Use these links to Financial Statementsrapidly review the document
TABLE OF CONTENTS
As filed with the Securities and Exchange Commission on July 27, 2004January 4, 2007
Registration No. 333-113865333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 5
to
FORM S-1
REGISTRATION STATEMENT
Under
UNDER
THE SECURITIES ACT OF 1933
MetroPCS Communications, Inc.METROPCS COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 4812 | 20-0836269 | ||
(State or other jurisdiction incorporation or organization) | (Primary Standard Industrial Classification Code Number) | (I.R.S. Employer Identification No.) |
8144 Walnut Hill Lane Suite 800 Dallas, Texas 75231-4388 (214) 265-2550 | Roger D. Linquist Chief Executive Officer 8144 Walnut Hill Lane Suite 800 Dallas, Texas 75231-4388 (214) 265-2550 | |
| (Address, including zip code, and telephone number, including area code, of agent for service) | (Name, address, including zip code, and telephone number, including area code, of registrant's principal executive offices) |
Copies to:
| Andrew M. Baker, Esq. William D. Howell, Esq. Baker Botts L.L.P. 2001 Ross Avenue Dallas, Texas 75201 (214) 953-6500 |
8144 Walnut Hill Lane, Suite 800
Dallas, Texas 75231
(214) 265-2550
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Roger D. Linquist
President, Chief Executive Officer,
Secretary and Chairman of the Board
8144 Walnut Hill Lane, Suite 800
Dallas, Texas 75231
(214) 265-2550
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:Marc D. Jaffe, Esq.
Rachel W. Sheridan, Esq.
| Latham & Watkins LLP
|
Approximate date of commencement of proposed sale to the public:
As soon as practicable followingafter the effectiveness of this registration statement.statement becomes effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the "Securities Act"), check the following box. ¨o
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨o
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨o
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If the delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. ¨o
CALCULATION OF REGISTRATION FEE
| Title of Each Class of Securities To Be Registered | Proposed Maximum Aggregate Offering Price(1), (2) | Amount of Registration Fee | ||
|---|---|---|---|---|
| Common Stock, par value $0.0001 per share | $1,125,000,000.00 | $120,375.00 | ||
|
|
| ||
|
The registrantRegistrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act, of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
SUBJECT TO COMPLETION, DATED JANUARY 4, 2007
The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission declares our registration statementis effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any statejurisdiction where the offer or sale is not permitted.
PROSPECTUS
SUBJECT TO COMPLETION, DATED JULY 27, 2004 Shares
PROSPECTUS
24,000,000 Shares
MetroPCS Communications, Inc.
Common Stock
This is anour initial public offering. We are offering of 24,000,000 shares of our common stock of MetroPCS Communications, Inc. No public market currently exists for any class of our capital stock. We areand the selling 12,000,000 of the shares of common stock offered under this prospectus, and certain of our stockholders referred toidentified in this prospectus as the selling stockholders, are selling the remaining 12,000,000 shares.offering an additional shares of our common stock. We will not receive any of the net proceeds from the shares soldsale of our common stock by the selling stockholders.
We currently anticipateexpect the initial public offering price offor our stock will be between $ and $ per share.
Prior to this offering, there has been no public market for our common stock. We have applied to list our common stock to be between $20.00 and $22.00 per share. Our shares have been approved for quotation on the Nasdaq National Market under the symbol “MPCS.”.
Investing in our common stock involves risks. See “Risk Factors”"Risk Factors" beginning on page 8 to read about risks that you should consider before buying shares of our common stock.14.
| Per Share | Total | |||||
|---|---|---|---|---|---|---|
| Public offering price | $ | $ | ||||
| Underwriting discounts | $ | $ | ||||
| Proceeds, before expenses, to us | $ | $ | ||||
| Proceeds to the selling stockholders | $ | $ | ||||
Neither the Securities and Exchange Commission nor any other regulatory bodystate securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
| ||||||
| ||||||
| ||||||
| ||||||
The underwriters expect to deliver the shares against payment in New York, New York on or about , 2007.
The underwriters mayhave a 30-day option to purchase up to an additional 3,600,000 shares of common stock from the selling stockholders at the initial public offering price less the underwriting discount to cover over-allotments.
The underwriters expect to deliverover-allotments, if any. We will not receive any proceeds from the shares on , 2004.
exercise of the over-allotment option.
| Bear, Stearns & Co. Inc. |
Banc of America Securities LLC |
Merrill Lynch & Co. |
UBS Investment Bank
JPMorgan
Thomas Weisel Partners LLC
Morgan Stanley |
The date of this prospectus is , 2004.2007.
You should rely only on the information contained in this prospectus.prospectus, any free writing prospectus prepared by us or the information to which we have referred you. We have not, and the underwriters have not, authorized anyone to provide you with information different from that contained in this prospectus. We are offeringinformation. This prospectus may only be used where it is legal to sell these securities and seeking offersthis prospectus is not an offer to sell or a solicitation to buy shares in any jurisdiction where an offer or sale of common stock only in jurisdictions where offers and sales are permitted.shares would be unlawful. The information contained in this prospectus isand any free writing prospectus prepared by us may be accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock.their respective dates.
i
| ||
| ||
i
This summary containshighlights selected information about us and this offering.offering contained elsewhere in this prospectus. This summary is not complete and does not contain all of the information that is important to you or that you should consider before investing in our common stock. You should read carefully read thisthe entire prospectus, including the section entitled “Risk Factors,”risk factors, financial data and our consolidated financial statements and the accompanying notes included elsewhere in this prospectus.prospectus, before making a decision about whether to invest in our common stock. In this prospectus, unless the context indicates otherwise, references to "MetroPCS," "MetroPCS Communications," "our Company," "the Company," "we," "our," "ours" and "us" refer to MetroPCS Communications, Inc., a Delaware corporation, and its wholly-owned subsidiaries.
MetroPCSCompany Overview
We are among the fastest growing wireless communications providers in the United States, measured by annual percentage growth in customers and revenue. We offer wireless voice and databroadband personal communication services, or PCS, on a no-contract,no long-term contract, flat rate, unlimited usage basis in the San Francisco, Miami, Atlanta and Sacramentoselected major metropolitan areas which includein the United States. Since we launched our innovative wireless service in 2002, we have been among the fastest growing wireless broadband PCS providers in the United States as measured by growth in subscribers and revenues during that period. We currently own or have access to, wireless licenses covering a total population of 22.6approximately 140 million people. Wein the United States, which includes 14 of the top 25 largest metropolitan areas in the country. As of September 30, 2006, we had launched service in allseven of thesethe top 25 largest metropolitan areas in the first quartercovering a licensed population of 2002, except for San Francisco, which we launched in September 2002. We reported positive net income after four quarters of operationsapproximately 36 million and one million customers after eight quarters of operations. As of March 31, 2004, we had approximately 1.152.6 million customers. We believe that we reached thesetotal subscribers, representing a 50% growth and profitability milestones significantly faster than any other U.S.rate over total subscribers as of September 30, 2005.
Our wireless carrier and that our no-contract, flat rate, unlimited usage service offering will allow us to continue to penetrate our existing markets and further drive our growth and profitability. In addition, we believe our services can be successfully introduced in new markets, and we continue to assess attractive expansion opportunities.
We provide wireless voice and data services to thetarget a mass market which we believe is largely underserved by traditional wireless carriers. Our service, branded under the “metroPCS”"MetroPCS" name, allows our customers to place unlimited wireless calls from within a local calling areaour service areas and to receive unlimited calls from any area under our simple and affordable flat monthly rate plan of $35. For an additional $5 per month, our customers may place unlimited long distance calls from within a local calling area to any number in the continental United States. For additional fees, we also provide caller ID, voicemail, text messaging, camera functions, downloads of ringtones, games and content applications, international long distance and other value-added services. Our calling plans differentiate us from the more complex plans and long-term contracts required by other wireless carriers.plans. Our customers pay for our service in advance, eliminating any customer-related credit exposure. Our flat rate service plans start as low as $30 per month. For an additional $5 to $15 per month, our customers may select a service plan that offers additional services, such as unlimited nationwide long distance service, voicemail, caller ID, call waiting, text messaging and picture and multimedia messaging. For additional fees, we also provide international long distance and text messaging, ringtones, games and content applications, unlimited directory assistance, mobile Internet browsing, ring back tones, nationwide roaming and other value-added services. As of September 30, 2006, over 80% of our customers selected either our $40 or $45 rate plan. Our flat rate plans differentiate our service from the more complex plans and long-term contract requirements of traditional wireless carriers.
We launched our service initially in 2002 in the Miami, Atlanta, Sacramento and San Francisco metropolitan areas, which we refer to as our Core Markets and which currently comprise our Core Markets segment. Our Core Markets have a licensed population of approximately 26 million, of which our networks cover approximately 22 million as of September 30, 2006. In our Core Markets we reached the one million customer credit exposure,mark after eight full quarters of operation, and as of September 30, 2006 we served approximately 2.2 million customers, representing a customer penetration of covered population of approximately 10%. We reported positive adjusted earnings before depreciation and amortization and non-cash stock-based compensation, or Core Markets segment Adjusted EBITDA, in our Core Markets segment after only four full quarters of operation. Our Core Markets segment Adjusted EBITDA for the 12 months ended December 31, 2005 was $317 million, representing a 55% increase over the comparable period in 2004, and representing 36.4% of our segment service revenue. Our Core Markets segment Adjusted EBITDA for the nine months ended September 30, 2006 was $365 million, representing a 56% increase over the comparable period in 2005 and representing 44% of our segment service revenue. For a discussion of our Core Markets segment Adjusted EBITDA, please
read "Summary Historical Financial and Operating Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations—Core Markets Performance Measures."
Beginning in the second half of 2004, we began to strategically acquire licenses in geographic areas that share certain key characteristics with our existing Core Markets. These new geographic areas, which we refer to as our Expansion Markets and which currently comprise our Expansion Markets segment, include the Tampa/Sarasota, Dallas/Ft. Worth and Detroit metropolitan areas, as well as the Los Angeles and Orlando metropolitan areas and portions of northern Florida, which were acquired by Royal Street Communications, LLC, or Royal Street, a company in which we own an 85% limited liability company member interest. We launched service in the Tampa/Sarasota metropolitan area in October 2005, in the Dallas/Ft. Worth metropolitan area in March 2006, and in the Detroit metropolitan area in April 2006. As of September 30, 2006, our networks covered approximately 14 million people and we do not requireserved approximately 442,000 customers in these Expansion Markets, representing a customer penetration of covered population of approximately 3.2%. In November 2006, we began offering our service in Orlando and portions of northern Florida, with network coverage of approximately 2 million people through our agreements with Royal Street. In the second quarter of 2007, also through our agreements with Royal Street, we expect to begin offering MetroPCS-branded services in Los Angeles, California. Together, our Core and Expansion Markets, including Los Angeles, are expected to cover a population of approximately 53 million by the end of 2008.
In November 2006, we were granted licenses covering a total unique population of 117 million which we acquired from the Federal Communications Commission, or FCC, in the spectrum auction denominated as Auction 66, for a total aggregate purchase price of approximately $1.4 billion. Approximately 69 million of the total licensed population associated with our Auction 66 licenses represents expansion opportunities in geographic areas outside of our Core and Expansion Markets, which we refer to as our Auction 66 Markets. These new expansion opportunities in our Auction 66 Markets cover six of the 25 largest metropolitan areas in the United States. Our east coast expansion opportunities cover a geographic area with a population of 50 million and include the entire east coast corridor from Philadelphia to Boston, including New York City, as well as the entire states of New York, Connecticut and Massachusetts. In the western United States, our new expansion opportunities cover a geographic area of 19 million people, including the San Diego, Portland, Seattle and Las Vegas metropolitan areas. The balance of our Auction 66 Markets, which cover a population of 48 million, supplements or expands the geographic boundaries of our existing operations in Dallas/Ft. Worth, Detroit, Los Angeles, San Francisco and Sacramento. We expect this additional spectrum to provide us with enhanced operating flexibility, lower capital expenditure requirements in existing licensed areas and an expanded service area relative to our position before our acquisition of this spectrum in Auction 66. We intend to focus our build-out strategy in our Auction 66 Markets initially on licenses covering a population of 35-45 million in major metropolitan areas where we believe we have the opportunity to achieve financial results similar to our existing Core and Expansion Markets.
For the twelve month period ended December 31, 2005, on a consolidated basis, our Adjusted EBITDA as calculated in accordance with our then existing senior secured credit facility was $294 million, cash flow from operations was $283 million and net income was $199 million. For the nine month period ended September 30, 2006, on a consolidated basis, our Adjusted EBITDA was $285 million, cash flow from operations was $285 million and net income was $71 million. Our consolidated financial results for these periods reflect the expenses we have incurred, and continue to incur, as we build-out networks, launch our service and ramp up our customer growth in our Expansion Markets. For a discussion of consolidated Adjusted EBITDA and a reconciliation to net cash provided by operating activities, please read "Summary Historical Financial and Operating Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources."
Competitive Strengths
Our business model has many competitive strengths that we believe distinguish us from our primary wireless broadband PCS competitors and will allow us to execute our business strategy successfully, including:
Our Fixed Price Unlimited Service Plans. We believe our service offering, which provides unlimited usage from within a local calling area, represents a compelling value proposition for our customers that differs from the offerings of the national wireless broadband PCS carriers and traditional wireline carriers. Our service model results in average per minute costs to our customers that are significantly lower than the average per minute costs of other traditional wireless broadband PCS carriers. We believe that many prospective customers refrain from subscribing to, or extensively utilizing, traditional wireless communications services because of high prices, long-term contract requirements, confusing calling plans and significant cash deposit requirements for credit challenged customers. Our simple, cost-effective rate plans, combined with our pay in advance no long-term contract service contract.model, allow us to attract many of these customers.
Our customersDensely Populated Markets. We believe the high relative population density of our markets results in increased efficiencies in network deployment, operations and product distribution. We believe we have one of the highest aggregate population densities of any major wireless carrier in the United States in our Core and Expansion Markets. The aggregate population density across the licensed areas we currently serve and plan to serve in our Core Markets and Expansion Markets is approximately 321 people per square mile, which is nearly four times higher than the national average of 84 people per square mile. Our high relative population density and efficient network design resulted in cumulative capital expenditures per covered person as of September 30, 2006 of approximately 1,800 minutes$42.00, which we believe enhances our overall return on capital. The opportunities on which we plan to focus initially in our Auction 66 Markets will have population density characteristics similar to our Core and Expansion Markets.
Our Cost Leadership Position. We believe we are one of usethe lowest cost providers of wireless broadband PCS services in the United States, which allows us to offer our services at affordable prices while maintaining cash profits per customer as a percentage of revenues per customer that are among the highest in the wireless industry. For the nine months ended September 30, 2006, our cost per user per month, comparedor CPU, was $19.65, which represents an average cost per minute of service on our network of approximately one cent. For the nine months ended September 30, 2006, our cost per gross addition, or CPGA, was $116.56, which we believe to be among the lowest in the industry. We believe our operating strategy, network design and rapidly increasing scale, together with the high relative population density of our markets, will continue to contribute to our cost leadership position. For a discussion of CPU and CPGA, and their respective reconciliations to cost of service and selling expenses, please read "Summary Historical Financial and Operating Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations—Reconciliation of Non-GAAP Financial Measures."
Our Spectrum Portfolio. We hold or have access to wireless licenses covering a population of approximately 675 minutes140 million in the United States. These licenses cover nine of the top 12 and 14 of the top 25 most populous metropolitan areas in the United States, including New York (#1), Los Angeles (#2), San Francisco (#4), Dallas/Ft. Worth (#5), Philadelphia (#6), Atlanta (#9), Detroit (#10), Boston (#11), Miami (#12), Seattle (#15), San Diego (#16), Tampa (#20), Sacramento (#24) and Portland (#25), as well as Las Vegas (#31).
Our Advanced CDMA 1XRTT Network. We use a 100% code division multiple access radio transmission technology known as CDMA 1XRTT. In each of our Core and Expansion Markets the network is designed to provide the capacity necessary to satisfy the usage requirements of our
customers. We believe CDMA 1XRTT technology provides us with substantially more voice and data capacity per monthMHz of spectrum than other commonly deployed wireless broadband PCS technology. We believe that the combination of our network technology, network design and spectrum depth will continue to allow us to serve efficiently the high usage demands of our rapidly growing customer base into the future.
Business Strategy
We believe the following components of our business strategy provide the foundation for customers ofour continued rapid growth:
Continue to Target Underserved Customer Segments in our Markets. We target a mass market which we believe is largely underserved by traditional wireless carriers. We believe that average monthly usage by our rapid growth to over 2.6 million customers also exceeds the average monthly usage for typical wireline customers. Average usage bysince our customers indicates that a majority of our customers use us as their primary telecommunicationsinitial service provider, and our customer survey results indicate that approximately 35% of our customers use us as their sole telecommunications service provider.
To date, our strategy has resulted in high rates of customer acceptance and strong financial performance. For the year ended December 31, 2003, we reported total revenues of $459.5 million, net cash provided by operating activities of $109.6 million and net income of $20.6 million. In 2003, our net income declined from net income of $139.1 million reportedlaunch in 2002 primarily as a result of a $279 million pre-tax gain realized ondemonstrates the sale of 10 MHz of spectrum in our Atlanta market in February 2002. As of December 31, 2003, we had $902.5 million of total assets, $236.0 million of cash and cash equivalents and $195.8 million of total debt.
Competitive Strengths
Our principal competitive strengths are:
Business Strategy
Our business strategy is to:
As a result of our business strategy, we have ranked among the leaderssubstantial demand in the U.S.United States for our innovative wireless industry in incremental market penetration in every quarter since we launched operations. Historically, approximately 42% of our gross customer additions have been first time wireless customers.services. We believe our rapid adoption rates and customer mix demonstrateindicate that our service is expanding the overall size of the wireless market and better meeting the needs of many existing wireless users. Our average monthly usage by our customers is approximately 2,000 minutes per month, and our recent customer surveys indicate that over 80% of our customers use us as their primary phone service and that over 50% of our customers have eliminated their traditional landline phone service. Approximately 65% of our customers are first time wireless users, while the balance have switched to our service from another wireless carrier.
Offer Affordable, Fixed Price Unlimited Service Plans With No Long-Term Service Contract Requirement. We plan to continue to offer our fixed price, unlimited wireless service plans, which we believe represent an attractive and differentiated offering to a large segment of the population. Our service is designed to provide mobile functionality while eliminating the gap between traditional wireless and wireline pricing. We believe this stimulates the demand for our wireless service, contributes to the continuing growth of our subscriber base and will increase the overall wireless adoption levels in our markets.
Remain One of the Lowest Cost Wireless Service Providers in the United States. We believe our operating strategy, network design and high relative population density in our markets have enabled us to become, and will enable us to continue to be, one of the lowest cost providers of wireless broadband PCS in the United States. We also believe our rapidly increasing scale shouldwill allow us to maintaincontinue to drive our cost leadership position, asper-customer operating costs down in the future. In addition, we further reduce ourwill seek to maintain operating costs per customer that are substantially below the operating costs of our national wireless broadband PCS competitors. We believe our industry leading cost position provides us and enhance profitabilitywill continue to provide us with a sustainable competitive advantage.
Expand into Attractive Markets. We have been successful in acquiring or gaining access to spectrum in a number of new metropolitan areas which share the high relative population density and customer characteristics of our Core Markets. We believe our early experience in Tampa/Sarasota, Dallas/Ft. Worth and Detroit, where, as of September 30, 2006, we have added approximately 442,000 new subscribers since the launch of service, demonstrates our ability to successfully expand our service into new metropolitan areas.
Recent Financing Transactions
On November 3, 2006, MetroPCS Wireless, Inc., or MetroPCS Wireless, our indirect wholly-owned subsidiary, entered into a senior secured credit facility pursuant to which MetroPCS Wireless may borrow up to $1.7 billion and consummated an offering of 91/4% senior notes due 2014, or the senior notes, in the future.aggregate principal amount of $1.0 billion. Prior to the closing of our senior secured credit facility and the sale of senior notes, we owed an aggregate of $900 million under MetroPCS Wireless'
first and second lien secured credit agreements, $1.25 billion under an exchangeable secured bridge credit facility entered into by one of our indirect wholly-owned subsidiaries and $250 million under an exchangeable unsecured bridge credit facility entered into by another of our indirect wholly-owned subsidiaries. The funds borrowed under the bridge credit facilities were used primarily to pay the aggregate purchase price of approximately $1.4 billion for the licenses, which we acquired in Auction 66. We expect that attractive expansion opportunities will become available,borrowed $1.6 billion under our senior secured credit facility concurrently with the closing of the sale of the senior notes and used the amount borrowed, together with the net proceeds from the sale of the senior notes, to repay all amounts owed under our existing first and second lien secured credit agreements and our bridge credit facilities and to pay related premiums, fees and expenses, and we plan to target new markets that complement our existing footprint or can be operated as a standalone cluster with growth and profitability characteristics similar to our existing markets. Consistent with this strategy, on July 8, 2004, we agreed to pay $43.5 million in cash to acquire two 10MHz PCS licenseswill use the remaining amounts for areas in Tampa and Sarasota, Florida, with a total population of approximately 3.3 million people. These markets have similar characteristics to our existing markets and are geographically contiguous to our existing operations in southwest Florida.
The OfferingCorporate Information
|
|
|
|
Capital stock to be outstanding after this offering:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The number of shares of capital stock to be outstanding upon consummation of this offering:
MetroPCS Communications, Inc., a Delaware corporation, was incorporated on March 10, 2004, and is the holding company parent of MetroPCS, Inc., a Delaware corporation. MetroPCS, Inc. was incorporated on June 24, 1994. We operate principally through two subsidiaries and hold PCS licenses in 15 subsidiaries. Our principal executive offices are located at 8144 Walnut Hill Lane, Suite 800, Dallas, Texas 75231 and our telephone number at that address is (214) 265-2550. Our principal website URL is located at www.metropcs.com. The information oncontained in, or that can be accessed through, our website is not a part of this prospectus.
"MetroPCS," "metroPCS," "MetroPCS Wireless" and the MetroPCS logo are registered trademarks of MetroPCS. In addition, the following are trademarks or service marks of MetroPCS: Permission to Speak Freely; Text Talk; Freedom Package; Talk All I Want, All Over Town; Metrobucks; Wireless Is Now Minuteless; Get Off the Clock; My Metro; @Metro; Picture Talk; MiniMetro; GreetMeTones; and Travel Talk. This prospectus also contains brand names, trademarks and service marks of other companies and organizations, and these brand names, trademarks and service marks are the property of their respective owners.
Common stock offered by MetroPCS | shares | |
Common stock offered by the selling stockholders | shares | |
Common stock to be outstanding after this offering | shares | |
Use of proceeds | We estimate that the net proceeds to us from this offering after expenses will be approximately $ million, assuming an initial public offering price of $ per share, the midpoint of the range set forth on the cover page of this prospectus. We intend to use the net proceeds from this offering primarily to build-out our network and launch our services in certain of our recently acquired Auction 66 Markets as well as for general corporate purposes. See "Use of Proceeds." | |
We will not receive any proceeds from the sale of shares of common stock by the selling stockholders. | ||
Proposed symbol | ||
Risk Factors | See "Risk Factors" beginning on page 14 for a discussion of some of the factors you should consider carefully before deciding to invest in our common stock. |
The number of shares of our common stock outstanding after this offering is based on shares of common stock outstanding as of , 200 , and excludes shares of common stock issuable upon the exercise of stock options outstanding as of , 200 , shares of common stock issuable upon exercise of stock options granted effective as of the consummation of this offering and shares of common stock available for issuance upon exercise of stock options not yet granted under our equity compensation plans.
Summary Consolidated Financial and Other DataSUMMARY HISTORICAL FINANCIAL AND OPERATING DATA
The following table setstables set forth summaryselected consolidated financial and other data offor MetroPCS Communications, Inc. at March 31, 2004,and its wholly-owned and majority-owned subsidiaries for the years ended December 31, 2001, 2002, 2003, 2004 and 2003 and2005, for the threenine months ended March 31, 2003September 30, 2005 and 2004.2006 and as of September 30, 2006. We derived our summary consolidatedhistorical financial data for each of the three years in the period ended December 31, 20032004 and 2005 from the audited consolidated financial statements included elsewhere in this prospectus.of MetroPCS, which were audited by Deloitte & Touche LLP. We derived our summary consolidatedhistorical financial data at March 31, 2004as of and for the threeyears ended December 31, 2002 and 2003 from our consolidated financial statements, which were audited by PricewaterhouseCoopers LLP. We derived our summary historical financial data as of September 30, 2006 and for the nine months ended March 31, 2003September 30, 2005 and 20042006 from our unaudited condensed consolidated interim financial statements included elsewhere in this prospectus. You should read the summary consolidatedhistorical financial and otheroperating data in conjunction with “Capitalization,” “Selected Consolidated Financial and Other Data,” “Management’s"Capitalization," "Management's Discussion and Analysis of Financial Condition and Results of Operations”Operations" and the"Risk Factors" and our audited consolidated financial statements, including the notes thereto, contained elsewhere in this prospectus. The summary historical financial and operating data presented in this prospectus may not be indicative of future performance.
| | Year Ended December 31, | Nine Months Ended September 30, | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2003 | 2004 | 2005 | 2005 | 2006 | |||||||||||||||
| | (in thousands, except per share data) | ||||||||||||||||||||
| Statement of Operations Data: | |||||||||||||||||||||
| Revenues: | |||||||||||||||||||||
| Service revenues | $ | 102,293 | $ | 369,851 | $ | 616,401 | $ | 872,100 | $ | 631,209 | $ | 916,179 | |||||||||
| Equipment revenues | 27,048 | 81,258 | 131,849 | 166,328 | 118,990 | 177,592 | |||||||||||||||
| Total revenues | 129,341 | 451,109 | 748,250 | 1,038,428 | 750,199 | 1,093,771 | |||||||||||||||
| Operating expenses: | |||||||||||||||||||||
| Cost of service (excluding depreciation and amortization disclosed separately below) | 63,567 | 122,211 | 200,806 | 283,212 | 201,940 | 313,510 | |||||||||||||||
| Cost of equipment | 106,508 | 150,832 | 222,766 | 300,871 | 210,529 | 330,898 | |||||||||||||||
| Selling, general and administrative expenses (excluding depreciation and amortization disclosed separately below) | 55,161 | 94,073 | 131,510 | 162,476 | 116,206 | 171,921 | |||||||||||||||
| Depreciation and amortization | 21,472 | 42,428 | 62,201 | 87,895 | 61,895 | 96,187 | |||||||||||||||
| (Gain) loss on disposal of assets | (279,659 | ) | 392 | 3,209 | (218,203 | ) | (218,292 | ) | 10,763 | ||||||||||||
| Total operating expenses | (32,951 | ) | 409,936 | 620,492 | 616,251 | 372,278 | 923,279 | ||||||||||||||
| Income from operations | 162,292 | 41,173 | 127,758 | 422,177 | 377,921 | 170,492 | |||||||||||||||
| Other expense (income): | |||||||||||||||||||||
| Interest expense | 6,720 | 11,115 | 19,030 | 58,033 | 40,867 | 67,408 | |||||||||||||||
| Accretion of put option in majority-owned subsidiary | — | — | 8 | 252 | 187 | 564 | |||||||||||||||
| Interest and other income | (964 | ) | (996 | ) | (2,472 | ) | (8,658 | ) | (4,876 | ) | (15,106 | ) | |||||||||
| Loss (gain) on extinguishment of debt | 703 | (603 | ) | (698 | ) | 46,448 | 46,448 | (244 | ) | ||||||||||||
| Total other expense | 6,459 | 9,516 | 15,868 | 96,075 | 82,626 | 52,622 | |||||||||||||||
| Income before provision for income taxes and cumulative effect of change in accounting principle | 155,833 | 31,657 | 111,890 | 326,102 | 295,295 | 117,870 | |||||||||||||||
| Provision for income taxes | (25,528 | ) | (16,179 | ) | (47,000 | ) | (127,425 | ) | (115,460 | ) | (47,245 | ) | |||||||||
| Income before cumulative effect of change in accounting principle | 130,305 | 15,478 | 64,890 | 198,677 | 179,835 | 70,625 | |||||||||||||||
| Cumulative effect of change in accounting principle, net of tax | — | (120 | ) | — | — | — | — | ||||||||||||||
| Net income | 130,305 | 15,358 | 64,890 | 198,677 | 179,835 | 70,625 | |||||||||||||||
| Accrued dividends on Series D Preferred Stock | (10,619 | ) | (18,493 | ) | (21,006 | ) | (21,006 | ) | (15,711 | ) | (15,711 | ) | |||||||||
| Accrued dividends on Series E Preferred Stock | — | — | — | (1,019 | ) | (263 | ) | (2,244 | ) | ||||||||||||
| Accretion on Series D Preferred Stock | (473 | ) | (473 | ) | (473 | ) | (473 | ) | (355 | ) | (355 | ) | |||||||||
| Accretion on Series E Preferred Stock | — | — | — | (114 | ) | (30 | ) | (254 | ) | ||||||||||||
| Net income (loss) applicable to Common Stock | $ | 119,213 | $ | (3,608 | ) | $ | 43,411 | $ | 176,065 | $ | 163,476 | $ | 52,061 | ||||||||
| Basic net income (loss) per common share(1): | |||||||||||||||||||||
| Income (loss) before cumulative effect of change in accounting principle | $ | 2.16 | $ | (0.10 | ) | $ | 0.55 | $ | 2.12 | $ | 2.02 | $ | 0.57 | ||||||||
| Cumulative effect of change in accounting principle, net of tax | — | (0.00 | ) | — | — | — | — | ||||||||||||||
| Basic net income (loss) per common share | $ | 2.16 | $ | (0.10 | ) | $ | 0.55 | $ | 2.12 | $ | 2.02 | $ | 0.57 | ||||||||
| Diluted net income (loss) per common share(1): | |||||||||||||||||||||
| Income (loss) before cumulative effect of change in accounting principle | $ | 1.56 | $ | (0.10 | ) | $ | 0.46 | $ | 1.87 | $ | 1.74 | $ | 0.56 | ||||||||
| Cumulative effect of change in accounting principle, net of tax | — | (0.00 | ) | — | — | — | — | ||||||||||||||
| Diluted net income (loss) per common share | $ | 1.56 | $ | (0.10 | ) | $ | 0.46 | $ | 1.87 | $ | 1.74 | $ | 0.56 | ||||||||
| Weighted average shares(1): | |||||||||||||||||||||
| Basic | 36,236,434 | 36,443,962 | 42,240,684 | 45,117,465 | 43,517,417 | 51,890,687 | |||||||||||||||
| Diluted | 50,072,699 | 36,443,962 | 50,211,229 | 51,203,530 | 50,417,637 | 53,158,789 | |||||||||||||||
| | Year Ended December 31, | Nine Months Ended September 30, | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2003 | 2004 | 2005 | 2005 | 2006 | |||||||||||||
| | (dollars, customers and POPs in thousands) | ||||||||||||||||||
| Other Financial Data: | |||||||||||||||||||
| Net cash (used in) provided by operating activities | $ | (50,672 | ) | $ | 112,605 | $ | 150,379 | $ | 283,216 | $ | 247,015 | $ | 284,688 | ||||||
| Net cash used in investment activities | (88,311 | ) | (306,868 | ) | (190,881 | ) | (905,228 | ) | (789,109 | ) | (489,255 | ) | |||||||
| Net cash provided by (used in) financing activities | 157,039 | 201,951 | (5,433 | ) | 712,244 | 564,777 | 208,123 | ||||||||||||
Consolidated Operating Data: | |||||||||||||||||||
| Licensed POPs (at period end)(2) | 22,584 | 22,584 | 28,430 | 64,222 | 41,247 | 65,346 | |||||||||||||
| Covered POPs (at period end)(2) | 16,964 | 17,662 | 21,083 | 23,908 | 21,168 | 35,980 | |||||||||||||
| Customers (at period end) | 513 | 977 | 1,399 | 1,925 | 1,740 | 2,616 | |||||||||||||
| Adjusted EBITDA (Deficit)(3) | $ | (94,376 | ) | $ | 89,566 | $ | 203,597 | $ | 294,465 | $ | 224,826 | $ | 285,192 | ||||||
| Adjusted EBITDA as a percentage of service revenues(4) | NM | 24.2 | % | 33.0 | % | 33.8 | % | 35.6 | % | 31.1 | % | ||||||||
| Capital Expenditures | $ | 227,350 | $ | 117,731 | $ | 250,830 | $ | 266,499 | $ | 204,450 | $ | 453,864 | |||||||
Core Markets Operating Data(5): | |||||||||||||||||||
| Licensed POPs (at period end)(2) | 22,584 | 22,584 | 24,686 | 25,433 | 25,320 | 25,769 | |||||||||||||
| Covered POPs (at period end)(2) | 16,964 | 17,662 | 21,083 | 21,263 | 21,168 | 22,194 | |||||||||||||
| Customers (at period end) | 513 | 977 | 1,399 | 1,872 | 1,740 | 2,174 | |||||||||||||
| Adjusted EBITDA (Deficit)(6) | $ | (94,376 | ) | $ | 89,566 | $ | 203,597 | $ | 316,555 | $ | 233,491 | $ | 364,585 | ||||||
| Adjusted EBITDA as a percentage of service revenues(4) | NM | 24.2 | % | 33.0 | % | 36.4 | % | 37.0 | % | 43.9 | % | ||||||||
| Capital Expenditures | $ | 227,350 | $ | 117,731 | $ | 250,830 | $ | 171,783 | $ | 157,153 | $ | 187,922 | |||||||
Expansion Markets Operating Data(5): | |||||||||||||||||||
| Licensed POPs (at period end)(2) | — | — | 3,744 | 38,789 | 15,927 | 39,577 | |||||||||||||
| Covered POPs (at period end)(2) | — | — | — | 2,645 | — | 13,786 | |||||||||||||
| Customers (at period end) | — | — | — | 53 | — | 442 | |||||||||||||
| Adjusted EBITDA (Deficit)(6) | — | — | — | $ | (22,090 | ) | $ | (8,665 | ) | $ | (79,393 | ) | |||||||
| Capital Expenditures | — | — | — | $ | 90,871 | $ | 44,893 | $ | 256,531 | ||||||||||
| | Year Ended December 31, | Nine Months Ended September 30, | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2003 | 2004 | 2005 | 2005 | 2006 | |||||||||||||
| Average monthly churn(7)(8) | 4.4 | % | 4.6 | % | 4.9 | % | 5.1 | % | 5.0 | % | 4.7 | % | |||||||
| Average revenue per user (ARPU)(9)(10) | $ | 39.23 | $ | 37.49 | $ | 41.13 | $ | 42.40 | $ | 42.34 | $ | 42.91 | |||||||
| Cost per gross addition (CPGA)(8)(9)(11) | $ | 157.02 | $ | 100.46 | $ | 103.78 | $ | 102.70 | $ | 101.46 | $ | 116.56 | |||||||
| Cost per user (CPU)(9)(12) | $ | 37.68 | $ | 18.21 | $ | 18.95 | $ | 19.57 | $ | 19.15 | $ | 19.65 | |||||||
| | As of September 30, 2006 | ||||
|---|---|---|---|---|---|
| | Actual | As Adjusted(13) | |||
| | (in thousands) | ||||
| Balance Sheet Data: | |||||
| Cash, cash equivalents & short-term investments | $ | 345,811 | |||
| Property and equipment, net | 1,207,982 | ||||
| Total assets | 2,626,174 | ||||
| Long-term debt (including current maturities) | 1,102,594 | ||||
| Series D Cumulative Convertible Redeemable Participating Preferred Stock | 437,955 | ||||
| Series E Cumulative Convertible Redeemable Participating Preferred Stock | 50,294 | ||||
| Stockholders' equity | 427,689 | ||||
| | Nine Months Ended September 30, | Year Ended December 31, | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2003 | 2004 | 2005 | 2005 | 2006 | ||||||||||||||
| | (in thousands) | |||||||||||||||||||
| Calculation of Consolidated Adjusted EBITDA (Deficit): | ||||||||||||||||||||
| Net income | $ | 130,305 | $ | 15,358 | $ | 64,890 | $ | 198,677 | $ | 179,835 | $ | 70,625 | ||||||||
| Adjustments: | ||||||||||||||||||||
| Depreciation and amortization | 21,472 | 42,428 | 62,201 | 87,895 | 61,895 | 96,187 | ||||||||||||||
| (Gain) loss on disposal of assets | (279,659 | ) | 392 | 3,209 | (218,203 | ) | (218,292 | ) | 10,763 | |||||||||||
| Non-cash compensation expense(a) | 1,519 | 5,573 | 10,429 | 2,596 | 3,302 | 7,750 | ||||||||||||||
| Interest expense | 6,720 | 11,115 | 19,030 | 58,033 | 40,867 | 67,408 | ||||||||||||||
| Accretion of put option in majority-owned subsidiary(a) | — | — | 8 | 252 | 187 | 564 | ||||||||||||||
| Interest and other income | (964 | ) | (996 | ) | (2,472 | ) | (8,658 | ) | (4,876 | ) | (15,106 | ) | ||||||||
| Loss (gain) on extinguishment of debt | 703 | (603 | ) | (698 | ) | 46,448 | 46,448 | (244 | ) | |||||||||||
| Provision for income taxes | 25,528 | 16,179 | 47,000 | 127,425 | 115,460 | 47,245 | ||||||||||||||
| Cumulative effect of change in accounting principle, net of tax(a) | — | 120 | — | — | — | — | ||||||||||||||
| Consolidated Adjusted EBITDA (Deficit) | $ | (94,376 | ) | $ | 89,566 | $ | 203,597 | $ | 294,465 | $ | 224,826 | $ | 285,192 | |||||||
| | Year Ended December 31, | Nine Months Ended September 30, | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2003 | 2004 | 2005 | 2005 | 2006 | ||||||||||||||
| | (in thousands) | |||||||||||||||||||
| Reconciliation of Net Cash (Used In) Provided By Operating Activities to Consolidated Adjusted EBITDA (Deficit): | ||||||||||||||||||||
| Net cash (used in) provided by operating activities | $ | (50,672 | ) | $ | 112,605 | $ | 150,379 | $ | 283,216 | $ | 247,015 | $ | 302,638 | |||||||
| Adjustments: | ||||||||||||||||||||
| Interest expense | 6,720 | 11,115 | 19,030 | 58,033 | 40,867 | 67,408 | ||||||||||||||
| Non-cash interest expense | (2,833 | ) | (3,073 | ) | (2,889 | ) | (4,285 | ) | (3,766 | ) | (3,702 | ) | ||||||||
| Interest and other income | (964 | ) | (996 | ) | (2,472 | ) | (8,658 | ) | (4,876 | ) | (15,106 | ) | ||||||||
| Provision for uncollectible accounts receivable | (359 | ) | (110 | ) | (125 | ) | (129 | ) | 38 | (64 | ) | |||||||||
| Deferred rent expense | (2,886 | ) | (2,803 | ) | (3,466 | ) | (4,407 | ) | (3,091 | ) | (5,365 | ) | ||||||||
| Cost of abandoned cell sites | (1,449 | ) | (824 | ) | (1,021 | ) | (725 | ) | (251 | ) | (2,069 | ) | ||||||||
| Accretion of asset retirement obligation | — | (127 | ) | (253 | ) | (423 | ) | (103 | ) | (469 | ) | |||||||||
| Loss (gain) on sale of investments | — | — | (576 | ) | 190 | (49 | ) | 1,875 | ||||||||||||
| Provision for income taxes | 25,528 | 16,179 | 47,000 | 127,425 | 115,460 | 47,245 | ||||||||||||||
| Deferred income taxes | (6,616 | ) | (18,716 | ) | (44,441 | ) | (125,055 | ) | (113,580 | ) | (41,792 | ) | ||||||||
| Changes in working capital | (60,845 | ) | (23,684 | ) | 42,431 | (30,717 | ) | (52,838 | ) | (65,407 | ) | |||||||||
| Consolidated Adjusted EBITDA (Deficit) | $ | (94,376 | ) | $ | 89,566 | $ | 203,597 | $ | 294,465 | $ | 224,826 | $ | 285,192 | |||||||
customers for any month represents the sum of the number of customers on the first day of the month and the last day of the month divided by two. The following table shows the calculation of ARPU for the periods indicated:
| | Year Ended December 31, | Nine Months Ended September 30, | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2003 | 2004 | 2005 | 2005 | 2006 | ||||||||||||||
| | (in thousands, except average number of customers and ARPU) | |||||||||||||||||||
| Calculation of ARPU: | ||||||||||||||||||||
| Service revenues | $ | 102,293 | $ | 369,851 | $ | 616,401 | $ | 872,100 | $ | 631,209 | $ | 916,179 | ||||||||
| Less: | ||||||||||||||||||||
| Activation revenues | (3,018 | ) | (14,410 | ) | (7,874 | ) | (6,808 | ) | (4,988 | ) | (6,026 | ) | ||||||||
| E-911, FUSF and vendor's compensation charges | — | (6,527 | ) | (12,522 | ) | (26,221 | ) | (18,875 | ) | (29,222 | ) | |||||||||
| Net service revenues | $ | 99,275 | $ | 348,914 | $ | 596,005 | $ | 839,071 | $ | 607,346 | $ | 880,931 | ||||||||
| Divided by: Average number of customers | 210,881 | 775,605 | 1,207,521 | 1,649,208 | 1,593,848 | 2,281,261 | ||||||||||||||
| ARPU | $ | 39.23 | $ | 37.49 | $ | 41.13 | $ | 42.40 | $ | 42.34 | $ | 42.91 | ||||||||
| | Year Ended December 31, | Nine Months Ended September 30, | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2003 | 2004 | 2005 | 2005 | 2006 | ||||||||||||||
| | (in thousands, except gross customer additions and CPGA) | |||||||||||||||||||
| Calculation of CPGA: | ||||||||||||||||||||
| Selling expenses | $ | 26,228 | $ | 44,006 | $ | 52,605 | $ | 62,396 | $ | 43,863 | $ | 72,796 | ||||||||
| Less: Activation revenues | (3,018 | ) | (14,410 | ) | (7,874 | ) | (6,809 | ) | (4,988 | ) | (6,026 | ) | ||||||||
| Less: Equipment revenues | (27,048 | ) | (81,258 | ) | (131,849 | ) | (166,328 | ) | (118,990 | ) | (177,592 | ) | ||||||||
| Add: Equipment revenue not associated with new customers | 482 | 13,228 | 54,323 | 77,011 | 55,324 | 80,571 | ||||||||||||||
| Add: Cost of equipment | 106,508 | 150,832 | 222,766 | 300,871 | 210,529 | 330,898 | ||||||||||||||
| Less: Equipment costs not associated with new customers | (4,850 | ) | (22,549 | ) | (72,200 | ) | (109,803 | ) | (77,910 | ) | (108,292 | ) | ||||||||
| Gross addition expenses | $ | 98,302 | $ | 89,849 | $ | 117,771 | $ | 157,338 | $ | 107,828 | $ | 192,355 | ||||||||
| Divided by: Gross customer additions | 626,050 | 894,348 | 1,134,762 | 1,532,071 | 1,062,772 | 1,650,282 | ||||||||||||||
| CPGA | $ | 157.02 | $ | 100.46 | $ | 103.78 | $ | 102.70 | $ | 101.46 | $ | 116.56 | ||||||||
this measure differently. The following table reconciles total costs used in the calculation of CPU to cost of service, which we consider to be the most directly comparable GAAP financial measure to CPU:
| | Year Ended December 31, | Nine Months Ended September 30, | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2003 | 2004 | 2005 | 2005 | 2006 | ||||||||||||||
| | (in thousands, except average number of customers and CPU) | |||||||||||||||||||
| Calculation of CPU: | ||||||||||||||||||||
| Cost of service | $ | 63,567 | $ | 122,211 | $ | 200,806 | $ | 283,212 | $ | 201,940 | $ | 313,510 | ||||||||
| Add: General and administrative expense | 28,933 | 50,067 | 78,905 | 100,080 | 72,343 | 99,125 | ||||||||||||||
| Add: Net loss on equipment transactions unrelated to initial customer acquisition | 4,368 | 9,320 | 17,877 | 32,791 | 22,586 | 27,721 | ||||||||||||||
| Less: Non-cash compensation expense included in cost of service and general and administrative expense | (1,519 | ) | (5,573 | ) | (10,429 | ) | (2,596 | ) | (3,302 | ) | (7,750 | ) | ||||||||
| Less: E-911, FUSF and vendor's compensation revenues | — | (6,527 | ) | (12,522 | ) | (26,221 | ) | (18,875 | ) | (29,222 | ) | |||||||||
| Total costs used in the calculation of CPU | $ | 95,349 | $ | 169,498 | $ | 274,637 | $ | 387,266 | $ | 274,692 | $ | 403,384 | ||||||||
| Divided by: Average number of customers | 210,881 | 775,605 | 1,207,521 | 1,649,208 | 1,593,848 | 2,281,261 | ||||||||||||||
| CPU | $ | 37.68 | $ | 18.21 | $ | 18.95 | $ | 19.57 | $ | 19.15 | $ | 19.65 | ||||||||
| Year Ended December 31, | Three Months Ended March 31, | |||||||||||||||||||
| 2001 | 2002 | 2003 | 2003 | 2004 | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
Statement of Operations Data: | ||||||||||||||||||||
Revenues: | ||||||||||||||||||||
Service revenues | $ | — | $ | 102,137 | $ | 370,920 | $ | 75,999 | $ | 132,921 | ||||||||||
Equipment revenues | — | 23,458 | 88,562 | 23,399 | 40,077 | |||||||||||||||
Total revenues | — | 125,595 | 459,482 | 99,398 | 172,998 | |||||||||||||||
Operating expenses: | ||||||||||||||||||||
Cost of service (excluding depreciation included below) | — | 61,881 | 118,335 | 25,929 | 40,909 | |||||||||||||||
Cost of equipment | — | 100,651 | 155,084 | 44,213 | 64,047 | |||||||||||||||
Selling, general and administrative expenses (excluding non-cash compensation) | 27,963 | 55,515 | 90,556 | 18,046 | 28,916 | |||||||||||||||
Non-cash compensation | 1,455 | 1,115 | 7,379 | 241 | 3,256 | |||||||||||||||
Depreciation and amortization | 208 | 21,394 | 41,900 | 9,047 | 12,774 | |||||||||||||||
(Gain) loss on sale of assets | — | (278,956 | )(1) | 333 | 111 | 87 | ||||||||||||||
Total operating expenses | 29,626 | (38,400 | ) | 413,587 | 97,587 | 149,989 | ||||||||||||||
Income (loss) from operations | (29,626 | ) | 163,995 | 45,895 | 1,811 | 23,009 | ||||||||||||||
Other (income) expense: | ||||||||||||||||||||
Interest expense | 10,491 | 6,805 | 11,254 | 1,755 | 5,572 | |||||||||||||||
Interest income | (2,046 | ) | (964 | ) | (1,061 | ) | (140 | ) | (616 | ) | ||||||||||
(Gain) loss on extinguishment of debt | 7,109 | — | (603 | ) | — | (201 | ) | |||||||||||||
Total other expense | 15,554 | 5,841 | 9,590 | 1,615 | 4,755 | |||||||||||||||
Income (loss) before income taxes and cumulative effect of change in accounting principle | (45,180 | ) | 158,154 | 36,305 | 196 | 18,254 | ||||||||||||||
Provision for income taxes | — | (19,087 | ) | (15,665 | ) | (113 | ) | (7,417 | ) | |||||||||||
Income (loss) before cumulative effect of change in accounting principle | (45,180 | ) | 139,067 | 20,640 | 83 | 10,837 | ||||||||||||||
Cumulative effect of change in accounting, net of tax | — | — | (74 | ) | (74 | ) | — | |||||||||||||
Net income (loss) | $ | (45,180 | ) | $ | 139,067 | $ | 20,566 | $ | 9 | $ | 10,837 | |||||||||
Other Financial and Operating Data (GAAP): | ||||||||||||||||||||
Net cash provided by (used in) operating activities | $ | (32,401 | ) | $ | (64,523 | ) | $ | 109,618 | $ | (4,826 | ) | $ | 24,368 | |||||||
Net cash provided by (used in) investing activities | 24,183 | (73,494 | ) | (137,321 | ) | (26,623 | ) | (70,527 | ) | |||||||||||
Net cash provided by (used in) financing activities | 41,708 | 157,066 | 201,951 | 5,581 | (4,697 | ) | ||||||||||||||
Cash used for capital expenditures | 133,604 | 212,305 | 117,212 | 26,899 | 73,338 | |||||||||||||||
| Year Ended December 31, | Three Months Ended March 31, | |||||||||||||||||||
| 2001 | 2002 | 2003 | 2003 | 2004 | ||||||||||||||||
Other Financial and Operating Data (Non-GAAP): | ||||||||||||||||||||
Adjusted EBITDA (in thousands) (2) | $ | (27,963 | ) | $ | (92,452 | ) | $ | 95,507 | $ | 11,210 | $ | 39,126 | ||||||||
Adjusted EBITDA margin (3) | — | — | 21 | % | 11 | % | 23 | % | ||||||||||||
Covered POPs (at period end) (4) | — | 16,964,450 | 17,662,491 | 17,197,196 | 17,942,763 | |||||||||||||||
Customers (at period end) | — | 513,484 | 976,899 | 708,965 | 1,150,954 | |||||||||||||||
Average monthly churn (5) | — | 4.4 | % | 4.6 | % | 3.5 | % | 3.8 | % | |||||||||||
Average revenue per user (ARPU) (2) | — | $ | 39.17 | $ | 37.68 | $ | 39.50 | $ | 40.00 | |||||||||||
Cost per gross addition (CPGA) (2) | — | 158.50 | 99.86 | 104.97 | 96.74 | |||||||||||||||
| As of March 31, 2004 | ||||||
| Actual | As Adjusted (6) | |||||
| (In thousands) | ||||||
Balance Sheet Data: | ||||||
Cash and cash equivalents | $ | 185,109 | $ | 420,119 | ||
Property and equipment, net | 519,549 | 519,549 | ||||
Total assets | 895,220 | 1,130,230 | ||||
Total debt, net of unamortized discount | 193,102 | 193,102 | ||||
| Year Ended December 31, | Three Months Ended March 31, | |||||||||||||||||||
| 2001 | 2002 | 2003 | 2003 | 2004 | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
Calculation of Adjusted EBITDA: | ||||||||||||||||||||
Net cash provided by (used in) operating activities | $ | (32,401 | ) | $ | (64,523 | ) | $ | 109,618 | $ | (4,826 | ) | $ | 24,368 | |||||||
Interest expense, net of interest income | 8,445 | 5,841 | 10,193 | 1,615 | 4,956 | |||||||||||||||
Bad debt expense | — | (381 | ) | (991 | ) | (749 | ) | (433 | ) | |||||||||||
Accretion of asset retirement obligation | — | — | (50 | ) | (25 | ) | (79 | ) | ||||||||||||
Non-cash interest | (3,882 | ) | (3,028 | ) | (3,090 | ) | (784 | ) | (688 | ) | ||||||||||
Deferred rents | (949 | ) | (1,853 | ) | (1,160 | ) | (414 | ) | (435 | ) | ||||||||||
Cost of abandoned cell sites | — | — | (824 | ) | (477 | ) | (183 | ) | ||||||||||||
Non-deferred tax | — | 8,993 | 1,643 | — | — | |||||||||||||||
Working capital changes | 824 | (37,501 | ) | (19,832 | ) | 16,870 | 11,620 | |||||||||||||
Adjusted EBITDA | $ | (27,963 | ) | $ | (92,452 | ) | $ | 95,507 | $ | 11,210 | $ | 39,126 | ||||||||
| Year Ended December 31, | Three Months Ended March 31, | |||||||||||||||||
| 2002 | 2003 | 2003 | 2004 | |||||||||||||||
| (In thousands, except average number of customers and ARPU) | ||||||||||||||||||
Calculation of Average Revenue Per User (ARPU) | ||||||||||||||||||
Service revenues | $ | 102,137 | $ | 370,920 | $ | 75,999 | $ | 132,921 | ||||||||||
Less: | Activation revenues | (3,018 | ) | (14,410 | ) | (1,860 | ) | (3,186 | ) | |||||||||
| E-911 charges | — | (5,823 | ) | (1,166 | ) | (2,076 | ) | |||||||||||
Net service revenues | 99,119 | 350,687 | 72,973 | 127,659 | ||||||||||||||
Divided by: Average number of customers | 210,881 | 775,605 | 615,876 | 1,063,815 | ||||||||||||||
ARPU | $ | 39.17 | $ | 37.68 | $ | 39.50 | $ | 40.00 | ||||||||||
| Year Ended December 31, | Three Months Ended March 31, | |||||||||||||||||
| 2002 | 2003 | 2003 | 2004 | |||||||||||||||
| (In thousands, except gross customer additions and CPGA) | ||||||||||||||||||
Calculation of Cost Per Gross Addition (CPGA): | ||||||||||||||||||
Selling expenses | $ | 26,526 | $ | 44,076 | $ | 9,879 | $ | 12,214 | ||||||||||
Less: | Activation revenues | (3,018 | ) | (14,410 | ) | (1,860 | ) | (3,186 | ) | |||||||||
Less: | Equipment revenues | (23,458 | ) | (88,562 | ) | (23,399 | ) | (40,077 | ) | |||||||||
Plus: | Equipment revenue not associated with new customers | 578 | 17,150 | 1,035 | 16,729 | |||||||||||||
Plus: | Cost of equipment | 100,651 | 155,084 | 44,213 | 64,047 | |||||||||||||
Less: | Equipment costs not associated with new customers | (2,050 | ) | (24,030 | ) | (2,541 | ) | (21,201 | ) | |||||||||
Gross addition expenses | 99,229 | 89,308 | 27,327 | 28,526 | ||||||||||||||
Divided by: Gross customer additions | 626,050 | 894,348 | 260,320 | 294,886 | ||||||||||||||
CPGA | $ | 158.50 | $ | 99.86 | $ | 104.97 | $ | 96.74 | ||||||||||
An investment in our common stock involves a high degree of risk. You should carefully consider carefully the followingspecific risk factors andset forth below, as well as the other information set forth elsewhere in this prospectus.prospectus, before purchasing our common stock. Our business, financial condition or results of operations could be materially adversely affected by any or all of these risks. As a result, the trading price of our common stock may decline, and you might lose part or all of your investment.
Risks Related to Our Business
Our business strategy may not succeed in the long term.
A major element of our business strategy is to offer consumers a service that allows them to make unlimited local calls and, depending on the service plan selected, long distance calls, from within a local calling area and to receive unlimited calls from any area for a flat monthly rate without entering into a long-term service contract. This is a relatively new approach to marketing wireless services and it may not prove to be successful in the long term or deployable in markets we have acquired but not launched or markets we may acquire in the future. Some companies that have offered this type of service in the past have not been successful. From time to time, we evaluate our service offerings and the demands of our target customers and may amend, change, discontinue or adjust our service offerings or trial new service offerings as a result. These service offerings may not be successful or prove to be profitable.
We have a limited operating history and have launched service in a limited number of metropolitan areas. Accordingly, our recent performance to date may not be indicative of our future results.results or our performance in future markets we launch.
We began offering service in the first quarter of 2002, and we had no revenues prior tobefore that time. Consequently, we have a limited operating and financial history upon which to evaluate our financial performance, business plan execution and ability to succeed in the future. You should consider our prospects in light of the risks, expenses and difficulties we may encounter, including those frequently encountered by new companies competing in rapidly evolving and highly competitive markets. If we are unable to execute our plans and grow our business, our financial results wouldwill be adversely affected. Our business strategy involves expanding into new markets beyond our Core Markets and these markets may present competitive challenges different from those encountered in our Core Markets. Our financial performance in new geographic areas, including our Expansion Markets and Auction 66 Markets, may not be as positive as our Core Markets.
We face intense competition from other wireless and wireline communications providers, which could adversely affect our operating results and hinder our ability to grow.
We compete directly in each of our markets with (i) other facilities-based wireless providers, such as Verizon Wireless, Cingular Wireless, Sprint Nextel, and T-Mobile, (ii) non-facilities based mobile virtual network operators, or MVNOs, such as Virgin Mobile USA, Amp'd Mobile and Boost, (iii) incumbent local exchange carriers, such as AT&T, Verizon and BellSouth, as a mobile alternative to traditional landline service and (iv) competitive local exchange carriers or Voice-Over-Internet-Protocol, or VoIP, service providers, such as Vonage, Time Warner, Comcast, McLeod USA, Clearwire and XO Communications, as a mobile alternative to wired service. Also, certain mobile satellite providers recently have received authority to offer ancillary terrestrial service. Many major cable television service providers also have indicated their intention to offer suites of service, including wireless service, often referred to as the "Quadruple Play," and are actively pursuing the acquisition of spectrum or leasing access to spectrum to implement those plans. Many of our current and prospective competitors are, or are affiliated with, major companies that have substantially greater financial,
technical, personnel and marketing resources than we have (including spectrum holdings, brands and intellectual property) and larger market share than we have, which may affect our ability to compete successfully. These competitors often have greater name and brand recognition and established relationships with a larger base of current and potential customers and, accordingly, we may not be able to compete successfully. In some markets, we also compete with local or regional carriers, some of whom have or may develop unlimited fixed-rate service plans similar to ours.
We expect that increased competition will result in more competitive pricing, slower growth and increased churn of our customer base. Our ability to compete will depend, in part, on our ability to anticipate and respond to various competitive factors and to keep our costs low. The competitive pressures of the wireless telecommunications industry have caused, and may continue to cause, other carriers to offer service plans with increasingly large bundles of minutes of use at increasingly lower prices and rate plans with unlimited nights and weekends. These competitive plans could adversely affect our ability to maintain our pricing and market penetration and maintain and grow our customer base.
We may face additional competition from new entrants in the wireless marketplace, many of whom may have significantly more resources than we do.
Certain new entrants with significant financial resources participated in Auction 66 and were designated as the high bidder on spectrum rights in geographic areas served by us. For example, a coalition of major cable companies acquired 20 MHz of spectrum in many of the metropolitan areas where we operate or will be operating. In addition, other carriers who offer unlimited fixed-rate service plans similar to ours acquired spectrum which overlaps some of the metropolitan areas we serve or plan to serve. These licenses could be used to provide services directly competitive with our services.
The auction and licensing of new spectrum, including the spectrum recently auctioned by the FCC in Auction 66, may result in new competitors and/or allow existing competitors to acquire additional spectrum, which could allow them to offer services that we may not technologically or cost effectively be able to offer in our spectrum. The FCC has already designated an additional 60 MHz of spectrum in the 700 MHz band which may be used to offer services competitive with the services we offer or plan to offer. Furthermore, the FCC may pursue policies designed to make available additional spectrum for the provision of wireless services in each of our metropolitan areas, which may increase the number of wireless competitors and enhance the ability of our wireless competitors to offer additional plans and services that we may be unable to successfully compete against.
Some of our competitors have technological or operating capabilities that we may not be able to successfully compete with in our existing markets or any new markets we may launch.
Some of the carriers we compete against provide wireless services using cellular frequencies in the 800 MHz band. These frequencies enjoy propagation advantages over the PCS frequencies we use, which may cause us to have to spend more capital than our competitors in certain areas to cover the same area. In addition, the FCC may auction additional spectrum in the 700 MHz band which will have similar characteristics to the cellular frequencies. Many of the wireless carriers against which we compete have service area footprints substantially larger than our footprint. In addition, certain of our competitors are able to offer their customers roaming services over larger geographic areas and at rates lower than the rates we can offer. Our ability to replicate these roaming service offerings at rates which will make us, or allow us to be, competitive is uncertain at this time.
Certain carriers we compete against, or may compete against in the future, are multi-faceted telecommunications service providers which, in addition to providing wireless services, are affiliated with companies that provide local wireline, long distance, satellite television, Internet, media, content, cable television and/or other services. These carriers are capable of bundling their wireless services with
other telecommunications services and other services in a package of services that we may not be able to duplicate at competitive prices.
We also compete with companies that use other communications technologies, including paging and digital two-way paging, enhanced specialized mobile radio and domestic and global mobile satellite service. These technologies may have certain advantages over the technology we use and may ultimately be more attractive to our existing and potential customers. We may compete in the future with companies that offer new technologies and market other services that we do not offer or may not be able to offer. Some of our competitors do or may offer these other services together with their wireless communications service, which may make their services more attractive to customers. Energy companies and utility companies are also expanding their services to offer communications services.
In addition, we compete with companies that take advantage of the unlicensed spectrum that the FCC is increasingly allocating for use. Certain technical standards are being prepared, including Worldwide Interoperability for Microwave Access, or Wi-Max, which may allow carriers to offer services competitive with ours in the unlicensed spectrum. The users of this unlicensed spectrum do not have the exclusive use of licensed spectrum, but they also are not subject to the same regulatory requirements that we are and, therefore, may have certain advantages over us.
We may face increased competition from other unlimited fixed rate plan competitors in our existing and new markets.
We currently overlap with Leap Wireless and Sure West Wireless, who are unlimited flat rate plan wireless carriers providing service in the Sacramento, Modesto and Merced, California basic trading areas. In Auction 66, the FCC auctioned 90 MHz of spectrum in each geographic area of the United States including the areas in which we currently hold licenses. At least one other unlimited fixed rate plan wireless carrier has been announced as the high bidder in Auction 66 in some of the same geographic areas in which we currently hold licenses or in which we were granted licenses as a result of Auction 66. Another fixed rate unlimited carrier may choose to begin service in the same geographic areas in which we currently offer service or plan to offer service, and such competition may reduce our growth, increase our churn, and cause us to incur additional costs to acquire customers, which may adversely affect our financial performance in the future. In addition, in the Auction 66 Markets in which we overlap with another unlimited fixed rate plan wireless carrier, we may not be able to launch our service first. As a result, we may experience lower growth in such areas, may experience higher churn, and may incur higher costs to acquire customers which may materially and adversely affect our financial performance in the future.
A patent infringement suit has been filed against us by Leap Wireless International, Inc., which could have a material adverse effect on our business or results of operations.
On June 14, 2006, Leap Wireless International, Inc. and Cricket Communications, Inc., or collectively Leap, filed suit against us in the United States District Court for the Eastern District of Texas, Marshall Division, Civil Action No. 2-06CV-240-TJW and amended on June 16, 2006, for infringement of U.S. Patent No. 6,813,497"Method for Providing Wireless Communication Services and Network and System for Delivering of Same," or the '497 Patent, issued to Leap. The complaint seeks both injunctive relief and monetary damages for our alleged infringement and alleged continued infringement of such patent.
If Leap is successful in its claim for injunctive relief, we could be enjoined from operating our business in the manner we operate currently, which could require us to redesign our current networks, to expend additional capital to change certain of our technologies and operating practices, or could prevent us from offering some or all of our services using some or all of our existing systems. In addition, if Leap is successful in its claim for monetary damage, we could be forced to pay Leap
substantial damages for past infringement and/or ongoing royalties on a portion of our revenues, which could materially adversely impact our financial performance. If Leap prevails in its action, it could have a material adverse effect on our business, financial condition and results of operations. Moreover, the actions may consume valuable management time, may be very costly to defend and may distract management attention away from our business.
The Department of Justice has informally requested information regarding our use of the PCS spectrum we acquired in the Dallas/Ft. Worth and Detroit Expansion Markets.
We acquired the PCS spectrum for the Dallas/Ft. Worth and Detroit Expansion Markets in connection with a consent decree entered into between Cingular Wireless, AT&T Wireless, and the United States Department of Justice, or the DOJ. When we acquired the spectrum, we had certain expectations which were communicated to the DOJ about how we would use the spectrum, including expectations about constructing a combined 1XRTT/EV-DO network on the spectrum capable of supporting data services. Although we have constructed a combined 1XRTT/EV-DO network in those markets, we expected to be able to support our services as demand increased by upgrading the networks to EV-DO Revision A with VoIP when available. Based upon our discussions at the time with our network vendor, we anticipated that these upgrades would be available in 2006.
As a result of a delay in the availability of EV-DO Revision A with VoIP, we recently contacted the DOJ to inform them that we had determined that it was necessary for us to redeploy the EV-DO network assets at certain cell sites in those markets to 1XRTT in order to serve our existing customers. The DOJ responded with an informal letter expressing concern over our use of the spectrum and requesting certain information regarding our construction of our network facilities in these markets, our use of EV-DO, and the services we are providing in the Dallas/Ft. Worth and Detroit Expansion Markets. We have responded to the initial DOJ request and subsequent follow-up requests. We cannot predict at this time whether the DOJ will pursue this matter any further and, if they do, what the outcome may be.
If we experience a higher rate of customer turnover than we have forecasted, our costs could increase and our revenues could decline, which would reduce our profits and could reduce the trading price of our common stock.profits.
Our average monthly rate of customer turnover, or churn, for the three monthsnine month period ended JuneSeptember 30, 20042006 was approximately 5.2%, an increase over our average monthly churn rate for the three months ended March 31, 2004 of 3.8%4.7%. A higher rate of churn wouldcould reduce our revenues and increase our marketing costs to attract the replacement customers required to sustain our business plan, which wouldcould reduce our profit margin and could reduce the trading price ofmargin. In addition, we may not be able to replace customers who leave our common stock. Many wireless service providers have historically experienced a high rate of customer turnover.profitably or at all. Our rate of customer turnoverchurn may be affected by several factors, including the following:
Unlike many of our competitors, we do not require our customers to enter into long-term service contracts. As a result, our customers retainhave the rightability to cancel their service at any time without penalty, and we therefore expect our churn rate to be higher than other wireless carriers. In addition, customers could elect to switch to another carrier that has service offerings based on newer network technology. We cannot assure you that our strategies to address customer churn will be successful. If we experience a high rate of wireless customer churn, seek to prevent significant customer churn, or fail to replace lost customers, our revenues could decline and our costs could increase which could have a material adverse effect on our business, financial condition and operating results.
We may not have access to all the funding necessary to build and operate our Auction 66 Markets.
Additionally, asThe proceeds from the sale of November 24, 2003, FCC rules require all wireless carriersthe senior notes and our borrowings under our senior secured credit facility did not include the funds necessary to provide for wireless number portability for their customersconstruct, launch and operate our Auction 66 Markets. In addition to the proceeds from this offering, we will need to generate significant excess free cash flow from our operations in our Core and Expansion Markets in order to construct and operate the Auction 66 Markets in the top 100 metropolitan statistical areas.near term or at all. If we are unable to fund the build-out of our Auction 66 Markets with the proceeds from this offering and excess internally generated cash flows, we may be forced to seek additional debt financing or delay our construction. The covenants under our senior secured credit facility and the indenture covering the notes may prevent us from incurring additional debt to fund the construction and operation of the Auction 66 Markets, or may prevent us from securing such funds on suitable terms or in accordance with our preferred construction timetable. Accordingly, we may be required to continue to pay interest on the secured debt and the senior notes for our Auction 66 Market licenses without the ability to generate any revenue from our Auction 66 Markets.
We may not achieve the customer penetration levels in our Core and Expansion Markets that we currently believe are possible with our business model.
Our ability to achieve the customer penetration levels that we currently believe are possible with our business model in our Core and Expansion Markets is subject to a number of risks, including:
If we are unable to achieve the aggregate levels of customer penetration that we currently believe are possible with our business model in our Core and Expansion Markets, our ability to continue to
grow our customer base and revenues at the rates we currently expect may be limited. Any failure to achieve the penetration levels we currently believe are possible may have a material adverse impact on our future financial results and operations. Furthermore, any inability to increase our overall level of market penetration in our Core and Expansion Markets could adversely impact the market price of our stock.
We may be subject to claims of infringement regarding telecommunications technologies that are protected by patents and other intellectual property rights.
Telecommunications technologies are protected by a wide array of patents and other intellectual property rights. As a result, third parties may assert infringement claims against us from time to time based on our general business operations, the equipment, software or services we use or provide, or the specific operation of our wireless networks. We generally have indemnification agreements with the manufacturers, licensors and suppliers who provide us with the equipment, software and technology that we use in our business to protect us against possible infringement claims, but we cannot guarantee that we will be fully protected against all losses associated with an infringement claim. Moreover, we may be subject to claims that products, software and services provided by different vendors which we combine to offer our services may infringe the rights of third parties and we may not have any indemnification protection from our vendors for these claims. Further, we have been and may be subject to further claims that certain business processes we use may infringe the rights of third parties, and we may have no indemnification rights from any of our vendors or suppliers. Whether or not an infringement claim is valid or successful, it could adversely affect our business by diverting management's attention, involving us in costly and time-consuming litigation, requiring us to enter into royalty or licensing agreements (which may not be available on acceptable terms, or at all), require us to pay royalties for prior periods, or requiring us to redesign our business operations, processes or systems to avoid claims of infringement. If a claim is found to be valid or if we cannot successfully negotiate a required royalty or license agreement, it could disrupt our business, prevent us from offering certain services and cause us to incur losses of customers or revenues, any or all of which could be material.
The wireless industry is experiencing rapid technological change, and we may lose customers if we fail to keep up with these changes.
The wireless telecommunications industry is experiencing significant technological change. Our continued success will depend, in part, on our ability to anticipate or adapt to technological changes and to offer, on a timely basis, services that meet customer demands. We cannot assure you that we will obtain access to new technology on a timely basis, on satisfactory terms, or that we will have adequate spectrum to offer new services or implement new technologies. This could have a material adverse effect on our business, financial condition and operating results. For us to keep pace with these technological changes and remain competitive, we must continue to make significant capital expenditures to our networks and to acquire additional spectrum. Customer acceptance of the services that we offer will continually be affected by technology-based differences in our product and service offerings and those offered by our competitors.
The wireless telecommunications industry has been, and we believe will continue to be, characterized by several trends, including the following:
We expect competition to intensify as a result of new competitors, allocation of additional spectrum and relaxation of existing policies, and the development of new technologies, products and services. For instance, we currently do not offer certain of the high speed data applications offered by our competitors. In addition, push-to-talk has become popular as it allows subscribers to save time on dialing or connecting to a network and some of the companies that compete with us in our wireless markets offer push-to-talk. We do not offer our customers a push-to-talk service. As demand for this service continues to grow, and if we do not offer these technologies, we may have difficulty attracting and retaining subscribers, which will have an adverse effect on our business. In addition, other service providers have announced plans to develop a Wi-Fi or Wi-Max enabled handset. Such a handset would permit subscribers to communicate using voice and data services with their handset using VoIP technology in any area equipped with a wireless Internet connection, or hot spot, potentially allowing more carriers to offer larger bundles of minutes while retaining low prices and the ability to offer attractive roaming rates. The number of hot spots in the U.S. is growing rapidly, with some major cities and urban areas being covered entirely. The availability of VoIP or another alternative technology to our competitor's subscribers could increase their ability to offer competing rate plans, which would have an adverse effect on our ability to attract and retain customers.
We and Royal Street may incur significant costs in our build-out and launch of new markets and we may incur operating losses in those markets for an undetermined period of time.
We and Royal Street have invested and expect to continue to invest a significant amount of capital to build systems that will adequately cover our Expansion Markets, and we and Royal Street will incur operating losses in each of these markets for an undetermined period of time. We also anticipate having to spend and invest a significant amount of capital to build systems and operate networks in the Auction 66 Markets.
Our and Royal Street's network capacities in our existing and new markets may be insufficient to meet customer demand or to offer new services that our competitors may be able to offer.
We and Royal Street have licenses for only 10 MHz of spectrum in certain of our markets, which is significantly less than most of the wireless carriers with whom we and Royal Street compete. This limited spectrum may require Royal Street and us to secure more cell sites to provide equivalent service (including data services based on EV-DO technology) compared to Royal Street's and our competitors or to deploy more expensive network equipment, such as six-sector antennas and EV-DO Revision A with VoIP, sooner than our competitors. Royal Street's and our limited spectrum may also limit Royal Street's and our ability to support our growth plans without additional technology
improvements and/or spectrum, and may make Royal Street and us more reliant on technology advances than our competitors. There is no guarantee we and Royal Street can secure adequate tower sites or additional spectrum, or that expected technology improvements will be available to support Royal Street's and our business requirements or that the cost of such technology improvements will allow Royal Street and us to remain competitive with other carriers. Competitive carriers in these markets now havealso may take steps prior to Royal Street and us launching service to try to attract Royal Street's and our target customers. There also is no guarantee that the ability to changeoperations in the Royal Street metropolitan areas, which are based on a wholesale model, will be profitable.
Most national wireless carriers but retain their wireless telephone number. Althoughhave greater spectrum capacity than we do that can be used to date these wireless number portability rules have not resulted in substantial increases in the frequency with which customers switchsupport third generation, or 3G, and fourth generation, or 4G, services. These national wireless carriers are currently investing substantial sums of capital to deploy the necessary capital equipment to deliver 3G enhanced services. We and Royal Street have access to less spectrum than certain major competitive carriers in most of our and Royal Street's markets. Our limited spectrum may make it is too soondifficult for us and Royal Street to predict the long-term effect of these rules on customer turnover.simultaneously support our voice services and 3G/4G services. In addition, these number portability requirements are likelywe and Royal Street may have to resultinvest additional capital and/or acquire additional spectrum to support the delivery of 3G/4G services. There is no guarantee that we or Royal Street will be able to provide 3G/4G services on existing spectrum, or will have access to either the spectrum or capital, necessary to provide competitive 3G/4G services in added capital expenditures for us to makeour metropolitan areas, or that our vendors will provide the necessary system changes.
Our internal controls over revenue reporting are insufficient to detectequipment and software in a timely manner misstatements that couldmanner. Moreover, Royal Street's and our deployment of 3G/4G services requires technology improvements which may not occur in our financial statements in amounts thator may be material.too costly for Royal Street and us to compete.
We are dependent on certain network technology improvements which may not occur, or may be materially delayed.
The adequacy of our spectrum to serve our customers in markets where we have access to only 10 MHz of spectrum is dependent upon certain recent and ongoing technology improvements, such as six-sector cell site technology, EV-DO Revision A with VoIP, 4G vocoders, and intelligent antennas. We have deployed six-sector technology and, while the results have shown capacity improvements over existing three-sector cell site technology, there can be no assurance that such improvements will actually occur when such technology is more widely deployed throughout a metropolitan area. Further, there can be no assurance that (1) the additional technology improvements will be developed by our existing infrastructure provider, (2) such improvements will be delivered when needed, (3) the prices for such improvements will be cost-effective, or (4) the technology improvements will deliver our projected network efficiency improvements. If projected or anticipated technology improvements are not achieved, or are not achieved in the timeframes we need such improvements, we and Royal Street may not have adequate spectrum in certain metropolitan areas, which may limit our ability to grow our customer base, may inhibit our ability to achieve additional economies of scale, may limit our ability to offer new services offered by our competitors, may require us to spend considerably more capital and incur more operating expenses than our competitors with more spectrum, and may force us to purchase additional spectrum at a potentially material cost. If our network infrastructure vendor does not supply such improvements or materially delays the delivery of such improvements and other network equipment manufacturers are able to develop such technology, we may be at a material competitive disadvantage to our competitors and we may be required to change network infrastructure vendors, the cost of which could be material.
Our customers payWe may be unable to acquire additional spectrum in advance for our services. In accordance with generally accepted accounting principles, amounts received in advance are recorded on our balance sheet as deferred revenue, and are recognized as
service revenues on our statement of operations only when the services actually are rendered. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates.” Because we currently prepare service revenue calculations and reconciliationsoffer unlimited calling services for a fixed fee, our customers tend, on average, to use our services more than the customers of deferred revenue balances manually, the process is inherently subject to error. This issue may become more significant as our business expands and our product offering becomes more complex.
In July 2003, during the preparation of quarterly financial statements, management notedother wireless carriers. We believe that the balanceaverage amount of use our customers generate may continue to rise. We intend to meet this demand by utilizing
spectrum-efficient state-of-the-art technologies, such as six sector cell site technology, EV-DO Revision A with VoIP, 4G vocoders and intelligent antennas. Nevertheless, in the deferred revenue accounts relativefuture we may need to acquire additional spectrum in order to maintain our grade of service revenues had fluctuated from periodand to period in an inconsistent manner. Management called this inconsistency tomeet increasing customer demands. However, we cannot be sure that additional spectrum will be made available by the attention of our auditors. In August 2003, management and our auditors noted that the reconciliation of deferred revenue did not include all the appropriate accounts receivable and deferred revenue accounts, and was not preparedFCC for commercial uses on a timely basis. In September 2003, management concludedbasis or that we were understaffedwill be able to acquire additional spectrum at a reasonable cost. For example, there have been recent calls for reallocating spectrum previously slated for commercial mobile uses to public safety uses in order to enable first responders to establish an interoperable nationwide broadband network. If the additional spectrum is unavailable when needed or unavailable at a reasonable cost, we could lose customers or revenues, which could be material, and our revenue accounting functionability to grow our customer base may be materially adversely affected.
Substantially all of our network infrastructure equipment is manufactured or provided by a single infrastructure vendor and any failure by that vendor could result in a material adverse effect on us.
We have entered into a general purchase agreement with an initial term of three years, effective as of June 6, 2005, with Lucent Technologies, Inc., or Lucent, now known as Alcatel Lucent, as our network infrastructure supplier of PCS CDMA system products and services, including without limitation, wireless base stations, switches, power, cable and transmission equipment and services. The agreement does not cover the spectrum we didrecently acquired in Auction 66. The agreement provides for both exclusive and non-exclusive pricing for PCS CDMA products and the agreement may be renewed at our option on an annual basis for three additional years after its initial three-year term concludes. Substantially all of our PCS network infrastructure equipment is manufactured or provided by Alcatel Lucent. A substantial portion of the equipment manufactured or provided by Alcatel Lucent is proprietary, which means that equipment and software from other manufacturers may not have personnelwork with Alcatel Lucent's equipment and software, or may require the appropriate experienceexpenditure of additional capital, which may be material. If Alcatel Lucent ceases to develop new products or support existing equipment and software, we may be required to properly account for activity resulting from the billing system.
In October 2003, in connection with the reviewspend significant amounts of our interim financial statements, our auditors issued a lettermoney to us describing these deficiencies. In February 2004, in connection with the audit of our financial statements for the year ended December 31, 2003, our auditors identified the lack of automation in the revenue reporting process as a “material weakness” in our internal controls over revenue reporting. The Public Company Accounting Oversight Board has defined material weakness as “a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.” This means that there is a risk that a material misstatement in the deferred revenue accountsreplace such equipment and the related service revenue accounts in our financial statements for a future period is reasonably possible.
To address revenue reporting, management made significant changes to the manual service revenue calculations and deferred revenue reconciliation processes to insure proper revenue reporting and a more timely and complete monthly reconciliation of accounts receivable balances provided by our billing system to the corresponding balances in our general ledger and the related deferred revenue accounts. To further enhance our internal controls, subsequent to December 31, 2003, we have added a Vice President–Controller and a Director of Revenue Accounting, each of whom has several years of relevant experience with revenue and billing systems in the telecommunications industry. We have also hired a senior accounting professional whose focus is to insure that we are effectively utilizing all of the functions available in our billing system, expand the related reporting capabilities, and continue to enhance and further automate our processes related to revenue accounting.
Management believes, and our auditors have advised us based on their review of our financial statements for the three months ended March 31, 2004, that the material weakness still exists due to the lack of automation in this area. Moreover, our auditors have advised us that they willsoftware, may not be able to confirmoffer new products or service, and may not be able to compete effectively in our markets. If we fail to continue purchasing our PCS CDMA products exclusively from Alcatel Lucent, we may have to pay certain liquidated damages based on the difference in prices between exclusive and non-exclusive prices, which may be material to us.
Our network infrastructure vendor has merged, which could have a material adverse effect on us.
Lucent announced on April 2, 2006 that it had entered into a definitive merger agreement with Alcatel, and the shareholders of each company approved the merger. Alcatel and Lucent announced on November 30, 2006 the completion of the merger and the companies began doing business on December 1, 2006 as "Alcatel Lucent." There can be no assurance that the combined entity will continue to produce and support the products and services that we currently purchase from Alcatel Lucent. In addition, the combined entity may delay or cease developing or supplying products or services necessary to our business. If Alcatel Lucent or the combined company delays or ceases to produce products or services necessary to our business and we are unable to secure replacement products and services on reasonable terms and conditions, our business could be materially adversely affected.
Our network infrastructure vendor may change where it manufactures equipment necessary for our network which could have a material weakness has been fully remediated until they complete an auditadverse effect on us.
As a result of its ongoing operations, Alcatel Lucent may move the manufacturing of some of its products from its existing facilities in one country to another manufacturing facility located in another country and that process may accelerate with the completion of its merger. To the extent that products are manufactured outside the current facilities, we may experience delays in receiving products from
Alcatel Lucent and the quality of the products we receive may suffer. These delays and quality problems could cause us to experience problems in increasing capacity of our financial statements. We expectexisting systems, expanding our next auditservice areas, and the construction of new markets. If these delays or quality problems occur, they could have a material adverse effect on our ability to meet our business plan and our business operations and finances may be completedmaterially adversely affected.
No equipment or handsets are currently available for the AWS spectrum and such equipment or handsets may not be developed in March 2005. If wea timely manner.
The advanced wireless services, or AWS, spectrum requires modified or new equipment and handsets which are not ablecurrently available. We do not manufacture or develop our own equipment or handsets and are dependent on third party manufacturers to remediate this weakness,design, develop and manufacture such equipment. If equipment or handsets are not available when we need them, we may not be able to prevent or detect a material misstatementdevelop the Auction 66 Markets. We may, therefore, be forced to pay interest on our indebtedness which we used to fund the purchase of the licenses in Auction 66, without realizing any revenues from our financial statements.
Auction 66 Markets.
Our inabilityIf we are unable to manage our planned growth effectively, our costs could increase our costs and adversely affect our level of service.service could be adversely affected.
We have experienced rapid growth and development in a relatively short period of time and expect to continue to experience substantial growth in the future. The management of suchrapid growth will require, among other things, continued development of our financial and management controls and management information systems. Historically, we have failed to adequately implement financial controls and management systems. We publicly acknowledged deficiencies in our financial reporting as early as August 2004, and controls and systems designed to address these deficiencies are not yet fully implemented. The costs of implementing these controls and systems will affect the near-term financial results of the business and the lack of these controls and systems may materially adversely affect our ability to access the capital markets.
Our expected growth also will require stringent control of costs, diligent management of our network infrastructure and itsour growth, increased capital requirements, increased costs associated with marketing activities, the ability to attract and retain qualified management, technical and sales personnel and the training and management of new personnel. Our growth will challenge the capacity and abilities of existing employees and future employees at all levels of our business. Failure to successfully manage our expected growth and development could have a material adverse effect on our business, increase our costs and adversely affect our level of service. Additionally, the costs of acquiring new customers could adversely affect our near-term profitability
adversely. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”
The wireless industry is experiencing rapid technological change, and we may lose customers if we fail to keep up with these changes.
The wireless communications industry is experiencing significant technological change, as evidenced by the ongoing improvements in the capacity and quality of digital technology, the development and commercial acceptance of advanced wireless data services, shorter development cycles for new products and enhancements and changes in end-user requirements and preferences. We may lose customers if we fail to keep up with these changes.
profitability.
We have identified material weaknesses in our internal control over financial reporting in the past. We will incur significant time and expense enhancing, documenting, testing and certifying our internal control over financial reporting and our business may be adversely affected if we have other material weaknesses or significant deficiencies in our internal control over financial reporting in the future.
In connection with the preparation of our quarterly financial statements for the three months ended June 30, 2004, we determined that previously disclosed financial statements for the three months ended March 31, 2004 understated service revenues and net income. Additionally, in connection with their evaluation of our disclosure controls and procedures with respect to the filing in May 2006 of our Annual Report on Form 10-K for the year ended December 31, 2004, our chief executive officer and chief financial officer concluded that certain material weaknesses in our internal controls over financial reporting existed as of December 31, 2004. The material weaknesses related to deficiencies in our information technology and accounting control environments, insufficient "tone at the top," deficiencies in our accounting for income taxes, and a lack of automation in our revenue reporting process. In
connection with their review of our material weaknesses, our management and audit committee concluded that our previously reported consolidated financial statements for the years ended December 31, 2002 and 2003 should be restated to correct accounting errors resulting from these material weaknesses.
We have identified, developed and implemented a number of measures to strengthen our internal control over financial reporting and address the material weaknesses that we identified. Although, there were no reported material weaknesses in our internal controls over financial reporting as of December 31, 2005, our management did identify a significant deficiency relating to the accrual of equipment and services in one of our markets. There can be no assurance that we will not have significant deficiencies in the future or that such conditions will not rise to the level of a material weakness. The existence of one or more material weaknesses or significant deficiencies could result in errors in our financial statements or delays in the filing of our periodic reports required by the SEC. Any failure by us to timely file our periodic reports could result in a breach of the indenture covering the senior notes and our secured credit facility, potentially accelerating payment under both agreements. We may not have the ability to pay, or borrow any amounts necessary to pay, any accelerated payment due under the secured credit facility or the indenture covering the senior notes. We may also incur substantial costs and resources to rectify any internal control deficiencies.
As a public company we will incur significant legal, accounting, insurance and other expenses. The Sarbanes-Oxley Act of 2002, as well as compliance with other SEC and exchange listing rules, will increase our legal and financial compliance costs and make some activities more time-consuming and costly. Furthermore, once we become a public company, SEC rules require that our chief executive officer and chief financial officer periodically certify the existence and effectiveness of our internal control over financial reporting. Our independent registered public accounting firm will be required, beginning with our Annual Report on Form 10-K for our fiscal year ending on December 31, 2008, to attest to our assessment of our internal control over financial reporting.
During the course of our testing, we may identify deficiencies that would have to be remediated to satisfy the SEC rules for certification of our internal control over financial reporting. As a consequence, we may have to disclose in periodic reports we file with the SEC significant deficiencies or material weaknesses in our system of internal controls. The existence of a material weakness would preclude management from concluding that our internal control over financial reporting is effective, and would preclude our independent auditors from issuing an unqualified opinion that our internal control over financial reporting is effective. If we cannot produce reliable financial reports, we may be in breach of the indenture covering the senior notes and our secured credit facility, potentially accelerating payment under both agreements. In addition, disclosures of this type in our SEC reports could cause investors to lose confidence in our financial reporting and may negatively affect the trading price of our common stock. Moreover, effective internal controls are dependentnecessary to produce reliable financial reports and to prevent fraud. If we have deficiencies in our disclosure controls and procedures or internal control over financial reporting it may negatively impact our business, results of operations and reputation.
Because we may have issued stock options and shares of common stock in violation of federal and state securities laws and some of our stockholders and optionholders may have a right of rescission, we intend to make a rescission offer to certain holders of shares of our common stock and options to purchase shares of our common stock.
Certain options to purchase our common stock granted since January 2004 and certain shares issued upon exercise of options granted during this period may not have been exempt from the registration and qualification requirements under Rule 701 under the Securities Act of 1933 or under the securities laws of various states. As a result, the holders of options and shares acquired from us in violation of federal and state securities laws may have a right to require us to repurchase those securities.
In order to address these issues, we intend to make a rescission offer to the holders of options to purchase 655,055 shares of our common stock as soon as practicable after the completion of our initial public offering. We will be making this offer to approximately 524 of our current and former officers and employees. If the rescission offer is accepted by all persons to whom it is made, we could be required to make aggregate payments of up to approximately $2.6 million. This amount reflects a purchase price equal to the price paid by the holder for each share of common stock that is the subject of the rescission offer and a purchase price equal to 20% of the aggregate exercise price for each option that is the subject of the rescission offer. It is possible that an optionholder could argue that the purchase price for the options does not represent an adequate remedy for the issuance of the option in violation of applicable securities laws, and a court may find that we are required to pay a greater amount for the options.
There can be no assurance that the SEC or state regulatory bodies will not take the position that any rescission offers should extend to all holders of options or stock acquired upon exercise of options granted during the relevant periods. However, the Securities Act of 1933 does not provide that a rescission offer will extinguish a holder's right to rescind the grant of an option or the issuance of shares that were not registered or exempt from the registration requirements under the Securities Act of 1933. Consequently, should any recipients of our rescission offer reject the offer, expressly or impliedly, we may remain liable under the Securities Act of 1933 for the purchase price of the options and shares that are subject to the rescission offer.
We failed to register our stock options under the Securities and Exchange Act of 1934 and, as a result, we may face potential claims under federal and state securities laws.
As of December 31, 2005, options granted under our 1995 option plan and our 2004 equity incentive plan were held by more than 500 holders. As a result, we were required to file a registration statement registering the stock options pursuant to Section 12(g) of the Securities Exchange Act of 1934 no later than April 30, 2006. We failed to file a registration statement within the required time period.
If we had filed a registration statement pursuant to Section 12(g) as required, we would have become subject to the periodic reporting requirements of Section 13 of the Securities Exchange Act of 1934 upon the effectiveness of that registration statement. We have not filed any periodic reports, including quarterly reports on Form 10-Q and periodic reports on Form 8-K during the period since April 30, 2006, which is the latest date upon which we were required to file a registration statement.
Our failure to file required periodic reports could give rise to potential claims by present or former stockholders based on the theory that such holders were harmed by the absence of such public reports. If any such claim is asserted, we could incur significant expenses and divert management's attention in defending them.
A significant portion of our revenue is derived from geographic areas susceptible to natural and other disasters.
Our markets in California, Texas and Florida contribute a substantial amount of revenue, operating cash flows, and net income to our operations. These same states, however, have a history of natural disasters which may adversely affect our operations in those states. The severity and frequency of certain of these natural disasters, such as hurricanes, are projected to increase over the next several years. In addition, the major metropolitan areas in which we operate, or plan to operate, could be the target of terrorist attacks. These events may cause our networks to cease operating for a substantial period of time while we reconstruct them and our competitors may be less affected by such natural disasters or terrorist attacks. If our networks cease operating for any substantial period of time, we may lose revenue and customers, and may have difficulty attracting new customers in the future, which
could materially adversely affect our operations. Although we have business interruption insurance which we believe is adequate, we cannot provide any assurance that the insurance will cover all losses we may experience as a result of a natural disaster or terrorist attack or that the insurance carrier will be solvent.
Our substantial indebtedness could adversely affect our financial health.
We have now, and will continue to have, a significant amount of debt. As of September 30, 2006, as adjusted to give effect to the repayment of our first and second lien credit agreements, the repayment of our bridge loans, the borrowing of $1.6 billion under our senior secured credit facility and the receipt of the proceeds from the sale of $1.0 billion of 91/4% senior notes due 2014, we had $2.6 billion of outstanding indebtedness under the senior secured credit facility and the senior notes. Our substantial amount of debt could have important material consequences to you. For example, it could:
In addition, a substantial portion of our debt, including borrowings under our senior secured credit facility, bears interest at variable rates. Although we have entered into a transaction to hedge some of our interest rate risk, if market interest rates increase, variable-rate debt will create higher debt service requirements, which could adversely affect our cash flow. While we have and may in the future enter into agreements limiting our exposure to higher interest rates, any such agreements may not offer complete protection from this risk and any portions not subject to such agreements would have full exposure to higher interest rates.
Despite current indebtedness levels, we will be able to incur substantially more debt. This could further exacerbate the risks associated with our customers and generate revenues could be harmed by adverse regulatory action or changes to existing laws or rules.leverage.
We may be able to incur additional debt in the future. The terms of the senior secured credit facility and the indenture governing the senior notes will allow us to incur substantial amounts of additional debt, subject to certain limitations. There are no restrictions on our or any of our future unrestricted or upstream subsidiaries' ability to incur additional indebtedness. If new debt is added to our current debt levels, the related risks we could face would be magnified.
The FCC regulatesTo service our debt, we will require a significant amount of cash, which may not be available to us.
Our ability to make payments on, or repay or refinance, our debt and to fund planned capital expenditures and operating losses associated with the licensing, construction, modification, operation, ownership, saleExpansion Markets and interconnection arrangementsthe Auction 66 Markets, will depend largely upon receipt of wireless communications systems, as do some stateproceeds from this offering and localour future operating performance. Our future performance is subject to certain general economic, financial, competitive, legislative, regulatory agencies.and other factors that are beyond our control. In addition, our ability to borrow funds in the
future to make payments on our debt will depend on the satisfaction of the covenants in our senior secured credit facility, the indenture covering the senior notes and our other debt agreements and other agreements we may enter into in the future. Specifically, we will need to maintain specified financial ratios and satisfy financial condition tests. We cannot assure you that the FCC or the state and local agencies having jurisdiction over our business will generate sufficient cash flow from operations or that future borrowings will be available to us under our senior secured credit facility or from other sources in an amount sufficient to enable us to pay interest or principal on our debt, including the senior notes, or to fund our other liquidity needs.
The terms of our debt place restrictions on certain of our subsidiaries which may limit our operating flexibility.
The indenture governing the senior notes and the senior secured credit facility impose material operating and financial restrictions on MetroPCS Wireless and certain of its subsidiaries. These restrictions, subject in certain cases to ordinary course of business and other exceptions, may limit MetroPCS Wireless' and our ability to engage in some transactions, including the following:
Under the senior secured credit facility, MetroPCS Wireless is also subject to financial maintenance covenants with respect to its senior secured leverage and in certain circumstances total maximum consolidated leverage and certain minimum fixed charge coverage ratios.
These restrictions could limit MetroPCS Wireless' and our business by imposing new costsability to obtain debt financing, repurchase stock, refinance or requiringpay principal on our outstanding debt, complete acquisitions for cash or debt or react to changes in our current or planned operations, or that the Communications Act of 1934, from which the FCC obtains its authority, will not be amended in a manner that could be adverse to us.
Our principal assets are our FCC licenses to provide personal communications services. The loss of any of these licenses could have a material adverse effect on our business. Our FCC licenses are subject to revocation if we are found not to have complied with the FCC’s rules or the Communications Act’s requirements. We also could be subject to fines and forfeitures for such non-compliance, which could affect our business adversely. For example, absent a waiver, failure to comply with the FCC’s enhanced 911, or E-911, requirements or with number portability requirements could subject us to significant penalties. In addition, because we acquired our licenses in an “entrepreneur’s block” FCC auction, our licenses are subject to additional FCC requirements, which dictate the manner in which our voting control and equity must be held during the first ten years we hold the licenses (until 2007 with respect to our current licenses), and obligate us to make quarterly installment payments to the FCC on theoperating environment. Any future debt we owe to the FCC for our licenses. Failure to comply with these requirements could result in revocation of the licenses and/or fines and forfeitures, and/or could require us to pay the outstanding debt to the FCC on an accelerated basis, any of which could have an adverse effect on our business. Finally, our current licenses expire in January 2007, and although the FCC’s rules provide for renewal, there is no guarantee that the FCC will renew all or any of our licenses. Failure to have our licenses renewed would affect our business adversely. See “Legislation and Government Regulations.”
In addition, the market value of FCC licenses has been subject to significant volatility in the past. There can be no assurance as to the market value of our FCC licenses or that the market value of FCC licenses will not be volatile in the future.
Our business strategy is relatively new and unproven and may not succeed in the long term.
A major element of our business strategy is to offer consumers a service that allows them to make unlimited local and/or long distance calls from within a local calling area, depending on the service plan selected, and receive unlimited calls from any area for a flat monthly rate without entering into a long-term service contract. This is a relatively new approach to marketing wireless services and it may not prove to be successful in the long term. From time to time, we also evaluate our service offerings and the demands of our target customers and may modify, change or adjust our service offerings or trial new service offerings as a result. We cannot assure you that these service offerings will be successful or prove to be profitable.
We face intense competition from other wireless and wireline communications providers.
We compete directly in each of our markets with other wireless providers and with wireline providers as a mobile alternative to traditional landline service. Many of our competitors have substantially greater resources and larger market share than we have, which may affect our ability to compete successfully. Additionally, many of our competitors offer larger coverage areas or nationwide calling plans that do not require additional charges for roaming, and the competitive pressures of the wireless communications industry have caused other carriers to offer service plans with increasingly large bundles of minutes of use at increasingly lower prices. These competitive plans could adversely affect our ability to maintain our pricing, market penetration and customer retention. Furthermore, the FCC may pursue policies designed to make available additional spectrum for the provision of wireless services in each of our markets, which may increase the number of wireless competitors and enhance the ability of our wireless competitors to offer additional plans and services.
We also compete with companies that use other communications technologies, including paging and digital two-way paging, enhanced specialized mobile radio and domestic and global mobile satellite service. These technologies may have advantages over the technology we use and may ultimately be more attractive to customers. We may compete in the future with companies that offer new technologies and market other services that we do not offer. Some of our competitors doincur may contain similar or may offer these other services together with their wireless communications service, which may make their services more attractive to customers. In addition, energy companies, utility companies and cable operators are expanding their services to offer communications services.
restrictive covenants.
Our success depends on our ability to attract and retain qualified management and other personnel.
Our business is managed by a small number of key executive officers. The loss of one or more of these persons could disrupt our ability to react quickly to business developments and changes in market conditions, which could reduce profits and the trading priceharm our financial results. Only one of our common stock.key executives has an employment contract, so any of our other key executive officers may leave at any time subject to forfeiture of any unpaid short-term incentive plan payment and any unvested stock options. In addition, upon any change in control, all unvested stock options will vest which may make it difficult for anyone to acquire us. We believe that our future success will also depend in large part on our continued ability to attract and retain highly qualified executive, technical and management personnel. We believe that there is and will continue to be intense competition for highly qualified management, technical and sales personnel in the personal communications services industry,is intense, and there can be no assurance that we may notwill retain our key management, technical and sales employees or that we will be successful in retaining our key personnelattracting, assimilating or in attracting and retaining other highly qualified management, technical and sales personnel in
the future sufficient to support our continued growth. We have occasionally experienced difficulty in recruiting qualified personnel and there can be no assurance that we will not experience such difficulties in the future. Our inability to attract or retain highly qualified executive, technical and management personnel. None of the members ofpersonnel could materially and adversely affect our management team is party to an employment agreement.
operations.
We rely on third partiesthird-party suppliers to provide our customers and us with equipment, software and services that are integral to our business.business, and any significant disruption in our relationship with these vendors could increase our cost and affect our operating efficiencies.
We have entered into agreements with third-party contractorssuppliers to provide equipment and software for our network and services required for our operation,operations, such as customer care and billing and payment processing. Sophisticated information and billing systems are vital to our ability to monitor and control costs, bill customers, process customer orders, provide customer service and achieve operating efficiencies. We currently rely on internal systems and third-party vendors to provide all of our information and processing systems. Some of our billing, customer service and management information systems have been developed by third-parties and may not perform as anticipated. If these suppliers experience interruptions or other problems delivering these products or services on a timely basis, it may cause us to have difficulty providing services to our customers, developing and deploying new services and/or upgrading, maintaining, or improving our networks. If alternative suppliers and vendors become necessary, we may not be able to obtain satisfactory and timely replacement services on economically attractive terms, or at all. Some of these agreements are subject to terminationmay be terminated upon relatively short notice. The loss, termination or expiration of these contracts or our inability to renew them or negotiate contracts with other providers at comparable rates could harm our business. Our reliance on others to provide essential services on our behalf also gives us less control over the efficiency, timeliness and quality of these services. In addition, our plans for developing and implementing our information and billing systems rely to some extent on the design, development and delivery of products and services by third-party vendors. Our right to use these systems is dependent on license agreements with third-party vendors. Since we rely on third-party vendors to provide some of these services, any switch or disruption by our vendors could be costly and affect operating efficiencies.
If we lose the right to install our equipment on wireless cell sites, or are unable to renew expiring leases for wireless cell sites on favorable terms or at all, our business and operating results could be adversely impacted.
Our base stations are installed on leased cell site facilities. A significant portion of these cell sites are leased from a small number of large cell site companies under master agreements governing the general terms of our use of that company's cell sites. If a master agreement with one of these cell site companies were to terminate, the cell site company were to experience severe financial difficulties or file for bankruptcy or if one of these cell site companies were unable to support our use of its cell sites, we would have to find new sites or rebuild the affected portion of our network. In addition, the concentration of our cell site leases with a limited number of cell site companies could adversely affect our operating results and financial condition if we are unable to renew our expiring leases with these cell site companies either on terms comparable to those we have today or at all.
In addition, the tower industry has continued to consolidate. If any of the companies from which we lease towers were to consolidate with other tower companies, they may have the ability to raise prices which could materially affect our profitability. If any of the cell site leasing companies with which we do business were to experience severe financial difficulties, or file for bankruptcy protection, our ability to use cell sites leased from that company could be adversely affected. If a material number of cell sites were no longer available for our use, our financial condition and operating results could be adversely affected.
We may be unable to obtain the roaming and other services we need from other carriers to remain competitive.
Many of our competitors have regional or national networks which enable them to offer automatic roaming and long distance telephone services to their subscribers at a lower cost than we can offer. We do not have a national network, and we must pay fees to other carriers who provide roaming services and who carry long distance calls made by our subscribers. We currently have roaming agreements with several other carriers which allow our customers to roam on those carriers' network. The roaming agreements, however, do not cover all geographic areas where our customers may seek service when they travel, generally cover voice but not data services, and one such agreement may be terminated on relatively short notice. In addition, we believe the rates charged by the carriers to us in some instances are higher than the rates they charge to certain other roaming partners. The FCC recently initiated a Notice of Proposed Rulemaking seeking comments on whether automatic roaming services are considered common carrier services, whether carriers have an obligation to offer automatic roaming services to other carriers, whether carriers have an obligation to provide non-voice automatic roaming services, and what rates a carrier may charge for roaming services. We are unable to predict with any certainty the likely outcome of this proceeding. The FCC previously has initiated roaming proceedings to address similar issues but repeatedly has failed to resolve these issues. Our current and future customers may desire that we offer automatic roaming services when they travel outside the areas we serve which we may be unable to obtain or provide cost effectively. If we are unable to obtain roaming agreements at reasonable rates, then we may be unable to effectively compete and may lose customers and revenues.
A recent ruling from the Copyright Office of the Library of Congress may have an adverse effect on our distribution strategy.
The Copyright Office of the Library of Congress, or the Copyright Office, recently released final rules on its triennial review of the exemptions to certain provisions of the Digital Millennium Copyright Act, or DMCA. A section of the DMCA prohibits anyone other than a copyright owner from circumventing technological measures employed to protect a copyrighted work, or access control. In addition, the DMCA provides that the Copyright Office may exempt certain activities which otherwise might be prohibited by that section of the DMCA for a period of three years when users are (or in the next three years are likely to be) adversely affected by the prohibition on their ability to make noninfringing uses of a class of copyrighted work. Many carriers, including us, routinely place software locks on wireless handsets, which prevent a customer from using a wireless handset sold by one carrier on another carrier's system. In its triennial review, the Copyright Office determined that these software locks on wireless handsets are access controls which adversely affect the ability of consumers to make noninfringing use of the software on their wireless handsets. As a result, the Copyright Office found that a person could circumvent such software locks and other firmware that enable wireless handsets to connect to a wireless telephone network when such circumvention is accomplished for the sole purpose of lawfully connecting the wireless handset to another wireless telephone network. A wireless carrier has filed suit in the United States District Court in Florida to reverse the Copyright Office's decision. This exemption is effective from November 27, 2006 through October 27, 2009 unless extended by the Copyright Office.
This ruling, if upheld, could allow our customers to use their wireless handsets on networks of other carriers. This ruling may also allow our customers who are dissatisfied with our service to utilize the services of our competitors without having to purchase a new handset. The ability of our customers to leave our service and use their wireless handsets on other carriers' networks may have an adverse material impact on our business. In addition, since we provide a subsidy for handsets to our distribution partners that is incurred in advance, we may experience higher distribution costs resulting from wireless handsets not being activated or maintained on our network, which costs may be material.
We may incur higher than anticipated intercarrier compensation costs, which could increase our costs and reduce our profit margin.
When our customers use our service to call customers of other carriers, we generally are required to pay the carrier that serves the called party.party and any intermediary or transit carrier. Similarly, when a customer of another carrier calls one of our customers, that carrier generally is required to pay us. While in most cases we generally have been successful in negotiating agreements with other carriers that limit ourestablish acceptable compensation obligations,arrangements, some carriers have claimed a right to unilaterally impose unreasonably high charges on us.us that we consider to be unreasonably high. The wireless industryFCC has soughtdetermined that certain unilateral termination charges imposed prior to April 2005 may be appropriate. We have requested clarification from the FCC that federal law prohibits such unreasonable and unilaterally imposed charges.of this order. We cannot assure you that the FCC will rule in our favor. An adverse ruling or FCC inaction could result in some carriers successfully collecting such fees from us, which could increase our costs and reduce our profit margin.
Concerns about whether mobilewireless telephones pose health and safety risks may lead to the adoption of new regulations, to lawsuits and to a decrease in demand for our services, which could increase our costs and reduce our revenues.
Media reports and some studies have suggested that and additional studies have been undertaken to determine whether, radio frequency emissions from wireless handsets may beare linked to various health concerns, including cancer, and mayor interfere with various electronic medical devices, including hearing aids and pacemakers. Additional studies have been undertaken to determine whether the suggestions from those reports and studies are accurate. In addition, lawsuits have been filed against other participants in the wireless industry alleging various adverse health consequences as a result of wireless phone usage. While many of these lawsuits have been dismissed on various grounds, including a lack of scientific evidence linking wireless handsets with such adverse health consequences, future lawsuits could be filed based on new evidence or in different jurisdictions. If any such suits do succeed, or if plaintiffs are successful in negotiating settlements, it is likely additional suits likely would be filed. Additionally, purported class action litigation has been filedcertain states have passed legislation seeking to require that all wireless telephones include an earpiece that would enable the use of wireless telephones without holding them against the user’suser's head. While it is not possible to predict the outcome of this litigation, circumstances surrounding itwhether any states in which we conduct business will pass such legislation, such legislation could increase the cost of our wireless handsets and other operating expenses.
If consumers’consumers' health concerns over radio frequency emissions increase, consumers may be discouraged from using wireless handsets, and regulators may impose restrictions or increased requirements on the location and operation of cell sites or the use or design of mobilewireless telephones. Such new restrictions or requirements could expose wireless providers to further litigation, which, even if not successful, may be costly to defend. In addition, compliance with such new requirements, and the associated costs, could adversely affect our business. The actual or perceived risk of radio frequency emissions could also adversely affect us through a reduction in customers or a reduction in the availability of financing in the future.
In addition to health concerns, safety concerns have been raised with respect to the use of wireless handsets while driving. There is a risk thatCertain states and municipalities in which we provide service or plan to provide service have passed laws prohibiting the use of wireless phones while driving or requiring the use of wireless headsets. If additional state and local governments mayin areas where we conduct business adopt
regulations restricting the use of wireless handsets while driving, whichwe could reducehave reduced demand for our services.
Our indebtednessA system failure could affect our financial health adversely.cause delays or interruptions of service, which could cause us to lose customers.
AsTo be successful, we must provide our customers reliable service. Some of March 31, 2004, we had $193.1 millionthe risks to our network and infrastructure which may prevent us from providing reliable service include:
Network disruptions may cause interruptions in service or reduced capacity for customers, either of outstanding indebtedness, which could have important consequences. For example, it could:cause us to lose customers and incur expenses. Further, our costs to replace or repair the network may be substantial, thus causing our costs to provide service to increase. We may also experience higher churn as our competitors systems may not experience similar problems.
Unauthorized use of, or interference with, our network could disrupt service and increase our costs.
We may incur costs associated with the unauthorized use of our network including administrative and capital costs associated with detecting, monitoring and reducing the incidence of fraud. Fraudulent use of our network may impact interconnection and long distance costs, capacity costs, administrative costs, fraud prevention costs and payments to other carriers for fraudulent roaming. Such increased costs could have a material adverse impact on our financial results.
Security breaches related to our physical facilities, computer networks, and informational databases may cause harm to our business and reputation and result in a loss of customers.
Our physical facilities and information systems may be vulnerable to physical break-ins, computer viruses, theft, attacks by hackers, or similar disruptive problems. If hackers gain improper access to our databases, they may be able to steal, publish, delete or modify confidential personal information concerning our subscribers. In addition, the indenture governingmisuse of our senior notes contains restrictive covenants that limitcustomer information could result in more substantial harm perpetrated by third-parties. This could damage our business and reputation and result in a loss of customers.
Risks Related to Legal and Regulatory Matters
We are dependent on our FCC licenses, and our ability to engage in activitiesprovide service to our customers and generate revenues could be harmed by adverse regulatory action or changes to existing laws or rules.
The FCC regulates most aspects of our business, including the licensing, construction, modification, operation, use, ownership, control, sale, roaming arrangements and interconnection arrangements of wireless communications systems, as do some state and local regulatory agencies. We can make no assurances that may bethe FCC or the state and local agencies having jurisdiction over our business will not adopt regulations or take other actions that would adversely affect our business by imposing new costs or requiring changes in our long-term best interest.current or planned operations, or that the Communications Act, from which the FCC obtains its authority, will not be amended in a manner materially adverse to us.
Taken together or individually, new or changed regulatory requirements affecting any or all of the wireless, local, and long distance industries may harm our business and restrict the manner in which we operate our business. The enactment of new adverse legislation, regulation or regulatory requirements may slow our growth and have a material adverse effect upon our business, results of operations and financial condition. We cannot assure you that changes in current or future regulations adopted by the FCC or state regulators, or other legislative, administrative or judicial initiatives relating to the communications industry, will not have a material adverse effect on our business, results of operations and financial condition. In addition, pending congressional legislative efforts to reform the Communications Act may cause major industry and regulatory changes that are difficult to predict.
Some of our principal assets are our FCC licenses which we use to provide our services. The loss of any of these licenses could have a material adverse effect on our business. Our FCC licenses are subject to revocation if the FCC finds we are not in compliance with its rules or the Communications Act's requirements. We also could be subject to fines and forfeitures for such non-compliance, which could adversely affect our business. For example, absent a waiver, failure to comply with those covenantsthe FCC's Enhanced-911, or E-911, requirements, privacy rules, lighting and painting regulations, employment regulations, Customer Proprietary Network Information, or CPNI, protection rules, number portability requirements, law enforcement cooperation or other existing or new regulatory mandates could subject us to significant penalties or a revocation of our FCC licenses, which could have a material adverse effect on our business, results of operations and financial condition. In addition, a failure to comply with these requirements or the FCC's construction requirements could result in revocation of the licenses and/or fines and forfeitures, any of which could have an eventadverse effect on our business.
The structure of defaultthe transaction with Royal Street creates several risks because we do not control Royal Street and do not own or control the licenses it holds.
We have agreements with Royal Street that if not cured or waived, could resultare intended to allow us to actively participate in the accelerationdevelopment of the Royal Street licenses and networks, and we have the right to acquire on a wholesale basis 85% of the services provided by the Royal Street systems and to resell these services on a retail basis under our brand in accordance with applicable laws and regulations. There are, nonetheless, risks inherent in the fact that we do not own or control Royal Street or the Royal Street licenses. C9 Wireless, LLC, or C9, an unaffiliated third party, has the ability to put all or part of its ownership interest in Royal Street to us, but, due to regulatory restrictions, we have no corresponding right to call C9's ownership interest in Royal Street. We can give no assurance that C9 will exercise its put rights or if it does, when such exercise may occur. Further, these put rights expire in June 2012. Subject to certain non-controlling investor protections in Royal Street's limited liability company agreement, C9 also has control over the operations of Royal Street because it has the right to elect three of the five members of Royal Street's management committee, which has the full power to direct the management of Royal Street. The FCC's rules also restrict our ability to acquire or control Royal Street licenses during the period that Royal Street must maintain its eligibility as a very small business
designated entity, or DE, which is currently through December 2010. Thus, we cannot be certain that the Royal Street licenses will be developed in a manner fully consistent with our business plan or that C9 will act in ways that benefit us.
Royal Street acquired certain of its PCS licenses as a DE entitled to a 25% discount. As a result, Royal Street received a bidding credit equal to approximately $94 million for its PCS licenses. If Royal Street is found to have lost its status as a DE it would be required to repay the FCC the amount of the bidding credit on a five-year straight-line basis beginning on the grant date of the license. If Royal Street were required to pay this amount, it could have a material adverse effect on us due to our non-controlling 85% limited liability company member interest in Royal Street. In addition, if Royal Street is found to have lost its status as a DE, it could lose all of the licenses only available to DEs, which includes most of its licenses in Florida. If Royal Street lost those licenses, it could have a material adverse effect on us because we would lose access to the Orlando metropolitan area and certain portions of northern Florida.
Certain recent regulatory developments pertaining to the DE program indicate that the FCC plans to be proactive in assuring that DEs abide by the FCC's control requirements. The FCC has the right to audit the compliance of DEs with FCC rules governing their operations, and there have been recent indications that it intends to exercise that authority. In addition, the Royal Street business plan may become so closely aligned with our debtsbusiness plan that there is a risk Royal Street will be deemed to have relinquished control over its licenses in violation of FCC requirements. If the FCC were to determine that Royal Street has failed to exercise the requisite control over its licenses, the result could be the loss of closed licenses, which are licenses that the FCC only offered to qualified DEs, the loss of bidding credits, which effectively lowered the purchase price for the open licenses, and fines and forfeitures, which amounts may be material.
In making the changes to the DE rules, the FCC concluded that certain relationships between a DE licensee and its investors would in the future be deemed impermissible material relationships based on a new FCC view that these relationships, by their very nature, are generally inconsistent with an applicant's or licensee's ability to achieve or maintain designated entity eligibility and inconsistent with Congress' legislative intent. The FCC cited wholesale service arrangements as an example of an impermissible material relationship, but indicated that previously approved arrangements of this nature would be allowed to continue. While the FCC has grandfathered the existing arrangements between Royal Street and us, there can be no assurance that any changes that may be required to those arrangements in the future will not cause the FCC to determine that the changes would trigger the loss of DE eligibility for Royal Street and require usthe reimbursement of the bidding credits received by Royal Street. Further, the FCC has opened an additional Notice of Further Proposed Rulemaking seeking to allocatedetermine what additional changes, if any, may be required or appropriate to its DE program. There can be no assurance that these changes will not be applied to the current arrangements between Royal Street and us. Any of these results could be materially adverse to our financial resources to repay such debts. See “Description of Certain Indebtedness.”
business.
Despite current indebtedness levels, we and our subsidiaries willWe may not be able to incur substantially more debt. This could further exacerbatecontinue to offer our services if the risks associated withFCC does not renew our leverage.licenses when they expire.
Our current PCS licenses begin to expire in January 2007. We can seek to renew our PCS licenses for additional ten-year periods by filing renewal applications with the FCC. We have commenced the preparation and filing of renewal applications for certain of our PCS licenses as the renewal application window has opened on those licenses. Renewal applications are subject to FCC review and potentially public comment to ensure that licensees meet their licensing requirements and comply with other applicable FCC mandates. If we fail to file for renewal of any particular license at the appropriate time or fail to meet any regulatory requirements for renewal, we could be denied a license renewal and, accordingly, our ability to continue to provide service in the geographic area covered by such license would be adversely affected. In addition, many of our licenses are subject to interim or final construction requirements. While we or the prior licensee have met the five-year construction
Webenchmark, there is no guarantee that the FCC will find our construction sufficient to meet the applicable construction requirement, in which case the FCC could terminate our license and our subsidiariesability to continue to provide service in that license area would be adversely affected. Further, there is no guarantee that the FCC will find our or the prior licensees' system construction to meet any ten-year build-out requirement or construction requirements for renewal. The FCC requires for renewal that a licensee provide substantial service. Additionally, while incumbent licensees may enjoy a certain renewal expectancy if they provide substantial service, there is no guarantee that the FCC will conclude that we are ableproviding substantial service, that we are entitled to incura renewal expectancy, or will renew all or any of our licenses, or that the FCC will not grant the renewal with conditions that could materially and adversely affect our business. Failure to have our licenses renewed would materially and adversely affect our business.
The value of our licenses may drop in the future as a result of volatility in the marketplace and the sale of additional spectrum by the FCC.
The market value of FCC licenses has been subject to significant volatility in the past and Congress has mandated that the FCC bring an additional substantial amount of spectrum to the market by auction in the next several years. The likely impact of these future auctions on license values is uncertain. For example, Congress has mandated that the FCC auction 60 MHz of spectrum in the 700 MHz band before mid 2008 and another 40 MHz of AWS spectrum is in the process of being assigned for wireless broadband services and is expected to be auctioned in the future by the FCC. There can be no assurance as to the market value of our FCC licenses or that the market value of our FCC licenses will not be volatile in the future. If the value of our licenses were to decline significantly, we could be forced to record non-cash impairment charges which could impact our ability to borrow additional indebtednessfunds. A significant impairment loss could have a material adverse effect on our operating income and on the carrying value of our licenses on our balance sheet.
The FCC may license additional spectrum which may not be appropriate for or available to us or which may allow new competitors to enter our markets.
The FCC periodically makes additional spectrum available for wireless use. For instance, the FCC recently allocated and auctioned an additional 90 MHz of spectrum for AWS. The AWS band plan makes some licenses available in small (Metropolitan Statistical Area (MSA) and Rural Service Area (RSA)) license areas, although the predominant amount of spectrum remains allocated on a regional basis in combinations of 10 MHz and 20 MHz spectrum blocks. This band plan favors large incumbent carriers with nationwide footprints and presented challenges for us in acquiring additional spectrum. The FCC also has allocated an additional 40 MHz of spectrum devoted to AWS. It is in the process of considering the channel assignment policies for 20 MHz of this spectrum and has indicated that it will initiate a further proceeding with regard to the remaining 20 MHz in the future. The termsFCC also is in the process of taking comments on the appropriate geographic license areas and channel blocks for an additional 60 MHz of spectrum in the 700 MHz band. Specifically, on August 10, 2006, the FCC issued a Notice of Proposed Rulemaking seeking comment on possible changes to the 700 MHz band plan, including possible changes in the service area and channel block sizes for the 60 MHz of as yet unauctioned 700 MHz spectrum. We, along with other small, regional and rural carriers, filed comments advocating changes to the current 700 MHz bandplan to create a greater number of licenses with smaller spectrum blocks and geographic area sizes. Several national wireless carriers support the current plan. In addition, one commenter advocates reassigning 30 MHz of the indenture governing700 MHz band which now is slated for commercial broadband use, to public safety use to create a nationwide, interoperable broadband network that public safety users can access on a priority basis. In September 2006, the FCC also sought comment on proposals to increase the flexibility of guard band licensees in the 700 MHz spectrum. Furthermore, in December 2006, the FCC sought comment on the possible implementation of a nationwide broadband interoperable network in the 700 MHz band allocated for public safety use,
which also could be used by commercial service providers on a secondary basis. We cannot predict the likely outcome of those proceedings or whether they will benefit or adversely affect us.
There are a series of risks associated with any new allocation of broadband spectrum by the FCC. First, there is no assurance that the spectrum made available by the FCC will be appropriate for or complementary to our senior notesbusiness plan and system requirements. Second, depending upon the quantity, nature and cost of the new spectrum, it is possible that we will not be granted any of the new spectrum and, therefore, we may have difficulty in providing new services. This could adversely affect the valuation of the licenses we already hold. Third, we may be unable to purchase additional spectrum or the prices paid for such spectrum may negatively affect our ability to be competitive in the market. Fourth, new spectrum may allow new competitors to enter our markets and impact our ability to grow our business and compete effectively in our market. Fifth, new spectrum may be sold at prices lower than we paid at past auctions or in private transactions, thus adversely affecting the value of our existing assets. Sixth, the clearing obligations for existing licensees on new spectrum may take longer or cost more than anticipated. Seventh, our competitors may be able to use this new spectrum to provide products and services that we cannot provide using our existing spectrum. Eighth, there can be no assurance that our competitors will not use certain FCC programs, such as its designated entity program, to purchase spectrum at materially lower prices than what we are required to pay. Any of these risks, if they occur, may have a material adverse effect on our business.
We are subject to numerous surcharges and fees from federal, state and local governments, and the applicability and amount of these fees is subject to great uncertainty and may prove to be material to our financial results.
Telecommunications providers pay a variety of surcharges and fees on their gross revenues from interstate and intrastate services. Interstate surcharges include federal Universal Service Fund fees and common carrier regulatory fees. In addition, state regulators and local governments impose surcharges, taxes and fees on our services and the applicability of these surcharges and fees to our services is uncertain in many cases and jurisdictions may argue as to whether we have correctly assessed and remitted those monies. The division of our services between interstate services and intrastate services is a matter of interpretation and may in the future be contested by the FCC or state authorities. In addition, periodic revisions by state and federal regulators may increase the surcharges and fees we currently pay. The Federal government and many states apply transaction-based taxes to sales of our products and services and to our purchases of telecommunications services from various carriers. It is possible that our transaction based tax liabilities could change in the future. We may or may not be able to recover some or all of those taxes from our customers and the amount of taxes may deter demand for our services.
Spectrum for which we have been granted licenses as a result of AWS Auction 66 is subject to certain legal challenges, which may ultimately result in the FCC revoking our licenses.
We have paid the full purchase price of approximately $1.4 billion to the FCC for the licenses we were granted as a result of Auction 66, even though there are ongoing uncertainties regarding some aspects of the final auction rules. In April 2006, the FCC adopted an Order relating to its DE program, or the DE Order. This Order was modified by the FCC in an Order on Reconsideration which largely upheld the revised DE rules but clarified that the FCC's revised unjust enrichment rules would only apply to licenses initially granted after April 25, 2006. Several interested parties filed an appeal in the U.S. Court of Appeals for the Third Circuit on June 7, 2006, of the DE Order. The appeal challenges the DE Order on both substantive and procedural grounds. Among other claims, the petitions contest the FCC's effort to apply the revised rules to applications for the AWS Auction 66 and seeks to overturn the results of Auction 66. We are unable at this time to predict the likely outcome of the court action. We also are unable to predict the likelihood that the litigation will result in any changes
to the DE Order or to the DE program, and, if there are changes, whether or not any such changes will be beneficial or detrimental to our interests. If the court overturns the results of Auction 66, there may be a delay in us receiving a refund of our payments. Further, the FCC may appeal any decision overturning Auction 66 and not refund any amounts paid until the appeal is final. In such instance, we may be forced to pay interest on the payments made to the FCC without receiving any interest on such payments from the FCC. If the results of Auction 66 were overturned and we receive a refund, the delay in the return of our money and the loss of any amounts spent to develop the licenses may affect our financial results and the loss of the licenses may affect our business plan. Additionally, such refund would be without interest. In the meantime we would have been obligated to pay interest to our lenders on the amounts we advanced to the FCC during the interim period and such interest amounts may be material.
We may be delayed in starting operations in the Auction 66 Markets because the incumbent licensees may have unreasonable demands for relocation or may refuse to relocate.
The spectrum allocated for AWS currently is utilized by a variety of categories of existing licensees (Broadband Radio Service, Fixed Service) as well as governmental users. The FCC rules provide that a portion of the money raised in Auction 66 will be used to reimburse the relocation costs of certain governmental users from the AWS band. However, not all governmental users are obligated to relocate. To foster the relocation of non-governmental incumbent licensees, the FCC also adopted a transition and cost sharing plan under which incumbent users can be reimbursed for relocating out of the AWS band with the costs of relocation being shared by AWS licensees benefiting from the relocation. The FCC has established rules requiring the new AWS licensee and the non-governmental incumbent user to negotiate voluntarily for up to three years before the non-governmental incumbent licensee is subject to mandatory relocation.
We are not able to determine with any certainty the costs we may incur to relocate the non-governmental incumbent licenses in the Auction 66 Markets or the time it will take to clear the AWS spectrum in those areas.
If any federal government users refuse to relocate out of the AWS band in a metropolitan area where we have been granted a license, we may be delayed or prevented from serving certain geographic areas or customers within the metropolitan area and such inability may have a material adverse effect on our financial performance, and our future prospects. In addition, if any of the incumbent users refuse to voluntarily relocate, we may be delayed in using the AWS spectrum granted to us and such delay may have a material adverse effect on our ability to serve the metropolitan areas, our financial performance, and our future prospects.
The FCC may adopt rules requiring new point-to-multipoint emergency alert capabilities that would require us to make costly investments in new network equipment and consumer handsets.
In 2004, the FCC initiated a proceeding to update and modernize its systems for distributing emergency broadcast alerts. Television stations, radio broadcasters and cable systems currently are required to maintain emergency broadcast equipment capable of retransmitting emergency messages received from a federal agency. As part of its attempts to modernize the emergency alert system, the FCC in its proceeding is addressing the feasibility of requiring wireless providers, such as us, to distribute emergency information through our wireless networks. Unlike broadcast and cable networks, however, our infrastructure and protocols—like those of all other similarly-situated wireless broadband PCS carriers—are optimized for the delivery of individual messages on a point-to-point basis, and not for delivery of messages on a point-to-multipoint basis, such as all subscribers within a defined geographic area. While multiple proposals have been discussed in the FCC proceeding, including limited proposals to use existing SMS capabilities on a short-term basis, the FCC has not yet ruled and therefore we are not able to assess the short- and long-term costs of meeting any future FCC
requirements to provide emergency and alert service, should the FCC adopt such requirements. Congress recently passed the Warning, Alert, and Response Network Act, or the Act, which was signed into law. In the Act, Congress provided for the establishment, within 60 days of enactment, of an advisory committee to provide recommendations to the FCC on, and the FCC is required to complete a proceeding to adopt, relevant technical standards, protocols, procedures and other technical requirements based on such recommendations necessary to enable alerting capability for commercial mobile radio service, or CMRS, providers that voluntarily elect to transmit emergency alerts. Under the Act, a CMRS carrier can elect not to participate in providing such alerting capability. If a CMRS carrier elects to participate, the carrier may not charge separately for the alerting capability and the CMRS carrier's liability related to or any harm resulting from the transmission of, or failure to transmit, an emergency is limited. Within a relatively short period of time after receiving the recommendations from the advisory committee, the FCC is obligated to complete its rulemaking implementing such rules. Adoption of such requirements, however, could require us to purchase new or additional equipment and may also require consumers to purchase new handsets. Until the FCC rules, we do not fully prohibitknow if it will adopt such requirements, and if it does, what their impact will be on our network and service.
FCC approval for the sale of our stock, if required, may not be forthcoming or may result in adverse conditions to the business or to the holders of our stock.
If the sale of our stock would cause a change in control of us under the Communications Act of 1934, as amended and the FCC's rules, regulations or our subsidiaries from doing so. If new debtpolicies promulgated thereunder, the prior approval of the FCC would be required prior to any such sale. There can be no assurance that, at the time the sale is added to our and our subsidiaries’ current debt levels,contemplated, the related risksFCC would grant such an approval, or that we and they now face could intensify.the FCC would grant such an approval without adverse conditions.
Risks Related to the Offering
A limited number of stockholders control us, and their interests may be different from yours.
Our certificate of incorporation and the stockholders agreement to which our current stockholders are parties provide that, upon the consummation of this offering, with respect to all matters submitted to a vote of stockholders for which a separate class vote is not required, the holders of our Class A common stock will have, collectively, votes equal to 50.1% of the aggregate voting power of all shares entitled to vote, and the holders of our common stock will have, collectively, votes equal to 49.9% of the aggregate voting power of all shares entitled to vote. In addition, the holders of Class A common stock will be entitled to a separate class vote to elect five of the nine members of our board of directors. Although we expect to petition the FCC for the ability to combine our Class A common stock and our common stock into a single class of capital stock after the consummation of this offering, we cannot assure you that the FCC will grant this request in a timely fashion or at all. See “Legislation and Government Regulations” and “Description of Capital Stock.”
Roger D. Linquist (our President, Chief Executive Officer, Secretary and Chairman of the Board) and C. Boyden Gray (a member of our board of directors) together own all outstanding shares of our Class A common stock. In addition, after consummation of this offering, our executive officers and directors and principal stockholders together will beneficially own shares representing approximately 44.3% of the voting power underlying our common stock and 73.2% of the voting power underlying all classes of our capital stock, including shares subject to options and warrants that confer beneficial ownership of the underlying shares. As a result, these controlling stockholders will have the ability to determine the composition of our board of directors and to control our future operations and strategy.
Conflicts of interest between the controlling stockholders and our public stockholders may arise with respect to sales of shares of capital stock owned by the controlling stockholders or other matters. In addition, the interests of the controlling stockholders and other existing stockholders regarding any proposed merger or sale may differ from the interests of our public stockholders, especially if the consideration to be paid for the common stock is less than the price paid by public stockholders.
This concentration of ownership could also have the effect of delaying or preventing a change in our control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which in turn could have a material and adverse effect on the market price of our common stock or prevent our stockholders from realizing a premium over the market prices for their shares. See “Principal and Selling Stockholders” for more information about the beneficial ownership of our capital stock by our executive officers, directors and principal stockholders.
There has been no prior market for our capitalcommon stock, our stock price may be volatile, and after the offering you may not be able to sell your shares at or above the offering price.
Before this offering, our common stock has not been publicly traded, and an active trading market may not develop.
Prior todevelop or be sustained after this offering, there has been no public market for any class of our capital stock. An active trading market may not develop following the closing of this offering or, if developed, may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair market value of your shares. An inactive market may also impair our ability to raise capital by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.
offering. You may not be able to seek remedies against Arthur Andersen LLP, our former independent public accountants, with respect to our financial statements that were auditedsell your shares at or above the offering price, which has been determined by Arthur Andersen LLP.
In February 2002, we appointed PricewaterhouseCoopers LLP to serve as our independent registered public accounting firm for fiscal year 2001 after previously dismissing Arthur Andersen LLP. On June 15, 2002, Arthur Andersen LLP was convictednegotiations between representatives of federal obstruction of justice arising from the government’s investigation of Enron Corp.,underwriters and subsequently ceased operations. Arthur Andersen LLP had audited our financial statements for
the fiscal years ended December 31, 1999 and 2000. Financial statements for those periods have not been reviewed by our current independent registered public accounting firm. Purchasers of our common stock may have no effective remedy against Arthur Andersen LLP in connection with any material misstatement or omission in those financial statements.
We do not intend to pay dividends in the foreseeable future.
We have never declared or paid any cash dividends on our common stock. For the foreseeable future, we intend to retain any earnings to finance the development and expansion of our business, and we do not anticipate paying any cash dividends on our common stock. Payment of any future dividends onus. The price at which our common stock will depend upon our earnings and capital requirements, the terms of our debt instruments and any preferred stock and other factors our board of directors considers appropriate. In addition, because we are a holding company, we depend on the cash flows of our subsidiaries to pay any potential dividends. The ability of our subsidiaries to distribute funds to us is and will be restricted by the terms of existing and future indebtedness, including the indenture governing our senior notes, and by applicable state laws that limit the payments of dividends. See “Description of Certain Indebtedness.”
Our stock price is likely to be very volatile.
Prior to this offering, you could not buy or sell our common stock publicly. Although the initial public offering price will be determined based on several factors, the market pricetrade after this offering may vary from the initial offering price. The market price of our common stock is likely to be highly volatile and could be subject to widemay fluctuate substantially because of a number of factors, such as:
In addition, in recent years, the stock market has experienced significant price and volume fluctuations. This volatility has had a significant impact on the trading price of securities issued by many companies, including companies in our industry. The changes frequently occur irrespective of the operating performance of the affected companies. Hence, the trading price of our common stock could fluctuate based upon factors such as the following, some of which are beyondthat have little or nothing to do with our control:
business.
SubstantialA substantial portion of our outstanding shares, other than the shares sold in this offering, will be restricted from immediate resale but may be sold into the market beginning 180 days after this offering. Any future sales of our common stock could adversely affectmay depress our stock price.
Sales of a substantial number of shares of our common stock into the public market after thisthe offering, or the perception that suchthese sales could occur, could adversely affect the marketour stock price or could impair our ability to obtain capital through an offering of our common stock by introducing a large number of sellers toequity securities. After the market. Given the volatility that will likely exist for our shares, such sales could cause the market price of our common stock to decline.
Immediately after this offering, we will have 97,106,870outstanding shares of common stock outstanding. We have reserved an additional 16,010,389stock. The shares of common stock for issuance under our equity compensation plans, of which 10,627,486 shares are subject to outstanding options. In addition, we have reserved 1,215,570 shares of common stock for issuance upon the exercise of outstanding warrants. Following this offering, all of the shares
of common stock to be sold in this offering will be freely tradable without restriction or further registration under the federal securities laws unlessSecurities Act of 1933, except for any shares purchased by our affiliates,"affiliates" as that term is defined inby Rule 144 under144. An aggregate of of the Securities Act, and an additional 32,683,857remaining shares of common stock outstanding will be freely tradable pursuant to Rule 144(k) under the Securities Act. The remaining 40,423,013restricted from resale until days after this offering. In addition, shares, which represent approximately of our total outstanding shares of common stock, will be restricted securities under"restricted" as that term is defined by Rule 144. You should read "Shares Eligible for Future Sale" for a more complete discussion of these matters.
As a new investor, you will experience immediate and substantial dilution in the Securities Act, subject to restrictions onvalue of the timing, manner and volume of sales of such shares.common stock.
After thisThe initial public offering the stockholder parties to our stockholders agreement, who will collectively hold 73,106,870 sharesprice of our common stock will be entitled to certain rights with respect tosubstantially higher than the registrationbook value per share of the saleoutstanding common stock. As a result, investors purchasing common stock in this offering will incur immediate dilution of such$ per share, assuming that we sell shares underat an initial public offering price of $ per share. An aggregate unrealized gain of approximately $ million will be incurred by our current stockholders as a result of the Securities Act. By exercising their registration rightsinitial public offering, assuming an initial offering price of $ per share.
We may need additional equity capital, and causing a large numberraising additional capital may dilute existing stockholders.
We believe that our existing capital resources, including the anticipated proceeds of sharesthis offering, together with internally generated cash flows will enable us to maintain our current and planned operations, including the build-out of certain of the Auction 66 Markets. However, we may choose to, or be soldrequired to, raise additional funds to complete construction and fund the operations of certain of the Auction 66 Markets or due to unforeseen circumstances. If our capital requirements vary materially from those currently planned, we may require additional equity financing sooner than anticipated. This financing may not be available in sufficient amounts or on terms acceptable to us and may be dilutive to existing stockholders. If adequate funds are not available or are not available on acceptable terms, our ability to fund our future growth, take advantage of unanticipated opportunities, develop or enhance services or products, or otherwise respond to competitive pressures would be significantly limited.
After this offering, our directors, executive officers and principal stockholders will continue to have substantial control over matters requiring stockholder approval and may not vote in the public market, these holders could cause the market pricesame manner as our other stockholders.
Following this offering, it is anticipated that our executive officers, directors and their affiliates will beneficially own or control approximately % of our common stock to decline. See “Descriptionstock. Together with other entities owning 5% or more of Capital Stock—Stockholders Agreement.”
Following the consummation of this offering, we also intend to file a registration statement on Form S-8 under the Securities Act coveringour outstanding shares of common stock, reserved for issuance under our equity compensation plans; that registration statementthis group will automatically become effective upon filing.
We cannot predict whether future salescontrol shares of our common stock, or approximately % of the availabilityoutstanding shares of our common stock for sale,stock. As a result, if such persons act together, they will adversely affecthave the market price for our common stock or our ability to raise capital by offering equity securities.
control all matters submitted to our stockholders for approval, including the election and removal of directors and the approval of any merger, consolidation or sales of all or substantially all of our assets. These stockholders may make decisions that are adverse to your interests. In addition, persons affiliated with these stockholders constitute of the members of our board of directors. See our discussion under the caption "Security Ownership of Principal and Selling Stockholders" for more information about ownership of our outstanding shares.
Anti-takeoverOur certificate of incorporation, bylaws and Delaware corporate law will contain provisions affecting uswhich could preventdelay or delayprevent a change of control.in control even if the change in control would be beneficial to our stockholders.
Provisions of Delaware law and ofas well as our certificate of incorporation and bylaws will contain provisions that could make it more difficult fordelay or prevent a third party to acquirechange in control of us. For example, we are subjectour company, even if it were beneficial to our stockholders to do so. These provisions could limit the price that investors might be willing to pay in the future for shares of our common stock. These provisions:
In addition, Section 203 of the Delaware General Corporation Law imposes restrictions on business combinations such as mergers between us and a holder of 15% or more of our voting stock. See "Description of Capital Stock—Anti-Takeover Effects of Delaware Law and Our Restated Certificate of Incorporation and Restated Bylaws."
Conflicts of interest may arise because some of our directors are principals of our stockholders, and we have waived our rights to certain corporate opportunities.
Our board of directors includes representatives from Accel Partners, TA Associates, Madison Dearborn Capital Partners and M/C Venture Partners. Those stockholders and their respective affiliates may invest in entities that directly or indirectly compete with us or companies in which would make it more difficult for another partythey are currently invested may already compete with us. As a result of these relationships, when conflicts between the interests of those stockholders or their respective affiliates and the interests of our other stockholders arise, these directors may not be disinterested. Under Delaware law, transactions that we enter into in which a director or officer has a conflict of interest are generally permissible so long as (1) the material facts relating to acquire our company without the approval ofdirector's or officer's relationship or interest as to the transaction
are disclosed to our board of directors. Additionally,directors and a majority of our disinterested directors approves the transaction, (2) the material facts relating to the director's or officer's relationship or interest as to the transaction are disclosed to our stockholders and a majority of our disinterested stockholders approves the transaction, or (3) the transaction is otherwise fair to us. Also, pursuant to the terms of our certificate of incorporation, authorizes our boardnon-employee directors, including the representatives from Accel Partners, TA Associates, Madison Dearborn Capital Partners and M/C Venture Partners, are not required to offer us any corporate opportunity of directorswhich they become aware and could take any such opportunity for themselves or offer it to issue preferred stock without requiring any stockholder approval, and preferred stock could be issuedother companies in which they have an investment, unless such opportunity is expressly offered to them in their capacity as a defensive measure in response to a takeover proposal. These provisions could make it more difficult for a third party to acquire us even if an acquisition might be in the best interestdirector of our stockholders.company. See “Description"Description of Capital Stock.”
Our certificate of incorporation provides for two classes of directors, those elected by holders of our Class A common stock and those elected by holders of our common stock. The classification of our board of directors could have the effect of delaying or preventing a change in control or otherwise discouraging a potential acquirer from attempting to obtain control of us. See “Description of Capital Stock.”
The indenture governing our senior notes contains limitations concerning mergers, consolidations and certain sales of assets by us. These limitations may further deter takeover attempts. In particular, the indenture requires us to give holders of the senior notes the opportunity to sell us their senior notes at 101% of their principal amount plus accrued and unpaid interest in the event of a change of control, as such term is defined in the indenture. See “Description of Certain Indebtedness.”
Our business is subject to regulation by the FCC and state regulatory commissions or similar state regulatory agencies in the states in which we operate. The FCC and some states have statutes or regulations that would require an investor who acquires a specified percentage of our securities or the securities of one of our subsidiaries to obtain approval to own those securities from the FCC or the applicable state commission. Therefore, such regulatory agencies have the ability to prevent a change of control even if such an acquisition is in the best interests of our stockholders.
Stock—Corporate Opportunities."
You will experience immediateWe have substantial discretion as to how to use the offering proceeds, and substantial dilution.the investment of these proceeds may not yield a favorable return.
The initial public offering price will be substantially higher than the net tangible book value of each outstanding share of common stock. Purchasers of common stock in this offering will suffer immediate and
substantial dilution. The dilution will be $14.59 per share in the net tangible book value of the common stock at an assumed initial public offering price of $21.00 per share.
Our management has broad discretion in the application of proceeds, which may increase the risk that the proceeds will not be applied effectively.
Our managementWe will have broad discretionconsiderable flexibility in determining how to spend the net proceeds we receive from this offering. Accordingly, we can spend the net proceeds fromof this offering are used, including investing in ways which turn outthe Auction 66 Markets and for general corporate purposes. You will not have an opportunity as part of this investment decision to be ineffective or with which our stockholdersassess whether the proceeds are being used appropriately. These investments may not agree.yield the same return as prior investments by us. In addition, we may use the proceeds to acquire additional licenses or assets which may require that we raise additional capital to construct the licenses or utilize the assets. If we use the proceeds in a way that yields lower return on capital than our prior investments or requires additional capital, it could dilute the price of our investment or could have a material adverse effect on our financial results.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Any statements made in this prospectus that are not statements of historical fact, including statements about our beliefs and expectations, are forward-looking statements and should be evaluated as such. Forward-looking statements include information concerning possible or assumed future results of operations, including statements that may relate to our plans, objectives, strategies, goals, future events, future revenues or performance, capital expenditures, financing needs and other information that is not historical information. These forward-looking statements often include words such as "anticipate," "expect," "suggests," "plan," "believe," "intend," "estimates," "targets," "projects," "should," "may," "will," "forecast," and other similar expressions. These forward-looking statements are contained throughout this offering memorandum, including the "Prospectus Summary," "Risk Factors," "Capitalization," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business."
The requirements We base these forward-looking statements or projections on our current expectations, plans and assumptions that we have made in light of our experience in the industry, as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. As you read and consider this prospectus, you should understand that these forward-looking statements or projections are not guarantees of future performance or results. Although we believe that these forward-looking statements and projections are based on reasonable assumptions at the time they are made, you should be aware that many factors could affect our actual financial results, performance or results of operations and could cause actual results to differ materially from those expressed in the forward-looking statements and projections. Factors that may materially affect such forward-looking statements and projections include:
Until recently, we were not subject to the reporting requirementsobligations of the Securities Exchange Act of 1934 or the other rules and regulations of the Securities and Exchange Commission relating to public companies. We have been working with companies;
The forward-looking statements and projections are subject to and involve risks, uncertainties and assumptions and you should not place undue reliance on these forward-looking statements and projections. All future written and oral forward-looking statements and projections attributable to us or persons acting on our behalf are expressly qualified in their entirety by our cautionary statements. We do not intend to, and do not undertake a duty to, update any forward-looking statement or projection in the future to reflect the occurrence of events or circumstances, except as a public company. These areas include corporate governance, corporate control, internal audit, and financial reporting and accounting systems. We have made, and will continue to make, improvements in theserequired by law.
Market data and other areas, including the establishment of an internal audit function, and the addition of new personnel in finance and accounting areas. However, we cannot assure you that thesestatistical information used throughout this prospectus are based on independent industry publications, government publications, reports by market research firms and other measurespublished independent sources. Some data and other information is also based on our good faith estimates, which are derived from our review of internal surveys and independent sources, including information provided to us by the U.S. Census Bureau. Although we may take will be sufficientbelieve these sources are reliable, we have not independently verified the data or information obtained from these sources and cannot guarantee the accuracy and completeness of such information. By including such market data and information, we do not undertake a duty to allow usprovide such data in the future or to satisfy our obligations as a public company on a timely basis.update such data when such data is updated.
We estimate that the net proceeds to us from theour sale of shares of common stock in this offering will be approximately $235.0 million$ , at an assumed initial public offering price of $21.00$ per share (the midpoint of the range set forth on the cover of this prospectus), and after deducting underwriting discounts and commissions and estimated transaction fees and expenses payable by us. A $1.00 increase or decrease in the initial public offering price per share would increase or decrease the expected net proceeds by approximately $ million. We will not receive any proceeds from the sale of common stock by the selling stockholders.
We intend to use the net proceeds to us primarily to build-out our network and launch our services in certain of our recently acquired Auction 66 Markets, as well as for general corporate purposes, including continued expansion of our networkspurposes. Our management will have broad discretion in existing markets and expansion into new markets, including through acquisitions. In addition, we may use a portionthe allocation of the net proceeds to redeemof this offering. The amounts actually expended and the timing of such expenditures will depend on a portionnumber of factors, including our realization of the different elements of our 10 3/4% senior notes due 2011 at a redemption price equal to 110.750% ofgrowth strategy and the principal amount of redeemed notes, plus accruedcash generated by our operations.
Until such time as we have identified specific uses for the net proceeds of this offering and unpaid interest onhave spent such notes.
funds, we will invest the net proceeds in short-term, investment grade securities.
We have never paid or declared or paid a cash dividend on our common stock. For the foreseeable future, we intend to retain any earnings to finance the development and expansion of our business, and we do not anticipate paying any cashregular dividends on our common stock. Paymentstock and do not intend to declare or pay regular dividends on our common stock in the foreseeable future. The terms of our senior secured credit facility restrict our ability to declare or pay dividends. We generally intend to retain the future earnings, if any, to invest in our business. Subject to Delaware law, our board of directors will determine the payment of future dividends on our common stock, will depend upon if any, and the amount of any dividends in light of:
The followingWe have provided in the table sets forthbelow our consolidated cash, and cash equivalents and consolidatedshort-term investments and capitalization as of March 31, 2004September 30, 2006 on an actual basis and on an as adjusted basis giving effect to:
YouEach $1.00 increase or decrease in the offering price per share would increase or decrease the as adjusted figure shown below for "cash, cash equivalents and short-term investments," "additional paid-in capital," "total stockholders' equity" and "total capitalization" by approximately $ , after deducting estimated underwriting discounts and commissions. This table should be read this table togetherin conjunction with “Selected"Selected Consolidated Financial and Other Data,” “Management’s" "Management's Discussion and Analysis of Financial Condition and Results of Operations”Operations" and theour consolidated financial statements of MetroPCS Communications, Inc., including theand related notes thereto, includedappearing elsewhere in this prospectus.
| As of March 31, 2004 | ||||||||
| Actual | Pro Forma | |||||||
| (unaudited) | ||||||||
| (In thousands) | ||||||||
Cash and cash equivalents | $ | 185,109 | $ | 420,119 | ||||
Total debt: | ||||||||
FCC notes, net of unamortized discount | $ | 39,285 | $ | 39,285 | ||||
Senior notes | 150,000 | 150,000 | ||||||
Other debt | 3,817 | 3,817 | ||||||
Total debt, net of unamortized discount | 193,102 | 193,102 | ||||||
Series D cumulative convertible redeemable participating | ||||||||
preferred stock, par value $.0001 per share, 4,000,000 shares designated and 3,500,953 shares issued and outstanding, actual; none designated, issued or outstanding, pro forma | 384,267 | — | ||||||
Stockholders’ equity: | ||||||||
Class A common stock, par value $.0001 per share, 300 shares authorized, and 90 shares issued and outstanding | — | — | ||||||
Class B common stock, par value $.0001 per share, 60,000,000 shares authorized and 4,113,785 shares issued and outstanding, actual; none authorized, issued or outstanding, pro forma | — | — | ||||||
Common stock, par value $.0001 per share, 240,000,000 shares authorized and 37,239,375 shares issued and outstanding, actual; 300,000,000 shares authorized and 94,798,683 shares issued and outstanding, pro forma | 4 | 9 | ||||||
Additional paid-in capital | 92,420 | 717,008 | ||||||
Subscription receivable | (93 | ) | (93 | ) | ||||
Deferred compensation | (4,328 | ) | (4,328 | ) | ||||
Retained earnings | 6,383 | 1,062 | ||||||
Total stockholders’ equity | 94,386 | 713,658 | ||||||
Total capitalization | $ | 671,755 | $ | 906,760 | ||||
| | As of September 30, 2006 | |||||||
|---|---|---|---|---|---|---|---|---|
| | Actual | As Adjusted | ||||||
| | (in thousands) | |||||||
| Cash, cash equivalents and short-term investments | $ | 345,811 | ||||||
Long-Term Debt: | ||||||||
| Senior secured first lien term loan | $ | 550,000 | — | |||||
| Senior secured second lien term loan | 350,000 | — | ||||||
| Bridge credit agreement | 200,000 | — | ||||||
| Senior secured credit facility | — | 1,600,000 | ||||||
| Senior notes | — | 1,000,000 | ||||||
| Other | 2,594 | — | ||||||
| Total Long-Term Debt | $ | 1,102,594 | $ | 2,600,000 | ||||
| Series D Preferred Stock(1) | $ | 437,955 | $ | — | ||||
| Series E Preferred Stock(2) | $ | 50,294 | $ | — | ||||
| Stockholders' Equity: | ||||||||
| Preferred stock(3) | $ | — | $ | — | ||||
| Common stock(4) | 5 | |||||||
| Additional paid-in capital | 157,712 | |||||||
| Retained earnings | 268,762 | |||||||
| Accumulated other comprehensive income | 1,210 | 1,210 | ||||||
| Total Stockholders' Equity | $ | 427,689 | ||||||
| Total Capitalization | $ | 2,018,532 | ||||||
If you invest in our common stock, you will experience dilution to the extent of the difference between the public offering price per share you pay in this offering and the pro forma net tangible book value per share of our common stock immediately after the completion of this offering.
Dilution results from the fact that the per share offering price of the common stock is substantially in excess of the book value per share attributable to the existing stockholders for the presently outstanding stock. Our net tangible book value as of was approximately $ million, or approximately $ per share of common stock. Net tangible book value per share is equal to our total tangible assets minus total liabilities, divided by the number of shares of common stock outstanding as of .
Our pro forma net tangible book value per share as of March 31, 2004 was approximately $372.5$ million, or $4.50approximately $ per share of our common stock, and Class A common stock. Pro forma net tangible book value represents the amount of total tangible assets less total liabilities, divided by the sum of the number of shares of our common stock and Class A common stock outstanding, assuming conversion of all outstanding shares of Series D preferred stock and Series E preferred stock into common stock. Without taking into account any other changes in the net tangible book value after March 31, 2004, other than to give
After giving effect to ourthe sale of the shares of common stock in thiswe are offering at an assumed initial public offering price of $21.00$ per share (the midpoint of the price range as set forth on the cover page of this prospectus), and after deducting underwriting discounts and commissions and our receiptestimated offering expenses, our pro forma as adjusted net tangible book value would have been approximately $ million, or approximately $ per share of the estimated net proceeds from this offering, our as adjustedcommon stock. This represents an immediate increase in pro forma net tangible book value as of March 31, 2004 would have been approximately $607.5 million, or $6.41 per share. This represents an immediate increase in net tangible book value of $1.91$ per share to existing stockholders and an immediate dilution of $14.59approximately $ per share to new investors.
The following table illustrates this immediate dilution of $ per share dilution:to new investors purchasing shares of common stock in this offering on a per share basis:
| Assumed initial public offering price per share | $ | ||||||
| Net tangible book value per share as of | $ | ||||||
| Pro forma net tangible book value per share as of | |||||||
| Increase in net tangible book value per share attributable to new investors purchasing shares in this offering | |||||||
| Pro forma as adjusted net tangible book value per share after this offering | |||||||
| Dilution of pro forma net tangible book value per share to new investors | $ | ||||||
Each $1.00 increase or decrease in the offering price per share would increase or decrease the as adjusted pro forma net tangible book value by $ per share and the dilution to investors in the offering by $ per share, assuming that the number of shares offered in this offering, as set forth on the cover page of this prospectus, remains the same. The pro forma information discussed above is illustrative only. Our net tangible book value following the completion of the offering is subject to adjustment based on the actual offering price of our common stock and other terms of this offering determined at pricing.
Assumed initial public offering price per share | $ | 21.00 | ||
Pro forma net tangible book value per share before this offering | 4.50 | |||
Increase per share attributable to new investors | 1.91 | |||
As adjusted pro forma net tangible book value per share after this offering | 6.41 | |||
Dilution per share to new investors | $ | (14.59 | ) | |
The following table summarizes, on a pro forma as adjusted basis as of March 31, 2004,, after giving effect to this offering, the differences between existing stockholders and the new investors with respect to thetotal number of shares of our common stock purchased from us and the total consideration paid and the average price per share paid before deductingby existing stockholders and by new investors:
| | Shares purchased | Total consideration | | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Average price per share | |||||||||||
| | Number | % | Amount | % | ||||||||
| Existing stockholders | % | % | $ | |||||||||
| New investors | $ | |||||||||||
| Total | 100.0 | % | 100.0 | % | ||||||||
If the underwriting discountsunderwriters exercise their over-allotment option in full, the following will occur:
The tables and estimated offering expenses payable by us.calculations above are based on shares outstanding as of , assuming conversion of all outstanding shares of Series D and Series E preferred stock into common stock, and exclude:
| Shares Purchased | Total Consideration | Average Price Per Share | ||||||||||||
| Number | Percent | Amount | Percent | |||||||||||
Existing stockholders | 82,798,773 | 87.3 | % | $ | 482,012,000 | 65.7 | % | $ | 5.82 | |||||
New investors | 12,000,000 | 12.7 | % | 252,000,000 | 34.3 | % | 21.00 | |||||||
Total | 94,798,773 | 100.0 | % | $ | 734,012,000 | 100.0 | % | $ | 7.74 | |||||
The foregoing table assumes no
If the underwriters’ over-allotment option is exercised in full, the number of shares of common stock held by existing stockholders will be reduced to 83.5% of the total number of shares of common stock outstanding after this offering, and the number of shares of common stock held by new investors will be increased to 15,600,000 shares, or 16.5% of the total number of shares of common stock outstanding after this offering.
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following table setstables set forth selected consolidated financial and otherdata. We derived our selected consolidated financial data of MetroPCS Communications, Inc. as of and for the years ended December 31, 1999, 2000, 2001, 20022004 and 2003 and as of and for the three months ended March 31, 2003 and 2004.2005 from our consolidated financial statements, which were audited by Deloitte & Touche LLP. We derived our selected consolidated financial data as of and for the years ended December 31, 2002 and 2003 and for each of the three years in the period ended December 31, 2003 from the consolidated financial statements, which were audited by PricewaterhouseCoopers LLP and are included elsewhere in this prospectus. We derived our selected consolidated financial data as of December 31, 2001 from the consolidated financial statements, which were audited by PricewaterhouseCoopers LLP. We derived our selected consolidated financial data as of and for the yearsyear ended December 31, 1999 and 20002001 from theour unaudited consolidated financial statements, which were audited by Arthur Andersen LLP.statements. We derived our selected consolidated financial data as of and for the threenine months ended March 31, 2003September 30, 2005 and 20042006 from our unaudited condensed consolidated financial statements which are included elsewhere in this prospectus. You should read the selected consolidated financial and other data in conjunction with “Capitalization,” “Management’s"Capitalization," "Management's Discussion and Analysis of Financial Condition and Results of Operations”Operations" and our consolidated financial statements includingand the related notes thereto, included elsewhere in this prospectus.
| | Year Ended December 31, | Nine Months Ended September 30, | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2001 | 2002 | 2003 | 2004 | 2005 | 2005 | 2006 | |||||||||||||||||
| | (in thousands) | |||||||||||||||||||||||
| Statement of Operations Data: | ||||||||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||
| Service revenues | $ | — | $ | 102,293 | $ | 369,851 | $ | 616,401 | $ | 872,100 | $ | 631,209 | $ | 916,179 | ||||||||||
| Equipment revenues | — | 27,048 | 81,258 | 131,849 | 166,328 | 118,990 | 177,592 | |||||||||||||||||
| Total revenues | — | 129,341 | 451,109 | 748,250 | 1,038,428 | 750,199 | 1,093,771 | |||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||
| Cost of service (excluding depreciation and amortization disclosed separately below) | — | 63,567 | 122,211 | 200,806 | 283,212 | 201,940 | 313,510 | |||||||||||||||||
| Cost of equipment | — | 106,508 | 150,832 | 222,766 | 300,871 | 210,529 | 330,898 | |||||||||||||||||
| Selling, general and administrative expenses (excluding depreciation and amortization disclosed separately below) | 28,451 | 55,161 | 94,073 | 131,510 | 162,476 | 116,206 | 171,921 | |||||||||||||||||
| Depreciation and amortization | 208 | 21,472 | 42,428 | 62,201 | 87,895 | 61,895 | 96,187 | |||||||||||||||||
| (Gain) loss on disposal of assets | — | (279,659 | ) | 392 | 3,209 | (218,203 | ) | (218,292 | ) | 10,763 | ||||||||||||||
| Total operating expenses | 28,659 | (32,951 | ) | 409,936 | 620,492 | 616,251 | 372,278 | 923,279 | ||||||||||||||||
| Income (loss) from operations | (28,659 | ) | 162,292 | 41,173 | 127,758 | 422,177 | 377,921 | 170,492 | ||||||||||||||||
| Other expense (income): | ||||||||||||||||||||||||
| Interest expense | 10,491 | 6,720 | 11,115 | 19,030 | 58,033 | 40,867 | 67,408 | |||||||||||||||||
| Accretion of put option in majority-owned subsidiary | — | — | — | 8 | 252 | 187 | 564 | |||||||||||||||||
| Interest and other income | (2,046 | ) | (964 | ) | (996 | ) | (2,472 | ) | (8,658 | ) | (4,876 | ) | (15,106 | ) | ||||||||||
| Loss (gain) on extinguishment of debt | 7,109 | 703 | (603 | ) | (698 | ) | 46,448 | 46,448 | (244 | ) | ||||||||||||||
| Total other expense | 15,554 | 6,459 | 9,516 | 15,868 | 96,075 | 82,626 | 52,622 | |||||||||||||||||
| Income (loss) before provision for income taxes and cumulative effect of change in accounting principle | (44,213 | ) | 155,833 | 31,657 | 111,890 | 326,102 | 295,295 | 117,870 | ||||||||||||||||
| Provision for income taxes | — | (25,528 | ) | (16,179 | ) | (47,000 | ) | (127,425 | ) | (115,460 | ) | (47,245 | ) | |||||||||||
| Income (loss) before cumulative effect of change in accounting principle | (44,213 | ) | 130,305 | 15,478 | 64,890 | 198,677 | 179,835 | 70,625 | ||||||||||||||||
| Cumulative effect of change in accounting, net of tax | — | — | (120 | ) | — | — | — | — | ||||||||||||||||
| Net income (loss) | (44,213 | ) | 130,305 | 15,358 | 64,890 | 198,677 | 179,835 | 70,625 | ||||||||||||||||
| Accrued dividends on Series D Preferred Stock | (4,963 | ) | (10,619 | ) | (18,493 | ) | (21,006 | ) | (21,006 | ) | (15,711 | ) | (15,711 | ) | ||||||||||
| Accrued dividends on Series E Preferred Stock | — | — | — | — | (1,019 | ) | (263 | ) | (2,244 | ) | ||||||||||||||
| Accretion on Series D Preferred Stock | (494 | ) | (473 | ) | (473 | ) | (473 | ) | (473 | ) | (355 | ) | (355 | ) | ||||||||||
| Accretion on Series E Preferred Stock | — | — | — | — | (114 | ) | (30 | ) | (254 | ) | ||||||||||||||
| Net income (loss) applicable to Common Stock | $ | (49,670 | ) | $ | 119,213 | $ | (3,608 | ) | $ | 43,411 | $ | 176,065 | $ | 163,476 | $ | 52,061 | ||||||||
Year Ended December 31, | Nine Months Ended September 30, | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2001 | 2002 | 2003 | 2004 | 2005 | 2005 | 2006 | ||||||||||||||||
| | (in thousands, except share and per share data) | ||||||||||||||||||||||
| Basic net income (loss) per common share(1): | |||||||||||||||||||||||
| Income (loss) before cumulative effect of change in accounting principle | $ | (1.42 | ) | $ | 2.16 | $ | (0.10 | ) | $ | 0.55 | $ | 2.12 | $ | 2.02 | $ | 0.57 | |||||||
| Cumulative effect of change in accounting, net of tax | — | — | (0.00 | ) | — | — | — | — | |||||||||||||||
| Basic net income (loss) per common share | $ | (1.42 | ) | $ | 2.16 | $ | (0.10 | ) | $ | 0.55 | $ | 2.12 | $ | 2.02 | $ | 0.57 | |||||||
| Diluted net income (loss) per common share(1): | |||||||||||||||||||||||
| Income (loss) before cumulative effect of change in accounting principle | $ | (1.42 | ) | $ | 1.56 | $ | (0.10 | ) | $ | 0.46 | $ | 1.87 | $ | 1.74 | $ | 0.56 | |||||||
| Cumulative effect of change in accounting, net of tax | — | — | (0.00 | ) | — | — | — | — | |||||||||||||||
| Diluted net income (loss) per common share | $ | (1.42 | ) | $ | 1.56 | $ | (0.10 | ) | $ | 0.46 | $ | 1.87 | $ | 1.74 | $ | 0.56 | |||||||
| Weighted average shares(1): | |||||||||||||||||||||||
| Basic | 34,874,716 | 36,236,434 | 36,443,962 | 42,240,684 | 45,117,465 | 43,517,417 | 51,890,687 | ||||||||||||||||
| Diluted | 34,874,716 | 50,072,699 | 36,443,962 | 50,211,229 | 51,203,530 | 50,417,637 | 53,158,789 | ||||||||||||||||
| Other Financial Data: | |||||||||||||||||||||||
| Net cash (used in) provided by operating activities | $ | (32,401 | ) | $ | (50,672 | ) | $ | 112,605 | $ | 150,379 | $ | 283,216 | $ | 247,015 | $ | 284,688 | |||||||
| Net cash provided by (used in) investment activities | 24,183 | (88,311 | ) | (306,868 | ) | (190,881 | ) | (905,228 | ) | (789,109 | ) | (489,255 | ) | ||||||||||
| Net cash provided by (used in) financing activities | 41,708 | 157,039 | 201,951 | (5,433 | ) | 712,244 | 564,777 | 208,123 | |||||||||||||||
As of December 31, | As of September 30, | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2001 | 2002 | 2003 | 2004 | 2005 | 2005 | 2006 | ||||||||||||||
| | (in thousands) | ||||||||||||||||||||
| Balance Sheet Data: | |||||||||||||||||||||
| Cash, cash equivalents & short-term investments | $ | 42,688 | $ | 60,724 | $ | 254,838 | $ | 59,441 | $ | 503,131 | $ | 338,204 | $ | 345,811 | |||||||
| Property and equipment, net | 169,459 | 352,799 | 485,032 | 636,368 | 831,490 | 767,498 | 1,207,982 | ||||||||||||||
| Total assets | 324,008 | 554,705 | 898,939 | 965,396 | 2,158,981 | 1,946,785 | 2,626,174 | ||||||||||||||
| Long-term debt (including current maturities) | 48,548 | 51,649 | 195,755 | 184,999 | 905,554 | 754,279 | 1,102,594 | ||||||||||||||
| Series D Cumulative Convertible Redeemable Participating Preferred Stock | 123,331 | 294,423 | 378,926 | 400,410 | 421,889 | 416,476 | 437,955 | ||||||||||||||
| Series E Cumulative Convertible Redeemable Participating Preferred Stock | — | — | — | — | 47,796 | 46,981 | 50,294 | ||||||||||||||
| Stockholders' equity (deficit) | (51,477 | ) | 69,397 | 71,333 | 125,434 | 367,906 | 295,028 | 427,689 | |||||||||||||
| Year Ended December 31, | Three Months Ended March 31, | |||||||||||||||||||||||||||
| 1999 | 2000 | 2001 | 2002 | 2003 | 2003 | 2004 | ||||||||||||||||||||||
| (Dollars in thousands, except per share data) | ||||||||||||||||||||||||||||
Statement of Operations Data: | ||||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||
Service revenues | $ | — | $ | — | $ | — | $ | 102,137 | $ | 370,920 | $ | 75,999 | $ | 132,921 | ||||||||||||||
Equipment revenues | — | — | — | 23,458 | 88,562 | 23,399 | 40,077 | |||||||||||||||||||||
Total revenues | — | — | — | 125,595 | 459,482 | 99,398 | 172,998 | |||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||
Cost of service (excluding depreciation included below) | — | — | — | 61,881 | 118,335 | 25,929 | 40,909 | |||||||||||||||||||||
Cost of equipment | — | — | — | 100,651 | 155,084 | 44,213 | 64,047 | |||||||||||||||||||||
Selling, general and administrative expenses (excluding non-cash compensation) | 3,170 | 3,411 | 27,963 | 55,515 | 90,556 | 18,046 | 28,916 | |||||||||||||||||||||
Non-cash compensation | 1,002 | 1,222 | 1,455 | 1,115 | 7,379 | 241 | 3,256 | |||||||||||||||||||||
Depreciation and amortization | 8 | 3 | 208 | 21,394 | 41,900 | 9,047 | 12,774 | |||||||||||||||||||||
(Gain) loss on sale of assets | — | — | — | (278,956 | )(1) | 333 | 111 | 87 | ||||||||||||||||||||
Total operating expenses | 4,180 | 4,636 | 29,626 | (38,400 | ) | 413,587 | 97,587 | 149,989 | ||||||||||||||||||||
Income (loss) from operations | (4,180 | ) | (4,636 | ) | (29,626 | ) | 163,995 | 45,895 | 1,811 | 23,009 | ||||||||||||||||||
Other (income) expense: | ||||||||||||||||||||||||||||
Interest expense | 15,261 | 16,142 | 10,491 | 6,805 | 11,254 | 1,755 | 5,572 | |||||||||||||||||||||
Interest income | (67 | ) | (169 | ) | (2,046 | ) | (964 | ) | (1,061 | ) | (140 | ) | (616 | ) | ||||||||||||||
(Gain) loss on extinguishment of debt | — | — | 7,109 | — | (603 | ) | — | (201 | ) | |||||||||||||||||||
Total other (income) expense | 15,194 | 15,973 | 15,554 | 5,841 | 9,590 | 1,615 | 4,755 | |||||||||||||||||||||
Income (loss) before income taxes and cumulative effect of change in accounting principle | (19,374 | ) | (20,609 | ) | (45,180 | ) | 158,154 | 36,305 | 196 | 18,254 | ||||||||||||||||||
Provisions for income taxes | — | — | — | (19,087 | ) | (15,665 | ) | (113 | ) | (7,417 | ) | |||||||||||||||||
Income (loss) before cumulative effect of change in accounting principle | (19,374 | ) | (20,609 | ) | (45,180 | ) | 139,067 | 20,640 | 83 | 10,837 | ||||||||||||||||||
Cumulative effect of change in accounting principle, net of tax | — | — | — | — | (74 | ) | (74 | ) | — | |||||||||||||||||||
Net income (loss) | (19,374 | ) | (20,609 | ) | (45,180 | ) | 139,067 | 20,566 | 9 | 10,837 | ||||||||||||||||||
Accrued dividends on Series C preferred stock | (400 | ) | (422 | ) | — | — | — | — | — | |||||||||||||||||||
Accrued dividends on Series D preferred stock | — | (195 | ) | (4,963 | ) | (10,838 | ) | (18,749 | ) | (4,268 | ) | (4,747 | ) | |||||||||||||||
Net income (loss) applicable to common stock | $ | (19,774 | ) | $ | (21,226 | ) | $ | (50,143 | ) | $ | 128,229 | $ | 1,817 | $ | (4,259 | ) | $ | 6,090 | ||||||||||
Income (loss) per share: | ||||||||||||||||||||||||||||
Income (loss) per share before cumulative effect of change in accounting principle—basic | $ | (0.86 | ) | $ | (0.76 | ) | $ | (1.44 | ) | $ | 2.26 | $ | 0.02 | $ | (0.12 | ) | $ | 0.08 | ||||||||||
Cumulative effect per share of change in accounting principle, net of tax—basic | — | — | — | — | (0.00 | ) | (0.00 | ) | — | |||||||||||||||||||
Net income (loss) per share—basic | (0.86 | ) | (0.76 | ) | (1.44 | ) | 2.26 | 0.02 | (0.12 | ) | 0.08 | |||||||||||||||||
Net income (loss) per share—diluted | (0.86 | ) | (0.76 | ) | (1.44 | ) | 1.71 | 0.02 | (0.12 | ) | 0.06 | |||||||||||||||||
Other Financial and Operating Data (GAAP): | ||||||||||||||||||||||||||||
Net cash provided by (used in) operating activities | $ | (9,884 | ) | $ | (9,463 | ) | $ | (32,401 | ) | $ | (64,523 | ) | $ | 109,618 | $ | (4,826 | ) | $ | 24,368 | |||||||||
Net cash provided by (used in) investing activities | (669 | ) | (15,093 | ) | 24,183 | (73,494 | ) | (137,321 | ) | (26,623 | ) | (70,527 | ) | |||||||||||||||
Net cash provided by (used in) financing activities | 10,420 | 31,015 | 41,708 | 157,066 | 201,951 | 5,581 | (4,697 | ) | ||||||||||||||||||||
Cash used for capital expenditures | 669 | 93 | 133,604 | 212,305 | 117,212 | 26,899 | 73,338 | |||||||||||||||||||||
Other Financial and Operating Data (Non-GAAP): | ||||||||||||||||||||||||||||
Adjusted EBITDA (2) | $ | (3,170 | ) | $ | (3,411 | ) | $ | (27,963 | ) | $ | (92,452 | ) | $ | 95,507 | $ | 11,210 | $ | 39,126 | ||||||||||
Adjusted EBITDA margin (3) | — | — | — | — | 21 | % | 11 | % | 23 | % | ||||||||||||||||||
| As of December 31, | As of 2004 | |||||||||||||||||
| 1999 | 2000 | 2001 | 2002 | 2003 | ||||||||||||||
| (In thousands) | ||||||||||||||||||
Balance Sheet Data: | ||||||||||||||||||
Cash and cash equivalents | $ | 2,719 | $ | 9,178 | $ | 42,668 | $ | 61,717 | $ | 235,965 | $ | 185,109 | ||||||
Property and equipment, net | 995 | 98 | 169,459 | 353,360 | 482,965 | 519,549 | ||||||||||||
Total assets | 108,296 | 126,520 | 324,010 | 562,922 | 902,494 | 895,220 | ||||||||||||
Total debt, net of unamortized discount | 79,697 | 81,251 | 48,548 | 50,850 | 195,795 | 193,102 | ||||||||||||
| Year Ended December 31, | Three Months Ended March 31, | |||||||||||||||||||||||||||
| 1999 | 2000 | 2001 | 2002 | 2003 | 2003 | 2004 | ||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||
Calculation of Adjusted EBITDA: | ||||||||||||||||||||||||||||
Net cash provided by (used in) operating activities | $ | (9,884 | ) | $ | (9,463 | ) | $ | (32,401 | ) | $ | (64,523 | ) | $ | 109,618 | $ | (4,826 | ) | $ | 24,368 | |||||||||
Interest expense, net interest income | 15,194 | 15,973 | 8,445 | 5,841 | 10,193 | 1,615 | 4,956 | |||||||||||||||||||||
Bad debt expense | — | — | — | (381 | ) | (991 | ) | (749 | ) | (433 | ) | |||||||||||||||||
Accretion of asset retirement obligation | — | — | — | — | (50 | ) | (25 | ) | (79 | ) | ||||||||||||||||||
Non-cash interest | (4,396 | ) | (5,506 | ) | (3,882 | ) | (3,028 | ) | (3,090 | ) | (784 | ) | (688 | ) | ||||||||||||||
Deferred rents | — | — | (949 | ) | (1,853 | ) | (1,160 | ) | (414 | ) | (435 | ) | ||||||||||||||||
Cost of abandoned cell sites | — | — | — | — | (824 | ) | (477 | ) | (183 | ) | ||||||||||||||||||
Loss on impairment of property, plant and equipment | — | (987 | ) | — | — | — | — | — | ||||||||||||||||||||
Non-deferred tax | — | — | — | 8,993 | 1,643 | — | — | |||||||||||||||||||||
Working capital changes | (4,084 | ) | (3,428 | ) | 824 | (37,501 | ) | (19,832 | ) | 16,870 | 11,620 | |||||||||||||||||
Adjusted EBITDA | $ | (3,170 | ) | $ | (3,411 | ) | $ | (27,963 | ) | $ | (92,452 | ) | $ | 95,507 | $ | 11,210 | $ | 39,126 | ||||||||||
MANAGEMENT’SMANAGEMENT'S DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from the results contemplated in these forward-looking statements as a result of factors including, but not limited to, those under "Risk Factors" and "—Liquidity and Capital Resources."
IntroductionCompany Overview
Except as expressly stated, the financial condition and results of operations discussed throughout Management's Discussion and Analysis of Financial Condition and Results of Operations are those of MetroPCS Communications, Inc. and its wholly-owned and majority-owned subsidiaries.
We are a wireless communications providertelecommunications carrier that currently offers digital wireless broadband personal communication services, or PCS, primarily in the greater Atlanta, Dallas/Ft. Worth, Detroit, Miami, San Francisco, Sacramento and Tampa/Sarasota/Orlando metropolitan areas. We launched service in the San Francisco,greater Atlanta, Miami Atlanta and Sacramento metropolitan areas. The year 2003 wasareas in the first full yearquarter of operations2002; in allSan Francisco in September 2002; in Tampa/Sarasota in October 2005; in Dallas/Ft. Worth in March 2006; in Detroit in April 2006; and Orlando in November 2006. In 2005, Royal Street Communications, LLC ("Royal Street"), a company in which we own 85% of the limited liability company member interests and with which we have a wholesale arrangement allowing us to sell MetroPCS-branded services to the public, was granted licenses by the Federal Communications Commission, or FCC, in Los Angeles and various metropolitan areas throughout northern Florida. Royal Street is in the process of constructing its network infrastructure in its licensed metropolitan areas. We commenced commercial services in Orlando and certain portions of northern Florida in November 2006 and we expect to begin offering services in Los Angeles in the second quarter of 2007 through our four market clusters.arrangements with Royal Street.
As a result of the significant growth we have experienced since we launched operations, our results of operations to date are not necessarily indicative of the results that can be expected in future periods. Moreover, we expect that our number of customers will continue to increase, which will continue to contribute to increases in our revenues and operating expenses. In September 2006, we were declared the high bidder on AWS licenses covering a total unique population of 117 million at the conclusion of FCC Auction 66 with total aggregate winning bids of approximately $1.4 billion. The Auction 66 licenses were granted on November 29, 2006. Approximately 69 million of the total covered population associated with our Auction 66 licenses represents expansion opportunities in geographic areas outside of our Core and Expansion Markets, which we refer to as our Auction 66 Markets. These new expansion opportunities in our Auction 66 Markets cover six of the 25 largest metropolitan areas in the United States. The balance of our Auction 66 Markets, which cover a population of approximately 48 million, supplements or expands the geographic boundaries of our existing operations in Dallas/Ft. Worth, Detroit, Los Angeles, San Francisco and Sacramento.
We sell products and services to customers through our 50 company-ownedCompany-owned retail stores as well as indirectly through relationships with indirectindependent retailers. We primarily offer two monthly calling plansservice which allows our customers to our customers. One plan provides customers withplace unlimited calling within the local calling area for $35 per month; the other plan provides customers with unlimited callingcalls from within aour local callingservice area and to anywhere within the continental United States for $40receive unlimited calls from any area while in our local service area, through flat rate monthly plans starting at $30 per month. For an additional $5 to $15 per month, our customers may select a service plan that offers additional services, such as unlimited nationwide long distance service, voicemail, caller ID, call waiting, text messaging and picture and multimedia messaging. For additional fees, we also provide caller ID, voicemail,international long distance and text messaging, camera functions, downloads of ringtones, games and content applications, international long distanceunlimited directory assistance, ring back tones, nationwide roaming, mobile Internet browsing and other value-added services. In 2002, we offered only one handset toAs of
September 30, 2006, over 80% of our customers for $149.have selected either our $40 or $45 rate plans. Our offering of handsets has grown and as of June 30, 2004 we offered seven different handsets priced from $109 to $239.
Recent Developments
Although full results for the second quarter of 2004 are not yet available, based upon information available to us and except as otherwise described in this prospectus, we are not aware and do not anticipate thatflat rate plans differentiate our results for the second quarter will be adversely impacted, in the aggregate, by material or unusual adverse events, and we do not believe that, during the second quarter, we incurred material additional borrowings or other liabilities, contingent or otherwise, or defaulted under our debt covenants. Nevertheless, our actual results for the second quarter of 2004 may differ from these expectations andservice from the estimates disclosed below. Moreover, our results from the second quartermore complex plans and long-term contract requirements of 2004 and these estimates have not been compiled or examined by our independent registered public accounting firm which does not express an opinion or any other form of assurance with respect thereto. Our results for this interim period are not indicative of the results that can be expected for the full year.
The following are estimates for certain key financial results that we expect for the second quarter of 2004:
In addition, we expect to report approximately 63,200 net new customer additions and an average monthly churn rate of approximately 5.2% for the three months ended June 30, 2004.
Adjusted EBITDA is a supplement to GAAP financial information and should not be construed as an alternative to, or more meaningful than, GAAP financial information. We have not provided a reconciliation of our projected adjusted EBITDA to net cash provided by operating activities as to do so would require us to make projections of balance sheet amounts that we believe are not subject to meaningful projection. See “—Reconciliation of Non-GAAP Financial Measures” for more information about adjusted EBITDA.
On July 8, 2004, we entered into an agreement with NextWave Telecom, Inc. and certain of its affiliates to acquire two 10MHz licenses for $43.5 million. The licenses cover areas in southwest Florida (Tampa, St. Petersburg, Clearwater, Sarasota and Bradenton) with a population of approximately 3.3 million people. Consummation of the acquisition is subject to satisfaction of several conditions, including the approvals of the FCC and the bankruptcy court in which NextWave’s Chapter 11 bankruptcy cases are pending. We intend to begin planning network deployment shortly and we expect to spend approximately $31.5 million, primarily in 2005, to complete the initial build out of our network and launch service in these areas.
traditional wireless carriers.
Critical Accounting Policies and Estimates
The following discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.America, or GAAP. You should read this discussion and analysis in conjunction with our consolidated financial statements and the related notes thereto contained elsewhere in this prospectus. The preparation of these consolidated financial statements in conformity with GAAP requires us to make estimates and judgmentsassumptions that affect the reported amounts of certain assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, allowance for doubtful accounts, inventory valuations, deferred income taxes, andliabilities at the impairmentdate of long-lived and indefinite-lived assets.the financial statements. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Our customers pay in advance for our services. In accordance with generally accepted accounting principles, amounts received in advance are recorded on our balance sheet as deferred revenue, and are recognized as service revenues on our statement of operations only when the services are actually rendered. Although our billing system properly calculates the amount due from customers for service and properly records customer payments, it is not integrated with our accounting system and does not calculate service revenues or deferred revenue balances on a customer-by-customer basis. As a result, management calculates gross service revenues based on the average number of customers within each service offering multiplied by the price of the relevant service offering. Gross service revenues are then reduced by an amount attributable to the estimated number of customers included in our customer counts with handsets that have been disenabled, or hotlined, and whose service will be disconnected before they make a payment. Management’s controls over this process include detailed manual reconciliations between our billing system and our general ledger to insure that the balances in our deferred revenue accounts on the balance sheet are properly stated and we have properly recorded service revenues on our statement of operations.
In July 2003, during the preparation of quarterly financial statements, management noted that the balance of the deferred revenue accounts relative to service revenues had fluctuated from period to period in an inconsistent manner. Management called this inconsistency to the attention of our auditors. In August 2003, prior to the time that MetroPCS, Inc. became a reporting company under the Securities Exchange Act of 1934, management and our auditors noted that the reconciliation of deferred revenue did not include all the appropriate accounts receivable and deferred revenue accounts, and was not prepared on a timely basis. In September 2003, management concluded that we were understaffed in our revenue accounting function and that we did not have personnel with the appropriate experience required to properly account for activity resulting from the billing system.
Management immediately began to implement steps to improve the capabilities and reliability of our financial and accounting systems in order to provide reasonable assurance that our financial statements would not contain a material misstatement. At that time, our Chief Financial Officer began devoting substantial additional attention to our revenue accounting function in order to augment the Controller’s increased focus on this area that had begun in July 2003. In September 2003, we hired a Director of External Reporting, which enabled our
Controller to devote additional time to our revenue accounting function. In October 2003, we began a search for additional accounting personnel with relevant training and experience in this area. Management believes the increased attention by our Chief Financial Officer and our Controller during the second half of 2003 was sufficient to remediate any understaffing in our revenue accounting function. In December 2003, we hired a Vice President–Controller and a Director of Revenue Accounting, whose responsibilities include direct oversight and supervision of our revenue accounting function. These new personnel assumed their positions with us in early January 2004.
In October 2003, in connection with the review of our interim financial statements, our auditors issued a letter to us describing these deficiencies. In February 2004, in connection with the audit of our financial statements for the year ended December 31, 2003, our auditors identified the lack of automation in the revenue reporting process as a “material weakness” in our internal controls over revenue reporting. The Public Company Accounting Oversight Board has defined material weakness as “a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.” This means that there is a risk that a material misstatement in the deferred revenue accounts and the related service revenue accounts in our financial statements for a future period is reasonably possible.
To address revenue reporting, management made significant changes to the manual calculation and reconciliation processes to insure proper revenue reporting, including implementation of the following procedures by the end of the third quarter of 2003:
We began a monthly reconciliation of cash received to recorded revenues and deferred revenues that was utilized in the December 31, 2003 year-end close.
As a result of these procedures, management and our auditors identified and recorded adjustments to our deferred revenue and service revenues accounts during the course of the preparation of the financial statements for the related periods. These adjustments totaled $110,000 for the three months ended December 31, 2003, or 0.1% of service revenues and 1.2% of income from operations for such period, and $665,000 for the three months ended March 31, 2004, or 0.5% of service revenues and 2.9% of income from operations for such period. These procedures also resulted in reclassification entries on our balance sheet prior to its issuance to properly classify amounts between deferred revenues and other liability accounts related to taxes and other charges to customers.
Management believes that the implementation of these procedures, together with the recording of the resulting adjustments prior to issuance of the related financial statements, were sufficient to permit it to conclude that the material weakness in our internal controls over revenue reporting had not resulted in a material misstatement of our financial statements.
To further enhance our internal controls, as discussed above, we have added a Vice President, Controller and a Director of Revenue Accounting, each of whom has several years of relevant experience with revenue and billing systems in the telecommunications industry. We have also hired a senior accounting professional whose focus is to make sure that we are effectively utilizing all of the functions available in our billing system, expand the related reporting capabilities, and continue to enhance and further automate our processes related to revenue
accounting. We have increased the overall size of the revenue accounting staff from three persons during most of 2003 to a staff of six currently. In order to reduce the risk of manual errors, we are automating the summarization and transfer of information from our billing system to our general ledger. We are also developing reports that will substantially improve our control over the revenue calculation and deferred revenue reconciliation process.
While these efforts represent significant steps in remediating the material weakness, management believes, and our auditors have advised us based on their review of our financial statements for the three months ended March 31, 2004, that the material weakness still exists due to the lack of automation in this area. Moreover, our auditors have advised us that they will not be able to confirm that the material weakness has been fully remediated until they complete an audit of our financial statements. We expect our next audit to be completed in March 2005.
Remediation of the material weakness requires the automation of reports, including the development of reporting that details the deferred revenue and service revenues accounts on a customer-by-customer basis. Remediation will also require the automation of the transfer of information between our billing system and our general ledger, which is currently being performed manually. Development of these automated processes is currently ongoing. Although we intend to eliminate the material weakness by December 31, 2004, we cannot assure you that we will be able to do so.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
Our wireless services are provided on a month-to-month basis and are paid in advance. We recognize revenues from wireless services as they are rendered. Amounts received in advance are recorded as deferred revenue. DisenablingSuspending service for non-payment is known as hotlining. We do not recognize revenue on hotlined customers.
Revenues and related costs from the sale of accessories are recognized at the point of sale. The cost of handsets sold to indirect retailers are included in deferred charges until they are sold to and activated by customers. Amounts billed to indirect retailers for handsets are recorded as accounts receivable and deferred revenue upon shipment by us and are recognized as equipment revenues when service is activated by customers. Customers
Our customers have the right to return handsets within a specified time or usage,after a certain amount of use, whichever occurs first. Of the total paid by a new customer for a handset and activation, we record an activation fee of $15, which, since July 1, 2003, is generally recognized in equipment revenue at the time service is activated. We record an estimate for returns as contra-revenue at the time of recognizing revenue. Our assessment of estimated returns is based on historical return rates. If our customers' actual returns are not consistent with our estimates of their returns, revenues may be different than initially recorded.
Beginning Effective July 1, 2003, we implemented EITFadopted Emerging Issues Task Force ("EITF") No. 00-21, “Accounting"Accounting for Revenue Arrangements with Multiple Deliverables,” prepared" ("EITF No. 00-21"), which is being applied on a prospective basis. EITF No. 00-21 also supersedes certain guidance set forth in U.S. Securities and Exchange Commission Staff Accounting Bulletin Number 101, "Revenue Recognition in Financial Statements," ("SAB 101"). SAB 101 was amended in December 2003 by Staff Accounting Bulletin Number 104, "Revenue Recognition." The consensus addresses the Emerging Issues Task Force,accounting for arrangements that involve the delivery or EITF,performance of multiple products, services and/or rights to use assets. Revenue arrangements with multiple deliverables are divided into separate units of accounting and the Financial Accounting Standards Board, or FASB. EITF 00-21 requires us to allocate amounts charged to customers betweenconsideration received is allocated among the saleseparate units of handsets andaccounting based on their relative fair values.
We determined that the sale of wireless telecommunication services on a relative fair value basis. This has resulted inthrough our direct and indirect sales channels with an accompanying handset constitutes revenue arrangements with multiple deliverables. Upon adoption
of EITF No. 00-21, we began dividing these arrangements into separate units of accounting, and allocating the amount collected from the customer being allocated to the sale ofconsideration between the handset and to the first month’swireless service fee. As a result of this treatment, activation fees included inbased on their relative fair values. Consideration received for the consideration athandset is recognized as equipment revenue when the time of sale are generally recordedhandset is delivered and accepted by the customer. Consideration received for the wireless service is recognized as handset revenue.service revenues when earned.
Prior to the adoption of EITF 00-21, we had deferred activation fee revenue and amortized these revenues over the average life of our customers. The existing deferred revenue at July 1, 2003, is beingactivation fees were deferred and amortized over the average life of our customers.estimated customer life. On October 1, 2003, we changed theour estimated average customer life from 25 months to 14 months, based on historical disconnect rates, resulting in an increase in activation revenuerevenues of $5.1 million in the fourth quarter of 2003 over amounts that would have been recognized using the prior estimated average life.
Allowance for DoubtfulUncollectible Accounts and ReturnsReceivable
We maintain allowances for doubtfuluncollectible accounts for estimated losses resulting from the inability of our indirectindependent retailers to pay for equipment purchases and for returns.amounts estimated to be uncollectible for intercarrier compensation. We estimate allowances for uncollectible accounts from independent retailers based on the length of time the receivables are past due, the current business environment and our historical experience. If the financial condition of a material portion of
our indirectindependent retailers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. In circumstances where we are aware of a specific carrier's inability to meet its financial obligations to us, we record a specific allowances for intercarrier compensation against amounts due, to reduce the net recognized receivable to the amount we reasonably believe will be collected. Total allowance for uncollectible accounts receivable at September 30, 2006 was approximately 7% of the total amount of gross accounts receivable.
Inventories
Inventory
We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value or replacement cost based upon assumptions about future demand and market conditions. Total inventory reserves for obsolescent and unmarketable inventory were not significant at September 30, 2006. If actual market conditions are less favorable than those projected, additional inventory write-downs may be required.
Deferred Income Tax Asset and Other Tax Reserves
We assess our deferred tax asset and record a valuation allowance, when necessary, to reduce our deferred tax asset to the amount that is more likely than not to be realized. We have considered future taxable income, taxable temporary differences and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. Should we determine that we would not be able to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to incomeearnings in the period we made that determination.
We establish reserves when, despite our belief that our tax returns are fully supportable, we believe that certain positions may be challenged and ultimately modified. We adjust the reserves in light of changing facts and circumstances. Our effective tax rate includes the impact of income tax related reserve positions and changes to income tax reserves that we consider appropriate. A number of years may elapse before a particular matter for which we have established a reserve is finally resolved. Unfavorable settlement of any particular issue wouldmay require the use of cash.cash or a reduction in our net operating loss carryforwards. Favorable resolution would be recognized as a reduction to the effective rate in the year of resolution. The taxTax reserves as of September 30, 2006 were $26.2 million of which $7.3 million and $18.9 million are presented on the consolidated interim balance sheet in accounts payable and accrued expenses and other longlong-term liabilities, respectively.
Property and Equipment
Depreciation on property and equipment is applied using the straight-line method over the estimated useful lives of the assets once the assets are placed in service, which are ten years for network infrastructure assets including capitalized interest, three to seven years for office equipment, which includes computer equipment, three to seven years for furniture and fixtures and five years for vehicles. Leasehold improvements are amortized over the shorter of the remaining term liabilities.of the lease and any renewal periods reasonably assured or the estimated useful life of the improvement. The estimated life of property and equipment is based on historical experience with similar assets, as well as taking into account anticipated technological or other changes. If technological changes were to occur more rapidly than anticipated or in a different form than anticipated, the useful lives assigned to these assets may need to be shortened, resulting in the recognition of increased depreciation expense in future periods. Likewise, if the anticipated technological or other changes occur more slowly than anticipated, the life of the assets could be extended based on the life assigned to new assets added to property and equipment. This could result in a reduction of depreciation expense in future periods.
Impairment of Long-Lived Assets and Indefinite Lived Assets
We assess the impairment of long-lived assets, other than indefinite-lived intangible assets whenever events or changes in circumstances indicate the carrying value may not be recoverable. Factors we consider important that could trigger an impairment review include significant underperformance relative to historical or projected future operating results or significant changes in the manner of use of the assets or in the strategy for our overall business. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. When we determine that the carrying value of a long-lived asset is not recoverable, we measure any impairment based upon a projected discounted cash flow method using a discount rate we determine to be commensurate with the risk involved.involved and would be recorded as a reduction in the carrying value of the related asset and charged to results of operations. If actual results are not consistent with our assumptions and estimates, we may be exposed to an additional impairment charge associated with long-lived assets. The carrying value of property and equipment was $1.2 billion as of September 30, 2006.
PCS Licenses and Microwave Relocation Costs
We operate broadband PCS networks under licenses granted by the FCC for a particular geographic area on spectrum allocated by the FCC for broadband PCS services. The PCS licenses included the obligation through April 2005 to relocate existing fixed microwave users of our licensed spectrum if our spectrum interfered with their systems and/or reimburse other carriers (according to FCC rules) that relocated prior users if the relocation benefits our system. Additionally, we incurred costs related to microwave relocation in constructing our PCS network. The PCS licenses and microwave relocation costs are recorded at cost. Although PCS licenses are issued with a stated term, generally ten years, the renewal of FCC licenses is generally a routine matter without substantial cost and we have determined that no legal, regulatory, contractual, competitive, economic, or other factors currently exist that limit the useful life of our PCS licenses.
Our primary indefinite-lived intangible assets are our FCCPCS licenses. We test investments in our FCCPCS licenses for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value of our FCCPCS licenses may not be impaired.recoverable. The impairment test consists of a comparison of the fair value with the carrying value. Estimates of the fair value of our PCS licenses are based primarily on discounted future cash flow projections. Cash flow projections, although subject to a degree of uncertainty, are based on trends of historical performance and management's estimate of future performance, giving consideration to existing and anticipated competitive economic conditions. We segregate our FCCPCS licenses by regional marketclusters for the purpose of performing the impairment test asbecause each geographical region is unique. An impairment loss would be recorded as a reduction in the carrying value of the related indefinite-lived intangible asset and charged to results of operations.
No impairment charges have been recognized through September 30, 2006. If actual results are not consistent with our assumptions and estimates, we may be exposed to an additional impairment charge associated with indefinite-lived intangible assets. The carrying value of PCS licenses and microwave relocations costs was $690.7 million as of September 30, 2006.
ValuationShare-Based Payments
We account for share-based awards exchanged for employee services in accordance with SFAS No. 123(R), "Share-Based Payment," ("SFAS No. 123(R)"). Under SFAS No. 123(R), share-based compensation cost is measured at the grant date, based on the estimated fair value of Commonthe award, and is recognized as expense over the employee's requisite service period. We adopted SFAS No. 123(R), as required, on January 1, 2006. Prior to 2006, we recognized stock-based compensation expense for employee share-based awards based on their intrinsic value on the date of grant pursuant to Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB No. 25") and followed the disclosure requirements of SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure," ("SFAS No. 148"), which amends the disclosure requirements of SFAS No. 123, "Accounting for Stock-Based Compensation," ("SFAS No. 123").
We adopted SFAS No. 123(R) using a modified prospective approach. Under the modified prospective approach, prior periods are not revised for comparative purposes. The valuation provisions of SFAS No. 123(R) apply to new awards and to awards that are outstanding on the effective date and subsequently modified or cancelled. Compensation expense, net of estimated forfeitures, for awards outstanding at the effective date is recognized over the remaining service period using the compensation cost calculated under SFAS No. 123 in prior periods.
Historically, we We have assessedgranted nonqualified stock options. Most of our stock option awards include a service condition that relates only to vesting. The stock option awards generally vest in one to four years from the grant date. Compensation expense is amortized on a straight-line basis over the requisite service period for the entire award, which is generally the maximum vesting period of the award.
The determination of the fair value of stock options using an option-pricing model is affected by our common stock at the endvaluation as well as assumptions regarding a number of each reporting period for the purpose of determining stock compensation on variable stock options. This valuation was alsocomplex and subjective variables. The methods used to determine deferred compensation, if any, on non-variable stock option awards granted inthese variables are generally similar to the period, as well asmethods used prior to 2006 for purposes of determining whether a beneficial conversion feature was in existence at each draw date of our Series D cumulative convertible redeemable participating preferred stock.pro forma information under SFAS No. 148. Factors we considered wereconsider in our common stock valuation are recent sales of stock to third parties,third-parties, contemporaneous enterprise valuation ranges provided by third parties and reviewed by management, the liquidation preference of our outstanding preferred stock, significant milestones achieved in the business, as well as the overall economic climate of the wireless industry.
During the twelve month period ended December 31, 2005 and the nine month period ended September 30, 2006, the following awards were granted under the Company's Option Plans:
| Grants Made During the Quarter Ended | Number of Options Granted | Weighted Average Exercise Price | Weighted Average Market Value per Share | Weighted Average Intrinsic Value per Share | |||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| March 31, 2005 | 20,000 | $ | 18.94 | $ | 18.94 | $ | 0.00 | ||||
| June 30, 2005 | — | — | — | — | |||||||
| September 30, 2005 | 1,640,795 | $ | 21.41 | $ | 21.41 | $ | 0.00 | ||||
| December 31, 2005 | 285,383 | $ | 21.46 | $ | 21.46 | $ | 0.00 | ||||
| March 31, 2006 | 956,663 | $ | 21.46 | $ | 21.46 | $ | 0.00 | ||||
| June 30, 2006 | 178,175 | $ | 22.63 | $ | 22.63 | $ | 0.00 | ||||
| September 30, 2006 | 139,475 | $ | 26.00 | $ | 26.00 | $ | 0.00 | ||||
Compensation expense is recognized over the requisite service period for the entire award, which is generally the maximum vesting period of the award.
The fair value of the common stock was determined contemporaneously with the option grants.
Based on an expected initial public offering price of $ , the intrinsic value of the options outstanding at September 30, 2006, was $ million, of which $ million related to vested options and $ million related to unvested options.
Determining the fair value of our common stock requires making complex and subjective judgments. Factors we consider in our common stock valuation are recent sales of stock to third-parties, contemporaneous enterprise valuation ranges provided by third parties and reviewed by management, the liquidation preference of our outstanding preferred stock, significant milestones achieved in the business, as well as the overall economic climate of the wireless industry.
Customer Recognition and Disconnect Policies
When a new customer subscribes to our service, the first month of service and activation fee is included with the handset purchase. Under GAAP, we are required to allocate the purchase price to each of the handset and to the first month ofwireless service and the activation fee.revenue. Generally, the amount allocated to the handset will be less than our cost, and this difference is included in cost per gross addition,Cost Per Gross Addition, or CPGA. We recognize new customers as gross customer additions upon activation of service. We offerPrior to January 23, 2006, we offered our customers the MetroPCSMetro Promise, which allowsallowed a customer to return a newly purchased handset for a full refund prior to the earlier of seven7 days or 60 minutes of use. Beginning on January 23, 2006, we expanded the terms of the Metro Promise to allow a customer to return a newly purchased handset for a full refund prior to the earlier of 30 days or 60 minutes of use. Customers who return their phones under the MetroPCSMetro Promise are reflected as a reduction to gross customer additions. Customers’Customers' monthly service payments are due in advance every month. Our customers must pay their monthly service amount by the payment date or their handsetservice will be disenabled,suspended, or hotlined, and the customer will not be able to make or receive calls on our network. However, a hotlined customer is still able to make E-911 calls in the event of an emergency. There is no service grace period. Any call attempted by a hotlined customer is routed directly to our interactive voice response system and customer service center in order to arrange payment. If the customer pays the amount due within 30 days of the original payment date then the customer’s handset is unhotlined andcustomer's service is restored. If a hotlined customer does not pay the amount due within 30 days of the payment date the account is disconnected and counted as churn. Once an account is disconnected upon reactivation, we charge a $15 reconnect fee upon reactivation to reestablish service and the revenue associated with this fee is deferred and recognized over the estimated life of the customer.
Revenues
We derive our revenues from the following sources:
Service Service.. We sell wireless personal communicationsbroadband PCS services. The various types of service revenues associated with wireless communications servicesbroadband PCS for our customers include monthly recurring charges for airtime, monthly recurring charges for optional features (including voicemailnationwide long distance and text messaging)messaging, ringtones, games and content applications, unlimited directory assistance, ring back tones and nationwide roaming) and charges for long distance service. Service revenues also include intercarrier compensation and non-recurring activation service charges to customers to the extent not allocated to handset revenue. See “—Critical Accounting Policies and Estimates—Revenue Recognition.”customers.
Equipment Equipment.. We sell wireless personal communicationsbroadband PCS handsets and accessories that are used by our customers in connection with our wireless services. This equipment is also sold to indirectour independent retailers to facilitate distribution to our customers.
Costs and Expenses
Our costs and expenses include:
Cost of ServiceService.. The major components of our cost of service are:
Cost of EquipmentEquipment.. We purchase personal communicationswireless broadband PCS handsets and accessories from third-party vendors to resell to our customers and indirectindependent retailers in connection with our services. We subsidize the sale of handsets to encourage the sale and use of our services. We do not manufacture any of this equipment.
Selling, General and Administrative ExpensesExpenses.. Our selling expense includes advertising and promotional costs associated with capturingmarketing and selling to new customers and fixed charges such as retail store rent and retail associates’associates' salaries. General and administrative expense includes support functions including, technical operations, finance, accounting, human resources, information technology and legal services.
Non-cash Compensation. We record stock-based compensation expense in cost of service and selling, general and administrative expenses associated with employee stock options issued below estimated fair market valuewhich is measured at the date of grant. In addition,grant, based on the estimated fair value of the award. Prior to the adoption of SFAS No. 123(R), we recordrecorded stock-based compensation expense at the end of each reporting period with respect to our variable stock options.
Depreciation and AmortizationAmortization.. Depreciation is applied using the straight-line method over the estimated useful lives of the assets once the assets are placed in service, which are ten years for network infrastructure assets and capitalized interest, three to seven years for office equipment, includingwhich includes computer equipment, and three to seven years for furniture and fixtures.fixtures and five years for vehicles. Leasehold improvements are amortized over the term of the respective leases, which includes renewal
periods that are reasonably assured, or the estimated useful life of the improvement, whichever is shorter.
Interest Expense and Interest IncomeIncome.. Interest expense consists ofincludes interest incurred on our FCC notes basedborrowings, amortization of debt issuance costs and amortization of discounts and premiums on an estimated fair market borrowing rate at the time of issuance, of which 6.5% is paid in cash, and interest on our senior notes.long-term debt. Interest income is earned primarily on our cash and cash equivalents.
Income TaxesTaxes.. As a result of our operating losses and additionalaccelerated depreciation available under federal tax laws, in 2003, we have paid no federal income tax to date.taxes through September 30, 2006. In addition, we have paid an immaterial amount of state income taxes to date.tax through September 30, 2006.
Seasonality
Our customer activity is influenced by seasonal effects related to traditional retail selling periods and other factors that arise from our target customer base. Based on historical results, we generally expect net customer additions to be strongest in the first and fourth quarters. Softening of sales and increased customer turnover, or churn, in the second and third quarters of the year usually combine to result in fewer net customer additions. However, sales activity and churn can be strongly affected by the launch of new markets and promotional activity, which have the ability to reduce or outweigh certain seasonal effects.
Results of OperationsPerformance Measures
Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003In managing our business and assessing our financial performance, we supplement the information provided by financial statement measures with several customer-focused performance metrics that are widely used in the wireless industry. These metrics include average revenue per user per month, or ARPU, which measures service revenue per customer; cost per gross customer addition, or CPGA, which measures the average cost of acquiring a new customer; cost per user per month, or CPU, which measures the non-selling cash cost of operating our business on a per customer basis; and churn, which measures turnover in our customer base. For a reconciliation of Non-GAAP performance measures and a further discussion of the measures, please read "—Reconciliation of Non-GAAP Financial Measures" below.
Set forth below is a summary of certain financialThe following table shows annual metric information for 2003, 2004 and 2005 and information for the periods indicated:
Three Months Ended March 31, | |||||||||
| 2003 | 2004 | Change | |||||||
| (In thousands) | |||||||||
Revenues | |||||||||
Service revenues | $ | 75,999 | $ | 132,921 | 75 | % | |||
Equipment revenues | 23,399 | 40,077 | 71 | % | |||||
Cost of service (excluding depreciation included below) | 25,929 | 40,909 | 58 | % | |||||
Cost of equipment | 44,213 | 64,047 | 45 | % | |||||
Selling, general and administrative expenses (excluding non-cash compensation included below) | 18,046 | 28,916 | 60 | % | |||||
Non-cash compensation | 241 | 3,256 | * | ||||||
Depreciation and amortization | 9,047 | 12,774 | 41 | % | |||||
Interest expense | 1,755 | 5,572 | 217 | % | |||||
Net income | 9 | 10,837 | * | ||||||
Revenues. For the threenine months ended March 31, 2004, our total revenues increased $73.6 million, or 74%, to $173.0 million from $99.4 million for the comparable period in 2003.
Service revenues accounted for 77% of total revenuesSeptember 30, 2005 and equipment revenues accounted for 23% of total revenues for the three months ended March 31, 2004. Service revenues increased $56.9 million, or 75%, to $132.9 million for the three months ended March 31, 2004 from $76.0 million for the three months ended March 31, 2003. The increase was attributable to the continued strong demand for service in our four market clusters resulting in a 73% increase in average number of customers.2006.
Equipment revenues increased $16.7 million, or 71%, to $40.1 million for the three months ended March 31, 2004 from $23.4 million for the three months ended March 31, 2003. During 2003, we significantly expanded our handset product line, leading to significant upgrade sales to existing customers. Handset sales to existing customers increased to $16.7 million of revenue during the first quarter of 2004, as compared to $1.0 million of revenue in the first quarter of 2003. The remaining increase was attributable to the revenues generated by new customers selecting handsets from our expanded product line.
| | Year Ended December 31, | Nine Months Ended September 30, | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2003 | 2004 | 2005 | 2005 | 2006 | ||||||||||||
| Customers: | |||||||||||||||||
| End of period | 976,899 | 1,398,732 | 1,924,621 | 1,739,787 | 2,616,532 | ||||||||||||
| Net additions | 463,415 | 421,833 | 525,889 | 341,055 | 691,911 | ||||||||||||
| Churn: | |||||||||||||||||
| Average monthly rate | 4.6 | % | 4.9 | % | 5.1 | % | 5.0 | % | 4.7 | % | |||||||
| ARPU | $ | 37.49 | $ | 41.13 | $ | 42.40 | $ | 42.34 | $ | 42.91 | |||||||
| CPGA | $ | 100.46 | $ | 103.78 | $ | 102.70 | $ | 101.46 | $ | 116.56 | |||||||
| CPU | $ | 18.21 | $ | 18.95 | $ | 19.57 | $ | 19.15 | $ | 19.65 | |||||||
Cost of Service. Customers. Cost of service increased $15.0 million, or 58%, to $40.9 million for the three months ended March 31, 2004 from $25.9 million for the three months ended March 31, 2003. This increase was due to the overall growth of our business and an increase in our customer base, including a $4.2 million increase in long distance costs, a $3.8 million increase in call center expenses, a $1.1 million increase in billing expenses, and a $0.9 million increase in E-911 fees.
Cost of Equipment. Cost of equipment increased $19.8 million, or 45%, to $64.0 million for the three months ended March 31, 2004 from $44.2 million for the three months ended March 31, 2003. This increase was attributable to our overall increase in customers as well as our increase in the number of equipment upgrades purchased by our existing customers due to our offering a broader line of handsets in 2004. Cost of equipment related to existing customers totaled $21.2 million during the first quarter 2004 as compared to $2.5 million for the same period last year.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $10.9 million, or 60%, to $28.9 million for the three months ended March 31, 2004 from $18.0 million for the three months ended March 31, 2003. Selling expenses increased by approximately $2.3 million as a result of increased sales and marketing activities, including advertising expenses aimed at growing our customer base. General and administrative expenses increased by $8.6 million. This increase was due to the overall growth of our business, including a $2.4 million increase in property taxes, a $2.0 million increase in software and data services, a $1.6 million increase in professional services, a $1.1 million increase in credit card and bank charges, a $0.5 million increase in employee related costs, and a $1.0 million increase in building lease, insurance and other expenses.
Non-cash Compensation. Non-cash compensation was $3.3 million for the three months ended March 31, 2004, compared to $0.2 million for the three months ended March 31, 2003. The increase was primarily due to the increase in the estimated fair market value of our stock, which resulted in a $3.0 million charge related to outstanding options accounted for under variable accounting.
Depreciation and Amortization. Depreciation and amortization expense increased $3.7 million, or 41%, to $12.8 million for the three months ended March 31, 2004 from $9.0 million for the three months ended March 31, 2003. The increase related primarily to the increase in network assets in service for the period. In-service base stations and switching equipment increased by 33% from the three months ended March 31, 2003. In addition, we had 177 more cell sites in service at March 31, 2004 than at March 31, 2003. We expect depreciation to continue to increase due to the additional cell sites and switches that we plan to place in service to meet future customer growth and usage.
Interest Expense. Interest expense was $5.6 million for the three months ended March 31, 2004, compared to $1.8 million for the three months ended March 31, 2003. This increase was due to interest on our $150.0 million of 10 3/4% senior notes issued in September 2003.
Net Income. Net income was $10.8 million for the three months ended March 31, 2004, compared to $9,000 for the three months ended March 31, 2003.
Set forth below is a summary of certain non-GAAP financial information for the periods indicated:
Three Months Ended March 31, | |||||||||||
| 2003 | 2004 | Change | |||||||||
Customers: | |||||||||||
End of period | 708,965 | 1,150,954 | 62 | % | |||||||
Net additions | 195,481 | 174,055 | (11 | %) | |||||||
Churn: | |||||||||||
Average monthly rate | 3.5 | % | 3.8 | % | 9 | % | |||||
ARPU | $ | 39.50 | $ | 40.00 | 1 | % | |||||
CPGA | 104.97 | 96.74 | (8 | %) | |||||||
Adjusted EBITDA (In thousands) | 11,210 | 39,126 | 249 | % | |||||||
Customers. Net customer additions were 174,055691,911 for the threenine months ended March 31, 2004, bringing our total customersSeptember 30, 2006, compared to 1,150,954 as of March 31, 2004,341,055 for the nine months ended September 30, 2005, an increase of 62%103%. Total customers were 2,616,532 as of September 30, 2006, an increase of 50% over the customer total as of MarchSeptember 30, 2005 and 36% over the customer total as of December 31, 2005. Net customer additions were 525,889 for the year ended December 31, 2005, bringing our total customers to approximately 1.9 million as of December 31, 2005, an increase of 38% over the total customers as of December 31,
2004. Net customer additions were 421,833 for the year ended December 31, 2004. Total customers at December 31, 2004 were approximately 1.4 million, an increase of 43% over total customers at December 31, 2003. Since March 31, 2003,These increases are primarily attributable to the continued demand for our service offering.
Churn. As we have expanded our network, offered new handsets anddo not require a long-term service plans and expanded our distribution network. Although we have a limited operating history, we have historically generated the highest number of net customer additions during the first calendar quarter, with the second highest number being generated during the fourth calendar quarter. In addition, periods in which we have generated high numbers of net customer additions typically are followed by periods of higher churn. As a result, we expectcontract, our churn rate for the three months ended June 30, 2004percentage is expected to be higher than we experienced during the three months ended March 31, 2004.
Churn. The average monthly rate of customer turnover, or churn, was 3.8% and 3.5% for the three months ended March 31, 2004 and 2003, respectively.traditional wireless carriers that require customers to sign a one- to two-year contract with significant early termination fees. Average monthly churn represents (a) the number of customers who have been disconnected from our system during the measurement period less the number of customers who have reactivated service, divided by (b) the sum of the average monthly number of customers during such period. We classify delinquent customers as churn after they have been delinquent for 30 days. In addition, when an existing customer establishes a new account in connection with the purchase of an upgraded or replacement phone and does not identify themselves as an existing customer, we count that phone leaving service as a churn and the new phone entering service as a gross customer addition. Churn for the nine months ended September 30, 2006 was 4.7% compared to 5.0% for the nine months ended September 30, 2005. Based upon a change in the allowable return period from 7 days to 30 days, we revised our definition of gross customer additions to exclude customers that discontinue service in the first 30 days of service. This revision reduces deactivations and gross customer additions commencing March 23, 2006, and reduces churn. Churn computed under the original 7 day allowable return period would have been 5.2% for the nine months ended September 30, 2006. Our average monthly rate of customer turnover, or churn, was 5.1%, 4.9% and 4.6% for the years ended December 31, 2005, 2004 and 2003, respectively.
Average Revenue Per User. Average revenue per user, or ARPU, was $40.00 and $39.50 for the three months ended March 31, 2004 and 2003, respectively. ARPU represents (a) service revenues less activation revenues, E-911, Federal Universal Service Fund, or FUSF, and E-911vendor's compensation charges for the measurement period, divided by (b) the sum of the average monthly number of customers during such period, divided by (c)period. ARPU was $42.91 and $42.34 for the numbernine months ended September 30, 2006 and 2005, respectively, an increase of months in such period. The $0.50,$0.57, or 1%. ARPU was $42.40 and $41.13 for the years ended December 31, 2005 and 2004, respectively, an increase of $1.27, or 3%. ARPU increased $3.64, or approximately 10%, during 2004 from $37.49 for the year ended December 31, 2003. The increase in ARPU was primarily the result of the increase inattracting customers electing theto higher priced service plans, which include unlimited nationwide long distance service plan, offset in part byfor $40 per month as well as unlimited nationwide long distance and certain calling and data features on an increase in customers who did not payunlimited basis for their service while in hotlined status. Revenue is only recognized for customers who pay for service. However, hotlined customers are included in our customer base until they are deactivated, and are therefore counted in the denominator of the ARPU calculation although there is no corresponding revenue recorded for these hotlined customers in the numerator. Once a customer is deactivated, they are removed from the customer base and no longer included in the denominator of the ARPU calculation. For more detail regarding our calculation of ARPU, refer to “—Reconciliation of Non-GAAP Financial Measures” below.$45 per month.
Cost Per Gross Addition. Cost per gross addition, or CPGA, was $96.74 and $104.97 for the three months ended March 31, 2004 and 2003, respectively. The $8.23, or 8%, decrease was primarily the result of lower handset subsidies and spreading selling costs over a larger number of gross additions. CPGA is determined by dividing (a) selling expenses plus the total cost of equipment associated with transactions with new customers less activation revenues and equipment revenues associated with transactions with new customers during the measurement period by (b) gross customer additions during such period. Retail customer service expenses and equipment margin on handsets sold to existing customers when they are identified, including handset upgrade transactions, are excluded, as these costs are incurred specifically for existing customers. For more detail regardingCPGA costs have increased to $116.56 for the nine months ended September 30, 2006 from $101.46 for the nine months ended September 30, 2005, which was primarily driven by the selling expenses associated with the launch of the Dallas/Ft. Worth and Detroit metropolitan areas. In addition, on January 23, 2006, we revised the terms of our calculationreturn policy from 7 days to 30 days, and as a result we revised our definition of gross customer additions to exclude customers that discontinue service in the first 30 days of service. This revision, commencing March 23, 2006, reduces deactivations and gross customer additions and increases CPGA. CPGA refercomputed under the original 7 day allowable return period would have been $109.84 for the nine months ended September 30, 2006. CPGA was $102.70 and $103.78 for the years ended December 31, 2005 and 2004, respectively. The $1.08, or 1%, decrease in CPGA was the result of the higher rate of growth in customer activations and the relatively fixed nature of the expenses associated with those activations. CPGA increased $3.32 or 3% in 2004 from $100.46 for the year ended
December 31, 2003. The increase in CPGA was the result of a decrease in activation fees revenue partially offset by lower per unit handset subsidies.
Cost Per User. CPU is cost of service and general and administrative costs (excluding applicable non-cash stock-based compensation expense included in cost of service and general and administrative expense) plus net loss on handset equipment transactions unrelated to “—Reconciliationinitial customer acquisition (which includes the gain or loss on sale of Non-GAAPhandsets to existing customers and costs associated with handset replacements and repairs (other than warranty costs which are the responsibility of the handset manufacturers)), divided by sum of the average monthly number of customers during such period. CPU for the nine months ended September 30, 2006 and 2005 was $19.65 and $19.15, respectively. CPU for the years ended December 31, 2005, 2004 and 2003 was $19.57, $18.95 and $18.21, respectively. We continue to achieve cost benefits due to the increasing scale of our business. However these benefits have been offset by a combination of the construction and launch expenses associated with our Expansion Markets, which contributed approximately $3.48 of additional CPU for the nine month period ended September 30, 2006. In addition, CPU has increased historically due to costs associated with higher ARPU service plans such as those related to unlimited nationwide long distance. During the years ended December 31, 2004 and 2005, CPU was impacted by substantial legal and accounting expenses associated with an internal investigation related to material weaknesses in our internal control over financial reporting as well as financial statement audits related to our restatement efforts.
Operating Segments
Operating segments are defined by Statement of Financial Measures” below.Accounting Standards ("SFAS") No. 131 "Disclosure About Segments of an Enterprise and Related Information," ("SFAS No. 131"), as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is the Chairman of the Board and Chief Executive Officer.
As of September 30, 2006, we had eight operating segments based on geographic region within the United States: Atlanta, Dallas/Ft. Worth, Detroit, Miami, San Francisco, Sacramento, Tampa/Sarasota/Orlando and Los Angeles. Each of these operating segments provide wireless voice and data services and products to customers in its service areas or is currently constructing a network in order to provide these services. These services include unlimited local and long distance calling, voicemail, caller ID, call waiting, text messaging, picture and multimedia messaging, international long distance and text messaging, ringtones, games and content applications, unlimited directory assistance, ring back tones, nationwide roaming, mobile Internet browsing and other value-added services.
We aggregate our operating segments into two reportable segments: Core Markets and Expansion Markets.
The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies. General corporate overhead, which includes expenses such as corporate employee labor costs, rent and utilities, legal, accounting and auditing expenses, is allocated equally across all operating segments. Corporate marketing and advertising expenses are allocated equally to the operating segments, beginning in the period during which we launch service in that operating segment. Expenses associated with our national data center are allocated based on the average number of customers in each operating segment. There are no transactions between reportable segments.
Interest expense, interest income, gain/loss on extinguishment of debt and income taxes are not allocated to the segments in the computation of segment operating profit for internal evaluation purposes.
Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30, 2005
Set forth below is a summary of certain financial information by reportable operating segment for the periods indicated:
| | Nine Months Ended September 30, | | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Reportable Operating Segment Data | | |||||||||
| 2006 | 2005 | Change | ||||||||
| | (in thousands) | | ||||||||
| REVENUES: | ||||||||||
| Service revenues: | ||||||||||
| Core Markets | $ | 831,053 | $ | 631,208 | 32% | |||||
| Expansion Markets | 85,126 | 1 | ** | |||||||
| Total | $ | 916,179 | $ | 631,209 | 45% | |||||
| Equipment revenues: | ||||||||||
| Core Markets | $ | 149,200 | $ | 118,973 | 25% | |||||
| Expansion Markets | 28,392 | 17 | ** | |||||||
| Total | $ | 177,592 | $ | 118,990 | 49% | |||||
| OPERATING EXPENSES: | ||||||||||
| Cost of service (excluding depreciation and amortization disclosed separately below)(1): | ||||||||||
| Core Markets | $ | 244,636 | $ | 197,425 | 24% | |||||
| Expansion Markets | 68,874 | 4,515 | ** | |||||||
| Total | $ | 313,510 | $ | 201,940 | 55% | |||||
| Cost of equipment: | ||||||||||
| Core Markets | $ | 261,258 | $ | 210,431 | 24% | |||||
| Expansion Markets | 69,640 | 98 | ** | |||||||
| Total | $ | 330,898 | $ | 210,529 | 57% | |||||
| Selling, general and administrative expenses (excluding depreciation and amortization disclosed separately below)(1): | ||||||||||
| Core Markets | $ | 114,021 | $ | 112,137 | 2% | |||||
| Expansion Markets | 57,900 | 4,069 | ** | |||||||
| Total | $ | 171,921 | $ | 116,206 | 48% | |||||
| Adjusted EBITDA (Deficit)(2): | ||||||||||
| Core Markets | $ | 364,585 | $ | 233,491 | 56% | |||||
| Expansion Markets | (79,393 | ) | (8,665 | ) | ** | |||||
Depreciation and amortization: | ||||||||||
| Core Markets | $ | 80,467 | $ | 60,158 | 34% | |||||
| Expansion Markets | 13,381 | 721 | ** | |||||||
| Other | 2,339 | 1,016 | 130% | |||||||
| Total | $ | 96,187 | $ | 61,895 | 55% | |||||
| Stock-based compensation expense: | ||||||||||
| Core Markets | $ | 4,246 | $ | 3,302 | 29% | |||||
| Expansion Markets | 3,504 | — | ** | |||||||
| Total | $ | 7,750 | $ | 3,302 | 135% | |||||
| Income (loss) from operations: | ||||||||||
| Core Markets | $ | 269,735 | $ | 388,572 | (31)% | |||||
| Expansion Markets | (96,904 | ) | (9,635 | ) | ** | |||||
| Other | (2,339 | ) | (1,016 | ) | 130% | |||||
| Total | $ | 170,492 | $ | 377,921 | (55)% | |||||
Service Revenues. Service revenues increased $285.0 million, or 45%, to $916.2 million for the nine months ended September 30, 2006 from $631.2 million for the nine months ended September 30, 2005. The increase is due to increases in Core Markets and Expansion Markets service revenues as follows:
Equipment Revenues. Equipment revenues increased $58.6 million, or 49%, to $177.6 million for the nine months ended September 30, 2006 from $119.0 million for the nine months ended September 30, 2005. The increase is due to increases in Core Markets and Expansion Markets equipment revenues as follows:
Cost of Service. Cost of service increased $111.6 million, or 55%, to $313.5 million for the nine months ended September 30, 2006 from $201.9 million for the nine months ended September 30, 2005. The increase is due to increases in Core Markets and Expansion Markets cost of service as follows:
metropolitan area in October 2005, the Dallas/Ft. Worth metropolitan area in March 2006 and the Detroit metropolitan area in April 2006, which contributed net customer additions of approximately 389,300 customers during the nine months ended September 30, 2006. These activities resulted in a $15.4 million increase in cell site and switch facility lease expense, a $10.6 million increase in employee costs, $8.7 million increase in intercarrier compensation, $5.0 million in customer service expense, $5.0 million in long distance costs and $2.1 million in billing expenses.
Cost of Equipment. Cost of equipment increased $120.4 million, or 57%, to $330.9 million for the nine months ended September 30, 2006 from $210.5 million for the nine months ended September 30, 2005. The increase is due to increases in Core Markets and Expansion Markets cost of equipment as follows:
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $55.7 million, or 48%, to $171.9 million for the nine months ended September 30, 2006 from $116.2 million for the nine months ended September 30, 2005. The increase is due to increases in Core Markets and Expansion Markets selling, general and administrative expenses as follows:
Depreciation and Amortization. Adjusted earnings before interest, taxes, Depreciation and amortization expense increased $34.3 million, or 55%, to $96.2 million for the nine months ended September 30, 2006 from $61.9 million for the nine months ended September 30, 2005. The increase is primarily due to increases in Core Markets and Expansion Markets depreciation expense as follows:
| | Nine Months Ended September 30, | | |||||||
|---|---|---|---|---|---|---|---|---|---|
| Consolidated Data | | ||||||||
| 2006 | 2005 | Change | |||||||
| | (in thousands) | | |||||||
| Loss (gain) on disposal of assets | $ | 10,763 | $ | (218,292 | ) | (105 | )% | ||
| (Gain) loss on extinguishment of debt | (244 | ) | 46,448 | (101 | )% | ||||
| Interest expense | 67,408 | 40,867 | 65 | % | |||||
| Provision for income taxes | 47,245 | 115,460 | (59 | )% | |||||
| Net income | 70,625 | 179,835 | (61 | )% | |||||
Loss (Gain) on Disposal of Assets. In May 2005, we completed the sale of a 10 MHz portion of our 30 MHz PCS license in the San Francisco-Oakland-San Jose basic trading area for cash consideration of $230.0 million. The sale of PCS spectrum resulted in a gain on disposal of asset in the amount of $228.2 million.
(Gain) Loss on Extinguishment of Debt. In May 2005, we repaid all of the outstanding debt under our FCC notes, Senior Notes and bridge credit agreement. As a result, we recorded a $1.9 million loss on the extinguishment of the FCC notes; a $34.0 million loss on extinguishment of the Senior Notes; and a $10.4 million loss on the extinguishment of the bridge credit agreement.
Interest Expense. Interest expense increased $26.5 million, or 65%, to $67.4 million for the nine months ended September 30, 2006 from $40.9 million for the nine months ended September 30, 2005. The increase in interest expense was primarily due to increased average principal balance outstanding as a result of additional borrowings of $150.0 million under our Credit Agreements in the fourth quarter of 2005 and additional $200.0 million under the secured bridge credit facility in the third quarter of 2006. Interest expense also increased due to the weighted average interest rate increasing to 10.67% for the nine months ended September 30, 2006 compared to 8.85% for the nine months ended September 30, 2005. The increase in interest expense was partially offset by the capitalization of $11.6 million of interest during the nine months ended September 30, 2006, compared to $2.3 million of interest capitalized during the same period in 2005. We capitalize interest costs associated with our PCS licenses and property and equipment during the construction of a new market. The amount of such capitalized interest depends on the carrying values of the PCS licenses and construction in progress involved in those markets and the duration of the construction process. We expect capitalized interest to be significant during the construction of our additional Expansion Markets.
Provision for Income Taxes. Income tax expense for nine months ended September 30, 2006 decreased to $47.2 million, which is approximately 40% of our income before provision for income
taxes. For more detail regardingthe nine months ended September 30, 2005 the provision for income taxes was $115.5 million, or approximately 39% of income before provision for income taxes. The nine months ended September 30, 2005 included a gain on the sale of a 10 MHz portion of our calculation30 MHz PCS license in the San Francisco-Oakland-San Jose basic trading area in the amount of adjusted EBITDA, refer to “—Reconciliation of Non-GAAP Financial Measures” below.$228.2 million.
Year Ended December 31, 20032005 Compared to Year Ended December 31, 20022004
Set forth below is a summary of certain financial information by reportable operating segment for the periods indicated. For the year ended December 31, 2004, the consolidated financial information represents the Core Markets reportable operating segment, as the Expansion Markets reportable operating segment had no operations until 2005.
| Reportable Operating Segment Data | 2005 | 2004 | Change | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in thousands) | | |||||||||
| REVENUES: | |||||||||||
| Service revenues: | |||||||||||
| Core Markets | $ | 868,681 | $ | 616,401 | 41% | ||||||
| Expansion Markets | 3,419 | — | ** | ||||||||
| Total | $ | 872,100 | $ | 616,401 | 41% | ||||||
| Equipment revenues: | |||||||||||
| Core Markets | $ | 163,738 | $ | 131,849 | 24% | ||||||
| Expansion Markets | 2,590 | — | ** | ||||||||
| Total | $ | 166,328 | $ | 131,849 | 26% | ||||||
| OPERATING EXPENSES: | |||||||||||
| Cost of service (excluding depreciation and amortization disclosed separately below): | |||||||||||
| Core Markets | $ | 271,437 | $ | 200,806 | 35% | ||||||
| Expansion Markets | 11,775 | — | ** | ||||||||
| Total | $ | 283,212 | $ | 200,806 | 41% | ||||||
| Cost of equipment: | |||||||||||
| Core Markets | $ | 293,702 | $ | 222,766 | 32% | ||||||
| Expansion Markets | 7,169 | — | ** | ||||||||
| Total | $ | 300,871 | $ | 222,766 | 35% | ||||||
| Selling, general and administrative expenses (excluding depreciation and amortization disclosed separately below) (1): | |||||||||||
| Core Markets | $ | 153,321 | $ | 131,510 | 17% | ||||||
| Expansion Markets | 9,155 | — | ** | ||||||||
| Total | $ | 162,476 | $ | 131,510 | 24% | ||||||
| Adjusted EBITDA (Deficit)(2): | |||||||||||
| Core Markets | $ | 316,555 | $ | 203,597 | 55% | ||||||
| Expansion Markets | (22,090 | ) | — | ** | |||||||
Depreciation and amortization: | |||||||||||
| Core Markets | $ | 84,436 | $ | 61,286 | 38% | ||||||
| Expansion Markets | 2,030 | — | ** | ||||||||
| Other | 1,429 | 915 | 56% | ||||||||
| Total | $ | 87,895 | $ | 62,201 | 41% | ||||||
| Stock-based compensation expense: | |||||||||||
| Core Markets | $ | 2,596 | $ | 10,429 | (75)% | ||||||
| Expansion Markets | — | — | — | ||||||||
| Total | $ | 2,596 | $ | 10,429 | (75)% | ||||||
| Income (loss) from operations: | |||||||||||
| Core Markets | $ | 219,777 | $ | 128,673 | 71% | ||||||
| Expansion Markets | (24,370 | ) | — | ** | |||||||
| Other | 226,770 | (915 | ) | ** | |||||||
| Total | $ | 422,177 | $ | 127,758 | 230% | ||||||
Service Revenues. Service revenues increased $255.7 million, or 41%, to $872.1 million for the year ended December 31, 2005 from $616.4 million for the year ended December 31, 2004. The increase is due to increases in Core Markets and Expansion Markets service revenues as follows:
Equipment Revenues. Equipment revenues increased $34.5 million, or 26%, to $166.3 million for the year ended December 31, 2005 from $131.8 million for the year ended December 31, 2004. The increase is due to increases in Core Markets and Expansion Markets equipment revenues as follows:
Cost of Service. Cost of service increased $82.4 million, or 41%, to $283.2 million for the year ended December 31, 2005 from $200.8 million for the year ended December 31, 2004. The increase is due to increases in Core Markets and Expansion Markets cost of service as follows:
Cost of Equipment. Cost of equipment increased $78.1 million, or 35%, to $300.9 million for the year ended December 31, 2005 from $222.8 million for the year ended December 31, 2004. The increase is due to increases in Core Markets and Expansion Markets cost of equipment as follows:
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $31.0 million, or 24%, to $162.5 million for the year ended December 31, 2005 from $131.5 million for the year ended December 31, 2004. The increase is due to increases in Core Markets and Expansion Markets selling, general and administrative expenses as follows:
Depreciation and Amortization. Depreciation and amortization expense increased $25.7 million, or 41%, to $87.9 million for the year ended December 31, 2005 from $62.2 million for the year ended December 31, 2004. The increase is primarily due to increases in Core Markets and Expansion Markets depreciation expense as follows:
| Consolidated Data | 2005 | 2004 | Change | ||||||
|---|---|---|---|---|---|---|---|---|---|
| | (in thousands) | | |||||||
| Loss (gain) on disposal of assets | $ | (218,203 | ) | $ | 3,209 | ** | |||
| (Gain) loss on extinguishment of debt | 46,448 | (698 | ) | ** | |||||
| Interest expense | 58,033 | 19,030 | 205 | % | |||||
| Provision for income taxes | 127,425 | 47,000 | 171 | % | |||||
| Net income | 198,677 | 64,890 | 206 | % | |||||
Loss (Gain) on Disposal of Assets. In May 2005, we completed the sale of a 10 MHz portion of our 30 MHz PCS license in the San Francisco-Oakland-San Jose basic trading area for cash consideration of $230.0 million. The sale of PCS spectrum resulted in a gain on disposal of asset in the amount of $228.2 million.
(Gain) Loss on Extinguishment of Debt. In May 2005, we repaid all of the outstanding debt under our FCC notes, Senior Notes and bridge credit agreement. As a result, we recorded a $1.9 million loss on the extinguishment of the FCC notes; a $34.0 million loss on extinguishment of the Senior Notes; and a $10.4 million loss on the extinguishment of the bridge credit agreement.
Interest Expense. Interest expense increased $39.0 million, or 205%, to $58.0 million for the year ended December 31, 2005 from $19.0 million for the year ended December 31, 2004. The increase was primarily attributable to $40.9 million in interest expense related to our Credit Agreements that were executed on May 31, 2005 as well as the amortization of the deferred debt issuance costs in the amount of $3.6 million associated with the Credit Agreements. On May 31, 2005, we paid all of our outstanding obligations under our FCC notes and Senior Notes, which generally had lower interest rates than our Credit Agreements.
Provision for Income Taxes. Income tax expense for year ended December 31, 2005 increased to $127.4 million, which is approximately 39% of our income before provision for income taxes. For the year ended December 31, 2004 the provision for income taxes was $47.0 million, or approximately 42% of income before provision for income taxes. The increase in our income tax expense in 2005 was attributable to our increased operating profits. The decrease in the effective tax rate from 2004 to 2005 relates primarily to the increase in book income which lowers the effective rate of tax items included in the calculation.
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
For the years ended December 31, 2004 and 2003, the consolidated summary information presented below represents Core Markets reportable segment information, as the Expansion Markets reportable segment had no operations until 2005.
Set forth below is a summary of certain financial information for the periods indicated:
| 2002 | 2003 | Change | |||||||
| (In thousands) | |||||||||
Revenues | |||||||||
Service revenues | $ | 102,137 | $ | 370,920 | 263 | % | |||
Equipment revenues | 23,458 | 88,562 | 278 | % | |||||
Cost of service (excluding depreciation included below) | 61,881 | 118,335 | 91 | % | |||||
Cost of equipment | 100,651 | 155,084 | 54 | % | |||||
Selling, general and administrative expenses (excluding non-cash compensation included below) | 55,515 | 90,556 | 63 | % | |||||
Non-cash compensation | 1,115 | 7,379 | 562 | % | |||||
Depreciation and amortization | 21,394 | 41,900 | 96 | % | |||||
Net income | 139,067 | 20,566 | (85 | %) | |||||
| | 2004 | 2003 | Change | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | (in thousands) | | ||||||||
| Revenues | ||||||||||
| Service revenues | $ | 616,401 | $ | 369,851 | 67 | % | ||||
| Equipment revenues | 131,849 | 81,258 | 62 | % | ||||||
| Cost of service (excluding depreciation and amortization disclosed separately below) | 200,806 | 122,211 | 64 | % | ||||||
| Cost of equipment | 222,766 | 150,832 | 48 | % | ||||||
| Selling, general and administrative expenses (excluding depreciation and amortization disclosed separately below) | 131,510 | 94,073 | 40 | % | ||||||
| Depreciation and amortization | 62,201 | 42,428 | 47 | % | ||||||
| Interest expense | 19,030 | 11,115 | 71 | % | ||||||
| Provision for income taxes | 47,000 | 16,179 | 191 | % | ||||||
| Net income | 64,890 | 15,358 | 323 | % | ||||||
Revenues Service Revenues.. Total Service revenues increased $333.9$246.5 million, or 266%67%, to $459.5$616.4 million for the year ended December 31, 20032004 from $125.6$369.9 million for the year ended December 31, 2002.2003. The increase is mainly attributable to the addition of approximately 422,000 customers during 2004 as well as a 10% increase in average revenue per user.
Service Equipment Revenues. Equipment revenues increased $268.8$50.6 million, or 263%62%, to $370.9$131.9 million for the year ended December 31, 20032004 from $102.1$81.3 million for the year ended December 31, 2002.2003. The increase was attributable to the timing of the commercial launch of our four market clusters and a 268% increase in gross customer additions during the averageyear of approximately 1.1 million as well as upgrade sales to our existing customers due to the increased number of our customers. We launchedhandsets models available for purchase during 2004.
Cost of Service. Cost of service in our Miami market in January 2002, in our Atlanta and Sacramento market clusters in February 2002, and in our San Francisco market cluster in September 2002. We launched commercial operations on the west coast of southern Florida in October 2003.
Equipment revenues increased $65.1$78.6 million, or 278%64%, to $88.6$200.8 million for the year ended December 31, 20032004 from $23.5$122.2 million for the year ended December 31, 2002. The increase was attributable to a 43% increase in gross additions and a 99% increase in revenue per handset and upgrade sales to our existing customers, resulting in an increase of $16.6 million in equipment revenues. In 2002, we offered only one handset model to new customers.
Cost of Service. Cost of service increased $56.5 million, or 91%, to $118.3 million for the year ended December 31, 2003 from $61.9 million for the year ended December 31, 2002.2003. The increase was attributable to the timingaddition of approximately 422,000 customers during the commercial launch of our four market clusters and the increase in our number of customers, which resulted in a $16.0 million increase in interconnect fees, a $12.9 million increase in call center expenses, a $7.8 million increase in billing expenses, a $6.5 million increase in long distance costs, a $5.8 million increase in E-911 fees.year. Additionally, employee costs, cell site and switch facility lease expense and repair and maintenance expense increased as a result of the growth of our business and the expansion of our network.
Cost of EquipmentEquipment.. Cost of equipment increased by $54.4$71.9 million, or 54%48%, to $155.1$222.7 million for the year ended December 31, 20032004 from $100.7$150.8 million for the year ended December 31, 2002.2003. The increase in cost of equipment was due to a 66%slight increase in the average handset cost per unit which related to an increase in sales of higher priced handset models in 2004. In addition, we experienced an increase in the number of handsets sold offset by a 7% reduction in average handset cost per unit.to new customers during the year.
Selling, General and Administrative ExpensesExpenses.. Selling, general and administrative expenses increased $35.0$37.4 million, or 63%40%, to $90.6$131.5 million for the year ended December 31, 20032004 from $55.5$94.1 million for the year ended December 31, 2002.2003. Selling, expenses increased by $17.6 million as a result of increased sales and marketing activities. Generalgeneral and administrative expenses include stock-based compensation expense, which increased by $17.4$4.8 million, primarily dueor 87%, to the increase in our customer base and to network expansion, including a $5.8 million increase in transaction fees for customer collections, a $2.1 million increase in handset repair fees, a $3.0 million increase employee salaries and benefits, a $1.5 million increase in maintenance agreements for our network facilities, a $1.5 million increase in property insurance and a $1.1 million increase in professional fees.
Non-cash Compensation. Non-cash compensation increased $6.3 million to $7.4$10.4 million for the year ended December 31, 20032004 from $1.1$5.6 million for the year ended December 31, 2002, as2003. This increase was primarily related to the extension of the exercise period of stock options for a terminated employee in the amount of approximately $3.6 million. The remaining increase was a result of an increase in the estimated fair market value of our stock used for valuing stock options accounted for under variable accounting. Selling expenses increased by $8.6 million as a result of increased sales and marketing activities. General and administrative expenses increased by $25.6 million primarily due to the increase in our administrative costs associated with our customer base and to network expansion, a $8.1 million increase in professional fees including legal and accounting services, a $3.7 million increase
in employee salaries and benefits, a $3.6 million increase in bank service charges, a $0.5 million increase in rent expense, a $1.2 million increase in personal property tax expense, and a $1.1 million increase in property insurance. Of the $8.1 million increase in professional fees, approximately $3.2 million was related to the preparation of a registration statement for an initial public offering of our Common Stock to the public. These costs were expensed, as this initial public offering was not completed and the registration statement was withdrawn.
Depreciation and AmortizationAmortization.. Depreciation and amortization expense increased $20.5$19.8 million, or 96%47%, to $41.9$62.2 million for the year ended December 31, 20032004 from $21.4$42.4 million for the year ended December 31, 2002.2003. The increase related primarily to thean increase in network infrastructure assets placed into service in service due to the timing of the commercial launch of our four market clusters.2004. In-service base stations and switching equipment increased by $123.4approximately $237.2 million during the year ended December 31, 2003.2004. In addition, we had 142460 more cell sites in service at December 31, 20032004 than at December 31, 2002.2003. We expect depreciation to continue to increase due to the additional cell sites, switches and switchesother network equipment that we plan to place in service to meet future customer growth and usage.
Interest ExpenseExpense.. Interest expense increased $4.5$7.9 million, or 65%71%, to $11.3$19.0 million for the year ended December 31, 20032004 from $6.8$11.1 million for the year ended December 31, 2002.2003. The increase was primarily attributable to additional interest expense on our $150.0 million of 10 3/4% senior notesSenior Notes that were issued in September 2003.
Net Income. Provision for Income Taxes. Net Income tax expense for year ended December 31, 2004 increased to $47.0 million, which is approximately 42% of our income decreased $118.5 million, or 85%, to $20.6 millionbefore provision for income taxes. For the year ended December 31, 2003 the provision for income taxes was $16.2 million, or approximately 51% of income before provision for income taxes. The increase in our income tax expense in 2004 was attributable to our increased operating profits. The decrease in the effective tax rate from $139.1 million2003 to 2004 relates primarily to the increase in book income which lowers the effective rate of tax items included in the calculation. In addition, the 2003 income tax provision includes a charge required under California law to partially reduce the 2003 California net operating loss carryforwards. However, this statutory requirement did not exist in 2004.
Quarterly Results of Operations
The following tables present our unaudited condensed consolidated quarterly statement of operations data for the yearthree months ended DecemberMarch 31, 2002. Net income for the year ended December 31, 2002 included a $279.0 million ($245.3 million after tax) gain on the sale2006, June 30, 2006 and September 30, 2006. We derived our quarterly results of 10 MHz of spectrum inoperations data from our Atlanta market.unaudited consolidated interim financial statements.
| | Three Months Ended | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | March 31, 2006 | June 30, 2006 | September 30, 2006 | |||||||||
| | (in thousands) | |||||||||||
| REVENUES: | ||||||||||||
| Service revenues | $ | 275,416 | $ | 307,843 | $ | 332,920 | ||||||
| Equipment revenues | 54,045 | 60,351 | 63,196 | |||||||||
| Total revenues | 329,461 | 368,194 | 396,116 | |||||||||
| OPERATING EXPENSES: | ||||||||||||
| Cost of service (excluding depreciation and amortization expense shown separately below) | 92,489 | 107,497 | 113,524 | |||||||||
| Cost of equipment | 100,911 | 112,005 | 117,982 | |||||||||
| Selling, general and administrative expenses (excluding depreciation and amortization expense shown separately below) | 51,437 | 60,264 | 60,220 | |||||||||
| Depreciation and amortization | 27,260 | 32,316 | 36,611 | |||||||||
| Loss (gain) on disposal of assets | 10,365 | 2,013 | (1,615 | ) | ||||||||
| Total operating expenses | 282,462 | 314,095 | 326,722 | |||||||||
| Income from operations | 46,999 | 54,099 | 69,394 | |||||||||
| OTHER EXPENSE (INCOME): | ||||||||||||
| Interest expense | 20,885 | 21,713 | 24,811 | |||||||||
| Accretion of put option in majority-owned subsidiary | 157 | 203 | 203 | |||||||||
| Interest and other income | (4,572 | ) | (6,147 | ) | (4,386 | ) | ||||||
| Gain on extinguishment of debt | (217 | ) | (27 | ) | — | |||||||
| Total other expense | 16,253 | 15,742 | 20,628 | |||||||||
| Income before provision for income taxes | 30,746 | 38,357 | 48,766 | |||||||||
| Provision for income taxes | (12,377 | ) | (15,368 | ) | (19,500 | ) | ||||||
| Net income | $ | 18,369 | $ | 22,989 | $ | 29,266 | ||||||
Core Markets Performance Measures
Set forth below is a summary of certain non-GAAP financial informationkey performance measures for the periods indicated:indicated for our Core Markets:
| | Year Ended December 31, | Nine Months Ended September 30, | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2003 | 2004 | 2005 | 2005 | 2006 | ||||||||||||
| | (dollars in thousands) | ||||||||||||||||
| Core Markets Customers: | |||||||||||||||||
| End of period | 976,899 | 1,398,732 | 1,871,665 | 1,739,441 | 2,174,264 | ||||||||||||
| Net additions | 463,415 | 421,833 | 472,933 | 340,709 | 302,599 | ||||||||||||
| Core Markets Adjusted EBITDA | $ | 89,566 | $ | 203,597 | $ | 316,555 | $ | 233,491 | $ | 364,585 | |||||||
| Core Markets Adjusted EBITDA as a Percent of Service Revenues | 24.2 | % | 33.0 | % | 36.4 | % | 37.0 | % | 43.9 | % | |||||||
| 2002 | 2003 | Change | |||||||||
Customers: | |||||||||||
End of period | 513,484 | 976,899 | 90 | % | |||||||
Net additions | 513,484 | 463,415 | (10 | %) | |||||||
Churn: | |||||||||||
Average monthly rate | 4.4 | % | 4.6 | % | 5 | % | |||||
ARPU | $ | 39.17 | $ | 37.68 | (4 | %) | |||||
CPGA | 158.50 | 99.86 | (37 | %) | |||||||
Adjusted EBITDA (In thousands) | (92,452 | ) | 95,507 | * | |||||||
We launched our service initially in 2002 in the greater Miami, Atlanta, Sacramento and San Francisco metropolitan areas. Our Core Markets have a licensed population of approximately 25 million, of which our networks currently cover approximately 22 million. In addition, we had positive adjusted earnings before interest, taxes, depreciation and amortization, gain/loss on disposal of assets, accretion of put option in majority-owned subsidiary, gain/loss on extinguishment of debt, cumulative effect of change in accounting principle and non-cash stock-based compensation, or Adjusted EBITDA, in our Core Markets after only four full quarters of operations.
Customers Customers.. Net customer additions in our Core Markets were 463,415302,599 for the yearnine months ended December 31, 2003, bringing our totalSeptember 30, 2006, compared to 340,709 for the nine months ended September 30, 2005. Total customers to 976,899were 2,174,264 as of December 31, 2003,September 30, 2006, an increase of 90%25% over the customer total as of September 30, 2005 and 16% over the customer total as of December 31, 2002. This2005. Net customer additions in our Core Markets were 472,933 for the year ended December 31, 2005, bringing our total customers to approximately 1.9 million as of December 31, 2005, an increase was dueof 34% over the total customers as of December 31, 2004. Net customer additions in our Core Markets were 421,833 for the year ended December 31, 2004. Total customers at December 31, 2004 were approximately 1.4 million, an increase of 43% over total customers at December 31, 2003. These increases are primarily attributable to the timing of our commercial launch and the continued demand for our service offering.
Adjusted EBITDA. Adjusted EBITDA is presented in accordance with SFAS No. 131 as it is the primary performance metric for which our reportable segments are evaluated and it is utilized by management to facilitate evaluation of our ability to meet future debt service, capital expenditures and working capital requirements and to fund future growth. For the nine months ended September 30, 2006, Core Markets Adjusted EBITDA was $364.6 million compared to $233.5 million for the same period in 2005. For the years ended December 31, 2005, 2004 and 2003, Core Markets Adjusted EBITDA was $316.6 million, $203.6 million and $89.7 million, respectively. We continue to experience increases in Core Markets Adjusted EBITDA as a result of continued customer growth and cost benefits due to the increasing scale of our business in the Core Markets.
Churn Adjusted EBITDA as a Percent of Service Revenues.. The average monthly churn rate Adjusted EBITDA as a percent of service revenues is calculated by dividing Adjusted EBITDA by total service revenues. Core Markets Adjusted EBITDA as a percent of service revenues for the nine months ended September 30, 2006 and 2005 was 4.6%44% and 4.4%37%, respectively. Core Markets Adjusted EBITDA as a percent of service revenues for the years ended December 31, 2005, 2004 and 2003 was 36%, 33% and 2002,24%, respectively.
Average Revenue Per User. ARPU was $37.68 and $39.17 for Consistent with the years ended December 31, 2003 and 2002, respectively. The $1.49, or 3.8%, decrease in ARPU was primarily the result of an increase in customers that did not pay forCore Markets Adjusted EBITDA, we continue to experience corresponding increases in Core Markets Adjusted EBITDA as a percent of service whilerevenues due to the growth in hotlined status. For more detail regarding our calculation of ARPU, refer to “—Reconciliation of Non-GAAP Financial Measures” below.
Cost Per Gross Addition. CPGA was $99.86 and $158.50 for the years ended December 31, 2003 and 2002, respectively. The $58.64, or 37%, decrease in CPGA was the result of an increase in activation fees revenueservice revenues as well as lower per unit handset subsidies. Equipment costs for handsets soldcost benefits due to existing customers, including handset upgrade transactions, are excluded from CPGA as these costs are incurred specifically for existing customers. For more detail regardingthe increasing scale of our calculation of CPGA, refer to “—Reconciliation of Non-GAAP Financial Measures” below.business in the Core Markets.
Adjusted EBITDA. Adjusted EBITDA increased $188.0 million to $95.5 million for the year ended December 31, 2003 from an adjusted EBITDA deficit of $92.5 million for the year ended December 31, 2002. The increase was primarily the result of customer and revenue growth and spreading operating costs over a larger customer base. For more detail regarding our calculation of adjusted EBITDA, refer to “—Reconciliation of Non-GAAP Financial Measures” below.Expansion Markets Performance Measures
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Set forth below is a summary of certain financial informationkey performance measures for the periods indicated:indicated for our Expansion Markets:
| 2001 | 2002 | Change | ||||||||
| (In thousands) | ||||||||||
Selling, general and administrative expenses (excluding non-cash compensation included below) | $ | 27,963 | $ | 55,515 | 99 | % | ||||
Non-cash compensation | 1,455 | 1,115 | (23 | )% | ||||||
Depreciation and amortization | 208 | 21,394 | * | |||||||
Net income (loss) | (45,180 | ) | 139,067 | * | ||||||
| | Year Ended December 31, | Nine Months Ended September 30, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2003 | 2004 | 2005 | 2005 | 2006 | ||||||||||
| | (dollars in thousands) | ||||||||||||||
| Expansion Markets Customers: | |||||||||||||||
| End of period | — | — | 52,956 | 346 | 442,268 | ||||||||||
| Net additions | — | — | 52,956 | 346 | 389,312 | ||||||||||
| Expansion Markets Adjusted EBITDA (Deficit) | — | — | $ | (22,090 | ) | $ | (8,665 | ) | $ | (79,394 | ) | ||||
Revenues Customers.. Net customer additions in our Expansion Markets were 389,312 for the nine months ended September 30, 2006. Total revenuescustomers were $125.6 million442,268 as of September 30, 2006, an increase of 735% over the customer total as of December 31, 2005. The increase in 2006 is primarily attributable to the launch of the Dallas/Ft. Worth metropolitan area in March 2006 and the Detroit metropolitan area in April 2006. Net customer additions in our Expansion Markets were 52,956 for the year ended December 31, 2002. We were a development stage company until2005, which is attributable to the launch of the Tampa/Sarasota metropolitan area in October 2005.
Adjusted EBITDA Deficit. Adjusted EBITDA is presented in accordance with SFAS No. 131 as it is the primary performance metric for which our commercial launchreportable segments are evaluated and it is utilized by management to facilitate evaluation of our ability to meet future debt service, capital expenditures and working capital requirements and to fund future growth. For the nine months ended September 30, 2006, Expansion Markets Adjusted EBITDA deficit was $78.9 million compared to $8.7 million for the same period in January 2002; therefore, we had no revenues in 2001.
Service revenues were $102.1 million2005. Expansion Market Adjusted EBITDA deficit for the year ended December 31, 2002. Our customer base grew to approximately 513,000 customers at December 31, 2002. ARPU2005 was $39.17 for the year ended December 31, 2002.
Equipment revenues were $23.5 million for the year ended December 31, 2002. We did not sell handsets or other products prior to 2002.
Cost of Service. Cost of service was $61.9 million for the year ended December 31, 2002. We had no cost of service$22.1 million. The increases in 2001.
Cost of Equipment. Cost of equipment was $100.7 million for the year ended December 31, 2002. We did not sell handsets or other products prior to 2002; therefore, we had no cost of equipment in 2001.
Selling, General and Administrative Expenses. Selling, general and administrative expenses including non-cash compensation increased $27.2 million, or 93%, to $56.6 million for the year ended December 31, 2002 from $29.4 million for the year ended December 31, 2001. Selling expenses were $26.5 million in 2002,Adjusted EBITDA deficit, when compared to no selling expensesthe same periods in 2001. General and administrative expenses were $30.1 million in 2002, which included additional staffing duethe previous year, are attributable to the timing of the launch of our business. General and administrative expensesthe Tampa/Sarasota metropolitan area in 2001 were $29.4 million, which included $9.5 million primarily related to build-out activities, which prior to commercialOctober 2005, the launch were classifiedof the Dallas/Ft. Worth metropolitan area in general and administrative expenses.
Depreciation and Amortization. Depreciation and amortization expense was $21.4 million for the year ended December 31, 2002, compared to $0.2 million for the year ended December 31, 2001. The increase related primarily to depreciating wireless network assets for the switches and cell sites put into operation during 2002, along with depreciating furniture and equipment purchased for our offices and retail stores.
Interest Expense and Interest Income. Interest expense decreased $3.7 million, or 35%, to $6.8 million for the year ended December 31, 2002 from $10.5 million for the year ended December 31, 2001. This decrease resulted from a reduction of a portion of our FCC notes following our sale of spectrum in 2002March 2006 and the settlementlaunch of notes to an equipment vendorthe Detroit metropolitan area in the third quarter of 2001. Interest income was $1.0 million for the year ended December 31, 2002, as compared to $2.0 million for the year ended December 31, 2001. This decrease was due to a decline in interest rates on our short-term investmentsApril 2006, as well as lower average cash balances.
Net Income. Net income was $139.1 million for the year ended December 31, 2002, as compared to a net loss of $45.2 million for the year ended December 31, 2001. Net income for the year ended December 31, 2002 included a $279.0 million ($245.3 million after tax) gain on the sale of 10 MHz of spectrum in our Atlanta market.
Liquidity and Capital Resources
The construction of our network and the marketing and distribution of our wireless communications products and services have required, and will continue to require, substantial capital investment. Capital outlays have included license acquisition costs, capital expenditures for network construction, funding of operating cash flow losses and other working capital costs, debt service and financing fees and expenses. We estimate that our aggregate capital expenditures for 2004, which will be primarily associated with our efforts to increase the capacity of our network through the addition of cell sites and switches, will be approximately $230 million, of which $49.2 million had been incurred through March 31, 2004. A portion of this amount includes the cost to begin the build out of our network for the newly acquired licensed areas in northern California; however, this amount does not include the cost to acquire the licenses and build out our network if we are successful in consummating the acquisition of the two licenses in southwest Florida discussed in “—Recent Developments.” Our estimated capital expenditures for 2004 represent an increase of approximately $20 million from our prior estimates, primarily due to additional network capacity requirements necessitated by the increased demand of adding more subscribers than planned whose average usage is higher than planned. We believe the increased service area and capacity will improve our service offering and thereby help us to attract additional customers and increase revenues. We believe our cash on hand and cash generated from operations will be sufficient to meet our projected capital requirements for the foreseeable future. The net proceeds we receive from this offering will allow us to continue the expansion of our networks in existing markets and into new markets, including through acquisitions, and maintain a cash liquidity cushion. Although we estimate that these funds will be sufficient to finance our continued growth, we may have additional capital requirements, which could be substantial, for future network upgrades and advances in new technology.
Existing Indebtedness. As of March 31, 2004, we had $193.1 million of total indebtedness. This indebtedness consisted of $150.0 million of senior notes, $43.5 million face amount of FCC notes, which are recorded net of unamortized original issue discount of $4.2 million, and $3.8 million of debt associated with our obligation to other carriers for the cost of clearing microwave links in areas covered by our licenses. For a description of our existing indebtedness, see “Description of Certain Indebtedness.”
Other Long-Term Liabilities. As of December 31, 2003, we had approximately $20.6 million in other long-term liabilities, comprised of liabilities to certain network equipment providers, the primary cause of the increase, and our reserve for uncertain tax positions, as compared to $1.8 million as of December 31, 2002.
Historical Cash Flow. As of March 31, 2004, we had $185.1 million in cash and cash equivalents, as compared to $236.0 million at December 31, 2003. Cash provided by operating activities was $24.4 million during the three months ended March 31, 2004 as a result of net income of $10.8 million, $25.2 million of non- cash charges consisting primarily of depreciation and amortization, deferred expenses accretion of interest and non-cash compensation, and $11.6 million of cash used for changes in working capital. Cash used in investing activities was $70.5 million during the three months ended March 31, 2004, relating to capital expenditures associated with increasing the capacity and expanding the footprint of our network during the first quarter of 2004 and payments made during the three months ended March 31, 2004 for network equipment accrued at December 31, 2003. We will continue to upgrade our network capacity and improve the quality of our service to support our anticipated customer growth and satisfy competitive requirements. Cash used by financing activities was $4.7 million during the three months ended March 31, 2004, primarily due to a $3.1 million repayment on our FCC debt.
As of December 31, 2003, we had $236.0 million in cash and cash equivalents, as compared to $61.7 million at December 31, 2002. Cash provided by operating activities was $109.6 million during the year ended December 31, 2003 as a result of our net income of $20.6 million and $69.2 million of non-cash charges consisting primarily of depreciation and amortization, deferred expenses, accretion of interest and non-cash
compensation, and $19.8 million of cash provided by changes in working capital. Cash used in investing activities was $137.3 million during the year ended December 31, 2003, primarily relating to capital expenditures associated with increasing the capacity of our network. Cash provided by financing activities was $202.0 million during the year ended December 31, 2003, primarily relating to the net proceeds from the sale of our senior notes of $144.5 million and the sale of our Series D preferred stock of $65.5 million.
As of December 31, 2002, we had $61.7 million in cash and cash equivalents, as compared to $42.7 million in cash and cash equivalents at December 31, 2001. Cash used in operating activities was $64.5 million during the year ended December 31, 2002 as a result of our net income of $139.1 million, $37.5 million of cash provided by changes in working capital and $37.9 million of non-cash charges consisting primarily of depreciation and amortization, deferred income taxes, accretion of interest, and non-cash compensation, offset by a $279.0 million gain resulting from our sale of spectrum, the proceeds of which are included in investing cash flows. Cash used by investing activities was $73.5 million during the year ending December 31, 2002, related to capital expenditures associated with our network build-out, offset by $141.2 million of proceeds on our sale of spectrum. Cash provided by financing activities was $157.1 million during the year ended December 31, 2002, primarily relating to proceeds from the sale of our preferred stock.
Cash used in operating activities was $32.4 million during the year ended December 31, 2001 as a result of our net loss of $45.2 million and $0.8 million of cash used in changes in working capital, offset by $13.6 million consisting of loss on extinguishment of debt, depreciation and amortization, accretion of interest and non-cash compensation and other expense. Cash provided by investing activities was $24.2 million during the year ending December 31, 2001, primarily relating to an advance associated with our sale of spectrum that ultimately closed in 2002, offset by capital expenditures associated with our network build-out. Cash provided by financing activities was $41.7 million during the year ended December 31, 2001, primarily relating to proceeds from the sale of our preferred stock.
Contractual Obligations and Commercial Commitments
The following table provides aggregate information about our contractual obligations as of December 31, 2003. See note 8 to our consolidated financial statements included elsewhere in this prospectus.
| Payments Due by Period | |||||||||||||||
| Total | Less Than 1 Year | 1-3 Years | 3-5 Years | More Than 5 Years | |||||||||||
Contractual Obligations | (In thousands) | ||||||||||||||
Long-term debt, including current portion | $ | 200,588 | $ | 13,362 | $ | 29,453 | $ | 4,252 | $ | 153,521 | |||||
Interest paid in cash | 136,035 | 19,092 | 35,455 | 32,791 | 48,697 | ||||||||||
Operating leases | 172,885 | 29,337 | 58,220 | 39,083 | 46,245 | ||||||||||
Firm purchase commitments | 22,139 | 13,622 | 8,517 | — | — | ||||||||||
Total cash contractual obligations | $ | 531,647 | $ | 75,413 | $ | 131,645 | $ | 76,126 | $ | 248,463 | |||||
Inflation
We believe that inflation has not affected our operations materially.
Qualitative and Quantitative Disclosures About Market Risk
Market risk is the potential loss arising from adverse changes in market prices and rates, including interest rates. We do not enter into derivatives or other financial instruments for trading, speculative or hedging purposes. Our outstanding indebtedness bears interest at fixed rates.
Effect of New Accounting Standards
In July 2001, the FASB issued Statement of Financial Accounting Standards, or SFAS, No. 143, “Accounting for Asset Retirement Obligations.” This statement provides accounting and reporting standards for
costs associated with the retirement of long-lived assets. This statement requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amountconstruction of the related long-lived asset. Over time, the liability is accreted to its present value each period,Orlando metropolitan area, portions of northern Florida, and the capitalized cost is depreciated over the estimated useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement.
We are subject to asset retirement obligations associated with our cell site operating leases, which are subject to the provisions of SFAS No. 143. Cell site lease agreements may contain clauses requiring restoration of the leased site at the end of the lease term, creating an asset retirement obligation. Landlords may choose not to exercise these rights as cell sites are considered useful improvements. In addition to cell site operating leases, we have leases related to switch site, retail, and administrative locations subject to the provisions of SFAS No. 143. We adopted SFAS No. 143 on January 1, 2003.
In November 2002, the EITF of the FASB reached consensus on EITF No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.” This consensus requires that revenue arrangements with multiple deliverables be divided into separate units of accounting if the deliverables in the arrangement meet specific criteria. In addition, arrangement consideration must be allocated among the separate units of accounting based on their relative fair values, with certain limitations. The sale of wireless service with an accompanying handset constitutes a revenue arrangement with multiple deliverables. We adopted the provisions of this consensus for revenue arrangements entered into beginning after July 1, 2003. We have elected to apply the accounting provisions of EITF 00-21 on a prospective basis beginning July 1, 2003. As a result, we allocate amounts charged to customers between the sale of handsets and the sale of wireless telecommunication services on a relative fair value basis. In most cases, this results in all amounts collected from the customer upon activation of the handset being allocated to the sale of the handset. As a result of this treatment, activation fees included in the consideration at the time of sale are recorded as handset revenue. Prior to the adoption of EITF 00-21, we had deferred activation fee revenue and amortized these revenues over the average life of our customers. The existing deferred revenue at July 1, 2003 continues to be amortized.
In March 2004, the EITF reached consensus on EITF Issue 03-6, “Participating Securities and the Two-Class Method under FASB Statement No. 128,” which requires, among other items, the use of the two-class method for calculating earnings per share when participating convertible securities exist. The consensus is effective for fiscal periods beginning after March 31, 2004 and requires restatement of prior periods if the two-class method has not been used. Our accounting policy, under FASB Statement No. 128, “Earnings per Share,” was to calculate earnings per share under both the two-class and if-converted method and report earnings per share on the method that was most dilutive. The adoption of EITF 03-06 will not have an effect on our financial statements as the two-class method is currently being followed.
Los Angeles metropolitan area.
Reconciliation of Non-GAAP Financial Measures
We utilize certain financial measures and key performance indicators that are not calculated in accordance with GAAP to assess our financial and operating performance. A non-GAAP financial measure is defined as a numerical measure of a company’scompany's financial performance that (i) excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the comparable measure calculated and presented in accordance with GAAP in the statement of operationsincome or statement of cash flows; or (ii) includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the comparable measure so calculated and presented.
Adjusted earnings before interest, taxes, depreciation and amortization or adjusted EBITDA, averageAverage revenue per user, or ARPU, and cost per gross addition, or CPGA, and cost per user, or CPU, are non-GAAP financial measures utilized by our management to judge our ability to meet our liquidity requirements and to evaluate our operating performance. We believe these measures are important in understanding the performance of our operations from period to period, and although every company in the wireless industry does not define each of these measures in precisely the same way, we believe that these measures (which are common in the wireless industry) facilitate
key liquidity and operating performance comparisons with other companies in the wireless industry. The following tables reconcile our non-GAAP financial measures with our financial statements presented in accordance with GAAP.
ARPU—We have presented adjusted EBITDA because this financial measure, in combination with other GAAP and non-GAAP financial measures, is an integral part of the internal reporting system utilized by management to facilitate evaluation of our ability to meet future debt service, capital expenditure and working capital requirements and fund future growth. Adjusted EBITDA is a supplement to GAAP financial information and should not be construed as an alternative to,utilize average revenue per user, or more meaningful than, cash flows from operating activities, as determined in accordance with GAAP. The following table reconciles adjusted EBITDA to net cash provided by (used in) operating activities.
Adjusted EBITDA
| Year Ended December 31, | Three Months Ended March 31, | |||||||||||||||||||
| 2001 | 2002 | 2003 | 2003 | 2004 | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
Net cash provided by (used in) operating activities | $ | (32,401 | ) | $ | (64,523 | ) | $ | 109,618 | $ | (4,826 | ) | $ | 24,368 | |||||||
Interest expense, net of interest income | 8,445 | 5,841 | 10,193 | 1,615 | 4,956 | |||||||||||||||
Bad debt expense | — | (381 | ) | (991 | ) | (749 | ) | (433 | ) | |||||||||||
Accretion of asset retirement obligation | — | — | (50 | ) | (25 | ) | (79 | ) | ||||||||||||
Non-cash interest | (3,882 | ) | (3,028 | ) | (3,090 | ) | (784 | ) | (688 | ) | ||||||||||
Deferred rents | (949 | ) | (1,853 | ) | (1,160 | ) | (414 | ) | (435 | ) | ||||||||||
Cost of abandoned cell sites | — | — | (824 | ) | (477 | ) | (183 | ) | ||||||||||||
Non-deferred tax | — | 8,993 | 1,643 | — | — | |||||||||||||||
Working capital changes | 824 | (37,501 | ) | (19,832 | ) | 16,870 | 11,620 | |||||||||||||
Adjusted EBITDA | $ | (27,963 | ) | $ | (92,452 | ) | $ | 95,507 | $ | 11,210 | $ | 39,126 | ||||||||
We believe ARPU, is a useful measure to evaluate our per-customer service revenue realization and to assist in forecasting our future service revenues. ARPU is calculated exclusive of activation revenues, as these amounts are a component of our costs of acquiring new customers and are included in our calculation of CPGA. ARPU is also calculated exclusive of E-911, FUSF and vendor's compensation charges, as these are generally pass through charges that we collect from our customers and remit to the appropriate government agencies.
Average number of customers for any measurement period is determined by dividing (a) the sum of the average monthly number of customers for the measurement period by (b) the number of months in such period. Average monthly number of customers for any month represents the sum of the
number of customers on the first day of the month and the last day of the month divided by two. The following table shows the calculation of ARPU for the periods indicated:indicated.
| | Year Ended December 31, | Nine Months Ended September 30, | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2003 | 2004 | 2005 | 2005 | 2006 | ||||||||||||
| | (in thousands, except average number of customers and ARPU) | ||||||||||||||||
| Calculation of Average Revenue Per User (ARPU): | |||||||||||||||||
| Service revenues | $ | 369,851 | $ | 616,401 | $ | 872,100 | $ | 631,209 | $ | 916,179 | |||||||
| Less: | |||||||||||||||||
| Activation revenues | (14,410 | ) | (7,874 | ) | (6,808 | ) | (4,988 | ) | (6,026 | ) | |||||||
| E-911, FUSF and vendor's compensation charges | (6,527 | ) | (12,522 | ) | (26,221 | ) | (18,875 | ) | (29,222 | ) | |||||||
| Net service revenues | $ | 348,914 | $ | 596,005 | $ | 839,071 | $ | 607,346 | $ | 880,931 | |||||||
| Divided by: Average number of customers | 775,605 | 1,207,521 | 1,649,208 | 1,593,848 | 2,281,261 | ||||||||||||
| ARPU | $ | 37.49 | $ | 41.13 | $ | 42.40 | $ | 42.34 | $ | 42.91 | |||||||
Average Revenue per User (ARPU)
| Year Ended December 31, | Three Months Ended March 31, | |||||||||||||||
| 2002 | 2003 | 2003 | 2004 | |||||||||||||
(In thousands, except average number of customers and ARPU) | ||||||||||||||||
Service revenues | $ | 102,137 | $ | 370,920 | $ | 75,999 | $ | 132,921 | ||||||||
Less: Activation revenues | (3,018 | ) | (14,410 | ) | (1,860 | ) | (3,186 | ) | ||||||||
E-911 charges | — | (5,823 | ) | (1,166 | ) | (2,076 | ) | |||||||||
Net service revenues | 99,119 | 350,687 | 72,973 | 127,659 | ||||||||||||
Divided by: Average number of customers | 210,881 | 775,605 | 615,876 | 1,063,815 | ||||||||||||
ARPU | $ | 39.17 | $ | 37.68 | $ | 39.50 | $ | 40.00 | ||||||||
CPGA—We utilize cost per gross customer addition, or CPGA, to assess the efficiency of our distribution strategy, validate the initial capital invested in our customers and determine the number of months to recover our customer acquisition costs. This measure also provides a gaugeallows us to compare our average acquisition costs per new customer to those of other wireless communicationsbroadband PCS providers. Activation revenues and equipment revenues related to new customers are deducted from selling costsexpenses in this calculation as they represent amounts paid by customers at the time their service is activated that reduce our acquisition cost of those customers. Additionally, equipment costs associated with existing customers, net of related revenues, are excluded as this measure is intended to reflect only the acquisition costs related to new customers. The following table reconciles total costs used in the calculation of CPGA to selling expenses, which we consider to be the most directly comparable GAAP financial measure to CPGA.
| | Year Ended December 31, | Nine Months Ended September 30, | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2003 | 2004 | 2005 | 2005 | 2006 | ||||||||||||
| | (in thousands, except gross customer additions and CPGA) | ||||||||||||||||
| Calculation of Cost Per Gross Addition (CPGA): | |||||||||||||||||
| Selling expenses | $ | 44,006 | $ | 52,605 | $ | 62,396 | $ | 43,863 | $ | 72,796 | |||||||
| Less: Activation revenues | (14,410 | ) | (7,874 | ) | (6,808 | ) | (4,988 | ) | (6,026 | ) | |||||||
| Less: Equipment revenues | (81,258 | ) | (131,849 | ) | (166,328 | ) | (118,990 | ) | (177,592 | ) | |||||||
| Add: Equipment revenue not associated with new customers | 13,228 | 54,323 | 77,010 | 55,324 | 80,571 | ||||||||||||
| Add: Cost of equipment | 150,832 | 222,766 | 300,871 | 210,529 | 330,898 | ||||||||||||
| Less: Equipment costs not associated with new customers | (22,549 | ) | (72,200 | ) | (109,803 | ) | (77,910 | ) | (108,292 | ) | |||||||
| Gross addition expenses | $ | 89,849 | $ | 117,771 | $ | 157,338 | $ | 107,828 | $ | 192,355 | |||||||
| Divided by: Gross customer additions | 894,348 | 1,134,762 | 1,532,071 | 1,062,772 | 1,650,282 | ||||||||||||
| CPGA | $ | 100.46 | $ | 103.78 | $ | 102.70 | $ | 101.46 | $ | 116.56 | |||||||
CPU—Cost per user, or CPU, is cost of service and general and administrative costs (excluding applicable non-cash stock-based compensation expense included in cost of service and general and administrative expense) plus net loss on equipment transactions unrelated to initial customer acquisition (which includes the gain or loss on sale of handsets to existing customers and costs associated with handset replacements and repairs (other than warranty costs which are the responsibility of the handset manufacturers)) exclusive of E-911, FUSF and vendor's compensation charges, divided by the sum of the average monthly number of customers during such period. CPU does not include any depreciation and amortization expense. Management uses CPU as a tool to evaluate the non-selling cash expenses associated with ongoing business operations on a per customer basis, to track changes in these non-selling cash costs over time, and to help evaluate how changes in our business operations affect non-selling cash costs per customer. In addition, CPU provides management with a useful measure to compare our non-selling cash costs per customer with those of other wireless providers. We believe investors use CPU primarily as a tool to track changes in our non-selling cash costs over time and to compare our non-selling cash costs to those of other wireless providers. Other wireless carriers may calculate this measure differently. The following table reconciles total costs used in the calculation of CPU to cost of service, which we consider to be the most directly comparable GAAP financial measure to CPU.
| | Year Ended December 31, | Nine Months Ended September 30, | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2003 | 2004 | 2005 | 2005 | 2006 | ||||||||||||
| | (in thousands, except average number of customers and CPU) | ||||||||||||||||
| Calculation of Cost Per User (CPU): | |||||||||||||||||
| Cost of service | $ | 122,211 | $ | 200,806 | $ | 283,212 | $ | 201,940 | $ | 313,510 | |||||||
| Add: General and administrative expense | 50,067 | 78,905 | 100,080 | 72,343 | 99,125 | ||||||||||||
| Add: Net loss on equipment transactions unrelated to initial customer acquisition | 9,320 | 17,877 | 32,791 | 22,586 | 27,721 | ||||||||||||
| Less: Stock-based compensation expense included in cost of service and general and administrative expense | (5,573 | ) | (10,429 | ) | (2,596 | ) | (3,302 | ) | (7,750 | ) | |||||||
| Less: E-911, FUSF and vendor's compensation revenues | (6,527 | ) | (12,522 | ) | (26,221 | ) | (18,875 | ) | (29,222 | ) | |||||||
| Total costs used in the calculation of CPU | $ | 169,498 | $ | 274,637 | $ | 387,266 | $ | 274,692 | $ | 403,384 | |||||||
| Divided by: Average number of customers | 775,605 | 1,207,521 | 1,649,208 | 1,593,848 | 2,281,261 | ||||||||||||
| CPU | $ | 18.21 | $ | 18.95 | $ | 19.57 | $ | 19.15 | $ | 19.65 | |||||||
Liquidity and Capital Resources
Our principal sources of liquidity are our existing cash, cash equivalents and short-term investments, cash generated from operations, proceeds from our recent sale of senior notes and our senior secured credit facility. At September 30, 2006, we had a total of approximately $345.8 million in cash, cash equivalents and short-term investments. We believe that our existing cash, cash equivalents and short-term investments, proceeds from this offering, and our anticipated cash flows from operations will be sufficient to meet our projected operating and capital requirements for our existing business.
Our strategy has been to offer our services in major metropolitan areas and their surrounding areas, which we refer to as clusters. We are seeking opportunities to enhance our current market clusters and to provide service in new geographic areas. From time to time, we may purchase spectrum and related assets from third parties or the FCC. We participated as a bidder in FCC Auction 66 and in November 2006 we were granted eight licenses for a total aggregate purchase price of approximately $1.4 billion. See "Business—Auction 66 Markets."
As a result of the acquisition of the spectrum licenses from Auction 66 and the opportunities that these licenses provide for us to expand our operations into major metropolitan markets, we will require significant additional capital in the future to finance the construction and initial operating costs associated with such licenses, including clearing costs associated with non-governmental incumbent licenses which will be material. We generally do not intend to commence the construction of any individual license area until we have sufficient funds available to provide for the related construction and initial operating costs associated with such license area. We intend to focus our build-out strategy in our new Auction 66 Markets initially on licenses covering a population of 35-45 million in major metropolitan areas where we believe we have the opportunity to achieve financial results similar to our existing Core and Expansion Markets. Historically, our average cumulative expense and capital investment per covered population at the time of launch has generally been between $15 and $21. Our build-out and launch of these metropolitan areas is dependent on proceeds from this offering and our ability to generate substantial excess free cash flow from existing operations.
The construction of our network and the marketing and distribution of our wireless communications products and services have required, and will continue to require, substantial capital investment. Capital outlays have included license acquisition costs, capital expenditures for construction of our network infrastructure, costs associated with clearing and relocating non-governmental incumbent licenses, funding of operating cash flow losses incurred as we launch services in new metropolitan areas and other working capital costs, debt service and financing fees and expenses. Our capital expenditures for the first nine months of 2006 were approximately $471.8 million and aggregate capital expenditures for 2005 were approximately $266.5 million. These expenditures were primarily associated with the construction of the network infrastructure in our Expansion Markets and our efforts to increase the service area and capacity of our existing Core Markets network through the addition of cell sites and switches. We believe the increased service area and capacity in existing markets will improve our service offering, helping us to attract additional customers and increase revenues. In addition, we believe our new Expansion Markets have attractive demographics which will result in increased revenues.
As of September 30, 2006, we owed an aggregate of $900 million under our Credit Agreements. In addition, in connection with our payment of the purchase price for the Auction 66 licenses in October 2006, certain of our subsidiaries borrowed $1.25 billion under a secured bridge credit facility and an additional $250 million under a unsecured bridge credit facility. See "—Bridge Credit Facilities" below. The funds borrowed under the bridge credit facilities were used primarily to pay the aggregate purchase price of approximately $1.4 billion for the licenses we purchased in Auction 66. In November 2006, we consummated the sale of $1.0 billion in aggregate principal amount of 91/4% senior notes and entered into a senior secured credit facility, pursuant to which we may borrow up to $1.7 billion. We borrowed $1.6 billion under our senior secured credit facility concurrently with the closing of the sale of the senior notes and used the amount borrowed, together with the net proceeds from the sale of the senior notes, to repay all amounts owed under the Credit Agreements and the bridge credit facilities and to pay the related premiums, fees and expenses and we intend to use the remaining amounts for general corporate purposes.
Our senior secured credit facility calculates consolidated Adjusted EBITDA as: consolidated net incomeplus depreciation and amortization; gain (loss) on disposal of assets; non-cash expenses; gain (loss) on extinguishment of debt; provision for income taxes; interest expense; and certain expenses of
MetroPCS Communicationsminus interest and other income and non-cash items increasing consolidated net income.
We consider Adjusted EBITDA, as defined above, to be an important indicator to investors because it provides information related to our ability to provide cash flows to meet future debt service, capital expenditures and working capital requirements and fund future growth. We present this discussion of Adjusted EBITDA because covenants in our senior secured credit facility contain ratios based on this measure. If our Adjusted EBITDA were to decline below certain levels, covenants in our senior secured credit facility that are based on Adjusted EBITDA, including our maximum senior secured leverage ratio covenant, may be violated and could cause, among other things, an inability to incur further indebtedness and in certain circumstances a default or mandatory prepayment under our senior secured credit facility. Our maximum senior secured leverage ratio is required to be less than 4.5 to 1.0 based on Adjusted EBITDA plus the impact of certain new markets. Adjusted EBITDA is not a measure calculated in accordance with GAAP, and should not be considered a substitute for, operating income (loss), net income (loss), or any other measure of financial performance reported in accordance with GAAP. In addition, Adjusted EBITDA should not be construed as an alternative to, or more meaningful than cash flows from operating activities, as determined in accordance with GAAP.
The following table shows the calculation of CPGAour consolidated Adjusted EBITDA, as defined in our senior secured credit facility, for the periods indicated:years ended December 31, 2003, 2004 and 2005 and for the nine months ended September 30, 2005 and 2006.
| | Year Ended December 31, | Nine Months Ended September 30, | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2003 | 2004 | 2005 | 2005 | 2006 | ||||||||||||
| | (in thousands) | ||||||||||||||||
| Calculation of Consolidated Adjusted EBITDA: | |||||||||||||||||
| Net income | $ | 15,358 | $ | 64,890 | $ | 198,677 | $ | 179,835 | $ | 70,625 | |||||||
| Adjustments: | |||||||||||||||||
| Depreciation and amortization | 42,428 | 62,201 | 87,895 | 61,895 | 96,187 | ||||||||||||
| Loss (gain) on disposal of assets | 392 | 3,209 | (218,203 | ) | (218,292 | ) | 10,763 | ||||||||||
| Stock-based compensation expense(1) | 5,573 | 10,429 | 2,596 | 3,302 | 7,750 | ||||||||||||
| Interest expense | 11,115 | 19,030 | 58,033 | 40,867 | 67,408 | ||||||||||||
| Accretion of put option in majority-owned subsidiary(1) | — | 8 | 252 | 187 | 564 | ||||||||||||
| Interest and other income | (996 | ) | (2,472 | ) | (8,658 | ) | (4,876 | ) | (15,106 | ) | |||||||
| (Gain) loss on extinguishment of debt | (603 | ) | (698 | ) | 46,448 | 46,448 | (244 | ) | |||||||||
| Provision for income taxes | 16,179 | 47,000 | 127,425 | 115,460 | 47,245 | ||||||||||||
| Cumulative effect of change in accounting principle, net of tax(1) | 120 | — | — | — | — | ||||||||||||
| Consolidated Adjusted EBITDA | $ | 89,566 | $ | 203,597 | $ | 294,465 | $ | 224,826 | $ | 285,192 | |||||||
In addition, for further information, the following table reconciles consolidated Adjusted EBITDA, as defined in our senior secured credit facility, to cash flows from operating activities for the years ended December 31, 2003, 2004 and 2005 and for the nine months ended September 30, 2005 and 2006.
| | Year Ended December 31, | Nine Months Ended September 30, | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2003 | 2004 | 2005 | 2005 | 2006 | ||||||||||||
| | (in thousands) | ||||||||||||||||
| Reconciliation of Net Cash Provided by Operating Activities to Consolidated Adjusted EBITDA: | |||||||||||||||||
| Net cash provided by operating activities | $ | 112,605 | $ | 150,379 | $ | 283,216 | $ | 247,015 | $ | 302,638 | |||||||
| Adjustments: | |||||||||||||||||
| Interest expense | 11,115 | 19,030 | 58,033 | 40,867 | 67,408 | ||||||||||||
| Non-cash interest expense | (3,073 | ) | (2,889 | ) | (4,285 | ) | (3,766 | ) | (3,702 | ) | |||||||
| Interest and other income | (996 | ) | (2,472 | ) | (8,658 | ) | (4,876 | ) | (15,106 | ) | |||||||
| Provision for uncollectible accounts receivable | (110 | ) | (125 | ) | (129 | ) | 38 | (64 | ) | ||||||||
| Deferred rent expense | (2,803 | ) | (3,466 | ) | (4,407 | ) | (3,091 | ) | (5,365 | ) | |||||||
| Cost of abandoned cell sites | (824 | ) | (1,021 | ) | (725 | ) | (251 | ) | (2,069 | ) | |||||||
| Accretion of asset retirement obligation | (127 | ) | (253 | ) | (423 | ) | (103 | ) | (469 | ) | |||||||
| Loss (gain) on sale of investments | — | (576 | ) | 190 | (49 | ) | 1,875 | ||||||||||
| Provision for income taxes | 16,179 | 47,000 | 127,425 | 115,460 | 47,245 | ||||||||||||
| Deferred income taxes | (18,716 | ) | (44,441 | ) | (125,055 | ) | (113,580 | ) | (41,792 | ) | |||||||
| Changes in working capital | (23,684 | ) | 42,431 | (30,717 | ) | (52,838 | ) | (65,407 | ) | ||||||||
| Consolidated Adjusted EBITDA | $ | 89,566 | $ | 203,597 | $ | 294,465 | $ | 224,826 | $ | 285,192 | |||||||
In connection with the closing of the sale of the senior notes, the entry into our senior secured credit facility and the repayment of all amounts outstanding under our Credit Agreements and bridge credit facilities, we consummated a concurrent restructuring transaction. As a result of the restructuring transaction, MetroPCS Wireless, Inc. became a wholly-owned direct subsidiary of MetroPCS, Inc. (formerly MetroPCS V, Inc.), which is a wholly-owned direct subsidiary of MetroPCS Communications, Inc. MetroPCS Communications, Inc. and MetroPCS, Inc. guaranteed the senior notes and the obligations under the senior secured credit facility. MetroPCS, Inc. also pledged the capital stock of MetroPCS Wireless, Inc. as security for the obligations under the senior secured credit facility. All of our FCC licenses and our 85% limited liability company member interest in Royal Street are now held by MetroPCS Wireless, Inc. and its wholly-owned subsidiaries.
Cost per Gross Addition (CPGA)Operating Activities
Cash provided by operating activities was $284.7 million during the nine months ended September 30, 2006 compared to $247.0 million during the nine months ended September 30, 2005. The increase was primarily attributable to a 284% increase in net income during the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005, adjusted for the $228.2 million gain on the sale of a 10 MHz portion of our 30 MHz PCS license for the San Francisco-Oakland-San Jose basic trading area. The timing of payments on accounts payable and accrued expenses in the nine months ended September 30, 2006, as well as an increase in deferred revenues as a result of the 50% increase in customers during the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005 also contributed to the increase in cash provided by operating activities.
Cash provided by operating activities was $283.2 million during the year ended December 31, 2005 compared to cash provided by operating activities of $150.4 million during the year ended December 31, 2004. The increase was primarily attributable to a significant increase in net income, including a $228.2 million gain on the sale of a 10 MHz portion of our 30MHz PCS license for the San Francisco-Oakland-San Jose basic trading area, and the timing of payments on accounts payable and accrued expenses in the year ended December 31, 2005, partially offset by interest payments on the Credit Agreements that were executed in May 2005.
| Year Ended December 31, | Three Months Ended March 31, | |||||||||||||||
| 2002 | 2003 | 2003 | 2004 | |||||||||||||
(In thousands, except gross customer additions and CPGA) | ||||||||||||||||
Selling expenses | $ | 26,526 | $ | 44,076 | $ | 9,879 | $ | 12,214 | ||||||||
Less: Activation revenues | (3,018 | ) | (14,410 | ) | (1,860 | ) | (3,186 | ) | ||||||||
Less: Equipment revenues | (23,458 | ) | (88,562 | ) | (23,399 | ) | (40,077 | ) | ||||||||
Plus: Equipment revenue not associated with new customers | 578 | 17,150 | 1,035 | 16,729 | ||||||||||||
Plus: Cost of equipment | 100,651 | 155,084 | 44,213 | 64,047 | ||||||||||||
Less: Equipment costs not associated with new customers | (2,050 | ) | (24,030 | ) | (2,541 | ) | (21,201 | ) | ||||||||
Gross addition expenses | 99,229 | 89,308 | 27,327 | 28,526 | ||||||||||||
Divided by: Gross customer additions | 626,050 | 894,348 | 260,320 | 294,886 | ||||||||||||
CPGA | $ | 158.50 | $ | 99.86 | $ | 104.97 | $ | 96.74 | ||||||||
Investing Activities
Cash used in investing activities was $489.3 million during the nine months ended September 30, 2006 compared to $789.1 million during the nine months ended September 30, 2005. The decrease was due primarily to a $419.1 million increase in net proceeds from investments and a $303.8 million decrease in purchases of FCC licenses, partially offset by a $249.4 million increase in purchases of property and equipment related to the construction of the Expansion Markets.
Cash used in investing activities was $905.2 million during the year ended December 31, 2005 compared to $190.9 million during the year ended December 31, 2004. This increase was due primarily to a $416.9 million increase in the purchase of FCC licenses, an increase in purchases of investments in the amount of $580.8 million, and a $27.5 million increase in purchases of property and equipment, partially offset by proceeds of $230.0 million from the sale of a 10 MHz portion of our 30 MHz PCS license for the San Francisco-Oakland-San Jose basic trading area.
Cash used in investing activities was $190.9 million during the year ended December 31, 2004, compared to $306.9 million for the year ended December 31, 2003. The decrease during 2004 is primarily attributable to a $284.6 million increase in proceeds from the sale and maturity of investments, as well as a $50.5 million decrease in the purchases of investments, partially offset by an increase in purchases of property and equipment in the amount of $133.1 million.
Financing Activities
Cash provided by financing activities was $208.1 million during the nine months ended September 30, 2006 compared to $564.8 million during the nine months ended September 30, 2005. This decrease was due primarily to the net proceeds from the Credit Agreements as well as net proceeds from the issuance of Series E Preferred Stock in the amount of $46.7 million during the first nine months of 2005.
Cash provided by financing activities during the year ended December 31, 2005 was $712.2 million, compared to cash used in financing activities of $5.4 million for the year ended December 31, 2004. The increase during 2005 is mainly attributable to proceeds from borrowings under our Credit Agreements of $902.9 million as well as net proceeds from the issuance of Series E Preferred Stock in the amount of $46.7 million. These proceeds are partially offset by various transactions including repayment of the FCC notes in the amount of $33.4 million, repayment of the Senior Notes in the amount of $178.9 million, which included a premium of $28.9 million, and payment of debt issuance costs in the amount of $29.5 million.
Cash used in financing activities during the year ended December 31, 2004 was $5.4 million, compared to cash provided by financing activities of $201.9 million for the year ended December 31, 2003. During 2003, we had net proceeds of $145.5 million from the issuance of our Senior Notes and $65.5 million from the issuance of Series D Preferred Stock, which are the primary reasons for the decrease in cash provided by financing activities in 2004.
First and Second Lien Credit Agreements
As of September 30, 2006, there was a total of $900.0 million outstanding under the Credit Agreements, which is reported as long-term debt on the consolidated balance sheets included elsewhere in this prospectus.
The terms of the Credit Agreements required us to enter into an interest rate cap agreement in an amount equal to at least 50% of the aggregate debt outstanding thereunder. On June 27, 2005, we entered into a three-year interest rate cap agreement to mitigate the impact of interest rate changes. An interest rate cap represents a right to receive cash if interest rates rise above a contractual strike rate. At September 30, 2006, the interest rate cap agreement had a notional value of $450.0 million and we will receive payments on a semiannual basis if the six-month LIBOR interest rate exceeds 3.75% through January 1, 2007 and 6.00% through the agreement maturity date of July 1, 2008. We paid $1.9 million upon execution of the interest rate cap agreement. This financial instrument is reported in long-term investments at fair market value on the consolidated balance sheets included elsewhere in this prospectus, which was $4.4 million as of September 30, 2006.
On November 3, 2006, we paid the lenders under the Credit Agreements $931.5 million plus accrued interest of $8.6 million to extinguish the aggregate outstanding principal balance under the Credit Agreements. As a result, we recorded a loss on extinguishment of debt in the amount of approximately $42.7 million.
On November 21, 2006, we terminated the interest rate cap agreement that was required by our Credit Agreements. We received approximately $4.3 million upon termination of the agreement. The proceeds from the termination of the agreement approximated carrying value and accordingly, no gain or loss was recognized upon disposition.
Bridge Credit Facilities
In July 2006, MetroPCS II, Inc., or MetroPCS II, an indirect wholly-owned subsidiary of MetroPCS Communications, Inc. (which has since merged into MetroPCS Wireless, Inc.), entered into an Exchangeable Senior Secured Credit Agreement and Guaranty Agreement, dated as of July 13, 2006, or the secured bridge credit facility. The aggregate credit commitments available under the secured bridge credit facility total $1.25 billion. On July 14, 2006, the lenders funded $200.0 million under the secured bridge credit facility. On October 3, 2006, the lenders funded an additional $80.0 million under the secured bridge credit facility. On October 18, 2006, the lenders funded the remaining $970.0 million under the secured bridge credit facility.
On November 3, 2006, MetroPCS II repaid the aggregate outstanding principal balance under the secured bridge credit facility of $1.25 billion and accrued interest of $5.9 million. As a result, MetroPCS II recorded a loss on extinguishment of debt of approximately $7.0 million.
In October 2006, MetroPCS IV, Inc., an indirect wholly-owned subsidiary of MetroPCS Communications, Inc. (which has since merged into MetroPCS Wireless, Inc.), entered into an additional Exchangeable Senior Unsecured Bridge Credit Facility, or the unsecured bridge credit facility. The aggregate credit commitments available under the unsecured bridge credit facility total $250 million. On October 18, 2006, the lenders funded the $250 million available under the unsecured bridge credit facility.
On November 3, 2006, MetroPCS IV, Inc. repaid the aggregate outstanding principal balance under the unsecured bridge credit facility of $250.0 million and accrued interest of $1.2 million. As a result, MetroPCS IV, Inc. recorded a loss on extinguishment of debt of approximately $2.4 million.
Senior Secured Credit Facility
MetroPCS Wireless, Inc., an indirect wholly-owned subsidiary of MetroPCS Communications, Inc., entered into the senior secured credit facility on November 3, 2006. The senior secured credit facility consists of a $1.6 billion term loan facility and a $100 million revolving credit facility. The term loan facility is repayable in quarterly installments in annual aggregate amounts equal to 1% of the initial aggregate principal amount of $1.6 billion. The term loan facility will mature seven years following the date of its execution in November 2006. The revolving credit facility will mature five years following the date of its execution in November 2006.
The facilities under the senior secured credit agreement are guaranteed by MetroPCS Communications, Inc., MetroPCS, Inc. and each of MetroPCS Wireless, Inc.'s direct and indirect present and future wholly-owned domestic subsidiaries. The facilities are not guaranteed by Royal Street or its subsidiaries, but MetroPCS Wireless, Inc. has pledged the promissory note given by Royal Street in connection with amounts borrowed by Royal Street from MetroPCS Wireless, Inc. and we pledged the limited liability company member interests we hold in Royal Street. The senior secured credit facility contains customary events of default, including cross defaults. The obligations are also secured by the capital stock of MetroPCS Wireless, Inc. as well as substantially all of the present and future assets of MetroPCS Wireless, Inc. and each of its direct and indirect present and future wholly-owned subsidiaries (except as prohibited by law and certain permitted exceptions).
Under the senior secured credit agreement, MetroPCS Wireless, Inc. will be subject to certain limitations, including limitations on its ability to incur additional debt, make certain restricted payments, sell assets, make certain investments or acquisitions, grant liens and pay dividends. MetroPCS Wireless, Inc. is also subject to certain financial covenants, including maintaining a maximum senior secured consolidated leverage ratio and, under certain circumstances, maximum consolidated leverage and minimum fixed charge coverage ratios. There is no prohibition on our ability to make investments in or loan money to Royal Street.
Amounts outstanding under our senior secured credit facility bear interest at a LIBOR rate plus a margin as set forth in the facility and the terms of the senior secured credit facility require us to enter into interest rate hedging agreements that fix the interest rate in an amount equal to at least 50% of our outstanding indebtedness, including the notes.
On November 21, 2006, MetroPCS Wireless, Inc. entered into a three-year interest rate protection agreement to manage its interest rate risk exposure and fulfill a requirement of its senior secured credit facility. The agreement is effective on February 1, 2007, covers a notional amount of $1.0 billion and effectively converts this portion of MetroPCS Wireless, Inc.'s variable rate debt to fixed rate debt at an annual rate of 7.419%, leaving $600.0 million in variable rate debt. The interest rate protection agreement expires on February 1, 2010.
91/4% Senior Notes Due 2014
On November 3, 2006, MetroPCS Wireless, Inc. also consummated the sale of $1.0 billion principal amount of its 91/4% senior notes due 2014. The senior notes are unsecured obligations and are guaranteed by MetroPCS Communications, Inc., MetroPCS, Inc., and all of MetroPCS Wireless, Inc.'s direct and indirect wholly-owned subsidiaries, but are not guaranteed by Royal Street or its subsidiaries. Interest is payable on the senior notes on May 1 and November 1 of each year, beginning with May 1, 2007. MetroPCS Wireless, Inc. may, at its option, redeem some or all of the senior notes at any time on or after November 1, 2010 for the redemption prices set forth in the indenture governing the senior
notes. In addition, MetroPCS Wireless, Inc. may also redeem up to 35% of the aggregate principal amount of the senior notes with the net cash proceeds of certain sales of equity securities, including the sale of common stock.
Capital Expenditures and Other Asset Acquisitions and Dispositions
Capital Expenditures. We and Royal Street currently expect to incur approximately $540 million in capital expenditures for the year ending December 31, 2006. We and Royal Street currently expect to incur approximately $650 million in capital expenditures for the year ending December 31, 2007 in our Core and Expansion Markets. We anticipate making additional material capital expenditures related to the Auction 66 licenses, which were granted to us on November 29, 2006.
During the nine months ended September 30, 2006, we and Royal Street incurred $453.9 million in capital expenditures. These capital expenditures were primarily for the expansion and improvement of our existing network infrastructure and costs associated with the construction of the Expansion Markets.
During the year ended December 31, 2005, we had $266.5 million in capital expenditures. These capital expenditures were primarily for the expansion and improvement of our existing network infrastructure and costs associated with the construction of the Tampa/Sarasota, Dallas/Ft. Worth and Detroit Expansion Markets.
MetroPCS Other Acquisitions and Dispositions. On April 19, 2004, we acquired four PCS licenses for an aggregate purchase price of $11.5 million. The PCS licenses cover 15 MHz of spectrum in each of the basic trading areas of Modesto, Merced, Eureka, and Redding, California.
On October 29, 2004, we acquired two PCS licenses for an aggregate purchase price of $43.5 million. The PCS licenses cover 10 MHz of spectrum in each of the basic trading areas of Tampa-St. Petersburg-Clearwater, Florida, and Sarasota-Bradenton, Florida.
On November 28, 2004, we executed a license purchase agreement by which we agreed to acquire 10 MHz of PCS spectrum in the basic trading area of Detroit, Michigan and certain counties of the basic trading area of Dallas/Ft. Worth, Texas for $230.0 million pursuant to a two-step, tax-deferred, like-kind exchange transaction under Section 1031 of the Internal Revenue Code of 1986, as amended.
On December 20, 2004, we acquired a PCS license for a purchase price of $8.5 million. The PCS license covers 20 MHz of PCS spectrum in the basic trading area of Daytona Beach, Florida.
On May 11, 2005, we completed the sale of a 10 MHz portion of our 30 MHz PCS license in the San Francisco-Oakland-San Jose basic trading area for cash consideration of $230.0 million. The sale was structured as a like-kind exchange under Section 1031 of the Internal Revenue Code of 1986, as amended, through which our right, title and interest in and to the divested PCS spectrum was exchanged for the PCS spectrum acquired in Dallas/Ft. Worth, Texas and Detroit, Michigan through a license purchase agreement for an aggregate purchase price of $230.0 million. The purchase of the PCS spectrum in Dallas/Ft. Worth and Detroit was accomplished in two steps with the first step of the exchange occurring on February 23, 2005 and the second step occurring on May 11, 2005 when we consummated the sale of 10 MHz of PCS spectrum for the San Francisco- Oakland-San Jose basic trading area. The sale of PCS spectrum resulted in a gain on disposal of asset in the amount of $228.2 million.
On July 7, 2005, we acquired a 10 MHz F-Block PCS license for Grayson and Fannin counties in the basic trading area of Sherman-Denison, Texas for an aggregate purchase price of $0.9 million.
On August 12, 2005, we acquired a 10 MHz F-Block PCS license in the basic trading area of Bakersfield, California for an aggregate purchase price of $4.0 million.
On December 21, 2005, the FCC granted Royal Street 10 MHz of PCS spectrum in the Los Angeles, California; Orlando, Lakeland-Winter Haven, Jacksonville, Melbourne-Titusville, and Gainesville, Florida basic trading areas. Royal Street, as the high bidder in Auction 58, had paid approximately $294.0 million to the FCC for these PCS licenses.
On August 7, 2006, we acquired a 10 MHz PCS license in the basic trading area of Ocala, Florida in exchange for a 10 MHz portion of our 30 MHz PCS license in the basic trading area of Athens, Georgia. We are amongpaid $0.2 million at the fastest growing wireless communications providersclosing of this agreement.
In November 2006, we were granted licenses covering a total unique population of 117 million as a result of FCC Auction 66, for a total aggregate purchase price of approximately $1.4 billion. Approximately 69 million of the total covered population associated with our Auction 66 Markets represents expansion opportunities in geographic areas outside of our Core and Expansion Markets. These new expansion opportunities in our Auction 66 Markets cover six of the 25 largest metropolitan areas in the United States. Our east coast expansion opportunities include the entire east coast corridor from Philadelphia to Boston, including New York City, as well as the entire states of New York, Connecticut and Massachusetts. In the western United States, our new expansion opportunities include the San Diego, Portland, Seattle and Las Vegas metropolitan areas. The balance of our Auction 66 Markets, which cover a population of approximately 48 million, supplements or expands the geographic boundaries of our existing operations in Dallas/Ft. Worth, Detroit, Los Angeles, San Francisco and Sacramento.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Contractual Obligations and Commercial Commitments
The following table provides aggregate information about our contractual obligations as of December 31, 2005. See Note 10 to our annual consolidated financial statements included elsewhere in this prospectus.
| | Payments Due by Period | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Total | Less Than 1 Year | 1 - 3 Years | 3 - 5 Years | More Than 5 Years | ||||||||||
| | (in thousands) | ||||||||||||||
| Contractual Obligations(1): | |||||||||||||||
| Long-term debt, including current portion | $ | 902,690 | $ | 2,690 | $ | — | $ | — | $ | 900,000 | |||||
| Interest expense on long-term debt(2) | 487,383 | 83,175 | 166,000 | 166,000 | 72,208 | ||||||||||
| Operating leases | 494,070 | 59,207 | 121,202 | 123,764 | 189,897 | ||||||||||
| Total cash contractual obligations | $ | 1,884,143 | $ | 145,072 | $ | 287,202 | $ | 289,764 | $ | 1,162,105 | |||||
In November 2006, we (i) repaid all amounts owed under our Credit Agreements; (ii) entered into a new Senior Secured Credit Facility and borrowed $1.6 billion thereunder, and (iii) consummated the sale of $1.0 billion principal amount of 91/4% Senior Notes due 2014.
Inflation
We believe that inflation has not materially affected our operations.
Effect of New Accounting Standards
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140" ("SFAS No. 155"). SFAS No. 155 permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133, establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and amends FASB Statement No. 140 to eliminate the prohibition on a qualifying special purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity's first fiscal year that begins after September 15, 2006. The adoption of this statement is not expected to have a material effect on our financial condition or results of operations.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial Assets—an amendment of FASB Statement No. 140" ("SFAS No. 156"). SFAS No. 156 amends SFAS No. 140 to require that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. SFAS No. 156 permits, but does not require, the subsequent measurement of separately recognized servicing assets and servicing liabilities at fair value. Under SFAS No. 156, an entity can elect subsequent fair value measurement to account for its separately recognized servicing assets and servicing liabilities. Adoption of SFAS No. 156 is required as of the beginning of the first fiscal year that begins after September 15, 2006. The adoption of this statement is not expected to have a material effect on our financial condition or results of operations.
In July 2006, the FASB issued Interpretation No. 48 "Accounting for Uncertainty in Income Taxes," ("FIN No. 48"), which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with SFAS No. 109. FIN No. 48 provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. We have not completed our evaluation of the effect of FIN No. 48.
In September 2006, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in the Current Year Financial Statements," ("SAB 108"), which addresses how the effects of prior year uncorrected misstatements should be considered when quantifying misstatements in current year financial statements. SAB 108 requires companies to quantify misstatements using a balance sheet and income statement approach and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors. When the effect of initial adoption is material, companies may record the effect as a cumulative effect adjustment to beginning of year retained earnings. SAB 108 is effective for annual financial statements covering the first fiscal year ending after November 15, 2006. We are required to adopt this interpretation by December 31, 2006. The adoption of this statement is not expected to have a material effect on our financial condition or results of operations.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," ("SFAS No. 157"), which defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosure about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years. We will be required to adopt SFAS No. 157 in the first quarter of fiscal year 2008. We have not completed our evaluation of the effect of SFAS No. 157.
Quantitative and Qualitative Disclosures about Market Risk
Market risk is the potential loss arising from adverse changes in market prices and rates, including interest rates. We do not routinely enter into derivatives or other financial instruments for trading, speculative or hedging purposes, unless it is required by our credit agreements. We do not currently conduct business internationally, so we are generally not subject to foreign currency exchange rate risk.
As of November 30, 2006, we had $1.6 billion in outstanding indebtedness under our senior secured credit facility that bears interest at floating rates based on the London Inter Bank Offered Rate, or LIBOR, plus 2.50%. The interest rate on the outstanding debt under our senior secured credit facility as of November 30, 2006 was 7.875%. On November 21, 2006, to manage our interest rate risk exposure and fulfill a requirement of our senior secured credit facility, we entered into a three-year interest rate protection agreement. This agreement is effective on February 1, 2007 and covers a notional amount of $1.0 billion and effectively converts this portion of our variable rate debt to fixed rate debt at an annual percentage growthrate of 7.419%, leaving $600.0 million in customersvariable rate debt. The interest rate swap agreement expires in 2010. If market LIBOR rates increase 100 basis points over the rates in effect at November 30, 2006, annual interest expense on the $600.0 million in variable rate debt would increase $6.0 million.
Change in Accountants
On June 13, 2005, PricewaterhouseCoopers LLP, or PwC, our independent auditor for 2002 and revenue.2003, declined to stand for re-election as our independent registered public accounting firm. PwC's tenure as our independent registered public accounting firm was to end upon completion of the financial statement audit for 2004. On January 4, 2006, PwC was dismissed by us from performing the audit for the year ended December 31, 2004. Our audit committee participated in and approved the decision to change its independent registered public accounting firm for the audit for the year ended December 31, 2004.
PwC's reports on our consolidated financial statements as of and for the year ended December 31, 2003 did not contain any adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principle. During the fiscal year ended December 31, 2003 and through January 4, 2006, there were no disagreements with PwC on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to the satisfaction of PwC, would have caused PwC to make reference thereto in their reports on the financial statements for such years.
As defined in Item 304(a)(1)(v) of Regulation S-K of the SEC, there was a reportable event related to five material weaknesses in our internal control over financial reporting for the fiscal year ended December 31, 2004. The material weaknesses related to deficiencies in our information technology and accounting control environments, insufficient "tone at the top," a lack of automation in the revenue reporting process and deficiencies in our accounting for income taxes. The subject matter of the material weaknesses was discussed with PwC by our management and audit committee of the board of directors. We authorized PwC to fully respond to the inquiries of our newly appointed independent auditor, Deloitte & Touche, LLP, or Deloitte.
In August 2005, Deloitte was appointed by the audit committee of MetroPCS Communications' board of directors as its independent auditor for the audit of the fiscal year ending December 31, 2005. On January 4, 2006, Deloitte was appointed by the audit committee of MetroPCS Communications' board of directors as its independent auditor for the audit of the fiscal year ended December 31, 2004.
General
We offer wireless voice and databroadband personal communication services, or PCS, on a no-contract,no long-term contract, flat rate, unlimited usage basis in selected major metropolitan markets in the United States. Since we launched our wireless service in 2002 we have been among the fastest growing wireless broadband PCS providers in the United States as measured by growth in subscribers and revenues. We reached one million customers in January 2004, 1.5 million customers in February 2005, two million customers in February 2006 and 2.5 million customers in August 2006. We currently offer our services in the greater San Francisco, Miami, Tampa/Sarasota/Orlando, Atlanta, Sacramento, Dallas/Ft. Worth, and Detroit metropolitan areas, which include a total licensed population of approximately 40 million. We launched service in the Miami, Atlanta and Sacramento metropolitan areas which include a total population of 22.6 million people. We launched service in all of these areas in the first quarter of 2002, except for2002; in San Francisco in September 2002; in Tampa/Sarasota in October 2005; in Dallas/Ft. Worth in March 2006; in Detroit in April 2006; and, through a wholesale arrangement with Royal Street, in Orlando and portions of northern Florida in November 2006. In 2005, Royal Street, a company in which we launchedown a non-controlling 85% limited liability company member interest, but only elect two of the five members of the management committee, was granted licenses by the FCC in September 2002. We recently acquired four additional licenses forthe Los Angeles basic trading area and various basic trading areas inthroughout northern California that have a total population of 1.2 million people. We areFlorida. Royal Street is in the process of planning network deploymentbuilding infrastructure in Los Angeles and have not begunexpects to providecommence commercial service in these areas.the second quarter of 2007. We reported positive net income and adjusted EBITDA after four quarters of operations and one million customers after eight quarters of operations. As of March 31, 2004, we had approximately 1.2 million customers. We believehave a wholesale arrangement that we reached these growth and profitability milestones significantly faster than any other U.S. wireless carrier and that our no-contract, flat rate, unlimited usage service offering will allow us to continuesell MetroPCS-branded service to penetrate our existing markets and further drive our growth and profitability. In addition, we believe ourthe public on up to 85% of the service capacity provided by the Royal Street systems.
Our wireless services can be successfully introduced in new markets, and we continue to assess attractive expansion opportunities.
We provide wireless voice and data services to thetarget a mass market which we believe is largely underserved by traditional wireless carriers. We operate principally through two subsidiaries and hold PCS licenses in 15 subsidiaries. Our service, branded under the “metroPCS”"MetroPCS" name, allows our customers to place unlimited wirelesslocal calls from within a local callingour service area, and to receive unlimited calls from any area for awhile in our local service areas, under simple and affordable flat monthly rate plan of $35.plans starting at $30 per month. For an additional $5 to $15 per month, our customers may select a service plan that offers additional services, such as the ability to place unlimited long distance calls from within aour local service calling area to any number in the continental United States.States or unlimited voicemail, caller ID, call waiting, text messaging and picture and multimedia messaging. For additional fees, we also provide caller ID, voicemail,international long distance and text messaging, camera functions,ringtones, ring back tones, downloads, of ringtones, games and content applications, international long distancemobile Internet browsing, unlimited directory assistance and other value-added services. Our callingcustomers also have access, on a prepaid basis, to nationwide roaming. Our rate plans differentiate usour service from the more complex plans and long-term contracts required by most other wireless carriers. Our customers pay for our service in advance, eliminating any customercustomer-related credit exposure, and we do not require a long-term service contract. Ourexposure.
As of December 31, 2005, our customers currently averagein all metropolitan areas averaged approximately 1,8002,000 minutes of use per month, compared to approximately 675875 minutes per month for customers of traditionalthe national wireless carriers. We believe that average monthly usage by our customers also exceeds the average monthly usage for typical wireline customers. Average usage by our customers indicates that a majoritysubstantial number of our customers use our services as their primary telecommunications service, and our customer surveys indicate that a significant number of our customers use us as their primary telecommunications service provider, and our customer survey results indicate that approximately 35% of our customers use us as theiror sole telecommunications service provider.
Competitive Strengths
We believe ourOur business model has many competitive strengths that we believe distinguish us from otherour primary wireless carriersbroadband PCS competitors and will allow us to successfully execute our business strategy successfully, including:
Our Flat RateFixed Price Unlimited Service Plans.. We believe our service offering that provides unlimited usage from within a local calling area represents a compelling value proposition for our customers that
differs substantially from the offerings of the national wireless broadband PCS carriers and traditional wireline carriers. Our service model results in average per minute costs to our customers that are significantly lower than the average per minute costs of other traditional wireless broadband PCS carriers. We believe that many prospective customers refrain from subscribing to, or extensively utilizing, traditional wireless communications services because of high prices, long-term contract requirements, confusing calling plans and wirelinesignificant cash deposit requirements for credit challenged customers. Our simple, cost-effective rate plans, combined with our pay in advance no long-term contract service model, allow us to attract many of these customers.
Our Densely Populated Markets. We believe the high relative population density of our markets results in increased efficiencies in network deployment, operations and product distribution. We believe we have one of the highest aggregate population densities of any major wireless carrier in the United States in our Core and Expansion Markets. The aggregate population density across the licensed areas we currently serve and plan to serve in our Core Markets and Expansion Markets is approximately 321 people per square mile, which is nearly four times higher than the national average of 84 people per square mile. Our high relative population density and efficient network design resulted in cumulative capital expenditures per covered person as of September 30, 2006 of approximately $42.00, which we believe enhances our overall return on capital. The opportunities on which we plan to focus initially in our Auction 66 Markets will have population density characteristics similar to our Core and Expansion Markets.
Our Cost Leadership Position. We believe we are one of the lowest cost providers of wireless broadband PCS services in the United States, which allows us to offer our services at affordable prices while maintaining cash profits per customer as a percentage of revenues per customer that are among the highest in the wireless industry. For the nine months ended September 30, 2006, our CPU was $19.65, which represents an average cost per minute of service on our network of approximately one cent. For the nine months ended September 30, 2006, our CPGA was $116.56, which we believe to be among the lowest in the industry. We believe our operating strategy, network design and rapidly increasing scale, together with the high relative population density of our markets, will continue to contribute to our cost leadership position. For a discussion of CPU and CPGA, and their respective reconciliations to cost of service and selling expenses, please read "Summary Historical Financial and Operating Data" and "Management's Discussion and Analysis—Reconciliation of Non-GAAP Financial Measures."
Our Spectrum Portfolio. We hold or have access to wireless licenses covering a population of approximately 140 million in the United States. These licenses cover nine of the top 12 and 14 of the top 25 most populous metropolitan areas in the United States, including New York (#1), Los Angeles (#2), San Francisco (#4), Dallas/Ft. Worth (#5), Philadelphia (#6), Atlanta (#9), Detroit (#10), Boston (#11), Miami (#12), Seattle (#15), San Diego (#16), Tampa (#20), Sacramento (#24) and Portland (#25), as well as Las Vegas (#31).
Our Advanced CDMA 1XRTT Network. We deploy a 100% CDMA 1XRTT network in each of our Core and Expansion Markets that is designed to provide the capacity necessary to satisfy the usage requirements of our customers. We believe CDMA 1XRTT technology provides us with substantially more voice and data capacity per MHz of spectrum than other commonly deployed wireless broadband PCS technology. We believe that the combination of our network technology, network design and spectrum depth will continue to allow us to serve efficiently the high usage demands of our rapidly growing customer base into the future.
Business Strategy
We believe the following components of our business strategy provide the foundation for our continued rapid growth:
Continue to Target Underserved Customer Segments in our Markets. We target a mass market which we believe is largely underserved by traditional wireless carriers. We believe that our rapid growth to over 2.6 million customers since our initial service launch in 2002 demonstrates the substantial demand in the United States for our innovative wireless services. We believe our rapid adoption rates and customer mix indicate that our service is expanding the overall size of the wireless market and better meeting the needs of many existing wireless users. Our average monthly usage by our customers is approximately 2,000 minutes per month, and our recent customer surveys indicate that over 80% of our customers use us as their primary phone service and that over 50% of our customers have eliminated their traditional landline phone service. Approximately 65% of our customers are first time wireless users, while the balance have switched to our service from another wireless carrier.
Offer Affordable, Fixed Price Unlimited Service Plans With No Long-Term Service Contract Requirement. We plan to continue to offer our fixed price, unlimited wireless service plans, which we believe represent an attractive and differentiated offering to a large segment of the population. Our service is designed to provide mobile functionality while eliminating the gap between traditional wireless and wireline pricing, which wepricing. We believe this stimulates usage ofthe demand for our wireless service, contributes to the continuing growth of our subscriber base and will contribute to drivingincrease the overall wireless adoption levels in our markets to levels comparable to the adoption rates currently experienced in Europe. We also believe that our ability to capture approximately 1.2 million customers to date demonstrates the substantial demand for our service offering.markets.
Our Focus on Densely Populated Markets. Our current service areas include four Remain One of the 25 most populous metropolitan areasLowest Cost Wireless Service Providers in the United States: San Francisco, Miami, Atlanta and Sacramento. We believe the high relative population density of our market clusters results in increased efficiencies in network deployment, operating costs and product distribution. As of March 31, 2004, our markets had an average population density ofStates.
335 POPs per square mile, over four times the national average. In addition, the population of our markets is growing at an average of 1.5 times faster than the national average and the average household income in our markets is $5,000 above the national average according to the Paul Kagan Associates, Inc. Wireless Telecom Atlas & Databook 2002. Based on these statistics, we believe our market profile is the most attractive of any U.S. wireless carrier. We believe significant opportunities exist to expand into other markets with similar characteristics.
Our Cost Leadership Position. We believe our operating strategy, network design and high relative population density and spectrum positionin our markets have enabled us to become, and will enable us to continue to be, one of the lowest cost providerproviders of wireless broadband PCS services in the United States. We also believe our rapidly increasing scale will allow us to continue to drive our per customerper-customer operating costs down in the future. For the three months ended March 31, 2004, our cost per gross addition, or CPGA, was $97 compared to an average of $345 for our three largest national competitors. In addition, ourwe will seek to maintain operating costs per customer that are substantially below the serviceoperating costs of our national wireless broadband PCS competitors. We believe that our industry leading cost position provides us and will continue to provide us with a sustainable competitive advantage in our markets.advantage.
Our State-of-the-Art CDMA 1XRTT Network Expand into Attractive Markets.. We have deployedbeen successful in acquiring or gaining access to spectrum in a 100% code division multiple access radio transmission technology, or CDMA 1XRTT, network in eachnumber of new metropolitan areas which share the high relative population density and customer characteristics of our markets that is designed specifically to provide the capacity necessary to satisfy the usage requirements of our customers. CDMA 1XRTT technology provides substantially more voice and data capacity than other commonly deployed wireless technologies and provides us with a network capacity advantage in our markets. Our CDMA 1XRTT network, which provides the most efficient use of spectrum, currently allows us to rapidly and cost-effectively add network capacity without adding incremental cell sites. We believe that the combination of our network technology, network design and spectrum depth will allow us to efficiently serve the high usage demands of our rapidly growing customer base into the future.
Our Deep Spectrum Portfolio. We currently hold 30 MHz of spectrum in 13 of our 18 license areas even though our business plan generally requires only 20 MHz of spectrum in our major markets. This excess spectrum provides us with the flexibility to swap or sell 10 MHz or more of spectrum in selected markets to support future expansion or investment initiatives without materially impacting our business plan. For example, in February 2002, we completed our only spectrum sale to date, selling 10 MHz of excess spectrum in our Atlanta market for $290.0 million.
Business Strategy
We believe the following components of our business strategy will allow us to continue our rapid, profitable growth:
Continue to Target Underserved Customer Segments in OurCore Markets. We believe there is substantial demand in the United States for our affordable wireless services, as demonstrated by the fact that we have been among the leaders of the U.S. wireless industry in incremental market penetration in every quarter since we launched operations. Historically, approximately 40% of our gross customer additions have been first time wireless customers, while the remainder have switched from traditional wireless carriers. We believe our rapid adoption ratesearly experience in Tampa/Sarasota, Dallas/Ft. Worth and customer mix demonstrate thatDetroit, where, as of September 30, 2006, we have added approximately 442,000 new subscribers since the launch of service, demonstrates our ability to successfully expand our service is expanding the overall size of the wireless market as well as better meeting the needs of many existing wireless users.
Offer Affordable, Fixed Price Calling Plans Without Long-Term Service Contracts. We believe that our fixed price, unlimited service represents an attractive offering to a large segment of the population. Our service results in average per minute usage costs to our customers that are significantly lower than the average per minute rates of other wireless operators. We believe that many prospective customers refrain from subscribing to or extensively using traditional wireless communications services due to high prices or unattractive and confusing calling plans, and that our simple, cost- effective service will allow us to attract many of these customers and continue our rapid growth.
Maintain Our Positionas the Lowest Cost Wireless Telephone Services Provider in the United States. We are the lowest cost provider of wireless services in the United States, which allows us to offer our services at affordable prices while maintaining cash profit margins per customer that are among the highest in the industry. Our operating strategy, network design, spectrum portfolio and rapidly increasing scale, together with the population density of our markets, should allow us to continue to maintain our cost leadership position and further reduce our per customer operating costs in the future.
Expand into Attractive Markets Through Acquisitions and Spectrum Swaps. We believe the success of our business model can be replicated in markets outside of our existing footprint. We expect that attractive expansion opportunities will become available. We plan to target expansion markets that complement our existing footprint or can be operated as a stand alone cluster with growth and profitability characteristics similar to our existing markets. Part of the proceeds from this offering may be used to fund expansion into new markets, and we may also choose to swap a portion of our existing excess spectrum for spectrum in new markets.metropolitan areas.
Company History
We wereGeneral Wireless, Inc., or GWI, was formed in 1994 for the purpose of bidding on, acquiring and operating broadband PCS licenses as a “small business”very small business under the FCC’s “designated entity”FCC's designated entity rules. In 1995, GWI formed GW1, Inc. as a wholly-owned subsidiary, and shortly afterwards changed GW1, Inc.'s name to GWI PCS, Inc., or GWI PCS. In 1996, weGWI PCS participated in the FCC’sFCC's C-Block auctions of broadband PCS spectrum licenses. Although the auctions in which we werelicenses and was declared the high bidder concluded in May 1996, the FCC did not issue the licenses to us until January 1997, by which time the market value of PCS licenses had declined dramatically due to, among other things, the FCC’s intervening auction ofon licenses in the D-, E-Miami, Atlanta, Sacramento and F-Blocks.San Francisco metropolitan areas. In connection with the C-Block auction, each1999, GWI changed its name to MetroPCS Wireless, Inc.
In March 2004, MetroPCS, Inc. formed MetroPCS Communications as a wholly-owned subsidiary of our license holding subsidiaries had executed a separate promissory note payable to the FCCMetroPCS, Inc. and in an amount equal to the purchase price of that subsidiary’s FCC license. As a result, we were unable to obtain the financing necessary to service our debt to the FCC and build our networks.
In October 1997, after repeated efforts to obtain a commercially viable restructuring of our debt to the FCC, the subsidiaries in which we hold our FCC licenses each filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code. In January 1998, we filed our own voluntary Chapter 11 petition, joining our license subsidiaries’ bankruptcy proceedings.
As a result of proceedings commenced in the bankruptcy court, it was determined that, after crediting the $106.0 million we had paid to the FCC as down payments for our licenses, the total amount owed by us to the FCC was $60.0 million. In September 1998, the bankruptcy court confirmed our plan of reorganization and we emerged from bankruptcy in October 1998.
On July 13, 2004 a wholly ownedwholly-owned subsidiary of MetroPCS Communications, Inc. was, MPCS Holdco Merger Sub, Inc., merged withinto MetroPCS, Inc. such thatand MetroPCS, Inc. was the surviving corporation. As a result of this merger, MetroPCS, Inc. became a wholly ownedwholly-owned subsidiary of
MetroPCS Communications, Inc. In August 2006, MetroPCS Communications, Inc. formed MetroPCS V, Inc., as a wholly-owned subsidiary which indirectly, through a series of no longer existing wholly-owned subsidiaries, held all of the common stock of MetroPCS Wireless, Inc.
In November 2006, as part of the restructuring associated with the issuance of the senior notes and the senior secured credit facility, MetroPCS, Inc. was merged into MetroPCS Wireless, Inc., with MetroPCS Wireless, Inc. surviving, and MetroPCS V, Inc. was renamed MetroPCS, Inc. MetroPCS Wireless, Inc.'s business constitutes substantially all of the business of MetroPCS Communications, Inc. and all of the holders of capital stockits wholly-owned subsidiary, and parent of MetroPCS Wireless, Inc., MetroPCS, Inc. became holders of capital stock of(formerly known as MetroPCS Communications,V, Inc.
), and we continue to conduct business under the MetroPCS brand.
Products and Services
Voice ServicesServices.. We provide affordable, reliable, and high-quality wireless communicationsbroadband PCS services which consists of two primarythrough the pricing plans.plans detailed in the chart below. All service plans are "paid-in-advance" and do not require a long-term contract. Our basic $35lowest priced $30 per month service offeringplan allows our customers to place unlimited local calls withininside our calling area and to receive unlimited calls from anywhere in the world. In November 2003, we beganworld but without the ability to market a $40add additional features. For an additional $5 to $15 per month, a subscriber may select a service offering in allplan which provides more flexibility and options such as nationwide long distance calling, unlimited text messaging (domestic and international), voicemail, caller ID, call waiting, picture and multimedia messaging, data and other a la carte options on a prepaid basis. Our most popular service plans currently are our unlimited $40 and $45 rate plans which offer unlimited local and long distance calling, text and picture messaging, enhanced voice mail, caller ID, call waiting and 3-way calling. As of September 30, 2006, over 80% of our markets that allowscustomers had selected either our customers to place unlimited calls from our coverage area to anywhere in the continental United States, and to receive unlimited calls from anywhere in the world. Both plans are paid for in advance and do not require a long-term service contract.$40 or $45 rate plans.
MetroPCS Service Plans
| Product | $30/Month | $35/Month | $40/Month | $45/Month | ||||
|---|---|---|---|---|---|---|---|---|
| Unlimited local calling | X | X | X | X | ||||
| Unlimited nationwide long distance calling | X | X | ||||||
| Unlimited domestic text messaging | X | |||||||
| Unlimited picture messaging | X | |||||||
| Enhanced voicemail | X | |||||||
| 3-way calling | X | |||||||
| Caller ID | X | |||||||
| Call waiting | X | |||||||
| Additional calling features available | X | X | X |
Our local outbound calling areas extend in most cases beyond the boundaries of our actual license footprint.area. For example, customers in our San Francisco and Sacramento markets may place unlimited local calls while inside our service area to areas throughout the majority of northern California for which ourwithout incurring toll charges. Our wireline competitors generally would impose toll charges.
Customers on our basic $35 per month plan desiring long distance and international calling service may choose a pre-paid option, allowing them to place calls anywhere in the world at favorable rates. Customers on our $40 per month plan who desire international calling service may also choose this pre-paid option for international calling service. Customers who travel outside of theirour coverage area may roam onto other wireless networks in two ways. First, a customer may purchase service directly from a manual roaming provider in that area by providing the carrier on those networksprovider with a credit card number, thereby allowingwhich allows that carrierprovider to bill themthe customer directly for theirany roaming charges. WeIf the customer chooses this option, we incur no costs, nor do we receive any revenues,revenues. Second, a customer may subscribe to our nationwide roaming service, branded as "TravelTalk," under which we provide voice roaming service through agreements with other wireless carriers. We launched our TravelTalk roaming service on a prepaid basis in April 2006. Under this option, the customer makes a deposit in a prepaid account and may access our nationwide roaming
service when traveling outside our local service area. We incur costs for providing, and earn revenue from, this nationwide roaming service in excess of our costs. Due to charges imposed by our roaming suppliers, our nationwide roaming service is not cost effective for customers utilize these third-partywho travel frequently outside our local service area, but the ability to roam nationwide on a prepaid basis expands the market to those customers that may find occasional roaming services.
beneficial.
Data ServicesServices.. Our data services include:
Custom Calling FeaturesFeatures.. We offer other custom calling features, including caller ID, call waiting, three-way calling, distinctive ringtones, ring back tones and voicemail.
Advanced HandsetsHandsets.. We sell a variety of handsets manufactured primarily by Nokia, Kyocera, Audiovox, LG and Sony Ericssonnationally recognized handset manufacturers for use on our network, including models that provide color screens, camera phones and other features to facilitatefacilitating digital data transmission.data. All of the handsets we offer are CDMA 1XRTT compliant.compliant and are capable of providing the location data mandated by the FCC's wireless E-911 rules and regulations.
Core and Expansion Markets
Our strategy has been to offer our services in major metropolitan markets and their surrounding areas, which we refer to as clusters. Within our Core Markets we operate three separate clusters, which include Georgia (Atlanta), South Florida (Miami) and Northern California (San Francisco and Sacramento). We continue to evaluate new productinitially launched our service in South Florida, Georgia and service offerings in order to enhance customer satisfaction and attract new customers. For example, in March 2004, we launched, on a trial basis, a limited usage offering in which customers purchase 250 minutesthe Sacramento area of local and long distance usage per month for $25 instead of our traditional unlimited usage offerings. We believe that this offering will help us to retain existing customers and attract new customers who do not require unlimited usage or who are unwilling or unable to pay for our traditional unlimited usage plans.
FCC Licenses
Fourteen of our wholly-owned license subsidiaries each hold one 30 MHz PCS license, with the exception of one subsidiary that holds a license for 20 MHz as a result of the February 2002 sale of 10 MHz of spectrum in our Atlanta market. Six licenses permit wireless operationsNorthern California in the greaterfirst quarter of 2002 and launched the San Francisco and Sacramento metropolitan area in September of 2002. These Core Market clusters five permit wireless operations in the greater Miami metropolitan cluster and three permit wireless operations in the Atlanta metropolitan cluster. The licenses have an initial term of ten years after the initial grant date in January 1997, and, subject to applicable conditions, may be renewed. Each FCC license is essential to our ability to operate and conduct our business in the area covered by that license. See “Risk Factors—Risks Related to Our Business” and “Legislation and Government Regulations.”
On April 15, 2004, we acquired, through a wholly-owned subsidiary, four additional 15 MHz licenses for areas in northern California (Merced, Modesto, Eureka and Redding), with a totallicensed population of approximately 1.226 million people. As withof which our other PCS licenses, these licensesnetworks currently cover 22 million. Our Core Market clusters have an initial termaverage population density of ten years after256 people per square mile, compared to the initial grant date in January 1997national average of 84, enjoy average annualized population growth of 1.8% compared to the national average of 1.1% and subjecthave a median household income of $53,000 compared to applicable conditions, may be renewed. We paid an aggregate cash purchase pricea national average of $10.9 million for this acquisition. We are$47,000.
Beginning in the processsecond half of planning network deployment and have not begun to provide service in these areas.
On July 8, 2004, we began to acquire licenses opportunistically in new markets that shared characteristics similar to our existing Core Markets. In addition to these acquisitions, we also entered into an agreementagreements with NextWave Telecom, Inc.Royal Street, a company in which we own a non-controlling 85% limited liability company member interest, and certain of its affiliates to acquire two 10 MHzwhich was granted broadband PCS licenses for the Tampa-St. Petersburg-Clearwater, Florida area, and the Sarasota-Bradenton, Florida area. These areas have a total population of approximately 3.3 million people. These licenses
have an initial term of ten years after the initial grant date in January 1997, and subject to applicable conditions, may be renewed. We agreed to pay a cash purchase price of $43.5 million for this acquisition. Consummation of this acquisition is subject to satisfaction of several conditions, including approval by the FCC in December 2005 following FCC Auction 58. For a discussion of Royal Street and approval byAuction 58, please see "—Auction 58 and Royal Street." We have a wholesale agreement with Royal Street that allows us to purchase up to 85% of Royal Street's service capacity and sell it on a retail basis under the bankruptcy courtMetroPCS brand in geographic areas where Royal Street was granted FCC licenses. Our Expansion Markets include Tampa/Sarasota/Orlando, Dallas/Ft. Worth, Detroit, portions of Northern Florida, which NextWave’s Chapter 11 bankruptcy cases are pending.
geographically complementary to our South Florida cluster, as well as Los Angeles, which is geographically complementary to our Northern California cluster. Within our Expansion Markets
we operate or will operate four new separate clusters: Northern and Central Florida, Dallas/Ft. Worth, Detroit and Southern California. As of November 2006, we had launched our service in all of our Expansion Markets except for Los Angeles, which we expect to launch in the second quarter of 2007 through our wholesale arrangement with Royal Street. Our FCC licensesExpansion Markets
have a licensed population of 40 million, of which our networks currently cover four clusters encompassing16 million people in the greater metropolitangeographic areas we have launched to date, including our operations in Orlando and portions of San Francisco, Miami, Atlantanorthern Florida. Together, our Core and Sacramento.Expansion Markets have average population density of 321 people per square mile, compared to the national average of 84, enjoy average annualized population growth of 1.7% compared to the national average of 1.1% and have a median household income of $50,000 compared to a national average of $47,000. We believe our marketsall of these Expansion Markets are particularly attractive because of their high population densities, attractive customer demographics, high historical and projected population growth rates, favorable business climates and long commuting times relative to national averages.
The table below provides a metropolitan area by metropolitan area overview of our Core and Expansion Markets (excluding Auction 66 Markets) including the FCC basic trading area (BTA) identification number, the number of people, or POPs, the POP density, the annualized POP growth rate, the spectrum depth and each metropolitan area's actual or expected launch date. For our Expansion Markets we have noted whether we are the FCC license holder in each metropolitan area or if we will provide our services in that metropolitan area through our agreements with Royal Street, which holds the license. It should also be noted that all of the licensed spectrum in our Core and Expansion Markets is in the 1900 MHz PCS band and that the metropolitan area classification in the table below conform to the FCC's basic trading area (BTA) geographic areas for PCS spectrum.
| Metropolitan Area | BTA | POPs ('000s) | POP Density(2) | Annualized POP Growth(3) | MHz | Launch Date | |||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Core Markets: | |||||||||||||
| Georgia: | |||||||||||||
| Atlanta, GA | 24 | 5,085.1 | 445 | 2.53 | % | 20 | Q1 2002 | ||||||
| Gainesville, GA | 160 | 295.6 | 170 | 3.15 | % | 30 | Q1 2002 | ||||||
| Athens, GA | 22 | 228.2 | 163 | 1.70 | % | 20 | Q1 2002 | ||||||
South Florida: | |||||||||||||
| Miami-Fort Lauderdale, FL | 293 | 4,342.4 | 1,005 | 1.69 | % | 30 | Q1 2002 | ||||||
| West Palm Beach, FL | 469 | 1,308.1 | 412 | 2.05 | % | 30 | Q1 2002 | ||||||
| Fort Myers, FL | 151 | 729.5 | 191 | 2.61 | % | 30 | Q1 2004 | ||||||
| Fort Pierce-Vero Beach, FL | 152 | 486.9 | 272 | 2.13 | % | 30 | Q1 2004 | ||||||
| Naples, FL | 313 | 310.9 | 146 | 3.63 | % | 30 | Q1 2004 | ||||||
Northern California: | |||||||||||||
| San Fran.-Oak.-S.J., CA | 404 | 7,458.9 | 540 | 0.57 | % | 20 | Q3 2002 | ||||||
| Sacramento, CA | 389 | 2,326.4 | 138 | 2.65 | % | 30 | Q1 2002 | ||||||
| Stockton, CA | 434 | 728.9 | 285 | 3.25 | % | 30 | Q1 2002 | ||||||
| Modesto, CA | 303 | 587.8 | 150 | 2.79 | % | 15 | Q1 2005 | ||||||
| Salinas-Monterey, CA | 397 | 429.0 | 128 | 1.21 | % | 30 | Q1 2002 | ||||||
| Redding, CA | 371 | 299.9 | 18 | 1.47 | % | 30 | Q4 2006 | ||||||
| Merced, CA | 291 | 262.7 | 75 | 2.53 | % | 15 | Q1 2005 | ||||||
| Chico-Oroville, CA | 79 | 244.1 | 80 | 1.13 | % | 30 | Q1 2002 | ||||||
| Eureka, CA | 134 | 155.5 | 34 | 0.18 | % | 15 | TBD | ||||||
| Yuba City-Marysville, CA | 485 | 152.7 | 120 | 1.68 | % | 30 | Q1 2002 | ||||||
Expansion Markets: | |||||||||||||
| Central and Northern Florida: | |||||||||||||
| Tampa-St. Petersburg, FL | 440 | 2,869.4 | 566 | 1.59 | % | 10 | Q4 2005 | ||||||
| Sarasota-Bradenton, FL | 408 | 694.3 | 343 | 1.97 | % | 10 | Q4 2005 | ||||||
| Daytona Beach, FL | 107 | 548.6 | 311 | 1.92 | % | 20 | TBD | ||||||
| Ocala, FL | 326 | 290.9 | 171 | 2.09 | % | 10 | TBD | ||||||
| Jacksonville, FL(1) | 212 | 1,499.2 | 178 | 1.78 | % | 10 | TBD | ||||||
| Lakeland-Winter Haven, FL(1) | 239 | 518.5 | 254 | 1.27 | % | 10 | Q4 2006 | ||||||
| Melbourne-Titusville, FL(1) | 289 | 521.5 | 484 | 1.65 | % | 10 | TBD | ||||||
| Gainesville, FL(1) | 159 | 336.5 | 90 | 0.92 | % | 10 | TBD | ||||||
| Orlando, FL(1) | 336 | 1,960.2 | 415 | 2.54 | % | 10 | Q4 2006 | ||||||
Dallas/Ft. Worth: | |||||||||||||
| Dallas/Ft. Worth, TX(4) | 101 | 5,878.4 | 687 | 2.56 | % | 10 | Q1 2006 | ||||||
| Sherman-Denison, TX(5) | 418 | 188.2 | 66 | 0.99 | % | 10 | Q1 2006 | ||||||
Detroit: | |||||||||||||
| Detroit, MI | 112 | 5,074.5 | 811 | 0.41 | % | 10 | Q2 2006 | ||||||
Southern California: | |||||||||||||
| Los Angeles, CA(1) | 262 | 17,962.8 | 398 | 1.66 | % | 10 | Q2 2007 | ||||||
| Bakersfield, CA | 28 | 737.6 | 89 | 1.95 | % | 10 | TBD | ||||||
Sources: Kagan 2005 Wireless Telecom Atlas and Databook and Company public filings.
Core and Expansion Market Launch Experience
When we launched our Core Markets in 2002 we had limited access to capital. As a result, as we prepared to launch each market, we limited our initial network coverage, pre and post launch expenditures on advertising and the number of distribution outlets. This strategy allowed us to protect our limited capital and closely regulate our post launch investments in both additional network coverage as well as our costs of customer acquisition. Our licensed population coverage at the time of launch across our Core Markets was between approximately 65% and 70%. In addition, the CDMA 1XRTT technology we deployed in our network was relatively new at the time we launched our Core Markets. As a result, we were able to offer only a single handset and a single $35 per month rate plan at the time we launched each of our Core Markets, which we believe limited the initial attractiveness of our service. In spite of these challenges, the demand for our service exceeded our initial expectations and the average customer penetration levels of our Core Markets at the end of 12 months of operations for each of our Core Markets as a percentage of covered population was approximately 4%. In the fourth quarter of 2003, we were able to raise additional capital, which allowed us to expand our network coverage and increase our distribution presence. As of September 30, 2006, our Core Market operations had achieved customer penetration levels as a percentage of covered population of 9.8%, representing an increase of 1.6% in incremental penetration over the prior year.
In early 2005, as we began to plan our network deployment and service launch in our Expansion Markets, we had sufficient liquidity to more effectively execute our build-out and launch strategy. We were also able to apply the lessons we learned from the launch and operations of our Core Markets to improve our execution plan for our Expansion Markets. As a result, we launched our Expansion Markets with higher initial population coverage of between approximately 80% and 90%. We also elected to deploy additional network equipment in certain high population areas in order to provide higher quality in-building coverage, increase by approximately 20% our average number of distribution locations per one million covered population at the time of launch, and offer a broader selection of monthly rate plans and handsets. These factors allowed us to initially target a larger population of potential customers and provide a more robust service offering at the launch dates. As a result of these changes, we are experiencing higher levels of initial customer penetration in our Expansion Markets than we experienced in our Core Markets, based on our performance to date in the Tampa/Sarasota/Orlando, Dallas, and Detroit metropolitan areas. Based on our experience to date and current industry trends, we believe our business model has the opportunity to achieve average penetration levels as a percent of covered population in excess of 15% in our Core and Expansion Markets.
Los Angeles, California, the second most populous market in the United States, is the only one of our major Expansion Markets that we have not yet launched. We plan to launch the Los Angeles metropolitan area in the second quarter of 2007. Los Angeles will represent the eighth top 25 metropolitan area launched by us. We believe that the Los Angeles metropolitan area could prove to be our most successful launch to date, based on its high population density and attractive demographics.
Auction 66 Markets
At the conclusion of FCC Auction 66 in September 2006, we were declared the high bidder on eight additional FCC licenses for total aggregate winning bids of approximately $1.4 billion, and in November 2006 we were granted all eight of these licenses. The spectrum licenses granted as a result of Auction 66 are in the advanced wireless services, or AWS, band which includes the 1710 to 1755 MHz frequencies as well as the 2110 to 2155 MHz frequencies. These frequency ranges are near the PCS band in which we operate our Core and Expansion Markets, and we believe this spectrum to have similar technical properties to the PCS spectrum we are currently licensed to operate. The licenses awarded by the FCC in Auction 66 were divided into geographic areas which are different from the geographic areas associated with PCS licenses. The map below describes the geographic
coverage of our Auction 66 licenses and shows the relationship between these new licenses and our existing Core and Expansion Markets.
Our Auction 66 licenses cover a total unique population of 117 million. New expansion opportunities in geographic areas outside of our Core and Expansion Markets represent approximately 69 million of the total covered population of our Auction 66 Markets. Our expansion opportunities as a result of Auction 66 cover six of the top 25 metropolitan market areas in the United States, including the entire east coast corridor from Philadelphia to Boston, including New York City, as well as the entire states of New York, Connecticut and Massachusetts. Together our east coast expansion opportunities cover a geographic area of 50 million people. In the Western United States our new expansion opportunities cover a geographic area of 19 million people, including the San Diego, Portland, Seattle and Las Vegas metropolitan areas.
The balance of our Auction 66 Markets, which covers a population of 48 million, supplements or expands the geographic boundaries of our existing operations in Dallas/Ft. Worth, Detroit, San Francisco and Sacramento, and Royal Street's license area in Los Angeles. Given our performance in the Core and Expansion Markets to date, we expect this additional spectrum to provide us with enhanced operating flexibility, reduced capital expenditure requirements in existing licensed areas and an expanded service area relative to our position prior to Auction 66. We intend to focus our build-out strategy in our new Auction 66 Markets initially on licenses covering a population of 35-45 million in major metropolitan areas which we believe offer us the opportunity to achieve financial results similar to our existing Core and Expansion Markets. Our build-out and launch of these markets is dependent on the proceeds of this offering and our ability to generate excess free cash flow from our existing operations.
| License | Purchase Price | Spectrum MHz | Population | ||||||
|---|---|---|---|---|---|---|---|---|---|
| REA 1 | Northeast | $ | 552,694,000 | 10 | 50,058,090 | ||||
| REA 6 | West | 355,726,000 | 10 | 49,999,164 | |||||
| EA 10 | New York-No. New Jer.-Long Island, NY-NJ-CT-PA-MA-VT(1) | 363,945,000 | 10 | 25,712,577 | |||||
| EA 57 | Detroit-Ann Arbor-Flint, MI | 50,317,000 | 10 | 6,963,637 | |||||
| EA 127 | Dallas/Ft. Worth, TX-AR-OK | 49,766,000 | 10 | 7,645,530 | |||||
| EA 62 | Grand Rapids-Muskegon-Holland, MI | 7,920,000 | 10 | 1,881,991 | |||||
| EA 153 | Las Vegas, NV-AZ-UT(1) | 10,420,000 | 10 | 1,709,797 | |||||
| EA 88 | Shreveport-Bossier City, LA-AR | 622,000 | 10 | 573,616 | |||||
Source: FCC Auction 66 Website
The New York EA overlaps that portion of the Northeast REA surrounding the greater New York metropolitan area. The Las Vegas EA also overlaps that portion of the West REA that also covers Las Vegas. As a result, we currently serve is growinghave 20 MHz of spectrum in these metropolitan areas which we believe will facilitate a more capital efficient rollout and is expectedallow us to continuemore effectively scale our operations.
There are incumbent governmental and non-governmental users in the AWS band. The relocation of incumbent governmental users will be funded by the proceeds of Auction 66, although certain governmental users will not be required to grow at an average of 1.5 times faster thanrelocate. The non-governmental incumbent licensees will need to be relocated pursuant to the national averageFCC's approved spectrum relocation order, which may require us to pay for their relocation expenses which could be material, and which requires voluntary registration for the period of 2001 through 2006.
first three years before the commercial incumbents are subject to mandatory relocation.
The following table sets forth information regarding our licensed markets as of March 31, 2004(1):Auction 58 and Royal Street
In January 2005, the FCC conducted Auction 58 for wireless broadband PCS spectrum. Auction 58 was the first significant FCC auction for wireless broadband PCS spectrum since Auction 35 in 2001. Auction 58, like other major auctions conducted by the FCC, was designed to allow small businesses, very small businesses and other so called designated entities, or DEs, to acquire spectrum and construct wireless networks to promote competition with existing carriers. To that end, the FCC designated certain blocks of wireless broadband PCS spectrum for which only DEs could apply. Qualified DEs were able to bid on these restricted or "closed" licenses which were not available to other bidders who did not qualify as DEs. In addition, very small business DEs were permitted to apply for and bid on "open" licenses with a bidding credit of 25% of the gross bid price. We entered into a cooperative arrangement with an unaffiliated very small business entrepreneur and invested in Royal Street, a DE that qualified to bid on "closed" licenses and was eligible for the 25% bidding credit on "open" licenses. We own a non-controlling 85% limited liability company member interest in Royal Street and may only elect only two of the five members to Royal Street's management committee, which has the full power to direct the management of Royal Street. C9 Wireless, LLC, or C9, has control over the operations of Royal Street because it has the right to elect three of the five members of Royal Street's management committee. C9 has the right to put all or part of its ownership interest in Royal Street to us, but due to regulatory restrictions, we have no corresponding right to call C9's ownership interest in Royal Street. These put rights expire in June 2012.
2002 POPs(2) | MHz in Market | 2001-2006 Annual Population Growth Rate(2) | Population Density(3) | ||||||
| (In thousands) | |||||||||
San Francisco Cluster: | |||||||||
San Francisco—Oakland—San Jose | 7,375.9 | 30 | 1.05 | % | 544 | ||||
Salinas—Monterey | 410.1 | 30 | 1.03 | % | 124 | ||||
Subtotals/Average | 7,786.0 | 1.05 | % | 462 | |||||
Miami Cluster: | |||||||||
Miami—Fort Lauderdale | 4,073.0 | 30 | 1.62 | % | 970 | ||||
West Palm Beach | 1,213.6 | 30 | 2.02 | % | 439 | ||||
Fort Myers | 654.7 | 30 | 2.04 | % | 191 | ||||
Fort Pierce—Vero Beach | 447.9 | 30 | 1.86 | % | 274 | ||||
Naples | 268.1 | 30 | 3.01 | % | 134 | ||||
Subtotals/Average | 6,657.3 | 1.81 | % | 475 | |||||
Atlanta Cluster: | |||||||||
Atlanta | 4,612.8 | 20 | 2.31 | % | 420 | ||||
Gainesville | 259.4 | 30 | 2.53 | % | 159 | ||||
Athens | 214.7 | 30 | 1.85 | % | 156 | ||||
Subtotals/Average | 5,086.9 | 2.30 | % | 364 | |||||
Sacramento Cluster: | |||||||||
Sacramento | 2,059.0 | 30 | 1.45 | % | 129 | ||||
Stockton | 619.6 | 30 | 1.31 | % | 254 | ||||
Chico—Oroville | 233.4 | 30 | 0.96 | % | 79 | ||||
Yuba City—Marysville | 141.9 | 30 | 1.09 | % | 114 | ||||
Subtotals/Average | 3,053.9 | 1.37 | % | 135 | |||||
Totals/Average | 22,584.1 | 1.60 | % | 335 | |||||
U.S. Totals/Average | 291,248.0 | 1.06 | % | 82 |
Auction 58 was completed in February 2005, and Royal Street made its final payment to the FCC for the licenses it won in Auction 58 in March 2005. In December 2005, Royal Street was granted the following licenses on which Royal Street was the high bidder at the conclusion of Auction 58: Los Angeles, California; and Orlando, Jacksonville, Lakeland-Winter Haven, Melbourne-Titusville and Gainesville, Florida basic trading areas.
Royal Street holds all of the Auction 58 licenses and has entered into certain cooperative agreements with us relating to the financing, design, construction and operation of the networks. The Royal Street agreements are based on a "wholesale model" in which Royal Street plans to sell up to 85% of its engineered service capacity on a wholesale basis to us, which we in turn will market on a retail basis under the MetroPCS-brand to our customers within the covered area. In addition, the Royal Street agreements contemplate that MetroPCS, at Royal Street's request and at all times subject to Royal Street's direction and control, will build-out the networks, provide information to Royal Street relating to the budgets and business plans as well as arrange for administrative, clerical, accounting, credit, collection, operational, engineering, maintenance, repair, and technical services. We do not own or control the Royal Street licenses. However, pursuant to contractual arrangements with Royal Street, we have access, via the wholesale arrangement, to as much as 85% of the engineered service capacity of Royal Street's network with the remaining 15% reserved by Royal Street to sell to other parties.
Also, pursuant to another of the Royal Street agreements, upon Royal Street's request, we will provide financing for the acquisition and build-out of licenses won in Auction 58. As of November 30, 2006 the maximum amount that Royal Street may borrow from us under the loan agreement is approximately $500 million. As of November 30, 2006 Royal Street has borrowed $394 million from us under the loan agreement, approximately $294 million of which was used for the acquisition of new licenses. Interest accrues under the loan agreement at a rate equal to 11% per annum, compounded quarterly. Royal Street has commenced repayment of that portion of the loans related to the Orlando and Lakeland-Winter Haven markets. The proceeds from this loan are to be used by Royal Street to make payments for the licenses won in Auction 58, to finance the build-out and operation of the Royal Street network infrastructure, and to make payments under the loan until Royal Street has positive free cash flow.
License Term
All of the broadband PCS licenses held by us and by Royal Street have an initial term of ten years after the initial grant date (which varies by license, but the initial San Francisco, Sacramento, Miami and Atlanta licenses were granted on January 1997), and, subject to applicable conditions, may be renewed at the end of their terms. The AWS licenses granted in Auction 66 have an initial term of fifteen years after the initial grant of the license. Each FCC license is essential to our and Royal Street's ability to operate and conduct our and Royal Street's business in the area covered by that license.
Distribution and Marketing
We offer our wirelessproducts and services under the “metroPCS”"MetroPCS" brand bothindirectly through indirectapproximately 2,000 independent retail outlets and directly to our customers through company-operated93 Company-operated retail stores. At May 31, 2004, our distribution outlets
included approximately 1,370 indirect retailers and 50 MetroPCS retail locations. Our indirect distribution outlets include a range of local, regional and national mass market retailers and specialty stores. For 2003, approximately 76%A significant portion of our gross customer additions have been added through our indirect distribution outlets and for the nine months ended September 30, 2006, 84% of our gross customer additions were added through indirect channels. We have over 2,000 locations where customers can make their monthly payments, and many of these locations also serve as distribution points for our products and services. Our cost to distribute through direct and indirect distribution outlets. Wechannels is substantially similar, and we believe our mix of indirect and direct distribution providesallows us with the ability to reach the largest number of potential customers in our markets at a low relative cost. We plan to increase our number of indirect distribution outlets and company-operated stores.Company-operated stores in both Core and Expansion Markets and in new markets acquired in the future, such as the Auction 66 Markets.
We engage in local advertising in orderadvertise locally to develop our brand and support our indirect and direct distribution channels. We advertise primarily advertise through local radio, cable, television, outdoor and local print media. In addition, we believe we have benefited from a significant number of word-of-mouth customer referrals.
Customer Care, Billing and Support Systems
OurWe use several outsourcing solutions to efficiently deliver quality service and support to our customers as part of our strategy of establishing and maintaining our leadership position as a low cost telecommunications provider while ensuring high customer satisfaction levels, has led us to pursue several outsourcing solutions to efficiently deliver quality service and support to our customers.levels. We outsource some or all of the following back office and support functions to nationally recognized third-party providers:
requests. We believe providing quality customer service is an important element in overall customer satisfaction and retention, and we regularly review performance of our call center vendors.
Network Operations
We believe we were the first U.S. wireless broadband PCS carrier to have 100% of our customers on a CDMA 1XRTT network. We began to build outbuilding our network in 2001, shortly after other CDMA carriers began to upgradeupgrading their networks to 1XRTT. As a result, we were able to deploybelieve we deployed our network with third generation capabilities at a fraction of themuch lower cost that wasthan incurred by other carriers who were forced to undergo a technology migration to deploy second generation CDMA networks. AllSince all of our handsets are CDMA 1XRTT compliant, and as a result we receive the full capacity and quality benefits thatprovided by CDMA 1XRTT provides across our entire network and customer base.
As of March 31, 2004,September 30, 2006, our network consistedconsists of seven11 switches at fiveeight switching centers and 1,0032,837 operating cell sites in operation.sites. A switching center serves several purposes, including routing calls, managing call handoffs, managing access to the public telephone network and providing access to voicemail and other value-added services. Currently, almost all of our cell sites are co-located, meaning our equipment is located on leased facilities that are owned by third parties who retainretaining the right to lease thesethe facilities to other carriers as well. We utilize ouradditional carriers. Our switching centers’ capabilities forcenters and national operations center provide around-the-clock monitoring of our network base stations and switches.
Our switches connect to the public telephone network through fiber rings leased from third-parties, which facilitate the first leg of originationoriginating and termination ofterminating traffic between our equipment and both local exchange and long distance carriers. We have negotiated interconnection agreements with ourrelevant local exchange carriers.
We use third-party providers for long distance services and forthe majority of the backhaul services. Backhaul services are the telecommunications services that other carriers providewe use to carry our traffic to and from our cell sites toand our switching facilities.
Network Technology
Wireless digital signal transmission is accomplished through the use ofby using various forms of frequency management technology, or “air"air interface protocols.”" The FCC has not mandated a universal air interface protocol for wireless broadband PCS systems. Rather,systems; rather, wireless broadband PCS systems in the United States operate under one of three principaldominant principle air interface protocols: code division multiple access, or CDMA; time division multiple access, or TDMA; or global system for mobile communications, or GSM. TDMA and GSM communications are both time division multiple access systems butAll three air interface protocols are incompatible with each other. CDMA is incompatible with both GSM and TDMA systems. Accordingly, a customer of a system that utilizes
CDMA technology is unable to use a CDMA handset when traveling in an area not served by a CDMA-based wireless carrier, unless the customer carries a dual- band/dual-band/dual-mode handset that permits the customer to use the analogalternate cellular system in that area. TheIn addition, certain carriers also restrict customers from changing the programming of their phones to be used on other carriers' networks using the same issue appliesair interface protocol.
We believe 10 MHz of spectrum to usersbe sufficient to begin service in metropolitan areas using technology that divides the base station coverage area served by a transmitter receiver into three parts or sectors. However, in metropolitan areas with only 10 MHz of TDMAspectrum we have a network design capable of subdividing the service area into six parts or GSM systems.sectors and to deploy these six-sector cells in selected, high-demand areas. This will increase the capacity of the wireless base stations in these markets by doubling the number of "sectors" (segments of the circle representing the base station's broadcast area) over which a base station's antennas can handle calls simultaneously. Our vendors have informed us that cell sites using six sectors have been in operation for many years in the U.S., and we have obtained actual performance data on cell sites that have been operational for multiple years. We and Royal Street have commercially deployed six-sector cell sites in certain geographic areas in 2006, and we anticipate that Royal Street will deploy this technology in Los Angeles in 2007.
We believe that this technology uses spectrum more efficiently than any alternative commonly used wireless technology in 10 MHz. We also intend to buy EVRC-B, or 4G vocoder, handsets when available. 4G vocoder handsets allow for greater capacity in the network. We believe these handsets will be available in 2007. We currently intend to further enhance network capacity by upgrading our networks with EV-DO Revision A with Voice-Over-Internet-Protocol, or VoIP, which we anticipate will be available in 2008. When combined with six-sector technology, it is our expectation that new 4G vocoder and EV-DO Revision A with VoIP will more than double the effective available spectrum relative to three-sector, 1XRTT technology. Thus, we believe 10 MHz of spectrum has the effective capacity of 20 MHz using today's technologies. We anticipate that spectral efficiency will continue to improve over the next several years, allowing us to keep up with the increased usage of third-generation services.
As a result of Auction 66, we were granted licenses for additional spectrum in some of these metropolitan areas. We acquired this spectrum because the price of the spectrum was attractive when considering the additional cost that would have been incurred to employ the technologies described above to more fully utilize the existing 10 MHz. In many cases, our Auction 66 spectrum will allow us to enlarge our existing geographic service area, which we believe will further enhance the attractiveness of our services.
Our decision to use CDMA wasis based on several key advantages relative toover other digital protocols, including the following:
Higher network capacitycapacity.. Cellular technology capitalizes on frequency reuse perreusing discrete amounts of spectrum at a cell site. CDMA has a reuse of one, meaningsite that every frequency channel can be used at another cell site in each cell. TDMA and GSM have a frequency reuse of greater than one, meaning that every frequency channel cannot be reused in a cell. Therefore, CDMA uses the entire frequency in each cell rather than using only a fraction of such frequency as is typically the case with TDMA and GSM technologies.system. We believe, based on studies by CDMA handset manufacturers, that our implementation of CDMA digital technology will eventually provide system capacity that is approximately seven to ten times greater than thatthe system capacity of analog technology and approximately three times greater than thatthe system capacity of TDMA and GSM systems, resulting in significant operating and cost efficiencies. Additionally, we believe that CDMA technology provides network capacity and call quality that areis superior to that of other wireless technologies.
Longer handset battery lifelife.. TDMA and GSM system power control is less stringent by design than CDMA, whereas the power regulating nature of CDMA establishes a communication link with a customer handset at the lowest possible power level suitable for high-quality voice transmission. As a result, while While a digital handset using any of the three technologiesdigital air interface protocols has a substantially longer battery life than an analog cellular handset, battery life in CDMA handsets can be proportionately extended to provide even longer periods between recharges.battery recharges than other commonly deployed digital PCS technologies.
Fewer dropped callscalls.. CDMA systems transfer calls throughout the CDMA network using a technique referred to as a soft"soft hand-off," which connects a mobile customer’scustomer's call with a new base station while maintaining a connection with the base station currently in use.use, and "hard hand-off," which disconnects the call from the current base station when it connects to another base station. CDMA networks monitor the quality of the transmission received by multiple neighbor base stations simultaneously to select a betterthe best transmission path and to ensure that the network doescall is not disconnect the calldisconnected in one cellbase station unless replaced by a stronger signal from another base station.another. Analog, TDMA and GSM networks only use a hard hand-off and disconnect the call from the current base station as it connects with a new one without any simultaneous connection to both base stations. This characteristic ofSince CDMA allows for both hard and soft hand-off, it results in fewer dropped calls compared to other wireless technologies.
Simplified frequency planningplanning.. Frequency planning is the process by which wireless service providers analyze and test alternative patterns of frequency use within their systems to minimize interference and maximize capacity. Currently, TDMA and GSM service providers spend considerable time and money on frequency planning because of the need tothey must reuse frequencies to maximize capacity throughout a network. Withnetwork capacity. CDMA technology however,allows reuse of the same subset of allocated frequencies can be reused in every cell, substantially reducing the need for costly frequency planning.
Efficient migration pathpath.. CDMA 1XRTT technology can be further upgraded easily and cost effectively,cost-effectively for enhanced voice and data capabilities. The technology requires relatively low incremental investment infor each step along the migration path is an advantage of this technology. Additional steps can be takenwith relatively modest incremental capital investment levels as demand for more robust data services or need for additional capacity develops at relatively modest capital investment levels. Handset compatibility is a primary objective of CDMA 2000, 1XRTT, IS-95A and IS-95B. Therefore, our 1XRTT system supports IS-95A, IS-95B and 1XRTT handsets.develops.
Privacy and securitysecurity.. CDMA uses coding to isolate users, whereas TDMA and GSM use time slots to isolate the users. Furthermore, CDMA uses a very long code extending over multiple days whichtechnology that requires accurate time and code phase knowledge to decode. Therefore, CDMA offers increaseddecode, increasing privacy and security.
Competition
We compete directly in each of our marketsmetropolitan areas with other wireless service providers, and with wireline providers ascompanies and increasingly with cable companies by providing a mobilewireless alternative to traditional landlinewireline service. The wireless industry is dominated by national carriers, such as Cingular Wireless, Verizon Wireless, Sprint Nextel and T-Mobile, which have an estimated 84% of the national wireless market share as measured by number of subscribers, according to the Federal Communications Commission's Annual Report and Analysis of Competitive Market Conditions with Respect to Commercial Mobile Services, FCC 06-142, released September 29, 2006. National carriers typically offer post-paid plans that require long-term contracts and credit checks or deposits. Over the past few years, the wireless industry has seen an emergence of several new competitors that provide either pay-as-you-go or prepaid wireless services. Some of these competitors, such as Virgin Mobile USA, Boost Mobile, Amp'd Mobile and Tracfone, are non-facility based mobile virtual network operators, or MVNOs, that contract with wireless network operators to provide a separately branded wireless service. These MVNOs typically also charge by the minute rather than offering flat-rate plans. Some companies, such as Leap Wireless d/b/a Cricket and Sure West Wireless, are regional carriers with unlimited rate plans similar to ours. Thus, we compete with both the national carriers, the prepaid, pay-as-you-go service providers and in some cases regional and local carriers. We believe that competition for subscribers among wireless communications providers is based primarily uponmostly on price, service area, services and features, offered, call quality and customer service. The wireline industry is also dominated by large incumbent carriers, such as AT&T, Verizon, and BellSouth, and competitive local exchange or Voice-Over-Internet-Protocol, or VoIP, service providers, such as Vonage, McLeod USA, and XO Communications. The cable industry is also dominated by large carriers such as Time Warner Cable, Comcast and Cox Communications.
Many of our competitors havewireless, wireline and cable competitors' resources are substantially greater, resources and their market shares are larger, market share than we have,ours, which may affect our ability to compete successfully. Additionally, many of our wireless competitors offer larger coverage areas or nationwide calling plans that do not requiregive rise to additional roaming charges, for roaming, and the competitive pressures of the wireless communications
industry have caused other carriersled them to offer service plans with increasingly largegrowing bundles of minutes of use at increasingly low prices. These competitivelower per minute prices or price plans with unlimited nights and weekends. Our competitors' plans could adversely affect our ability to maintain our pricing, market penetration, growth and customer retention. Furthermore,In addition, large national wireless carriers have been reluctant to enter into roaming agreements at attractive rates with smaller and regional carriers like us, which limits our ability to serve certain market segments. Moreover, the FCC may pursueis pursuing policies designed to make availablemaking additional spectrum for the provision of wireless services available in each of our markets, which may increase the number of wireless competitors we face and enhance the ability of our wireless competitors and enhance our wireless competitors' ability to offer additional plans and services. Further, since many of our competitors are large companies, they can require handset manufacturers to provide the newest handsets exclusively to them. Our competitors also can afford to heavily subsidize the price of the subscriber's handset because they require long term contracts. These advantages may detract from our ability to attract customers from certain market segments.
We also compete with companies that useusing other communications technologies, including paging, and digital two-way paging, enhanced specialized mobile radio, and domestic and global mobile satellite service.service, and wireline telecommunications services. These technologies may have advantages over theour technology we use andthat customers may ultimately befind more attractive to customers. Weattractive. Additionally, we may compete in the future with companies that offer new technologies and market other services that we do not offer.offer or may not be available with our network technology, from our vendors or within our spectrum. Some of our competitors do or may offerbundle these other services together with their wireless communications service, which customers may make their servicesfind more attractive to customers. In addition, energyattractive. Energy companies, utility companies, satellite companies and cable operators also are expanding their services to offer communicationstelecommunications services.
In the future, we may also face competition from mobile satellite service, or MSS, providers, as well as from resellers of these services. The FCC has granted to some MSS providers, and may grant others, the flexibility to deploy an ancillary terrestrial component to their satellite services. This added flexibility may enhance MSS providers' ability to offer more competitive mobile services.
Seasonality
Net customer additions are typically strongest in the first and fourth calendar quarters of the year. Softening of sales and increased churn in the second and third calendar quarters of the year usually combine to result in fewer net customer additions during the second and third calendar quarters. The following table sets forth our net subscriber additions and total subscribers from the first quarter of 2004 through the third quarter of 2006.
MetroPCS Subscriber Statistics
| | Net Additions | Subscribers | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Core Markets | Expansion Markets | Consolidated | Core Markets | Expansion Markets | Consolidated | ||||||
| | (in 000s) | |||||||||||
| 2004 | ||||||||||||
| Q1 | 174 | — | 174 | 1,151 | — | 1,151 | ||||||
| Q2 | 63 | — | 63 | 1,214 | — | 1,214 | ||||||
| Q3 | 66 | — | 66 | 1,280 | — | 1,280 | ||||||
| Q4 | 119 | — | 119 | 1,399 | — | 1,399 | ||||||
2005 | ||||||||||||
| Q1 | 169 | — | 169 | 1,568 | — | 1,568 | ||||||
| Q2 | 77 | — | 77 | 1,645 | — | 1,645 | ||||||
| Q3 | 95 | — | 95 | 1,740 | — | 1,740 | ||||||
| Q4 | 132 | 53 | 185 | 1,872 | 53 | 1,925 | ||||||
2006 | ||||||||||||
| Q1 | 184 | 61 | 245 | 2,056 | 114 | 2,170 | ||||||
| Q2 | 63 | 186 | 249 | 2,119 | 300 | 2,419 | ||||||
| Q3 | 55 | 142 | 198 | 2,174 | 442 | 2,617 | ||||||
Inflation
We do not believe that inflation has had a material effect on our operations.
Employees
As of March 31, 2004,September 30, 2006, we had 8591,860 employees. We believe that our relationship with our employees is good. None of our employees is covered by a collective bargaining agreement or represented by an employee union.
Properties
We currently maintain our executive offices in Dallas, Texas, and regional offices in Alameda, California; Sunrise, Florida; Norcross, Georgia; Folsom, California; Plano, Texas; Livonia, Michigan; Irvine, California; Tampa, Florida; and Folsom, California. WeOrlando, Florida. As of September 30, 2006, we also operate 50operated 93 retail stores throughout our markets.metropolitan areas. All of our regional offices, switch sites, retail stores and virtually all of our cell site facilities are leased.
leased from unaffiliated third parties. We believe these properties, which are being used for their intended purposes, are adequate and well-maintained.
Legal ProceedingsRegulation
From time to time, we are involved in litigation that we consider to be inThe government regulates the normal course of business. We are not party to any pending legal proceedings that we believe would, individually or in the aggregate, have a material adverse effect on our financial condition or results of operations.
LEGISLATION AND GOVERNMENT REGULATIONS
The wireless communicationstelecommunications industry is subject to extensive governmental regulation onextensively at both the federal level and, to varying degrees, onat the state level. The enactment of the Telecommunications Act of 1996 has had an effect on many aspects of this regulation. In addition, this regulation currently is the subject of administrativeand local levels. Administrative rulemakings, legislation and judicial proceedings that arecan affect this government regulation and may be significant to us.
In recent years, the regulation of the communications industry has been in a state of flux as Congress, the FCC, state legislatures and state regulators have passed laws and promulgated policies to foster greater competition in telecommunications markets.
Federal Regulation
The licensing, construction, modification, operation, ownership, saleWireless telecommunications systems and interconnection arrangements of wireless communications systemsservices are subject to regulations and policies adopted by the FCCextensive federal regulation under the Communications Act of 1934, as amended, or the Communications Act.Act, and the implementing regulations adopted thereunder by the FCC. These regulations and associated policies govern, among other things, applications for and renewals of licenses to construct and operate wireless communications systems, ownership of wireless licenses and the transfer of control or assignment of such licenses, and the ongoing technical, operational and operationalservice requirements under which wireless licensees must operate.
operate, the rates, terms and conditions of service, the protection and use of customer information, roaming policies, the provision of certain services, such as E-911, and the interconnection of communications networks.
General Licensing Requirements and Broadband Spectrum Allocations
The FCC awardedawards certain broadband PCS licenses for protected geographic service areas called major trading areas,Major Trading Areas, or MTAs, and basic trading areas,other broadband PCS licenses for Basic Trading Areas, or BTAs, which are defined by Rand McNally & Company. Under this scheme,the broadband PCS licensing plan, the United States and its possessions and territories are divided into 493 BTAs, all of which are included within 51 MTAs. The FCC has allocatedallocates 120 MHz of radio spectrum in the 1.9 GHz band for licensed broadband PCS. The FCC divided the 120 MHz of spectrum into two 30 MHz blocks, known as the AA- and B blocks,B-Blocks, licensed for each of the 51 MTAs, one 30 MHz block, known as the C block,C-Block, licensed for each of the 493 BTAs, and three 10 MHz blocks, known as the D, ED-, E- and F blocks,F-Blocks, licensed for each of the 493 BTAs, for a total of more than 2,000 licenses. Each broadband PCS license authorizes operation on one of six frequency blocks allocated for broadband PCS.
However, licensees are given the flexibility to partition their service areas and to disaggregate their spectrum into smaller areas or spectrum blocks with the approval of the FCC. The FCC has adoptedalso awarded two cellular licenses on a metropolitan statistical area, or
MSA, and rural service area, or RSA, basis with 25 MHz of spectrum for each license. There are 306 MSAs and 428 RSAs in the United States. Licensees of cellular spectrum can offer PCS services in competition with broadband PCS licensees. Many of our competitors utilize a combination of cellular and broadband PCS spectrum to provide their services.
In 2005, the FCC allocated an additional 90 MHz of spectrum to be used for AWS. Each AWS license authorizes operation on one of six frequency blocks. The FCC divided the 90 MHz of spectrum into two 10 MHz and one 20 MHz blocks licensed for each of 12 designated regional economic area groupings, or REAG, one 10 MHz and one 20 MHz block licensed for each of 176 designated economic areas, or EA, licenses, and a 20 MHz block licensed for each of 734 designated metropolitan statistical area/rural service area basis. The economic areas are geographic areas defined by the Regional Economic Analysis Division of the Bureau of Economic Analysis, U.S. Department of Commerce. Regional economic areas are collections of economic areas. Metropolitan statistical areas and rural service areas are defined by the Office of Management and Budget and the FCC, respectively. The FCC auctioned the AWS spectrum in a single multiple round auction which commenced on August 9, 2006. In November 2006, the FCC granted us 10 MHz REAG licenses in the Northeast and West, and 10 MHz EA licenses in New York, Detroit-Ann Arbor, Dallas/Ft. Worth, Las Vegas, Grand Rapids-Muskegon-Holland, Michigan, and Shreveport-Bossier City, Louisiana. See "Business—Ownership Restrictions."
The FCC sets construction benchmarks for broadband PCS and AWS licenses. All 30 MHz broadband PCS licensees, holding licenses originally granted as 30 MHz licenses, must construct facilities that offer coverage to provide service covering one-third of the population of their service areaarea's population within five years, and two-thirds of the population within ten years, of their initial license grants.grant date. All broadband PCS licensees holding licenses which originally were granted as, or disaggregated to become, 10 MHz and 15 MHz block licenseeslicenses must construct facilities to provide service to 25% of the servicelicense area within five years of their initial license grants,grant date, or make a showing of substantial service. While the FCC has granted limited extensions to and waivers of these requirements, licensees that failfailing to meet thethese coverage requirements maygenerally must forfeit their license. Either we or the previous licensee for each of our broadband PCS licenses has satisfied the applicable five-year coverage requirement for our licenses and the ten-year requirement for those licenses with license terms expiring in January 2007. All AWS licensees will be subjectrequired to forfeitureconstruct facilities to provide substantial service by the end of the license. We have satisfied the initial five-year construction requirements for all of the PCS licenses we currently hold.15-year license term.
The FCC generally grants broadband PCS licenses for ten-year terms of ten years that are renewable upon application to the FCC. AWS licenses are granted for an initial 15-year term and then are renewable for successive ten-year terms. Our initial PCS license terms end in January 2007 and we will need to renew them. Our initial AWS license terms end in November 2021. Near the conclusion of the license term, we must file applications for renewal of licenses to obtain authority to operaterenew each license for an additional ten-year term.term or the license will expire. The FCC may revokedeny our licensesbroadband PCS and may deny ourAWS license renewal applications for cause after appropriate notice and hearing. The FCC will award a renewal expectancy to us for our broadband PCS licenses if we meet specific standards of past performance. If we receive a renewal expectancy, it is very likely that the FCC will renew our existing PCS licenses so that they will not become subject to competing applications. The FCC has not yet issued any renewal expectancies for PCS licensees, and has clarified only the basic requirements and process.performance standards. To receive a renewal expectancy for our broadband PCS licenses, we must show that we have provided substantial service during our past license term, and have substantially complied with applicable FCC rules and policies and the Communications Act. The FCC defines substantial service as service which is sound, favorable and substantially above a level of mediocre service that mightlevel only minimally warrantwarranting renewal. If we receive a licensee doesrenewal expectancy, it is very likely that the FCC will renew our existing broadband PCS licenses at the end of their terms. If we do not receive a renewal expectancy, then the FCC will accept competing applications for the license renewal period, subject to a comparative hearing, and the FCC may award the broadband PCS license for the subsequentnext term to another entity. We believe we will be eligible for a renewal expectancy for our broadband PCS licenses that will be renewed in the near term, but cannot be certain because the applicable FCC standards are not precisely defined.
The FCC may deny applications for FCC authority,licenses, and in extreme cases revoke FCC licenses, if it finds that an entitya licensee lacks the requisite character qualifications to be a licensee. In making this determination, the FCC considers whether an applicant or licensee has been the subject ofany adverse findings against the licensee or applicant in a judicial or administrative proceeding involving felonies, the possession or sale of unlawfulillegal drugs, fraud, antitrust violations or unfair
competition, employment discrimination, misrepresentations to the FCC or other government agencies, or serious violations of the Communications Act or FCC regulations. We believe there are no activities and no judicial or administrative proceedings in which we are involvedinvolving us that would warrant such a finding by the FCC.
The FCC also regulateshas other broadband wireless spectrum allocation proceedings in process. In 2004, the FCC sought comment on service rules for an additional 20 MHz of AWS spectrum in the 1915-1920 MHz, 1995-2000 MHz, 2020-2025 MHz and 2175-2180 MHz bands and has indicated that it intends to initiate a further proceeding with regard to an additional 20 MHz of AWS spectrum in the 2155-2175 MHz band in the future. These proposed allocations present certain unique spectrum clearing and interference issues, and we cannot predict with any certainty the likely timing of these proposed allocations. The FCC also has allocated an additional 60 MHz of wireless broadband spectrum in the 700 MHz band and the FCC is now required by statute to commence auctioning this spectrum no later than January of 2008. On August 10, 2006, the FCC issued a Notice of Proposed Rulemaking seeking comment on possible changes to the 700 MHz band plan, including possible changes in the service area sizes for the 60 MHz of as yet unauctioned 700 MHz spectrum. We are participating in this proceeding and advocating a greater number of smaller license areas, but cannot predict the likely outcome or whether it will benefit or adversely affect us. On September 8, 2006, the FCC also sought comment on the existing licenses in the 700 MHz spectrum and the disposition of the 700 MHz spectrum returned by Nextel Communications. Furthermore, in December 2006, the FCC sought comment on the possible implementation of a nationwide broadband interoperable network in the 700 MHz band allocated for public safety use, which also could be used by commercial service providers on a secondary basis.
Transfer and Assignment of PCS Licenses
The Communications Act requires prior FCC approval for assignments or transfers of control of any license or construction permit, with limited exceptions. The FCC may prohibit or impose conditions on assignments and transfers of control of licenses. We have managed to secure the requisite approval of the FCC to a variety of assignment and transfer proposals without undue delay. Although we cannot assure you that the FCC will approve or act in a timely fashion on any of our future requests to approve assignments or transfer of control applications, we have no reason to believe the FCC will not approve or grant such requests or applications in due course. Because an FCC license is necessary to lawfully provide wireless broadband service, FCC disapproval of any such request would adversely affect our business plans.
The FCC allows FCC licenses and service areas to be subdivided geographically or by bandwidth, with each divided license covering a smaller service area and/or less spectrum. Any such division is subject to FCC approval, which cannot be guaranteed. In addition, in May 2003, the FCC adopted a Report and Order to facilitate development of a secondary market for unused or underused wireless spectrum by imposing less restrictive standards on transferring and leasing of spectrum to third parties. These policies provide us with alternative means to obtain additional spectrum or dispose of excess spectrum, subject to FCC approval and applicable FCC conditions. These alternatives also allow our competitors to obtain additional spectrum or new competitors to enter our markets.
Ownership Restrictions
Before January 1, 2003, the FCC rules imposed a "spectrum cap" limiting to 55 MHz the amount of commercial mobile radio service, or CMRS, spectrum an entity could hold in a major market. The
FCC now has eliminated the spectrum cap for CMRS in favor of a case-by-case review of transactions raising CMRS spectrum concentration issues. Previously decided cases under the case-by-case approach indicate that the FCC will screen a transaction for competitive concerns if 70 MHz of cellular and broadband PCS spectrum in a single market is attributable to a party or affiliated group. The 70 MHz benchmark may change over time as more and more broadband spectrum is made available, and its applicability to AWS or 700MHz spectrum is unclear. By eliminating a spectrum cap for CMRS in favor of a more flexible analysis, we believe the FCC's changes will increase wireless operators' ability to attract capital and make investments in other wireless operators. We also believe that these changes allow our competitors to make additional acquisitions of spectrum and further consolidate the industry.
The FCC rules initially established specific ownership requirements for broadband PCS licenses obtained in the C- and F-Block auctions, which are known as the entrepreneur's block auctions. We were subject to these requirements until recently because our licenses were obtained in the C-Block auction. When we acquired our C-Block broadband PCS licenses, the FCC's rules for the C-Block auction permitted entities to exclude the gross revenues and assets of non-attributable investors in determining eligibility as a DE and small business, so long as the licensee employed one of two control group structural options. We elected to meet the 25% control group option which required that, during the first ten years of the initial license term (which for us would have ended on January 27, 2007), a licensee have an established group of investors meeting the requirements for the C-Block auctions, holding at least 50.1% of the voting interests of the licensee, possessing actual and legal control of both the control group and the licensee, and electing or appointing a majority of the licensee's board of directors. In addition, those qualifying investors were required to hold no less than a specified percentage of the equity. After the first three years of the license term (which for us ended January 27, 2000), the qualifying investors must collectively retain at least 10% of the licensee's equity interests. The 10% equity interest could be held in the form of options, provided the options were exercisable at any time, solely at the holder's discretion, at an exercise price less than or equal to the current market value of the underlying shares on the short-form auction application filing date or, for options issued later, the options' issue date. Finally, under the 25% control group option, no investor or group of affiliated investors in the control group was permitted to hold over 25% of the licensee's overall equity during the initial license term.
In August 2000, the FCC revised its control group requirements as they applied to DE licensees. The revised rules apply a control test that obligates the eligible very small business members of a DE licensee to maintainde facto (actual) andde jure (legal) control of the business. Because we had taken advantage of installment payments at the time we purchased the licenses in the C-Block auction, we were still required to comply with the control group requirements. In May 2005, we paid off the remaining installments we owed to the FCC on all of the licenses we acquired in the C-Block auction. In addition, none of the license acquisitions made by us after the C-Block auction required that we qualify as a DE. As a consequence, upon repayment of the installments to the FCC, we were no longer subject to the FCC rules and regulations pertaining to unjust enrichment or installment financing. Based on this change of circumstances, we were no longer required to maintain our previous status as an eligible DE or to abide by the ownership restrictions applicable to DEs under the 25% control group option. In August 2005, we filed administrative updates with the FCC with respect to all of our FCC licenses, which served to notify the FCC and all interested parties of this change of circumstances. Effective as of December 31, 2005, MetroPCS Communications, Inc.'s Class A Common Stock was converted into Common Stock and the built-in control structures required to maintain our DE status were terminated with the consent of the FCC.
Royal Street is a DE which must meet and continue to abide by the FCC's DE requirements, including the revised control group requirements. The FCC rules provide that if a license is transferred to a non-eligible entity, an entity which qualifies for a lesser credit on open licenses, or the DE ceases to be qualified, the licensee may lose all closed licenses which are not constructed, and may be
required to refund to the FCC a portion of the bidding credit received for all open licenses, based on a five-year straight-line basis and might lose its closed licenses or be required to pay an unjust enrichment payment on the closed licenses. In Auction 58, Royal Street received a bidding credit equal to approximately $94 million. If Royal Street were found to no longer qualify as a DE, it would be required to repay the FCC the amount of the bidding credit on a five-year straight-line basis. Any closed licenses which are transferred prior to the five-year anniversary may also be subject to an unjust enrichment payment. Royal Street also is party to certain grandfathered arrangements with us that cannot be extended to new or additional licenses due to recent changes in the DE rules. For this reason, the ability of Royal Street to own or control additional licenses in the future will be inhibited absent significant changes in the business relationship with us.
Specifically, in April 2006, the FCC adopted a Second Report and Order and Second Further Notice of Proposed Rulemaking relating to its DE program. This Order was clarified by the FCC in its June 2006 Order on Reconsideration of the Second Report and Order, which largely upheld the rules established in the Second Report and Order but clarified that the FCC's revised unjust enrichment rules would only apply to licenses initially granted after April 25, 2006 (the Second Report and Order, as clarified by the Order on Reconsideration, is referred to herein as the DE Order). First, the FCC found that an entity that enters into an impermissible material relationship will be ineligible for award of designed entity benefits and subject to unjust enrichment on a license-by-license basis. The FCC concluded that any arrangement whereby a DE leases or resells more than fifty percent of the capacity of its spectrum or network to third parties is an impermissible material relationship and will render the licensee ineligible for any DE benefits, including bidding credits, installment payments, and, as applicable, set-asides, and will subject the DE to unjust enrichment payments on a license-by-license basis. Second, the FCC found that any entity which has a spectrum leasing or resale arrangement (including wholesale arrangements) with an applicant for more than 25% of the applicant's total spectrum capacity on a license-by-license basis will be considered to have an attributable interest in the applicant. Based on these revised rules, Royal Street will not be able to enter into the same relationship it currently has with us for any future FCC auctions and receive DE benefits, including bidding credits. In addition, Royal Street will not be able to acquire any additional DE licenses in the future, and resell services to us on those licenses on the same basis as the existing arrangements, without making itself ineligible for DE benefits. The FCC, however, grandfathered otherwise impermissible material relationships for existing licenses that were entered into or filed with the FCC before the release date of the FCC order.
Third, the FCC has revised the DE unjust enrichment rules to provide that a licensee which seeks to assign or transfer of control of the license, enter into an otherwise impermissible material relationship, or otherwise loses its eligibility for a bidding credit for any reason, will be required to reimburse the FCC for any bidding credits received as follows: if the DE loses its eligibility or seeks to assign or transfer control of the license, the DE will have to reimburse the FCC for 100% of the bidding credit plus interest if such loss, assignment or transfer occurs within the first five years of the license term; 75% if during the sixth and seventh year of the license term; 50% if during the eighth and ninth of the license term; and 25% in the tenth year. In addition, to the extent that a DE enters into an impermissible material relationship, seeks to assign or transfer control of the license, or otherwise loses its eligibility for a bidding credit for any reason prior to the filing of the notification informing the FCC that the construction requirements applicable at the end of the license term have been met, the DE must reimburse the FCC for 100% of the bidding credit plus interest. In its June 2006 Order on Reconsideration of the Second Report and Order, the FCC clarified its rules to state that its changes to the DE unjust enrichment rules would only apply to licenses initially issued after April 25, 2006. Licenses issued prior to April 25, 2006, including those granted to Royal Street from Auction 58, would be subject to the five-year unjust enrichment rules previously in effect. Likewise, the requirement that the FCC be reimbursed for the entire bidding credit amount owed if a DE loses its eligibility for a bidding credit prior to the filing of the notifications informing the FCC that the construction
requirements applicable at the end of the license term have been met applies only to those licenses that are initially granted on or after April 25, 2006. Fourth, the FCC has adopted rules requiring a DE to seek approval for any event in which it is involved that might affect its ongoing eligibility, such as entry into an impermissible material relationship, even if the event would not have triggered a reporting requirement under the FCC's existing rules. In connection with this rule change, the FCC now requires DEs to file annual reports with the FCC listing and summarizing all agreements and arrangements that relate to eligibility for designated entity benefits. Fifth, the FCC indicated that it will step up its audit program of DEs and has stated that it will audit the eligibility of every DE that wins a license in the AWS auction at least once during the initial license term. Sixth, these changes will all be effective with respect to all applications filed with the FCC that occur after the effective date of the FCC's revised rules, including the AWS auction.
Several interested parties filed a Petition for Expedited Reconsideration and a Motion for Expedited Stay Pending Reconsideration or Judicial Review of the DE Order. The Petitions challenged the DE Order on both substantive and procedural grounds. Among other claims, the Petitions contested the FCC's effort to apply the revised rules to applications for the AWS auction and to apply the revised unjust enrichment payment schedule to existing DE arrangements. In the Motion for Stay, the petitioners requested that the FCC also stay the effectiveness of the rule changes, and stay the commencement of the AWS auction which commenced on June 29, 2006 and all associated pre-AWS auction deadlines. The FCC did not grant the stay, and the petitioners sought a court stay. On June 7, 2006, the petitioners filed an appeal of the DE Order with the Court of Appeals for the Third Circuit and sought an emergency stay of the DE Order. On June 29, 2006, the Court issued a decision denying the emergency stay motion. The parties to the appeal recently filed briefs in this case. The court has not yet set a date for oral argument. We are unable at this time to predict the likely outcome of the appeals and unable to predict the impact on the Auction. We also are unable to predict whether the litigation will result in any changes to the DE Order or to the DE program, and, if there are changes, whether or not any such changes will be beneficial or detrimental to our interests. However, the relief sought by the petitioners includes overturning the results of Auction 66. If the petitioners are ultimately successful in getting this relief, any licenses granted to us as a result of Auction 66 would be revoked. Our payments to the FCC for the licenses would be refunded, but without interest. If our licenses are revoked we will have been required to pay interest to our lenders on the money deposited with the FCC, but would not receive interest. The interest expense, which could be substantial, may affect our results of operations and the loss of the Auction 66 licenses could affect our future prospects.
In connection with the changes to the DE rules, the FCC also adopted in April 2006 a Second Further Notice of Proposed Rulemaking seeking comment on whether additional restrictions should be adopted in its DE program relating to, among other things:
There can be no assurance what additional changes, if any, to the DE program may be adopted as result of this rulemaking. Based on the FCC's latest rulings, we do not expect any future changes in the DE rules to be applied retroactively to Royal Street, but we cannot give any assurance that the FCC will not give any new rules retroactive effect. If additional changes are made to the program that are applied to the current arrangements between Royal Street, C9 Wireless and us, it could have a material adverse effect on our and Royal Street's operations and financial performance.
The Communications Act includes provisions authorizing the FCC to restrict ownership levels in us by foreign nationals or their representatives, a foreign government or its representative or any corporation organized under the laws of a foreign country. The law permits indirect foreign ownership of as much as 25% of our equity without the need for any action by the FCC. If the FCC determines it is in the best interest of the general public, the FCC may revoke licenses or require an ownership restructuring if our foreign ownership exceeds the statutory 25% benchmark. However, the FCC generally permits additional indirect foreign ownership in excess of the statutory 25% benchmark particularly if that interest is held by an entity or entities from World Trade Organization member countries. For investors from countries that are not members of the World Trade Organization, the FCC determines if the home country extends reciprocal treatment, called "equivalent competitive opportunities," to United States entities. If these opportunities do not exist, the FCC may not permit such foreign investment beyond the 25% benchmark. We have adopted internal procedures to assess the nature and extent of our foreign ownership, and we believe that the indirect ownership of our equity by foreign entities is below the benchmarks established by the Communications Act. If we have foreign ownership in excess of the limits, we have the right to acquire the portion of the foreign investment which places us over the foreign ownership restriction. Nevertheless, these foreign ownership restrictions could affect our ability to attract additional equity financing and complying with the restrictions could increase our cost of operations.
General Regulatory Obligations
The Communications Act and the FCC's rules impose a number of other aspectsrequirements upon wireless broadband PCS, and in many instances AWS, licensees. These requirements, summarized below, could increase our costs of the wirelessdoing business.
Federal legislation enacted in 1993 requires the FCC to reduce the disparities in the regulatory treatment of similar mobile services, such as cellular, PCS and enhanced specialized mobile radio,Enhanced Specialized Mobile Radio, or ESMR, services. Under this regulatory structure, all of our wireless broadband PCS licensesand AWS services are classified as Commercial Mobile Radio Services, or CMRS, licenses.CMRS. The FCC regulates providers of CMRS carriersservices as common carriers, and thus we are subjectwhich subjects us to many generally applicable common carrier requirements under the Communications Act and FCC rules and regulations. The FCC, however, has exempted cellular and PCSCMRS offerings from some typical common carrier regulations, such as tariff and interstate certification filings, thereby allowingwhich allows us to respond more quickly to our competition in the marketplace. The 1993 federal legislation also preempted state rate and entry regulation.regulation of CMRS providers.
The FCC permits cellular, broadband PCS, paging and ESMR licensees to offer fixed services on a co-primary basis along with mobile services. This rule may facilitate the provision of wireless local loop service which involves the use ofby CMRS licensees using wireless links to provide local telephone service by CMRS licensees, although theservice. The extent of lawful state regulation of such wireless local loop service is undetermined. While we do not presently have a fixed service offering, our network is fully capable of accommodatingcan accommodate such a service. We continue to evaluate our service offerings, which may include a fixed service plan at some point in the future.
Until April 4, 2005, the FCC requires that aThe spectrum allocated for broadband PCS licensee ensure that its operations do not cause interference to incumbent licensees that operatewas utilized previously by fixed microwave systems withinsystems. To foster the PCS licensee’s license area. In an effort to balanceorderly clearing of the competing interests of existing microwave users and newly authorized PCS licensees,spectrum, the FCC adopted a transition plan to relocate such microwave operators to other spectrum blocks and a cost sharing plan so that ifpursuant to which incumbent microwave users could be reimbursed for relocating out of the band and the costs of relocation of an incumbent benefits more than one PCS licensee,were shared by the benefitingbroadband PCS licensees will sharebenefiting from the cost ofrelocation. Under the relocation.FCC regulations, DEs were able to pay microwave reimbursed clearing obligations through installment payments. We incurred various microwave relocation obligations pursuant to this transition plan. The transition and cost sharing plans expire onexpired in April 4, 2005, at which time remaining microwave incumbents in the broadband PCS spectrum will be responsibleremained obligated to relocate to different spectrum but assumed responsibility for their costs to relocate to alternate spectrum locations.spectrum. We have fulfilled all of the relocation obligations (and related payments) we directly incurred in our broadband PCS markets, andmarkets. As of September 30, 2006, we have ongoinghad no obligations of approximately $3.8 million that are payable to other carriers under cost sharing plans related to for
microwave relocation in our markets. The FCC allows “designated entities” to pay these shared relocation expenses over the same term as the applicable FCC license for the area. Each of these obligations hasAs a ten-year term, with interest only payments through year six and principal payments commencing in year seven.
Ownership Restrictions
Pursuant to a Report and Order released in December 2001, as of January 1, 2003, the FCC no longer enforces a particular limit on the amount of CMRS spectrum in which an entity may hold an attributable interest. The FCC now engages in a case-by-case review of transactions that would raise concerns similar to those that the CMRS spectrum cap was designed to address. By eliminating a hard cap in favorresult of the more flexible analysis,offer to purchase made by Madison Dearborn Capital Partners IV, L.P. and certain affiliates of TA Associates, Inc. in 2005, we believe the changes adopted by the FCCceased being a DE and are in the December 2001 Report and Orderprocess of paying off all remaining microwave clearing obligations to other carriers. This process has taken longer than we anticipated which could further increase the ability of wireless operatorsgive rise to attract capital oran objection by a carrier to make investments in other wireless operators.which microwave clearing payments are due.
The FCC may prohibit or impose conditions on assignments and transfers of control of licenses. The Communications Act requires prior FCC approval for assignments or transfers of control of any license or construction permit, with limited exceptions. Although we cannot assure you that the FCC will approve or act in a timely fashion upon any future requests for approval of assignments or transfer of control applications that we file, we have no reason to believe that the FCC would not approve or grant such requests or applications in due course. Because an FCC license is necessary to lawfully provide PCS service, if the FCC were to disapprove any such filing our business plans would be adversely affected.
The FCC allows broadband PCS licenses and service areas to be partitioned geographically or disaggregated by bandwidth, with each partitioned or disaggregated license covering a smaller service area and/or less spectrum. Any such partitioning or disaggregation is subject to FCC approval, which cannot be guaranteed. In addition, on May 15, 2003,spectrum allocated for AWS currently is utilized by a variety of categories of commercial and governmental users. To foster the orderly clearing of the spectrum, the FCC adopted a Reporttransition and Ordercost sharing plan pursuant to facilitatewhich incumbent non-governmental users could be reimbursed for relocating out of the developmentband and the costs of relocation would be shared by AWS licensees benefiting from the relocation. The FCC has established a secondary marketplan where the AWS licensee and the incumbent non-governmental user are to negotiate voluntarily for unused or underused wireless spectrum by imposing less restrictive standards forthree years and then, if no agreement has been reached, the transfer and lease of spectrum to third parties. The availability of these options provides us with a flexible alternative to obtain additional spectrum or dispose of excess spectrum,incumbent licensee is subject to FCC approval and applicable FCC conditions. These alternativesmandatory relocation where the AWS licensee can force the incumbent non-governmental licensee to relocate at the AWS licensee's expense. The spectrum allocated for AWS currently is utilized also are available as a means for our competitors to obtain additional spectrum or for new competitors to enter our markets.
by governmental users. The FCC rules establish specific ownership requirements for PCS licenses obtainedprovide that a portion of the money raised in Auction 66 will be used to reimburse the relocation costs of governmental users from the AWS band. However, not all governmental users are obligated to relocate. We have not yet determined the costs we may incur to relocate the incumbent licensees in the Careas where we have been granted licenses in Auction 66, which costs could be material, and F block auctions, which are known as the entrepreneur’s block auctions. Our licenses were obtainedtime it will take to clear the AWS spectrum in the C block auction and thus are subject to these requirements. For the C block auction in whichmarkets where we acquired our licenses the FCC’s rules permitted entities to exclude the gross revenues and assets of an entity’s non-attributable investors in determining eligibility as a “designated entity” and small business, so long as the licensee employed one of two control group structural options. We elected to meet the 25% control group structural option, which requires that, for the first ten years of the initial license term (which for us will end on January 27, 2007), a licensee have an established group of investors that meet the requirements set forth for the entrepreneur block auctions, hold at least 50.1% of the voting interests of the licensee, have actual and legal control of both the control group and the licensee, and elect or appoint a majority of the licensee’s board of directors. In addition, those qualifying investors are required to hold a percentage of the equity: after the first three years of the license term (which for us ended January 27, 2000), the qualifying investors must collectively retain at least 10% of the equity interests in the licensee. The 10% equity interest may be held in the form of options, provided that these options are exercisable at any time, solely at the holder’s discretion, at an exercise price less than or equal to the current market valuation of the underlying shares at the time of the short-form auction application filing date or, for options issued later, the date such options were issued. Finally, under the 25% control group structural option, no investor or group of affiliated investors that is not in the control group may hold more that 25% of the licensee’s overall equity during the initial license term.uncertain.
Although the ownership requirements applicable to our FCC licenses will expire on January 27, 2007, or the tenth anniversary of the date on which they were granted by the FCC, it is possible that we will acquire additional FCC licenses in the aftermarket that are subject to similar ownership restrictions. Depending on when such licenses were initially granted by the FCC, in order to be eligible to hold such licenses we could be required to continue to comply with the 25% control group structural option beyond January 27, 2007, unless the FCC has approved a different structural option for us.
Although the FCC terminated future application of its control group requirements in August 2000, allowing licensees to qualify as designated entities by meeting alternative controlling interests rules, the FCC held that existing licensees could continue to qualify under the rules in existence at the time they received their licenses. We met and continue to meet the 25% control group structural option. In order to meet the control group requirements, our certificate of incorporation provides that our Class A common stock, as a class, must constitute 50.1% of the aggregate voting power of all classes and series of our capital stock and elect or appoint a majority of our board of directors. In addition, our bylaws provide for restrictions on transfer relating to shares of our capital stock held by investors that are qualifying investors, and our certificate of incorporation includes redemption rights that allow us to redeem shares of our capital stock, as necessary, in order to ensure our continued compliance with the control group structural option rules for the purposes of C block license requirements.
FCC rules also allowed companies to qualify as a designated entity in the 1996 C Block auction where they met the FCC’s definition of a “Publicly Traded Corporation with Widely Dispersed Voting Power.” To qualify for this alternative structural option, a company had to demonstrate that no person or entity:
We intend to request approval from the FCC to adopt this alternative structure without financial penalty after the consummation of this offering. Prior to the consummation of this offering, our certificate of incorporation will be amended to allow us to redeem shares of our capital stock to ensure that we are eligible for this structure.
FCC rules impose specific restrictions on the voluntary assignments or transfers of control of C block licenses. During the first five years of the license term (or until the licensee satisfies the five-year construction benchmark), assignments or transfers of control are permitted, but only to entities that meet specified qualifications, and if the original entity and the assignee or transferee have different entrepreneur or small business qualifications, the assignment or transfer may result in an obligation to make additional payments to the FCC. After the first five years of the initial license term (which for us ended January 27, 2002), voluntary assignments and transfers of control to entities not meeting the eligibility criteria for participation in the entrepreneurs’ block are permitted; however, if a license is being paid for in installments, as ours are, all unpaid principal and accrued interest on the license must be paid to the FCC as a condition of any assignment or transfer of control to a non-qualifying entity.
The Communications Act includes provisions that authorize the FCC to restrict the level of ownership that foreign nationals or their representatives, a foreign government or its representative or any corporation organized under the laws of a foreign country may have in us. The law permits foreign ownership of as much as 25% of our equity without the need for any action by the FCC. If the FCC determines that it is in the best interest of the general public, the FCC may revoke licenses or require an ownership restructuring in the event that such ownership exceeds the statutory 25% benchmark. The FCC generally permits, however, additional foreign ownership in excess of the statutory 25% benchmark where that interest is to be held by an entity or entities from member countries of the World Trade Organization. For investors from countries that are not members of the World Trade Organization, the FCC will determine whether the home country of the foreign investor extends reciprocal treatment called “equivalent competitive opportunities” to United States entities. If these opportunities do not exist, the FCC may not permit investment beyond the 25% benchmark. These restrictions could adversely affect our ability to attract additional equity financing. We have no knowledge that any foreign entity directly or indirectly owns a significant percentage of our capital stock.
General Regulatory Obligations
The Communications Act and the FCC’s rules impose a number of requirements upon PCS licensees. These requirements, which are summarized below, could increase our costs of doing business.
We are obligated to pay certain annual regulatory fees and assessments to support the FCC’s regulation of theFCC wireless industry regulation, as well as fees necessary to supportsupporting federal universal service programs, number portability, regional database costs, centralized administration of telephone numbering administration, telecommunications relay service for the hearing-impaired and application filing fees. These fees are subject to increase by the FCC periodically.
The FCC has adopted requirements forrequires CMRS providers to implement basic 911 and enhanced, 911, or E-911, emergency services. Our obligation to implement these services is incurred in stages on a market-by-market basis as local emergency service providers request E-911 services. These services provideallow state and local emergency service providers with the ability to better identify and locate callers using wireless services, including callers using special devices for the hearing impaired. Our obligations to implement these services occur in stages, and on a market-by-market basis as emergency service providers request the implementation of E-911 services within their locales. In June 2002, the FCC extended the deadlines for meeting some of these requirements, specifically the Phase II capabilities whereby emergency service providers receive the 911 caller’s geographic location, until March 1, 2003 at the earliest (the actual date for implementing this capability in any given locale will be based on the readiness of public safety agencies to participate in E-911 services). We are currently constructinghave constructed facilities to implement these capabilities in several markets althoughwhere we do not currently know whetherhave had requests and are in the process of constructing facilities in the markets we will be ablelaunched recently. The FCC also has rules that require us, because we employ a handset-based location technology, to meet allensure that specified percentages of the requirements imposed by
the FCC, whether some additional relief from these regulations will be required, or whether the FCC would grant such relief iflocation-capable and we request that it do so. Absent a waiver, failuremet this requirement. Failure to complymaintain compliance with the FCC’sFCC's E-911 requirements couldcan subject us to significant penalties. The extent to which we are required tomust deploy E-911 services will affectaffects our capital spending obligations. TheIn 1999, the FCC in 1999 amended its rules to eliminate a requirement thatno longer require compensation by the state to carriers be compensated for E-911 costs and to expand the circumstances under which wireless carriers may be required to offer E-911 services.services to the public safety agencies. States in which we do business may limit or eliminate our ability to recover our E-911 costs. Federal legislation enacted in 1999 may limit our liability for uncompleted 911 calls to a degree commensurate withsimilar level to wireline carriers in our markets.
Federal law also requires PCSCMRS carriers to provide law enforcement agencies with capacity to support for lawful wiretaps and technical capabilities for wiretaps. Federal law also requires compliance with wiretap-related record-keeping and personnel-related obligations. Maintaining complianceComplying with these wireless 911E-911 and law enforcement wiretap requirements may createrequire systems upgrades creating additional capital obligations for us and additional personnel, a process which may cost us additional expense which we may not be able to make necessary system upgrades.recover. Our customer base may be subject to a greater percentage of law enforcement requests than those of other carriers and that the resulting expenses incurred by us to cooperate with law enforcement are proportionately greater.
Because the availability of telephone numbers is dwindling, the FCC has adopted number pooling rules that govern the way in whichhow telephone numbers generally are allocated. At present, numberNumber pooling is only mandatory withininside the wireline rate centers in whichwhere we have drawn numbers and whichthat are located in counties thatincluded in the top 100 metropolitan statistical areas, or MSAs, as defined by FCC rules. We have implemented number pooling and support pooled number roaming in all of our markets which are included in the top 100 MSAs as defined by the FCC’s rules. Our markets are partially or wholly contained within the top 100 MSAs. We have expended capital preparing for number pooling in these markets as well as preparing to support the roaming of pooled numbers into our markets. The FCC also has authorized states to initiatestart limited numbering administration to supplement federal requirements. Somerequirements and some of the states in whichwhere we provide service have been so authorized.authorized by the FCC to start limiting numbering administration.
In addition, the FCC has ordered all telecommunications carriers, including wirelessCMRS carriers, to adopt a method for providing customers withprovide telephone number portability or the abilityenabling subscribers to keep their telephone numbers when they change telecommunications carriers, eitherwhether wireless to wireless or, in some instances, wireline to wireless, and vice versa. Under these local number portability rules, a CMRS carrier located in one of the top 100 MSAs must have the technology in place to allow its customers to portkeep their telephone numbers when they switch to a new carrier. Outside of the top 100 MSAs, CMRS carriers that receivereceiving a request to allow end users to portkeep their telephone numbers must be capable of doing so within six months after receivingof the request or within six months of November 24, 2003, whichever is later. In addition, all CMRS carriers have beenare required since November 24, 2002 to support nationwide roaming nationwide for customers with ported or pooledretaining their numbers. TheseWe currently support number portability requirements are likely to result in added capital expenditures for us to make necessary system changes.all of our markets.
FCC rules provide that all local exchange carriers must, upon request, enter into mutual or reciprocal compensation arrangements with CMRS carriers for the exchange of local traffic, wherebyunder which each carrier compensates the other for terminated local traffic that carrier terminates that originatedoriginating on the other carrier’scompensating carrier's network. Local traffic is defined for purposes of the reciprocal compensation arrangement between local exchange carriers and CMRS carriers is defined as intra-MTA traffic, and thus the FCC’sFCC's reciprocal compensation rules apply to any local traffic originated by a CMRS carrier and terminated by a local exchange carrier within the same MTA and vice versa, even if such traffic is inter-exchange.interexchange. While these rules provide that local exchange carriers may not charge CMRS carriers for facilities used by CMRS carriers to terminate local exchange carriers’carriers' traffic, local exchange carriers may charge CMRS carriers for facilities used to transport and terminate CMRS traffic and for facilities used for transit purposes to carry CMRS carrier traffic to a third carrier. FCC rules also provide that, on the CMRS carrier's request, incumbent local exchange carriers must exchange local traffic with CMRS carriers at rates based on the FCC’sFCC's costing rules if the CMRS carrier so requests; suchrules; rates are set by state public utility commissions applying the FCC’sFCC's rules. Some competitive (non-incumbent)The rules governing CMRS interconnection are under review by the FCC in a rulemaking proceeding, and we cannot be certain whether or not there will be material changes in the applicable rules, and if there are changes, whether they will be beneficial or detrimental to us.
Before 2005, some local exchange carriers have claimed a right under existing FCC rulesby filing a state tariff to impose unilateral charges on CMRS carriers for the termination of such carriers’CMRS carriers' traffic basedon the local exchange carrier's network, often at above-cost rates. In 2005, the FCC issued a Report and Order holding that, on a going forward basis, no local exchange carrier was permitted to unilaterally impose tariffed rates for the termination of a CMRS carrier's traffic. This Report and have argued that they have noOrder imposed on CMRS carriers an obligation to negotiate mutual compensation arrangements orengage in voluntary negotiation and arbitration with incumbent local exchange carriers similar to those imposed on the incumbent local exchange carriers pursuant to Section 252 of the Communications Act. Further, the FCC found that its prior rules did not preclude incumbent local exchange carriers from imposing unilateral charges pursuant to tariff for the period prior to the effective date of the Report and Order. Finally, the Report and Order found that, once an incumbent local exchange carrier requested negotiation of an interconnection arrangement, both carriers are obligated to begin paying the FCC's default rates for all traffic exchanged after the request for negotiation. Several CMRS carriers and incumbent local exchange carriers have appealed the Report and Order and we have sought clarification on certain aspects of the Report and Order. In the meantime, a number of local exchange carriers and incumbent local exchange carriers have demanded
that we pay bills for traffic exchanged in the past and we are evaluating those demands. We may pay some portion of these amounts, which may be material. Also, a number of local exchange carriers have requested that we enter into negotiations for interconnection agreements and, as a result of such negotiations, we may be obligated to pay CMRS carriers for traffic transmitted indirectly over another carrier’s transit facilities. There are petitions for declaratory ruling pending at the FCC that these carriers’ positionsamounts to settle prior claims and related practices are contrary to lawon a going forward basis, and relevant FCC precedent. The FCC also is currently considering changes tosuch amounts may be material. Also, other local exchange carrier-CMRS interconnection and other so-called intercarriercompanies have threatened to sue us if agreements governing termination compensation schemes, and the outcome of the proceeding may affect the manner in which CMRS carriers are charged or compensated for such traffic.not reached. We generally have
generally been successful in negotiating arrangements with carriers with whichwhom we exchange traffic; however, our business could be adversely affected shouldif the rates some carriers charge us for terminating our customers’customers' traffic ultimately prove to be higher than anticipated. In one case, a complaint has been filed by a CLEC against us before the FCC claiming a right to terminating compensation payments on a going forward basis and going backward basis at a rate that we consider to be excessive. We are vigorously defending against the complaint, but cannot predict the outcome at this time. An adverse outcome could be material.
The FCC has adopted rules that requirerequiring interstate communications carriers, including PCSCMRS carriers, to “make"make an equitable and non-discriminatory contribution”contribution" to a Universal Service Fund, or USF, that reimburses communications carriers that provideproviding basic communications services to users who receivereceiving services at subsidized rates. We have made such payments, as the FCC has required.these FCC-required payments. The FCC recently initiatedstarted a rule makingrulemaking proceeding in which it solicitsto solicit public comment on ways of reforming both the manner by whichhow it assesses carrier USF contributions to the USF and the way in whichhow carriers may recover their costs from customers.customers and some of the proposals may cause the amount of USF contributions required from us and our customer to increase. Effective April 1, 2003, the FCC prospectively forbade carriers from recovering administrative costs related to administering the required universal service assessments from customers as USF charges their administrative costs associated with administering the universal service assessments that carriers are required to pay.charges. The FCC’s newFCC's rules require that carriers’carriers' USF recovery charges to customers may not exceed the assessment rate that the carrier pays times the proportion of interstate telecommunications revenue on the bill. We are working diligently to complycurrently in compliance with these new requirements. They may have an effect on our ability to recover our administrative costs for administering our participation in the program.
Wireless broadband carriers may be designated as eligible telecommunications carriers,Eligible Telecommunications Carriers, or ETCs, and may receive universal service support for providing service to customers that useusing wireless service in high cost areas. Other wireless broadband carriers operating in states where we operate have obtained or applied for ETC status. Such other carriers’carriers' receipt of universal service support funds may affect our competitive status in a particular market by allowing our competitors to offer service at a lower rate. We are currently contemplating whether and wheremay decide in the future to apply for this designation in the various jurisdictions in whichcertain qualifying high cost areas where we provide wireless services to qualifying high cost areas.services. If suchwe are approved, these payments are made available to us, they would be an additional revenue source of revenue to us that we could be useduse to support the serviceservices we provide in the high cost areas.
PCSCMRS carriers are exempt from the obligation to provide equal access to interstate long distance carriers. However, the FCC has the authority to impose rules to requirerequiring unblocked access through carrier identification codes or 800/888 numbers to long distance carriers so that PCSCMRS customers are not denied access to thetheir chosen long distance carrier, of their choosing, if the FCC determines that the public interest so requires. Our customers have access to alternative long distance carriers using toll-free numbers.
FCC rules also impose restrictions on a telecommunications carrier’scarrier's use of customer proprietary network information, or CPNI, without prior customer approval, including restrictions on the use of information related to a customer’scustomer's location. The FCC recently began an investigation into whether CMRS carriers are properly protecting the CPNI of their customers against unauthorized disclosure to third parties. In February 2006, the FCC requested that all CMRS carriers provide a certificate from an officer of the CMRS carrier based on personal knowledge that the CMRS carrier was in compliance with all CPNI rules. We have provided such a certificate. The FCC also has proposed substantial fines on certain wireless carriers for their failure to comply with the FCC's CPNI rules. We believe that our current marketing approach ispractices are consistent with existing FCC rules on CPNI, and do not foresee new costs or limitations on our existing practices as a result of FCC rules in that area. However, in February 2006, the FCC also adopted a notice of proposed rulemaking seeking comment on a variety of issues related to customer privacy, including what additional security measures may be warranted to protect a
customer's CPNI. Congress and state legislators also are in the process of enacting legislation which addresses the use and protection of CPNI which may impact our obligations. For example, Congress recently enacted the Telephone Records and Privacy Protection Act of 2006, which imposes criminal penalties upon persons who purchase without a customer's consent, or use fraud to gain unauthorized access to, telephone records. The FCC's proposed rules, if adopted or modified, and the recent and pending legislation (if enacted) may require us to change how we protect our customer's CPNI and could require us to incur additional costs, which costs may be material.
Telecommunications carriers are required to make their services accessible to persons with disabilities and the FCC’s rules implementing these requirements are in effect.disabilities. These FCC rules generally require service providers to offer equipment and services that are accessible to and usable by persons with disabilities, if readily achievable, and to comply with FCC-mandated complaint/grievance procedures for violations of these provisions.procedures. These rules are largely untested and are subject to interpretation through the FCC’sFCC's complaint process. While muchthese rules principally focus on the manufacturer of the focus of these rules is on the manufacture of equipment, we could be subject to the imposition ofhave costly new requirements imposed on us and, if we were found to have violated the rules, be subject to fines, as well.which fines could be material. As a related matter, on July 10, 2003, the FCC adoptedissued an order requiring digital wireless phone manufacturers and wireless service providers (including us) to take steps to ensureensuring the availability of hearing aid compatible digital wireless phones, that are compatible with hearing aids, which may increase our costs for handsets we sell.
The FCC has determined that interexchange, or long distance or interexchange service offerings offrom CMRS providers are subject to Communications Act rate averaging and rate integration requirements of the Communications Act.requirements. Rate averaging requires us to average our intrastate long distance CMRS rates between rural and high cost areas and urban areas. The FCC has delayed implementation of the rate integration requirements with respect tofor wide area rate plans pending further reconsideration of its rules, and has also delayed thea requirement that CMRS carriers integrate their
rates among CMRS affiliates. Other aspects of the FCC’sFCC's rules have been vacated by the United States Court of Appeals for the District of Columbia Circuit, and are subject to further consideration by the FCC. There is a pending proceeding in whichfor the FCC willto determine how integration requirements apply to CMRS offerings, including single rate plans. ToOur pricing flexibility is reduced to the extent that we offer services subject to these requirements, our pricing flexibility is reduced, and we cannot assure you that the FCC will decline to imposeimposing these requirements on us.
Antenna structures used by us and other wireless providers are subject to the FCC’sFCC rules implementing the National Environmental Policy Act and the National Historic Preservation Act. Under these rules, construction cannot begin on any structure that may significantly affect the human environment or that may affect historic properties may not be constructed until the wireless provider has filed an environmental assessment with and obtained approval from the FCC. Processing of environmental assessments can delay construction of antenna facilities, particularly if the FCC determines that additional information is required or if there is community opposition.opposition arises. In addition, several environmental groups have unsuccessfully have requested changes into the FCC’sFCC's environmental processing rules, challenged specific environmental assessments as inadequate to meetfailing statutory requirements and sought to have the FCC conduct a comprehensive assessment of the environmental effects of antenna tower construction.construction environmental effects. The FCC also is considering the impact that communications facilities, including wireless towers and antennas, may have on migratory birds. In August of 2003, the FCC initiated a rulemaking proceeding seeking information on whether rule changes should be adopted to reduce the risk of migratory bird collisions with commercial towers. The FCC released a Notice of Proposed Rulemaking in this proceeding on November 7, 2006, in which the FCC tentatively concludes that medium-intensity white strobe lights should be considered the preferred system in place of red obstruction lighting systems to the maximum extent possible without compromising safety. The FCC also seeks comments on the possible adoption of various other measures that might serve to mitigate the impact of communications towers on migratory birds. In the meantime, there are a variety of federal and state court actions in which citizen and environmental groups have sought to deny tower approvals based upon potential adverse impacts to migratory birds. Although we use antenna structures that are owned and maintained by third parties, the results of
these FCC and court proceedings could have an impact on our efforts to secure access to particular towers, or the costs of access.
The location and construction of PCS antennas, base stations and towers also are subject to FCC and Federal Aviation Administration regulations, federal, state and local environmental regulation, and state and local zoning, land use and other regulation. Before we can put a system into commercial operation, we, or the tower owner in the case of leased sites, must obtain all necessary zoning and building permit approvals for the cell site and microwave tower locations. The time needed to obtain necessary zoning approvals and state permits varies from market to market and state to state. Variations also exist in local zoning processes. Further, certain municipalities impose severe restrictions and limitations on the placement of wireless facilities which may impede our ability to provide service in that area. In 2002, the Board of Supervisors for the City and County of San Francisco, or the City of San Francisco, denied certain applications to construct three sites in the City of San Francisco. The City of San Francisco claimed that additional facilities were not necessary because adequate services are available from other wireless carriers. In July 2002, we filed suit against the City of San Francisco and its Board of Supervisors based on their denial of our applications. The trial was conducted in late March 2006 and early April 2006. In June 2006, the court found in favor of the City of San Francisco and denied our applications. The court clarified that a gap in coverage existed, but that we had not used the least restrictive means to provide service in the area. None of the parties to the proceeding have appealed and the time to bring an appeal has expired. A failure or inability to obtain necessary zoning approvals or state permits, or to satisfy environmental rules may make construction impossible or infeasible on a particular site, might adversely affect our network design, increase our network design costs, require us to use more costly alternative technologies, such as distributed antenna systems, reduce the service provided to our customers, and affect our ability to attract and retain customers.
In 2004, the FCC initiated a proceeding to update and modernize its systems for distributing emergency broadcast alerts. Television stations, radio broadcasters and cable systems currently are required to maintain emergency broadcast equipment capable of retransmitting emergency messages received from a federal agency. As part of its attempts to modernize the emergency alert system, the FCC in its proceeding is addressing the feasibility of requiring wireless providers, such as us, to distribute emergency information through wireless networks. Unlike broadcast and cable networks, however, our infrastructure and protocols—like those of all other similarly-situated wireless broadband CMRS carriers—are optimized for the delivery of individual messages on a point-to-point basis, and not for delivery of messages on a point-to-multipoint basis, such as all subscribers within a defined geographic area. While multiple proposals have been discussed in the FCC proceeding, including limited proposals to use existing short messaging service capabilities on a short-term basis, the FCC has not yet ruled and therefore we are not able to assess the short- and long-term costs of meeting any future FCC requirements to provide emergency and alert service, should the FCC adopt such requirements. Adoption of such requirements, however, could require new components within our network and transmission infrastructure and also require consumers to purchase new handsets. Congress recently passed the Warning, Alert, and Response Network Act as part of the Security and Accountability For Every Port Act of 2006. In this Act, which was recently signed into law, Congress provided for the establishment, within 60 days of enactment, of an advisory committee to provide recommendations to the FCC regarding technical standards and protocols under which electing commercial mobile radio service, or CMRS, providers may offer subscribers the capability of receiving emergency alerts. The FCC is required to complete a proceeding to adopt relevant technical standards, protocols, procedures, and other technical requirements based on the recommendations of such Advisory Committee necessary to enable alerting capability for CMRS providers that voluntarily elect to transmit emergency alert. Under the Act, a CMRS carrier can elect not to participate in providing such alerting capability. If a CMRS carrier elects to participate, the carrier may not charge separately for the alerting capability and the CMRS carrier's liability related to, or any harm resulting from, the transmission of, or failure to transmit, an emergency alert is limited. The FCC is obligated to complete
its rulemaking implementing such rules within a relatively short period of time after receiving the recommendations from the advisory committee. Until the FCC promulgates rules, we do not know if they will adopt such requirements, and if it does, what their impact will be on our infrastructure and service.
The FCC historically has required that CMRS providers permit customers of other carriers to roam "manually" on their networks, for example, by supplying a credit card number, provided that the roaming customer's handset is technically capable of accessing the roamed-on network. The FCC recently initiated a notice of proposed rulemaking seeking comments on whether automatic roaming services are considered common carrier services, whether CMRS carriers have an obligation to offer automatic roaming services to other carriers, whether carriers have an obligation to provide non-voice roaming services, and what rates a carrier may charge for roaming services. The FCC previously initiated roaming proceedings on similar issues but failed to resolve these issues. Roaming rights are important to us because we have a limited service area and must rely on other carriers in order to offer roaming outside our existing service areas. We have commented in this proceeding in support of an FCC rule requiring carriers to honor requests for automatic roaming at reasonable, non-discriminatory rates. However, we cannot predict the likely outcome of this proceeding or the likely timing of an FCC ruling. If the FCC decides not to require automatic roaming at reasonable non-discriminatory rates, or limits roaming to voice services only, we may have difficulty attracting and retaining certain groups of customers which could have an adverse impact on our business.
In September of 2004, the FCC issued a Report and Order and Further Notice of Proposed Rulemaking and adopted several measures designed to increase carrier flexibility, reduce regulatory costs and to promote access to capital and spectrum for entities seeking to provide or improve wireless service to rural areas, including the relaxation of the FCC rule that prohibited a carrier from having any interest in both the Block A and Block B cellular licenses in a common market. These rule changes create potential opportunities for us if we seek to extend our service to rural markets, but also could benefit our competitors.
On February 13, 2003, severalNovember 20, 2006, the Copyright Office of these groups filed a petition withthe Library of Congress, or the Copyright Office, released the final rules in its triennial review of the exemptions to the prohibition on circumvention of copyright protection systems for access control technologies, or Triennial Review, contained in the Digital Millennium Copyright Act, or DMCA. In 1998, Congress enacted the DMCA, which among other things amended the United States CourtCopyright Act to add a section prohibiting the circumvention of Appealstechnological measures employed to protect a copyrighted work, or access control. In addition, the Copyright Office has the authority to exempt certain activities which otherwise might be prohibited by that section for a period of three years when users are (or in the next three years are likely to be) adversely affected by the prohibition in their ability to make noninfringing uses of a class of copyrighted work. Many carriers, including us, routinely place software locks on their wireless handsets which prevent a customer from using a wireless handset sold by one carrier on another carrier's system. In its Triennial Review, the Copyright Office determined that these software locks on wireless handsets are access controls which adversely affect the ability of consumers to make noninfringing use of the software on their wireless handsets. As a result, the Copyright Office found that a person could circumvent such software locks and other firmware that enable wireless handsets to connect to a wireless telephone network when such circumvention is accomplished for the sole purpose of lawfully connecting the wireless handset to another wireless telephone network. A wireless carrier has filed suit in the United States District of Columbia Circuit seekingCourt in Florida to forcereverse the FCC to modify its environmental processing rules to address issues underCopyright Office's decision. This exemption is effective from November 27, 2006 through October 27, 2009 unless extended by the Migratory Bird Treaty Act. Although the parties have filed briefs, there is no schedule for court action on this petition. On May 1, 2003, the FCC announced its intent to develop a strategic plan to address environmental and historic preservation issues, but the FCC did not indicate when it will take action to adopt or implement this plan.Copyright Office.
This ruling, if upheld, could allow customers to use their wireless handsets on the networks of other carriers. Since many of our competitors generally subsidize their wireless handsets substantially more than we do, customers of our competitors may find it attractive to bring their phones to us for
activation. This may result in us experiencing lower costs to add customers. This ruling may also allow our customers who are dissatisfied with our service to utilize the services of our competitors without having to purchase a new wireless handset. The ability of our customers to leave our service and use their wireless handsets to receive a competitor's service may have an adverse material impact on our business. In addition, since our subsidy for handsets to our distribution partners is incurred in advance, we may experience higher distribution costs resulting from wireless handsets not being activated or maintained on our network, which costs may be material.
State, Local and Other Regulation
The Communications Act preempts state or local regulation of the market entry of, or the rates charged by any CMRS provider, which include cellular telephone service and PCS providers. The FCC denied the petitions of eight states to continue their rate regulation authority, including authority over cellular operators.provider. As a practical matter,result, we are free to establish rates and offer new products and services with minimum state regulation. However, states may continue regulating "other terms and conditions" of wireless service, with a minimum of state regulatory requirements. Theand certain states in whichwhere we operate maintain nominaladditional oversight jurisdiction, primarily focusing upon prior approval of acquisitions and transfers of licensesconsumer protection issues and resolution of customer complaints. However, states may continue to regulate “other terms and conditions” of wireless service, and a number ofIn addition, several state authorities have initiated actions or investigations of various wireless carrier practices. The outcome of these proceedings is uncertain and could require us to change our marketing practices, and ultimately increaseincreasing state regulatory authority over the wireless industry. State and local governments are also permitted tomay manage public rights of way and can require fair and reasonable compensation from telecommunications carriers, including PCSCMRS providers, for the use of such rights of any, so long as the compensation required isgovernment publicly discloseddiscloses such compensation.
A dispute exists between the FCC and certain state public utility commission advocates as to whether the FCC's preemptive rights over rates allows the FCC to prevent states from prohibiting the use of separate line items on wireless bills for charges that are not mandated by federal, state or local law. The FCC ruled in 2005 that states were preempted from requiring or prohibiting the government.
use of non-misleading line items on wireless bills. In 2006, the United States Court of Appeals for the Eleventh Circuit vacated the FCC decision. Several parties have announced an intention to seek review of the appeals court decision in the U.S. Supreme Court. The location and constructionoutcome of this case, which we are unable to predict at this time, could affect the extent to which our PCS antennas and base stations and the towers we lease on which such antennas are locatedCMRS services are subject to FCC and Federal Aviation Administrationstate regulations and arethat may cause us to incur additional costs.
The California Public Utilities Commission, or CPUC, in early 2006 adopted consumer protection rules replacing an earlier consumer bill of rights. The new consumer bill of rights applies to "telecommunications services" subject to federal, statethe CPUC's jurisdiction—they do not replace and local environmental regulation, as well as state or local zoning, land use and other regulation. Before we can put a system into commercial operation, we must obtain all necessary zoning and building permit approvals for the cell site and microwave tower locations. The time needed to obtain zoning approvals and requisite state permits varies from market to marketonly supplement existing requirements that carriers have under federal and state law, tariffs, other orders and decisions of the FCC or the CPUC, and FCC requirements. The consumer bill of rights establishes seven rights (freedom of choice, disclosure, privacy, public participation and enforcement, accurate bills and dispute resolution, nondiscrimination, and public safety) and also includes rules on CPUC staff requests for information; worker identification; E-911 access; slamming rules (e.g., change of a subscriber's telecommunications service without authorization) with some modifications to state. Likewise, variations exist in local zoning processes. Additionally, any proposed site must comply with the FCC’s environmental rules. If zoning approval or requisite state permits cannot be obtained, or if environmentalexisting slamming rules; and new cramming rules make construction impossible or infeasible(e.g., placement of unauthorized charges on a particular site,telecommunications bill) that apply to all charges on a telephone bill (and eliminates the interim opt-in rules for non-communications relating services). The cramming rules generally reiterate requirements that already exist under the law with some additions. The consumer bill of rights does not create a private right of action or liability that would not exist absent the rules. We have reviewed the consumer bill of rights and believe that we are in compliance. We cannot give any assurance that the consumer bill of rights will not cause us to spend additional funds or complicate our network design might be adversely affected, network design costs could increasemarketing and the service provided tosales programs which may have a material adverse impact on our customers might be reduced.operations in California.
We cannot assure you that any state or local regulatory requirements currently applicable to our systems will not be changed in the future or that regulatory requirements will not be adopted in those
states and localities which currently have none. Such changes could impose new obligations on us that would adversely affect our operating results.
Future Regulation
From time to time, federal or state legislators propose legislation and federal or state regulators propose regulations that could affect us, either beneficially or adversely. We cannot assure you that federal or state legislationgovernments will not be enacted,enact legislation or that regulations will not be adopted or actions taken by the FCC or other federal or state regulatory authoritiesregulator will not adopt regulations or take other action that might adversely affect our business adversely.us. Changes such as the allocation by the FCC ofallocating additional radio spectrum for services that competecompeting with our business or granting existing licensees of other services flexibility to offer mobile wireless services could adversely affect our operating results.
Legal Proceedings
On June 14, 2006, Leap Wireless International, Inc. and Cricket Communications, Inc., or collectively Leap, filed suit against us in the United States District Court for the Eastern District of Texas, Marshall Division, Civil Action No. 2-06CV-240-TJW and amended on June 16, 2006, for infringement of U.S. Patent No. 6,813,497"Method for Providing Wireless Communication Services and Network and System for Delivering of Same," or the '497 Patent, issued to Leap. The complaint seeks both injunctive relief and monetary damages for our alleged infringement and continued infringement of such patent. On August 3, 2006, we (i) answered the complaint, (ii) raised a number of affirmative defenses, and (iii) together with two related entities, counterclaimed against Leap and several related entities and certain current and former employees of Leap and certain of its related entities, including Leap's CEO. We have also tendered Leap's claims to the manufacturer of our network infrastructure equipment for indemnity and defense. In our counterclaims, we claim that we do not infringe any valid or enforceable claim of the '497 Patent. Certain of the Leap defendants, including its CEO, answered our counterclaims on October 13, 2006. In its answer, Leap and its CEO denied our allegations and asserted affirmative defenses to our counterclaims. We plan to vigorously defend against Leap's claims relating to the '497 Patent.
On August 3, 2006, we filed a separate action in the United States District Court for the Northern District of Texas, Dallas Division, Civil Action No. 3-06CV1399-D, seeking a declaratory judgment that Leap's U.S. Patent No. 6,959,183"Improved Operations Method for Providing Wireless Communication Services and Network and System for Delivering Same" (a different patent from the one that is the subject of Leap's infringement action against us) is invalid and is not being infringed by us. Leap responded to our complaint on October 13, 2006 by filing a motion to dismiss our complaint for lack of subject matter jurisdiction or, in the alternative, that the action be transferred to the United States District Court for the Eastern District of Texas, Marshall Division where Leap has brought suit against us in connection with the '497 Patent. We have responded to this motion to dismiss and are awaiting a decision from the court.
On August 15, 2006, we filed a separate action in the California Superior Court, Stanislaus County, Case No. 382780, against Leap for unfair competition, misappropriation of trade secrets, interference with contracts, breach of contract, intentional interference with prospective business advantage, and trespass. In this suit we seek monetary and punitive damages. Leap responded to our complaint on October 13, 2006 by filing a motion requesting that the Court stay the action pending the outcome of the action on the '497 Patent. The court denied Leap's motion and Leap sought review of this decision from the court of appeals. Leap's appeal was denied by the court of appeals on December 15, 2006.
On September 22, 2006, Royal Street filed a separate action in the United States District Court for the Middle District of Florida, Tampa Division, Civil Action No. 8:06-CV-01754-T-23TBM, seeking a declaratory judgment that Leap's '497 Patent is invalid and not being infringed upon by Royal Street.
Leap responded to Royal Street's complaint by filing a motion to dismiss Royal Street's complaint for lack of subject matter jurisdiction or, in the alternative, that the action be transferred to the United States District Court for the Eastern District of Texas, Marshall Division where Leap has brought suit against us under the same patent. Royal Street has responded to this motion.
If Leap were successful in its claim for injunctive relief, we could be enjoined from operating our business in the manner we currently operate, which could require us to expend additional capital to change certain of our technologies and operating practices, or could prevent us from offering some or all of our services using some or all of our existing systems. In addition, if Leap were successful in its claim for monetary damage, we could be forced to pay Leap substantial damages for past infringement and/or ongoing royalties on a portion of our revenues, which could materially adversely impact our financial performance.
In addition, we are involved in litigation from time to time that we consider to be in the normal course of business. We are not currently party to any other pending legal proceedings that we believe would, individually or in the aggregate, have a material adverse effect on our financial condition or results adversely.of operations.
DirectorsExecutive Officers and Executive OfficersDirectors
The following table sets forth information concerning our executive officers and directors, of MetroPCS, andincluding their ages, as of the date of this prospectus, are as follows:
January 3, 2007.
| Name | Age | Position | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
Roger D. Linquist |
| ||||||||||
| President, Chief Executive Officer | ||||||||||
| J. Braxton Carter | Senior Vice President and Chief Financial Officer | ||||||||||
Douglas S. Glen | 49 | Senior Vice President, Corporate Operations | |||||||||
| Thomas C. Keys | 48 | Senior Vice President, Market Operations, West | |||||||||
| Christine B. Kornegay | 43 | Vice President, Controller and Chief Accounting Officer | |||||||||
| Malcolm M. Lorang | Senior Vice President and Chief Technology Officer | ||||||||||
| John J. Olsen | 50 | Vice President and Chief | |||||||||
| Mark A. Stachiw | |||||||||||
| Senior Vice President, General Counsel and | ||||||||||
| |||||||||||
| |||||||||||
| |||||||||||
| |||||||||||
| |||||||||||
| 42 | Vice President, Finance and | |||||||||
| Robert A. Young | |||||||||||
| |||||||||||
| W. Michael Barnes | |||||||||||
| |||||||||||
| |||||||||||
| 62 | Director | |||||||||
Arthur C. | Director | ||||||||||
| James N. Perry, Jr. | Director | ||||||||||
| 67 | Director | |||||||||
| Walker C. Simmons | 35 | Director | |||||||||
| James F. | 50 | Director | |||||||||
| |||||||||||
| |||||||||||
| |||||||||||
| |||||||||||
|
Roger D. Linquist co-founded our companyMetroPCS Communications and has served as our President, Chief Executive Officer, and chairman of the Board of Directors of MetroPCS Communications since its inception and its Secretary and a director since our inception.from inception through October 2004. In 1989, Mr. Linquist founded PageMart Wireless (now Metrocall)USA Mobility), a U.S. paging company. He served as PageMart’sPageMart's Chief Executive Officer from 1989 to 1993, and as Chairman from 1989 through March 1994, when he resigned to form MetroPCS, Inc. Prior to founding PageMart, Mr. Linquist was Chief Executive Officer of PacTel Personal Communications (which later became AirTouch) and of Communications Industries, covering the time period from 1982 to 1989. Prior to 1982, Mr. Linquist was a management consultant with McKinsey & Co. and held various management positions with Texas Instruments.company. Mr. Linquist served as a director of PageMart Wireless from June 1989 to September 1997, and was a founding director of the Cellular Telecommunications and Internet Association. Mr. Linquist was an executive officer of MetroPCS, Inc. when it initiated its bankruptcy proceedings in October 1997. Mr. Linquist is the father of Corey A. Linquist, our Vice President and General Manager, Sacramento,Sacramento; father of Todd C. Linquist, Staff Vice President of Wireless Data Services; father-in-law of Michelle Linquist, Director of Logistics; and the father-in-law of Phillip R. Terry, our Vice President, of Corporate Marketing.
Malcolm M. Lorang co-founded our company and has served as our Vice President and Chief Technical Officer since our inception. Mr. Lorang has a broad background in radio frequency communications systems and systems engineering, most recently serving as Vice President of Engineering for PageMart Wireless from 1989 to
1994. Mr. Lorang has authored numerous patents, including patents in the radio frequency communications systems area, and was involved in the development and testing of military applications for spread spectrum technology upon which CDMA is based. Mr. Lorang’s experience includes positions with Magnavox Research Laboratories from 1957 to 1972, and Texas Instruments from 1972 to 1988 as a senior design engineer and member of its technical staff. Mr. Lorang was an executive officer of MetroPCS, Inc. when it initiated its bankruptcy proceedings in October 1997.
J. Lyle PatrickBraxton Carter joined us as became MetroPCS Communications' Senior Vice President and Chief Financial Officer in May 2004. From 2001 until 2002, Mr. Patrick served as Vice President and Chief Financial Officer of Completel, an emerging telecommunications company headquartered in London. Prior to joining Completel, Mr. Patrick served at McLeodUSA Incorporated as Group Vice President and Chief Financial Officer from 1998 through 2001, and Executive Vice President-Telecom and Public Policy from 1997 until 1998. Subsequent to Mr. Patrick’s departure, McLeodUSA filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code on January 31, 2002. Civil suits alleging violations of the Securities Act and the Exchange Act have been filed against McLeodUSA and its current and former officers, including Mr. Patrick. Mr. Patrick believes that these suits are without merit and intends to defend them vigorously. From 1988 until its 1997 merger into McLeodUSA, Mr. Patrick served as Chief Financial Officer, Vice President and Controller of Consolidated Communications Inc. Mr. Patrick was a partner at the accounting firm of Arthur Andersen & Co. prior to joining Consolidated Communications.
Dennis G. Spickler became our Vice President of Business Development in March 2004.2005. Previously, Mr. SpicklerCarter served as our Vice President, of Finance and Chief Financial OfficerCorporate Operations from September 1996 throughFebruary 2001 to March 2004.2005. Prior to joining our company, he served as Vice President, Chief Financial and Information Technology Officer for PrimeCo PersonalMetroPCS Communications, from its inception in March 1995 through September 1996. Prior to joining PrimeCo, Mr. Spickler served in various management positions for Bell Atlantic including Managing Director, Mergers and Acquisitions from April 1991 to March 1995, and Vice President, Financial Operations for Bell Atlantic TriCon Leasing from 1988 to 1991. Mr. Spickler also served as General Manager—External Reporting and Professional Accounting Matters for Bell Atlantic and prior to that was an Audit Manager for Coopers & Lybrand (now PricewaterhouseCoopers LLP). Mr. Spickler was an executive officer of MetroPCS, Inc. when it initiated its bankruptcy proceedings in October 1997.
Robert A. Young joined us as Executive Vice President, Market Operations in May 2001. Previously, Mr. Young served as President of the Great Lakes Area of Verizon Wireless from February 2001 until April 2001, and as President of Verizon Wireless Messaging Services (previously known as AirTouch Paging) from April 2000 until January 2001. Prior to joining Verizon Wireless, Mr. Young held various positions with PrimeCo Personal Communications, including Vice President—Customer Care from April 1998 until April 2000, President—Independent Region from October 1997 until October 1998, and Vice President/General Manager—Houston from May 1995 until September 1997. He also chaired PrimeCo’s Information Technology Steering Committee and was a member of its Senior Leadership Team.
J. Braxton Carter joined us as Vice President of Corporate Operations in February 2001. Prior to joining our company, Mr. Carter was Chief Financial Officer and Chief Operating Officer of PrimeCo PCS, the successor entity of PrimeCo Personal Communications formed in March 2000. He held various senior management positions with PrimeCo Personal Communications, including Chief Financial Officer and Controller, from 1996 until March 2000. Mr. Carter also has extensive senior management experience in the retail industry and spent 10ten years in public accounting.
Douglas S. Glen became MetroPCS Communications' Senior Vice President, Corporate Operations in June 2006. Prior to joining us, Mr. Glen served as the Vice President of Wireless Solutions and Business Development at BearCom from October 2004 to June 2006. He led the initiative at BearCom to launch new wireless broadband enterprise solutions through a national direct sales force. Before joining BearCom in 2004, from September 2002 to November 2003, Mr. Glen was the Senior Vice President and Chief Operating Officer of WebLink Wireless Inc. (formerly PageMart, Inc.) directing numerous operations of the company including sales, business development, network services,
information technology, distribution, customer service, and marketing departments. From July 2001 to September 2002, Mr. Glen was Senior Vice President and Chief Network Officer of Weblink Wireless Inc., directing the planning, engineering and operations of the company's wireless messaging network. From November 2000 to July 2001, he served as Weblink Wireless Inc.'s Vice President, Business Sales Division, overseeing the sales and customer care operations for many of the company's strategic business units, including national accounts, field sales, resellers and telemetry.
Herbert “Chip” Graves, IVThomas C. Keys joined us became MetroPCS Communications' Senior Vice President, Market Operations, West in January 2007. Previously, Mr. Keys served as our Vice President and General Manager, San Francisco in March 2002.Dallas from April 2005 until January 2007. Prior to joining our company, Mr. Graves was employed by Sprint PCS, during which time heKeys served as Areathe President and Chief Operating Officer for VCP International Inc., a Dallas-based wholesale distributor of wireless products, from July 2002 to April 2005. Prior to joining VCP International Inc., Mr. Keys served as the Senior Vice President, Business Sales for Northern CaliforniaWeblink Wireless Inc. (formerly PageMart, Inc.) from August 1998 until September 2000,March 1999 to June 2002, which included leading and managing the national sales and distribution efforts, and in other senior management positions with Weblink Wireless Inc. from January 1993 to March 1999.
Christine B. Kornegay joined MetroPCS Communications as Area Vice President, Controller and Chief Accounting Officer in January 2005. Previously, Ms. Kornegay served as Vice President of Finance and Controller for Southern CaliforniaAllegiance Telecom, Inc. from January 2001 to June 2004. Ms. Kornegay was an officer of Allegiance Telecom, Inc. when it initiated bankruptcy proceedings in May 2003. Prior to joining Allegiance Telecom, Inc. in January 2001, Ms. Kornegay held various accounting and finance roles with AT&T Wireless Services from June 1994 through January 2001 and is also a certified public accountant.
Malcolm M. Lorang co-founded MetroPCS Communications and became our Senior Vice President and Chief Technical Officer in January 2006. Previously, Mr. Lorang served as our Vice President and Chief Technical Officer from our inception to January 2006. Prior to joining MetroPCS Communications, Mr. Lorang served as Vice President of Engineering for PageMart Wireless from 1989 to 1994.
John J. Olsen joined MetroPCS Communications as Vice President and Chief Information Officer in April 2006. Mr. Olsen was formerly the Vice President and Chief Technology Officer at GTESS Corporation and was responsible for GTESS' core technology products and information technology services. Prior to joining GTESS in May 2004, Mr. Olsen held senior information technology positions with Sprint Corporation focused on Software/Product Development for Sprint's consumer business and Sprint's nationwide technology infrastructure. From December 1997 through August 2001, Mr. Olsen was Vice President of Information Services and Chief Information Officer at NEC Business Network Solutions. Mr. Olsen began his information technology career in the U.S. Air Force at the School of Aerospace Medicine and spent 2 years as a Senior Consultant at General Electric, Aerospace Division.
Mark A. Stachiw became MetroPCS Communications' Senior Vice President, General Counsel and Secretary in January 2006. Previously, Mr. Stachiw served as our Vice President, General Counsel and Secretary from October 2004 until January 2006. Prior to joining MetroPCS Communications, Mr. Stachiw served as Senior Vice President and General Counsel, Allegiance Telecom Company Worldwide for Allegiance Telecom, Inc. from September 2000 until March 2002.
Albert S. Loverde joined us2003 to June 2004, and as Vice President and General Manager, GeorgiaCounsel, Allegiance Telecom Company Worldwide from March 2002 to September 2003. Mr. Stachiw was an officer of Allegiance Telecom, Inc. when it initiated bankruptcy proceedings in May 2003. Prior to joining Allegiance Telecom, Inc., from April 2001 through March 2002, Mr. Stachiw was Of Counsel at Paul, Hastings, Janofsky and Walker, LLP, and represented national and international telecommunications firms in regulatory and transactional matters. Before joining Paul Hastings, Mr. Stachiw was the chief legal officer for Verizon Wireless Messaging Services (formerly known as AirTouch Paging and PacTel Paging) and was the Vice President and General Counsel from April 2000
through March 2001, and Vice President, Senior Counsel and Secretary from April 1995 through April 2000.
Keith D. Terreri joined MetroPCS Communications as Vice President Finance and Treasurer in July 1996.2006. Prior to joining us, Mr. Terreri served as the Vice President, Finance and Treasurer of Valor Communications Group, Inc. from July 2001 to July 2006. Mr. Terreri was Vice President, Finance and Treasurer of RCN Corporation from December 1999 to June 2001 and Director of Finance from January 1998 to December 1999. Mr. Terreri has over 19 years experience in finance and nine in the telecommunications industry. Mr. Terreri originally began his career at Deloitte & Touche LLP, and is also a certified public accountant.
Robert A. Young became MetroPCS Communications' Executive Vice President, Market Operations, East in January 2007. Previously Mr. Young served as our Executive Vice President, Market Operations from May 2001 until January 2007. Prior to joining our company, Mr. LoverdeYoung served as DirectorPresident of Engineering for PriCellularthe Great Lakes Area of Verizon Wireless from February 1995 to
July 1996, as Director of Marketing at Haddcomm International from January 1995 to March 1995,2001 until April 2001, and as Vice President of Verizon Wireless Messaging Services (formerly known as AirTouch Paging and General Manager for Sterling CellularPacTel Paging) from August 1990 toApril 2000 until January 1995. Mr. Loverde also spent 25 years at Bell Laboratories in various positions. Mr. Loverde was an executive officer of MetroPCS, Inc. when it initiated its bankruptcy proceedings in October 1997.
Corey A. Linquist became our Regional Vice President and General Manager, Sacramento in January 2001. Previously, Mr. Linquist was Director of Strategic Planning for our company, a position he held since our inception in July 1994. Prior to joining us, Mr. Linquist served in a similar position at PageMart Wireless. Mr. Linquist is the son of Roger D. Linquist, our President, Chief Executive Officer, Secretary and Chairman of our Board of Directors.
Frank J. Bell joined us as Vice President and General Manager, Florida in June 2001. Prior to joining our company,Verizon Wireless Messaging Services, Mr. Bell was Area Vice President of Florida for Sprint PCS from February 1998 to March 2001. During his 16 years in the wireless industry, Mr. Bell hasYoung held various senior management positions with Pactel/AirTouch PagingPrimeCo Personal Communications, including Vice President—Customer Care from April 1998 until April 2000, President—Independent Region from October 1997 until October 1998, and Dial Page.Vice President/General Manager—Houston from May 1995 until September 1997. He also chaired PrimeCo's Information Technology Steering Committee and was a member of its Senior Leadership Team.
Phillip R. Terry became our Vice President of Corporate Marketing in December 2003. Previously, Mr. Terry served as our Staff Vice President for Product Management and Distribution Services from April 2002 to December 2003, and as our Director of Field Distribution from April 2001 to April 2002. Prior to joining us, Mr. Terry was employed by WebLink Wireless where he was the Corporate Director of Carrier Services from January 1998 to March 2001, Southwest Regional Vice President from January 1995 through December 1997 and Area Vice President for Dallas/Fort Worth from January 1990 through December 1994. Mr. Terry is the son-in-law of Roger D. Linquist, our President, Chief Executive Officer, Secretary and Chairman of our Board of Directors.
Michael N. Lavey joined us as Vice President and Controller in January 2004 and also served as Interim Chief Financial Officer from March 2004 until May 2004. Prior to joining our company, Mr. Lavey served from May 2002 to November 2003 as Vice President – Controller for VarTec Telecom, a nationwide provider of long distance and local telephone service. Previously, Mr. Lavey served as Vice President – Corporate Controller for Excel Communications from January 2000 until its acquisition by VarTec in April 2002. Prior to joining Excel, Mr. Lavey held various management positions with BancTec, including Vice President – Enterprise System Strategy from May 1996 to January 2000, Vice President and Controller – North American Operations from March 1995 to May 1996, and Treasurer from March 1994 to March 1995.
W. Michael Barnes, a director of our companyMetroPCS Communications since May 2004, held several positions at Rockwell International Corporation (now Rockwell Automation, Inc.) between 1968 and 2001, including Senior Vice President, Finance & Planning and Chief Financial Officer from 1991 through 2001. Mr. Barnes also serves as a director of Advanced Micro Devices, Inc.
C. Boyden GrayKevin Landry, a director of our companyMetroPCS Communications since January 1997,August 2005, currently serves as the Chief Executive Officer of TA Associates, Inc. which through its funds, is an investor in MetroPCS Communications. TA Associates, founded in 1968, is one of the oldest and largest private equity firms in the world and focuses on investing in private companies and helping management teams build their businesses. Mr. Landry previously served as Counsel to President George Bush from 1989 to 1993. From 1981 to 1988, he served in many capacities, including Counsel to then-Vice President Bush. In addition to his service to President Bush, he has been a partner at the law firm of Wilmer Cutler Pickering LLP since 1976, providing advice on a range of regulatory matters with emphasis on telecommunications, antitrust, food and drug and environmental issues. He also serves as a director of four other privately held companies. Mr. Gray was a director of MetroPCS, Inc. when it initiated its bankruptcy proceedings in October 1997.
Harry F. Hopper, III, a director of our company since May 2001, has been a managing member of Columbia Capital or its affiliates since 1994. Columbia Capital is a venture capital firm with an investment focus on communications services, media, network infrastructure and software. Mr. Hopper is currently a member of the board of directors of Affinity InternetAlex Brown Incorporated, Ameritrade Holding Corporation, Biogen, Continental Cablevision, Instinet Group, Keystone Group, SBA Communications, Standex International Corporation and was formerly a director of DSL.Net, Equinix and Pegasus Communications Inc. as well as a number of privately held companies.the National Venture Capital Association.
Joseph T. McCullen, Jr.Arthur C. Patterson, has been a director of our company since May 2001 and previously from December 1995 until November 2000. He has served as a Managing Director of McCullen Capital, a venture capital and
advisory firm, since July 2001. He served as a Managing Director of Whitney & Co. from 1999 until 2001, and as a Managing Director of OneLiberty Ventures, a venture capital firm, from 1986 until 1999. Mr. McCullen also serves as a director of several privately held companies. Mr. McCullen’s public sector experience includes service as Assistant Secretary of the Navy from 1973 to 1977, and as Special Assistant to the President from 1971 to 1973. Mr. McCullen was a director of MetroPCS Inc. when it initiated its bankruptcy proceedings in October 1997.
Arthur C. Patterson, a director of our companyCommunications since its inception, is a foundingFounding General Partner of Accel Partners, a venture capital firm, which was establishedlocated in 1983.Palo Alto, California. Affiliates of Accel Partners are investors in MetroPCS Communications. Mr. Patterson also serves as a director of iPass, Actuate and several privately held companies. Mr. Patterson was
James N. Perry, Jr., a director of MetroPCS Communications since August 2005, is a Managing Director of Madison Dearborn Partners, Inc., a Chicago-based private equity investing firm, where he specializes in investing in companies in the communications industry. From January 1993 to January 1999, Mr. Perry was a Vice President of Madison Dearborn Partners, Inc. when it initiated its bankruptcy proceedingsAn affiliate of Madison Dearborn Partners, Inc. is an investor in October 1997.MetroPCS Communications. Mr. Perry also presently serves on the boards of directors of Band-X Limited, Cbeyond Communications, Inc., Cinemark, Inc., Intelstat Holdings Ltd., Madison River Telephone Company, LLC and Catholic Relief Services.
John Sculley, a director of our companyMetroPCS Communications since December 1995,its inception, has been a partner in Sculley Brothers, a private investment capital firm, since June 1994. Mr. Sculley is an investor in MetroPCS Communications. Mr. Sculley also serves on the boards of directors of InPhonic and several privately held companies. Mr. Sculley was
Walker C. Simmons, a director of MetroPCS Communications since June 2006, joined Wachovia Capital Partners in 2000 and has been a partner since 2002. Before joining Wachovia Capital Partners, he worked as a Vice President with Bruckmann, Rosser, Sherrill & Co., Inc. when it initiated its bankruptcy proceedings in October 1997.
Craig R. StapletonMr. Simmons also presently serves on the Board of Directors of American Community Newspapers, Heartland Publications, LLC, IntraLinks, Inc., Sonitrol, Inc., Three Eagles Communications and TMW Systems, Inc. Mr. Simmons also previously served as a director of our company since JuneMetroPCS Communications from December 2004 served as U.S. Ambassador to the Czech Republic from August 2001 to December 2003. Prior to assuming his duties in the Czech Republic,until March 2005, when he resigned. Mr. StapletonSimmons' resignation was not caused by a real estate executive, serving since 1982 as President of Marsh and McLennan Real Estate Advisors, Inc. Mr. Stapleton currently serves on the boards of directors of T.B. Woods and Allegany Properties, and previously served on the boards of Cornerstone Properties, Security Capital Corporation and Sonoma West.disagreement with MetroPCS Communications or management.
James F. Wade,, a director of our companyMetroPCS Communications since November 2000,December 2006, has served as Managing Partner of M/C Venture Partners, a venture capital firm, since December 1998. M/C Venture Partners is an investor in MetroPCS Communications. Mr. Wade leads the investment process including determining sector focus, seeking out management teams, founding new companiespreviously served as a director of MetroPCS Communications from March 2005 until May 2006, when he resigned and working with financial sources that provide debt and equity capital to grow companies. Hefrom November 2000 through December 2004 when he resigned. Mr. Wade currently serves on the boards of directors of Attenda, Ltd., Cavalier Telephone, City SignalCleveland Unlimited, NuVox Communications and New South Communications.Texas 11 Acquisition LLC. Mr. Wade's previous resignations were not caused by a disagreement with MetroPCS Communications or management.
Board of DirectorsComposition
Our certificatePrior to the completion of incorporation provides for twothis offering our directors will be divided into three classes serving staggered three-year terms. Class I, Class II and Class III directors will serve until our annual meeting of stockholders in 2007, 2008 and 2009, respectively. Upon expiration of the term of a class of directors, thosedirectors in that class will be eligible to be elected by holdersfor a new three-year term at the annual meeting of our Class A common stock and those elected by holdersstockholders in the year in which their term expires. This classification of our common stock. The certificatedirectors could have the effect of incorporation provides for five Class A directors andincreasing the length of time necessary to change the composition of a number of common directors determined as set forth in our bylaws. We currently have five Class A directors and three common directors. Each Class A director has one vote on each matter submitted to a votemajority of our board of directors, and each common director currently has one vote;provided,however, that if,directors. In general, at any time,least two annual meetings of stockholders will be necessary for stockholders to effect a change in a majority of the members of our board of directors has more than four common directors, each common director shall individuallydirectors. We currently have a fractional vote such that the common directors collectively have four votes.eight members and one vacancy on our board of directors.
Board Committees
The designation of common directors and election of all directors is governed by the provisions of an amended and restated stockholders agreement. Allstanding committees of our directors have been elected pursuant to the termsboard consist of the stockholders agreement. See “Description of Capital Stock.”
Committees of the Board of Directors
Our board of directors has established four standing committees: an audit committee, a nominating and corporate governance committee, a compensation committee and a finance committee. Upon the consummation of this offering, the composition of each board committee will comply with the requirements of the Nasdaq National Market and the Sarbanes-Oxley Act of 2002.
planning committee.
Audit Committee. The members of our audit committee are Messrs. Joseph T. McCullen, Jr., W. Michael Barnes and Harry F. Hopper, III, each of whom has been affirmatively determined by our board of directors to be independent in accordance with applicable NASD and SEC rules and the independence requirements of our audit
committee charter. Our board of directors has determined that Mr.established an audit committee of the board of directors. The members of the audit committee are currently Messrs. W. Michael Barnes, is an “audit committee financial expert” as such term is defined in Item 401 of Regulation S-K.C. Kevin Landry and John Sculley. The responsibilities of the audit committee include:of the board of directors include, among other things:
Nominating and Corporate Governance Committee. The members of our nominating and corporate governance committee are Messrs. Arthur C. Patterson James F. Wade and Harry F. Hopper, III, each of whom has been affirmatively determined by our board of directors to be independent in accordance with Nasdaq rules.Perry. The responsibilities of the nominating and corporate governance committee include:
Compensation Committee. The members of our compensation committee are Messrs. Arthur C.Perry and Sculley. The responsibilities of the compensation committee of the board of directors include:
Finance and Planning Committee. The members of our finance and planning committee are Messrs. Patterson, James F. Wade, Joseph T. McCullen, Jr.Landry and Harry F. Hopper, III,Perry. The responsibilities of the finance and planning committee include:
Code of Ethics
Our board of directors has adopted a code of ethics which establishes the standards of ethical conduct applicable to all of our directors, officers, employees, consultants and contractors. The code of ethics addresses, among other things, competition and fair dealing, conflicts of interest, financial matters and external reporting, company funds and assets, confidentiality and corporate opportunity requirements and the process for reporting violations of the code of ethics, employee misconduct, conflicts of interest or other violations. Our code of ethics is publicly available on our website atwww.metropcs.com. Any waiver of our code of ethics with respect to our chief executive officer, chief financial officer, controller or persons performing similar functions may only be authorized by our audit committee and will be disclosed as required by applicable law.
Compensation Discussion and Analysis
We provide what we believe is a competitive total compensation package to our executive management team through a combination of base salary, an annual cash incentive plan, a long-term equity incentive compensation plan and broad-based benefits programs.
We place significant emphasis on pay for performance-based incentive compensation programs, which make payments when certain company/team and individual goals are achieved and/or when our common stock price appreciates. This Compensation Discussion and Analysis explains our compensation philosophy, policies and practices with respect to our chief executive officer, chief financial officer, and the other three most highly-compensated executive officers, which are collectively referred to as the named executive officers.
The Objectives of our Executive Compensation Program
Our compensation committee is responsible for establishing and administering our policies governing the compensation for our executive officers. Our executive officers are elected by our board of directors. The compensation committee is composed entirely of non-employee directors. See "Management—Board Committees—Compensation Committee."
Our executive compensation programs are designed to achieve the following objectives:
To assist management and the compensation committee in assessing and determining competitive compensation packages, the compensation committee engaged compensation consultants, Frederic W. Cook and Co, Inc. in 2005 and 2006 and Towers Perrin in 2006.
The compensation committee meets outside the presence of all of our executive officers, including the named executive officers, to consider appropriate compensation for our chief executive officer. For all other named executive officers, the committee meets outside the presence of all executive officers except our chief executive officer and our general counsel who recuses himself when the committee discusses his compensation. Mr. Linquist, our chief executive officer, or CEO, annually reviews each other named executive officer's performance with the committee and makes recommendations to the compensation committee with respect to the appropriate base salary, payments to be made under our annual cash incentive plan, or Bonus Opportunity Plan, and the grants of long-term equity incentive awards for all executive officers, excluding himself. Based in part on these recommendations from our
CEO and other considerations discussed below, the compensation committee approves the annual compensation package of our executive officers other than our CEO. The compensation committee also annually analyzes our CEO's performance and determines his base salary, Bonus Opportunity Plan award payout and stock option awards based on its assessment of his performance with input from the committee's consultants. The annual performance review of our executive officers are considered by the compensation committee when making decisions on setting base salary, targets for and payments under our Bonus Opportunity Plan and grants of long-term equity incentive awards. When making decisions on setting base salary, targets for and payments under our Bonus Opportunity Plan and initial grants of long-term equity incentive awards for new executive officers, the compensation committee considers the importance of the position to us, the past salary history of the executive officer and the contributions to be made by the executive officer to us. The compensation committee also reviews the analyses and recommendations of the executive compensation consultant retained by the committee and approves the recommendations with modifications as deemed appropriate by the compensation committee.
The compensation committee also reviews the annual performance of any parties related to the CEO and considers the recommendations of the related person's direct supervisor with respect to base salary, targets for and payments under our Bonus Opportunity Plan and grants of long-term equity incentive awards. The compensation committee reviews and approves these recommendations with modifications as deemed appropriate by the compensation committee.
We use the following principles to guide our decisions regarding executive compensation:
Provide compensation opportunities targeted at market median levels.
To attract and retain executives with the ability and the experience necessary to lead us and deliver strong performance to our shareholders, we strive to provide a total compensation package that is competitive with total compensation provided by our industry peer group.
We benchmark our salary and target incentive levels and practices as well as our performance results in relation to other comparable wireless communications industry companies and general industry companies of similar size in terms of revenue and market capitalization. We believe that this group of companies provides an appropriate peer group because they consist of similar organizations against whom we compete for executive talent. We annually review the companies in our peer group and add or remove companies as necessary to insure that our peer group comparisons are meaningful. Specifically, we use the following market data to establish our salary and target incentive levels:
We target base salaries to result in annual salaries equal to the market median (50th percentile) for our peer group. We target total compensation at the 75th percentile of our peer group for our executives with outstanding performance achievement. To arrive at the 50th percentile for the base salaries of our named executive officers, we consider the median of the data gathered from proxy statements for the positions of the named executive officers in relation to the named executive officers of our peer group as well as the 50th percentile of data from published surveys for each position. If our performance on company/team and individual goals exceeds targeted levels, our executives have the opportunity, through our Bonus Opportunity Plan and long-term equity incentive compensation plans, to receive total compensation above the median of market pay. We believe our executive compensation packages are reasonable when considering our business strategy, our compensation philosophy and the competitive market pay data.
For each executive officer, we consider the relevance of data of our peer group, considering:
Require performance goals to be achieved or common stock price to increase in order for the majority of the target pay levels to be earned.
Our executive compensation program emphasizes pay for performance. Performance is measured based on shareholder return as well as achievement of company/team and individual performance goals established by our board of directors relative to our board of director approved annual business plan. The goals for our company/team and individual measures are established so that target attainment is not assured. The attainment of payment for performance at target or above will require significant effort on the part of our executives.
The compensation package for our executive officers includes both cash and equity incentive plans that align an executive's compensation with our short-term and long-term performance goals and objectives.
Annual cash incentive awards under our Bonus Opportunity Plan are earned based on performance measures that are aligned with our business strategy and are approved by the board of directors at the beginning of each fiscal year.
Gross margin is defined as gross revenues less Enhanced 911 revenues, Federal Universal Service Fund revenues and the total cost of equipment.
Adjusted EBITDA per average subscriber is determined by dividing Adjusted EBITDA by the sum of the average monthly number of customers during the year.
Capital expenditures per ending subscriber is determined by dividing the total balance of property, plant and equipment and microwave relocation costs at the end of the year by (b) the number of customers at the end of the year.
Cost per gross addition is determined by dividing (a) selling expenses plus the total cost of equipment associated with transactions with new customers less activation revenues and equipment revenues associated with transactions with new customers during the year by (b) gross customer additions during the year.
Average monthly churn is determined by dividing (a) the number of customers who have been affirmativelydisconnected from our system during the year less the number of customers who have reactivated service by (b) the sum of the average monthly number of customers during the year.
The new market percent of build measure is intended to provide focus on the successful launch of the new market for the management team during the market construction period. Each year, milestones are established specific to new markets such as number of cell sites constructed and payout is determined by percent achievement of these objectives across all new markets.
In addition to the components listed above, the team performance measure has a discretionary component. This component is intended to capture how the market has performed in areas that are not quantified in the major metrics. The determination and payout of the discretionary component is based on general performance in other categories and provides recognition for contributions made to the overall health of the business.
Our long-term equity incentive program for 2005 and 2006 consists of awards of options to acquire our common stock which require growth in our common stock price in order for the executive officer to realize any value. We award stock options to align the interests of the executive officers to the interests of the shareholders through appreciation of our common stock price.
Offer the same comprehensive benefits package to all full-time employees.
We provide a competitive benefits package to all full-time employees which includes health and welfare benefits, such as medical, dental, vision care, disability insurance, life insurance benefits, and a 401(k) savings plan. We have no structured executive perquisite benefits (e.g., club memberships or company vehicles) for any executive officer, including the named executive officers, and we currently do not provide any deferred compensation programs or supplemental pensions to any executive officer, including the named executive officers.
Provide fair and equitable compensation.
We provide a total compensation program that we believe will be perceived by both our executive officers and our shareholders as fair and equitable. In addition to conducting analyses of market pay levels and considering individual circumstances related to each executive officer, we also consider the pay of each executive officer relative to each other executive officer and relative to other members of the management team. We have designed the total compensation programs to be consistent for our executive management team.
Certain Policies of our Executive Compensation Program
We have adopted the following material policies related to our executive compensation program:
Our Executive Compensation Programs
Overall, our executive compensation programs are designed to be consistent with the objectives and principles set forth above. The basic elements of our executive compensation programs are summarized in the table below, followed by a more detailed discussion of each compensation program.
| Element | Characteristics | Purpose | ||
|---|---|---|---|---|
| Base salary | Fixed annual cash compensation; all executives are eligible for periodic increases in base salary based on performance; targeted at the median market pay level. | Keep our annual compensation competitive with the market for skills and experience necessary to meet the requirements of the executive's role with us. | ||
Bonus Opportunity Plan awards | Performance-based annual cash incentive earned based on company/team and individual performance against target performance levels; targeted at the median market pay level. | Motivate and reward for the achievement and over-performance of our critical financial and strategic goals. Amounts earned for achievement of target performance levels based on our annual budget is designed to provide a market-competitive pay package at median performance; potential for lesser or greater amounts are intended to motivate participants to achieve or exceed our financial performance goals and to not reward if performance goals are not met. | ||
Long-term equity incentive plan awards (stock options) | Performance-based equity award which has value to the extent our common stock price increases over time; targeted at the median market pay level and/or competitive practices at peer companies. | Align interest of management with shareholders; motivate and reward management to increase the shareholder value of the company over the long term. Vesting based on continued employment will facilitate retention; amount realized from exercise of stock options rewards increased shareholder value of the company; provides change in control protection. | ||
Retirement savings opportunity | Tax-deferred plan in which all employees can choose to defer compensation for retirement. We provide no matching or other contributions; we do not allow employees to invest these savings in company stock. | Provide employees the opportunity to save for their retirement. Account balances are affected by contributions and investment decisions made by the employee. | ||
Health & welfare benefits | Fixed component. The same/comparable health & welfare benefits (medical, dental, vision, disability insurance and life insurance) are available for all full-time employees. | Provides benefits to meet the health and welfare needs of employees and their families. |
All pay elements are cash-based except for the long-term equity incentive program, which is an equity-based (stock options) award. We consider market pay practices and practices of peer companies in determining the amounts to be paid, what components should be paid in cash versus equity, and how much of a named executive officer's compensation should be short-term versus long-term.
Our executive officers, including the named executive officers, are assigned to pay grades, determined by comparing position-specific duties and responsibilities with the market pay data and the internal structure. Each pay grade has a salary range with corresponding annual and long-term incentive award opportunities. We believe this is the most transparent and flexible approach to achieve the objectives of the executive compensation program.
Compensation opportunities for our executive officers, including our named executive officers, are designed to be competitive with peer companies. We believe that a substantial portion of each named executive officer's compensation should be in performance-based pay.
In determining whether to increase or decrease compensation to our executive officers, including our named executive officers, annually we take into account the changes (if any) in the market pay levels based on our peer group, the contributions made by the executive officer, the performance of the executive officer, the increases or decreases in responsibilities and roles of the executive officer, the business needs for the executive officer, the transferability of managerial skills to another employer, the relevance of the executive officer's experience to other potential employers and the readiness of the executive officer to assume a more significant role with another organization. In addition, we consider the executive officer's current base salary in relation to the median pay of peer group companies so that for the same individual performance, an executive officer will receive larger increases when below median and smaller increases when at or above median.
In general, compensation or amounts realized by executives from prior compensation from us, such as gains from previously awarded stock options or options awards, are not taken into account in setting other elements of compensation, such as base pay, Bonus Opportunity Plan payments, or awards of stock options under our long-term equity incentive program. With respect to new executive officers, we take into account their prior base salary and annual cash incentive, as well as the contribution expected to be made by the new executive officer, the business needs and the role of the executive officer with us. We believe that our executive officers should be fairly compensated each year relative to market pay levels of our peer group and internal equity among executive officers. Moreover, we believe that our long-term incentive compensation program furthers our significant emphasis on pay for performance compensation.
Annual Cash Compensation
To attract and retain executives with the ability and the experience necessary to lead us and deliver strong performance to our shareholders, we provide a competitive total compensation package. Base salaries are targeted at the market median (50thpercentile) of our peer group, while total compensation is targeted at the 75th percentile of our peer group, considering individual performance and experience, to ensure that each executive is appropriately compensated.
Base Salary
Annually we review salary ranges and individual salaries for our executive officers. We establish the base salary for each executive officer based on consideration of median pay levels of our peer group and internal factors, such as the individual's performance and experience, and the pay of others on the executive team.
We consider market median pay levels among individuals in comparable positions with transferable skills within the wireless communications industry and comparable companies in general industry. When establishing the base salary of any executive officer, we also consider business requirements for certain skills, individual experience and contributions, the roles and responsibilities of the executive and other factors. We believe competitive base salary is necessary to attract and retain an executive management team with the appropriate abilities and experience required to lead us. Approximately 25% to 45% of an executive officer's total compensation, depending on the executive's role with us.
The base salaries paid to our named executive officers are set forth below in the Summary Compensation Table. See "—Summary of Compensation." For the fiscal year ended December 31, 2005, cash compensation to our named executive officers was approximately $1.5 million, with our chief executive officer receiving approximately $435,000 of that amount. We believe that the base salary paid
to our executive officers during 2005 achieves our executive compensation objectives, compares favorably to our peer group and is within our target of providing a base salary at the market median.
In 2006, adjustments to our executive officers' total compensation were made based on an analysis of current market pay levels of peer companies and in published surveys. In addition to the pay levels of our peer group, factors taken into account in making any changes for 2006 included the contributions made by the executive officer, the performance of the executive officer, the role and responsibilities of the executive officer and the relationship of the executive officer's base pay to the base salary of our other executives.
Bonus Opportunity Plan Awards
Consistent with our emphasis on pay for performance incentive compensation programs, we have established a written Bonus Opportunity Plan pursuant to which our executive officers, including our named executive officers, are eligible to receive Bonus Opportunity Plan awards based upon our performance against annual established performance targets, including financial measures and other factors, including individual performance. The Bonus Opportunity Plan is important to focus our executive officer's efforts and reward executive officers for annual operating results that help create value for our shareholders. The Bonus Opportunity Plan award represents 15% to 30% of a named executive officer's total compensation, depending on the executive's role.
Incentive award opportunities are targeted to result in Bonus Opportunity Plan payments equal to the market median of our peer group assuming our target business objectives are achieved. If the target level for the performance goals is exceeded, executives have an opportunity to earn cash incentive awards above the median of the market of our peer group. If the target levels for the performance goals are not achieved, executives may earn less or no Bonus Opportunity Plan payments. In 2005, our named executive officers exceeded the target business objectives which result in achieving 140.9% for the Bonus Opportunity Plan. The incentive plan targets for the Bonus Opportunity Plan are determined through our annual planning process, which generally begins in October before the beginning of the fiscal year.
For 2005, the financial measures used to determine annual incentive cash payments included gross margin, Adjusted EBITDA per average subscriber, capital expenditures per ending subscriber, cost per gross addition, average monthly churn and new market build-out. See "—2005 Financial Measures." The cost per gross addition measures the financial effort required to add a new subscriber. The average monthly churn is designed to measure subscriber disconnections and reconnections. We changed the measures in 2006 to be more straight-forward and easier to understand. Gross margin, Adjusted EBITDA per average subscriber fully capture the cost per gross addition and average monthly churn impact that were specific components of the 2005 plan. For 2006, the financial measures used to determine annual cash payments included gross margin, Adjusted EBITDA per average subscriber, capital expenditures per ending subscriber and new market build-out performance. See "—2006 Financial Measures."
The gross margin measure is designed to reflect our strategy of developing new markets, growing top line revenue, and expanding our market share in existing markets. To ensure we efficiently develop and expand our markets, the Adjusted EBITDA per average subscriber measure motivates our executives to manage our costs and to take into account the appropriate level of expenses expected with our growth in number of subscribers. The capital expenditures per ending subscriber measure is designed to ensure that the appropriate level of investment is being made in our networks consistent with our growth. The new market percent of build measure exists to provide focus during the market construction period. The discretionary component provides recognition for contributions made to the overall health of the business and is intended to capture how the market has performed in areas that are not quantified in the major metrics.
A business plan which contains annual financial and strategic objectives is developed each year by management, reviewed and recommended by the finance and planning committee, presented to the board of directors with such changes that are deemed appropriate by the finance and planning committee, and are ultimately reviewed and approved by our board of directors with such changes that are deemed appropriate by the board of directors. The business plan objectives include our budgeted results for the annual incentive performance measures, such as penetrating existing markets and securing and developing new markets, and include all of our performance goals. The Bonus Opportunity Plan is presented to the compensation committee for review, and ultimately to the board of directors for their approval with such modifications deemed appropriate by the board of directors.
Bonus Opportunity Plan awards are determined at year-end based on our performance against the board of directors-approved Bonus Opportunity Plan targets. The compensation committee also exercises discretion adjusting awards based on its consideration of each executive officer's individual performance and for each executive officer other than the chief executive officer, based on a review of such executives performance as communicated to the compensation committee by the chief executive officer, and our overall performance during the year. The incentive plan award amounts of all executive officers, including the named executive officers, must be reviewed and recommended by the compensation committee for approval and ultimately must be approved by the board of directors before being paid. The committee and the board of directors may modify the Bonus Opportunity Plan awards prior to their payment.
2005 Financial Measures
Shown as a percentage of the total Bonus Opportunity Plan award at target in the following table, is the weighting of the individual measures as well as the financial measures used to determine award payments to the named executive officers for the fiscal year ended December 31, 2005.
| 2005 Measures | CEO | CFO | EVP Market Ops | Other NEOs | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Company/team performance | • | Gross Margin | 50 | % | 60 | % | 67 | % | 75 | % | |||
| • | Adjusted EBITDA per average subscriber | ||||||||||||
| • | Capital expenditures per ending subscriber | ||||||||||||
| • | Cost per gross addition | ||||||||||||
| • | Average monthly churn | ||||||||||||
| • | New market % of build | ||||||||||||
| • | Discretionary | ||||||||||||
| Individual objectives—remediation | 20 | % | 20 | % | 16.5 | % | 0 | % | |||||
| Individual performance | 30 | % | 20 | % | 16.5 | % | 25 | % | |||||
2006 Financial Measures
Shown as a percentage of the total payment opportunity in the following table, is the weighting of the individual measures as well as the financial measures used to determine award payments to the named executive officers for the fiscal year ended December 31, 2006.
| 2006 Measures | CEO | CFO | EVP Market Ops | Other NEOs | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Company/team performance | • | Gross Margin | 70 | % | 60 | % | 70 | % | 70 | % | |||
| • | Adjusted EBITDA per average subscriber | ||||||||||||
| • | Capital expenditures per ending subscriber | ||||||||||||
| • | New market % of build | ||||||||||||
| • | Discretionary | ||||||||||||
| Financial Controls/Sarbanes-Oxley Act compliance | 20 | % | 20 | % | 20 | % | 15 | % | |||||
| Individual performance | 10 | % | 20 | % | 10 | % | 15 | % | |||||
In addition to changes to our financial measures to make our plan more straight-forward and easier to understand, the non-financial measures were adjusted in 2006 to reflect the change of focus on our internal initiatives from remediation of certain material weaknesses in financial reporting in 2005 to financial controls and Sarbanes-Oxley compliance in 2006. Likewise, individual performance measures of each executive officer were also reviewed and updated as deemed appropriate by our chief executive officer and the compensation committee to reflect the focus of our 2006 initiatives.
Bonus Opportunity Plan Payout
We have developed goals for our performance measures that would result in varying levels of Bonus Opportunity Plan payments. If the maximum performance on these goals is met, our executive officers have the opportunity to receive a maximum payment equal to two times their target award. The target and maximum payment opportunities under the 2005 and 2006 annual Bonus Opportunity Plans were set based on competitive market pay levels of our peer group and are shown as a percentage of annual base salary at corresponding levels of performance against our goals as shown in the following table:
| 2005 Bonus Opportunity Plan payout level based on goal achievement | 2006 Bonus Opportunity Plan payout level based on goal achievement | |||||||
|---|---|---|---|---|---|---|---|---|
| Officer | ||||||||
| At 100% (Target) | Maximum performance | At 100% (Target) | Maximum performance | |||||
| CEO | 75% of base salary | 150% of base salary | 100% of base salary | 200% of base salary | ||||
CFO | 55% of base salary | 110% of base salary | 75% of base salary | 150% of base salary | ||||
EVP, Market Ops | 55% of base salary | 110% of base salary | 75% of base salary | 150% of base salary | ||||
SVP, General Counsel and Secretary | 45% of base salary | 90% of base salary | 65% of base salary | 130% of base salary | ||||
SVP, CTO | 45% of base salary | 90% of base salary | 65% of base salary | 130% of base salary | ||||
The actual annual incentive payments made to our named executive officers pursuant to our Bonus Opportunity Plan for the fiscal year ended December 31, 2005 are set forth below in the Summary Compensation Table. See "—Summary of Compensation." We believe that the annual incentive payments made to our named executive officers for the fiscal year ended December 31, 2005 achieved our executive compensation objectives, compare favorably to our peer group and are within our target of providing total compensation at the 75th percentile of the market with outstanding performance achievement.
Long-term Equity Incentive Compensation
We award long-term equity incentive grants to executive officers, including the named executive officers, as part of our total compensation package. These awards are consistent with our pay for performance principles and align the interests of the executive officers to the interests of our shareholders. The compensation committee reviews and recommends to the board of directors the amount of each award to be granted to each named executive officer and the board of directors approves each award. Long-term equity incentive awards are made pursuant to our 1995 Plan, and in 2005 and 2006, our 2004 Plan. The 1995 Plan terminated in November 2005 and no further awards can be made under the 1995 Plan, but all options granted before November 2005 remain valid in accordance with their terms.
Our long-term equity incentive compensation is currently exclusively in the form of options to acquire our common stock. The value of the stock options awarded is dependent upon the performance of our common stock price. While the 2004 Plan allows for other forms of equity compensation, the compensation committee and management believe that currently stock options are the appropriate vehicle to provide long-term incentive compensation to our executive officers. Other types of long-term equity incentive compensation may be considered in the future as our business strategy evolves.
Stock option awards provide our executive officers with the right to purchase shares of our common stock at a fixed exercise price for a period of up to ten years under the 2004 Plan and fifteen years under the 1995 Plan. Stock options are earned on the basis of continued service to us and generally vest over four years, beginning with one-fourth vesting one year after the date of grant, then pro-rata vesting monthly thereafter. See "—Employment Agreements, Severance Benefits and Change in Control Provisions" for a discussion of the change in control provisions related to stock options.
The exercise price of each stock option granted in 2005 and 2006 is based on the fair market value of our common stock on the grant date. The exercise price of stock options was determined by our board of directors based on a valuation performed by an independent outside valuation consultant. With the exception of the grant in December 2006, the valuation was performed quarterly. The award in December 2006 was based on a valuation performed in December 2006. Following our initial public offering, all options will continue to be independentgranted with an exercise price equal to the fair market value of our common stock on the date of grant, but fair market value will be defined as the closing market price of a share of our common stock on the date of grant. We do not have any program, plan or practice of setting the exercise price based on a date or price other than the fair market value of our common stock on the grant date.
Our named executive officers and other employees receive an initial grant of stock options which are generally granted at the last board of directors meeting in accordancethe quarter in which their employment commences. Our executive officers and other employees are eligible to receive annual awards of stock options beginning in the year in which they reach their second anniversary of their hire date. Individual determinations are made with Nasdaq rules.respect to the number of stock options granted to executive officers. In making these determinations, we consider our performance relative to the financial and strategic objectives set forth in the annual business plan, the previous year's individual performance of each executive officer, and the market pay levels for the executive officer. Annual grants are targeted at the
median level of market pay practices and market pay levels for the executive officer, but may be adjusted based on individual performance. This analysis is also used to determine any new hire or promotion-related grants that may be made during the year. Based on individual performance and contributions to our overall performance, the 2005 and 2006 stock option grants awarded to the named executive officers were at approximately the 75th percentile of market pay level for each named executive officer.
Like our other pay components, long-term equity incentive award grants are determined based on an analysis of competitive market levels of our peer group. Long-term equity incentive grant ranges have been established which result in total compensation levels ranging from median to above median of market pay levels of our peer group. The responsibilitiesnumber of options granted to a named executive officer is intended to reward prior year's individual performance.
Generally, we do not consider an executive officer's stock holdings or previous stock option grants in determining the number of stock options to be granted. We believe that our executive officers should be fairly compensated each year relative to market pay levels of our peer group and relative to our other executive officers. Moreover, we believe that our long-term incentive compensation program furthers our significant emphasis on pay for performance compensation. However, we undertook an analysis of executive officer stock holdings in determining the appropriate one-time stock option grant, as discussed below, made prior to our initial public offering. We do not have any requirement that executive officers hold a specific amount of our common stock or stock options.
Although the compensation committee include:is the plan administrator for the 2004 Plan, all awards of stock options under the 1995 Plan and the 2004 Plan are recommended by the compensation committee and approved by our board of directors. For 2005 and 2006, the board of directors made all annual option grants to eligible employees on a single date each year, with exceptions for new hires, promotions and special grants. Typically, the board of directors has granted annual awards at its regularly scheduled meeting in March. The timing of the grants is consistent each year and is not coordinated with the public release of nonpublic material information.
Finance Committee.While the vast majority of stock option awards to our executive officers have been made pursuant to our annual grant program or in connection with their hiring or promotion, the compensation committee retains discretion to make stock option awards to executive officers at other times, including in connection with the hiring of a new executive officer, the promotion of an executive officer, to reward executive officers, for retention purposes or for other circumstances recommended by management or the compensation committee. The membersexercise price of any such grant is the fair market value of our finance committee are Messrs. Arthur C. Patterson, James F. Wadestock on the grant date.
In December 2006, in recognition of efforts related to our pending initial public offering and Harry F. Hopper, III. Eachto align executive ownership with us, we made a special stock option grant to our named executive officers and certain other eligible employees. We granted stock options to purchase an aggregate of these members has been2,295,000 shares of our common stock to our named executive officers and certain other officers and employees. The purpose of the grant was also to provide retention of employees following our initial public offering as well as to motivate employees to return value to our shareholders through future appreciation of our common stock price. The exercise price for the option grants is $34.00, which is the fair market value of our common stock on the date of the grant as determined by our board of directors after receiving a valuation performed by an outside valuation consultant. The stock options granted to the named executive officers other than our CEO and our senior vice president and chief technical officer will generally vest on a four-year vesting schedule with 25% vesting on the first anniversary date of the award and pro-rata on a monthly basis thereafter. The stock options granted to our CEO will vest on a three-year vesting schedule with one-third vesting on the first anniversary date of the award and pro-rata on a monthly basis thereafter. The stock options granted to our senior vice
president and chief technology officer will vest over a two-year vesting schedule with one-half vesting on the first anniversary of the award and pro-rata on a monthly basis thereafter.
For accounting purposes, we apply the guidance in Statement of Financial Accounting Standard 123 (revised December 2004), or SFAS 123(R), to record compensation expense for our stock option grants. SFAS 123(R) is used to develop the assumptions necessary and the model appropriate to value the awards as well as the timing of the expense recognition over the requisite service period, generally the vesting period, of the award.
Executive officers recognize taxable income from stock option awards when a vested option is exercised. We generally receive a corresponding tax deduction for compensation expense in the year of exercise. The amount included in the executive officer's wages and the amount we may deduct is equal to the common stock price when the stock options are exercised less the exercise price multiplied by the number of stock options exercised. We do not pay or reimburse any executive officer for any taxes due upon exercise of a stock option.
In 2005, we determined that we had previously granted certain options to purchase our common stock under our 1995 Plan at exercise prices which we believed were below the fair market value of our common stock at the time of grant. In December 2005, we offered to amend the affected stock option grants of all affected employees by increasing the exercise price of such affected stock option grants to the fair value of our common stock as of the date of grant and awarding additional stock options which vested 50% on January 1, 2006 and 50% on January 1, 2007 at the fair market value of our common stock as of the award date provided that the employee remained employed on those dates. See "—Discussion of Summary Compensation and Plan-Based Awards Tables—Option Repricing."
Stock option grants are currently made only from the 2004 Plan. Under the 2004 Plan, an option repricing is only allowable with shareholder approval. We no longer grant options under the 1995 Plan, but options granted under the 1995 Plan remain in effect in accordance with their terms.
Overview of 2005 Compensation
We believe that the total compensation paid to our named executive officers for the fiscal year ended December 31, 2005 achieves the overall objectives of our executive compensation program. In accordance with our overall objectives, executive compensation for 2005 was competitive with our peer group and was weighted more heavily to pay for performance. Based on an analysis of the proxy statements filed in 2005 by our peer group, base salaries paid to our named executive officers for 2005 were generally at the 50th percentile of the market and total cash compensation paid to our named executive officers was generally at the 25thpercentile of the market. Where our philosophy is to target the 75th percentile for total cash compensation, we have been moving, and continue to move, towards this targeted level of pay for our executive officers who have achieved outstanding performance.
For 2005, our chief executive officer received total compensation of approximately $2.7 million, which includes a base salary of $435,833, stock option awards with a grant date value of approximately $1.8 million and non-equity incentive plan compensation of $527,840. On average, the chief executive officers of our peer group received cash compensation of $953,000 based on an analysis of the proxy statements filed in 2005. Based on an analysis of our peer group, the base salary paid to our chief executive officer for 2005 was at the 50th percentile and his cash compensation was between the 25th percentile and the median of the market. Based on an analysis of peer group and survey data, the median value for an equity grant was approximately $1 million and our chief executive officer's 2005 stock option grant was between the median and the 75th percentile of the market. We believe that the total compensation paid to our chief executive officer satisfies the objectives of our executive compensation program. The total compensation and elements thereof paid to each of our named executive officers during 2005 is set forth below in the Summary Compensation Table. See "—Summary of Compensation."
Other Benefits
Retirement Savings Opportunity
All employees may participate in our 401(k) Retirement Savings Plan, or 401(k) Plan. Each employee may make before-tax contributions of up to 60% of their base salary up to the current Internal Revenue Service limits. We provide this plan to help our employees save some amount of their cash compensation for retirement in a tax efficient manner. We do not match any contributions made by our employees to the 401(k) Plan, nor did we make any discretionary contributions to the 401(k) Plan in the fiscal years ended December 31, 2005 and 2006. We also do not provide an option for our employees to invest in our stock in the 401(k) plan.
Health and Welfare Benefits
All full-time employees, including our named executive officers, may participate in our health and welfare benefit programs, including medical, dental and vision care coverage, disability insurance and life insurance.
Employment Agreements, Severance Benefits and Change in Control Provisions
Except with respect to our chief financial officer, Mr. J. Braxton Carter, we do not have any employment agreements in effect with any of our named executive officers. We entered into this agreement with Mr. Carter to ensure he would perform the role for an extended period of time. In addition, we also considered the critical nature of the position and our need to retain him when we committed to this agreement.
In March 2005, we entered into a two-year employment contract with Mr. Carter. If he is terminated for cause or terminates without good reason (as defined in the agreement), we are obligated to pay only those wages, bonuses pursuant to the terms of our annual incentive plan and other compensation then vested. If terminated without cause or if he terminates the employment agreement for good reason (as defined in the agreement), or if we fail to renew his employment contract upon expiration of its term, in addition to the payment of amounts then vested, in exchange for a general release of all claims, he is entitled to:
We grant options, or have granted options, that remain outstanding under two plans, the 1995 Plan and the 2004 Plan. The 1995 Plan terminated in November 2005 and no further awards can be independentmade under the 1995 Plan, but all options granted before November 2005 remain valid in accordance with their terms. The 1995 Plan and the 2004 Plan contain certain change in control provisions. We have these change in control provisions in our 1995 Plan and 2004 Plan to ensure that our executives remain with us through the closing of the sale of the business.
The 1995 Plan
Under our 1995 Plan, in the event of a "corporate transaction," as defined by NASD and SEC rules. The responsibilitiesin the 1995 Plan, the following occurs with respect to options granted under the 1995 Plan:
Compensation of Directors
Non-employee directors receive an annual retainer of $15,000such option immediately before the corporation transaction;
Corporate transactions for purposes of the 1995 Plan include either of the following shareholder-approved actions involving us:
The 2004 Plan
Under our 2004 Plan, unless otherwise provided in an "award," a "change of control," as defined in the 2004 Plan, results in the following:
Our non-employee directors receive an initial option grant of 40,000 shares and all non-employee directors will receive an annual option grant of 10,000 shares if they remain in office on the date of each annual stockholders meeting. Such grants will vest ratably over three years. The chairmenthe change in control; and
A change of control for purpose of the 2004 Plan is deemed to have occurred if:
Compensation Committee Interlocks and Insider Participation
Our compensation committee is currently comprised of Messrs. Arthur C. Patterson, James F. Wade, Joseph T. McCullen, Jr. and Harry F. Hopper, III. None of these individuals has been atthe 2004 Plan (or any time an officer or employee of our company. No member of our compensation committee serves as a member ofindividual who was appointed to the board of directors or compensation committeeby a majority of the individuals who constitute our board of directors as of the effective date of the 2004 Plan) cease for any entity that has one or more executive officers serving asreason to constitute at least a membermajority of our board of directors.
Additionally, under the 2004 Plan, if approved by our board of directors prior to or compensation committee.within 30 days after such a change in control, the board of directors has the right for a 45-day period immediately following the change in control to require all, but not less than all, "participants" to transfer and deliver to us all "awards" previously granted to the participants in exchange for an amount equal to the "cash value" of the "awards."
While we have no written severance plan for our executives, in practice, we have offered severance payments to terminated executives based on the position held and the time in the role. Generally, it has been our practice to provide twelve months of severance for executives, potentially adjusted for length of service, where the executive's service has been severed by us. For a more detailed discussion of the 2004 Plan, see "—Discussion of Summary Compensation and Plan-Based Awards Tables—2004 Equity Incentive Compensation Plan."
Indemnification of Directors and OfficersStock Ownership Guidelines
Under Section 145 ofStock ownership guidelines have not been implemented by the Delaware General Corporation Law, we have broad powerscompensation committee for our executive officers. Prior to indemnify our directorsinitial public offering, the market for our stock was limited to other shareholders and officers against liabilities they may incur in such capacities, including liability under the Securities Act. Our certificate of incorporation providessubject to a stockholders agreement that under specific conditions, we shall indemnify any person who was or islimited a party or is threatenedstockholder's ability to be made a party to any threatened, pending or completed action, suit or proceeding by reason of the fact that he or she is or was our director, officer, employee or agent.transfer their stock. We have also entered into separate indemnification agreements with each ofchosen not to require stock ownership given the limited market for our directorssecurities. We will continue to periodically review best practices and executive officers under which we have agreed to indemnify, and to advance expenses to, each director and executive officer to the fullest extent permitted by applicable lawre-evaluate our position with respect to liabilities theystock ownership guidelines.
Securities Trading Policy
Our securities trading policy states that executive officers, including the named executive officers, and directors may incurnot purchase or sell puts or calls to sell or buy our stock, engage in their capacities as directors and officers.short sales with respect to our stock, or buy our securities on margin.
We maintain director and officer liability insurance to insure each person who was, is, or will be our director or officer against specified losses and wrongful actsTax Deductibility of such director or officer in his or her capacity as such, including breaches of duty and trust, neglect, error and misstatement. In accordance with the director and officer insurance policy, each insured party will be entitled to receive advances of specified defense costs.
At present, there is no pending litigation or proceeding involving any of our directors, officers, employees or agents where indemnification would be required or permitted. We are not aware of any threatened litigation or proceeding that might result in a claim for such indemnification.
Executive Compensation
Limitations on deductibility of compensation may occur under Section 162(m) of the Internal Revenue Code which generally limits the tax deductibility of compensation paid by a public company to its chief executive officer and certain other highly compensated executive officers to $1 million in the year the compensation becomes taxable to the executive officer. There is an exception to the limit on deductibility for performance-based compensation that meets certain requirements.
Although deductibility of compensation is preferred, tax deductibility is not a primary objective of our compensation programs. We believe that achieving our compensation objectives set forth above is more important than the benefit of tax deductibility and we reserve the right to maintain flexibility in how we compensate our executive officers that may result in limiting the deductibility of amounts of compensation from time to time.
Summary of Compensation
The following table sets forth certain information with respect to compensation for the cash and non-cash compensationyear ended December 31, 2005 earned by awarded to andor paid to our “namedchief executive officers,” who areofficer, chief financial officer, including the former chief financial officer, and our Chief Executive Officer and fourthree other most highly compensated executive officers, whose salary and bonus forwhich are referred to as the fiscal years ended December 31, 2003 were in excess of $100,000 for services rendered in all capacities to us for each such fiscal year:named executive officers.
Summary Compensation Table
| Name & Principal Position | Year | Salary $ | Option Awards $(5) | Non-Equity Incentive Plan Compensation $(6) | Total $ | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Roger D. Linquist— President and CEO | 2005 | $ | 435,833 | — | $ | 527,840 | $ | 963,673 | |||||
| J. Braxton Carter— Senior VP/CFO(1) | 2005 | $ | 264,750 | — | $ | 238,280 | $ | 503,030 | |||||
| Robert A. Young— Executive VP Market Operations | 2005 | $ | 310,750 | — | $ | 265,340 | $ | 576,090 | |||||
| Mark A. Stachiw— VP/General Counsel and Secretary(2) | 2005 | $ | 204,583 | — | $ | 136,740 | $ | 341,323 | |||||
| Malcolm M. Lorang— VP/Chief Technology Officer(3) | 2005 | $ | 202,250 | — | $ | 130,790 | $ | 333,040 | |||||
| J. Lyle Patrick— CFO(4) | 2005 | $ | 54,858 | — | $ | 0 | $ | 54,858 | |||||
Grants of Plan-Based Awards
The following table sets forth certain information with respect to grants of plan-based awards for the year ended December 31, 2005 to the named executive officers.
Grants of Plan-Based Awards
| All Other Stock Awards: Number of Shares or Stock/ Units (#) | All Other Option Awards: Number of Securities Underlying Options (#) | |||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Estimated Future Payouts Under Non-Equity Incentive Plan Awards(8) | Estimated Future Payouts Under Equity Incentive Plan Awards(9) | Exercise or Base Price of Option Awards ($/share) | ||||||||||||||||||||||||
| Name & Principal Position | Grant Date Fair Value ($)(7) | |||||||||||||||||||||||||
| Grant Date | Threshold ($) | Target ($) | Maximum ($) | Threshold (#) | Target (#) | Maximum (#) | ||||||||||||||||||||
| Roger D. Linquist—President and CEO | 8/3/2005 12/28/2005 12/30/2005 | (5) (6) | $ $ $ | 1,791,639 (1,801 8,416 | ) | $ | 0 — — — | $ | 330,000 — — — | $ | 660,000 — — — | — — — — | — — — — | — — — — | — — — — | — 173,600 8,385 806 | — 21.4000 16.4600 21.4600 | |||||||||
| J. Braxton Carter— Senior VP/CFO(1) | 3/31/2005 8/3/2005 12/28/2005 12/30/2005 | (5) (6) | $ $ $ $ | 182,682 595,493 (1,091 2,328 | ) | $ | 0 — — — — | $ | 151,250 — — — — | $ | 302,500 — — — — | — — — — — | — — — — — | — — — — — | — — — — — | — 20,000 57,700 2,323 223 | — 18.9400 21.4000 16.4600 21.4600 | |||||||||
| Robert A. Young— Executive VP Market Operations | 8/3/2005 12/28/2005 12/30/2005 | (5) (6) | $ $ $ | 993,864 (1,238 2,652 | ) | $ | 0 — — — | $ | 171,600 — — — | $ | 343,200 — — — | — — — — | — — — — | — — — — | — — — — | — 96,300 2,637 254 | — 21.4000 16.4600 21.4600 | |||||||||
| Mark A. Stachiw— VP/General Counsel and Secretary(2) | 9/21/2005 12/28/2005 12/30/2005 | (5) (6) | $ $ $ | 412,548 (59,155 115,605 | ) | $ | 0 — — — | $ | 92,250 — — — | $ | 184,500 — — — | — — — — | — — — — | — — — — | — — — — | — 40,000 40,000 11,072 | — 21.4600 16.4100 21.4600 | |||||||||
| Malcolm M. Lorang— VP/Chief Technology Officer(3) | 8/3/2005 12/28/2005 12/28/2005 12/28/2005 12/30/2005 | (5) (5) (5) (6) | $ $ $ $ $ | 236,339 (2,679 (6,697 (3,609 59,797 | ) ) ) | $ | 0 — — — — — | $ | 91,350 — — — — — | $ | 182,700 — — — — — | — — — — — — | — — — — — — | — — — — — — | — — — — — — | — 22,900 15,469 7,687 8,035 5,727 | — 21.4000 9.3800 16.4600 5.7600 21.4600 | |||||||||
| J. Lyle Patrick— CFO(4) | — | — | ||||||||||||||||||||||||
| — |
| |||||||||||||||||||||||||
| ||||||||||||||||||||||||||
|
|
|
|
|
|
| ||||||||||||||||||||
|
| | — | |||||||||||||||||||||||
|
| |||||||||||||||||||||||||
|
| — | ||||||||||||||||||||||||
|
| |||||||||||||||||||||||||
Grants in Last Fiscal Year
Repricing."
| Number of Securities Underlying Options Granted (1) (2) | Individual Grants | Expiration Date | Potential Realizable Value at Assumed Annual Rate of Stock Price | ||||||||||||||||
Name | % of Total Options Granted to Employees in Fiscal Year | Exercise Price Per Share | 0% | 5% | 10% | ||||||||||||||
Roger D. Linquist | 57,000 | 5.62 | % | $ | 4.70 | 9/16/2013 | $ | 929,100 | $ | 1,681,887 | $ | 2,836,810 | |||||||
Robert A. Young | 37,500 | 3.70 | 4.70 | 6/24/2013 | 611,250 | 1,106,505 | 1,866,322 | ||||||||||||
Dennis G. Spickler | 28,500 | 2.81 | 4.70 | 9/16/2013 | 464,550 | 840,943 | 1,418,405 | ||||||||||||
Frank J. Bell | 23,250 | 2.29 | 4.70 | 9/16/2013 | 378,975 | 686,033 | 1,157,120 | ||||||||||||
Herbert “Chip” Graves, IV | — | — | — | — | — | — | — | ||||||||||||
Aggregated Option Exercises in 2003Discussion of Summary Compensation and Fiscal Year-End Option ValuesPlan-Based Awards tables
The followingOur executive compensation policies and practices, pursuant to which the compensation set forth in the Summary Compensation Table and the grants of Plan Based Awards table setswas paid or awarded, are described above under "Compensation Discussion and Analysis." A summary of certain material terms of our compensation plans and arrangements is set forth information concerning options exercised during the last fiscal yearbelow.
Employment and held asIndemnification Arrangements
Except with respect to J. Braxton Carter, we do not have any employment contracts in effect with any of December 31, 2003 by each of theits named executive officers. To date, all shares acquired pursuant to the exercise of options have been fully vested on the date of exercise.
| Shares Acquired on Exercise | Value Realized (1) | Number of Shares Underlying at December 31, 2003 | Value of Unexercised In-the-Money Options at | ||||||||||||
| Exercisable (2) | Unexercisable (3) | Exercisable | Unexercisable | ||||||||||||
Roger D. Linquist | — | $ | — | 4,198,450 | — | $ | 46,383,493 | $ | — | ||||||
Robert A. Young | — | — | 162,500 | — | 1,088,750 | — | |||||||||
Dennis G. Spickler | 65,500 | 729,179 | 499,400 | — | 5,264,623 | — | |||||||||
Frank J. Bell | — | — | 83,250 | — | 557,775 | — | |||||||||
Herbert “Chip” Graves, IV | — | — | 55,000 | — | 368,500 | — | |||||||||
Equity Compensation Plans
1995 Stock Option Plan
Our second amended and restated 1995 stock option plan, which we refer toMr. Carter serves as our 1995 stock option plan, provides forSenior Vice President and Chief Financial Officer.
In March 2005, we entered into a two-year employment contract with J. Braxton Carter, our Senior Vice President and Chief Financial Officer. Under the agreement, Mr. Carter receives, in addition to benefits generally available to all other employees, an initial annual base salary of $275,000, which amount has been subsequently increased by the board of directors, an annual bonus of fifty-five percent based on our performance, which amount has been increased to seventy-five percent by the board of directors, and an initial grant of options to acquire 20,000 shares of our common stock. Incentive and nonqualified options may be granted to our employees, directors, consultants and other independent advisors. The maximum number of shares of common stock that may be issued under our 1995 stock option plan is currently 12,321,500 shares, subject to adjustments upon specified corporate events. In the discretionFor a discussion of the compensation committee,and benefits payable to Mr. Carter under the exercise price for options granted prioragreement upon termination, see "—Employment Agreements, Severance Benefits and Change in Control Provisions."
We have also entered into agreements with each director, each officer, and certain other employees which require us to indemnify and advance expenses to the consummationdirectors, officers, and covered employees to the fullest extent permitted by applicable law if the person is or threatened to be made a party to any threatened, pending or completed action, suit, proceeding, investigation, administrative hearing whether formal or informal, governmental or non-governmental, civil, criminal, administrative, or investigative if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of this offering may be less than, equalMetroPCS Communications or in a manner otherwise expressly permitted under our certificate of incorporation, the by-laws, or our stockholders agreement.
Option Repricing
In 2004, Congress passed the American Job Creation Act of 2004 which changed certain rules with respect to or greater thandeferred compensation, including options to purchase our common stock which were granted below the fair market value of the underlying common stock onas of the option grant date. However,We had previously granted certain options to purchase our common stock under the 1995 Plan at exercise price for options granted after the consummation of this offering may not be less thanprices which we believe were below the fair market value of the underlyingour common stock onat the time of grant. In December 2005, we offered to amend the stock option grant date. Options shall havegrants of all affected employees by increasing the exercise price of such exercise and other terms as may be established byaffected stock option grants to the compensation committee, but may not be granted for terms greater than 15 years. Options
may be granted for sharesfair value of our common stock as of the date of grant and granting additional stock options which will vest over timevested 50% on January 1, 2006 and 50% on January 1, 2007 at the fair market value of our common stock as of the grant date provided that the employee remained employed by us on those dates. The total number of affected stock options was 872,380 and we granted 135,758 additional stock options.
Bonus and Salary
Our board of directors has established a pay for performance approach for determining executive pay. Base salaries are targeted at the median of competitive practice while total annual cash compensation is targeted at the 75th percentile of competitive practice. We have established a peer group of publicly traded companies in accordance with schedules establishedsimilar lines of business in similar geographies, as well as similar in size in terms of revenue and market capitalization. We have also utilized several well-established third-party surveys that are industry specific and focused on executive pay in the telecommunications and wireless industries. See "—The Objectives of our Executive Compensation Program."
2004 Equity Incentive Compensation Plan
Our board of directors has adopted, and our stockholders have approved, our 2004 Equity Incentive Compensation Plan, as amended, or the 2004 Plan.
Administration. Our 2004 Plan is administered by the compensation committee of our board of directors. Option holders have the right to exercise these options immediately, even if the vesting criteria have not been met. If an option for unvested shares of common stock is exercised, the option holder is restricted from selling the unvested restricted shares prior to their vesting and if the option holder’s service with us is terminated, we may repurchase any and all of their unvested shares at a price equal to the aggregate exercise price paid for such shares. Our 1995 stock optionAs plan also provides thatadministrator, the compensation committee may, withhas full authority to (i) interpret the consent of the affected option holders, reprice outstanding options or cancel2004 Plan and regrant options onall awards thereunder, (ii) make, amend and rescind such termsrules as it deems appropriate. Stockholder approval is also required for any repricing.
2004 Equity Incentive Compensation Plan
Our 2004 equity incentive compensation plan providesnecessary for the administration of the 2004 Plan, (iii) make all determinations necessary or advisable for the administration of the 2004 Plan, and (iv) make any corrections to the 2004 Plan or an award deemed necessary by the compensation committee to effectuate the 2004 Plan. All awards under the 2004 Plan are granted by the compensation committee in its discretion.
Eligibility. All of our and our affiliates' employees, consultants and non-employee directors are eligible to be granted awards by the compensation committee under the 2004 Plan. An employee, consultant or non-employee director granted an award is a participant under our 2004 Plan. The compensation committee also has the authority to grant awards to a third party designated by a non-employee director provided that (i) the board of incentivedirectors consents to such grant, (ii) such grant is made with respect to awards that otherwise would be granted to such non-employee director, and nonqualified(iii) such grant and subsequent issuance of stock options, purchased stock, bonus stock, phantom stock, stock appreciation rights, restricted stock, performance awards and other stock or performance-based awards. Grants may be made to our employees, directors and consultants.upon reliance of an exemption from the Securities Act.
Number of Shares Available for Issuance. The maximum number of shares of our common stock that may be issuedare authorized for issuance under our 2004 equity incentive compensation planPlan currently is currently 4,700,0006,200,000, which amount we intend to increase prior to our initial public offering. Shares issued under the 2004 Plan may be treasury shares, authorized but unissued shares or, if applicable, shares acquired in the open market.
In the event the number of shares to be delivered upon the exercise or payment of any award granted under the 2004 Plan is reduced for any reason or in the event that any award (or portion thereof) can no longer be exercised or paid, the number of shares no longer subject to adjustments upon specified corporate events.such award shall be released from such award and shall thereafter be available under the 2004 Plan for the grant of additional awards.
Upon the occurrence of a merger, consolidation, recapitalization, reclassification, stock split, stock dividend, combination of shares or the like, the administrator of the 2004 Plan may ratably adjust the aggregate number and affected class of securities available under the 2004 Plan.
Types of Awards. The compensation committee may grant the following types of awards under our 2004 Plan: stock options; purchased stock; bonus stock; stock appreciation rights; phantom stock; restricted stock; performance awards; or other stock or performance-based awards. Stock Optionsoptions awarded under our 2004 Plan may be nonqualified stock options or incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended, or the Code. With the exception of incentive stock options, the compensation committee may grant, from time to time, any of the types of awards under our 2004 Plan to our employees, consultants and non-employee directors. Incentive stock options may only be granted to our employees. Awards granted may be granted either alone or in addition to, in tandem with, or in substitution or exchange for, any other award or any award granted under another of our plans, or any business entity to be acquired by us, or any other right of a participant to receive payment from us.
Stock Options.. A stock option is the right to acquire shares of our common stock at a fixed price for a fixed period of time and generally are subject to a vesting requirement. A stock option will be in the form of a nonqualified stock option or an incentive stock options. The exercise price for options granted under our 2004 equity incentive compensation plan may not be less than the fair market value of the underlying common stock on the option grant date. Options shall have such exercise and other terms as may be establishedis set by the compensation committee but may notcannot be granted for terms greater than ten years. Options may be granted for shares of common stock which will vest over time in accordance with schedules established by the compensation committee of our board of directors. Option holders have the right to exercise these options immediately, even if the vesting criteria have not been met. If an option for unvested shares of common stock is exercised, the option holder is restricted from selling the unvested restricted shares prior to their vesting and if the option holder’s service with us is terminated, we may repurchase any and all of their unvested shares at a price equal to the aggregate exercise price paid for such shares. The plan also provides that the compensation committee may, with the consent of the affected option holders, reprice outstanding options or cancel and regrant options on such terms as it deems appropriate. Stockholder approval is also required for any repricing.
Purchased Stock. The plan provides that we may sell shares of our common stock to our employees, directors and consultants on such terms as the compensation committee may establish. The price per share of common stock to be purchased may be equal to or less than the fair market value of the common stock on the date of purchase.
Bonus Stock. We may grant shares of bonus stock under the plan to our employees, directors and consultants for the performance of services by such individuals without additional consideration except as may be required by the compensation committee.
Stock Appreciation Rights. The plan also provides that we may grant rights to receive, in either cash or shares of common stock, the excess100% of the fair market value of our common stock on the date of grant, or, in the case of incentive stock options granted to an employee who owns 10%
or more of total combined voting power of our common stock, or a 10% owner, the exercise overprice cannot be less than 110% of the grant price as determined byfair market value of our common stock on the date grant. The term of a stock option may not exceed ten years or five years in the case of incentive stock options granted to a 10% owner. With stockholder approval, the compensation committee whichmay grant to the holder of outstanding nonqualified stock option a replacement options with lower (or higher with consent) exercise price shall notthan the exercise price of the replaced options.
Purchased Stock. Purchase stock awards entitle the participant to purchase our common stock at a price per share that may be less than, but not greater than, the fair market value per share at the time of purchase.
Bonus Stock. Bonus stock grants are made in consideration of performance or services by the participant with no additional consideration except as may be required by the compensation committee or the 2004 Plan.
Stock Appreciation Rights and Phantom Stock. Stock appreciation rights are awards that entitle the participant to receive a payment equal to the excess, if any, of the common stockfair market value on the exercise date of grant. We refer to these rights as stock appreciation rights. The compensation committee shall determine at the date of grant the time or times at which and the circumstances under which a stock appreciation right may be exercised. The term of any stock appreciation right may not exceed ten years.
Phantom Stock. Under the plan, we may grant rights to receive a specified number of shares of our common stock over a specified grant price. Phantom stock awards are rights to receive cash equal to the fair market value of a specified number of shares of our common stock or a combination thereof at the end of a specified deferral period. We refer to theseStock appreciation rights as phantom stock awards. Such awards may be subject togranted in tandem with options. All stock appreciation rights granted under our 2004 Plan must have a grant price per share that is not less than the achievementfair market value of performance goals and specified restrictions, including a risk of forfeiture, which restrictions may lapse at the expiration of the deferral period or at earlier specified times. The term of any phantom stock award may not exceed ten years.
Restricted Stock Awards. We may also grant awards in the form of restricted sharesshare of our common stock. Thesestock on date of the grant.
Restricted Stock. Restricted stock awards are subject to such restrictions as the compensation committee may impose including forfeiture, transfer and repurchase restrictions. In no event may the term of any restricted stock award exceed ten years.
Performance Awards. We may grant shares of our common stock cash or a combination thereofthat are subject to plan participants uponcancellation, restrictions and vesting conditions, as determined by the attainment of certaincompensation committee.
Performance Awards. Performance awards are awards granted based on performance goalscriteria measured over a period of not less than six months norand not more than ten years. AfterPerformance awards may be payable in shares of our common stock, cash or any combination thereof as determined by our compensation committee.
Other Awards. The compensation committee also may grant other forms of awards that generally are based on the endvalue of each performance period,our common stock, or cash, as determined by the compensation committee will determineto be consistent with the amount, if any,purposes of our 2004 Plan.
Section 162(m) Performance-Based Awards. The performance goals for performance awards under our 2004 Plan consist of one or more business criteria and a targeted level or levels of performance awards payablewith respect to each plan participant based uponof such criteria, as specified by the compensation committee. In the case of any award granted to our chief executive officer or one of our four most highly paid officers other than the chief executive officer, performance goals are designed to be objective and shall otherwise meet the requirements of Section 162(m) of the Code and regulations thereunder (including Treasury Regulations section 1.162-27 and successor regulations thereto), including the requirement that the level or levels of performance targeted by the compensation committee are such that the achievement of certain established business criteria.performance goals is "substantially uncertain" at the time of grant. The compensation committee may determine that such performance awards shall be granted and/or settled upon achievement of any one performance goal or that two or more of the performance goals must be achieved as a condition to the grant and/or settlement of such performance awards. Performance goals may differ among performance awards granted to any one participant or for performance awards granted to different participants.
One or more of the following business criteria for us, on a consolidated basis, and/or for our specified subsidiaries, divisions or business or geographical units (except with respect to the total stockholder return and earnings per share criteria), may be used by the compensation committee in
establishing performance goals for performance awards granted to a participant: (A) earnings per share; (B) increase in price per share; (C) increase in revenues; (D) increase in cash flow; (E) return on net assets; (F) return on assets; (G) return on investment; (H) return on equity; (I) economic value added; (J) gross margin; (K) net income; (L) pretax earnings; (M) pretax earnings before interest, depreciation and amortization; (N) pretax operating earnings after interest expense and before incentives, service fees, and extraordinary or special items; (O) operating income; (P) total stockholder return; (Q) debt reduction; (R) other company or industry specific measurements used in our management and internal or external reporting, including but not limited to, average revenue per user, cost per gross add, cash cost per user, adjusted earnings before interest, taxes, depreciation and amortization, capital expenditure per customer, etc., and (S) any of the above goals determined on the absolute or relative basis or as compared to the performance of a published or special index deemed applicable by the compensation committee including, but not limited to, the Standard & Poor's 500 Stock Index or components thereof, or a group of comparable companies. For a discussion of our equity incentive compensation for 2005 and 2006, see "—Long-term Equity Incentive Compensation."
Other Stock Exercise of Options. The exercise price is due upon the exercise of the option. The exercise price may be paid (1) in cash or Performance-Based Awards. The plan also permits other stock or performance-based awards that are denominated or payableby check, (2) with the consent of the compensation committee, in valued in whole or in part by reference to, or otherwise based on or related toshares of our common stock held previously acquired by the optionee (that meet a holding period requirement) based on the shares fair market value as of the exercise date, or (3) with the consent and pursuant to the instructions of the compensation committee, by cashless exercise through a broker. Nonqualified stock options may be exercised at any time before the expiration of the option period at the discretion of the compensation committee. Incentive stock options must not be exercised more than three months after termination of employment for any reason other than death or disability and no more than one year after the termination of employment due to death or disability in order to meet the Code section 422 requirements.
Change of Control. For a discussion of the change of control provisions under our 2004 Plan, please see "—Employment Agreements, Severance Benefits and Change in Control Provisions."
Amendment and Discontinuance; Term. Our board of directors may amend, suspend or terminate our 2004 Plan at any time, with or without prior notice to or consent of any person, except as would require the approval of our stockholders, be required by law or the requirements of the exchange on which our common stock is listed or would adversely affect a participant's rights to outstanding awards without their consent. Unless terminated earlier, our 2004 Plan will expire on the tenth anniversary of its effective date.
Material Terms of Plan-Based Awards
Bonus Opportunity Plan
We have established a written Bonus Opportunity Plan. Full time employees who do not participate in a sales variable compensation plan and who are hired on or before October 31st of the applicable year are qualified to participate in the plan. Employees who are hired before October 31st will have their bonus amount prorated for time in the plan, calculated in whole month increments. Employees who enter the plan prior to the 15th of a month are credited with a whole month of service; those who enter after the 15th begin accruing service under the plan at the beginning of the next month.
This plan provides for the award of annual cash bonuses based upon targets and maximum bonus payouts set by the board of directors at the beginning of each fiscal year. The performance period for the annual Bonus Opportunity Plan is the calendar year, and payouts under the plan are made in February following the plan year.
Target bonus levels under the Bonus Opportunity Plan as a percentage of base salary are set based on each employee's level. All officers (vice president and above) will have a target bonus opportunity set for their position ranging from 35% of base salary at the vice president level to 100% of base salary for the chief executive officer in 2006. The target bonus level reflects 100% achievement of established performance goals. The maximum payout opportunity under the Plan is 200% of target.
Supplemental Stock Option Grant Program
We have has established an unwritten supplemental stock option grant program to:
Full time employees, other than retail store non-exempt personnel, are eligible for consideration under the program. Under the supplemental grant program, employees with two or more years of vested service during a year are eligible for consideration, based on their prior year performance rating under the organization's performance appraisal program and management recommendation.
Each year we work with an outside consultant to evaluate the competitiveness of the stock grant structure to ensure that the program remains competitive in the market. Recommendations are reviewed by board designated external experts, the compensation committee of the board of directors, and presented to the board of directors for approval. Grants are reviewed and approved by the board of directors during the first quarter of each year. This program is discretionary and may be discontinued at any time.
Outstanding Equity Awards
The following table sets forth certain information with respect to outstanding equity awards at December 31, 2005 with respect to the named executive officers.
Outstanding Equity Awards at Fiscal Year-End
| Stock Awards | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Option Awards | Equity Incentive Awards: Number of Unearned Shares, Units or Other Rights that Have Not Vested (#) | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights that Have Not Vested ($) | ||||||||||||||||
| Name | Number of Securities Underlying Unexercised Options (#) Exercisable(1) | Number of Securities Underlying Unexercised Options (#) Unexercisable(1) | Equity Incentive Plan Awards; Number of Securities Underlying Unexercised Unearned Options (#) | Option Exercise Price ($)(13) | Option Expiration Date | Number of Shares or Units of Stock that Have Not Vested (#) | Market Value of Shares or Units of Stock that Have Not Vested ($) | |||||||||||
| Roger D. Linquist President and CEO | 8,385 173,600 | (2) (3) | — — 806 | (4) | — — — | $ $ $ | 16.46 21.40 21.46 | 3/11/2014 8/3/2015 12/30/2015 | — — — | — — — | — — — | — — — | ||||||
| J. Braxton Carter Senior VP/CFO | 2,323 20,000 55,019 — — | (2) (5) (3) | — — — 2,681 223 | (3) (4) | — — — — — | $ $ $ $ $ | 16.46 18.94 21.40 21.40 21.46 | 3/11/2014 3/31/2015 8/3/2015 8/3/2015 12/30/2015 | — — — | — — — | — — — | — — — | ||||||
| Robert A. Young Executive VP Market Operations | 2,637 — — | (2) | — 96,300 254 | (3) (4) | — — — | $ $ $ | 16.46 21.40 21.46 | 3/11/2014 8/3/2015 12/30/2015 | — — — | — — — | — — — | — — — | ||||||
| Mark A. Stachiw VP/General Counsel and Secretary | 40,000 — — | (6) | — 40,000 11,072 | (7) (4) | — — — | $ $ $ | 16.41 21.46 21.46 | 10/12/2014 9/21/2015 12/30/2015 | — — — | — — — | — — — | — — — | ||||||
| Malcolm M. Lorang VP/Chief Technology Officer | 95,148 12,265 8,035 7,031 15,469 7,687 22,900 | (8) (9) (10) (11) (12) (2) (3) | — — — — — — — 5,727 | (4) | — — — — — — — — | $ $ $ $ $ $ $ $ | 0.23 4.70 5.76 4.70 9.38 16.46 21.40 21.46 | 7/1/2009 7/1/2012 7/1/2012 10/30/2013 10/30/2013 3/11/2014 8/3/2015 12/30/2015 | — — — — — — — — | — — — — — — — — | — — — — — — — — | — — — — — — — — | ||||||
| J. Lyle Patrick(14) VP/CFO | — | — | — | — | — | — | — | — | — | |||||||||
Option Exercises
The following table sets forth certain information with respect to option and stock exercises during the fiscal year ended December 31, 2005 with respect to the named executive officers.
Option Exercises and Stock Vested
| | Option Awards | Stock Awards | |||||||
|---|---|---|---|---|---|---|---|---|---|
| Name & Principal Position | Number of Shares Acquired on Exercise (#) | Value Realized on Exercise ($) | Number of Shares Acquired on Vesting (#) | Value Realized on Vesting ($) | |||||
| Roger D. Linquist— President and CEO | 4,214,062 | $ | 88,736,209 | (5)(6) | — | — | |||
| J. Braxton Carter— Senior VP/CFO(1) | 98,717 | $ | 1,488,57 | (5)(7) | — | — | |||
| Robert A. Young— Executive VP Market Operations | 183,316 | $ | 2,859,033 | (5)(8) | — | — | |||
| Mark A. Stachiw— VP/General Counsel and Secretary(2) | — | — | — | — | |||||
| Malcolm M. Lorang— VP/Chief Technology Officer(3) | 584,802 | $ | 12,346,046 | (9)(10) | — | — | |||
| J. Lyle Patrick— CFO(4) | — | — | — | — | |||||
Pension Benefits
We do not have any plan that provides for payments or other benefits at, following, or in connection with, retirement.
Non-Qualified Deferred Compensation
We do not have any plan that provides for the deferral of compensation on a basis that is not tax-qualified.
Compensation of Directors
Non-employee members of our board of directors are eligible to participate in a non-employee director remuneration plan under which such directors may receive compensation for serving on our board of directors. Our objectives for director compensation are to remain competitive with the compensation paid to directors of comparable companies while adhering to corporate governance best practices with respect to such compensation, and to reinforce our practice of encouraging stock ownership. Our non-employee director compensation includes:
of the committee receives an additional $500 for each in-person Committee Paid Event and $250 for each telephonic Committee Paid Event attended.
The following table sets forth certain information with respect to our non-employee director compensation during the fiscal year ended December 31, 2005.
| Name | Fees Earned or Paid in Cash | Stock Awards(1) | Option Awards(2) | Non-Equity Incentive Plan Compensation | Change in Pension Value & Non-qualified Deferred Compensation Earnings | All Other Compensation | Total | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| W. Michael Barnes(3) | $ | 126,250 | $ | 70,385 | — | — | — | — | $ | 196,635 | |||||||
| C. Boyden Gray(4) | $ | 15,750 | $ | 52,794 | — | — | — | — | $ | 68,544 | |||||||
| Harry F. Hopper, III(5) | $ | 70,250 | $ | 59,834 | — | — | — | — | $ | 130,084 | |||||||
| Joseph T. McCullen, Jr.(6) | $ | 75,750 | $ | 52,794 | — | — | — | — | $ | 128,544 | |||||||
| Arthur C. Patterson(7) | $ | 63,750 | $ | 59,834 | — | — | — | — | $ | 123,584 | |||||||
| John Sculley(8) | $ | 62,250 | $ | 52,794 | — | — | — | — | $ | 115,044 | |||||||
| Craig R. Stapleton(9) | $ | 8,250 | $ | 52,794 | — | — | — | — | $ | 61,044 | |||||||
| James F. Wade(10) | $ | 47,000 | $ | 59,834 | — | — | — | — | $ | 106,834 | |||||||
| George E. Morgan, III(11) | $ | 1,500 | $ | 52,794 | — | — | — | — | $ | 54,294 | |||||||
| Walker C. Simmons(12) | $ | 14,250 | $ | 52,794 | — | — | — | — | $ | 67,044 | |||||||
| C. Kevin Landry(13) | $ | 11,250 | $ | 0 | — | — | — | — | $ | 11,250 | |||||||
| James N. Perry, Jr.(14) | $ | 11,750 | $ | 0 | — | — | — | — | $ | 11,750 | |||||||
| Name | Grant Date | Number of Securities Underlying Options (#) | Exercise or Base Price of Option Awards ($/share) | Grant Date Fair Value ($) | |||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| W. Michael Barnes | 8/3/2005 12/28/2005 12/30/2005 | (a) | 17,217 7,600 1,012 | $ $ $ | 21.4000 16.4100 21.4600 | $ $ $ | 177,688 (5,031 10,566 | ) | |||
| C. Boyden Gray | 8/3/2005 | 18,506 | $ | 21.4000 | $ | 190,991 | |||||
| Harry F. Hopper, III | 8/3/2005 | 22,208 | $ | 21.4000 | $ | 229,198 | |||||
| Joseph T. McCullen, Jr | 8/3/2005 | 19,912 | $ | 21.4000 | $ | 205,502 | |||||
| Arthur C. Patterson | 8/3/2005 | 22,208 | $ | 21.4000 | $ | 229,198 | |||||
| John Sculley | 8/3/2005 | 18,506 | $ | 21.4000 | $ | 190,991 | |||||
| Craig R. Stapleton | — | — | — | — | |||||||
| James F. Wade | 8/3/2005 | 22,208 | $ | 21.4000 | $ | 229,198 | |||||
| George E. Morgan, III | — | — | — | — | |||||||
| Walker C. Simmons | — | — | — | — | |||||||
| C. Kevin Landry | 9/21/2005 | 40,000 | $ | 21.4600 | $ | 412,548 | |||||
| James N. Perry, Jr | 10/19/2005 | 40,000 | $ | 21.4600 | $ | 412,548 | |||||
Registration Rights Agreement
We plan to amend and restate our existing stockholders agreement and rename it a registration rights agreement effective upon the consummation of this offering. The stockholder parties to the registration rights agreement will be entitled to certain rights with respect to the registration of the sale of such shares under the Securities Act. Under the terms of the registration rights agreement, if we propose to register any of its securities under the Securities Act, either for our own account or for the account of other security holders exercising registration rights, such holders will be entitled to notice of such registration and are entitled to include shares in the registration. Stockholders benefiting from these rights may also require us to file a registration statement under the Securities Act at our expense with respect to their shares of common stock, and we will be required to use our best efforts to effect such registration. Further, these stockholders
may require us to file additional registration statements on Form S-3 at our expense. These rights are subject to certain conditions and limitations, among them the rights of underwriters to limit the number of shares included in such registration and an agreement not to sell any securities for 180 days following our initial public offering.
Post-Employment and Change in Control Payments
In March 2005, we entered into a two-year employment contract with J. Braxton Carter, our senior vice president and chief financial officer. The agreement provides that if he is terminated for cause or terminates without good reason (as defined in the agreement), we are obligated to pay only those wages, bonuses pursuant to the terms of our annual cash incentive plan and other compensation then vested. If he is terminated without cause, if he terminates the employment agreement for good reason, or if we fail to renew his employment contract upon expiration of its term, in addition to the payment of amounts then vested, in exchange for a general release of all claims, he is entitled to:
If Mr. Carter had been terminated for cause or if he terminated his employment without good reason on December 31, 2005, the approximate value of the severance benefits under his employment agreement would have been $0.2 million. If Mr. Carter had been terminated without cause, if he terminated his employment for good reason or if we failed to renew his employment contract, the approximate value of the severance benefits under his employment agreement would have been approximately $1.2 million.
We have two stock option plans under which we grant options to purchase our common stock: the Second Amended and Restated 1995 Stock Option Plan, as amended, and the 2004 Equity Incentive Compensation Plan, as amended. The 1995 Plan terminated in November 2005 and no further awards can be made under the 1995 Plan, but all options granted before November 2005 remain valid in accordance with their terms. Each of these plans contain certain change in control provisions. For a discussion of these change in control provisions, please see "—Employment Agreements, Severance Benefits and Change in Control Provisions."
Had a "corporate transaction" (as defined in our 1995 Plan) or a "change of control" (as defined in our 2004 Plan) occurred on December 31, 2005 with respect to each named executive officer, the value of the benefits for each such officer, based on the fair market value of our stock on that date, would have been as follows: Mr. Linquist $637,561, Mr. Carter $236,692, Mr. Young $324,274, Mr. Stachiw $143,087, Mr. Lorang $188,397 and Mr. Patrick $0.
SECURITY OWNERSHIP OF PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information as of September 30, 2006 regarding the beneficial ownership of each class of our outstanding capital stock by:
The beneficial ownership information has been presented in accordance with SEC rules and is not necessarily indicative of beneficial ownership for any other purpose. Unless otherwise indicated below and except to the extent authority is shared by spouses under applicable law, to our knowledge, each of the persons set forth below has sole voting and investment power with respect to all shares of each class or series of common stock and preferred stock shown as beneficially owned by them. The number of shares of common stock used to calculate each listed person's percentage ownership of each such class includes the shares of common stock underlying options, warrants or other convertible securities held by such person that are exercisable within 60 days after September 30, 2006. There are no currently outstanding options, warrants or other convertible securities exercisable for shares of Series D or Series E Preferred Stock.
There were 52,071,221 shares of our common stock, 3,500,993 shares of Series D Preferred Stock and 500,000 shares of Series E Preferred Stock outstanding as of September 30, 2006. Each share of Series D Preferred Stock and Series E Preferred Stock is immediately convertible at the option of the holder and will automatically convert into shares of our common stock)stock upon the consummation of this offering. Each share of Series D Preferred Stock and Series E Preferred Stock accrues dividends at the rate of 6% per annum. Upon a conversion of Series D Preferred Stock or cash. The termsSeries E Preferred Stock, whether at the option of the holder or upon an automatic conversion, all accrued but unpaid dividends are also converted into shares of common stock. Accordingly, the number and conditionspercentage of any such awards will be determined byclass of common stock columns set forth below include all shares issuable upon conversion of the compensation committee.Series D
Employment Contracts and ChangePreferred Stock and/or Series E Preferred Stock, as applicable, including all accrued but unpaid dividends as of Control ArrangementsSeptember 30, 2006.
We do not presently have any employment contracts in effect with any Common Stock Beneficially Owned
Prior to this Offering Common Stock Beneficially Owned
After this Offering Shares of Common Stock Being Offered Number Percentage Number Percentage Directors and Named Executive Officers(1): Roger D. Linquist(2) 2,927,003 2.74 % J. Braxton Carter(3) 96,298 * Robert A. Young(4) 83,122 * Mark A. Stachiw(5) 57,202 * Malcolm M. Lorang(6) 230,798 * John Sculley(7) 449,805 * James F. Wade(8)(16) 9,014,427 8.45 % Arthur C. Patterson(9) 12,488,868 11.70 % W. Michael Barnes(10) 60,573 * C. Kevin Landry(11)(18) 14,125,118 13.24 % James N. Perry, Jr.(12)(17) 14,088,382 13.20 % Walker C. Simmons(13) — — All directors and executive officers as a group (12 persons) 53,621,596 50.25 %
Common Stock Beneficially Owned
Prior to this Offering
Common Stock Beneficially Owned
After this Offering Shares of Common Stock Being Offered Number Percentage Number Percentage Beneficial Owners of More Than 5%: Accel Partners, et al(14)
428 University Ave.
Palo Alto, CA 94301 12,014,788 11.26 % First Plaza Group Trust(15)
One Chase Manhattan Plaza, 17th Floor
New York, NY 10005 7,823,783 7.33 % M/C Venture Partners, et al(16)(8)
75 State Street
Boston, MA 02109 9,014,427 8.45 % Madison Dearborn Capital Partners IV,
L.P.(17)(12)
Three First National Plaza, Suite 3800
Chicago, IL 60602
14,088,382
13.20
% TA Associates, et al(18)(11)
John Hancock Tower—56th Floor
200 Clarendon Street
Boston, MA 012116 14,125,118 13.24 %
Our equity compensation plans, provide for1,507,624 shares of common stock held directly by Mr. Linquist, and
1,236,991 shares of common stock held by Baltimore 8801 X Ltd. Partners, a partnership in which Mr. Linquist is a general partner.
Stock, which includes 1,099,268 shares issuable pursuant to accrued dividends, and 986,350 shares of common stock issuable upon the conversion of Series E Preferred Stock, which includes 60,426 shares of common stock issuable pursuant to accrued dividends are owned directly by TA Atlantic and Pacific V L.P., TA Investors II L.P., TA IX L.P., TA Strategic Partners Fund A L.P., TA Strategic Partners Fund B L.P. and TA/Atlantic and Pacific IV L.P., with which Mr. Landry is affiliated and may be deemed to be a member of a "group" (hereinafter referred to as TA Associates, et al) under Section 13d-3 of the Exchange Act and may be deemed to share voting and/or investment power with respect to the shares owned by such entities. Mr. Landry disclaims beneficial ownership of such shares, except to the extent of his interest in such shares arising from his interests in TA Associates, et al.
TRANSACTIONS WITH RELATED PARTY TRANSACTIONSPERSONS
Employment of Immediate Family Members
Corey A. Linquist co-founded MetroPCS Communications and is the son of our President, Chief Executive Officer Secretary and Chairman of our Boardboard of Directors,directors, Roger D. Linquist, and has served as our Regional Vice President and General Manager, Sacramento since January 2001, and as our Director of Strategic Planning from July 1994 until January 2001. In 2003,December 2006, we granted Mr. Corey Linquist 75,000 options to acquire our common stock at an exercise price of $34.00 per share. In 2005, we paid Mr. Corey Linquist a salary of $163,906$199,250 and a bonus of $70,000,$118,300, and we granted Mr. Linquisthim options to purchase up to 19,75033,000 and 5,114 shares of our common stock at an exercise price of $4.70$21.40 and $21.46, per share. Suchshare, respectively. These options expire on OctoberAugust 3, 2015 and December 30, 2013.2015, respectively. In 2002,2004, we paid Mr. Corey Linquist a salary of $157,000$188,725 and a bonus of $55,292,$97,500, and we granted Mr. Linquisthim options to purchase up to 17,8507,639 shares of our common stock at an exercise price of $4.70$14.90 per share. SuchThese options expire on July 1, 2012.March 11, 2014.
Todd C. Linquist, the son of our President, Chief Executive Officer Secretary and Chairman of our Boardboard of Directors,directors, Roger D. Linquist, and husband of Michelle D. Linquist, our Director of Logistics, has served inheld several positions with us since July 1996, and most recently asis currently our DirectorStaff Vice President, Wireless Data Services. In December 2006, we granted Mr. Todd Linquist 10,000 options to acquire our common stock at an exercise price of Marketing.$34.00 per share. In 2003,2005, we paid Mr. Todd Linquist a salary of $99,748$115,227 and a bonus of $28,424,$44,147, and we granted Mr. Linquisthim options to purchase up to 7,5008,200 and 1,939 shares of our common stock at an exercise price of $4.70$21.40 and $21.46 per share. Theshare, respectively. These options expire on OctoberAugust 3, 2015 and December 30, 2013.2015, respectively. In 2002,2004, we paid Mr. Todd Linquist a salary of $94,261$110,691 and a bonus of $22,437,$41,675, and we granted Mr. Linquisthim options to purchase up to 6,8502,849 shares of our common stock at an exercise price of $4.70$14.90 per share. TheThese options expire on July 1, 2012.March 11, 2014.
Phillip R. Terry, the son-in-law of our President, Chief Executive Officer Secretary and Chairman of our Boardboard of Directors,directors, Roger D. Linquist, has served as our Vice President of Corporate Marketing since December 2003, as our Staff Vice President for Product Management and Distribution Services from April 2002 until December 2003, and as our Director of Field Distribution from April 2001 until April 2002. In 2003,December 2006, we granted Mr. Terry 75,000 options to acquire our common stock at an exercise price of $34.00 per share. In 2005, we paid Mr. Terry a salary of $140,759$179,167 and a bonus of $53,396,$91,000, and we granted Mr. Terryhim options to purchase up to 11,00031,500 and 7,662 shares of our common stock at an exercise price of $4.70$21.40 and $21.46 per share. Suchshare, respectively. These options expire on June 14, 2013.August 3, 2015 and December 30, 2015, respectively. In 2002,2004, we paid Mr. Terry a salary of $132,622$168,750 and a bonus of $46,747.
Michael D. Loverde, the son of our Vice President and General Manager, Georgia, Albert S. Loverde, has served as our Director of Advertising and Public Relations for our Atlanta market since August 2001.$55,129. In 2003, we paid Mr. Loverde a salary of $94,963 and a bonus of $20,000, and2004, we granted Mr. LoverdeTerry options to purchase up to 3,50016,000 and 11,517 shares of our common stock at an exercise price of $4.70$5.40 and $14.90 per share. Suchshare, respectively. These options expire on October 30, 2013.January 27, 2014 and March 11, 2014, respectively.
Michelle D. Linquist, the daughter-in-law of our President, Chief Executive Officer and Chairman of our board of directors, Roger D. Linquist, and wife of Mr. Todd C. Linquist, our Staff Vice President, Wireless Data Services is currently our Director of Logistics and has been an employee since June 2004. Originally, Mrs. Linquist served as our Manager of Logistics. In 2002,2005, we paid Mr. LoverdeMrs. Linquist a salary of $91,413$90,333 and a bonus of $9,894.
Ginger L. Loverde, the daughter-in-law of our Vice President and General Manager, Georgia, Albert S. Loverde, has served as our Customer Operations Specialist for our Atlanta market since February 2001. In 2003, we paid Ms. Loverde a salary of $55,839 and a bonus of $6,500. In 2002, we paid Ms. Loverde a salary of $53,750 and a bonus of $8,000.
Karen L. Albregts, the daughter of our Vice President and General Manager, Georgia, Albert S. Loverde, has served as our Radio Frequency Engineer for our Atlanta market since June 2002. In 2003, we paid Ms. Albregts a salary of $76,112 and a bonus of $5,000. In 2002, we paid Ms. Albregts a salary of $35,217,$9,930, and we granted Ms. Albregtsher options to purchase up to 4,5007,500 shares of our common stock at an exercise price of $4.70$21.46 per share. SuchThese options expire on August 14, 2012.
Legal Services Performed by Wilmer Cutler Pickering LLP
OneSeptember 21, 2015. In 2004, we paid Mrs. Linquist a salary of our directors, C. Boyden Gray, has been a partner in the law firm of Wilmer Cutler Pickering LLP since 1976. Such firm regularly performs legal services for us. The aggregate amount of fees paid by us$39,602 and we granted her options to Wilmer Cutler Pickering LLP was less than 5% of the law firm’s gross revenues for the year ended December 31, 2003.
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information as of May 31, 2004 regarding the beneficial ownership of each class of our outstanding capital stock both before and after giving effect to this offering and the conversion of all outstanding3,800 shares of our Class B common stock and Series D preferred stock into common stock by:at an exercise price of $12.13 per share. These options expire on September 14, 2014.
Beneficial ownershipEffective as of June 19, 2006, MetroPCS Wireless, Inc. entered into an Interconnection and Traffic Exchange Agreement, or TEA, with Cleveland Unlimited, Inc., d/b/a Revol, or Revol, under which we and Revol provide wireless roaming services to each other. Revol is determined in accordance with the ruleswholly owned by Cleveland Unlimited, LLC, or CU LLC. M/C Venture Partners and Columbia Capital, two of our largest shareholders, each own 44.6% of the SEC. Unless otherwise indicated belowmembership interests of CU LLC. Additionally, James F. Wade,
one of our current directors, and exceptHarry F. Hopper, III, one of our former directors, are directors of Revol. Amounts due under the TEA are not fixed. For the first six months of the TEA, plus the later of one month or the date the parties elect to bill each other, traffic is exchanged for no charge. Afterwards, each party pays the other party on a per minute basis for directing telecommunications traffic to its network. This agreement was negotiated as an arms-length transaction and we believe it represents market terms. Our audit committee has reviewed and recommended to our board of directors that this transaction be approved.
Procedures for Approval of Related Person Transactions
We have a written policy on authorizations, the Policy on Authorizations, which includes specific provisions for related party transactions. Pursuant to the extent authority is shared by spouses under applicable law, to our knowledge, the persons named in the table have sole votingPolicy on Authorizations, related party transactions include related amounts receivable or payable, including sales, purchases, loans, transfers, leasing arrangements and investment power with respect to all shares of each class of capital stockguarantees, and shown as beneficially owned by them. The number of shares of common stock used to calculate each listed person’s percentage ownership of such class includes the shares of common stock underlying options, warrantsamounts receivable from or other convertible securities held by such person that are exercisable within 60 days of this offering. There are no currently outstanding options, warrants or other convertible securities exercisable for shares of Class A common stock. After giving effect to the conversion of our Class B common stock into common stock and our Series D preferred stock into common stock, there were 90 shares of Class A common stock and 85,106,870 shares of common stock outstanding as of May 31, 2004. The table below assumes no exercise of the underwriters’ over-allotment option and excludes shares of common stock to be issued in respect of unpaid dividends on our outstanding Series D preferred stock that have accumulated subsequent to May 31, 2004.
Other than as disclosed below, no selling stockholder holds or has held during the past three years any position, office or other material relationship with us.
| After the Offering | |||||||||||||||||||||||||
Name and Address | Class A | Common Stock Beneficially Owned | Common Stock to be Sold in the Offering | Common Stock Beneficially Owned | Total Shares Beneficially Owned | Voting Percentage | |||||||||||||||||||
| Number | Percentage | Number | Percentage | Number | Percentage | Number | Percentage | ||||||||||||||||||
Directors and Named Executive Officers: | |||||||||||||||||||||||||
Roger D. Linquist (2) | 60 | 66.7 | % | 5,959,507 | 6.7 | % | 515,651 | 5,443,856 | 5.4 | % | 5,443,916 | 5.4 | % | 36.1 | % | ||||||||||
J. Lyle Patrick (3) | — | — | 100,000 | * | — | 100,000 | * | 100,000 | * | * | |||||||||||||||
Dennis G. Spickler (4) | — | — | 691,669 | * | 55,430 | 636,239 | * | 636,239 | * | * | |||||||||||||||
Frank J. Bell (5) | — | — | 90,595 | * | 3,707 | 86,888 | * | 86,888 | * | * | |||||||||||||||
Herbert “Chip” Graves, IV (6) | — | — | 71,621 | * | 2,598 | 69,023 | * | 69,023 | * | * | |||||||||||||||
Robert A. Young (7) | — | — | 186,053 | * | 7,950 | 178,103 | * | 178,103 | * | * | |||||||||||||||
C. Boyden Gray (8) | 30 | 33.3 | % | 269,370 | * | 10,903 | 258,467 | * | 258,467 | * | 16.8 | % | |||||||||||||
John Sculley (9) | — | — | 512,219 | * | 54,504 | 457,715 | * | 457,715 | * | * | |||||||||||||||
Joseph T. McCullen, Jr. (10) | — | — | 209,551 | * | 37,650 | 171,901 | * | 171,901 | * | * | |||||||||||||||
Harry F. Hopper, III (11) | — | — | 3,071,285 | 3.6 | % | 308,563 | 2,762,722 | 3.2 | % | 2,762,722 | 3.2 | % | 1.6 | % | |||||||||||
Arthur C. Patterson (12) | — | — | 15,363,231 | 18.0 | % | — | 15,363,231 | 15.8 | % | 15,363,231 | 15.8 | % | 7.9 | % | |||||||||||
W. Michael Barnes | — | — | — | * | — | — | * | — | * | * | |||||||||||||||
Craig R. Stapleton (13) | — | — | 4,252,273 | 5.0 | % | 250,000 | 4,002,273 | 4.1 | % | 4,002,273 | 4.1 | % | 2.1 | % | |||||||||||
James F. Wade | — | — | — | * | — | — | * | — | * | * | |||||||||||||||
All directors and executive officers as a group (20 persons) | 90 | 100.0 | % | 33,028,772 | 35.6 | % | 1,422,210 | 31,606,562 | 30.1 | % | 31,606,652 | 30.0 | % | 66.2 | % | ||||||||||
Additional 5% and Selling Stockholders: | |||||||||||||||||||||||||
Accel Partners, et al (14) | — | — | 15,272,932 | 17.9 | % | — | 15,272,932 | 15.7 | % | 15,272,932 | 15.7 | % | 7.8 | % | |||||||||||
Auchincloss, Wadsworth & Co. L.P. | — | — | 182,386 | * | 16,369 | 166,017 | * | 166,017 | * | * | |||||||||||||||
BancAmerica Capital Investors SBIC I, LP | — | — | 1,490,530 | 1.8 | % | 373,132 | 1,117,398 | 1.2 | % | 1.2 | % | * | |||||||||||||
Battery Ventures III, L.P. (15) | — | — | 3,880,771 | 4.6 | % | 427,667 | 3,453,104 | 3.6 | % | 3,453,104 | 3.6 | % | 1.8 | % | |||||||||||
Ralph Baruch | — | — | 302,214 | * | 37,514 | 264,700 | * | 264,700 | * | * | |||||||||||||||
Berkeley Investments | — | — | 416,419 | * | 63,668 | 352,751 | * | 352,751 | * | * | |||||||||||||||
Dennis Bovin (45) | — | — | 21,150 | * | 3,172 | 17,978 | * | 17,978 | * | * | |||||||||||||||
BP Amoco Corporation Master Trust for Employee Pension Plans | — | — | 867,294 | 1.0 | % | 132,267 | 735,027 | * | 735,027 | * | * | ||||||||||||||
Erika Butler (16) | — | — | 50 | * | 6 | 44 | * | 44 | * | * | |||||||||||||||
J. Braxton Carter (17) | — | — | 101,090 | * | 4,933 | 95,157 | * | 95,157 | * | * | |||||||||||||||
Chestnut Venture Partners LP (18) | — | — | 239,122 | * | 59,427 | 179,695 | * | 179,695 | * | * | |||||||||||||||
Clarity Partners (19) | — | — | 3,177,541 | 3.7 | % | 797,123 | 2,380,418 | 2.5 | % | 2,380,418 | 2.5 | % | 1.2 | % | |||||||||||
Steven T. Cochran (20) | — | — | 30,982 | * | 1,221 | 29,761 | * | 29,761 | * | * | |||||||||||||||
Columbia Capital, et al (21) | — | — | 3,071,285 | 3.6 | % | 308,563 | 2,762,722 | 3.2 | % | 2,762,722 | 3.2 | % | 1.6 | % | |||||||||||
Ashton de Peyster FL Trust (22) | — | — | 257,184 | * | 53,585 | 203,599 | * | 203,599 | * | * | |||||||||||||||
Jennifer DiGuisti (23) | — | — | 6,250 | * | 689 | 5,561 | * | 5,561 | * | * | |||||||||||||||
First Plaza Group Trust (24) | — | — | 7,674,832 | 9.0 | % | 1,014,065 | 6,660,767 | 6.9 | % | 6,660,767 | 6.9 | % | 3.4 | % | |||||||||||
Peter Fox | — | — | 12,570 | * | 1,385 | 11,185 | * | 11,185 | * | * | |||||||||||||||
Robert Gerard | — | — | 105,150 | * | 11,588 | 93,562 | * | 93,562 | * | * | |||||||||||||||
Rakesh Gupta | — | — | 23,863 | * | 5,988 | 17,875 | * | 17,875 | * | * | |||||||||||||||
Patricia G. Hambrecht | — | — | 61,470 | * | 6,744 | 54,726 | * | 54,726 | * | * | |||||||||||||||
The Hamilton Companies, LLC | — | — | 593,190 | * | 65,370 | 527,820 | * | 527,820 | * | * | |||||||||||||||
Robert Harteveldt (45) | — | — | 11,250 | * | 1,240 | 10,010 | * | 10,010 | * | * | |||||||||||||||
| After the Offering | ||||||||||||||||||||||||
Name and Address of Beneficial Owner (1) | Class A | Common Stock Beneficially Owned | Common Stock to be Sold in the Offering | Common Stock Beneficially Owned | Total Shares Beneficially Owned | Voting Percentage | ||||||||||||||||||
| Number | Percentage | Number | Percentage | Number | Percentage | Number | Percentage | |||||||||||||||||
Ronald Hersh | — | –– | 11,250 | * | 1,240 | 10,010 | * | 10,010 | * | * | ||||||||||||||
INVESCO Investors (25) | — | –– | 2,596,644 | 3.1 | % | 312,621 | 2,284,023 | 2.4 | % | 2,284,023 | 2.4 | % | 1.2 | % | ||||||||||
Eric Jensen | — | — | 3,750 | * | 413 | 3,337 | * | 3,337 | * | * | ||||||||||||||
Kurt Jensen | — | — | 3,750 | * | 413 | 3,337 | * | 3,337 | * | * | ||||||||||||||
Louise Jensen | — | — | 7,500 | * | 827 | 6,673 | * | 6,673 | * | * | ||||||||||||||
David Kaplan | — | –– | 19,928 | * | 1,049 | 18,879 | * | 18,879 | * | * | ||||||||||||||
Key Principal Partners LLC | — | –– | 1,638,319 | 1.9 | % | 411,349 | 1,226,970 | 1.3 | % | 1,226,970 | 1.3 | % | * | |||||||||||
Ira D. Levy (26) | — | — | 42,632 | * | 1,614 | 41,018 | * | 41,018 | * | * | ||||||||||||||
Barry Lewis | — | — | 119,256 | * | 29,946 | 89,310 | * | 89,310 | * | * | ||||||||||||||
John Lewis | — | — | 3,841 | * | 964 | 2,877 | * | 2,877 | * | * | ||||||||||||||
Corey A. Linquist (27) | — | — | 562,949 | * | 45,384 | 517,565 | * | 517,565 | * | * | ||||||||||||||
Todd C. Linquist (28) | — | –– | 362,199 | * | 30,202 | 331,997 | * | 331,997 | * | * | ||||||||||||||
John R. Lister (29) | — | –– | 420,320 | * | 47,092 | 373,228 | * | 373,228 | * | * | ||||||||||||||
Malcolm M. Lorang (30) | — | — | 888,836 | 1.0 | % | 73,607 | 815,229 | * | 815,229 | * | * | |||||||||||||
Los Angeles County Employee Retirement Association (31) | — | — | 2,535,900 | 3.0 | % | 279,460 | 2,256,440 | 2.3 | % | 2,256,440 | 2.3 | % | 1.2 | % | ||||||||||
Albert S. Loverde (32) | — | –– | 584,889 | * | 49,716 | 535,173 | * | 535,173 | * | * | ||||||||||||||
Amanda Loverde | — | — | 5,010 | * | 562 | 4,448 | * | 4,448 | * | * | ||||||||||||||
Patrick Loverde | — | — | 5,010 | * | 562 | 4,448 | * | 4,448 | * | * | ||||||||||||||
M/C Venture Investors, L.L.C. (33) | — | — | 1,179,050 | 1.4 | % | 274,281 | 904,769 | * | 904,769 | * | * | |||||||||||||
M/C Venture Partners IV, LP (34) | — | — | 2,547,471 | 3.0 | % | 641,644 | 1,905,827 | 2.0 | % | 1,905,827 | 2.0 | % | 1.0 | % | ||||||||||
M/C Venture Partners V, LP (35) | — | — | 6,036,115 | 7.1 | % | 1,520,349 | 4,515,766 | 4.6 | % | 4,515,766 | 4.6 | % | 2.3 | % | ||||||||||
Ralph Mack (45) | — | — | 22,500 | * | 2,480 | 20,020 | * | 20,020 | * | * | ||||||||||||||
Mark Massur | — | –– | 28,293 | * | 5,000 | 23,293 | * | 23,293 | * | * | ||||||||||||||
Metro PCS Investors LLC (36) | — | — | 3,178,944 | 3.7 | % | 795,797 | 2,383,147 | 2.5 | % | 2,383,147 | 2.5 | % | 1.2 | % | ||||||||||
Mitsui & Co., Ltd. (37) | — | –– | 2,520,000 | 3.0 | % | 277,708 | 2,242,292 | 2.3 | % | 2,242,292 | 2.3 | % | 1.2 | % | ||||||||||
Donald Mullen | — | — | 22,628 | * | 2,512 | 20,116 | * | 20,116 | * | * | ||||||||||||||
New York Life Insurance Co. | — | –– | 808,890 | * | 89,141 | 719,749 | * | 719,749 | * | * | ||||||||||||||
One Liberty Fund III, L.P. | — | — | 1,936,713 | 2.3 | % | 217,635 | 1,719,078 | 1.8 | % | 1,719,078 | 1.8 | % | * | |||||||||||
Paragon Venture Partners II, LP | — | — | 551,553 | * | 22,502 | 529,051 | * | 529,051 | * | * | ||||||||||||||
James E. Parker (38) | — | –– | 31,730 | * | 1,319 | 30,411 | * | 30,411 | * | * | ||||||||||||||
Ann L. Pattee | — | –– | 72,450 | * | 7,984 | 64,466 | * | 64,466 | * | * | ||||||||||||||
Gordon B. Pattee | — | –– | 79,110 | * | 8,718 | 70,392 | * | 70,392 | * | * | ||||||||||||||
Ellen M. Poss | — | –– | 22,055 | * | 2,430 | 19,625 | * | 19,625 | * | * | ||||||||||||||
Primus Capital Fund III, L.P. | — | –– | 1,765,529 | 2.1 | % | 198,269 | 1,567,260 | 1.6 | % | 1,567,260 | 1.6 | % | * | |||||||||||
Primus Capital Fund V, L.P. | — | –– | 1,165,315 | 1.4 | % | 260,089 | 905,226 | * | 905,226 | * | * | |||||||||||||
Primus Executive Fund V, L.P. | — | –– | 24,416 | * | 4,872 | 19,544 | * | 19,544 | * | * | ||||||||||||||
James M. Rhodes (39) | — | –– | 5,250 | * | 579 | 4,671 | * | 4,671 | * | * | ||||||||||||||
Sani Holdings, Ltd. (Bahamas) | — | –– | 341,396 | * | 44,610 | 296,786 | * | 296,786 | * | * | ||||||||||||||
Steven L. Scari (45) | — | –– | 17,218 | * | 1,499 | 15,719 | * | 15,719 | * | * | ||||||||||||||
Curtis Schade | — | — | 11,250 | * | 1,240 | 10,010 | * | 10,010 | * | * | ||||||||||||||
David Schoenthal (45) | — | — | 16,896 | * | 1,094 | 15,802 | * | 15,802 | * | * | ||||||||||||||
Douglas Sharon | — | –– | 14,370 | * | 1,584 | 12,786 | * | 12,786 | * | * | ||||||||||||||
SonomaWest Holdings, Inc. | — | –– | 358,419 | * | 89,686 | 268,733 | * | 268,733 | * | * | ||||||||||||||
Technology Ventures Associates III, LP (40) | — | –– | 4,252,273 | 5.0 | % | 250,000 | 4,002,273 | * | 4,002,273 | * | * | |||||||||||||
Betsy Terry | — | — | 15,000 | * | 1,653 | 13,347 | * | 13,347 | * | * | ||||||||||||||
Phillip R. Terry (41) | — | — | 62,516 | * | 1,614 | 60,902 | * | 60,902 | * | * | ||||||||||||||
Salvatore A. Tiano (45) | — | –– | 11,250 | * | 1,240 | 10,010 | * | 10,010 | * | * | ||||||||||||||
Trailhead Ventures, LP | — | –– | 1,806,140 | 2.1 | % | 216,085 | 1,590,055 | 1.6 | % | 1,590,055 | 1.6 | % | * | |||||||||||
Craig Vieweg | — | –– | 119,238 | * | 29,941 | 89,297 | * | 89,297 | * | * | ||||||||||||||
Terri J. Visser | — | –– | 3,000 | * | 331 | 2,669 | * | 2,669 | * | * | ||||||||||||||
Wachovia Capital Partners 2001, LLC (42) | — | — | 2,980,985 | 3.5 | % | 748,540 | 2,232,445 | 2.3 | % | 2,232,445 | 2.3 | % | 1.1 | % | ||||||||||
Jason Whitmire (43) (45) | — | — | 1,000 | * | 110 | 890 | * | 890 | * | * | ||||||||||||||
Whitney & Co. affiliated funds (44) | — | — | 2,986,768 | 3.5 | % | 747,195 | 2,239,573 | 2.4 | % | 2,239,573 | 2.4 | % | 1.2 | % | ||||||||||
Winston-Thayer Partners | — | –– | 674,595 | * | 169,368 | 505,227 | * | 505,227 | * | * | ||||||||||||||
James Wolfsberg | — | — | 11,250 | * | 1,240 | 10,010 | * | 10,010 | * | * | ||||||||||||||
|
|
DESCRIPTION OF CERTAIN INDEBTEDNESS
Senior Notes
In September 2003, our wholly-owned subsidiary, MetroPCS, Inc., issued $150.0 million in aggregate principal amount of its 10¾% Senior Notes due 2011, which we refer to as our senior notes, pursuant to an indenture dated as of September 29, 2003. Our senior notes mature on October 1, 2011, and interest is payable on our senior notes on April 1 and October 1 of each year, commencing April 1, 2004. Our senior notes are guaranteed on a senior unsecured basis by all of the current and future domestic restricted subsidiaries of MetroPCS, Inc., other than certain immaterial subsidiaries. MetroPCS Communications, Inc. is not a guarantor of the senior notes.
MetroPCS, Inc. may, at its option, redeem some or all of the senior notes at any time on or after October 1, 2007, at specific redemption prices set forth in the indenture. In addition, prior to October 1, 2006, MetroPCS, Inc. may, at its option, redeem senior notes with the net proceeds of equity sales at a redemption price equal to 110.750% of the principal amount, plus accrued and unpaid interest;provided that, after the redemption, at least 65% of the initial aggregate principal amount of the senior notes remains outstanding.
If MetroPCS, Inc. or its restricted subsidiaries sell assets, MetroPCS, Inc. may be required to use the proceeds from such sale to offer to repurchase senior notes at a purchase price equal to 100% of the aggregate principal amount of senior notes repurchased, plus accrued and unpaid interest to the date of purchase. If MetroPCS, Inc. or its restricted subsidiaries experience a change of control, as such term is defined in the indenture, MetroPCS, Inc. may be required to offer to repurchase the senior notes at a purchase price equal to 101% of the aggregate principal amount of senior notes repurchased, plus accrued and unpaid interest to the date of purchase.
The indenture, among other things, restricts the ability of MetroPCS, Inc. and its restricted subsidiaries under certain conditions to:
FCC Notes
Fourteen of our wholly-owned license subsidiaries have executed separate promissory notes payable to the FCC in a principal amount equal to the adjusted price of that license subsidiary’s FCC license, as determined in accordance with our plan of reorganization under the United States Bankruptcy Code. Under the terms of a separate security agreement between the FCC and each license subsidiary, each FCC note is secured by a first priority security interest in the FCC license held by such license subsidiary. All of the FCC notes mature in January 2007, which is the expiration of the original ten-year term of our FCC licenses. The FCC notes bear interest at a rate of 6.5% per annum, and are payable in quarterly installments of principal and interest, until maturity, on January 31, April 30, July 31 and October 31 of each year.related parties.
Scheduled principal and interest payments under the FCC notes are approximately $4.0 million per quarter.
In the event that a license subsidiary fails to make an installment payment torelated party transaction is identified, such transaction must be reviewed and approved by our Chief Financial Officer, Chief Executive Officer or our board of directors, depending on the FCC when due or becomes unable to meet its other obligations under its FCC note or otherwise violates regulations applicable to holders of FCC licenses, the FCC could take a variety of remedial actions, including revocation of that subsidiary’s FCC license and acceleration of its FCC note. See “Risk Factors—Risks Related to Our Business” and “Legislation and Government Regulations.” The FCC notes and related security agreements do not contain cross-default or cross-collateral provisions and do not allow the FCC to revoke the FCC license, or accelerate the FCC note, of any non-defaulting license subsidiary.
As of March 31, 2004, the aggregate principal amount of the FCC notes was $43.5 million, which is recorded on our balance sheet net of a discount to reflect the fair marketmonetary value of the obligations determined assumingtransaction. All related party transactions must be approved by our Senior Vice President and General Counsel and reported to the Vice President—Controller for financial statement disclosure purposes. Additionally, related party transactions cannot be approved by the Chief Financial Officer, Chief Executive Officer, Senior Vice President and General Counsel or a fair market borrowing rate at the time the FCC notes were issued. The resulting discountmember of $4.2 million is being amortized through maturityour board of directors if they are one of the FCC notes. However, ifparties in the FCC notes are accelerated for any reason, including a default by us in anyrelated party transaction. In such instance, the next higher level of our obligations with respect to the FCC notes, the full principal amount of the FCC notes, plus accrued interest, together with any late and/or administrative charge, would become due and payable.authority must approve that particular related party transaction.
As of March 31, 2004, we had ongoing obligations of approximately $3.8 million that are payable to other wireless carriers under cost-sharing plans related to microwave relocation in our markets. Each of these obligations has a ten-year term, with interest only payments through year six and principal payments commencing in year seven. See “Legislation and Government Regulations—General Licensing Requirements.”
The following describes our common stock, preferred stock, certificate of incorporation and bylaws that will be in effect at the closing of this offering. This description is a summary description of our capital stock does not purportonly. We encourage you to beread the complete and is subject to and qualified in its entirety by the provisionstext of our certificate of incorporation and bylaws, copieswhich are incorporated by reference as exhibits to the registration statement of which may be obtained as described under “Available Information,” and by the provisions of applicable Delaware law. As used in this prospectus is a part. These documents will be effective at the term “common stock” refers totime of the offering without substantive change.
Our authorized capital stock will consist of 300,000,000 shares of our capitalcommon stock, par value $0.0001 per share, and 25,000,000 shares of the same class as the shares offered bypreferred stock, par value $0.0001 per share. Immediately prior to this prospectus and does not include Class Aoffering, there has been no public market for our common stock. As of September 30, 2006 we had 180 stockholders of record. Although we have applied to list our common stock on , a market for our common stock may not develop, and if one develops, it may not be sustained.
Upon consummation of this offering, our authorized capital stock will consist of:
Dual Class Voting Structure
Following this offering we will have two outstanding classes of capital stock. One class will be common stock, which is the class we are issuing in this offering. The other class of our capital stock will be our existing Class A common stock. MetroPCS, Inc. issued Class A common stock in 1995 in order to bid in the FCC’s 1996 C Block PCS spectrum auction, which was limited to “designated entities,” and we have maintained this capital structure so as to continue to qualify as a designated entity. Qualifying as a designated entity also allowed MetroPCS, Inc. to obtain favorable financing terms for the FCC licenses, including the right to pay for the licenses in installments over the ten-year initial term of the licenses. Under the FCC’s rules applicable to the 1996 C Block auction, a “designated entity” is an entity that, together with its affiliates and persons or entities that hold attributable interests in the entity and their affiliates, had gross revenues of less than $125.0 million in each of the preceding two years and total assets of less than $500.0 million at the time they applied to compete in the auction.
In order to avoid attribution of the gross revenues and assets of certain investors, the FCC’s rules in place at the time of the 1996 C Block auction permitted licensees to identify a “control group” composed of individuals or entities whose interests would be deemed the only “attributable” interests in, and whose assets and revenues would be the only assets and revenues attributed to the licensee. Under these rules, for the remaining three years of the initial term of our FCC licenses, our control group must exercise de facto control over MetroPCS, must control or appoint the majority of the board of directors, must own at least 10% of our overall equity on a fully-diluted basis and must retain at least 50.1% of the voting control over MetroPCS. In addition, for the remaining three years of the initial term of our FCC licenses, no investor or group of affiliated investors that is not in our control group may hold more than 25% of our overall equity. Maintaining our status as a designated entity is important in order to maintain favorable terms for our FCC licenses. Although FCC rules now allow our FCC licenses to be held by a non-designated entity, that could result in the immediate loss of the right to pay for the licenses in installments and the immediate obligation to pay the outstanding balance of all amounts owed to the FCC. In addition, although the ownership requirements applicable to our FCC licenses will expire on January 27, 2007, or the tenth anniversary of the date on which they were granted by the FCC, it is possible that we will acquire additional FCC licenses in the future that are subject to similar ownership restrictions. Depending on when such licenses were initially granted by the FCC, in order to be eligible to hold such licenses we could be required to continue to comply with the 25% control group structural option beyond January 27, 2007, unless the FCC has approved a different structural option for us.
The holders of our Class A common stock currently hold 50.1% of our equity voting rights by virtue of their Class A common stock holdings, and those holders will retain such voting control immediately following this offering. We believe, however, that following this offering we may be able to qualify as a designated entity using an alternative to the control group described above, which would allow us to eliminate the supervoting Class A common stock. Under the proposed alternative qualifying structure, which was available to applicants in the 1996 C Block auction that were publicly traded corporations, no person or entity would be permitted to:
Under this proposed alternative structure, which we refer to as the publicly traded corporation structure, the existing control group restrictions would no longer be necessary or possible. Accordingly, after this offering, we intend to petition the FCC to allow us to convert to this alternative structure and to convert our Class A common stock into common stock, with one vote per share, while retaining our designated entity status. We believe that we will be successful in obtaining this approval from the FCC, which will allow us to convert to a single class of equity securities, within a period of approximately nine months following the consummation of this offering. However, we cannot assure you that the FCC will grant this request in a timely fashion or at all. Absent more rapid FCC approval for the conversion of our Class A common stock into common stock, each share of Class A common stock will automatically convert into one share of common stock on January 27, 2007 (the tenth anniversary of the grant of our FCC licenses by the FCC, at which point the designated entity requirement expires on its own terms), though such conversion shall not be permitted if the effects thereof on stock ownership levels would violate FCC ownership restrictions in place at that time.
Common Stock and Class A Common Stock
General
After giving effect to the conversion of our Class B common stock into common stock and our Series D preferred stock into common stock, there were 90 shares of Class A common stock and 85,106,870
Roger D. Linquist, who holds 60 par value $0.0001 per share; and
Subject to the rights of holders of all outstanding classes of stock having prior rights as to dividends, the holders of common stock and Class A common stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by our board of directors out of our corporate assets legally available for distribution.
Subject to the rights of holders of all outstanding classes of stock having prior rights as to distributions, in the event of the liquidation, dissolution or winding up of our company, the holders of common stock and Class A common stock are entitled to share ratably in all assets remaining after payment of liabilities, if any, then outstanding.
Prior to the consummation of this offering, there was no established trading market for any class of our capital stock.
Voting Rights and Board RepresentationCommon Stock
Our certificate of incorporation provides that the holders of our Class A common stock have the right to vote on every matter submitted to a vote of our stockholders other than any matter on which only the holders of one or more classes or series of capital stock other than Class A common stock are entitled to vote separately as a class. Similarly, the holdersHolders of our common stock have the right to vote on every matter submitted to a vote of our stockholders other than any matter on which only the holders of one or more classes or series of capital stock other than commonpreferred stock are entitled to vote separately as a class.
Holders There will be no cumulative voting rights. Accordingly, holders of the common stock offered in this prospectus will have one vote per share. However, with respect to all matters submitted to a votemajority of stockholders for which a separate class vote is not required, the Class A stockholders have, collectively, votes equal to 50.1% of the aggregate voting power of all shares entitled to vote
andpreferences that may be applicable to any outstanding preferred stock, the holders of common stock have, collectively, votes equal to 49.9%will share equally on a per share basis any dividends when, as and if declared by the board of the aggregate voting powerdirectors out of all shares entitled to vote.
Thefunds legally available for that purpose. If we are liquidated, dissolved or wound up, the holders of Class Aour common stock arewill be entitled to a separate class voteratable share of any distribution to elect five membersstockholders, after satisfaction of all of our boardliabilities and of directors. The holdersthe prior rights of common stock are entitled to a separateany outstanding class vote to elect a number of members of our board of directors as shall be fixed by, or in the manner provided in, our bylaws (currently four members). Each Class A director has one vote on each matter submitted to a vote of our board of directors, and each common director currently has one vote;provided,however, that if, at any time, our board of directors has more than four common directors, each common director will individually have a fractional vote such that the common directors collectively have four votes.
Conversion
Each share of Class Apreferred stock. Our common stock will automatically convert into one sharecarry no preemptive or other subscription rights to purchase shares of our common stock on January 27, 2007 (the tenth anniversary of the initial grant of our PCS licenses by the FCC) or such earlier date as may be determined by our board of directors. Any conversion described in the preceding sentenceand will not be permitted ifconvertible, assessable or entitled to the effects thereof on stock ownership levels would violate FCC ownership restrictions. The common stock has no conversion rights.
Our certificatebenefits of incorporation provides that immediately upon the conversion of all issued and outstanding shares of Class A common stock into common stock, the Class A common stock shall cease to be a part of our authorized capital stock.any sinking fund.
Redemption
If a holder of common stock acquires additional shares of common stock or otherwise is attributed with ownership of such shares that would cause us to violate FCC ownership restrictions, or FCC requirements necessary to retain our status as a designated entity using the 25% control group structure (or the publicly traded corporation structure if we are authorized by the FCC to adopt that alternative structure),rules, we may, at the option of our board of directors, redeem shares of common stock sufficient to eliminate the violation (or to allow us to comply with the alternative structure). In the event of a violation of the FCC’sFCC's foreign ownership restrictions, we must first redeem the stock of the foreign stockholder that most recently purchased its first shares of our stock.
The redemption price will be a price mutually determined by us and our stockholders, but if no agreement can be reached, the redemption price will be either:
For a discussion of the FCC’sFCC's ownership restrictions, please see “Legislation and Government Regulations—"Business—Ownership Restrictions.”"
Warrants to Purchase Common Stock
Between December 1995 and October 1999, we issued warrants to certain investors, members of management and other individuals in conjunction with sales of stock and in exchange for outside consulting services. As of May 31, 2004, warrants to purchase 1,215,570 shares of common stock, at a weighted average exercise price of $0.5697, remained outstanding. Each warrant contains provisions for the adjustment of the exercise price and the aggregate number of shares of common stock issuable upon the exercise of the warrant in the event of stock dividends, stock splits, reclassifications, combinations and other dilutive events.
Preferred Stock
Subject to the provisions of our certificate of incorporation and limitations prescribed by law, our board of directors has the authority to issue up to 5,000,00025,000,000 shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions of the preferred stock, including dividend rights, dividend rates, conversion rates, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any series or the designation of the series, which may be superior to those of common stock, without further vote or action by the stockholders. After giving effect to the conversion of our Series D and Series E preferred stock into common stock in connection with this offering, we will have no shares of preferred stock outstanding. We have no present plans to issue any shares of preferred stock.
One of the effects of undesignated preferred stock may be to enable our board of directors to render more difficult or to discourage an attempt to obtain control of us by means of a tender offer, proxy contest, merger or otherwise, and as a result, protect the continuity of our management. The issuance of shares of the preferred stock under the board of directors’directors' authority described above may adversely affect the rights of the holders of common stock. For example, preferred stock issued by us may rank prior to the common stock as to dividend rights, liquidation preference or both, may have full or limited voting rights and may be convertible into shares of common stock. Accordingly, the issuance of shares of preferred stock may discourage bids for the common stock or may otherwise adversely affect the market price of the common stock.
StockholdersRegistration Rights Agreement
We and the current holders of our common stock and our Class A common stock are parties to an amended and restated stockholders agreement.
Election of Board of Directors
Pursuant to the terms of our stockholders agreement and our certificate of incorporation, the Class A stockholders are entitled to elect five members of the board of directors and the common stockholders are entitled to elect four members of the board of directors. Also, on any issue presented to the board of directors, our stockholders agreement, certificate of incorporation and bylaws provide that each Class A director has one vote, and each common director currently has one vote;provided,however, that if, at any time, our board of directors has more than four common directors, each common director will individually have a fractional vote such that the common directors collectively have four votes.
Our stockholders agreement provides that, of the five Class A directors, Roger D. Linquist is entitled to designate two directors, C. Boyden Gray is entitled to designate one director, and Messrs. Linquist and Gray, together, are entitled to designate two directors. The Class A stockholders have agreed to vote all of their shares of Class A common stock for such designees. In addition, pursuant to the terms of our stockholders agreement, of the four common directors, Accel Partners is entitled to designate one director, M/C Venture Partners is entitled to designate one director, and the common stockholders who formerly held shares of Series D preferred stock are entitled to designate one director. The common stockholders that are parties to our stockholders agreement have agreed to vote all of their shares of common stock for such designees.
The fourth common director shall be nominated in accordance with the applicable provisions of Delaware law, our certificate of incorporation and our bylaws. The right of each of Accel Partners and M/C Venture Partners to designate one director shall terminate when and if such stockholder ceases to own:
According to our stockholders agreement, under specific conditions, our board of directors and the stockholders who are parties to that agreement must use their reasonable best efforts to amend our corporate governance documents to provide for the Class A stockholders and the common stockholders to vote on a one
vote per share basis, and the reduction of the number of directors elected by the Class A stockholders as a class from five to two directors, with these two directors being designated one by Roger D. Linquist and a second by C. Boyden Gray. The agreement requires reasonable best efforts to effect these amendments upon the occurrence of both of the following events:
Also, if these amendments have not been effected by January 27, 2007 (ten years following the initial grant to us of a PCS license), then our board of directors and the stockholder parties to thea registration rights agreement must use their reasonable best efforts to make these amendments.
Registration Rights
Afterthat will become effective upon a consummation of this offering, the stockholder parties to our stockholders agreement, who will collectively hold 73,106,870 shares of common stock, will be entitled to certain rights with respect to the registration of the sale of such shares under the Securities Act. Under the terms of the stockholdersregistration rights agreement, if we propose to register any of our securities under the Securities Act, either for our own account or for the account of other security holders exercising registration rights, such holders are entitled to notice of such registration and are entitled to include shares in the registration. Stockholders benefiting from these rights may also require us to file a registration statement under the Securities Act at our expense with respect to their shares of common stock, and we are required to use our best efforts to effect such registration. Further, these stockholders may require us to file additional registration statements on Form S-3 at our expense. These rights are subject to certain conditions and limitations, among them the rights of underwriters to limit the number of shares included in such registration.
registration and limit such stockholder's right to sell securities during the 180 days following our initial public offering of our common stock.
Anti-takeover Effects of Delaware Law ourand Our Restated Certificate of Incorporation and ourRestated Bylaws
Delaware Anti-Takeover Statute
We are a Delaware corporation and are subject to Delaware law, which generally prohibits a publicly held Delaware corporation from engaging in a “business combination”"business combination" with an “interested stockholder”"interested stockholder" for a period of three years after the time that the person became an interested stockholder, unless:
outstanding at the time the transaction commenced, excluding shares owned by persons who are directors and also officers of the corporation and by certain employee stock plans; or
A “business combination”"business combination" generally includes mergers, asset sales and similar transactions between the corporation and the interested stockholder, and other transactions resulting in a financial benefit to the stockholder. An “interested stockholder”"interested stockholder" is a person:
The provisions of Delaware law described above would make more difficult or discourage a proxy contest or acquisition of control by a holder of a substantial block of our stock or the removal of the incumbent board of directors. Such provisions could also have the effect of discouraging an outsider from making a tender offer or otherwise attempting to obtain control of MetroPCS,our Company, even though such an attempt might be beneficial to us and our stockholders.
Limitations on Liability and Indemnification of Officers and Directors
Our certificate of incorporation provides for two classesand bylaws:
We believe that these provisions are necessary to attract and retain qualified directors and officers.
We have also entered into separate indemnification agreements with each of our Class A common stockdirectors and thoseofficers under which we have agreed to indemnify, and to advance expenses to, each director and officer to the fullest extent permitted by applicable law with respect to liabilities they may incur in their capacities as directors and officers.
Classified Board of Directors
Prior to the consummation of this offering, our certificate of incorporation and bylaws will be amended to provide for a board of directors consisting of three divisions of directors, each serving staggered three-year terms. At each annual meeting of stockholders, directors will be elected by holdersto succeed the class of our common stock.directors whose terms have expired. The terms of the first, second and third divisions will expire in 2007, 2008 and 2009, respectively. The first division will consist of three directors, two of whom are currently appointed and one vacancy, and each of the second and third divisions will consist of three directors. The classification of our board of directors could have the effect of delaying or preventing a change in control or otherwise discouraging a potential acquirer from attempting to obtain control of us. However, we believe that this feature of our certificate of incorporation will help to
assure the continuity and stability of our business strategies and policies as determined by the board of directors. See “Description of Capital Stock—Dual Class Voting Structure.”
Advanced Notice Requirements
Our certificate of incorporationbylaws also providesrequire that subject to the rights of the holders of any class or series of preferred stock then outstanding, any newly created directorship resulting from an increase in the number of directors or a vacancy on the board of directors may be filled only by vote of a majority of the remaining directors then in office, even if less than a quorum or by a sole remaining director. For so long as any shares of Class A common stock remain outstanding, those directors elected by holders of our Class A common stock may be removed at any time, but only for cause and upon the affirmative vote of the holders of at least a majority of the voting power underlying the shares of Class A common stock then outstanding, voting separately as a class.
Our certificate of incorporation also provides that if at any time there ceasestockholder proposals to be any shares of our Class A common stock issued and outstanding, then:
The provisions of our certificate of incorporation relating to the matters described above in this “Description of Capital Stock” section may not be amended or repealed without:
Our bylaws provide that a stockholder may propose business or nominate directorsconsidered at an annual meeting only if the stockholder delivers written noticeof stockholders must be delivered to us not less than 90 days or20 nor more than 12060 days before the first anniversary date of the preceding year’s annual meeting. If the date of the annual meeting is advanced more than 30 days before or delayed more than 70 days after the anniversary of the preceding year’s annual meeting, then we must receive the stockholder’s notice not earlier than the one hundred twentieth day before the annual meeting and not later than the later of the ninetieth day prior to the annual meeting or the tenth day following the day on which public announcement of the date of the annual meeting is first made.meeting. In addition, in anythe notice of proposed business,any such proposal, the proposing stockholder must state the proposals, the reasons for the proposal, the
stockholder’s stockholder's name and address, the class and number of shares held by such stockholder and any material interest of the stockholder in the proposals. There are additional informational requirements in connection with a proposal concerning a nominee for the board of directors.
Amendments to Organizational Documents
Our bylaws also provideDelaware law provides generally that special meetingsthe affirmative vote of stockholders may be called only by us. No business may be transacted at any special meetinga majority of stockholders other than the business specified in our notice of the special meeting. In the event a special meeting is called for the purpose of electing directors, any stockholdershares entitled to vote inon any matter is required to amend a corporation's certificate of incorporation or bylaws, unless either a corporation's certificate of incorporation or bylaws require a greater percentage. Our restated certificate of incorporation will provide that the affirmative vote of at least % of our capital stock issued and outstanding and entitled to vote (in accordance with our restated certificate of incorporation) will be required to amend or repeal certain provisions of our restated certificate of incorporation that are designed to protect against takeovers unless such election may nominate directors only if the stockholder delivers notice to usamendments are approved by % of such nomination not earlier than the close of business on the 120th day prior to such special meeting and not later than the close of business on the later of the 90th day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by theour board of directorsdirectors. In addition, our restated bylaws will provide that an amendment to be electedour bylaws by shareholder action will require the affirmative vote of at such meeting.
Additionally,least % of our abilitycapital stock issued and outstanding and entitled to issue undesignated preferred stock may render more difficult, or discourage, an attempt to obtain control of us. See “Description of Capital Stock—Preferred Stock”
vote.
Indemnification of Directors and OfficersCorporate Opportunities
Our certificate of incorporation provides, as permitted by the Delaware General Corporation Act, that our non-employee directors have no obligation to offer us a corporate opportunity to participate in business opportunities presented to them or their respective affiliates even if the opportunity is one that we will indemnify any person who was ormight reasonably have pursued, unless such corporate opportunity is a party or is threatenedoffered to be made a party to any action, suit or proceeding, by reason of the fact that he or she is or was our director, officer, employee or agent. This indemnification extends to all expenses, judgments, fines and amounts paid in settlement reasonably incurred by any indemnified person if he or she acted in good faith and in a manner he or she reasonably believed to be in our best interests, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. However, we are not required to indemnify any person ultimately determined to be liable to us, in any action, suit or proceeding brought on our behalf, unless the court in which the action, suit or proceeding is brought determines that indemnification is fair and reasonable under the circumstances.
We may pay the expenses (including attorneys’ fees) incurred by an officer or director in defending any civil, criminal, administrative or investigative action, suit or proceeding in advance of final disposition upon receipt of an undertaking by the director or officer to repay the amount advanced if it is ultimately determined that he or she is not entitled to be indemnified as authorized in our certificate of incorporation.
The indemnification and advancement of expenses described above:
Our certificate of incorporation also provides that our directors will not be personally liable to us or our stockholders for monetary damages for breach of fiduciary duty as a director, except for liability:
The effect of this provision is to restrict our rights and the rights of our stockholders in derivative suits to recover monetary damages against a director for breach of certain fiduciary duties as a director. However, we believe that this provision, and the provisions relating to indemnification of directors and officers described above, are necessary to attract and retain qualified directors and officers.
Any repeal or modification of the provisions of our certificate of incorporation governing indemnification or limitation of liability will be prospective, and will not adversely affect:
We have also entered into separate indemnification agreements with each of our directors and executive officers under which we have agreed to indemnify, and to advance expenses to, each director and executive officer to the fullest extent permitted by applicable law with respect to liabilities they may incur in their capacities as directors and officers.
We maintain director and officer liability insurance to insure each person who was, is, or will be our director or officer against specified losses and wrongful acts of such director or officer in his or her capacity as such, including breachesa director of duty and trust, neglect, error and misstatement. In accordance with the director and officer insurance policy, each insured partyour company. Stockholders will be entitleddeemed to receive advanceshave notice of specified defense costs.and consented to this provision of our certificate of incorporation.
Listing of Common Stock
We will apply to list our common stock on under the symbol .
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Mellon Investor Services LLC, and its telephone number is (201) 373-7198..
MATERIAL U.S. FEDERAL TAX CONSIDERATIONS FOR NON-U.S. HOLDERS
The following is a discussion of the material U.S. federal income and estate tax consequences of the acquisition, ownership and disposition of our common stock purchased pursuant to this offering by a stockholder that, for U.S. federal income tax purposes, is not a “U.S. person,” as we define that term below. A beneficial owner of our common stock who is not a U.S. person is referred to below as a “non-U.S. holder.” This discussion is based upon current provisions of the Internal Revenue Code of 1986, as amended, or the Code, Treasury regulations promulgated thereunder, judicial opinions, administrative pronouncements and published rulings of the U.S. Internal Revenue Service, (or the IRS) all as in effect as of the date of this prospectus. These authorities may be changed, possibly retroactively, resulting in U.S. federal tax consequences different from those discussed below. We have not sought, and will not seek, any ruling from the IRS or opinion of counsel with respect to the statements made in this discussion, and there can be no assurance that the IRS will not take a position contrary to such statements or that any such contrary position taken by the IRS would not be sustained.
This discussion is limited to non-U.S. holders who purchase our common stock issued pursuant to this offering and who hold our common stock as a capital asset (generally, property held for investment). This discussion also does not address the tax considerations arising under the laws of any foreign, state or local jurisdiction, or under United States federal estate or gift tax laws (except as specifically described below). In addition, this discussion does not address tax considerations that may be applicable to an investor’s particular circumstances or to investors that may be subject to special tax rules, including, without limitation:
If a partnership (including any entity treated as a partnership for U.S. federal income tax purposes) is a stockholder, the tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. A stockholder that is a partnership, and partners in such partnership, are encouraged to consult their own tax advisors regarding the tax consequences of the purchase, ownership and disposition of our common stock.
For purposes of this discussion, a U.S. person means any one of the following:
You are urged to consult your tax advisor with respect to the application of the U.S. federal income tax laws to your particular situation as well as any tax consequences arising under the federal estate or gift tax rules or under the laws of any state, local, foreign or other taxing jurisdiction or under any applicable tax treaty.
Dividends
If distributions are paid on shares of our common stock, these distributions will constitute dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. To the extent a distribution exceeds our current and accumulated earnings and profits, it will constitute a return of capital that is applied against and reduces, but not below zero, your adjusted tax basis in our common stock. Any remainder will constitute gain on the common stock. Dividends paid to a non-U.S. holder will generally be subject to withholding of U.S. federal income tax at the rate of 30% or such lower rate as may be specified by an applicable income tax treaty. If the dividend is effectively connected with the non-U.S. holder’s conduct of a trade or business in the United States or, if a tax treaty applies, attributable to a U.S. permanent establishment maintained by the non-U.S. holder, the dividend will not be subject to any withholding tax (provided specific certification requirements are met, as described below) but will be subject to U.S. federal income tax imposed on net income on the same basis that applies to U.S. persons generally. A corporate stockholder under certain circumstances also may be subject to a branch profits tax equal to 30% (or such lower rate as may be specified by an applicable income tax treaty) of a portion of its effectively connected earnings and profits for the taxable year.
In order to claim the benefit of a tax treaty or to claim exemption from withholding because the income is effectively connected with the conduct of a trade or business in the United States, a non-U.S. holder must provide a properly executed IRS Form W-8BEN for treaty benefits or W-8ECI for effectively connected income, or such successor forms as the IRS designates, prior to the payment of dividends. These forms must be periodically updated. Non-U.S. holders may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund.
Gain on Disposition of Common Stock
A non-U.S. holder will generally not be subject to U.S. federal income tax, including by way of withholding, on gain recognized on a sale or other disposition of our common stock unless any one of the following is true:
We believe that we are not currently and will not become a USRPHC. However, because the determination of whether we are a USRPHC depends on the fair market value of our United States real property interests relative to the fair market value of our other business assets, there can be no assurance that we will not become a USRPHC in the future. As long as our common stock is regularly traded on an established securities market, however, it will be treated as United States real property interests, in general, only with respect to a non-U.S. holder that holds more than 5% of such regularly traded common stock.
Unless an applicable treaty provides otherwise, gain described in the first bullet point above will be subject to the U.S. federal income tax imposed on net income on the same basis that applies to U.S. persons generally but
will generally not be subject to withholding. Corporate stockholders also may be subject to a branch profits tax on such gain. Gain described in the second bullet point above will be subject to a flat 30% U.S. federal income tax, which may be offset by U.S. source capital losses. Non-U.S. holders should consult any applicable income tax treaties that may provide for different rules.
U.S. Federal Estate Taxes
Our common stock owned or treated as owned by an individual who at the time of death is a non-U.S. holder will be included in his or her estate for U.S. federal estate tax purposes, unless an applicable estate tax treaty provides otherwise.
Information Reporting and Backup Withholding
Under U.S. Treasury regulations, we must report annually to the IRS and to each non-U.S. holder the amount of dividends paid to such non-U.S. holder and the tax withheld with respect to those dividends. These information reporting requirements apply even if withholding was not required because the dividends were effectively connected dividends or withholding was reduced or eliminated by an applicable tax treaty. Pursuant to an applicable tax treaty, that information may also be made available to the tax authorities in the country in which the non-U.S. holder resides.
The United States generally imposes a backup withholding tax on dividends and specific other types of payments to certain non-corporate holders who fail to comply with specific information requirements. Backup withholding will generally not apply to payments of dividends made by us or our paying agents, in their capacities as such, to a non-U.S. holder of our common stock if the stockholder has provided the required certification that it is not a U.S. person or certain other requirements are met. Notwithstanding the foregoing, backup withholding may apply if either we or our paying agent has actual knowledge, or reason to know, that the stockholder is a U.S. person.
Payments of the proceeds from a disposition or a redemption effected outside the United States by a non-U.S. holder of our common stock made by or through a foreign office of a broker generally will not be subject to information reporting or backup withholding. However, information reporting, but not backup withholding, generally will apply to such a payment if the broker has certain connections with the United States unless the broker has documentary evidence in its records that the beneficial owner is a non-U.S. holder and specified conditions are met or an exemption is otherwise established.
Payment of the proceeds from a disposition by a non-U.S. holder of common stock made by or through the U.S. office of a broker is generally subject to information reporting and backup withholding unless the non-U.S. holder certifies that it is not a U.S. person under penalties of perjury and such broker does not have actual knowledge, or reason to know, that the stockholder is a U.S. person or otherwise establishes an exemption from information reporting and backup withholding.
Backup withholding is not an additional tax. Any amounts that we withhold under the backup withholding rules will be refunded or credited against the non-U.S. holder’s U.S. federal income tax liability if certain required information is furnished to the IRS. Non-U.S. holders are urged to consult their own tax advisors regarding application of backup withholding in their particular circumstance and the availability of, and procedure for obtaining an exemption from, backup withholding under current Treasury regulations.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for any class of our capital stock, and a significant public market for our common stock may not develop or be sustained after this offering. Future sales of significant amounts of our capital stock, including shares of our outstanding stock and shares of our stock issued upon exercise of outstanding options, in the public market after this offering, or the perception that such sales could occur, could adversely affect the prevailing market price of our common stock and could impair our future ability to raise capital through the sale of our equity securities.
Sale of Restricted Shares and Lock-Up Agreements
Upon the closing of this offering, we will have outstanding 90 shares of Class A common stock and 97,106,870 shares of common stock in each case, based upon our shares outstanding as of May 31, 2004,, and after giving effect to the conversion of all shares of our Class B commonSeries D preferred stock and Series DE preferred stock. See “Description"Description of Capital Stock.”"
Of these shares, the 24,000,000 shares of common stock sold in this offering will be freely tradable without restriction under the Securities Act, unless purchased by affiliates of our company, as that term is defined in Rule 144 under the Securities Act, and an additional 32,683,857 shares will be freely tradable pursuant to Rule 144(k) under the Securities Act.
The shares of Class A common stock and the remaining 40,423,013 shares of common stock are “restricted securities” as that term is defined in Rule 144 under the Securities Act. These restricted securities may be sold in the public market only if they are registered under the Securities Act or sold in accordance with Rule 144 or Rule 701 promulgated under the Securities Act. Beginning 90 days after the date of this prospectus, approximately 32,133,025 of the remaining shares of common stock will have become eligible for sale in the public market pursuant to Rule 144, subject to certain volume limitations.
Substantially all of the shares of our capital stock, other than theAll shares of our common stock to be sold in this offering,are held by holders who are subject to a stockholders agreement, and our executive officers and directors who are not stockholders will be subject to a lock-up agreements. Underagreement, pursuant to which, subject to certain exceptions, these agreements, holders, of these sharesexecutive officers and directors have agreed not to sell or otherwise dispose of their shares of capitalcommon stock or any securities convertible into or exchangeable for shares of capitalcommon stock for a period of 180 days after the date of this prospectus,prospectus. and , as representatives of the underwriters may, in their sole discretion and at any time without notice, release all or any portion of the securities subject to certain exceptions, including providing for transfers to family members, affiliates, trusts and investment funds and the conversion of Class A common stock to common stock upon FCC approval.
Bear, Stearns & Co. Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated have advised us that they will determine to release shares subject to lock-ups on a case-by-case basis after considering various factors such as the current equity market condition, the performance of the price of our common stock since the offering, the likely impact of any release on the price of our common stock, the number of shares requested to be released and the requesting party’s reason for making the request. Bear, Stearns & Co. Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated have also agreed to waive the lock-up arrangements to the extent necessary to permit the selling stockholders to sell the shares being offered by them.agreements. See “Underwriting.”
"Underwriting."
Rule 144
In general, Rule 144 allows a stockholder (or stockholders where shares are aggregated), including an affiliate, who has beneficially owned shares of our common stock for at least one year and who files a Form 144 with the SEC to sell within any three month period commencing 90 days after the date of this prospectus a number of those shares that does not exceed the greater of:
Approximately 32,133,025 shares of our common stock will have become available for sale, subject to the volume limitations of Rule 144, after the expiration of the lock-up period. The remaining shares of our common stock will become available for sale, subject to the volume limitation of Rule 144, at various times after the expiration of the lock-up period and upon expiration of the one-year holding periods required by Rule 144.
Sales under Rule 144, however, are subject to specific manner of sale provisions, notice requirements, and the availability of current public information about us. We cannot estimate the number of shares of common stock our existing stockholders will sell under Rule 144, as this will depend on the market price for our common stock, the personal circumstances of the stockholders and other factors.
Rule 144(k)
Under Rule 144(k), in general, a stockholder who has beneficially owned shares of our common stock for at least two years and who is not deemed to have been an affiliate of our company at any time during the immediately preceding 90 days may sell shares without complying with the manner of sale provisions, notice requirements, public information requirements, or volume limitations of Rule 144. Affiliates of our company, however, must always sell pursuant to Rule 144, even after the otherwise applicable Rule 144(k) holding periods have been satisfied.
Rule 701
Rule 701 generally allows a stockholder who purchased shares of our common stock pursuant to a written compensatory plan or contract and who is not deemed to have been an affiliate of our company during the immediately preceding 90 days to sell these shares in reliance upon Rule 144, but without being required to comply with the public information, holding period, volume limitation or notice provisions of Rule 144. Rule 701 also permits affiliates of our company to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. All holders of Rule 701 shares, however, are required to wait until 90 days after the date of this prospectus before selling such shares pursuant to Rule 701.
As of May 31, 2004, 1,011,112, 200 , shares of our common stock had been issued to some of our management employees in reliance on Rule 701.
Registration Rights
After this offering, theThe stockholder parties to our stockholdersregistration rights agreement that will become effective upon consummation of this offering, who will collectively hold 73,106,870 shares of common stock, will be entitled to certain rights with respect to the registration of the sale of such shares under the Securities Act. Under the terms of the stockholdersregistration rights agreement, if we propose to register any of our securities under the Securities Act, either for our own account or for the account of other security holders exercising registration rights, such holders are entitled to notice of such registration and are entitled to include shares in the registration. Stockholders benefiting from these rights may also require us to file a registration statement under the Securities Act at our expense with respect to their shares of common stock, and we are required to use our best efforts to effect such registration. Further, these stockholders may require us to file additional registration statements on Form S-3 at our expense. These rights are subject to certain conditions and limitations, among them the exclusion from registration of any shares that could be sold pursuant to Rule 144(k) as well as the rights of underwriters to limit the number of shares included in such registration. All stockholder parties to our registration rights agreement shall not sell or otherwise dispose of their securities for a period of 180 days after our initial public offering.
By exercising their registration rights and causing a large number of shares to be sold in the public market, these holders could cause the market price of our common stock to decline. See “Description"Description of Capital Stock—Stockholders Agreement.”Registration Rights Agreement"
Options and Warrants
In addition to the shares of our common stock and Class A common stock outstanding immediately after this offering, as of May 31, 2004,, 200, there were outstanding options to purchase 10,627,486 shares of our common stock and outstanding warrants to purchase 1,215,570 shares of common stock. An additional 5,286,703 shares of common stock have been reserved for issuance pursuant to our equity compensation plans.
As soon as practicable after the closing of this offering, we intend to file a registration statement on Form S-8 under the Securities Act covering shares of our common stock issued or reserved for
issuance under our equity compensation plans. Accordingly, shares of our common stock registered under such registration statement will be available for sale in the open market upon exercise by the holders, subject to vesting restrictions with us, contractual lock-up restrictions and/or market stand-off provisions applicable to each option agreement that prohibit the sale or other disposition of the shares of common stock underlying the options for a period of 180 days after the date of this prospectus without the prior written consent from us or our underwriters.
UNDERWRITING
MATERIAL UNITED STATES FEDERAL TAX CONSIDERATIONS FOR NON-U.S. HOLDERS
The following is a discussion of the material U.S. federal income and estate tax consequences of the acquisition, ownership and disposition of our common stock purchased pursuant to this offering by a stockholder that, for U.S. federal income tax purposes, is not a "U.S. person," as we define that term below. A beneficial owner of our common stock who is not a U.S. person is referred to below as a "non-U.S. holder." This discussion is based upon current provisions of the Internal Revenue Code of 1986, as amended, or the Code, Treasury regulations promulgated thereunder, judicial opinions, administrative pronouncements and published rulings of the U.S. Internal Revenue Service, (or the IRS) all as in effect as of the date of this prospectus. These authorities may be changed, possibly retroactively, resulting in U.S. federal tax consequences different from those discussed below. We have not sought, and will not seek, any ruling from the IRS or opinion of counsel with respect to the statements made in this discussion, and there can be no assurance that the IRS will not take a position contrary to such statements or that any such contrary position taken by the IRS would not be sustained.
This discussion is limited to non-U.S. holders who purchase our common stock issued pursuant to this offering and who hold our common stock as a capital asset (generally, property held for investment). This discussion also does not address the tax considerations arising under the laws of any foreign, state or local jurisdiction, or under United States federal estate or gift tax laws (except as specifically described below). In addition, this discussion does not address tax considerations that may be applicable to an investor's particular circumstances or to investors that may be subject to special tax rules, including, without limitation:
If a partnership (including any entity treated as a partnership for U.S. federal income tax purposes) is a stockholder, the tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. A stockholder that is a partnership, and partners in such partnership, are encouraged to consult their own tax advisors regarding the tax consequences of the purchase, ownership and disposition of our common stock.
For purposes of this discussion, a U.S. person means any one of the following:
other trusts considered U.S. persons for U.S. federal income tax purposes, or (ii) that has a valid election in effect to be treated as a U.S. person.
You are urged to consult your tax advisor with respect to the application of the U.S. federal income tax laws to your particular situation as well as any tax consequences arising under the federal estate or gift tax rules or under the laws of any state, local, foreign or other taxing jurisdiction or under any applicable tax treaty.
Dividends
If distributions are paid on shares of our common stock, these distributions will constitute dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. To the extent a distribution exceeds our current and accumulated earnings and profits, it will constitute a return of capital that is applied against and reduces, but not below zero, your adjusted tax basis in our common stock. Any remainder will constitute gain on the common stock and will be treated as described under "Gain on Disposition of Common Stock," below. Dividends paid to a non-U.S. holder will generally be subject to withholding of U.S. federal income tax at the rate of 30% or such lower rate as may be specified by an applicable income tax treaty. If the dividend is effectively connected with the non-U.S. holder's conduct of a trade or business in the United States or, if a tax treaty applies, attributable to a U.S. permanent establishment maintained by the non-U.S. holder, the dividend will not be subject to any withholding tax (provided specific certification requirements are met, as described below) but will be subject to U.S. federal income tax imposed on net income on the same basis that applies to U.S. persons generally. A corporate stockholder under certain circumstances also may be subject to a 30% (or such lower rate as may be specified by an applicable income tax treaty) branch profits tax on such effectively connected dividend income, connected earnings and profits for the taxable year.
In order to claim the benefit of a tax treaty or to claim exemption from withholding because the income is effectively connected with the conduct of a trade or business in the United States, a non-U.S. holder must provide a properly executed IRS Form W-8BEN for treaty benefits or W-8ECI for effectively connected income, or such successor forms as the IRS designates, prior to the payment of dividends. These forms must be periodically updated. Non-U.S. holders may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund.
Gain on Disposition of Common Stock
A non-U.S. holder will generally not be subject to U.S. federal income tax, including by way of withholding, on gain recognized on a sale or other disposition of our common stock unless any one of the following is true:
We believe that we are not currently and will not become a USRPHC. However, because the determination of whether we are a USRPHC depends on the fair market value of our United States
real property interests relative to the fair market value of our other business assets, there can be no assurance that we will not become a USRPHC in the future.
Unless an applicable treaty provides otherwise, gain described in the first bullet point above will be subject to the U.S. federal income tax imposed on net income on the same basis that applies to U.S. persons generally but will generally not be subject to withholding. Corporate stockholders also may be subject to a branch profits tax on such gain. Gain described in the second bullet point above will be subject to a flat 30% U.S. federal income tax, which may be offset by U.S. source capital losses. Non-U.S. holders should consult any applicable income tax treaties that may provide for different rules.
U.S. Federal Estate Taxes
Common stock owned or treated as owned by an individual who at the time of death is a non-U.S. holder will be included in his or her estate for U.S. federal estate tax purposes, unless an applicable estate tax treaty provides otherwise.
Information Reporting and Backup Withholding
Under U.S. Treasury regulations, we must report annually to the IRS and to each non-U.S. holder the amount of dividends paid to such non-U.S. holder and the tax withheld with respect to those dividends. These information reporting requirements apply even if withholding was not required because the dividends were effectively connected dividends or withholding was reduced or eliminated by an applicable tax treaty. Pursuant to an applicable tax treaty, that information may also be made available to the tax authorities in the country in which the non-U.S. holder resides.
The United States generally imposes a backup withholding tax on dividends and specific other types of payments to certain non-corporate holders who fail to furnish certain required information. Backup withholding will generally not apply to payments of dividends made by us or our paying agents, in their capacities as such, to a non-U.S. holder of our common stock if the stockholder has provided the required certification that it is not a U.S. person or certain other requirements are met. Notwithstanding the foregoing, backup withholding may apply if either we or our paying agent has actual knowledge, or reason to know, that the stockholder is a U.S. person.
Payments of the proceeds from a disposition or a redemption effected outside the United States by a non-U.S. holder of our common stock made by or through a foreign office of a broker generally will not be subject to information reporting or backup withholding. However, information reporting, but not backup withholding, generally will apply to such a payment if the broker has certain connections with the United States unless the broker has documentary evidence in its records that the beneficial owner is a non-U.S. holder and specified conditions are met or an exemption is otherwise established.
Payment of the proceeds from a disposition by a non-U.S. holder of common stock made by or through the U.S. office of a broker is generally subject to information reporting and backup withholding unless the non-U.S. holder certifies that it is not a U.S. person under penalties of perjury and such broker does not have actual knowledge, or reason to know, that the stockholder is a U.S. person, or the non-U.S. holder otherwise establishes an exemption from information reporting and backup withholding.
Backup withholding is not an additional tax. Any amounts that we withhold under the backup withholding rules will be credited against the non-U.S. holder's U.S. actual federal income tax liability and, if the amounts so withheld exceed the non-U.S. holder's actual U.S. federal income tax liability, a refund may be obtained from the IRS if certain required information is furnished by the non-U.S. holder to the IRS. Non-U.S. holders are urged to consult their own tax advisors regarding application of backup withholding in their particular circumstance and the availability of, and procedure for obtaining an exemption from, backup withholding under current Treasury regulations.
We and the selling stockholders intend to offer the shares of our common stock through the underwriters. Subject to the terms and conditions described in an underwriting agreement among us, the selling stockholders and Bear, Stearns & Co. Inc., Banc of America Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated UBS Securities LLC, J.P.and Morgan Securities Inc. and Thomas Weisel Partners LLC,Stanley & Co. Incorporated as representatives of the several underwriters,joint book-running managers for this offering, we and the selling stockholders have agreed to sell to the underwriters, and the underwriters severally have agreed to purchase from us and the selling stockholders, the number of shares of common stock listed opposite their names below.
| Underwriter | Number of Shares | ||||
|---|---|---|---|---|---|
| |||||
Bear, Stearns & Co. Inc. | |||||
Banc of America Securities LLC | |||||
| Merrill Lynch, Pierce, Fenner & Smith Incorporated | |||||
| |||||
| |||||
| |||||
Total | |||||
The underwriters have agreed to purchase all of the shares sold under the underwriting agreement if any of these shares are purchased. If an underwriter defaults, the underwriting agreement provides that the purchase commitments of the non-defaulting underwriters may be increased or the underwriting agreement may be terminated.
We and the selling stockholders have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the underwriters may be required to make in respect of those liabilities.
The underwriters are offering the shares, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of legal matters by their counsel, including the validity of the shares, and other conditions contained in the underwriting agreement, such as the receipt by the underwriters of officer’sofficer's certificates and legal opinions. The underwriters reserve the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part.
A prospectus in electronic format may be made available on internetInternet sites or through other online services maintained by one or more of the underwriters and/or selling group members participating in this offering, or by their affiliates. In those cases, prospective investors may view offering terms online and, depending upon the particular underwriter or selling group member, prospective investors may be allowed to place orders online. Certain underwriters may allocate a limited number of shares for sale to online brokerage account holders. Any such allocation for online distributions will be made by the representativesunderwriters on the same basis as other allocations.
Other than the prospectus in electronic format, information contained on any other website maintained by an underwriter or selling group member is not part of this prospectus or the registration statement of which this prospectus forms a part, has not bebeen endorsed by us or any underwriter or any selling group member in its capacity as underwriter or selling group member and should not be relied on by prospective investors in deciding whether to purchase any shares of common stock. The underwriters and selling group members are not responsible for information contained in internetInternet websites that they do not maintain.
In addition, the underwriters may send prospectuses via email as a courtesy to certain of their customers to whom they are concurrently sending a prospectus hard copy.
Commissions and Discounts
The underwriters have advised us that they propose initially to offer the shares to the public at the public offering price on the cover page of this prospectus and to dealers at that price less a concession not in excess of
$ per share. The underwriters may allow, and the dealers may reallow, a discount not in excess of $ per share to other dealers. After the public offering, the public offering price, concession and discount may be changed.
The following table shows the public offering price, underwriting discountdiscounts and proceeds before expenses to us.
The information assumes either no exercise or full exercise by the underwriters of their over-allotment option.
option:
| Total | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Per Share | No Exercise | Full Exercise | |||||||||||||||||
|
| ||||||||||||||||||
Public offering price | $ | $ | $ | ||||||||||||||||
Underwriting | $ | $ | $ | ||||||||||||||||
Proceeds, before expenses, to MetroPCS | $ | $ | $ | ||||||||||||||||
Proceeds, before expenses, to the selling stockholders | $ | $ | $ | ||||||||||||||||
The expenses of this offering, excluding the underwriting discount and commissions and related fees, are estimated at $2.5 million and are payable by us.
Over-allotmentOver-Allotment Option
The selling stockholders have granted the underwriters an option exercisable for 30 days from the date of this prospectus to purchase a total of up to 3,600,000 additional shares at the public offering price less the underwriting discount. The underwriters may exercise this option solely to cover any over-allotments, if any, made in connection with this offering. To the extent the underwriters exercise this option in whole or in part, each will be obligated, subject to conditions contained in the underwriting agreement, to purchase a number of additional shares approximately proportionate to that underwriter’sunderwriter's initial commitment amount reflected in the above table.
If the underwriters sell more shares than could be covered by the over-allotment option, a naked short position would be created that can only be closed out by buying shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering.
No Sales of Similar Securities
We, each of our executive officers and directors and holdersall of substantially allthe holders of our common stock, have agreed, withsubject to limited exceptions, will agree not to sell or transfer any shares of our common stock for 180 days after the date of this prospectus (which period could be extended by the underwriters for up to an additional 34 days under certain circumstances) without first obtaining the written consent of Bear, Stearns & Co. Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated. Specifically,
The 180-day period described in the preceding paragraph will be automatically extended if: (i) during the last 17 days of the 180-day period we and these other individuals have agreedissue an earnings release or announce material news or a material event; or (ii) prior to the expiration of the 180-day period, we announce that we will release earnings results during the 15-day period following the last day of the 180-day period, in either of which case the restrictions described in the preceding paragraph will continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the announcement of the material news or material event.
Notwithstanding the foregoing, parties who will agree not to:
This lock-up provision applies to sell or transfer shares of our common stock any other equity securityduring such period of MetroPCS or anytime may transfer shares during such period, without the prior written consent of its subsidiaries and any security convertible into, or exercisable or exchangeable for, any common stock or other such equity security. Bear, Stearns & Co. Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated may waive this lock-up without public notice. This lockup provision does not limit our ability :
provided, however, it is a condition to purchase common stock or issue common stock uponany such transfer that the exercise of options or otherwise under our equity compensation plans.
At our request, the underwriters have reserved up to 720,000 of the shares of common stock being offered by this prospectus for sale to our directors, officers and employees and particular other individuals designated by us at the initial public offering price. Shares purchased through this directed share program may be subject to a 180-day lock-up restriction substantially similar to the lock-up restriction described above. Any purchases of the
reserved shares will reduce the number of shares available to the general public. If all of these reserved shares are not purchased, the underwriters will offer the remainder to the general public on the same terms as the other shares offered by this prospectus.
Quotation on the Nasdaq National Market
Our common stock has been approved for quotation on the Nasdaq National Market under the symbol “MPCS.”
Price Stabilization, Short Positions
Until the distribution of the shares is completed, SEC rules may limit the underwriters from bidding for and purchasing our common stock. However, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of our common stock during and after this offering.
If the underwriters over-allot or otherwise create a short position in our common stock in connection with this offering, i.e., if they sell more shares than are listed on the cover of this prospectus, the underwriters may reduce that short position by purchasing sharestransferee (or trustee in the open market. The underwriters may also elect to reduce any short position by exercising all or partcase of the over-allotment option described above. In addition, the underwriters may impose penalty bids, under which selling concessions allowed to syndicate members or other broker-dealers participating in this offering are reclaimed ifclause (ii) above) execute an agreement stating that such transferee (or trustee) is receiving and holding shares of our common stock previously distributedsubject to the provisions of the agreement pursuant to which these persons agreed not to sell or transfer shares of our common stock and there shall be no further transfer of shares of our common stock except in this offering are repurchasedaccordance with the terms of such agreement; provided, further, that in the case of any such transfer, no filing by any party under the Securities Act or the Securities Exchange Act of 1934 is required in connection with stabilizationsuch transfer. The transfer restrictions set forth above do not apply to (i) the registration of the offer to and sale of our common stock as contemplated herein, including the sale of our common stock by any selling stockholder, (ii) any grant to, or exercise of any stock or other awards under our equity incentive plans, or (iii) the transfer, sale or offer to sell of not more than the number of shares sufficient to cover the exercise price and taxes of such employee's options that will expire in connection with such termination following an involuntary termination of employment,provided that any such sale, transfer or offer to sell does not occur before the earlier of (A) 85 days following the termination of employment and (B) the remainder of the 180-day period.
Stabilization, Short Positions and Penalty Bids
The underwriters may engage in over-allotment, stabilizing transactions, or otherwise. Thesesyndicate covering transactions and penalty bids in accordance with Regulation M under the Securities Exchange Act of 1934.
Stabilizing transactions, syndicate covering transactions and penalty bids may cause the price of our common stock to be higher than it mightwould otherwise be in the absence of suchthese transactions. The imposition of a penalty bidThese transactions may also affect the price of our common stock to the extent that it discourages resales.
Neither we nor any of the underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may havebe effected on the price of our common stock. In addition, neither we nor any of the underwriters makes any representation that they will engage in these transactions or that these transactions, onceotherwise and, if commenced, will notmay be discontinued without notice.
at any time.
Passive Market MakingDiscretionary Shares
In connection with this offering, the underwriters may allocate shares to accounts over which they exercise discretionary authority. The underwriters do not expect to allocate shares to discretionary accounts in excess of 5% of the total number of shares in this offering.
Sales in Other Jurisdictions
Each of the underwriters may arrange to sell shares in certain jurisdictions outside the United States through affiliates, either directly where they are permitted to do so or through affiliates.
Each of the underwriters has represented and agreed that:
The shares will not be offered, directly or indirectly, to the public in Switzerland and this prospectus does not constitute a public offering prospectus as that term is understood pursuant to article 652a or 1156 of the Swiss Federal Code of Obligations.
The shares (i) will not be offered or sold, directly or indirectly, to the public (appel public à l'épargne) in the Republic of France and (ii) offers and sales of shares in the Republic of France (a) will only be made to qualified investors (investisseurs qualifiés) as defined in, and in accordance with, Rule 103Articles L 411-1, L 411-2 and D 411-1 to D 411-3 of Regulation M under the Securities Exchange ActFrench Code monétaire et financier or (b) will be made in any other circumstances which do not require the publication by the issuer of 1934 during a period beforeprospectus pursuant to Article L 411-2 of the commencementCode monétaire et financier and Article 211-2 of the Règlement Général of the Autorité des marchés financiers.
Investors are informed that this prospectus has not been admitted to the clearance procedures of the Autorité des marchés financiers, and that any subsequent direct or indirect circulation to the public of the shares so acquired may not occur without meeting the conditions provided for in Articles L 411-1, L 411-2, L 412-2 and L 621-8 to L 621-8-2 of the Code Monétaire et Financier.
In addition, the issuer represents and agrees that it has not distributed or caused to be distributed and will not distribute or cause to be distributed in the Republic of France, this prospectus or any other offering material relating to the shares other than to those investors (if any) to whom offers orand sales of common stock and extending through the completionshares in the Republic of distribution. A passive market maker must display its bid at a price not in excessFrance may be made as described above.
In relation to each Member State of the highest independent bidEuropean Economic Area which has implemented the Prospectus Directive (each, a Relevant Member State), with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State (the Relevant Implementation Date), it has not made and will not make an offer of shares to the public in that security. However,Relevant Member State prior to the publication of a prospectus in relation to the shares which has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, all in accordance with the Prospectus Directive, except that it may, with effect from and
including the Relevant Implementation Date, make an offer of shares to the public in that Relevant Member State at any time:
For the purposes of this provision, the expression an "offer of shares to the public" in relation to any shares in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the shares to be offered so as to enable an investor to decide to purchase or subscribe the shares, as the same may be varied in that bid must then be lowered when specified purchase limits are exceeded.
Member State by any measure implementing the Prospectus Directive in that Member State and the expression "Prospectus Directive" means Directive 2003/71/EC and includes any relevant implementing measure in each Relevant Member State.
Other Relationships
Some of the underwriters and their affiliates have engaged in, and may in the future engage in, investment banking and other commercial dealings in the ordinary course of business with us. They have received customary fees and commissions for these transactions. In addition, Bear, Stearns & Co. Inc. and certain of its employees own, in the aggregate, less than 1% of our common stock. Certain employees
In particular, (i) Bear, Stearns & Co. Inc. acted as lead arranger and joint book running manager under each of our former bridge credit facilities, as sole lead arranger and sole book runner under our former first and second lien secured credit agreements, as joint book running manager in connection with the private placement of our senior notes and as sole lead arranger and joint book runner under our senior secured credit facility, (ii) Bear Stearns Corporate Lending Inc., an affiliate of Bear, Stearns & Co. Inc. are selling stockholders, acted as a lender and as syndication agent and administrative agent under each of our former bridge credit facilities and our former first lien secured credit agreements, as a lender and syndication agent under our former second lien secured credit agreements and as syndication agent under our senior secured credit facility, (iii) Merrill Lynch, Pierce, Fenner & Smith Incorporated acted as documentation agent under our former first lien secured credit agreements, as joint book running manager in this offering. See “Principalconnection with the private placement of our senior notes and Selling Stockholders.”
as joint book runner under our senior secured credit facility, (iv) Merrill Lynch Capital Corporation, an affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated, acted as a joint book running manager and lender under each of our former bridge credit facilities, as a lender under our former first lien secured credit agreements and as administrative agent and lender under our former second lien secured credit agreements, (v) Bank of America, N.A., acted as issuing lender under our senior secured credit facility, (vi) Banc of America Bridge LLC, an affiliate of Banc of America Securities LLC, acted as joint book running manager and lender under each of our former bridge credit facilities, and (vii) Banc of America Securities LLC acted as joint book running manager in connection with the private placement of our senior notes.
Pricing of this Offering Price Determination
Prior toBefore this offering, there has been no public market for our shares of common stock. Consequently, theThe initial public offering price for our shares of common stock will be determined by negotiationsnegotiation between usthe underwriters and us. The principal factors to be considered in determining the public offering price include: the information set forth in this
prospectus and otherwise available to the underwriters; the history and the representativesprospects for the industry in which we will compete; the ability of our management; the prospects for our future earnings; the present state of our development and our current financial condition; the general condition of the underwriters.
Resale Restrictions
The distributionsecurities markets at the time of this offering; and the recent market prices of, and the demand for, publicly traded common stock in Canada is being made only on a private placement basis exempt from the requirement that we and the selling stockholders prepare and file a prospectus with the securities regulatory authorities in each province where trades of common stock are made. Any resale of the common stock in Canada must be made under applicable securities laws, which will vary depending on the relevant jurisdiction, and which may require resales to be made under available statutory exemptions or under a discretionary exemption granted by the applicable Canadian securities regulatory authority. Purchasers are advised to seek legal advice prior to any resale of the common stock.generally comparable companies.
By purchasing common stock in Canada and accepting a purchase confirmation a purchaser is representing to us, the selling stockholders and the dealer from whom the purchase confirmation is received that:
Rights of Action—Ontario Purchasers Only
Under Ontario securities legislation, a purchaser who purchases a security offered by this prospectus during the period of distribution will have a statutory right of action for damages, or while still the owner of the common stock, for rescission against us and the selling stockholders in the event that this prospectus contains a misrepresentation. A purchaser will be deemed to have relied on the misrepresentation. The right of action for damages is exercisable not later than the earlier of 180 days from the date the purchaser first had knowledge of the facts giving rise to the cause of action and three years from the date on which payment is made for the common stock. The right of action for rescission is exercisable not later than 180 days from the date on which payment is made for the common stock. If a purchaser elects to exercise the right of action for rescission, the purchaser will have no right of action for damages against us or the selling stockholders. In no case will the amount recoverable in any action exceed the price at which the common stock were offered to the purchaser and if the purchaser is shown to have purchased the securities with knowledge of the misrepresentation, we and the selling stockholders will have no liability. In the case of an action for damages, we and the selling stockholders will not be liable for all or any portion of the damages that are proven to not represent the depreciation in value of the common stock as a result of the misrepresentation relied upon. These rights are in addition to, and without derogation from, any other rights or remedies available at law to an Ontario purchaser. The foregoing is a summary of the rights available to an Ontario purchaser. Ontario purchasers should refer to the complete text of the relevant statutory provisions.
Enforcement of Legal Rights
All of our directors and officers as well as the experts named herein and the selling stockholders may be located outside of Canada and, as a result, it may not be possible for Canadian purchasers to effect service of process within Canada upon us or those persons. All or a substantial portion of our assets and the assets of those persons may be located outside of Canada and, as a result, it may not be possible to satisfy a judgment against us or those persons in Canada or to enforce a judgment obtained in Canadian courts against us or those persons outside of Canada.
Taxation and Eligibility for Investment
Canadian purchasers of common stock should consult their own legal and tax advisors with respect to the tax consequences of an investment in the common stock in their particular circumstances and about the eligibility of the common stock for investment by the purchaser under relevant Canadian legislation.
The Communications Act of 1934 includes provisions that authorize the FCC to restrict the level of ownership that foreign nationals or their representatives, a foreign government or its representative or any corporation organized under the laws of a foreign country may have in us. For a discussion of these and other FCC ownership restrictions, please see “Legislation and Government Regulations—"Business—Ownership Restrictions.”"
If a holder of our common stock acquires additional shares of common stock or otherwise is attributed with ownership of such shares that would cause us to violate FCC ownership restrictions, we may, at the option of our board of directors, redeem shares of common stock sufficient to eliminate the violation. In the event of a violation of the FCC’sFCC's foreign ownership restrictions, we must first redeem the stock of the foreign stockholder which most recently purchased its first shares of our stock. For a discussion of the redemption features of our common stock, including the prices at which we may redeem such stock, please see “Description"Description of Capital Stock—Common Stock and Class A Common Stock—Redemption.”
The validity of the shares of common stock offered hereby will be passed upon for us by Andrews Kurth LLP, Houston, Texas. Certain legal matters in connection with this offering will be passed upon for us by Baker Botts L.L.P., Dallas, Texas, and Paul, Hastings, Janofsky & Walker LLP, Washington D.C. and for the underwriters by Latham & Watkins LLP, New York, New York.
The consolidated financial statements of MetroPCS Communications, Inc. and its wholly-owned and majority-owned subsidiaries as of and for the years ended December 31, 20032004 and 20022005 included in this prospectus have been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report appearing herein, and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.
The consolidated financial statements of MetroPCS Communications, Inc. and its subsidiaries for each of the three years in the periodyear ended December 31, 2003 included in this prospectusProspectus have been so included in reliance on the report (which contains an explanatory paragraph that the Company restated its consolidated financial statements for the year ended December 31, 2003 as discussed in Note 2 to the 2004 consolidated financial statements, (not presented herein)) of PricewaterhouseCoopers LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.
AVAILABLEWHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the shares of common stock offered by this offering. Thisprospectus. In this prospectus does not contain all the information set forth in thewe refer to that registration statement, certain portions of which are omittedtogether with all amendments, exhibits and schedules to that registration statement, as "the registration statement."
As is permitted by the rules and regulations of the SEC.SEC, this prospectus, which is part of the registration statement, omits some information, exhibits, schedules and undertakings set forth in the registration statement. For further information aboutwith respect to us, and the sharessecurities offered by this prospectus, you shouldplease refer to the registration statement, including the exhibits and schedules filed with the registration statement. You may obtain copies of the registration statement, of which
Following this prospectus is a part, together with such exhibits and schedules, upon payment of the fee prescribed by the SEC, or you may examine these documents without charge at the office of the SEC. Statements contained in this prospectus as to the contents of any contract, agreement or other document to whichoffering, we make reference are not necessarily complete. In each instance, we refer you to the copy of such contract, agreement or other document filed as an exhibit to the registration statement, each such statement being qualified in all respects by the more complete description of the matter involved.
Our subsidiary, MetroPCS, Inc., is subject to the informational requirements of the Securities Exchange Act of 1934, or the Exchange Act, and iswill be required to file current, quarterly and annual and quarterly reports, proxy statements and other information with the SEC. In addition, upon consummationYou may read and copy those reports, proxy statements and other information at the public reference facility maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. Copies of this offering, MetroPCS Communications, Inc. willmaterial may also become subject tobe obtained from the informational and reporting requirements of the Exchange Act. Any materials filed with the SEC may be read and copied at the SEC’s Public Reference Room of the SEC at 450 Fifth100 F Street, N.W.N.E., Washington, D.C. 20549.20549 at prescribed rates. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.(800) 732-0330. The SEC maintains an Interneta Web site (http://www.sec.gov)at www.sec.gov that contains reports, proxy and information statements and other information regarding issuersregistrants that file electronically with the SEC. We expect that any materials filed by MetroPCS Communications, Inc. or by MetroPCS, Inc.make electronic filings with the SEC will be filed electronically.using its EDGAR system.
INDEX TOCONSOLIDATEDTO FINANCIAL STATEMENTS
| Page | |||||
|---|---|---|---|---|---|
Audited Consolidated Financial | |||||
| F-2 | ||||
| Report of Independent Registered Public Accounting Firm—PricewaterhouseCoopers LLP | |||||
Consolidated Balance Sheets as of December 31, | |||||
| F-5 | |||||
| Consolidated Statements of Stockholders' Equity for the years ended December 31, 2005, 2004 and 2003 | F-6 | ||||
Consolidated Statements of Cash Flows for the years ended December 31, | |||||
Unaudited Interim Condensed Consolidated Financial Statements: | |||||
| F-53 | ||||
| |||||
| 2005 | |||||
| 2005 | |||||
Notes to Condensed Consolidated Interim Financial Statements | |||||
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
MetroPCS Communications, Inc.:
Dallas, Texas
In our opinion,We have audited the accompanying consolidated balance sheets of MetroPCS Communications, Inc. and subsidiaries (the "Company") as of December 31, 2005 and 2004, and the related consolidated statements of operations, stockholders’income and comprehensive income, stockholders' equity, (deficit) and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of MetroPCS Communications, Inc. and its subsidiaries atas of December 31, 20032005 and 2002,2004, and the results of their operations and their cash flows for each of the three years then ended, in conformity with accounting principles generally accepted in the periodUnited States of America.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
August 8, 2006 (January 3, 2007 as to Note 19)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of MetroPCS Communications, Inc.:
In our opinion, the consolidated statements of income and comprehensive income, stockholders' equity and cash flows for the year ended December 31, 2003 present fairly, in all material respects, the results of operations, and cash flows of MetroPCS Communications, Inc. and its subsidiaries for the year ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; ourCompany's management. Our responsibility is to express an opinion on these financial statements based on our audits.audit. We conducted our auditsaudit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States), which. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provideaudit provides a reasonable basis for our opinion.
As discussed in Note 2 to the 2004 consolidated financial statements, (not presented herein) the Company has changedrestated its method of accountingconsolidated financial statements for revenue arrangements with multiple deliverables as a result of adopting EITF No. 00-21 as of July 1,the year ended December 31, 2003.
PricewaterhouseCoopers/s/ PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
TX
February 25, 2004, except as tofor "Restatement of Consolidated Financial Statements" under Note 182 for which the date is as of July 23, 2004May 5, 2006 and for "Earnings Per Share" under Note 2 and Note 17 and "Guarantor Subsidiaries" under Note 19 for which the date is December 20, 2006
MetroPCS Communications, Inc. and Subsidiaries
Consolidated Balance Sheets
As of December 31, 2005 and 2004
(in thousands, except share and per share information)
(In Thousands, Except Share Information)
| December 31, | Unaudited Pro Forma Stockholders’ December 31, | |||||||||||
| 2002 | 2003 | |||||||||||
ASSETS: | ||||||||||||
Cash and cash equivalents | $ | 61,717 | $ | 235,965 | ||||||||
Inventory, net | 13,546 | 21,210 | ||||||||||
Accounts receivable (net of allowance of $383 and $1,085 at December 31, 2002 and 2003, respectively) | 5,241 | 8,678 | ||||||||||
Prepaid expenses | 4,839 | 5,292 | ||||||||||
Deferred charges | 7,910 | 6,498 | ||||||||||
Current deferred tax asset | 13,330 | 6,675 | ||||||||||
Other current assets | 3,073 | 8,833 | ||||||||||
Total current assets | 109,656 | 293,151 | ||||||||||
Property and equipment, net | 353,360 | 482,965 | ||||||||||
Restricted cash and investments | 2,180 | 1,248 | ||||||||||
Long-term investments | — | 19,000 | ||||||||||
PCS licenses | 90,619 | 90,619 | ||||||||||
Microwave relocation costs | 6,932 | 10,000 | ||||||||||
Other assets | 175 | 5,511 | ||||||||||
Total assets | $ | 562,922 | $ | 902,494 | ||||||||
LIABILITIES: | ||||||||||||
Accounts payable and accrued expenses | $ | 89,829 | $ | 153,688 | ||||||||
Current maturities of long-term debt | 9,499 | 13,362 | ||||||||||
Deferred revenue | 14,375 | 31,091 | ||||||||||
Other current liabilities | 5,508 | 2,295 | ||||||||||
Total current liabilities | 119,211 | 200,436 | ||||||||||
Long-term debt, net | 41,351 | 182,433 | ||||||||||
Deferred tax liabilities | 23,424 | 30,791 | ||||||||||
Long-term deferred revenue | 3,585 | 30 | ||||||||||
Deferred rents | 2,802 | 3,961 | ||||||||||
Other long-term liabilities | 1,785 | 20,554 | ||||||||||
Total liabilities | 192,158 | 438,205 | ||||||||||
COMMITMENTS AND CONTINGENCIES (See Note 8) | ||||||||||||
SERIES D CUMULATIVE CONVERTIBLE REDEEMABLE PARTICIPATING PREFERRED STOCK, par value $.0001 per share, 4,000,000 shares designated, 2,845,578 and 3,500,947 shares issued and outstanding at December 31, 2002 and 2003, respectively, actual; none designated, issued or outstanding, pro forma; liquidation preference of $300,554 and $384,841 at December 31, 2002 and 2003, respectively | 294,642 | 379,401 | $ | — | ||||||||
STOCKHOLDERS’ EQUITY: | ||||||||||||
Preferred stock, par value $.0001 per share, 5,000,000 shares authorized, 4,000,000 of which have been designated as Series D Preferred Stock, no shares issued and outstanding at December 31, 2002 and 2003, actual; none designated, issued or outstanding, pro forma | — | — | — | |||||||||
Common stock, par value $.0001 per share— | ||||||||||||
Class A, 300 shares authorized, 90 shares issued and outstanding at December 31, 2002 and 2003, actual and pro forma | — | — | — | |||||||||
Class B, 60,000,000 shares authorized, 3,843,785 and 3,908,785 shares issued and outstanding at December 31, 2002 and 2003, respectively, actual; none authorized, issued or outstanding, pro forma | — | — | — | |||||||||
Class C, 240,000,000 shares authorized, 32,579,427 and 32,682,903 shares issued and outstanding at December 31, 2002 and 2003, respectively, actual; 77,532,189 shares issued and outstanding, pro forma | 3 | 3 | 8 | |||||||||
Additional paid-in capital | 88,776 | 88,913 | 468,602 | |||||||||
Subscriptions receivable | (86 | ) | (92 | ) | (92 | ) | ||||||
Deferred compensation | (2,234 | ) | (4,229 | ) | (4,229 | ) | ||||||
Retained earnings (deficit) | (10,337 | ) | 293 | — | ||||||||
Total stockholders’ equity | 76,122 | 84,888 | $ | 464,289 | ||||||||
Total liabilities and stockholders’ equity | $ | 562,922 | $ | 902,494 | ||||||||
| | 2005 | 2004 | |||||||
|---|---|---|---|---|---|---|---|---|---|
| CURRENT ASSETS: | |||||||||
| Cash and cash equivalents | $ | 112,709 | $ | 22,477 | |||||
| Short-term investments | 390,422 | 36,964 | |||||||
| Inventories, net | 39,431 | 33,717 | |||||||
| Accounts receivable (net of allowance for uncollectible accounts of $2,383 and $2,323 at December 31, 2005 and 2004, respectively) | 16,028 | 9,101 | |||||||
| Prepaid expenses | 21,430 | 7,023 | |||||||
| Deferred charges | 13,270 | 9,225 | |||||||
| Deferred tax asset | 2,122 | 3,574 | |||||||
| Security deposits | 72 | 25,007 | |||||||
| Other current assets | 16,618 | 9,470 | |||||||
| Total current assets | 612,102 | 156,558 | |||||||
| Property and equipment, net | 831,490 | 636,368 | |||||||
| Restricted cash and investments | 2,920 | 2,293 | |||||||
| Long-term investments | 5,052 | — | |||||||
| PCS licenses | 681,299 | 154,144 | |||||||
| Microwave relocation costs | 9,187 | 9,566 | |||||||
| Other assets | 16,931 | 6,467 | |||||||
| Total assets | $ | 2,158,981 | $ | 965,396 | |||||
| CURRENT LIABILITIES: | |||||||||
| Accounts payable and accrued expenses | $ | 174,220 | $ | 105,541 | |||||
| Current maturities of long-term debt | 2,690 | 14,310 | |||||||
| Deferred revenue | 56,560 | 40,424 | |||||||
| Other current liabilities | 2,147 | 2,745 | |||||||
| Total current liabilities | 235,617 | 163,020 | |||||||
| Long-term debt, net | 902,864 | 170,689 | |||||||
| Deferred tax liabilities | 146,053 | 73,101 | |||||||
| Deferred rents | 14,739 | 10,331 | |||||||
| Redeemable minority interest | 1,259 | 1,008 | |||||||
| Other long-term liabilities | 20,858 | 21,403 | |||||||
| Total liabilities | 1,321,390 | 439,552 | |||||||
| COMMITMENTS AND CONTINGENCIES (See Note 10) | |||||||||
| SERIES D CUMULATIVE CONVERTIBLE REDEEMABLE PARTICIPATING PREFERRED STOCK, par value $0.0001 per share, 4,000,000 shares designated, 3,500,993 shares issued and outstanding at December 31, 2005 and 2004; Liquidation preference of $426,382 and $405,376 at December 31, 2005 and 2004, respectively | 421,889 | 400,410 | |||||||
| SERIES E CUMULATIVE CONVERTIBLE REDEEMABLE PARTICIPATING PREFERRED STOCK, par value $0.0001 per share, 500,000 shares designated, 500,000 shares issued and outstanding at December 31, 2005; Liquidation preference of $51,019 at December 31, 2005 | 47,796 | — | |||||||
| STOCKHOLDERS' EQUITY: | |||||||||
| Preferred stock, par value $0.0001 per share, 25,000,000 and 5,000,000 shares authorized at December 31, 2005 and 2004, 4,000,000 of which have been designated as Series D Preferred Stock and 500,000 of which have been designated as Series E Preferred Stock; no shares of preferred stock other than Series D & E Preferred Stock (presented above) issued and outstanding at December 31, 2005 and 2004 | — | — | |||||||
| Common Stock, par value $0.0001 per share, 300,000,000 shares authorized, 51,775,698 and 43,431,927 shares issued and outstanding at December 31, 2005 and 2004, respectively | 5 | 4 | |||||||
| Additional paid-in capital | 149,594 | 88,493 | |||||||
| Subscriptions receivable | — | (98 | ) | ||||||
| Deferred compensation | (178 | ) | (3,331 | ) | |||||
| Retained earnings | 216,702 | 40,637 | |||||||
| Accumulated other comprehensive income (loss) | 1,783 | (271 | ) | ||||||
| Total stockholders' equity | 367,906 | 125,434 | |||||||
| Total liabilities and stockholders' equity | $ | 2,158,981 | $ | 965,396 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
MetroPCS Communications, Inc. and Subsidiaries
Consolidated Statements of OperationsIncome and Comprehensive Income
For the years ended December 31, 2005, 2004 and 2003
(in thousands, except share and per share information)
(In Thousands, except Share Information)
| Year Ended December 31, | ||||||||||||
| 2001 | 2002 | 2003 | ||||||||||
REVENUES: | ||||||||||||
Service revenues | $ | — | $ | 102,137 | $ | 370,920 | ||||||
Equipment revenues | — | 23,458 | 88,562 | |||||||||
Total revenues | — | 125,595 | 459,482 | |||||||||
OPERATING EXPENSES: | ||||||||||||
Cost of service (excluding depreciation included below) | — | 61,881 | 118,335 | |||||||||
Cost of equipment | — | 100,651 | 155,084 | |||||||||
Selling, general and administrative expenses (excludes non-cash compensation) | 27,963 | 55,515 | 90,556 | |||||||||
Non-cash compensation | 1,455 | 1,115 | 7,379 | |||||||||
Depreciation and amortization | 208 | 21,394 | 41,900 | |||||||||
(Gain) loss on sale of asset | — | (278,956 | ) | 333 | ||||||||
Total operating expenses | 29,626 | (38,400 | ) | 413,587 | ||||||||
INCOME (LOSS) FROM OPERATIONS | (29,626 | ) | 163,995 | 45,895 | ||||||||
OTHER (INCOME) EXPENSE: | ||||||||||||
Interest expense | 10,491 | 6,805 | 11,254 | |||||||||
Interest income | (2,046 | ) | (964 | ) | (1,061 | ) | ||||||
Loss (gain) on extinguishment of debt | 7,109 | — | (603 | ) | ||||||||
Total other expense | 15,554 | 5,841 | 9,590 | |||||||||
INCOME (LOSS) BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE | (45,180 | ) | 158,154 | 36,305 | ||||||||
Provision for income taxes | — | (19,087 | ) | (15,665 | ) | |||||||
NET INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE | (45,180 | ) | 139,067 | 20,640 | ||||||||
Cumulative effect of change in accounting principle, net of tax | — | — | (74 | ) | ||||||||
NET INCOME (LOSS) | (45,180 | ) | 139,067 | 20,566 | ||||||||
ACCRUED DIVIDENDS ON SERIES D PREFERRED STOCK | (4,963 | ) | (10,838 | ) | (18,749 | ) | ||||||
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK | $ | (50,143 | ) | $ | 128,229 | $ | 1,817 | |||||
NET INCOME (LOSS) PER SHARE: (Note 14) | ||||||||||||
BASIC | ||||||||||||
Income before cumulative effect of change in accounting principle | $ | (1.44 | ) | $ | 2.26 | $ | 0.02 | |||||
Cumulative effect of change in accounting principle, net of tax | — | — | 0.00 | |||||||||
NET INCOME (LOSS) PER SHARE—BASIC | $ | (1.44 | ) | $ | 2.26 | $ | 0.02 | |||||
DILUTED | ||||||||||||
Income before cumulative effect of change in accounting principle | $ | (1.44 | ) | $ | 1.71 | $ | 0.02 | |||||
Cumulative effect of change in accounting principle, net of tax | — | — | 0.00 | |||||||||
NET INCOME (LOSS) PER SHARE—DILUTED | $ | (1.44 | ) | $ | 1.71 | $ | 0.02 | |||||
WEIGHTED AVERAGE SHARES | ||||||||||||
Basic | 34,902,736 | 36,247,740 | 36,433,053 | |||||||||
Diluted | 34,902,736 | 48,004,343 | 49,254,463 | |||||||||
NET INCOME PER SHARE—PRO FORMA: | ||||||||||||
BASIC | ||||||||||||
Income before cumulative effect of change in accounting principle | $ | 0.28 | ||||||||||
Cumulative effect of change in accounting principle, net of tax | (0.00 | ) | ||||||||||
NET INCOME PER SHARE—BASIC PRO FORMA | $ | 0.28 | ||||||||||
DILUTED | ||||||||||||
Income before cumulative effect of change in accounting principle | $ | 0.24 | ||||||||||
Cumulative effect of change in accounting principle | (0.00 | ) | ||||||||||
NET INCOME PER SHARE—DILUTED PRO FORMA | $ | 0.24 | ||||||||||
| | 2005 | 2004 | 2003 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| REVENUES: | ||||||||||||
| Service revenues | $ | 872,100 | $ | 616,401 | $ | 369,851 | ||||||
| Equipment revenues | 166,328 | 131,849 | 81,258 | |||||||||
| Total revenues | 1,038,428 | 748,250 | 451,109 | |||||||||
| OPERATING EXPENSES: | ||||||||||||
| Cost of service (exclusive of depreciation and amortization expense of $81,196, $57,572 and $39,379, shown separately below) | 283,212 | 200,806 | 122,211 | |||||||||
| Cost of equipment | 300,871 | 222,766 | 150,832 | |||||||||
| Selling, general and administrative expenses (exclusive of depreciation and amortization expense of $6,699, $4,629 and $3,049, shown separately below) | 162,476 | 131,510 | 94,073 | |||||||||
| Depreciation and amortization | 87,895 | 62,201 | 42,428 | |||||||||
| (Gain) loss on disposal of assets | (218,203 | ) | 3,209 | 392 | ||||||||
| Total operating expenses | 616,251 | 620,492 | 409,936 | |||||||||
| Income from operations | 422,177 | 127,758 | 41,173 | |||||||||
| OTHER EXPENSE (INCOME): | ||||||||||||
| Interest expense | 58,033 | 19,030 | 11,115 | |||||||||
| Accretion of put option in majority-owned subsidiary | 252 | 8 | — | |||||||||
| Interest income | (8,658 | ) | (2,472 | ) | (996 | ) | ||||||
| Loss (gain) on extinguishment of debt | 46,448 | (698 | ) | (603 | ) | |||||||
| Total other expense | 96,075 | 15,868 | 9,516 | |||||||||
| Income before provision for income taxes and cumulative effect of change in accounting principle | 326,102 | 111,890 | 31,657 | |||||||||
| Provision for income taxes | (127,425 | ) | (47,000 | ) | (16,179 | ) | ||||||
| Income before cumulative effect of change in accounting principle | 198,677 | 64,890 | 15,478 | |||||||||
| Cumulative effect of change in accounting principle, net of tax | — | — | (120 | ) | ||||||||
| Net income | 198,677 | 64,890 | 15,358 | |||||||||
| Accrued dividends on Series D Preferred Stock | (21,006 | ) | (21,006 | ) | (18,493 | ) | ||||||
| Accrued dividends on Series E Preferred Stock | (1,019 | ) | — | — | ||||||||
| Accretion on Series D Preferred Stock | (473 | ) | (473 | ) | (473 | ) | ||||||
| Accretion on Series E Preferred Stock | (114 | ) | — | — | ||||||||
| Net income (loss) applicable to common stock | $ | 176,065 | $ | 43,411 | $ | (3,608 | ) | |||||
| Net income | $ | 198,677 | $ | 64,890 | $ | 15,358 | ||||||
| Other comprehensive income: | ||||||||||||
| Unrealized losses on available-for-sale securities, net of tax | (28 | ) | (240 | ) | (72 | ) | ||||||
| Unrealized gain on cash flow hedging derivative, net of tax | 1,914 | — | — | |||||||||
| Reclassification adjustment for losses included in net income, net of tax | 168 | 41 | — | |||||||||
| Comprehensive income | $ | 200,731 | $ | 64,691 | $ | 15,286 | ||||||
| Net income (loss) per common share: (See Note 17) | ||||||||||||
| Basic | ||||||||||||
| Income (loss) before cumulative effect of change in accounting principle | $ | 2.12 | $ | 0.55 | $ | (0.10 | ) | |||||
| Cumulative effect of change in accounting principle, net of tax | — | — | (0.00 | ) | ||||||||
| Net income (loss) per common share—basic | $ | 2.12 | $ | 0.55 | $ | (0.10 | ) | |||||
| Diluted | ||||||||||||
| Income (loss) before cumulative effect of change in accounting principle | $ | 1.87 | $ | 0.46 | $ | (0.10 | ) | |||||
| Cumulative effect of change in accounting principle, net of tax | — | — | (0.00 | ) | ||||||||
| Net income (loss) per common share—diluted | $ | 1.87 | $ | 0.46 | $ | (0.10 | ) | |||||
| Weighted average shares: | ||||||||||||
| Basic | 45,117,465 | 42,240,684 | 36,443,962 | |||||||||
| Diluted | 51,203,530 | 50,211,229 | 36,443,962 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
MetroPCS Communications, Inc. and Subsidiaries
Consolidated Statements of Stockholders’Stockholders' Equity (Deficit)
For the years ended December 31, 2005, 2004 and 2003
(in thousands, except share information)
(In Thousands, Except Share Information)
| Common Stock | |||||||||||||||||||||||||
| Number of Shares | Amount | Additional Paid-In Capital | Subscriptions Receivable | Deferred Compensation | Retained Earnings (Deficit) | Total | |||||||||||||||||||
BALANCE, December 31, 2000 | 33,441,600 | $ | 3 | $ | 112,736 | $ | (33 | ) | $ | (1,491 | ) | $ | (104,224 | ) | $ | 6,991 | |||||||||
Exercise of Class C Common Stock Options | 50,167 | — | 236 | — | — | — | 236 | ||||||||||||||||||
Exercise of Class C Common Stock Warrants | 2,551,860 | — | 17 | — | — | — | 17 | ||||||||||||||||||
Issuance of contingent Class C Stock Warrants | — | — | 3,000 | — | — | — | 3,000 | ||||||||||||||||||
Redemption of Class C Common Stock Warrants | — | — | (13,953 | ) | — | — | — | (13,953 | ) | ||||||||||||||||
Accrued interest on subscription receivable | — | — | 3 | (3 | ) | — | — | — | |||||||||||||||||
Deferred compensation | — | — | 2,537 | — | (2,537 | ) | — | — | |||||||||||||||||
Amortization of deferred compensation expense | — | — | — | — | 1,455 | — | 1,455 | ||||||||||||||||||
Accretion of costs to issue Series D Preferred | — | — | (494 | ) | — | — | — | (494 | ) | ||||||||||||||||
Accrued dividends on Series D Preferred | — | — | (4,963 | ) | — | — | — | (4,963 | ) | ||||||||||||||||
Net Loss | — | — | — | — | — | (45,180 | ) | (45,180 | ) | ||||||||||||||||
BALANCE, December 31, 2001 | 36,043,627 | 3 | 99,119 | (36 | ) | (2,573 | ) | (149,404 | ) | (52,891 | ) | ||||||||||||||
Exercise of Class B Common Stock Options | 363,425 | — | 112 | (46 | ) | — | — | 66 | |||||||||||||||||
Exercise of Class C Common Stock Options | 16,250 | — | 76 | — | — | — | 76 | ||||||||||||||||||
Accrued interest on subscription receivable | — | — | 4 | (4 | ) | — | — | — | |||||||||||||||||
Deferred compensation | — | — | 776 | — | (776 | ) | — | — | |||||||||||||||||
Amortization of deferred compensation expense | — | — | — | — | 1,115 | — | 1,115 | ||||||||||||||||||
Accretion of costs to issue Series D Preferred | — | — | (473 | ) | — | — | — | (473 | ) | ||||||||||||||||
Accrued dividends on Series D Preferred | — | — | (10,838 | ) | — | — | — | (10,838 | ) | ||||||||||||||||
Net Income | — | — | — | — | — | 139,067 | 139,067 | ||||||||||||||||||
BALANCE, December 31, 2002 | 36,423,302 | 3 | 88,776 | (86 | ) | (2,234 | ) | (10,337 | ) | 76,122 | |||||||||||||||
Exercise of Class B Common Stock Options | 65,000 | — | 15 | — | — | — | 15 | ||||||||||||||||||
Exercise of Class C Common Stock Options | 5,946 | — | 28 | — | — | — | 28 | ||||||||||||||||||
Exercise of Class C Common Stock warrants | 97,530 | — | — | — | — | — | — | ||||||||||||||||||
Accrued interest on subscription receivable | — | — | 6 | (6 | ) | — | — | — | |||||||||||||||||
Deferred compensation | — | — | 3,404 | — | (3,404 | ) | — | — | |||||||||||||||||
Forfeitures of stock options | — | — | (261 | ) | — | 261 | — | — | |||||||||||||||||
Amortization of deferred compensation expense | — | — | — | — | 1,148 | — | 1,148 | ||||||||||||||||||
Compensation expense | — | — | 6,231 | — | — | — | 6,231 | ||||||||||||||||||
Accretion of costs to issue Series D Preferred | — | — | (473 | ) | — | — | — | (473 | ) | ||||||||||||||||
Accrued dividends on Series D Preferred | — | — | (8,813 | ) | — | — | (9,936 | ) | (18,749 | ) | |||||||||||||||
Net Income | — | — | — | — | — | 20,566 | 20,566 | ||||||||||||||||||
BALANCE, December 31, 2003 | 36,591,778 | $ | 3 | $ | 88,913 | $ | (92 | ) | $ | (4,229 | ) | $ | 293 | $ | 84,888 | ||||||||||
| | Number of Shares | Amount | Additional Paid-In Capital | Subscriptions Receivable | Deferred Compensation | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| BALANCE, December 31, 2002 | 36,423,302 | $ | 3 | $ | 89,811 | $ | (86 | ) | $ | (2,199 | ) | $ | (18,132 | ) | $ | — | $ | 69,397 | ||||||
| Exercise of Class B Common Stock options | 65,000 | — | 15 | — | — | — | — | 15 | ||||||||||||||||
| Exercise of Class C Common Stock options | 5,946 | — | 28 | — | — | — | — | 28 | ||||||||||||||||
| Exercise of Class C Common Stock warrants | 225,450 | — | — | — | — | — | — | — | ||||||||||||||||
| Accrued interest on subscriptions receivable | — | — | 6 | (6 | ) | — | — | — | — | |||||||||||||||
| Deferred compensation | — | — | 7,528 | — | (7,528 | ) | — | — | — | |||||||||||||||
| Amortization of deferred compensation expense | — | — | — | — | 5,573 | — | — | 5,573 | ||||||||||||||||
| Accrued dividends on Series D Preferred Stock | — | — | (18,493 | ) | — | — | — | — | (18,493 | ) | ||||||||||||||
| Accretion on Series D Preferred Stock | — | — | (473 | ) | — | — | — | — | (473 | ) | ||||||||||||||
| Net income | — | — | — | — | — | 15,358 | — | 15,358 | ||||||||||||||||
| Unrealized loss on available-for-sale securities, net of reclassification adjustment and tax | — | — | — | — | — | — | (72 | ) | (72 | ) | ||||||||||||||
| BALANCE, December 31, 2003 | 36,719,698 | $ | 3 | $ | 78,422 | $ | (92 | ) | $ | (4,154 | ) | $ | (2,774 | ) | $ | (72 | ) | $ | 71,333 | |||||
| Exercise of Common Stock options | 211,976 | — | 416 | — | — | — | — | 416 | ||||||||||||||||
| Exercise of Common Stock warrants | 6,500,340 | 1 | 43 | — | — | — | — | 44 | ||||||||||||||||
| Reverse stock split-fractional shares redeemed | (87 | ) | — | — | — | — | — | — | — | |||||||||||||||
| Accrued interest on subscriptions receivable | — | — | 6 | (6 | ) | — | — | — | — | |||||||||||||||
| Deferred stock-based compensation | — | — | 9,606 | — | (9,606 | ) | — | — | — | |||||||||||||||
| Amortization of deferred stock-based compensation expense | — | — | — | — | 10,429 | — | — | 10,429 | ||||||||||||||||
| Accrued dividends on Series D Preferred Stock | — | — | — | — | — | (21,006 | ) | — | (21,006 | ) | ||||||||||||||
| Accretion on Series D Preferred Stock | — | — | — | — | — | (473 | ) | — | (473 | ) | ||||||||||||||
| Net income | — | — | — | — | — | 64,890 | — | 64,890 | ||||||||||||||||
| Unrealized loss on available-for-sale securities, net of reclassification adjustment and tax | — | — | — | — | — | — | (199 | ) | (199 | ) | ||||||||||||||
| BALANCE, December 31, 2004 | 43,431,927 | $ | 4 | $ | 88,493 | $ | (98 | ) | $ | (3,331 | ) | $ | 40,637 | $ | (271 | ) | $ | 125,434 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
MetroPCS Communications, Inc. and Subsidiaries
Consolidated Statements of Cash FlowsStockholders' Equity—(Continued)
For the years ended December 31, 2005, 2004 and 2003
(in thousands, except share information)
(In Thousands)
| Year Ended December 31, | ||||||||||||
| 2001 | 2002 | 2003 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||
Net income (loss) | $ | (45,180 | ) | $ | 139,067 | $ | 20,566 | |||||
Adjustments to reconcile net income (loss) to net cash used in operating activities— | ||||||||||||
Cumulative effect of accounting change | — | — | 74 | |||||||||
Loss (gain) on extinguishment of debt | 7,109 | — | (603 | ) | ||||||||
Loss on sale of asset | — | — | 333 | |||||||||
Gain on sale of spectrum | — | (278,956 | ) | — | ||||||||
Depreciation and amortization | 208 | 21,394 | 41,900 | |||||||||
Non-cash interest expense | 3,882 | 3,028 | 3,090 | |||||||||
Bad debt expense | — | 381 | 991 | |||||||||
Equity based compensation expense | — | — | 6,231 | |||||||||
Amortization of deferred compensation | 1,455 | 1,115 | 1,148 | |||||||||
Accretion of asset retirement obligation | — | — | 50 | |||||||||
Deferred rents | 949 | 1,853 | 1,160 | |||||||||
Deferred taxes | — | 10,094 | 14,022 | |||||||||
Cost of abandoned cell sites | — | — | 824 | |||||||||
Changes in assets and liabilities— | ||||||||||||
Inventory | (6,037 | ) | (7,509 | ) | (7,664 | ) | ||||||
Accounts receivable | — | (5,622 | ) | (4,428 | ) | |||||||
Prepaid expenses | (2,509 | ) | (2,783 | ) | (274 | ) | ||||||
Deferred charges and other current assets | (126 | ) | (10,514 | ) | (4,263 | ) | ||||||
Accounts payable, accrued expenses and deferred revenue | 7,848 | 63,929 | 36,461 | |||||||||
Net cash provided by (used in) operating activities | (32,401 | ) | (64,523 | ) | 109,618 | |||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||
Collection of notes receivable | 15,000 | — | — | |||||||||
Purchase of investments | (1,520 | ) | (1,912 | ) | (19,912 | ) | ||||||
Proceeds from sale of investments | — | 1,297 | 1,860 | |||||||||
Proceeds from sale of Spectrum | — | 286,242 | — | |||||||||
Proceeds from advance on sale of Spectrum | 145,000 | — | — | |||||||||
Repayment of advance on sale of Spectrum | — | (145,000 | ) | — | ||||||||
Microwave relocation | (693 | ) | (1,806 | ) | (2,028 | ) | ||||||
Purchase of other assets | — | (10 | ) | (35 | ) | |||||||
Purchase of property and equipment | (133,604 | ) | (212,305 | ) | (117,212 | ) | ||||||
Proceeds from sale of property and equipment | — | — | 6 | |||||||||
Net cash provided by (used in) investing activities | 24,183 | (73,494 | ) | (137,321 | ) | |||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||
Book overdraft | 6,660 | (2,776 | ) | 824 | ||||||||
Repayment of notes | (39,446 | ) | (251 | ) | (9,077 | ) | ||||||
Proceeds from issuance of warrants | 16 | — | — | |||||||||
Proceeds from sale of Senior Notes, net of underwriter fees | — | — | 145,500 | |||||||||
Payment of debt issuance costs on Senior Notes | — | — | (876 | ) | ||||||||
Proceeds from sale of Series D Preferred Stock, net of issuance cost | 88,194 | 159,951 | 65,537 | |||||||||
Proceeds from exercise of stock options and warrants | 236 | 142 | 43 | |||||||||
Repurchase of warrants | (13,952 | ) | — | — | ||||||||
Net cash provided by financing activities | 41,708 | 157,066 | 201,951 | |||||||||
INCREASE IN CASH AND CASH EQUIVALENTS | 33,490 | 19,049 | 174,248 | |||||||||
CASH AND CASH EQUIVALENTS, beginning of period | 9,178 | 42,668 | 61,717 | |||||||||
CASH AND CASH EQUIVALENTS, end of period | $ | 42,668 | $ | 61,717 | $ | 235,965 | ||||||
| | Number of Shares | Amount | Additional Paid-In Capital | Subscriptions Receivable | Deferred Compensation | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Common Stock issued | 26,479 | — | 483 | — | — | — | — | 483 | ||||||||||||||||
| Exercise of Common Stock options | 7,556,557 | 1 | 8,604 | — | — | — | — | 8,605 | ||||||||||||||||
| Exercise of Common Stock warrants | 760,735 | — | 605 | — | — | — | — | 605 | ||||||||||||||||
| Accrued interest on subscriptions receivable | — | — | 5 | (5 | ) | — | — | — | — | |||||||||||||||
| Proceeds from repayment of subscriptions receivable | — | — | — | 103 | — | — | — | 103 | ||||||||||||||||
| Forfeiture of unvested stock compensation | — | — | (2,887 | ) | — | 2,887 | — | — | — | |||||||||||||||
| Deferred stock-based compensation | — | — | 2,330 | — | (2,330 | ) | — | — | — | |||||||||||||||
| Amortization of deferred stock-based compensation expense | — | — | — | — | 2,596 | — | — | 2,596 | ||||||||||||||||
| Accrued dividends on Series D Preferred Stock | — | — | — | — | — | (21,006 | ) | — | (21,006 | ) | ||||||||||||||
| Accrued dividends on Series E Preferred Stock | — | — | — | — | — | (1,019 | ) | — | (1,019 | ) | ||||||||||||||
| Accretion on Series D Preferred Stock | — | — | — | — | — | (473 | ) | — | (473 | ) | ||||||||||||||
| Accretion on Series E Preferred Stock | — | — | — | — | — | (114 | ) | — | (114 | ) | ||||||||||||||
| Tax benefits from the exercise of Common Stock options | — | — | 51,961 | — | — | — | — | 51,961 | ||||||||||||||||
| Net income | — | — | — | — | — | 198,677 | — | 198,677 | ||||||||||||||||
| Unrealized losses on available-for-sale securities, net of tax | — | — | — | — | — | — | (28 | ) | (28 | ) | ||||||||||||||
| Reclassification adjustment for losses included in net income, net of tax | — | — | — | — | — | — | 168 | 168 | ||||||||||||||||
| Unrealized gain on cash flow hedging derivative, net of tax | — | — | — | — | — | — | 1,914 | 1,914 | ||||||||||||||||
| BALANCE, December 31, 2005 | 51,775,698 | $ | 5 | $ | 149,594 | $ | — | $ | (178 | ) | $ | 216,702 | $ | 1,783 | $ | 367,906 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
MetroPCS Communications, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the years ended December 31, 2005, 2004 and 2003
(in thousands)
| | 2005 | 2004 | 2003 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||
| Net income | $ | 198,677 | $ | 64,890 | $ | 15,358 | |||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Cumulative effect of change in accounting principle | — | — | 120 | ||||||||
| Depreciation and amortization | 87,895 | 62,201 | 42,428 | ||||||||
| Provision for uncollectible accounts receivable | 129 | 125 | 110 | ||||||||
| Deferred rent expense | 4,407 | 3,466 | 2,803 | ||||||||
| Cost of abandoned cell sites | 725 | 1,021 | 824 | ||||||||
| Non-cash compensation expense | 2,596 | 10,429 | 5,573 | ||||||||
| Non-cash interest expense | 4,285 | 2,889 | 3,073 | ||||||||
| (Gain) loss on disposal of assets | (218,203 | ) | 3,209 | 392 | |||||||
| Loss (gain) on extinguishment of debt | 46,448 | (698 | ) | (603 | ) | ||||||
| (Gain) loss on sale of investments | (190 | ) | 576 | — | |||||||
| Accretion of asset retirement obligation | 423 | 253 | 127 | ||||||||
| Accretion of put option in majority-owned subsidiary | 252 | 8 | — | ||||||||
| Deferred income taxes | 125,055 | 44,441 | 18,716 | ||||||||
| Changes in assets and liabilities: | |||||||||||
| Inventories | (5,717 | ) | (16,706 | ) | (7,745 | ) | |||||
| Accounts receivable | (7,056 | ) | (714 | ) | (1,041 | ) | |||||
| Prepaid expenses | (2,613 | ) | (1,933 | ) | (182 | ) | |||||
| Deferred charges | (4,045 | ) | (2,727 | ) | (1,645 | ) | |||||
| Other assets | (5,580 | ) | (2,243 | ) | (4,131 | ) | |||||
| Accounts payable and accrued expenses | 41,204 | (31,304 | ) | 21,305 | |||||||
| Deferred revenue | 16,071 | 10,317 | 14,264 | ||||||||
| Other liabilities | (1,547 | ) | 2,879 | 2,859 | |||||||
| Net cash provided by operating activities | 283,216 | 150,379 | 112,605 | ||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||
| Purchases of property and equipment | (266,499 | ) | (250,830 | ) | (117,731 | ) | |||||
| Change in prepaid purchases of property and equipment | (11,800 | ) | — | — | |||||||
| Proceeds from sale of property and equipment | 146 | — | 6 | ||||||||
| Purchase of other assets | — | — | (35 | ) | |||||||
| Purchase of investments | (739,482 | ) | (158,672 | ) | (209,149 | ) | |||||
| Proceeds from sale of investments | 386,444 | 307,220 | 22,650 | ||||||||
| Change in restricted cash and investments | (107 | ) | (1,511 | ) | 953 | ||||||
| Purchase of FCC licenses | (503,930 | ) | (62,025 | ) | — | ||||||
| Deposit to FCC for licenses | — | (25,000 | ) | (1,500 | ) | ||||||
| Proceeds from sale of FCC licenses | 230,000 | — | — | ||||||||
| Microwave relocation costs | — | (63 | ) | (2,062 | ) | ||||||
| Net cash used in investing activities | (905,228 | ) | (190,881 | ) | (306,868 | ) | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||
| Change in book overdraft | (565 | ) | 5,778 | 824 | |||||||
| Payment upon execution of cash flow hedging derivative | (1,899 | ) | — | — | |||||||
| Proceeds from 103/4% Senior Notes Due 2011 | — | — | 145,500 | ||||||||
| Proceeds from Credit Agreements | 902,875 | — | — | ||||||||
| Proceeds from Bridge Credit Agreement | 540,000 | — | — | ||||||||
| Proceeds from short-term notes payable | — | 1,703 | — | ||||||||
| Debt issuance costs | (29,480 | ) | (164 | ) | (876 | ) | |||||
| Repayment of debt | (754,662 | ) | (14,215 | ) | (9,077 | ) | |||||
| Proceeds from minority interest in majority-owned subsidiary | — | 1,000 | — | ||||||||
| Proceeds from repayment of subscriptions receivable | 103 | — | — | ||||||||
| Proceeds from issuance of preferred stock, net of issuance costs | 46,662 | 5 | 65,537 | ||||||||
| Proceeds from exercise of stock options and warrants | 9,210 | 460 | 43 | ||||||||
| Net cash provided by (used in) financing activities | 712,244 | (5,433 | ) | 201,951 | |||||||
| INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 90,232 | (45,935 | ) | 7,688 | |||||||
| CASH AND CASH EQUIVALENTS, beginning of period | 22,477 | 68,412 | 60,724 | ||||||||
| CASH AND CASH EQUIVALENTS, end of period | $ | 112,709 | $ | 22,477 | $ | 68,412 | |||||
The accompanying notes are integral part of these consolidated financial statements.
MetroPCS Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
1. Organization and Business Operations:
MetroPCS Communications, Inc. (“MetroPCS”("MetroPCS"), a Delaware corporation, together with its wholly ownedwholly- and majority-owned subsidiaries (the “Company”"Company"), is a wireless communicationstelecommunications carrier that offers digital wireless servicebroadband personal communication services ("PCS") as of December 31, 2005, primarily in the metropolitan areas of Atlanta, Miami, San Francisco, Sacramento and Sacramento.Tampa/Sarasota. The Company launched service in the Dallas/Ft. Worth metropolitan area in March 2006 and in the Detroit metropolitan area in April 2006. The Company initiated the commercial launch of its first market and exited the development stage in January 2002. The year 2003 was the first full year of operations in all four markets. The Company sells products and services to customers through company-ownedCompany-owned retail stores as well as through relationships with indirectindependent retailers.
On February 25, 2004, the Company retained underwriters for the purposeMetroPCS, Inc. formed MetroPCS, a new wholly-owned subsidiary. In July 2004, MetroPCS, Inc. merged with a subsidiary of effecting an initial public offering of common stock.
Unaudited pro forma stockholders’ equity at December 31, 2003 gives effectMetroPCS pursuant to the conversion ofa transaction that resulted in all of our outstanding Class B commonthe capital stock (and the options and Series D preferredwarrants related thereto) of MetroPCS, Inc. converting into capital stock into Class C common stock, which will occur concurrently with the consummation(and options and warrants) of this offering, including sharesMetroPCS, and MetroPCS, Inc. becoming a wholly-owned subsidiary of Class C common stock to be issued in respect of unpaid dividends on the outstanding Series D preferred stock that have accumulated as of December 31, 2003.MetroPCS.
On November 24, 2004, MetroPCS, through its wholly-owned subsidiaries, and C9 Wireless, LLC, an independent third-party, formed a limited liability company called Royal Street Communications, LLC ("Royal Street"), to bid on spectrum auctioned by the Federal Communications Commission ("FCC") in Auction No. 58. The Company owns 85% of the limited liability company member interest of Royal Street, but may only elect two of the five members of Royal Street's management committee (See Note 3).
2. Summary of Significant Accounting Policies:
Consolidation
The accompanying consolidated financial statements include the accountsbalances and results of operations of MetroPCS and its wholly ownedwholly- and majority-owned subsidiaries. MetroPCS indirectly owns, through its wholly-owned subsidiaries, a majority interest in Royal Street, and its results of operations are consolidated with MetroPCS. The redeemable minority interest in Royal Street is included in long-term liabilities. All significant intercompany balances and transactions are eliminated.have been eliminated in consolidation. Certain reclassifications of prior period amounts have been made to conform to current period presentation.
Operating Segment
The Company has adopted the Financial Accounting Standards Board (the “FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosure About Segments of an Enterprise and Related Information,” which requires companies to report selected information about products, services, geographical areas and major customers. Operating segments are determined based on the way management organizes its business for making decisions and assessing performance. The Company has concluded its operating segments meet the aggregation criteria of SFAS No. 131 and as such, has one reportable segment.
Use of Estimates in Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates. The most significant of such estimates include:
MetroPCS Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Reclassifications
During 2002,used by the Company adopted include:
Derivative Instruments and Hedging Activities
The Company accounts for its hedging activities under Statement of Financial Accounting Standards ("SFAS") No. 133,"Accounting for Derivative Instruments and Hedging Activities," as amended ("SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections as of April 2002.” This133"). The standard requires the reclassificationCompany to recognize all derivatives on the consolidated balance sheet at fair value. Changes in the fair value of derivatives are to be recorded each period in earnings or on the accompanying consolidated balance sheets in accumulated other comprehensive income (loss) depending on the type of hedged transaction and whether the derivative is designated and effective as part of a hedged transaction. Gains or losses on derivative instruments reported in accumulated other comprehensive income (loss) must be reclassified to earnings in the period in which earnings are affected by the underlying hedged transaction and the ineffective portion of all losses on the extinguishment of debt that were presentedhedges must be recognized in prior periods as extraordinary items to components of income or loss from operations when such losses did not satisfy the criteria of Accounting Principles Board (“APB”) Opinion No. 30.
Certain reclassifications have been made to prior year balances to conform toearnings in the current year presentation. These reclassifications had no effect on the resultsperiod. The Company's use of operations or stockholders’ equity (deficit) as previously reported.derivative financial instruments is discussed in Note 5.
Cash and Cash Equivalents
The Company includes as cash and cash equivalents (i) cash on hand, (ii) cash in bank accounts, (iii) investments in money market funds, and (iv) corporate bonds with an original maturity of three months90 days or less.
Short-Term Investments
Inventory, Net
InventoriesThe Company's short-term investments consist of securities classified as available-for-sale, which are stated at fair value. The securities include corporate and government bonds with an original maturity of over 90 days and auction rate securities. Unrealized gains and losses, net of related income taxes, for available-for-sale securities are reported in accumulated other comprehensive income (loss), a component of stockholders' equity, until realized. The estimated fair values of investments are based on quoted market prices as of the end of the reporting period (See Note 4).
Inventories
Substantially all of the Company's inventories are stated at the lower of average cost or market, if lower. Inventory consistsmarket. Inventories consist mainly of handsets and accessoriesthat are available for sale to customers and indirectindependent retailers. At December 31, 2003, the Company recorded a valuation reserve of $1.9 million. No valuation reserve was recorded in prior years.
Allowance for DoubtfulUncollectible Accounts Receivable
The Company maintains allowances for doubtfuluncollectible accounts for estimated losses resulting from the inability of indirectindependent retailers to pay for equipment purchases and for amounts estimated to be uncollectible for inter-carrier compensation.from other carriers.
Prepaid Expenses
Restricted Cash and Investments
Restricted cash and investments consists of money market instruments and short-term investments. Short-term investments held to maturity are stated at cost plus accrued interest, which approximates market, mature within twelve months and are comprised primarily of federal home loan mortgage notes, all denominated in U.S. dollars. In general, these investments are pledged as collateral against letters of credit used as security for payment obligations. For purposesPrepaid expenses consisted of the consolidated statement of cash flows, the Company does not consider restricted cash and investments to be cash equivalents.following (in thousands):
| | 2005 | 2004 | ||||
|---|---|---|---|---|---|---|
| Prepaid vendor purchases | $ | 11,801 | $ | — | ||
| Prepaid rent | 6,347 | 4,065 | ||||
| Prepaid maintenance and support contracts | 1,393 | 609 | ||||
| Prepaid insurance | 1,020 | 1,855 | ||||
| Other | 869 | 494 | ||||
| Prepaid expenses | $ | 21,430 | $ | 7,023 | ||
Long-Term Investments
Long-term investments consist of federal home loan mortgage notes and bonds. Long-term investments held to maturity are stated at cost, which approximates market. Long-term investments mature in October and November 2005.
MetroPCS Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Property and Equipment Net
Property and equipment, net, consistconsisted of the following:following (in thousands):
| | 2005 | 2004 | |||||
|---|---|---|---|---|---|---|---|
| Construction-in-progress | $ | 98,078 | $ | 25,460 | |||
| Network infrastructure | 905,924 | 712,745 | |||||
| Office equipment | 17,059 | 9,139 | |||||
| Leasehold improvements | 16,608 | 12,145 | |||||
| Furniture and fixtures | 4,000 | 2,444 | |||||
| Vehicles | 118 | — | |||||
| 1,041,787 | 761,933 | ||||||
Accumulated depreciation | (210,297 | ) | (125,565 | ) | |||
| Property and equipment, net | $ | 831,490 | $ | 636,368 | |||
| December 31, | ||||||||
| 2002 | 2003 | |||||||
| (in thousands) | ||||||||
Construction-in-progress | $ | 30,602 | $ | 74,802 | ||||
Network infrastructure | 335,166 | 455,617 | ||||||
Office equipment | 2,918 | 6,157 | ||||||
Furniture and fixtures | 1,248 | 1,725 | ||||||
Leasehold improvements | 5,043 | 7,925 | ||||||
| 374,977 | 546,226 | |||||||
Accumulated depreciation | (21,617 | ) | (63,261 | ) | ||||
Property and equipment, net | $ | 353,360 | $ | 482,965 | ||||
Property and equipment are stated at cost. Additions and improvements are capitalized, while expenditures that do not enhance or extend the asset’sasset's useful life are charged to operating expenses as incurred. When the Company sells, disposes of or retires property and equipment, the related gains or losses are included in operating results. Depreciation is applied using the straight-line method over the estimated useful lives of the assets once the assets are placed in service, which are ten years for network infrastructure assets, three to seven years for office equipment, which includes computer equipment, and three to seven years for furniture and fixtures.fixtures and five years for vehicles. Leasehold improvements are amortized over the shorter of the remaining term of the lease and any renewal periods reasonably assured or the estimated useful life of the improvement, whichever is shorter.improvement. Maintenance and repair costs are charged to expense as incurred. The Company follows the provisions of SFAS No. 34, “Capitalization
"Capitalization of Interest Cost”," with respect to its PCS licenses and the related construction of its network. The Company has not capitalized any interest expense throughnetwork infrastructure assets. For the years ended December 31, 2003.2005, 2004 and 2003, the Company capitalized interest in the amount of $3.6 million, $2.9 million and $0.1 million, respectively.
Restricted Cash and Investments
Restricted cash and investments consist of money market instruments and short-term investments. Short-term investments, which are held-to-maturity, are stated at cost plus accrued interest, which approximates market value, mature within twelve months and are comprised primarily of federal home loan mortgage notes, all denominated in U.S. dollars. In general, these investments are pledged as collateral against letters of credit used as security for payment obligations and are presented as current or non-current assets based on the terms of the underlying letters of credit.
Revenues and Cost of Revenues
WirelessThe Company's wireless services are provided on a month-to-month basis and are paid in advance. Revenues from wireless services are recognized as services are rendered. Amounts received in advance are recorded as deferred revenue. Long-term deferred revenue is included in other long-term liabilities. Cost of service generally includes direct costs of operating the Company’sCompany's networks.
In addition, the Company charges a fee for the initial activation of service that is recognized immediately in equipment revenue for all activations beginning on Effective July 1, 2003, as provided by the adoption of theCompany adopted Emerging Issues Task Force (“EITF”("EITF") of the FASB No. 00-21, “Accounting"Accounting for Revenue Arrangements with Multiple Deliverables.” See Note 3Deliverables," ("EITF No. 00-21"). The consensus also supersedes certain guidance set forth in U.S. Securities and Exchange Commission ("SEC") Staff Accounting Bulletin Number 101, "Revenue Recognition in Financial Statements," ("SAB 101"). SAB 101 was amended in December 2003 by Staff Accounting Bulletin Number 104, "Revenue Recognition," ("SAB 104"). The consensus addresses the accounting for further discussion.arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. Revenue arrangements with multiple deliverables are divided into separate units of accounting and the consideration received is allocated among the separate units of accounting based on their relative fair values.
The Company determined that the sale of wireless services through its direct and indirect sales channels with an accompanying handset constitutes a revenue arrangement with multiple deliverables. Upon adoption of EITF No. 00-21, the Company began dividing these arrangements into separate units of accounting, and allocating the consideration between the handset and the wireless service based on their relative fair values. Consideration received for the handset is recognized as equipment revenue when the handset is delivered and accepted by the customer. Consideration received for the wireless service is recognized as service revenues when earned.
Equipment revenues arise from the sale of handsets and accessories. Revenues and related costs from the sale of handsets in the direct retail locations are recognized at the point of sale. Handsets shipped to independent retailers are recorded as deferred revenue and deferred cost upon shipment by the Company and are recognized as equipment revenues and related costs when service is activated by its customers. Revenues and related costs from the sale of accessories are recognized at the point of sale. The costs of handsets and accessories sold are recorded in cost of equipment.
Sales incentives offered without charge to customers related to the sale of handsets are recognized as a reduction of revenue when the related equipment revenue is recognized. At December 31, 2005,
customers had the right to return handsets within 7 days or 60 minutes of usage, whichever occurred first. In January 2006, the Company expanded the terms of its return policy to allow customers the right to return handsets within 30 days or 60 minutes of usage, whichever occurs first.
Prior to July 1, 2003, activation fees were deferred and amortized over the estimated customer life. On October 1, 2003, the Company changed its estimated customer life from 25 months to 14 months, based on historical disconnect rates, resulting in an increase in activation revenues of $5.1 million in the fourth quarter of 2003 over amounts that would have been recognized using the prior estimated life.
Equipment revenues arise from the sale of handsets and accessories. Revenues and related costs from the sale of handsets are recognized when service is activated by customers. Revenues and related costs from the sale of accessories are recognized at the point of sale. The costs of handsets and accessories sold are recorded in cost of equipment. Handsets shipped to indirect retailers are recorded as deferred revenue upon shipment by the Company and are recognized as equipment revenues when service is activated by customers.
MetroPCS Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Sales incentives offered without charge to customers related to the sale of handsets are recognized as a reduction of revenue when the related equipment revenue is recognized. Customers have the right to return handsets within 7 days or 60 minutes of usage, whichever occurs first. The Company records an estimate for returns at the time of recognizing revenue.
Software Costs
In accordance with Statement of Position (“SOP”("SOP") 98-1, “Accounting"Accounting for Costs of Computer Software Developed or Obtained for Internal Use”," ("SOP 98-1"), certain costs related to the purchase of internal-useinternal use software are capitalized and amortized over the estimated useful life of the software. In 2002For the years ended December 31, 2005 and 2003,2004, the Company capitalized approximately $0.3$2.7 million and $0.5$0.9 million, respectively, of purchased software costs under SOP 98-1, that areis being amortized over a three-year life. The Company amortized computer software costs of approximately $43,000, $221,000$0.8 million, $0.4 million and $313,000$0.3 million for the years ended December 31, 2001, 20022005, 2004 and 2003, respectively. Capitalized software costs are classified as office equipment.
PCS Licenses and Microwave Relocation Costs
The Company acquiredoperates broadband personal communication services networks under licenses fromgranted by the FCC to operate asfor a particular geographic area on spectrum allocated by the FCC for broadband PCS service provider.services. The PCS licenses incorporateincluded the obligation through April 2005 to relocate existing fixed microwave users of the Company’sCompany's licensed spectrum if the Company’sCompany's spectrum will interfereinterfered with their systems and/or reimburse other carriers (according to FCC rules) that relocated prior users if the relocation benefits the Company’sCompany's system. Accordingly,Additionally, as discussed in Note 8,10, the Company incurred costs related to microwave relocation to clear spectrum allocated underin constructing its PCS licenses.network. The PCS licenses and microwave relocationsrelocation costs are recorded at cost adjusted for impairment. The licenses and microwave locations were not placed into service prior to 2002.cost. Although PCS licenses are issued with a stated term, generally 10ten years, the renewal of PCS licenses is generally a routine matter involving a nominal feewithout substantial cost and the Company has determined that no legal, regulatory, contractual, competitive, economic, or other factors currently exist that limit the useful life of its PCS licenses. As such, under the provisions of SFAS No. 142, “Goodwill"Goodwill and Other Intangible Assets”," the Company does not amortize licensingPCS licenses and microwave relocation costs as they are considered to have indefinite lives and together represent the cost of the Company’sCompany's spectrum. On a prospective basis, theThe Company is required to test indefinite-lifeindefinite-lived intangible assets, consisting of PCS licenses and microwave relocation costs, for impairment on an annual basis based upon a fair value approach. Indefinite-lifeIndefinite-lived intangible assets must be tested between annual tests if events or changes in circumstances indicate that the asset might be impaired. These events or circumstances could include a significant change in the business climate, including a significant sustained decline in an entity’sentity's market value, legal factors, operating performance indicators, competition, sale or disposition of a significant portion of the business, or other factors. The Company completed its impairment tests induring the fourththird quarter of 2003, and no impairment has been recognized through December 31, 2003.2005.
Advertising and Promotion Costs
Advertising and promotion costs are expensed as incurred. Advertising costs totaled $0.2$25.6 million, $13.3$22.2 million and $21.9$21.5 million during the years ended December 31, 2001, 20022005, 2004 and 2003, respectively.
Income Taxes
The Company providesrecords income taxes pursuant to SFAS No. 109, “Accounting"Accounting for Income Taxes.”Taxes," ("SFAS No. 109"). SFAS No. 109 uses an asset and liability approach to account for income taxes, wherein deferred taxes are provided for book and tax basis differences for assets and liabilities. In the event differences between the financial reporting basis and the tax basis of the Company’sCompany's assets and liabilities result in deferred tax assets, ana valuation allowance is provided for a portion or all of the deferred tax assets when there is sufficient uncertainty regarding the Company’sCompany's ability to recognize the benefits of the assets in future years.
MetroPCS Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
The Company establishes reserves when, despite the belief that the Company’sCompany's tax return positions are fully supportable, the Company believes that certain positions it has taken might be challenged and ultimately might not be sustained. The Company adjusts these reserves in light of changing facts and circumstances. The Company’sCompany's effective tax rate includes the impact of reserve positions and changes to reserves that the Company considers appropriate. A number of years may elapse before a particular matter, for which the Company has established a reserve, is finally resolved. Unfavorable settlement of any particular issue would require the use of cash. Favorable resolution would be recognized as a reduction to the effective rate in the year of resolution. TheOther long-term liabilities included tax reserves are presented on the balance sheet in other long term liabilities. See Note 13.
Earnings per Share
Basic earnings per share (“EPS”) are based upon the weighted average number of common shares outstanding for the period. Diluted EPS is computed in the same manner as EPS after assuming issuanceamount of common stock for all potentially dilutive equivalent shares, whether exercisable or not. All classes of the Company’s common stock share equally$17.1 million and $18.9 million at December 31, 2005 and 2004, respectively. Accounts payable and accrued expenses included tax reserves in the Company’s earningsamount of $4.1 million at December 31, 2005 (See Note 16).
Other Comprehensive Income
Unrealized gains and losses on available-for-sale securities and accordingly, EPS is the same for each classcash flow hedging derivatives are reported in accumulated other comprehensive income (loss) as a separate component of common stock.
The Series D Preferred Stock is a participating security, such thatstockholders' equity until realized. Realized gains and losses on available-for-sale securities are included in interest income. Gains or losses on cash flow hedging derivatives reported in accumulated other comprehensive income (loss) are reclassified to earnings in the event a dividend is declared or paid onperiod in which earnings are affected by the common stock, the Company must simultaneously declare and pay a dividend on the Series D Preferred Stock as if the Series D Preferred Stock had been converted into common stock. The EITF’s Topic D-95, “Effect of Participating Convertible Securities on the Computation of Basic Earnings per Share,” requires that the Preferred Stock be included in the computation of basic earnings per share if the effect of inclusion is dilutive. The Company’s accounting policy requires the use of the two-class method for its participating securities for earnings per share calculations. The Series D Preferred Stock is considered in the calculation of diluted earnings per share under the “if-converted” method, if dilutive.underlying hedged transaction.
Stock BasedStock-Based Compensation
The Company follows the disclosure requirements of SFAS No. 148, “Accounting"Accounting for Stock-Based Compensation—Transition and Disclosure”," which amends the disclosure requirements of SFAS No. 123, “Accounting"Accounting for Stock-Based Compensation”Compensation" ("SFAS No. 123") to require prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.
MetroPCS Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
As permitted by SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company measures compensation expense for its stock-based employee compensation plans, described further in Note 11,14, using the intrinsic value method prescribed
by the APBAccounting Principles Board Opinion No. 25, “Accounting"Accounting for Stock Issued to Employees.”Employees" ("APB No. 25").
The Company has adopted the disclosure-only provisions of SFAS No. 123. The following table illustrates the effect on net income (loss) availableapplicable to Common Stock (in thousands) and net income per common stockholders and earningsshare as if the Company had elected to recognize compensation costs based on the fair value at the date of grant for the Company’s common stockCompany's Common Stock awards consistent with the provisions of SFAS No. 123 (see(See Note 1114 for assumptions used in the fair value method):
| | 2005 | 2004 | 2003 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Net income (loss) applicable to Common Stock—as reported | $ | 176,065 | $ | 43,411 | $ | (3,608 | ) | ||||
| Add: Amortization of deferred compensation determined under the intrinsic method for employee stock awards, net of tax | 1,584 | 6,036 | 2,725 | ||||||||
| Less: Total stock-based employee compensation expense determined under the fair value method for employee stock awards, net of tax | (3,227 | ) | (5,689 | ) | (1,642 | ) | |||||
| Net income (loss) applicable to Common Stock—pro forma | $ | 174,422 | $ | 43,758 | $ | (2,525 | ) | ||||
Basic net income (loss) per common share: | |||||||||||
| As reported | $ | 2.12 | $ | 0.55 | $ | (0.10 | ) | ||||
| Pro forma | $ | 2.10 | $ | 0.55 | $ | (0.07 | ) | ||||
| Diluted net income (loss) per common share: | |||||||||||
| As reported | $ | 1.87 | $ | 0.46 | $ | (0.10 | ) | ||||
| Pro forma | $ | 1.86 | $ | 0.46 | $ | (0.07 | ) | ||||
| 2001 | 2002 | 2003 | ||||||||||
| (in thousands) | ||||||||||||
Net income (loss) applicable to common stock—As reported | $ | (50,143 | ) | $ | 128,229 | $ | 1,817 | |||||
Add: Amortization of deferred compensation determined under the intrinsic method for employee stock awards, net of tax | 880 | 675 | 4,465 | |||||||||
Less: Total stock-based employee compensation expense determined under the fair value method for employee stock awards, net of tax | (2,016 | ) | (2,419 | ) | (5,632 | ) | ||||||
Net income (loss) applicable to common stock—Pro forma | $ | (51,279 | ) | $ | 126,485 | $ | 650 | |||||
Basic net income (loss) per share—As reported | $ | (1.44 | ) | $ | 2.26 | $ | 0.02 | |||||
Basic net income (loss) per share—Pro forma | $ | (1.48 | ) | $ | 2.24 | $ | 0.00 | |||||
Diluted net income (loss) per share—As reported | $ | (1.44 | ) | $ | 1.71 | $ | 0.02 | |||||
Diluted net income (loss) per share—Pro forma | $ | (1.48 | ) | $ | 1.71 | $ | 0.00 | |||||
The pro forma amounts presented above may not be representative of the future effects on reported net income (loss) and net income (loss) per share, since the pro forma compensation expense is allocated over the periods in which options become exercisable, and new option awards may be granted each year.
Asset Retirement Obligations
In June 2001, the FASB issued The Company accounts for asset retirement obligations as determined by SFAS No. 143, “Accounting"Accounting for Asset Retirement Obligations.” This statement providesObligations" ("SFAS No. 143") and Financial Accounting Standards Board ("FASB") Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143" ("FIN No. 47"). SFAS No. 143 and FIN No. 47 address financial accounting and reporting standards for costslegal obligations associated with the retirement of tangible long-lived assets. This statementassets and the related asset retirement costs. SFAS No. 143 requires entities to recordthat companies recognize the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the estimated useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The Company adopted SFAS No. 143 on January 1, 2003.
The Company is subject to asset retirement obligations associated with its cell site operating leases, which are subject to the provisions of SFAS No. 143.143 and FIN No. 47. Cell site lease agreements may contain clauses requiring restoration of the leased site at the end of the lease term to its original condition, creating an asset retirement obligation. This liability is classified under other long-term liabilities. Landlords may choose not to exercise these rights as cell sites are considered useful improvements. In addition to cell site operating leases, the Company has leases related to switch site, retail, and administrative locations subject to the provisions of SFAS No. 143.143 and FIN No. 47.
The adoption of SFAS No. 143 resulted in a January 1, 2003 adjustment to record a $0.7 million increase in the carrying values of property and equipment with a corresponding increase in other long-term liabilities. In addition, $0.1 million of accretion, before taxes, was recorded to increase the liability to $0.8 million at adoption.
MetroPCS Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
The net effect was to record a loss of $74,000approximately $0.1 million as a cumulative effect adjustment resulting from a change in accounting principle in the Company’sCompany's consolidated statements of operationsincome upon adoption on January 1, 2003.
The following pro forma datatable summarizes the Company’sCompany's asset retirement obligation transactions (in thousands):
| | 2005 | 2004 | ||||
|---|---|---|---|---|---|---|
| Beginning asset retirement obligations | $ | 1,893 | $ | 1,115 | ||
| Liabilities incurred | 1,206 | 525 | ||||
| Accretion expense | 423 | 253 | ||||
| Ending asset retirement obligations | $ | 3,522 | $ | 1,893 | ||
Earnings Per Share
Basic earnings per share ("EPS") are based upon the weighted average number of common shares outstanding for the period. Diluted EPS is computed in the same manner as EPS after assuming issuance of common stock for all potentially dilutive equivalent shares, whether exercisable or not.
The Series D Cumulative Convertible Redeeming Participating Preferred Stock and Series E Cumulative Convertible Redeeming Participating Preferred Stock are participating securities, such that in the event a dividend is declared or paid on the common stock, the Company must simultaneously declare and pay a dividend on the Series D Cumulative Convertible Redeeming Participating Preferred Stock and Series E Cumulative Convertible Redeeming Participating Preferred Stock as if they had been converted into common stock. The EITF's Topic D-95, "Effect of Participating Convertible Securities on the Computation of Basic Earnings per Share," requires that the preferred stock be included in the computation of basic earnings per share if the effect of inclusion is dilutive. The Company's accounting policy requires the use of the two-class method for its participating securities for earnings per share calculations.
Recent Accounting Pronouncements
In December 2003, the FASB issued a revised interpretation of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," ("FIN No. 46(R)"), which replaces FASB Interpretation
No. 46, "Consolidation of Variable Interest Entities," ("FIN No. 46"). FIN No. 46(R) clarifies and expands current accounting guidance for variable interest entities. FIN No. 46 and FIN No. 46(R) are effective immediately for all variable interest entities created after January 31, 2003, and for variable interest entities prior to February 1, 2003, no later than the end of the first reporting period after March 15, 2004. The adoption of FIN No. 46 and FIN No. 46 (R) did not have a material impact on the Company's financial position or results of operations.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment" ("SFAS No. 123(R)"). SFAS No. 123(R) requires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments, including stock options granted to employees. SFAS No. 123(R) replaces SFAS No. 123 and supersedes APB No. 25 and its related interpretations. This statement will be effective for awards granted, modified or settled in interim periods or fiscal years beginning after December 15, 2005. Although early adoption is allowed, the Company will adopt SFAS No. 123(R) as of the required effective date for calendar year companies, which is January 1, 2006. The Company estimates compensation expense related to the adoption of SFAS No. 123(R) to be approximately $10.6 million for the year ending December 31, 2006.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3" ("SFAS No. 154"). SFAS No. 154 replaces APB Opinion No. 20, "Accounting Changes" ("APB No. 20"), and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements." SFAS No. 154 requires retrospective application to prior periods' financial statements of a voluntary change in accounting principle unless it is impracticable to determine either the period-specific effects or the cumulative effects of the change. APB No. 20 previously required that most voluntary changes in accounting principles be recognized by including in net income in the period of the change the cumulative effect of changing to the new accounting principle. SFAS No. 154 generally will not apply with respect to the adoption of new accounting standards, as new accounting standards usually include specific transition provisions, and will not override transition provisions contained in new or existing accounting literature. SFAS No. 154 is effective for fiscal years beginning after December 15, 2005, and early adoption is permitted for accounting changes and error corrections made in years beginning after the date that SFAS No. 154 was issued. The adoption of this statement is not expected to have a material effect on the financial condition or results of operations of the Company.
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140" ("SFAS No. 155"). SFAS No. 155 permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133, establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and amends FASB Statement No. 140 to eliminate the prohibition on a qualifying special purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity's first fiscal year that begins after September 15, 2006. The
adoption of this statement is not expected to have a material effect on the financial condition or results of operations of the Company.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial Assets—an amendment of FASB Statement No. 140" ("SFAS No. 156"). SFAS No. 156 amends SFAS No. 140 to require that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. SFAS No. 156 permits, but does not require, the subsequent measurement of separately recognized servicing assets and servicing liabilities at fair value. Under SFAS No. 156, an entity can elect subsequent fair value measurement to account for its separately recognized servicing assets and servicing liabilities. Adoption of SFAS No. 156 is required as of the beginning of the first fiscal year that begins after September 15, 2006. The adoption of this statement is not expected to have a material effect on the financial condition or results of operations of the Company.
In July 2006, the FASB issued Interpretation No. 48 "Accounting for Uncertainty in Income Taxes," ("FIN No. 48"), which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with SFAS No. 109. FIN No. 48 provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. The Company has not completed its evaluation of the effect of FIN No. 48.
In September 2006, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in the Current Year Financial Statements," ("SAB 108"), which addresses how the effects of prior year uncorrected misstatements should be considered when quantifying misstatements in current year financial statements. SAB 108 requires companies to quantify misstatements using a balance sheet and income statement approach and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors. When the effect of initial adoption is material, companies may record the effect as a cumulative effect adjustment to beginning of year retained earnings. SAB 108 is effective for annual financial statements covering the first fiscal year ending after November 15, 2006. The Company is required to adopt this interpretation by December 31, 2006. The adoption of this statement is not expected to have a material effect on the financial condition or results of operations of the Company.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," ("SFAS No. 157"), which defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosure about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company will be required to adopt SFAS No. 157 in the first quarter of fiscal year 2008. The Company has not completed its evaluation of the effect of SFAS No. 157.
3. Majority-Owned Subsidiary:
On November 24, 2004, MetroPCS, through its wholly-owned subsidiaries, together with C9 Wireless, LLC, an independent, unaffiliated third-party, formed a limited liability company, Royal Street, that qualified to bid for closed licenses and to receive bidding credits as a very small business on
open licenses in FCC Auction No. 58. MetroPCS indirectly owns 85% of the limited liability company member interest of Royal Street, but may elect only two of five members of the Royal Street management committee, which has the full power to direct the management of Royal Street. Royal Street holds all licenses won in Auction No. 58. At Royal Street's request and subject to Royal Street's control and direction, MetroPCS is constructing Royal Street's networks and has agreed to purchase, via a resale arrangement, as much as 85% of the engineered service capacity of Royal Street's networks. The results of Royal Street's operations are consolidated with those of MetroPCS and all intercompany balances have been eliminated.
C9 Wireless, LLC has a right to put its interests in Royal Street to MetroPCS at specific future dates based on a contractually determined amount (the "Put Right"). The Put Right represents an unconditional obligation of MetroPCS and its wholly-owned subsidiaries to purchase Royal Street interests from C9 Wireless, LLC. In accordance with SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity," this obligation is recorded as a liability and is measured at each reporting date as the amount of cash that would be required to settle the obligation under the contract terms if settlement occurred at the reporting date.
4. Short-Term Investments:
Short-term investments consisted of the following (in thousands):
| | 2005 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Aggregate Fair Value | ||||||||
| United States government and agencies | $ | 28,999 | $ | — | $ | (241 | ) | $ | 28,758 | |||
| Auction rate securities | 333,819 | — | — | 333,819 | ||||||||
| Corporate bonds | 27,788 | 57 | — | 27,845 | ||||||||
| Total short-term investments | $ | 390,606 | $ | 57 | $ | (241 | ) | $ | 390,422 | |||
| | 2004 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Aggregate Fair Value | ||||||||
| United States government and agencies | $ | 29,995 | $ | — | $ | (366 | ) | $ | 29,629 | |||
| Auction rate securities | 5,300 | — | — | 5,300 | ||||||||
| Corporate bonds | 2,074 | — | (39 | ) | 2,035 | |||||||
| Total short-term investments | $ | 37,369 | $ | — | $ | (405 | ) | $ | 36,964 | |||
The cost and aggregate fair values of short-term investments by contractual maturity at December 31, 2005 were as follows (in thousands):
| | Amortized Cost | Aggregate Fair Value | ||||
|---|---|---|---|---|---|---|
| Less than one year | $ | 95,156 | $ | 95,030 | ||
| Due in 1 - 2 years | 2,000 | 1,942 | ||||
| Due in 2 - 5 years | — | — | ||||
| Due after 5 years | 293,450 | 293,450 | ||||
| Total | $ | 390,606 | $ | 390,422 | ||
5. Derivative Instruments and Hedging Activities:
On June 27, 2005, MetroPCS Wireless, Inc. ("Wireless") entered into a three-year interest rate cap agreement, as required by Wireless' First Lien Credit Agreement, maturing May 31, 2011, and Second Lien Credit Agreement maturing May 31, 2012 (collectively, the "Credit Agreements"), to mitigate the impact of interest rate changes on 50% of the aggregate debt outstanding thereunder. An interest rate cap represents a right to receive cash if interest rates rise above a contractual strike rate. At December 31, 2005, the interest rate cap agreement has a notional value of $450.0 million and Wireless will receive payments on a semiannual basis if the Company had adoptedsix-month LIBOR interest rate exceeds 3.75% through January 1, 2007 and 6.00% through the agreement maturity date of July 1, 2008. Wireless paid $1.9 million upon execution of the interest rate cap agreement. This financial instrument is reported in long-term investments at fair market value, which was $5.1 million as of December 31, 2005. The change in fair value of $3.2 million is reported in accumulated other comprehensive income (loss) in the consolidated balance sheets, net of income taxes in the amount of $1.3 million.
The interest rate cap has been designated as a cash flow hedge. If a derivative is designated as a cash flow hedge and the hedging relationship qualifies for hedge accounting under the provisions of SFAS No. 143 on January 1, 2001, including an associated pro forma asset retirement obligation on that date133, the effective portion of $0.4 million:
| December 31, | |||||||||||
| 2001 | 2002 | 2003 | |||||||||
| (in thousands) | |||||||||||
Net income, as reported | $ | (45,180 | ) | $ | 139,067 | $ | 20,566 | ||||
Pro forma adjustments to reflect retroactive adoption of SFAS No. 143 | — | (20 | ) | 74 | |||||||
Pro forma adjustments to reflect accretion expense | (16 | ) | (45 | ) | — | ||||||
Pro forma adjustments to reflect depreciation expense | (4 | ) | (10 | ) | — | ||||||
Pro forma net income | (45,200 | ) | $ | 138,992 | $ | 20,640 | |||||
The following table summarizes the Company’s asset retirement obligation transactionschange in fair value of the derivative is recorded in accordance withaccumulated other comprehensive income (loss) and reclassified to interest expense in the provisions of SFAS No. 143:
| Pro Forma December 31, 2002 | December 31, 2003 | |||||
| (in thousands) | ||||||
Beginning asset retirement obligations | $ | 401 | $ | 701 | ||
Cumulative effect of accounting change, before taxes | — | 100 | ||||
Liabilities incurred | 225 | — | ||||
Accretion/depreciation expense | 75 | 50 | ||||
Ending asset retirement obligations | $ | 701 | $ | 851 | ||
3. Effects of Recent Accounting Pronouncements:
In June 2001,period in which the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.”hedged transaction affects earnings. The Company adopted the provisions of this statement on January 1, 2003. See Note 2 for further details.
In November 2002, the EITFineffective portion of the FASB reached consensus on EITF No. 00-21, “Accountingchange in fair value of a derivative qualifying for Revenue Arrangements with Multiple Deliverables.” This consensus requires that revenue arrangements with multiple deliverables be divided into separate units ofhedge accounting if the deliverablesis recognized in interest expense in the arrangement meet specific criteria. In addition, arrangement consideration must be allocated amongperiod of the separate unitschange.
At inception of accounting based on their relativethe hedge and quarterly thereafter, the Company performs an assessment to determine whether changes in the fair values with certain limitations. The sale of wireless service with an accompanying handset constitutes a revenue arrangement with multiple deliverables. The Company adopted the provisions of this consensus for revenue arrangements entered into beginning after July 1, 2003. The Company has elected to apply the accounting provisions of this EITF on a prospective basis beginning July 1, 2003. The Company allocates amounts charged to customers between the sale of handsets and the sale of wireless telecommunication services on a relative fair value basis. In most cases, this results in all amounts collected from the customer upon activationor cash flows of the handset being allocatedderivatives are deemed highly effective in offsetting changes in the fair values or cash flows of the hedged transaction. If at any time subsequent to the saleinception of the handset. Ashedge, the assessment indicates that the derivative is no longer highly effective as a resulthedge, the Company will discontinue hedge accounting and recognize all subsequent derivative gains and losses in results of this treatment, activation fees includedoperations.
During the next twelve months, the Company expects to reclassify into earnings gains that are reported in the considerationaccumulated other comprehensive income (loss) of approximately $2.8 million, net of income taxes of $1.8 million, at the time of sale are recorded as handset revenue. Prior to the adoption of EITF 00-21, the Company had deferred activation fee revenue and amortized these revenues over the average life of the Company’s subscribers. The existing deferred revenue of $13.5 million at July 1, 2003 continues to be amortized over the remaining life of the customer.underlying hedged transaction is realized.
MetroPCS Communications, Inc. and Subsidiaries6. Intangible Assets:
The changes in the carrying value of intangible assets during the years ended December 31, 2005 and 2004 are as follows (in thousands):
Notes to Consolidated Financial Statements—(Continued)
| | PCS Licenses | Microwave Relocation Costs | ||||||
|---|---|---|---|---|---|---|---|---|
| Balance at December 31, 2003 | $ | 90,619 | $ | 10,000 | ||||
| Additions | 63,525 | 63 | ||||||
| Reductions | — | (497 | ) | |||||
| Balance at December 31, 2004 | $ | 154,144 | $ | 9,566 | ||||
| Additions | 528,930 | — | ||||||
| Reductions | (1,775 | ) | (379 | ) | ||||
| Balance at December 31, 2005 | $ | 681,299 | $ | 9,187 | ||||
4. PCS Licenses:
PCS licenses represent the 14 C-Block PCS licenses acquired by the Company in the FCC auction in May 1996.1996, as well as PCS licenses subsequently acquired from other carriers. PCS licenses also represent licenses acquired in 2005 by Royal Street in Auction No. 58.
The grant of the licenses by the FCC subjects the Company to certain FCC on-going ownership restrictions. Should the Company failcease to continue to qualify under such ownership restrictions, the PCS licenses may be subject to FCC revocation provisions. Management believes thator require the payment of fines or forfeitures. All PCS licenses held by the Company currently complies and will continue to comply with such restrictions. All licenses granted will expire ten years from the initial date of grant;grant of the PCS license by the FCC; however, the FCC rules provide for renewal provisions.renewal. Such renewals are granted routinely without substantial cost.
On April 19, 2004, the Company acquired four PCS licenses for an aggregate purchase price of $11.5 million. The PCS licenses cover 15 MHz of spectrum in each of the basic trading areas of Modesto, Merced, Eureka, and Redding, California.
In On October 29, 2004, the Company acquired two PCS licenses for an aggregate purchase price of $43.5 million. The PCS licenses cover 10 MHz of spectrum in each of the basic trading areas of Tampa-St. Petersburg-Clearwater, Florida, and Sarasota-Bradenton, Florida.
On November 28, 2004, the Company executed a license purchase agreement by which the Company agreed to acquire 10 MHz of PCS spectrum in the basic trading area of Detroit, Michigan and certain counties of the basic trading area of Dallas/Ft. Worth, Texas for $230.0 million pursuant to a two-step, tax-deferred, like-kind exchange transaction under Section 1031 of the Internal Revenue Code of 1986, as amended.
On December 20, 2004, the Company acquired a PCS license for a purchase price of $8.5 million. The PCS license covers 20 MHz of spectrum in the basic trading area of Daytona Beach, Florida.
On May 11, 2005, the Company completed the sale of a 10 MHz portion of its 30 MHz PCS license in the San Francisco-Oakland-San Jose, California basic trading area for cash consideration of $230.0 million. The sale was structured as a like-kind exchange under Section 1031 of the Internal Revenue Code of 1986, as amended, through which the Company's right, title and interest in and to the divested PCS spectrum was exchanged for the PCS spectrum acquired in Dallas/Ft. Worth, Texas
and Detroit, Michigan through a license purchase agreement for an aggregate purchase price of $230.0 million. The purchase of the PCS spectrum in Dallas/Ft. Worth and Detroit was accomplished in two steps with the first step of the exchange occurring on February 2002,23, 2005 and the second step occurring on May 11, 2005 when the Company consummated the sale of 10 MHz of PCS spectrum for the San Francisco-Oakland-San Jose basic trading area. The sale of PCS spectrum resulted in a single 30gain on disposal of asset in the amount of $228.2 million.
On July 7, 2005, the Company acquired a 10 MHz F-Block PCS license for cash consideration of $286.2 million, $145.0 million of which was paid in advance of the sale in 2001, plus the assumption by the purchaser of $3.8 million in FCC debt resulting in a gain of $279.0 millionGrayson and Fannin counties in the reductionbasic trading area of Sherman-Denison, Texas for an aggregate purchase price of $0.9 million.
On August 12, 2005, the Company acquired a 10 MHz F-Block PCS license carrying value atin the basic trading area of Bakersfield, California for an aggregate purchase price of $4.0 million.
On December 31, 2002.
21, 2005, the FCC granted Royal Street 10 MHz of PCS spectrum in the Los Angeles, California; Orlando, Lakeland-Winter Haven, Jacksonville, Melbourne-Titusville, and Gainesville, Florida basic trading areas. Royal Street, as the high bidder in Auction No. 58, had previously paid approximately $294.0 million to the FCC for these PCS licenses.
5.7. Accounts Payable and Accrued Expenses:
Accounts payable and accrued expenses consisted of the following (in thousands):
| December 31, | ||||||
| 2002 | 2003 | |||||
Accounts payable | $ | 18,552 | $ | 48,492 | ||
Book overdraft | 3,884 | 4,708 | ||||
Accrued property and equipment | 28,953 | 50,421 | ||||
Accrued accounts payable | 2,905 | 32,128 | ||||
Payroll and employee benefits | 4,313 | 5,446 | ||||
Accrued interest | 647 | 4,847 | ||||
Taxes, other than income | 20,759 | 6,277 | ||||
Taxes payable | 8,993 | 304 | ||||
Other | 823 | 1,065 | ||||
Accounts payable and accrued expenses | $ | 89,829 | $ | 153,688 | ||
| | 2005 | 2004 | ||||
|---|---|---|---|---|---|---|
| Accounts payable | $ | 29,430 | $ | 19,540 | ||
| Book overdraft | 9,920 | 10,486 | ||||
| Accrued accounts payable | 69,611 | 40,524 | ||||
| Accrued liabilities | 7,590 | 5,382 | ||||
| Vendor purchase commitment | — | 5,091 | ||||
| Payroll and employee benefits | 12,808 | 6,941 | ||||
| Accrued interest | 17,578 | 4,393 | ||||
| Taxes, other than income | 23,211 | 13,184 | ||||
| Income taxes | 4,072 | — | ||||
| Accounts payable and accrued expenses | $ | 174,220 | $ | 105,541 | ||
6.8. Long-Term Debt:
Long-term debt consisted of the following at December 31 (in thousands):
| | 2005 | 2004 | ||||||
|---|---|---|---|---|---|---|---|---|
| FCC notes | $ | — | $ | 33,409 | ||||
| Senior Notes | — | 150,000 | ||||||
| Microwave relocation obligations | 2,690 | 4,061 | ||||||
| Credit Agreements | 900,000 | — | ||||||
| Total | 902,690 | 187,470 | ||||||
| Less: original issue discount | — | (2,471 | ) | |||||
| Add: unamortized premium on debt | 2,864 | — | ||||||
| Total debt | 905,554 | 184,999 | ||||||
| Less: current maturities | (2,690 | ) | (14,310 | ) | ||||
| Total long-term debt | $ | 902,864 | $ | 170,689 | ||||
| 2002 | 2003 | |||||||
FCC notes | $ | 56,242 | $ | 46,771 | ||||
Senior Notes | — | 150,000 | ||||||
Microwave clearing obligations | 2,397 | 3,817 | ||||||
Total face-value debt | 58,639 | 200,588 | ||||||
Less—Original issue discount | (7,789 | ) | (4,793 | ) | ||||
Total debt | 50,850 | 195,795 | ||||||
Less—Current maturities | (9,499 | ) | (13,362 | ) | ||||
Total long-term debt | $ | 41,351 | $ | 182,433 | ||||
MetroPCS Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Maturities of the principal amount of long-term debt at face value are as follows (in thousands):
| For the Year Ending December 31, | | ||
|---|---|---|---|
| 2006 | $ | 2,690 | |
| 2007 | — | ||
| 2008 | — | ||
| 2009 | — | ||
| 2010 | — | ||
| Thereafter | 900,000 | ||
| Total | $ | 902,690 | |
FCC Debt
For the Year Ending December 31, | |||
2004 | $ | 13,362 | |
2005 | 14,252 | ||
2006 | 15,201 | ||
2007 | 3,956 | ||
2008 | 296 | ||
Thereafter | 153,521 | ||
Total | $ | 200,588 | |
The FCC Notes maturenotes matured in January 2007, bearhad an annual interest rate of 6.5% interest per annum and provideprovided for quarterly payments of interest only until April 2003 and principal and interest thereafter until maturity. The FCC notes arewere secured by a first priority interest in the Company's original PCS licenses.licenses acquired by the Company in the FCC auction in May 1996.
Based on an estimated fair market borrowing rate of 14% at time of issuance, the FCC notes are recorded on the Company’sCompany's consolidated financial statements at December 31, 2002 and 2003,2004, at the discounted value of $48.5 million and $42.0 million, respectively.$30.9 million. The discount of $7.8 million and $4.8$2.5 million at December 31, 2002 and 2003, respectively, is2004, was amortized using the effective interest method over the term of the debt. Amortization of the original issue discount resulted in additional interest expense of $2.7 million, $3.0$0.6 million and $3.0$2.4 million for the years ended December 31, 2001, 20022005 and 2003,2004, respectively. In February, 2002, $3.8 million
On March 2, 2005, in face value of FCC notes were assumed byconnection with the purchasersale of 10 MHz of PCS spectrum in the San Francisco-Oakland-San Jose, California basic trading area, the Company repaid the outstanding principal balance of a single$12.2 million in debt payable to the FCC. This debt was incurred in connection with the original
acquisition of the 30 MHz license.of PCS spectrum for the San Francisco-Oakland-San Jose basic trading area. The repayment resulted in a loss on extinguishment of debt of $0.9 million.
In the event thatOn May 31, 2005, the Company becomes unablerepaid the remaining outstanding principal balance of $15.7 million in debt payable to meet its obligations under an individual FCC note or otherwise violates regulations applicable to holdersthe FCC. This debt was incurred in connection with the acquisition of the Company's original PCS licenses acquired by the Company in the FCC could takeauction in May 1996. The repayment resulted in a varietyloss on extinguishment of actions, including requiring immediate repaymentdebt of amounts due under that individual FCC note, the revocation of the PCS license related to that FCC note, and fining the Company an amount equal to the difference between the price at which the Company acquired the license and the amount of the winning bid at a subsequent auction of that license, plus an additional penalty of 3% of the lesser of the subsequent winning bid and the Company’s bid amount. The Company is current with its obligations under these notes.$1.0 million.
As provided by FCC regulations, and further discussed in Note 8,10, the Company has opted to make payments on the installment method to the various carriers to whom it owes a microwave relocation cost sharing liability. The Company has remitted a 10% down payment upon presentation of the supported costs by the carrier and makes payments to the carriers for the same terms as the FCC notes which mature in 10ten years from inception.
In October 1998, the Company sold $30.0 million of$150 Million 103/4% Senior Notes due October 2006 to Lucent (the “Lucent Senior Notes”) and warrants to purchase $6.0 million of Class C Common Stock (the “Warrants”), which were exercisable upon grant. In addition, the Company issued contingent warrants (the “Contingent Warrants”) to purchase $3.0 million of Class C Common Stock, which were contingent upon the Company not repaying the Lucent Senior Notes before February 2001. The Contingent Warrants to purchase $3.0 million of Class C Common Stock became exercisable in February 2001, and were recorded as additional $3.0 million in original issue discount. During 2000, Lucent and the Company amended the Lucent Senior Notes and increased the amount outstanding by $3.6 million for interest payments that were deferred. The Lucent Senior Notes were recorded on the Company’s financial statements at December 31, 2000 at the accreted value of $34.5 million. The original issue discount of $1.3 million at December 31, 2000 was amortized using an effective interest rate of 16.85%, which resulted in additional interest expense of $0.6 million during 2001. The Lucent Senior Notes bore interest at a variable rate equal to either (a) LIBOR plus an applicable margin or (b) a base rate (defined as
MetroPCS Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
the higher of the prime rate or the federal funds rate plus 0.5%) plus an applicable margin, which was payable quarterly, and was secured by substantially all assets of the Company. The weighted average interest in effect for the period ended December 31, 2001 with respect to the Lucent Senior Notes was 9.73%.
In October 1998, the Company entered into an Unsecured Creditors’ Credit Agreement with Lucent to fund up to $18 million of the unsecured creditors’ fund, as defined, in the Company’s plan of reorganization under the United States Bankruptcy Code. The Unsecured Creditors’ Credit Agreement provided for payment of fees for the undrawn amount of the commitment and for interest to be paid quarterly on amounts funded under the agreement at a rate which is the greater of (a) the prime rate in effect on any day or (b) the federal funds effective rate plus one-half of 1%, plus an applicable margin which escalated quarterly. As part of the Unsecured Creditors’ Credit Agreement, the Company issued warrants to purchase 685,590 shares of Class C Common Stock at an exercise price of approximately $0.03 per share. Lucent was entitled to exercise these warrants at any time prior to October 8, 2008. The fair value of these warrants at the time of issuance, $2.3 million, and an initial commitment fee of $0.7 million was recorded as debt issuance cost and was amortized over the term of the Unsecured Creditors’ Credit Agreement. In February 2001, the Unsecured Creditors’ Credit Agreement was terminated by the Company and the remaining debt issuance cost was expensed because such cost had no future benefit.
In September 2001, the Company paid Lucent $13.9 million to settle the Warrants, Contingent Warrants and the 685,590 warrants associated with the Unsecured Creditors’ Credit Agreement and $39.8 million to settle the Lucent Senior Notes and other liabilities. See Note 10 for further discussion.
On September 29, 2003, the Company’s wholly-owned subsidiary, MetroPCS, Inc. completed the sale of $150.0 million of 10¾103/4% Senior Notes due 2011 (the “Senior Notes”"Senior Notes"). The Senior Notes are guaranteed on a senior unsecured basis by all of theMetroPCS, Inc.'s current and future domestic restricted subsidiaries, of MetroPCS, Inc. other than Royal Street and certain immaterial subsidiaries. MetroPCS, Inc. has no independent assets or operations. The guarantees are full and unconditional and joint and several, and currentlyas of December 31, 2004 there are no wholly-owned subsidiaries of MetroPCS, Inc. other than the subsidiary guarantors. The Company isMetroPCS and Royal Street are not a guarantorguarantors of the Senior Notes. The Senior Notes rank equally in right of payment with all of MetroPCS, Inc.’s's future senior unsecured indebtedness, and rank senior to all of MetroPCS, Inc.’s's future subordinated indebtedness. The Senior Notes are effectively subordinated however, to MetroPCS, Inc.’s's existing and future secured indebtedness to the extent of the collateral securing such indebtedness. MetroPCS, Inc. may redeem some or all of the Senior Notes at any time on or after October 1, 2007, beginning at 105.375% of principal amount, plus accrued and unpaid interest, decreasing to 100% of principal amount, plus accrued and unpaid interest on October 1, 2009. In addition, prior to October 1, 2006, MetroPCS, Inc. may redeem up to 35% of the Senior Notes with the net proceeds of equity sales at 110.75% of principal amount, plus accrued and unpaid interest; provided that the redemption occurs within 90 days of the closing of such offering. The indenture also contains repurchase provisions related to asset sales and changes in control. Additionally, the indenture, among other things, restricts the ability of MetroPCS, Inc. and its restricted subsidiaries under certain conditions to:
MetroPCS Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
The net proceeds of the offering were approximately $144.5 million after estimated underwriter fees and other debt issuance costs of $5.5 million which have been recorded in long-term other assets and are being amortized over the life of the debt. Of such costs, $0.1 million is included in accounts payable and accrued expenses.expenses at December 31, 2003. The net proceeds will be used to further deploy the Company’sCompany's network and related infrastructure, as well as for general corporate purposes. MetroPCS, Inc. is subject to certain covenants set forth in the indenture governing the Senior Notes. On August 20, 2004, the Company announced that it would delay the filing of its quarterly report on Form 10-Q for the quarter ended June 30, 2004 pending the completion of an independent investigation. Failure to file the quarterly report for the quarter ended June 30, 2004 in a timely manner constituted a failure to comply with the covenant relating to the Senior Notes (the "Reporting Covenant"), requiring the Company to file with the SEC, and furnish to the holders of the Senior Notes, certain reports required to be filed pursuant to the Securities Exchange Act of 1934. On September 9, 2004, the trustee under the indenture provided notice to MetroPCS, Inc. of its failure to comply with the Reporting Covenant. Had MetroPCS, Inc. not complied with the Reporting Covenant (or otherwise obtained a waiver related thereto) by November 8, 2004, this failure to comply would have constituted an event of default under the indenture and would have permitted the trustee (or the holders of at least 25% of the principal amount of the Senior Notes) to accelerate the Senior Notes. On November 3, 2004, MetroPCS, Inc. received and accepted consents from the holders of a majority of its Senior Notes to a limited waiver, for up to 180 days, of any default or event of default arising from a failure to file with the SEC, and furnish to the holders of the notes, reports required to be filed pursuant to the Securities Exchange Act of 1934. The Company believes that there was in compliance with these covenantsno uncured event of noncompliance at December 31, 2003.2004.
On May 10, 2005, holders of all of the Senior Notes tendered their Senior Notes in response to MetroPCS, Inc.'s cash tender offer and consent solicitation. As a result, MetroPCS, Inc. executed a supplemental indenture governing the Senior Notes to eliminate substantially all of the restrictive covenants and event of default provisions in the Indenture, to amend other provisions of the Indenture, and to waive any and all defaults and events of default that may have existed under the Indenture. On May 31, 2005, MetroPCS, Inc. purchased all of its outstanding Senior Notes in the tender offer. MetroPCS, Inc. paid the holders of the notes $178.9 million plus accrued interest of $2.7 million in the tender offer, resulting in a loss on extinguishment of debt of $34.0 million.
Bridge Credit Agreement
In February 2005, Wireless entered into a secured bridge credit facility, dated as of February 22, 2005 (as amended, the "Bridge Credit Agreement"). The aggregate credit commitments available under the Bridge Credit Agreement totaled $540.0 million. The lenders funded $240.0 million and $300.0 million under the Bridge Credit Agreement in February 2005 and March 2005, respectively.
The Bridge Credit Agreement provided that all borrowings were senior secured obligations of Wireless and were guaranteed on a senior secured basis by MetroPCS, Inc. and its wholly-owned subsidiaries (other than Wireless). The obligations under the Bridge Credit Agreement were secured by security interests in substantially all of the assets of MetroPCS, Inc. and its wholly-owned subsidiaries, including capital stock, except as prohibited by law and certain permitted exceptions, as more fully described in the Security Agreement and the Pledge Agreement both, dated as of February 22, 2005, as amended.
The carrying In May 2005, Wireless repaid the aggregate outstanding principal balance under the Bridge Credit Agreement of $540.0 million and accrued interest of $8.7 million. As a result, Wireless recorded a loss on extinguishment of debt in the amount of $10.4 million.
First and Second Lien Credit Agreements
On May 31, 2005, MetroPCS, Inc. and Wireless, both wholly-owned subsidiaries of MetroPCS, entered into the Company’s debt approximates fair valueCredit Agreements, which provided for total borrowings of up to $900.0 million. MetroPCS, Inc. and its wholly-owned subsidiaries also entered into Guarantee and Collateral Agreements, dated as of May 31, 2005, in connection with the Credit Agreements, in which the lenders hold a security interest in substantially all property, including capital stock, now owned or at any time acquired by MetroPCS, Inc. and its wholly-owned subsidiaries, except for certain permitted exceptions or as prohibited by law. Royal Street did not enter into any Guarantee and Collateral Agreements in connection with the Credit Agreements, however, MetroPCS pledged the promissory note that Royal Street has given the Company in connection with amounts borrowed by Royal Street from Wireless. On May 31, 2005, Wireless borrowed $500.0 million under the First Lien Credit Agreement and $250.0 million under the Second Lien Credit Agreement.
On December 19, 2005, Wireless entered into amendments to the Credit Agreements and borrowed an additional $50.0 million under the First Lien Credit Agreement and an additional $100.0 million under the Second Lien Credit Agreement. Under the amendments to the Credit Agreements the total amount available under the First Lien Credit Agreement increased by $330.0 million and the total amount available under the Second Lien Credit Agreement increased by $220.0 million, for a total increase in the amounts available under the Credit Agreements of $550.0 million. Wireless's ability to draw on this additional $550.0 million is restricted until it complies with certain conditions which were not met at December 31, 2002 and 2003 based2005.
The interest rates on the Company’s estimateoutstanding debt under the Credit Agreements are variable. The rates as of December 31, 2005 were 8.25% for $500.0 million outstanding under the First Lien Credit Agreement and 10.75% for $250.0 million outstanding under the Second Lien Credit Agreement. As of December 31, 2005, the interest rates that would be obtainedon the additional funds borrowed by Wireless on December 19, 2005 were 8.875% for newthe $50.0 million borrowed under the First Lien Credit Agreement and 11.375% for the $100.0 million borrowed under the Second Lien Credit Agreement. As of December 31, 2005, there was a total of $900.0 million outstanding under the Credit Agreements, which is reported as long-term debt with similar terms.on the accompanying consolidated balance sheets.
7.9. Concentrations:
The Company purchases a substantial portion of its wireless infrastructure equipment and handset equipment from only a few major suppliers. Further, the Company generally relies on one key vendor in each of the following areas: network infrastructure equipment, billing services, customer care, handset logistics and payroll processing.long distance services. Loss of any of these suppliers could adversely affect operations temporarily until a comparable substitute could be found.
Local and long-distancelong distance telephone and other companies provide certain communication services to the Company. Disruption of these services could adversely affect operations in the short term until an alternative telecommunication provider was found.
Concentrations of credit risk with respect to trade accounts receivable are limited due to the diversity of the Company’sCompany's indirect retailer base.
8.10. Commitments and Contingencies:
Until April 2005, the Company may bewas required to share radio frequency spectrum with existing fixed microwave licensees operating on the same spectrum as the Company’s. ToCompany's. Until April 2005, to the extent that the Company’sCompany's PCS operations interfereinterfered with those of existing microwave licensees, the Company will bewas required to pay for the relocation of the existing microwave station paths to alternate spectrum locations or transmission technologies. The FCC adopted a transition plan to move those microwave users to different locations on the spectrum. The FCC also adopted a cost sharing plan, so that if the relocation of a microwave user benefits more than one PCS licensee, all benefiting PCS licensees are required to share the relocation costs. After the expiration of the FCC-mandated transition and cost sharing plans in April 2005, any remaining microwave user operating in the PCS spectrum must relocate if it interferes with a PCS licensee’slicensee's operations, and it will be responsible for its own relocation costs. The Company does not believe the costs to relocate existing microwave station paths to alternate spectrum locations or transmission technologies will be material to the Company’s financial position or results of operations.
MetroPCS Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
The Company has entered into non-cancelable operating lease agreements to lease facilities, certain equipment and sites for towers and antennas required for the operation of its wireless networks. Future minimum rental payments required for all non-cancelable operating leases at December 31, 20032005 are as follows (in thousands):
| For the Year Ending December 31, | | ||
|---|---|---|---|
| 2006 | $ | 59,207 | |
| 2007 | 60,205 | ||
| 2008 | 60,997 | ||
| 2009 | 61,533 | ||
| 2010 | 62,231 | ||
| Thereafter | 189,897 | ||
| Total | $ | 494,070 | |
Year Ending December 31: | |||
2004 | $ | 29,337 | |
2005 | 29,710 | ||
2006 | 28,510 | ||
2007 | 21,033 | ||
2008 | 18,050 | ||
Thereafter | 46,245 | ||
Total | $ | 172,885 | |
Total rent expense for the years ended December 31, 2001, 20022005, 2004 and 2003 was $6.4$51.6 million, $22.8$37.7 million and $27.6$29.3 million, respectively.
In May 2001, the Company entered into a purchase commitment with Lucent Technologies, Inc. for the purchase of personal communication services systems totaling $161.0 million: $86.9 million, $46.1which required
$28.0 million and $28.0$46.1 million to be purchased for the years ended December 31, 2001,2003 and 2002, and 2003, respectively. At December 31, 2003,2004, the Company had no outstanding purchase commitments onunder this agreement.
The Company entered into non-cancelable purchase agreements with a vendor for the acquisition of expansion carriers installed in base stations which are recorded in property and equipment upon shipment. Under these agreements, the Company agreesagreed to pay for the base stations upon shipment, and the expansion carriers at the earlier of the date the carrier is turned on or twelve months from the shipment date of the base station for the first expansion carrier, and the earlier of the date the carrier is turned on or twenty-four months from the shipment date of the base station for the second expansion carrier. Outstanding obligations under these purchase agreements were $9.2$5.1 million and $22.1 million at December 31, 20022004 and 2003, respectively. Of these amounts, $9.2$5.1 million and $13.6 million were included in accounts payable and accrued expenses at December 31, 20022004 and 2003, respectively,respectively. This agreement was terminated on June 6, 2005 when Wireless entered into a new general purchase agreement with this vendor for the purchase of PCS CDMA system products ("CDMA Products") and $8.5 million was includedservices, including without limitation, wireless base stations, switches, power, cable and transmission equipment and services, with an initial term of three years. The agreement provides for both exclusive and non-exclusive pricing for CDMA Products and the agreement may be renewed at Wireless' option on an annual basis for three subsequent years after the conclusion of the initial three-year term. If Wireless fails to purchase exclusively CDMA Products from the vendor, it may have to pay certain liquidated damages based on the difference in other long-term liabilities at December 31, 2003.prices between exclusive and non-exclusive prices for CDMA Products already purchased since the effective date of the agreement, which may be material to Wireless.
Litigation
The Company is involved in various claims and legal actions arising in the ordinary course of business. The ultimate disposition of these matters is not expected to have a material adverse impact on the Company’sCompany's financial position, results of operations or liquidity.
The Company is involved in various claims and legal actions in relation to claims of patent infringement. The ultimate disposition of these matters is not expected to have a material adverse impact on the Company's financial position, results of operations or liquidity.
9.11. Series D Cumulative Convertible Redeemable Participating Preferred Stock:
In July 2000, the CompanyMetroPCS, Inc. executed a Securities Purchase Agreement, which was subsequently amended (as amended, the “SPA”"SPA"). Under the SPA, the Company soldMetroPCS, Inc. issued shares of Series D Cumulative Convertible Redeemable Participating Preferred Stock, (“par value of $0.0001 per share ("Series D Preferred Stock”Stock"). In January 2001, the CompanyMetroPCS, Inc. finalized $350.0 million in commitments to purchaseissue shares of Series D Preferred Stock. Of this commitment, net proceeds of $88.2 million and $160.0 million were received in 2001 and 2002, respectively. In 2003, the CompanyMetroPCS, Inc. called the remaining commitments for, and issued, the shares of Series D Preferred Stock for proceeds of approximately $65.5 million. Additionally, all principal and accrued interest totaling $5.1 million on the Company’sMetroPCS, Inc.'s 2002 Subordinated Convertible Notes were converted into Series D Preferred Stock. In July 2004, each share of MetroPCS, Inc. Series D Preferred Stock was converted into a share of
Series D Preferred Stock of MetroPCS (See Note 1). Dividends accrue at an annual rate of 6% of the liquidation value of $100 per share on the Series D Preferred Stock. Dividends of $5.0$21.0 million, $10.8$21.0 million and $18.7$18.5 million were accrued for the years ended December 31, 2001, 20022005, 2004 and 2003, respectively, and are included in the Series D Preferred Stock balance.
MetroPCS Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Each share of Series D Preferred Stock iswill automatically convertedconvert into Class C Common Stock upon the event of (i) the completion of a qualified public offering, asQualified Public Offering (as defined in the agreement,SPA), (ii) the Company’s Class CMetroPCS' Common Stock tradestrading (or in the case of a merger or consolidation of MetroPCS with another company, other than a sale or change of control of MetroPCS, the shares received in such merger or consolidation having traded immediately prior to such merger and consolidation) on a national securities exchange for a period of 30 consecutive trading dates above a price that implies a market valuation of the Series D Preferred Stock in excess of twice the initial purchase price of the Series D Preferred Stock, or (iii) 66 2/3% ofthe date specified by the holders of two-thirds of the outstanding Series D Preferred Stock provide written notice to the Company stating the Series D Preferred Stock is to be converted into Class C Common Stock. In addition, any individual investor may, at any time prior to automatic conversion, as set forth above, convert their shares into Class C Common Stock. The Series D Preferred Stock and the accrued but unpaid dividends thereon are convertible into Class C Common Stock at $4.70$9.40 per share of Class C Common Stock, which per share amount is subject to adjustment in accordance with the terms of the certificateMetroPCS' Second Amended and Restated Articles of designations relating to the Series D Preferred Stock.Incorporation. If not previously converted, the CompanyMetroPCS is required to redeem all outstanding shares of Series D Preferred Stock on July 17, 2015, at the liquidation preferencevalue plus accrued but unpaid dividends.
The holders of Series D Preferred Stock, as a class with the holders of the Class C Common Stock, have the right to vote on all matters as if each share of Series D Preferred Stock had been converted into Class C Common Stock, except for the election of directors. See Note 10. The holders of Series D Preferred Stock, as a class, can nominate one member of the Board of Directors.Directors of MetroPCS. Each share of Series D Preferred Stock is entitled to a liquidation preference upon a liquidation event (as defined in MetroPCS' Second Amended and Restated Articles of Incorporation) equal to the sum of:
The SPA defines a number of events of noncompliance. Upon an occurrence of an event of noncompliance, the holders of not less than 66 2/3%two-thirds of the then outstanding shares of Series D Preferred Stock can request the CompanyMetroPCS to redeem the outstanding shares at an amount equal to the liquidation preferencevalue plus accrued but unpaid dividends. The Company believes that there was in complianceno uncured or unwaived event of noncompliance at December 31, 2003.2005 and 2004.
12. Series E Cumulative Convertible Redeemable Participating Preferred Stock:
MetroPCS entered into a stock purchase agreement, dated as of August 30, 2005, under which MetroPCS issued 500,000 shares of Series E Preferred Stock for $50.0 million in cash. Total proceeds to MetroPCS were $46.7 million, net of transaction costs of approximately $3.3 million. The Series E Preferred Stock and the Series D Preferred Stock rank equally with respect to dividends, conversion rights and liquidation preferences. Dividends on the Series E Preferred Stock accrue at an annual rate of 6% of the liquidation value of $100 per share. Dividends of $1.0 million were accrued for the year ended December 31, 2005.
Each share of Series E Preferred Stock will be converted into Common Stock of MetroPCS upon (i) the completion of a Qualifying Public Offering, (as defined in the Second Amended and Restated Stockholders Agreement), (ii) the Common Stock trading (or, in the case of a merger or consolidation of MetroPCS with another company, other than as a sale or change of control of MetroPCS, the shares received in such merger or consolidation having traded immediately prior to such merger or consolidation) on a national securities exchange for a period of 30 consecutive trading dates above a price implying a market valuation of the Series D Preferred Stock over twice the Series D Preferred Stock initial purchase price, or (iii) the date specified by the holders of two-thirds of the Series E Preferred Stock. The Series E Preferred Stock is convertible into Common Stock at $27.00 per share, which per share amount is subject to adjustment in accordance with the terms of the Second Amended and Restated Articles of Incorporation of MetroPCS. If not previously converted, MetroPCS is required to redeem all outstanding shares of Series E Preferred Stock on July 17, 2015, at the liquidation preference of $100 per share plus accrued but unpaid dividends. In 2005 MetroPCS, in connection with the sale of the Series E Preferred Stock, increased the total authorized Preferred Stock to 25,000,000 shares, par value $0.0001 per share.
On October 25, 2005, pursuant to the terms of the stock purchase agreement, the investors in the Series E Preferred Stock also conducted a tender offer in which they purchased outstanding Series D Preferred Stock and Common Stock. The Company believes that there was no uncured or unwaived event of noncompliance at December 31, 2005.
10.13. Capitalization:
Warrants
From inception through October 1999, the CompanyFebruary 1998, MetroPCS, Inc. issued various warrants to purchase Common Stock in conjunction with sales of stock and in exchange for consulting services.services, which were converted into warrants in MetroPCS in July 2004. As of December 31, 2003,2005, the total numbernumbers of warrants outstanding andwas 175,650 at an exercise price of $0.0003 per warrant.
During the exercise prices related thereto, are as follows:
Price | Issued | Outstanding | ||
Warrants for Class B Shares | ||||
$0.0004 | 264,000 | 264,000 | ||
$0.0334 | 51,000 | 51,000 | ||
Total Warrants for Class B Shares | 315,000 | 315,000 | ||
Warrants for Class C Shares | ||||
$0.0004 | 13,643,383 | 6,282,045 | ||
$0.0334 | 3,895,920 | 914,040 | ||
$3.3334 | 207,000 | 207,000 | ||
Total Warrants for Class C Shares | 17,746,303 | 7,403,085 | ||
Total Warrants | 18,061,303 | 7,718,085 | ||
MetroPCS Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Conversionyear ended December 31, 2005, 760,735 warrants were exercised for 760,735 shares of Debt
In September 2001, the Company executed a Termination and Release Agreement with Lucent whereby all amounts owed under the Lucent Senior Notes including interest, costs of counsel and indemnity amounts together with $6.0 million aggregate denomination of Class C Common Stock Warrants and $3.0 million aggregate denominationfor total proceeds of Class C Common Stock Contingent Warrants issued pursuant to the Lucent Senior Notes and 685,590 Class C Common Stock Warrants issued pursuant to the Unsecured Creditors’ Credit Agreement were fully settled and terminated for cash consideration of $53.7approximately $0.6 million. Approximately $39.8 million was allocated to the retirement of the Lucent Senior Notes resulting in a loss on the early extinguishment of debt of $7.1 million. The remaining $13.9 million was allocated to the repurchase of the warrants resulting in a reduction of paid-in capital.
Redemption
If, at any time, ownership of shares of Class C Common Stock, Series D Preferred Stock or Series E Preferred Stock by a holder would cause the Company to violate any FCC ownership requirements or restrictions, the CompanyMetroPCS may, at the option of the Board of Directors, redeem a number of shares of Class C
Common Stock, Series D Preferred Stock or Series E Preferred Stock sufficient to eliminate such violation.
Conversion Rights
Each share of Class A and B Common Stock shall automatically be converted into one share of Class C Common Stock in January 2007 or such earlier date as may be determined byOn April 15, 2004, the Board of Directors. The Board of Directors may approveapproved the conversion of shares of Class B non-voting common stock into Class C Common StockStock. Each outstanding share of Class B non-voting common stock was converted into sharesa share of Class C Common Stock at any time following the consummation of an initial public offeringon May 18, 2004. On July 13, 2004, as part of the Company’s capital stock.merger of a wholly-owned subsidiary of MetroPCS into MetroPCS, Inc., each share of the Class A Common Stock, Class C Common Stock and Series D Preferred Stock of MetroPCS, Inc. was converted on a share for share basis into Class A Common Stock, Class C Common Stock or Series D Preferred Stock, as applicable, of MetroPCS. On July 23, 2004, the Class C Common Stock was renamed Common Stock. Effective December 31, 2005, each share of Class A Common Stock was automatically converted into one share of Common Stock upon the occurrence of the Class A Termination Event.
Stock Split
On July 23, 2004, MetroPCS effected a 1-for-2 reverse stock split of the Common Stock of MetroPCS. All share, per share and conversion amounts relating to the Common Stock, stock options, and stock purchase warrants included in the accompanying consolidated financial statements have been retroactively adjusted to reflect the reverse stock split.
Voting RightsClass A Common Stock Termination Event
MetroPCS previously qualified as a very small business designated entity ("DE"). MetroPCS met the DE control requirements of the FCC by issuing Class A Common Stock entitling its holders to 50.1% of the stockholders' votes and the right to designate directors holding a majority of the voting power of MetroPCS' Board of Directors. As a result of MetroPCS' repayment of its FCC debt in May 2005, it was no longer required to maintain its eligibility as a DE. On August 5, 2005 MetroPCS' wholly-owned licensee subsidiaries each filed administrative updates with the FCC notifying the FCC that MetroPCS was no longer subject to the DE control requirements. The administrative updates were informational in nature since no transfer ofde jure orde factocontrol took place at that time.
As part of the stock purchase agreement for the Series E Preferred Stock, MetroPCS filed its Second Amended and Restated Certificate of Incorporation ("Revised Articles") and MetroPCS and certain of its stockholders entered into the Second Amended and Restated Stockholders Agreement, dated as of August 30, 2005 ("Stockholders Agreement"). The Revised Articles and Stockholders Agreement required, among other things, that MetroPCS cause a change in control by the later of December 31, 2005 or the date on or after which the FCC's grant of MetroPCS' application to transfer control became final ("Class A Termination Event"). The Class A Termination Event triggers, among other things, the conversion of all of the Class A Common Stock into MetroPCS Common Stock and the extinguishment of the special voting and board appointment rights of the Class A Common Stock. In addition, certain supermajority voting rights held by the Series D Preferred Stock and Series E Preferred Stock are also extinguished. The stock purchase agreement for the Series E Preferred Stock requires that under the new structure MetroPCS have a nine member Board of Directors. In addition,
after the Class A Termination Event, votes on significant matters requiring a stockholder vote are generally by vote of the holders of a majority of all of the shares of capital stock of MetroPCS, with the holders of the Series D Preferred Stock and Series E Preferred Stock voting with holders of the Common Stock on an "as converted" basis. On November 1, 2005, MetroPCS' wholly-owned licensee subsidiaries filed transfer of control applications with the FCC to seek the FCC's consent to the Class A Termination Event. The FCC applications were approved and the grants were listed in an FCC Public Notice on November 10, 2005. The grants were finalized on December 19, 2005 and the Class A Termination Event occurred on December 31, 2005. The net effect of these changes is that the holders of Class A Common Stock have relinquished affirmative control of MetroPCS to the stockholders as a class, have the rightwhole. There was no significant financial accounting impact.
Common Stock Issued to (i) vote 50.1%Directors
Non-employee members of the Company’s voting interestsMetroPCS' Board of Directors receive compensation for serving on all matters and (ii) elect four (of seven) members of the Board of Directors.Directors, as defined in MetroPCS' Non-Employee Director Remuneration Plan. The holders of Class Bannual retainer provided under the Non-Employee Director Remuneration Plan may be paid in cash, Common Stock, asor a class, have no voting rights. The holderscombination of Class Ccash and Common Stock, as a class with the holders of Series D Preferred Stock, have the right to (i) vote 49.9% of the Company’s voting interests on all matters and (ii) elect the remaining number ofStock. During 2005, non-employee members of the Board of Directors (collectively, threewere issued 26,479 shares of seven)Common Stock as are from time-to-time set forth in the Company’s bylaws.
payment of their annual retainer.
11.14. Stock Option Plan:
The CompanyMetroPCS has atwo stock option planplans (the “Option Plan”"Option Plans") under which it grants options to purchase Class BCommon Stock of MetroPCS; the Second Amended and Class C Common Stock.Restated 1995 Stock Option Plan, as amended ("1995 Plan"), and the 2004 Equity Incentive Compensation Plan, as amended ("2004 Plan"). The 1995 Plan terminated in November 2005 and no further awards can be made under the 1995 Plan, but all options granted before November 2005 will remain valid in accordance with their terms. As of December 31, 20022005 and 2003,2004, the maximum number of shares reserved for the Option2004 Plan was 12,321,5004,700,000 shares. The Option1995 Plan is administered by MetroPCS' Board of Directors and the 2004 Plan is administered by the Compensation Committee of the Board of Directors.Directors of MetroPCS. Vesting periods and terms for stock option grants are determined by the plan administrator.administrator, which is MetroPCS' Board of Directors for the 1995 Plan and the Compensation Committee of the Board of Directors of MetroPCS for the 2004 Plan. No option granted under the 1995 Plan shall have a term in excess of fifteen years and no option granted under the 2004 Plan shall have a term in excess of ten years. Options granted during 2001, 2002the years ended December 31, 2005, 2004 and 2003 have a vesting period of threeone to four years.
Options granted under the Option1995 Plan are exercisable upon grant. Shares received upon exercising options prior to vesting are restricted from sale based on a vesting schedule. In the event an option holder’sholder's service with the Company is terminated, the CompanyMetroPCS may repurchase unvested shares issued under the Option1995 Plan at the option exercise price.
MetroPCS Communications, Inc. and Subsidiaries Options granted under the 2004 Plan are only exercisable upon vesting.
Notes to Consolidated Financial Statements—(Continued)
Generally, theThe value of the options is determined by using a Black-Scholes pricing model that includes the following variables: 1) exercise price of the instrument, 2) fair market value of the underlying stock on date of grant, 3) expected life, 4) estimated volatility and 5) the risk-free interest rate. The Company
utilized the following weighted-average assumptions in estimating the fair value of the options grants in 2001, 2002the years ended December 31, 2005, 2004 and 2003:
| | 2005 | 2004 | 2003 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Expected dividends | 0.00 | % | 0.00 | % | 0.00 | % | |||||
| Expected volatility | 50.00 | % | 55.00 | % | 68.01 | % | |||||
| Risk-free interest rate | 4.24 | % | 3.22 | % | 2.82 | % | |||||
| Expected lives in years | 5.00 | 5.00 | 5.00 | ||||||||
Weighted-average fair value of options: | |||||||||||
| Granted at below fair value | $ | — | $ | 8.64 | $ | 5.52 | |||||
| Granted at fair value | $ | 10.32 | $ | 7.93 | $ | — | |||||
| Weighted-average exercise price of options: | |||||||||||
| Granted at below fair value | $ | — | $ | 13.37 | $ | 4.70 | |||||
| Granted at fair value | $ | 21.39 | $ | 15.74 | $ | — | |||||
| 2001 | 2002 | 2003 | ||||||||||
Expected dividends | 0.00 | % | 0.00 | % | 0.00 | % | ||||||
Expected volatility | 43.63 | % | 60.67 | % | 68.01 | % | ||||||
Risk-free interest rate | 4.60 | % | 4.08 | % | 2.82 | % | ||||||
Expected lives in years | 5.00 | 5.00 | 5.00 | |||||||||
Weighted-average fair value of options: | ||||||||||||
Granted at below market price | $ | 2.94 | $ | 3.46 | $ | 5.52 | ||||||
Weighted-average exercise price of options: | ||||||||||||
Granted at below market price | $ | 4.70 | $ | 4.70 | $ | 4.70 | ||||||
The Black-Scholes model was not developed for use in valuing employee stock options, but was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, it requires the use of subjective assumptions including expectations of future dividends and stock price volatility. Such assumptions are only used for making the required fair value estimate and should not be considered as indicators of future dividend policy or stock price appreciation. Because changes in the subjective assumptions can materially affect the fair value estimate, and because employee stock options have characteristics significantly different from those of traded options, the use of the Black-Scholes option pricing model may not provide a reliable estimate of the fair value of employee stock options.
A summary of the status of the Company’sCompany's Option PlanPlans as of December 31, 2001, 20022005, 2004 and 2003, and changes during the periods then ended, is presented in the table below:
| | 2005 | 2004 | 2003 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Shares | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | |||||||||
| Outstanding, beginning of year | 10,816,285 | $ | 2.76 | 10,352,394 | $ | 1.82 | 9,555,770 | $ | 1.55 | ||||||
Granted | 1,946,178 | $ | 21.39 | 890,506 | $ | 14.28 | 1,012,425 | $ | 4.70 | ||||||
| Exercised | (7,556,557 | ) | $ | 1.13 | (211,976 | ) | $ | 1.96 | (70,946 | ) | $ | 0.60 | |||
| Forfeited | (371,836 | ) | $ | 12.11 | (214,639 | ) | $ | 6.07 | (144,855 | ) | $ | 4.70 | |||
Outstanding, end of year | 4,834,070 | $ | 12.54 | 10,816,285 | $ | 2.76 | 10,352,394 | $ | 1.82 | ||||||
Options exercisable at year-end | 3,661,859 | 10,816,285 | 10,352,394 | ||||||||||||
| Options vested at year-end | 2,232,110 | 8,992,324 | 8,296,724 | ||||||||||||
| 2001 | 2002 | 2003 | ||||||||||||||||
| Shares | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | |||||||||||||
Outstanding and exercisable, beginning of year | 7,769,490 | $ | 1.02 | 9,436,956 | $ | 1.28 | 9,556,831 | $ | 1.56 | |||||||||
Granted | 1,908,066 | 4.70 | 775,975 | 4.70 | 1,013,425 | 4.70 | ||||||||||||
Exercised | (50,167 | ) | 4.70 | (379,675 | ) | 0.50 | (70,946 | ) | 0.60 | |||||||||
Forfeited | (190,433 | ) | 4.70 | (276,425 | ) | 2.48 | (153,437 | ) | 4.70 | |||||||||
Outstanding and exercisable, end of year | 9,436,956 | 1.28 | 9,556,831 | 1.56 | 10,345,873 | 1.82 | ||||||||||||
Options vested at year-end | 6,248,869 | 7,469,662 | 8,275,695 | |||||||||||||||
The following table summarizes information about stock options outstanding at December 31, 2003:2005:
| | Options Outstanding | Options Vested | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Exercise Price | Number of Shares | Weighted Average Contractual Life | Weighted Average Exercise Price | Number of Shares | Weighted Average Exercise Price | |||||||
| $ 0.23 - $ 1.00 | 320,667 | 6.43 | $ | 0.34 | 320,667 | $ | 0.34 | |||||
| $ 4.70 - $ 4.70 | 1,557,089 | 5.73 | $ | 4.70 | 1,499,297 | $ | 4.70 | |||||
| $ 5.40 - $18.94 | 1,058,536 | 7.91 | $ | 11.85 | 346,980 | $ | 11.36 | |||||
| $20.00 - $21.46 | 1,897,778 | 9.67 | $ | 21.42 | 65,166 | $ | 21.41 | |||||
| 4,834,070 | 2,232,110 | |||||||||||
| Options Outstanding | Options Vested | |||||||||||
Exercise Price | Number of Shares | Weighted Average Contractual Life | Weighted Average Exercise Price | Number of Shares | Weighted Average Exercise Price | |||||||
$0.24 | 6,343,690 | 8.2 | $ | 0.24 | 6,343,690 | $ | 0.24 | |||||
$1.00 | 399,000 | 11.5 | $ | 1.00 | 340,812 | $ | 1.00 | |||||
$4.70 | 3,603,183 | 8.2 | $ | 4.70 | 1,591,193 | $ | 4.70 | |||||
| 10,345,873 | 8,275,695 | |||||||||||
deferred compensation, including options to purchase MetroPCS' Common Stock which were granted below the fair market value of the Common Stock as of the grant date. MetroPCS Communications, Inc. and Subsidiaries
Noteshad previously granted certain options to Consolidated Financial Statements—(Continued)
During 2002, 379,675 options grantedpurchase its Common Stock under the Option1995 Plan at exercise prices which MetroPCS believes were exercised for 363,425 sharesbelow the fair market value of Class Bits Common Stock and 16,250 sharesat the time of Class Cgrant. In December 2005, MetroPCS offered to amend the stock option grants of all affected employees by increasing the exercise price of such affected stock option grants to the fair value of MetroPCS' Common Stock for an aggregateas of approximately $188,000.the date of grant and granting additional stock options which vested 50% on January 1, 2006 and 50% on January 1, 2007 at the fair market value of MetroPCS' Common Stock as of the grant date provided that the employee remained employed by the Company on those dates. The total number of affected stock options was 872,380 and MetroPCS granted 135,758 additional stock options.
During 2003, 70,946 options granted under the Option PlanPlans were exercised for 65,000 shares of Class B Common Stocknon-voting common stock and 5,946 shares of Class C Common Stock for total proceeds of approximately $43,000. During 2004, 211,976 options granted under the Option Plans were exercised for 211,976 shares of Common Stock for total proceeds of approximately $0.4 million. During 2005, 7,556,557 options granted under the Option Plans were exercised for 7,556,557 shares of Common Stock for total proceeds of approximately $8.5 million.
As of December 31, 2001, 2002,2005, 2004 and 2003, options outstanding under the Option PlanPlans have a weighted average remaining contractual life of 10.3, 9.17.80, 7.23 and 8.38.07 years, respectively.
During 2001, 2002 and 2003,Deferred compensation, which is included within stockholders' equity on the Company recorded deferred compensation of $2.5 million, $0.8 million and $3.4 million, representingconsolidated balance sheets, represents the difference between the estimated fair value of the stock and the option exercise price at the date of grant. The deferredDeferred compensation is amortized over the vesting period.period and is recorded as deferred compensation expense within selling, general and administrative expenses. During the year ended December 31, 2005, the Company recorded reductions in deferred compensation in the amount of $2.9 million as a result of forfeitures and the amendment of certain stock option grants due to the American Job Creation Act of 2004, as discussed above. During the year ended December 31, 2004, the Company recorded additional deferred compensation of $0.9 million. The Company recorded a reduction in deferred compensation of $0.1 million in 2003. The Company recognized amortizationdeferred
compensation expense of deferred compensation of $1.5$0.3 million, $1.1$1.7 million and $1.1$1.4 million in 2001, 2002for the years ended December 31, 2005, 2004 and 2003, respectively. In addition, the CompanyMetroPCS has approximately 0.9 millionadditional stock options outstanding that are required to be marked-to-market under variable accounting. Theaccounting and as a result, the Company recognized additional deferred compensation expense of $6.2$2.3 million, related to these options in$5.1 million and $4.1 million for the years ended December 31, 2005, 2004 and 2003, respectively, to reflect an increase in the estimated value of MetroPCS' Common Stock. During the Company’s common stock.
year ended December 31, 2004, the Company recognized additional deferred compensation expense of $3.6 million related to the extension of the contractual life of certain outstanding options.
12.15. Employee Benefit Plan:
The Company sponsors a savings plan under Section 401(k) of the Internal Revenue Code for the majority of its employees. The plan allows employees to contribute a portion of their pretax income in accordance with specified guidelines. The Company does not match employee contributions but may make discretionary or profit-sharing contributions. The Company has made no contributions to the savings plan through December 31, 2003.
2005.
13.16. Income Taxes:
The provision for taxes on income consistsconsisted of the following (in thousands):
| | 2005 | 2004 | 2003 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Current: | |||||||||||
| Federal | $ | (233 | ) | $ | 197 | $ | (4,721 | ) | |||
| State | 2,603 | 2,502 | 2,184 | ||||||||
| 2,370 | 2,699 | (2,537 | ) | ||||||||
Deferred: | |||||||||||
| Federal | 114,733 | 39,056 | 16,230 | ||||||||
| State | 10,322 | 5,245 | 2,486 | ||||||||
| 125,055 | 44,301 | 18,716 | |||||||||
Provision for income taxes | $ | 127,425 | $ | 47,000 | $ | 16,179 | |||||
| 2001 | 2002 | 2003 | |||||||
Current: | |||||||||
Federal | $ | — | $ | 7,186 | $ | 1,087 | |||
State | — | 1,807 | 556 | ||||||
| — | 8,993 | 1,643 | |||||||
Deferred: | |||||||||
Federal | — | 8,325 | 12,424 | ||||||
State | — | 1,769 | 1,598 | ||||||
| — | 10,094 | 14,022 | |||||||
Provision for income taxes | $ | — | $ | 19,087 | $ | 15,665 | |||
MetroPCS Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Deferred taxes are provided for those items reported in different periods for income tax and financial reporting purposes. The Company’s significantCompany's net deferred tax liability consisted of the following deferred tax assets and liabilities and the changes in those(in thousands):
| | 2005 | 2004 | |||||||
|---|---|---|---|---|---|---|---|---|---|
| Deferred tax assets: | |||||||||
| Start-up costs capitalized for tax purposes | $ | 866 | $ | 2,772 | |||||
| Net operating loss carry forward | 85,152 | 50,933 | |||||||
| Net basis difference in PCS licenses | 1,428 | 6,440 | |||||||
| Revenue deferred for book purposes | 5,007 | 3,704 | |||||||
| Interconnect accrual | 256 | 445 | |||||||
| Allowance for uncollectible accounts | 1,272 | 1,060 | |||||||
| Deferred rent expense | 5,747 | 4,063 | |||||||
| Deferred compensation | 2,818 | 6,397 | |||||||
| Accrued property tax | 69 | 324 | |||||||
| Asset retirement obligation | 347 | 215 | |||||||
| Accrued board of directors fees | 35 | 27 | |||||||
| Inventory capitalization | 81 | 38 | |||||||
| Accrued vacation | 603 | 556 | |||||||
| Inventory reserve | 38 | — | |||||||
| Partnership interest | 392 | — | |||||||
| Other | 79 | 67 | |||||||
| Total deferred tax assets | 104,190 | 77,041 | |||||||
Deferred tax liabilities: | |||||||||
| Depreciation | (157,083 | ) | (141,132 | ) | |||||
| Deferred cost of handset sales | (4,867 | ) | (3,407 | ) | |||||
| Amortization of original issue discount | — | (927 | ) | ||||||
| Prepaid maintenance contracts and other | (297 | ) | (152 | ) | |||||
| Prepaid insurance | (374 | ) | (685 | ) | |||||
| Prepaid collateral | (276 | ) | (97 | ) | |||||
| Gain deferral related to like kind exchange | (83,699 | ) | — | ||||||
| Other comprehensive income | (1,331 | ) | — | ||||||
| Other | — | (26 | ) | ||||||
| Total deferred tax liabilities | (247,927 | ) | (146,426 | ) | |||||
Subtotal | (143,737 | ) | (69,385 | ) | |||||
| Valuation allowance | (194 | ) | (142 | ) | |||||
| Net deferred tax liability | $ | (143,931 | ) | $ | (69,527 | ) | |||
Deferred tax assets and liabilities wereat December 31, 2005 and 2004 are as follows (in thousands):
| | 2005 | 2004 | ||||||
|---|---|---|---|---|---|---|---|---|
| Current deferred tax asset | $ | 2,122 | $ | 3,574 | ||||
| Non-current deferred tax liability | (146,053 | ) | (73,101 | ) | ||||
| Net deferred tax liability | $ | (143,931 | ) | $ | (69,527 | ) | ||
| 2002 | Change | 2003 | ||||||||||
Start-up costs capitalized for tax purposes | $ | 7,434 | $ | (2,534 | ) | $ | 4,900 | |||||
Net operating loss carry forward | — | 30,126 | 30,126 | |||||||||
Net basis difference in PCS licenses | 14,884 | (3,606 | ) | 11,278 | ||||||||
Revenue deferred for book purposes | 6,426 | (2,495 | ) | 3,931 | ||||||||
Accrued interest expense | 3,548 | (3,548 | ) | — | ||||||||
Allowance for doubtful accounts | 2,786 | (1,368 | ) | 1,418 | ||||||||
Deferred rent expense | 1,107 | 458 | 1,565 | |||||||||
Deferred compensation | 1,005 | 2,872 | 3,877 | |||||||||
Accrued property tax | 900 | (635 | ) | 265 | ||||||||
Inventory | — | 840 | 840 | |||||||||
Accrued vacation | 437 | (24 | ) | 413 | ||||||||
Depreciation | (42,184 | ) | (35,915 | ) | (78,099 | ) | ||||||
Deferred cost of handset sales | (3,125 | ) | 558 | (2,567 | ) | |||||||
Amortization of original issue discount | (3,077 | ) | 1,184 | (1,893 | ) | |||||||
Other | (235 | ) | 65 | (170 | ) | |||||||
Valuation allowance | — | — | — | |||||||||
| $ | (10,094 | ) | $ | (14,022 | ) | $ | (24,116 | ) | ||||
At December 31, 2001, the Company had approximately $45 million of net operating loss carryforwards for federal income tax purposes. In connection with the gain on sale of spectrum (see Note 4) the Company fully utilized the net operating loss carryforward in 2002. During 2003, the Company generated approximately $76.8$89.5 million of net operating loss for federal income tax purposes, of which $15.3$14.1 million will bewas carried back to 2002 and the remaining amount of $61.5$75.4 million will be available for carryforward to offset future income. In addition,During 2004, the Company generated approximately $49.3 million of net operating loss for federal income tax purposes which will also be available for carryforward to offset future income. At December 31, 2004 the Company has approximately $162$124.7 million and $160.8 million of net operating loss carryforwards for federal and state income tax purposes.purposes, respectively. The federal net operating loss will expirebegin expiring in 2023. The state net operating losses will begin to expire in 2013. The Company has been able to take advantage of additionalaccelerated depreciation available under federal tax law, in 2002 and 2003 for federal income tax purposes, therefore creatingwhich has created a significant deferred tax liability. The reversal of the timing differences which gave rise to the deferred tax liability, future taxable income and future tax planning strategies will allow the Company to benefit from the deferred tax assets, and as such, most of the valuation allowance was released in 2002. The Company has a valuation allowance of $0.1 million at December 31, 2004 relating primarily to state net operating losses.
During 2005, the Company generated approximately $103.2 million of net operating loss for federal income tax purposes which will also be available for carryforward to offset future income. At December 31, 2005 the Company has approximately $228.7 million and $102.5 million of net operating loss carryforwards for federal and state income tax purposes, respectively. The federal net operating loss will begin expiring in 2023. The state net operating losses will begin to expire in 2013. The Company has been able to take advantage of accelerated depreciation and like-kind exchange gain deferral available under federal tax law, which has created a significant deferred tax liability. The reversal of the timing differences which gave rise to the deferred tax liability, future taxable income and future tax planning strategies will allow the Company to benefit from the deferred tax assets. As such, theThe Company has a valuation allowance was releasedof $0.2 million at December 31, 2005 relating primarily to state net operating losses.
The Company establishes income tax reserves when, despite its belief that its tax returns are fully supportable, it believes that certain positions may be challenged and ultimately modified. The Company established tax reserves of $21.2 million and $18.9 million as of December 31, 2005 and 2004, respectively. The tax reserves are included in 2002.other long-term liabilities at December 31, 2004. At December 31, 2005 the tax reserves in the amount of $17.1 million and $4.1 million are included in other long-term liabilities and accounts payable and accrued expenses, respectively.
A reconciliation of income taxes computed at the United States federal statutory income tax rate (35%) to the provision for income taxes reflected in the consolidated statements of operationsincome and
comprehensive income for the years ended December 31, 2001, 20022005, 2004 and 2003 is as follows (in thousands):
| | 2005 | 2004 | 2003 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| U.S. federal income tax provision at statutory rate | $ | 114,136 | $ | 39,117 | $ | 11,080 | ||||
| Increase (decrease) in income taxes resulting from: | ||||||||||
| State income taxes, net of federal income tax impact | 10,865 | 5,187 | 2,407 | |||||||
| Change in valuation allowance | 52 | 58 | 50 | |||||||
| Provision for tax uncertainties | 2,274 | 2,561 | 2,410 | |||||||
| Permanent items | 98 | 15 | 125 | |||||||
| Other | — | 62 | 107 | |||||||
Provision for income taxes | $ | 127,425 | $ | 47,000 | $ | 16,179 | ||||
Internal Revenue Service Audit
| 2001 | 2002 | 2003 | |||||||||
U.S. Federal income tax (benefit) provision at statutory rate | $ | (15,813 | ) | $ | 55,354 | $ | 12,681 | ||||
Increase (decrease) in income taxes resulting from: | |||||||||||
State income taxes, net of federal income tax impact | (2,033 | ) | 7,117 | 1,630 | |||||||
Change in valuation allowance | 16,128 | (43,209 | ) | — | |||||||
Resolution of federal income tax audit | — | — | 647 | ||||||||
Other | 1,718 | (175 | ) | 707 | |||||||
Provision for income taxes | $ | — | $ | 19,087 | $ | 15,665 | |||||
MetroPCS Communications, Inc.Texas Margin Tax
On May 18, 2006, the Texas Governor signed into law a Texas margin tax ("H.B. No. 3") which restructures the state business tax by replacing the taxable capital and Subsidiariesearned surplus components of the current franchise tax with a new "taxable margin" component. Because the tax base on the Texas margin tax is derived from an income-based measure, the Company believes the margin tax is an income tax and, therefore, the provisions of SFAS No. 109 regarding the recognition of deferred taxes apply to the new margin tax. In accordance with SFAS No. 109, the effect on deferred tax assets of a change in tax law should be included in tax expense attributable to continuing operations in the period that includes the enactment date. Although the effective date of H.B. No. 3 is January 1, 2008, certain effects of the change should be reflected in the financial statements of the first interim or annual reporting period that includes May 18, 2006. The Company has not completed its evaluation of the effect of H.B. No. 3.
Notes to Consolidated Financial Statements—(Continued)
14.17. Net Income (Loss) Per Common Share:
The following table sets forth the computation of basic and diluted net income (loss) per common share for the periods indicated (in thousands, except share and per share data):
| 2001 | 2002 | 2003 | ||||||||||
| (In Thousands, except Share Information) | ||||||||||||
Basic EPS—Two-Class Method: | ||||||||||||
Net income (loss) before cumulative effect of change in accounting principle | $ | (45,180 | ) | $ | 139,067 | $ | 20,640 | |||||
Accrued dividends on Series D Preferred Stock | (4,963 | ) | (10,838 | ) | (18,749 | ) | ||||||
Net income (loss) attributable to Common Stockholders before cumulative effect of change in accounting principle | $ | (50,143 | ) | $ | 128,229 | $ | 1,891 | |||||
Amount allocable to Common Stockholders | 100% | 64% | 50% | |||||||||
Rights to undistributed earnings (losses) | $ | (50,143 | ) | $ | 82,067 | $ | 946 | |||||
Cumulative effect of change in accounting principle | — | — | (74 | ) | ||||||||
Amount allocable to Common Stockholders | 100% | 64% | 50% | |||||||||
Rights to undistributed earnings (losses) | $ | — | $ | — | $ | (37 | ) | |||||
Net income attributable to Common Stockholders | $ | (50,143 | ) | $ | 128,229 | $ | 1,817 | |||||
Amount allocable to Common Stockholders | 100% | 64% | 50% | |||||||||
Rights to undistributed earnings (losses) | $ | (50,143 | ) | $ | 82,067 | $ | 909 | |||||
Weighted average common shares outstanding: | ||||||||||||
Common Stock, Class A | 90 | 90 | 90 | |||||||||
Common Stock, Class B | 3,480,360 | 3,681,488 | 3,843,785 | |||||||||
Common Stock, Class C | 31,422,286 | 32,566,162 | 32,589,178 | |||||||||
| 34,902,736 | 36,247,740 | 36,433,053 | ||||||||||
Basic EPS—before cumulative effect of change in accounting principle | (1.44 | ) | 2.26 | 0.02 | ||||||||
Cumulative effect of change in accounting principle | — | — | (0.00 | ) | ||||||||
Basic EPS | (1.44 | ) | 2.26 | 0.02 | ||||||||
Diluted EPS: | ||||||||||||
Net income (loss) before cumulative effect of change in accounting principle allocable to Common Stockholders | $ | (50,143 | ) | $ | 82,067 | $ | 946 | |||||
Cumulative effect of change in accounting principle, allocable to Common Stockholders | — | — | (37 | ) | ||||||||
Net income (loss), allocable to Common Stockholders | $ | (50,143 | ) | $ | 82,067 | $ | 909 | |||||
Weighted average common shares outstanding: | ||||||||||||
Common Stock, Class A | 90 | 90 | 90 | |||||||||
Common Stock, Class B | 3,480,360 | 3,681,488 | 3,843,785 | |||||||||
Common Stock, Class C | 31,422,286 | 32,566,162 | 32,589,178 | |||||||||
Dilutive effect of stock options | — | 4,067,183 | 4,562,207 | |||||||||
Dilutive effect of warrants | — | 7,689,420 | 8,259,203 | |||||||||
| �� | 34,902,736 | 48,004,343 | 49,254,463 | |||||||||
Diluted EPS—before cumulative effect of change in accounting principle | $ | (1.44 | ) | $ | 1.71 | $ | 0.02 | |||||
Cumulative effect of change in accounting principle | — | — | (0.00 | ) | ||||||||
Diluted EPS | $ | (1.44 | ) | $ | 1.71 | $ | 0.02 | |||||
| | 2005 | 2004 | 2003 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Basic EPS—Two Class Method: | |||||||||||||
| Net income | $ | 198,677 | $ | 64,890 | $ | 15,358 | |||||||
| Accrued dividends and accretion: | |||||||||||||
| Series D Preferred Stock | (21,479 | ) | (21,479 | ) | (18,966 | ) | |||||||
| Series E Preferred Stock | (1,133 | ) | — | — | |||||||||
| Net income (loss) applicable to common stock | $ | 176,065 | $ | 43,411 | $ | (3,608 | ) | ||||||
| Amount allocable to common shareholders | 54.4 | % | 53.1 | % | 100.00 | % | |||||||
| Rights to undistributed earnings (losses) | $ | 95,722 | $ | 23,070 | $ | (3,608 | ) | ||||||
Weighted average shares outstanding—basic | 45,117,465 | 42,240,684 | 36,443,962 | ||||||||||
Net income (loss) per common share—basic | $ | 2.12 | $ | 0.55 | $ | (0.10 | ) | ||||||
Diluted EPS: | |||||||||||||
| Rights to undistributed earnings (losses) | $ | 95,722 | $ | 23,070 | $ | (3,608 | ) | ||||||
Weighted average shares outstanding—basic | 45,117,465 | 42,240,684 | 36,443,962 | ||||||||||
| Effect of dilutive securities: | |||||||||||||
| Warrants | 896,459 | 2,214,005 | — | ||||||||||
| Stock options | 5,189,606 | 5,756,540 | — | ||||||||||
| Weighted average shares outstanding—diluted | 51,203,530 | 50,211,229 | 36,443,962 | ||||||||||
Net income (loss) per common share—diluted | $ | 1.87 | $ | 0.46 | $ | (0.10 | ) | ||||||
At December 31, 2001, 20022005, 2004 and 2003, 9.243.1 million, 20.640.9 million and 36.534.4 million, respectively, of convertible shares of Series D preferred stock, respectively,Preferred Stock were excluded from the calculation of diluted earningsnet income (loss) per common share since the effect was anti-dilutive.
MetroPCS Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
At December 31, 2001, 9.12005, 0.6 million of convertible shares of Series E Preferred Stock were excluded from the calculation of diluted net income per common share since the effect was anti-dilutive.
At December 31, 2003, 7.7 million of warrants to purchase common stock were excluded from the calculation of diluted earningsnet loss per common share since the effect was anti-dilutive.
At December 31, 2001, 3.82003, 5.0 million of options to purchase common stock were excluded from the calculation of diluted earningsnet loss per common share since the effect was anti-dilutive.
Pro forma net income per common share, presented below, gives effect to the conversion of all outstanding shares of Series D Preferred Stock and Series E Preferred Stock, as well as accrued, but unpaid dividends, as well as Class B common stock, in connection with the proposed initial public offering and the formation of our holding company, MetroPCS Communications, Inc. See Note 1.offering. As a result of the conversion
of the Series D Preferred Stock and the Series E Preferred Stock, pro forma earningsnet income per common share is not calculated using the two-class method, as presented above.
| | 2005 | ||
|---|---|---|---|
| Net income | $ | 198,677 | |
Basic net income per common share—Pro forma | $ | 2.24 | |
Diluted net income per common share—Pro forma | $ | 2.09 | |
Shares used in computing pro forma basic net income per common share | 88,866,582 | ||
| Shares used in computing pro forma diluted net income per common share | 94,952,646 | ||
| Year Ended December 31, 2003 | ||||
Net income before cumulative effect of change in accounting principle | $ | 20,640 | ||
Cumulative effect of change in accounting principle | (74 | ) | ||
Net income | $ | 20,566 | ||
Basic Earnings Per Share—Pro Forma | ||||
Net income before cumulative effect of change in accounting principle | $ | 0.28 | ||
Cumulative effect of change in accounting principle | (0.00 | ) | ||
Net income per share—basic | $ | 0.28 | ||
Diluted Earnings Per Share—Pro Forma | ||||
Net income before cumulative effect of change in principle | $ | 0.24 | ||
Cumulative effect of change in accounting principle | (0.00 | ) | ||
Net income per share—diluted | $ | 0.24 | ||
Shares used in computing pro forma basic net income per share | 72,899,790 | |||
Shares used in computing pro forma diluted net income per share | 85,721,201 | |||
18. Segment Information:
15. Operating segments are defined by SFAS No. 131 "Disclosure About Segments of an Enterprise and Related Information," ("SFAS No. 131"), as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company's chief operating decision maker is the Chairman of the Board and Chief Executive Officer.
At December 31, 2005, the Company had eight operating segments based on geographic region within the United States: Atlanta, Dallas/Ft. Worth, Detroit, Miami, San Francisco, Sacramento, Tampa/Sarasota/Orlando, and Los Angeles. Each of these operating segments provide wireless voice and data services and products to customers in its service areas or is currently constructing a network in order to provide these services. These services include unlimited local and long distance calling, voicemail, caller ID, call waiting, text messaging, picture and multimedia messaging, international long distance and text messaging, ringtones, games and content applications, unlimited directory assistance, ring back tones, nationwide roaming and other value-added services.
The Company aggregates its operating segments into two reportable segments: Core Markets and Expansion Markets.
class of customer, method of distribution, and regulatory environment and have similar expected long-term financial performance and economic characteristics.
The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies. General corporate overhead, which includes expenses such as corporate employee labor costs, rent and utilities, legal, accounting and auditing expenses, is allocated equally across all operating segments. Corporate marketing and advertising expenses are allocated equally to the operating segments, beginning in the period during which the Company launches service in that operating segment. Expenses associated with the Company's national data center are allocated based on the average number of customers in each operating segment. There are no transactions between reportable segments.
Interest expense, interest income, gain/loss on extinguishment of debt and income taxes are not allocated to the segments in the computation of segment operating profit for internal evaluation purposes.
| Year Ended December 31, 2005 | Core Markets | Expansion Markets | Other | Total | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Service revenues | $ | 868,681 | $ | 3,419 | $ | — | $ | 872,100 | |||||
| Equipment revenues | 163,738 | 2,590 | — | 166,328 | |||||||||
| Total revenues | 1,032,419 | 6,009 | — | 1,038,428 | |||||||||
| Cost of service | 271,437 | 11,775 | — | 283,212 | |||||||||
| Cost of equipment | 293,702 | 7,169 | — | 300,871 | |||||||||
| Selling, general and administrative expenses(1) | 153,321 | 9,155 | — | 162,476 | |||||||||
| Adjusted EBITDA (deficit)(2) | 316,555 | (22,090 | ) | — | |||||||||
| Depreciation and amortization | 84,436 | 2,030 | 1,429 | 87,895 | |||||||||
| Non-cash compensation expense | 2,596 | — | — | 2,596 | |||||||||
| Income (loss) from operations | 219,777 | (24,370 | ) | 226,770 | 422,177 | ||||||||
| Interest expense | — | — | 58,033 | 58,033 | |||||||||
| Accretion of put option in majority-owned subsidiary | — | — | 252 | 252 | |||||||||
| Interest income | — | — | (8,658 | ) | (8,658 | ) | |||||||
| Loss on extinguishment of debt | — | — | 46,448 | 46,448 | |||||||||
| Income (loss) before provision for income taxes | 219,777 | (24,370 | ) | 130,695 | 326,102 | ||||||||
| Capital expenditures | 171,783 | 90,871 | 3,845 | 266,499 | |||||||||
| Total assets | 701,675 | 378,671 | 1,078,635 | 2,158,981 | |||||||||
For the years ended December 31, 2004 and 2003, the consolidated financial statements represent the Core Markets reportable segment, as the Expansion Markets reportable segment had no operations until 2005.
19. Guarantor Subsidiaries:
In connection with Wireless' sale of $1.0 billion of 91/4% Senior Notes due 2014 (the "Notes") and the entry into a new senior secured credit facility, pursuant to which Wireless may borrow up to $1.7 billion (the "Senior Secured Credit Facility"), MetroPCS and all of MetroPCS' subsidiaries, other than Wireless and Royal Street (the "guarantor subsidiaries") provided guarantees on the Notes and Senior Secured Credit Facility. These guarantees are full and unconditional as well as joint and several. Certain provisions of the Senior Secured Credit Facility restrict the ability of the guarantor subsidiaries to transfer funds to Wireless. Royal Street and its subsidiaries (the "non-guarantor subsidiaries") are not guarantors of the Notes or the Senior Secured Credit Facility.
The following information presents condensed consolidating balance sheets as of December 31, 2005 and 2004, condensed consolidating statements of income for the years ended December 31, 2005, 2004 and 2003, and condensed consolidating statements of cash flows for the years ended December 31, 2005, 2004 and 2003 of the parent company, the issuer, the guarantor subsidiaries and the non-guarantor subsidiaries. Investments include investments in subsidiaries held by the parent company and the issuer and have been presented using the equity method of accounting.
| | Consolidated Balance Sheet As of December 31, 2005 | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Parent | Issuer | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
| | (in thousands) | |||||||||||||||||||||
| CURRENT ASSETS: | ||||||||||||||||||||||
| Cash and cash equivalents | $ | 10,624 | $ | 95,772 | $ | 219 | $ | 6,094 | $ | — | $ | 112,709 | ||||||||||
| Short-term investments | 24,223 | 366,199 | — | — | — | 390,422 | ||||||||||||||||
| Inventories, net | — | 34,045 | 5,386 | — | — | 39,431 | ||||||||||||||||
| Accounts receivable, net | — | 16,852 | — | — | (824 | ) | 16,028 | |||||||||||||||
| Prepaid expenses | — | — | 21,412 | 18 | — | 21,430 | ||||||||||||||||
| Deferred charges | — | 13,270 | — | — | — | 13,270 | ||||||||||||||||
| Deferred tax asset | — | 2,122 | — | — | — | 2,122 | ||||||||||||||||
| Other current assets | 208 | 2,364 | 14,118 | — | — | 16,690 | ||||||||||||||||
| Total current assets | 35,055 | 530,624 | 41,135 | 6,112 | (824 | ) | 612,102 | |||||||||||||||
| Property and equipment, net | — | — | 829,457 | 2,033 | — | 831,490 | ||||||||||||||||
| Restricted cash and investments | — | 2,917 | 3 | — | — | 2,920 | ||||||||||||||||
| Long-term investments | — | 16,385 | — | — | (11,333 | ) | 5,052 | |||||||||||||||
| Investment in subsidiaries | 243,930 | 709,704 | — | — | (953,634 | ) | — | |||||||||||||||
| PCS licenses | — | — | 387,700 | 293,599 | — | 681,299 | ||||||||||||||||
| Microwave relocation costs | — | — | 9,187 | — | — | 9,187 | ||||||||||||||||
| Long-term receivable from subsidiaries | — | 320,630 | — | — | (320,630 | ) | — | |||||||||||||||
| Other assets | — | 15,360 | 1,571 | — | — | 16,931 | ||||||||||||||||
| Total assets | $ | 278,985 | $ | 1,595,620 | $ | 1,269,053 | $ | 301,744 | $ | (1,286,421 | ) | $ | 2,158,981 | |||||||||
| CURRENT LIABILITIES: | ||||||||||||||||||||||
| Accounts payable and accrued expenses | $ | 321 | $ | 58,104 | $ | 125,362 | $ | 2,590 | $ | (12,157 | ) | $ | 174,220 | |||||||||
| Current maturities of long-term debt | — | — | 2,690 | — | — | 2,690 | ||||||||||||||||
| Deferred revenue | — | 9,158 | 47,402 | — | — | 56,560 | ||||||||||||||||
| Advances to subsidiaries | (559,186 | ) | 218,278 | 340,908 | — | — | — | |||||||||||||||
| Other current liabilities | — | — | 2,147 | — | — | 2,147 | ||||||||||||||||
| Total current liabilities | (558,865 | ) | 285,540 | 518,509 | 2,590 | (12,157 | ) | 235,617 | ||||||||||||||
| Long-term debt, net | — | 902,864 | — | — | — | 902,864 | ||||||||||||||||
| Long-term note to parent | — | — | — | 320,630 | (320,630 | ) | — | |||||||||||||||
| Deferred tax liabilities | — | 146,053 | — | — | — | 146,053 | ||||||||||||||||
| Deferred rents | — | — | 14,739 | — | — | 14,739 | ||||||||||||||||
| Redeemable minority interest | — | — | — | — | 1,259 | 1,259 | ||||||||||||||||
| Other long-term liabilities | — | 17,233 | 3,625 | — | — | 20,858 | ||||||||||||||||
| Total liabilities | (558,865 | ) | 1,351,690 | 536,873 | 323,220 | (331,528 | ) | 1,321,390 | ||||||||||||||
| COMMITMENTS AND CONTINGENCIES (See Note 10) | ||||||||||||||||||||||
| SERIES D PREFERRED STOCK | 421,889 | — | — | — | — | 421,889 | ||||||||||||||||
| SERIES E PREFERRED STOCK | 47,796 | — | — | — | — | 47,796 | ||||||||||||||||
| STOCKHOLDERS' EQUITY: | ||||||||||||||||||||||
| Preferred stock | — | — | — | — | — | — | ||||||||||||||||
| Common stock | 5 | — | — | — | — | 5 | ||||||||||||||||
| Additional paid-in capital | 149,594 | — | — | 20,000 | (20,000 | ) | 149,594 | |||||||||||||||
| Subscriptions receivable | — | — | — | (13,333 | ) | 13,333 | — | |||||||||||||||
| Deferred compensation | (178 | ) | (178 | ) | (178 | ) | — | 356 | (178 | ) | ||||||||||||
| Retained earnings (deficit) | 216,961 | 242,357 | 732,358 | (28,143 | ) | (946,831 | ) | 216,702 | ||||||||||||||
| Accumulated other comprehensive income | 1,783 | 1,751 | — | — | (1,751 | ) | 1,783 | |||||||||||||||
| Total stockholders' equity | 368,165 | 243,930 | 732,180 | (21,476 | ) | (954,893 | ) | 367,906 | ||||||||||||||
| Total liabilities and stockholders' equity | $ | 278,985 | $ | 1,595,620 | $ | 1,269,053 | $ | 301,744 | $ | (1,286,421 | ) | $ | 2,158,981 | |||||||||
| | Consolidated Balance Sheet As of December 31, 2004 | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Parent | Issuer | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
| | (in thousands) | |||||||||||||||||||||
| CURRENT ASSETS: | ||||||||||||||||||||||
| Cash and cash equivalents | $ | 1 | $ | 22,349 | $ | 127 | $ | — | $ | — | $ | 22,477 | ||||||||||
| Short-term investments | — | 36,964 | — | — | — | 36,964 | ||||||||||||||||
| Inventories, net | — | 29,439 | 4,278 | — | — | 33,717 | ||||||||||||||||
| Accounts receivable, net | — | 9,101 | — | — | — | 9,101 | ||||||||||||||||
| Prepaid expenses | — | 2,610 | 4,413 | — | — | 7,023 | ||||||||||||||||
| Deferred charges | — | 9,225 | — | — | — | 9,225 | ||||||||||||||||
| Deferred tax asset | — | 3,574 | — | — | — | 3,574 | ||||||||||||||||
| Other current assets | — | 8,031 | 1,446 | 25,000 | — | 34,477 | ||||||||||||||||
| Total current assets | 1 | 121,293 | 10,264 | 25,000 | — | 156,558 | ||||||||||||||||
| Property and equipment, net | — | 3,404 | 632,964 | — | — | 636,368 | ||||||||||||||||
| Restricted cash and investments | — | 2,293 | — | — | — | 2,293 | ||||||||||||||||
| Investment in subsidiaries | 40,069 | 313,821 | — | — | (353,890 | ) | — | |||||||||||||||
| PCS licenses | — | — | 154,144 | — | — | 154,144 | ||||||||||||||||
| Microwave relocation costs | — | — | 9,566 | — | — | 9,566 | ||||||||||||||||
| Long-term receivable from subsidiaries | — | 18,408 | — | — | (18,408 | ) | — | |||||||||||||||
| Other assets | — | 5,157 | 1,310 | — | — | 6,467 | ||||||||||||||||
| Total assets | $ | 40,070 | $ | 464,376 | $ | 808,248 | $ | 25,000 | $ | (372,298 | ) | $ | 965,396 | |||||||||
| CURRENT LIABILITIES: | ||||||||||||||||||||||
| Accounts payable and accrued expenses | $ | — | $ | 16,707 | $ | 88,691 | $ | 143 | $ | — | $ | 105,541 | ||||||||||
| Current maturities of long-term debt | — | — | 14,310 | — | — | 14,310 | ||||||||||||||||
| Deferred revenue | — | 6,371 | 34,053 | — | — | 40,424 | ||||||||||||||||
| Advances to subsidiaries | (484,861 | ) | 155,579 | 329,282 | — | — | — | |||||||||||||||
| Other current liabilities | — | 2,559 | 186 | — | — | 2,745 | ||||||||||||||||
| Total current liabilities | (484,861 | ) | 181,216 | 466,522 | 143 | — | 163,020 | |||||||||||||||
| Long-term debt, net | — | 150,000 | 20,689 | — | — | 170,689 | ||||||||||||||||
| Long-term note to parent | — | — | — | 18,408 | (18,408 | ) | — | |||||||||||||||
| Deferred tax liabilities | (921 | ) | 74,022 | — | — | — | 73,101 | |||||||||||||||
| Deferred rents | — | 71 | 10,260 | — | — | 10,331 | ||||||||||||||||
| Redeemable minority interest | — | — | — | — | 1,008 | 1,008 | ||||||||||||||||
| Other long-term liabilities | — | 18,998 | 2,405 | — | — | 21,403 | ||||||||||||||||
| Total liabilities | (485,782 | ) | 424,307 | 499,876 | 18,551 | (17,400 | ) | 439,552 | ||||||||||||||
| COMMITMENTS AND CONTINGENCIES (See Note 10) | ||||||||||||||||||||||
| SERIES D PREFERRED STOCK | 400,410 | — | — | — | — | 400,410 | ||||||||||||||||
| STOCKHOLDERS' EQUITY: | ||||||||||||||||||||||
| Preferred stock | — | — | — | — | — | — | ||||||||||||||||
| Common stock | 4 | — | — | — | — | 4 | ||||||||||||||||
| Additional paid-in capital | 88,493 | — | — | 6,667 | (6,667 | ) | 88,493 | |||||||||||||||
| Subscriptions receivable | (98 | ) | (98 | ) | — | — | 98 | (98 | ) | |||||||||||||
| Deferred compensation | (3,331 | ) | (3,331 | ) | — | — | 3,331 | (3,331 | ) | |||||||||||||
| Retained earnings (deficit) | 40,645 | 43,769 | 308,372 | (218 | ) | (351,931 | ) | 40,637 | ||||||||||||||
| Accumulated other comprehensive income | (271 | ) | (271 | ) | — | — | 271 | (271 | ) | |||||||||||||
| Total stockholders' equity | 125,442 | 40,069 | 308,372 | 6,449 | (354,898 | ) | 125,434 | |||||||||||||||
| Total liabilities and stockholders' equity | $ | 40,070 | $ | 464,376 | $ | 808,248 | $ | 25,000 | $ | (372,298 | ) | $ | 965,396 | |||||||||
| | Consolidated Statement of Income Year Ended December 31, 2005 | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Parent | Issuer | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
| | (in thousands) | |||||||||||||||||||||
| REVENUES: | ||||||||||||||||||||||
| Service revenues | $ | — | $ | — | $ | 872,100 | $ | — | $ | — | $ | 872,100 | ||||||||||
| Equipment revenues | — | 13,960 | 152,368 | — | — | 166,328 | ||||||||||||||||
| Total revenues | — | 13,960 | 1,024,468 | — | — | 1,038,428 | ||||||||||||||||
| OPERATING EXPENSES: | ||||||||||||||||||||||
| Cost of service (excluding depreciation and amortization expense shown separately below) | — | — | 283,175 | 37 | — | 283,212 | ||||||||||||||||
| Cost of equipment | — | 12,837 | 288,034 | — | — | 300,871 | ||||||||||||||||
| Selling, general and administrative expenses (excluding depreciation and amortization expense shown separately below) | 274 | 2,893 | 158,287 | 1,022 | — | 162,476 | ||||||||||||||||
| Depreciation and amortization | — | 120 | 87,775 | — | — | 87,895 | ||||||||||||||||
| Gain on disposal of assets | — | — | (218,203 | ) | — | — | (218,203 | ) | ||||||||||||||
| Total operating expenses | 274 | 15,850 | 599,068 | 1,059 | — | 616,251 | ||||||||||||||||
| Income from operations | (274 | ) | (1,890 | ) | 425,400 | (1,059 | ) | — | 422,177 | |||||||||||||
| OTHER EXPENSE (INCOME): | ||||||||||||||||||||||
| Interest expense | — | 58,482 | (444 | ) | 26,997 | (27,002 | ) | 58,033 | ||||||||||||||
| Earnings from consolidated subsidiaries | (198,587 | ) | (396,060 | ) | — | — | 594,647 | — | ||||||||||||||
| Accretion of put option in majority-owned subsidiary | — | — | — | — | 252 | 252 | ||||||||||||||||
| Interest income | (615 | ) | (34,913 | ) | (1 | ) | (131 | ) | 27,002 | (8,658 | ) | |||||||||||
| Loss on extinguishment of debt | — | 44,589 | 1,859 | — | — | 46,448 | ||||||||||||||||
| Total other expense | (199,202 | ) | (327,902 | ) | 1,414 | 26,866 | 594,899 | 96,075 | ||||||||||||||
| Income before provision for income taxes | 198,928 | 326,012 | 423,986 | (27,925 | ) | (594,899 | ) | 326,102 | ||||||||||||||
| Provision for income taxes | — | (127,425 | ) | — | — | — | (127,425 | ) | ||||||||||||||
| Net income (loss) | $ | 198,928 | $ | 198,587 | $ | 423,986 | $ | (27,925 | ) | $ | (594,899 | ) | $ | 198,677 | ||||||||
| | Consolidated Statement of Income Year Ended December 31, 2004 | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Parent | Issuer | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
| | (in thousands) | |||||||||||||||||||||
| REVENUES: | ||||||||||||||||||||||
| Service revenues | $ | — | $ | — | $ | 616,401 | $ | — | $ | — | $ | 616,401 | ||||||||||
| Equipment revenues | — | 11,720 | 120,129 | — | — | 131,849 | ||||||||||||||||
| Total revenues | — | 11,720 | 736,530 | — | — | 748,250 | ||||||||||||||||
| OPERATING EXPENSES: | ||||||||||||||||||||||
| Cost of service (excluding depreciation and amortization expense shown separately below) | — | — | 200,806 | — | — | 200,806 | ||||||||||||||||
| Cost of equipment | — | 10,944 | 211,822 | — | — | 222,766 | ||||||||||||||||
| Selling, general and administrative expenses (excluding depreciation and amortization expense shown separately below) | 2,631 | 38,956 | 89,761 | 162 | — | 131,510 | ||||||||||||||||
| Depreciation and amortization | — | 915 | 61,286 | — | — | 62,201 | ||||||||||||||||
| Loss on disposal of assets | — | 24 | 3,185 | — | — | 3,209 | ||||||||||||||||
| Total operating expenses | 2,631 | 50,839 | 566,860 | 162 | — | 620,492 | ||||||||||||||||
| Income from operations | (2,631 | ) | (39,119 | ) | 169,670 | (162 | ) | — | 127,758 | |||||||||||||
OTHER EXPENSE (INCOME): | ||||||||||||||||||||||
| Interest expense | — | 16,723 | 2,307 | 56 | (56 | ) | 19,030 | |||||||||||||||
| Earnings from consolidated subsidiaries | (56,004 | ) | (167,844 | ) | — | — | 223,848 | — | ||||||||||||||
| Accretion of put option in majority-owned subsidiary | — | — | — | — | 8 | 8 | ||||||||||||||||
| Interest income | — | (2,528 | ) | — | — | 56 | (2,472 | ) | ||||||||||||||
| Gain on extinguishment of debt | — | — | (698 | ) | — | — | (698 | ) | ||||||||||||||
| Total other expense | (56,004 | ) | (153,649 | ) | 1,609 | 56 | 223,856 | 15,868 | ||||||||||||||
| Income before provision for income taxes | 53,373 | 114,530 | 168,061 | (218 | ) | (223,856 | ) | 111,890 | ||||||||||||||
| Provision for income taxes | 921 | (47,921 | ) | — | — | — | (47,000 | ) | ||||||||||||||
| Net income (loss) | $ | 54,294 | $ | 66,609 | $ | 168,061 | $ | (218 | ) | $ | (223,856 | ) | $ | 64,890 | ||||||||
| | Consolidated Statement of Income Year Ended December 31, 2003 | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Parent | Issuer | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||||
| | (in thousands) | ||||||||||||||||||||
| REVENUES: | |||||||||||||||||||||
| Service revenues | $ | — | $ | — | $ | 369,851 | $ | — | $ | — | $ | 369,851 | |||||||||
| Equipment revenues | — | 9,372 | 71,886 | — | — | 81,258 | |||||||||||||||
| Total revenues | 9,372 | 441,737 | 451,109 | ||||||||||||||||||
| OPERATING EXPENSES: | |||||||||||||||||||||
| Cost of service (excluding depreciation and amortization expense shown separately below) | — | — | 122,211 | — | — | 122,211 | |||||||||||||||
| Cost of equipment | — | 8,242 | 142,590 | — | — | 150,832 | |||||||||||||||
| Selling, general and administrative expenses (excluding depreciation and amortization expense shown separately below) | — | 21,671 | 72,402 | — | — | 94,073 | |||||||||||||||
| Depreciation and amortization | — | 1,058 | 41,370 | — | — | 42,428 | |||||||||||||||
| Loss on disposal of assets | — | 13 | 379 | — | — | 392 | |||||||||||||||
| Total operating expenses | — | 30,984 | 378,952 | — | — | 409,936 | |||||||||||||||
| Income from operations | — | (21,612 | ) | 62,785 | — | — | 41,173 | ||||||||||||||
| OTHER EXPENSE (INCOME): | |||||||||||||||||||||
| Interest expense | — | 4,613 | 6,502 | — | — | 11,115 | |||||||||||||||
| Earnings from consolidated subsidiaries | — | (56,886 | ) | — | — | 56,886 | — | ||||||||||||||
| Interest income | — | (996 | ) | — | — | — | (996 | ) | |||||||||||||
| Gain on extinguishment of debt | — | — | (603 | ) | — | — | (603 | ) | |||||||||||||
| Total other expense | — | (53,269 | ) | 5,899 | — | 56,886 | 9,516 | ||||||||||||||
| Income before provision for income taxes and cumulative effect of change in accounting principle | — | 31,657 | 56,886 | — | (56,886 | ) | 31,657 | ||||||||||||||
| Provision for income taxes | — | (16,179 | ) | — | — | — | (16,179 | ) | |||||||||||||
| Income before cumulative effect of change in accounting principle | — | 15,478 | 56,886 | — | (56,886 | ) | 15,478 | ||||||||||||||
| Cumulative effect of change in accounting principle | — | (120 | ) | — | — | — | (120 | ) | |||||||||||||
| Net income | $ | — | $ | 15,358 | $ | 56,886 | $ | — | $ | (56,886 | ) | $ | 15,358 | ||||||||
| | Consolidated Statement of Cash Flows Year Ended December 31, 2005 | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Parent | Issuer | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||
| | (in thousands) | |||||||||||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||||||||
| Net income (loss) | $ | 198,928 | $ | 198,587 | $ | 423,986 | $ | (27,925 | ) | $ | (594,899 | ) | $ | 198,677 | ||||||
| Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: | ||||||||||||||||||||
| Depreciation and amortization | — | 120 | 87,775 | — | — | 87,895 | ||||||||||||||
| Provision for uncollectible accounts receivable | — | 129 | — | — | — | 129 | ||||||||||||||
| Deferred rent expense | — | (72 | ) | 4,479 | — | — | 4,407 | |||||||||||||
| Cost of abandoned cell sites | — | — | 725 | — | — | 725 | ||||||||||||||
| Non-cash interest expense | — | 3,695 | 590 | 26,997 | (26,997 | ) | 4,285 | |||||||||||||
| Gain on disposal of assets | — | — | (218,203 | ) | — | — | (218,203 | ) | ||||||||||||
| Loss on extinguishment of debt | — | 44,589 | 1,859 | — | — | 46,448 | ||||||||||||||
| Gain on sale of investments | (154 | ) | (36 | ) | — | — | — | (190 | ) | |||||||||||
| Accretion of asset retirement obligation | — | 1 | 422 | — | — | 423 | ||||||||||||||
| Accretion of put option in majority-owned subsidiary | — | — | — | — | 252 | 252 | ||||||||||||||
| Deferred income taxes | 52,882 | 72,173 | — | — | — | 125,055 | ||||||||||||||
| Stock-based compensation expense | — | — | 2,596 | — | — | 2,596 | ||||||||||||||
| Changes in assets and liabilities | (272,868 | ) | (608,004 | ) | 13,857 | 862 | 896,870 | 30,717 | ||||||||||||
| Net cash (used in) provided by operating activities | (21,212 | ) | (288,818 | ) | 318,086 | (66 | ) | 275,226 | 283,216 | |||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||||||
| Purchases of property and equipment | — | — | (266,033 | ) | (466 | ) | — | (266,499 | ) | |||||||||||
| Change in prepaid purchases of property and equipment | — | — | (11,800 | ) | — | — | (11,800 | ) | ||||||||||||
| Proceeds from sale of property and equipment | — | — | 146 | — | — | 146 | ||||||||||||||
| Purchase of investments | (54,262 | ) | (685,220 | ) | — | — | — | (739,482 | ) | |||||||||||
| Proceeds from sale of investments | 30,225 | 356,219 | — | — | — | 386,444 | ||||||||||||||
| Change in restricted cash and investments | — | (121 | ) | 14 | — | — | (107 | ) | ||||||||||||
| Purchases of FCC licenses | — | — | (235,330 | ) | (268,600 | ) | — | (503,930 | ) | |||||||||||
| Proceeds from sale of FCC licenses | — | — | 230,000 | — | — | 230,000 | ||||||||||||||
| Net cash used in investing activities | (24,037 | ) | (329,122 | ) | (283,003 | ) | (269,066 | ) | — | (905,228 | ) | |||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||||||||
| Change in book overdraft | — | (565 | ) | — | — | — | (565 | ) | ||||||||||||
| Payment upon execution of cash flow hedging derivative | — | (1,899 | ) | — | — | — | (1,899 | ) | ||||||||||||
| Proceeds from Credit Agreements | — | 902,875 | — | — | — | 902,875 | ||||||||||||||
| Proceeds from Bridge Credit Agreements | — | 540,000 | — | — | — | 540,000 | ||||||||||||||
| Proceeds from long-term note to parent | — | — | — | 275,226 | (275,226 | ) | — | |||||||||||||
| Debt issuance costs | — | (29,480 | ) | — | — | — | (29,480 | ) | ||||||||||||
| Repayment of debt | — | (719,671 | ) | (34,991 | ) | — | — | (754,662 | ) | |||||||||||
| Proceeds from repayment of subscriptions receivable | — | 103 | — | — | — | 103 | ||||||||||||||
| Proceeds from issuance of preferred stock, net of issuance costs | 46,662 | — | — | — | — | 46,662 | ||||||||||||||
| Proceeds from exercise of stock options and warrants | 9,210 | — | — | — | — | 9,210 | ||||||||||||||
| Net cash provided by (used in) financing activities | 55,872 | 691,363 | (34,991 | ) | 275,226 | (275,226 | ) | 712,244 | ||||||||||||
| INCREASE IN CASH AND CASH EQUIVALENTS | 10,623 | 73,423 | 92 | 6,094 | — | 90,232 | ||||||||||||||
| CASH AND CASH EQUIVALENTS, beginning of period | 1 | 22,349 | 127 | — | — | 22,477 | ||||||||||||||
| CASH AND CASH EQUIVALENTS, end of period | $ | 10,624 | $ | 95,772 | $ | 219 | $ | 6,094 | $ | — | $ | 112,709 | ||||||||
| | Consolidated Statement of Cash Flows Year Ended December 31, 2004 | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Parent | Issuer | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||
| | (in thousands) | |||||||||||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||||||||
| Net income (loss) | $ | 54,294 | $ | 66,609 | $ | 168,061 | $ | (218 | ) | $ | (223,856 | ) | $ | 64,890 | ||||||
| Adjustments to reconcile net income to net cash (used in) provided by operating activities: | ||||||||||||||||||||
| Depreciation and amortization | — | 915 | 61,286 | — | — | 62,201 | ||||||||||||||
| Provision for uncollectible accounts receivable | — | 125 | — | — | — | 125 | ||||||||||||||
| Deferred rent expense | — | 15 | 3,451 | — | — | 3,466 | ||||||||||||||
| Cost of abandoned cell sites | — | — | 1,021 | — | — | 1,021 | ||||||||||||||
| Non-cash interest expense | — | 470 | 2,419 | 56 | (56 | ) | 2,889 | |||||||||||||
| Loss (gain) on disposal of assets | — | 24 | 3,185 | — | — | 3,209 | ||||||||||||||
| (Gain) loss on extinguishment of debt | — | — | (698 | ) | — | — | (698 | ) | ||||||||||||
| (Gain) loss on sale of investments | — | 576 | — | — | — | 576 | ||||||||||||||
| Accretion of asset retirement obligation | — | (1 | ) | 254 | — | — | 253 | |||||||||||||
| Accretion of put option in majority-owned subsidiary | — | — | — | — | 8 | 8 | ||||||||||||||
| Deferred income taxes | (921 | ) | 45,362 | — | — | — | 44,441 | |||||||||||||
| Stock-based compensation expense | — | 10,429 | — | — | — | 10,429 | ||||||||||||||
| Changes in assets and liabilities | (53,837 | ) | (314,588 | ) | 77,929 | 143 | 247,922 | (42,431 | ) | |||||||||||
| Net cash (used in) provided by operating activities | (464 | ) | (190,064 | ) | 316,908 | (19 | ) | 24,018 | 150,379 | |||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||||||
| Purchases of property and equipment | — | (1,558 | ) | (249,272 | ) | — | — | (250,830 | ) | |||||||||||
| Purchase of investments | — | (158,672 | ) | — | — | — | (158,672 | ) | ||||||||||||
| Proceeds from sale of investments | — | 307,220 | — | — | — | 307,220 | ||||||||||||||
| Change in restricted cash and investments | — | (1,511 | ) | — | — | — | (1,511 | ) | ||||||||||||
| Purchases of FCC licenses | — | (8,700 | ) | (53,325 | ) | — | — | (62,025 | ) | |||||||||||
| Deposit to FCC for licenses | — | — | — | (25,000 | ) | — | (25,000 | ) | ||||||||||||
| Microwave relocation costs | — | — | (63 | ) | — | — | (63 | ) | ||||||||||||
| Net cash provided by (used in) investing activities | — | 136,779 | (302,660 | ) | (25,000 | ) | — | (190,881 | ) | |||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||||||||
| Change in book overdraft | — | 5,778 | — | — | — | 5,778 | ||||||||||||||
| Proceeds from short-term notes payable | — | 1,703 | — | — | — | 1,703 | ||||||||||||||
| Proceeds from long-term note to parent | — | — | — | 18,352 | (18,352 | ) | — | |||||||||||||
| Proceeds from capital contributions | — | — | — | 6,667 | (6,667 | ) | — | |||||||||||||
| Debt issuance costs | — | (164 | ) | — | — | — | (164 | ) | ||||||||||||
| Repayment of debt | — | — | (14,215 | ) | — | — | (14,215 | ) | ||||||||||||
| Proceeds from minority interest in majority-owned subsidiary | — | — | — | — | 1,000 | 1,000 | ||||||||||||||
| Proceeds from issuance of preferred stock, net of issuance costs | 5 | — | — | — | — | 5 | ||||||||||||||
| Proceeds from exercise of stock options and warrants | 460 | — | — | — | — | 460 | ||||||||||||||
| Net cash provided by (used in) financing activities | 465 | 7,317 | (14,215 | ) | 25,019 | (24,019 | ) | (5,433 | ) | |||||||||||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 1 | (45,968 | ) | 33 | — | (1 | ) | (45,935 | ) | |||||||||||
| CASH AND CASH EQUIVALENTS, beginning of period | — | 68,318 | 94 | — | — | 68,412 | ||||||||||||||
| CASH AND CASH EQUIVALENTS, end of period | $ | 1 | $ | 22,350 | $ | 127 | $ | — | $ | (1 | ) | $ | 22,477 | |||||||
| | Consolidated Statement of Cash Flows Year Ended December 31, 2003 | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Parent | Issuer | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||
| | (in thousands) | |||||||||||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||||||||
| Net income | $ | — | $ | 15,358 | $ | 56,886 | $ | — | $ | (56,886 | ) | $ | 15,358 | |||||||
| Adjustments to reconcile net income to net cash (used in) provided by operating activities: | ||||||||||||||||||||
| Cumulative effect of change in accounting principle | — | 120 | — | — | — | 120 | ||||||||||||||
| Depreciation and amortization | — | 1,058 | 41,370 | — | — | 42,428 | ||||||||||||||
| Provision for uncollectible accounts receivable | — | 110 | — | — | — | 110 | ||||||||||||||
| Deferred rent expense | — | 17 | 2,786 | — | — | 2,803 | ||||||||||||||
| Cost of abandoned cell sites | — | — | 824 | — | — | 824 | ||||||||||||||
| Non-cash interest expense | — | 90 | 2,983 | — | — | 3,073 | ||||||||||||||
| Loss on disposal of assets | — | 13 | 379 | — | — | 392 | ||||||||||||||
| Gain on extinguishment of debt | — | — | (603 | ) | — | — | (603 | ) | ||||||||||||
| Accretion of asset retirement obligation | — | 28 | 99 | — | — | 127 | ||||||||||||||
| Deferred income taxes | — | 18,716 | — | — | — | 18,716 | ||||||||||||||
| Stock-based compensation expense | — | 5,573 | — | — | — | 5,573 | ||||||||||||||
| Changes in assets and liabilities | — | (57,393 | ) | 24,191 | — | 56,886 | 23,684 | |||||||||||||
| Net cash (used in) provided by operating activities | — | (16,310 | ) | 128,915 | — | — | 112,605 | |||||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||||||
| Purchases of property and equipment | — | — | (117,731 | ) | — | — | (117,731 | ) | ||||||||||||
| Proceeds from sale of property and equipment | — | — | 6 | — | — | 6 | ||||||||||||||
| Purchase of other assets | — | — | (35 | ) | — | — | (35 | ) | ||||||||||||
| Purchase of investments | — | (209,149 | ) | — | — | — | (209,149 | ) | ||||||||||||
| Proceeds from sale of investments | — | 22,650 | — | — | — | 22,650 | ||||||||||||||
| Change in restricted cash and investments | — | 953 | — | — | — | 953 | ||||||||||||||
| Deposit to FCC for licenses | — | (1,500 | ) | — | — | — | (1,500 | ) | ||||||||||||
| Microwave relocation costs | — | — | (2,062 | ) | — | — | (2,062 | ) | ||||||||||||
| Net cash (used in) provided by investing activities | — | (187,046 | ) | (119,822 | ) | — | — | (306,868 | ) | |||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||||||||
| Change in book overdraft | — | 824 | — | — | — | 824 | ||||||||||||||
| Proceeds from 103/4% Senior Notes Due 2011 | — | 145,500 | — | — | — | 145,500 | ||||||||||||||
| Debt issuance costs | — | (876 | ) | — | — | — | (876 | ) | ||||||||||||
| Repayment of debt | — | — | (9,077 | ) | — | — | (9,077 | ) | ||||||||||||
| Proceeds from issuance of preferred stock, net of issuance costs | — | 65,537 | — | — | — | 65,537 | ||||||||||||||
| Proceeds from exercise of stock options and warrants | — | 43 | — | — | — | 43 | ||||||||||||||
| Net cash provided by financing activities | — | 211,028 | (9,077 | ) | — | — | 201,951 | |||||||||||||
INCREASE IN CASH AND CASH EQUIVALENTS | — | 7,672 | 16 | — | — | 7,688 | ||||||||||||||
| CASH AND CASH EQUIVALENTS, beginning of period | — | 60,646 | 78 | — | — | 60,724 | ||||||||||||||
| CASH AND CASH EQUIVALENTS, end of period | $ | — | $ | 68,318 | $ | 94 | $ | — | $ | — | $ | 68,412 | ||||||||
20. Related-Party Transactions:
The Company paid approximately $0.2 million, $0.4 million and $0.2 million for the years ended December 31, 2005, 2004 and 2003, respectively, to a law firm for professional services, a partner of which was a director of the Company during 2004 and 2005. The Company paid approximately $1.3 million, $2.3 million and $0.7 million for the years ended December 31, 2005, 2004 and 2003, respectively, to a law firm for professional services, a partner of which is related to a Company officer.
21. Supplemental Cash Flow Information:
| Year Ended December 31, | |||||||||
| 2001 | 2002 | 2003 | |||||||
| (in thousands) | |||||||||
Cash paid for interest | $ | 9,742 | $ | 3,805 | $ | 3,596 | |||
Cash paid for income taxes | — | — | 21 | ||||||
| | Year Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| | 2005 | 2004 | 2003 | ||||||
| | (in thousands) | ||||||||
| Cash paid for interest | $ | 41,360 | $ | 19,180 | $ | 3,596 | |||
| Cash paid for income taxes | — | — | 21 | ||||||
Non-cash investing and financing activities:
The Company accrued dividends of $5.0$21.0 million, $10.8$21.0 million and $18.7$18.5 million related to the Series D Preferred Stock for the years ended December 31, 2001, 20022005, 2004 and 2003, respectively.
The Company accrued $36.0dividends of $1.0 million $29.0 million and $55.6 millionrelated to the Series E Preferred Stock for the year ended December 31, 2005.
Net changes in the Company's accrued purchases of property, plant and equipment atwere $25.3 million, $33.4 million and $19.9 million for the years ended December 31, 2001, 20022005, 2004 and 2003, respectively. Of the $33.4 million net change for the year ended December 31, 2004, $8.5 million was included in other long-term liabilities.
The Company accrued $0, $2.8$0.5 million and $1.0 million of microwave relocation costs at December 31, 2001, 2002 and 2003, respectively.
In 2002, the Company sold 10 MHz of spectrum in which $3.8 million of face value FCC debt was assumed by the purchaser (see Note 4).
MetroPCS Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
16. Quarterly Results of Operations (Unaudited)
The following table summarizes the Company’s quarterly financial data for the two years ended December 31, 2002 and 2003, respectively (in thousands):
2002 | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||
Total revenues | $ | 5,737 | $ | 22,421 | $ | 36,994 | $ | 60,443 | ||||||||
Income/(loss) from operations | 243,832 | (32,140 | ) | (25,214 | ) | (22,483 | ) | |||||||||
Net income (loss) | 190,434 | (20,334 | ) | (16,205 | ) | (14,828 | ) | |||||||||
Basic earnings (loss) per share | 3.76 | (0.62 | ) | (0.52 | ) | (0.52 | ) | |||||||||
Diluted earnings (loss) per share | 2.86 | (0.62 | ) | (0.52 | ) | (0.52 | ) | |||||||||
2003 | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||
Total revenues | $ | 99,398 | $ | 107,650 | $ | 116,852 | $ | 135,582 | ||||||||
Income from operations | 1,811 | 19,088 | 15,593 | 9,403 | ||||||||||||
Income before cumulative effect of change in accounting principle | 83 | 10,693 | 8,514 | 1,350 | ||||||||||||
Net income | 9 | 10,693 | 8,514 | 1,350 | ||||||||||||
Net income (loss) allocable to Common Stockholders | (4,259 | ) | 3,158 | 1,840 | (3,762 | ) | ||||||||||
Net income (loss) per share | ||||||||||||||||
Basic | ||||||||||||||||
Income before cumulative effect of change in accounting principle | (0.12 | ) | 0.08 | 0.06 | (0.10 | ) | ||||||||||
Cumulative effect of change in accounting principle, net of tax | (0.00 | ) | — | — | — | |||||||||||
Net income (loss) per share—basic | (0.12 | ) | 0.08 | 0.06 | (0.10 | ) | ||||||||||
Diluted | ||||||||||||||||
Income before cumulative effect of change in accounting principle | (0.12 | ) | 0.06 | 0.04 | (0.10 | ) | ||||||||||
Cumulative effect of change in accounting principle, net of tax | (0.00 | ) | — | — | — | |||||||||||
Net income (loss) per share—diluted | (0.12 | ) | 0.06 | 0.04 | (0.10 | ) | ||||||||||
Net income for the first quarter of 2002 included a $279.0 million ($245.3 million after tax) gain on the sale of spectrum in our Atlanta market.
In the first and fourth quarters of 2003 the net loss per share, allocable to Common Stockholders, resulted from the accrued dividends on Series D preferred stock.
17. Related-Party Transactions:
The Company paid approximately $0.3 million, $0.2 million and $0.2 million for the years ended December 31, 2001, 20022004 and 2003, respectively,respectively. Accrued microwave relocation costs are included in long-term debt and other long-term liabilities.
In addition, in 2003 the Company paid a $1.5 million security deposit toward the purchase of the Modesto, Merced, Eureka, and Redding, California spectrum purchase that was consummated in 2004.
See Note 2 for the non-cash increase in the Company's asset retirement obligations.
22. Fair Value of Financial Instruments:
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Long-Term Debt
The fair value of the Company's long-term debt is estimated based on the quoted market prices for the same of similar issues or on the current rates offered to the Company for debt of the same remaining maturities.
The estimated fair values of the Company's long-term debt, including current maturities, are as follows (in thousands):
| | 2005 | 2004 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||
| FCC notes | $ | — | $ | — | $ | 33,409 | $ | 32,240 | ||||
| Senior Notes | — | — | 150,000 | 160,875 | ||||||||
| Microwave relocation obligations | 2,690 | 2,690 | 4,061 | 4,061 | ||||||||
| Credit Agreements | 900,000 | 861,380 | — | — | ||||||||
23. Subsequent Events:
Dallas/Ft. Worth Market Launch
The Company launched service in the Dallas/Ft. Worth metropolitan area on March 23, 2006.
Detroit Market Launch
The Company launched service in the Detroit metropolitan area on April 18, 2006.
$1.25 Billion Exchangeable Senior Secured Credit Agreement
In July 2006, MetroPCS II, Inc. ("MetroPCS II"), a firmwholly-owned subsidiary of MetroPCS, entered into an Exchangeable Senior Secured Credit Agreement and Guaranty Agreement, dated as of July 13, 2006 ("Senior Secured Credit Agreement"). On that same date, MetroPCS II and one of its wholly-owned subsidiaries, MetroPCS AWS, LLC, also entered into a related Security Agreement, and MetroPCS II, MetroPCS AWS, LLC, and MetroPCS II's immediate parent, MetroPCS III, Inc., also entered into a related Pledge Agreement. Under the Security Agreement, the lenders under the Senior Secured Credit Agreement hold a security interest in substantially all property, including capital stock, now owned or at any time acquired by the parties to that agreement, except for professional services,certain permitted exceptions or as prohibited by law. Under the terms of the Pledge Agreement, the lenders under the Senior Secured Credit Agreement hold a partnersecurity interest in the capital stock of the subsidiaries of the parties to that agreement.
The aggregate credit commitments available under the Senior Secured Credit Agreement total $1.25 billion. The Senior Secured Credit Agreement provides that all borrowings are senior secured obligations of MetroPCS II and all borrowings are guaranteed by certain subsidiaries of MetroPCS II. On July 14, 2006, the lenders funded $200.0 million under the Senior Secured Credit Agreement.
Auction No. 66
The FCC has announced plans to auction 90 MHz of spectrum to be used for Advanced Wireless Services in Auction No. 66 which is a directorcurrently scheduled to commence on August 9, 2006. MetroPCS AWS, LLC filed an application with the FCC to participate in Auction No. 66 and the application has been accepted for filing. On July 17, 2006, MetroPCS AWS, LLC submitted an upfront payment to the FCC in the amount of the Company. The Company paid approximately $1.3$200.0 million $0.1 million and $0.7 million for the years ended December 31, 2001, 2002 and 2003, respectively, to a firm for professional services, a partner of which is relatedqualify to a Company officer.participate in Auction No. 66.
MetroPCS Communications, Inc. and Subsidiaries
Notes to
Condensed Consolidated Financial Statements—(Continued)
18. Subsequent Event
On May 18, 2004, the Company effected a conversion of Class B common stock to Class C common stock, on a share-for-share basis. Concurrent with the conversion, the Company increased the authorized number of Class C common stock shares to 300,000,000Balance Sheets
(in thousands, except share and decreased the authorized number of Class B common stock shares to zero. In addition, on July 23, 2004, the Company effected a 1-for-2 reverse stock split of the Company’s Class A and Class C common stock. All share, per share and conversion amounts relating to the Class A and Class C common stock, stock options, and stock purchase warrants included in the accompanying consolidated financial statements have been retroactively adjusted to reflect the reverse stock split.
MetroPCS Communications, Inc. and Subsidiariesinformation)
(Unaudited)
Consolidated Balance Sheets
(In Thousands, Except Share Information)
(UNAUDITED)
| December 31, 2003 | March 31, 2004 | Unaudited Pro Forma Stockholders’ Equity at March 31, 2004 | ||||||||||
CURRENT ASSETS: | ||||||||||||
Cash and cash equivalents | $ | 235,965 | $ | 185,109 | ||||||||
Inventory, net | 21,210 | 22,957 | ||||||||||
Accounts receivable (net of allowance of $1,085 and $1,377 at December 31, 2003 and March 31, 2004, respectively) | 8,678 | 9,042 | ||||||||||
Prepaid expenses | 5,292 | 7,528 | ||||||||||
Deferred charges | 6,498 | 8,894 | ||||||||||
Current deferred tax asset | 6,675 | 6,675 | ||||||||||
Other current assets | 8,833 | 11,774 | ||||||||||
Total current assets | 293,151 | 251,979 | ||||||||||
Property and equipment, net | 482,965 | 519,549 | ||||||||||
Restricted cash and investments | 1,248 | 1,422 | ||||||||||
Long-term investments | 19,000 | 15,999 | ||||||||||
PCS licenses | 90,619 | 90,619 | ||||||||||
Microwave relocation costs | 10,000 | 9,872 | ||||||||||
Other assets | 5,511 | 5,780 | ||||||||||
Total assets | $ | 902,494 | $ | 895,220 | ||||||||
CURRENT LIABILITIES: | ||||||||||||
Accounts payable and accrued expenses | $ | 153,688 | $ | 121,677 | ||||||||
Current maturities of long-term debt | 13,362 | 13,579 | ||||||||||
Deferred revenue | 31,091 | 36,472 | ||||||||||
Other current liabilities | 2,295 | 1,673 | ||||||||||
Total current liabilities | 200,436 | 173,401 | ||||||||||
Long-term debt, net | 182,433 | 179,523 | ||||||||||
Deferred tax liabilities | 30,791 | 38,208 | ||||||||||
Long-term deferred revenue | 30 | 105 | ||||||||||
Deferred rents | 3,961 | 4,397 | ||||||||||
Other long-term liabilities | 20,554 | 20,933 | ||||||||||
Total liabilities | 438,205 | 416,567 | ||||||||||
COMMITMENTS AND CONTINGENCIES (Note 9) | ||||||||||||
SERIES D CUMULATIVE CONVERTIBLE REDEEMABLE PARTICIPATING PREFERRED STOCK, par value $.0001 per share, 4,000,000 shares designated, 3,500,947 and 3,500,953 shares issued and outstanding at December 31, 2003 and March 31, 2004, respectively, actual; none designated, issued or outstanding, pro forma | ||||||||||||
Liquidation preference of $384,841 and $389,588, at December 31, 2003 and March 31, 2004, respectively | 379,401 | 384,267 | — | |||||||||
STOCKHOLDERS’ EQUITY: | ||||||||||||
Preferred stock, par value $.0001 per share, 5,000,000 shares authorized, 4,000,000 of which have been designated as Series D Preferred Stock, no shares issued and outstanding at December 31, 2003 and March 31, 2004, respectively, actual; none designated, issued or outstanding, pro forma | — | — | — | |||||||||
Common stock, par value $.0001 per share— | ||||||||||||
Class A, 300 shares authorized, 90 shares issued and outstanding at December 31, 2003 and March 31, 2004, respectively actual and pro forma | — | — | — | |||||||||
Class B, 60,000,000 shares authorized, 3,908,785 and 4,113,785 shares issued and outstanding at December 31, 2003 and March 31, 2004, respectively, actual; none authorized, issued or outstanding, pro forma | — | — | — | |||||||||
Class C, 240,000,000 shares authorized, 32,682,903 shares and 37,239,375 shares issued and outstanding at December 31, 2003 and March 31, 2004, respectively, actual; 82,798,683 shares issued and outstanding, pro forma | 3 | 4 | 8 | |||||||||
Additional paid-in capital | 88,913 | 92,420 | 482,004 | |||||||||
Subscriptions receivable | (92 | ) | (93 | ) | (93 | ) | ||||||
Deferred compensation | (4,229 | ) | (4,328 | ) | (4,328 | ) | ||||||
Retained earnings | 293 | 6,383 | 1,062 | |||||||||
Total stockholders’ equity | 84,888 | 94,386 | $ | 478,653 | ||||||||
Total liabilities and stockholders’ equity | $ | 902,494 | $ | 895,220 | ||||||||
| | September 30, 2006 | Pro Forma September 30, 2006 | December 31, 2005 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| CURRENT ASSETS: | ||||||||||||
| Cash and cash equivalents | $ | 116,265 | $ | 112,709 | ||||||||
| Short-term investments | 229,546 | 390,422 | ||||||||||
| Inventories, net | 39,648 | 39,431 | ||||||||||
| Accounts receivable (net of allowance for uncollectible accounts of $1,806 and $2,383 at September 30, 2006 and December 31, 2005, respectively) | 23,506 | 16,028 | ||||||||||
| Prepaid charges | 25,854 | 21,430 | ||||||||||
| Deferred charges | 21,442 | 13,270 | ||||||||||
| Deferred tax asset | 10,365 | 2,122 | ||||||||||
| Other current assets | 22,870 | 16,690 | ||||||||||
| Total current assets | 489,496 | 612,102 | ||||||||||
| Property and equipment, net | 1,207,982 | 831,490 | ||||||||||
| Restricted cash and investments | 6,163 | 2,920 | ||||||||||
| Long-term investments | 2,272 | 5,052 | ||||||||||
| PCS licenses | 681,475 | 681,299 | ||||||||||
| Microwave relocation costs | 9,187 | 9,187 | ||||||||||
| Long-term deposits | 200,165 | 84 | ||||||||||
| Other assets | 29,434 | 16,847 | ||||||||||
| Total assets | $ | 2,626,174 | $ | 2,158,981 | ||||||||
CURRENT LIABILITIES: | ||||||||||||
| Accounts payable and accrued expenses | $ | 281,789 | $ | 174,220 | ||||||||
| Current maturities of long-term debt | 200,000 | 2,690 | ||||||||||
| Deferred revenue | 78,600 | 56,560 | ||||||||||
| Other current liabilities | 2,989 | 2,147 | ||||||||||
| Total current liabilities | 563,378 | 235,617 | ||||||||||
| Long-term debt, net | 902,594 | 902,864 | ||||||||||
| Deferred tax liabilities | 196,314 | 146,053 | ||||||||||
| Deferred rents | 20,104 | 14,739 | ||||||||||
| Redeemable minority interest | 3,823 | 1,259 | ||||||||||
| Other long-term liabilities | 24,023 | 20,858 | ||||||||||
| Total liabilities | 1,710,236 | 1,321,390 | ||||||||||
| COMMITMENTS AND CONTINGENCIES (See Note 11) | ||||||||||||
| SERIES D CUMULATIVE CONVERTIBLE REDEEMABLE PARTICIPATING PREFERRED STOCK, par value $0.0001 per share, 4,000,000 shares designated, 3,500,993 shares issued and outstanding at September 30, 2006 and December 31, 2005; Liquidation preference of $442,093 and $426,382 at September 30, 2006 and December 31, 2005, respectively | 437,955 | — | 421,889 | |||||||||
| SERIES E CUMULATIVE CONVERTIBLE REDEEMABLE PARTICIPATING PREFERRED STOCK, par value $0.0001 per share, 500,000 shares designated, 500,000 shares issued and outstanding at September 30, 2006 and December 31, 2005; Liquidation preference of $53,263 and $51,019 at September 30, 2006 and December 31, 2005, respectively | 50,294 | — | 47,796 | |||||||||
| STOCKHOLDERS' EQUITY: | ||||||||||||
| Preferred stock, par value $0.0001 per share, 25,000,000 shares authorized, 4,000,000 of which have been designated as Series D Preferred Stock and 500,000 of which have been designated as Series E Preferred Stock; no shares of preferred stock other than Series D & E Preferred Stock (presented above) issued and outstanding at September 30, 2006 and December 31, 2005 | — | — | — | |||||||||
| Common Stock, par value $0.0001 per share, 300,000,000 shares authorized, 52,071,221 and 51,775,698 shares issued and outstanding at September 30, 2006 and December 31, 2005, respectively | 5 | 10 | 5 | |||||||||
| Additional paid-in capital | 157,712 | 645,956 | 149,594 | |||||||||
| Deferred compensation | — | — | (178 | ) | ||||||||
| Retained earnings | 268,762 | 268,762 | 216,702 | |||||||||
| Accumulated other comprehensive income | 1,210 | 1,210 | 1,783 | |||||||||
| Total stockholders' equity | 427,689 | 915,938 | 367,906 | |||||||||
| Total liabilities and stockholders' equity | $ | 2,626,174 | $ | 2,158,981 | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
MetroPCS Communications, Inc. and Subsidiaries
Condensed Consolidated Statements of OperationsIncome and Comprehensive Income
(in thousands, except share and per share information)
(Unaudited)
(In Thousands, Except Share Information)
(UNAUDITED)
| Three Months Ended March 31, | ||||||||
| 2003 | 2004 | |||||||
REVENUES: | ||||||||
Service revenues | $ | 75,999 | $ | 132,921 | ||||
Equipment revenues | 23,399 | 40,077 | ||||||
Total revenues | 99,398 | 172,998 | ||||||
OPERATING EXPENSES: | ||||||||
Cost of service (excluding depreciation included below) | 25,929 | 40,909 | ||||||
Cost of equipment | 44,213 | 64,047 | ||||||
Selling, general and administrative expenses (excludes non-cash compensation) | 18,046 | 28,916 | ||||||
Non-cash compensation | 241 | 3,256 | ||||||
Depreciation and amortization | 9,047 | 12,774 | ||||||
Loss on sale of assets | 111 | 87 | ||||||
Total operating expenses | 97,587 | 149,989 | ||||||
INCOME FROM OPERATIONS | 1,811 | 23,009 | ||||||
OTHER (INCOME) EXPENSE: | ||||||||
Interest expense | 1,755 | 5,572 | ||||||
Interest income | (140 | ) | (616 | ) | ||||
Gain on extinguishment of debt | — | (201 | ) | |||||
Total other expense | 1,615 | 4,755 | ||||||
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT ON CHANGE IN ACCOUNTING PRINCIPLE | 196 | 18,254 | ||||||
PROVISION FOR INCOME TAXES | (113 | ) | (7,417 | ) | ||||
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE | 83 | 10,837 | ||||||
Cumulative effect of change in accounting principle, net of tax | (74 | ) | — | |||||
NET INCOME | 9 | 10,837 | ||||||
ACCRUED DIVIDENDS ON SERIES D PREFERRED STOCK | (4,268 | ) | (4,747 | ) | ||||
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK | $ | (4,259 | ) | $ | 6,090 | |||
NET INCOME (LOSS) PER SHARE: (Note 8) BASIC | ||||||||
Income before cumulative effect of change in accounting principle | $ | (0.12 | ) | $ | 0.08 | |||
Cumulative effect of change in accounting principle | (0.00 | ) | — | |||||
NET INCOME (LOSS) PER SHARE – BASIC | $ | (0.12 | ) | $ | 0.08 | |||
DILUTED | ||||||||
Income before cumulative effect of change in accounting principle | $ | (0.12 | ) | $ | 0.06 | |||
Cumulative effect of change in accounting principle | (0.00 | ) | — | |||||
NET INCOME (LOSS) PER SHARE – DILUTED | $ | (0.12 | ) | $ | 0.06 | |||
| | For the nine months ended September 30, | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| | 2006 | 2005 | |||||||
| REVENUES: | |||||||||
| Service revenues | $ | 916,179 | $ | 631,209 | |||||
| Equipment revenues | 177,592 | 118,990 | |||||||
| Total revenues | 1,093,771 | 750,199 | |||||||
OPERATING EXPENSES: | |||||||||
| Cost of service (excluding depreciation and amortization expense of $87,602 and $57,270, shown separately below) | 313,510 | 201,940 | |||||||
| Cost of equipment | 330,898 | 210,529 | |||||||
| Selling, general and administrative expenses (excluding depreciation and amortization expense of $8,585 and $4,625, shown separately below) | 171,921 | 116,206 | |||||||
| Depreciation and amortization | 96,187 | 61,895 | |||||||
| Loss (gain) loss on disposal of assets | 10,763 | (218,292 | ) | ||||||
| Total operating expenses | 923,279 | 372,278 | |||||||
| Income from operations | 170,492 | 377,921 | |||||||
OTHER EXPENSE (INCOME): | |||||||||
| Interest expense | 67,408 | 40,867 | |||||||
| Accretion of put option in majority-owned subsidiary | 564 | 187 | |||||||
| Interest income | (15,106 | ) | (4,876 | ) | |||||
| (Gain) loss on extinguishment of debt | (244 | ) | 46,448 | ||||||
| Total other expense | 52,622 | 82,626 | |||||||
Income before provision for income taxes | 117,870 | 295,295 | |||||||
Provision for income taxes | (47,245 | ) | (115,460 | ) | |||||
| Net income | 70,625 | 179,835 | |||||||
| Accrued dividends on Series D Preferred Stock | (15,711 | ) | (15,711 | ) | |||||
| Accrued dividends on Series E Preferred Stock | (2,244 | ) | (263 | ) | |||||
| Accretion on Series D Preferred Stock | (355 | ) | (355 | ) | |||||
| Accretion on Series E Preferred Stock | (254 | ) | (30 | ) | |||||
| Net income applicable to Common Stock | $ | 52,061 | $ | 163,476 | |||||
| Net income | $ | 70,625 | $ | 179,835 | |||||
| Other comprehensive income: | |||||||||
| Unrealized (loss) gain on available-for-sale securities, net of tax | (847 | ) | 104 | ||||||
| Unrealized gain on cash flow hedging derivative, net of tax | 896 | 1,495 | |||||||
| Reclassification adjustment for gains included in net income, net of tax | (622 | ) | (30 | ) | |||||
| Comprehensive income | $ | 70,052 | $ | 181,404 | |||||
Net income per common share: (See Note 10) | |||||||||
| Basic | $ | 0.57 | $ | 2.02 | |||||
| Diluted | $ | 0.56 | $ | 1.74 | |||||
Weighted average shares: | |||||||||
| Basic | 51,890,687 | 43,517,417 | |||||||
| Diluted | 53,158,789 | 50,417,637 | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
MetroPCS Communications, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
(In Thousands)
(UNAUDITED)
| Three Months Ended March 31, | ||||||||
| 2003 | 2004 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net income | $ | 9 | $ | 10,837 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities— | ||||||||
Cumulative effect of change in accounting | 74 | — | ||||||
Gain on extinguishment of debt | — | (201 | ) | |||||
Loss on sale of assets | 111 | 87 | ||||||
Depreciation and amortization | 9,047 | 12,774 | ||||||
Non-cash interest expense | 784 | 688 | ||||||
Bad debt expense | 749 | 433 | ||||||
Equity based compensation expense | — | 2,965 | ||||||
Amortization of deferred compensation | 241 | 291 | ||||||
Accretion of asset retirement obligation | 25 | 79 | ||||||
Deferred rent | 414 | 435 | ||||||
Deferred taxes | 113 | 7,417 | ||||||
Cost of abandoned cell sites | 477 | 183 | ||||||
Changes in assets and liabilities— | ||||||||
Inventory | (2,057 | ) | (1,747 | ) | ||||
Accounts receivable | (4,883 | ) | (797 | ) | ||||
Prepaid expenses | (1,208 | ) | (2,236 | ) | ||||
Deferred charges and other current assets | 1,295 | (5,337 | ) | |||||
Accounts payable, accrued expenses & deferred revenue | (10,017 | ) | (1,503 | ) | ||||
Net cash provided by (used in) operating activities | (4,826 | ) | 24,368 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Purchase of investments | (390 | ) | (3,174 | ) | ||||
Proceeds from sale of investments | 762 | 6,004 | ||||||
Microwave relocation | (96 | ) | (19 | ) | ||||
Purchase of property and equipment | (26,899 | ) | (73,338 | ) | ||||
Net cash used in investing activities | (26,623 | ) | (70,527 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Change in book overdraft | 5,671 | (1,908 | ) | |||||
Repayment of notes | (90 | ) | (3,059 | ) | ||||
Proceeds from sale of Series D Preferred Stock, net of issuance cost | — | 1 | ||||||
Proceeds from exercise of stock options | — | 269 | ||||||
Net cash provided by (used in) financing activities | 5,581 | (4,697 | ) | |||||
DECREASE IN CASH AND CASH EQUIVALENTS | (25,868 | ) | (50,856 | ) | ||||
CASH AND CASH EQUIVALENTS, beginning of period | 61,717 | 235,965 | ||||||
CASH AND CASH EQUIVALENTS, end of period | $ | 35,849 | $ | 185,109 | ||||
| | For the nine months ended September 30, | |||||||
|---|---|---|---|---|---|---|---|---|
| | 2006 | 2005 | ||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net income | $ | 70,625 | $ | 179,835 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 96,187 | 61,895 | ||||||
| Provision for (recovery of) uncollectible accounts receivable | 64 | (38 | ) | |||||
| Deferred rent expense | 5,365 | 3,091 | ||||||
| Cost of abandoned cell sites | 2,069 | 251 | ||||||
| Non-cash interest expense | 3,702 | 3,766 | ||||||
| Loss (gain) on disposal of assets | 10,763 | (218,292 | ) | |||||
| (Gain) loss on extinguishment of debt | (244 | ) | 46,448 | |||||
| (Gain) loss on sale of investments | (1,875 | ) | 49 | |||||
| Accretion of asset retirement obligation | 469 | 103 | ||||||
| Accretion of put option in majority-owned subsidiary | 564 | 187 | ||||||
| Deferred income taxes | 41,792 | 113,580 | ||||||
| Stock-based compensation expense | 7,750 | 3,302 | ||||||
| Changes in assets and liabilities: | ||||||||
| Inventories | (220 | ) | 14,825 | |||||
| Accounts receivable | (7,542 | ) | (3,721 | ) | ||||
| Prepaid expenses | (7,365 | ) | (1,890 | ) | ||||
| Deferred charges | (8,172 | ) | (4,443 | ) | ||||
| Other assets | (2,974 | ) | (4,804 | ) | ||||
| Accounts payable and accrued expenses | 49,121 | 40,060 | ||||||
| Deferred revenue | 22,055 | 10,830 | ||||||
| Other liabilities | 2,554 | 1,981 | ||||||
| Net cash provided by operating activities | 284,688 | 247,015 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchases of property and equipment | (453,864 | ) | (204,450 | ) | ||||
| Change in prepaid purchases of property and equipment | 2,427 | (4,336 | ) | |||||
| Proceeds from sale of property and equipment | 2,548 | 123 | ||||||
| Purchase of investments | (737,088 | ) | (427,732 | ) | ||||
| Proceeds from sale of investments | 900,189 | 171,725 | ||||||
| Change in restricted cash and investments | (3,291 | ) | (50,510 | ) | ||||
| Purchases of FCC licenses | (176 | ) | (235,330 | ) | ||||
| Deposit to FCC for licenses | (200,000 | ) | (268,599 | ) | ||||
| Proceeds from sale of FCC licenses | — | 230,000 | ||||||
| Net cash used in investing activities | (489,255 | ) | (789,109 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Change in book overdraft | 22,993 | 11,105 | ||||||
| Proceeds from bridge credit agreements | 200,000 | 540,000 | ||||||
| Proceeds from Credit Agreements | — | 750,000 | ||||||
| Payment upon execution of cash flow hedging derivative | — | (1,899 | ) | |||||
| Debt issuance costs | (15,313 | ) | (28,801 | ) | ||||
| Repayment of debt | (2,446 | ) | (753,080 | ) | ||||
| Proceeds from minority interest in majority-owned subsidiary | 2,000 | — | ||||||
| Proceeds from issuance of preferred stock, net of issuance costs | — | 46,688 | ||||||
| Proceeds from exercise of stock options and warrants | 889 | 764 | ||||||
| Net cash provided by financing activities | 208,123 | 564,777 | ||||||
INCREASE IN CASH AND CASH EQUIVALENTS | 3,556 | 22,683 | ||||||
| CASH AND CASH EQUIVALENTS, beginning of period | 112,709 | 22,477 | ||||||
| CASH AND CASH EQUIVALENTS, end of period | $ | 116,265 | $ | 45,160 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
MetroPCS Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)1. Basis of Presentation:
Note 1—OrganizationThe accompanying unaudited condensed consolidated interim financial statements include the balances and Business Operations
MetroPCS Communications, Inc., a Delaware corporation (“MetroPCS”), together with its wholly owned subsidiaries (collectively, the “Company”) is a wireless communications carrier that offers digital wireless service in the metropolitan areasresults of Atlanta, Miami, San Francisco and Sacramento. The Company initiated the commercial launchoperations of its first market in January 2002 and was in the development stage for 2000 and 2001. The Company is headquartered in Dallas, Texas and has approximately 859 employees Company-wide as of March 31, 2004.
On March 23, 2004, MetroPCS Communications, Inc. filed a Registration Statement on Form S-1("MetroPCS") and its wholly-owned and majority-owned subsidiaries (the "Company"). MetroPCS indirectly owns, through its wholly-owned subsidiaries, 85% of the limited liability company member interest in Royal Street Communications, LLC ("Royal Street"), and its results of operations are consolidated with the SecuritiesMetroPCS. The redeemable minority interest in Royal Street is included in long-term liabilities. All significant intercompany balances and Exchange Commission to affect an initial public offering of its common stock.
Unaudited pro forma stockholders’ equity at March 31, 2004 gives effect to the conversion of all of our outstanding Class B common stock and Series D preferred stock into Class C common stock, which will occur concurrently with the consummation of this offering, including shares of Class C common stock to be issuedtransactions have been eliminated in respect of unpaid dividends on the outstanding Series D preferred stock that have accumulatedconsolidation. The condensed consolidated interim balance sheets as of MarchSeptember 30, 2006 and December 31, 2004.
Note 2—Basis of Presentation of Unaudited Interim Financial Statements
The unaudited2005, the condensed consolidated balance sheet as of March 31, 2004, the unaudited consolidatedinterim statements of operations for the three months ended March 31, 2003income and 2004, the unaudited consolidated statements ofcomprehensive income and cash flows for the threenine months ended March 31, 2003September 30, 2006 and 20042005, and the related footnotes have beenare prepared in accordance with accounting principles generally accepted in the United States of America for("GAAP").
The unaudited pro forma balance sheet data presented as of September 30, 2006 reflects the conversion of all outstanding shares of preferred stock as of that date into common stock, which will occur upon closing of the proposed initial public offering.
The unaudited condensed consolidated interim financial information and Article 10statements included herein reflect all adjustments (consisting of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally acceptednormal, recurring adjustments) which are, in the United States of America. The financial information presented should be read in conjunction with the Company’s audited consolidated financial statements as of and for the year ended December 31, 2003. In the opinion of management, the interim data includes all normal and recurring adjustments necessary for a fair presentation ofto state fairly the results for the interim periods. Operatingperiods presented. The results of operations for the three months ended March 31, 2004interim periods presented are not necessarily indicative of the operating results that mayto be expected for any subsequent interim period or for the year ending December 31, 2004.fiscal year.
Certain reclassifications have been made to prior period balances to conform to current period presentation. These reclassifications had no effect on the resultsThe preparation of operations or stockholders’ equity as previously reported.
Note 3—Principles of Consolidation
The unaudited consolidated financial statements includein conformity with GAAP requires management to make estimates and assumptions that affect the accountsreported amounts of MetroPCSassets and its wholly owned subsidiaries. All significant intercompany balancesliabilities and transactions are eliminated. The Company managesdisclosure of contingent assets and liabilities at the business as one reportable business segment – wireless voice and data services and products.
Note 4—Effectsdate of Recent Accounting Pronouncements
In March 2004, the Emerging Issues Task Force (“EITF”) reached consensus on EITF Issue 03-6, “Participating Securitiesfinancial statements and the Two-Class Method under FASBreported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 128,” which requires, among
MetroPCS Communications, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
other items, the use of the two-class method for calculating earnings per share when participating convertible securities exist. The consensus is effective for fiscal periods beginning after March 31, 2004 and requires restatement of prior periods if the two-class method has not been used. The Company’s accounting policy, under FASB Statement No. 128, “Earnings per Share”123(R), was to calculate earnings per share under both the two-class and if-converted method and report earnings per share on the method that was most dilutive. The adoption of EITF 03-06 will not have an effect on the Company’s financial statements as the two-class method is currently being followed.
"Note 5—Stock Based CompensationShare-Based Payment,
The Company follows the disclosure requirements of " ("SFAS No. 148, “Accounting123(R)"), the Company has recognized stock-based compensation expense in an amount equal to the fair value of share-based payments, which includes stock options granted to employees. SFAS No. 123(R) replaces SFAS No. 123, "Accounting for Stock-Based Compensation, – Transition and Disclosure,” which amends the disclosure requirements of " ("SFAS No. 123, “Accounting123") and supersedes Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock-Based Compensation,”Stock Issued to require prominent disclosure in both annualEmployees," and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.
As permitted byits related interpretations ("APB No. 25"). The Company adopted SFAS No. 123,123(R) on January 1, 2006. Stock-based compensation expense recognized under SFAS No. 123(R) was $7.8 million for the nine months ended September 30, 2006.
2. Share-Based Payments:
Prior to the first quarter of 2006, the Company measuresmeasured stock-based compensation expense for its stock-based employee compensation plans using the intrinsic value method prescribed by the Accounting Principles Board (“APB”) OpinionAPB No. 25, “Accounting for Stock Issued to Employees.” Theas allowed by SFAS No. 123.
Effective January 1, 2006, the Company has adopted the disclosure-onlyfair value recognition provisions of SFAS No. 123.123(R) using the modified prospective transition method. Under that transition method, compensation expense recognized beginning on that date includes: (a) compensation expense for all share-based payments granted prior to, but not yet vested as of, January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123, and
(b) compensation expense for all share-based payments granted on or after January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R). Although there was no material impact on the Company's financial position, results of operations or cash flows from the adoption of SFAS No. 123(R), the Company reclassified all deferred equity compensation on the consolidated balance sheet to additional paid-in capital upon its adoption. The period prior to the adoption of SFAS No. 123(R) does not reflect any restated amounts.
MetroPCS has two stock option plans (the "Option Plans") under which it grants options to purchase Common Stock of MetroPCS: the Second Amended and Restated 1995 Stock Option Plan, as amended ("1995 Plan"), and the 2004 Equity Incentive Compensation Plan, as amended ("2004 Plan"). The 1995 Plan was terminated in November 2005 and no further awards can be made under the 1995 Plan, but all options granted before November 2005 will remain valid in accordance with their original terms. As of September 30, 2006, the maximum number of shares reserved for the 2004 Plan was 4,700,000 shares. In December 2006, the 2004 Plan was amended to increase the number of shares of Common Stock reserved for issuance under the plan to a total of 6,200,000 shares and to include certain provisions required by California law in order to permit the Company to make option grants to California residents. Vesting periods and terms for stock option grants are determined by the plan administrator, which is MetroPCS' Board of Directors for the 1995 Plan and the Compensation Committee of the Board of Directors of MetroPCS for the 2004 Plan. No option granted under the 1995 Plan shall have a term in excess of fifteen years and no option granted under the 2004 Plan shall have a term in excess of ten years. Options granted during the nine months ended September 30, 2006 and 2005 have a vesting period of three to four years.
Options granted under the 1995 Plan are exercisable upon grant. Shares received upon exercising options prior to vesting are restricted from sale based on a vesting schedule. In the event an option holder's service with the Company is terminated, MetroPCS may repurchase unvested shares issued under the 1995 Plan at the option exercise price. Options granted under the 2004 Plan are only exercisable upon vesting. Upon exercise of options under the Option Plans, new shares of Common Stock are issued to the option holder.
The value of the options is determined by using a Black-Scholes pricing model that includes the following variables: 1) exercise price of the instrument, 2) fair market value of the underlying stock on date of grant, 3) expected life, 4) estimated volatility and 5) the risk-free interest rate. The Company
utilized the following weighted-average assumptions in estimating the fair value of the option grants in the nine months ended September 30, 2006 and 2005:
| | Nine Months Ended September 30, | |||||||
|---|---|---|---|---|---|---|---|---|
| | 2006 | 2005 | ||||||
| Expected dividends | 0.00 | % | 0.00 | % | ||||
| Expected volatility | 45.00 | % | 50.00 | % | ||||
| Risk-free interest rate | 4.76 | % | 4.11 | % | ||||
| Expected lives in years | 5.00 | 5.00 | ||||||
Weighted-average fair value of options: | ||||||||
| Granted at fair value | $ | 10.12 | $ | 10.31 | ||||
| Weighted-average exercise price of options: | ||||||||
| Granted at fair value | $ | 22.12 | $ | 21.38 | ||||
The Black-Scholes model requires the use of subjective assumptions including expectations of future dividends and stock price volatility. Such assumptions are only used for making the required fair value estimate and should not be considered as indicators of future dividend policy or stock price appreciation. Because changes in the subjective assumptions can materially affect the fair value estimate, and because employee stock options have characteristics significantly different from those of traded options, the use of the Black-Scholes option pricing model may not provide a reliable estimate of the fair value of employee stock options.
A summary of the status of the Company's Option Plans as of September 30, 2006 and 2005, and changes during the nine month periods then ended, is presented in the table below:
| | As of September 30, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2006 | 2005 | ||||||||
| | Shares | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | ||||||
| Outstanding, beginning of period | 4,834,070 | $ | 12.54 | 10,816,285 | $ | 2.76 | ||||
Granted | 1,274,313 | $ | 22.12 | 1,660,795 | $ | 21.38 | ||||
| Exercised | (105,258 | ) | $ | 8.45 | (99,405 | ) | $ | 6.02 | ||
| Forfeited | (368,054 | ) | $ | 12.00 | (322,448 | ) | $ | 12.09 | ||
Outstanding, end of period | 5,635,071 | $ | 14.82 | 12,055,227 | $ | 5.05 | ||||
Options exercisable at period-end | 3,649,360 | $ | 10.98 | 11,154,412 | $ | 3.72 | ||||
| Options vested at period-end | 2,879,196 | 9,515,477 | ||||||||
The following table summarizes information about stock options outstanding at September 30, 2006:
| | Options Outstanding | Options Vested | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Exercise Price | Number of Shares | Weighted Average Contractual Life (Years) | Weighted Average Exercise Price | Number of Shares | Weighted Average Exercise Price | |||||||
| $ 0.23 - $ 1.00 | 283,997 | 6.18 | $ | 0.35 | 283,997 | $ | 0.35 | |||||
| $ 4.70 - $ 4.70 | 1,356,132 | 5.07 | $ | 4.70 | 1,329,671 | $ | 4.70 | |||||
| $ 5.62 - $18.94 | 992,683 | 7.16 | $ | 11.91 | 612,482 | $ | 11.04 | |||||
| $21.40 - $21.40 | 1,180,254 | 8.84 | $ | 21.40 | 469,023 | $ | 21.40 | |||||
| $21.46 - $26.00 | 1,822,005 | 9.40 | $ | 21.92 | 184,023 | $ | 21.46 | |||||
| 5,635,071 | 2,879,196 | |||||||||||
In October 2005, Madison Dearborn Capital Partners and TA Associates consummated a tender offer in which they purchased from existing stockholders shares of Series D Preferred Stock and Common Stock in MetroPCS. In connection with this transaction, 7,367,429 options granted under the Option Plans were exercised for 7,367,429 shares of Common Stock, resulting in a significant decrease in options exercisable as of September 30, 2006 compared to options exercisable as of September 30, 2005.
During the nine months ended September 30, 2005, 99,405 options granted under the Option Plans were exercised for 99,405 shares of Common Stock, respectively. The intrinsic value of these options was approximately $1.3 million and total proceeds were approximately $0.6 million for the nine months ended September 30, 2005. During the nine months ended September 30, 2006, 105,258 options granted under the Option Plans were exercised for 105,258 shares of Common Stock, respectively. The intrinsic value of these options was approximately $1.6 million and total proceeds were approximately $0.9 million for the nine months ended September 30, 2006.
As of September 30, 2006, options outstanding and exercisable under the Option Plans have a weighted average remaining contractual life of 7.68 and 6.79 years, respectively.
The following table summarizes information about unvested stock option grants:
| Stock Option Grants | Shares | Weighted Average Grant-Date Fair Value | |||
|---|---|---|---|---|---|
| Unvested balance, January 1, 2006 | 2,527,553 | $ | 9.00 | ||
| Grants | 1,274,313 | $ | 10.12 | ||
| Vested shares | (866,454 | ) | $ | 8.45 | |
| Forfeitures | (179,537 | ) | $ | 9.21 | |
Unvested balance, September 30, 2006 | 2,755,875 | $ | 9.68 | ||
The Company determines fair value of stock option grants as the share price of the Company's stock at grant-date. The weighted average grant-date fair value of the stock option grants for the nine months ended September 30, 2006 and 2005 is $10.12 and $10.31, respectively. The weighted average exercise price of the stock options granted during the nine months ended September 30, 2006 and 2005 is $22.12 and $21.38, respectively.
The Company has recorded $7.8 million and $3.3 million of non-cash stock-based compensation expense in the nine months ended September 30, 2006 and 2005, respectively, and an income tax benefit of $3.1 million and $1.3 million, respectively.
As of September 30, 2006, there was approximately $24.1 million of unrecognized stock-based compensation cost related to unvested share-based compensation arrangements, which is expected to be recognized over a weighted average period of approximately 1.46 years. Such costs were originally scheduled to be recognized as follows: $2.8 million in the remainder of 2006, $9.1 million in 2007, $7.6 million in 2008, $3.8 million in 2009 and $0.8 million in 2010.
The total aggregate intrinsic value of stock options outstanding and exercisable as of September 30, 2006 was approximately $63.0 million and $54.8 million, respectively. The total fair value of stock options that vested during the nine months ended September 30, 2006 and 2005 was $7.3 million and $3.6 million, respectively.
The following table illustrates the effect on net income (loss) availableapplicable to Common Stock (in thousands, except per share data) and net income per common stockholdersshare as if the Company had elected to recognize stock-based compensation costs based on the fair value at the date of grant for the Company’s common stockCompany's Common Stock awards consistent with the provisions of SFAS No. 123.123:
| | Nine Months Ended September 30, 2005 | ||||
|---|---|---|---|---|---|
| Net income applicable to Common Stock—as reported | $ | 163,476 | |||
| Add: Amortization of deferred compensation determined under the intrinsic method for employee stock awards, net of tax | 1,981 | ||||
| Less: Total stock-based employee compensation expense determined under the fair value method for employee stock awards, net of tax | (1,855 | ) | |||
Net income applicable to Common Stock—pro forma | $ | 163,602 | |||
Basic net income per common share: | |||||
| As reported | $ | 2.02 | |||
| Pro forma | $ | 2.02 | |||
| Diluted net income per common share: | |||||
| As reported | $ | 1.74 | |||
| Pro forma | $ | 1.75 | |||
| Three Months Ended March 31, | ||||||||
| 2003 | 2004 | |||||||
| (in thousands) | ||||||||
Net income (loss) applicable to common stock – As reported | $ | (4,259 | ) | $ | 6,090 | |||
Add: Amortization of deferred compensation determined under the intrinsic method for employee stock awards, net of tax | 146 | 1,933 | ||||||
Less: Total stock-based employee compensation expense determined under the fair value method for employee stock awards, net of tax | (484 | ) | (548 | ) | ||||
Net income (loss) applicable to common stock – Pro forma | $ | (4,597 | ) | $ | 7,475 | |||
Basic net income (loss) per share – As reported | $ | (0.12 | ) | $ | 0.08 | |||
Basic net income (loss) per share – Pro forma | $ | (0.12 | ) | $ | 0.10 | |||
Diluted net income (loss) per share – As reported | $ | (0.12 | ) | $ | 0.06 | |||
Diluted net income (loss) per share – Pro forma | $ | (0.12 | ) | $ | 0.08 | |||
During the first three monthsnine month period ended September 30, 2006, the following awards were granted under the Company's Option Plans:
| Grants Made During the Quarter Ended | Number of Options Granted | Weighted Average Exercise Price | Weighted Average Market Value per Share | Weighted Average Intrinsic Value per Share | |||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| March 31, 2006 | 956,663 | $ | 21.46 | $ | 21.46 | $ | 0.00 | ||||
| June 30, 2006 | 178,175 | $ | 22.63 | $ | 22.63 | $ | 0.00 | ||||
| September 30, 2006 | 139,475 | $ | 26.00 | $ | 26.00 | $ | 0.00 | ||||
Compensation expense is recognized over the requisite service period for the entire award, which is generally the maximum vesting period of 2004,the award.
The fair value of the common stock was determined contemporaneously with the option grants.
In December 2006, the Company recognizedamended stock option agreements of a former member of MetroPCS' Board of Directors to extend the contractual life of 135,018 vested common stock options until December 31, 2006. This amendment will result in the recognition of additional non-cash stock-based compensation expense of $3.0approximately $4.1 million in the fourth quarter of 2006.
In December 2006, in recognition of efforts related to the Company's pending initial public offering and to align executive ownership with the Company, the Company made a special stock option grant to its named executive officers and certain other eligible employees. The Company granted stock options outstanding that are required to be marked-to-market under variable accounting, as a resultpurchase an aggregate of 2,295,000 shares of the increase inCompany's common stock to its named executive officers and certain other officers and employees. The purpose of the estimatedgrant was also to provide retention of employees following the Company's initial public offering as well as to motivate employees to return value to the Company's shareholders through future appreciation of the Company's common stock price. The exercise price for the option grants is $34.00, which is the fair market value of the Company’sCompany's common stock.stock on the date of the grant as determined by the Company's board of directors after receiving a valuation performed by an outside valuation consultant. The stock options granted to the named executive officers other than the Company's CEO will generally vest on a four-year vesting schedule with 25% vesting on the first anniversary date of the award and pro-rata on a monthly basis thereafter. The stock options granted to the Company's CEO will vest on a three-year vesting schedule with one-third vesting on the first anniversary date of the award and pro-rata on a monthly basis thereafter. The stock options granted to the Company's senior vice president and chief technology officer will vest over a two-year vesting schedule with one-half vesting on the first anniversary of the award and pro-rata on a monthly basis thereafter.
Note 6—Long-Term Investments3. Property and Equipment:
Property and equipment, net, consisted of the following (in thousands):
| | September 30, 2006 | December 31, 2005 | |||||
|---|---|---|---|---|---|---|---|
| Construction-in-progress | $ | 206,599 | $ | 98,078 | |||
| Network infrastructure | 1,244,749 | 905,924 | |||||
| Office equipment | 28,545 | 17,059 | |||||
| Leasehold improvements | 21,428 | 16,608 | |||||
| Furniture and fixtures | 5,938 | 4,000 | |||||
| Vehicles | 185 | 118 | |||||
| 1,507,444 | 1,041,787 | ||||||
Accumulated depreciation | (299,462 | ) | (210,297 | ) | |||
Property and equipment, net | $ | 1,207,982 | $ | 831,490 | |||
4. PCS Licenses:
Auction 66
The Federal Communications Commission ("FCC") auctioned 90 MHz of spectrum to be used for Advanced Wireless Services ("AWS") in Auction 66 which commenced on August 9, 2006. On July 17, 2006, MetroPCS AWS, LLC, an indirect, wholly-owned subsidiary of MetroPCS II, Inc., submitted an upfront payment to the FCC in the amount of $200.0 million to qualify to participate in Auction 66.
During Auction 66 concluded on September 21, 2006 and the three months endedCompany was declared the high bidder on licenses covering a total unique population of 117 million, with total aggregate winning bids of approximately $1.4 billion (See Note 17). These new expansion opportunities cover six of the 25 largest metropolitan markets in the United States. The expansion opportunities in the eastern United States include the entire east coast corridor from Philadelphia to Boston, including New York City, as well as the entire states of New York, Connecticut and Massachusetts. In the western United States, these new expansion opportunities cover a geographic area including the San Diego, Portland, Seattle and Las Vegas metropolitan areas. The balance of the licenses supplements or expands the geographic boundaries of our existing operations in Dallas/Ft. Worth, Detroit, Los Angeles, San Francisco and Sacramento.
5. Accounts Payable and Accrued Expenses:
Accounts payable and accrued expenses consisted of the following (in thousands):
| | September 30, 2006 | December 31, 2005 | ||||
|---|---|---|---|---|---|---|
| Accounts payable | $ | 59,446 | $ | 29,430 | ||
| Book overdraft | 32,913 | 9,920 | ||||
| Accrued accounts payable | 92,429 | 69,611 | ||||
| Accrued liabilities | 8,624 | 7,590 | ||||
| Payroll and employee benefits | 13,535 | 12,808 | ||||
| Accrued interest | 29,664 | 17,578 | ||||
| Taxes, other than income | 37,896 | 23,211 | ||||
| Income taxes | 7,282 | 4,072 | ||||
Accounts payable and accrued expenses | $ | 281,789 | $ | 174,220 | ||
6. Long-Term Debt:
Long-term debt consisted of the following (in thousands):
| | September 30, 2006 | December 31, 2005 | |||||
|---|---|---|---|---|---|---|---|
| Microwave relocation obligations | $ | — | $ | 2,690 | |||
| Secured Bridge Credit Facility | 200,000 | — | |||||
| Credit Agreements | 900,000 | 900,000 | |||||
Total | 1,100,000 | 902,690 | |||||
| Add: unamortized premium on debt | 2,594 | 2,864 | |||||
Total debt | 1,102,594 | 905,554 | |||||
| Less: current maturities | (200,000 | ) | (2,690 | ) | |||
Total long-term debt | $ | 902,594 | $ | 902,864 | |||
Bridge Credit Agreement
In February 2005, MetroPCS Wireless, Inc. ("Wireless") entered into a secured bridge credit facility, dated as of February 22, 2005, as amended ("Bridge Credit Agreement"). The aggregate credit commitments available under the Bridge Credit Agreement totaled $540.0 million. The lenders funded $240.0 million and $300.0 million under the Bridge Credit Agreement in February 2005 and March 2005, respectively.
The Bridge Credit Agreement provided that all borrowings were senior secured obligations of Wireless and were guaranteed on a senior secured basis by MetroPCS, Inc. and its wholly-owned subsidiaries (other than Wireless). The obligations under the Bridge Credit Agreement were secured by security interests in substantially all of the assets of MetroPCS, Inc. and its wholly-owned subsidiaries,
including capital stock, except as prohibited by law and certain permitted exceptions, as more fully described in the Security Agreement and the Pledge Agreement both dated as of February 22, 2005, as amended.
In May 2005, Wireless repaid the aggregate outstanding principal balance under the Bridge Credit Agreement of $540.0 million and accrued interest of $8.7 million. As a result, Wireless recorded a loss on extinguishment of debt in the amount of approximately $10.4 million.
FCC Debt
On March 2, 2005, in connection with the sale of a 10 MHz portion of a 30 MHz PCS license in the San Francisco-Oakland-San Jose, California basic trading area, the Company repaid the outstanding principal balance of $12.2 million in debt payable to the FCC. This debt was incurred in connection with the original acquisition of the 30 MHz PCS license for the San Francisco-Oakland-San Jose basic trading area. The repayment resulted in a loss on extinguishment of debt of $0.9 million.
On May 31, 2004, long-term investments classified as held-to-maturity were called2005, the Company repaid the remaining outstanding principal balance of $15.7 million in debt payable to the FCC. This debt was incurred in connection with the Company's original PCS licenses acquired by the issuer, thereby acceleratingCompany in the maturity. ProceedsFCC auction in May 1996. The repayment resulted in a loss on extinguishment of debt of approximately $1.0 million.
$150 Million 103/4% Senior Notes
On September 29, 2003, MetroPCS, Inc. completed the sale of $150.0 million of 103/4% Senior Notes due 2011 (the "103/4% Senior Notes"). MetroPCS, Inc. was subject to certain covenants set forth in the indenture governing the 103/4% Senior Notes. On November 3, 2004, MetroPCS, Inc. received and accepted consents from the sale were approximately $6.0holders of a majority of its 103/4% Senior Notes to a limited waiver, for up to 180 days, of any default or event of default arising from a failure of the Company to comply with a reporting covenant in the 103/4% Senior Notes. Accordingly, the reporting covenant was waived until the close of business on May 2, 2005.
On May 10, 2005, holders of all of the 103/4% Senior Notes tendered their 103/4% Senior Notes in response to MetroPCS, Inc.'s cash tender offer and consent solicitation. As a result, MetroPCS, Inc. executed a supplemental indenture governing the 103/4% Senior Notes to eliminate substantially all of the restrictive covenants and event of default provisions in the indenture, to amend other provisions of the indenture, and to waive any and all defaults and events of default that may have existed under the indenture. On May 31, 2005, MetroPCS, Inc. purchased all of its outstanding 103/4% Senior Notes in the tender offer. MetroPCS, Inc. paid the holders of the 103/4% Senior Notes $178.9 million plus accrued interest of $2.7 million in the tender offer, resulting in a loss on extinguishment of debt of $34.0 million.
First and Second Lien Credit Agreements
On May 31, 2005, MetroPCS, Inc. and Wireless, both wholly-owned subsidiaries of MetroPCS, entered into a First Lien Credit Agreement, maturing May 31, 2011, and a Second Lien Credit Agreement maturing May 31, 2012 (collectively, the "Credit Agreements"), which provided for total borrowings of up to $900.0 million. MetroPCS, Inc. and its wholly-owned subsidiaries also entered into
Guarantee and Collateral Agreements, dated as of May 31, 2005, in connection with the Credit Agreements, in which the lenders hold a security interest in substantially all property, including capital stock, now owned or at any time acquired by MetroPCS, Inc. and its wholly-owned subsidiaries, except for certain permitted exceptions or as prohibited by law. Royal Street did not enter into any Guarantee and Collateral Agreements in connection with the Credit Agreements, however, MetroPCS pledged the intercompany promissory note that Royal Street has given the Company in connection with amounts borrowed by Royal Street from Wireless as collateral. On May 31, 2005, Wireless borrowed $500.0 million under the First Lien Credit Agreement and $250.0 million under the Second Lien Credit Agreement.
On December 19, 2005, Wireless entered into amendments to the Credit Agreements and borrowed an additional $50.0 million under the First Lien Credit Agreement and an additional $100.0 million under the Second Lien Credit Agreement. Under the amendments to the Credit Agreements the total amount available under the First Lien Credit Agreement increased by $330.0 million and the total amount available under the Second Lien Credit Agreement increased by $220.0 million, for a total increase in the amounts available under the Credit Agreements of $550.0 million.
Interest Rate Cap Agreement
On June 27, 2005, Wireless entered into a three-year interest rate cap agreement, as required by Wireless' Credit Agreements, to mitigate the impact of interest rate changes on 50% of the aggregate debt outstanding thereunder. This financial instrument is being accounted for in accordance with SFAS No. 133,"Accounting for Derivative Instruments and Hedging Activities," ("SFAS No. 133"). SFAS No. 133 addresses the accounting for financial instruments that are designated as cash flow hedges and the effective portion of the change in value of the financial instrument is reported as a component of the Company's other comprehensive income and reclassified into earnings in the same periods during which the hedged transaction affects earnings. Comprehensive income is comprised of net income and includes the impact of a deferred gain on the change in the fair value of the financial instrument. Wireless paid $1.9 million upon execution of the agreement and the financial instrument is reported in other current assets and long-term investments at fair market value, which was $4.4 million and $5.1 million as of September 30, 2006 and December 31, 2005, respectively. The change in fair value is reported in accumulated other comprehensive income on the condensed consolidated interim balance sheets, net of income taxes.
$1.25 Billion Exchangeable Senior Secured Credit Agreement
In July 2006, MetroPCS II, Inc. ("MetroPCS II"), a wholly-owned subsidiary of MetroPCS, entered into an Exchangeable Senior Secured Credit Agreement and Guaranty Agreement, dated as of July 13, 2006 ("Secured Bridge Credit Facility"). On that same date, MetroPCS II and one of its wholly-owned subsidiaries, MetroPCS AWS, LLC, also entered into a related Security Agreement, and MetroPCS II, MetroPCS AWS, LLC, and MetroPCS II's immediate parent, MetroPCS III, Inc., also entered into a related Pledge Agreement. Under the Security Agreement, the lenders under the Secured Bridge Credit Facility hold a security interest in substantially all property, including capital stock, now owned or at any time acquired by the parties to that agreement, except for certain permitted exceptions or as
prohibited by law. Under the terms of the Pledge Agreement, the lenders under the Secured Bridge Credit Facility hold a security interest in the capital stock of the subsidiaries of the parties to that agreement.
The aggregate credit commitments available under the Secured Bridge Credit Facility total $1.25 billion. The Secured Bridge Credit Facility provides that all borrowings are senior secured obligations of MetroPCS II and all borrowings are guaranteed by certain subsidiaries of MetroPCS II. On July 14, 2006, the lenders funded $200.0 million under the Secured Bridge Credit Facility.
7. Asset Retirement Obligations:
The Company recognized noaccounts for asset retirement obligations as determined by SFAS No. 143, "Accounting for Asset Retirement Obligations," ("SFAS No. 143") and Financial Accounting Standards Board ("FASB") Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143," ("FIN No. 47"). SFAS No. 143 and FIN No. 47 address financial accounting and reporting for legal obligations associated with the retirement of tangible long-lived assets and the related asset retirement costs. SFAS No. 143 requires that companies recognize the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the estimated useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement.
The Company is subject to asset retirement obligations associated with its cell site operating leases, which are subject to the provisions of SFAS No. 143 and FIN No. 47. Cell site lease agreements may contain clauses requiring restoration of the leased site at the end of the lease term to its original condition, creating an asset retirement obligation. This liability is classified under other long-term liabilities. Landlords may choose not to exercise these rights as cell sites are considered useful improvements. In addition to cell site operating leases, the Company has leases related to switch site, retail, and administrative locations subject to the provisions of SFAS No. 143 and FIN No. 47.
The following table summarizes the Company's asset retirement obligation transactions (in thousands):
| | September 30, 2006 | December 31, 2005 | ||||
|---|---|---|---|---|---|---|
| Beginning asset retirement obligations | $ | 3,522 | $ | 1,893 | ||
| Liabilities incurred | 972 | 1,206 | ||||
| Accretion expense | 469 | 423 | ||||
| Ending asset retirement obligations | $ | 4,963 | $ | 3,522 | ||
8. Income Taxes:
The Company records income taxes pursuant to SFAS No. 109,"Accounting for Income Taxes," ("SFAS No. 109"). SFAS No. 109 uses an asset and liability approach to account for income taxes,
wherein deferred taxes are provided for book and tax basis differences for assets and liabilities. In the event differences between the financial reporting basis and the tax basis of the Company's assets and liabilities result in deferred tax assets, a valuation allowance is provided for a portion or all of the deferred tax assets when there is sufficient uncertainty regarding the Company's ability to recognize the benefits of the assets in future years.
Income before provision for income taxes for the nine months ended September 30, 2005 included a gain on the transactions. Also duringsale of a 10 MHz portion of the three months ended MarchCompany's 30 MHz PCS license in the San Francisco-Oakland-San Jose basic trading area in the amount of $228.2 million. At December 31, 2004,2005, the Company purchased additional long-term investmentshas approximately $228.7 million and $102.5 million of approximately $3.0 million. These
MetroPCS Communications, Inc.expire in 2013. The Company has been able to take advantage of accelerated depreciation and Subsidiarieslike kind exchange gain deferral available under federal tax law, which has created a significant deferred tax liability. The reversal of the timing differences which gave rise to the deferred tax liability, future taxable income and future tax planning strategies will allow the Company to benefit from the deferred tax assets. The Company has no valuation allowance as of September 30, 2006 and a valuation allowance of $0.2 million as of December 31, 2005, relating primarily to state net operating losses.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
investments consistsOn May 18, 2006, the Texas Governor signed into law a Texas margin tax ("H.B. No. 3") which restructures the state business tax by replacing the taxable capital and earned surplus components of federal home loan mortgage notes and bonds, are classified as held to maturity, stated at cost, which approximates market value, and mature between September 2005 and March 2007.
Note 7—Stockholders’ Equity
During the three months ended March 31, 2004, warrants to purchase 4,505,940 shares of Class C common stock and 75,000 shares of Class B common stock were exercised for $0.0004 per share. In addition, options to purchase 130,000 shares of Class B common stock and 50,532 shares of Class C common stock were exercised for proceeds of approximately $30,000 and $237,000, respectively.
Note 8—Net Income (Loss) Per Common Share
Basic earnings per share (“EPS”) are based uponcurrent franchise tax with a new "taxable margin" component. Because the weighted average number of common shares outstanding for the period. Diluted EPS is computed in the same manner as basic EPS after assuming the issuance of common stock for all potentially dilutive shares, whether exercisable or not.
The Series D Preferred Stock is a participating security, such that in the event a dividend is declared or paidtax base on the common stock,Texas margin tax is derived from an income-based measure, the Company must simultaneously declarebelieves the margin tax is an income tax and, paytherefore, the provisions of SFAS No. 109 regarding the recognition of deferred taxes apply to the new margin tax. In accordance with SFAS No. 109, the effect on deferred tax assets of a dividend on the Series D Preferred Stock as if the Series D Preferred Stock had been converted into common stock. The EITF’s Topic D-95, “Effect of Participating Convertible Securities on the Computation of Basic Earnings per Share,” requires that the Preferred Stockchange in tax law should be included in tax expense attributable to continuing operations in the period that includes the enactment date. Although the effective date of H.B. No. 3 is January 1, 2008, certain effects of the change should be reflected in the financial statements of the first interim or annual reporting period that includes May 18, 2006. The Company has recorded a deferred tax liability of $0.1 million as of September 30, 2006 relating to H.B. No. 3.
Internal Revenue Service Audit
The Internal Revenue Service (the "IRS") commenced an audit of MetroPCS' 2002 and 2003 federal income tax returns in March 2005. In October 2005 the IRS issued a 30-day letter which primarily related to depreciation expense claimed on the returns under audit. The Company filed an appeal of the auditor's assessments in November 2005. The IRS appeals officer made the Company an offer to settle all issues in July 2006. The expected net result of the settlement offer should create an increase to 2002 taxable income of $3.9 million and an increase to the 2003 net operating loss of $0.5 million. The increase to 2002 taxable income would be offset by net operating loss carryback from 2003. The Company owes additional interest on the 2002 deferred taxes of approximately $0.1 million, but no additional tax or penalty. In addition, the IRS Joint Committee concluded its review of the audit and issued a closing letter dated September 5, 2006.
9. Stockholders' Equity:
Common Stock Issued to Directors
Non-employee members of MetroPCS' Board of Directors receive compensation for serving on the Board of Directors, as defined in MetroPCS' Non-Employee Director Remuneration Plan. The annual retainer provided under the Non-Employee Director Remuneration Plan may be paid in cash, Common Stock, or a combination of cash and Common Stock. During the nine months ended September 30, 2006, non-employee members of the Board of Directors were issued 14,615 shares of Common Stock as payment of their annual retainer.
10. Net Income Per Common Share:
The following table sets forth the computation of basic earningsand diluted net income per common share for the periods indicated (in thousands, except share and per share if the effect of inclusion is dilutive. The Company’s accounting policy requires the use of the two-class method for its participating securities for EPS calculations. The Series D Preferred Stock is considered in the calculation of diluted earnings per share under the “if-converted” method, if dilutive.data):
| | Nine Months Ended September 30, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2006 | 2005 | ||||||||
| Basic EPS—Two Class Method: | ||||||||||
| Net income | $ | 70,625 | $ | 179,835 | ||||||
| Accrued dividends and accretion: | ||||||||||
| Series D Preferred Stock | (16,066 | ) | (16,066 | ) | ||||||
| Series E Preferred Stock | (2,498 | ) | (293 | ) | ||||||
| Net income applicable to common stock | $ | 52,061 | $ | 163,476 | ||||||
| Amount allocable to common shareholders | 57.0 | % | 53.7 | % | ||||||
| Rights to undistributed earnings | $ | 29,691 | $ | 87,858 | ||||||
Weighted average shares outstanding—basic | 51,890,687 | 43,517,417 | ||||||||
Net income per common share—basic | $ | 0.57 | $ | 2.02 | ||||||
Diluted EPS: | ||||||||||
| Rights to undistributed earnings | $ | 29,691 | $ | 87,858 | ||||||
Weighted average shares outstanding—basic | 51,890,687 | 43,517,417 | ||||||||
| Effect of dilutive securities: | ||||||||||
| Warrants | 49,086 | 769,325 | ||||||||
| Stock options | 1,219,016 | 6,130,895 | ||||||||
| Weighted average shares outstanding—diluted | 53,158,789 | 50,417,637 | ||||||||
Net income per common share—diluted | $ | 0.56 | $ | 1.74 | ||||||
Three Months Ended March 31, | ||||||||
| 2003 | 2004 | |||||||
Basic EPS – Two-Class Method: | ||||||||
Income before cumulative effect of change in accounting principle | $ | 83 | $ | 10,837 | ||||
Accrued dividends on Series D Preferred Stock | (4,268 | ) | (4,747 | ) | ||||
Income (loss) attributable to Common Stockholders before | ||||||||
cumulative effect of change in accounting principle | $ | (4,185 | ) | $ | 6,090 | |||
Amount allocable to Common Stockholders | 100 | % | 49 | % | ||||
Rights to undistributed earnings (losses) | $ | (4,185 | ) | $ | 2,984 | |||
Cumulative effect of change in accounting principle | $ | (74 | ) | $ | — | |||
Amount allocable to Common Stockholders | 100 | % | 49 | % | ||||
Rights to undistributed earnings (losses) | $ | (74 | ) | $ | — | |||
Net income (loss) attributable to Common Stockholders | $ | (4,259 | ) | $ | 6,090 | |||
Amount allocable to Common Stockholders | 100 | % | 49 | % | ||||
Rights to undistributed earnings (losses) | $ | (4,259 | ) | $ | 2,984 | |||
MetroPCS Communications, Inc.At September 30, 2006 and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Three Months Ended March 31, | |||||||
| 2003 | 2004 | ||||||
Weighted average common shares outstanding: | |||||||
Common Stock, Class A | 90 | 90 | |||||
Common Stock, Class B | 3,843,785 | 3,988,950 | |||||
Common Stock, Class C | 32,579,427 | 35,062,135 | |||||
| 36,423,302 | 39,051,175 | ||||||
Basic EPS – before cumulative effect of change in accounting principle | $ | (0.12 | ) | $ | 0.08 | ||
Cumulative effect of change in accounting principle | (0.00 | ) | — | ||||
Basic EPS | $ | (0.12 | ) | $ | 0.08 | ||
Diluted EPS: | |||||||
Income (loss) before cumulative effect of change in accounting principle allocable to Common Stockholders | $ | (4,185 | ) | $ | 2,984 | ||
Cumulative effect of change in accounting principle, allocable to Common Stockholders | (74 | ) | — | ||||
Net income (loss), allocable to Common Stockholders | $ | (4,259 | ) | $ | 2,984 | ||
Weighted average common shares outstanding: | |||||||
Common Stock, Class A | 90 | 90 | |||||
Common Stock, Class B | 3,843,785 | 3,988,950 | |||||
Common Stock, Class C | 32,579,427 | 35,062,l35 | |||||
Dilutive effect of warrants | — | 5,233,287 | |||||
Dilutive effect of stock options | — | 5,245,677 | |||||
Weighted average common stock and common stock equivalents outstanding | 36,423,302 | 49,530,139 | |||||
Diluted EPS – before cumulative effect of change in accounting principle | $ | (0.12 | ) | $ | 0.06 | ||
Cumulative effect of change in accounting principle | (0.00 | ) | — | ||||
Diluted EPS | $ | (0.12 | ) | $ | 0.06 | ||
All classes of the Company’s common stock share equally in the earnings and losses of the Company, and, accordingly, EPS is the same for each class of common stock.
At March 31, 2003 and 2004, 32.52005, 45.4 million and 41.543.1 million, respectively, of convertible shares of Series D Preferred Stock were excluded from the calculation of diluted EPSnet income per common share since the effect was anti-dilutive.
At March 31, 2003, 7.7September 30, 2006 and 2005, 1.9 million warrants and 4.20.2 million, options to purchase common stockrespectively, of convertible shares of Series E Preferred Stock were excluded from the calculation of diluted EPSnet income per common share since the effect was anti-dilutive.
MetroPCS Communications, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Pro forma net income per common share, presented below, gives effect to the conversion of all outstanding shares of Series D Preferred Stock and Series E Preferred Stock, as well as accrued, but unpaid dividends, as well as Class B common stock, in connection with the proposed initial public offering and the formation of our holding company, MetroPCS Communications, Inc. See Note 1.offering. As a result of the conversion of the Series D Preferred Stock and the Series E Preferred Stock, pro forma earningsnet income per common share is not calculated using the two-class method, as presented above.
| Three Months Ended March 31, 2004 | |||
Net income | $ | 10,837 | |
Basic Earnings Per Share—Pro Forma | $ | 0.14 | |
Diluted Earnings Per Share—Pro Forma | $ | 0.12 | |
Shares used in computing pro forma basic net income per share | 80,496,705 | ||
Shares used in computing pro forma diluted net income per share | 90,975,669 | ||
| | Nine Months Ended September 30, 2006 | ||
|---|---|---|---|
| Net income (in thousands) | $ | 70,625 | |
Basic net income per common share—Pro forma | $ | 0.71 | |
Diluted net income per common share—Pro forma | $ | 0.70 | |
Shares used in computing pro forma basic net income per common share | 99,140,030 | ||
| Shares used in computing pro forma diluted net income per common share | 100,408,133 | ||
Note 9—11. Commitments and ContingenciesContingencies:
Until April 2005, the Company may be required to share radio frequency spectrum with existing fixed microwave licensees operating on the same spectrum as the Company. To the extent that the Company’s PCS operations interfere with those of existing microwave licensees, the Company will be required to pay for the relocation of the existing microwave station paths to alternate spectrum locations or transmission technologies. The FCC adopted a transition plan, so that if the relocation of a microwave user benefits more than one PCS licensee, all benefiting PCS licensees are required to share the relocation costs. After the expiration of the FCC mandated transition and cost sharing plans in April 2005, any remaining microwave user operating in the PCS spectrum must relocate if it interferes with a PCS licensee’s operation, and it will be responsible for its own relocation costs. The Company does not believe the costs to relocate existing microwave station paths to alternate spectrum locations or transmission technologies will be material to the Company’s financial position or results of operations.
The Company entered into non-cancelable purchase agreements with a vendor for the acquisition of expansion carriers installed in base stations which are recorded in property and equipment upon shipment. Under these agreements, the Company agrees to pay for the base stations upon shipment, and the expansion carriers at the earlier of the date the carrier is turned on or twelve months from the shipment date of the base station for the first expansion carrier, and the earlier of the date the carrier is turned on or twenty-four months from the shipment date of the base station for the second expansion carrier. Outstanding obligations under these purchase agreements were $22.1 million and $21.7 million at December 31, 2003 and March 31, 2004, respectively. Of the these amounts $13.6 million and $12.8 million were included in accounts payable and accrued expenses at December 31, 2003 and March 31, 2004, respectively, and $8.5 million and $8.9 million, respectively, were included in other long-term liabilities.
Litigation
The Company is involved in various claims and legal actions arising in the ordinary course of business. The ultimate disposition of these matters is not expected to have a material adverse impact on the Company’sCompany's financial position, results of operationoperations or liquidity.
The Company is involved in various claims and legal actions in relation to claims of patent infringement. The ultimate disposition of these matters is not expected to have a material adverse impact on the Company's financial position, results of operations or liquidity.
Rescission Offer
Shares issued and options granted under the Company's 1995 Stock Option Plan and 2004 Equity Incentive Plan may not have been exempt from registration or qualification under federal securities laws and the securities laws of certain states. As a result, the Company intends to make a rescission offer to the holders of these shares and options. If this rescission offer is accepted, the Company could be required to make aggregate payments to the holders of these shares and options of up to $2.6 million, which includes statutory interest, based on shares and options outstanding as of September 30, 2006. Federal securities laws do not provide that a rescission offer will terminate a
purchaser's right to rescind a sale of stock that was not registered as required. If any or all of the offerees reject the rescission offer, the Company may continue to be liable for this amount under federal and state securities laws. As management believes there is only a remote possibility the rescission offer will be accepted by any of the Company's option holders and stockholders in an amount that would result in a material expenditure by the Company, no liability has been recorded. Management does not believe that this rescission offer will have a material effect on the Company's results of operations, cash flows or financial position.
| | Nine Months Ended September 30, | |||||
|---|---|---|---|---|---|---|
| | 2006 | 2005 | ||||
| | (in thousands) | |||||
| Cash paid for interest | $ | 34,225 | $ | 21,022 | ||
| Cash paid for income taxes | 525 | — | ||||
Non-cash investing activities:
Net changes in the Company's accrued purchases of property, plant and equipment were $34.8 million and $1.4 million for the nine months ended September 30, 2006 and 2005, respectively.
See Note 7 for non-cash increases in the Company's asset retirement obligations.
Non-cash financing activities:
MetroPCS accrued dividends of $15.7 million and $15.7 million related to the Series D Preferred Stock for the nine months ended September 30, 2006 and 2005, respectively.
MetroPCS accrued dividends of $2.2 million and $0.3 million related to the Series E Preferred Stock for the nine months ended September 30, 2006 and 2005, respectively.
13. Related-Party Transactions:
The Company had the following transactions with related parties:
| | Nine Months Ended September 30, | |||||
|---|---|---|---|---|---|---|
| | 2006 | 2005 | ||||
| | (in thousands) | |||||
| Professional services to a law firm, a partner of which was a director of the Company | $ | 44 | $ | 179 | ||
| Professional services to a law firm, a partner of which is related to an officer of the Company | 28 | 1,095 | ||||
14. Segment Information:
Operating segments are defined by SFAS No. 131, "Disclosure About Segments of an Enterprise and Related Information," ("SFAS No. 131"), as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company's chief operating decision maker is the Chairman of the Board and Chief Executive Officer.
As of September 30, 2006, the Company had eight operating segments based on geographic region within the United States: Atlanta, Dallas/Ft. Worth, Detroit, Miami, San Francisco, Sacramento, Tampa/Sarasota/Orlando and Los Angeles. Each of these operating segments provides wireless voice and data services and products to customers in its service areas or is currently constructing a network in order to provide these services. These services include unlimited local and long distance calling, voicemail, caller ID, call waiting, text messaging, picture and multimedia messaging, international long distance and text messaging, ringtones, games and content applications, unlimited directory assistance, ring back tones, nationwide roaming, mobile Internet browsing and other value-added services.
The Company aggregates its operating segments into two reportable segments: Core Markets and Expansion Markets.
The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies. General corporate overhead, which includes expenses such as corporate employee labor costs, rent and utilities, legal, accounting and auditing expenses, is allocated equally across all operating segments. Corporate marketing and advertising expenses are allocated equally to the operating segments, beginning in the period during which the Company launches service in that operating segment. Expenses associated with the Company's national data center are allocated based on the average number of customers in each operating segment. There are no transactions between reportable segments.
Interest expense, interest income, gain/loss on extinguishment of debt and income taxes are not allocated to the segments in the computation of segment operating profit for internal evaluation purposes.
| Nine Months Ended September 30, 2006 | Core Markets | Expansion Markets | Other | Total | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in thousands) | ||||||||||||
| Service revenues | $ | 831,053 | $ | 85,126 | $ | — | $ | 916,179 | |||||
| Equipment revenues | 149,200 | 28,392 | — | 177,592 | |||||||||
| Total revenues | 980,253 | 113,518 | — | 1,093,771 | |||||||||
| Cost of service(1) | 244,636 | 68,874 | — | 313,510 | |||||||||
| Cost of equipment | 261,258 | 69,640 | — | 330,898 | |||||||||
| Selling, general and administrative expenses(2) | 114,021 | 57,900 | — | 171,921 | |||||||||
| Adjusted EBITDA (deficit)(3) | 364,585 | (79,393 | ) | — | |||||||||
| Depreciation and amortization | 80,467 | 13,381 | 2,339 | 96,187 | |||||||||
| Stock-based compensation expense | 4,246 | 3,504 | — | 7,750 | |||||||||
| Income (loss) from operations | 269,735 | (96,904 | ) | (2,339 | ) | 170,492 | |||||||
| Interest expense | — | — | 67,408 | 67,408 | |||||||||
| Accretion of put option in majority-owned subsidiary | — | — | 564 | 564 | |||||||||
| Interest and other income | — | — | (15,106 | ) | (15,106 | ) | |||||||
| Loss on extinguishment of debt | — | — | (244 | ) | (244 | ) | |||||||
| Income (loss) before provision for income taxes | 269,735 | (96,904 | ) | (54,961 | ) | 117,870 | |||||||
| Capital expenditures | 187,922 | 256,531 | 9,411 | 453,864 | |||||||||
| Total assets | 958,792 | 963,847 | 703,535 | 2,626,174 | |||||||||
Nine Months Ended September 30, 2005 | Core Markets | Expansion Markets | Other | Total | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in thousands) | ||||||||||||
| Service revenues | $ | 631,208 | $ | 1 | $ | — | $ | 631,209 | |||||
| Equipment revenues | 118,973 | 17 | — | 118,990 | |||||||||
| Total revenues | 750,181 | 18 | — | 750,199 | |||||||||
| Cost of service | 197,425 | 4,515 | — | 201,940 | |||||||||
| Cost of equipment | 210,431 | 98 | — | 210,529 | |||||||||
| Selling, general and administrative expenses | 112,137 | 4,069 | — | 116,206 | |||||||||
| Adjusted EBITDA (deficit)(3) | 233,491 | (8,665 | ) | — | |||||||||
| Depreciation and amortization | 60,158 | 721 | 1,016 | 61,895 | |||||||||
| Stock-based compensation expense | 3,302 | — | — | 3,302 | |||||||||
| Income (loss) from operations | 388,572 | (9,635 | ) | (1,016 | ) | 377,921 | |||||||
| Interest expense | — | — | 40,867 | 40,867 | |||||||||
| Accretion of put option in majority-owned subsidiary | — | — | 187 | 187 | |||||||||
| Interest and other income | — | — | (4,876 | ) | (4,876 | ) | |||||||
| Loss on extinguishment of debt | — | — | 46,448 | 46,448 | |||||||||
| Income (loss) before provision for income taxes | 388,572 | (9,635 | ) | (83,642 | ) | 295,295 | |||||||
| Capital expenditures | 157,153 | 44,893 | 2,404 | 204,450 | |||||||||
| Total assets | 698,623 | 646,107 | 602,055 | 1,946,785 | |||||||||
15. Guarantor Subsidiaries:
In connection with Wireless' sale of $1.0 billion of 91/4% Senior Notes due 2014 (the "Notes") and the entry into a new senior secured credit facility, pursuant to which Wireless may borrow up to $1.7 billion (the "Senior Secured Credit Facility"), MetroPCS and all of MetroPCS' subsidiaries, other than Wireless and Royal Street (the "guarantor subsidiaries") provided guarantees on the Notes and Senior Secured Credit Facility. These guarantees are full and unconditional as well as joint and several. Certain provisions of the Senior Secured Credit Facility restrict the ability of the guarantor subsidiaries to transfer funds to Wireless. Royal Street and its subsidiaries (the "non-guarantor subsidiaries") are not guarantors of the Notes or the Senior Secured Credit Facility.
The following information presents condensed consolidating balance sheets as of September 30, 2006 and December 31, 2005, condensed consolidating statements of income for the nine months ended September 30, 2006 and 2005, and condensed consolidating statements of cash flows for the nine months ended September 30, 2006 and 2005 of the parent company, the issuer, the guarantor subsidiaries and the non-guarantor subsidiaries. Investments include investments in subsidiaries held by the parent company and have been presented using the equity method of accounting.
| | Consolidated Balance Sheet As of September 30, 2006 | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Parent | Issuer | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||||
| | (in thousands) | ||||||||||||||||||||
| CURRENT ASSETS: | |||||||||||||||||||||
| Cash and cash equivalents | $ | 7,338 | $ | 99,985 | $ | 260 | $ | 8,682 | $ | — | $ | 116,265 | |||||||||
| Short-term investments | 37,844 | 191,702 | — | — | — | 229,546 | |||||||||||||||
| Inventories, net | — | 33,804 | 5,844 | — | — | 39,648 | |||||||||||||||
| Accounts receivable, net | — | 26,493 | — | — | (2,987 | ) | 23,506 | ||||||||||||||
| Prepaid expenses | — | 4,751 | 20,861 | 242 | — | 25,854 | |||||||||||||||
| Deferred charges | — | 21,442 | — | — | — | 21,442 | |||||||||||||||
| Deferred tax asset | — | 10,365 | — | — | — | 10,365 | |||||||||||||||
| Other current assets | 77 | 5,201 | 17,513 | 79 | — | 22,870 | |||||||||||||||
| Total current assets | 45,259 | 393,743 | 44,478 | 9,003 | (2,987 | ) | 489,496 | ||||||||||||||
| Property and equipment, net | — | 17,324 | 1,141,145 | 49,513 | — | 1,207,982 | |||||||||||||||
| Restricted cash and investments | 834 | 5,279 | — | 50 | — | 6,163 | |||||||||||||||
| Long-term investments | — | 2,272 | — | — | — | 2,272 | |||||||||||||||
| Investment in subsidiaries | 319,565 | 875,666 | — | — | (1,195,231 | ) | — | ||||||||||||||
| PCS licenses | — | — | 387,876 | 293,599 | — | 681,475 | |||||||||||||||
| Microwave relocation costs | — | — | 9,187 | — | — | 9,187 | |||||||||||||||
| Long-term deposits | 200,000 | — | 134 | 31 | — | 200,165 | |||||||||||||||
| Long-term receivable from subsidiaries | — | 379,242 | — | — | (379,242 | ) | — | ||||||||||||||
| Other assets | 12,889 | 14,040 | 2,461 | 44 | — | 29,434 | |||||||||||||||
| Total assets | $ | 578,547 | $ | 1,687,566 | $ | 1,585,281 | $ | 352,240 | $ | (1,577,460 | ) | $ | 2,626,174 | ||||||||
CURRENT LIABILITIES: | |||||||||||||||||||||
| Accounts payable and accrued expenses | $ | 4,395 | $ | 116,655 | $ | 144,571 | $ | 19,155 | $ | (2,987 | ) | $ | 281,789 | ||||||||
| Current maturities of long-term debt | 200,000 | — | — | — | — | 200,000 | |||||||||||||||
| Deferred revenue | — | 15,172 | 63,428 | — | — | 78,600 | |||||||||||||||
| Advances to subsidiaries | (542,617 | ) | 118,302 | 424,315 | — | — | — | ||||||||||||||
| Other current liabilities | — | 25 | 2,964 | — | — | 2,989 | |||||||||||||||
| Total current liabilities | (338,222 | ) | 250,154 | 635,278 | 19,155 | (2,987 | ) | 563,378 | |||||||||||||
| Long-term debt, net | — | 902,594 | — | — | — | 902,594 | |||||||||||||||
| Long-term note to parent | — | — | — | 379,242 | (379,242 | ) | — | ||||||||||||||
| Deferred tax liabilities | 8 | 196,306 | — | — | — | 196,314 | |||||||||||||||
| Deferred rents | — | — | 19,972 | 132 | — | 20,104 | |||||||||||||||
| Redeemable minority interest | — | — | — | — | 3,823 | 3,823 | |||||||||||||||
| Other long-term liabilities | — | 18,947 | 5,020 | 56 | — | 24,023 | |||||||||||||||
| Total liabilities | (338,214 | ) | 1,368,001 | 660,270 | 398,585 | (378,406 | ) | 1,710,236 | |||||||||||||
| COMMITMENTS AND CONTINGENCIES (See Note 11) | |||||||||||||||||||||
| SERIES D PREFERRED STOCK | 437,955 | — | — | — | — | 437,955 | |||||||||||||||
| SERIES E PREFERRED STOCK | 50,294 | — | — | — | — | 50,294 | |||||||||||||||
| STOCKHOLDERS' EQUITY: | |||||||||||||||||||||
| Preferred stock | — | — | — | — | — | — | |||||||||||||||
| Common stock | 5 | — | — | — | — | 5 | |||||||||||||||
| Additional paid-in capital | 157,712 | — | — | 20,000 | (20,000 | ) | 157,712 | ||||||||||||||
| Retained earnings | 269,585 | 318,429 | 925,011 | (66,345 | ) | (1,177,918 | ) | 268,762 | |||||||||||||
| Accumulated other comprehensive income | 1,210 | 1,136 | — | — | (1,136 | ) | 1,210 | ||||||||||||||
| Total stockholders' equity | 428,512 | 319,565 | 925,011 | (46,345 | ) | (1,199,054 | ) | 427,689 | |||||||||||||
| Total liabilities and stockholders' equity | $ | 578,547 | $ | 1,687,566 | $ | 1,585,281 | $ | 352,240 | $ | (1,577,460 | ) | $ | 2,626,174 | ||||||||
| | Consolidated Balance Sheet As of December 31, 2005 | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Parent | Issuer | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
| | (in thousands) | |||||||||||||||||||||
| CURRENT ASSETS: | ||||||||||||||||||||||
| Cash and cash equivalents | $ | 10,624 | $ | 95,772 | $ | 219 | $ | 6,094 | $ | — | $ | 112,709 | ||||||||||
| Short-term investments | 24,223 | 366,199 | — | — | — | 390,422 | ||||||||||||||||
| Inventories, net | — | 34,045 | 5,386 | — | — | 39,431 | ||||||||||||||||
| Accounts receivable, net | — | 16,852 | — | — | (824 | ) | 16,028 | |||||||||||||||
| Prepaid expenses | — | — | 21,412 | 18 | — | 21,430 | ||||||||||||||||
| Deferred charges | — | 13,270 | — | — | — | 13,270 | ||||||||||||||||
| Deferred tax asset | — | 2,122 | — | — | — | 2,122 | ||||||||||||||||
| Other current assets | 208 | 2,364 | 14,118 | — | — | 16,690 | ||||||||||||||||
| Total current assets | 35,055 | 530,624 | 41,135 | 6,112 | (824 | ) | 612,102 | |||||||||||||||
| Property and equipment, net | — | — | 829,457 | 2,033 | — | 831,490 | ||||||||||||||||
| Restricted cash and investments | — | 2,917 | 3 | — | — | 2,920 | ||||||||||||||||
| Long-term investments | — | 16,385 | — | — | (11,333 | ) | 5,052 | |||||||||||||||
| Investment in subsidiaries | 243,930 | 709,704 | — | — | (953,634 | ) | — | |||||||||||||||
| PCS licenses | — | — | 387,700 | 293,599 | — | 681,299 | ||||||||||||||||
| Microwave relocation costs | — | — | 9,187 | — | — | 9,187 | ||||||||||||||||
| Long-term receivable from subsidiaries | — | 320,630 | — | — | (320,630 | ) | — | |||||||||||||||
| Other assets | — | 15,360 | 1,571 | — | — | 16,931 | ||||||||||||||||
| Total assets | $ | 278,985 | $ | 1,595,620 | $ | 1,269,053 | $ | 301,744 | $ | (1,286,421 | ) | $ | 2,158,981 | |||||||||
CURRENT LIABILITIES: | ||||||||||||||||||||||
| Accounts payable and accrued expenses | $ | 321 | $ | 58,104 | $ | 125,362 | $ | 2,590 | $ | (12,157 | ) | $ | 174,220 | |||||||||
| Current maturities of long-term debt | — | — | 2,690 | — | — | 2,690 | ||||||||||||||||
| Deferred revenue | — | 9,158 | 47,402 | — | — | 56,560 | ||||||||||||||||
| Advances to subsidiaries | (559,186 | ) | 218,278 | 340,908 | — | — | — | |||||||||||||||
| Other current liabilities | — | — | 2,147 | — | — | 2,147 | ||||||||||||||||
| Total current liabilities | (558,865 | ) | 285,540 | 518,509 | 2,590 | (12,157 | ) | 235,617 | ||||||||||||||
| Long-term debt, net | — | 902,864 | — | — | — | 902,864 | ||||||||||||||||
| Long-term note to parent | — | — | — | 320,630 | (320,630 | ) | — | |||||||||||||||
| Deferred tax liabilities | — | 146,053 | — | — | — | 146,053 | ||||||||||||||||
| Deferred rents | — | — | 14,739 | — | — | 14,739 | ||||||||||||||||
| Redeemable minority interest | — | — | — | — | 1,259 | 1,259 | ||||||||||||||||
| Other long-term liabilities | — | 17,233 | 3,625 | — | — | 20,858 | ||||||||||||||||
| Total liabilities | (558,865 | ) | 1,351,690 | 536,873 | 323,220 | (331,528 | ) | 1,321,390 | ||||||||||||||
| COMMITMENTS AND CONTINGENCIES (See Note 11) | ||||||||||||||||||||||
| SERIES D PREFERRED STOCK | 421,889 | — | — | — | — | 421,889 | ||||||||||||||||
| SERIES E PREFERRED STOCK | 47,796 | — | — | — | — | 47,796 | ||||||||||||||||
| STOCKHOLDERS' EQUITY: | ||||||||||||||||||||||
| Preferred stock | — | — | — | — | — | — | ||||||||||||||||
| Common stock | 5 | — | — | — | — | 5 | ||||||||||||||||
| Additional paid-in capital | 149,594 | — | — | 20,000 | (20,000 | ) | 149,594 | |||||||||||||||
| Subscriptions receivable | — | — | — | (13,333 | ) | 13,333 | — | |||||||||||||||
| Deferred compensation | (178 | ) | (178 | ) | (178 | ) | — | 356 | (178 | ) | ||||||||||||
| Retained earnings | 216,961 | 242,357 | 732,358 | (28,143 | ) | (946,831 | ) | 216,702 | ||||||||||||||
| Accumulated other comprehensive income | 1,783 | 1,751 | — | — | (1,751 | ) | 1,783 | |||||||||||||||
| Total stockholders' equity | 368,165 | 243,930 | 732,180 | (21,476 | ) | (954,893 | ) | 367,906 | ||||||||||||||
| Total liabilities and stockholders' equity | $ | 278,985 | $ | 1,595,620 | $ | 1,269,053 | $ | 301,744 | $ | (1,286,421 | ) | $ | 2,158,981 | |||||||||
| | Consolidated Statement of Income Nine Months Ended September 30, 2006 | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Parent | Issuer | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
| | (in thousands) | |||||||||||||||||||||
| REVENUES: | ||||||||||||||||||||||
| Service revenues | $ | — | $ | — | $ | 916,179 | $ | — | $ | — | $ | 916,179 | ||||||||||
| Equipment revenues | — | 9,300 | 168,292 | — | — | 177,592 | ||||||||||||||||
| Total revenues | — | 9,300 | 1,084,471 | — | — | 1,093,771 | ||||||||||||||||
| OPERATING EXPENSES: | ||||||||||||||||||||||
| Cost of service (excluding depreciation and amortization expense shown separately below) | — | — | 308,546 | 4,964 | — | 313,510 | ||||||||||||||||
| Cost of equipment | — | 9,022 | 321,876 | — | — | 330,898 | ||||||||||||||||
| Selling, general and administrative expenses (excluding depreciation and amortization expense shown separately below) | — | 278 | 160,850 | 10,793 | — | 171,921 | ||||||||||||||||
| Depreciation and amortization | — | — | 96,187 | — | — | 96,187 | ||||||||||||||||
| Loss on disposal of assets | — | — | 10,763 | — | — | 10,763 | ||||||||||||||||
| �� | Total operating expenses | — | 9,300 | 898,222 | 15,757 | — | 923,279 | |||||||||||||||
| Income from operations | — | — | 186,249 | (15,757 | ) | — | 170,492 | |||||||||||||||
| OTHER EXPENSE (INCOME): | ||||||||||||||||||||||
| Interest expense | 6,820 | 71,638 | (5,481 | ) | 22,997 | (28,566 | ) | 67,408 | ||||||||||||||
| Earnings from consolidated subsidiaries | (76,073 | ) | (154,450 | ) | — | — | 230,523 | — | ||||||||||||||
| Accretion of put option in majority-owned subsidiary | — | — | — | — | 564 | 564 | ||||||||||||||||
| Interest income | (1,936 | ) | (40,505 | ) | (678 | ) | (553 | ) | 28,566 | (15,106 | ) | |||||||||||
| Gain on extinguishment of debt | — | — | (244 | ) | — | — | (244 | ) | ||||||||||||||
| Total other expense | (71,189 | ) | (123,317 | ) | (6,403 | ) | 22,444 | 231,087 | 52,622 | |||||||||||||
| Income before provision for income taxes | 71,189 | 123,317 | 192,652 | (38,201 | ) | (231,087 | ) | 117,870 | ||||||||||||||
| Provision for income taxes | — | (47,245 | ) | — | — | — | (47,245 | ) | ||||||||||||||
| Net income (loss) | $ | 71,189 | $ | 76,072 | $ | 192,652 | $ | (38,201 | ) | $ | (231,087 | ) | $ | 70,625 | ||||||||
| | Consolidated Statement of Income Nine Months Ended September 30, 2005 | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Parent | Issuer | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
| | (in thousands) | |||||||||||||||||||||
| REVENUES: | ||||||||||||||||||||||
| Service revenues | $ | — | $ | — | $ | 631,209 | $ | — | $ | — | $ | 631,209 | ||||||||||
| Equipment revenues | — | 897 | 118,093 | — | — | 118,990 | ||||||||||||||||
| Total revenues | — | 897 | 749,302 | — | — | 750,199 | ||||||||||||||||
| OPERATING EXPENSES: | ||||||||||||||||||||||
| Cost of service (excluding depreciation and amortization expense shown separately below) | — | — | 201,940 | — | — | 201,940 | ||||||||||||||||
| Cost of equipment | — | 829 | 209,700 | — | — | 210,529 | ||||||||||||||||
| Selling, general and administrative expenses (excluding depreciation and amortization expense shown separately below) | 234 | 3,207 | 112,388 | 377 | — | 116,206 | ||||||||||||||||
| Depreciation and amortization | — | 120 | 61,775 | — | — | 61,895 | ||||||||||||||||
| Gain on disposal of assets | — | — | (218,292 | ) | — | — | (218,292 | ) | ||||||||||||||
| Total operating expenses | 234 | 4,156 | 367,511 | 377 | — | 372,278 | ||||||||||||||||
| Income from operations | (234 | ) | (3,259 | ) | 381,791 | (377 | ) | — | 377,921 | |||||||||||||
| OTHER EXPENSE (INCOME): | ||||||||||||||||||||||
| Interest expense | — | 40,537 | 331 | 17,905 | (17,906 | ) | 40,867 | |||||||||||||||
| Earnings from consolidated subsidiaries | (180,149 | ) | (361,389 | ) | — | — | 541,538 | — | ||||||||||||||
| Accretion of put option in majority-owned subsidiary | — | — | — | — | 187 | 187 | ||||||||||||||||
| Interest income | (107 | ) | (22,604 | ) | — | (71 | ) | 17,906 | (4,876 | ) | ||||||||||||
| Loss on extinguishment of debt | — | 44,589 | 1,859 | — | — | 46,448 | ||||||||||||||||
| Total other expense | (180,256 | ) | (298,867 | ) | 2,190 | 17,834 | 541,725 | 82,626 | ||||||||||||||
| Income before provision for income taxes | 180,022 | 295,608 | 379,601 | (18,211 | ) | (541,725 | ) | 295,295 | ||||||||||||||
| Provision for income taxes | — | (115,460 | ) | — | — | — | (115,460 | ) | ||||||||||||||
| Net income (loss) | $ | 180,022 | $ | 180,148 | $ | 379,601 | $ | (18,211 | ) | $ | (541,725 | ) | $ | 179,835 | ||||||||
| | Consolidated Statement of Cash Flows Nine Months Ended September 30, 2006 | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Parent | Issuer | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||
| | (in thousands) | |||||||||||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||||||||
| Net income (loss) | $ | 71,189 | $ | 76,072 | $ | 192,652 | $ | (38,201 | ) | $ | (231,087 | ) | $ | 70,625 | ||||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||||||||||||||
| Depreciation and amortization | — | — | 96,187 | — | — | 96,187 | ||||||||||||||
| Provision for uncollectible accounts receivable | — | 64 | — | — | — | 64 | ||||||||||||||
| Deferred rent expense | — | — | 5,233 | 132 | — | 5,365 | ||||||||||||||
| Cost of abandoned cell sites | — | — | 702 | 1,367 | — | 2,069 | ||||||||||||||
| Non-cash interest expense | 2,505 | 724 | 473 | 28,566 | (28,566 | ) | 3,702 | |||||||||||||
| Loss on disposal of assets | — | — | 10,763 | — | — | 10,763 | ||||||||||||||
| Gain on extinguishment of debt | — | — | (244 | ) | — | — | (244 | ) | ||||||||||||
| Gain on sale of investments | (611 | ) | (1,264 | ) | — | — | — | (1,875 | ) | |||||||||||
| Accretion of asset retirement obligation | — | — | 464 | 5 | — | 469 | ||||||||||||||
| Accretion of put option in majority-owned subsidiary | — | — | — | — | 564 | 564 | ||||||||||||||
| Deferred income taxes | (650 | ) | 42,442 | — | — | — | 41,792 | |||||||||||||
| Stock-based compensation expense | — | — | 7,750 | — | — | 7,750 | ||||||||||||||
| Changes in assets and liabilities | (47,568 | ) | (307,695 | ) | 98,019 | 17,567 | 287,134 | 47,457 | ||||||||||||
| Net cash provided by (used in) operating activities | 24,865 | (189,657 | ) | 411,999 | 9,436 | 28,045 | 284,688 | |||||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||||||
| Purchases of property and equipment | — | (2,700 | ) | (414,320 | ) | (36,844 | ) | — | (453,864 | ) | ||||||||||
| Change in prepaid purchases of property and equipment | — | — | 2,427 | — | — | 2,427 | ||||||||||||||
| Proceeds from sale of property and equipment | — | — | 2,548 | — | — | 2,548 | ||||||||||||||
| Purchase of investments | (280,971 | ) | (456,117 | ) | — | — | — | (737,088 | ) | |||||||||||
| Proceeds from sale of investments | 268,079 | 632,110 | — | — | — | 900,189 | ||||||||||||||
| Change in restricted cash and investments | (834 | ) | (2,416 | ) | 9 | (50 | ) | — | (3,291 | ) | ||||||||||
| Purchases of FCC licenses | — | — | (176 | ) | — | — | (176 | ) | ||||||||||||
| Deposit to FCC for licenses | (200,000 | ) | — | — | — | — | (200,000 | ) | ||||||||||||
| Net cash (used in) provided by investing activities | (213,726 | ) | 170,877 | (409,512 | ) | (36,894 | ) | — | (489,255 | ) | ||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||||||||
| Change in book overdraft | — | 22,993 | — | — | — | 22,993 | ||||||||||||||
| Proceeds from bridge credit agreements | 200,000 | — | — | — | — | 200,000 | ||||||||||||||
| Proceeds from long-term note to parent | — | — | — | 30,045 | (30,045 | ) | — | |||||||||||||
| Debt issuance costs | (15,313 | ) | — | — | — | — | (15,313 | ) | ||||||||||||
| Repayment of debt | — | — | (2,446 | ) | — | — | (2,446 | ) | ||||||||||||
| Proceeds from minority interest in majority-owned subsidiary | — | — | — | — | 2,000 | 2,000 | ||||||||||||||
| Proceeds from exercise of stock options and warrants | 889 | — | — | — | — | 889 | ||||||||||||||
| Net cash provided by (used in) financing activities | 185,576 | 22,993 | (2,446 | ) | 30,045 | (28,045 | ) | 208,123 | ||||||||||||
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | (3,285 | ) | 4,213 | 41 | 2,587 | — | 3,556 | |||||||||||||
| CASH AND CASH EQUIVALENTS, beginning of period | 10,623 | 95,772 | 219 | 6,095 | — | 112,709 | ||||||||||||||
| CASH AND CASH EQUIVALENTS, end of period | $ | 7,338 | $ | 99,985 | $ | 260 | $ | 8,682 | $ | — | $ | 116,265 | ||||||||
| | Consolidated Statement of Cash Flows Nine Months Ended September 30, 2005 | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Parent | Issuer | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||
| | (in thousands) | |||||||||||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||||||||
| Net income | $ | 180,022 | $ | 180,148 | $ | 379,601 | $ | (18,211 | ) | $ | (541,725 | ) | $ | 179,835 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||||||
| Depreciation and amortization | — | 120 | 61,775 | — | — | 61,895 | ||||||||||||||
| Provision for uncollectible accounts receivable | — | (38 | ) | — | — | — | (38 | ) | ||||||||||||
| Deferred rent expense | — | (71 | ) | 3,162 | — | — | 3,091 | |||||||||||||
| Cost of abandoned cell sites | — | — | 251 | — | — | 251 | ||||||||||||||
| Non-cash interest expense | (107 | ) | 3,271 | 603 | 17,905 | (17,906 | ) | 3,766 | ||||||||||||
| Gain on disposal of assets | — | — | (218,292 | ) | — | — | (218,292 | ) | ||||||||||||
| Loss on extinguishment of debt | — | 44,589 | 1,859 | — | — | 46,448 | ||||||||||||||
| Loss on sale of investments | — | 49 | — | — | — | 49 | ||||||||||||||
| Accretion of asset retirement obligation | — | 1 | 102 | — | — | 103 | ||||||||||||||
| Accretion of put option in majority-owned subsidiary | — | — | — | — | 187 | 187 | ||||||||||||||
| Deferred income taxes | — | 113,580 | — | — | — | 113,580 | ||||||||||||||
| Stock-based compensation expense | — | — | 3,302 | — | — | 3,302 | ||||||||||||||
| Changes in assets and liabilities | (177,242 | ) | (619,680 | ) | 14,965 | 86 | 834,709 | 52,838 | ||||||||||||
| Net cash provided by operating activities | 2,673 | (278,031 | ) | 247,328 | (220 | ) | 275,265 | 247,015 | ||||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||||||
| Purchases of property and equipment | — | — | (204,300 | ) | (150 | ) | — | (204,450 | ) | |||||||||||
| Change in prepaid purchases of property and equipment | — | — | (4,336 | ) | — | — | (4,336 | ) | ||||||||||||
| Proceeds from sale of property and equipment | — | — | 123 | — | — | 123 | ||||||||||||||
| Purchase of investments | — | (427,732 | ) | — | — | — | (427,732 | ) | ||||||||||||
| Proceeds from sale of investments | — | 171,725 | — | — | — | 171,725 | ||||||||||||||
| Change in restricted cash and investments | (50,000 | ) | (524 | ) | 14 | — | — | (50,510 | ) | |||||||||||
| Purchases of FCC licenses | — | — | (235,330 | ) | — | — | (235,330 | ) | ||||||||||||
| Deposit to FCC for licenses | — | — | — | (268,599 | ) | — | (268,599 | ) | ||||||||||||
| Proceeds from sale of FCC licenses | — | — | 230,000 | — | — | 230,000 | ||||||||||||||
| Net cash used in investing activities | (50,000 | ) | (256,531 | ) | (213,829 | ) | (268,749 | ) | — | (789,109 | ) | |||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||||||||
| Change in book overdraft | — | 11,105 | — | — | — | 11,105 | ||||||||||||||
| Proceeds from bridge credit agreements | — | 540,000 | — | — | — | 540,000 | ||||||||||||||
| Proceeds from Credit Agreements | — | 750,000 | — | — | — | 750,000 | ||||||||||||||
| Proceeds from long-term note to parent | — | — | — | 275,265 | (275,265 | ) | — | |||||||||||||
| Payment upon execution of cash flow hedging derivative | — | (1,899 | ) | — | — | — | (1,899 | ) | ||||||||||||
| Debt issuance costs | — | (28,801 | ) | — | — | — | (28,801 | ) | ||||||||||||
| Repayment of debt | — | (719,671 | ) | (33,409 | ) | — | — | (753,080 | ) | |||||||||||
| Proceeds from issuance of preferred stock, net of issuance costs | 46,688 | — | — | — | — | 46,688 | ||||||||||||||
| Proceeds from exercise of stock options and warrants | 764 | — | — | — | — | 764 | ||||||||||||||
| Net cash provided by (used in) financing activities | 47,452 | 550,734 | (33,409 | ) | 275,265 | (275,265 | ) | 564,777 | ||||||||||||
| INCREASE IN CASH AND CASH EQUIVALENTS | 125 | 16,172 | 90 | 6,296 | — | 22,683 | ||||||||||||||
| CASH AND CASH EQUIVALENTS, beginning of period | 1 | 22,349 | 127 | — | — | 22,477 | ||||||||||||||
| CASH AND CASH EQUIVALENTS, end of period | $ | 126 | $ | 38,521 | $ | 217 | $ | 6,296 | $ | — | $ | 45,160 | ||||||||
16. Recent Accounting Pronouncements:
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140" ("SFAS No. 155"). SFAS No. 155 permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133, establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and amends FASB Statement No. 140 to eliminate the prohibition on a qualifying special purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity's first fiscal year that begins after September 15, 2006. The adoption of this statement is not expected to have a material effect on the financial condition or results of operations of the Company.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial Assets—an amendment of FASB Statement No. 140" ("SFAS No. 156"). SFAS No. 156 amends SFAS No. 140 to require that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. SFAS No. 156 permits, but does not require, the subsequent measurement of separately recognized servicing assets and servicing liabilities at fair value. Under SFAS No. 156, an entity can elect subsequent fair value measurement to account for its separately recognized servicing assets and servicing liabilities. Adoption of SFAS No. 156 is required as of the beginning of the first fiscal year that begins after September 15, 2006. The adoption of this statement is not expected to have a material effect on the financial condition or results of operations of the Company.
In July 2006, the FASB issued Interpretation No. 48 "Accounting for Uncertainty in Income Taxes," ("FIN No. 48"), which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with SFAS No. 109. FIN No. 48 provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. The Company has not completed its evaluation of the effect of FIN No. 48.
In September 2006, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in the Current Year Financial Statements," ("SAB 108"), which addresses how the effects of prior year uncorrected misstatements should be considered when quantifying misstatements in current year financial statements. SAB 108 requires companies to quantify misstatements using a balance sheet and income statement approach and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors. When the effect of initial adoption is material, companies may record the effect as a cumulative effect adjustment to beginning of year retained earnings. SAB 108 is effective for annual financial statements covering the first fiscal year ending after November 15, 2006. The Company is required to adopt this interpretation by December 31, 2006. The adoption of this statement is not expected to have a material effect on the financial condition or results of operations of the Company.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," ("SFAS No. 157"), which defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosure about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company will be required to adopt SFAS No. 157 in the first quarter of fiscal year 2008. The Company has not completed its evaluation of the effect of SFAS No. 157.
17. Subsequent Events:
$1.25 Billion Exchangeable Senior Secured Credit Agreement
On October 3, 2006, the lenders funded an additional $80.0 million under the Secured Bridge Credit Facility. On October 18, 2006, the lenders funded the remaining $970.0 million available under the Secured Bridge Credit Facility.
On November 3, 2006, MetroPCS II repaid the aggregate outstanding principal balance under the Secured Bridge Credit Facility of $1.25 billion and accrued interest of $5.9 million. As a result, the Company recorded a loss on extinguishment of debt of approximately $7.0 million.
$250 Million Exchangeable Senior Unsecured Credit Agreement
In October 2006, MetroPCS IV, Inc. ("MetroPCS IV") entered into an additional exchangeable senior unsecured credit agreement ("Unsecured Bridge Credit Facility"). The aggregate credit commitments available under the Unsecured Bridge Credit Facility totaled $250.0 million. On October 18, 2006, the lenders funded the $250.0 million available under the Unsecured Bridge Credit Facility.
On November 3, 2006, MetroPCS IV repaid the aggregate outstanding principal balance under the Unsecured Bridge Credit Facility of $250.0 million and accrued interest of $1.2 million. As a result, the Company recorded a loss on extinguishment of debt of approximately $2.4 million.
Auction 66
On October 18, 2006, the Company paid the FCC the remaining $1.2 billion for the purchase of the Auction 66 licenses on which the Company had been announced as the high bidder. On November 29, 2006, the FCC awarded the Auction 66 licenses to the Company.
Orlando Market Launch
The Company launched service in the Orlando metropolitan area and certain portions of Northern Florida on November 1, 2006.
$1.0 Billion 91/4% Senior Notes
On November 3, 2006, Wireless completed the sale of the 91/4% Senior Notes. The 91/4% Senior Notes are unsecured obligations and are guaranteed by MetroPCS, MetroPCS, Inc., and all of Wireless' direct and indirect wholly-owned subsidiaries, but are not guaranteed by Royal Street or its subsidiaries. Interest is payable on the 91/4% Senior Notes on May 1 and November 1 of each year, beginning with
May 1, 2007. Wireless may, at its option, redeem some or all of the 91/4% Senior Notes at any time on or after November 1, 2010 for the redemption prices set forth in the indenture governing the 91/4% Senior Notes. In addition, Wireless may also redeem up to 35% of the aggregate principal amount of the 91/4% Senior Notes with the net cash proceeds of certain sales of equity securities. The net proceeds of the offering were approximately $979.5 million after underwriter fees and other debt issuance costs of $20.5 million. The net proceeds from the sale of the 91/4% Senior Notes, together with the borrowings under the Senior Secured Credit Facility, were used to repay amounts owed under the Credit Agreements, Secured Bridge Credit Facility and Unsecured Bridge Credit Facility, and to pay related premiums, fees and expenses, as well as for general corporate purposes.
Senior Secured Credit Facility
On November 3, 2006, Wireless entered into the Senior Secured Credit Facility, pursuant to which Wireless may borrow up to $1.7 billion. The Senior Secured Credit Facility consists of a $1.6 billion term loan facility and a $100.0 million revolving credit facility. The term loan facility will be repayable in quarterly installments in annual aggregate amounts equal to 1% of the initial aggregate principal amount of $1.6 billion. The term loan facility will mature in seven years and the revolving credit facility will mature in five years. On November 3, 2006, Wireless borrowed $1.6 billion under the Senior Secured Credit Facility. The net proceeds from the borrowings under the Senior Secured Credit Facility, together with the sale of the 91/4% Senior Notes, were used to repay amounts owed under the Credit Agreements, Secured Bridge Credit Facility and Unsecured Bridge Credit Facility, and to pay related premiums, fees and expenses, as well as for general corporate purposes
The facilities under the Senior Secured Credit Agreement are guaranteed by MetroPCS, MetroPCS, Inc. and each of Wireless' direct and indirect present and future wholly-owned domestic subsidiaries. The facilities are not guaranteed by Royal Street or its subsidiaries, but Wireless pledged the promissory note that Royal Street had given it in connection with amounts borrowed by Royal Street from Wireless and the limited liability company member interest held in Royal Street. The Senior Secured Credit Facility contains customary events of default, including cross defaults. The obligations are also secured by the capital stock of Wireless as well as substantially all of Wireless' present and future assets and each of its direct and indirect present and future wholly-owned subsidiaries (except as prohibited by law and certain permitted exceptions).
First and Second Lien Credit Agreements
On November 3, 2006, Wireless paid the lenders under the Credit Agreements $931.5 million, which included a premium of approximately $31.5 million, plus accrued interest of $8.6 million to extinguish the aggregate outstanding principal balance under the First and Second Lien Credit Agreements. As a result, Wireless recorded a loss on extinguishment of debt in the amount of approximately $42.7 million.
Restructuring
On November 3, 2006, in connection with the closing of the sale of the Notes, the entry into the Senior Secured Credit Facility and the repayment of all amounts outstanding under the First and Second Lien Credit Agreements, the Secured Bridge Credit Facility and the Unsecured Bridge Credit
Facility, the Company consummated a restructuring transaction. As a result of the restructuring transaction, Wireless became a wholly-owned direct subsidiary of MetroPCS, Inc. (formerly MetroPCS V, Inc.), which is a wholly-owned direct subsidiary of MetroPCS. MetroPCS and MetroPCS, Inc., along with each of Wireless' wholly-owned subsidiaries (which excludes Royal Street), guarantee the 91/4% Senior Notes and the obligations under the Senior Secured Credit Facility. MetroPCS, Inc. pledged the capital stock of Wireless as security for the obligations under the Senior Secured Credit Facility. All of the Company's PCS licenses and AWS licenses and the Company's interest in Royal Street are held by Wireless and its wholly-owned subsidiaries.
Interest Rate Protection Agreement
On November 21, 2006, Wireless entered into a three-year interest rate protection agreement to manage the Company's interest rate risk exposure and fulfill a requirement of Wireless' Senior Secured Credit Facility. The agreement is effective on February 1, 2007, covers a notional amount of $1.0 billion and effectively converts this portion of Wireless' variable rate debt to fixed rate debt at an annual rate of 7.419%, leaving $600.0 million in variable rate debt. The interest rate protection agreement expires on February 1, 2010.
Termination of Interest Rate Cap Agreement
On November 21, 2006, Wireless terminated its interest rate cap agreement that was required by Wireless' Credit Agreements. Wireless received approximately $4.3 million upon termination of the agreement. The proceeds from the termination of the agreement approximated its carrying value.
Shares
MetroPCS Communications, Inc. and Subsidiaries
Common Stock
PROSPECTUS
, 2007
Joint Book-Running Managers
Bear, Stearns & Co. Inc.
Banc of America Securities LLC
Merrill Lynch & Co.
Morgan Stanley
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Note 10—Supplemental Cash Flow Information
The change in accounts payable and accrued expenses for purchases of property and equipment was $4.8 million and $24.1 million for the three month periods ended March 31, 2003 and 2004, respectively.
Note 11—Subsequent Event
On April 15, 2004, upon receiving FCC approval, the Company finalized an agreement to purchase four additional PCS licenses to expand the Sacramento market for approximately $10.9 million.
On July 8, 2004, we entered into an agreement to acquire two 10MHz licenses to expand our Florida market for $43.5 million.
On May 18, 2004, the Company effected a conversion of Class B common stock to Class C common stock, on a share-for-share basis. Concurrent with the conversion, the Company increased the authorized number of Class C common stock shares to 300,000,000 and decreased the authorized number of Class B common stock shares to zero. In addition, on July 23, 2004, the Company effected a 1-for-2 reverse stock split of the Company’s Class A and Class C common stock. All share, per share and conversion amounts relating to the Class A and Class C common stock, stock options, and stock purchase warrants included in the accompanying consolidated financial statements have been retroactively adjusted to reflect the reverse stock split.
Until , 20042007 (25 days after the datecommencement of this prospectus)offering), all dealers effectingthat effect transactions of thein our common stock, offered hereby, whether or not participating in this distribution,offering, may be required to deliver a prospectus. This is in addition to the obligations of dealersdealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
24,000,000 Shares
MetroPCS Communications, Inc.
Common Stock
PROSPECTUS
Merrill Lynch & Co.
UBS Investment Bank
Joint Lead Manager
JPMorgan
Thomas Weisel Partners LLC
, 2004
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table setsSet forth below are the various expenses other(other than the underwriting discounts and commissions, payable by uscommissions) expected to be incurred in connection with the saleissuance and distribution of the securities being registered. All amounts shown are estimates, exceptregistered hereby. With the exception of the Securities and Exchange Commission registration fee, the National Association of Securities Dealers, Inc. filing fee and the Nasdaq National Market application fee.listing fee, the amounts set forth below are estimates.
| SEC registration fee | $ | 1,125,000 | |
| National Association of Securities Dealers, Inc. filing fee | $ | 75,500 | |
| listing fee | * | ||
| Legal fees and expenses | * | ||
| Blue sky fees and expenses | * | ||
| Accounting fees and expenses | * | ||
| Printing expenses | * | ||
| Transfer agent fees and expenses | * | ||
| Miscellaneous | * | ||
Total | $ | ||
SEC registration fee | $ | 76,933 | |
NASD filing fee | 30,500 | ||
Nasdaq National Market application fee | 145,000 | ||
Accounting fees and expenses | 800,000 | ||
Legal fees and expenses | 900,000 | ||
Printing and engraving expenses | 225,000 | ||
Transfer agent fees and expenses | 2,500 | ||
Miscellaneous fees and expenses | 320,067 | ||
Total | $ | 2,500,000 | |
Item 14. Indemnification of DirectorsOfficers and Officers.Directors.
Section 145 of the Delaware General Corporation Law permits a Delaware corporation to indemnify any person who was or is a party or witness or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reasonsreason of the fact that he or she is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or enterprise. Depending on the character of the proceeding, a corporation may indemnify against expenses, costs and fees (including attorneys’attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with such action, suit or proceeding if the person indemnified acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. If the person indemnified is not wholly successful in such action, suit or proceeding, but is successful, on the merits or otherwise, in one or more but less than all claims, issues or matters in such proceeding, he or she may be indemnified against expenses actually and reasonably incurred in connection with each successfully resolved claim, issue or matter. In the case of an action or suit by or in the right of the corporation, no indemnification may be made in respect to any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery of the State of Delaware, or the court in which such action or suit was brought, shall determine that, despite the adjudication of liability, such person is fairly and reasonably entitled to indemnity for such expenses which the court shall deem proper. Section 145 provides that, to the extent a director, officer, employee or agent of a corporation has been successful in the defense of any action, suit or proceeding referred to above or in the defense of any claim, issue or manner therein, he or she shall be indemnified against expenses (including attorneys’attorneys' fees) actually and reasonably incurred by him or her in connection therewith.
II-1
Our certificate of incorporation provides that we shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding whether civil, criminal, administrative or investigative (other than an action by or in the right of our company) by reason of the fact that he or she is or was our director, officer, employee or agent, or is or was serving at our request as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise,
II-1
against expenses (including attorneys’attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with such action, suit or proceeding if he or she acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, our best interests, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful.
Our certificate of incorporation also provides that we shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of our company to procure a judgment in its favor by reason of the fact that he or she is or was our director, officer, employee or agent, or is or was serving at our request as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys’attorneys' fees) actually and reasonably incurred by him or her in connection with the defense or settlement of such action or suit if he or she acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, our best interests and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to our company unless and only to the extent that the Court of Chancery of the State of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper.
Expenses (including attorneys’attorneys' fees) incurred by an officer or director in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by us in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by us as authorized in our certificate of incorporation. Such expenses (including attorneys’attorneys' fees) incurred by other employees and agents may be so paid upon such terms and conditions, if any, as our board of directors deems appropriate.
The indemnification and advancement of expenses described above:
Our certificate of incorporation also provides that our directors shall not be personally liable to us or our stockholders for monetary damages for breach of fiduciary duty as a director, except for liability:
II-2
Any repeal or modification of the provisions of our certificate of incorporation governing indemnification or limitation of liability shall be prospective only, and shall not adversely affect:
II-2
We have also entered into separate indemnification agreements with each of our directors and executive officers under which we have agreed to indemnify, and to advance expenses to, each director and executive officer to the fullest extent permitted by applicable law with respect to liabilities they may incur in their capacities as directors and officers.
We maintain director and officer liability insurance to insure each person who was, is, or will be our director or officer against specified losses and wrongful acts of such director or officer in his or her capacity as such, including breaches of duty and trust, neglect, error and misstatement. In accordance with the director and officer insurance policy, each insured party will be entitled to receive advances of specified defense costs.
ItemITEM 15. Recent Sales of Unregistered Securities.Securities
Set forth below is a listing of all sales of securities by MetroPCS Communications and its wholly-owned and majority-owned subsidiaries during the past three years not registered under the Securities Act:
Series E Convertible Preferred Stock. In September 2005, MetroPCS Communications, Inc. issued 500,000 shares of Series E Preferred Stock, par value $0.0001 per share, of MetroPCS Communications, Inc., to Madison Dearborn Capital Partners and TA Associates for an aggregate sales price of $50,000,000 pursuant to a Stock Purchase Agreement, dated August 30, 2005, or Series E Purchase Agreement. This transaction was undertaken in reliance upon the accredited investors' exemption from registration afforded by Rule 506 of Regulation D, or Rule 506, of the Securities Act. We believe that other exemptions may also exist for this transaction. Each share of Series E Preferred Stock accrues dividends from the date of issuance at a rate of 6% per year on the liquidation value of $100 per share. Each share of Series E Preferred Stock will be converted into common stock upon (i) the completion of a Qualifying Public Offering, (as defined in the Second Amended and Restated Stockholders Agreement), (ii) the common stock trading (or, in the case of a merger or consolidation of MetroPCS Communications, Inc. with another company, other than as a sale or change of control of MetroPCS Communications, Inc., the shares received in such merger or consolidation having traded immediately prior to such merger or consolidation) on a national securities exchange for a period of 30 consecutive trading days above a price implying a market valuation of the Series D Preferred Stock over twice the Series D Preferred Stock initial purchase price, or (iii) the date specified by the holders of 662/3% of the Series E Preferred Stock. The Series E Preferred Stock is convertible into common stock at $27.00 per share, which per share amount is subject to adjustment in accordance with the terms of the Second Amended and Restated Certificate of Incorporation of MetroPCS Communications, Inc. If not previously converted, MetroPCS Communications, Inc. is required to redeem all outstanding shares of Series E Preferred Stock on July 17, 2015, at the liquidation preference of $100 per share plus accrued but unpaid dividends.
Series D Convertible Preferred Stock. Between July 2000 and January 2004, MetroPCS, Inc. issued 3,500,993 shares of Series D Preferred Stock, par value $0.0001 per share, of MetroPCS, Inc., or MetroPCS Series D Preferred Stock, in multiple closings, for an aggregate sales price of $350,099,300.
II-3
These transactions relied on the accredited investors' exemption from registration requirements afforded by Rule 506. We believe that other exemptions may also exist for these transactions. In 2004, each share of MetroPCS Series D Preferred Stock was converted into Series D Preferred Stock. The conversion was exempt from registration under Section 4(2) of the Securities Act as a transaction by an issuer not involving any public offering. Each share of Series D Preferred Stock will be converted into common stock upon (i) the completion of a Qualifying Public Offering, (as defined in the Second Amended and Restated Stockholders Agreement), (ii) the common stock trades (or, in the case of a merger or consolidation of MetroPCS Communications, Inc. with another company, other than as a sale or change of control of MetroPCS Communications, Inc., the shares received in such merger or consolidation having traded immediately prior to such merger or consolidation) on a national securities exchange for a period of 30 consecutive trading days above a price that implies a market valuation of the Series D Preferred Stock in excess of twice the initial purchase price of the Series D Preferred Stock, or (iii) the date specified by the holders of 662/3% of the Series D Preferred Stock. The Series D Preferred Stock is convertible into common stock at $9.40 per share, which per share amount is subject to adjustment under the terms of the Second Amended and Restated Certificate of Incorporation of MetroPCS Communications, Inc. If not previously converted, MetroPCS Communications, Inc. is required to redeem all outstanding shares of Series D Preferred Stock on July 17, 2015, at the liquidation preference of $100 per share plus accrued but unpaid dividends.
MetroPCS Restructuring Transaction.In connection with its formation, MetroPCS Communications, Inc. issued 100 shares of its common stock to MetroPCS, Inc. on March 10, 2004 for an aggregate purchase price of $1,000. The transaction was deemed to be exempt from Securities Act registration under Section 4(2) of the Securities Act in reliance on Section 4(2) thereof as a transaction by an issuer not involving any public offering. In April 2004, each share of Class B non-voting common stock in MetroPCS, Inc. acquired(and each option and warrant related thereto) was converted into one share of Class C common stock (as an option or warrant to purchase Class C common stock) in MetroPCS, Inc. Concurrent with the securities for investment onlyconversion, MetroPCS, Inc. increased the number of Class C common stock shares to 300,000,000 and not with a viewdecreased the authorized number of Class B common stock shares to or for salezero. In April 2004, in connection with the abandoned initial public offering, MetroPCS, Inc., MetroPCS Communications, Inc., and MPCS Holdco Merger Sub, Inc., a wholly-owned subsidiary of MetroPCS Communications, Inc. ("Merger Sub"), entered into an Agreement and Plan of Merger in which Merger Sub and MetroPCS, Inc. agreed to merge with MetroPCS, Inc. as the surviving corporation. On the effective date of the merger, which was in July 2004, each share of Class A common stock of MetroPCS, Inc., par value $0.0001 per share, was automatically converted into one share of Class A common stock, par value $0.0001 per share, of MetroPCS Communications, Inc.; each share of Class C common stock of MetroPCS, Inc., par value $0.0001 per share, (including each share of Class B non-voting common stock of MetroPCS, Inc. that was converted into Class C common stock of MetroPCS, Inc. in April 2004) was automatically converted into one share of Class C common stock, par value $0.0001 per share, of MetroPCS Communications, Inc.; and each share of Series D Preferred Stock of MetroPCS, Inc. was automatically converted into one share of Series D Preferred Stock of MetroPCS Communications, Inc. In addition, each option to purchase MetroPCS, Inc. Class C common stock (including each option to purchase MetroPCS, Inc. Class B non-voting common stock that was converted into an option to purchase MetroPCS, Inc. Class C common stock in April 2004) was assumed by MetroPCS Communications, Inc., and if and when exercisable, shall be exercised for common stock, par value $0.0001 per share, in MetroPCS Communications, Inc. Further, each warrant outstanding to obtain Class C common stock (including each warrant to purchase MetroPCS, Inc. Class B non-voting common stock that was converted into a warrant to purchase MetroPCS, Inc. Class C common stock) in MetroPCS, Inc. was assumed by MetroPCS Communications, Inc. and, if and when exercisable, shall be exercised for the same class of common stock in MetroPCS Communications, Inc. On July 23, 2004 the Class C common stock of MetroPCS Communications, Inc.
II-4
was renamed Common Stock. These transactions are exempt from registration under Section 4(2) of the Securities Act as a transaction by an issuer not involving any distribution thereof. Appropriate legends were affixedpublic offering.
Exchange of Common Stock. When MetroPCS, Inc. emerged from bankruptcy in October 1998, its Fifth Amended and Restated Certificate of Incorporation included a provision prohibiting the issuance of non-voting equity securities pursuant to our bankruptcy plan of reorganization and Section 1123(a)(6) of the Bankruptcy Code. After its emergence from bankruptcy, MetroPCS, Inc. issued shares of Class B non-voting common stock, which had been authorized by its certificate of incorporation in effect prior to the bankruptcy filing. The Class B common stock had no voting rights except as required by law. MetroPCS, Inc.'s board of directors has indicated that the continued inclusion of the prohibition on the issuance of non-voting equity securities after MetroPCS, Inc.'s emergence from bankruptcy was a mistake, and on August 30, 2005, MetroPCS, Inc. filed a certificate of correction to remove this prohibition. In addition, MetroPCS, Inc.'s Seventh Amended and Restated Certificate of Incorporation retroactively rescinds any prohibition on the issuance of the non-voting equity securities and ratifies the authorization and issuance of the Class B common stock by MetroPCS, Inc.
In April 2004, all of the shares of Class B non-voting common stock, par value $0.0001 per share, certificateof MetroPCS, Inc., or Class B Common Stock, converted into shares of Class C Common Stock of MetroPCS, Inc. In order to resolve any uncertainty regarding the validity of the common stock ultimately received in the conversion of Class B Common Stock, MetroPCS Communications, Inc. entered into an exchange agreement with Madison Dearborn Capital Partners and TA Associates in August 2005 to exchange all the common stock, which had been issued in such transaction. MetroPCS, Inc. had adequate access, through its relationshipconnection with the registrant,conversion of Class B Common Stock, that Madison Dearborn Capital Partners and TA Associates acquired as a result of their recent offer to information aboutpurchase, along with all claims relating to the registrant.
possible invalidity of the issuance of the Class B Common Stock for an equivalent number of shares of MetroPCS Communications, Inc. common stock. In addition, in December 2005, we initiated an offer to exchange any remaining MetroPCS Communications, Inc. common stock ultimately received in connection with the conversion of Class B Common Stock, along with any claims relating to the possible invalidity of the issuance of the Class B Common Stock, for an equivalent number of shares of MetroPCS Communications, Inc. common stock. As a result, all shares of MetroPCS Communications, Inc. common stock which were ultimately received in connection with the conversion of Class B Common Stock, along with all claims relating to the possible invalidity of the issuance of the Class B Common Stock, have been exchanged for new shares of MetroPCS Communications, Inc. common stock. The transaction is exempt from Securities Act registration under Section 4(2) of the Securities Act as a transaction by an issuer not involving any public offering.
Equity Incentive Plans. Since January 1, 2004 through September 30, 2006, our employees have purchased 7,871,258 shares of MetroPCS Communications, Inc. common stock through the exercise of outstanding options under the 1995 Plan for an aggregate sales price of approximately $9.8 million. Since January 1, 2004 through September 30, 2006, our employees have purchased 2,532 shares of MetroPCS Communications, Inc. common stock through the exercise of outstanding options under our 2004 Equity Incentive Compensation Plan, as amended, or the 2004 Plan, for an aggregate sales price of approximately $0.1 million. These transactions were undertaken in reliance upon exemptions from Securities Act registration requirements afforded by Rule 701, Rule 506 and Section 4(2) of the Securities Act, except that we have determined that the issuance of options to purchase 655,055 shares of MetroPCS Communications, Inc. common stock under the 1995 Plan and 2004 Plan since January 1, 2004 may not have been exempt from registration or qualification requirements under federal or state securities laws. Consequently, certain of these options and shares of MetroPCS Communications, Inc. common stock may have been issued in violation of federal or state securities laws and may be subject to rescission. We intend to make a rescission offer as soon as practicable after the effective date of this offering to holders of any outstanding options and shares subject to rescission. If the rescission offer is
II-5
accepted by all offerees, we could be required to make an aggregate payment of up to approximately $2.6 million.
Director Remuneration Plan. Non-employee members of our board of directors are eligible to participate in our non-employee director remuneration plan under which such directors may receive compensation for serving on the board of directors. This compensation includes annual retainers, board meeting fees, committee paid event fees, initial stock grants and annual stock grants. Non-employee directors are eligible to receive an initial grant of 40,000 options to purchase MetroPCS Communications, Inc. common stock plus an additional 10,000 or 3,000 options to purchase MetroPCS Communications, Inc. common stock if the member serves as the chairman of the audit committee or any of the other committees, respectively. Non-employee directors are also eligible to receive an annual grant of 10,000 options to purchase MetroPCS Communications, Inc. common stock plus an additional 5,000 or 2,000 options to purchase MetroPCS Communications, Inc. common stock if the member serves as the chairman of the audit committee or the other committees, respectively. In addition, non-employee directors may elect to receive their annual retainer in the form of MetroPCS Communications, Inc. common stock. If such election is made, the non-employee director is eligible to receive the number of shares of MetroPCS Communications, Inc. common stock that is equal to (a) the portion of the annual retainer received in MetroPCS Communications, Inc. common stock divided by the fair market value of the MetroPCS Communications, Inc. common stock at the time the annual retainer is paid (b) times three. Since the inception of the plan, non-employee directors have been granted 325,365 options to purchase MetroPCS Communications, Inc. common stock and 4,660 of those options have been exercised. Shares of MetroPCS Communications, Inc. common stock granted under the non-employee director remuneration plan were granted in reliance upon Rule 506 of the Securities Act and options were granted in reliance upon Rule 701 and/or Rule 506 of the Securities Act. We believe other exemptions may also be available.
II-6
ItemITEM 16. Exhibits and Financial Statement Schedules.Schedules
(a) Exhibits. The following exhibits are filed as part of this registration statement:
| Exhibit No. | Description | |||||
|---|---|---|---|---|---|---|
| 1.1** | Form of Underwriting Agreement. | |||||
2.1(a)* | Agreement and Plan of Merger, dated as of April 6, 2004, by and among MetroPCS Communications, Inc., MPCS Holdco Merger Sub, Inc. and MetroPCS, Inc. | |||||
2.1(b)* | Agreement and Plan of Merger, dated as of November 3, 2006, by and among MetroPCS Wireless, Inc., MetroPCS IV, Inc., MetroPCS III, Inc., MetroPCS II, Inc. and MetroPCS, Inc. | |||||
3.1** | Form of Third Amended and Restated Certificate of Incorporation of MetroPCS Communications, Inc. to be filed upon the closing of this offering. | |||||
3.2** | Form of Third Amended and Restated Bylaws of MetroPCS Communications, Inc. to be effective upon the closing of this offering. | |||||
4.1** | Form of Certificate of MetroPCS Communications, Inc. Common Stock. | |||||
5.1** | Opinion of | |||||
10.1(a)* | MetroPCS Communications, Inc. 2004 Equity Incentive Compensation Plan. | |||||
10.1(b)* | First Amendment to the | |||||
10.1(c)* | Second Amendment to the MetroPCS Communications, Inc. 2004 Equity Incentive Compensation Plan, effective December 6, 2006. | |||||
10.1(d)* | Second Amended and Restated 1995 Stock Option Plan of MetroPCS, Inc. | |||||
10.1(e)* | Amendment to the Second Amended and Restated 1995 Stock Option Plan of MetroPCS, Inc. | |||||
10.1(f)* | Second Amendment to the Second Amended and Restated 1995 Stock Option Plan of MetroPCS, Inc. | |||||
10.2** | Form of Registration Rights Agreement | |||||
10.3** | Employment Agreement, dated as of | |||||
10.4** | ||||||
II-3
| ||
| ||
| Form of Officer and Director Indemnification Agreement. | ||
10.5(a)** | General Purchase Agreement, effective as of June 6, 2005, by and between MetroPCS Wireless and Lucent Technologies Inc. | |
10.5(b)** | Amendment No. 1 to the General Purchase Agreement, effective as of September 30, 2005, by and between MetroPCS Wireless and Lucent Technologies Inc. | |
10.5(c)** | Amendment No. 2 to the General Purchase Agreement, effective as of November 10, 2005, by and between MetroPCS Wireless and Lucent Technologies Inc. | |
10.6** | Amended and Restated Services Agreement, executed on December 15, 2005 as of November 24, 2004, by and between Royal Street and MetroPCS Wireless, Inc., including all amendments and waivers thereto. | |
II-7
10.7** | Second Amended and Restated | |
| ||
10.8** | Amended and Restated Pledge Agreement, executed on December 15, 2005 as of December 22, 2004, by and between Royal Street and MetroPCS Wireless, Inc., including all amendments and waivers thereto. | |
10.9** | Amended and Restated Security Agreement, executed on December 15, 2005 as of December 22, 2004, by and between Royal Street and MetroPCS Wireless, Inc., including all amendments and waivers thereto. | |
10.10** | Amended and Restated Limited Liability Company Agreement of Royal Street, executed on December 15, 2005 as of November 24, 2004 by and between C9 Wireless, LLC, GWI PCS1, Inc., and MetroPCS Wireless, Inc., including all amendments and waivers thereto. | |
10.11** | Master Equipment and Facilities Lease Agreement, executed as of May 17, 2006, by and between Royal Street and MetroPCS Wireless, Inc., including all amendments and waivers thereto. | |
10.12** | Credit Agreement, dated as of November 3, 2006, among MetroPCS Wireless, Inc., the several banks and other financial institutions or entities from time to time parties thereto, Bear, Stearns & Co. Inc., as sole lead arranger and joint book runner, Bear Stearns Corporate Lending Inc., as syndication agent, Merrill Lynch, Pierce, Fenner & Smith Incorporated, as joint book runner, Banc of America Securities LLC, as joint book runner, Bear Stearns Corporate Lending Inc., as administrative agent, and Bank of America, N.A., as issuing lender. | |
10.13** | Indenture, dated as of November 3, 2006, among MetroPCS Wireless, Inc., the Guarantors as defined therein and The Bank of New York, as trustee. | |
16.1* | Letter regarding change in certifying accountant. | |
21.1* | Subsidiaries of Registrant. | |
23.1* | Consent of PricewaterhouseCoopers | |
23.2* | Consent of Deloitte & Touche LLP | |
23.3** | Consent of | |
24.1* | ||
Power of Attorney, | ||
(b)
Financial statement schedules are omitted because they are not required or the required information is shown in our consolidated financial statements or the notes thereto.
Report of Independent Registered Public Accounting Firm on Financial Statement Schedule
Consolidated Valuation and Qualifying Accounts
II-4
ItemITEM 17. Undertakings.Undertakings
(a) The undersigned registrant hereby undertakes to provide to the underwriterunderwriters at the closing specified in the underwriting agreements,agreement certificates in such denominations and registered in such names as required by the underwriterunderwriters to permit prompt delivery to each purchaser.
II-8
(b) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrants haveregistrant has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by one or more of the registrantsregistrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, eachthe registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
II-9
II-5
Pursuant to the requirements of the Securities Act of 1933, the registrantRegistrant has duly caused this amendmentregistration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the cityCity of Dallas, State of Texas, on this26th day of July, 2004.January 3, 2007.
|
| |||
METROPCS COMMUNICATIONS, INC. | ||||
By: | /s/ ROGER D. LINQUIST Roger D. Linquist
| |||
Pursuant to requirements of the Securities Act, this amendment has been signed on July 26, 2004 by the following persons in the capacities indicated.
|
| |||||||
|
| |||||||
|
| |||||||
|
| |||||||
|
| |||||||
| ||||||||
II-10
|
II-6
Report of Independent Registered Public Accounting Firm on
Financial Statement SchedulePOWER OF ATTORNEY
ToKNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby severally constitutes and appoints Roger D. Linquist his true and lawful attorney-in-fact and agent, each with the Boardpower of Directors of MetroPCS Communications, Inc.:
Our audits of the consolidated financial statements referredsubstitution and resubstitution, for him in any and all capacities, to in our report dated February 25, 2004, except assign any and all amendments to Note 18 which is as of July 23, 2004, appearing in this Registration Statement on Form S-1 (and any additional registration statement related thereto permitted by Rule 462(b) promulgated under the Securities Act of MetroPCS Communications, Inc. also included an audit1933 (and all further amendments, including post-effective amendments thereto)), and to file the same, with accompanying exhibits and other related documents, with the Securities and Exchange Commission, and ratify and confirm all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue of said appointment.
Pursuant to the requirements of the consolidated financialSecurities Exchange Act of 1934, this registration statement schedulehas been signed below by the following persons on behalf of MetroPCS Communications, Inc. includedthe registrant and in this Form S-1. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction withcapacities and on the related consolidated financial statements.
PricewaterhouseCoopers LLP
Dallas, Texas
February 25, 2004
SCHEDULE II
MetroPCS Communications, Inc. and Subsidiaries
Consolidated Valuation and Qualifying Accounts
For the Period December 31, 2000 through 2003
(in thousands)
Classification | Balance at Beginning of Period | Additions Charged to Costs and Expenses | Additions Charged to Other Accounts | Deductions | Balance At End of Period | ||||||
December 31, 2001 | |||||||||||
Allowance for doubtful accounts | — | — | — | — | — | ||||||
Deferred tax valuation | 15,921 | 27,288 | — | — | 43,209 | ||||||
December 31, 2002 | |||||||||||
Allowance for doubtful accounts | — | 383 | — | — | 383 | ||||||
Deferred tax valuation | 43,209 | — | — | (43,209 | )(1) | — | |||||
December 31, 2003 | |||||||||||
Allowance for doubtful accounts | 383 | 991 | — | (289 | ) | 1,085 | |||||
Deferred tax valuation | — | — | — | — | — |
EXHIBIT INDEX
dates indicated.
Roger D. Linquist President and Chief Executive Officer and Chairman of the Board (Principal Executive Officer) | /s/ J. BRAXTON CARTER J. Braxton Carter Senior Vice President and Chief Financial Officer (Principal Financial Officer) | ||
/s/ CHRISTINE B. KORNEGAY Christine B. Kornegay Vice President, Controller and Chief Accounting Officer (Principal Accounting Officer) | /s/ ARTHUR C. PATTERSON Arthur C. Patterson Director | ||
/s/ WALKER C. SIMMONS Walker C. Simmons Director | /s/ JOHN SCULLEY John Sculley Director | ||
/s/ JAMES F. WADE James F. Wade Director | /s/ W. MICHAEL BARNES W. Michael Barnes Director | ||
/s/ C. KEVIN LANDRY C. Kevin Landry Director | /s/ JAMES N. PERRY, JR. James N. Perry, Jr. Director |
II-11
| Exhibit No. | Description | ||
|---|---|---|---|
| 1.1** | Form of Underwriting Agreement. | ||
2.1(a)* | Agreement and Plan of Merger, dated as of April 6, 2004, by and among MetroPCS Communications, Inc., MPCS Holdco Merger Sub, Inc. and MetroPCS, Inc. | ||
2.1(b)* | Agreement and Plan of Merger, dated as of November 3, 2006, by and among MetroPCS Wireless, Inc., MetroPCS IV, Inc., MetroPCS III, Inc., MetroPCS II, Inc. and MetroPCS, Inc. | ||
3.1** | Form of Third Amended and Restated Certificate of Incorporation of MetroPCS Communications, Inc. to be filed upon the closing of this offering. | ||
3.2** | Form of Third Amended and Restated Bylaws of MetroPCS Communications, Inc. to be effective upon the closing of this offering. | ||
4.1** | Form of Certificate of MetroPCS Communications, Inc. Common Stock. | ||
5.1** | Opinion of | ||
10.1(a)* | MetroPCS Communications, Inc. 2004 Equity Incentive Compensation Plan. | ||
10.1(b)* | First Amendment to the | ||
10.1(c)* | Second Amendment to the MetroPCS Communications, Inc. 2004 Equity Incentive Compensation Plan, effective December 6, 2006. | ||
10.1(d)* | Second Amended and Restated 1995 Stock Option Plan of MetroPCS, Inc. | ||
10.1(e)* | Amendment to the Second Amended and Restated 1995 Stock Option Plan of MetroPCS, Inc. | ||
10.1(f)* | Second Amendment to the Second Amended and Restated 1995 Stock Option Plan of MetroPCS, Inc. | ||
10.2** | Form of Registration Rights Agreement | ||
10.3** | Employment Agreement, dated as of | ||
10.4** | |||
| |||
| |||
| Form of Officer and Director Indemnification Agreement. | ||
10.5(a)** | General Purchase Agreement, effective as of June 6, 2005, by and between MetroPCS Wireless and Lucent Technologies Inc. | |
10.5(b)** | Amendment No. 1 to the General Purchase Agreement, effective as of September 30, 2005, by and between MetroPCS Wireless and Lucent Technologies Inc. | |
10.5(c)** | Amendment No. 2 to the General Purchase Agreement, effective as of November 10, 2005, by and between MetroPCS Wireless and Lucent Technologies Inc. | |
10.6** | Amended and Restated Services Agreement, executed on December 15, 2005 as of November 24, 2004, by and between Royal Street and MetroPCS Wireless, Inc., including all amendments and waivers thereto. | |
10.7** | Second Amended and Restated | |
10.8** | Amended and Restated Pledge Agreement, executed on December 15, 2005 as of December 22, 2004, by and between Royal Street and MetroPCS Wireless, Inc., including all amendments and waivers thereto. | |
10.9** | Amended and Restated Security Agreement, executed on December 15, 2005 as of December 22, 2004, by and between Royal Street and MetroPCS Wireless, Inc., including all amendments and waivers thereto. | |
10.10** | Amended and Restated Limited Liability Company Agreement of Royal Street, executed on December 15, 2005 as of November 24, 2004 by and between C9 Wireless, LLC, GWI PCS1, Inc., and MetroPCS Wireless, Inc., including all amendments and waivers thereto. | |
10.11** | Master Equipment and Facilities Lease Agreement, executed as of May 17, 2006, by and between Royal Street and MetroPCS Wireless, Inc., including all amendments and waivers thereto. | |
10.12** | Credit Agreement, dated as of November 3, 2006, among MetroPCS Wireless, Inc., the several banks and other financial institutions or entities from time to time parties thereto, Bear, Stearns & Co. Inc., as sole lead arranger and joint book runner, Bear Stearns Corporate Lending Inc., as syndication agent, Merrill Lynch, Pierce, Fenner & Smith Incorporated, as joint book runner, Banc of America Securities LLC, as joint book runner, Bear Stearns Corporate Lending Inc., as administrative agent, and Bank of America, N.A., as issuing lender. | |
10.13** | Indenture, dated as of November 3, 2006, among MetroPCS Wireless, Inc., the Guarantors as defined therein and The Bank of New York, as trustee. | |
16.1* | Letter regarding change in certifying accountant. | |
21.1* | Subsidiaries of Registrant. | |
23.1* | Consent of PricewaterhouseCoopers | |
23.2* | Consent of Deloitte & Touche LLP | |
23.3** | Consent of | |
24.1* | ||
Power of Attorney, | ||