**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 September 30, 2003**

 

**Commission File Number**

**000-30761**

 

**UbiquiTel Inc.**

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

 

| **Delaware**                                                      |   | **23-3017909**                        |
|-------------------------------------------------------------------|--------|---------------------------------------|
| (State of  incorporation)                                         |   | (I.R.S. Employer  Identification No.) |
|                                                              |   |                                  |
| **One West Elm Street, Suite 400,  Conshohocken, PA**             |   | **19428**                             |
| (Address of principal  executive office)                          |   | (Zip code)                            |
|                                                              |   |                                  |
| Co-Registrant’s  telephone number:  **(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’s telephone 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 thepreceding 12 months (or for such shorter period that each co-registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

Yes ý     No o

 

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

Yes o     No ý

 

There were 92,579,141 shares of common stock, $0.0005 par value, of UbiquiTel Inc. outstanding atNovember 14, 2003.

 

There were 1,000 shares of common stock, $0.01 par value, of UbiquiTelOperating Company outstanding at November 14,2003, all of which were owned by UbiquiTel Inc.

 

 

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**UbiquiTel Inc. and Subsidiaries**

 

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

 

**INDEX**

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

 

2

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**Explanatory Note:**

 

The ConsolidatedFinancial Statements included herein are that of UbiquiTel Inc.(“UbiquiTel”).  The Co-Registrants areUbiquiTel and UbiquiTel Operating Company (“Operating Company”), which is awholly-owned subsidiary of UbiquiTel and the issuer of 14% senior subordinateddiscount notes due 2010, 14% senior discount notes due 2010 and 14% Series Bsenior discount notes due 2008 (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 Note 7 to theConsolidated Financial Statements have been presented herein. As used hereinand except as the context otherwise may require, the “Company,” “we,” “us,”“our” or “UbiquiTel” means, collectively UbiquiTel, Operating Company and theirconsolidated subsidiary, UbiquiTel Leasing Company.

 

3

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**PART I****. FINANCIAL INFORMATION**

 

**Item 1****.  FinancialStatements**

 

# **UbiquiTel Inc. and Subsidiaries**

# **ConsolidatedBalance Sheets**

# **(Unaudited)**

# **(In Thousands, Except Per Share Data)**

 
|                                                                                                                                                                                         |   | **September 30, 2003** |    | **December 31, 2002** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|---------|----------------------------|--------|
| **ASSETS**                                                                                                                                                                                   |   |                        |    |                       |   |
| CURRENT ASSETS:                                                                                                                                                                              |   |                        |    |                       |   |
| Cash and cash  equivalents                                                                                                                                                                   |   | $                           | 58,700  |                       | $      | 73,481 |   |
| Restricted cash                                                                                                                                                                              |   | 2,424                       |    | 2,408                      |   |
| Accounts  receivable, net of allowance for doubtful accounts of $3,026 at  September 30, 2003 and $4,343 at December 31, 2002                                                      |   | 21,257                      |    | 21,762                     |   |
| Inventory                                                                                                                                                                                    |   | 2,366                       |    | 2,751                      |   |
| Prepaid expenses  and other assets                                                                                                                                                           |   | 16,551                      |    | 15,380                     |   |
| Income tax  receivable                                                                                                                                                                       |   | 217                         |    | 8,784                      |   |
| Total current  assets                                                                                                                                                                        |   | 101,515                     |    | 124,566                    |   |
| PROPERTY AND  EQUIPMENT, NET                                                                                                                                                                 |   | 263,083                     |    | 275,588                    |   |
| CONSTRUCTION IN  PROGRESS                                                                                                                                                                    |   | 4,752                       |    | 8,117                      |   |
| DEFERRED  FINANCING COSTS, NET                                                                                                                                                               |   | 9,367                       |    | 12,717                     |   |
| GOODWILL                                                                                                                                                                                     |   | 38,138                      |    | 38,138                     |   |
| INTANGIBLE  ASSETS, NET                                                                                                                                                                      |   | —                      |    | 2,753                      |   |
| OTHER  INTANGIBLES, NET                                                                                                                                                                      |   | 69,945                      |    | 73,174                     |   |
| OTHER LONG-TERM  ASSETS                                                                                                                                                                      |   | 3,468                       |    | 3,774                      |   |
| Total assets                                                                                                                                                                                 |   | $                           | 490,268 |                       | $      | 538,827 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                               |   |                        |    |                       |   |
| CURRENT LIABILITIES:                                                                                                                                                                         |   |                        |    |                       |   |
| Accounts payable                                                                                                                                                                             |   | $                           | 9,227   |                       | $      | 11,209 |   |
| Accrued expenses                                                                                                                                                                             |   | 24,421                      |    | 23,681                     |   |
| Accrued  compensation and benefits                                                                                                                                                           |   | 3,474                       |    | 2,547                      |   |
| Deferred revenue                                                                                                                                                                             |   | 11,046                      |    | 9,252                      |   |
| Interest payable                                                                                                                                                                             |   | 1,586                       |    | 1,923                      |   |
| Current portion  of long-term debt                                                                                                                                                           |   | 5,645                       |    | 683                        |   |
| Other                                                                                                                                                                                        |   | 8,360                       |    | 7,379                      |   |
| Total current  liabilities                                                                                                                                                                   |   | 63,759                      |    | 56,674                     |   |
| LONG-TERM DEBT  AND CAPITAL LEASE OBLIGATIONS, EXCLUDING CURRENT MATURITIES                                                                                                                  |   | 395,798                     |    | 457,038                    |   |
| OTHER LONG-TERM  LIABILITIES                                                                                                                                                                 |   | 4,132                       |    | 3,506                      |   |
| Total long-term  liabilities                                                                                                                                                                 |   | 399,930                     |    | 460,544                    |   |
| Total  liabilities                                                                                                                                                                           |   | 463,689                     |    | 517,218                    |   |
| COMMITMENTS AND  CONTINGENCIES STOCKHOLDERS’ EQUITY:                                                                                                                                    |   |                        |    |                       |   |
| Preferred stock,  par value $0.001 per share; 10,000 shares authorized; 0 shares issued and  outstanding at September 30, 2003 and December 31, 2002                               |   | —                      |    | —                     |   |
| Common stock,  par value $0.0005 per share; 240,000 shares authorized; 92,579 and 81,432  shares issued and outstanding at September 30, 2003 and  December 31, 2002, respectively |   | 46                          |    | 41                         |   |
| Additional  paid-in-capital                                                                                                                                                                  |   | 299,908                     |    | 295,236                    |   |
| Accumulated  deficit                                                                                                                                                                         |   | (273,375                    | )       | (273,668                   | )      |
| Total  stockholders’ equity                                                                                                                                                             |   | 26,579                      |    | 21,609                     |   |
| Total  liabilities and stockholders’ equity                                                                                                                                             |   | $                           | 490,268 |                       | $      | 538,827 |   |

 

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

 

4

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**UbiquiTelInc. and Subsidiaries**

# **ConsolidatedStatements of Operations**

**(Unaudited)**

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

 
|                                                                                  |   | **Three  Months Ended September 30,** |   | **Nine  Months Ended September 30,** |   |
|---------------------------------------------------------------------------------------|--------|--------------------------------------------|--------|-------------------------------------------|--------|
|                                                                                  |   | **2003**                                   |   | **2002**                                  |   | **2003** |   | **2002** |   |
| REVENUES:                                                                             |   |                                       |   |                                      |   |   |   |   |   |
| Service revenue                                                                       |   | $                                          | 69,289 |                                      | $      | 58,901 |   | $ | 188,961 |   | $ | 154,257 |   |
| Equipment  revenue                                                                    |   | 3,504                                      |   | 2,105                                     |   | 8,361 |   | 6,438 |   |
| Total revenues                                                                        |   | 72,793                                     |   | 61,006                                    |   | 197,322 |   | 160,695 |   |
| COSTS AND  EXPENSES:                                                                  |   |                                       |   |                                      |   |   |   |   |   |
| Cost of service  and operations (exclusive of depreciation as shown separately below) |   | 29,984                                     |   | 37,468                                    |   | 90,942 |   | 103,511 |   |
| Cost of products  sold                                                                |   | 10,721                                     |   | 9,493                                     |   | 29,526 |   | 27,334 |   |
| Selling and  marketing                                                                |   | 13,095                                     |   | 15,312                                    |   | 37,255 |   | 40,001 |   |
| General and  administrative expenses excluding non-cash compensation charges          |   | 7,876                                      |   | 6,751                                     |   | 23,098 |   | 19,317 |   |
| Non-cash  compensation for general and administrative matters                         |   | 47                                         |   | 95                                        |   | 157 |   | 284 |   |
| Depreciation,  amortization and accretion                                             |   | 11,032                                     |   | 13,946                                    |   | 34,690 |   | 37,678 |   |
| Total costs and  expenses                                                             |   | 72,755                                     |   | 83,065                                    |   | 215,668 |   | 228,125 |   |
| OPERATING INCOME  (LOSS)                                                              |   | 38                                         |   | (22,059                                   | )      | (18,346 | ) | (67,430 | ) |
| INTEREST INCOME                                                                       |   | 146                                        |   | 396                                       |   | 483 |   | 1,365 |   |
| INTEREST EXPENSE                                                                      |   | (6,989                                     | )      | (11,855                                   | )      | (24,147 | ) | (34,137 | ) |
| GAIN ON DEBT  RETIREMENTS                                                             |   | —                                     |   | —                                    |   | 42,872 |   | — |   |
| OTHER INCOME                                                                          |   | —                                     |   | 140                                       |   | — |   | 214 |   |
| INCOME (LOSS)  BEFORE INCOME TAXES                                                    |   | (6,805                                     | )      | (33,378                                   | )      | 862 |   | (99,988 | ) |
| INCOME TAX  (EXPENSE) BENEFIT                                                         |   | (200                                       | )      | 2,896                                     |   | (569 | ) | 8,687 |   |
| NET INCOME  (LOSS)                                                                    |   | $                                          | (7,005 | )                                         | $      | (30,482 | ) | $ | 293 |   | $ | (91,301 | ) |
|                                                                                  |   |                                       |   |                                      |   |   |   |   |   |
| NET INCOME  (LOSS) PER SHARE:                                                         |   |                                       |   |                                      |   |   |   |   |   |
| BASIC                                                                                 |   | $                                          | (0.08  | )                                         | $      | (0.38 | ) | $ | 0.00 |   | $ | (1.13 | ) |
| DILUTED                                                                               |   | $                                          | (0.08  | )                                         | $      | (0.38 | ) | $ | 0.00 |   | $ | (1.13 | ) |
|                                                                                  |   |                                       |   |                                      |   |   |   |   |   |
| WEIGHTED AVERAGE  SHARES OUTSTANDING:                                                 |   |                                       |   |                                      |   |   |   |   |   |
| BASIC                                                                                 |   | 90,687                                     |   | 81,222                                    |   | 84,952 |   | 81,152 |   |
| DILUTED                                                                               |   | 90,687                                     |   | 81,222                                    |   | 93,488 |   | 81,152 |   |

 

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

 

5

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# **UbiquiTel Inc. and Subsidiaries**

# **ConsolidatedStatements of Cash Flows**

**(Unaudited)**

**(InThousands)**

 
|                                                                                                 |   | **Nine  Months Ended  September 30, 2003** |   | **Nine Months Ended**September 30, 2002 |   |
|------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------|--------|----------------------------------------------|--------|
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                               |   |                                            |   |                                         |   |
| Net income  (loss)                                                                                   |   | $                                               | 293    |                                         | $      | (91,301 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by (used in) operating  activities: |   |                                            |   |                                         |   |
| Amortization of  deferred financing costs                                                            |   | 2,381                                           |   | 2,637                                        |   |
| Amortization of  intangible assets                                                                   |   | 5,982                                           |   | 12,254                                       |   |
| Depreciation and  accretion                                                                          |   | 28,709                                          |   | 25,424                                       |   |
| (Gain) loss on  sale of equipment                                                                    |   | 31                                              |   | (114                                         | )      |
| Interest accrued  on discount notes                                                                  |   | 12,040                                          |   | 20,438                                       |   |
| Non-cash  compensation from stock options granted to employees                                       |   | 157                                             |   | 284                                          |   |
| Deferred income  taxes                                                                               |   | —                                          |   | (2,357                                       | )      |
| Gain on debt  retirements                                                                            |   | (42,872                                         | )      | —                                       |   |
| Changes in  operating assets and liabilities exclusive of acquisitions and capital  expenditures:    |   |                                            |   |                                         |   |
| Accounts  receivable                                                                                 |   | 505                                             |   | (1,906                                       | )      |
| Inventory                                                                                            |   | 385                                             |   | 1,653                                        |   |
| Prepaid expenses  and other assets                                                                   |   | (865                                            | )      | (12,564                                      | )      |
| Income tax  receivable                                                                               |   | 8,567                                           |   | —                                       |   |
| Accounts payable  and accrued expenses                                                               |   | 2,392                                           |   | 10,903                                       |   |
| Net cash  provided by (used in) operating activities                                                 |   | 17,705                                          |   | (34,649                                      | )      |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                               |   |                                            |   |                                         |   |
| Capital  expenditures                                                                                |   | (12,741                                         | )      | (41,629                                      | )      |
| Change in  restricted cash                                                                           |   | (16                                             | )      | 1,157                                        |   |
| Cash received on  sale of equipment                                                                  |   | —                                          |   | 114                                          |   |
| Net cash used in  investing activities                                                               |   | (12,757                                         | )      | (40,358                                      | )      |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                               |   |                                            |   |                                         |   |
| Drawings under  senior secured credit facility                                                       |   | —                                          |   | 30,000                                       |   |
| Repayments under  senior secured credit facility                                                     |   | (15,000                                         | )      | —                                       |   |
| Proceeds from  issuance of senior unsecured Series B discount notes                                  |   | 10,914                                          |   | —                                       |   |
| Cash payments  for purchase and exchange of senior subordinated discount notes                       |   | (10,701                                         | )      | —                                       |   |
| Financing costs                                                                                      |   | (4,573                                          | )      | (1,170                                       | )      |
| Proceeds from  issuance of common stock                                                              |   | 32                                              |   | 67                                           |   |
| Proceeds from  exercise of stock options and warrants                                                |   | 147                                             |   | —                                       |   |
| Repayment of  capital lease obligations and other long-term liabilities                              |   | (548                                            | )      | (1,033                                       | )      |
| Net cash  provided by (used in) financing activities                                                 |   | (19,729                                         | )      | 27,864                                       |   |
| NET DECREASE IN  CASH AND CASH EQUIVALENTS                                                           |   | (14,781                                         | )      | (47,143                                      | )      |
| CASH AND CASH  EQUIVALENTS, beginning of period                                                      |   | 73,481                                          |   | 124,744                                      |   |
| CASH AND CASH  EQUIVALENTS, end of period                                                            |   | $                                               | 58,700 |                                         | $      | 77,601 |   |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:                                                   |   |                                            |   |                                         |   |
| Cash paid for  interest                                                                              |   | $                                               | 9,726  |                                         | $      | 11,062 |   |
| Cash paid for  taxes                                                                                 |   | 318                                             |   | —                                       |   |
| SUPPLEMENTAL  DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:                             |   |                                            |   |                                         |   |
| Network assets  acquired but not yet paid                                                            |   | —                                          |   | 1,000                                        |   |

 

*The accompanying notes are an integral part of theseconsolidated financial statements.*

 

6

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**UbiquiTelInc. and Subsidiaries**

# **Notes to**ConsolidatedFinancial Statements

**(Unaudited)**

 

**1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

**Basis ofPresentation of Unaudited Interim Financial Information**

 

The consolidatedfinancial information as of September 30, 2003 and for the three and ninemonths ended September 30, 2003 and 2002 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 theinformation and footnotes required by generally accepted accountingprinciples.  In the opinion of management,the interim data includes all adjustments, consisting only of normal recurringadjustments, that are considered necessary for a fair presentation of theCompany’s interim results.  Operatingresults for the three and nine months ended September 30, 2003 are notnecessarily indicative of results that may be expected for the entire year.  This financial information should be read inconjunction with the audited financial statements and notes thereto for theyear ended December 31, 2002 of UbiquiTel which are included in its andOperating Company’s Joint Annual Report on Form 10-K for the year endedDecember 31, 2002.

 

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

 

# **Stock-Based Compensation**

# ** **

AtSeptember 30, 2003, UbiquiTel had two stock-based employee compensationplans, an equity incentive plan and an employee stock purchase plan, which wassuspended effective with the offering period beginning January 1,2003.  The Company accounts for thoseplans in accordance with Accounting Principles Board (“APB”) Opinion No. 25,“Accounting for Stock Issued to Employees” (“APB No. 25”), and relatedinterpretations. Based on the additional disclosure requirements of Statementof Financial Accounting Standards (“SFAS”) No. 148, “Accounting for Stock-BasedCompensation—Transition and Disclosure—an amendment of FASB Statement No. 123”(“SFAS No. 148”), the following table illustrates the effect on net income and earningsper share if the Company had applied the fair value recognition provisions ofSFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”).

 

7

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|                                                                                                                   |   | **Three Months Ended September 30,**    |   | **Nine Months Ended September 30,** |   |
|------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------|--------|------------------------------------------|--------|
|                                                                                                                   |   | **2003**                                     |   | **2002**                                 |   | **2003** |   | **2002** |   |
|                                                                                                                   |   | **(In Thousands, Except Per Share Amounts)** |   |
|                                                                                                                   |   |                                         |   |
| Net income  (loss), as reported                                                                                        |   | $                                            | (7,005 | )                                        | $      | (30,482 | ) | $ | 293 |   | $ | (91,301 | ) |
| Add: Stock-based  employee compensation included in reported net income (loss), net of related  tax                    |   | 47                                           |   | 95                                       |   | 157 |   | 284 |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value-based  method, net of related tax |   | (561                                         | )      | (679                                     | )      | (1,660 | ) | (2,025 | ) |
| Pro forma net  income (loss)                                                                                           |   | $                                            | (7,519 | )                                        | $      | (31,066 | ) | $ | (1,210 | ) | $ | (93,042 | ) |
|                                                                                                                   |   |                                         |   |                                     |   |   |   |   |   |
| Basic net income  (loss) per share:                                                                                    |   |                                         |   |                                     |   |   |   |   |   |
| As reported                                                                                                            |   | $                                            | (0.08  | )                                        | $      | (0.38 | ) | $ | 0.00 |   | $ | (1.13 | ) |
| Pro forma                                                                                                              |   | $                                            | (0.08  | )                                        | $      | (0.38 | ) | $ | (0.01 | ) | $ | (1.15 | ) |
|                                                                                                                   |   |                                         |   |                                     |   |   |   |   |   |
| Diluted net  income (loss) per share:                                                                                  |   |                                         |   |                                     |   |   |   |   |   |
| As reported                                                                                                            |   | $                                            | (0.08  | )                                        | $      | (0.38 | ) | $ | 0.00 |   | $ | (1.13 | ) |
| Pro forma                                                                                                              |   | $                                            | (0.08  | )                                        | $      | (0.38 | ) | $ | (0.01 | ) | $ | (1.15 | ) |

 

**Intangible Assets**

 

Intangible assetsrepresented the estimated value of acquired subscriber bases for VIA Wirelessand the Spokane market at the dates of acquisition. Intangible assets were $0and $2.8 million, net of accumulated amortization expense of $19.1 million and$16.3 million as of September 30, 2003 and December 31, 2002,respectively, and were amortized on a straight-line basis over a period of 20months to five years. The VIA Wireless and Spokane market subscriber basesacquired were initially being amortized over 36 months and 60 months,respectively, which represented the estimated average lives of a subscriber inthese respective markets. Effective April 1, 2002, however, the Companychanged the amortization periods of the VIA Wireless and Spokane marketsubscriber bases to 20 months and 33 months, respectively, resulting fromhigher customer turnover in these markets. As of March 31, 2003, the VIAWireless subscriber base was fully amortized and as of December 31, 2002,the Spokane market subscriber base was fully amortized. Amortization expensefor intangible assets was $0 and approximately $3.8 million for the threemonths ended September 30, 2003 and 2002, respectively, and approximately$2.8 million and $9.0 million for the nine months ended September 30, 2003and 2002, respectively.

 

Other intangibleassets were $69.9 million and $73.2 million, net of accumulated amortizationexpense of $9.2 million and $5.9 million as of September 30, 2003 andDecember 31, 2002, respectively. Other intangible assets represent the estimated value of VIA Wireless’Sprint PCS management agreement. Amortization expense for other intangible assets was approximately $1.1million for the three months ended September 30, 2003 and 2002 andapproximately $3.2 million for the nine months ended September 30, 2003and 2002.

 

Estimated futureamortization expense of intangible assets for the next five years atSeptember 30, 2003 is as follows:

 
| **Years  Ending December 31,** |   | **(In  Thousands)** |   |
|-------------------------------------|--------|---------------------|--------|
|                                |   |                |   |
| 2003 (remaining)                    |   | $                   | 1,076  |   |
| 2004                                |   | 4,304               |   |
| 2005                                |   | 4,304               |   |
| 2006                                |   | 4,304               |   |
| 2007                                |   | 4,304               |   |
|                                     |        |                     |        |  |

 

8

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**RecentAccounting Pronouncements**

 

In May 2003, the Financial Accounting StandardsBoard (“FASB”) issued SFAS No. 150, “Accounting for Certain FinancialInstruments with Characteristics of Both Liabilities and Equity” (“SFAS No.150”).  The Statement establishesstandards for how certain financial instruments with characteristics of bothliabilities and equity must be classified and measured.  SFAS No. 150 requires that a financialinstrument that is within its scope be classified as a liability, or an assetin some circumstances.  Many of those instrumentswere previously classified as equity.  ThisStatement is effective for financial instruments entered into or modified afterMay 31, 2003, and otherwise if effective at the beginning of the firstinterim period beginning after June 15, 2003, excluding mandatorilyredeemable non-controlling interests associated with finite-lived subsidiaries,for which the provisions of this Statement have been deferred indefinitelypursuant to FASB Staff Position 150-3.  The Company has determined that itcurrently has no instruments within the scope of this Statement.

 

InApril 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 onDerivative Instruments and Hedging Activities” (“SFAS No. 149”).  SFAS No. 149 amends and clarifies theaccounting guidance on derivative instruments (including certain derivativeinstruments embedded in other contracts) and hedging activities that fallwithin the scope of SFAS No. 133, “Accounting for Derivative Instruments andHedging Activities.”  SFAS No. 149 alsoamends certain other existing pronouncements, which will result in moreconsistent reporting of contracts that are derivatives in their entirety orthat contain embedded derivatives that warrant separate accounting.  This Statement is effective for contractsentered into or modified after June 30, 2003, with certain exceptions, andfor hedging relationships designated after June 30, 2003.  The Company does not have any contracts thatare derivatives or that contain embedded derivatives.

 

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

 

In April 2002, the FASB issued SFAS No. 145,“Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB StatementNo. 13, and Technical Corrections” (“SFAS No. 145”). Among other things, thisStatement rescinds FASB Statement No. 4, “Reporting Gains and Losses fromExtinguishment of Debt,” which required all gains and losses fromextinguishment of debt to be aggregated and, if material, classified as anextraordinary item, net of related income tax effect. As a result, the criteriain APB Opinion No. 30, “Reporting the Results of Operations—Reporting theEffects of Disposal of a Segment of a Business, and Extraordinary, Unusual andInfrequently Occurring Events and Transactions,” will now be used to classifythose gains and losses. The Company’s adoption of SFAS No. 145 onJanuary 1, 2003 did not have a material impact on the Company’s financialposition, results of operations or cash flows.

 

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

 

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after June 15, 2002.

 

The Company’snetwork is primarily located on leased property and the Company has certain legalobligations, principally related to its tower leases, which fall within thescope of SFAS No. 143. These legal obligations primarily include certainobligations to remediate leased land on which the Company’s tower assets arelocated. In addition to its tower leases, the Company has leases relatedto switch site, retail and administrative locations subject to the provisionsof SFAS No. 143. In the third quarter of 2003, the Company recorded aninitial asset retirement obligation of approximately $0.3 million, andcapitalized the same amount by increasing the carrying cost of the relatedasset.  Additionally during the thirdquarter, approximately $0.1 million of accretion expense was recorded toincrease the asset retirement obligation to its present value, and thecapitalized costs were depreciated by approximately $0.1 million.

 

InJanuary 2003, the FASB issued FASB Interpretation No. 46, “Consolidationof Variable Interest Entities—An Interpretation of Accounting Research Bulletin(ARB) No. 51” (“FIN 46”). This interpretation clarifies how to identifyvariable interest entities and how a company should assess its interests in avariable interest entity to decide whether to consolidate the entity. FIN 46applies to variable interest entities created after January 31, 2003, inwhich a company obtains an interest after that date. The FASB has delayedimplementation of FIN 46 for variable interest entities created beforeFebruary 1, 2003 until the first fiscal quarter or interim period ending afterDecember 15, 2003. The Company does not have any ownership in variableinterest entities.

 

InNovember 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others.” This interpretation expands thedisclosures to be made by a guarantor about its obligations under certainguarantees and requires that, at the inception of a guarantee, a guarantorrecognize a liability for the fair value of the obligation undertaken inissuing the guarantee. The disclosure requirements are effectiveimmediately.  As disclosed in Note 7 tothe Consolidated Financial Statements, UbiquiTel has fully and unconditionallyguaranteed Operating Company’s obligations under its 14% senior subordinateddiscount notes, 14% senior discount notes and 14% Series B senior discountnotes. The initial recognition and measurement provisions of thisinterpretation are effective for guarantees issued or modified afterDecember 31, 2002. The adoption of the initial recognition and measurementprovisions of this interpretation did not have a material impact on theCompany’s financial position, results of operations or cash flows.

 

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

 

In November 2002, the EITF issued EITF Issue No.00-21, “Accounting for Multiple-Element Revenue Arrangements” (“EITF 00-21”).EITF 00-21 addresses how to account for arrangements that may involve thedelivery or performance of multiple products, services and/or rights to useassets. Revenue arrangements with multiple deliverables are required to bedivided into separate units of accounting if the deliverables in thearrangement meet certain criteria. Arrangement consideration should beallocated among the separate units of accounting based on their relative fairvalues.  EITF 00-21 is applicable toagreements entered into in quarters beginning after June 15, 2003. TheCompany has determined that the sale of wireless services through its directsales channels with an accompanying handset constitutes a revenue arrangementwith multiple deliverables. Upon adoption of EITF 00-21, the Companydiscontinued deferring non-refundable, up-front activation fees and associatedcosts for its direct sales channels. Additionally, direct sales channelactivation fees are now included in equipment

 

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revenue rather thanservice revenue in the consolidated statement of operations to the extent thatthe aggregate activation fee and handset proceeds received from a subscriber donot exceed the fair value of the handset sold. The Company adopted this newpronouncement effective July 1, 2003 on a prospective basis which did nothave a material impact on the Company’s financial position, results ofoperations or cash flows.

 

**Reclassifications**

 

Certain prior year amountshave been reclassified to conform with current year presentation.

 

**2.ORGANIZATION, NATURE OF BUSINESS AND LIQUIDITY**

 

**Organizationand Nature of Business**

 

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

 

In October 1998, UbiquiTel L.L.C. (a Washingtonstate limited liability company), whose sole member was The Walter Group,entered into an agreement with Sprint PCS for no consideration given for theexclusive rights to market Sprint’s 100% digital, 100% PCS products andservices to the approximately one million 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. On November 1, 1999,the Company entered into a founders’ agreement and issued common stock to agroup of five shareholders including The Walter Group. In November 1999,UbiquiTel L.L.C. assigned all of its material contracts, including the rightsto the Sprint PCS agreements, to UbiquiTel. On December 28, 1999,UbiquiTel  amended its agreement with Sprint PCS to expand the Company’smarkets to the northern California, Spokane/Montana, southern Idaho/Utah/Nevadaand southern Indiana/Kentucky markets, which together with the Reno/Tahoemarkets, contain approximately 7.7 million residents.

 

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

 

On February 22, 2001, UbiquiTel entered into amerger agreement for the acquisition of VIA Wireless LLC, a California limitedliability company and PCS affiliate of Sprint (“VIA Wireless”). Upon theclosing of the merger agreement, as amended and restated, on August 13,2001, VIA Wireless became a wholly owned subsidiary of UbiquiTel through aseries of mergers and related transactions. VIA Wireless was the exclusiveprovider of Sprint PCS digital wireless services to the central valley ofCalifornia, which covers approximately 3.4 million residents. OnFebruary 21, 2001, in connection with the acquisition, UbiquiTel amendedits agreement with Sprint PCS to expand its markets to include the six VIAWireless basic trading areas (BTAs) included under VIA Wireless’ formeraffiliation agreement with Sprint PCS, including Bakersfield, Fresno, Merced,Modesto, Stockton and Visalia, California, which went into effect at theclosing of the acquisition.  OnDecember 31, 2001, through a series of mergers, certain corporate membersof VIA Wireless merged into the sole remaining member, VIA Holding Inc., whichhad become a wholly owned subsidiary of Operating Company effective immediatelyafter the acquisition of VIA Wireless in August 2001, and which, alongwith VIA Wireless LLC, has since been merged into UbiquiTel Operating Company.

 

In August 2003, UbiquiTel amended its Sprint PCSmanagement agreement to eliminate the obligation to build out the state ofMontana, thereby reducing the Company’s licensed resident population toapproximately 10.0 million.

 

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

 

**Liquidity**

 

ThroughSeptember 30, 2003, the Company has principally relied on the proceedsfrom equity and debt financings, and to a lesser extent revenues, as theprimary sources of capital. Completion of the Company’s PCS network hasrequired substantial capital and as of September 30, 2003, the Company hadan accumulated deficit of approximately $273.4 million.

 

As ofSeptember 30, 2003, the Company had approximately $61.1 million in cash,cash equivalents and restricted cash, working capital was approximately $37.8million and the Company’s unused revolving line of credit was approximately$47.7 million. The Company received notice during the three months endedSeptember 30, 2003 that the Federal Deposit Insurance Corporation had beenappointed as receiver for one of the participants in the Company’s seniorsecured credit facility and had exercised its statutory authority to repudiateand disaffirm its obligations with respect to the credit agreement, effectivelyeliminating approximately $2.3 million of the Company’s availability under itsrevolving line of credit. In June 2003, the Company announced that itentered into a definitive sale and lease-back agreement for the sale ofwireless communication tower sites owned by the Company located in the centralvalley of California and the lease-back of space on those sites.  The Company received $10.95 million in cashfor the sale of 94 towers and related assets on October 15, 2003. TheCompany and the purchaser executed an escrow agreement pursuant to the terms ofthe asset purchase agreement whereby the Company will place in escrow for aperiod of one year after the closing an amount equal to 10% of the purchaseprice, or approximately $1.1 million, for any indemnification claims that ariseduring the holdback period and are resolved in the purchaser’s favor. In earlyAugust 2003, the Company announced that it had amended its managementagreement with Sprint PCS to remove the build-out requirement for the state ofMontana, thereby reducing the Company’s projected capital expenditures andoperating expenses to launch this market by approximately $25.0 million.  In addition, in early August 2003,Sprint PCS announced that it had entered into a reseller agreement with QwestCommunications allowing Qwest to provide wireless voice and data services tonew and existing customers in Qwest’s service areas using Sprint’s network andthe network of affiliates of Sprint who overlap with Qwest’s service areas.Qwest has approximately 30,000 to 40,000 customers in portions of the Company’sservice areas in Washington, Idaho and Utah and the Company anticipatesreceiving additional incremental revenue from Qwest for customers who use theCompany’s network under this reseller arrangement.  Management believes cashand cash equivalents and cash availability under the Company’s senior securedcredit facility, combined with cash flow from operations, are expected to besufficient to fund any operating losses and working capital, to meet capitalexpenditure needs and to service debt requirements through September 30, 2004 and into the foreseeable future. Dueto a number of factors, including improving operating performance, theelimination of the Montana build-out requirement, the Qwest resellerarrangement described above and the changes to the Sprint PCS management andservices agreements described in Note 3 (Sprint Agreements), the Companyexpects to attain positive cash flow from operations less capital expendituresfor the year 2004 and beyond.

 

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

 

In addition,Operating Company’s ability to borrow funds under the senior secured creditfacility’s $47.7 million revolving line of credit is subject to continuedcompliance with restrictive covenants under the senior secured credit facility(see Note 6) and will be restricted unless the cash balance (as defined in thecredit facility) is less than $25.0 million at the time of borrowing. TheCompany obtained an amendment to its senior secured credit facility onOctober 10, 2003 that made the Company in compliance with the minimumsubscriber covenant for the

 

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quarter endedSeptember 30, 2003.The Company presently is in compliance with allfinancial and operational covenants relating to the senior secured creditfacility; however, there is uncertainty as to the Company’s ability to continueto comply with such financial and operating covenants over the next twelve months.Should the Company determine that it may not be able to meet, or has not met,covenant requirements, the Company would seek modifications to, or waivers of,its covenant requirements; however, receipt of such modifications or waivers isnot guaranteed.

 

If the Company’sbusiness does not generate the results required by the covenants in the seniorsecured credit facility, its ability to make borrowings under the revolvingline of credit could be restricted or terminated and the credit facility couldbe declared in default.  Additionally,if the Company fails to make an interest or principal payment when due on anyof the Company’s senior secured credit facility, senior discount notes, SeriesB senior discount notes and senior subordinated discount notes, it couldtrigger cross-default provisions on the other long-term debt agreements.  If the Company’s long-term debt agreementsare declared in default, the creditors under these agreements may demandimmediate payment of the outstanding indebtedness.

 

**3.SPRINT AGREEMENTS**

 

In November 2003, the Company entered into anaddendum with Sprint PCS that modified several provisions of the management andservices agreements that govern the Company’s relationship with SprintPCS.  A summary of the key provisions inthe addendum are noted below:

 

•                  Sprint PCSconsolidated several support services relating to billing, customer care,collections, network operations control center monitoring, national platforminterconnectivity, voice mail, directory assistance, operator services androaming clearinghouse services into one back office service referred to asSprint CCPU service.  The Company hasagreed to continue to purchase the Sprint CCPU service from Sprint PCS for theperiod November 2003 through December 2006 and pay a monthly rate of$7.70 per subscriber.  Beginning in2007, the monthly rate for the next three years for Sprint CCPU service will bebased on a to-be-determined percentage of Sprint PCS’ reported cash cost peruser (“CCPU”).  If the Company and SprintPCS cannot agree to a new rate for any future three year period beyond 2006,the Company has the option to continue to purchase the Sprint CCPU service andhave an arbitrator determine the new rate or self provision or procure thoseservices elsewhere.

 

•                  Sprint PCSconsolidated several services relating to subscriber activation, creditverification and handset logistics into one service referred to as Sprint CPGAservice.  The Company has agreed tocontinue to purchase the Sprint CPGA service from Sprint PCS for the periodNovember 2003 through December 2006 at a monthly rate of 5.2% ofSprint PCS’ cost per gross addition (“CPGA”). Beginning in 2007, the monthly percentage rate for the next three yearsfor Sprint CPGA service will be based on a to-be-determined percentage ofSprint PCS’ reported CPGA.  If theCompany and Sprint PCS cannot agree to a new rate for any future three yearperiod beyond 2006, the Company has the option to continue to purchase theSprint CPGA service and have an arbitrator determine the new rate or selfprovision or procure those services elsewhere.

 

•                  The Companyearns travel revenues when a Sprint PCS subscriber outside the Company’smarkets travels onto the Company’s network. Similarly, the Company pays Sprint PCS when the Company’s subscribersuse the Sprint PCS nationwide network outside the Company’s markets.  The Sprint PCS travel rate will continue tobe $0.058 per minute of use plus the actual long distance charges incurredthrough December 2006.  Beginningin 2007, the Sprint PCS travel rate will change annually to equal 90% of SprintPCS’ retail yield from the prior year. Sprint PCS’ retail yield is defined as Sprint PCS’ average revenue peruser for voice services divided by the average minutes of use per month per user.

 

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•                  The Companyearns reseller revenue when a reseller subscriber uses the Company’s PCSnetwork in its markets.  The resellerrate will be $0.058 per minute of use from November 2003 through December 2006.  Beginning in 2007, the Sprint PCS resellerrate will change annually to equal 90% of Sprint PCS’ retail yield from theprior year.  Sprint PCS’ retail yield isdefined as Sprint PCS’ average revenue per user for voice services divided bythe average minutes of use per month per user.

 

•                  The Company hasthe right to be offered through December 2006 any future changes thatSprint PCS may offer to another Sprint PCS affiliate of similar size (definedas more than 3.0 million covered POPs). If exercised, the Company must acceptall changes to the management and services agreements of the other affiliate.

 

•                  Under certainconditions, the Company is provided protective rights to decline to implementfuture program requirement changes that could be imposed by Sprint PCS andadversely effect the Company’s business. A program requirement change can generally alter certain operatingparameters of the Company’s business to coincide with changes that are beingmade by Sprint PCS nationally and could affect the Company’s revenues, expensesand/or capital expenditures.

 

During the three month period ended September 30,2003, the Company recorded a one-time adjustment to reduce operating expensesby approximately $3.2 million relating to the resolution of more than $7.5million of previously disputed charges with Sprint PCS for which the Companyhad fully reserved the amounts under dispute. The adjustment reduced cost of service and operations expense byapproximately $3.2 million and the Company paid Sprint PCS approximately $4.3million in conjunction with other previously disputed charges inNovember 2003.

 

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

 

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

 

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

 
|                                                 |   | **Three Months Ended September 30,**    |   | **Nine Months Ended September 30,** |   |
|------------------------------------------------------|--------|----------------------------------------------|--------|------------------------------------------|--------|
|                                                 |   | **2003**                                     |   | **2002**                                 |   | **2003** |   | **2002** |   |
|                                                 |   | **(In Thousands, Except Per Share Amounts)** |   |
| Basic                                                |   |                                         |   |                                     |   |   |   |   |   |
| Net income  (loss)                                   |   | $                                            | (7,005 | )                                        | $      | (30,482 | ) | $ | 293 |   | $ | (91,301 | ) |
| Average common  shares outstanding                   |   | 90,687                                       |   | 81,222                                   |   | 84,952 |   | 81,152 |   |
| Basic                                                |   | $                                            | (0.08  | )                                        | $      | (0.38 | ) | $ | 0.00 |   | $ | (1.13 | ) |
|                                                 |   |                                         |   |                                     |   |   |   |   |   |
| Diluted                                              |   |                                         |   |                                     |   |   |   |   |   |
| Net income (loss)                                    |   | $                                            | (7,005 | )                                        | $      | (30,482 | ) | $ | 293 |   | $ | (91,301 | ) |
| Average common  shares outstanding Effect of:        |   | 90,687                                       |   | 81,222                                   |   | 84,952 |   | 81,152 |   |
| Dilutive options                                     |   | —                                       |   | —                                   |   | 1,195 |   | — |   |
| Dilutive  securities                                 |   | —                                       |   | —                                   |   | 7,341 |   | — |   |
| Average common  shares outstanding assuming dilution |   | 90,687                                       |   | 81,222                                   |   | 93,488 |   | 81,152 |   |
| Diluted                                              |   | $                                            | (0.08  | )                                        | $      | (0.38 | ) | $ | 0.00 |   | $ | (1.13 | ) |

 

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The following tablesummarizes the securities outstanding, which are excluded from the income(loss) per share calculation, whenamounts would have an antidilutive effect.

 
|          |   | **Three Months Ended September 30,** |   | **Nine Months Ended September 30,** |   |
|---------------|--------|-------------------------------------------|--------|------------------------------------------|--------|
|          |   | **2003**                                  |   | **2002**                                 |   | **2003** |   | **2002** |   |
| Stock options |   | 6,658,300                                 |   | 5,586,000                                |   | 6,658,300 |   | 5,586,000 |   |
| Warrants      |   | 3,665,183                                 |   | 3,665,183                                |   | 3,665,183 |   | 3,665,183 |   |
| Total         |   | 10,323,483                                |   | 9,251,183                                |   | 10,323,483 |   | 9,251,183 |   |

 

**5.PROPERTY AND EQUIPMENT**

 

Property and equipment consisted of the following (inthousands): 

 
|                            |   | **September 30, 2003** |    | **December 31, 2002** |   |
|---------------------------------|--------|-----------------------------|---------|----------------------------|--------|
| Network  equipment              |   | $                           | 325,422 |                       | $      | 310,709 |   |
| Vehicles                        |   | 1,311                       |    | 1,268                      |   |
| Furniture and  office equipment |   | 11,845                      |    | 10,855                     |   |
| Leasehold  improvements         |   | 4,022                       |    | 3,727                      |   |
| Land                            |   | 130                         |    | 130                        |   |
| Buildings                       |   | 4,670                       |    | 4,670                      |   |
|                            |   | 347,400                     |    | 331,359                    |   |
| Accumulated  depreciation       |   | (84,317                     | )       | (55,771                    | )      |
| Property and  equipment, net    |   | $                           | 263,083 |                       | $      | 275,588 |   |

 

Depreciation expense was approximately $9.8 millionand $9.1 million for the three months ended September 30, 2003 and 2002,respectively, and approximately $28.6 million and $25.4 million for the ninemonths ended September 30, 2003 and 2002, respectively.

 

**6.LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS**

 

Long-term debt and capital lease obligationsoutstanding as of September 30, 2003 and December 31, 2002 were asfollows (in thousands): 

 
|                                                                              |   | **September 30, 2003** |    | **December 31, 2002** |   |
|-----------------------------------------------------------------------------------|--------|-----------------------------|---------|----------------------------|--------|
| Senior secured  credit facility                                                   |   | $                           | 230,000 |                       | $      | 245,000 |   |
| Building  mortgage and other long-term liabilities                                |   | 3,503                       |    | 3,653                      |   |
| Capital lease  obligations                                                        |   | 161                         |    | 564                        |   |
| Senior discount  notes                                                            |   | 48,180                      |    | —                     |   |
| Less: Discount                                                                    |   | (9,053                      | )       | —                     |   |
| Series B senior  discount notes                                                   |   | 14,515                      |    | —                     |   |
| Less: Discount                                                                    |   | (2,721                      | )       | —                     |   |
| Less: Detachable  warrants                                                        |   | (3,916                      | )       | —                     |   |
| Senior  subordinated discount notes                                               |   | 100,380                     |    | 300,000                    |   |
| Less: Discount                                                                    |   | (18,887                     | )       | (79,865                    | )      |
| Less: Detachable  warrants                                                        |   | (3,498                      | )       | (11,631                    | )      |
| Subtotal                                                                          |   | 358,664                     |    | 457,721                    |   |
| Future cash  flows associated with senior discount notes for interest and other   |   | 42,779                      |    | —                     |   |
| Total long-term  debt and capital lease obligations                               |   | 401,443                     |    | 457,721                    |   |
| Less: Current  maturities                                                         |   | 5,645                       |    | 683                        |   |
| Total long-term debt  and capital lease obligations, excluding current maturities |   | $                           | 395,798 |                       | $      | 457,038 |   |

 

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The interest rates for the senior secured creditfacility ranged from 4.2% to 6.2% during the nine months endedSeptember 30, 2003.

 

On April 11, 2000, Operating Company issued 14%senior subordinated discount notes. See Note 7 for additional information.

 

On March 31,2000, Operating Company entered into a $250.0 million senior secured creditfacility with Paribas, as administrative agent, and certain banks and otherfinancial institutions as parties thereto, which was guaranteed byUbiquiTel.  The credit facilityconsisted of a revolving loan of up to $55.0 million, a term loan A of $120.0million and a term loan B of $75.0 million. The Company’s obligations under thecredit agreement are secured by all of the Company’s assets. On March 1,2001, Operating Company and Paribas and the other lenders under the seniorsecured credit facility entered into a second amendment and consent to thecredit agreement, whereby the lenders increased the $250.0 million creditfacility by $50.0 million to $300.0 million, and approved UbiquiTel’sacquisition of VIA Wireless.  Theadditional borrowing increased the term loan B to $125.0 million. OperatingCompany fully drew down the term loans according to a mandatory draw downschedule during the years ended December 31, 2002, 2001 and 2000. Asdescribed below, the credit facility was reduced to $280.0 million in February 2003.As described in Note 2 (Liquidity), the unused revolving line of credit wasreduced to approximately $47.7 million during the quarter endedSeptember 30, 2003. In conjunction with the closing in March 2000,the increase of the facility in March 2001, an amendment executed inJuly 2002 and an amendment executed in February 2003, OperatingCompany incurred financing fees of approximately $11.6 million which arebeing amortized over the term of the credit facility.

 

The revolving loan and term loan A will mature in October 2007and the term loan B will mature in October 2008.  The term loans A and B are required to be repaid beginning inJune 2004 in fourteen and eighteen consecutive quarterly installments,respectively. The amount of each of the quarterly consecutive installmentsincreases incrementally in accordance with the credit facility agreement.  The amount that can be borrowed andoutstanding under the revolving loan reduces in seven quarterly reductionsbeginning in December 2005. Effective March 1, 2003, OperatingCompany can voluntarily prepay the term loans without a prepayment premium.

 

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

 

The Company has a mortgage relating to a building andland with a balance of approximately $3.5 million at September 30, 2003.The mortgage carries a fixed interest rate of 6.99% and is payable in monthlyinstallments of approximately $37,000. The mortgage is due to be repaid in full by April 2015.

 

In July 2002, the Company entered into anamendment to its senior secured credit facility. The amendment primarilyadjusted certain financial covenants, provided for new financial covenantsregarding minimum cash balances and minimum consolidated EBITDA (each asdefined in the credit facility), and imposed additional conditions on theavailability of drawings under the revolving line of credit. The Company mustmeet the following financial and operating covenants: minimum levels forsubscribers, revenues, cash balances and network coverage, and maximum capitalspending limits; and must achieve financial ratios including total debt to adjustedEBITDA and senior debt to adjusted EBITDA (each as defined in the creditfacility). Beginning with the three months ending June 30, 2004, theCompany also must achieve minimum EBITDA and meet additional financial ratiosincluding interest coverage to EBITDA, total debt to EBITDA and senior debt toEBITDA (each as defined in the credit facility), among other restrictions.Beginning with the three months ending March 31, 2006, the Company alsomust maintain a fixed

 

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charge coverage ratio (asdefined in the credit facility). The Company obtained an amendment to itssenior secured credit facility on October 10, 2003 that made the Companyin compliance with the minimum subscriber covenant for the quarter endedSeptember 30, 2003. The Company presently is in compliance with allfinancial and operational covenants associated with its senior secured creditfacility, 14% senior subordinated discount notes, 14% senior discount notes and14% Series B senior discount notes.

 

In February 2003, Operating Company consummatedcertain transactions which reduced its long-term debt outstanding and relatedfuture minimum annual principal payments due on the amounts outstanding underthe senior secured credit facility and the 14% senior subordinated discountnotes.  See Note 7 for additionalinformation.  The Company accounted forthese transactions in accordance with SFAS No. 15, “Accounting by Debtorsand Creditors for Troubled Debt Restructurings” (“SFAS No. 15”), and EITF IssueNo. 02-04, “Determining Whether a Debtor’s Modification or Exchange ofDebt Instruments Is Within the Scope of FASB Statement No. 15” (“EITF02-04”). Also in February 2003, Operating Company and the lenders underthe senior secured credit facility amended the credit facility to gain thelenders’ consent to the transactions described above, which terms included a$15.0 million partial prepayment against the outstanding $245.0 millionprincipal balance of term loans as of December 31, 2002 and the reductionof the unused $55.0 million revolving line of credit to $50.0 million, whichwas reduced to $47.7 million during the quarter ended September 30, 2003as described in Note 2 (Liquidity).

 

In a series of transactions during the three monthsended June 30, 2003, Operating Company purchased a portion of itsaggregate principal amount of outstanding 14% senior subordinated discountnotes and issued additional 14% Series B senior discount notes and detachablewarrants.  See Note 7 for additionalinformation.

 

**7. WHOLLY-OWNED OPERATING SUBSIDIARYAND DEBT RETIREMENTS**

 

On April 11, 2000, Operating Company issued 14%senior subordinated discount notes (the “Existing Notes”) with a maturity valueof $300.0 million and warrants to purchase 3,579,000 shares of common stock ofUbiquiTel at an exercise price of $11.37 per share under Section 4(2) ofthe Securities Act of 1933.  InAugust 2000, the Existing Notes and warrants were registered with theSecurities and Exchange Commission.  TheExisting Notes were issued at a discount and generated approximately $152.3million in gross proceeds.  The valueassigned from the proceeds to the warrants was approximately $15.9million.  The proceeds have been used tofund capital expenditures relating to the network build-out and operatinglosses. The Existing Notes have a ten-year maturity and will accrete in valueuntil April 15, 2005 at an interest rate of 14%.  Interest will become payable semiannually beginning on October 15,2005.  The Existing Notes that remainoutstanding will be redeemable on or after April 15, 2005.

 

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

 

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

 

In February 2003, Operating Company consummatedcertain transactions which reduced its long-term debt outstanding and relatedfuture minimum annual principal payments due under the senior secured creditfacility and the Existing Notes. Operating Company consummated a private placementexchange of $48.2 million aggregate principal amount of its new 14% seniordiscount notes due May 15, 2010 (“New Notes”) and $9.6 million in cash for$192.7 million aggregate principal amount of its outstanding Existing Notes dueApril 15, 2010.  Additionally,Operating Company consummated a related new financing, in a private placementoffering, of $12.8 million

 

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aggregate principalamount of Series B senior discount notes due 2008 (“Series B Notes”) in whichOperating Company received cash proceeds of $9.6 million to fund the cashportion of the exchange. Under the new financing, the Company issued detachablewarrants to purchase up to approximately 9.6 million shares of its common stockat an exercise price of $0.01 per share. Three directors of the Company or their affiliates participated in theprivate placement offering for consideration of approximately $3.3 million, andwere issued approximately $4.4 million aggregate principal amount of Series BNotes and approximately 3.3 million detachable warrants, which becameexercisable upon shareholder approval on May 16, 2003 in accordance withNasdaq Marketplace Rule 4350(i)(1)(A). The Company wrote off approximately $2.9million in deferred financing fees related to the original issuance of theExisting Notes and the Company incurred estimated fees and expenses ofapproximately $3.8 million in connection with the issuance of the New Notes,which reduced the gain resulting from the private placement exchange, and theCompany incurred estimated expenses of approximately $0.4 million in connectionwith the issuance of the Series B Notes. The Company recognized a gain of $39.0million as a result of the private placement exchange.

 

As a condition to these transactions, OperatingCompany’s senior lenders required Operating Company to prepay $15.0 million ofits outstanding term loans under its senior secured credit facility, therebyreducing the outstanding term loans under the senior secured credit facility to$230.0 million. In addition, the $55.0 million unused revolving line of creditwas permanently reduced by $5.0 million to $50.0 million, which was reduced to$47.7 million during the quarter ended September 30, 2003 as described inNote 2 (Liquidity).

 

The Company followed the provisions of SFAS No. 15 andEITF 02-04 in recording these transactions. These provisions require that the carrying value of the New Notes berecorded at the total future cash payments (principal and interest) specifiedby the New Notes; therefore, the New Notes were classified on the Company’sbalance sheet as long-term liabilities and were valued at $81.9 million as ofthe transaction date.  As a result, nointerest expense related to the New Notes will be recognized in future periods.

 

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

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

 

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

 

The New Notes have substantially the same terms as theExisting Notes, except they rank senior in right of payment to the ExistingNotes, they mature on May 15, 2010, thirty days after the maturity of theExisting Notes, and they are not subject to the blocking rights of OperatingCompany’s senior lenders in the event of default with respect to the debt underOperating Company’s senior secured credit facility.  Like the Existing Notes, the New

 

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Notes will accrete invalue until April 15, 2005 and interest thereon will become payablesemiannually beginning on October 15, 2005. The New Notes are redeemableand are governed by an indenture substantially the same as the indenturegoverning the Existing Notes, except that the indenture for the New Notescontains, among other things, a “basket” permitting up to $10 million ofrestricted payments. UbiquiTel has fully and unconditionally guaranteedOperating Company’s obligations under the New Notes.

 

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

 

Additionally, in a series of transactions during thethree months ended June 30, 2003, Operating Company received cash proceedsof approximately $1.3 million, of which $1.1 million were used by OperatingCompany to fund open market purchases of $6.9 million aggregate principalamount ($5.3 million aggregate accreted value) of Existing Notes, and OperatingCompany issued approximately $1.7 million aggregate principal amount ofadditional Series B Notes.  Under theseprivate placement sales, the Company issued detachable warrants to purchase upto approximately 1.3 million shares of its common stock at an exercise price of$0.01 per share. Three directors of UbiquiTel or their affiliates participatedin the private placement sales for aggregate consideration of approximately$0.4 million, and were issued approximately $0.6 million aggregate principalamount of Series B Notes and approximately 0.4 million detachable warrants. Inconnection with these transactions, the Company wrote off approximately $0.1million in deferred financing fees and $0.3 million in unamortized discount ondetachable warrants related to the original issuance of the Existing Notes,which reduced the gain resulting from the open market purchases.  The Company recorded a gain of approximately$3.9 million during the three months ended June 30, 2003. The holders haveexercised all of the warrants issued in connection with the issuance of theSeries B Notes and UbiquiTel issued 10,913,607 shares of its common stock inthe aggregate upon the exercises.

 

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

 

**Item 2****. Management’s Discussion and Analysis of FinancialCondition 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 Operating Company with the Securitiesand Exchange Commission, specifically the most recent filings which identifyimportant risk factors that could cause actual results to differ from thosecontained in the forward-looking statements, including, but not limited to:

 

•                                          UbiquiTel’sdependence on its affiliation with Sprint PCS;

 

•                                          changesin Sprint’s fee structure with UbiquiTel;

 

•                                          thecompetitiveness of and changes in Sprint’s pricing plans, products andservices;

 

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•                                          UbiquiTel’sreliance on the timeliness, accuracy and sufficiency of financial and otherdata and information received from Sprint;

 

•                                          theability of Sprint PCS to provide back office, customer care and other services;

 

•                                          increasedcompetition in UbiquiTel’s markets;

 

•                                          ratesof penetration in the wireless industry;

 

•                                          thepotential to experience a high rate of customer turnover;

 

•                                          SprintPCS’ credit policies;

 

•                                          customerquality;

 

•                                          themarketability, liquidity and price volatility of UbiquiTel’s common stock;

 

•                                          anticipatedfuture losses;

 

•                                          UbiquiTel’sdebt level;

 

•                                          adequacyof bad debt and other reserves;

 

•                                          UbiquiTel’sability to manage anticipated growth and rapid expansion;

 

•                                          changesin population;

 

•                                          changesor advances in technology; and

 

•                                          generaleconomic 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, 2002 filed withthe Securities and Exchange Commission, and under the caption “Liquidity andCapital Resources—Factors That May Affect Operating Results and Liquidity”and elsewhere in this Item 2. We assume no obligation to publicly update orrevise any forward-looking statement made in this report, whether as a resultof new information, future events, changes in assumptions or otherwise, afterthe date of this report.  All written ororal forward-looking statements attributable to us are expressly qualified intheir entirety by these cautionary statements.

 

**Use of Certain Terms**

 

During the three months ended June 30, 2003, weinitiated a reseller program with Virgin Mobile USA in our markets, pursuant towhich Virgin Mobile began reselling wireless services to its customers on apre-paid basis using our network in our markets.  As of September 30, 2003, we had approximately 8,300reseller subscribers and approximately 305,000 subscribers excluding resellers,for a total subscriber base of 313,300. 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 resellers.

 

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### **Overview**

### ** **

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

 

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

 

In February 2001, we entered into a mergeragreement to acquire another PCS affiliate of Sprint, VIA Wireless LLC, theexclusive Sprint PCS provider to the central valley of California market. Wecompleted the mergers and related transactions in August 2001, issuing16.4 million shares of common stock to the former VIA Wireless owners, assumingapproximately $80.1 million of debt and incurring transaction costs of approximately$10.7 million. In October 2001, we sold VIA Wireless’ California PCSlicenses to VoiceStream Wireless for $50.0 million in cash, resulting in netdebt assumed in the VIA Wireless acquisition of $30.1 million. Concurrentlywith the acquisition, we amended our Sprint PCS management agreement to includethe central valley of California market with a total of 3.4 million residents,bringing our licensed resident population under the agreement to approximately11.1 million.

 

In August 2003, we amended our Sprint PCSmanagement agreement to eliminate the obligation to build out the state ofMontana, thereby reducing our licensed resident population to approximately10.0 million.

 

As of September 30, 2003, we had approximately305,000 subscribers excluding resellers and approximately 8,300 resellersubscribers, for a total subscriber base of approximately 313,300.  Our network covered approximately 7.8million residents which represented approximately 78% of the licensed populationin our markets.

 

From our inception on September 29, 1999 throughSeptember 30, 2003, we have incurred losses of approximately $273.4million. We expect to continue to incur net losses through at least 2005. Fromour inception through September 30, 2003, we have used approximately$345.7 million in cash for operating activities and capital expenditures,exclusive of approximately $79.6 million worth of network equipmentacquired as part of the Spokane market and VIA Wireless purchases. We alsoexpect to continue to use cash for operating activities and capitalexpenditures through 2003. At September 30, 2003, we had approximately$61.1 million of cash, cash equivalents and restricted cash and an unusedrevolving line of credit of approximately $47.7 million. We believe we havesufficient cash and cash equivalents to fund capital expenditures, includingthe completion of our build-out, working capital requirements and operatinglosses until we generate positive cash flow.

 

As a PCS affiliate of Sprint, we do not own thelicenses to operate our network and instead pay Sprint PCS for the use of itslicenses. Under our management agreement with Sprint PCS 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 and inaccordance with the terms of the addendum to the management agreement as discussedbelow in “Sprint PCS Management Agreement and Services Agreement

 

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Amendment,” Sprint isentitled to receive 8.0% of billed revenue less current period bad debts fromSprint PCS subscribers based in our markets and fees from wireless serviceproviders other than Sprint PCS when their subscribers roam into our network.We are entitled to 100% of revenues collected from the sale of handsets andaccessories from our stores and on roaming revenues received when Sprint PCScustomers from a different territory make a wireless call on our PCS network.We are responsible for building, owning and managing the portion of the SprintPCS network located in our markets under the Sprint and Sprint PCS brand names.Our results of operations are dependent on Sprint PCS’ network and, to a lesserextent, on the networks of other affiliates of Sprint PCS.

 

As a PCS affiliate of Sprint, we purchase a full suiteof support services from Sprint PCS. We have access to these services duringthe term of our management agreement unless Sprint PCS provides us at leastnine months’ advance notice of its intention to terminate any particularsignificant service. We are purchasing customer billing and collections,customer care, subscriber activation including credit verification, handsetlogistics, network operations control center monitoring, national platforminterconnectivity, voice mail, directory assistance and operator services, longdistance and roaming clearinghouse services. If Sprint PCS terminates service,our operations may be interrupted or restricted.

 

**Sprint PCS Management Agreement andServices Agreement Amendment**

 

In November 2003, we entered into an addendumwith Sprint PCS that modified several provisions of the management and servicesagreements that govern our relationship with Sprint PCS.  A summary of the key provisions in theaddendum are noted below:

 

•                  Sprint PCSconsolidated several support services relating to billing, customer care,collections, network operations control center monitoring, national platforminterconnectivity, voice mail, directory assistance, operator services androaming clearinghouse services into one back office service referred to asSprint CCPU service.  We have agreed tocontinue to purchase the Sprint CCPU service from Sprint PCS for the periodNovember 2003 through December 2006 and pay a monthly rate of $7.70per subscriber.  Beginning in 2007, themonthly rate for the next three years for Sprint CCPU service will be based ona to-be-determined percentage of Sprint PCS’ reported cash cost per user(“CCPU”).  If we and Sprint PCS cannotagree to a new rate for any future three year period beyond 2006, we have theoption to continue to purchase the Sprint CCPU service and have an arbitratordetermine the new rate or self provision or procure those services elsewhere.

 

•                  Sprint PCSconsolidated several services relating to subscriber activation, creditverification and handset logistics into one service referred to as Sprint CPGAservice.  We have agreed to continue topurchase the Sprint CPGA service from Sprint PCS for the periodNovember 2003 through December 2006 at a monthly rate of 5.2% ofSprint PCS’ cost per gross addition (“CPGA”). Beginning in 2007, the monthly percentage rate for the next three yearsfor Sprint CPGA service will be based on a to-be-determined percentage ofSprint PCS’ reported CPGA.  If we andSprint PCS cannot agree to a new rate for any future three year period beyond2006, we have the option to continue to purchase the Sprint CPGA service andhave an arbitrator determine the new rate or self provision or procure thoseservices elsewhere.

 

•                  We earn travelrevenues when a Sprint PCS subscriber outside our markets travels onto ournetwork.  Similarly, we pay Sprint PCSwhen our subscribers use the Sprint PCS nationwide network outside ourmarkets.  The Sprint PCS travel ratewill continue to be $0.058 per minute of use plus the actual long distancecharges incurred through December 2006. Beginning in 2007, the Sprint PCS travel rate will change annually toequal 90% of Sprint PCS’ retail yield from the prior year.  Sprint PCS’ retail yield is defined asSprint PCS’ average revenue per user for voice services divided by the averageminutes of use per month per user.

 

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•                  We earn resellerrevenue when a reseller subscriber uses our PCS network in our markets.  The reseller rate will be $0.058 per minuteof use from November 2003 through December 2006.  Beginning in 2007, the Sprint PCS resellerrate will change annually to equal 90% of Sprint PCS’ retail yield from theprior year. Sprint PCS’ retail yield is defined as Sprint PCS’ average revenueper user for voice services divided by the average minutes of use per month peruser.

 

•                  We have theright to be offered through December 2006 any future changes that SprintPCS may offer to another Sprint PCS affiliate of similar size (defined as morethan 3.0 million covered POPs).  Ifexercised, we must accept all changes to the management and services agreementsof the other affiliate.

 

•                  Under certainconditions, we are provided protective rights to decline to implement futureprogram requirement changes that could be imposed by Sprint PCS and adverselyeffect our business.  A programrequirement change can generally alter certain operating parameters of ourbusiness to coincide with changes that are being made by Sprint PCS nationallyand could affect our revenues, expenses and/or capital expenditures.

 

During the three month period ended September 30,2003, we recorded a one-time adjustment to reduce operating expenses byapproximately $3.2 million relating to the resolution of more than $7.5 millionof previously disputed charges with Sprint PCS for which we had fully reservedthe amounts under dispute.  Theadjustment reduced cost of service and operations expense by approximately $3.2million and we paid Sprint PCS approximately $4.3 million in conjunction withother previously disputed charges in November 2003.

 

**Critical Accounting Policies**

 

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

 

***Revenue Recognition:***

 

We recognizerevenues when services have been rendered or products have been delivered, theprice to the buyer is fixed and determinable, and collectibility is reasonablyassured. We record service revenues, consisting of subscriber revenues,reseller revenues, Sprint PCS travel revenues and non-Sprint PCS roamingrevenues, and equipment revenues consisting of sales of handsets andaccessories. Subscriber revenues consist of monthly recurring service chargesfor voice and third generation data (“3G data”) services and monthlynon-recurring charges for local, long distance, travel and roaming airtimeusage and 3G data usage in excess of the pre-subscribed usage plan receivedfrom our subscribers, cancellation and late fee revenues and surcharges, lessreductions for billing adjustments and credits. Our revenue recognitionpolicies are consistent with the guidance in Emerging Issues Task Force(“EITF”) Issue No. 00-21, “Accounting for Multiple-Element RevenueArrangements” (“EITF 00-21”), and Staff Accounting Bulletin No. 101,“Revenue Recognition in Financial Statements,” promulgated by the Securitiesand Exchange Commission.

 

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, whichis estimated to be 30 months. Direct customer activation costs in excessof activation fee revenue were recognized immediately.  For the three months endedSeptember 30, 2003 and 2002, we recognized approximately $1.3 million and$0.8 million, respectively, of activation fee revenue and for the nine monthsended September 30, 2003 and 2002, we recognized approximately $3.6million and $2.0 million, respectively, of

 

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activation fee revenue.We have deferred approximately $6.1 million and $6.4 million of activation feerevenue and related costs as of September 30, 2003 and December 31,2002, respectively, to future periods. We have determined that the sale ofwireless services through our direct sales channels with an accompanyinghandset constitutes a revenue arrangement with multiple deliverables.  Upon adoption of EITF 00-21, we discontinueddeferring non-refundable, up-front activation fees and associated costs for ourdirect sales channels.  Additionally,direct sales channel activation fees are now included in equipment revenuesrather than service revenues in the consolidated statement of operations to theextent that the aggregate activation fee and handset proceeds received from asubscriber do not exceed the fair value of the handset sold. Approximately $0.6million of activation fees were included in equipment revenues for the threemonths ended September 30, 2003.

 

During the three months ended June 30, 2003, weinitiated the reseller program with Virgin Mobile USA.  We record reseller revenues as Virgin MobileUSA customers use our PCS network.  Forthe three and nine months ended September 30, 2003, we recordedapproximately $59,000 and $70,000 in reseller revenues, respectively.

 

We record Sprint PCS travel revenue on a per-minuterate or on a per kilobyte rate when a Sprint PCS or reseller subscriber basedoutside our markets uses our network. We earned approximately $13.8 million and$17.1 million of Sprint PCS travel revenue for the three months endedSeptember 30, 2003 and 2002, respectively, and approximately $34.9 millionand $40.7 million of Sprint PCS travel revenue for the nine months endedSeptember 30, 2003 and 2002, respectively. We record non-Sprint PCSroaming revenue when a non-Sprint PCS subscriber uses our network. We earnedapproximately $3.9 million and $2.2 million of non-Sprint PCS roaming revenuefor the three months ended September 30, 2003 and 2002, respectively, andapproximately $9.9 million and $3.9 million of non-Sprint PCS roaming revenuefor the nine months ended September 30, 2003 and 2002, respectively.

 

Equipment revenue consists of proceeds from sales ofhandsets and accessories which are recorded at the time of sale. Revenues fromsales of handsets and accessories represent a separate earnings process fromservice revenues because sales of handsets and accessories do not requirecustomers to subscribe to wireless services. We account for rebates, discountsand other sales incentives as a reduction to revenue. Beginning July 1,2003, equipment revenue also includes an allocation of the arrangementconsideration from activation revenue received as part of revenue arrangementswith multiple deliverables.

 

We participate inthe Sprint national and regional distribution programs in which nationalretailers such as Radio Shack, Best Buy and Costco sell Sprint PCS products andservices. In order to facilitate the sale of Sprint PCS products and services,national retailers purchase wireless handsets from Sprint for resale andreceive compensation 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. Handset subsidycharges included in cost of products sold for the three months endedSeptember 30, 2003 and 2002 were approximately $4.1 million and $3.0million, respectively, and approximately $11.4 million and $8.2 million for thenine months ended September 30, 2003 and 2002, respectively.

 

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

 

We placesubstantial reliance on the timeliness, accuracy and sufficiency of certainrevenue, accounts receivable and cost data provided by Sprint which we use inthe preparation of our financial statements and financial disclosures. 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. At times, we have been invoiced by Sprint for charges thatwe believe to be contractually incorrect. We review all charges from Sprint and

 

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dispute charges ifappropriate based upon our interpretation of our agreements with SprintPCS.  When Sprint does not notify ustimely for charges that we have incurred or when we are invoiced for chargesthat we believe to be incorrect, we record estimates primarily based on ourhistorical trends and our estimate for the amount which we believe we willremit to Sprint after the disputed item or items have been settled.

 

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

 

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

 

Reserve forObsolete/Excess Inventory - We record a reserve for obsolete or excess handsetand accessories inventory for models and accessories that are no longermanufactured, for defective models and accessories that have been returned bycustomers and for second generation handsets and accessories. With themigration to the third generation (“1XRTT”) network in the third quarter of2002, we have discontinued purchasing second generation handsets andaccessories.  If the estimate ofobsolete inventory is understated, our operating income would be reduced.

 

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

 

EffectiveJanuary 1, 2002, we adopted Statement of Financial Accounting Standards(“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-LivedAssets” (“SFAS No. 144”), and SFAS No. 142, “Goodwill and Other IntangibleAssets” (“SFAS No. 142”). SFAS No. 144 requires that long-lived assets bereviewed for impairment whenever events or changes in circumstances indicatethat the carrying amount of an asset may not be recoverable. Recoverability isassessed based on the future cash flows expected to result from the use of theasset and its eventual disposition. If the sum of the undiscounted cash flowsis less than the carrying value of the asset, an impairment loss is recognized.Any impairment loss, if indicated, is measured as the amount by which thecarrying amount of the asset exceeds the fair value of the asset. SFASNo. 142 requires that goodwill and certain intangible assets resultingfrom business combinations entered into prior to June 30, 2001 no longerbe amortized, but instead be reviewed for recoverability, and that annual testsfor impairment of goodwill and intangible assets that have indefinite usefullives be performed. SFAS No. 142 also requires interim tests when an eventhas occurred that more likely than not has reduced the fair value of suchassets.  We will assess on an annualbasis the fair values of the reporting unit housing the goodwill andintangibles and, if necessary, assess on an annual basis for any impairment.Any write-offs would result in a charge to earnings and a reduction in equityin the period taken. As of October 31, 2002, we completed our annualimpairment review for the year ended December 31, 2002 and determined thatno impairment charge was required.  Management does not believe that anysignificant changes have occurred since year end and thus no write-offs havebeen made. Management will continue to monitor any triggering events andperform re-evaluations, as necessary, and we will complete our annualimpairment review for the year ended December 31, 2003 as ofOctober 31, 2003.

 

Purchase price accounting requires extensive use ofaccounting estimates and judgments to allocate the

 

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purchase price to thefair market value of the assets and liabilities purchased. In our recording ofthe purchase of VIA Wireless, we engaged a nationally recognized valuationexpert to assist us in determining the fair value of these assets andliabilities. Included in the asset valuation for this purchase was thevaluation of three intangible assets: the VIA Wireless subscriber base, theright to be the exclusive provider of Sprint PCS services in the markets in whichVIA Wireless operated and the California PCS licenses subsequently sold toVoiceStream Wireless. For the subscriber base a useful life of 20 monthswas assigned effective April 1, 2002. For the period from the date ofacquisition (August 13, 2001) to March 31, 2002, the subscriber basewas amortized using a useful life of 36 months. As of March 31, 2003,the VIA Wireless subscriber base was fully amortized. For the right to provideservice under the Sprint PCS management agreement, a useful life of 18 yearshas been assigned. In April 2000, we acquired the Spokane, Washingtonmarket from Sprint PCS. Included in the asset valuation for this purchase wasthe Sprint PCS customer base for this market. For the subscriber base a usefullife of 33 months was assigned effective April 1, 2002. For theperiod from the date of acquisition in April 2000 to March 31, 2002,the subscriber base was amortized using a useful life of 60 months. As ofDecember 31, 2002, the Spokane market subscriber base was fully amortized.VIA Wireless’ Sprint PCS management agreement will be amortized over itsestimated useful life of 18 years.

 

***Income Taxes:***

 

As part of the process of preparing our consolidatedfinancial statements, we are required to estimate our taxes in each of the jurisdictionsof operation.  This process involvesmanagement estimating the actual current tax expense together with assessingtemporary differences resulting from differing treatment of items for tax andaccounting purposes. These differences result in deferred tax assets andliabilities, which are included within the consolidated balance sheets.  We then must assess the likelihood that thedeferred tax assets will be recovered from future taxable income and, to the extentrecovery is not likely, we must establish a valuation allowance. Future taxableincome depends on the ability to generate income in excess of allowabledeductions.  To the extent we establisha valuation allowance or increase this allowance in a period, an expense isrecorded within the tax provision in the consolidated statement ofoperations.  Significant managementjudgment is required in determining our provision for income taxes, deferredtax assets and liabilities and any valuation allowance recorded against netdeferred tax assets. In the event that actual results differ from theseestimates or we adjust these estimates in future periods, we may need toestablish a valuation allowance that could materially impact our financialcondition and results of operations.

 

**RecentAccounting Pronouncements**

 

In May 2003, the Financial Accounting StandardsBoard (“FASB”) issued SFAS No. 150, “Accounting for Certain FinancialInstruments with Characteristics of Both Liabilities and Equity” (“SFAS No.150”).  The Statement establishesstandards for how certain financial instruments with characteristics of bothliabilities and equity must be classified and measured.  SFAS No. 150 requires that a financialinstrument that is within its scope be classified as a liability, or an assetin some circumstances.  Many of thoseinstruments were previously classified as equity.  This Statement is effective for financial instruments enteredinto or modified after May 31, 2003, and otherwise if effective at thebeginning of the first interim period beginning after June 15, 2003,excluding mandatorily redeemable non-controlling interests associated withfinite-lived subsidiaries, for which the provisions of this Statement have beendeferred indefinitely pursuant to FASB Staff Position 150-3.  We havedetermined that we currently have no instruments within the scope of thisStatement.

 

In April 2003, the FASB issued SFAS No. 149,“Amendment of Statement 133 on Derivative Instruments and Hedging Activities”(“SFAS No. 149”).  SFAS No. 149 amendsand clarifies the accounting guidance on derivative instruments (includingcertain derivative instruments embedded in other contracts) and hedgingactivities that fall within the scope of SFAS No. 133, “Accounting forDerivative Instruments and Hedging Activities.”  SFAS No. 149 also amends certain other existing pronouncements,which will result in more consistent reporting of

 

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contracts that arederivatives in their entirety or that contain embedded derivatives that warrantseparate accounting.  This Statement iseffective for contracts entered into or modified after June 30, 2003, withcertain exceptions, and for hedging relationships designated afterJune 30, 2003.  We do not have anycontracts that are derivatives or that contain embedded derivatives.

 

In June 2002, the FASB issued SFAS No. 146,“Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS No.146”).  SFAS No. 146 provides newguidance on the recognition of costs associated with exit or disposal activities.  The Statement requires companies torecognize costs associated with exit or disposal activities when they areincurred rather than at the date of commitment to an exit or disposal plan.SFAS No. 146 supercedes previous accounting guidance provided by EITF Issue No.94-3, “Liability Recognition for Certain Employee Termination Benefits andOther Costs to Exit an Activity (including Certain Costs Incurred in aRestructuring)” (“EITF 94-3”). EITF 94-3 required recognition of costs at thedate of commitment to an exit or disposal plan. SFAS No. 146 is to be appliedprospectively to exit or disposal activities initiated after December 31,2002.  Our adoption of SFAS No. 146 didnot have a material impact on our financial position, results of operations orcash flows.

 

In April 2002, the FASB issued SFAS No. 145,“Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB StatementNo. 13, and Technical Corrections” (“SFAS No. 145”). Among other things, thisStatement rescinds FASB Statement No. 4, “Reporting Gains and Losses fromExtinguishment of Debt,” which required all gains and losses fromextinguishment of debt to be aggregated and, if material, classified as anextraordinary item, net of related income tax effect. As a result, the criteriain APB Opinion No. 30, “Reporting the Results of Operations—Reporting theEffects of Disposal of a Segment of a Business, and Extraordinary, Unusual andInfrequently Occurring Events and Transactions,” will now be used to classifythose gains and losses. Our adoption of SFAS No. 145 on January 1, 2003did not have a material impact on our financial position, results of operationsor cash flows.

 

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

 

Our network isprimarily located on leased property and we have certain legal obligations,principally related to our tower leases, which fall within the scope of SFASNo. 143. These legal obligations primarily include certain obligations toremediate leased land on which our tower assets are located.  In additionto our tower leases, we have leases related to switch site, retail and administrativelocations subject to the provisions of SFAS No. 143. In the third quarterof 2003, we recorded an initial asset retirement obligation of approximately$0.3 million, and capitalized the same amount by increasing the carrying costof the related asset.  Additionallyduring the third quarter, approximately $0.1 million of accretion expense wasrecorded to increase the asset retirement obligation to its present value, andthe capitalized costs were depreciated by approximately $0.1 million.

 

InJanuary 2003, the FASB issued FASB Interpretation No. 46, “Consolidationof Variable Interest Entities—An Interpretation of Accounting Research Bulletin(ARB) No. 51” (“FIN 46”). This interpretation clarifies how to identifyvariable interest entities and how a company should assess its interests in avariable interest entity to decide whether to consolidate the entity. FIN 46applies to variable interest entities created after January 31, 2003, inwhich a company obtains an interest after that date. The FASB has delayedimplementation of FIN 46 for variable interest entities created beforeFebruary 1, 2003 until the first fiscal quarter or interim period endingafter December 15, 2003. We do not have any ownership in variable interestentities.

 

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InNovember 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others.” This interpretation expands thedisclosures to be made by a guarantor about its obligations under certainguarantees and requires that, at the inception of a guarantee, a guarantorrecognize a liability for the fair value of the obligation undertaken inissuing the guarantee. The disclosure requirements are effectiveimmediately.  As disclosed in Note 7 tothe Consolidated Financial Statements, UbiquiTel has fully and unconditionallyguaranteed Operating Company’s obligations under its 14% senior subordinateddiscount notes, 14% senior discount notes and 14% Series B senior discountnotes. The initial recognition and measurement provisions of thisinterpretation are effective for guarantees issued or modified afterDecember 31, 2002. The adoption of the initial recognition and measurementprovisions of this interpretation did not have a material impact on ourfinancial position, results of operations or cash flows.

 

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

 

In November 2002, the EITF issued EITF Issue No.00-21, “Accounting for Multiple-Element Revenue Arrangements.” EITF 00-21 addresseshow to account for arrangements that may involve the delivery or performance ofmultiple products, services and/or rights to use assets. Revenue arrangementswith multiple deliverables are required to be divided into separate units ofaccounting if the deliverables in the arrangement meet certain criteria.Arrangement consideration should be allocated among the separate units ofaccounting based on their relative fair values.  EITF 00-21 is applicable to agreements entered into in quartersbeginning after June 15, 2003. We have determined that the sale ofwireless services through our direct sales channels with an accompanyinghandset constitutes a revenue arrangement with multiple deliverables. Uponadoption of EITF 00-21, we discontinued deferring non-refundable, up-frontactivation fees and associated costs for our direct sales channels.Additionally, direct sales channel activation fees are now included inequipment revenue rather than service revenue in the consolidated statement ofoperations to the extent that the aggregate activation fee and handset proceedsreceived from a subscriber do not exceed the fair value of the handset sold. Weadopted this new pronouncement effective July 1, 2003 on a prospectivebasis which did not have a material impact on our financial position, resultsof operations or cash flows.

 

**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 in “Liquidity and CapitalResources—Reconciliation of non-GAAP financial measures.”

 

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

### ** **

***Customer Net Additions***

 

As of September 30, 2003, we provided personalcommunications services to approximately 305,000 customers compared toapproximately 234,600 customers as of September 30, 2002.  During the three months endedSeptember 30, 2003, we added 13,200 net additions compared to 18,800 netadditions for the prior period.  Thedecrease in net customers acquired was primarily attributable to lower salesdue to the intense competition from other national wireless telecommunicationscompanies.

 

# ***Churn***

# ** **

Churn is themonthly rate of customer turnover for subscribers expressed as the percentageof customers of the beginning customer base that both voluntarily andinvoluntarily discontinued service during the period.  Churn is computed by dividing the number of customers thatdiscontinued service during the month, net of 30 day returns, by the beginningcustomer base for the period. Churn for the three months endedSeptember 30, 2003 was approximately 3.4% compared to 4.3% for the threemonths ended September 30, 2002. The decrease in churn was primarily the result of an improvement in thecredit quality of the overall customer base. At September 30, 2003, theoverall mix of our customer base was 73% prime, 20% sub-prime with deposits and7% sub-prime without deposits. At September 30, 2002, the overall mix ofour customer base was 67% prime, 13% sub-prime with deposits and 20% sub-primewithout deposits.

 

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

 

Average revenueper user (ARPU) summarizes the average monthly service revenue per customer,excluding roaming and reseller revenue. ARPU is computed by dividing subscriberrevenue by the average subscribers for the period. During the three monthsended September 30, 2003 and 2002, our ARPU was approximately $58 and $58,respectively. Higher monthly access charges were offset by a decrease inoverage charges attributable to a higher mix of customers on large anytimeminutes rate plans and lower cancellation fees resulting from lower customerchurn.

 

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

 

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 endedSeptember 30, 2003 and 2002, our CCPU was approximately $42 and $65,respectively.  The decrease in CCPUprimarily resulted from decreases in network operating, Sprint PCS travel andbad debt expense on a per subscriber basis, and an approximate $4 credit persubscriber from a one-time adjustment of $3.2 million relating to theresolution of disputed charges with Sprint PCS that was recorded during thethree months ended September 30, 2003. The decrease in network operating expense reflects the continuingbenefits of scale resulting from the increase in the subscriber base, areduction in interconnection rates, and the resolution of disputed charges withSprint PCS.  The decrease in Sprint PCStravel expense was primarily due to the reduction in the reciprocal roamingrate with Sprint PCS from $0.10 per minute during 2002 to $0.058 per minuteeffective January 1, 2003. The decrease in bad debt expense was primarilyattributable to the resolution of disputed charges with Sprint PCS, theimprovement in the credit quality of our subscriber base, tighter creditpolicies, the re-instatement of deposits in late February 2002 and higherrecoveries of previously written-off customer account balances.

 

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

 

Cost per gross addition (CPGA) summarizes the averagecost to acquire new customers during the period. CPGA is computed by adding theincome statement components of selling and marketing and the cost of productssold, and reducing that amount by the equipment revenue recorded.  That net amount is then divided by the grosscustomers acquired during the period. CPGA was approximately $466 for the three months endedSeptember 30, 2003 which is comparable to approximately $474 for the threemonths ended September 30, 2002.

 

***Revenues***

 

•                  *SubscriberRevenue*.  Subscriber revenueduring the three months ended September 30, 2003 and 2002 wasapproximately $51.6 million and $39.6 million, respectively. Subscriber revenueconsists of monthly recurring service charges for voice and 3G data usage andmonthly non-recurring charges for local, long distance, travel and roamingairtime usage and 3G data usage in excess of the pre-subscribed usage planreceived from our subscribers, cancellation and late fee revenues and surcharges,less reductions for billing adjustments and billing corrections.  Our customers’ charges are dependent ontheir rate plans, based on the number of minutes and 3G data usage included intheir plans. These plans generally reflect the terms of national plans offeredby Sprint PCS. The increase in subscriber revenue was primarily attributable tothe increase in our subscriber base.

 

•                  *Reseller Revenue*.  Reseller revenue is generated when areseller subscriber uses our PCS network. Reseller revenues were approximately $59,000 and $0 for the three monthsended September 30, 2003 and 2002, respectively, and were generated underthe reseller agreement with Virgin Mobile USA. In the future, we anticipate receiving additional incremental revenuefrom Qwest for customers who use our network under the Qwest reseller agreementthat Sprint announced in early August 2003.

 

•                  *Sprint PCSTravel Revenue*.  Travelrevenue is generated on a per-minute rate or on a per kilobyte rate when aSprint PCS subscriber based outside our markets uses our network.  An additional long distance rate per minuteis generated when that customer initiates a call from our network to calloutside the local calling area and the long distance rate we receive is basedon the actual wholesale transport and terminating calls associated with theoriginating switch. The travel and long distance rates for 2002 were $0.10 perminute and approximately $0.02 per minute, respectively. EffectiveJanuary 1, 2003, the travel rate per minute was reduced to approximately$0.058 per minute, and for the three months ended September 30, 2003 thelong distance rate was approximately $0.012 per minute.

 

During the three months ended September 30, 2003,our network captured approximately 195.5 million of system travel minutes withapproximately 64% of those minutes generating long distance charges whichresulted in approximately $13.8 million in travel revenue. During thethree months ended September 30, 2002, our network captured approximately155.0 million of system travel minutes with approximately 67% of thoseminutes generating long distance charges which resulted in approximately$17.1 million in travel revenue. The decrease in Sprint PCS travel revenue was primarily dueto the decrease in the reciprocal Sprint PCS travel rate and long distance rateper minute offset by the increase in travel and long distance minutes of useand 3G data usage.

 

•                  *Non-SprintPCS Roaming Revenue*. Non-Sprint PCS roaming revenue is generated when a non-Sprint PCSsubscriber uses our network.  We earnedapproximately $3.9 million in non-Sprint PCS roaming revenue during the threemonths ended September 30, 2003 compared to approximately $2.2 millionduring the three months ended September 30, 2002.  Non-Sprint PCS roaming minutes increasedfrom 13.0 million during the three months ended September 30, 2002 to 27.1million during the three months ended September 30, 2003. The increase inroaming minutes represented a $2.4 million increase in revenue, and thedecrease in the average non-Sprint PCS roaming revenue rate we receive fromother carriers represented a $0.7 million reduction of roaming revenue.

 

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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 September 30, 2003 and 2002 fromequipment revenue totaled approximately $3.5 million and $2.1 million,respectively, and the increase was primarily due to higher average retailprices for handsets and the allocation of activation revenue to equipment revenuebased on relative fair values in accordance with EITF 00-21, which we adoptedon July 1, 2003, offset by a decrease in gross additions.

 

***Cost of Service and Operations***

 

•                  *NetworkOperations Expenses*.  Networkoperations expenses include radio communications site lease costs, utilities,network control maintenance, network control site leases, engineeringpersonnel, transport facilities and interconnect charges, and totaledapproximately $15.4 million during the three months ended September 30,2003 compared to approximately $17.0 million during the three months endedSeptember 30, 2002. The decrease in network operations expenses wasprimarily attributable to a $2.0 million reduction of expense related to theresolution of disputed charges with Sprint PCS and lower interconnect andtelecommunications charges, partially offset by an increase in rent for radiocommunications sites. The number of active radio communications sites increasedfrom 816 at September 30, 2002 to 850 at September 30, 2003.

 

•                  *Sprint PCS Travel Expense*. We pay SprintPCS travel fees on a per-minute rate or on a per kilobyte rate when ourcustomers use the Sprint PCS network outside our markets and we incuradditional long distance fees when our customers call long distance originatingin a Sprint PCS or PCS affiliate of Sprint territory. During the three monthsended September 30, 2003, our customers generated approximately119.6 million of travel minutes with approximately 63% of those minutesgenerating long distance charges which resulted in approximately$8.4 million in travel fees. During the three months endedSeptember 30, 2002, our customers generated approximately78.7 million of travel minutes with approximately 66% of those minutesgenerating long distance charges which resulted in approximately$8.7 million in travel fees. The decrease in travel expense wasattributable to the decrease in the reciprocal Sprint PCS travel rate and longdistance rate per minute offset by the increase in travel and long distanceminutes of use and 3G data usage. As discussed above, the per minute rate wepay Sprint PCS when customers from our markets roam onto Sprint PCS’ or anotherSprint PCS affiliate’s network and the long distance rate per minute of useboth decreased in 2003 as compared to 2002. For the year endedDecember 31, 2003, we expect an increase in travel fees resulting fromincreasing subscriber levels in our markets to be partially offset by the lowerper minute travel and long distance rates paid to Sprint PCS.

 

•                  *Non-Sprint PCS Roaming Expense*. We payroaming fees to other wireless providers when our customers use their network.During the three months ended September 30, 2003, our customers generatedapproximately 3.0 million of roaming minutes resulting in approximately$0.7 million in roaming fees. During the three months endedSeptember 30, 2002, our customers generated approximately 2.7 millionof roaming minutes resulting in approximately $1.1 million in roaming fees. Thedecrease in roaming expense of approximately $0.4 million was attributable tothe increase in roaming minutes offset by a decrease in the average non-SprintPCS roaming rate paid to other carriers.

 

•                  *Bad Debt Expense.*  Bad debt expense during the three monthsended September 30, 2003 was a credit of approximately $0.1 millioncompared to bad debt expense of approximately $5.9 million for the three monthsended September 30, 2002.  Bad debtexpense for the three months ended September 30, 2003 included a one-timecredit adjustment of approximately $1.2 million due to the resolution ofdisputed charges with Sprint PCS. The remaining decrease in bad debt expensewas primarily attributable to the

 

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improvement in the credit quality of our customerbase, tighter credit policies, the re-instatement of deposits in lateFebruary 2002 and higher recoveries of previously written-off customeraccount balances.

 

•                  *OperatingExpenses. *Operating expensesduring the three months ended September 30, 2003 and 2002 were approximately$5.6 million and $4.8 million, respectively. Operating expenses included feeswe paid to Sprint PCS for the use of their support services, including billingand collections services and customer care. The increase in operating expenseswas primarily attributable to the increase in our subscriber base, in additionto increases in fees charged by Sprint for their services.

 

***Cost of Products Sold***

 

The cost ofproducts sold included the costs of handsets and accessories and totaledapproximately $10.7 million and $9.5 million during the three months endedSeptember 30, 2003 and 2002, respectively.  The cost of handsets normally exceeds the sales price because wesubsidize the cost of handsets to subscribers, consistent with industrypractice. The increase in cost of products sold was primarily attributable tothe increase in handset subsidies and upgrade costs during the three monthsended September 30, 2003 as compared to the three months endedSeptember 30, 2002. Handset subsidies on units sold by third partiestotaled approximately $4.1 million and $3.0 million for the three months endedSeptember 30, 2003 and 2002, respectively.

 

***Selling and Marketing***

 

Selling expensesrelate to our distribution channels, sales representatives, sales supportpersonnel, retail stores, advertising programs and commissions.  We incurred expenses of approximately $13.1million and $15.3 million during the three months ended September 30, 2003and 2002, respectively.  The decrease inselling and marketing expenses was primarily attributable to lower advertisingand marketing costs.

 

***General and Administrative***

 

We incurredgeneral and administrative expenses (excluding non-cash compensation expenses)totaling approximately $7.9 million and $6.8 million during the three monthsended September 30, 2003 and 2002, respectively. General andadministrative expenses included approximately $4.3 million and $2.8 million ofmanagement fee expense (defined as 8% of collected revenues for the threemonths ended September 30, 2003 and 2002) paid to Sprint PCS during thethree months ended September 30, 2003 and 2002, respectively. The increasein general and administrative expenses was attributable to the increase inmanagement fee expense resulting from the increase in our subscriber base,offset by other expense savings of approximately $0.4 million.

 

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

 

During the threemonths ended September 30, 2003 and 2002, non-cash compensation forgeneral and administrative matters totaled approximately $47,000 and $0.1million, respectively.  We apply theprovisions of Accounting Principles Board Opinion No. 25, “Accounting for StockIssued to Employees,” and related interpretations in accounting for our equityincentive plan.  Unearned stock optioncompensation is recorded for the difference between the exercise price and thefair market value of our stock at the date of grant and is recognized asnon-cash stock option compensation expense in the period in which the relatedservices are rendered.

 

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***Depreciation, Amortization and Accretion***

 

Depreciation,amortization and accretion expense for the three months endedSeptember 30, 2003 and 2002 totaled approximately $11.0 million and $13.9million, respectively.  We depreciateour property and equipment using the straight-line method over four to 10years.  A building acquired as part ofthe VIA Wireless acquisition is being depreciated using the straight-linemethod over 30 years. Amortization of intangible assets with finite usefullives is over 20 months to 18 years. Accretion expense increases the asset retirement obligation associatedwith our tower leases, switch site and retail and administrative locations toits present value. The decrease in depreciation, amortization and accretionexpense was primarily due to an approximate $3.8 million decrease inamortization expense attributable to the Spokane market and VIA Wirelesssubscriber bases, which were fully amortized as of December 31, 2002 andMarch 31, 2003, respectively, partially offset by an approximate $0.8million increase in depreciation expense.

 

***Interest Income***

 

For the three months ended September 30, 2003 and2002, interest income was approximately $0.1 million and $0.4 million,respectively.  The interest income wasgenerated from cash, cash equivalents and restricted cash balances.  The decrease in interest income wasprimarily due to lower levels of cash, cash equivalents and restricted cashcombined with lower interest rates during the three months endedSeptember 30, 2003 than during the three months ended September 30,2002.

 

***Interest Expense***

 

Interest expense totaled approximately $7.0 millionduring the three months ended September 30, 2003. We accrue interest at arate of 14% per annum on our senior subordinated discount notes due 2010 and14% per annum on our Series B senior discount notes due 2008.  Interest on our senior secured creditfacility was accrued at the London interbank offered rate, based on contractsranging from 30 to 180 days. During the three months ended September 30,2002, interest expense was approximately $11.9 million. The decrease ininterest expense was primarily due to lower debt levels during the three monthsended September 30, 2003 than during the three months endedSeptember 30, 2002 as a result of the debt-for-debt exchange offerconsummated in February 2003 and the open market purchases of 14% seniorsubordinated discount notes during the three months ended June 30, 2003,partially offset by the interest expense attributable to the Series B seniordiscount notes issued in February 2003 and during the three months endedJune 30, 2003.

 

Interest expense also included the amortized amount ofdeferred financing fees relating to our senior secured credit facility, seniorsubordinated discount notes and Series B senior discount notes.

 

***Income Taxes***

 

For the threemonths ended September 30, 2003 and 2002, we recognized an income taxexpense of approximately $0.2 million and an income tax benefit of approximately$2.9 million, respectively. The $0.2 million income tax expense recorded duringthe three months ended September 30, 2003 represents a deferred taxadjustment to establish a valuation allowance against our deferred tax assetssince we are no longer able to reasonably estimate the period of reversal, ifany, for deferred tax liabilities related to taxable goodwill as the result ofthe adoption of SFAS No. 142, “Goodwill and Other Intangible Assets.”Approximately $2.1 million of the tax benefit recorded during the three monthsended September 30, 2002 was monetized during the three months endedJune 30, 2003 due to the receipt of a federal income tax refund. Therefund was the result of carrying back 2002 net operating losses from our whollyowned VIA Holding subsidiary (which has since been merged into OperatingCompany) to realize a federal income tax refund for taxes that had beenpreviously paid by one of the acquired VIA Wireless member companies.  The remaining $0.8 million tax benefitrecorded during the three months ended September 30, 2002 was due toconsolidated net operating loss carryforwards that reduced the net deferred taxliability on our consolidated balance sheet.

 

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***Net Loss***

 

For the three months ended September 30, 2003 and2002, our net loss was approximately $7.0 million and $30.5 million,respectively. The decrease in net loss was primarily due to the increase inrevenues resulting from the increase in our subscriber base, the decrease inbad debt expense resulting from the improvement in the credit quality of thesubscriber base, the decrease in interest expense resulting from the debtrestructuring and the one-time adjustment of $3.2 million relating to theresolution of disputed charges with Sprint PCS.

 

### ***Analysis of the nine months ended September 30,2003 compared to the nine months ended September 30, 2002***

### ** **

***Customer Net Additions***

 

During the nine months ended September 30, 2003,we added 48,000 net additions compared to 57,600 net additions for the priorperiod.  The decrease in net customersacquired was primarily attributable to lower sales due to the intensecompetition from other national wireless telecommunications companies.

 

# ***Churn***

# ** **

Churn for the ninemonths ended September 30, 2003 was approximately 3.3% compared to 4.2%for the nine months ended September 30, 2002.  The decrease in churn was primarily the result of an improvementin the credit quality of the overall customer base.

 

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

 

During the nine months ended September 30, 2003and 2002, our ARPU was approximately $57 and $58, respectively. The decrease inARPU primarily resulted from a decrease in overage charges attributable to ahigher mix of customers on large anytime minutes rate plans and lowercancellation fees resulting from lower customer churn.

 

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

 

During the ninemonths ended September 30, 2003 and 2002, our CCPU was approximately $45and $65, respectively.  The decrease inCCPU primarily resulted from decreases in network operating, Sprint PCS traveland bad debt expense on a per subscriber basis, and an approximate $1 creditper subscriber from a one-time adjustment of $3.2 million relating to theresolution of disputed charges with Sprint PCS that was recorded during thethree months ended September 30, 2003. The decrease in network operating expense reflects the continuingbenefits of scale resulting from the increase in the subscriber base and areduction in interconnection rates. The decrease in Sprint PCS travel expensewas primarily due to the reduction in the reciprocal roaming rate with SprintPCS from $0.10 per minute during 2002 to $0.058 per minute effectiveJanuary 1, 2003.  The decrease inbad debt expense was primarily attributable to the improvement in the creditquality of our subscriber base, tighter credit policies, the re-instatement ofdeposits in late February 2002, higher recoveries of previouslywritten-off customer account balances and the resolution of disputed chargeswith Sprint PCS.

 

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

 

CPGA was approximately $450 for the nine months endedSeptember 30, 2003 which is comparable to approximately $447 for the ninemonths ended September 30, 2002.

 

***Revenues***

 

•                  *SubscriberRevenue*.  Subscriber revenueduring the nine months ended September 30, 2003 and 2002 was approximately$144.1 million and $109.6 million, respectively. The increase in subscriberrevenue was primarily attributable to the increase in our subscriber base.

 

•                  *Reseller Revenue*.  Reseller revenues were approximately $70,000and $0 for the nine months ended September 30, 2003 and 2002,respectively, and were generated under the reseller agreement with VirginMobile USA.

 

•                  *Sprint PCSTravel Revenue*.  During thenine months ended September 30, 2003, our network captured approximately500.4 million of system travel minutes with approximately 64% of those minutesgenerating long distance charges which resulted in approximately$34.9 million in travel revenue. During the nine months endedSeptember 30, 2002, our network captured approximately 355.9 millionof system travel minutes with approximately 67% of those minutes generatinglong distance charges which resulted in approximately $40.7 million intravel revenue. Thedecrease in Sprint PCS travel revenue was primarily due to the decrease in thereciprocal Sprint PCS travel rate and long distance rate per minute offset bythe increase in travel and long distance minutes of use and 3G data usage.

 

•                  *Non-SprintPCS Roaming Revenue*.  Weearned approximately $9.9 million in non-Sprint PCS roaming revenue during thenine months ended September 30, 2003 compared to approximately $3.9million during the nine months ended September 30, 2002.  Non-Sprint PCS roaming minutes increasedfrom 20.0 million during the nine months ended September 30, 2002 to 68.4million during the nine months ended September 30, 2003. The increase inroaming minutes represented an approximate $9.5 million increase in revenue, andthe decrease in the average non-Sprint PCS roaming revenue rate we receive fromother carriers represented an approximate $3.6 million reduction of roamingrevenue.

 

•                  *EquipmentRevenue*.    The amountsrecorded during the nine months ended September 30, 2003 and 2002 fromequipment revenue totaled approximately $8.4 million and $6.4 million,respectively, and the increase was primarily due to higher average retailprices for handsets and the allocation of activation revenue to equipmentrevenue based on relative fair values in accordance with EITF 00-21, which weadopted on July 1, 2003, offset by a decrease in gross additions.

 

***Cost of Service and Operations***

 

•                  *NetworkOperations Expenses*.  Networkoperations expenses totaled approximately $49.0 million during the ninemonths ended September 30, 2003 compared to approximately$48.2 million during the nine months ended September 30, 2002. Theincrease in network operations expenses was primarily attributable to theincrease in radio communications site rent offset by lower interconnect andtelecommunications charges and $2.0 million of expense reductions related tothe resolution of disputed charges with Sprint PCS.

 

•                  *Sprint PCS Travel Expense*. During the ninemonths ended September 30, 2003, our customers generated approximately305.5 million of travel minutes with approximately 63% of those minutesgenerating long distance charges which resulted in approximately$21.2 million in travel fees. During the nine months endedSeptember 30, 2002, our customers generated approximately178.1 million of travel minutes with approximately 67% of those minutesgenerating long distance charges which resulted in approximately

 

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$19.9 million in travel fees. The increase intravel expense was attributable to the increase in travel and long distanceminutes of use and 3G data usage offset by the decrease in the reciprocalSprint PCS travel rate.

 

•                  *Non-Sprint PCS Roaming Expense*. During thenine months ended September 30, 2003, our customers generatedapproximately 7.0 million of roaming minutes resulting in approximately$1.8 million in roaming fees. During the nine months endedSeptember 30, 2002, our customers generated approximately 6.2 millionof roaming minutes resulting in approximately $2.5 million in roaming fees. Thedecrease in roaming expense of $0.7 million was attributable to a decrease inthe average non-Sprint PCS roaming revenue rate paid to other carriers.

 

•                  *Bad Debt Expense.* Bad debtexpense during the nine months ended September 30, 2003 and 2002 wasapproximately $2.5 million and approximately $19.6 million, respectively.  Bad debt expense for the nine months endedSeptember 30, 2003 included a one-time credit adjustment of approximately$1.2 million due to the resolution of disputed charges with Sprint PCS. Theremaining decrease in bad debt expense was primarily attributable to theimprovement in the credit quality of our customer base, tighter creditpolicies, the re-instatement of deposits in late February 2002 and higherrecoveries of previously written-off customer account balances.

 

•                  *OperatingExpenses. *Operating expensesduring the nine months ended September 30, 2003 and 2002 wereapproximately $16.4 million and $13.3 million, respectively. Operating expensesincluded fees we paid to Sprint PCS for the use of their support services,including billing and collections services and customer care. The increase inoperating expenses was primarily attributable to the increase in our subscriberbase, in addition to increases in fees charged by Sprint for their services.

 

***Cost of Products Sold***

 

The cost ofproducts sold included the costs of handsets and accessories and totaledapproximately $29.5 million and $27.3 million during the nine months ended September 30,2003 and 2002, respectively.  Theincrease in cost of products sold was primarily attributable to higherequipment subsidies partially offset by the decrease in gross sales during thenine months ended September 30, 2003 as compared to the nine months endedSeptember 30, 2002. Handset subsidies on units sold by third partiestotaled approximately $11.4 million and $8.2 million for the nine months endedSeptember 30, 2003 and 2002, respectively.

 

***Selling and Marketing***

 

We incurredselling and marketing expenses of approximately $37.3 million and $40.0 millionduring the nine months ended September 30, 2003 and 2002,respectively.  The decrease in sellingand marketing expenses was primarily attributable to lower advertising costs.

 

***                General and Administrative***

 

We incurredgeneral and administrative expenses (excluding non-cash compensation expenses)totaling approximately $23.1 million and $19.3 million during the nine monthsended September 30, 2003 and 2002, respectively.  General and administrative expenses included approximately $11.9million and $7.6 million of management fee expense (defined as 8% of collectedrevenues for the nine months ended September 30, 2003 and 2002) paid toSprint PCS during the nine months ended September 30, 2003 and 2002,respectively. The increase in general and administrative expenses wasattributable to the increase in management fee expense resulting from theincrease in our subscriber base and a decrease in other general andadministrative expenses of approximately $0.5 million.

 

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

 

During the ninemonths ended September 30, 2003 and 2002, non-cash compensation forgeneral and administrative matters totaled approximately $0.2 million and $0.3million, respectively.

 

***Depreciation, Amortization and Accretion***

 

Depreciation andamortization expense for the nine months ended September 30, 2003 and 2002totaled approximately $34.7 million and $37.7 million, respectively.   The decrease in depreciation andamortization expense was primarily due to an approximate $6.3 million decreasein amortization expense attributable to the Spokane market and VIA Wirelesssubscriber bases, which were fully amortized as of December 31, 2002 andMarch 31, 2003, respectively, partially offset by an approximate $3.2million increase in depreciation expense primarily resulting from networkequipment additions from September 30, 2002 through September 30,2003.

 

***Interest Income***

 

For the nine months ended September 30, 2003 and2002, interest income was approximately $0.5 million and $1.4 million,respectively.  The interest income wasgenerated from cash, cash equivalents and restricted cash balances.  The decrease in interest income wasprimarily due to lower levels of cash, cash equivalents and restricted cashcombined with lower interest rates during the nine months endedSeptember 30, 2003 than during the nine months ended September 30,2002.

 

***Interest Expense***

 

Interest expense totaled approximately $24.1 millionduring the nine months ended September 30, 2003. During the nine monthsended September 30, 2002, interest expense was approximately $34.1million. The decrease in interest expense was primarily due to lower debt levelsduring the nine months ended September 30, 2003 than during the ninemonths ended September 30, 2002 as a result of the debt-for-debt exchangeoffer consummated in February 2003 and the open market purchases of 14%senior subordinated discount notes during the three months ended June 30,2003, partially offset by the interest expense attributable to the Series Bsenior discount notes issued in February 2003 and during the three monthsended June 30, 2003.

 

Interest expense also included the amortized amount ofdeferred financing fees relating to our senior secured credit facility, seniorsubordinated discount notes and Series B senior discount notes.

 

***Gain on Debt Retirements***

 

In a series of transactions during the three monthsended June 30, 2003, we received cash proceeds of approximately $1.3million, of which $1.1 million was used to fund open market purchases of $6.9million aggregate principal amount ($5.3 million aggregate accreted value) ofoutstanding 14% senior subordinated discount notes due April 15, 2010(“Existing Notes”), and we issued approximately $1.7 million aggregateprincipal amount of additional 14% Series B senior discount notes due 2008(“Series B Notes”).  Under theseprivate placement sales, we issued detachable warrants to purchase up to approximately1.3 million shares of common stock at an exercise price of $0.01 per share. Wewrote off approximately $0.1 million in deferred financing fees and $0.3million in unamortized discount on detachable warrants related to the originalissuance of the Existing Notes, which reduced the gain resulting from the openmarket purchases.  We recorded a gain ofapproximately $3.9 million related to the open market purchases during thethree months ended June 30, 2003.

 

InFebruary 2003, Operating Company consummated its private placementexchange of $48.2 million aggregate principal amount of its new 14% seniordiscount notes due May 15, 2010 (“New Notes”) and $9.6 million in cash for $192.7 millionaggregate principal amount of its outstanding Existing Notes. Additionally,Operating

 

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Company consummated arelated new financing, in a private placement offering, of $12.8 millionaggregate principal amount of Series B Notes in which Operating Companyreceived cash proceeds of $9.6 million to fund the cash portion of theexchange. Under the new 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 wrote off approximately $2.9 millionin deferred financing fees related to the original issuance of the ExistingNotes and we incurred estimated fees and expenses of approximately$3.8 million in connection with the issuance of the New Notes, whichreduced the gain resulting from the exchange offer, and we incurred estimatedexpenses of approximately $0.4 million in connection with the issuance ofthe Series B Notes.

 

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

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

 

***Income Taxes***

 

For the ninemonths ended September 30, 2003, we recognized an income tax expense ofapproximately $0.6 million and for the nine months ended September 30,2002, we recognized an income tax benefit of approximately $8.7 million. The$0.6 million income tax expense recorded during the nine months endedSeptember 30, 2003 represents a deferred tax adjustment to establish avaluation allowance against our deferred tax assets since we are no longer ableto reasonably estimate the period of reversal, if any, for deferred taxliabilities related to taxable goodwill as the result of the adoption of SFASNo. 142, “Goodwill and Other Intangible Assets.”   Approximately $6.3 million of the tax benefit recorded duringthe nine months ended September 30, 2002 was monetized during the threemonths ended June 30, 2003 due to the receipt of a federal income taxrefund. The refund was the result of carrying back 2002 net operating lossesfrom our wholly owned VIA Holding subsidiary (which has since been merged intoOperating Company) to realize a federal income tax refund for taxes that hadbeen previously paid by one of the acquired VIA Wireless member companies.  The remaining $2.4 million tax benefitrecorded during the nine months ended September 30, 2002 was due toconsolidated net operating loss carryforwards that reduced the net deferred taxliability on our consolidated balance sheet.

 

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***Net Income (Loss)***

 

For the nine months ended September 30, 2003, ournet income was approximately $0.3 million and for the nine months endedSeptember 30, 2002, our net loss was $91.3 million. The reduction of thenet loss was related to the gain on debt retirements and other items previouslydiscussed.

 

**Liquidityand Capital Resources**

 

From inception toJune 30, 2000, the period during which we were a development-stagecompany, our activities consisted principally of raising capital, consummatingand supporting our agreements with Sprint PCS, developing the initial design ofour PCS network and adding to our management team. Through September 30,2003, we have principally relied on the proceeds from equity and debtfinancings, and to a lesser extent revenues, as our primary sources of capital.  During late 2001, we moved from aconstruction and build-out phase to an operational phase.

 

Completion of ourPCS network required substantial capital, of which approximately $261.1 millionhas been incurred through September 30, 2003. Although we have essentiallycompleted our network coverage build-out, our business could require additionalcapital expenditures of up to approximately $30.0 million annually formaintenance, capacity enhancements and coverage improvements. As ofSeptember 30, 2003, we had 32 retail stores in operation in our markets.

 

As of September 30, 2003, we had approximately$61.1 million in cash, cash equivalents and restricted cash and an unusedrevolving line of credit of approximately $47.7 million, and our workingcapital was approximately $37.8 million. In June 2003, we announced thatwe entered into a definitive sale and lease-back agreement for the sale ofwireless communication tower sites that we owned located in the central valleyof California and the lease-back of space on those sites. We received $10.95million in cash for the sale of 94 towers and related assets onOctober 15, 2003.  We and thepurchaser executed an escrow agreement pursuant to the terms of the assetpurchase agreement whereby we will place in escrow for a period of one yearafter the closing an amount equal to 10% of the purchase price, orapproximately $1.1 million, for any indemnification claims that arise duringthe holdback period and are resolved in the purchaser’s favor.  In early August 2003, we announced thatwe had amended our Sprint PCS management agreement to remove the build-outrequirement for the state of Montana, thereby reducing our projected capitalexpenditures and operating expenses to launch this market by approximately$25.0 million.  In addition, in earlyAugust 2003, Sprint PCS announced that it had entered into a reselleragreement with Qwest Communications allowing Qwest to provide wireless voiceand data services to new and existing customers in Qwest’s service areas usingSprint’s network and the network of affiliates of Sprint who overlap withQwest’s service areas. Qwest has approximately 30,000 to 40,000 customers inportions of our service areas in Washington, Idaho and Utah and we anticipatereceiving additional incremental revenue from Qwest for customers who useUbiquiTel’s network under this reseller arrangement. Cash and cash equivalentsand cash availability under our senior secured credit facility, combined withcash flow from operations, are expected to be sufficient to fund any operatinglosses and working capital, to meet capital expenditure needs and to servicedebt requirements through September 30, 2004 and into the foreseeablefuture. Due to a number of factors, including improving operating performanceand the elimination of the Montana build-out requirement and the Qwest resellerarrangement described above, we expect to attain positive cash flow fromoperations less capital expenditures for the year 2004 and beyond.

 

Net cash providedby operating activities was approximately $17.7 million and net cash used inoperating activities was approximately $34.6 million for the nine months endedSeptember 30, 2003 and 2002, respectively.  The increase in cash provided by operating activities wasprimarily due to a lower operating loss and the receipt of an $8.6 millionfederal income tax refund.

 

Net cash used in investing activities wasapproximately $12.8 million and $40.4 million for the nine months endedSeptember 30, 2003 and 2002, respectively.  The decrease was primarily due to lower capital expenditures forcoverage expansion and 3G upgrades.

 

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Net cash used in financing activities for the ninemonths ended September 30, 2003 was approximately $19.7 million,consisting primarily of a $15.0 million repayment under the senior securedcredit facility and $4.6 million in financing costs directly associated withthe issuance of the Series B Notes and the debt-for-debt exchange offerconsummated in February 2003. For the nine months ended September 30,2002, net cash provided by financing activities was approximately $27.9million, consisting primarily of funding under our senior secured creditfacility.

 

***Liquidity***

 

AtSeptember 30, 2003, we had approximately $61.1 million of cash, cashequivalents and restricted cash and an unused revolving line of credit ofapproximately $47.7 million. We received notice during the three monthsended September 30, 2003 that the Federal Deposit Insurance Corporationhad been appointed as receiver for one of the participants in our seniorsecured credit facility and had exercised its statutory authority to repudiateand disaffirm its obligations with respect to the credit agreement, effectivelyeliminating approximately $2.3 million of our availability under the revolvingline of credit.  The availability of therevolving credit line is subject to continued compliance with restrictivecovenants under our senior secured credit facility; however, there isuncertainty as to our ability to continue to comply with such covenants overthe next twelve months. We obtained an amendment to our senior secured creditfacility on October 10, 2003 that made us in compliance with the minimumsubscriber covenant for the quarter ended September 30, 2003. ThroughSeptember 30, 2003, we have used proceeds from our initial public offeringof equity, our senior subordinated discount notes, borrowings from our seniorsecured credit facility, and to a lesser extent revenues, to fund capitalexpenditures, operating losses, working capital and cash interest needs whilewe built out our PCS network and acquired customers. We believe our financialposition will be sufficient to meet the cash requirements of the businessincluding: capital expenditures, operating losses, cash interest, requiredamortization of principal under our senior secured credit facility and workingcapital needs. Our projections contain significant assumptions includingprojections for gross new customer additions, ARPU, churn, CPGA, CCPU, bad debtexpense and Sprint PCS travel and non-Sprint PCS roaming revenue. 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.

 

On February 26, 2003, we consummated threetransactions that have reduced our total debt by approximately$146.7 million and annual cash interest requirements by approximately$9.7 million in 2005 and approximately $19.3 million annuallybeginning in 2006, providing cumulative savings of approximately$243.0 million. We completed a private placement exchange offer of$48.2 million aggregate principal amount of Operating Company’s New Notesand $9.6 million in cash for $192.7 million aggregate principalamount of Operating Company’s outstanding Existing Notes, and we also completedin a private placement a related new financing of $12.8 million aggregateprincipal amount of Operating Company’s Series B Notes in which wereceived cash proceeds of $9.6 million to fund the cash portion of theexchange. We issued detachable warrants with the Series B Notes topurchase up to approximately 9.6 million shares of UbiquiTel common stock.In connection with the exchange, UbiquiTel and the lenders under our seniorsecured credit facility amended the credit facility to gain the lenders’consent to the exchange offer, which terms included a $15.0 millionpartial prepayment against our outstanding $245.0 million principal balanceof term loans and the reduction of the unused $55.0 million revolving lineof credit to $50.0 million as of February 26, 2003 which, asdescribed above, has since been reduced to approximately $47.7 million. In aseries of separate transactions during the three months ended June 30,2003, Operating Company received cash proceeds of approximately $1.3 million,of which $1.1 million were used by Operating Company to fund open marketpurchases of $6.9 million aggregate principal amount ($5.3 million aggregateaccreted value) of Existing Notes, and we issued approximately$1.7 million aggregate principal amount of additional Series B Notes.Under these private placement sales, UbiquiTel issued detachable warrants topurchase up to approximately 1.3 million shares of its common stock at anexercise price of $0.01 per share. We may from time to time continue topurchase Existing Notes that remain outstanding in the open market, inprivately negotiated transactions or otherwise in accordance with applicable law.

 

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

 

In addition to therisk factors referred to in the “Forward-Looking Statements” section ofthis Item 2, the following risk factors could materially and adversely affectour liquidity and our future operating results and could cause actual events todiffer materially from those predicted in forward-looking statements related toour business.

 

We may not be able to sustain our growth or obtainsufficient revenue to achieve and sustain profitability. If the current trendof slower net customer growth worsens, it will lower the expected amount ofpositive cash flow from operations less capital expenditures, which in turnwill have a negative effect on liquidity and capital resources. For the ninemonths ended September 30, 2003, approximately $17.7 million in cashwas provided by operating activities and capital expenditures, primarily due tothe receipt of an $8.6 million federal income tax refund and a $3.2 millionincrease in working capital due to the resolution of outstanding charges withSprint PCS that was negotiated as part of the addendum to the Sprint PCSmanagement agreement that was announced on November 10, 2003. Theaddendum, as disclosed in “Sprint PCS Management Agreement and ServiceAgreement Amendment,” modified several provisions of the management andservices agreements that govern our relationship with Sprint PCS, includingroaming, reseller and back office support rates through 2006.  We expect to realize a reduction ofapproximately 15% from the current back office support costs. Our businessprojections reflect continuing growth in our subscriber base and a reductionand eventual elimination of operating losses and negative cash flows as thecash flow generated by the growing subscriber base exceeds costs incurred toacquire new customers. If we acquire more new customers than we project, theupfront costs to acquire those customers (including the handset subsidy,commissions and promotional expenses) may result in greater cash used in thenear term but provide greater cash flows in later periods. In addition, ifthere is a slowdown in new subscriber growth in our markets or the wirelessindustry generally, we may acquire fewer new customers, which would result inlower cash needs in the near term but provide lower cash flows in laterperiods.

 

We re-instated thedeposit requirement for new sub-prime credit customers in lateFebruary 2002 in connection with the Sprint PCS Clear Pay program. There-instatement of deposits had a significant impact on gross customer additionsduring the last five weeks of the three months ended March 31, 2002 andduring the remainder of 2002. While deposits for Clear Pay customers provide uswith protection against bad debt expense for sub-prime customers, it has andmay continue to deter some people with sub-prime credit from becomingsubscribers. As a result, our gross additions may decline. As ofSeptember 30, 2003, 27% of our approximate 305,000 subscribers had acredit rating placing them in the sub-prime category, of which 20% of oursubscriber base had deposits. If the deposit requirement for new sub-primecredit customers continues to deter some potential customers with sub-primecredit from becoming subscribers, we may acquire fewer new customers, whichwould result in lower operating losses in the near term but provide lower cashflows in later periods.

 

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 anannual evaluation of these controls to us by engaging its independent auditorsto provide a “Report on Controls Placed in Operation and Tests of OperatingEffectiveness for Affiliates” under guidance provided in Statement of AuditingStandards No. 70 (“SAS 70”). There can be no assurance that the SAS

 

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70 procedures willidentify all weaknesses that might be material to us. Although we are notpresently aware of any material errors affecting us, errors that are notreconciled on a timely basis by Sprint could cause us to misstate our revenuesor expenses and could result in out-of-period adjustments that may materiallyadversely affect our financial results and could have a material adverse effecton our business, financial condition, results of operations and cash flows.Additionally, if we or any other PCS affiliate of Sprint find significanterrors in information provided by Sprint which causes a restatement offinancial statements or otherwise affects us, investors and the investmentcommunity may lose confidence in us. In late February 2003,iPCS, Inc., a PCS affiliate of Sprint, filed for bankruptcy protectionunder Chapter 11 of the federal bankruptcy code and concurrently brought anadversarial action against Sprint alleging, among other things, that Sprint hadfailed to remit certain amounts owed to iPCS under its agreements with Sprint.Should Sprint fail to deliver timely, accurate and sufficient information, thiscould lead to a greater degree of uncertainty in our business and financialplanning and may lead to adverse short-term decisions. The failure of Sprint toremit future amounts owing to PCS affiliates of Sprint, including us, couldlead to actions on the part of us or other PCS affiliates of Sprint to enforcerights under the Sprint agreements and other remedies available underapplicable law.  In addition, inJuly 2003, US Unwired Inc., a PCS affiliate of Sprint, filed suit againstSprint alleging violations of the federal racketeering laws, breach offiduciary duty and fraud arising out of Sprint’s dealings with the affiliateand its related entities, and in August 2003, Horizon PCS, Inc. and itsaffiliated entities, a PCS affiliate of Sprint, filed for bankruptcy protectionunder Chapter 11 of the federal bankruptcy code and subsequently filed anadversarial action against Sprint alleging similar causes of action to thosemade by U.S. Unwired Inc.

 

The Federal Communications Commission has mandatedthat wireless carriers provide for local number portability byNovember 24, 2003.  Local numberportability would allow subscribers to keep their wireless phone number whenswitching to a different service provider. We anticipate number portability could increase churn, which could lowerour revenues.  We may be required toincrease subsidies for product upgrades and/or reduce pricing to matchcompetitors’ initiatives and retain customers, which could adversely impact ourrevenue and profitability and our liquidity. It is unclear whether the wireless industry is fully prepared to implementnumber portability.  If consumer dissatisfactionresults, it could adversely impact industry growth.

 

Our ability toborrow funds under our senior secured credit facility’s $47.7 millionrevolving line of credit will be restricted unless our cash balance (as definedin the credit facility) is less than $25.0 million at the time ofborrowing and could be terminated due to our failure to maintain or comply withthe restrictive financial and operating covenants contained in the agreementgoverning the senior secured credit facility as described in Note 6 to theConsolidated Financial Statements. We obtained an amendment to our seniorsecured credit facility on October 10, 2003 that made us in compliancewith the minimum subscriber covenant for the quarter ended September 30, 2003.We presently are in compliance with all financial and operational covenantsrelating to the senior secured credit facility; however, there is uncertaintyas to our ability to continue to comply with such covenants over the nexttwelve months. If we are unable to operate our business within the covenantsspecified in the senior secured credit facility, our ability to obtain futureamendments to the covenants in the senior secured credit facility is notguaranteed and our ability to make borrowings under the revolving line ofcredit required to operate our business could be restricted or terminated. Sucha restriction or termination would have a material adverse effect on ourliquidity.

 

Variable interestrates may increase substantially. At September 30, 2003, we had $230.0 millionoutstanding under our senior secured credit facility. The rate of interest onthe facility is presently based on a margin above the London interbank offeredrate (LIBOR). Our weighted average borrowing rate on variable rate borrowingswas 5.4% for the nine months ended September 30, 2003. Increases in amarket interest rate substantially above our estimates may result inunanticipated cash interest costs.

 

We may not be ableto access the credit markets for additional capital if the liquidity discussedabove is insufficient for the cash needs of our business. We frequentlyevaluate options for additional financings to

 

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supplement our liquidityposition and maintain maximum financial flexibility. However, if theassumptions used in our projections are incorrect, we may be unable to raiseadditional capital.

 

***Capital Resources***

 

The ExistingNotes, the New Notes and the Series B Notes will require cash payments ofinterest of approximately $11.4 million on October 15, 2005 and $22.8million annually beginning in 2006.

 

As ofSeptember 30, 2003, our senior secured credit facility provided for a$47.7 million revolving loan, a term loan A of $112.7 million and aterm loan B of $117.3 million. The term loans A and B, all of which wereoutstanding as of September 30, 2003, are required to be repaid beginningin June 2004 in fourteen and eighteen consecutive quarterly installments,respectively. The revolving loan and term loan A will mature in October 2007and the term loan B will mature in October 2008. The commitment fee onunused borrowings is 0.75%, payable quarterly. Our obligations under the creditagreement are secured by all of our assets. The senior secured credit facilityis subject to certain restrictive covenants including the timing ofavailability for borrowing under the $47.7 million revolving line ofcredit, maintaining certain financial ratios, attaining defined subscribergrowth goals, network covered population goals and minimum quarterly servicerevenues, and limiting annual capital expenditures.

 

We presently arein compliance with all financial and operational covenants associated with oursenior secured credit facility, Existing Notes, New Notes and Series B Notes.

 

***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-GAAPfinancial measure is defined as a numerical measure of a company’s financialperformance that (a) excludes amounts, or is subject to adjustments thathave the effect of excluding amounts, that are included in the comparablemeasure 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 September 30, 2003 compared to the three months endedSeptember 30, 2002” and “—Analysis of the nine months endedSeptember 30, 2003 compared to the nine months ended September 30, 2003,”and the following tables reconcile the non-GAAP financial measures with ourconsolidated financial statements presented in accordance with GAAP.

 
|                             |   | **Three Months Ended September 30,** |       | **Nine Months Ended September 30,** |   |
|----------------------------------|--------|-------------------------------------------|------------|------------------------------------------|--------|
|                             |   | **2003**                                  |       | **2002**                                 |   | **2003** |   | **2002** |   |
| Average revenue  per user (ARPU) |   |                                      |       |                                     |   |   |   |   |   |
| Service revenue                  |   | $                                         | 69,289,000 |                                     | $      | 58,901,000 |   | $ | 188,961,000 |   | $ | 154,257,000 |   |
| Less: Reseller  revenue          |   | (59,000                                   | )          | —                                   |   | (70,000 | ) | — |   |
| Less: Travel  revenue            |   | (13,778,000                               | )          | (17,055,000                              | )      | (34,891,000 | ) | (40,724,000 | ) |
| Less: Roaming  revenue           |   | (3,898,000                                | )          | (2,224,000                               | )      | (9,853,000 | ) | (3,939,000 | ) |
| Subscriber  revenue              |   | $                                         | 51,554,000 |                                     | $      | 39,622,000 |   | $ | 144,147,000 |   | $ | 109,594,000 |   |
|                             |   |                                      |       |                                     |   |   |   |   |   |
| Average  subscribers             |   | 298,170                                   |       | 226,640                                  |   | 281,912 |   | 209,131 |   |
|                             |   |                                      |       |                                     |   |   |   |   |   |
| ARPU                             |   | $                                         | 58         |                                     | $      | 58 |   | $ | 57 |   | $ | 58 |   |

 

43

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We believe ARPU, which calculates the average monthlyservice revenue per customer, excluding roaming revenue, is a useful measure toassist in evaluating our past and forecasting our future subscriber revenue. Inaddition, it provides a gauge to compare our service revenue to that of otherwireless communications providers, although other wireless communicationsproviders may include or exclude certain items from their calculations whichmay make the comparison less meaningful.

 
|                                      |   | **Three Months Ended September 30,** |       | **Nine Months Ended September 30,** |   |
|-------------------------------------------|--------|-------------------------------------------|------------|------------------------------------------|--------|
|                                      |   | **2003 (1)**                              |       | **2002**                                 |   | **2003 (1)** |   | **2002** |   |
| Cash cost per  user (CCPU)                |   |                                      |       |                                     |   |   |   |   |   |
| Cost of service  and operations           |   | $                                         | 29,984,000 |                                     | $      | 37,468,000 |   | $ | 90,942,000 |   | $ | 103,511,000 |   |
| Add: General and  administrative expenses |   | 7,876,000                                 |       | 6,751,000                                |   | 23,098,000 |   | 19,317,000 |   |
| Total cash costs                          |   | $                                         | 37,860,000 |                                     | $      | 44,219,000 |   | $ | 114,040,000 |   | $ | 122,828,000 |   |
|                                      |   |                                      |       |                                     |   |   |   |   |   |
| Average  subscribers                      |   | 298,170                                   |       | 226,640                                  |   | 281,912 |   | 209,131 |   |
|                                      |   |                                      |       |                                     |   |   |   |   |   |
| CCPU                                      |   | $                                         | 42         |                                     | $      | 65 |   | $ | 45 |   | $ | 65 |   |

 

----

(1)                                  Costof service and operations included a one-time credit adjustment of $3.2 millionrelating to the resolution of disputed items with Sprint PCS, which resulted incredits of approximately $4 and $1 per user for the three and nine months endedSeptember 30, 2003, respectively.

 

We believe CCPU, which measures the average monthlycash costs to provide digital wireless mobility communications services percustomer, is a useful measure used to compare our cash cost of operations percustomer to that of other wireless communications providers, although otherwireless communications providers may include or exclude certain items fromtheir calculations which may make the comparison less meaningful.

 
|                            |   | **Three Months Ended September 30,** |       | **Nine Months Ended September 30,** |   |
|---------------------------------|--------|-------------------------------------------|------------|------------------------------------------|--------|
|                            |   | **2003**                                  |       | **2002**                                 |   | **2003** |   | **2002** |   |
| Cost per gross  addition (CPGA) |   |                                      |       |                                     |   |   |   |   |   |
| Selling and  marketing          |   | $                                         | 13,095,000 |                                     | $      | 15,312,000 |   | $ | 37,255,000 |   | $ | 40,001,000 |   |
| Add: Cost of  products sold     |   | 10,721,000                                |       | 9,493,000                                |   | 29,526,000 |   | 27,334,000 |   |
| Less: Equipment  revenue        |   | (3,504,000                                | )          | (2,105,000                               | )      | (8,361,000 | ) | (6,438,000 | ) |
| CPGA costs                      |   | $                                         | 20,312,000 |                                     | $      | 22,700,000 |   | $ | 58,420,000 |   | $ | 60,897,000 |   |
|                            |   |                                      |       |                                     |   |   |   |   |   |
| Gross additions                 |   | 43,600                                    |       | 47,900                                   |   | 129,900 |   | 136,200 |   |
|                            |   |                                      |       |                                     |   |   |   |   |   |
| CPGA (1)                        |   | $                                         | 466        |                                     | $      | 474 |   | $ | 450 |   | $ | 447 |   |

 

----

(1)                                  Minordifferences from numbers appearing in “—Results of Operations” may exist due torounding the gross additions to the nearest 100.

 

We believe CPGA, which measures the average cost toacquire new customers during the period, is a useful measure used to compareour average cost to acquire a new subscriber to that of other wirelesscommunication providers, although other wireless communications providers mayinclude or exclude certain items from their calculations which may make thecomparison less meaningful.

 

***Contractual Obligations***

 

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

 

44

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|                                               |   |      |    | **Payments due by period ending  September 30:** |   |
|----------------------------------------------------|--------|-----------|---------|-------------------------------------------------------|--------|
| **Contractual obligation**                         |   | **Total** |    | **Less than  1 year**                                 |   | **1-3 years** |   | **4-5 years** |   | **After 5  years** |   |
|                                               |   |      |    |                                                  |   |   |   |   |   |   |   |
| Senior secured  credit facility(1)                 |   | $         | 230,000 |                                                  | $      | 5,280 |   | $ | 51,633 |   | $ | 173,087 |   | $ | — |   |
| Operating  leases(2)                               |   | 62,979    |    | 16,256                                                |   | 24,534 |   | 11,117 |   | 11,072 |   |
| Capital leases                                     |   | 161       |    | 161                                                   |   | — |   | — |   | — |   |
| Building  mortgage and other long-term liabilities |   | 3,503     |    | 204                                                   |   | 452 |   | 519 |   | 2,328 |   |
| Senior  subordinated discount notes(1)             |   | 100,380   |    | —                                                |   | — |   | — |   | 100,380 |   |
| Senior discount  notes(1)                          |   | 48,180    |    | —                                                |   | — |   | — |   | 48,180 |   |
| Series B senior  discount notes(1)                 |   | 14,515    |    | —                                                |   | — |   | — |   | 14,515 |   |
|                                               |   |      |    |                                                  |   |   |   |   |   |   |   |
|                                               |   | $         | 459,718 |                                                  | $      | 21,901 |   | $ | 76,619 |   | $ | 184,723 |   | $ | 176,475 |   |
|                                                    |        |           |         |                                                       |        |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)                                  Totalrepayments, excluding interest payments, are based on borrowings outstanding asof September 30, 2003, and do not include projected borrowings under thesenior secured credit facility.

 

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

 

There areprovisions in each of the agreements governing the senior secured creditfacility, the senior subordinated discount notes, the senior discount notes andthe Series B senior discount notes that provide for an acceleration ofrepayment upon an event of default, as defined in the respective agreements.

 

***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 retaildistribution, which is dependent on year-end holiday shopping, the timing ofnew product and service offerings, competitive pricing pressures and aggressivemarketing and promotions during the holiday season.  The increased level of activity requires a greater use of ouravailable financial resources during this period.

 

**Item 3****. Quantitative and Qualitative Disclosures AboutMarket Risk**

 

In the normalcourse of business, our operations are exposed to interest rate risk on our seniorsecured credit facility and any future financing requirements. Our fixed ratedebt consisted primarily of the accreted carrying value of the Existing Notes($81.5 million at September 30, 2003) and the Series B Notes ($11.8million at September 30, 2003). Our New Notes also have a fixed interest rate, but because we havefollowed the provisions of SFAS No. 15 and EITF 02-04, we will not recognizeany interest expense with respect to the New Notes in future periods.  These provisions require that the carryingvalue be recorded at the total future cash payments (principal andinterest).  Therefore, these New Notesare carried on our balance sheet as long-term liabilities valued at $81.9million (see Note 7 to the Consolidated Financial Statements). Our variablerate debt consisted of borrowings made under the

 

45

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senior secured creditfacility ($230.0 million at September 30, 2003).

 

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

 

We may decide, from time to time, to manage theinterest rate risk on our outstanding long-term debt through the use of fixedand variable rate debt and interest rate swaps. While we cannot predict our abilityto refinance existing debt or the impact interest rate movements will have onour existing debt, we continue to evaluate our interest rate risk on an ongoingbasis.

 

The followingtable presents the estimated future balances of outstanding long-term debtprojected at the end of each period and future required annual principalpayments for each period then ended based on our projected level of long-termindebtedness as of September 30, 2003 (dollars in thousands):

 
|                                |   | **Years  ending December 31,** |   |
|-------------------------------------|--------|-------------------------------------|--------|
|                                |   | **2003**                            |   | **2004** |   | **2005** |   | **2006** |   | **2007** |   |
|                                |   |                                |   |   |   |   |   |   |   |   |   |
| Senior  subordinated discount notes |   | 84,330                              |   | 96,549 |   | 100,380 |   | 100,380 |   | 100,380 |   |
| Fixed interest  rate                |   | 14.0                                | %      | 14.0 | % | 14.0 | % | 14.0 | % | 14.0 | % |
| Principal  repayments               |   | —                              |   | — |   | — |   | — |   | — |   |
|                                |   |                                |   |   |   |   |   |   |   |   |   |
| Senior secured  credit facility     |   | 230,000                             |   | 222,079 |   | 207,997 |   | 157,538 |   | 100,625 |   |
| Variable  interest rate(1)          |   | 5.4                                 | %      | 6.1 | % | 7.0 | % | 7.7 | % | 7.9 | % |
| Principal  payments                 |   | 15,000                              |   | 7,921 |   | 14,082 |   | 50,459 |   | 56,913 |   |
|                                |   |                                |   |   |   |   |   |   |   |   |   |
| Senior discount  notes(2)           |   | 48,180                              |   | 48,180 |   | 48,180 |   | 48,180 |   | 48,180 |   |
| Fixed interest  rate                |   | 14.0                                | %      | 14.0 | % | 14.0 | % | 14.0 | % | 14.0 | % |
| Principal  repayments               |   | —                              |   | — |   | — |   | — |   | — |   |
|                                |   |                                |   |   |   |   |   |   |   |   |   |
| Series B senior  discount notes     |   | 12,197                              |   | 13,961 |   | 14,515 |   | 14,515 |   | 14,515 |   |
| Fixed interest  rate                |   | 14.0                                | %      | 14.0 | % | 14.0 | % | 14.0 | % | 14.0 | % |
| Principal  repayments               |   | —                              |   | — |   | — |   | — |   | — |   |

 

----

(1)                               Theinterest rate on the senior secured credit facility equals the London interbankoffered rate (LIBOR) plus a weighted-average interest rate of 3.8%. LIBOR isassumed to equal 1.6% for 2003, 2.3% for 2004, 3.2% for 2005, 3.9% for 2006 and4.1% for 2007. A 1.0% increase (decrease) in the variable interest rate wouldresult in a $2.3 million increase (decrease) in the interest expense for theyear ended December 31, 2003.

 

(2)                               Thesenior discount notes were issued at a discount in February 2003, but wehave followed the provisions of SFAS No. 15 and EITF 02-04.  These provisions require that the carryingvalue be recorded at the total future cash payments (principal and interest).  Therefore, the notes are carried on ourbalance sheet as long-term liabilities valued at $81.9 million beginningFebruary 26, 2003, which is the date of the debt-for-debt exchange offerdescribed in Note 7 to the Consolidated Financial Statements.  As a result, no interest expense related tothese notes will be recognized in future periods.

 

46

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**Item 4****. Controls and Procedures**

 

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

## ** **

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

 

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

 

## **Changes in Internal Controls**

## ** **

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

 

47

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# **PART II**.  OTHER INFORMATION

# ** **

# **Item 1. Legal Proceedings**

# ** **

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 and Use of Proceeds**

 

None.

 

**Item 3. Defaults Upon Senior Securities**

 

None.

 

**Item 4. Submission of Matters to a Vote of SecurityHolders**

 

None.

 

**Item 5. Other Information**

 

None.

 

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

 

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

 

Two reports on Form 8-K were filed during the quarterended September 30, 2003: 

 
| **Date**            |   | **Item Reported  On**                                                                                                                                                                                                                                                                                                                                   |
|---------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| July 10, 2003  |   | Item 5. Other Events.  UbiquiTel announced the transfer of the listing of its common  stock to The Nasdaq National Market from The Nasdaq SmallCap Market,  effective as of the opening of trading on July 10, 2003.                                                                                                                          |
|                |   |                                                                                                                                                                                                                                                                                                                                                    |
| August 5, 2003 |   | Item 5. Other Events and Required FD  Disclosure.  UbiquiTel announced that  it and Sprint PCS had amended UbiquiTel’s management agreement with Sprint  PCS to remove the build-out requirement for the state of Montana, thereby  reducing the total population in UbiquiTel’s service areas to approximately  10.0 million residents. |
|                |   |                                                                                                                                                                                                                                                                                                                                                    |
|                |   | Item 12. Results of Operations and Financial  Condition. UbiquiTel announced on August 11, 2003 its operating and  financial results for the quarter ended June 30, 2003.                                                                                                                                                                     |

 

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

 
| **Exhibit No.** |   | **Description**                                                                                                         |
|-----------------|--------|-------------------------------------------------------------------------------------------------------------------------|
| 10.1            |   | Master Site Agreement dated as of October 15,  2003 between UbiquiTel Leasing Company and GoldenState Towers, LLC. |

 

48

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| 10.2   |   | Sixth Amendment to Credit Agreement dated as of  October 10, 2003 among UbiquiTel Inc., UbiquiTel Operating Company, the  financial institutions party thereto from time to time and BNP Paribas as  agent.                                                                                                                                                                                                                |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.3   |   | Addendum VII dated July 31, 2003 to Sprint PCS  Management 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.                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.4   |   | Addendum VIII dated November 7, 2003 to Sprint  PCS Management Agreement, Sprint PCS Services Agreement, Sprint Trademark and  Service Mark License Agreement and Sprint Spectrum Trademark and Service Mark  License 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).                                                                                                                                                                                                                                 |

 

49

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**SIGNATURES**

 

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

 
|                   | CO-REGISTRANTS:              |
|------------------------|------------------------------|
|                   |                         |
|                   | UBIQUITEL INC.               |
|                   | UBIQUITEL OPERATING  COMPANY |
|                   |                         |
|                   |                         |
|                   | By:                          | /s/ DONALD A. HARRIS |   |
|                   |                         | Donald A. Harris |
|                   |                         | Chairman of the Board, President  and Chief Executive Officer |
|                   |                         | (Principal Executive Officer) |
|                   |                         |
|                   |                         |
|                   | By:                          | /s/ JAMES J. VOLK |   |
|                   |                         | James J. Volk |
|                   |                         | Chief Financial Officer |
|                   |                         | (Principal Financial and Accounting Officer) |
|                   |                         |
|                   |                         |
| November 14, 2003 |                         |
|                        |                              |  |  |  |  |

 

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