**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

 

**FORM 10-Q**

 

**QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF**

**THE SECURITIES EXCHANGE ACT OF1934**

 

**For the quarterly period endedMarch 31, 2005**

 

**CommissionFile Number**

**000-30761**

 

**UbiquiTel Inc.**

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

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

 

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

 

**CommissionFile Number**

**333-39950**

 

**UbiquiTel OperatingCompany**

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

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

 

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

 

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

Yes ý        Noo

 

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

Yes ý        Noo

 

There were 93,216,132 shares of common stock, $0.0005 par value, of UbiquiTel Inc. outstanding at May 5,2005.

 

There were 1,000 shares of common stock, $0.01 par value, of UbiquiTelOperating Company outstanding at May 5, 2005, all of which were owned byUbiquiTel Inc.

 

 

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**UbiquiTel Inc. and Subsidiaries**

 

**Form 10-Q for the Quarter EndedMarch 31, 2005**

 

**INDEX**

 
| PART I.    | FINANCIAL INFORMATION                                                                                 |   |
|------------|-------------------------------------------------------------------------------------------------------|--------|
|       |                                                                                                  |   |
| Item 1.    | Financial Statements                                                                                  |   |
|       | Consolidated Balance  Sheets as of March 31, 2005 and December 31, 2004                               |   |
|       | Consolidated  Statements of Operations for the three months ended March 31, 2005 and 2004  (restated) |   |
|       | Consolidated  Statements of Cash Flows for the three months ended March 31, 2005 and 2004  (restated) |   |
|       | 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.    | Unregistered  Sales of Equity 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                                                                                              |   |
|       |                                                                                                  |   |
| Signatures |                                                                                                  |

 

2

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**Explanatory Note:**

 

The Consolidated Financial Statements included hereinare those of UbiquiTel Inc. (“UbiquiTel”). The Co-Registrants are UbiquiTel and UbiquiTel Operating Company (“OperatingCompany”), which is a wholly-owned subsidiary of UbiquiTel and the issuer of9.875% senior notes due 2011. UbiquiTel has provided a full, unconditional,joint and several guaranty of Operating Company’sobligations under the 9.875% senior notes due 2011.  UbiquiTel has no operations separate from itsinvestment in Operating Company. Pursuant to Rule 12h-5 of the Securities Exchange Act, no separatefinancial statements and other disclosures concerning Operating Company otherthan narrative disclosures set forth in Notes 5 and 6 to the ConsolidatedFinancial Statements have been presented herein. As used herein and except asthe context otherwise may require, the “Company,” “we,” “us,” “our” or “UbiquiTel”means, collectively UbiquiTel, Operating Company and their consolidatedsubsidiary, 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)**

 
| ** **                                                                                                                                                                     | ** ** | **March 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **ASSETS**                                                                                                                                                                     |       |               |       |                  |       |
| CURRENT ASSETS:                                                                                                                                                                |       |               |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                     |       | $                  | 84,287     |                  | $          | 91,781 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $2,908 at March 31,  2005 and $3,358 at December 31, 2004                                                      |       | 22,780             |       | 22,609                |       |
| Inventory, net                                                                                                                                                                 |       | 5,013              |       | 4,025                 |       |
| Prepaid expenses  and other assets                                                                                                                                             |       | 18,274             |       | 17,680                |       |
| Total current  assets                                                                                                                                                          |       | 130,354            |       | 136,095               |       |
| PROPERTY AND  EQUIPMENT, NET                                                                                                                                                   |       | 245,147            |       | 243,679               |       |
| CONSTRUCTION IN  PROGRESS                                                                                                                                                      |       | 4,681              |       | 1,867                 |       |
| DEFERRED  FINANCING COSTS, NET                                                                                                                                                 |       | 10,429             |       | 10,868                |       |
| GOODWILL                                                                                                                                                                       |       | 38,138             |       | 38,138                |       |
| INTANGIBLES, NET                                                                                                                                                               |       | 63,489             |       | 64,565                |       |
| OTHER LONG-TERM  ASSETS                                                                                                                                                        |       | 2,403              |       | 2,595                 |       |
| Total assets                                                                                                                                                                   |       | $                  | 494,641    |                  | $          | 497,807 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                 |       |               |       |                  |       |
| CURRENT  LIABILITIES:                                                                                                                                                          |       |               |       |                  |       |
| Current  maturities of long-term debt                                                                                                                                          |       | $                  | 227        |                  | $          | 223 |   |
| Accounts payable                                                                                                                                                               |       | 8,905              |       | 3,124                 |       |
| Accrued expenses                                                                                                                                                               |       | 18,386             |       | 18,824                |       |
| Accrued  compensation and benefits                                                                                                                                             |       | 1,415              |       | 4,591                 |       |
| Interest payable                                                                                                                                                               |       | 3,456              |       | 13,825                |       |
| Taxes payable                                                                                                                                                                  |       | 3,051              |       | 2,672                 |       |
| Deferred revenue                                                                                                                                                               |       | 12,396             |       | 12,274                |       |
| Other                                                                                                                                                                          |       | 2,132              |       | 1,501                 |       |
| Total current  liabilities                                                                                                                                                     |       | 49,968             |       | 57,034                |       |
| LONG-TERM DEBT,  EXCLUDING CURRENT MATURITIES                                                                                                                                  |       | 423,803            |       | 423,893               |       |
| OTHER LONG-TERM  LIABILITIES                                                                                                                                                   |       | 13,088             |       | 11,462                |       |
| Total long-term  liabilities                                                                                                                                                   |       | 436,891            |       | 435,355               |       |
| Total  liabilities                                                                                                                                                             |       | 486,859            |       | 492,389               |       |
| COMMITMENTS AND  CONTINGENCIES                                                                                                                                                 |       | —             |       | —                |       |
| STOCKHOLDERS’  EQUITY:                                                                                                                                                    |       |               |       |                  |       |
| Preferred stock,  par value $0.001 per share; 10,000 shares authorized; 0 shares issued and  outstanding at March 31, 2005 and December 31, 2004                               |       | —             |       | —                |       |
| Common stock,  par value $0.0005 per share; 240,000 shares authorized; 93,184 and 93,016  shares issued and outstanding at March 31, 2005 and December 31, 2004,  respectively |       | 46                 |       | 46                    |       |
| Additional  paid-in-capital                                                                                                                                                    |       | 303,742            |       | 303,830               |       |
| Accumulated  deficit                                                                                                                                                           |       | (296,006           | )          | (298,458              | )          |
| Total  stockholders’ equity                                                                                                                                               |       | 7,782              |       | 5,418                 |       |
| Total  liabilities and stockholders’ equity                                                                                                                               |       | $                  | 494,641    |                  | $          | 497,807 |   |

 

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

 

4

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# **UbiquiTel Inc. and Subsidiaries**

# **ConsolidatedStatements of Operations**

# **(Unaudited)**

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

 
| ** **                                                                                                         | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                         | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| ** **                                                                                                         | ** ** | ** **                       | ** ** | **(Restated)** | ** ** |
| ** **                                                                                                         | ** ** | ** **                       | ** ** | ** ** | ** ** |
| REVENUES:                                                                                                          |       |                             |       |   |   |
| Subscriber  revenue                                                                                                |       | $                                | 66,892     |   | $ | 56,571 |   |
| Roaming and  wholesale revenue                                                                                     |       | 29,606                           |       | 20,867 |   |
| Service revenue                                                                                                    |       | 96,498                           |       | 77,438 |   |
| Equipment  revenue                                                                                                 |       | 3,433                            |       | 3,872 |   |
| Total revenues                                                                                                     |       | 99,931                           |       | 81,310 |   |
| COSTS AND  EXPENSES:                                                                                               |       |                             |       |   |   |
| Cost of service  and operations (exclusive of depreciation, amortization and accretion as  shown separately below) |       | 44,006                           |       | 39,138 |   |
| Cost of products  sold                                                                                             |       | 10,385                           |       | 9,215 |   |
| Selling and  marketing                                                                                             |       | 15,926                           |       | 16,977 |   |
| General and  administrative expenses                                                                               |       | 4,988                            |       | 4,383 |   |
| Non-cash  compensation                                                                                             |       | (521                             | )          | — |   |
| Depreciation,  amortization and accretion                                                                          |       | 12,157                           |       | 12,930 |   |
| Total costs and  expenses                                                                                          |       | 86,941                           |       | 82,643 |   |
| OPERATING INCOME  (LOSS)                                                                                           |       | 12,990                           |       | (1,333 | ) |
| INTEREST INCOME                                                                                                    |       | 526                              |       | 135 |   |
| INTEREST EXPENSE                                                                                                   |       | (10,935                          | )          | (8,430 | ) |
| GAIN ON DEBT  RETIREMENT                                                                                           |       | —                           |       | 1,109 |   |
| INCOME (LOSS)  BEFORE INCOME TAXES                                                                                 |       | 2,581                            |       | (8,519 | ) |
| INCOME TAX  EXPENSE                                                                                                |       | (129                             | )          | (72 | ) |
| NET INCOME  (LOSS)                                                                                                 |       | $                                | 2,452      |   | $ | (8,591 | ) |
|                                                                                                               |       |                             |       |   |   |
| NET INCOME  (LOSS) PER SHARE:                                                                                      |       |                             |       |   |   |
| BASIC                                                                                                              |       | $                                | 0.03       |   | $ | (0.09 | ) |
| DILUTED                                                                                                            |       | $                                | 0.02       |   | $ | (0.09 | ) |
|                                                                                                               |       |                             |       |   |   |
| WEIGHTED AVERAGE  SHARES OUTSTANDING:                                                                              |       |                             |       |   |   |
| BASIC                                                                                                              |       | 93,103                           |       | 92,579 |   |
| DILUTED                                                                                                            |       | 98,644                           |       | 92,579 |   |

 

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

 

5

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# **UbiquiTel Inc. and Subsidiaries**

# **ConsolidatedStatements of Cash Flows**

# **(Unaudited)**

# **(In Thousands)**

 
| ** **                                                                                | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| ** **                                                                                | ** ** | ** **                       | ** ** | **(Restated)** | ** ** |
|                                                                                      |       |                             |       |   |   |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                    |       |                             |       |   |   |
| Net income  (loss)                                                                        |       | $                                | 2,452      |   | $ | (8,591 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities: |       |                             |       |   |   |
| Amortization of  deferred financing costs                                                 |       | 439                              |       | 410 |   |
| Amortization of  debt discount                                                            |       | (32                              | )          | 303 |   |
| Amortization of  intangible assets                                                        |       | 1,076                            |       | 1,076 |   |
| Depreciation and  accretion                                                               |       | 11,080                           |       | 11,854 |   |
| Interest accrued  on discount notes                                                       |       | —                           |       | 3,149 |   |
| Non-cash  compensation from stock options granted to employees                            |       | (521                             | )          | — |   |
| Deferred income  taxes                                                                    |       | 69                               |       | 72 |   |
| Gain on sale of  equipment                                                                |       | (71                              | )          | (58 | ) |
| Gain on debt  retirement                                                                  |       | —                           |       | (1,109 | ) |
| Changes in  operating assets and liabilities exclusive of capital expenditures:           |       |                             |       |   |   |
| Accounts receivable                                                                       |       | (171                             | )          | (1,156 | ) |
| Inventory                                                                                 |       | (988                             | )          | (224 | ) |
| Prepaid expenses  and other assets                                                        |       | (402                             | )          | (1,811 | ) |
| Accounts payable  and accrued expenses                                                    |       | (10,773                          | )          | 5,265 |   |
| Net cash  provided by operating activities                                                |       | 2,158                            |       | 9,180 |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                    |       |                             |       |   |   |
| Capital  expenditures                                                                     |       | (10,031                          | )          | (5,941 | ) |
| Net cash used in  investing activities                                                    |       | (10,031                          | )          | (5,941 | ) |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                    |       |                             |       |   |   |
| Proceeds from  issuance of 9.875% senior notes                                            |       | —                           |       | 265,302 |   |
| Repayments under  senior secured credit facility                                          |       | —                           |       | (230,000 | ) |
| Repayment of 14%  Series B senior discount notes                                          |       | —                           |       | (12,478 | ) |
| Purchase of 14%  senior discount notes                                                    |       | —                           |       | (15,872 | ) |
| Financing costs                                                                           |       | —                           |       | (8,296 | ) |
| Change in book  cash overdraft                                                            |       | —                           |       | (5,671 | ) |
| Proceeds from  issuance of common stock                                                   |       | 106                              |       | — |   |
| Proceeds from  exercise of stock options                                                  |       | 327                              |       | — |   |
| Repayment of  capital lease obligations and other long-term debt                          |       | (54                              | )          | (110 | ) |
| Net cash  provided by (used in) financing activities                                      |       | 379                              |       | (7,125 | ) |
| NET DECREASE IN  CASH AND CASH EQUIVALENTS                                                |       | (7,494                           | )          | (3,886 | ) |
| CASH AND CASH  EQUIVALENTS, beginning of period                                           |       | 91,781                           |       | 57,225 |   |
| CASH AND CASH  EQUIVALENTS, end of period                                                 |       | $                                | 84,287     |   | $ | 53,339 |   |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:                                        |       |                             |       |   |   |
| Cash paid for  interest                                                                   |       | $                                | 20,847     |   | $ | 3,489 |   |
| Cash paid for  taxes                                                                      |       | 3                                |       | 8 |   |

 

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

 

6

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**UbiquiTelInc. and Subsidiaries**

# **Notesto Consolidated Financial Statements**

**(Unaudited)**

 

**1.****              SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

 

**Basis of Presentation of Unaudited InterimFinancial Information**

 

The consolidated financial information as of March 31,2005 and for the three months ended March 31, 2005 and 2004 is unaudited, but hasbeen prepared 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 annually by generally accepted accountingprinciples.  In the opinion ofmanagement, the interim data reflects all adjustments necessary for a fairstatement of the Company’s results for the periods presented.  Operating results for the three months endedMarch 31, 2005 are not necessarily indicative of results that may be expectedfor the entire year.  This financialinformation should be read in conjunction with the audited consolidatedfinancial statements and notes thereto for the year ended December 31, 2004 ofUbiquiTel which are included in its and Operating Company’s Joint Annual Reporton Form 10-K for the year ended December 31, 2004.

 

**Principles of Consolidation and Use of Estimates**

 

The accompanyingfinancial statements include the accounts of UbiquiTel Inc. and itssubsidiaries (see Note 2).  Allsignificant intercompany balances and transactions have been eliminated.  Certain prior year amounts have beenreclassified to conform with current yearpresentation.

 

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 revenues and expenses during the reportingperiods.  Actual results could differfrom those estimates and assumptions.

 

**Restatementsof Prior Years’ Financial Statements**

 

As previously reported in UbiquiTel’s and OperatingCompany’s Joint Annual Report on Form 10-K for the year ended December 31,2004, the Company reviewed its accounting practices with respect to leasetransactions. As a result of this review and in consultation with the auditcommittee of UbiquiTel’s board of directors, UbiquiTel determined that it wasappropriate to restate its consolidated financial statements for the yearsended December 31, 2000 through December 31, 2003 and the nine months endedSeptember 30, 2004.  The Company did notamend its previously filed Annual Reports on Form 10-K or Quarterly Reports onForm 10-Q for the restatement, and the financial statements and relatedfinancial information contained in such reports should no longer be reliedupon.  Historically, when accounting fortower leases with renewal options, the Company recorded rent expense on astraight-line basis over the initial non-cancelable lease term, excluding anypotential renewal periods. The restatements recognized rent expense on a straight-linebasis over the lease term (as defined in Statement of Financial AccountingStandards No. 13, “Accounting for Leases,” as amended) of the Company’s towerleases. Cell site assets associated with such leased towers are depreciatedover the shorter of the assets’ useful lives or the lease term. Theserestatements resulted from the correction of accounting errors and were notattributable to any material non-compliance by the Company with any financialreporting requirements under the federal securities laws. Amounts for priorperiods presented in these financial statements and the notes thereto reflectapplicable balances and amounts on a restated basis.

 

As a result of these restatements, certain previouslyreported amounts in the consolidated statement of 

 

7

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operations for the three monthsended March 31, 2004 and consolidated balance sheet as of March 31, 2004 havebeen restated in the following tables:

 
| ** **                                           | ** ** | **Three Months  Ended March 31, 2004**     | ** ** |
|------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                           | ** ** | **(In thousands,  except per share data)** | ** ** |
| ** **                                           | ** ** | **As  Originally  Reported**               | ** ** | **Adjustments** | ** ** | **As Restated** | ** ** |
|                                                 |       |                                       |       |   |   |   |   |
| Cost of services and operations                      |       | $                                          | 39,105     |   | $ | 33 |   | $ | 39,138 |   |
| Total costs and expenses                             |       | 82,610                                     |       | 33 |   | 82,643 |   |
| Operating loss                                       |       | (1,300                                     | )          | (33 | ) | (1,333 | ) |
| Loss before income taxes                             |       | (8,486                                     | )          | (33 | ) | (8,519 | ) |
| Net loss                                             |       | (8,558                                     | )          | (33 | ) | (8,591 | ) |
| Basic and diluted net loss per share of common stock |       | $                                          | (0.09      | ) | $ | (0.00 | ) | $ | (0.09 | ) |
|                                                 |       |                                       |       |   |   |   |   |   |   |   |
| ** **                                           |       | **As of March 31, 2004**                   |       |
| ** **                                           | ** ** | **(In thousands)**                         | ** ** |
| ** **                                           | ** ** | **As Originally  Reported**                | ** ** | **Adjustments** | ** ** | **As Restated** | ** ** |
| Other long-term liabilities                          |       | $                                          | 9,406      |   | $ | 1,414 |   | $ | 10,820 |   |
| Total liabilities                                    |       | 467,280                                    |       | 1,414 |   | 468,694 |   |
| Accumulated deficit                                  |       | (290,339                                   | )          | (1,414 | ) | (291,753 | ) |
| Total stockholders’ equity                      |       | 9,662                                      |       | (1,414 | ) | 8,248 |   |
|                                                      |            |                                            |            |  |  |  |  |  |  |  |  |  |  |

 

The amounts reflected in cost of service andoperations, as originally reported, included Sprint PCS management fee expensereclassified from general and administrative expenses totaling approximately$4.9 million for the three months ended March 31, 2004.

 

# **Recent AccountingPronouncements**

# ** **

In March 2005, the Financial Accounting StandardsBoard (“FASB”) issued Interpretation Number 47, “Accounting for ConditionalAsset Retirement Obligations, an interpretation of FASB Statement No. 143” (“FIN47”).  FIN 47 clarifies the term “conditionalasset retirement obligation”**asused in Statement of Financial Accounting Standards (“SFAS”) No. 143, “Accountingfor Asset Retirement Obligations,” and also clarifies when an entity would havesufficient information to reasonably estimate the fair value of an assetretirement.  FIN 47 is effective no laterthan the end of fiscal years ending after December 15, 2005.  The Company does not anticipate that theimplementation of FIN 47 will have a material impact on its financial position,results of operations or cash flows.

 

In December 2004, the FASB issued SFAS No. 123(revised 2004), “Share-Based Payments” (“SFAS No. 123R”). SFAS No. 123Rrequires the recognition of the cost of employee services received in exchangefor an award of equity instruments in the financial statements and measurementbased on the grant-date fair value of the award. It requires the cost to berecognized over the period during which an employee is required to provideservice in exchange for the award. Additionally, compensation expense will berecognized over the remaining employee service period for the outstandingportion of any awards for which compensation expense had not been previouslyrecognized or disclosed under SFAS No. 123, “Accounting for Stock-Based Compensation”(“SFAS No. 123”).  SFAS No. 123R replacesSFAS No. 123 and supersedes Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees” (“APB No. 25”), and its related interpretations.

 

8

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SFAS No. 123R was originally required to be adopted bythe Company beginning no later than the third quarter of 2005.  However, in April 2005, the Securities andExchange Commission announced the adoption of a new rule that amends thecompliance dates for SFAS No. 123R. Accordingly, the Company is required to adopt SFAS No. 123R no laterthan January 1, 2006.  The Company iscurrently assessing the timing and impact of adopting SFAS No. 123R.

 

# **Stock-Based Compensation**

# ** **

At March 31, 2005, UbiquiTel had two stock-basedemployee compensation plans, an employee stock purchase plan and an equityincentive plan.  The Company accounts forthe plans in accordance with APB No. 25 and related interpretations.

 

In May 2002, 1,220,800 options previously issuedto employees and board members under the Company’s equity incentive plan weremodified to reduce the exercise price to $4.00, which was approximately $2.14per share above the fair market value on the date of modification. Themodification reducing the exercise price resulted in variable accounting forthese options from the date of modification to the date the options areexercised, forfeited or expire unexercised. At March 31, 2004, the fair marketvalue of UbiquiTel’s common stock did not exceed the modified price and, assuch, no compensation expense was recorded for the three months ended March 31,2004.  The decrease in the fair marketvalue of the common stock from $7.12 at December 31, 2004 to $6.70 at March 31,2005 resulted in a credit to non-cash compensation expense of approximately$0.5 million for the three months ended March 31, 2005.

 

The following table illustrates the effect on netincome (loss) and net income (loss) per share if the Company had applied thefair value recognition provisions of SFAS No. 123.

 
| ** **                                                                                         | ** ** | **Three Months Ended March 31,**             | ** ** |
|----------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                                         | ** ** | **2005**                                     | ** ** | **2004** | ** ** |
| ** **                                                                                         | ** ** | ** **                                   | ** ** | **(Restated)** | ** ** |
| ** **                                                                                         | ** ** | **(In Thousands, Except Per Share Amounts)** | ** ** |
| Net income  (loss), as reported                                                                    |       | $                                            | 2,452      |   | $ | (8,591 | ) |
| Add: stock-based  employee compensation included in reported net income (loss)                     |       | (521                                         | )          | — |   |
| Deduct: total  stock-based employee compensation expense determined under fair value-based  method |       | (450                                         | )          | (364 | ) |
| Pro forma net  income (loss)                                                                       |       | $                                            | 1,481      |   | $ | (8,955 | ) |
|                                                                                               |       |                                         |       |   |   |
| Basic net income  (loss) per share:                                                                |       |                                         |       |   |   |
| As reported                                                                                        |       | $                                            | 0.03       |   | $ | (0.09 | ) |
| Pro forma                                                                                          |       | $                                            | 0.02       |   | $ | (0.10 | ) |
|                                                                                               |       |                                         |       |   |   |
| Diluted net  income (loss) per share:                                                              |       |                                         |       |   |   |
| As reported                                                                                        |       | $                                            | 0.02       |   | $ | (0.09 | ) |
| Pro forma                                                                                          |       | $                                            | 0.02       |   | $ | (0.10 | ) |

 

**2. ORGANIZATION AND NATURE OF BUSINESS**

 

**Organization and Nature of Business**

 

UbiquiTel Inc. andSubsidiaries (“UbiquiTel” or the “Company”) was formed for the purpose ofbecoming the exclusive provider of Sprint Personal Communications Services (“PCS”)in certain defined midsize markets in 

 

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thewestern and midwestern United States.

 

In October 1998,UbiquiTel L.L.C. (a Washington state limited liability company) entered into amanagement agreement with Sprint PCS for the exclusive rights to market Sprint’s100% digital, 100% PCS products and services to the residents in theReno/Tahoe, Nevada market. UbiquiTel L.L.C. had no financial transactions fromits inception (August 24, 1998) to September 29, 1999. OnSeptember 29, 1999, UbiquiTel Inc. (formerly, UbiquiTel Holdings, Inc.)was incorporated in Delaware. In November 1999, UbiquiTel L.L.C. assignedall of its material contracts including the rights to the Sprint PCS agreementsto UbiquiTel Inc. On November 9, 1999, UbiquiTel Operating Company (aDelaware corporation, formerly a Delaware limited liability company) (“OperatingCompany”), was formed to serve as the operating company for UbiquiTel Inc.Also, on March 17, 2000, UbiquiTel Leasing Company (a Delawarecorporation) was formed to serve as the leasing company for UbiquiTel Inc.UbiquiTel Inc. assigned the Sprint PCS agreements to Operating Companyfollowing its formation. On December 28, 1999, UbiquiTel amended itsmanagement agreement with Sprint PCS to expand its markets to include northernCalifornia, Spokane/Montana, southern Idaho/Utah/Nevada and southernIndiana/Kentucky/Tennessee. On February 21, 2001, in connection withUbiquiTel’s acquisition of VIA Wireless LLC, UbiquiTel amended its managementagreement with Sprint PCS to expand its markets effective at the closing inAugust 2001 to include the six VIA Wireless Basic Trading Areas covering the central valley ofCalifornia market. On August 13, 2001, upon the closing of themerger agreement, VIA Wireless became a wholly owned subsidiary of OperatingCompany and was later merged into Operating Company in June 2003. OnJuly 31, 2003, Operating Company amended its management agreement withSprint PCS to eliminate the obligation to build out the state of Montana,thereby reducing its licensed resident population in its markets to approximately10.8 million.

 

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

 

## **Recent Development**

## ** **

On December 15, 2004, Sprint Corporation and NextelCommunications, Inc. announced that their boards of directors had unanimouslyapproved a definitive agreement for a merger of equals. Nextel Communicationscurrently operates a wireless mobility communications network in certainterritories in which the Company also provides digital wireless mobilitycommunications network services under the Sprint or affiliated brands.

 

The Company has had preliminary discussions withSprint regarding the potential impact on the Company of the pendingSprint-Nextel transaction. The Company believes that, based on currentlyavailable information, and assuming that no changes are effected with respectto Sprint’s agreements with the Company, Sprint could potentially be in violationof the exclusivity provision of the parties’ management agreement at some pointfollowing completion of the Sprint-Nextel transaction due to the overlapbetween certain of the Company’s and Nextel’s territories. Sprint’s agreementswith the Company provide for specific remedies in the event of a materialbreach by Sprint of such agreements. The Company has not made any determinationas to the potential impact on the Company’s operations or the value of theCompany’s business of any of such remedies or whether any such remedy would bemore or less favorable to it than the Company’s existing arrangements withSprint or any renegotiated arrangements with Sprint.

 

The Company is committed to working with Sprint toreach mutually agreeable arrangements with respect to these matters. However,there can be no assurances that the Company and Sprint will be able to reachmutually beneficial arrangements or as to the terms of any such arrangements orthe potential impact on the Company of any such arrangements. Furthermore, theCompany has not been able to assess the potential impact of the Sprint-Nextelbusiness combination on Sprint’s competitiveness in the wireless industry oneither a short-term or long-term basis.

 

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

 

The Company computes net income (loss) per commonshare in accordance with SFAS No. 128, “Earnings per Share” (“SFAS No. 128”).  In accordance with SFAS No. 128, incrementalpotential common shares from stock options and warrants are excluded in thecalculation of diluted net income (loss) per share when the effect would beantidilutive.

 

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

 
| ** **                                                    | ** ** | **Three Months Ended March 31,**             | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                    | ** ** | **2005**                                     | ** ** | **2004** | ** ** |
| ** **                                                    | ** ** | ** **                                   | ** ** | **(Restated)** | ** ** |
| ** **                                                    | ** ** | **(In Thousands, Except Per Share Amounts)** | ** ** |
| Basic                                                         |       |                                         |       |   |   |
| Net income  (loss)                                            |       | $                                            | 2,452      |   | $ | (8,591 | ) |
| Weighted average  common shares outstanding                   |       | 93,103                                       |       | 92,579 |   |
| Net income  (loss) per share                                  |       | $                                            | 0.03       |   | $ | (0.09 | ) |
|                                                          |       |                                         |       |   |   |
| Diluted                                                       |       |                                         |       |   |   |
| Net income  (loss)                                            |       | $                                            | 2,452      |   | $ | (8,591 | ) |
| Weighted average  common shares outstanding                   |       | 93,103                                       |       | 92,579 |   |
| Effect of  dilutive options                                   |       | 5,541                                        |       | — |   |
| Weighted average  common shares outstanding assuming dilution |       | 98,644                                       |       | 92,579 |   |
| Net income (loss)  per share                                  |       | $                                            | 0.02       |   | $ | (0.09 | ) |

 

The following table summarizes the securities that areexcluded from the net income (loss) per share calculation, as amounts wouldhave an antidilutive effect.

 
| ** **    | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------|------------|----------------------------------|------------|
| ** **    | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| Stock options |       | 20,000                           |       | 6,506,200 |   |
| Warrants      |       | 3,665,183                        |       | 3,665,183 |   |
| Total         |       | 3,685,183                        |       | 10,171,383 |   |

 

**4. PROPERTY AND EQUIPMENT**

 

Property and equipmentconsisted of the following:

 
| ** **                       | ** ** | **March 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|----------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **(In Thousands)** | ** ** |
| Network  equipment               |       | $                  | 357,785    |                  | $          | 347,746 |   |
| Vehicles                         |       | 1,449              |       | 1,508                 |       |
| Furniture and  office equipment  |       | 5,316              |       | 5,211                 |       |
| Computer  equipment and software |       | 9,410              |       | 8,548                 |       |
| Leasehold  improvements          |       | 4,609              |       | 4,403                 |       |
| Land                             |       | 130                |       | 130                   |       |
| Buildings                        |       | 4,670              |       | 4,670                 |       |
|                             |       | 383,369            |       | 372,216               |       |
| Accumulated  depreciation        |       | (138,222           | )          | (128,537              | )          |
| Property and  equipment, net     |       | $                  | 245,147    |                  | $          | 243,679 |   |

 

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Depreciation expense wasapproximately $11.1 million and $11.8 million for the three months ended March31, 2005 and 2004, respectively.

 

**5. LONG-TERM DEBT AND DEBT RETIREMENTS**

 

Long-term debt outstanding was as follows:

 
| ** **                                                                          | ** ** | **March 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|-------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                          | ** ** | **(In Thousands)** | ** ** |
| 9.875% senior  notes                                                                |       | $                  | 420,000    |                  | $          | 420,000 |   |
| Plus: premium                                                                       |       | 802                |       | 834                   |       |
| 14% senior  discount notes                                                          |       | 32                 |       | 32                    |       |
| Less: discount                                                                      |       | 3⁄4             |       | (2                    | )          |
| Building  mortgage                                                                  |       | 3,174              |       | 3,228                 |       |
| Subtotal                                                                            |       | 424,008            |       | 424,092               |       |
| Future cash  flows associated with 14% senior discount notes for interest and other |       | 22                 |       | 24                    |       |
| Total long-term  debt                                                               |       | 424,030            |       | 424,116               |       |
| Less: current  maturities                                                           |       | 227                |       | 223                   |       |
| Total long-term  debt, excluding current maturities                                 |       | $                  | 423,803    |                  | $          | 423,893 |   |

 

# **Notes**

# ** **

In April 2000,Operating Company issued in a private placement $300.0 million aggregateprincipal amount of 14% senior subordinated discount notes due April 15,2010 (the “14% Subordinated Notes”) that were accreting in value until April15, 2005 with interest payable semiannually beginning on October 15, 2005.  The 14% Subordinated Notes were subsequentlyregistered under the Securities Act of 1933, as amended. All outstanding 14%Subordinated Notes were purchased by the Company in a series of transactions in2003 and 2004.

 

In February 2003, Operating Company consummatedcertain private placement transactions to reduce its long-term debtoutstanding, including an exchange of $48.2 million aggregate principalamount of 14% senior discount notes due May 15, 2010 (“14% Senior Notes”)and $9.6 million in cash for $192.7 million aggregate principalamount of its outstanding 14% Subordinated Notes, and a related financing of$12.8 million aggregate principal amount of 14% Series B seniordiscount notes due 2008 (“14% Series B Senior Notes”) and detachablewarrants for UbiquiTel’s common stock in which Operating Company received cashproceeds of $9.6 million to fund the cash portion of the exchange. The 14%Senior Notes were accreting in value until April 15, 2005 with interest payablesemiannually beginning on October 15, 2005. The 14% Senior Notes weresubsequently registered under the Securities Act. The 14% Series B Senior Noteswere accreting in value until April 15, 2005 with interest payablesemiannually beginning on October 15, 2005. Operating Company issued anadditional approximately $1.7 million aggregate principal amount of 14% SeriesB Senior Notes in a series of financings in 2003. All but approximately $32,000aggregate principal amount of outstanding 14% Senior Notes were purchased bythe Company and all outstanding 14% Series B Senior Notes were redeemed by theCompany in a series of refinancing transactions in 2004.

 

The Company followed theprovisions of SFAS No. 15, “Accounting by Debtors and Creditors forTroubled Debt Restructurings,” and Emerging Issues Task Force IssueNo. 02-04, “Determining Whether a Debtor’s 

 

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Modification or Exchangeof Debt Instruments Is Within the Scope of FASBStatement No. 15,” in recording the 2003 private placement exchangetransaction. These provisions required that the carrying value of the 14%Senior Notes be recorded at the total future cash payments (principal andinterest) specified by the 14% Senior Notes; therefore, the 14% Senior Noteswere classified on the Company’s balance sheet as long-term liabilities. As aresult, no interest expense related to the 14% Senior Notes was recognized infuture periods.

 

In February 2004, Operating Company issued in aprivate placement $270.0 million in aggregate principal amount of 9.875% seniornotes due March 1, 2011 (“9.875% Senior Notes”). The 9.875% Senior Notes wereissued at a discount and generated approximately $265.3 million inproceeds. The 9.875% Senior Notes were subsequently registered under theSecurities Act. Interest on the 9.875% Senior Notes became payable semiannuallybeginning on September 1, 2004. The 9.875% Senior Notes are redeemable in wholeor in part on or after March 1, 2007. Prior to March 1, 2007, Operating Companymay redeem up to 35% of the aggregate principal amount of the 9.875% SeniorNotes with net cash proceeds of a sale of its equity or a contribution to itscommon equity capital, provided that at least 65% of the principal amount of9.875% Senior Notes originally issued under the indenture remains outstandingafter giving effect to such redemption and such redemption occurs within 45days of the date of such sale of equity interests or contribution. Theindenture governing the 9.875% Senior Notes contains customary covenants,including covenants limiting indebtedness, dividends and distributions on, andredemptions and repurchases of, capital stock and other similar payments, theacquisition and disposition of assets, and transactions with affiliates orrelated persons. The indenture governing the 9.875% Senior Notes provides forcustomary events of default, including cross defaults, judgment defaults andevents of bankruptcy. Operating Company is permitted to issue additional 9.875%Senior Notes under the indenture from time to time.

 

The proceeds from thesale of the 9.875% Senior Notes were used to repay and terminate OperatingCompany’s senior secured credit facility, including the repayment of$230.0 million in outstanding borrowings plus accrued interest andtermination of its unused $47.7 million revolving line of credit, toredeem all of Operating Company’s outstanding 14% Series B Senior Notes($14.5 million outstanding principal amount) for approximately$12.5 million, to purchase $16.7 million principal amount ofOperating Company’s outstanding 14% Senior Notes for approximately$15.9 million and to pay financing costs for the issuance of the 9.875%Senior Notes of approximately $7.8 million. The repayments of the seniorsecured credit facility and the 14% Series B Senior Notes and the purchase ofthe 14% Senior Notes resulted in a net gain on debt retirements ofapproximately $1.1 million, consisting of a loss on the purchase of the 14%Senior Notes of approximately $1.6 million, the write-off of deferred financingfees related to the senior secured credit facility and the 14% Series B SeniorNotes of approximately $7.7 million, the write-off of unamortized debt discountfor detachable warrants associated with the 14% Series B Senior Notes ofapproximately $3.6 million and costs of approximately $0.1 million related tothe termination of the senior secured credit facility, net of a gain ofapproximately $14.1 million recognized on the reduction in carrying value ofthe future cash payments associated with the purchased 14% Senior Notes.

 

In October 2004, Operating Company completed afinancing of an additional $150.0 million aggregate principal amount of 9.875%Senior Notes in a private placement at a price of 103.5% generating cashproceeds of approximately $155.3 million. These 9.875% Senior Notes are ofthe same class as the previously outstanding $270.0 million aggregate principalamount of 9.875% Senior Notes and were subsequently registered under theSecurities Act. Operating Company used approximately $139.3 million of thesecash proceeds to fund a cash tender offer and consent solicitation for its outstanding14% Subordinated Notes and 14% Senior Notes. Approximately $100.4 millionaggregate principal amount of 14% Subordinated Notes, representing all of thethen outstanding 14% Subordinated Notes, and approximately $31.4 millionaggregate principal amount of 14% Senior Notes were validly tendered andaccepted. There were approximately $32,000 aggregate principal amount of 14%Senior Notes that remained outstanding, which were redeemed in full byOperating Company in April 2005.

 

The $420.0 million aggregate principal amount of9.875% Senior Notes outstanding as of March 31, 2005 will require cash paymentsof interest of $41.5 million in each of the years 2005 (of which approximately$20.7 

 

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millionwas paid on March 1, 2005) through 2009.

 

The Company presently isin compliance with all covenants associated with the 9.875% Senior Notes.UbiquiTel has fully and unconditionally guaranteed Operating Company’sobligations under the 9.875% Senior Notes.

 

The Company may from timeto time purchase outstanding 9.875% Senior Notes in the open market, inprivately negotiated transactions or otherwise in accordance with its debtinstruments and applicable law.

 

**Building Mortgage**

 

The Company has amortgage on an owned building and land with a balance of approximately $3.2million at March 31, 2005. The mortgage carries a fixed interest rate of 6.99%and is payable in monthly installments of approximately $37,000. The mortgageis due to be repaid in full by April 2015.

 

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

 

UbiquiTel has fully and unconditionally guaranteedOperating Company’s obligations under the 9.875% Senior Notes (seeNote 5). UbiquiTel has no independent assets or operations separate fromits investment in Operating Company. UbiquiTel Leasing Company is a minorsubsidiary.

 

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

 

**Forward-Looking Statements**

 

This Joint Quarterly Report on Form 10-Q includesforward-looking statements that involve known and unknown risks, uncertaintiesand other factors.  Our actual resultscould differ materially from the results anticipated in these forward-lookingstatements.  Risk factors that couldcause actual results to differ from those contained in the forward-lookingstatements include, but are not limited to:

 

•                                            UbiquiTel’sdependence on its affiliation with Sprint;

 

•                                            the potential impact of the Sprint-Nextel businesscombination on UbiquiTel’s affiliation with Sprint as well as Sprint’scompetitiveness in the wireless industry;

 

•                                            the competitiveness of and changes in Sprint’s pricingplans, products and services;

 

•                                            increasedcompetition in UbiquiTel’s markets;

 

•                                            rates of penetration in the wireless communicationsindustry;

 

•                                            the potential to experience a high rate of customerturnover;

 

•                                            customer quality;

 

•                                            potential declines in roaming and wholesale revenue;

 

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

 

•                                            the ability of Sprint to provide back office, customer careand other services;

 

•                                            UbiquiTel’sdebt level;

 

•                                            adequacy of bad debt and other reserves;

 

•                                            the marketability, liquidity and price volatility ofUbiquiTel’s common stock;

 

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

 

•                                            changes in population;

 

•                                            changes or advances in technology;

 

•                                            effects of mergers and consolidations within the wirelesscommunications industry and unexpected announcements or developments fromothers in the wireless communications industry; and

 

•                                            general economic and business conditions.

 

These and other applicable risks are described underthe caption “Business3⁄4Risk Factors” andelsewhere in UbiquiTel’s and Operating Company’s Joint Annual Report on Form10-K for the fiscal year ended December 31, 2004

 

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filed with the Securities andExchange Commission, and under the caption “Liquidity and Capital Resources”and elsewhere in this Item 2. Investors are referred to UbiquiTel’s andOperating Company’s subsequent filings with the Securities and ExchangeCommission for other risk factors. We assume no obligation to publicly updateor revise any forward-looking statement made in this report, whether as aresult of new information, future events, changes in assumptions or otherwise,after the date of this report.  Allwritten or oral forward-looking statements attributable to us are expresslyqualified in their entirety by these cautionary statements.

 

**Use of Certain Terms**

 

In 2003, we initiated a reseller program under whichmobile virtual network operators (MVNOs) use our network and resell wirelessservice under a private label.  In this “Item 2. Management’s Discussion and Analysisof Financial Condition and Results of Operations,” unless the context indicatesotherwise, all references to “subscribers” or “customers” and other operatingmetrics mean subscribers or customers excluding reseller subscribers.

 

### **Overview**

### ** **

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. entered into amanagement agreement with Sprint PCS for the exclusive rights to market Sprint’s100% digital, 100% PCS products and services to the residents in theReno/Tahoe, Nevada market. UbiquiTel L.L.C. had no financial transactions fromits inception (August 24, 1998) to September 29, 1999. OnSeptember 29, 1999, UbiquiTel Inc. (formerly, UbiquiTelHoldings, Inc.) was incorporated in Delaware. In November 1999,UbiquiTel L.L.C. assigned all of its material contracts including the rights tothe Sprint PCS agreements to UbiquiTel Inc. On November 9, 1999,UbiquiTel Operating Company (“Operating Company”) was formed to serve as theoperating company for UbiquiTel Inc. Also, on March 17, 2000,UbiquiTel Leasing Company was formed to serve as the leasing company forUbiquiTel Inc. UbiquiTel Inc. assigned the Sprint PCS agreements toOperating Company following its formation. On December 28, 1999, weamended our management agreement with Sprint PCS to expand our markets toinclude northern California, Spokane/Montana, southern Idaho/Utah/Nevada andsouthern Indiana/Kentucky/Tennessee. On February 21, 2001, in connectionwith our acquisition of VIA Wireless LLC, we amended our management agreementwith Sprint PCS to expand our markets effective at the closing inAugust 2001 to include the six VIA Wireless Basic Trading Areas coveringthe central valley of California market. On August 13, 2001, upon theclosing of the merger agreement, VIA Wireless became a wholly owned subsidiaryof Operating Company and was later merged into Operating Company inJune 2003. On July 31, 2003, we amended our management agreement withSprint PCS to eliminate the obligation to build out the state of Montana,thereby reducing our licensed resident population in our markets toapproximately 10.8 million.  SeeNote 2 (Organization and Nature of Business–Recent Development) to theunaudited consolidated financial statements included in this report withrespect to Sprint’s proposed merger with Nextel Communications, Inc.

 

As of March 31, 2005, we had approximately 412,900subscribers excluding resellers and approximately 112,200 reseller subscribers,for a total subscriber base of approximately 525,100. As of March 31, 2005, ournetwork covered approximately 8.3 million residents which representedapproximately 77% of the licensed population in our markets.

 

As a PCS affiliate ofSprint, we do not own the licenses to operate our network and instead paySprint PCS for the use of its licenses. Under ourmanagement agreement with Sprint PCS, Sprint is entitled to receive 8.0% ofbilled revenue from Sprint PCS subscribers based in our markets less currentperiod bad debts, net of bad debt recoveries, from Sprint PCS subscribers basedin our markets and fees from wireless service providers other than 

 

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Sprint PCS when theirsubscribers roam into our network. We are entitled to 100% of revenuescollected from the sale of handsets and accessories from our stores and onroaming revenues received when Sprint PCS customers from a different territorymake a wireless call on our PCS network and outbound non-Sprint PCS roamingbilled to subscribers based in our markets. We are responsible for building,owning and managing the portion of the PCS network located in our markets underthe Sprint brand name. Our results of operations are dependent on Sprint PCS’network and, to a lesser extent, on the networks of other PCS affiliates ofSprint.

 

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

 

**CriticalAccounting Policies and Estimates**

 

The preparation of our consolidated financialstatements requires us to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses, and related disclosuresof contingent liabilities. The methods, estimates and judgments we use inapplying our accounting policies have a significant impact on the results wereport in our consolidated financial statements. Some of our accountingpolicies require us to make subjective judgments, often as a result of the needto make estimates of matters that are inherently uncertain. On an ongoingbasis, we evaluate our estimates, including, but not limited to, those relatedto long-lived assets, goodwill, lease transactions, property and equipment, baddebt, inventory valuation, income taxes, deferred revenue and contingencies. Webase our estimates on historical experience and on various other assumptions webelieve to be reasonable under the circumstances, the results of which form thebasis for making judgments about the carrying values of assets and liabilitiesthat are not readily apparent from other sources. Actual results may differfrom these estimates under different assumptions or conditions. Some of themost critical accounting policies, including those that require a significantamount of estimation or judgment in their application, include:

 

***Revenue Recognition:***

 

We recognize revenueswhen services have been rendered or products have been delivered, the price tothe buyer is fixed and determinable, and collectibility is reasonably assured.We account for rebates, discounts and other sales incentives as a reduction torevenue. Subscriber revenue consists of monthly recurring service charges forvoice and third generation data (“3G data”) services and monthly non-recurringcharges for local, long distance, travel and roaming airtime usage and 3G datausage in excess of the pre-subscribed usage plan received from our subscribers,cancellation and late fee revenues and surcharges, less reductions for billingadjustments and credits. Equipment revenue includes sales of handsets andaccessories. Our revenue recognition policies are consistent with the guidancein Emerging Issues Task Force Issue No. 00-21, “Accounting for RevenueArrangements with Multiple Deliverables,” and Staff Accounting BulletinNo. 104, “Revenue Recognition.”

 

We recognize revenue from our subscribers as they usethe service. We pro-rate access revenue over the billing period and recordairtime usage in excess of the pre-subscribed usage plan. Our subscribers payan activation fee to us when they initiate service. Non-refundable, up-frontactivation fees billed in our direct sales channel are included in equipmentrevenue in the consolidated statement of operations to the extent that theaggregate activation fee and handset proceeds received from a subscriber do notexceed the fair value of the handset sold.

 

Roaming and wholesalerevenue includes reseller revenue, Sprint PCS travel revenue and non-Sprint PCSroaming revenue. We record Sprint PCS travel revenue on a perminute rate for voice services and on a per kilobit rate for data services whenSprint PCS subscribers based outside our markets use our network. We recordnon-Sprint 

 

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PCS roamingrevenue when non-Sprint PCS subscribers use our network.We record reseller revenue when reseller subscribers use our network.  Minutes and kilobytes are sold at wholesalerates.

 

Equipment revenueconsists of proceeds from sales of handsets and accessories, which are recordedat the time of sale. Revenues from sales of handsets and accessories representa separate earnings process from service revenues because sales of handsets andaccessories do not require customers to subscribe to wireless services.Equipment revenue also includes an allocation of the arrangement considerationfrom activation revenue received as part of revenue arrangements with multipledeliverables.

 

We participate in theSprint national and regional distribution programs in which national retailerssuch as RadioShack, Best Buy and Costco sell Sprint PCS products and services.In order to facilitate the sale of Sprint PCS products and services, nationalretailers purchase wireless handsets from Sprint for resale and receivecompensation from Sprint for Sprint PCS products and services sold. Forindustry competitive reasons, Sprint subsidizes the price of these handsets byselling the handsets at a price below cost. Under our Sprint PCS agreements,when a national retailer sells a handset purchased from Sprint to a subscriberin our markets, we are obligated to reimburse Sprint for the handset subsidy. Wedo not receive any revenues from sales of handsets and accessories by nationalretailers. For a new subscriber activation and ahandset upgrade to an existing subscriber, we include these handset subsidycharges in cost of products sold in the consolidated statements of operations.

 

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

 

**Reservefor Doubtful Accounts**—Estimates are used in determining ourallowance for bad debt and are based both on our historical collectionexperience, current trends and credit policy and on a percentage of ouraccounts receivables by aging category. In determining these percentages, welook at historical write-offs of our receivables. We also look at currenttrends in the credit quality of our customer base and changes in the creditpolicies. Sub-prime credit class customers are required to make a depositranging from $125 to $250 that can be credited against future billings. UnderSprint PCS service plans, sub-prime credit class customers also are subject toaccount spending limits, ranging from $125 to $250 depending on the creditquality of the customer, to control credit exposure. If our estimates of baddebt are insufficient for any reason, our operating income and available cashwould be reduced.

 

**Reservefor Obsolete/Excess Inventory**—We record a reserve forobsolete or excess handset and accessories inventory for models and accessoriesthat are no longer manufactured and defective models and accessories that havebeen returned by customers.  If theestimate of obsolete inventory is understated, our operating income would bereduced.

 

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

 

Statement of Financial Accounting Standards (“SFAS”)No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,”requires that long-lived assets be reviewed for impairment whenever events orchanges in circumstances indicate that the carrying amount of an asset may notbe recoverable. Recoverability is assessed based on the future cash flowsexpected to result from the use of the asset and its eventual disposition. Ifthe sum of the undiscounted cash flows is less than the carrying value of theasset, an impairment loss is recognized. Any impairment loss, if indicated, ismeasured as the amount by which the carrying amount of the asset exceeds the fairvalue of the asset. SFAS No. 142, “Goodwill and Other Intangible Assets,”requires that goodwill and certain intangible assets resulting from businesscombinations be reviewed for recoverability, and that annual tests forimpairment of goodwill and intangible assets that have indefinite useful livesbe performed. Any write-offs would result in a charge to earnings and areduction in equity in the period taken. As of October 31, 2004, wecompleted our annual impairment review and determined that no impairment chargewas required.

 

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Intangible assets consist of the unamortized cost of aSprint PCS management agreement acquired in a business combination.  Intangible assets are amortized over theirestimated useful life.  As of December31, 2004, the remaining useful life of the acquired Sprint PCS managementagreement was approximately 15 years. If there was a reduction in the usefullife of this asset, our operating income would be reduced.

 

***Lease Transactions:***

 

We lease office space, retail stores, land for radiocommunications sites, leased space on radio communications sites and officeequipment under operating leases. Our accounting for an operating leasetransaction as of the lease’s inception involves judgments in determining thenumber of lease renewal periods to be included in the lease term, in additionto the initial non-cancelable term, used in recognizing rent expense on astraight-line basis. This judgment considers various factors that we would considerat the time of opting to renew such leases, particularly whether any nonrenewalcould result in an economic detriment to us or the forgoing of an economicbenefit available to us. Additionally, the lease term can impact thedetermination of the period over which depreciable assets associated withoperating leases are depreciated.

 

If a lease with a lease term containing one or morerenewal periods is not renewed after the initial term has expired, then thecarrying values of the deferred rent liability resulting from straight-linerecognition of rent expense and any lease-related assets reflected in theconsolidated balance sheet would be written off and reflected in our results ofoperations in the period such nonrenewal occurred.

 

***Income Taxes:***

 

As part of theprocess of preparing our consolidated financial statements, we are required toestimate our income taxes in each of the jurisdictions in which we operate.This process involves management estimating the actual current income taxexpense together with assessing temporary differences resulting from differingtreatment of items for tax and accounting purposes in accordance with theprovisions of SFAS No. 109, “Accounting for Income Taxes.” These differencesresult in deferred tax assets and liabilities, which are included in theconsolidated balance sheets. It is expected that our deferred income tax assetswill either expire unused or give rise to future tax deductions that will beavailable to offset the future taxable income arising from the reversal of thedeferred income tax liabilities, except for the liability arising from goodwillamortization. As a result, a full valuation allowance was recorded against alldeferred income tax assets that are not offset by anticipated reversals ofdeferred income tax liabilities. In determining the likelihood and value of therealization of deferred tax assets, we consider forecasts of our taxableincome, available tax planning strategies and the future reversal of existingtemporary differences. Changes in circumstances may cause changes in ourjudgments about the realizability of our deferred tax assets in future periodsand may result in reductions of our valuation allowance and income tax expense.

 

# **Recent AccountingPronouncements**

# ** **

In March 2005, the Financial Accounting StandardsBoard (“FASB”) issued Interpretation Number 47, “Accounting for ConditionalAsset Retirement Obligations, an interpretation of FASB Statement No. 143” (“FIN47”).  FIN 47 clarifies the term “conditionalasset retirement obligation”**asused in SFAS No. 143, “Accounting for Asset Retirement Obligations,” and alsoclarifies when an entity would have sufficient information to reasonablyestimate the fair value of an asset retirement. FIN 47 is effective no later than the end of fiscal years ending afterDecember 15, 2005.  We do not anticipatethat the implementation of FIN 47 will have a material impact on our financialposition, results of operations or cash flows.

 

In December 2004, the FASB issued SFAS No. 123(revised 2004), “Share-Based Payments” (“SFAS No. 123R”). SFAS No. 123Rrequires the recognition of the cost of employee services received in exchangefor an award of equity instruments in the financial statements and measurementbased on the grant-date fair value of the award. It requires the cost to berecognized over the period during which an employee is required to provideservice in 

 

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exchangefor the award. Additionally, compensation expense will be recognized over theremaining employee service period for the outstanding portion of any awards forwhich compensation expense had not been previously recognized or disclosedunder SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”).  SFAS No. 123R replaces SFAS No. 123 andsupersedes Accounting Principles Board Opinion No. 25, “Accounting for StockIssued to Employees” (“APB No. 25”), and its related interpretations.

 

SFAS No. 123R was originally required to be adopted byus beginning no later than the third quarter of 2005. However, in April 2005,the Securities and Exchange Commission announced the adoption of a new rulethat amends the compliance dates for SFAS No. 123R.  Accordingly, we are required to adopt SFASNo. 123R no later than January 1, 2006. We are currently assessing the timing and impact of adopting SFAS No.123R.

 

**Results of Operations**

 

We provide certain financial measures that arecalculated in accordance with accounting principles generally accepted in theUnited States (GAAP) and adjustments to GAAP (non-GAAP) to assess our financialperformance.  In addition, we use certainnon-financial terms that are not measures of financial performance underGAAP.  Terms such as customer additionsand churn are terms used in the wireless communications industry.  The non-GAAP financial measures of averagerevenue per user and cost per gross addition reflect standard measures ofliquidity, profitability or performance. The non-financial terms and the non-GAAP measures reflect wirelesscommunications industry conventions and are commonly used by the investmentcommunity for comparability purposes. The non-GAAP measures included in this report are reconciled below in “—Liquidityand Capital Resources—Reconciliation of non-GAAP financial measures.”

 

### ***Analysis of the three months ended March 31, 2005compared to the three months ended March 31, 2004***

### ** **

***Customer Net Additions***

 

As of March 31, 2005, weprovided personal communications services to approximately 412,900 customerscompared to approximately 349,100 customers as of March 31, 2004.  During the three months ended March 31, 2005,we added 14,400 net new subscribers compared to 21,400 net new subscribers forthe three months ended March 31, 2004. The decrease was primarily attributable to lower gross additions ofsub-prime credit class customers due to tighter credit policies in certainmarkets.

 

# ***Churn***

# ** **

Churn is the monthly rate of customer turnoverexpressed as the percentage of customers of the beginning customer base thatboth voluntarily and involuntarily discontinued service during the period.  Churn is computed by dividing the number ofcustomers that discontinued service during the month, net of 30 day returns, bythe beginning customer base for the period. Churn for the three months ended March 31, 2005 was approximately 2.6%compared to approximately 3.1% for the three months ended March 31, 2004.  Involuntary churn declined 0.2% due totighter credit policies in certain markets. Voluntary churn declined 0.3% due to an increased percentage of ourcustomer base on two-year contracts and service plans with lower overagecharges.  We expect churn to marginallydecline in the near term.

 

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

 

Average revenue per user(ARPU) summarizes the average monthly subscriber revenue per customer.  ARPU is computed by dividing subscriberrevenue by the average subscribers for the period. During the three monthsended March 31, 2005 and 2004, our ARPU was approximately $55 and $56,respectively. Voice ARPU declined $3 primarily as a result of a decrease inbilling for overage minutes, partially offset by an increase in data ARPU of$2.  

 

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We expect ARPU to trendbetween $55 and $56 throughout 2005.

 

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

 

Cost per gross addition(CPGA) summarizes the average cost to acquire new customers during the period.CPGA is computed by adding the income statement components of selling andmarketing and the cost of products sold, and reducing that amount by the equipmentrevenue recorded. The net result of these components is then divided by thegross customers acquired during the period. CPGA was approximately $497 for thethree months ended March 31, 2005 compared to CPGA of approximately $425 forthe three months ended March 31, 2004. The increase in CPGA was due to higherhandset upgrade costs of approximately $18 per gross addition, the effect ofincreased handset promotion and subsidy costs of approximately $25 per grossaddition, and the remainder is due primarily to fixed costs spread over lowergross additions. We believe that CPGA will decline to between$480 to $490 in 2005.

 

***Revenues***

 

•                  *Subscriber Revenue*. Subscriber revenue during the three months ended March 31, 2005 and 2004was approximately $66.9 million and $56.6 million, respectively. Subscriberrevenue consists of monthly recurring service charges for voice and 3G datausage and monthly non-recurring charges for local, long distance, travel androaming airtime usage and 3G data usage in excess of the pre-subscribed usageplan amount received from our subscribers, cancellation and late fee revenuesand surcharges, less reductions for billingadjustments and billing corrections. Our customers’ charges are dependent ontheir rate plans, based on the number of minutes and 3G data usage included intheir plans.  The increase in subscriberrevenue was attributable to the effect of the increase in our subscriber base.

 

•                  *Roamingand Wholesale Revenue.* Roaming and wholesale revenue consists ofSprint PCS travel revenue, non-Sprint PCS roaming revenue and reseller revenue.Travel revenue is generated on a per minute rate forvoice services or on a per kilobit rate for data services when a Sprint PCSsubscriber based outside our markets uses our network. An additional longdistance rate per minute is generated when that customer initiates a call fromour network to call outside the local calling area. Non-Sprint PCS roamingrevenue is generated when a non-Sprint PCS subscriber uses our network.Reseller revenue is generated when a reseller subscriber uses our PCS network.During the second quarters of 2003 and 2004, we initiated reseller programswith Virgin Mobile USA and Qwest Communications, respectively.

 

Roaming and wholesale revenue during the three monthsended March 31, 2005 and 2004 was approximately $29.6 million and $20.9million, respectively. The increase in roaming and wholesale revenue was due toincreases in Sprint PCS travel revenues for voice and data services ofapproximately $3.9 million and $1.0 million, respectively, and an increase inreseller revenue of approximately $4.1 million. The increase in Sprint PCStravel revenue was primarily due to increases in travel minutes of use and 3Gdata usage.  The increase in resellerrevenue was due to increases in reseller minutes of use primarily from theaddition of Qwest as a reseller in the second quarter of 2004.

 

We expect the growth rate for Sprint PCS travelminutes and kilobytes in 2005 to slow compared to the rate of growth during2004. We expect non-Sprint PCS roaming revenue to decline in the near-term,primarily due to a decline in the roaming rate we receive from a significantroaming partner. During 2005, we expect reseller revenue to exceed amountsrecognized in 2004 as a result of the significant increase in resellersubscribers during the second half of 2004.

 

•                  *Equipment Revenue*. Equipment revenue is generated from the sale of handsets and accessoriesand is recorded at the time of sale. We record and retain 100% of the revenuefrom the sale of handsets and accessories, net of rebates, discounts and othersales incentives, as equipment revenue. The amounts 

 

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recordedduring the three months ended March 31, 2005 and 2004 from equipment revenuetotaled approximately $3.4 million and $3.9 million, respectively.  The decrease was due to lower gross additionsin our controlled sales distribution network.

 

***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 interconnection charges, and totaledapproximately $16.5 million during the three months ended March 31,2005 compared to approximately $15.6 million during the three months endedMarch 31, 2004. The increase was primarily due to the effect of anincrease in interconnection charges resulting from increased minutes of use.

 

•                  *Travel and Roaming Expenses*. We pay SprintPCS travel fees on a per minute rate for voice services or on a per kilobitrate for data services when our customers use the Sprint PCS network outsideour markets and we incur additional long distance fees when our customers call longdistance originating in a Sprint PCS or PCS affiliate of Sprint territory. Wealso pay roaming fees to other wireless providers when our customers use theirnetwork. Travel and roaming expense totaled approximately $12.5 million and$10.4 million for the three months ended March 31, 2005 and 2004,respectively.  The increase in travel androaming expenses was primarily due to an increase in Sprint PCS travel expensefor voice services resulting primarily from an increase in our subscriber base.

 

•                  *Bad Debt Expense.*  Bad debt expense during the three monthsended March 31, 2005 and 2004 was approximately $1.0 million and $0.8 million,respectively.

 

•                  *Sprint Operating Expenses. *Sprintoperating expenses during the three months ended March 31, 2005 and 2004 wereapproximately $14.0 million and $12.3 million, respectively. Sprint operatingexpenses included Sprint PCS management fee expense and other fees we paid toSprint PCS for the use of its support services, including billing andcollections services and customer care. For the three months ended March 31,2004, Sprint PCS management fee expense of approximately $4.9 million wasreclassified from general and administrative expenses to cost of service andoperations in the consolidated statements of operations to conform with current year presentation. The increase in Sprintoperating expenses was primarily attributable to the effect of the increase inour subscriber base.

 

***Cost of Products Sold***

 

The cost of products sold includes the costs ofhandsets and accessories and totaled approximately $10.4 million and $9.2million during the three months ended March 31, 2005 and 2004,respectively.  The cost of handsetsgenerally exceeds the sales price because we subsidize the cost of handsets tosubscribers, consistent with industry practice. Handset subsidies on units soldby third parties totaled approximately $2.9 million and $2.8 million for thethree months ended March 31, 2005 and 2004, respectively.  The increase in cost of products sold wasprimarily due to a $0.5 million increase in handset upgrade costs, a $0.7million increase resulting from the sale of more expensive handset models and a$0.4 million increase resulting from a write-down of inventory to market value.The increase was slightly offset by the effect of a decrease in customer grossadditions.

 

***Selling and Marketing***

 

Selling and marketing expenses relate to ourdistribution channels, sales representatives, sales support personnel, retailstores, advertising programs and commissions. We incurred selling and marketing expenses of approximately $15.9million and $17.0 million during the three months ended March 31, 2005 and2004, respectively.  The decrease inselling and marketing expenses was primarily attributable to lower variablecosts resulting from a decrease in gross additions.

 

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***General and Administrative***

 

Weincurred general and administrative expenses totaling approximately $5.0million and $4.4 million during the three months ended March 31, 2005 and 2004,respectively.  For the threemonths ended March 31, 2004, Sprint PCS management fee expense of approximately$4.9 million was reclassified from general and administrative expenses to costof service and operations in the consolidated statements of operations toconform with current year presentation.

 

***Non-CashCompensation***

 

We apply the provisions of APB No. 25 and relatedinterpretations in accounting for our equity incentive plan.  In May 2002, we modified 1,220,800options previously issued to employees and board members under our equityincentive plan to reduce the exercise price to $4.00, which was approximately$2.14 per share above the fair market value on the date of modification. Themodification reducing the exercise price resulted in variable accounting forthese options from the date of modification to the date the options areexercised, forfeited or expire unexercised. At March 31, 2004, the fair marketvalue of our common stock did not exceed the modified price and, as such, nocompensation expense was recorded for the three months ended March 31,2004.  The decrease in the fair marketvalue of our common stock from $7.12 at December 31, 2004 to $6.70 at March 31,2005 resulted in a credit to non-cash compensation expense of approximately$0.5 million for the three months ended March 31, 2005.

 

***Depreciation, Amortization and Accretion***

 

Depreciation, amortization and accretion expense forthe three months ended March 31, 2005 and 2004 totaled approximately $12.2million and $12.9 million, respectively. We depreciate our property and equipment using the straight-line methodover two to 10 years.  A building ownedby us is being depreciated using the straight-line method over 30 years.Amortization of intangible assets with finite useful lives is over 18years.  Accretion expense increases theasset retirement obligation associated with our tower leases, switch site andretail and administrative locations to its present value.  The decrease in depreciation, amortizationand accretion expense was due primarily to the impact of accelerateddepreciation of our minicell base stations totaling approximately $2.3 millionfor the three months ended March 31, 2004 compared to approximately $0.2million for the three months ended March 31, 2005. The decrease was partiallyoffset by increases in depreciation expense resulting primarily from networkequipment additions.

 

***Interest Income***

 

For the three months ended March 31, 2005 and 2004,interest income was approximately $0.5 million and $0.1 million,respectively.  The interest income wasgenerated from cash, cash equivalents and restricted cash balances.

 

***Interest Expense***

 

Interest expense totaled approximately $10.9 millionand $8.4 million during the three months ended March 31, 2005 and 2004,respectively. Interest is accrued on our notes on a per annum basis at thestated interest rate. Interest on our senior secured credit facility, which wasrepaid in full during the three months ended March 31, 2004, was accrued at theLondon interbank offered rate based on contracts ranging from 30 to 180days.  The increase in interest expenseprimarily resulted from our refinancing of the outstanding borrowings under oursenior secured credit facility in the first quarter of 2004 with longer term higherfixed rate notes.

 

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

 

***Gain on Debt Retirement***

 

During the first quarterof 2004, Operating Company issued $270.0 million aggregate principal amount of9.875% senior notes due March 1, 2011 (the “9.875% Senior Notes”), in atransaction exempt from the registration requirements of the Securities Act of1933, as amended. The 9.875% Senior Notes were issued at a discount andgenerated approximately $265.3 million in proceeds. The proceeds were usedto repay and terminate Operating Company’s senior secured credit facility,including the repayment of $230.0 million in outstanding borrowings plusaccrued interest and termination of its unused $47.7 million revolvingline of credit, to redeem all of its outstanding 14% Series B seniordiscount notes due 2008 (“14% Series B Senior Notes”) ($14.5 millionoutstanding principal amount) for approximately $12.5 million, and topurchase $16.7 million principal amount of its outstanding 14% seniordiscount notes due 2010 (“14% Senior Notes”) for approximately$15.9 million. The repayments of the senior secured credit facility andthe 14% Series B Senior Notes and the purchase of the 14% Senior Notes resultedin a net gain on debt retirements of approximately $1.1 million, consisting ofa loss on the purchase of the 14% Senior Notes of approximately $1.6 million,the write-off of deferred financing fees related to the senior secured creditfacility and the 14% Series B Senior Notes of approximately $7.7 million, thewrite-off of unamortized debt discount for detachable warrants associated withthe 14% Series B Senior Notes of approximately $3.6 million and costs ofapproximately $0.1 million related to the termination of the senior securedcredit facility, net of a gain of approximately $14.1 million recognized on thereduction in carrying value of the future cash payments associated with thepurchased 14% Senior Notes.

 

***Income Taxes***

 

For the three months ended March 31, 2005 and 2004, werecognized income tax expense of approximately $0.1 million. Income tax expensewas comprised primarily of deferred income taxes that resulted from an expectedincome tax deduction for amortization of goodwill, which is not amortizable toexpense for financial reporting purposes.

 

***Net Income (Loss)***

 

For the three months ended March 31, 2005, our netincome was approximately $2.5 million and for the three months ended March 31,2004, our net loss was approximately $8.6 million. We recognized a gain on debtretirement of approximately $1.1 million for the three months ended March 31,2004.

 

**Liquidity and Capital Resources**

 

From inception through December 31, 2002, weprincipally relied on the proceeds from equity and debt financings, and to alesser extent revenues, as our primary sources of capital. In 2003 and 2004, wegenerated cash flow from operating activities of approximately $14.5 millionand $55.4 million, respectively. For the three months ended March 31, 2005, wegenerated cash flow from operating activities of approximately $2.2 million.

 

Although we substantially completed our contractuallyrequired network coverage build-out in 2002, our business could requireadditional capital expenditures for capacity enhancements and coverageimprovements.  Capital expenditures forthe three months ended March 31, 2005 and the year ended December 31, 2004totaled approximately $10.0 million and $27.0 million, respectively.  Since 2003, we have funded and expect to fundall of our future capital expenditures through cash flows from operatingactivities, cash and cash equivalent balances.

 

In February 2005, we announced a network coverageexpansion which is expected to cost approximately $13 million

 

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andis expected to be completed in 2006. As part of this expansion, we entered intoan agreement with an equipment vendor to acquire network equipment.  The agreement provides for a minimum purchasecommitment of $18 million in each of the years 2005 through 2008 for allnetwork equipment and performance services that we purchase.

 

In mid-2004, Sprint announced its intention to deploythe next generation of CDMA technology known as EV-DO in a substantial portionof its network. EV-DO technology is expected to generate higher network dataspeeds and allow the introduction of new data products and features. WhileSprint has not required the implementation of EV-DO by us or its other PCSaffiliates, we expect to begin deploying EV-DO in selected markets in 2005 andexpect to upgrade approximately 56% of our covered population to EV-DO by theend of 2006 at an estimated cost of $13 million.

 

On February 23, 2004, Operating Company issued $270.0million aggregate principal amount of the 9.875% Senior Notes at a discountgenerating approximately $265.3 million in proceeds, and on October 14,2004, Operating Company issued an additional $150.0 million aggregate principalamount of 9.875% Senior Notes of the same class at a price of 103.5% generatingcash proceeds of approximately $155.3 million, in transactions exempt from theregistration requirements of the Securities Act. The 9.875% Senior Noteswere subsequently registered under the Securities Act. UbiquiTel has fully andunconditionally guaranteed Operating Company’s obligations under the 9.875%Senior Notes.  The proceeds from theseofferings in 2004 were used to repay and terminate Operating Company’s seniorsecured credit facility, to redeem all of its outstanding 14% Series BSenior Notes, to repurchase all of its outstanding 14% senior subordinateddiscount notes due 2010 and to repurchase all but approximately $32,000aggregate principal amount of 14% Senior Notes, which were subsequentlyredeemed in full by Operating Company in April 2005.

 

 Under theindenture governing the 9.875% Senior Notes, Operating Company is permitted toissue additional notes from time to time. Prior to March 1, 2007, OperatingCompany may redeem up to 35% of the aggregate principal amount of the 9.875%Senior Notes with net cash proceeds of a sale of its equity or a contributionto its common equity capital, provided that at least 65% of the principalamount of 9.875% Senior Notes originally issued under the indenture remainsoutstanding after giving effect to such redemption and such redemption occurswithin 45 days of the date of such sale of equity interests or contribution. Wedo not have any current plans to sell equity interests of Operating Company ormake any capital contributions to its common equity capital and, as such, donot currently anticipate exercising this optional redemption right.

 

The $420.0 millionaggregate principal amount of 9.875% Senior Notes outstanding as of March 31,2005 will require cash payments of interest of $41.5 million in each of theyears 2005 (of which approximately $20.7 million was paid on March 1, 2005)through 2009. We presently are in compliance with all covenants in theindenture associated with the 9.875% Senior Notes. We may from time to timepurchase outstanding 9.875% Senior Notes and/or shares of UbiquiTel commonstock in the open market, in privately negotiated transactions or otherwise inaccordance with our debt agreements and applicable law.

 

As of March 31, 2005, wehad approximately $84.3 million in cash and cash equivalents and workingcapital of approximately $80.4 million. Management expects cash and cashequivalents, combined with cash flow from operating activities, to besufficient to meet capital expenditures needs and service debt requirementsthrough March 31, 2006 and into the foreseeable future.

 

While management does not anticipate the need to raiseadditional capital to meet our operating or capital expenditure requirements inthe foreseeable future, our funding status is dependent on a number of factorsinfluencing projections of operating cash flows, including those related togross new customer additions, customer turnover, revenues, marketing costs, baddebt expense and roaming and reseller revenue. Management believes ourfinancial position will be sufficient to meet the cash requirements of thebusiness including capital expenditures, 

 

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cashinterest and working capital needs. We from time to time evaluate options foradditional financings to supplement our liquidity position and maintain maximumfinancial flexibility. However, if actual results differ significantly fromthese assumptions, our liquidity position could be adversely affected and wecould be in a position that would require us to raise additional capital whichmay not be available or may not be available on acceptable terms.

 

***Analysis of Cash Flows***

 

A significant portion of our revenues is generatedfrom customers who subscribe to PCS service from us or Sprint on contracts thatrange from one to two years. Our cash flow from operating activities willfluctuate with the size of our subscriber base and indirectly from the size ofSprint’s subscriber base and the recurring subscriber and roaming revenuestreams generated from these customers. We expect cash flow from operatingactivities will continue to grow for the remainder of 2005 and in futureperiods as our subscriber base continues to grow.

 

Net cash provided byoperating activities was approximately $2.2 million and $9.2 million for thethree months ended March 31, 2005 and 2004, respectively.  The decrease in cash provided by operatingactivities was primarily due to the increase in cash paid for interest ofapproximately $17.4 million, partially offset by the increase in operatingincome of approximately $14.3 million.

 

Net cash used in investing activities wasapproximately $10.0 million and $5.9 million for the three months ended March31, 2005 and 2004, respectively.  Theincrease resulted primarily from higher capital expenditures for base stationsfor network coverage expansion.

 

Net cash provided by financing activities for thethree months ended March 31, 2005 was approximately $0.4 million, consistingprimarily of proceeds from the exercise of stock options. Net cash used in financingactivities for the three months ended March 31, 2004 was approximately $7.1million, consisting primarily of the reduction in a book cash overdraft ofapproximately $5.7 million and $1.0 million in net payments relating torefinancing transactions that were completed in 2004.

 

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

 

We utilize certainfinancial measures that are not calculated in accordance with accountingprinciples generally accepted in the United States, or GAAP, to assess ourfinancial performance. A non-GAAP financial measure is defined as a numericalmeasure of a company’s financial performance that (a) excludes amounts, oris subject to adjustments that have the effect of excluding amounts, that areincluded in the comparable measure calculated and presented in accordance withGAAP in the statement of income or statement of cash flows; or (b) includesamounts, or is subject to adjustments that have the effect of includingamounts, that are excluded from the comparable GAAP measure so calculated andpresented. The non-GAAP financial measures discussed in “—Results of Operations”are average revenue per user (ARPU) 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 March 31, 2005 compared to the three months ended March 31,2004,” and the following tables reconcile the non-GAAP financial measures withour unaudited consolidated financial statements presented in accordance withGAAP (excluding subscriber data).

 

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| ** **                          | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|
| **Average revenue per user (ARPU)** | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| ** **                          | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Subscriber  revenue                 |       | $                                | 66,892,000 |   | $ | 56,571,000 |   |
|                                |       |                             |       |   |   |
| Average  subscribers                |       | 404,300                          |       | 338,400 |   |
|                                |       |                             |       |   |   |
| ARPU                                |       | $                                | 55         |   | $ | 56 |   |

 

We believe ARPU, which calculates the average monthlyservice revenue per customer, is a useful measure to assist in evaluating ourpast and forecasting our future subscriber revenue. In addition, it provides agauge to compare our subscriber revenue to that of other wireless communicationsproviders, although other wireless communications providers may include orexclude certain items from their calculations which may make the comparisonless meaningful.

 
| ** **                         | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------|------------|----------------------------------|------------|
| **Cost per gross addition (CPGA)** | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| ** **                         | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Selling and  marketing             |       | $                                | 15,926,000 |   | $ | 16,977,000 |   |
| Add: Cost of  products sold        |       | 10,385,000                       |       | 9,215,000 |   |
| Less: Equipment  revenue           |       | (3,433,000                       | )          | (3,872,000 | ) |
| Total CPGA costs                   |       | $                                | 22,878,000 |   | $ | 22,320,000 |   |
|                               |       |                             |       |   |   |
| Gross additions                    |       | 46,000                           |       | 52,500 |   |
|                               |       |                             |       |   |   |
| CPGA                               |       | $                                | 497        |   | $ | 425 |   |

 

We believe CPGA, whichmeasures the average cost to acquire new customers during the period, is auseful measure used to compare our average cost to acquire a new subscriber tothat of other wireless communication providers, although other wirelesscommunications providers may include or exclude certain items from theircalculations which may make the comparison less meaningful. The inclusion ofcost of products sold net of the equipment revenues earned is critical to ourunderstanding of how much it costs us to acquire a new customer.

 

***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 dependent on fourth quarter results. Among other things, the industry relies on higher customer additions andhandset sales in the fourth quarter as compared to the other three fiscalquarters.  The factors contributing tothis trend include the increasing use of retail distribution, which isdependent on year-end holiday shopping, the timing of new product and serviceofferings, competitive pricing pressures and aggressive marketing andpromotions during the holiday season. The increased level of activity requires a greater use of our availablefinancial resources during this period.

 

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

 

Market risk is the potential loss arising from adversechanges in market prices and rates, including interest rates. All of theinterest rates on our notes are fixed; the weighted average interest rate onour notes was 9.875% 

 

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asof March 31, 2005. We have not entered into derivatives or other financial instrumentsfor trading, speculative or hedging purposes, though we may do so from time totime if such instruments are available to us on acceptable terms and prevailingmarket conditions are accommodating. No principal repayments on our notes aredue within the next five years.

 

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

 

**Evaluationof Disclosure Controls and Procedures**

 

Our management, under thesupervision and with the participation of our Chief Executive Officer and ChiefFinancial Officer (who serves as our principal financial and accountingofficer), conducted an evaluation of our “disclosure controls and procedures”(as defined in the Securities Exchange Act of 1934 (“Exchange Act”) Rules13a-15(e) or 15d-15(e)) as of March 31, 2005. Based on that evaluation, ourChief Executive Officer and Chief Financial Officer concluded that ourdisclosure controls and procedures were effective as of March 31, 2005.

 

**Changes in Internal Control Over Financial Reporting**

 

Therewere no changes in our internal control over financial reporting identified inconnection with the evaluation required by paragraph (d) of Exchange Act Rules13a-15 or 15d-15 that occurred during the three months ended March 31, 2005that have materially affected, or are reasonably likely to materially affect,our internal control over financial reporting.

 

Managementis responsible for all of our disclosure controls and procedures and internalcontrol over financial reporting including those relating to functionsoutsourced to a third party and including controls over the information flow toand from the third party service organization. We also are responsible for assessing the identified controls overfinancial reporting over the outsourced operations. We place reliance on Sprint to adequatelydesign its internal controls with respect to the processes established toprovide financial information and other information to us and the other PCSaffiliates of Sprint.  To address thisissue, Sprint engages its independent auditors to perform a periodic evaluationof these controls and to provide a “Report on Controls Placed in Operation andTests of Operating Effectiveness for Affiliates” under guidance provided inStatement of Auditing Standards No. 70 (“SAS 70”). This report is providedsemi-annually to us and we have placed reliance on this SAS 70 reportfor assessing the identified controls over financial reporting over theoutsourced operations.

 

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**PART II.****  OTHER INFORMATION**

 

# **Item 1.** Legal Proceedings

# ** **

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

 

**Item 2.****Unregistered Sales of Equity****Securities and Use of Proceeds**

 

None.

 

**Item 3.****Defaults Upon****Senior Securities**

 

None.

 

**Item 4.****Submission of Matters****to a Vote of Security Holders**

 

None.

 

**Item 5.****Other Information**

 

None.

 

**Item 6.****           Exhibits**

 

**Exhibits:**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                      |
|-----------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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). |

 

29

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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) |
|        |                             |  |  |  |

 

May 10, 2005

 

30

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