbase, the decrease in bad debt expense resulting from the improvement in thecredit quality of the subscriber base, the decrease in interest expenseresulting from the debt restructuring and the gain on debt retirement.

 

### ***Analysis of the six months ended June 30, 2003compared to the six months ended June 30, 2002***

 

## ***CustomerNet Additions***

 

During the six months ended June 30, 2003, we added34,800 net additions compared to 38,800 net additions for the priorperiod.  The decrease in net customersacquired was attributable to tighter credit policies, slightly offset by lowerchurn.

 

# ***Churn***

 

Churn for the six months ended June 30, 2003 wasapproximately 3.2% compared to 4.2% for the six months ended June 30,2002.  The decrease in churn wasprimarily the result of an improvement in the credit quality of the overallcustomer base.

 

***Average Revenue Per User (ARPU)***

 

During the six monthsended June 30, 2003 and 2002, our ARPU was approximately $56 and $58,respectively. The decrease in ARPU primarily resulted from a decrease inoverage charges attributable to a higher mix of customers on large anytimeminutes rate plans and lower cancellation fees resulting from lower customerchurn.

 

***Cash Cost Per User (CCPU)***

 

During the six months ended June 30, 2003 and 2002,our CCPU was approximately $46 and $65, respectively.  The decrease in CCPU primarily resulted from decreases in networkoperating, Sprint PCS travel and bad debt expense on a per subscriberbasis.  The decrease in networkoperating expense reflects the continuing benefits of scale resulting from theincrease in the subscriber base and a reduction in interconnection rates, thedecrease in Sprint PCS travel expense was primarily due to the reduction in thereciprocal roaming rate with Sprint PCS from $0.10 per minute during 2002 to$0.058 per minute effective January 1, 2003, and the decrease in bad debtexpense was primarily attributable to the improvement in the credit quality ofour subscriber base, tighter credit policies, the re-instatement of deposits inlate February 2002, and higher recoveries of previously written-off customeraccount balances.

 

31

----

 

***Cost Per Gross Addition (CPGA)***

 

CPGA wasapproximately $442 for the six months ended June 30, 2003 compared toapproximately $433 for the six months ended June 30, 2002. The increase in CPGAprimarily resulted from an increase in handset subsidies and handset upgradecosts that were incurred during the six months ended June 30, 2003 as comparedto the six months ended June 30, 2002 and a decrease in gross customeradditions for the six months ended June 30, 2003 as compared to the six monthsended June 30, 2002, which increased fixed costs on a per add basis.

 
|   |   | ***Revenues***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| • |   | *Subscriber Revenue*.  Subscriber  revenue during the six months ended June 30, 2003 and 2002 was approximately  $92.6 million and $70.0 million, respectively. The increase in subscriber  revenue was primarily attributable to the increase in our subscriber base.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| • |   | *Reseller  Revenue*.  Reseller revenue is generated when a  reseller subscriber uses our PCS network.   Reseller revenues were approximately $11,000 and $0 for the six months  ended June 30, 2003 and 2002, respectively, and were generated under the  reseller agreement with Virgin Mobile USA.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| • |   | *Sprint PCS Travel Revenue*.  During the  six months ended June 30, 2003, our network captured approximately 301.0  million of system travel minutes with approximately 65% of those minutes  generating long distance charges which resulted in approximately  $21.1 million in travel revenue. During the six months ended June 30,  2002, our network captured approximately 200.9 million of system travel  minutes with approximately 67% of those minutes generating long distance  charges which resulted in approximately $23.7 million in travel revenue.  The decrease in Sprint PCS travel revenue was primarily due to the increase  in travel and long distance minutes of use offset by the decrease in the  reciprocal Sprint PCS travel rate and long distance rate per minute. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| • |   | *Non-Sprint PCS Roaming Revenue*.   We earned approximately $6.0 million in non-Sprint PCS roaming revenue  during the six months ended June 30, 2003 compared to approximately $1.7  million during the six months ended June 30, 2002.  Non-Sprint PCS roaming minutes increased from 7.0 million  during the six months ended June 30, 2002 to 41.3 million during the six  months ended June 30, 2003. The increase in roaming minutes represented a  $8.4 million increase in revenue, and the decrease in the average non-Sprint  PCS roaming revenue rate we receive from other carriers represented a $4.1  million reduction of roaming revenue.                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| • |   | *Equipment Revenue*.  The  amounts recorded during the six months ended June 30, 2003 and 2002 from  equipment revenue totaled approximately $4.9 million and $4.3 million,  respectively, and the increase was primarily due to a decrease in promotions  and discounts in order to acquire more customers offset by a decrease in  gross customer additions.                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   | ***Cost of Service and Operations***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| • |   | *Network Operations Expenses*.  Network  operations expenses totaled approximately $33.6 million during the six  months ended June 30, 2003 compared to approximately $31.2 million  during the six months ended June 30, 2002. The increase in network operations  expenses was primarily attributable to the increase in radio communications  site rent offset by lower interconnect and telecommunications charges.  The number of active radio communications  sites increased from 805 at June 30, 2002 to 842 at June 30, 2003.                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| • |   | *Sprint  PCS Travel Expense*.  During the six months ended June 30, 2003, our customers generated  approximately 182.0 million of travel minutes with approximately 65% of  those minutes generating long                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |

 

32

----

 
|   |   | distance charges which  resulted in approximately $12.9 million in travel fees. During the six  months ended June 30, 2002, our customers generated approximately  99.4 million of travel minutes with approximately 68% of those minutes  generating long distance charges which resulted in approximately  $11.3 million in travel fees. The increase in travel expense was attributable  to the 82.6 million minutes of use increase from the six months ended  June 30, 2002 to the six months ended June 30, 2003, which accounted for  approximately $9.2 million in additional expense, offset by positive  variances of approximately $6.9 million resulting from the changes in  the reciprocal rate received from Sprint PCS and $0.7 million  attributable to the reduction of the long distance rate per minute. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| • |   | *Non-Sprint  PCS Roaming Expense*. During the six months ended June 30, 2003, our customers generated  approximately 3.8 million of roaming minutes resulting in approximately  $1.1 million in roaming fees. During the six months ended June 30, 2002,  our customers generated approximately 3.5 million of roaming minutes  resulting in approximately $1.3 million in roaming fees. The decrease in  roaming expense of $0.2 million was attributable to a decrease in the average  non-Sprint PCS roaming revenue rate paid to other carriers.                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| • |   | *Bad Debt Expense.* Bad debt expense during the six months  ended June 30, 2003 and 2002 was approximately $2.6 million and approximately  $13.7 million, respectively.  The  decrease in bad debt expense was primarily attributable to the improvement in  the credit quality of our customer base, tighter credit policies, the re-instatement  of deposits in late February 2002, and higher recoveries of previously  written-off customer account balances.                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| • |   | *Operating Expenses. *Operating  expenses during the six months ended June 30, 2003 and 2002 were  approximately $10.8 million and $8.5 million, respectively. Operating  expenses included fees we paid to Sprint PCS for the use of their support  services, including billing and collections services and customer care. The  increase in operating expenses was primarily attributable to the increase in  our subscriber base, in addition to increases in fees charged by Sprint for  their services.                                                                                                                                                                                                                                                                                                                                               |

 

***Cost of Products Sold***

 

The cost ofproducts sold included the costs of handsets and accessories and totaledapproximately $18.8 million and $17.8 million during the six months ended June30, 2003 and 2002, respectively.  Theincrease in cost of products sold was primarily attributable to higherequipment subsidies partially offset by the decrease in gross sales during thesix months ended June 30, 2003 as compared to the six months ended June 30,2002. Handset subsidies on units sold by third parties totaled approximately$7.3 million and $5.2 million for the six months ended June 30, 2003 and 2002,respectively.

 

***Selling and Marketing***

 

We incurred sellingand marketing expenses of approximately $24.2 million and $24.6 million duringthe six months ended June 30, 2003 and 2002, respectively.  The decrease in selling and marketingexpenses was primarily attributable to lower advertising costs.

 

***General and Administrative***

 

We incurredgeneral and administrative expenses (excluding non-cash compensation expenses)totaling approximately $15.2 million and $12.6 million during the six monthsended June 30, 2003 and 2002, respectively. General and administrative expenses included approximately $7.6 millionand $4.8 million of management fee expense (defined as 8% of collectedrevenues) paid to Sprint PCS during the six months ended June 30, 2003 and2002, respectively. The increase in general and administrative expenses wasattributable to the increase in

 

33

----

 

management fee expenseresulting from the increase in our subscriber base, offset by other expensesavings of approximately $0.2 million.

 

***Non-Cash Compensation for General and Administrative Matters***

 

During the sixmonths ended June 30, 2003 and 2002, non-cash compensation for general andadministrative matters totaled approximately $0.1 million and $0.2 million,respectively.

 

***Depreciation and Amortization***

 

Depreciation andamortization expense for the six months ended June 30, 2003 and 2002 totaledapproximately $23.6 million and $23.7 million, respectively.   The decrease in depreciation andamortization expense was primarily due to the decrease in amortization expenseattributable to the Spokane market and VIA Wireless subscriber bases, whichwere fully amortized as of December 31, 2002 and March 31, 2003, respectively,partially offset by higher depreciation expense resulting from networkequipment additions from June 30, 2002 through June 30, 2003.

 

***Interest Income***

 

For the six monthsended June 30, 2003 and 2002, interest income was approximately $0.3 millionand $1.0 million, respectively.  Theinterest income was generated from cash, cash equivalents and restricted cashbalances.  The decrease in interestincome was primarily due to lower levels of cash, cash equivalents andrestricted cash combined with lower interest rates during the six months endedJune 30, 2003 than during the six months ended June 30, 2002.

 

***Interest Expense***

 

Interest expensetotaled approximately $17.1 million during the six months ended June 30, 2003.During the six months ended June 30, 2002, interest expense was approximately$22.3 million. The decrease in interest expense was primarily due to lower debtlevels during the six months ended June 30, 2003 than during the six monthsended June 30, 2002 as a result of the debt-for-debt exchange offer consummatedin February 2003 and the open market purchases of 14% senior subordinateddiscount notes during the three months ended June 30, 2003, partially offset bythe interest expense attributable to the Series B senior discount notes issuedin February 2003 and during the three months ended June 30, 2003.

 

Interest expensealso included the amortized amount of deferred financing fees relating to oursenior secured credit facility, senior subordinated discount notes and Series Bsenior discount notes.

 

***Gain on Debt Retirements***

 

In a series oftransactions during the three months ended June 30, 2003, we received cashproceeds of approximately $1.3 million, of which $1.1 million was used to fundopen market purchases of $6.9 million aggregate principal amount ($5.3 millionaggregate accreted value) of outstanding Existing Notes, and we issuedapproximately $1.7 million aggregate principal amount of additional 14% SeriesB senior discount notes due 2008 (“Series B Notes”).  Under these private placement sales, weissued detachable warrants to purchase up to approximately 1.3 million shares ofcommon stock at an exercise price of $0.01 per share. We wrote offapproximately $0.1 million in deferred financing fees and $0.3 million inunamortized discount on detachable warrants related to the original issuance ofthe Existing Notes, which reduced the gain resulting from the open marketpurchases.  We recorded a gain ofapproximately $3.9 million related to the open market purchases during thethree months ended June 30, 2003.

 

34

----

 

InFebruary 2003, Operating Company consummated its private placementexchange of $48.2 million aggregate principal amount of its new 14% seniordiscount notes due May 15, 2010 (“New Notes”) and $9.6 million in cash for $192.7 millionaggregate principal amount of its outstanding Existing Notes. Additionally,Operating Company consummated a related new financing, in a private placementoffering, of $12.8 million aggregate principal amount of Series BNotes in which Operating Company received cash proceeds of $9.6 million tofund the cash portion of the exchange. Under the new financing, UbiquiTelissued detachable warrants to purchase up to approximately 9.6 millionshares of its common stock at an exercise price of $0.01 per share. We wroteoff approximately $2.9 million in deferred financing fees related to theoriginal issuance of the Existing Notes and we incurred estimated fees andexpenses of approximately $3.8 million in connection with the issuance ofthe New Notes, which reduced the gain resulting from the exchange offer, and weincurred estimated expenses of approximately $0.4 million in connectionwith the issuance of the Series B Notes.

 

We followed theprovisions of SFAS No. 15, “Accounting by Debtors and Creditors forTroubled Debt Restructurings” (“SFAS No. 15”), and EITF IssueNo. 02-04, “Determining Whether a Debtor’s Modification or Exchange ofDebt Instruments Is Within the Scope of FASB Statement 15” (“EITF 02-04”), inrecording these transactions. These provisions require that the carrying valueof the New Notes be recorded at the total future cash payments (principal andinterest) specified by the New Notes; therefore, the New Notes were classifiedon our balance sheet as long-term liabilities and were valued at$81.9 million on the transaction date. As a result, no interest expenserelated to the New Notes will be recognized in future periods. The followingtable presents the aggregate gain recognized in the transactions during thethree months ended March 31, 2003 (in thousands, except per share data):

 

| Principal amount  of senior subordinated discount notes exchanged        |   | $       | 192,720 |   |
|--------------------------------------------------------------------------|--------|---------|---------|--------|
| Unamortized  discount on senior subordinated discount notes              |   | (48,214 | )       |
| Unamortized  discount on detachable warrants                             |   | (7,306  | )       |
| Unamortized  deferred financing costs                                    |   | (2,859  | )       |
| Carrying value  of debt exchanged                                        |   | 134,341 |    |
| Maximum future  cash principal payments for senior discount notes issued |   | (48,180 | )       |
| Maximum future  cash interest payments for senior discount notes issued  |   | (33,726 | )       |
| Cash payments  for amount of debt exchanged                              |   | (9,636  | )       |
| Estimated direct  expenses of exchange transaction                       |   | (3,781  | )       |
| Aggregate gain  from exchange transaction                                |   | $       | 39,018  |   |
| Aggregate gain  per share — Basic                                   |   | $       | 0.48    |   |
| Aggregate gain  per share — Diluted                                 |   | $       | 0.43    |   |

 

***Income Taxes***

 

For the six months ended June 30, 2003, we recognizedan income tax expense of approximately $0.4 million and for the six monthsended June 30, 2002, we recognized an income tax benefit of $5.8 million. The$0.4 million income tax expense recorded during the six months ended June 30, 2003represents a deferred tax adjustment to establish a valuation allowance againstour deferred tax assets since we are no longer able to reasonably estimate theperiod of reversal, if any, for deferred tax liabilities related to taxablegoodwill as the result of the adoption of SFAS No. 142, “Goodwill and OtherIntangible Assets.”   Approximately $4.2million of the tax benefit recorded during the six months ended June 30, 2002was monetized during the three months ended June 30, 2003 due to the receipt ofa federal income tax refund. The refund was the result of carrying back 2002net operating losses from our wholly owned VIA Holding subsidiary (which hassince been merged into Operating Company) to realize a federal income taxrefund for taxes that had been previously paid by one of the acquired VIAWireless member companies.  Theremaining $1.6 million tax benefit recorded during the six months ended June30, 2002 was due to consolidated net operating loss carryforwards that reducedthe net deferred tax liability on our consolidated balance sheet.

 

35

----

 

***Net Income (Loss)***

 

For the six monthsended June 30, 2003, our net income was approximately $7.3 million and for thesix months ended June 30, 2002, our net loss was approximately $60.8 million.The net income for the six months ended June 30, 2003 was primarilyattributable to a lower operating loss driven by higher revenues due to alarger subscriber base and the recognition of a $39.0 million gain resultingfrom the debt-for-debt exchange offer consummated in February 2003, thedecrease in interest expense resulting from the debt restructuring and the $3.9million gain resulting from the open market purchases of 14% seniorsubordinated discount notes during the three months ended June 30, 2003.

 

**Liquidity and Capital Resources**

 

From inception toJune 30, 2000, the period during which we were a development-stage company, ouractivities consisted principally of raising capital, consummating andsupporting our agreements with Sprint PCS, developing the initial design of ourPCS network and adding to our management team. Through June 30, 2003, we haveprincipally relied on the proceeds from equity and debt financings, and to alesser extent revenues, as our primary sources of capital.  During late 2001, we moved from aconstruction and build-out phase to an operational phase.

 

Completion of ourPCS network required substantial capital, of which approximately $255.4 millionhas been incurred through June 30, 2003. Although we have essentially completedour network coverage build-out, our business could require additional capitalexpenditures of up to approximately $30.0 million annually formaintenance, capacity enhancements and coverage improvements. As of June 30, 2003,we had 33 retail stores in operation in our markets.

 

As of June 30, 2003, we had approximately $60.1 million in cash, cashequivalents and restricted cash and an unused revolving line of credit ofapproximately $50.0 million, and our working capital was approximately $40.5million. In June 2003, we announced that we entered into a definitive sale andlease-back agreement for the sale of 100 wireless communication tower siteslocated in the central valley of California and the lease-back of space on thosesites. We expect to receive $11.5 million in cash for the sale of the tower andrelated assets, and will lease back space on the tower sites at agreed uponrates for an initial term of 10 years. The assets sale is subject to customaryclosing conditions, including certain due diligence matters and the receipt ofthird-party consents, and is expected to close during the three months endedSeptember 30, 2003.  In early August2003, we announced that we had amended our management agreement with Sprint PCSto remove the build-out requirement for the state of Montana, thereby reducingour projected capital expenditures and operating expenses to launch this marketby approximately $25.0 million.  Inaddition, in early August 2003, Sprint PCS announced that it had entered into areseller agreement with Qwest Communications allowing Qwest to provide wirelessvoice and data services to new and existing customers in Qwest’s service areasusing Sprint’s network and the network of affiliates of Sprint who overlap withQwest’s service areas. Qwest has approximately 30,000 to 40,000 customers inportions of our service areas in Washington, Idaho and Utah and we anticipatereceiving additional incremental revenue from Qwest for customers who useUbiquiTel’s network under this reseller arrangement. Cash and cash equivalentsand cash availability under our senior secured credit facility, combined withcash flow from operations, are expected to be sufficient to fund any operatinglosses and working capital, to meet capital expenditure needs and to servicedebt requirements through June 30, 2004 and into the foreseeable future. Due toa number of factors, including improving operating performance and theelimination of the Montana build-out requirement and the Qwest reseller arrangementdescribed above, we expect to attain positive cash flow from operations lesscapital expenditures in 2004 and beyond.

 

Net cash provided by operating activities wasapproximately $10.5 million and net cash used in operating

 

36

----

 

activities was approximately $16.6 million for the sixmonths ended June 30, 2003 and 2002, respectively.  The increase in cash provided by operating activities wasprimarily due to a lower operating loss and the receipt of the $8.1 millionfederal income tax refund.

 

Net cash used ininvesting activities was approximately $7.1 million and $34.6 million for thesix months ended June 30, 2003 and 2002, respectively.  The decrease was due to lower capitalexpenditures for coverage expansion and 3G upgrades.

 

Net cash used infinancing activities for the six months ended June 30, 2003 was approximately$19.2 million, consisting primarily of a $15.0 million repayment under thesenior secured credit facility and $4.2 million in financing costs directlyassociated with the issuance of the Series B Notes and the debt-for-debtexchange offer consummated in February 2003. For the six months ended June 30,2002, net cash provided by financing activities was approximately $29.6 million,consisting primarily of funding under our senior secured credit facility.

 

***Liquidity***

 

At June 30, 2003, we had approximately$60.1 million of cash, cash equivalents and restricted cash and an unusedrevolving line of credit of approximately $50.0 million. The availabilityof the revolving credit line is subject to continued compliance withrestrictive covenants under our senior secured credit facility; however, thereis uncertainty as to our ability to continue to comply with such covenants overthe next twelve months. Through June 30, 2003, we have used proceeds from ourinitial public offering of equity, our senior subordinated discount notes,borrowings from our senior secured credit facility, and to a lesser extentrevenues, to fund capital expenditures, operating losses, working capital andcash interest needs while we built out our PCS network and acquired customers.We believe our financial position will be sufficient to meet the cashrequirements of the business including: capital expenditures, operating losses,cash interest, required amortization of principal under our senior securedcredit facility and working capital needs. Our projections contain significantassumptions including projections for gross new customer additions, ARPU,churn, CPGA, CCPU, bad debt expense and Sprint PCS travel and non-Sprint PCSroaming revenue. Should actual results differ significantly from theseassumptions, our liquidity position could be adversely affected and we could bein a position that would require us to raise additional capital which may notbe available or may not be available on acceptable terms.

 

On February 26, 2003, we consummated threetransactions that have reduced our total debt by approximately$146.7 million and cash interest requirements by approximately$9.7 million in 2005 and approximately $19.3 million annuallybeginning in 2006, providing cumulative savings of approximately$243.0 million. We completed a private placement exchange offer of$48.2 million aggregate principal amount of Operating Company’s New Notesand $9.6 million in cash for $192.7 million aggregate principalamount of Operating Company’s outstanding Existing Notes, and we also completedin a private placement a related new financing of $12.8 million aggregateprincipal amount of Operating Company’s Series B Notes in which wereceived cash proceeds of $9.6 million to fund the cash portion of theexchange. We issued detachable warrants with the Series B Notes topurchase up to approximately 9.6 million shares of UbiquiTel common stock.In connection with the exchange, UbiquiTel and the lenders under our seniorsecured credit facility amended the credit facility to gain the lenders’consent to the exchange offer, which terms included a $15.0 millionpartial prepayment against our outstanding $245.0 million principalbalance of term loans and the reduction of the unused $55.0 millionrevolving line of credit to $50.0 million as of February 26, 2003. Ina series of separate transactions during the three months ended June 30, 2003,Operating Company received cash proceeds of approximately $1.3 million, ofwhich $1.1 million were used by Operating Company to fund open market purchasesof $6.9 million aggregate principal amount ($5.3 million aggregate accretedvalue) of Existing Notes, and we issued approximately $1.7 millionaggregate principal amount of additional Series B Notes. Under theseprivate placement sales, UbiquiTel issued detachable warrants to purchase up toapproximately 1.3 million shares of its common stock at an exercise priceof $0.01 per share. We may from time to time continue to purchase ExistingNotes that remain outstanding in the open market, in privately negotiated

 

37

----

 

transactions or otherwise in accordance with applicable law.

 

***Factors That May Affect Operating Results and Liquidity***

 

In addition to the risk factors referred to in the“Forward-Looking Statements” section of this Item 2, the following risk factorscould materially and adversely affect our liquidity and our future operatingresults and could cause actual events to differ materially from those predictedin forward-looking statements related to our business.

 

We may not be able tosustain our growth or obtain sufficient revenue to achieve and sustain profitability.If the current trend of slower net customer growth worsens, it will lengthenthe amount of time it will take for us to attain a sufficient number ofcustomers to achieve positive cash flow from operations less capitalexpenditures, which in turn will have a negative effect on liquidity andcapital resources. For the six months ended June 30, 2003, approximately $3.4 millionin cash was provided by operating activities and capital expenditures,primarily due to the receipt of the $8.1 million federal income tax refund. Ourbusiness projections reflect continuing growth in our subscriber base and areduction and eventual elimination of operating losses and negative cash flowsas the cash flow generated by the growing subscriber base exceeds costs incurredto acquire new customers. If we acquire more new customers than we project, theupfront costs to acquire those customers (including the handset subsidy,commissions and promotional expenses) may result in greater cash used in thenear term but provide greater cash flows in later periods. In addition, ifthere is a slowdown in new subscriber growth in our markets or the wirelessindustry generally, we may acquire fewer new customers, which would result inlower cash needs in the near term but provide lower cash flows in laterperiods.

 

We re-instated thedeposit requirement for new sub-prime credit customers in lateFebruary 2002 in connection with the Sprint PCS Clear Pay program. There-instatement of deposits had a significant impact on gross customer additionsduring the last five weeks of the three months ended March 31, 2002 andduring the remainder of 2002. While deposits for Clear Pay customers provide uswith protection against bad debt expense for sub-prime customers, it has andmay continue to deter some people with sub-prime credit from becomingsubscribers. As a result, our gross additions may decline. As of June 30, 2003,27% of our approximate 291,800 subscribers had a credit rating placing them inthe sub-prime category, of which 19% of our subscriber base had deposits. Ifthe deposit requirement for new sub-prime credit customers continues to detersome potential customers with sub-prime credit from becoming subscribers, wemay acquire fewer new customers, which would result in lower operating lossesin the near term but provide lower cash flows in later periods.

 

The Sprint PCS reciprocaltravel rate was reduced from $0.10 per minute in 2002 to $0.058 per minute in2003, and there can be no assurance that it will not be reduced further in futureyears. We are paid a fee from Sprint PCS for every minute that a Sprint PCSsubscriber based outside of our markets uses our network; we refer to such feesas travel revenue. Similarly, we pay a fee to Sprint for every minute that ourcustomers use the Sprint PCS network outside of our markets; we refer to suchfees as travel expense. Under our original agreement with Sprint PCS, thereciprocal travel rate exchanged for customers who roam into the other party’sor another PCS affiliate’s network, was established at $0.20 per minute. Thetravel rate was reduced from the original $0.20 per minute of use to $0.15 perminute of use beginning June 1, 2001, and to $0.12 per minute of usebeginning October 1, 2001. The rate was reduced to $0.10 per minute for2002. With a travel-in to travel-out ratio of approximately 1.8 to one duringthe six months ended June 30, 2003 and an expected continued favorable nettravel position in the next few years, the lower travel rate has increased ouroperating losses and could further increase our expected operating losses andreduce our liquidity projections during the next two or three years. We projectthat growth in our customer base will result in a ratio of travel revenue totravel expense approaching one to one in the long-term, minimizing the netearnings and the operating loss impact of any substantial reduction in thetravel rate during those later years.

 

At times, we have beeninvoiced by Sprint for charges under the agreements between us that we believeto be contractually incorrect. We review all charges from Sprint and disputecertain of these charges based upon our

 

38

----

 

interpretation ofour agreements and are attempting to work with Sprint to improve the process.We presently have approximately $7.5 million under dispute with Sprint forcharges that we believe are contractually incorrect and are engaged indiscussions with Sprint to attempt to resolve these disputed items. We havefully reserved the amount under dispute with Sprint. If the disputed item oritems are settled in our favor, our expenses would be reduced.  If we are unable to resolve these disputeditems favorably for us, we may be required to pay the invoiced amounts, whichwill reduce our cash and liquidity.

 

We place substantialreliance on the timeliness, accuracy and sufficiency of revenue and cost dataand information generated by Sprint for the compilation of our financialstatements and other financial disclosures, including substantial portions ofour revenues, expenses and accounts receivable. As part of our agreements, weoutsource several functions to Sprint including billing, customer care,national network operations support, inventory logistics support, long distancetransport and national retailer sales support. The data provided by Sprint isthe primary source for our recognition of service revenue and a significantportion of our selling and marketing and cost of service and operationsexpenses. In certain cases, the data is provided at a level of detail that isnot adequate for us to verify for accuracy back to the originating source. Werely on Sprint to have designed adequate internal controls with respect to theprocesses established to provide this data. Because of this reliance, we aredependent on Sprint to periodically evaluate the effectiveness of thesecontrols and report any significant deficiencies and weaknesses in the designor operation of these controls that could have a material impact on ourfinancial statements and disclosures. Sprint provides an annual evaluation ofthese controls to us by engaging its independent auditors to provide a “Reporton Controls Placed in Operation and Tests of Operating Effectiveness forAffiliates” under guidance provided in Statement of Auditing StandardsNo. 70 (“SAS 70”). There can be no assurance that the SAS 70 procedureswill identify all weaknesses that might be material to us. Although we are notpresently aware of any material errors affecting us, errors that are notreconciled on a timely basis by Sprint could cause us to misstate our revenuesor expenses and could result in out-of-period adjustments that may materiallyadversely affect our financial results and could have a material adverse effecton our business, financial condition, results of operations and cash flows.Additionally, if we or any other PCS affiliate of Sprint find significanterrors in information provided by Sprint which causes a restatement offinancial statements or otherwise affects us, investors and the investmentcommunity may lose confidence in us. In late February 2003,iPCS, Inc., a PCS affiliate of Sprint, filed for bankruptcy protectionunder Chapter 11 of the federal bankruptcy code and concurrently brought anadversarial action against Sprint alleging, among other things, that Sprint hadfailed to remit certain amounts owed to iPCS under its agreements with Sprint.Should Sprint fail to deliver timely, accurate and sufficient information, thiscould lead to a greater degree of uncertainty in our business and financialplanning and may lead to adverse short-term decisions. The failure of Sprint toremit current or future amounts owing to PCS affiliates of Sprint, includingus, could lead to actions on the part of us or other PCS affiliates of Sprintto enforce rights under the Sprint agreements and other remedies availableunder applicable law.  In addition, inJuly 2003, US Unwired Inc., another PCS affiliate of Sprint, filed suit againstSprint alleging violations of the federal racketeering laws, breach offiduciary duty and fraud arising out of Sprint’s dealings with the affiliateand its related entities.

 

Our ability to borrowfunds under our senior secured credit facility’s $50.0 million revolvingline of credit will be restricted unless our cash balance (as defined in thecredit facility) is less than $25.0 million at the time of borrowing andcould be terminated due to our failure to maintain or comply with therestrictive financial and operating covenants contained in the agreementgoverning the senior secured credit facility as described in Note 5 to theConsolidated Financial Statements. We are currently in compliance with allfinancial and operational covenants relating to the senior secured creditfacility; however, there is uncertainty as to our ability to continue to complywith such covenants over the next twelve months. If we are unable to operateour business within the covenants specified in the senior secured creditfacility, our ability to obtain future amendments to the covenants in the seniorsecured credit facility is not guaranteed and our ability to make borrowingsunder the revolving line of credit required to operate our business could berestricted or terminated. Such a restriction or termination would have amaterial adverse effect on our liquidity.

 

39

----

 

Variable interest ratesmay increase substantially. At June 30, 2003, we had $230.0 millionoutstanding under our senior secured credit facility. The rate of interest onthe facility is presently based on a margin above the London interbank offeredrate (LIBOR). Our weighted average borrowing rate on variable rate borrowingswas 5.5% for the six months ended June 30, 2003. Increases in a market interestrate substantially above our estimates may result in unanticipated cashinterest costs.

 

We may not be able toaccess the credit markets for additional capital if the liquidity discussedabove is insufficient for the cash needs of our business. We frequentlyevaluate options for additional financings to supplement our liquidity positionand maintain maximum financial flexibility. However, if the assumptions used inour projections are incorrect, we may be unable to raise additional capital.

 

***Capital Resources***

 

The Existing Notes, theNew Notes and the Series B Notes will require cash payments of interestbeginning on October 15, 2005.

 

As of June 30, 2003, oursenior secured credit facility provided for a $50.0 million revolvingloan, a term loan A of $112.7 million and a term loan B of $117.3 million.The term loans A and B, all of which were outstanding as of June 30, 2003, arerequired to be repaid beginning in June 2004 in fourteen and eighteenconsecutive quarterly installments, respectively. The revolving loan and termloan A will mature in October 2007 and the term loan B will mature inOctober 2008. The commitment fee on unused borrowings is 0.75%, payablequarterly. Our obligations under the credit agreement are secured by all of ourassets. The senior secured credit facility is subject to certain restrictivecovenants including the timing of availability for borrowing under the$50.0 million revolving line of credit, maintaining certain financialratios, attaining defined subscriber growth goals, network covered population goalsand minimum quarterly service revenues, and limiting annual capitalexpenditures.

 

As of June 30, 2003, wewere in compliance with all financial and operational covenants associated withour senior secured credit facility, Existing Notes, New Notes and Series BNotes.

 

***Reconciliation of non-GAAP financial measures***

 

We utilize certainfinancial measures that are not calculated in accordance with accountingprinciples generally accepted in the United States, or GAAP, to assess ourfinancial performance. A non-GAAP financial measure is defined as a numericalmeasure of a company’s financial performance that (a) excludes amounts, oris subject to adjustments that have the effect of excluding amounts, that areincluded in the comparable measure calculated and presented in accordance withGAAP in the statement of income or statement of cash flows; or(b) includes amounts, or is subject to adjustments that have the effect ofincluding amounts, that are excluded from the comparable measure so calculatedand presented. The non-GAAP financial measures discussed in “—Results ofOperations” are average revenue per user (ARPU), cash cost per user (CCPU) andcost per gross addition (CPGA). Descriptions of these non-GAAP financialmeasures are provided where the particular measures are discussed in “—Resultsof Operations—Analysis of the three months ended June 30, 2003 compared to the three months endedJune 30,2002” and “—Analysis of the six months ended June 30, 2003 compared to the sixmonths ended June 30, 2003,” and the following tables reconcile the non-GAAPfinancial measures with our consolidated financial statements presented inaccordance with GAAP.

 

40

----

 
|                                 |   | **Three  Months Ended June 30,** |       | **Six Months  Ended June 30,** |   |
|--------------------------------------|--------|----------------------------------|------------|--------------------------------|--------|
|                                 |   | **2003**                         |       | **2002**                       |   | **2003** |   | **2002** |   |
| **Average  revenue per user (ARPU)** |   |                             |       |                           |   |   |   |   |   |
| Service revenue                      |   | $                                | 63,428,000 |                           | $      | 51,806,000 |   | $ | 119,672,000 |   | $ | 95,356,000 |   |
| Less: Reseller  revenue              |   | (11,000                          | )          | —                         |   | (11,000 | ) | — |   |
| Less: Travel  revenue                |   | (10,814,000                      | )          | (14,164,000                    | )      | (21,113,000 | ) | (23,669,000 | ) |
| Less: Roaming  revenue               |   | (3,081,000                       | )          | (1,165,000                     | )      | (5,955,000 | ) | (1,715,000 | ) |
| Subscriber  revenue                  |   | $                                | 49,522,000 |                           | $      | 36,477,000 |   | $ | 92,593,000 |   | $ | 69,972,000 |   |
|                                 |   |                             |       |                           |   |   |   |   |   |
| Average  subscribers                 |   | 282,638                          |       | 208,104                        |   | 273,783 |   | 200,376 |   |
|                                 |   |                             |       |                           |   |   |   |   |   |
| ARPU                                 |   | $                                | 58         |                           | $      | 58 |   | $ | 56 |   | $ | 58 |   |

 

We believe ARPU, whichcalculates the average monthly service revenue per customer, excluding roamingrevenue, is a useful measure to assist in evaluating our past and forecastingour future subscriber revenue. In addition, it provides a gauge to compare ourservice revenue to that of other wireless communications providers, althoughother wireless communications providers may include or exclude certain itemsfrom their calculations which may make the comparison less meaningful.

 
|                                      |   | **Three  Months Ended June 30,** |       | **Six Months  Ended June 30,** |   |
|-------------------------------------------|--------|----------------------------------|------------|--------------------------------|--------|
|                                      |   | **2003**                         |       | **2002**                       |   | **2003** |   | **2002** |   |
| **Cash cost  per user (CCPU)**            |   |                             |       |                           |   |   |   |   |   |
| Cost of service  and operations           |   | $                                | 31,557,000 |                           | $      | 36,405,000 |   | $ | 60,958,000 |   | $ | 66,042,000 |   |
| Add: General and  administrative expenses |   | 7,748,000                        |       | 6,498,000                      |   | 15,222,000 |   | 12,566,000 |   |
| Total cash costs                          |   | $                                | 39,305,000 |                           | $      | 42,903,000 |   | $ | 76,180,000 |   | $ | 78,608,000 |   |
|                                      |   |                             |       |                           |   |   |   |   |   |
| Average  subscribers                      |   | 282,638                          |       | 208,104                        |   | 273,783 |   | 200,376 |   |
|                                      |   |                             |       |                           |   |   |   |   |   |
| CCPU                                      |   | $                                | 46         |                           | $      | 69 |   | $ | 46 |   | $ | 65 |   |
|                                           |        |                                  |            |                                |        |  |  |  |  |  |  |  |  |  |

 

We believe CCPU, whichmeasures the average monthly cash costs to provide digital wireless mobilitycommunications services per customer, is a useful measure used to compare ourcash cost of operations per customer to that of other wireless communicationsproviders, although other wireless communications providers may include orexclude certain items from their calculations which may make the comparisonless meaningful.

 
|                                |   | **Three  Months Ended June 30,** |       | **Six Months  Ended June 30,** |   |
|-------------------------------------|--------|----------------------------------|------------|--------------------------------|--------|
|                                |   | **2003**                         |       | **2002**                       |   | **2003** |   | **2002** |   |
| **Cost per  gross addition (CPGA)** |   |                             |       |                           |   |   |   |   |   |
| Selling and  marketing              |   | $                                | 12,079,000 |                           | $      | 12,242,000 |   | $ | 24,160,000 |   | $ | 24,688,000 |   |
| Add: Cost of  products sold         |   | 9,504,000                        |       | 8,223,000                      |   | 18,805,000 |   | 17,842,000 |   |
| Less: Equipment  revenue            |   | (2,618,000                       | )          | (1,798,000                     | )      | (4,857,000 | ) | (4,333,000 | ) |
| CPGA costs                          |   | $                                | 18,965,000 |                           | $      | 18,667,000 |   | $ | 38,108,000 |   | $ | 38,197,000 |   |
|                                |   |                             |       |                           |   |   |   |   |   |
| Gross additions                     |   | 42,000                           |       | 41,000                         |   | 86,300 |   | 88,300 |   |
|                                |   |                             |       |                           |   |   |   |   |   |
| CPGA                                |   | $                                | 452        |                           | $      | 456 |   | $ | 442 |   | $ | 433 |   |
|                                     |        |                                  |            |                                |        |  |  |  |  |  |  |  |  |  |

 

Webelieve CPGA, which measures the average cost to acquire new customers duringthe period, is a useful measure used to compare our average cost to acquire anew subscriber to that of other wireless communication providers, althoughother wireless communications providers may include or exclude certain itemsfrom their calculations which may make the comparison less meaningful.

 

41

----

 

***Contractual Obligations***

 

We are obligated to make future payments under variouscontracts we have entered into, including amounts pursuant to the seniorsecured credit facility; noncancelable operating lease agreements for officespace, retail stores, land for radio communications sites, leased space onradio communications sites and office equipment; capital leases; the buildingmortgage and other long-term liabilities; the Existing Notes; the New Notes;and the Series B Notes.  The followingtable lists our expected future minimum contractual cash obligations for thenext five years and in the aggregate as of June 30, 2003 (dollars inthousands):

 

|                                               |   |      |    | **Payments  due by period ending June 30:** |   |
|----------------------------------------------------|--------|-----------|---------|---------------------------------------------|--------|
| **Contractual obligation**                         |   | **Total** |    | **Less than  1 year**                       |   | **1-3 years** |   | **4-5 years** |   | **After 5  years** |   |
| Senior secured  credit facility(1)                 |   | $         | 230,000 |                                        | $      | — |   | $ | 25,816 |   | $ | 107,959 |   | $ | 96,225 |   |
| Operating  leases(2)                               |   | 66,400    |    | 16,193                                      |   | 26,239 |   | 11,929 |   | 12,039 |   |
| Capital leases                                     |   | 282       |    | 277                                         |   | 5 |   | — |   | — |   |
| Building  mortgage and other long-term liabilities |   | 3,551     |    | 200                                         |   | 444 |   | 511 |   | 2,396 |   |
| Senior  subordinated discount notes(1)             |   | 100,380   |    | —                                      |   | — |   | — |   | 100,380 |   |
| Senior discount  notes(1)                          |   | 48,180    |    | —                                      |   | — |   | — |   | 48,180 |   |
| Series B senior  discount notes(1)                 |   | 14,515    |    | —                                      |   | — |   | — |   | 14,515 |   |
|                                               |   |      |    |                                        |   |   |   |   |   |   |   |
|                                               |   | $         | 463,308 |                                        | $      | 16,670 |   | $ | 52,504 |   | $ | 120,399 |   | $ | 273,735 |   |

----

| (1) |   | Total repayments, excluding interest payments, are  based on borrowings outstanding as of June 30, 2003, and do not include  projected borrowings under the senior secured credit facility. |
|-----|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Does not include payments due under renewals to the  original lease term.                                                                                                                   |

 

There are provisions in each of the agreementsgoverning the senior secured credit facility, the senior subordinated discountnotes, the senior discount notes and the Series B senior discount notes thatprovide for an acceleration of repayment upon an event of default, as definedin the respective agreements.

 

***Inflation***

 

We believe thatinflation has not had, and will not have, a material adverse effect on ourresults of operations.

 

***Seasonality***

 

Our business isseasonal because the wireless industry is heavily dependent on fourth quarterresults.  Among other things, theindustry relies on significantly higher customer additions and handset sales inthe fourth quarter as compared to the other three fiscal quarters.  The factors contributing to this trendinclude the increasing use of retail distribution, which is dependent onyear-end holiday shopping, the timing of new product and service offerings,competitive pricing pressures and aggressive marketing and promotions duringthe holiday season.  The increased levelof activity requires a greater use of our available financial resources duringthis period.

 

42

----

 

**Item 3.Quantitative and Qualitative Disclosures About Market Risk**

 

In the normal course of business, our operations areexposed to interest rate risk on our senior secured credit facility and anyfuture financing requirements. Our fixed rate debt consisted primarily of theaccreted carrying value of the Existing Notes ($78.8 million at June 30, 2003)and the Series B Notes ($11.4 million at June 30, 2003).  Our New Notes also have a fixed interestrate, but because we have followed the provisions of SFAS No. 15 and EITF02-04, we will not recognize any interest expense with respect to the New Notesin future periods.  These provisionsrequire that the carrying value be recorded at the total future cash payments(principal and interest).  Therefore,these New Notes are carried on our balance sheet as long-term liabilitiesvalued at $81.9 million (see Note 6 to the Consolidated Financial Statements).Our variable rate debt consisted of borrowings made under the senior securedcredit facility ($230.0 million at June 30, 2003).

 

Our primary interest rate risk exposures relates to(i) the interest rate on long-term borrowings; (ii) our ability to refinancethe Existing Notes, the New Notes and the Series B Notes at maturity at marketrates, if needed; and (iii) the impact of interest rate movements on ourability to meet interest expense requirements and financial covenants under ourdebt instruments.

 

We may decide, from time to time, to manage theinterest rate risk on our outstanding long-term debt through the use of fixedand variable rate debt and interest rate swaps. While we cannot predict ourability to refinance existing debt or the impact interest rate movements willhave on our existing debt, we continue to evaluate our interest rate risk on anongoing basis.

 

The following table presents the estimated futurebalances of outstanding long-term debt projected at the end of each period andfuture required annual principal payments for each period then ended based onour projected level of long-term indebtedness as of June 30, 2003 (dollars inthousands):

 

|                                |   | **Years  ending December 31,** |   |
|-------------------------------------|--------|--------------------------------|--------|
|                                |   | **2003**                       |   | **2004** |   | **2005** |   | **2006** |   | **2007** |   |
|                                |   |                           |   |   |   |   |   |   |   |   |   |
| Senior  subordinated discount notes |   | 84,330                         |   | 96,549 |   | 100,380 |   | 100,380 |   | 100,380 |   |
| Fixed interest  rate                |   | 14.0                           | %      | 14.0 | % | 14.0 | % | 14.0 | % | 14.0 | % |
| Principal  repayments               |   | —                         |   | — |   | — |   | — |   | — |   |
|                                |   |                           |   |   |   |   |   |   |   |   |   |
| Senior secured  credit facility     |   | 230,000                        |   | 222,079 |   | 207,997 |   | 157,538 |   | 100,625 |   |
| Variable  interest rate(1)          |   | 5.7                            | %      | 6.3 | % | 7.0 | % | 7.2 | % | 7.2 | % |
| Principal  payments                 |   | 15,000                         |   | 7,921 |   | 14,082 |   | 50,459 |   | 56,913 |   |
|                                |   |                           |   |   |   |   |   |   |   |   |   |
| Senior discount  notes(2)           |   | 48,180                         |   | 48,180 |   | 48,180 |   | 48,180 |   | 48,180 |   |
| Fixed interest  rate                |   | 14.0                           | %      | 14.0 | % | 14.0 | % | 14.0 | % | 14.0 | % |
| Principal  repayments               |   | —                         |   | — |   | — |   | — |   | — |   |
|                                |   |                           |   |   |   |   |   |   |   |   |   |
| Series B senior  discount notes     |   | 12,197                         |   | 13,961 |   | 14,515 |   | 14,515 |   | 14,515 |   |
| Fixed interest  rate                |   | 14.0                           | %      | 14.0 | % | 14.0 | % | 14.0 | % | 14.0 | % |
| Principal  repayments               |   | —                         |   | — |   | — |   | — |   | — |   |

----

| **(1)** |   | **The interest rate on the senior  secured credit facility equals the London interbank offered rate (LIBOR) plus  a weighted-average interest rate of 3.8%. LIBOR is assumed to equal 1.9% for  2003, 2.5% for 2004, 3.2% for 2005, 3.4% for 2006 and 3.4% for 2007. A 1.0%  increase (decrease) in the variable interest rate would result in a $2.3  million increase (decrease) in the interest expense for the year ended  December 31, 2003.** |
|---------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (2)     |   | The senior discount notes were issued at a discount  in February 2003, but we have followed the provisions of SFAS No. 15 and EITF  02-04.  These provisions require that  the carrying value be                                                                                                                                                                                                                                               |

 

43

----

 
|   |   | recorded at the total future cash payments  (principal and interest).  Therefore,  the notes are carried on our balance sheet as long-term liabilities valued at  $81.9 million beginning February 26, 2003, which is the date of the  debt-for-debt exchange offer described in Note 6 to the Consolidated  Financial Statements.  As a result, no  interest expense related to these notes will be recognized in future periods. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**Item 4. Controls and Procedures**

 

## **Evaluation of Disclosure Controls and Procedures**

 

Our Chief Executive Officerand Chief Financial Officer have evaluated the effectiveness of our disclosurecontrols and procedures (as defined in the Securities Exchange Act of 1934Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by thisQuarterly Report on Form 10-Q.  Based onthis evaluation, they have concluded that, as of the end of the period coveredby this report, our disclosure controls and procedures are reasonably designedto alert them on a timely basis to material information relating to us requiredto be included in our reports filed or submitted under the Exchange Act.

 

We place reliance on Sprintto adequately design its internal controls with respect to the processesestablished to provide financial information and other information to us andthe other PCS affiliates of Sprint.  Toaddress this issue, Sprint engages its independent auditors to perform aperiodic evaluation of these controls and to provide a “Report on ControlsPlaced in Operation and Tests of Operating Effectiveness for Affiliates” underguidance provided in Statement of Auditing Standards No. 70. This report isprovided annually to us.

 

## **Changes in Internal Controls**

 

There were no significantchanges to our internal controls or, to our knowledge, in other factors thatcould significantly affect our internal controls, subsequent to the date of ourChief Executive Officer’s and Chief Financial Officer’s last evaluation of ourinternal controls, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

44

----

 

# **PART II.  OTHER INFORMATION**

 

# **Item 1. LegalProceedings**

 

Neither UbiquiTel norOperating Company is a party to any pending legal proceedings that eitherUbiquiTel or Operating Company believes would, if adversely determined,individually or in the aggregate, have a material adverse effect on ourfinancial condition or results of operations.

 

**Item 2. Changes in Securities and Useof Proceeds**

 

None.

 

**Item 3. Defaults Upon SeniorSecurities**

 

None.

 

**Item 4. Submission of Matters to aVote of Security Holders**

 

UbiquiTel’s 2003 AnnualMeeting of Shareholders (the “Annual Meeting”) was held on May 16, 2003 inConshohocken, Pennsylvania to vote on the following matters:

 
| • |   | the election  of three Class III directors, each for a three-year term ending in 2006; and                                                                                                                                                                                                                                                                                                                            |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                  |
| • |   | approval of the issuance of shares of  UbiquiTel’s common stock that are issuable upon the exercise of warrants at  an exercise price of $0.01 per share that were and may be acquired by three  of UbiquiTel’s directors or their affiliates in a series of related private  placements; and                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                  |
| • |   | to grant UbiquiTel’s board of directors the sole  discretion until the first anniversary of the Annual Meeting to amend  UbiquiTel’s certificate of incorporation to effect a reverse stock split of  all of the outstanding shares of UbiquiTel’s common stock, at a ratio ranging  from one-to-two up to one-to-ten to be determined at the sole discretion of  UbiquiTel’s board of directors. |

 

Proxies for the Annual Meeting were solicited pursuantto Regulation 14A under the Securities Exchange Act of 1934, as amended, andthere was no solicitation in opposition to UbiquiTel’s solicitation.

 

The holders of record of an aggregate of 75,363,378shares of common stock, out of 81,590,534 shares outstanding on the record datefor the Annual Meeting, were present either in person or by proxy, andconstituted a quorum for the transaction of business at the Annual Meeting.

 

All nominees for director were elected and theproposals submitted for shareholder approval were approved, with voting asdetailed below:

 

45

----

 

1.  The election of Donald A. Harris, Robert A. Berlacher and Joseph N.Walter as Class III directors, each for a three-year term ending in 2006:

 

| **Director  Nominee** |   | **Votes For** |   | **Votes  Against** |
|-----------------------|--------|---------------|--------|--------------------|
| Donald A. Harris      |   | 75,017,261    |   | 346,117            |
| Robert A. Berlacher   |   | 75,189,675    |   | 173,703            |
| Joseph N. Walter      |   | 75,284,675    |   | 78,703             |

 

2. Approval of the issuance of shares of UbiquiTel’s common stock that areissuable upon the exercise of the warrants:

 

| **Votes For** |   | **Votes  Against** |   | **Votes  Abstained** |
|---------------|--------|--------------------|--------|----------------------|
| 44,898,658    |   | 30,439,496         |   | 25,224               |

 

3. Approval of granting UbiquiTel’s board of directorsauthorization to effect a reverse stock split:

 

| **Votes For** |   | **Votes  Against** |   | **Votes  Abstained** |
|---------------|--------|--------------------|--------|----------------------|
| 75,085,623    |   | 262,205            |   | 15,550               |

 

**Item 5. Other Information**

 

None.

 

**Item 6. Exhibits and Reports on Form****8-K**

 

**(a)****                                 ****Reports on Form 8-K**

 

One report on Form 8-Kwas filed during the quarter ended June 30, 2003: 
| **Date**       |   | **Item Reported On**                                                                                                                                                            |
|----------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| April 30, 2003 |   | Item 12. Results of Operations and Financial  Condition. On April 30, 2003, UbiquiTel Inc. announced its operating and  financial results for the quarter ended March 31, 2003. |

 

**(b)****                                 ****Exhibits:**

** **
| **Exhibit No.** |   | **Description**                                                                                                                                    |
|-----------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1            |   | Asset Purchase Agreement dated as of June 12, 2003  between VIA Wireless LLC and GoldenState Towers, LLC.                                          |
|            |   |                                                                                                                                               |
| 10.2            |   | Escrow Agreement dated as of June 12, 2003 among VIA  Wireless LLC, GoldenState Towers, LLC and Commonwealth Land Title Company, as  Escrow Agent. |

 

46

----

 
| 31.1   |   | Certification Pursuant to Item 601(b)(31) of  Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002.                                                 |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                 |
| 31.2   |   | Certification Pursuant to Item 601(b)(31) of  Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002.                                                 |
|   |   |                                                                                                                                                                                 |
| 32.1   |   | Certification Pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 9.06 of the Sarbanes-Oxley Act of 2002 (furnished  pursuant to Item 601(b)(32) of Regulation S-K). |
|   |   |                                                                                                                                                                                 |
| 32.2   |   | Certification Pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 9.06 of the Sarbanes-Oxley Act of 2002 (furnished  pursuant to Item 601(b)(32) of Regulation S-K). |

 

47

----

**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|   | CO-REGISTRANTS:             |
|--------|-----------------------------|
|   |                        |
|   | UBIQUITEL INC.              |
|   | UBIQUITEL OPERATING COMPANY |
|   |                        |
|   |                        |
|   | By:                         | /s/ DONALD A. HARRIS |
|   |                        | Donald A. Harris |
|   |                        | Chairman of the Board, President |
|   |                        | and Chief Executive Officer |
|   |                        | (Principal Executive Officer) |
|   |                        |
|   | By:                         | /s/ JAMES J. VOLK |
|   |                        | James J. Volk |
|   |                        | Chief Financial Officer |
|   |                        | (Principal Financial  and Accounting Officer) |

 

 

August 13, 2003

 

 

48

----