** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,DC 20549**

** **

**FORM 10-Q**

 

**QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended June 30, 2004**

 

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**

 

Commission File 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          Noo

 

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

Yes ý          Noo

 

There were 92,799,294 shares of common stock, $0.0005 par value, of UbiquiTel Inc. outstanding at August 6,2004.

 

There were 1,000 shares of common stock, $0.01 par value, of UbiquiTelOperating Company outstanding at August6, 2004, all of which were owned by UbiquiTel Inc.

 

 

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**UbiquiTel Inc. and Subsidiaries**

 

**Form 10-Q for the Quarter Ended June 30, 2004**

 

**INDEX**

 
| PART I.    | FINANCIAL INFORMATION                                                                             |   |
|------------|---------------------------------------------------------------------------------------------------|--------|
|       |                                                                                              |   |
| Item 1.    | Financial Statements                                                                              |   |
|       | Consolidated Balance Sheets  as of June 30, 2004 and December 31, 2003                            |   |
|       | Consolidated  Statements of Operations for the three and six months ended June 30, 2004 and  2003 |   |
|       | Consolidated  Statements of Cash Flows for the six months ended June 30, 2004 and 2003            |   |
|       | 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, Use of Proceeds  and Issuer Purchases of Equity Securities                 |   |
|       |                                                                                              |   |
| 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

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**ExplanatoryNote:**

 

The Consolidated Financial Statements included herein are those ofUbiquiTel Inc. (“UbiquiTel”).  TheCo-Registrants are UbiquiTel and UbiquiTel Operating Company (“OperatingCompany”), which is a wholly-owned subsidiary of UbiquiTel and the issuer of9.875% senior notes due 2011, 14% senior subordinated discount notes due 2010and 14% senior discount notes due 2010 (collectively, the “Notes”).  UbiquiTel has provided a full,unconditional, joint and several guaranty of Operating Company’s obligationsunder the Notes.  UbiquiTel has nooperations separate from its investment in Operating Company.  Pursuant to Rule 12h-5 of the SecuritiesExchange Act, no separate financial statements and other disclosures concerningOperating Company other than narrative disclosures set forth in Notes 5 and 6to the Consolidated Financial Statements have been presented herein. As usedherein and except as the context otherwise may require, the “Company,” “we,”“us,” “our” or “UbiquiTel” means, collectively UbiquiTel, Operating Company andtheir consolidated subsidiary, UbiquiTel Leasing Company.

 

3

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**PART I.FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements**

 

# **UbiquiTel Inc. andSubsidiaries**

# **Consolidated Balance Sheets**

# **(Unaudited)**

# **(In Thousands, Except PerShare Data)**

 
|                                                                                                                                                                          |   | **June 30,  2004** |    | **December  31, 2003** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|---------|------------------------|--------|
| **ASSETS**                                                                                                                                                                    |   |               |    |                   |   |
| CURRENT ASSETS:                                                                                                                                                               |   |               |    |                   |   |
| Cash and cash  equivalents                                                                                                                                                    |   | $                  | 57,137  |                   | $      | 57,225 |   |
| Restricted cash                                                                                                                                                               |   | 1,135              |    | 3,562                  |   |
| Accounts  receivable, net of allowance for doubtful accounts of $2,930 at June 30, 2004  and $2,722 at December 31, 2003                                                      |   | 22,166             |    | 19,614                 |   |
| Inventory                                                                                                                                                                     |   | 3,418              |    | 3,408                  |   |
| Prepaid expenses  and other assets                                                                                                                                            |   | 17,464             |    | 15,848                 |   |
| Income tax  receivable                                                                                                                                                        |   | 76                 |    | 217                    |   |
| Total current  assets                                                                                                                                                         |   | 101,396            |    | 99,874                 |   |
| PROPERTY AND  EQUIPMENT, NET                                                                                                                                                  |   | 249,381            |    | 259,556                |   |
| CONSTRUCTION IN  PROGRESS                                                                                                                                                     |   | 6,339              |    | 5,045                  |   |
| DEFERRED  FINANCING COSTS, NET                                                                                                                                                |   | 8,670              |    | 8,918                  |   |
| GOODWILL                                                                                                                                                                      |   | 38,138             |    | 38,138                 |   |
| OTHER INTANGIBLE  ASSETS, NET                                                                                                                                                 |   | 66,717             |    | 68,869                 |   |
| OTHER LONG-TERM  ASSETS                                                                                                                                                       |   | 2,791              |    | 3,004                  |   |
| Total assets                                                                                                                                                                  |   | $                  | 473,432 |                   | $      | 483,404 |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                |   |               |    |                   |   |
| CURRENT  LIABILITIES:                                                                                                                                                         |   |               |    |                   |   |
| Current portion  of long-term debt                                                                                                                                            |   | $                  | 219     |                   | $      | 8,209 |   |
| Accounts payable                                                                                                                                                              |   | 4,163              |    | 3,633                  |   |
| Book cash  overdraft                                                                                                                                                          |   | —             |    | 5,671                  |   |
| Accrued expenses                                                                                                                                                              |   | 17,015             |    | 16,591                 |   |
| Accrued  compensation and benefits                                                                                                                                            |   | 2,578              |    | 3,978                  |   |
| Interest payable                                                                                                                                                              |   | 9,406              |    | 1,563                  |   |
| Taxes payable                                                                                                                                                                 |   | 4,277              |    | 4,049                  |   |
| Deferred revenue                                                                                                                                                              |   | 11,967             |    | 11,347                 |   |
| Other                                                                                                                                                                         |   | 1,930              |    | 4,110                  |   |
| Total current  liabilities                                                                                                                                                    |   | 51,555             |    | 59,151                 |   |
| LONG-TERM DEBT  AND CAPITAL LEASE OBLIGATIONS, EXCLUDING CURRENT MATURITIES                                                                                                   |   | 409,248            |    | 396,664                |   |
| OTHER LONG-TERM  LIABILITIES                                                                                                                                                  |   | 9,393              |    | 9,369                  |   |
| Total long-term  liabilities                                                                                                                                                  |   | 418,641            |    | 406,033                |   |
| Total  liabilities                                                                                                                                                            |   | 470,196            |    | 465,184                |   |
| COMMITMENTS AND  CONTINGENCIES                                                                                                                                                |   |               |    |                   |   |
| STOCKHOLDERS’  EQUITY:                                                                                                                                                   |   |               |    |                   |   |
| Preferred stock,  par value $0.001 per share; 10,000 shares authorized; 0 shares issued and  outstanding at June 30, 2004 and December 31, 2003                               |   | —             |    | —                 |   |
| Common stock,  par value $0.0005 per share; 240,000 shares authorized; 92,799 and 92,579  shares issued and outstanding at June 30, 2004 and December 31, 2003,  respectively |   | 46                 |    | 46                     |   |
| Additional  paid-in capital                                                                                                                                                   |   | 300,366            |    | 299,955                |   |
| Accumulated  deficit                                                                                                                                                          |   | (297,176           | )       | (281,781               | )      |
| Total  stockholders’ equity                                                                                                                                              |   | 3,236              |    | 18,220                 |   |
| Total  liabilities and stockholders’ equity                                                                                                                              |   | $                  | 473,432 |                   | $      | 483,404 |   |

 

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

 

4

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**UbiquiTelInc. and Subsidiaries**

# **Consolidated Statements of Operations**

**(Unaudited)**

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

 
|                                                                                  |   | **Three  Months Ended June 30,** |   | **Six Months  Ended June 30,** |   |
|---------------------------------------------------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                                                                                  |   | **2004**                         |   | **2003**                       |   | **2004** |   | **2003** |   |
| REVENUES:                                                                             |   |                             |   |                           |   |   |   |   |   |
| Service revenue                                                                       |   | $                                | 85,489 |                           | $      | 63,428 |   | $ | 162,927 |   | $ | 119,672 |   |
| Equipment  revenue                                                                    |   | 3,192                            |   | 2,618                          |   | 7,064 |   | 4,857 |   |
| Total revenues                                                                        |   | 88,681                           |   | 66,046                         |   | 169,991 |   | 124,529 |   |
| COSTS AND  EXPENSES:                                                                  |   |                             |   |                           |   |   |   |   |   |
| Cost of service  and operations (exclusive of depreciation as shown separately below) |   | 36,885                           |   | 31,557                         |   | 71,133 |   | 60,958 |   |
| Cost of products  sold                                                                |   | 8,919                            |   | 9,504                          |   | 18,134 |   | 18,805 |   |
| Selling and  marketing                                                                |   | 15,852                           |   | 12,079                         |   | 32,829 |   | 24,160 |   |
| General and  administrative expenses excluding non-cash compensation charges          |   | 9,621                            |   | 7,748                          |   | 18,861 |   | 15,222 |   |
| Non-cash  compensation for general and administrative matters                         |   | 226                              |   | 16                             |   | 226 |   | 110 |   |
| Depreciation,  amortization and accretion                                             |   | 13,705                           |   | 10,610                         |   | 26,635 |   | 23,658 |   |
| Total costs and  expenses                                                             |   | 85,208                           |   | 71,514                         |   | 167,818 |   | 142,913 |   |
| OPERATING INCOME  (LOSS)                                                              |   | 3,473                            |   | (5,468                         | )      | 2,173 |   | (18,384 | ) |
| INTEREST INCOME                                                                       |   | 140                              |   | 144                            |   | 275 |   | 337 |   |
| INTEREST EXPENSE                                                                      |   | (10,370                          | )      | (7,031                         | )      | (18,800 | ) | (17,158 | ) |
| GAIN ON DEBT  RETIREMENTS                                                             |   | —                           |   | 3,854                          |   | 1,109 |   | 42,872 |   |
| INCOME (LOSS)  BEFORE INCOME TAXES                                                    |   | (6,757                           | )      | (8,501                         | )      | (15,243 | ) | 7,667 |   |
| INCOME TAX  EXPENSE                                                                   |   | (80                              | )      | (402                           | )      | (152 | ) | (369 | ) |
| NET INCOME  (LOSS)                                                                    |   | $                                | (6,837 | )                              | $      | (8,903 | ) | $ | (15,395 | ) | $ | 7,298 |   |
|                                                                                  |   |                             |   |                           |   |   |   |   |   |
| NET INCOME  (LOSS) PER SHARE:                                                         |   |                             |   |                           |   |   |   |   |   |
| BASIC                                                                                 |   | $                                | (0.07  | )                              | $      | (0.11 | ) | $ | (0.17 | ) | $ | 0.09 |   |
| DILUTED                                                                               |   | $                                | (0.07  | )                              | $      | (0.11 | ) | $ | (0.17 | ) | $ | 0.08 |   |
|                                                                                  |   |                             |   |                           |   |   |   |   |   |
| WEIGHTED AVERAGE  SHARES OUTSTANDING:                                                 |   |                             |   |                           |   |   |   |   |   |
| BASIC                                                                                 |   | 92,717                           |   | 82,527                         |   | 92,648 |   | 82,037 |   |
| DILUTED                                                                               |   | 92,717                           |   | 82,527                         |   | 92,648 |   | 93,383 |   |

 

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

 

5

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# **UbiquiTel Inc. andSubsidiaries**

# **Consolidated Statements of Cash Flows**

**(Unaudited)**

**(InThousands)**

 
|                                                                                      |   | **Six Months Ended  June 30, 2004** |    | **Six Months  Ended********June 30, 2003** |   |
|-------------------------------------------------------------------------------------------|--------|-------------------------------------|---------|--------------------------------------------|--------|
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                    |   |                                |    |                                       |   |
| Net income  (loss)                                                                        |   | $                                   | (15,395 | )                                          | $      | 7,298 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities: |   |                                |    |                                       |   |
| Amortization of  deferred financing costs                                                 |   | 742                                 |    | 937                                        |   |
| Amortization of  debt discount                                                            |   | 556                                 |    | 675                                        |   |
| Amortization of  intangible assets                                                        |   | 2,152                               |    | 4,906                                      |   |
| Depreciation and  accretion                                                               |   | 24,483                              |    | 18,752                                     |   |
| Interest accrued  on discount notes                                                       |   | 6,184                               |    | 8,965                                      |   |
| Non-cash  compensation from stock options granted to employees                            |   | 226                                 |    | 110                                        |   |
| Deferred income  taxes                                                                    |   | 152                                 |    | —                                     |   |
| Loss on sale of  equipment                                                                |   | 81                                  |    | 31                                         |   |
| Gain on debt  retirements                                                                 |   | (1,109                              | )       | (42,872                                    | )      |
| Interest earned  on restricted cash balances                                              |   | (10                                 | )       | (11                                        | )      |
| Changes in  operating assets and liabilities exclusive of capital expenditures:           |   |                                |    |                                       |   |
| Accounts  receivable                                                                      |   | (2,552                              | )       | 4,412                                      |   |
| Inventory                                                                                 |   | (10                                 | )       | 526                                        |   |
| Prepaid expenses  and other assets                                                        |   | (1,410                              | )       | 1,089                                      |   |
| Income tax  receivable                                                                    |   | 141                                 |    | 8,079                                      |   |
| Accounts payable  and accrued expenses                                                    |   | 9,094                               |    | (2,437                                     | )      |
| Net cash provided  by operating activities                                                |   | 23,325                              |    | 10,460                                     |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                    |   |                                |    |                                       |   |
| Capital  expenditures                                                                     |   | (16,405                             | )       | (7,110                                     | )      |
| Net cash used in  investing activities                                                    |   | (16,405                             | )       | (7,110                                     | )      |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                    |   |                                |    |                                       |   |
| Repayments under  senior secured credit facility                                          |   | (230,000                            | )       | (15,000                                    | )      |
| Proceeds from  issuance of 9.875% senior notes                                            |   | 265,302                             |    | —                                     |   |
| Proceeds from  issuance of 14% Series B senior discount notes                             |   | —                              |    | 10,914                                     |   |
| Cash payments  for amount of 14% senior subordinated discount notes exchanged             |   | —                              |    | (10,701                                    | )      |
| Repayment of 14%  Series B senior discount notes                                          |   | (12,478                             | )       | —                                     |   |
| Purchase of 14%  senior discount notes                                                    |   | (15,872                             | )       | —                                     |   |
| Financing costs                                                                           |   | (8,296                              | )       | (4,173                                     | )      |
| Change in book  cash overdraft                                                            |   | (5,671                              | )       | —                                     |   |
| Proceeds from  issuance of common stock                                                   |   | 72                                  |    | 32                                         |   |
| Proceeds from  exercise of stock options and warrants                                     |   | 113                                 |    | 127                                        |   |
| Repayment of  capital lease obligations and other long-term liabilities                   |   | (178                                | )       | (384                                       | )      |
| Net cash used in  financing activities                                                    |   | (7,008                              | )       | (19,185                                    | )      |
| NET DECREASE IN  CASH AND CASH EQUIVALENTS                                                |   | (88                                 | )       | (15,835                                    | )      |
| CASH AND CASH  EQUIVALENTS, beginning of period                                           |   | 57,225                              |    | 73,481                                     |   |
| CASH AND CASH  EQUIVALENTS, end of period                                                 |   | $                                   | 57,137  |                                       | $      | 57,646 |   |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:                                        |   |                                |    |                                       |   |
| Cash paid for  interest                                                                   |   | $                                   | 3,573   |                                       | $      | 6,581 |   |
| Cash paid for  taxes                                                                      |   | 25                                  |    | 279                                        |   |

 

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

 

6

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**UbiquiTelInc. and Subsidiaries**

# **Notes to Consolidated Financial Statements**

**(Unaudited)**

 

**1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

**Basis ofPresentation of Unaudited Interim Financial Information**

 

The consolidated financial information as of June 30, 2004 and for thethree and six months ended June 30, 2004 and 2003 is unaudited, but has beenprepared in accordance with generally accepted accounting principles forinterim financial information and Article 10 of Regulation S-X.  Accordingly, they do not include all the informationand footnotes required by generally accepted accounting principles.  In the opinion of management, the interimdata includes all adjustments, consisting only of normal recurring adjustmentsthat are considered necessary for a fair presentation of the Company’s interimresults.  Operating results for thethree and six months ended June 30, 2004 are not necessarily indicative ofresults that may be expected for the entire year.  This financial information should be read in conjunction with theaudited consolidated financial statements and notes thereto for the year endedDecember 31, 2003 of UbiquiTel which are included in its and OperatingCompany’s Joint Annual Report on Form 10-K for the year ended December 31,2003.

 

**Principlesof Consolidation and Use of Estimates**

 

The accompanying financial statements include the accounts of UbiquiTelInc. and its subsidiaries (see Note 2). All significant intercompany balances and transactions have beeneliminated.

 

The preparation of financial statements in conformity with generallyaccepted accounting principles requires management to make estimates andassumptions.  These estimates andassumptions affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements.  These assumptions alsoaffect the reported amounts of revenues and expenses during the reportingperiods.  Actual results could differfrom those estimates and assumptions.

 

# **Stock-BasedCompensation**

# ** **

At June 30, 2004,UbiquiTel had two stock-based employee compensation plans, an employee stockpurchase plan and an equity incentive plan. The employee stock purchase plan was suspended effective with theoffering period beginning January 1, 2003 and resumed effective with theoffering period beginning January 1, 2004. Under the terms of the employeestock purchase plan, during a calendar year there are four quarterly offeringperiods, beginning January 1, April 1, July 1 and October 1, during whicheligible employees can participate. The stock purchase price is the lower of85% of fair market value of the common stock on the first business day of theoffering period or 85% of the fair market value of the common stock on the lastbusiness day of the offering period. The Company accounts for these plans inaccordance with Accounting Principles Board Opinion No. 25, “Accounting forStock Issued to Employees,” and related interpretations.

 

In May 2002, the Company modified 1,220,800 optionspreviously issued to employees and board members under its equity incentive planto reduce the exercise price to $4.00 per share, which was $2.14 per shareabove the fair market value on the date of modification.  The modification reducing the exercise priceof these stock options results in variable accounting for the options from thedate of modification to the date the options are exercised, forfeited or expireunexercised.  Prior to the three monthsended June 30, 2004, the fair market value of the Company’s common stock hadnot exceeded the modified exercise price and, as such, no compensation expensehad been recorded prior to the three months ended June 30, 2004.  As of June 30, 2004, the market price pershare of common stock was $4.22. Under variable accounting, compensationexpense of $0.2 million was recognized in the

 

7

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three months ended June 30, 2004 for the excess of the common stock’sfair market value over the modification price on 1,027,500 stock options deemedvested.

 

The followingtable illustrates the effect on net income and earnings per share if theCompany had applied the fair value recognition provisions of Statement ofFinancial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-BasedCompensation.”

 
|                                                                                                                   |   | **Three  Months Ended June 30,**              |   | **Six Months  Ended June 30,** |   |
|------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------|--------|--------------------------------|--------|
|                                                                                                                   |   | **2004**                                      |   | **2003**                       |   | **2004** |   | **2003** |   |
|                                                                                                                   |   | **(In  Thousands, Except Per Share Amounts)** |   |
|                                                                                                                   |   |                                          |   |                           |   |   |   |   |   |
| Net income  (loss), as reported                                                                                        |   | $                                             | (6,837 | )                              | $      | (8,903 | ) | $ | (15,395 | ) | $ | 7,298 |   |
| Add: stock-based  employee compensation included in reported net income (loss), net of related  tax                    |   | 226                                           |   | 16                             |   | 226 |   | 110 |   |
| Deduct: total  stock-based employee compensation expense determined under fair value-based  method, net of related tax |   | (775                                          | )      | (491                           | )      | (1,119 | ) | (1,099 | ) |
| Pro forma net  income (loss)                                                                                           |   | $                                             | (7,366 | )                              | $      | (9,378 | ) | $ | (16,288 | ) | $ | 6,309 |   |
|                                                                                                                   |   |                                          |   |                           |   |   |   |   |   |
| Basic net income  (loss) per share:                                                                                    |   |                                          |   |                           |   |   |   |   |   |
| As reported                                                                                                            |   | $                                             | (0.07  | )                              | $      | (0.11 | ) | $ | (0.17 | ) | $ | 0.09 |   |
| Pro forma                                                                                                              |   | $                                             | (0.08  | )                              | $      | (0.11 | ) | $ | (0.18 | ) | $ | 0.08 |   |
|                                                                                                                   |   |                                          |   |                           |   |   |   |   |   |
| Diluted net  income (loss) per share:                                                                                  |   |                                          |   |                           |   |   |   |   |   |
| As reported                                                                                                            |   | $                                             | (0.07  | )                              | $      | (0.11 | ) | $ | (0.17 | ) | $ | 0.08 |   |
| Pro forma                                                                                                              |   | $                                             | (0.08  | )                              | $      | (0.11 | ) | $ | (0.18 | ) | $ | 0.07 |   |

 

 

**OtherIntangible Assets**

 

**Other intangible assets were approximately $66.7million and $68.9 million, net of accumulated amortization expense ofapproximately $12.4 million and $10.3 million as of June 30, 2004 and December31, 2003, respectively. Other intangible assets represent the estimated valueof VIA Wireless’ Sprint PCS management agreement.  Amortization expense for other intangible assets wasapproximately $1.1 million for the three months ended June 30, 2004 and 2003and approximately $2.2 million for the six months ended June 30, 2004 and 2003.**

** **

**Estimated future amortization expense of intangibleassets for the next five years at June 30, 2004 is as follows:**

** **
| **Years  Ending December 31,** |   | **(In  Thousands)** |   |
|--------------------------------|--------|---------------------|--------|
|                           |   |                |   |
| 2004                           |   | $                   | 2,152  |   |
| 2005                           |   | 4,304               |   |
| 2006                           |   | 4,304               |   |
| 2007                           |   | 4,304               |   |
| 2008                           |   | 4,304               |   |
|                                |        |                     |        |  |

 

**Reclassifications**

 

Certain prior year amounts have been reclassified to conform withcurrent year presentation.

 

8

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**2.ORGANIZATION AND NATURE OF BUSINESS**

 

**Organizationand Nature of Business**

 

UbiquiTel Inc. and Subsidiaries (“UbiquiTel” or the “Company”) wasformed for the purpose of becoming the exclusive provider of Sprint Personal CommunicationsServices (“PCS”) in certain defined midsize markets in the western andmidwestern United States.

 

In October 1998, UbiquiTel L.L.C. (a Washington state limitedliability company) entered into a management agreement with Sprint PCS for theexclusive rights to market Sprint’s 100% digital, 100% PCS products andservices to the residents in the Reno/Tahoe, Nevada market. UbiquiTel L.L.C.had no financial transactions from its inception (August 24, 1998) toSeptember 29, 1999. On September 29, 1999, UbiquiTel Inc.(formerly, UbiquiTel Holdings, Inc.) was incorporated in Delaware. InNovember 1999, UbiquiTel L.L.C. assigned all of its material contractsincluding the rights to the Sprint PCS agreements to UbiquiTel Inc. On November 9,1999, UbiquiTel Operating Company (a Delaware corporation, formerly a Delawarelimited liability company) (“Operating Company”), was formed to serve as theoperating company for UbiquiTel Inc. Also, on March 17, 2000,UbiquiTel Leasing Company (a Delaware corporation) was formed to serve as theleasing company for UbiquiTel Inc. UbiquiTel Inc. assigned the SprintPCS agreements to Operating Company following its formation. OnDecember 28, 1999, UbiquiTel amended its management agreement with SprintPCS to expand its markets to include northern California, Spokane/Montana,southern Idaho/Utah/Nevada and southern Indiana/Kentucky, which together withReno/Tahoe, contain approximately 7.7 million residents. OnFebruary 21, 2001, in connection with UbiquiTel’s acquisition of VIAWireless LLC, UbiquiTel amended its management agreement with Sprint PCS toexpand its markets effective at the closing in August 2001 to include3.4 million additional residents from the six VIA Wireless BTAs includingBakersfield, Fresno, Merced, Modesto, Stockton and Visalia, California (alsocollectively referred to as the central valley of California market). OnAugust 13, 2001, upon the closing of the merger agreement, VIA Wirelessbecame a wholly owned subsidiary of Operating Company and was later merged intoOperating Company in June 2003. On July 31, 2003, Operating Companyamended its management agreement with Sprint PCS to eliminate the obligation tobuild out the state of Montana, thereby reducing its licensed residentpopulation in its markets to approximately 10.0 million.

 

The consolidatedfinancial statements contain the financial information of UbiquiTel Inc.and its subsidiaries, UbiquiTel Operating Company and UbiquiTel LeasingCompany. The Company operates under one segment.

 

**3. BASICAND DILUTED NET INCOME (LOSS) PER SHARE**

 

The Company computes net income (loss) per common share in accordancewith SFAS No. 128, “Earnings per Share” (“SFAS No. 128”).  Under the provisions of SFAS No. 128,basic net income (loss) per common share is computed by dividing the net income(loss) applicable to common stockholders for the period by the weighted averagenumber of shares of common stock outstanding.  In accordance with SFAS No. 128, incremental potential common sharesfrom stock options and warrants are excluded in the calculation of diluted lossper share when the effect would be antidilutive.  Accordingly, the number of weighted average shares outstanding aswell as the amount of net loss per share are the same for basic and diluted pershare calculations for the three and six months ended June 30, 2004 and thethree months ended June 30, 2003.

 

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

 

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|                                                 |   | **Three  Months Ended June 30,**              |   | **Six Months  Ended June 30,** |   |
|------------------------------------------------------|--------|-----------------------------------------------|--------|--------------------------------|--------|
|                                                 |   | **2004**                                      |   | **2003**                       |   | **2004** |   | **2003** |   |
|                                                 |   | **(In  Thousands, Except Per Share Amounts)** |   |
| Basic                                                |   |                                          |   |                           |   |   |   |   |   |
| Net income  (loss)                                   |   | $                                             | (6,837 | )                              | $      | (8,903 | ) | $ | (15,395 | ) | $ | 7,298 |   |
| Average common  shares outstanding                   |   | 92,717                                        |   | 82,527                         |   | 92,648 |   | 82,037 |   |
| Basic                                                |   | $                                             | (0.07  | )                              | $      | (0.11 | ) | $ | (0.17 | ) | $ | 0.09 |   |
|                                                 |   |                                          |   |                           |   |   |   |   |   |
| Diluted                                              |   |                                          |   |                           |   |   |   |   |   |
| Net income  (loss)                                   |   | $                                             | (6,837 | )                              | $      | (8,903 | ) | $ | (15,395 | ) | $ | 7,298 |   |
| Average common  shares outstanding                   |   | 92,717                                        |   | 82,527                         |   | 92,648 |   | 82,037 |   |
| Effect of:                                           |   |                                          |   |                           |   |   |   |   |   |
| Dilutive options                                     |   | —                                        |   | —                         |   | — |   | 602 |   |
| Dilutive  securities                                 |   | —                                        |   | —                         |   | — |   | 10,739 |   |
| Average common  shares outstanding assuming dilution |   | 92,717                                        |   | 82,527                         |   | 92,648 |   | 93,378 |   |
|                                                 |   |                                          |   |                           |   |   |   |   |   |
| Diluted                                              |   | $                                             | (0.07  | )                              | $      | (0.11 | ) | $ | (0.17 | ) | $ | 0.08 |   |

 

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

 
|          |   | **Three  Months Ended June 30,** |   | **Six Months  Ended June 30,** |   |
|---------------|--------|----------------------------------|--------|--------------------------------|--------|
|          |   | **2004**                         |   | **2003**                       |   | **2004** |   | **2003** |   |
| Stock options |   | 7,963,625                        |   | 5,198,300                      |   | 7,963,625 |   | 2,178,300 |   |
| Warrants      |   | 3,665,183                        |   | 14,578,790                     |   | 3,665,183 |   | 3,665,183 |   |
| Total         |   | 11,628,808                       |   | 19,777,090                     |   | 11,628,808 |   | 5,843,483 |   |

 

**4.PROPERTY AND EQUIPMENT**

 

Property and equipment consisted of the following: 

 
|                             |   | **June 30,  2004**  |    | **December  31, 2003** |   |
|----------------------------------|--------|---------------------|---------|------------------------|--------|
|                             |   | **(In  Thousands)** |    |
| Network  equipment               |   | $                   | 340,160 |                   | $      | 330,738 |   |
| Vehicles                         |   | 1,407               |    | 1,381                  |   |
| Furniture and  office equipment  |   | 4,807               |    | 4,727                  |   |
| Computer  equipment and software |   | 8,046               |    | 7,687                  |   |
| Leasehold  improvements          |   | 4,023               |    | 4,196                  |   |
| Land                             |   | 130                 |    | 130                    |   |
| Buildings                        |   | 4,670               |    | 4,670                  |   |
|                             |   | 363,243             |    | 353,529                |   |
| Accumulated  depreciation        |   | (113,862            | )       | (93,973                | )      |
| Property and  equipment, net     |   | $                   | 249,381 |                   | $      | 259,556 |   |

 

Depreciation expense wasapproximately $12.7 million and $9.5 million for the three months ended June30, 2004 and 2003, respectively, and approximately $24.5 million and $18.8million for the six months ended June 30, 2004 and 2003, respectively.

 

In the fourth quarter of 2003, the Companyentered into an agreement to systematically replace many of the Company’sexisting minicell base stations with an equivalent quantity of currentgeneration multi-carrier capable base stations, or modcells. As of the date ofthe agreement, the estimated useful life of each existing minicell base stationwas reduced to reflect the remaining number of months such assets will be inuse prior to conversion, thereby accelerating depreciation expense. The impactof this change increased depreciation expense by approximately $2.4 million and$4.7 million for the three and six months ended June 30, 2004,respectively, and is estimated to increase

 

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depreciation expense by approximately $5.0 million and$0.7 million for the years ending December 31, 2004 and 2005, respectively.Under this agreement, all existing equipment will be deinstalled and the newequipment will be installed in the same locations and will includesignificantly upgraded technology. The Company is committed to convert 285 basestations during the years 2004 through 2006 at prices fixed in the agreement.The minimum annual cash payments required under this agreement areapproximately $3.0 million, $4.6 million and $4.9 million forthe years ending December 31, 2004, 2005 and 2006, respectively.

 

**5.LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS AND DEBT RETIREMENTS**

 

Long-term debt andcapital lease obligations outstanding as of June 30, 2004 and December 31, 2003were as follows: 

 
|                                                                                       |   | **June 30,  2004**  |    | **December  31, 2003** |   |
|--------------------------------------------------------------------------------------------|--------|---------------------|---------|------------------------|--------|
|                                                                                       |   | **(In  Thousands)** |    |
| 9.875% senior  notes                                                                       |   | $                   | 270,000 |                   | $      | — |   |
| Less: discount                                                                             |   | (4,529              | )       | —                 |   |
| 14% senior  discount notes                                                                 |   | 31,473              |    | 48,180                 |   |
| Less: discount                                                                             |   | (3,173              | )       | (7,691                 | )      |
| 14% senior  subordinated discount notes                                                    |   | 100,380             |    | 100,380                |   |
| Less: discount                                                                             |   | (10,147             | )       | (16,050                | )      |
| Less: additional  discount for detachable warrants                                         |   | (3,097              | )       | (3,364                 | )      |
| 14% Series B  senior discount notes                                                        |   | —              |    | 14,515                 |   |
| Less: discount                                                                             |   | —              |    | (2,318                 | )      |
| Less: additional  discount for detachable warrants                                         |   | —              |    | (3,730                 | )      |
| Senior secured  credit facility                                                            |   | —              |    | 230,000                |   |
| Capital lease  obligations                                                                 |   | 5                   |    | 81                     |   |
| Building  mortgage and other long-term liabilities                                         |   | 3,351               |    | 3,453                  |   |
| Subtotal                                                                                   |   | 384,263             |    | 363,456                |   |
| Future cash  flows associated with 14% senior   discount notes for interest and other |   | 25,204              |    | 41,417                 |   |
| Total long-term  debt and capital lease obligations                                        |   | 409,467             |    | 404,873                |   |
| Less: current  maturities                                                                  |   | 219                 |    | 8,209                  |   |
| Total long-term  debt and capital lease obligations, excluding current maturities          |   | $                   | 409,248 |                   | $      | 396,664 |   |

 

**Firstand Second Quarter 2003 Refinancings**

 

In February 2003,Operating Company consummated certain transactions which reduced its long-termdebt outstanding. Operating Company consummated a private placement exchange of$48.2 million aggregate principal amount of its 14% senior discount notesdue May 15, 2010 (“14% Senior Notes”) and $9.6 million in cash for$192.7 million aggregate principal amount of its outstanding 14% seniorsubordinated discount notes due April 15, 2010 (“14% Subordinated Notes”). The14% Senior Notes were subsequently registered with the Securities and ExchangeCommission.

 

Additionally, in February2003, Operating Company consummated a related financing, in a private placementoffering, of $12.8 million aggregate principal amount of 14% Series Bsenior discount notes due 2008 (“14% Series B Senior Notes”) in whichOperating Company received cash proceeds of $9.6 million to fund the cashportion of the exchange. Under the financing, the Company issued detachablewarrants to purchase up to approximately 9.6 million shares of UbiquiTel’scommon stock at an exercise price of $0.01 per share.

 

As a condition to thetransactions consummated in February 2003, Operating Company’s senior securedlenders required Operating Company to prepay $15.0 million of itsoutstanding term loans under its former senior secured credit facility, therebyreducing the outstanding term loans under the senior secured credit facility to

 

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$230.0 million. In addition, the $55.0 million unusedrevolving line of credit was permanently reduced by $5.0 million to$50.0 million, which was further reduced to $47.7 million during thethird quarter of 2003.

 

The Company followed theprovisions of SFAS No. 15, “Accounting by Debtors and Creditors forTroubled Debt Restructurings,” and Emerging Issues Task Force IssueNo. 02-04, “Determining Whether a Debtor’s Modification or Exchange ofDebt Instruments Is Within the Scope of FASB Statement No. 15,” inrecording the private placement exchange transaction. These provisions requirethat the carrying value of the 14% Senior Notes be recorded at the total futurecash payments (principal and interest) specified by the 14% Senior Notes;therefore, the 14% Senior Notes were classified on the Company’s balance sheetas long-term liabilities and were valued at $81.9 million as of thetransaction date. As a result, no interest expense related to the 14% SeniorNotes will be recognized in future periods. As a result of these transactions,the Company reduced overall debt by approximately $146.7 million aggregateprincipal amount ($113.8 million aggregate accreted value). In the firstquarter of 2003, the Company recognized a gain of approximately$39.0 million as a result of the private placement exchange.

 

Additionally, in a seriesof transactions during the second quarter of 2003, Operating Company receivedcash proceeds of approximately $1.3 million, of which $1.1 millionwere used by Operating Company to fund open market purchases of$6.9 million aggregate principal amount ($5.3 million aggregateaccreted value) of 14% Subordinated Notes, and Operating Company issuedapproximately $1.7 million aggregate principal amount of additional 14%Series B Senior Notes. Under these private placement sales, the Companyissued detachable warrants to purchase up to approximately 1.3 millionshares of UbiquiTel’s common stock at an exercise price of $0.01 per share. Inconnection with these transactions, the Company wrote off approximately$0.1 million in deferred financing fees and $0.3 million in unamortizeddebt discount for detachable warrants related to the original issuance of the14% Subordinated Notes, which reduced the gain resulting from the open marketpurchases. As a result of these transactions, the Company recorded a gain ofapproximately $3.9 million during the second quarter of 2003.

 

**FirstQuarter 2004 Refinancing**

 

On February 23, 2004,Operating Company issued $270.0 million in aggregate principal amount of 9.875%senior notes due March 1, 2011 (“9.875% Senior Notes”), in a transaction exemptfrom the registration requirements of the Securities Act. The 9.875% SeniorNotes were issued at a discount and generated approximately $265.3 millionin proceeds. The proceeds were used to repay and terminate Operating Company’ssenior secured credit facility, including the repayment of $230.0 millionin outstanding borrowings plus accrued interest and termination of itsunused  $47.7 million revolvingline of credit, to redeem all of Operating Company’s outstanding 14%Series B Senior Notes ($14.5 million outstanding principal amount)for approximately $12.5 million, to purchase $16.7 million principalamount of Operating Company’s outstanding 14% Senior Notes for approximately$15.9 million and to pay financing costs for the issuance of the 9.875%Senior Notes of approximately $7.8 million. The repayments of the seniorsecured credit facility and the 14% Series B Senior Notes and the purchase ofthe 14% Senior Notes resulted in a net gain on debt retirements ofapproximately $1.1 million, consisting of a loss on the purchase of the 14%Senior Notes of approximately $1.6 million, the write-off of deferred financingfees related to the senior secured credit facility and the 14% Series B SeniorNotes of approximately $7.7 million, the write-off of unamortized debt discountfor detachable warrants associated with the 14% Series B Senior Notes ofapproximately $3.6 million and costs of approximately $0.1 million related tothe termination of the senior secured credit facility, net of a gain ofapproximately $14.1 million recognized on the reduction in carrying value ofthe future cash payments associated with the purchased 14% Senior Notes.

 

The 9.875% Senior Notes rank pari passu in right ofpayment to the 14% Senior Notes and senior to the 14% Subordinated Notes.Interest on the 9.875% Senior Notes will be payable semiannually beginning onSeptember 1, 2004. The 9.875% Senior Notes are redeemable in whole or in parton or after March 1, 2007. Prior to March 1, 2007, up to 35% of the 9.875%Senior Notes are redeemable upon the occurrence of certain events. Theindenture governing the 9.875% Senior Notes contains customary covenants,including covenants limiting indebtedness,

 

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dividends and distributions on, and redemptions and repurchases of,capital stock and other similar payments, the acquisition and disposition ofassets, and transactions with affiliates or related persons. The indenturegoverning the 9.875% Senior Notes provides for customary events of default,including cross defaults, judgment defaults and events of bankruptcy.  Operating Company is permitted to issueadditional 9.875% Senior Notes under the indenture from time to time. On July 29, 2004, Operating Company completed aregistered exchange offer involving the 9.875% Senior Notes, pursuant to whichall of the outstanding 9.875% Senior Notes were exchanged for 9.875% SeniorNotes that have been registered under the Securities Act of 1933.   The registered 9.875% Senior Notes aresubstantially identical to the unregistered 9.875% Senior Notes, except thatcertain transfer restrictions and registration rights do not apply to theregistered 9.875% Senior Notes.

 

UbiquiTel has fully andunconditionally guaranteed Operating Company’s obligations under the 14%Subordinated Notes, the 14% Senior Notes and the 9.875% Senior Notes. UbiquiTelhas no independent assets or operations separate from its investment inOperating Company.

 

The Company presently isin compliance with all covenants associated with the 14% Subordinated Notes,the 14% Senior Notes and the 9.875% Senior Notes.

 

The Company may from timeto time purchase outstanding 14% Subordinated Notes, 14% Senior Notes and9.875% Senior Notes in the open market, in privately negotiated transactions orotherwise in accordance with its debt instruments and applicable law.

 

**6.**** WHOLLY-OWNEDOPERATING SUBSIDIARY**

 

UbiquiTel has fully and unconditionally guaranteed Operating Company’sobligations under the 14% Subordinated Notes, the 14% Senior Notes and the9.875% Senior Notes (see Note 5). UbiquiTel has no independent assets oroperations separate from its investment in Operating Company. UbiquiTel LeasingCompany is a minor subsidiary.

 

**Item 2. Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

**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 UbiquiTel Operating Company with theSecurities and Exchange Commission, specifically the most recent filings whichidentify important risk factors that could cause actual results to differ fromthose contained in the forward-looking statements, including, but not limitedto:

 
| **•** |   | UbiquiTel’s dependence  on its affiliation with Sprint;                               |
|------------|--------|--------------------------------------------------------------------------------------------|
|       |   |                                                                                       |
| **•** |   | 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 communications industry;                             |
|       |   |                                                                                       |
| **•** |   | the potential to  experience a high rate of customer turnover;                             |
|       |   |                                                                                       |
| **•** |   | customer quality;                                                                          |

 

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| **•** |   | potential declines in  roaming revenue;                                                                                                   |
|------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                      |
| **•** |   | UbiquiTel’s reliance on  the timeliness, accuracy and sufficiency of financial and other data and  information received from Sprint; |
|       |   |                                                                                                                                      |
| **•** |   | the ability of Sprint to  provide back office, customer care and other services;                                                          |
|       |   |                                                                                                                                      |
| **•** |   | the potential impact of  wireless local number portability;                                                                               |
|       |   |                                                                                                                                      |
| **•** |   | anticipated future net  losses;                                                                                                           |
|       |   |                                                                                                                                      |
| **•** |   | UbiquiTel’s debt level;                                                                                                              |
|       |   |                                                                                                                                      |
| **•** |   | adequacy of bad debt  and other reserves;                                                                                                 |
|       |   |                                                                                                                                      |
| **•** |   | the marketability,  liquidity and price volatility of UbiquiTel’s common stock;                                                      |
|       |   |                                                                                                                                      |
| **•** |   | 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 otherapplicable risks are described under the caption “Business3⁄4RiskFactors” and elsewhere in UbiquiTel’s and Operating Company’s Joint AnnualReport on Form 10-K for the fiscal year ended December 31, 2003 filed with theSecurities and Exchange Commission, and under the caption “Liquidity andCapital Resources—Factors That May Affect Operating Results and Liquidity” andelsewhere in this Item 2. We assume no obligation to publicly update or reviseany forward-looking statement made in this report, whether as a result of newinformation, future events, changes in assumptions or otherwise, after the dateof this report.  All written or oralforward-looking statements attributable to us are expressly qualified in theirentirety by these cautionary statements.

 

**Use ofCertain Terms**

 

In 2003, weinitiated a reseller program in which mobile virtual network operators (MVNOs)use our network and resell wireless service under a private label. Minutes andkilobytes are sold at wholesale rates. Virgin Mobile USA launched resellerservice in the second quarter of 2003. Qwest Communications launched resellerservice in the second quarter of 2004. As of June 30, 2004, we had approximately 46,900 reseller subscribers.In this “Item 2. Management’s Discussion and Analysis of FinancialCondition and Results of Operations,” unless the context indicates otherwise,all references to “subscribers” or “customers” and other operating metrics meansubscribers or customers excluding reseller subscribers.

 

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### **Overview**

### ** **

UbiquiTel Inc. and Subsidiaries (“UbiquiTel” or the “Company”) wasformed for the purpose of becoming the exclusive provider of Sprint PersonalCommunications Services (“PCS”) in certain defined midsize markets in thewestern and midwestern United States.

 

In October 1998, UbiquiTel L.L.C. entered into a managementagreement with Sprint PCS for the exclusive rights to market Sprint’s 100%digital, 100% PCS products and services to the residents in the Reno/Tahoe,Nevada market. UbiquiTel L.L.C. had no financial transactions from itsinception (August 24, 1998) to September 29, 1999. OnSeptember 29, 1999, UbiquiTel Inc. (formerly, UbiquiTelHoldings, Inc.) was incorporated in Delaware. In November 1999,UbiquiTel L.L.C. assigned all of its material contracts including the rights tothe Sprint PCS agreements to UbiquiTel Inc. On November 9, 1999,UbiquiTel Operating Company (“Operating Company”) was formed to serve as theoperating company for UbiquiTel Inc. Also, on March 17, 2000,UbiquiTel Leasing Company was formed to serve as the leasing company forUbiquiTel Inc. UbiquiTel Inc. assigned the Sprint PCS agreements toOperating Company following its formation. On December 28, 1999, weamended our management agreement with Sprint PCS to expand our markets toinclude northern California, Spokane/Montana, southern Idaho/Utah/Nevada andsouthern Indiana/Kentucky, which together with Reno/Tahoe, containapproximately 7.7 million residents. On February 21, 2001, inconnection with our acquisition of VIA Wireless LLC, we amended our managementagreement with Sprint PCS to expand our markets effective at the closing inAugust 2001 to include 3.4 million additional residents from the sixVIA Wireless BTAs including Bakersfield, Fresno, Merced, Modesto, Stockton andVisalia, California (also collectively referred to as the central valley ofCalifornia market). On August 13, 2001, upon the closing of the mergeragreement, VIA Wireless became a wholly owned subsidiary of Operating Companyand was later merged into Operating Company in June 2003. On July 31,2003, we amended our management agreement with Sprint PCS to eliminate theobligation to build out the state of Montana, thereby reducing our licensedresident population in our markets to approximately 10.0 million.

 

As of June 30, 2004, wehad approximately 365,900 subscribers excluding resellers and approximately46,900 reseller subscribers, for a total subscriber base of approximately412,800. As of June 30, 2004, our network covered approximately7.9 million residents which represented approximately 79% of the licensedpopulation in our markets.

 

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 and for the periodfrom our inception through October 31, 2003, Sprint PCS was entitled toreceive 8.0% of collected revenue from Sprint PCS subscribers based in ourmarkets and fees from wireless service providers other than Sprint PCS whentheir subscribers roam into our network. Effective November 1, 2003,Sprint is entitled to receive 8.0% of billed revenue less current period baddebts from Sprint PCS subscribers based in our markets and fees from wirelessservice providers other than Sprint PCS when their subscribers roam into ournetwork. We are entitled to 100% of revenues collected from the sale ofhandsets and accessories from our stores and on roaming revenues received whenSprint PCS customers from a different territory make a wireless call on our PCSnetwork and outbound non-Sprint PCS roaming billed to subscribers based in ourmarkets. We are responsible for building, owning and managing the portion ofthe PCS network located in our markets under the Sprint brand name. Our resultsof operations are dependent on Sprint PCS’ network and, to a lesser extent, onthe networks of other PCS affiliates of Sprint.

 

As a PCS affiliate ofSprint, we purchase a full suite of support services from Sprint PCS includingbilling, customer care, collections and national platform services. We pay amonthly per subscriber rate for these services which is reset every threeyears. The initial period for the service rates ends December 31, 2006. We haveaccess to these services during the term of our management agreement unlessSprint PCS provides us at least nine months’ advance notice of its intention toterminate any particular significant service. If Sprint PCS terminates service,our operations may be interrupted or restricted.

 

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**CriticalAccounting Policies and Estimates**

 

We rely on the use ofestimates and make assumptions that impact our financial condition and results.These estimates and assumptions are based on historical results and trends aswell as our forecasts as to how these might change in the future. Some of themost critical accounting policies that might materially impact our resultsinclude:

 

***Revenue Recognition:***

 

We recognize revenueswhen services have been rendered or products have been delivered, the price tothe buyer is fixed and determinable, and collectibility is reasonably assured.We account for rebates, discounts and other sales incentives as a reduction torevenue. Service revenues include subscriber revenues, reseller revenues,Sprint PCS travel revenues and non-Sprint PCS roaming revenues. Equipmentrevenues include sales of handsets and accessories. Subscriber revenues consistof monthly recurring service charges for voice and third generation data (“3Gdata”) services and monthly non-recurring charges for local, long distance,travel and roaming airtime usage and 3G data usage in excess of thepre-subscribed usage plan received from our subscribers, cancellation and latefee revenues and surcharges, less reductions for billing adjustments andcredits. Our revenue recognition policies are consistent with the guidance inEmerging Issues Task Force (“EITF”) Issue No. 00-21, “Accounting forRevenue Arrangements with Multiple Deliverables” (“EITF 00-21”), and StaffAccounting Bulletin No. 104, “Revenue Recognition.”

 

We recognize servicerevenue from our subscribers as they use the service. We pro-rate accessrevenue over the billing period and record airtime usage in excess of thepre-subscribed usage plan. Our subscribers pay an activation fee to us whenthey initiate service. Prior to the adoption of EITF 00-21 on July 1,2003, we deferred all activation fee revenue and direct customer activationcosts on a straight-line basis over the average life of our subscribers, whichwas estimated to be 30 months. Direct customer activation costs in excessof activation fee revenue were recognized immediately. For the six months endedJune 30, 2004 and 2003, we recognized approximately $2.6 million and $2.3million, respectively, of activation fee revenue. We have deferredapproximately $5.2 million and $5.9 million of activation fee revenue andrelated costs as of June 30, 2004 and December 31, 2003, respectively, to futureperiods. We have determined that the sale of wireless services through ourdirect sales channels with an accompanying handset constitutes a revenuearrangement with multiple deliverables. Upon adoption of EITF 00-21, wediscontinued deferring non-refundable, up-front activation fees and associatedcosts for our direct sales channels. Additionally, direct sales channelactivation fees are now included in equipment revenues rather than servicerevenues in the consolidated statement of operations to the extent that theaggregate activation fee and handset proceeds received from a subscriber do notexceed the fair value of the handset sold. Approximately $1.0 million ofactivation fees were included in equipment revenues during the six months endedJune 30, 2004.

 

We record Sprint PCStravel revenue on a per minute rate for voice services and on a per kilobitrate for data services when Sprint PCS subscribers based outside our marketsuse our network. We record non-Sprint PCS roaming revenue when non-Sprint PCSsubscribers use our network. We record reseller revenue when resellersubscribers use our network.

 

Equipment revenueconsists of proceeds from sales of handsets and accessories which are recordedat the time of sale. Revenues from sales of handsets and accessories representa separate earnings process from service revenues because sales of handsets andaccessories do not require customers to subscribe to wireless services.Beginning July 1, 2003, equipment revenue also includes an allocation of thearrangement consideration from activation revenue received as part of revenuearrangements with multiple deliverables.

 

We participate in the Sprint national and regionaldistribution programs in which national retailers such as

 

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RadioShack, Best Buy and Costco sell Sprint PCS products and services.In order to facilitate the sale of Sprint PCS products and services, nationalretailers purchase wireless handsets from Sprint for resale and receivecompensation from Sprint for Sprint PCS products and services sold. Forindustry competitive reasons, Sprint subsidizes the price of these handsets byselling the handsets at a price below cost. Under our Sprint PCS agreements,when a national retailer sells a handset purchased from Sprint to a subscriberin our markets, we are obligated to reimburse Sprint for the handset subsidy.We do not receive any revenues from sales of handsets and accessories bynational retailers. For a new subscriber activation and a handset upgrade to anexisting subscriber, we include these handset subsidy charges in cost ofproducts sold in the consolidated statements of operations.

 

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

 

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 or paid at rates that we have believed tobe contractually incorrect. We review all charges and payments from Sprint anddispute items if appropriate based upon our interpretation of our agreementswith Sprint PCS. When Sprint does not timely notify us of charges that we haveincurred or when we are invoiced for charges that we believe to be incorrect, werecord estimates primarily based on our historical trends and our estimate ofthe amount which we believe we will remit to Sprint after the disputed item oritems have been settled.

 

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

 

**Reservefor Doubtful Accounts**—Estimates are used in determining ourallowance for bad debt and are based both on our historical collectionexperience, current trends and credit policy and on a percentage of ouraccounts receivables by aging category. In determining these percentages, welook at historical write-offs of our receivables. We also look at currenttrends in the credit quality of our customer base and changes in the creditpolicies. Under the Sprint PCS service plans, customers who do not meet certaincredit criteria can nevertheless select any plan offered subject to an accountspending limit, or ASL, to control credit exposure. Account spending limitsrange from $125 to $250 depending on the credit quality of the customer.Sub-prime subscribers are required to make a deposit ranging from $125 to $250that can be credited against future billings. If these estimates areinsufficient for any reason, our operating income and available cash would bereduced.

 

**Reservefor Obsolete/Excess Inventory**—We record a reserve forobsolete or excess handset and accessories inventory for models and accessoriesthat are no longer manufactured, for defective models and accessories that havebeen returned by customers and for second generation handsets and accessories.If the estimate of obsolete inventory is understated, our operating incomewould be reduced.

 

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

 

Statement ofFinancial Accounting Standards (“SFAS”) No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), requiresthat long-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, “Goodwill and Other Intangible Assets” (“SFASNo. 142”), requires that goodwill and certain intangible assets resultingfrom business combinations be reviewed for recoverability, and that annualtests for impairment of goodwill and intangible assets that have indefiniteuseful lives be performed. SFAS No. 142 also requires interim tests whenan event has occurred that more likely than not has

 

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reduced the fair value of such assets. We assess on an annual basis thefair values of the reporting unit housing the goodwill and intangibles and,when necessary, assess on an annual basis for any impairment. Any write-offswould result in a charge to earnings and a reduction in equity in the periodtaken. As of October 31, 2003, we completed our annual impairment reviewand determined that no impairment charge was required. Management does not believe that anysignificant changes have occurred since this review and accordingly nowrite-offs have been made in the subsequent period. Management will continue tomonitor any triggering events and perform 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 LLC, we engaged a nationally recognized valuationexpert to assist us in determining the fair value of these assets andliabilities. Intangible assets are amortized over their respective useful life.If there were a reduction in useful lives, our operating income would bereduced. VIA Wireless’ Sprint PCS management agreement is being amortized overits estimated useful life of 18 years from the date of acquisition onAugust 13, 2001.

 

***Income Taxes:***

 

As part of the process ofpreparing our consolidated financial statements, we are required to estimateour taxes in each of the jurisdictions of operation. This process involvesmanagement estimating the actual current tax expense together with assessingtemporary differences resulting from differing treatment of items for tax andaccounting purposes in accordance with the provisions of SFAS No. 109, “Accountingfor Income Taxes.” These differences result in deferred tax assets andliabilities, which are included within the consolidated balance sheets. We thenmust assess the likelihood that the deferred tax assets will be recovered fromfuture taxable income and, to the extent recovery is not likely, we mustestablish a valuation allowance. Future taxable income depends on the abilityto generate income in excess of allowable deductions. To the extent weestablish a valuation allowance or increase this allowance in a period, anexpense is recorded within the tax provision in the consolidated statement ofoperations. Significant management judgment is required in determining ourprovision for income taxes, deferred tax assets and liabilities and any valuationallowance recorded against net deferred tax assets. In the event that actualresults differ from these estimates or we adjust these estimates in futureperiods, we may need to establish a valuation allowance that could materiallyimpact our financial condition and results of operations.

 

**Resultsof Operations**

 

We provide certainfinancial measures that are calculated in accordance with accounting principlesgenerally accepted in the United States (GAAP) and adjustments to GAAP(non-GAAP) to assess our financial performance.  In addition, we use certain non-financial terms that are notmeasures of financial performance under GAAP. Terms such as customer additions and churn are terms used in thewireless communications industry.  Thenon-GAAP financial measures of average revenue per user, cash cost per user andcost per gross addition reflect standard measures of liquidity, profitabilityor performance.  The non-financial termsand the non-GAAP measures reflect wireless communications industry conventionsand are commonly used by the investment community for comparabilitypurposes.  The non-GAAP measuresincluded in this report are reconciled below in “—Liquidity and CapitalResources—Reconciliation of non-GAAP financial measures.”

 

### ***Analysis of the three months ended June 30, 2004 compared tothe three months ended June 30, 2003***

### ** **

***Customer Net Additions***

 

As of June 30, 2004, weprovided personal communications services to approximately 365,900 customerscompared to approximately 291,800 customers as of June 30, 2003.  During the three months ended June 30, 2004,we added 16,900 net new subscribers compared to 17,600 net subscriber additionsfor the three months ended June

 

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30, 2003.  The decrease wasprimarily attributable to higher deactivations due to a larger customer base,partially offset by an increase in gross additions.

 

# ***Churn***

# ** **

Churn is themonthly rate of customer turnover expressed as the percentage of customers ofthe beginning customer base that both voluntarily and involuntarilydiscontinued service during the period. Churn is computed by dividing the number of customers that discontinuedservice during the month, net of 30 day returns, by the beginning customer basefor the period.  Churn for the threemonths ended June 30, 2004 was approximately 2.7% compared to approximately2.9% for the three months ended June 30, 2003. The decrease in churn was primarily the result of the improvement in thecredit quality of the overall customer base resulting in less service beingdiscontinued involuntarily. At June 30, 2004, the overall mix of our customerbase was 74% prime, 19% sub-prime with deposits and 7% sub-prime withoutdeposits. 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. As compared to2003, we expect involuntary churn to continue to decline at a slower rate withcontinued improvement in the quality of our customer base. However, voluntarychurn is expected to increase due to the availability of wireless numberportability in all of our markets which started in May 2004.

 

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

 

Average revenue per user(ARPU) summarizes the average monthly service revenue per customer, excludingwholesale revenue. ARPU is computed by dividing subscriber revenue by theaverage subscribers for the period. During the three months ended June 30, 2004and 2003, our ARPU was approximately $58 and $58, respectively. ARPU wasprimarily impacted by increases in monthly recurring access charges and thirdgeneration services (3G) revenues, offset by a reduction in overage chargerevenues attributable to a higher mix of customers on larger anytime minutesrate plans. We expect ARPU to decline marginally as billing for overage minutescontinues to decrease. This reduction is expected to be partially offset by thecontinued increase in data revenue.

 

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

 

Cash cost per usersummarizes the average monthly cash costs to provide digital wireless mobilitycommunications services per customer. CCPU is computed by dividing the sum of cost of service and operationsand general and administrative expenses by the average subscribers for theperiod.  During the three months endedJune 30, 2004 and 2003, our CCPU was approximately $43 and $46, respectively.The decrease in CCPU primarily resulted from lower network operating expensesand Sprint CCPU service fees on a per subscriber basis. The decrease in networkoperating expense reflects the continuing benefits of scale resulting from theincrease in the subscriber base.  Thereduction in Sprint CCPU service fees is due to the recent addendums to theservices agreement between Sprint PCS and us. We expect CCPU to remain stableas future net additions enable us to spread fixed charges over a largersubscriber base, slightly offset by higher minutes and kilobytes of use by ourcustomers using the Sprint PCS network outside of our markets.

 

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

 

Cost per gross addition(CPGA) summarizes the average cost to acquire new customers during the period.CPGA is computed by adding the income statement components of selling andmarketing and the cost of products sold, and reducing that amount by theequipment revenue recorded. The net result of these components is then dividedby the gross customers acquired during the period. CPGA was approximately $471for the three months ended June 30, 2004 compared to approximately $452 for thethree months ended June 30, 2003. The increase in CPGA was primarily due to ahigher number of customer handset upgrades. We expect CPGA to range between$440 and $460 in 2004 due to significant competition coupled with ourcommitment to subscriber growth.

 

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***Revenues***

 

•                  *SubscriberRevenue*.  Subscriber revenueduring the three months ended June 30, 2004 and 2003 was approximately $62.0million and $49.5 million, respectively. Subscriber revenue consists of monthlyrecurring service charges for voice and 3G data usage and monthly non-recurringcharges for local, long distance, travel and roaming airtime usage and 3G datausage in excess of the pre-subscribed usage plan amount received from oursubscribers, cancellation and late fee revenues and surcharges, less reductionsfor billing adjustments and billing corrections. Our customers’ charges aredependent on their rate plans, based on the number of minutes and 3G data usageincluded in their plans. These plans generally reflect the terms of nationalplans offered by Sprint PCS. The increase in subscriber revenue was primarilyattributable to the increases in our subscriber base and monthly recurringcharges for access and 3G data, partially offset by a reduction in overagecharge revenues attributable to a higher mix of customers on larger anytimeminutes rate plans.

 

•            *Reseller Revenue*.  Reseller revenue is generated when areseller subscriber uses our PCS network. During the second quarters of 2003and 2004, we initiated reseller programs with Virgin Mobile and Qwest, respectively.Reseller revenue was approximately $1.4 million and $11,000 for the threemonths ended June 30, 2004 and 2003, respectively. During the remainder of2004, we expect reseller revenue to increase at a rapid rate as we expect asignificant increase in Qwest subscribers and minutes of use.

 

•                  *Sprint PCSTravel Revenue*.  Travelrevenue is generated on a per minute rate or on a per kilobit rate when aSprint PCS subscriber based outside our markets uses our network. An additionallong distance rate per minute is generated when that customer initiates a callfrom our network to call outside the local calling area. During 2003 and thefirst six months of 2004, the travel rate per minute was $0.058. The averagelong distance rate per minute decreased from approximately $0.015 per minuteduring the three months ended June 30, 2003 to approximately $0.011 per minuteduring the three months ended June 30, 2004. During the first six months of2003 and the first six months of 2004, the travel rate for data services was$0.0014 per kilobit of use and $0.002 per kilobit of use, respectively.

 

During the three months ended June 30, 2004, ournetwork captured approximately 240.4 million system travel minutes withapproximately 61% of those minutes generating long distance charges whichresulted in approximately $15.5 million in travel revenue. During thethree months ended June 30, 2003, our network captured approximately 157.2million system travel minutes with approximately 65% of those minutesgenerating long distance charges which resulted in approximately$10.4 million in travel revenue. 3G data usage by Sprint PCS subscribersbased outside our markets increased from approximately 327.6 million kilobytes,or approximately $0.4 million in travel revenues, during the three months endedJune 30, 2003 to approximately 916.0 million kilobytes, or approximately $1.8million in travel revenues, during the three months ended June 30, 2004. Theincrease in Sprint PCS travel revenue was primarily due to the increase in traveland long distance minutes of use and 3G data usage. We expect the annual growthrate for travel minutes and kilobytes to remain fairly constant throughout2004.

 

•                  *Non-SprintPCS Roaming Revenue*. Non-Sprint PCS roaming revenue is generated when a non-Sprint PCSsubscriber uses our network. We earned approximately $4.7 million in non-SprintPCS roaming revenue during the three months ended June 30, 2004 compared toapproximately $3.1 million during the three months ended June 30, 2003.  Non-Sprint PCS roaming minutes increasedfrom 21.7 million during the three months ended June 30, 2003 to 36.7 millionduring the three months ended June 30, 2004. The increase in roaming minutesrepresented a $2.1 million increase in revenue, and the decrease in the averagenon-Sprint PCS roaming revenue rate we receive from other carriers representeda $0.5 million reduction of roaming revenue. We expect non-Sprint PCS roamingrevenue growth rates to slow in the near- to medium-term.

 

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•                  *EquipmentRevenue*.  Equipment revenueis generated from the sale of handsets and accessories and is recorded at thetime of sale. We record and retain 100% of the revenue from the sale ofhandsets and accessories, net of rebates, discounts and other sales incentives,as equipment revenue.  The amountsrecorded during the three months ended June 30, 2004 and 2003 from equipmentrevenue totaled approximately $3.2 million and $2.6 million, respectively. Theincrease was primarily due to an increase in gross additions and the allocationof approximately $0.4 million of activation revenue to equipment revenuebased on relative fair values in accordance with EITF 00-21, which we adoptedon July 1, 2003.

 

***Cost of Service and Operations***

 

•                  *Network OperationsExpenses*.  Network operationsexpenses include radio communications site lease costs, utilities, networkcontrol maintenance, network control site leases, engineering personnel,transport facilities and interconnect charges, and totaled approximately$15.5 million during the three months ended June 30, 2004 compared toapproximately $15.3 million during the three months ended June 30, 2003.For the three months ended June 30, 2003, we reclassified certain networkoperations expenses to operating expenses to conform with current yearpresentation, due to the changes in costs resulting from the amendment to ourSprint agreements in the fourth quarter of 2003. The increase was primarily dueto an increase in radio communications site rent from an increase in the numberof leased radio communications sites from June 30, 2003 to June 30, 2004,including co-location rents for the lease of space on towers sold in the fourthquarter of 2003.

 

•                  *Sprint PCS Travel Expense*.  We pay Sprint PCS travel fees on a perminute rate or on a per kilobit rate when our customers use the Sprint PCSnetwork outside our markets and we incur additional long distance fees when ourcustomers call long distance originating in a Sprint PCS or PCS affiliate ofSprint territory. During the three months ended June 30, 2004, our customersgenerated approximately 157.0 million travel minutes with approximately61% of those minutes generating long distance charges which resulted inapproximately $10.2 million in travel fees. During the three months endedJune 30, 2003, our customers generated approximately 98.3 million travelminutes with approximately 64% of those minutes generating long distancecharges which resulted in approximately $6.5 million in travel fees. 3Gdata usage by our customers outside our markets increased from approximately201.1 million kilobytes, or approximately $0.3 million in travel fees, duringthe three months ended June 30, 2003, to approximately 555.3 million kilobytes,or approximately $1.1 million in travel fees, during the three months endedJune 30, 2004. The increase in travel expense was attributable to the increasein our subscriber base and the overall minutes and kilobytes of use persubscriber.

 

•                  *Non-Sprint PCS Roaming Expense*.  We pay roaming fees to other wirelessproviders when our customers use their network. During the three months endedJune 30, 2004, our customers generated approximately 3.5 million roamingminutes resulting in approximately $0.5 million in roaming fees. Duringthe three months ended June 30, 2003, our customers generated approximately2.1 million roaming minutes resulting in approximately $0.6 million inroaming fees. The decrease in roaming expense was attributable to a decrease inthe average non-Sprint PCS roaming rate paid to other carriers partially offsetby an increase in minutes.

 

•                  *Bad Debt Expense.*  Bad debt expense during the three monthsended June 30, 2004 and 2003 was approximately $1.4 million and approximately$1.5 million, respectively. The decrease in bad debt expense was primarilyattributable to the improvement in the credit quality of our customer base andlower customer write-offs.

 

•                  *OperatingExpenses. *Operating expensesduring the three months ended June 30, 2004 and 2003 were approximately $8.1million and $7.4 million, respectively. Operating expenses included fees wepaid to

 

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Sprint PCS for the use of its support services,including billing and collections services and customer care. As noted above undernetwork operations expenses, certain expenses were reclassified from networkoperations expenses to operating expenses for the three months ended June 30,2003. The increase in operating expenses was primarily attributable to theincrease in our subscriber base, offset by savings related to the amendments tothe Sprint agreements effective in November 2003.

 

***Cost of Products Sold***

 

**The costof products sold includes the costs of handsets and accessories and totaledapproximately $8.9 million and $9.5 million during the three months ended June30, 2004 and 2003, respectively. **The cost of handsets generally exceeds the salesprice because we subsidize the cost of handsets to subscribers, consistent withindustry practice. Handset subsidies onunits sold by third parties totaled approximately $2.9 million and $3.4 millionfor the three months ended June 30, 2004 and 2003, respectively.

** **

***Selling and Marketing***

 

**Sellingand marketing expenses relate to our distribution channels, salesrepresentatives, sales support personnel, retail stores, advertising programsand commissions.  We incurred**selling and marketingexpenses of approximately $15.9 million and$12.1 million during the three months ended June 30, 2004 and 2003,respectively. The increase in selling andmarketing expenses was primarily attributable to the increases in grossadditions and the number of customer handset upgrades.

** **

***General and Administrative***

 

Weincurred general and administrative expenses (excluding non-cash compensationexpenses) totaling approximately $9.6 million and $7.7 million during the threemonths ended June 30, 2004 and2003, respectively. General and administrative expenses included approximately$5.1 million and $4.0 million of management fee expense paid to Sprint PCSduring the three months ended June 30, 2004 and 2003, respectively. The increase in general andadministrative expenses was primarily due to the increase in management feeexpense resulting from the increase in our subscriber base.

 

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

 

During the threemonths ended June 30, 2004 and 2003, non-cash compensation for general andadministrative matters totaled approximately $0.2 million and $16,000,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.

 

In May 2002, we modified 1,220,800 options previouslyissued to employees and board members under our equity incentive plan to reducethe exercise price to $4.00 per share, which was $2.14 per share above the fairmarket value on the date of modification. The modification reducing the exercise price of these stock options resultsin variable accounting for the options from the date of modification to thedate the options are exercised, forfeited or expire unexercised.  Prior to the three months ended June 30,2004, the fair market value of our common stock had not exceeded the modifiedexercise price and, as such, no compensation expense had been recorded prior tothe three months ended June 30, 2004. As of June 30, 2004, the market price per share of common stock was$4.22. Under variable accounting, compensation expense of $0.2 million wasrecognized in the three months ended June 30, 2004 for the excess of the commonstock’s fair market value over the modification price on 1,027,500 stockoptions deemed vested.

 

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***Depreciation, Amortization and Accretion***

 

Depreciation,amortization and accretion expense for the three months ended June 30, 2004 and2003 totaled approximately $13.7 million and $10.6 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 depreciated using the straight-line method over30 years. Amortization of intangible assets with finite useful lives is over 18years.  Accretion expense increases theasset retirement obligation associated with our tower leases, switch site andretail and administrative locations to its present value. The increase indepreciation, amortization and accretion expense was primarily due to theimpact of accelerated depreciation of our existing minicell base stationsresulting from our reduction of their estimated useful lives during the fourthquarter of 2003 totaling $2.4 million and increases in depreciationexpense primarily resulting from network equipment additions during the secondquarter of 2004. We expect accelerated depreciation expense of approximately$5.0 million and $0.7 million for the years ending December 31, 2004 and 2005,respectively, related to the reductions of the estimated useful lives ofcertain minicell base stations.

 

***Interest Income***

 

For the three months ended June 30, 2004 and 2003,interest income was approximately $0.1 million.  The interest income was generated from cash, cash equivalents andrestricted cash balances.

 

***Interest Expense***

 

Interest expense totaled approximately $10.4 millionand $7.0 million during the three months ended June 30, 2004 and 2003,respectively. Interest is accrued on our notes on a per annum basis at thestated interest rate. Interest on our senior secured credit facility during thethree months ended June 30, 2003 was accrued at the London interbank offeredrate, based on contracts ranging from 30 to 180 days. The increase in interestexpense primarily resulted from our refinancing of the outstanding borrowingsunder our senior secured credit facility in the first quarter of 2004 withlonger term higher fixed rate notes.

 

Interest expense also included the amortized amount ofdeferred financing fees relating to our senior secured credit facility andvarious note offerings, prior to any retirements of such debt.

 

***Gain on Debt Retirements***

 

In a series oftransactions during the second quarter of 2003, Operating Company received cashproceeds of approximately $1.3 million, of which $1.1 million wereused by Operating Company to fund open market purchases of $6.9 millionaggregate principal amount ($5.3 million aggregate accreted value) of 14%senior subordinated discount notes due 2010 (“14% Subordinated Notes”), andOperating Company sold in private placements approximately $1.7 millionaggregate principal amount of 14% Series B senior discount notes due 2008 (“14%Series B Senior Notes”). Under these private placement sales, UbiquiTelissued detachable warrants to purchase up to approximately 1.3 millionshares of its common stock at an exercise price of $0.01 per share. Inconnection with these transactions, we wrote off approximately$0.1 million in deferred financing fees and $0.3 million inunamortized debt discount for detachable warrants related to the originalissuance of the 14% Subordinated Notes, which reduced the gain resulting fromthe open market purchases. As a result of these transactions, we recorded again of approximately $3.9 million during the second quarter of 2003.

 

***Income Taxes***

 

For the three months ended June 30, 2004 and 2003, werecognized an income tax expense of approximately $80,000 and $0.4 million,respectively. Income tax expense for the three months ended June 30, 2004 and2003 is

 

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comprised primarily of deferred income taxes that resulted from anexpected income tax deduction for amortization of goodwill, which is notamortizable to expense for financial reporting purposes.

 

***Net Income (Loss)***

 

For the threemonths ended June 30, 2004 and 2003, respectively, our net loss wasapproximately $6.8 million and $8.9 million. We recognized gains on debtretirements of approximately $3.9 million for the three months ended June 30,2003.

 

### ***Analysis of the six months ended June 30, 2004 compared tothe six months ended June 30, 2003***

### ** **

***Customer Net Additions***

 

During the six monthsended June 30, 2004, we added 38,200 net new subscribers compared to 34,800 netnew subscribers for the six months ended June 30, 2003.  We have increased our deposit requirementsfor sub-prime credit class customers in certain markets which is expected toslow net subscriber additions to be more comparable to the levels experiencedin 2003.

 

# ***Churn***

# ** **

Churn for the sixmonths ended June 30, 2004 was approximately 2.9% compared to approximately3.2% for the six months ended June 30, 2003. The decrease in churn was primarily the result of the improvement in thecredit quality of the overall customer base resulting in less service beingdiscontinued involuntarily.

 

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

 

During the six monthsended June 30, 2004 and 2003, our ARPU was approximately $57 and $56,respectively. The increase in ARPU primarily resulted from increases in monthlyrecurring access charges and third generation services (3G) revenues. Thisincrease was offset primarily by a reduction in overage charge revenuesattributable to a higher mix of customers on larger anytime minutes rate plans.

 

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

 

During the six monthsended June 30, 2004 and 2003, our CCPU was approximately $43 and $46, respectively.The decrease in CCPU primarily resulted from lower network operating expensesand Sprint CCPU service fees on a per subscriber basis. The decrease in networkoperating expense reflects the continuing benefits of scale resulting from theincrease in the subscriber base and the reduction in Sprint CCPU service feesdue to the recent addendums to the services agreement between Sprint PCS andus, slightly offset by higher minutes and kilobytes of use by our customersusing the Sprint PCS network outside of our markets.

 

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

 

CPGA was approximately$447 for the six months ended June 30, 2004 compared to approximately $442 forthe six months ended June 30, 2003. The increase in CPGA was primarily due to ahigher number of customer handset upgrades.

 

***Revenues***

 

•                       *SubscriberRevenue*.  Subscriber revenueduring the six months ended June 30, 2004 and 2003 was approximately $118.5million and $92.6 million, respectively. The increase in subscriber revenue wasprimarily attributable to the increases in our subscriber base and monthlyrecurring charges for access

 

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and 3G data, partiallyoffset by a reduction in overage charge revenues attributable to a higher mixof customers on larger anytime minutes rate plans.

 

•                       *Reseller Revenue*.  Reseller revenue was approximately$2.3 million and $11,000 for the six months ended June 30, 2004 and 2003,respectively.

 

•                       *Sprint PCSTravel Revenue*.  During thesix months ended June 30, 2004, our network captured approximately 452.1million system travel minutes with approximately 61% of those minutesgenerating long distance charges which resulted in approximately$29.3 million in travel revenue. During the six months ended June 30,2003, our network captured approximately 301.0 million system travel minuteswith approximately 65% of those minutes generating long distance charges whichresulted in approximately $20.5 million in travel revenue. 3G data usageby Sprint PCS subscribers based outside our markets increased fromapproximately 454.3 million kilobytes, or approximately $0.6 million in travelrevenues, during the six months ended June 30, 2003 to approximately 1,634.1million kilobytes, or approximately $3.3 million in travel revenues, during thesix months ended June 30, 2004. The increase in Sprint PCS travel revenue wasprimarily due to the increase in travel and long distance minutes of use and 3Gdata usage.

 

•                       *Non-SprintPCS Roaming Revenue*.  Weearned approximately $9.4 million in non-Sprint PCS roaming revenue during thesix months ended June 30, 2004 compared to approximately $6.0 million duringthe six months ended June 30, 2003. Non-Sprint PCS roaming minutes increased from 41.3 million during thesix months ended June 30, 2003 to 73.4 million during the six months ended June30, 2004. The increase in roaming minutes represented a $4.6 million increasein revenue, and the decrease in the average non-Sprint PCS roaming revenue ratewe receive from other carriers represented a $1.2 million reduction of roamingrevenue.

 

•                       *EquipmentRevenue*.  Equipment revenuerecorded during the six months ended June 30, 2004 and 2003 totaledapproximately $7.1 million and $4.9 million, respectively. The increase wasprimarily due to an increase in gross additions, higher net handset retailprices charged to subscribers and the allocation of approximately$1.0 million of activation revenue to equipment revenue based on relativefair values in accordance with EITF 00-21.

 

***Cost of Service andOperations***

 

•                        *NetworkOperations Expenses*.  Networkoperations expenses totaled approximately $31.1 million during the sixmonths ended June 30, 2004 compared to approximately $29.9 million duringthe six months ended June 30, 2003. For the six months ended June 30, 2003, wereclassified certain network operations expenses to operating expenses toconform with current year presentation, due to the changes in costs resultingfrom the amendment to our Sprint agreements in the fourth quarter of 2003. Theincrease was primarily due to an increase in radio communications site rentfrom an increase in the number of leased radio communications sites from June30, 2003 to June 30, 2004, including co-location rents for the lease of spaceon towers sold in the fourth quarter of 2003.

 

•                  *Sprint PCS Travel Expense*.  During the six months ended June 30, 2004,our customers generated approximately 296.1 million travel minutes withapproximately 61% of those minutes generating long distance charges whichresulted in approximately $19.3 million in travel fees. During the sixmonths ended June 30, 2003, our customers generated approximately182.0 million travel minutes with approximately 65% of those minutesgenerating long distance charges which resulted in approximately $12.5 millionin travel fees. 3G data usage by our customers outside our markets increasedfrom

 

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approximately 281.2 million kilobytes, orapproximately $0.4 million in travel fees, during the six months ended June 30,2003, to approximately 1,049.1 million kilobytes, or approximately $2.1 millionin travel fees, during the six months ended June 30, 2004. The increase intravel expense was attributable to the increase in our subscriber base and theoverall minutes and kilobytes of use per subscriber.

 

•                  *Non-Sprint PCS Roaming Expense*.  During the six months ended June 30, 2004,our customers generated approximately 5.9 million roaming minutesresulting in approximately $0.9 million in roaming fees. During the sixmonths ended June 30, 2003, our customers generated approximately3.8 million roaming minutes resulting in approximately $1.1 million inroaming fees. The decrease in roaming expense was attributable to a decrease inthe average non-Sprint PCS roaming revenue rate paid to other carrierspartially offset by an increase in minutes.

 

•                  *Bad Debt Expense.*  Bad debt expense during the six months endedJune 30, 2004 and 2003 was approximately $2.2 million and approximately $2.6million, respectively. The decrease in bad debt expense was primarilyattributable to the improvement in the credit quality of our customer base andlower customer write-offs.

 

•                  *OperatingExpenses. *Operating expensesduring the six months ended June 30, 2004 and 2003 were approximately $15.6million and $14.5 million, respectively. As noted above under networkoperations expenses, certain expenses were reclassified from network operationsexpenses to operating expenses for the six months ended June 30, 2003. Theincrease in operating expenses was primarily attributable to the increase inour subscriber base, offset by savings related to the amendments to the Sprintagreements effective in November 2003.

 

***Cost of Products Sold***

 

**Cost ofproducts sold totaled approximately $18.1 million and $18.8 million during thesix months ended June 30, 2004 and 2003, respectively.  Handset subsidies on units sold by thirdparties totaled approximately $5.7 million and $7.3 million for the six monthsended June 30, 2004 and 2003, respectively.**

** **

***Selling and Marketing***

 

**Weincurred**selling andmarketingexpensesof approximately $32.8 million and $24.2 million during the six months endedJune 30, 2004 and 2003, respectively. Theincrease in selling and marketing expenses was primarily attributable to theincreases in gross additions and the number of customer handset upgrades.

** **

***General andAdministrative***

 

Weincurred general and administrative expenses (excluding non-cash compensationexpenses) totaling approximately $18.9 million and $15.2 million during the sixmonths ended June 30, 2004 and2003, respectively. General and administrative expenses included approximately$10.0 million and $7.6 million of management fee expense paid to Sprint PCSduring the six months ended June 30, 2004 and 2003, respectively. The increase in general andadministrative expenses was primarily due to the increase in management feeexpense resulting from the increase in our subscriber base.

 

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

 

During the six months ended June 30, 2004 and 2003,non-cash compensation for general and administrative matters totaledapproximately $0.2 million and $0.1 million, respectively.

 

26

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***Depreciation, Amortization and Accretion***

 

Depreciation,amortization and accretion expense for the six months ended June 30, 2004 and2003 totaled approximately $26.6 million and $23.7 million, respectively. Theincrease in depreciation, amortization and accretion expense was primarily dueto the impact of accelerated depreciation of our existing minicell basestations resulting from our reduction of their estimated useful lives duringthe fourth quarter of 2003 totaling $4.7 million and increases in depreciationexpense primarily resulting from network equipment additions during the firstsix months of 2004, offset by an approximate $2.8 million decrease inamortization expense attributable to the VIA Wireless subscriber base, whichwas fully amortized as of March 31, 2003.

 

***Interest Income***

 

For the six months ended June 30, 2004 and 2003,interest income was approximately $0.3 million.

 

***Interest Expense***

 

Interest expense totaled approximately $18.8 millionand $17.2 million during the six months ended June 30, 2004 and 2003,respectively. The increase in interest expense primarily resulted from ourrefinancing of the outstanding borrowings under our senior secured creditfacility in the first quarter of 2004 with longer term higher fixed rate notes,offset by lower average debt levels in the first quarter of 2004 as compared tothe same quarter of 2003.

 

Interest expense also included the amortized amount ofdeferred financing fees relating to our senior secured credit facility andvarious note offerings, prior to any retirements of such debt.

 

***Gain on Debt Retirements***

 

During the first quarterof 2004, Operating Company issued $270.0 million in aggregate principal amountof 9.875% senior notes due March 1, 2011 (the “9.875% Senior Notes”), in atransaction exempt from the registration requirements of the Securities Act of1933, as amended. The 9.875% Senior Notes were issued at a discount andgenerated approximately $265.3 million in proceeds. The proceeds were usedto repay and terminate Operating Company’s senior secured credit facility,including the repayment of $230.0 million in outstanding borrowings plusaccrued interest and termination of its unused $47.7 million revolvingline of credit, to redeem all of its outstanding 14% Series B Senior Notes($14.5 million outstanding principal amount) for approximately $12.5 million,and to purchase $16.7 million principal amount of its outstanding 14%senior discount notes due 2010 (“14% Senior Notes”) for approximately$15.9 million. The repayments of the senior secured credit facility andthe 14% Series B Senior Notes and the purchase of the 14% Senior Notes resultedin a net gain on debt retirements of approximately $1.1 million, consisting ofa loss on the purchase of the 14% Senior Notes of approximately $1.6 million,the write-off of deferred financing fees related to the senior secured creditfacility and the 14% Series B Senior Notes of approximately $7.7 million, thewrite-off of unamortized debt discount for detachable warrants associated withthe 14% Series B Senior Notes of approximately $3.6 million and costs of approximately$0.1 million related to the termination of the senior secured credit facility,net of a gain of approximately $14.1 million recognized on the reduction incarrying value of the future cash payments associated with the purchased 14%Senior Notes.

 

During the first quarterof 2003, Operating Company consummated a private placement exchange ofapproximately $48.2 million aggregate principal amount of its 14% SeniorNotes and approximately $9.6 million in cash for approximately$192.7 million aggregate principal amount of its outstanding 14%Subordinated Notes. Additionally, Operating Company consummated a relatedfinancing, in a private placement offering, of approximately $12.8 millionaggregate principal amount of 14% Series B Senior Notes in which we receivedcash

 

27

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proceeds of approximately $9.6 million to fund the cash portion ofthe exchange. Under the financing, UbiquiTel issued detachable warrants topurchase up to approximately 9.6 million shares of its common stock at anexercise price of $0.01 per share. We followed the provisions of SFASNo. 15, “Accounting by Debtors and Creditors for Troubled DebtRestructurings,” and EITF Issue No. 02-04, “Determining Whether a Debtor’sModification or Exchange of Debt Instruments Is Within the Scope of FASBStatement No. 15,” in recording the private placement exchange transactionin the first quarter of 2003. These provisions require that the carrying valueof the 14% Senior Notes be recorded at the total future cash payments(principal and interest) specified by the 14% Senior Notes; therefore, the 14%Senior Notes were classified on our balance sheet as long-term liabilities andwere valued at approximately $81.9 million as of the transaction date. Asa result, no interest expense related to the 14% Senior Notes will berecognized in future periods. In the first quarter of 2003, we recognized again of approximately $39.0 million as a result of the private placementexchange in addition to the $3.9 million gain recognized in the three monthsended June 30, 2004, for a total gain during the six months ended June 30, 2004of $42.9 million.

 

***Income Taxes***

 

For the six months ended June 30, 2004 and 2003, werecognized an income tax expense of approximately $0.2 million and $0.4million, respectively. Income tax expense for the six months ended June 30,2004 and June 30, 2003 is comprised primarily of deferred income taxes thatresulted from an expected income tax deduction for amortization of goodwill, whichis not amortizable to expense for financial reporting purposes.

 

***Net Income (Loss)***

 

For the six monthsended June 30, 2004, our net loss was approximately $15.4 million and for thesix months ended June 30, 2003, our net income was approximately $7.3 million.We recognized gains on debt retirements of approximately $1.1 million and $42.9million for the six months ended June 30, 2004 and 2003, respectively.

 

**Liquidityand Capital Resources**

 

From inception throughDecember 31, 2002, we principally relied on the proceeds from equity anddebt financings, and to a lesser extent revenues, as our primary sources ofcapital. In 2003, we generated approximately $14.5 million of positivecash flow from operating activities.  Inthe six months ended June 30, 2004, we generated approximately$23.3 million of positive cash flow from operating activities.

 

Completion of our PCS network has required substantialcapital.  Although we have essentiallycompleted our network coverage build-out, our business could require additionalcapital expenditures of up to approximately $20 to $25 million annuallyfor capacity enhancements and coverage improvements. Capital expenditures forthe six months ended June 30, 2004 totaled approximately $16.4 million. In the second quarterof 2004, Sprint announced its intention to deploy the next generation of CDMAtechnology known as EVDO in a portion of its network over the next 18 months.EVDO technology is expected to generate higher network data speeds and allowthe introduction of new data products and features. While Sprint will notrequire the implementation of EVDO by us or its other PCS affiliates, duringthe second half of 2004 we intend to analyze the business case for theimplementation of EVDO in portions of our network. If we decide to implementEVDO in portions of our network, we expect to be able to fund capitalexpenditures necessary for the EVDO technology deployment through cash flowsfrom our operating activities, and presently do not anticipate the need toraise additional capital to fund such expenditures.

 

On February 23, 2004,Operating Company issued $270.0 million in aggregate principal amount of the9.875% Senior Notes at a discount and generated approximately$265.3 million in proceeds. UbiquiTel has fully and unconditionallyguaranteed Operating Company’s obligations under the 9.875% Senior Notes. Theproceeds were used to repay and terminate Operating Company’s senior securedcredit facility, including the repayment of $230.0 million in outstandingborrowings plus accrued interest and termination of its unused$47.7 million revolving line of credit, to redeem all of its outstanding14% Series B Senior Notes ($14.5 million outstanding principal

 

28

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amount) for approximately $12.5 million and to purchase$16.7 million principal amount of its outstanding 14% Senior Notes forapproximately $15.9 million. Under the indenture governing the 9.875%Senior Notes, Operating Company is permitted to issue additional notes fromtime to time. On July 29,2004, Operating Company completed a registered exchange offer involving the9.875% Senior Notes, pursuant to which all of the outstanding 9.875% SeniorNotes were exchanged for 9.875% Senior Notes that have been registered underthe Securities Act of 1933.  Theregistered 9.875% Senior Notes are substantially identical to the unregistered9.875% Senior Notes, except that certain transfer restrictions and registrationrights do not apply to the registered 9.875% Senior Notes.

 

The 14% SubordinatedNotes, the 14% Senior Notes and the 9.875% Senior Notes will require cashpayments of interest of $0, $0 and approximately $13.8 in 2004, respectively,approximately $7.0 million, $2.2 million and $26.7 million in 2005,respectively, and approximately $14.1 million, $4.4 million and $26.7million in 2006, respectively. We presently are in compliance with allcovenants associated with the 14% Subordinated Notes, 14% Senior Notes and9.875% Senior Notes. We may from time to time purchase outstanding 14%Subordinated Notes, 14% Senior Notes and 9.875% Senior Notes in the openmarket, in privately negotiated transactions or otherwise in accordance withour debt agreements and applicable law.

 

As of June 30, 2004, wehad approximately $58.3 million in cash, cash equivalents and restrictedcash, and working capital of approximately $49.8 million. Managementexpects cash and cash equivalents, combined with cash flow from operatingactivities, to be sufficient to meet capital expenditures needs and servicedebt requirements through June 30, 2005 and into the foreseeable future.

 

While management does notanticipate the need to raise additional capital to meet our operating orcapital expenditure requirements in the foreseeable future, our funding statusis dependent on a number of factors influencing projections of operating cashflows, including those related to gross new customer additions, customerturnover, revenues, marketing costs, bad debt expense and roaming and resellerrevenue. Management believes our financial position will be sufficient to meetthe cash requirements of the business including capital expenditures, anyoperating losses, cash interest and working capital needs. Should actualresults differ significantly from these assumptions, our liquidity positioncould be adversely affected and we could be in a position that would require usto raise additional capital which may not be available or may not be availableon acceptable terms.

 

***Contractual Obligations***

 

We are obligated to make future payments under variouscontracts we have entered into, including amounts pursuant to noncancelableoperating lease agreements for office space, retail stores, land for radiocommunications sites, leased space on radio communications sites and officeequipment; capital leases; purchase obligations; the building mortgage andother long-term liabilities; the 14% Subordinated Notes; the 14% Senior Notes;and the 9.875% Senior Notes.  Thefollowing table lists our expected future minimum contractual cash obligationsfor the next five years and in the aggregate as of June 30, 2004 (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** |   |
|                                               |   |                                        |    |   |   |   |   |   |   |   |   |
| Operating  leases(1)                               |   | $                                           | 69,998  |   | $ | 17,292 |   | $ | 22,359 |   | $ | 12,989 |   | $ | 17,358 |   |
| Capital leases                                     |   | 5                                           |    | 5 |   | — |   | — |   | — |   |
| Purchase  obligations(2)                           |   | 9,572                                       |    | 2,328 |   | 7,244 |   | — |   | — |   |
| Building  mortgage and other long-term liabilities |   | 3,351                                       |    | 214 |   | 477 |   | 548 |   | 2,112 |   |
| 14% subordinated  notes(3)                         |   | 100,380                                     |    | — |   | — |   | — |   | 100,380 |   |
| 14% senior  notes(3)                               |   | 31,473                                      |    | — |   | — |   | — |   | 31,473 |   |
| 9.875% senior  notes(3)                            |   | 270,000                                     |    | — |   | — |   | — |   | 270,000 |   |
|                                               |   | $                                           | 484,779 |   | $ | 19,839 |   | $ | 30,080 |   | $ | 13,537 |   | $ | 421,323 |   |

 

29

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(1)                                  Doesnot include payments due under renewals to the original lease term.

 

(2)                                  OperatingCompany is committed to convert 285 base stations during the years 2004 through2006 at prices fixed in an agreement with a third party.

 

(3)                                  Totalrepayments, excluding interest payments, are based on borrowings outstanding asof June 30, 2004.

 

There areprovisions in each of the indentures governing the 14% Subordinated Notes, 14%Senior Notes  and 9.875% Senior Notesthat provide for an acceleration of repayment upon an event of default, asdefined in the respective agreements.

 

***Analysis of Cash Flows***

 

Net cash providedby operating activities was approximately $23.3 million and $10.5 million forthe six months ended June 30, 2004 and 2003, respectively.  The increase in cash provided by operatingactivities was primarily due to the reduction in operating loss offset byincreases in accounts receivable and prepaid and other assets.

 

Net cash used in investing activities was approximately $16.4 million and$7.1 million for the six months ended June 30, 2004 and 2003,respectively.  The increase resultedfrom higher capital expenditures for switch capacity upgrades and cash paymentsfor the purchase of current generation multi-carrier capable base stationspursuant to our plan to replace our existing minicell base stations.

 

Net cash used in financing activities for the sixmonths ended June 30, 2004 was approximately $7.0 million, consisting primarilyof the reduction in the book cash overdraft of approximately $5.7 million,financing costs incurred in connection with our January 2004 amendment to modify certain covenants ofour senior secured credit facility of approximately $0.4 million and capitallease and other long-term debt payments of approximately $0.2 million. Asdiscussed above, the proceeds from the issuance of the 9.875% Senior Notes inFebruary 2004 were used to repay outstanding borrowings plus accrued interestdue under the senior secured credit facility, to redeem outstanding 14% Series BSenior Notes, to purchase a portion of the outstanding 14% Senior Notes and topay all financing fees associated with the refinancing. 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 the senior securedcredit facility, $4.2 million in financing costs directly associated with theissuance of the Series B Notes, the debt-for-debt exchange offer and openmarket note purchases and $0.4 million of capital lease and other long-termdebt payments.

 

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

 

In addition to therisk factors referred to in the “Forward-Looking Statements” section of thisItem 2, the following risk factors could materially and adversely affect ourfuture operating results and liquidity and could cause actual events to differmaterially from those predicted in forward-looking statements related to ourbusiness.

 

We may not be able tosustain our growth or obtain sufficient revenue to achieve and sustainprofitability. If the current trend of slower net customer growth is more rapidthan we anticipate, it will lower the expected amount of positive cash flowfrom operating activities less capital expenditures, which in turn will have anegative effect on liquidity and capital resources. For the three months ended June30, 2004, approximately$14.1 million of cash flow was provided by operating activities. Ourbusiness projections reflect continuing growth in our subscriber base and areduction and eventual elimination of net losses. If we acquire more newcustomers than we project, the upfront

 

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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 inhigher cash provided in the near term but provide lower cash flows in laterperiods.

 

We placesubstantial reliance on the timeliness, accuracy and sufficiency of revenue andcost data and information generated by Sprint for the compilation of ourfinancial statements and other financial disclosures, including substantialportions of our revenues, expenses and accounts receivable. As part of ouragreements, we outsource several functions to Sprint including billing,customer care, national network operations support, inventory logisticssupport, long distance transport and national retailer sales support. The dataprovided by Sprint is the primary source for our recognition of service revenueand a significant portion of our selling and marketing and cost of service andoperations expenses. In certain cases, the data is provided at a level ofdetail that is not adequate for us to verify for accuracy back to theoriginating source. We rely on Sprint to have designed adequate internalcontrols with respect to the processes established to provide this data.Because of this reliance, we are dependent on Sprint to periodically evaluatethe effectiveness of these controls and report any significant deficiencies andweaknesses in the design or operation of these controls that could have amaterial impact on our financial statements and disclosures. Sprint provides asemi-annual evaluation of these controls to us by engaging its independentauditors to provide a “Report on Controls Placed in Operation and Tests ofOperating Effectiveness for Affiliates” under guidance provided in Statement ofAuditing Standards No. 70 (“SAS 70”). There can be no assurance that theSAS 70 procedures will identify all weaknesses that might be material to us. Althoughwe are not presently aware of any material errors affecting us, errors that arenot reconciled on a timely basis by Sprint could cause us to misstate ourrevenues or expenses and could result in out-of-period adjustments that maymaterially adversely affect our financial results and could have a materialadverse effect on our business, financial condition, results of operations andcash flows. Additionally, if we or any other PCS affiliate of Sprint findsignificant errors in information provided by Sprint which causes a restatementof financial statements or otherwise affects us, investors and the investmentcommunity may lose confidence in us. Should Sprint fail to deliver timely,accurate and sufficient information, this could lead to a greater degree ofuncertainty in our business and financial planning and may lead to adverseshort-term decisions. In addition, the failure of Sprint to remit current orfuture amounts owing to PCS affiliates of Sprint, including us, could lead toactions on the part of us or other PCS affiliates of Sprint to enforce rightsunder the Sprint agreements and other remedies available under applicable law.

 

The FCC mandated that wireless carriers provide for wireless localnumber portability (“WLNP”) by November 24, 2003 in certain markets, andby May 24, 2004 in the remaining markets. Local number portability allowssubscribers to keep their wireless phone number when switching to a differentservice provider. Number portability could potentially increase churn, which couldlower our revenues. We may be required to increase subsidies for productupgrades and/or reduce pricing to match competitors’ initiatives and retaincustomers, which could adversely impact our revenue and profitability and ourliquidity. WLNP had no material impact on our results for the year endedDecember 31, 2003 or the six months ended June 30, 2004.

 

Wemay not be able to access the credit markets for additional capital if theliquidity discussed above is insufficient for the cash needs of our business.We frequently evaluate options for additional financings to supplement ourliquidity position and maintain maximum financial flexibility. However, if theassumptions used in our projections are incorrect, we may be unable to raiseadditional capital.

 

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

 

We utilize certain financial measures that are notcalculated in accordance with accounting principles generally accepted in theUnited States, or GAAP, to assess our financial performance. A non-GAAP financialmeasure is defined as a numerical measure of a company’s financial performancethat (a) excludes amounts, or is subject to adjustments that have theeffect of excluding amounts, that are included in the comparable measure

 

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calculated and presented in accordance with GAAP in the statement ofincome or statement of cash flows; or (b) includes amounts, or is subjectto adjustments that have the effect of including amounts, that are excludedfrom the comparable measure so calculated and presented. The non-GAAP financialmeasures discussed in “—Results of Operations” are average revenue per user(ARPU), cash cost per user (CCPU) and cost per gross addition (CPGA).Descriptions of these non-GAAP financial measures are provided where theparticular measures are discussed in “—Results of Operations—Analysis of thethree months ended June 30, 2004 compared to the three months ended June 30,2003,” and the following tables reconcile the non-GAAP financial measures withour unaudited consolidated financial statements presented in accordance withGAAP (excluding subscriber data).

 
|                             |   | **Three  Months Ended June 30,** |       | **Six Months  Ended June 30,** |   |
|----------------------------------|--------|----------------------------------|------------|--------------------------------|--------|
|                             |   | **2004**                         |       | **2003**                       |   | **2004** |   | **2003** |   |
| Average revenue  per user (ARPU) |   |                             |       |                           |   |   |   |   |   |
| Service revenue                  |   | $                                | 85,489,000 |                           | $      | 63,428,000 |   | $ | 162,927,000 |   | $ | 119,672,000 |   |
| Less: Wholesale  revenue         |   | (23,515,000                      | )          | (13,906,000                    | )      | (44,382,000 | ) | (27,079,000 | ) |
| Subscriber  revenue              |   | $                                | 61,974,000 |                           | $      | 49,522,000 |   | $ | 118,545,000 |   | $ | 92,593,000 |   |
|                             |   |                             |       |                           |   |   |   |   |   |
| Average  subscribers             |   | 357,800                          |       | 282,600                        |   | 348,100 |   | 273,800 |   |
|                             |   |                             |       |                           |   |   |   |   |   |
| ARPU                             |   | $                                | 58         |                           | $      | 58 |   | $ | 57 |   | $ | 56 |   |

 

We believeARPU, which calculates the average monthly service revenue per customer,excluding wholesale revenue, is a useful measure to assist in evaluating ourpast and forecasting our future subscriber revenue. In addition, it provides agauge to compare our subscriber revenue to that of other wirelesscommunications providers, although other wireless communications providers mayinclude or exclude certain items from their calculations which may make thecomparison less meaningful.

 
|                                                     |   | **Three  Months Ended June 30,** |       | **Six Months  Ended June 30,** |   |
|----------------------------------------------------------|--------|----------------------------------|------------|--------------------------------|--------|
|                                                     |   | **2004**                         |       | **2003**                       |   | **2004** |   | **2003** |   |
| Cash cost per  user (CCPU)                               |   |                             |       |                           |   |   |   |   |   |
| Cost of service  and operations (excluding depreciation) |   | $                                | 36,885,000 |                           | $      | 31,557,000 |   | $ | 71,133,000 |   | $ | 60,958,000 |   |
| Add: General  and  administrative expenses          |   | 9,621,000                        |       | 7,748,000                      |   | 18,861,000 |   | 15,222,000 |   |
| Total cash costs                                         |   | $                                | 46,506,000 |                           | $      | 39,305,000 |   | $ | 89,994,000 |   | $ | 76,180,000 |   |
|                                                     |   |                             |       |                           |   |   |   |   |   |
| Average  subscribers                                     |   | 357,800                          |       | 282,600                        |   | 348,100 |   | 273,800 |   |
|                                                     |   |                             |       |                           |   |   |   |   |   |
| CCPU                                                     |   | $                                | 43         |                           | $      | 46 |   | $ | 43 |   | $ | 46 |   |

 

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,** |   |
|---------------------------------|--------|----------------------------------|------------|--------------------------------|--------|
|                            |   | **2004**                         |       | **2003**                       |   | **2004** |   | **2003** |   |
| Cost per gross  addition (CPGA) |   |                             |       |                           |   |   |   |   |   |
| Selling and  marketing          |   | $                                | 15,852,000 |                           | $      | 12,079,000 |   | $ | 32,829,000 |   | $ | 24,160,000 |   |
| Add: Cost of  products sold     |   | 8,919,000                        |       | 9,504,000                      |   | 18,134,000 |   | 18,805,000 |   |
| Less: Equipment  revenue        |   | (3,192,000                       | )          | (2,618,000                     | )      | (7,064,000 | ) | (4,857,000 | ) |
| CPGA costs                      |   | $                                | 21,579,000 |                           | $      | 18,965,000 |   | $ | 43,899,000 |   | $ | 38,108,000 |   |
|                            |   |                             |       |                           |   |   |   |   |   |
| Gross additions                 |   | 45,800                           |       | 42,000                         |   | 98,300 |   | 86,300 |   |
|                            |   |                             |       |                           |   |   |   |   |   |
| CPGA                            |   | $                                | 471        |                           | $      | 452 |   | $ | 447 |   | $ | 442 |   |

 

32

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We believe CPGA, whichmeasures the average cost to acquire new customers during the period, is auseful measure used to compare our average cost to acquire a new subscriber tothat of other wireless communication providers, although other wirelesscommunications providers may include or exclude certain items from theircalculations which may make the comparison less meaningful.

 

***Inflation***

 

We believe that inflation has not had, and will nothave, a material adverse effect on our results of operations.

 

***Seasonality***

 

Our business is seasonal because the wireless industryis heavily dependent on fourth quarter results.  Among other things, the industry relies on significantly highercustomer additions and handset sales in the fourth quarter as compared to theother three fiscal quarters.  Thefactors contributing to this trend include the increasing use of retail distribution,which is dependent on year-end holiday shopping, the timing of new product andservice offerings, competitive pricing pressures and aggressive marketing andpromotions during the holiday season. The increased level of activity requires a greater use of our availablefinancial resources during this period.

 

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

 

Market risk is the potential loss arising from adversechanges in market prices and rates, including interest rates. All of theinterest rates on our notes are fixed. Consequently, we have not entered intoderivatives or other financial instruments for trading, speculative or hedgingpurposes, though we may do sofrom time to time if such instruments are available to us on acceptable termsand prevailing market conditions are accommodating. No principalrepayments on our notes are due within the next five years.

 

**Item 4. Controls and Procedures**

 

## **Evaluation ofDisclosure Controls and Procedures**

## ** **

Our management, under thesupervision and with the participation of our Chief Executive Officer and ChiefAccounting Officer, has conducted an evaluation of our “disclosure controls andprocedures” (as defined in the Securities Exchange Act of 1934 (“Exchange Act”)Rules 13a-15(e) or 15d-15 (e)) as of June 30, 2004. Based on that evaluation,our Chief Executive Officer and Chief Accounting Officer concluded that ourdisclosure controls and procedures were effective as of June 30, 2004.

 

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 semi-annually to us.

 

## **Changes in InternalControls**

## ** **

There was no change in ourinternal control over financial reporting identified in connection with theevaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15that occurred during the three months ended June 30, 2004 that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

 

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# **PARTII.  OTHER INFORMATION**

# ** **

# **Item 1. LegalProceedings**

# ** **

Neither UbiquiTel nor Operating Company is a party toany pending legal proceedings that either UbiquiTel or Operating Companybelieves would, if adversely determined, individually or in the aggregate, havea material adverse effect on our financial condition or results of operations.

 

**Item 2. Changes in Securities, Use of Proceeds and IssuerPurchases of Equity Securities**

 

None.

 

**Item 3. Defaults Upon SeniorSecurities**

 

None.

 

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

 

UbiquiTel’s 2004 Annual Meeting of Shareholders (the“Annual Meeting”) was held on May 14, 2004 in Conshohocken, Pennsylvania tovote on the election of three ClassI directors, each for a three-year term ending in 2007.

 

Proxies for the Annual Meeting were solicited pursuantto Regulation 14A under the Securities Exchange Act of 1934, and there was nosolicitation in opposition to UbiquiTel’s solicitation.

 

The holders of record of an aggregate of 77,100,707shares of common stock**, out of92,579,141 shares outstanding on the record date for the Annual Meeting,******were present either in person or byproxy, and constituted a quorum for the transaction of business at the AnnualMeeting.

 

All nominees for Class I directors, James E. Blake, Peter Lucas and Bruce E.Toll, were elected, with voting as detailed below:

 
| **Director Nominee** |   | **Votes For** |   | **Votes  Against** |   |
|----------------------|--------|---------------|--------|--------------------|--------|
| James E. Blake       |   | 76,213,926    |   | 886,781            |   |
| Peter Lucas          |   | 72,246,603    |   | 4,854,104          |   |
| Bruce E. Toll        |   | 76,184,876    |   | 915,831            |   |

 

**Item 5. Other Information**

 

None.

 

34

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

 

**(a)****                                  Reportson Form 8-K**

 

During the quarter ended June 30, 2004, one report onForm 8-K was furnished: 

 
| **Date**       |   | **Item  Reported On**                                                                                                                                                           |
|----------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| April 28, 2004 |   | Item 12. Results of Operations and Financial  Condition. On April 28, 2004, UbiquiTel Inc. announced its operating and  financial results for the quarter ended March 31, 2004. |

 

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

 
| **Exhibit  No.** |   | **Description**                                                                                                                                                                                                                                                                                   |
|------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |   |                                                                                                                                                                                                                                                                                              |
| 10.1             |   | Addendum IX dated July 31,  2004 to Sprint PCS Management Agreement and Sprint PCS Services Agreement by  and between Sprint Spectrum L.P., Wireless Co., L.P., Sprint Communications  Company L.P., Sprint Telephony PCS, L.P. and Sprint PCS License, L.L.C., and  UbiquiTel Operating Company. |
|             |   |                                                                                                                                                                                                                                                                                              |
| 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).                                                                                                              |

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|           | 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 6, 2004 |                        |   |
|                |                             |  |  |  |  |  |

 

36

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