Edgar Filing: NEXTEL PARTNERS INC

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2004

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission file number: 000-29633

NEXTEL PARTNERS, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware	91-1930918
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

4500 Carillon Point
Kirkland, Washington 98033
(425) 576-3600

(Address of principal executive offices, zip code and registrant’s telephone number,
including area code)

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

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

Indicate the number of shares outstanding of each of the issuer classes of common stock, as of the latest practicable date:

Outstanding Title of Class		Number of Shares on November 1, 2004
Class A Common Stock		180,364,933 shares
Class B Common Stock		84,632,604 shares

NEXTEL PARTNERS, INC.
FORM 10-Q
TABLE OF CONTENTS

			Page No.
PART I		FINANCIAL INFORMATION
	Item 1.	Financial Statements	3
		Consolidated Condensed Balance Sheets As of September 30, 2004 and December 31, 2003	3
		Consolidated Condensed Statements of Operations Three and nine months ended September 30, 2004 and 2003	4
		Consolidated Condensed Statements of Cash Flows Nine months ended September 30, 2004 and 2003	5
		Notes to Consolidated Condensed Financial Statements	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	61
	Item 4.	Controls and Procedures	63
PART II		OTHER INFORMATION
	Item 1.	Legal Proceedings	64
	Item 5.	Other Information	65
	Item 6.	Exhibits	66
		Signatures	67

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

NEXTEL PARTNERS, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(dollars in thousands)
(unaudited)

	September 30, 2004				December 31, 2003
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	121,945			$	122,620
Short-term investments		115,342				146,191
Accounts receivable, net of allowance $16,835 and $14,873, respectively		183,843				150,219
Subscriber equipment inventory		41,490				24,007
Other current assets		24,613				19,006
Total current assets		487,233				462,043
PROPERTY, PLANT AND EQUIPMENT, at cost		1,479,095				1,380,866
Less—accumulated depreciation and amortization		(466,048		)		(355,770		)
Property, plant and equipment, net		1,013,047				1,025,096
OTHER NON-CURRENT ASSETS:
FCC licenses, net of accumulated amortization of $8,744		375,208				371,898
Debt issuance costs and other, net of accumulated amortization of $5,579 and $12,165, respectively		21,065				30,273
Total non-current assets		396,273				402,171
TOTAL ASSETS		$	1,896,553			$	1,889,310
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable		$	72,650			$	76,654
Accrued expenses and other current liabilities		102,118				98,878
Due to Nextel WIP		6,488				9,893
Total current liabilities		181,256				185,425
LONG-TERM OBLIGATIONS:
Long-term debt		1,633,162				1,653,539
Deferred income taxes		45,814				45,387
Other long-term liabilities		15,331				18,255
Total long-term obligations		1,694,307				1,717,181
TOTAL LIABILITIES		1,875,563				1,902,606
COMMITMENTS AND CONTINGENCIES (See Notes)
STOCKHOLDERS’ EQUITY (DEFICIT):
Common stock, Class A, par value $.001 per share, 180,060,600 and 183,186,434 shares, respectively, issued and outstanding, and paid-in capital		1,018,810				1,015,376
Common stock, Class B, par value $.001 per share convertible, 84,632,604 and 79,056,228 shares issued and outstanding, and paid-in capital		172,697				163,312
Accumulated deficit		(1,169,853		)		(1,190,643		)
Deferred compensation		(664		)		(1,341		)
Total stockholders’ equity (deficit)		20,990				(13,296		)
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)		$	1,896,553			$	1,889,310

See accompanying notes to the consolidated condensed financial statements.

NEXTEL PARTNERS, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Operations
(dollars in thousands, except per share amounts)
(unaudited)

	For the three months ended September 30,						For the nine months ended September 30,
	2004			2003			2004			2003
REVENUES:
Service revenues (earned from Nextel WIP $42,738, $32,622, $113,315 and $82,488, respectively)	$	337,152		$	260,650		$	936,646		$	687,699
Equipment revenues	20,390			20,264			59,426			35,293
Total revenues	357,542			280,914			996,072			722,992
OPERATING EXPENSES:
Cost of service revenues (excludes depreciation of $30,337, $27,134, $89,614 and $80,310, respectively) (incurred from Nextel WIP $31,258, $26,348, $86,292 and $70,161, respectively)	92,606			83,258			262,897			232,331
Cost of equipment revenues	34,248			37,076			107,830			82,011
Selling, general and administrative (incurred from Nextel WIP $3,932, $3,538, $14,507 and $9,923, respectively)	127,160			104,808			358,390			292,177
Stock based compensation (primarily selling, general and administrative related)	(22		)	259			532			740
Depreciation and amortization	37,311			33,527			110,510			99,521
Total operating expenses	291,303			258,928			840,159			706,780
INCOME FROM OPERATIONS	66,239			21,986			155,913			16,212
Interest expense, net	(23,460		)	(37,438		)	(81,708		)	(116,835		)
Interest income	823			648			1,802			1,930
Loss on early retirement of debt	—			(6,290		)	(54,971		)	(74,417		)
INCOME (LOSS) BEFORE DEFERRED INCOME TAX PROVISION	43,602			(21,094		)	21,036			(173,110		)
Deferred income tax provision	(8,081		)	(885		)	(246		)	(6,975		)
NET INCOME (LOSS)	35,521			(21,979		)	20,790			(180,085		)
Mandatorily redeemable preferred stock dividends	—			—			—			(2,141		)
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS	$	35,521		$	(21,979	)	$	20,790		$	(182,226	)
NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS:
Basic	$	0.13		$	(0.09	)	$	0.08		$	(0.73	)
Diluted	$	0.12		$	(0.09	)	$	0.08		$	(0.73	)
Weighted average number of shares outstanding:
Basic	263,945,444			251,284,864			263,134,769			250,909,273
Diluted	304,833,454			251,284,864			269,973,801			250,909,273

See accompanying notes to the consolidated condensed financial statements.

NEXTEL PARTNERS, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
(in thousands)
(unaudited)

	For the nine months ended September 30,
	2004				2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)		$	20,790			$	(180,085	)
Adjustments to reconcile net income (loss) to net cash from operating activities
Deferred income tax provision		246				6,975
Depreciation and amortization		110,510				99,521
Amortization of debt issuance costs		3,009				3,717
Interest accretion for senior discount notes		20				27,013
Interest accretion for mandatorily redeemable preferred stock series B		—				1,138
Bond discount amortization		720				928
Loss on retirement of debt		54,971				74,417
Fair value adjustments of derivative instruments		(2,760		)		(2,689		)
Stock based compensation		532				740
Other		(449		)		1,144
Changes in current assets and liabilities:
Accounts receivable, net		(33,624		)		(12,096		)
Subscriber equipment inventory		(17,483		)		149
Other current and long-term assets		(5,523		)		(2,085		)
Accounts payable, accrued expenses and other current liabilities		3,450				9,104
Operating advances due from Nextel WIP		(2,691		)		1,561
Net cash from operating activities		131,718				29,452
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(103,372		)		(147,066		)
FCC licenses		(3,650		)		(14,369		)
Proceeds from sale and maturities of short-term investments, net		30,849				(16,803		)
Net cash from investing activities		(76,173		)		(178,238		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings		724,565				750,000
Stock options exercised		10,774				1,314
Proceeds from stock issued for employee stock purchase plan		1,827				1,362
Proceeds from sale lease-back transactions		1,211				6,392
Debt repayments		(788,909		)		(540,704		)
Capital lease payments		(2,380		)		(1,858		)
Debt and equity issuance costs		(3,308		)		(17,017		)
Net cash from financing activities		(56,220		)		199,489
NET INCREASE IN CASH AND CASH EQUIVALENTS		(675		)		50,703
CASH AND CASH EQUIVALENTS, beginning of period		122,620				67,522
CASH AND CASH EQUIVALENTS, end of period		$	121,945			$	118,225
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS
Cash paid for income taxes		$	—			$	—
Capitalized interest on accretion of senior discount notes		$	—			$	378
Accretion of mandatorily redeemable preferred stock dividends		$	—			$	2,141
Retirement of long-term debt with common stock		$	—			$	6,973
Cash paid for interest, net of capitalized amount		$	94,762			$	93,676

See accompanying notes to the consolidated condensed financial statements.

NEXTEL PARTNERS, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
September 30, 2004
(unaudited)

1. BASIS OF PRESENTATION

Our interim consolidated condensed financial statements for the three- and nine-month periods ended September 30, 2004 and 2003 have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations for interim financial statements. These consolidated condensed financial statements should be read in conjunction with the audited consolidated financial statements and notes contained in our annual report on Form 10-K for the year ended December 31, 2003 and quarterly filings on Form 10-Q filed with the SEC.

The financial information included herein reflects all adjustments (consisting only of normal recurring adjustments and accruals), which are, in the opinion of management, necessary for the fair presentation of the results of the interim periods. The results of operations for the three- and nine-month periods ended September 30, 2004 are not necessarily indicative of the results to be expected for the full year ending December 31, 2004.

2. OPERATIONS

Description of Business

Nextel Partners provides a wide array of digital wireless communications services throughout the United States, primarily to business users, utilizing frequencies licensed by the Federal Communications Commission (“FCC”). Our operations are primarily conducted by Nextel Partners Operating Corp. (“OPCO”), a wholly owned subsidiary. Substantially all of our assets, liabilities, operating losses and cash flows are within OPCO and our other wholly owned subsidiaries.

Our digital network (“Nextel Digital Wireless Network”) has been developed with advanced mobile communication systems employing digital technology developed by Motorola, Inc. (“Motorola”) (such technology is referred to as the “integrated Digital Enhanced Network” or “iDEN”) with a multi-site configuration permitting frequency reuse. Our principal business objective is to offer high-capacity, high-quality, advanced communication services in our territories throughout the United States targeted towards mid-sized and rural markets. Various operating agreements entered into by our subsidiaries and Nextel WIP Corp. (“Nextel WIP”), an indirect wholly owned subsidiary of Nextel Communications, Inc. (“Nextel”), govern the support services to be provided to us by Nextel WIP (see Note 7).

3. SIGNIFICANT ACCOUNTING POLICIES

Concentration of Risk

We believe that the geographic and industry diversity of our customer base minimizes the risk of incurring material losses due to concentration of credit risk.

We are a party to certain equipment purchase agreements with Motorola. For the foreseeable future we expect that we will need to rely on Motorola for the manufacture of a substantial portion of the

infrastructure equipment necessary to construct and make operational our portion of the Nextel Digital Wireless Network as well as for the provision of digital mobile telephone handsets and accessories.

As previously discussed, we are reliant on Nextel WIP for the provision of certain services. For the foreseeable future, we will need to rely on Nextel WIP for the provision of these services, as we will not have the infrastructure to support those services.

In addition, if Nextel encounters financial or operating difficulties relating to its portion of the Nextel Digital Wireless Network, or experiences a significant decline in customer acceptance of services and products, our business may be adversely affected, including the quality of our services, the ability of our customers to roam within the entire network and our ability to attract and retain customers.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.

Principles of Consolidation

The consolidated condensed financial statements include our accounts and those of our wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.

Net Income (Loss) per Share

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 128, “Computation of Earnings Per Share,” basic earnings per share is computed by dividing income (loss) attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share adjust basic earnings per common share for the effects of potentially dilutive common shares. Potentially dilutive common shares primarily include the dilutive effects of shares issuable under our stock option plan and outstanding unvested restricted stock using the treasury stock method and the dilutive effects of shares issuable upon the conversion of our convertible senior notes using the if-converted method. For the three and nine months ended September 30, 2003, basic and diluted loss per share are equal since common equivalent shares are excluded from the calculation of diluted earnings per share as their effects are antidilutive due to our net losses.

The following schedule is our net income (loss) per share calculation for the three and nine months ended September 30, 2004 and 2003:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
	(in thousands, except share and per share amounts)
Income (loss) attributable to common stockholders (numerator for basic)	$	35,521		$	(21,979	)	$	20,790		$	(182,226	)
Effect of dilutive securities:
Convertible Senior Notes	$	1,125		—			—			—
Adjusted Income (loss) attributable to common stockholders (numerator for diluted)	$	36,646		$	(21,979	)	$	20,790		$	(182,226	)
Gross weighted average common shares outstanding	264,056,776			251,435,407			263,236,913			251,079,346
Less: Weighted average shares subject to repurchase	(111,332		)	(150,543		)	(102,144		)	(170,073		)
Weighted average common shares outstanding—basic (denominator for basic)	263,945,444			251,284,864			263,134,769			250,909,273
Effect of dilutive securities:
Convertible Senior Notes	32,872,584			—			—			—
Stock options	7,944,490			—			6,769,395			—
Restricted stock (unvested)	70,936			—			69,637			—
Weighted average common shares outstanding—diluted (denominator for diluted)	304,833,454			251,284,864			269,973,801			250,909,273
Net income (loss) per share, basic	$	0.13		$	(0.09	)	$	0.08		$	(0.73	)
Net income (loss) per share, diluted	$	0.12		$	(0.09	)	$	0.08		$	(0.73	)

For the nine months ended September 30, 2004, approximately 32.9 million shares issuable upon the assumed conversion of our 1½% convertible senior notes that could potentially dilute earnings per share in the future were excluded from the calculation of diluted earnings per common share due to their antidilutive effects. Additionally, for the three and nine months ended September 30, 2004 approximately 3.1 million options were excluded from the calculation of diluted earnings per common share as their exercise prices exceed the average market price of our class A common stock.

For the three months ended September 30, 2003, approximately 32.9 million shares issuable upon the assumed conversion of our 1½% senior convertible notes that could potentially dilute earnings per share in the future were excluded from the calculation of diluted earnings per common share due to their antidilutive effects. Additionally, for the three months ended September 30, 2003 approximately 170,000 shares of restricted stock and 18.8 million stock options outstanding were excluded from the calculation of common equivalent shares, as their effects were antidilutive.

Cash and Cash Equivalents

Cash equivalents include time deposits and highly liquid investments with remaining maturities of three months or less at the time of purchase.

Short-Term Investments

Marketable debt securities with original purchase maturities greater than three months are classified as short-term investments. Short-term investments at September 30, 2004 and December 31, 2003 consisted of U.S. Treasury securities, mortgage-backed securities, auction rate securities and commercial paper. We classify our debt securities as trading because the securities are bought and held principally for the purpose of selling them in the near term. Trading securities are recorded at fair value. Unrealized holding gains and losses on trading securities are included in earnings.

Sale-Leaseback Transactions

We periodically enter into transactions whereby we transfer specified switching equipment and telecommunication towers and related assets to third parties, and subsequently lease all or a portion of these assets from these parties. During the three months ended September 30, 2004 and 2003 we received cash proceeds of approximately $432,000 and $142,000, respectively, and for the nine months ended September 30, 2004 and 2003 we received cash proceeds of approximately $1.2 million and $6.4 million, respectively, for assets sold to third parties. No gain was initially recognized on these transactions.

FCC Licenses

FCC operating licenses are recorded at historical cost. Our FCC licenses and the requirements to maintain the licenses are similar to other licenses granted by the FCC, including Personal Communications Services (“PCS”) and cellular licenses, in that they are subject to renewal after the initial 10-year term. Historically, the renewal process associated with these FCC licenses has been perfunctory. The accounting for these licenses has historically not been constrained by the renewal and operational requirements.

On January 1, 2002 we implemented SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 requires the use of a non-amortization approach to account for purchased goodwill and certain intangibles. Under a non-amortization approach, goodwill and certain intangibles are not amortized into results of operations, but instead are reviewed at least annually for impairment, and written down as a charge to results of operations only in the periods in which the recorded value of goodwill and certain intangibles exceeds fair value. We have determined that FCC licenses have indefinite lives; therefore, as of January 1, 2002, we no longer amortize the cost of these licenses. We performed an annual asset impairment analyses on our FCC licenses and to date we have determined there has been no impairment related to our FCC licenses. For our impairment analysis, we used the aggregate of all our FCC licenses, which constitutes the footprint of our portion of the Nextel Digital Wireless Network, as the unit of accounting for our FCC licenses based on the guidance in Emerging Issues Task Force (“EITF”) Issue No. 02-7, “Unit of Accounting for Testing Impairment of Indefinite-Lived Intangible Assets.”

As a result of adopting SFAS No. 142, we record a non-cash income tax provision in accordance with the annual effective tax rate methodology for interim tax reporting. Because we ceased amortizing licenses for financial statement purposes on January 1, 2002, we can no longer estimate the amount, if any, of deferred tax liabilities related to our FCC licenses which will reverse during the net operating loss carry forward period. Accordingly, we increase the valuation allowance as the deferred tax liabilities related to FCC licenses increase. During the three and nine months ended September 30, 2004, we recorded a deferred income tax provision of $8.1 million and $246,000, respectively, relating to our FCC licenses. During the same periods ended September 30, 2003, we recorded a deferred income tax provision of $885,000 and $7.0 million, respectively, relating primarily to our FCC licenses.

Interest Rate Risk Management

We use derivative financial instruments consisting of interest rate swap and interest rate protection agreements in the management of our interest rate exposures. In April 1999 and 2000, we entered into interest rate swap agreements for $60 million and $50 million, respectively, to partially hedge interest rate exposure with respect to our term B and C loans. In April 2004, we terminated the $60 million interest rate swap agreement in accordance with its original terms and paid approximately $639,000 for the final settlement. We did not record any realized gain or loss with this termination since this swap did not qualify for cash flow hedge accounting and we recognized changes in its fair value up to the termination date as part of our interest expense.

The term B and C loans were replaced in connection with the refinancing of our credit facility in May 2004; however, we maintained the existing $50 million rate swap agreement. The interest rate swap agreement has the effect of converting certain of our variable rate obligations to fixed or other variable rate obligations. Prior to the adoption of SFAS No. 133 (as described below), amounts paid or received under the interest rate swap agreement were accrued as interest rates changed and recognized over the life of the swap agreement as an adjustment to interest expense. On January 1, 2001, we adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 138. These statements establish accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded on the balance sheet as either an asset or liability measured at fair value. These statements require that changes in the derivative’s fair value be recognized currently in earnings unless specific hedge accounting criteria are met. If hedge accounting criteria are met, the changes in a derivative’s fair value (for a cash flow hedge) are deferred in stockholders’ equity as a component of comprehensive income. These deferred gains and losses are recognized as income in the period in which the hedge item and hedging instrument are settled. The ineffective portions of hedge returns are recognized as earnings. In accordance with SFAS No. 133, our existing swap agreement has been designated as an ineffective cash flow hedge.

The interest rate swap agreement is included in other long-term liabilities on the balance sheet. The following discloses the fair value of the swap agreements recorded as of September 30, 2004:

	(in thousands)
Fair value of liability as of December 31, 2003		$	5,195
Change in fair value—interest rate changes		(2,760		)
Settlement of $60 million swap agreement terminated		(639		)
Fair value of liability as of September 30, 2004		$	1,796

For the three months ended September 30, 2004 and 2003, we recorded non-cash, non-operating gains of $654,000 and $1.3 million, respectively, and for the nine months ended September 30, 2004 and 2003, we recorded non-cash, non-operating gains of $2.8 million and $2.7 million, respectively, related to the change in market value of the interest rate swap agreements in interest expense.

In September 2004 we entered into a series of interest rate swap agreements, which will have the effect of converting certain of our variable interest rate $700 million term C loan obligations to fixed interest rates. The total amount to be hedged will be $150 million. The commencement date for the swap transactions is December 1, 2004 and the expiration date is August 31, 2006. We believe these interest rate swap agreements qualify for cash flow accounting since the critical terms of the instruments match at inception and are expected to on an ongoing basis, therefore it is assumed the instruments will offset and be perfectly effective.

We will not use financial instruments for trading or other speculative purposes, nor will we be a party to any leveraged derivative instrument. The use of derivative financial instruments is monitored through

regular communication with senior management. We will be exposed to credit loss in the event of nonperformance by the counter parties. This credit risk is minimized by dealing with a group of major financial institutions with whom we have other financial relationships. We do not anticipate nonperformance by these counter parties. We are also subject to market risk should interest rates change.

Revenue Recognition

Service revenues primarily include fixed monthly access charges for the digital cellular service, Nextel Direct Connect, and other wireless services and variable charges for airtime usage in excess of plan minutes. We recognize revenue for access charges and other services charged at fixed amounts plus excess airtime usage ratably over the service period, net of customer discounts and adjustments, over the period earned.

For regulatory fees billed to customers such as the Universal Service Fund (“USF”) we net those billings against payments to the USF. Total billings to customers during the three months ended September 30, 2004 and 2003 were $3.4 million and $1.6 million, respectively, and for the nine months ended September 30, 2004 and 2003 were $9.7 million and $4.4 million, respectively.

In November 2002, the EITF issued a final consensus on Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.” Issue No 00-21 provides guidance on how and when to recognize revenues on arrangements requiring delivery of more than one product or service. We adopted EITF Issue No. 00-21 on July 1, 2003 and elected to apply the provisions prospectively to our existing customer arrangements, as described below.

Under EITF Issue No. 00-21, we are no longer required to consider whether a customer is able to realize utility from the phone in the absence of the undelivered service. Given that we meet the criteria stipulated in EITF Issue No. 00-21, we account for the sale of a phone as a unit of accounting separate from the subsequent service to the customer. Accordingly, we recognize revenue from phone equipment sales and the related cost of phone equipment revenues when title to the phone equipment passes to the customer for all arrangements entered into beginning in the third quarter of 2003. This has resulted in the classification of amounts received for the sale of the phone equipment, including any activation fees charged to the customer, as equipment revenues at the time of the sale. In December 2003, the SEC staff issued SAB No. 104, “Revenue Recognition in Financial Statements,” which updated SAB No. 101 to reflect the impact of the issuance of EITF No. 00-21.

For arrangements entered into prior to July 1, 2003, we continue to amortize the revenues and costs previously deferred as was required by SAB No. 101. For the three months ended September 30, 2004 and 2003, we recognized $5.8 million and $7.6 million, respectively, and $18.8 million and $22.6 million for the nine months ended September 30, 2004 and 2003, respectively, of activation fees and phone equipment revenues and equipment costs that had been previously deferred. The table below shows the recognition of service revenues, equipment revenues and cost of equipment revenues (handset costs) on a pro forma basis adjusted to exclude the impact of SAB No. 101 and as if EITF No. 00-21 had been historically recorded for all customer arrangements.

	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2004		2003			2004		2003
	(in thousands, except per share amounts)
Service revenues	$	336,239	$	259,527		$	933,709	$	687,772
Equipment revenues	$	15,512	$	13,805		$	43,568	$	35,906
Cost of equipment revenues	$	28,457	$	29,494		$	89,035	$	82,697
Income (loss) attributable to common stockholders	$	35,521	$	(21,979	)	$	20,790	$	(182,226	)
Income (loss) per share attributable to common stockholders, basic	$	0.13	$	(0.09	)	$	0.08	$	(0.73	)
Income (loss) per share attributable to common stockholders, diluted	$	0.12	$	(0.09	)	$	0.08	$	(0.73	)

Reclassifications

Certain amounts in prior years’ financial statements have been reclassified to conform to the current year presentation.

Long-Lived Assets

Our long-lived assets consist principally of property, plant and equipment. It is our policy to assess impairment of long-lived assets pursuant to SFAS No.144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” This includes determining if certain triggering events have occurred, including significant decreases in the market value of certain assets, significant changes in the manner in which an asset is used, significant changes in the legal climate or business climate that could affect the value of an asset, or current period or continuing operating or cash flow losses or projections that demonstrate continuing losses associated with certain assets used for the purpose of producing revenue that might be an indicator of impairment. When we perform the SFAS 144 impairment tests, we identify the appropriate asset group to be our network system, which includes the grouping of all our assets required to operate our portion of the Nextel Digital Mobile Network and provide service to our customers. We based this conclusion of asset grouping on the revenue dependency, operating interdependency and shared costs to operate our network. Thus far, none of the above triggering events has resulted in any impairment charges.

Stock-Based Compensation

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock Based Compensation—Transition and Disclosure.” This statement amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. We continue to apply the intrinsic value method for stock-based compensation to employees prescribed by Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees.” We have provided below the disclosures required by SFAS No. 148.

As required by SFAS No. 148, had compensation cost been determined based upon the fair value of the awards granted during the three and nine months ended September 30, 2004 and 2003, our net income (loss) and basic and diluted income (loss) per share would have adjusted to the pro forma amounts indicated below:

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2004			2003			2004			2003
	(in thousands, except per share amounts)
Net income (loss), as reported	$	35,521		$	(21,979	)	$	20,790		$	(182,226	)
Add: stock-based employee compensation expense (income) included in reported net loss	(22		)	259			532			740
Deduct: total stock-based employee compensation expense determined under fair-value-based method for all awards	(6,212		)	(5,996		)	(19,016		)	(19,439		)
As adjusted, net income (loss)	$	29,287		$	(27,716	)	$	2,306		$	(200,925	)
Basic income (loss) per share attributable to common stockholders
As reported	$	0.13		$	(0.09	)	$	0.08		$	(0.73	)
As adjusted	$	0.11		$	(0.11	)	$	0.01		$	(0.80	)
Diluted income (loss) per share attributable to common stockholders
As reported	$	0.12		$	(0.09	)	$	0.08		$	(0.73	)
As adjusted	$	0.10		$	(0.11	)	$	0.01		$	(0.80	)
Weighted average fair value per share of options granted	$	7.76		$	6.32		$	8.38		$	4.82

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model as prescribed by SFAS No. 148 using the following assumptions:

	2004	2003
Expected stock price volatility	53% - 71%	74% - 85%
Risk-free interest rate	3.1% - 3.4%	3.6% - 3.8%
Expected life in years	5 years	5 years
Expected dividend yield	0.00%	0.00%

The Black-Scholes option-pricing model requires the input of subjective assumptions and does not necessarily provide a reliable measure of fair value.

Recently Issued Accounting Pronouncements

In December 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities” (“FIN 46R”), which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46, “Consolidation of Variable Interest Entities,” which was issued in January 2003. We adopted FIN 46R effective January 1, 2004 without any impact to our financial statements.

4. PROPERTY AND EQUIPMENT

	As of
	September 30, 2004				December 31, 2003
	(in thousands)
Building and improvements		$	9,828			$	8,523
Equipment		1,314,763				1,223,279
Furniture, fixtures and software		119,831				105,544
Less—accumulated depreciation and amortization		(466,048		)		(355,770		)
Subtotal		978,374				981,576
Construction in progress		34,673				43,520
Total property and equipment		$	1,013,047			$	1,025,096

5. NON-CURRENT PORTION OF LONG-TERM DEBT

	As of
	September 30, 2004			December 31, 2003
	(in thousands)
121¤2% Senior Discount Notes due 2009, net discount of $7.2 million and $7.9 million, respectively		$	139,047		$	138,344
14% Senior Discount Notes due 2009		—			1,773
11% Senior Notes due 2010, interest payable semiannually in cash and in arrears		1,157			367,450
11¤2% Convertible Senior Notes due 2008, interest payable semi-annually in cash and in arrears		300,000			300,000
81¤8% Senior Notes due 2011, net of $0.4 million and $0 discount, respectively, interest payable semi-annually in cash and in arrears		474,582			450,000
Bank Credit Facility—tranche C loan and term B and C loans, respectively; interest, at our option, calculated on Administrative Agent’s alternate base rate or reserve adjusted LIBOR		700,000			375,000
Capital leases		18,376			20,972
Total non-current portion of long-term debt		$	1,633,162		$	1,653,539

121¤2% Senior Discount Notes Due 2009

On December 4, 2001 we issued in a private placement $225.0 million of 121¤2% senior discount notes due 2009. These notes were issued at a discount to their aggregate principal amount at maturity and generated aggregate gross proceeds to us of approximately $210.4 million. We subsequently exchanged all of these 121¤2% senior discount notes due 2009 for registered notes having the same financial terms and covenants as the privately placed notes. Interest accrues for these notes at the rate of 121¤2% per annum, payable semi-annually in cash in arrears on May 15 and November 15 of each year, which commenced on May 15, 2002. During August 2003, we repurchased for cash $11.1 million (principal amount at maturity) of our 121¤2% senior discount notes due 2009 in open-market purchases. On December 31, 2003 we completed the redemption of $67.7 million (principal amount at maturity) of the notes outstanding with net proceeds from our public offering in November 2003.

The 121¤2% senior discount notes due 2009 represent our senior unsecured obligations and rank equally in right of payment to our entire existing and future senior unsecured indebtedness and senior in right of payment to all of our existing and future subordinated indebtedness. The 121¤2% senior discount notes due 2009 are effectively subordinated to (i) all of our secured obligations, including borrowings under the bank credit facility, to the extent of assets securing such obligations and (ii) all indebtedness,

including borrowings under the bank credit facility and trade payables, of OPCO. As of September 30, 2004, we were in compliance with applicable covenants.

14% Senior Discount Notes Due 2009

On March 15, 2004, we redeemed for cash the remainder of our outstanding 14% senior discount notes due 2009, representing approximately $1.8 million aggregate principal amount at maturity, for a total redemption price of approximately $1.9 million. As a result of this transaction the notes have been paid in full.

11% Senior Notes Due 2010

On March 10, 2000, we issued $200.0 million of 11% senior notes due 2010, and on July 27, 2000, we issued an additional $200.0 million of 11% senior notes due 2010, each in a private placement. We subsequently exchanged all of the March 2000 and July 2000 notes for registered notes having the same financial terms and covenants as the privately placed notes. Interest accrues for these notes at the rate of 11% per annum, payable semi-annually in cash in arrears on March 15 and September 15 of each year, which commenced on September 15, 2000.

In November 2002 we exchanged $10.0 million (principal amount at maturity) of the notes for shares of our Class A common stock. During August 2003 and March 2004, we repurchased for cash $22.6 million and $10.5 million (principal amounts at maturity), respectively, of our 11% senior notes dues 2010 in open-market purchases for $24.1 million and $11.8 million, respectively, including accrued interest.

On April 28, 2004, we commenced a tender offer and consent solicitations relating to all of our outstanding 11% senior notes due 2010. The tender offer expired May 25, 2004 and we received the consents necessary to amend the indentures governing the 11% senior notes due 2010 to eliminate substantially all restrictive covenants and certain event of default provisions. As of September 30, 2004 we had purchased approximately $355.8 million (principal amount at maturity) of our 11% senior notes due 2010 for $406.6 million including accrued interest, resulting in a loss of approximately $43.8 million for the premium paid for retiring the debt early. The tender offer was funded through a combination of proceeds from a private placement of $25 million aggregate principal amount of 81¤8% senior notes due 2011, refinancing our wholly owned subsidiary’s existing $375.0 million tranche B term loan with a new $700.0 million tranche C term loan and available cash.

The 11% senior notes due 2010 represent our senior unsecured obligations, and rank equally in right of payment to our entire existing and future senior unsecured indebtedness and senior in right of payment to all of our existing and future subordinated indebtedness. The 11% senior notes due 2010 are effectively subordinated to (i) all of our secured obligations, including borrowings under the bank credit facility, to the extent of assets securing such obligations and (ii) all indebtedness, including borrowings under the bank credit facility and trade payables, of OPCO. As of September 30, 2004, with respect to $1.2 million (principal amount at maturity) of 11% senior notes due 2010 that remain outstanding, we were in compliance with applicable covenants.

11¤2% Convertible Senior Notes Due 2008

In May and June 2003, we issued an aggregate principal amount of $175.0 million of 11¤2% convertible senior notes due 2008 in private placements. At the option of the holders, these 11¤2% convertible senior notes due 2008 are convertible into shares of our Class A common stock at a conversion rate of 131.9087 shares per $1,000 principal amount of notes, which represents a conversion price of $7.58 per share, subject to adjustment. Interest accrues for these notes at the rate of 11¤2% per annum, payable semi-annually in cash in arrears on May 15 and November 15 of each year, which commenced on November 15, 2003. We subsequently filed a registration statement with the SEC to register the resale of the 11¤2% convertible

senior notes due 2008 and the shares of our Class A common stock into which the 11¤2% convertible senior notes due 2008 are convertible.

In addition, in August 2003 we closed a private placement of $125.0 million of 11¤2% convertible senior notes due 2008. At the option of the holders, these 1½% convertible senior notes due 2008 are convertible into shares of our Class A common stock at a conversion rate of 78.3085 shares per $1,000 principal amount of notes, which represents a conversion price of $12.77 per share, subject to adjustment. Interest accrues for these notes at the rate of 11¤2% per annum, payable semi-annually in cash in arrears on May 15 and November 15 of each year, which commenced on November 15, 2003. We subsequently filed a registration statement with the SEC to register the resale of the 11¤2% convertible senior notes due 2008 and the shares of our Class A common stock into which the 11¤2% convertible senior notes due 2008 are convertible.

The 1½% convertible senior notes due 2008 represent our senior unsecured obligations, and rank equally in right of payment to our entire existing and future senior unsecured indebtedness and senior in right of payment to all of our existing and future subordinated indebtedness. The 1½% convertible senior notes due 2008 are effectively subordinated to (i) all of our secured obligations, including borrowings under the bank credit facility, to the extent of assets securing such obligations and (ii) all indebtedness, including borrowings under the bank credit facility and trade payables, of OPCO.

81¤8% Senior Notes Due 2011

On June 23, 2003, we issued $450.0 million of 81¤8% senior notes due 2011 in a private placement. We subsequently exchanged all of the 81¤8% senior notes due 2011 for registered notes having the same financial terms and covenants as the privately placed notes. Interest accrues for these notes at the rate of 81¤8% per annum, payable semi-annually in cash in arrears, on January 1 and July 1 of each year, which commenced on January 1, 2004.

On May 19, 2004, we issued an additional $25 million of 81¤8% senior notes due 2011 under a separate indenture in a private placement for proceeds of $24.6 million. We subsequently exchanged all of the 81¤8% senior notes due 2011 for registered notes having the same financial terms and covenants as the privately placed notes. Interest accrues at the rate of 81¤8% per annum, payable semi-annually in cash in arrears on January 1 and July 1 of each year, which commenced on July 1, 2004.

The 81¤8% senior notes due 2011 represent our senior unsecured obligations and rank equally in right of payment to our entire existing and future senior unsecured indebtedness and senior in right of payment to all of our existing and future subordinated indebtedness. The 81¤8% senior notes due 2011 are effectively subordinated to (i) all of our secured obligations, including borrowings under the bank credit facility, to the extent of assets securing such obligations and (ii) all indebtedness including borrowings under the bank credit facility and trade payables, of OPCO. As of September 30, 2004, we were in compliance with applicable covenants.

Bank Credit Facility

On May 19, 2004, OPCO refinanced its existing $475.0 million credit facility with a syndicate of banks and other financial institutions led by J.P. Morgan Securities Inc. and Morgan Stanley Senior Funding, Inc. as joint lead arrangers and book runners, Morgan Stanley Senior Funding, Inc. as syndication agent, and JPMorgan Chase Bank as administrative agent. The new credit facility includes a $700.0 million tranche C term loan, a $100.0 million revolving credit facility and an option to request an additional $200.0 million of incremental term loans. Such incremental term loans shall not exceed $200.0 million or have a final maturity date earlier than the maturity date for the tranche C term loan. The tranche C term loan matures on May 31, 2011. The revolving credit facility will terminate on the last business day in May falling on or

nearest to May 31, 2011. The incremental term loans, if any, shall mature on the date specified on the date the respective loan is made, provided that such maturity date shall not be earlier than the maturity date for the tranche C term loan. As of September 30, 2004, $700.0 million of the tranche C term loan was outstanding and no amounts were outstanding under either the $100.0 million revolving credit facility or the incremental term loans. The proceeds from the tranche C term loan were used to repay borrowings under our previous tranche B senior secured credit facility as well as fund a portion of the tender offer for our 11% senior notes due 2010.

The tranche C term loan bears interest, at our option, at the administrative agent’s alternate base rate or reserve-adjusted LIBOR plus, in each case, applicable margins. The initial applicable margin for the tranche C term loan is 2.50% over LIBOR and 1.50% over the base rate. For the revolving credit facility, the initial applicable margin is 3.00% over LIBOR and 2.00% over the base rate and thereafter will be determined on the basis of the ratio of total debt to annualized EBITDA and will range between 1.50% and 3.00% over LIBOR and between 0.50% and 2.00% over the base rate. As of September 30, 2004, the interest rate on the tranche C term loan was 4.3125%.

Borrowings under the term loans are secured by, among other things, a first priority pledge of all assets of OPCO and all assets of the subsidiaries of OPCO and a pledge of their respective capital stock. The credit facility contains financial and other covenants customary for the wireless industry, including limitations on our ability to incur additional debt or create liens on assets. The credit facility also contains covenants requiring that we maintain certain defined financial ratios. As of September 30, 2004, we were in compliance with all covenants associated with this credit facility.

Mandatorily Redeemable Preferred Stock

In May 2003, the FASB issued SFAS No. 150. “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This statement establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within the scope of the statement as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. This statement was effective for all freestanding financial instruments entered into or modified after May 31, 2003; otherwise it was effective at the beginning of the first interim period beginning after June 15, 2003. We identified that our Series B mandatorily redeemable preferred stock was within the scope of this statement and reclassified it to long-term debt and began recording the Series B mandatorily redeemable preferred stock dividends as interest expense beginning July 1, 2003.

In November 2003, we redeemed all of the 13,110,000 shares of our outstanding Series B mandatorily redeemable preferred stock held by Nextel WIP for an aggregate redemption price of $38.9 million. Following the redemption, we no longer have any shares of preferred stock outstanding.

The following schedule shows the pro forma impact of SFAS No. 150 had it been effective in prior periods.

	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2004		2003			2004		2003
	(in thousands)
Net income (loss), as reported	$	35,521	$	(21,979	)	$	20,790	$	(180,085	)
Less: mandatorily redeemable preferred stock dividend classified as interest expense	—		—			—		(2,141		)
Net income (loss), adjusted for SFAS No. 150	$	35,521	$	(21,979	)	$	20,790	$	(182,226	)

6. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

On December 5, 2001, a purported class action lawsuit was filed against us, two of our executive officers and four of the underwriters involved in our initial public offering. It was filed on behalf of all persons who acquired our common stock between February 22, 2000 and December 6, 2000 and initially named as defendants us, John Chapple, our President, Chief Executive Officer and Chairman of the Board, John D. Thompson, our Chief Financial Officer and Treasurer until August 2003, and the underwriters involved in our initial public offering. Mr. Chapple and Mr. Thompson have been dismissed from the lawsuit without prejudice. The complaint seeks recessionary and/or compensatory damages. We dispute the allegations of the complaint that suggest any wrongdoing on our part or by our officers. However, the plaintiffs and the issuing company defendants, including us, have reached a settlement of the issues in the lawsuit. The proposed settlement, which is not material to us, is subject to a number of contingencies, including negotiation of a settlement agreement and its approval by the Court. In June 2004, an agreement of settlement was submitted to the Court for preliminary approval. We are unable to determine whether or when a settlement will occur or be finalized.

On June 8, 2001, a purported class action lawsuit was filed against Nextel Partners, Inc. as well as several other wireless carriers and manufacturers of wireless telephones. The complaint alleges that the defendants, among other things, manufactured and distributed wireless telephones that cause adverse health effects. The plaintiffs seek compensatory damages, reimbursement for certain costs including reasonable legal fees, punitive damages and injunctive relief. The defendants timely removed the case to Federal court and this case and related cases were consolidated in the United States District Court for the District of Maryland. On March 5, 2003, the court granted the defendants’ consolidated motion to dismiss the plaintiffs’ claims. The plaintiffs have appealed to the United States Court of Appeals for the Fourth Circuit. The appeal is fully briefed. We dispute the allegations of the complaint, will vigorously defend against the action, and intend to seek indemnification from the manufacturers of the wireless telephones if necessary.

On April 1, 2003, a purported class action lawsuit was filed in the 93^rd District Court of Hidalgo County, Texas against us, Nextel and Nextel West Corp. The lawsuit is captioned Rolando Prado v. Nextel Communications, et al, Civil Action No. C-695-03-B. On May 2, 2003, a purported class action lawsuit was filed in the Circuit Court of Shelby County for the Thirtieth Judicial District at Memphis, Tennessee against us, Nextel and Nextel West Corp. The lawsuit is captioned Steve Strange v. Nextel Communications, et al, Civil Action No. 01-002520-03. On May 3, 2003, a purported class action lawsuit was filed in the Circuit Court of the Second Judicial Circuit in and for Leon County, Florida against Nextel Partners Operating Corp. d/b/a Nextel Partners and Nextel South Corp. d/b/a Nextel Communications. The lawsuit is captioned Christopher Freeman and Susan and Joseph Martelli v. Nextel South Corp., et al, Civil Action No. 03-CA1065. On July 9, 2003, a purported class action lawsuit was filed in Los Angeles Superior Court, California against us, Nextel, Nextel West, Inc., Nextel of California, Inc. and Nextel Operations, Inc. The lawsuit is captioned Nick’s Auto Sales, Inc. v. Nextel West, Inc., et al, Civil Action No. BC298695. On August 7, 2003, a purported class action lawsuit was filed in the Circuit Court of Jefferson County, Alabama against us and Nextel. The lawsuit is captioned Andrea Lewis and Trish Zruna v. Nextel Communications, Inc., et al, Civil Action No. CV-03-907. On October 3, 2003, an amended complaint for a purported class action lawsuit was filed in the United States District Court for the Western District of Missouri. The amended complaint named us and Nextel Communications, Inc. as defendants; Nextel Partners was substituted for the previous defendant, Nextel West Corp. The lawsuit is captioned Joseph Blando v. Nextel West Corp., et al, Civil Action No. 02-0921 (the “Blando Case”). All of these complaints allege that we, in conjunction with the other defendants, misrepresented certain cost-recovery line-item fees as government taxes. Plaintiffs seek to enjoin such practices and seek a refund of monies paid by the class based on the alleged misrepresentations. Plaintiffs also seek attorneys’ fees, costs and, in

some cases, punitive damages. We believe the allegations are groundless. On October 9, 2003, Judge Gaitan in the United States District Court for the Western District of Missouri in the Blando Case entered an order granting preliminary approval of a nationwide class action settlement that encompasses most of the claims involved in these cases. Notice of the settlement was provided to the identified class, and on January 29, 2004, the court conducted a final approval hearing and, on April 20, 2004, approved the settlement. On May 27, 2004, various objectors and class members appealed Judge Gaitan’s order granting final approval of the settlement to the United States Court of Appeals for the Eighth Circuit. Distribution of settlement benefits is stayed until the appellate court issues a final order resolving the appeal. In conjunction with the settlement, we recorded an estimated liability during the third quarter of 2003, which did not materially impact our financial results.

We are subject to other claims and legal actions that may arise in the ordinary course of business. We do not believe that any of these other pending claims or legal actions or the items discussed above will have a material effect on our business, financial position or results of operations.

7. RELATED PARTY TRANSACTIONS

Nextel Operating Agreements

We, our operating subsidiary and Nextel WIP, which held approximately 32.0% of our outstanding common stock as of September 30, 2004 and with which one of our directors is affiliated, entered into a joint venture agreement dated January 29, 1999. The joint venture agreement, along with the other operating agreements, defines the relationships, rights and obligations between the parties and governs the build-out and operation of our portion of the Nextel Digital Wireless Network and the transfer of licenses from Nextel WIP to us. Our roaming agreement with Nextel WIP provides that each party pays the other company’s monthly roaming fees in an amount based on the actual system minutes used by our respective customers when they are roaming on the other party’s network. For the three months ended September 30, 2004 and 2003, we earned approximately $42.7 million and $32.6 million, respectively, and for the nine months ended September 30, 2004 and 2003, we earned approximately $113.3 million and $82.5 million, respectively, from Nextel customers roaming on our system, which is included in our service revenues.

During the three months ended September 30, 2004 and 2003, we incurred charges from Nextel WIP totaling $31.3 million and $26.3 million, respectively, and for the nine months ended September 30, 2004 and 2003, we incurred charges from Nextel WIP of $86.3 million and $70.2 million, respectively, for services such as specified telecommunications switching services, charges for our customers roaming on Nextel’s system and other support costs. The costs for these services are recorded in cost of service revenues.

During 2003 and 2004, Nextel continued to provide certain services to us for which we paid a fee based on their cost. These services are limited to Nextel telemarketing and customer care, fulfillment, activations, and billing for the national accounts. We also paid Nextel a royalty fee and a 2004 sponsorship fee for NASCAR. For the three months ended September 30, 2004 and 2003, we were charged approximately $2.6 million and $2.5 million, respectively, and $10.8 million and $6.6 million for the nine months ended the same periods, respectively, for these services and fees. Nextel WIP also provides us access to certain back office and information systems platforms on an ongoing basis. For the three months ended September 30, 2004 and 2003, we were charged approximately $1.3 million and $1.1 million, respectively, and $3.7 million and $3.4 million for the nine months ended September 30, 2004 and 2003, respectively, for these services. The costs for all of these services and fees are included in selling, general and administrative expenses.

In the event of a termination of the joint venture agreement, Nextel WIP could, under certain circumstances, purchase or be required to purchase all of our outstanding common stock. In such event, Nextel WIP, at its option, would be entitled to pay the purchase price therefor in cash or in shares of

Nextel common stock. The circumstances that could trigger these rights and obligations include, without limitation, termination of our operating agreements with Nextel WIP, a change of control of Nextel or a failure by us to make certain required changes to our business.

Business Relationship

In the ordinary course of business, we lease tower space from American Tower Corporation. One of our directors is a stockholder and former president, chief executive officer and chairman of the board of directors of American Tower Corporation. During the three months ended September 30, 2004 and 2003, we paid American Tower Corporation for these tower leases $3.0 million and $2.7 million, respectively, and $7.9 million for each of the nine-month periods ended September 30, 2004 and 2003.

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

Some statements and information contained in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are not historical facts but are forward-looking statements. For a discussion of these forward-looking statements and of important factors that could cause results to differ materially from the forward-looking statements, see “—Forward-Looking Statements” and “—Risk Factors” below.

Please read the following discussion together with our 2003 annual report on Form 10-K along with “—Selected Consolidated Financial Data,” the consolidated condensed financial statements and the related notes included elsewhere in this report.

Overview

We provide fully integrated, wireless digital communications services using the Nextel® brand name in mid-sized and rural markets throughout the United States. We offer four distinct wireless services in a single wireless handset. These services include Nationwide Direct Connect^SM, cellular voice, short messaging and cellular Internet access, which provides users with wireless access to the Internet and an organization’s internal databases as well as other applications, including e-mail. We hold licenses for wireless frequencies in markets where over 53 million people, or Pops, live and work. We have constructed and operate a digital mobile network compatible with the digital mobile network constructed and operated by Nextel in targeted portions of these markets, including 13 of the top 100 metropolitan statistical areas and 56 of the top 200 metropolitan statistical areas in the United States ranked by population. Our combined Nextel Digital Wireless Network constitutes one of the largest fully integrated digital wireless communications systems in the United States, currently covering 297 of the top 300 metropolitan statistical areas in the United States.

We offer a package of wireless voice and data services under the Nextel brand name targeted primarily to business users. We currently offer the following four services, which are fully integrated and accessible through a single wireless handset:

· digital cellular, including advanced calling features such as speakerphone, conference calling, voicemail, call forwarding and additional line service;

· Direct Connect service, the digital walkie-talkie service that allows customers to instantly connect with business associates, family and friends without placing a phone call;

· short messaging, the service that utilizes the Internet to keep customers connected to clients, colleagues and family with text, numeric and two-way messaging; and

· Nextel Online® services, which provide customers with Internet-ready handsets access to the World Wide Web and web-based applications such as e-mail, address books, calendars and advanced Java™ enabled business applications.

As of September 30, 2004, we had approximately 1,507,500 digital subscribers. Our network provides coverage to approximately 39 million Pops in 31 different states, which include markets in Alabama, Arkansas, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maryland, Minnesota, Mississippi, Missouri, Nebraska, New York, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Virginia, Vermont, West Virginia and Wisconsin. We also hold licenses in Kansas and Wyoming but currently do not have any cell sites operational in these states.

During the third quarter of 2004 we continued to focus on our key financial and operating performance metrics, including growth in subscribers and service revenues, adjusted EBITDA, net cash from operating activities, churn and lifetime revenue per subscriber (“LRS”).

Accomplishments during the third quarter of 2004, which we believe are important indicators of our overall performance and financial well-being, include:

· Growing our subscriber base approximately 32% in a twelve-month period by adding approximately 362,800 net new customers to end the third quarter of 2004 at 1,507,500 subscribers as compared to 1,144,700 as of September 30, 2003.

· Growing our service revenues approximately 29% from $260.7 million for the prior year’s third quarter to $337.2 million for third quarter 2004.

· Increasing Adjusted EBITDA 86% from $55.8 million for the three months ended September 30, 2003 to $103.5 million for the three months ended September 30, 2004.

· Lowering our customer churn rate to 1.4% for the three-month period ended September 30, 2004 compared to 1.5% for the same period ended September 30, 2003.

· Remaining one of the industry leaders in LRS with an LRS of $4,857 for the third quarter of 2004 compared to $4,667 for the third quarter of 2003.

· Generating $50.9 million net cash from operating activities during the third quarter of 2004 compared to $50.1 million during the third quarter of 2003.

Please see “—Selected Consolidated Financial Data—Additional Reconciliations of Non-GAAP Financial Measures (Unaudited)” for more information regarding our use of Adjusted EBITDA and LRS as non-GAAP financial measures. Our operations are primarily conducted by OPCO. Substantially all of our assets, liabilities, operating losses and cash flows are within OPCO and our other wholly owned subsidiaries.

During the three months ended September 30, 2004, we also accomplished the following:

· Completed our 30,000 square foot Customer Care Center expansion in Panama City Beach, Florida.

· Launched a camera phone, the i860, with multimedia messaging capabilities.

· Introduced two new handset models, the i315 and i325, with off-network walkie-talkie capabilities designed for industrial, government and public safety users.

SELECTED CONSOLIDATED FINANCIAL DATA

We have summarized below our historical consolidated condensed financial data as of September 30, 2004 and December 31, 2003 and for the three and nine months ended September 30, 2004 and 2003, which are derived from our records.

	Three Months Ended September 30						Nine Months Ended September 30
	2004			2003			2004			2003
	(in thousands, except per share amounts)
	(unaudited)
Consolidated Statements of Operations Data:
Operating revenues:
Service revenues(1)	$	337,152		$	260,650		$	936,646		$	687,699
Equipment revenues(1)	20,390			20,264			59,426			35,293
Total revenues	357,542			280,914			996,072			722,992
Operating expenses:
Cost of service revenues (excludes depreciation of $30,337, $27,134, $89,614 and $80,310, respectively)	92,606			83,258			262,897			232,331
Cost of equipment revenues(1)	34,248			37,076			107,830			82,011
Selling, general and administrative	127,160			104,808			358,390			292,177
Stock-based compensation (primarily selling, general and administrative related)	(22		)	259			532			740
Depreciation and amortization	37,311			33,527			110,510			99,521
Total operating expenses	291,303			258,928			840,159			706,780
Income from operations	66,239			21,986			155,913			16,212
Other income (expense):
Interest expense, net(2)	(23,460		)	(37,438		)	(81,708		)	(116,835		)
Interest income	823			648			1,802			1,930
Loss on early extinguishment of debt	—			(6,290		)	(54,971		)	(74,417		)
Income (Loss) before deferred income tax provision	43,602			(21,094		)	21,036			(173,110		)
Deferred income tax provision	(8,081		)	(885		)	(246		)	(6,975		)
Net Income (Loss)	35,521			(21,979		)	20,790			(180,085		)
Mandatorily redeemable preferred stock dividends(2)	—			—			—			(2,141		)
Net Income (Loss) attributable to common stockholders	$	35,521		$	(21,979	)	$	20,790		$	(182,226	)
Net Income (Loss) per share attributable to common stockholders
Basic	$	0.13		$	(0.09	)	$	0.08		$	(0.73	)
Diluted	$	0.12		$	(0.09	)	$	0.08		$	(0.73	)
Weighted average number of shares outstanding
Basic	263,945			251,285			263,135			250,909
Diluted	304,833			251,285			269,974			250,909

	As of September 30, 2004			As of December 31, 2003
	(in thousands)
	(unaudited)
Consolidated Balance Sheet Data:
Cash and cash equivalents, and short-term investments		$	237,287		$	268,811
Property, plant and equipment, net		1,013,047			1,025,096
FCC operating licenses, net		375,208			371,898
Total assets		$	1,896,553		$	1,889,310
Current liabilities		181,256			185,425
Long-term debt		1,633,162			1,653,539
Total stockholders’ equity (deficit)		20,990			(13,296		)
Total liabilities and stockholders’ equity (deficit)		$	1,896,553		$	1,889,310

	As of September 30, 2004		As of September 30, 2003
Other Data:
Covered Pops (end of period) (millions)		39		38
Subscribers (end of period)		1,507,500		1,144,700

	Three Months Ended September 30						Nine Months Ended September 30
	2004			2003			2004			2003
	(in thousands)
	(unaudited)
Other Data:
Statements of Cash Flows Data:
Net cash from operating activities	$	50,872		$	50,111		$	131,718		$	29,452
Net cash from investing activities	$	(71,334	)	$	(71,919	)	$	(76,173	)	$	(178,238	)
Net cash from financing activities	$	4,227		$	67,605		$	(56,220	)	$	199,489
Adjusted EBITDA(3)	$	103,529		$	55,772		$	266,956		$	116,473
Net capital expenditures(4)	$	38,390		$	40,546		$	97,411		$	129,212

(1) Effective July 1, 2003, we adopted Emerging Issues Task Force (“EITF”) Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables,” and elected to apply the provisions prospectively to our existing customer arrangements. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a more detailed description of the impact of our adoption of this policy.

(2) In May 2003, the Financial Accounting Standards Board, or FASB, issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This statement establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within the scope of the statement as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. This statement was effective for all freestanding financial instruments entered into or modified after May 31, 2003; otherwise it was effective at the beginning of the first interim period beginning after June 15, 2003. We identified that our Series B mandatorily redeemable preferred stock was within the scope of this statement and reclassified it to long-term debt and began recording the Series B mandatorily redeemable preferred stock dividends as interest expense beginning July 1,

2003. We redeemed all of our outstanding Series B mandatorily redeemable preferred stock on November 21, 2003 and currently have no other preferred stock outstanding.

(3) The term “EBITDA” refers to a financial measure that is defined as earnings (loss) before interest, taxes, depreciation and amortization; we use the term “Adjusted EBITDA” to reflect that our financial measure also excludes cumulative effect of change in accounting principle, loss from disposal of assets, gain (loss) from early extinguishment of debt and stock-based compensation. Adjusted EBITDA is commonly used to analyze companies on the basis of leverage and liquidity. However, Adjusted EBITDA is not a measure determined under generally accepted accounting principles, or GAAP, in the United States of America and may not be comparable to similarly titled measures reported by other companies. Adjusted EBITDA should not be construed as a substitute for operating income or as a better measure of liquidity than cash flow from operating activities, which are determined in accordance with GAAP. We have presented Adjusted EBITDA to provide additional information with respect to our ability to meet future debt service, capital expenditure and working capital requirements. The following schedule reconciles Adjusted EBITDA to net cash from operating activities reported on our Consolidated Statements of Cash Flows, which we believe is the most directly comparable GAAP measure:

	Three Months Ended September 30						Nine Months Ended September 30
	2004			2003			2004			2003
	(in thousands)
Net cash from operating activities (as reported on Consolidated Condensed Statements of Cash Flows)	$	50,872		$	50,111		$	131,718		$	29,452
Adjustments to reconcile to Adjusted EBITDA:
Cash paid interest expense, net of capitalized amount	24,711			42,317			94,762			93,676
Interest income	(823		)	(648		)	(1,802		)	(1,930		)
Change in working capital and other	28,769			(36,008		)	42,278			(4,725		)
Adjusted EBITDA	$	103,529		$	55,772		$	266,956		$	116,473

(4) Net capital expenditures exclude capitalized interest and are offset by net proceeds from the sale and leaseback transactions of telecommunication towers and related assets to third parties accounted for as operating leases. Net capital expenditures as defined are not a measure determined under GAAP in the United States of America and may not be comparable to similarly titled measures reported by other companies. Net capital expenditures should not be construed as a substitute for capital expenditures reported on the Consolidated Condensed Statements of Cash Flows, which is determined in accordance with GAAP. We report net capital expenditures in this manner because we believe it reflects the net cash used by us for capital expenditures and to satisfy the reporting requirements for our debt covenants. The following schedule reconciles net capital expenditures to capital expenditures reported on our Consolidated Condensed Statements of Cash Flows, which we believe is the most directly comparable GAAP measure:

	Three Months Ended September 30						Nine Months Ended September 30
	2004			2003			2004			2003
	(in thousands)
Capital expenditures (as reported on Consolidated Condensed Statements of Cash Flows)	$	39,054		$	62,242		$	103,372		$	147,066
Less: cash paid portion of capitalized interest	(318		)	(352		)	(824		)	(1,028		)
Less: cash proceeds from sale and lease-back transactions accounted for as operating leases	(432		)	(142		)	(1,211		)	(6,392		)
Change in capital expenditures accrued or unpaid	86			(21,202		)	(3,926		)	(10,434		)
Net capital expenditures	$	38,390		$	40,546		$	97,411		$	129,212

Additional Reconciliations of Non-GAAP Financial Measures (Unaudited)

The information presented in this report includes financial information prepared in accordance with GAAP, as well as other financial measures that may be considered non-GAAP financial measures. Generally, a non-GAAP financial measure is a numerical measure of a company’s performance, financial position or cash flows that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with GAAP. As described more fully below, management believes these non-GAAP measures provide meaningful additional information about our performance and our ability to service our long-term debt and other fixed obligations and to fund our continued growth. The non-GAAP financial measures should be considered in addition to, but not as a substitute for, the information prepared in accordance with GAAP.

ARPU—Average Revenue Per Unit

ARPU is an industry term that measures service revenues per month from our subscribers divided by the average number of subscribers in commercial service. ARPU itself is not a measurement under GAAP in the United States and may not be similar to ARPU measures of other companies; however, ARPU uses GAAP measures as the basis for calculation. We believe that ARPU provides useful information concerning the appeal of our rate plans and service offerings and our performance in attracting high value customers. The following schedule reflects the ARPU calculation and reconciliation of service revenues reported on the Consolidated Condensed Statements of Operations to service revenues used for the ARPU calculation:

	Three Months Ended September 30						Nine Months Ended September 30
	2004			2003			2004			2003
	(in thousands, except ARPU)
ARPU (without roaming revenues)
Service revenues	$	337,152		$	260,650		$	936,646		$	687,699
Adjust: activation fees deferred and recognized for SAB No. 101	(913		)	(1,123		)	(2,937		)	73
Add: activation fees reclassed for EITF No. 00-21(1)	3,054			2,100			8,190			2,100
Less: roaming and other revenues	(43,327		)	(32,622		)	(114,993		)	(82,488		)
Service revenue for ARPU	$	295,966		$	229,005		$	826,906		$	607,384
Average units (subscribers)	1,458			1,096			1,364			1,007
ARPU	$	68		$	70		$	67		$	67

	Three Months Ended September 30						Nine Months Ended September 30
	2004			2003			2004			2003
	(in thousands, except ARPU)
ARPU (including roaming revenues)
Service revenues	$	337,152		$	260,650		$	936,646		$	687,699
Adjust: activation fees deferred and recognized for SAB No. 101	(913		)	(1,123		)	(2,937		)	73
Add: activation fees reclassed for EITF No. 00-21(1)	3,054			2,100			8,190			2,100
Less: other revenues	(588		)	—			(1,678		)	—
Service revenue for ARPU	$	338,705		$	261,627		$	940,221		$	689,872
Average units (subscribers)	1,458			1,096			1,364			1,007
ARPU	$	77		$	80		$	77		$	76

(1) On July 1, 2003, we adopted EITF Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables,” and elected to apply the provisions prospectively to our existing customer arrangements. Subsequent to that date, each month we recognize the activation fees, phone equipment revenues and equipment costs that had been previously deferred in accordance with Staff Accounting Bulletin, or SAB, No. 101. Under the provisions of SAB No. 101, “Revenue Recognition in Financial Statements,” we accounted for the sale of our phone equipment and the subsequent service to the customer as a single unit of accounting due to the fact that our wireless service is essential to the functionality of our phones. Accordingly, we recognized revenues from the phone equipment sales and an equal amount of the cost of phone equipment revenues over the expected

customer relationship period when title to the phone passed to the customer. Under EITF Issue No. 00-21, we are no longer required to consider whether a customer is able to realize utility from the phone in the absence of the undelivered service. Given that we meet the criteria stipulated in EITF Issue No. 00-21, we account for the sale of a phone as a unit of accounting separate from the subsequent service to the customer. Accordingly, we recognize revenues from phone equipment sales and the related cost of phone equipment revenues when title to the phone equipment passes to the customer for all arrangements entered into beginning in the third quarter of 2003. In December 2003, the SEC staff issued SAB No. 104, “Revenue Recognition in Financial Statements,” which updated SAB No. 101 to reflect the impact of the issuance of EITF No. 00-21.

LRS—Lifetime Revenue Per Subscriber

LRS is an industry term calculated by dividing ARPU (see above) by the subscriber churn rate. The subscriber churn rate is an indicator of subscriber retention and represents the monthly percentage of the subscriber base that disconnects from service. Subscriber churn is calculated by dividing the number of handsets disconnected from commercial service during the period by the average number of handsets in commercial service during the period. LRS itself is not a measurement determined under GAAP in the United States of America and may not be similar to LRS measures of other companies; however, LRS uses GAAP measures as the basis for calculation. We believe that LRS is an indicator of the expected lifetime revenue of our average subscriber, assuming that churn and ARPU remain constant as indicated. We also believe that this measure, like ARPU, provides useful information concerning the appeal of our rate plans and service offering and our performance in attracting and retaining high value customers. The following schedule reflects the LRS calculation:

	Three Months Ended September 30
	2004			2003
ARPU	$	68		$	70
Divided by: churn	1.4		%	1.5		%
Lifetime revenue per subscriber (LRS)	$	4,857		$	4,667

RESULTS OF OPERATIONS

Three Months Ended September 30, 2004 Compared to Three Months Ended September 30, 2003

Revenues

Total revenues increased 27% to $357.5 million for the three months ended September 30, 2004 as compared to $280.9 million generated in the same period in 2003. This growth in revenues was due mostly to the increase in our subscriber base. We expect our revenues to continue to increase as we add more subscribers and continue to introduce new products. Although we anticipate continued growth in our revenues in 2004, we have launched all of our markets and we therefore do not expect to continue to experience revenue growth rates of the same magnitude as we have experienced in the past when we were launching new markets on a continuous basis.

For the third quarter of 2004, our ARPU was $68 (or $77, including roaming revenues from Nextel), which was a decline of $2 compared to the third quarter of 2003 due mostly to growth in our government and corporate accounts, which typically have a lower ARPU, offset by an increase for our Nationwide Direct Connect service, which initially launched during third quarter 2003.

We expect to continue to achieve ARPU levels above the industry average and anticipate our ARPU to be in the mid to high $60s for the remainder of 2004. The following table illustrates service and equipment revenues as a percentage of total revenues for the three months ended September 30, 2004 and 2003 and our ARPU for those periods.

	For the Three Months Ended September 30, 2004			% of Consolidated Revenues			For the Three Months Ended September 30, 2003			% of Consolidated Revenues
Service and roaming revenues		$	337,152		94	%		$	260,650		93	%
Equipment revenues		20,390			6	%		20,264			7	%
Total revenues		$	357,542		100	%		$	280,914		100	%
ARPU(1)		$	68					$	70

(1) See “—Selected Consolidated Financial Data—Additional Reconciliations of Non-GAAP Financial Measures (Unaudited)” for more information regarding our use of ARPU as a non-GAAP financial measure.

Our primary sources of revenues are service revenues and equipment revenues. Service revenues increased 29% to $337.2 million for the three-month period ended September 30, 2004 as compared to $260.7 million for the same period in 2003. Our service revenues consist of charges to our customers for airtime usage and monthly network access fees from providing integrated wireless services within our territory, specifically digital cellular services, Direct Connect services, text messaging and Nextel Online services. Service revenues also include roaming revenues from Nextel subscribers using our portion of the Nextel Digital Wireless Network. Roaming revenues for the third quarter of 2004 accounted for approximately 13% of our service revenues and is slightly higher compared to third quarter 2003 at 12%. Although we continue to see growth in roaming revenues due to an increase in coverage and on-air cell sites, we expect roaming revenues as a percentage of our service revenues to remain flat or decline due to the anticipated revenue growth that we expect to achieve from our own customer base.

We adopted EITF Issue No. 00-21,“Accounting for Revenue Arrangements with Multiple Deliverables,” on July 1, 2003 and elected to apply the provisions prospectively to our existing customer arrangements, as described below. Under EITF Issue No. 00-21, we are no longer required to consider whether a customer is able to realize utility from the phone in the absence of the undelivered service. Given that we meet the criteria stipulated in EITF Issue No. 00-21, we account for the sale of a phone as a unit of accounting

separate from the subsequent service to the customer. Accordingly, we recognize revenues from phone equipment sales and the related cost of phone equipment revenues when title to the phone equipment passes to the customer for all arrangements entered into beginning in the third quarter of 2003. This results in the classification of amounts received for the sale of the phone equipment, including any activation fees charged to the customer, as equipment revenues at the time of the sale. For arrangements entered into prior to July 1, 2003, we continue to amortize the revenues and costs previously deferred as was required by SAB No. 101 (as amended by SAB 104 in December 2003). For a more detailed discussion of this accounting policy, please see “—Critical Accounting Policies—Revenue Recognition.”

The following table shows the reconciliation of the reported service revenues, equipment revenues and cost of equipment revenues to the adjusted amounts that exclude the effects of the adoption of EITF No. 00-21 and SAB No. 101. We believe the adjusted amounts best represent the actual service revenues and the actual subsidy on equipment costs when equipment revenues are netted with cost of equipment revenues that we use to measure our operating performance.

	Three Months Ended September 30,
	2004			2003
	(in thousands)
Revenues:
Service revenues as reported	$	337,152		$	260,650
Previously deferred activation fees recognized (SAB No. 101)	(913		)	(1,123		)
Activation fees to equipment revenues (EITF No. 00-21)	3,054			2,100
Total service revenues without SAB No. 101 and EITF No. 00-21	$	339,293		$	261,627
Equipment revenues as reported:	$	20,390		$	20,264
Previously deferred equipment revenues recognized (SAB No. 101)	(4,878		)	(6,459		)
Activation fees from service revenues (EITF No. 00-21)	(3,054		)	(2,100		)
Total equipment revenues without SAB No. 101 and EITF No. 00-21	$	12,458		$	11,705
Cost of equipment revenues as reported:	$	34,248		$	37,076
Previously deferred cost of equipment revenues recognized (SAB No. 101)	(5,791		)	(7,582		)
Total cost of equipment revenues without SAB No. 101 and EITF No. 00-21	$	28,457		$	29,494

Equipment revenues reported for the third quarter of 2004 were $20.4 million as compared to $20.3 million reported for the same period in 2003, representing a slight increase of 1%. Of the $126,000 increase from 2003 to 2004, $954,000 is for additional activation fees recorded as equipment revenues based on EITF No. 00-21 plus $753,000 due to an increase in number of gross additional subscribers, offset by recognizing $1.6 million less equipment revenues previously deferred in accordance with SAB No. 101. Our equipment revenues consist of revenues received for wireless telephones and accessories purchased by our subscribers.

Cost of Service Revenues

Cost of service revenues consists primarily of network operating costs, which include site rental fees for cell sites and switches, utilities, maintenance and interconnect and other wireline transport charges. Cost of service revenues also includes the amounts we must pay Nextel WIP when our customers roam onto Nextel’s portion of the Nextel Digital Wireless Network. These expenses depend mainly on the number of operating cell sites, total minutes of use and the mix of minutes of use between interconnect and Direct Connect. The use of Direct Connect is more efficient than interconnect and, accordingly, less costly for us to provide.

For the three months ended September 30, 2004, our cost of service revenues was $92.6 million as compared to $83.3 million for the same period in 2003, representing an increase of $9.3 million, or 11%. The increase in costs was partially the result of bringing on-air approximately 325 additional cell sites since September 30, 2003. Furthermore, our number of customers as of September 30, 2004 grew 32% since September 30, 2003, and we experienced an increase in airtime usage by our customers, both of which resulted in higher network operating costs. Compared to third quarter 2003, the average monthly minutes of use per subscriber increased by 7%, to 758 average monthly minutes of use per subscriber from 711 average monthly minutes of use per subscriber for the same period in 2003. Our roaming fees paid to Nextel also increased as our growing subscriber base roamed on Nextel’s compatible network.

We expect cost of service revenues to increase as we place more cell sites in service and the usage of minutes increases as our customer base grows. However, we expect our cost of service revenues as a percentage of service revenues and cost per average minute of use to decrease as economies of scale continue to be realized. From the third quarter of 2003 to the same period in 2004, our cost of service revenues as a percentage of service revenues declined from 32% to 27%.

Cost of Equipment Revenues

Cost of equipment revenues includes the cost of the subscriber wireless telephones and accessories sold by us. Our cost of equipment revenues for the three-month period ended September 30, 2004 was $34.2 million as compared to $37.1 million for the same period in 2003, or a decline of $2.9 million, or 8%. The decrease in costs relates mostly to recognizing $1.8 million less equipment costs that were previously deferred in accordance with SAB No. 101 and $1.1 million from volume purchase discounts applied to offset the cost of phones.

Due to the “push to talk” functionality of our handsets, the cost of our equipment tends to be higher than that of our competitors. As part of our business plan, we often offer our equipment at a discount or as part of a promotion as an incentive to our customers to commit to contracts for our higher priced service plans and to compete with the lower priced competitor handsets. The table below shows that the gross subsidy (without the effects of SAB No. 101 and EITF No. 00-21) between equipment revenues and cost of equipment revenues was a loss of $16.0 million for the three months ended September 30, 2004 as compared to a loss of $17.8 million for the same period in 2003. We expect to continue to employ these discounts and promotions in an effort to grow our subscriber base. Therefore, for the foreseeable future, we expect that cost of equipment revenues will continue to exceed our equipment revenues.

	For the Three Months Ended September 30,
	2004			2003
	(in thousands)
Equipment revenues billed	$	12,458		$	11,705
Cost of equipment revenues billed	(28,457		)	(29,494		)
Total gross subsidy for equipment	$	(15,999	)	$	(17,789	)

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist of sales and marketing expenses, expenses related to customer care services and general and administrative costs. For the three months ended September 30, 2004, selling, general and administrative expenses were $127.2 million compared to $104.8 million for the same period in 2003, representing an increase of $22.4 million, or 21%.

Sales and marketing expenses for the three months ended September 30, 2004 were $52.8 million, an increase of $7.7 million, or 17%, from third quarter 2003 due to the following:

· $1.9 million increase in advertising and media expenses as a result of general marketing campaigns along with sponsorship of NASCAR in conjunction with Nextel;

· $600,000 in facility and lease costs for the 25 new company-owned stores put in operation since September 30, 2003, for a total of 56 retail stores at September 30, 2004. We expect to have approximately 70 company-owned stores by year-end, which will result in additional start-up and operating costs for fourth quarter 2004; and

· $5.2 million increase in commissions, commission bonuses and residuals paid to account representatives and the indirect sales channel.

General and administrative costs include costs associated with customer care center operations and service and repair for customer phones along with corporate personnel including billing, collections, legal, finance, human resources and information technology. For the three months ended September 30, 2004, general and administrative costs were $74.4 million, an increase of $14.7 million, or 25%, compared to the same period in 2003 due to the following:

· $3.5 million increase due to hiring additional staff and operating expenses to support our growing customer base and related customer care activities in Las Vegas, Nevada and Panama City Beach, Florida;

· $10.6 million increase in expenses for service and repair, billing, collection and customer retention expenses to support a larger and growing customer base, offset by a $5.6 million decrease in bad debt due to improved collection activity; and

· $6.2 million increase in support of our information systems, facilities and corporate expenses.

As we continue to grow our customer base and expand our operations, we expect our sales and marketing expenses and general and administrative costs to continue to increase, but at a slower rate than our customer growth due to efficiencies we anticipate being able to implement.

Stock-Based Compensation Expense

For the three-month period ended September 30, 2004 we recorded a non-cash stock-based compensation credit of $22,000 due to forfeitures and for 2003 we recorded non-cash, stock-based compensation expense associated with our grants of restricted stock and employee stock options of approximately $259,000. Subject to our mandatory adoption of any future accounting pronouncements, we expect stock-based compensation expense to continue to decrease as the options and restricted stock continue to vest.

Depreciation and Amortization Expense

For the third quarter ended September 30, 2004, our depreciation and amortization expense was $37.3 million compared to $33.5 million for the same period in 2003, representing an increase of 11%. The $3.8 million increase in depreciation expense was due to adding approximately 325 cell sites since September 30, 2003. We also acquired furniture and equipment for our offices and 25 new company-owned stores. We expect depreciation to continue to increase due to additional cell sites we plan to place in service along with furniture and equipment for new company-owned stores and the expansion of our existing customer call center in Panama City Beach, Florida which became operational during third quarter 2004.

Interest Expense and Interest Income

Interest expense, net of capitalized interest, declined $13.9 million, or 37%, from $37.4 million for the three-month period ended September 30, 2003 to $23.5 million for the three-month period ended September 30, 2004. This decline was due mostly to our repurchase for cash of our 14% senior discount notes due 2009, 12¹/2% senior discount notes due 2009 and 11% senior notes due 2010 during that period. In addition, for our interest rate swap agreements we recorded a non-cash fair market value gain of approximately $654,000 for the third quarter of 2004 compared to approximately $1.3 million non-cash fair market value gain for the same period in 2003.

For the three months ended September 30, 2004, interest income was $823,000 compared to $648,000 for 2003. The increase is due mostly to improved rates of return.

Deferred Income Tax Provision

Because we ceased amortizing licenses for financial statement purposes on January 1, 2002 in accordance with SFAS 142, we can no longer estimate the amount, if any, of deferred tax liabilities related to our FCC licenses which will reverse during the net operating loss carry forward period. Accordingly, we adjust the valuation allowance as the deferred tax liabilities related to FCC licenses increase. During the three months ended September 30, 2004, we recorded a deferred income tax provision of $8.1 million compared to a provision of $885,000 for the three months ended September 30, 2003 relating to our FCC licenses. Our interim period tax provision (or benefit) is calculated as the estimated annual effective tax rate applied to the year-to-date income less amounts reported for previous interim periods. The increase in tax expense over the prior year is a result of the fact that we incurred losses in the second quarter, but we expect income for the year whereas we had losses in all four quarters last year.

Net Income (Loss) Attributable to Common Stockholders

For the three months ended September 30, 2004, we had a net income attributable to common stockholders of approximately $35.5 million compared to a net loss attributable to common stockholders of $22.0 million for the same period in 2003, representing an improvement of $57.5 million. With our continuing progress in increasing revenues as well as scaling our cost structure, we expect to generate net income for the fourth quarter of 2004.

Nine Months Ended September 30, 2004 Compared to Nine Months Ended September 30, 2003

Revenues

Total revenues increased 38% to $996.1 million for the nine months ended September 30, 2004 compared to $723.0 million generated in the same period in 2003. This growth was due to increased revenues from existing markets in addition to launching new markets in Augusta, Georgia during May 2003 and Burlington, Vermont during June 2003. For the nine months ended September 30, 2004 our ARPU was $67, which was the same for the nine months ended September 30, 2003.

The following table sets forth our revenues and ARPU for these periods:

	For the Nine Months Ended September 30, 2004			% of Consolidated Revenues			For the Nine Months Ended September 30, 2003			% of Consolidated Revenues
Service and roaming revenues		$	936,646		94	%		$	687,699		95	%
Equipment revenues		59,426			6	%		35,293			5	%
Total revenues		$	996,072		100	%		$	722,992		100	%
ARPU(1)		$	67					$	67

Service revenues increased 36% to $936.6 million for the nine months ended September 30, 2004 compared to $687.7 million for the nine months ended September 30, 2003. Roaming revenues for the nine months ended September 30, 2004 accounted for approximately 12% of our service revenues, which was consistent for the same period in 2003.

Because we adopted EITF No. 00-21 prospectively beginning on July 1, 2003, all previously deferred activation fees, handset revenues and related costs for the handsets deferred in accordance with SAB No. 101 will continue to be amortized over their remaining customer relationships. For a discussion of this accounting policy, please see “—Critical Accounting Policies—Revenue Recognition.”

The following table shows the reconciliation from the reported service revenues, equipment revenues and cost of equipment revenues to the adjusted amounts that exclude the adoption of EITF No. 00-21 and SAB No. 101. We believe the adjusted amounts best represent our actual service revenues and the actual subsidy on equipment costs when equipment revenues are netted with cost of equipment revenues.

	Nine Months Ended September 30,
	2004			2003
	(in thousands)
Revenues:
Service revenues as reported	$	936,646		$	687,699
Activation fees deferred (SAB No. 101)	—			3,319
Previously deferred activation fees recognized (SAB No. 101)	(2,937		)	(3,246		)
Activation fees to equipment revenues (EITF No. 00-21)	8,190			2,100
Total service revenues without SAB No. 101 and EITF No. 00-21	$	941,899		$	689,872
Equipment revenues as reported:	$	59,426		$	35,293
Equipment revenues deferred (SAB No. 101)	—			19,947
Previously deferred equipment revenues recognized (SAB No. 101)	(15,858		)	(19,334		)
Activation fees from service revenues (EITF No. 00-21)	(8,190		)	(2,100		)
Total equipment revenues without SAB No. 101 and EITF No. 00-21	$	35,378		$	33,806
Cost of equipment revenues as reported:	$	107,830		$	82,011
Cost of equipment revenues deferred (SAB No. 101)	—			23,266
Previously deferred cost of equipment revenues recognized (SAB No. 101)	(18,795		)	(22,580		)
Total cost of equipment revenues without SAB No. 101 and EITF No. 00-21	$	89,035		$	82,697

Equipment revenues for the nine months ended September 30, 2004 were $59.4 million compared to $35.3 million for the same period in 2003, representing an increase of $24.1 million, or 68%. Of the increase, $16.4 million relates to the adoption of EITF No. 00-21 and recognizing equipment revenues previously deferred in accordance with SAB No. 101, in addition to $6.1 million of activation fees reported in equipment revenues. The remaining $1.6 million increase is due to growth in the number of subscribers during the period.

Cost of Service Revenues

For the nine months ended September 30, 2004, our cost of service revenues was $262.9 million compared to $232.3 million for the same period in 2003, representing an increase of $30.6 million, or 13%. The increase in costs was primarily the result of bringing on-air approximately 325 additional cell sites since September 30, 2003, as well as an increase in airtime usage from 667 average monthly minutes of use per subscriber for the nine months ended September 30, 2003 to 739 average monthly minutes of use per subscriber for the nine months ended September 30, 2004. Increased airtime usage resulted from the 32% growth in the number of customers from September 30, 2003 along with the 11% increase in average minutes of use per subscriber per month since that time.

Cost of Equipment Revenues

Our cost of equipment revenues for the nine months ended September 30, 2004 was $107.8 million compared to $82.0 million for the same period in 2003. Of the $25.8 million increase in costs, $19.5 million was related to the adoption of EITF No. 00-21 and recognizing cost of equipment revenues previously deferred in accordance with SAB No. 101. The remaining $6.3 million increase in costs was due to the growth in number of subscribers.

Due to the “push to talk” functionality of our handsets, the cost of our equipment tends to be higher than that of our competitors. As part of our business plan, we often offer our equipment at a discount or as part of a promotion as an incentive to our customers to commit to contracts for our higher priced service plans and to compete with the lower priced competitor handsets. Therefore, we believe these amounts best represent the economics and actual cash subsidy on equipment costs. As a result, the table below shows that the gross subsidy (without the effects of SAB No. 101 and EITF No. 00-21) between equipment revenues and cost of equipment revenues was a loss of $53.7 million for the nine months ended September 30, 2004, compared to a loss of $48.9 million for the same period in 2003. We expect to continue to employ these discounts and promotions in an effort to grow our subscriber base. Therefore, for the foreseeable future, we expect that cost of equipment revenues will continue to exceed our equipment revenues.

		For the Nine Months Ended September 30,