e10vk
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2008
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 1-33409
MetroPCS Communications, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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20-0836269
(I.R.S. Employer
Identification No.) |
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2250 Lakeside Boulevard |
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Richardson, Texas
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75082 |
(Address of principal executive offices)
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(Zip code) |
Registrants telephone number, including area code: (214) 570-5800
Securities registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.0001 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of the registrants knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer or a smaller reporting company.
See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer þ |
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Accelerated filer o |
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Non-accelerated filer o
(Do not check if a smaller reporting company) |
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Smaller reporting company o |
Indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
As of June 30, 2008, the aggregate market value of the registrants voting and non-voting
common stock held by non-affiliates of the registrant was approximately $3,994,225,877, based on
the closing price of MetroPCS Communications, Inc. common stock on the New York Stock Exchange on
June 30, 2008, of $17.71 per share.
350,999,607 shares of MetroPCS Communications, Inc. common stock were outstanding as of
January 30, 2009.
Documents incorporated
by reference: Portions of the definitive Proxy Statement relating to the
2009 Annual Meeting of Stockholders are incorporated by reference into Part III of this
report.
MetroPCS Communications, Inc.
Index to Form 10-K
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4 |
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4 |
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27 |
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48 |
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48 |
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49 |
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49 |
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51 |
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52 |
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85 |
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85 |
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85 |
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85 |
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86 |
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86 |
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86 |
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86 |
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86 |
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86 |
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86 |
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87 |
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87 |
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-i-
CAUTIONARY STATEMENT
REGARDING FORWARD-LOOKING STATEMENTS
Any statements made in this annual report that are not statements of historical fact,
including statements about our beliefs and expectations, are forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and
Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and should be
evaluated as such. Forward-looking statements include information concerning any possible or
assumed future financial condition and results of operations, including statements that may relate
to our plans, objectives, strategies, goals, future events, future revenues or performance, future
penetration rates, planned market launches, capital expenditures, financing needs, outcomes of
litigation and other information that is not historical information. Forward-looking statements
often include words such as anticipate, expect, suggests, plan, believe, intend,
estimates, targets, projects, would, could, should, may, will, continue,
forecast, and other similar expressions. Forward-looking statements are contained throughout this
annual report, including the Business, Regulation, Risk Factors, and Managements Discussion
and Analysis of Financial Condition and Results of Operations.
We base the forward-looking statements or projections made in this report 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 and at such times. As you read
and consider this annual report, 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 of these factors are beyond our control and 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:
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the highly competitive nature of our industry; |
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the rapid technological changes in our industry; |
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an economic slowdown or recession in the United States; |
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the state of the capital markets and the United States economy; |
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our exposure to counterparty risk in our financial agreements; |
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our ability to maintain adequate customer care and manage our churn rate; |
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our ability to sustain the growth rates we have experienced to date; |
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our ability to manage our rapid growth, train additional personnel and improve our
financial and disclosure controls and procedures; |
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our ability to secure the necessary spectrum and network infrastructure equipment; |
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our ability to adequately enforce or protect our intellectual property rights or defend
against suits filed by others; |
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governmental regulation of our services and the costs of compliance and our failure to
comply with such regulations; |
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our capital structure, including our indebtedness amounts; |
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changes in consumer preferences or demand for our products; |
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our inability to attract and retain key members of management; and |
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other factors described in this annual report under Risk Factors. |
3
These forward-looking statements and projections speak only as to the date made and are
subject to and involve risks, uncertainties and assumptions, many of which are beyond our control
or ability to predict and you should not place undue reliance on these forward-looking statements
and projections. The results presented for any period, including the year ended December 31, 2008,
may not be reflective of results for any subsequent period. 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 required by law.
MARKET AND OTHER DATA
Market data and other statistical information used throughout this report are based on
independent industry publications, government publications, reports by market research firms and
other published independent sources. Some data is also based on our good faith estimates, which we
derive from our review of internal surveys and independent sources, including information provided
to us by the U.S. Census Bureau. Although we believe these sources are reliable, we have not
independently verified the information. By including such market data and information, we do not
guarantee its accuracy or undertake a duty to provide such data in the future or to update such
data when such data is updated.
This report contains
trademarks, service marks and trade names of companies and organizations
other than us. MetroPCS® and other trademarks are registered trademarks of MetroPCS Wireless,
Inc., a wholly-owned subsidiary, and certain of our other subsidiaries.
In this annual report on Form 10-K, 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.
PART I
Item 1. Business
General
We are a wireless communications provider that offers wireless broadband mobile services under
the MetroPCS® brand in selected major metropolitan areas in the United States over our
own licensed networks or networks of entities in which we hold a substantial non-controlling
ownership interest. We provide a wide array of wireless communications services to our subscribers
on a no long-term contract, paid-in-advance, flat-rate, unlimited usage basis. As of December 31,
2008, we had approximately 5.4 million subscribers in eight states. We are the sixth largest
facilities-based provider of wireless services in the United States measured by the number of
subscribers served.
MetroPCS Communications, Inc., or MetroPCS, was incorporated in 2004 by MetroPCS, Inc. in the
state of Delaware and MetroPCS maintains its corporate headquarters in Richardson, Texas. In July
2004, as a result of a merger between a wholly-owned subsidiary of MetroPCS and MetroPCS, Inc.,
with MetroPCS, Inc. being the surviving corporation, MetroPCS, Inc. and all of its subsidiaries
became wholly-owned subsidiaries of MetroPCS. In April 2007, MetroPCS consummated an initial
public offering of its common stock, par value $0.001 per share, and became listed for trading on
The New York Stock Exchange under the symbol PCS.
Our web site address is www.metropcs.com. Information contained on or accessible from our web
site is not incorporated by reference into this annual report on Form 10-K and should not be
considered part of
4
this report or any other filing we make with the Securities and Exchange Commission, or the
SEC. We file with, or furnish to, the SEC, all our periodic filings and reports, including an
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any
amendments thereto, as well as other information. All of our filings with the SEC are available
free of charge through the Investor Relations page of our web site as soon as practicable after
providing such information to the SEC. Copies of any of our filings may also be requested, without
charge, by sending a written request to Investor Relations, MetroPCS Communications, Inc., 2250
Lakeside Blvd., Richardson, Texas 75082.
Business Overview
We currently provide our wide array of wireless broadband mobile services primarily in
selected major metropolitan areas in the United States, including the Atlanta, Boston, Dallas/Ft.
Worth, Detroit, Las Vegas, Los Angeles, Miami, New York, Orlando/Jacksonville, Philadelphia,
Sacramento, San Francisco, and Tampa/Sarasota metropolitan areas. As of December 31, 2008, we
hold, or have access to, wireless spectrum covering a total population of approximately 150 million
people and 9 of the top 12 and 14 of the top 25 most populous metropolitan areas in the United
States. We provide our services using code division multiple access, or CDMA, networks, using
1xRTT technology.
In September 2008, we entered into a national roaming agreement and an agreement to exchange
wireless spectrum with Leap Wireless International, Inc., or Leap, and at the same time we settled
all outstanding litigation between the parties. The nationwide roaming agreement, which has an
initial term of 10 years, covers our, Royal Street Communications, LLC, or Royal Street
Communications, and Leaps existing and future markets. Additionally, we and Leap entered into a
spectrum exchange agreement covering licenses in certain markets, with Leap acquiring from us 10
MHz of spectrum in San Diego, Fresno, Seattle and certain other Washington and Oregon markets, and
our acquiring from Leap an additional 10 MHz of spectrum in Dallas-Ft. Worth, Shreveport-Bossier
City, Lakeland-Winter Haven, Florida and certain other North Texas markets, with consummation
subject to customary closing conditions.
Competitive Strengths
We believe our business model has the following competitive strengths that distinguish us from
our principal wireless competitors:
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Our Fixed Price Unlimited Service Plans. We offer our services on a no long-term
contract, paid-in-advance, flat-rate, unlimited usage basis. We believe we offer a
compelling value proposition to our customers through our service offerings that provide
unlimited usage from within a local calling area for a lower fixed price than any of our
primary competitors, which differentiates our offerings from those of the national
wireless broadband mobile carriers. Our average per minute costs to our customers for
our service plans are significantly lower than the average per minute costs of other
traditional wireless broadband mobile carriers. We believe our low average cost per
minute positions us very well for the growing trend of wireline displacement. |
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Our Densely Populated Markets. The aggregate population density of the metropolitan
areas we currently serve and plan to serve is substantially higher than the national
average. We believe the high relative population density of the metropolitan areas we
serve or plan to serve results in increased efficiencies in network deployment,
operations and product distribution. |
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Our Cost Leadership Position. We believe we have the lowest costs of any of the
providers of wireless broadband mobile services in the United States, which allows us to
offer our services |
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on a flat-rate basis at affordable prices while maintaining cash profits per subscriber
as a percentage of revenues per subscriber that we believe are among the highest in the
wireless broadband mobile services industry. |
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Our Spectrum Portfolio. As of December 31, 2008, we hold or have access to wireless
spectrum covering a population of approximately 150 million in the United States and
covering 9 of the top 12 and 14 of the top 25 most populous metropolitan areas in the
United States. |
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Our Advanced CDMA Network. We deploy a CDMA network that is designed to provide the
capacity necessary to satisfy the usage requirements of our customers. We believe CDMA
technology provides us with substantially more voice and data capacity per MHz of
spectrum than other commonly deployed wireless broadband mobile technologies. |
Business Strategy
We believe the following components of our business strategy provide a foundation for our
continued growth:
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Target Underserved Customer Segments in our Markets. We target a mass market which
we believe is largely underserved by traditional wireless broadband mobile carriers.
Our recent customer surveys indicate that over 85% of our customers use our service as
their primary phone service and that over 50% of our customers no longer have
traditional landline phone service, which we believe is evidence that our services are
gaining acceptance as a substitute for landline service. |
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Offer Affordable, Paid-In-Advance, Fixed Price, Unlimited Service Plans With No
Long-Term Service Contract Requirement. We plan to continue to focus on increasing the
value provided to our subscribers by offering affordable, paid-in-advance, fixed price,
unlimited service plans with no long-term service contract and plan to continue to focus
on increasing the value provided to our subscribers. |
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Remain One of the Lowest Cost Wireless Service Providers in the United States. We
plan to continue to focus on controlling our costs allowing us to remain one of the
lowest cost providers of wireless broadband services in the United States. |
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Expand into Attractive Markets. We plan to continue to focus on acquiring or gaining
access to spectrum in metropolitan areas which have high relative population density and
customer characteristics similar to our existing metropolitan areas. We may in the
future pursue means, other than purchasing spectrum, to acquire or gain access to new
metropolitan areas. See Competition. |
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Effectively Compete in our Markets. We continue to make significant capital
improvements to our network to be able to offer our subscribers competitive and
technologically advanced services, including enhanced data services, location based
services and digital technology as it becomes increasingly available. |
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Products and Services
Our service, branded under the MetroPCS name, allows customers to place unlimited local
calls from within our service area, and to receive unlimited calls from any area while in our local
service areas, under simple and affordable flat monthly rate service plans starting at $30 per
month. For an additional $5 to $20 per month, our customers may select alternative service plans
that offer additional features on an unlimited basis, such as unlimited long distance calls from
within our local service calling area to any telephone number in the continental United States and
roaming while in the service area of certain other wireless broadband mobile carriers. For
additional usage fees we also provide certain other value-added services, such as international
long distance and international text messaging. All our service plans are paid-in-advance and do
not require a long-term service contract. We provide the following products and services:
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Voice Services. Our voice services allow customers to place voice calls to, and
receive calls from, any telephone in the world, including local, domestic long distance,
and international calls. Our services also allow customers to receive and make calls
while they are located in geographic areas served by certain other wireless broadband
mobile carriers through roaming arrangements with such carriers. |
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Data Services. Our data services include services provided through the Binary
Runtime Environment for Wireless, or BREW, platform, such as ringtones, ring back tones,
games and content applications; text messaging services (domestic and international);
multimedia messaging services; mobile Internet browsing; mobile instant messaging;
location based services; social networking services; and push e-mail. |
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Custom Calling Features. We offer custom calling features, including caller ID, call
waiting, three-way calling and voicemail. |
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Advanced Handsets. We sell a variety of handsets manufactured by nationally
recognized handset manufacturers for use on our network, including models that have
cameras, can browse the Internet, play music and have other features facilitating
digital data. |
Service Areas
Our strategy has been to offer our services in major metropolitan markets and surrounding
areas. We commenced providing commercial service in the first quarter of 2002. We launched service
in our current major metropolitan areas as follows:
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Miami, Atlanta and Sacramento in the first quarter of 2002 |
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San Francisco in September 2002 |
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Tampa/Sarasota in October 2005 |
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Dallas/Ft. Worth in March 2006 |
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Detroit in April 2006 |
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Orlando and portions of northern Florida in November 2006 |
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Los Angeles in September 2007 |
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Las Vegas in March 2008 |
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Philadelphia in July 2008 |
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New York and Boston in February 2009 |
We provide service in Los Angeles, California and certain portions of Northern Florida, including
Orlando, through a wholesale arrangement with Royal Street Communications, a company in which we
hold an 85% non-controlling interest. For a discussion of Royal Street Communications, and its
wholly owned subsidiaries, or collectively with Royal Street Communications, Royal Street, please
see Royal Street.
7
The table below provides an overview of our currently licensed metropolitan areas including
the Federal Communications Commission, or FCC, licensed geographic area, the amount of broadband
wireless spectrum held, and whether we hold the FCC license ourselves or provide or will provide
our services in that metropolitan area through our agreements with Royal Street, which holds the
license.
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Metropolitan Area |
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Licensed Area |
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MHz |
Core Markets: |
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Georgia: |
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Atlanta, GA |
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BTA024 |
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20 |
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Gainesville, GA |
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BTA160 |
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30 |
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Athens, GA |
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BTA022 |
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20 |
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Albany, GA |
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BEA037 |
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10 |
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Augusta-Aiken, GA-SC |
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BEA027 |
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10 |
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Macon, GA |
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BEA038 |
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10 |
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Georgia 1- Whitfield |
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CMA371 |
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20 |
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Georgia 2 Dawson |
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CMA372 |
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20 |
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Georgia 3 Chattooga |
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CMA373 |
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20 |
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Georgia 4 Jasper |
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CMA374 |
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20 |
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Georgia 13 Early(12) |
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CMA383 |
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20 |
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South Florida: |
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Miami-Fort Lauderdale, FL |
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BTA293 |
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30 |
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West Palm Beach, FL |
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BTA469 |
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30 |
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Fort Myers, FL |
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BTA151 |
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30 |
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BEA032(11) |
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10 |
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Fort Pierce-Vero Beach, FL |
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BTA152 |
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30 |
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Naples, FL |
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BTA313 |
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30 |
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Florida 1 Collier(11) |
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CMA360 |
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20 |
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Florida 2 Glades(11) |
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CMA361 |
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20 |
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Florida 11 Monroe(11) |
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CMA370 |
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20 |
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Northern California: |
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San Fran.-Oak.-S.J., CA |
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BTA404(5) |
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30 |
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Sacramento, CA |
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BTA389(5) |
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40 |
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Stockton, CA |
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BTA434(5) |
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40 |
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Modesto, CA |
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BTA303(5) |
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25 |
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Salinas-Monterey, CA |
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BTA397(5) |
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40 |
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Redding, CA |
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BTA371(5) |
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40 |
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Merced, CA |
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BTA291(5) |
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25 |
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Chico-Oroville, CA |
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BTA079(5) |
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40 |
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Eureka, CA |
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BTA134(5) |
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25 |
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Yuba City-Marysville, CA |
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BTA485(5) |
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40 |
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California 5 San Luis Obispo(11) |
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CMA340 |
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20 |
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California 9 Mendocino(11) |
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CMA344 |
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20 |
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Expansion Markets: |
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Central and Northern Florida: |
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Tampa-St. Petersburg, FL |
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BTA440 |
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10 |
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Sarasota-Bradenton, FL |
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BTA408 |
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10 |
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BEA033 |
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10 |
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Daytona Beach, FL |
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BTA107 |
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20 |
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Ocala, FL |
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BTA326 |
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10 |
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CMA245 |
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20 |
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Jacksonville, FL(2) |
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BTA212 |
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20 |
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Metropolitan Area |
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Licensed Area |
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MHz |
Lakeland-Winter Haven, FL(2)(13) |
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BTA239 |
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20 |
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Melbourne-Titusville, FL(2) |
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BTA289 |
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20 |
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Gainesville, FL(1) |
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BTA159 |
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10 |
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Orlando, FL(1) |
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BTA336 |
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10 |
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Tallahassee, FL-GA(12) |
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BEA035 |
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10 |
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Florida 6 Dixie(12) |
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CMA365 |
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20 |
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Florida 7 Hamilton(12) |
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CMA366 |
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20 |
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Florida 8 Jefferson(12) |
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CMA367 |
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20 |
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Florida 9 Calhoun(12) |
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CMA368 |
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20 |
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Dallas/Ft.
Worth |
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Dallas/Ft. Worth, TX |
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CMA009 |
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10 |
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EA 127(13) |
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10 |
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Sherman-Denison, TX(3) |
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BTA418 |
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10 |
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Shreveport-Bossier City, LA-AR(13) |
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EA 88 |
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20 |
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Waco, TX(11) |
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CMA194 |
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20 |
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Longview-Marshall, TX(13) |
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CMA206 |
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10 |
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Tyler, TX(13) |
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CMA237 |
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10 |
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Lufkin-Nacogdoches, TX(13) |
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BTA265 |
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10 |
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Abilene, TX(13) |
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EA128 |
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10 |
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Detroit: |
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Detroit, MI |
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BTA112 |
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10 |
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EA 57 |
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10 |
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Grand Rapids-Muskegon-Holland, MI |
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EA 62 |
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10 |
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Michigan 9 Cass, MI(14 ) |
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CMA480 |
|
|
20 |
|
Southern California: |
|
|
|
|
|
|
Los Angeles, CA |
|
BTA262(2)(5) |
|
|
20 |
|
Bakersfield, CA |
|
BTA028(5) |
|
|
20 |
|
Las Vegas: |
|
|
|
|
|
|
Las Vegas, NV-AZ-UT |
|
EA 153(5) |
|
|
20 |
|
Philadelphia: |
|
|
|
|
|
|
Philadelphia, PA |
|
EA12(6) |
|
|
10 |
|
New York: |
|
|
|
|
|
|
New York-No. New Jer.-Long Island, NY-NJ-CT-PA-MA-VT(10) |
|
EA 10(7) |
|
|
20 |
|
New Jersey 1 Hunterdon(11) |
|
CMA550 |
|
|
20 |
|
New Jersey 3 Sussex(11) |
|
CMA552 |
|
|
20 |
|
Boston: |
|
|
|
|
|
|
Boston-Worcester, MA/NH/RI/VT |
|
EA 3(7) |
|
|
22 |
|
New London-Norwich, CT(10) |
|
BTA319 |
|
|
10 |
|
Providence-Pawtucket, RI Bedford-Fall River, MA(10) |
|
BTA364 |
|
|
10 |
|
Worcester-Fitchburg-Leominster, MA(10) |
|
BTA480 |
|
|
10 |
|
Other Regional Spectrum(8): |
|
|
|
|
|
|
Northeast(8) |
|
REA 1 |
|
|
10 |
|
West(8)(13) |
|
REA 6 |
|
|
10 |
|
8
|
|
|
|
(1) |
|
License held by a wholly-owned subsidiary of Royal Street Communications. |
|
(2) |
|
10 MHz license held by a wholly-owned subsidiary of Royal Street Communications and 10 MHz license held
by MetroPCS. |
|
(3) |
|
Comprised of Grayson and Fannin counties only. |
|
(4) |
|
Spectrum licensed as part of West REA 6. |
|
(5) |
|
Includes 10 MHz of spectrum from West REA 6. |
|
(6) |
|
Spectrum licensed as part of Northeast REA 1. |
|
(7) |
|
Includes 10 MHz of spectrum from Northeast REA 1. |
|
(8) |
|
Portions listed in connection with other metropolitan areas. |
|
(9) |
|
Counties of Clay, Wichita, Archer, Baylor, Wilbarger, Ford, and Hardeman, TX leased to Flat Wireless, LLC. |
|
(10) |
|
In July 2008, we entered into an agreement to acquire 10 MHz of PCS spectrum in certain markets in
Connecticut, Massachusetts and New York and to assign 10 MHz of AWS spectrum in Hartford, Middlesex,
Toland, Litchfield, and New Haven, CT, Berkshire, Franklin, Hampden, and Hampshire, MA, and Duchess and
Ulster, NY to, Tuscarora Communications, LLC. See Note 7 to the consolidated financial statements
included elsewhere in this report. |
|
(11) |
|
In December 2008, we entered into an agreement to acquire AWS spectrum in certain markets from AWS
Wireless, Inc. See Note 7 to the consolidated financial statements included elsewhere in this report. |
|
(12) |
|
In November 2008, we entered into an agreement to acquire AWS spectrum in certain markets from Cavalier
Wireless, L.L.C. See Note 7 to the consolidated financial statements included elsewhere in this report. |
|
(13) |
|
In September 2008, we entered into an agreement to acquire this spectrum from Cricket Licensee
(Reauction), Inc. and Cricket Licensee I, Inc., both subsidiaries of Leap and to assign 10 MHz of AWS
spectrum in the Fresno, CA (BEA162), San Diego, CA (BEA161), Seattle-Everett, WA (CMA020), Pendleton,
OR-WA (BEA168), and Richland-Kennewick-Pasco, WA (BEA169) to Leap. See Note 7 to the consolidated
financial statements included elsewhere in this report. |
|
(14) |
|
In February 2009, we consummated an agreement to acquire this spectrum from Cincinnati Bell Wireless,
LLC. See Note 7 to the consolidated financial statement included elsewhere in this report. |
The map below illustrates the geographic coverage of our licensed spectrum as of December 31,
2008:
9
Royal Street
In November 2004, we entered into a cooperative arrangement with C9 Wireless, LLC, or C9, an
unaffiliated very small business entrepreneur and, as part of that arrangement, acquired an 85%
non-controlling interest in Royal Street Communications, an entity controlled by C9. Royal Street
Communications participated in FCC Auction 58, was the high bidder on, and was granted 10 MHz of
spectrum in the Los Angeles basic trading area, or BTA, and 10 MHz of spectrum in certain other
BTAs in Northern Florida, including Orlando. 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, or closed licenses, for which only qualified DEs could apply. In
addition, DEs were permitted to apply for and bid on open licenses in competition with non-DEs,
but very small business DEs could receive a bidding credit of up to 25% of the gross bid price.
Royal Street Communications qualified as a very small business DE and was granted in December 2005
certain closed broadband PCS licenses and certain open broadband PCS licenses on which it
received a 25% bidding credit. Subsequently, these licenses were assigned with the consent of the
FCC to a series of wholly-owned subsidiaries of Royal Street Communications.
We do not own or control the Royal Street licenses. We own a non-controlling 85% limited
liability company member interest in Royal Street Communications, and we may elect only two of the
five members to Royal Street Communications management committee, which has the full power to
direct the management of Royal Street Communications. C9 has control over the operations of Royal
Street, because it has the right to elect three of the five members of Royal Street Communications
management committee. C9 also has the right to put, or require us to purchase, all or part of its
ownership interest in Royal Street Communications, but due to regulatory restrictions, we have no
corresponding right to call, or require C9 to sell to us, C9s ownership interest in Royal Street
Communications. The put right has been structured so that its exercise will not adversely affect
Royal Street Communications continued eligibility as a very small business DE during periods where
such eligibility is required. If C9 exercises its put right, we will be required to pay a fixed
return on C9s invested capital in Royal Street Communications, which fixed return diminishes
annually beginning in the sixth year following the grant of Royal Streets FCC licenses. These put
rights expire in June 2012.
Royal Street Communications holds all of its licenses through its wholly-owned subsidiaries
and has entered into certain cooperative agreements with us relating to the financing, design,
construction and operation of its networks. The Royal Street agreements are based on a wholesale
model in which Royal Street sells up to 85% of its engineered service capacity to us on a
wholesale basis, which we in turn market on a retail basis under the MetroPCS brand to our
customers. The remaining 15% of the engineered service capacity of Royal Streets network is
reserved by Royal Street and may be sold to other parties. In addition, the Royal Street
agreements provide that MetroPCS, at Royal Streets request and at all times subject to Royal
Streets direction and control, will assist Royal Street in building out its 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.
Additionally, we have provided and will provide financing to Royal Street, at Royal Streets
request, under a loan agreement the proceeds of which are to be used for the acquisition of
licenses, build out of its licensed areas, operation of the Royal Street network infrastructure,
and to make payments under the loan until Royal Street has positive free cash flow. As of December
31, 2008, the maximum amount that Royal Street could borrow from us under the loan agreement was
approximately $1.0 billion of which Royal Street had net outstanding borrowings of $905.0 million
from us, approximately $227.7 million of which was incurred in 2008. On February 17, 2009, we
executed an amendment to the loan agreement which increased the amount available to Royal Street
under the loan agreement by an additional $550.0 million. Royal Street has incurred an additional
$14.2 million in net borrowings through February 23, 2009. Interest accrues under the loan
agreement at a rate equal to 11% per annum. As of December 31, 2008, Royal Street has commenced
repayment of that portion of the loan related to the Orlando, Lakeland-Winter Haven,
Melbourne-Titusville and Los Angeles metropolitan areas.
License Term
The broadband personal communications services, or PCS, licenses held by us and by Royal
Street have an initial term of ten years. The initial license term is fifteen years for our
advanced wireless services, or AWS, licenses which runs from the initial grant date (which varies
by license), and ten years from June 12, 2009 for our 700 MHz license. Subject to applicable
conditions, all of our and Royal Streets licenses may be renewed at the end of their
10
terms. For example, the initial broadband PCS licenses for San Francisco, Sacramento, Miami
and Atlanta were granted in 1997, were renewed in 2007 and are subject to renewal in January 2017;
the AWS licenses were granted in November 2007 and are subject to renewal in November 2022; and the
700 MHz license was granted in June 2008 and is subject to renewal in June 2019. Each FCC license
is essential to our and Royal Streets ability to operate and conduct our and Royal Streets
business in the area covered by that license. We also have other licenses, such as microwave
licenses, which we use to provide service. We intend to file renewal applications for our licenses
when the renewal filing windows open. The next wireless broadband PCS licenses that need to be
renewed expire in 2009. For a discussion of general licensing requirements, please see
Construction Obligations.
Distribution and Marketing
We offer our products and services to our customers under the MetroPCS brand both indirectly
through independent retail outlets and directly through Company-operated retail stores. We also
sell our services over the Internet using our own branded MetroPCS® website. Our
indirect distribution outlets include a mixture of local, regional and national mass market dealers
and retailers and specialty stores. Many of our dealers own and operate more than one location and
may operate in more than one of our metropolitan areas. A substantial number of our retailers,
dealers and corporate store locations also accept payment for our services and many also perform
other services for us. A significant portion of our gross customer additions have been added
through our indirect distribution outlets. For the twelve months ended December 31, 2008,
approximately 89% of our gross customer additions were through indirect channels.
Our marketing strategy is to create and provide products, services and communications that
drive growth while optimizing our marketing return on investment and minimizing the cost to acquire
customers. Our marketing campaigns emphasize that MetroPCS offers unlimited services on a flat
rate basis without long-term service contracts for an affordable price. MetroPCS builds consumer
awareness and promotes the MetroPCS brand by strategic local advertising to develop our brand and
support our indirect and direct distribution channels. We advertise primarily 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
We outsource some or all of our customer care, billing, payment processing and logistics to
nationally recognized third-party providers. We also are in the process of transitioning our
billing services to another nationally recognized third party vendor. See Risk Factors We
currently are migrating our billing services to a new vendor.
Our outsourced call centers are staffed with professional and bilingual customer service
personnel, who are available to assist our customers 24 hours a day, 365 days a year. Some of
these outsourced call centers are located outside the United States, in Mexico, Panama, and the
Philippines, which facilitates the efficient provision of customer support to our large and growing
subscriber base, including Spanish speaking customers. We also provide automated voice response
service to assist our customers with routine information requests. MetroPCS ranked Highest in
Customer Satisfaction with Wireless Prepaid Service in the J.D. Power and Associates third annual
Prepaid Customer Satisfaction Study in July of 2008.
Network Operations
We and Royal Street operate 1xRTT CDMA networks in all of the metropolitan areas where we have
launched service. A network includes a switching center (which may be shared between metropolitan
areas) which serves several purposes, including routing calls, managing call handoffs, managing
access to the public switched telephone network and providing access to voicemail and other
value-added services, cell sites or distributed antenna system, or DAS, nodes, and backhaul
facilities, which carry traffic to and from our cell sites and our switching facilities. Currently,
almost all cell sites in the network are co-located, meaning our and Royal Streets equipment is
located on leased facilities that are owned by third parties who retain the right to lease the
facilities to additional carriers. The switching centers and national operations center provide
around-the-clock monitoring of our network.
Our switches connect to the public switched telephone network through fiber rings leased from
third-parties, which transmit originating and terminating traffic between our equipment and local
exchange and long distance carriers. We also have negotiated interconnection agreements with
relevant local exchange carriers in our service areas.
We use third-party providers for long distance services and the majority of our backhaul
services.
11
Network Technology
Communications between the subscriber wireless device and our network is accomplished by a
frequency management technology, or air interface protocol. The FCC has not mandated a universal
air interface protocol for wireless broadband systems. We and Royal Street have deployed 1xRTT CDMA
technology, which is one of the dominant air interface protocols. Our and Royal Streets decision
to use CDMA is based on what we believe are several key advantages that CDMA has over other air
interface protocols, including higher network capacity, longer handset battery life, fewer dropped
calls, simplified frequency planning, efficient migration path as our CDMA technology can be easily
upgraded to fourth generation air interface protocols in a cost effective manner, and increased
privacy and security. CDMA is incompatible with certain other air interface protocols. Customers
and former customers of other carriers may not be able to use their wireless devices on our or
Royal Streets networks because either their wireless device uses a different air interface
protocol or the other CDMA carriers may have restricted the customers from changing the programming
of their wireless device to allow it to be used on networks other than the original CDMA carriers
network.
We also purchase EVRC-B, or 4G vocoder, handsets which will allow for greater capacity in our
network and we are considering other network technology such as long term evolution, or LTE, which
we believe would provide significant increases in network capacity and data rates. This technology
may replace or supplement our and Royal Streets 1xRTT CDMA network.
Competition
The market for our wireless services is highly competitive. We compete directly in each of
our metropolitan areas with other wireless broadband mobile service providers, wireline, Internet,
cable, satellite and other communications service providers by providing a wireless alternative to
traditional wireline service. We believe that competition for subscribers among wireless broadband
mobile providers is based mostly on price, service area, services and features, call quality and
customer service.
The current wireless broadband mobile industry is dominated by four national carriers AT&T,
Verizon Wireless, Sprint Nextel and T-Mobile and their prepaid affiliates or brands. National
carriers typically offer post-paid plans that subsidize wireless devices, but require long-term
service contracts and credit checks or deposits. The national carriers also have introduced, either
directly or through their affiliates, unlimited fixed-rate services plans in areas in which we
offer or plan to offer service. These unlimited fixed-rate service plans may cause other
competitors to introduce similar unlimited fixed-rate plans. In addition, some regional companies,
such as Leap, have unlimited fixed-rate service plans similar to ours and compete, or have
announced plans to compete, in certain of our markets.
Over the past few years, the wireless industry also 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, 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
unlimited service plans.
The wireline industry is dominated by large incumbent carriers, such as AT&T and Verizon, and
also includes competitive local exchange or voice over Internet protocol, or VoIP, service
providers. The cable industry also is dominated by large carriers such as Time Warner Cable,
Comcast and Cox Communications. These cable companies, along with cable company Advance/Newhouse,
formed a joint venture called SpectrumCo LLC, or SpectrumCo, which bid on and acquired 20 MHz of
AWS spectrum in a number of major metropolitan areas throughout the United States, including all of
the major metropolitan areas which comprise our Core and Expansion Markets. Certain large national
cable companies, Sprint, Intel, Clearwire and others also have formed a joint venture to construct
a national network to provide wireless data and telecommunications services.
In the future, we may face competition from mobile satellite service, or MSS, providers, and
from resellers of these services. The FCC has granted 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. In
addition, several large satellite companies, computer companies, and Internet search and portal
companies have indicated an interest in establishing next generation wireless networks, and certain
VoIP providers have indicated that in the future they may acquire FCC licenses or use unlicensed
12
spectrum to offer wireless services to compete directly with us. The FCC also has adopted an
order that allows companies to provide wireless services on an unlicensed basis in certain unused
portions of the television spectrum. Further, we also may face competition from providers of
WiMax, which is the name given to a family of digital technologies that are capable of supporting
high-speed, long-range wireless services suitable for mobility applications, using exclusively
licensed or unlicensed spectrum. Additionally, we may compete in the future with companies that
offer new technologies and market other services we do not offer or may not be available with our
network technology, from our vendors or within our spectrum. Some of our competitors do or may
bundle these other services together with their wireless communications service, which customers
may find more attractive. Energy companies, utility companies and satellite companies also are
expanding their services to offer telecommunications services.
There continues to be substantial merger and acquisition activity in the wireless industry. We
have in the past acquired and may in the future acquire spectrum to enter new metropolitan areas.
We also may in the future consider acquisitions of or other business combinations with companies in
addition to acquisitions of spectrum. For example, we have in the past made a public offer to
acquire Leap which we subsequently withdrew. In the future, there could be discussions between us
and Leap or others regarding potential transactions between the companies.
Many of our wireless, wireline, cable and other competitors resources are substantially
greater, and their market shares are larger, than ours. Additionally, many of our wireless
competitors offer larger coverage areas and nationwide calling plans that do not give rise to
additional roaming charges for their customers. The competitive pressures of the wireless broadband
mobile services industry have caused certain competitors to offer service plans with growing
bundles of minutes of use at lower per minute prices or price plans with unlimited nights and
weekends and could lead them, and have led some of our competitors, to offer unlimited service
plans similar to ours. Our competitors plans could adversely affect our ability to maintain our
pricing, market penetration, growth and customer retention. In addition, large national wireless
broadband mobile services 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 and recent FCC actions to promote automatic roaming do not resolve these
difficulties. Moreover, the policies of the United States government have made, and may continue to
make, additional spectrum for wireless services available in each of our markets, which may
increase the number of our competitors and enhance our competitors ability to offer additional
plans and services. Further, since many of our competitors are large companies, they have on
occasion been able to convince handset manufacturers to provide the newest handsets exclusively to
them. Our competitors also can afford to heavily subsidize the price of the subscribers handset
because they have greater resources than us and may require their customers to enter into long term
contracts. The FCC has indicated it may examine, and Congress is considering legislation that may
limit, early termination fees for the long term contracts used by national wireless broadband
mobile services carriers which could prompt them to reduce the subsidization of handsets and limit
their long term contracts.
All of these factors may detract from our ability to attract customers from certain market
segments.
As competition develops, we may add additional features or services to our existing service
plans, or make other changes to our service plans.
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. Net customer additions are
typically strongest in the first and fourth calendar quarters of the year. Softening of sales and
increased customer turnover, or 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. However, sales activity and churn can be strongly affected by the launch of new and
surrounding metropolitan areas and promotional activity, which could reduce or outweigh certain
seasonal effects. For a more detailed discussion of seasonality in our business, please read
Managements Discussion and Analysis of Financial Condition and Results of Operations
Seasonality.
Inflation
We do not believe that inflation has had a material effect on our operations.
13
Employees
As of December 31, 2008, we have approximately 3,200 employees. We believe our relationship
with our employees is good. None of our employees are covered by a collective bargaining agreement
or represented by an employee union.
Regulation
The wireless telecommunications industry is regulated extensively by the federal government
and, to varying degrees, by state and local governments. Congress, state legislatures,
municipalities, federal, state and local regulators, and the courts have passed legislation,
ordinances, codes, rules, regulations, instituted administrative rulemakings, and issued judicial
decisions, affecting the telecommunications industry. Due to the recent changes in the party
affiliation of the President of the United States and changes in the composition of Federal and
state legislatures, the political environment, and financial conditions, the regulation of the
communications industry has been, and is expected to remain in the future, in a state of constant
flux. Many of these legislative actions, rulemakings, and judicial decisions have had, and possible
future regulations may have, a significant material effect on us, our business, our financial
condition, and our operating results.
Federal regulation
Our business is subject to extensive federal regulation under the Communications Act of 1934,
as amended, or the Communications Act, the implementing regulations adopted thereunder by the FCC,
judicial and regulatory decisions interpreting and implementing the Communications Act, and other
federal statutes as discussed below. These statutes, regulations and associated policies govern,
among other things, the allocation and licensing of radio spectrum; the ownership, lease, transfer
of control and assignment of wireless licenses; the ongoing technical, operational and service
requirements under which we must operate; the timing, nature and scope of network construction; 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; the interconnection of communications
networks; the provision of subscriber equipment; the location of network assets; and the use of
rights of way.
Broadband spectrum allocations
We utilize paired radio spectrum licensed by the FCC. The principal spectrum bands used to
provide terrestrial broadband wireless mobile services in the United States are as follows, all of
which can be used to provide services competitive with the spectrum held by us:
Cellular Spectrum. Starting in the 1980s, the FCC awarded two cellular licenses with 25 MHz
of spectrum each in the 800 MHz band on a metropolitan statistical area, or MSA, and rural service
area, or RSA, basis. There are 306 MSAs and 428 RSAs in the United States. MSAs and RSAs are
defined by the Office of Management and Budget and the FCC, respectively.
PCS Spectrum. In the 1990s, the FCC assigned licenses to use 120 MHz of radio spectrum in
the 1.9 GHz band for broadband PCS. The FCC divided the 120 MHz of spectrum into two 30 MHz blocks
licensed on a Major Trading Area, or MTA, basis, and one 30 MHz block and three 10 MHz blocks
licensed on a Basic Trading Area, or BTA, basis. Under 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. Both MTAs and BTAs are defined by Rand McNally & Company, as supplemented by the
FCC. Many of our competitors utilize a combination of cellular and broadband PCS spectrum to
provide their services. In addition, the FCC granted a nationwide 10 MHz paired PCS license to
Nextel Communications (now Sprint Nextel) in conjunction with its relocation and rebanding of ESMR
spectrum.
SMR Spectrum. The FCC first established specialized mobile radio, or SMR, in 1979 to provide
for land mobile communications on a commercial basis. The FCC initially licensed spectrum in the
800 and 900 MHz bands for this service, in non-contiguous bands, on a site-by-site basis. Since
then, the FCC has established geographic area licenses for such spectrum. In total, the FCC has
licensed 19 megahertz of SMR spectrum, plus an additional 7.5 megahertz of spectrum that is
available for SMR as well as other services. FCC policy permits flexible use of this spectrum,
including the provision of mobile wireless services, and such spectrum is taken into consideration
when the FCC is assessing the competitive impact of broadband wireless merger and acquisition
transactions.
14
AWS-1 Spectrum. In 2006, the FCC assigned 90 MHz of spectrum to be used for advanced wireless
services, or AWS. The FCC divided the 90 MHz of spectrum into two 10 MHz and one 20 MHz paired
blocks assigned on a regional economic area grouping, or REAG, basis; one 10 MHz and one 20 MHz
paired blocks each assigned on an economic area, or EA, basis; and a 20 MHz paired block assigned
on a Cellular Marketing Area, or CMA, basis. The CMAs generally correspond to MSAs and RSAs. Under
the AWS band plan, the United States is divided into 176 EAs, 12 REAGs, and 734 CMAs. The EAs are
geographic areas defined by the Regional Economic Analysis Division of the Bureau of Economic
Analysis, U.S. Department of Commerce, as supplemented by the FCC. REAGs are collections of EAs.
700 MHz Spectrum. In 2008, the FCC assigned 62 MHz of spectrum in the 700 MHz band. The FCC
divided the 62 MHz of spectrum into two 12 MHz paired blocks and one 6 MHz unpaired block licensed
on a CMA or EA basis; one 22 MHz paired block licensed on a REAG basis, and one 10 MHz paired
block, or D Block, assigned on a nationwide basis to be used as part of a private/public safety
partnership. The holders of the 22 MHz licenses, most of which are held by Verizon Wireless, must
provide a network platform that is generally open to third-party wireless devices and applications,
or an Open Network Platform, by allowing consumers to use the handset of their choice and to
download and use the applications of their choice, subject to certain network management conditions
that are intended to allow the licensee to protect the network from harm. As originally allocated,
the D Block licensee was required to fund the construction of a nationwide interoperable broadband
network for public safety on a nationwide public safety license and to provide public safety with
priority access during emergencies to the D Block owned by the licensee. The D Block remained
unpurchased at auction, and the FCC currently is considering revisions to the auction and service
rules that will apply to this license.
BRS Spectrum. In 2004, the FCC ordered that the 2496-2690 MHz band, or the 2.5 GHz band, be
reconfigured over a period of time into upper and lower-band segments for low-power operations,
with a mid-band segment for high-power operations. This spectrum is allocated and licensed in the
United States and its possessions and territories in 493 BTAs. The Commission concluded in 2008
that 55.5 MHz of the broadband radio service, or BRS, spectrum holdings in the 2.5 GHz band will be
included in the Commissions product market for mobile telephony/broadband services, and taken into
consideration when the Commission is assessing the competitive impact of broadband wireless merger
and acquisition transactions.
Future Allocations. The FCC also has other broadband wireless spectrum allocation proceedings
in process. For example, the FCC is considering service rules for an additional 20 MHz of paired
AWS spectrum, or AWS-2, in the 1915-1920 MHz, 1995-2000 MHz, 2020-2025 MHz and 2175-2180 MHz bands,
as well as 20 MHz of unpaired AWS spectrum, or AWS-3, in the 2155-2175 MHz band. Both AWS-2 and
AWS-3 have been allocated for advanced fixed and mobile services, including AWS. As noted above,
the FCC also is seeking further comment on service rules for the 700 MHz D Block. The FCC and
interested parties have proposed that these blocks of spectrum be subject to various conditions,
configurations and terms and conditions. We cannot predict with any certainty the likely
configuration, conditions or timing of these proposed allocations, or the usability of any of this
spectrum for wireless services competitive with our services or by us. Congress, the federal
government, and the FCC also may pass legislation or undertake actions or proceedings in the future
to allocate additional spectrum for wireless services or to change the rules relating to already
licensed spectrum which may allow new or existing licensees to provide services comparable to the
services we provide.
Construction obligations
The FCC has established various construction obligations for wireless licenses with different
requirements often applying to spectrum licensed at different points in time. For example,
broadband PCS licensees holding licenses originally granted as 30 MHz licenses must construct
facilities to provide service covering one-third of the population of the licensed area within five
years, and two-thirds of the population of the licensed area within ten years, or otherwise provide
substantial service to the licensed area within the appropriate five- and ten-year benchmarks, of
their initial license grant date. Broadband PCS licensees holding 10 MHz and 15 MHz licenses
generally must construct facilities to provide service to 25% of the licensed area within five
years of their initial license grant date, or otherwise make a showing of substantial service. The
FCC defines substantial service as service which is sound, favorable and substantially above a
mediocre service level only minimally warranting renewal. Either we or the previous licensee
satisfied the applicable five-year coverage requirement for each of our broadband PCS licenses and
the ten-year requirement for those PCS licenses that have already been renewed. All AWS licensees
will be required to construct facilities to provide substantial service by the end of the initial
15-year license term. The initial 15-year license term for our AWS licenses does not expire until
November 2021.
15
The 700 MHz licenses are subject to more stringent performance requirements which are measured
from June 13, 2009. Licensees of the CMA and EA license blocks are required to build systems that
provide wireless coverage to 35% of the licensed geographic area in four years and 70% of the
licensed geographic area by the end of the license term. Licensees of the REAG license blocks are
required to cover at least 40% of the population of the licensed area in four years and 75% of the
population of the licensed area by the end of the license term. Under the current rules, the
licensees of the D Block are required to cover at least 75% of the population in four years, 95% of
the population of the nationwide license area within seven years and 99.3% of the population of the
nationwide license area within ten years. The build-out requirements for the D Block currently are
subject to further comment and may change when the final rules are issued for assigning this
license. While the FCC occasionally has granted brief extensions to, and limited waivers of,
license construction requirements, any licensee failing to meet these coverage requirements risks
forfeiting their license or, in some cases, being subject to fines or monetary forfeitures.
License term
The FCC grants broadband PCS licenses for ten-year terms that are renewable upon application
to the FCC. Our broadband PCS license terms began expiring in 2007. We filed renewal applications
and have been granted additional ten-year terms for all of our PCS licenses expiring before
December 31, 2008. Certain of our broadband PCS licenses will need to be renewed in 2009. AWS
licenses are granted for an initial 15-year term that is renewable for successive ten-year terms
upon application to the FCC. Our initial AWS license terms end in November 2021. The 700 MHz
license we hold has an initial term extending up to June 2019, and is renewable for additional 10
year terms. However, if we fail to meet an initial construction benchmark in June of 2013 for our
700 MHz license, the license term will be shortened to June of 2017, in addition to possibly being
subject to fines and forfeitures and/or having our licensed service area reduced. However, if we
fail to meet the build out requirements by the end of the license term for our 700 MHz license, we
will lose our authority to serve any unserved area and could be subject to fines and forfeitures,
including a revocation of our license. At present, our 700 MHz license term in Boston ends in June
2019, but this date could change in the event that Congress or the FCC decides to further extend
the digital television transition date.
The FCC may deny license renewal applications for cause after appropriate notice and hearing.
The FCC will award a renewal expectancy to broadband commercial mobile radio service, or CMRS,
licensees if the licensee meets specific performance standards. To receive a renewal expectancy, 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. If we
receive a renewal expectancy, it is very likely that the FCC will renew our existing licenses. If
we do not receive a renewal expectancy, the FCC may accept competing applications for the license
renewal period, subject to a comparative hearing, and may award the license for the next term to
another entity.
Revocation of licenses
The FCC may deny applications for FCC licenses and in extreme cases revoke FCC licenses, if it
finds that a licensee lacks the requisite qualifications to be a licensee. For example, the FCC may
revoke a license or deny an application of an entity found in a judicial or administrative
proceeding to have knowingly or repeatedly engaged in conduct involving felonies, possession or
sale of illegal 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.
Transfer and Assignment of FCC licenses
The Communications Act requires prior FCC approval for assignments or transfers of control of
any license or construction permit, with limited exceptions. In granting FCC approval for
assignments or transfers of control, the FCC may prohibit or impose conditions on such assignments
or transfers of control. We have managed to secure the requisite approval of the FCC to a variety
of assignment and transfer of control applications without undue delay or the imposition of
conditions outside of the ordinary course. We cannot assure you that the FCC will approve or act in
a timely fashion on any of our future requests to approve assignment or transfer of control
applications. Further, if we are acquired in the future, the FCC may disapprove the transfer of
control or assignment, impose conditions, or otherwise require divestitures of some or all of our
spectrum, licenses, or other assets.
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Disaggregation, Partitioning and Spectrum Leasing
The FCC allows spectrum and service areas to be subdivided, partitioned, or disaggregated,
geographically or by bandwidth, with each resulting license covering a smaller service area and/or
including less spectrum. Any such partition or disaggregation is subject to FCC approval, which
generally is received, but cannot be guaranteed. The FCC also has adopted policies to facilitate
development of a secondary market for unused or underused wireless spectrum by permitting the
leasing of spectrum to third parties. These policies provide us, new entrants, and our competitors
with alternative means to obtain additional spectrum and allow us to dispose of excess spectrum,
subject to FCC approval and applicable FCC conditions.
Spectrum and Market Concentration Limits
The FCC has certain policies intended to prevent undue concentration of the terrestrial
wireless broadband mobile services market. For example, the FCC conducts a case-by-case review of
all transactions where wireless spectrum is being assigned or a transfer of control is occurring
where both parties to the transaction hold CMRS spectrum in the same or in an overlapping area.
Previously, the FCC would screen a transaction for competitive concerns if, upon consummation, 95
MHz or more of cellular, broadband PCS, enhanced SMR, and 700 MHz spectrum in a single market was
attributable to a party or affiliated group, or if there was a material change in the
post-transaction market share concentrations as measured by the Herfindahl-Hirschman Index. In
2008, the FCC revised this screen to include situations where AWS-1 or certain BRS spectrum is
available, on a geographic area basis as follows:
|
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For geographic areas in which AWS-1 and certain BRS spectrum is available, the Commissions
initial spectrum screen is 145 MHz. |
|
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For geographic areas in which AWS-1 is available but certain BRS is not available, the
Commissions initial spectrum screen is 125 MHz. |
|
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For geographic areas in which certain BRS spectrum is available but AWS-1 is not available,
the Commissions initial spectrum screen is 115 MHz. |
|
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For geographic areas in which neither BRS spectrum or AWS-1 is available, the Commissions
initial spectrum screen is 95 MHz. |
The FCC also stated that it now will apply this revised screen to spectrum acquired via
auction. These benchmarks are subject to pending reconsideration proceedings at the FCC. The FCC
also is considering whether to initiate a proceeding to eliminate case-by-case application of a
spectrum screen entirely in favor of a bright-line spectrum cap.
We are well below the spectrum aggregation screen in the geographic areas in which we hold or
have access to licenses which means we may be able to acquire additional spectrum either by auction
or in private transactions and we may be able to be acquired by certain other carriers. However,
the FCCs retention of a case-by-case approach to spectrum acquisition and the continuing revision
upward of the spectrum screen may allow our competitors to make additional acquisitions of spectrum
and further consolidate the industry.
Foreign Ownership Restrictions
The Communications Act authorizes the FCC to restrict the ownership levels held by foreign
nationals or their representatives, a foreign government or its representative or any corporation
organized under the laws of a foreign country. Generally, the law prohibits indirect foreign
ownership of over 25% of our common stock. Our stock is freely tradable on the NYSE and as such
foreign ownership of our common stock could exceed this 25% threshold without our knowledge. The
FCC may revoke licenses, or require us to restructure our ownership, if ownership of our common
stock by non-United States citizens or entities exceeds the statutory 25% benchmark. However, the
FCC may waive the foreign ownership limits for CMRS licensees, such as us, and generally permits
additional indirect foreign ownership in excess of the statutory 25% benchmark particularly if that
interest is held by an entity or entities that are citizens of, representatives of or organized
under the laws of countries that are members of the World Trade Organization, or WTO. For investors
from countries that are not members of the WTO, the FCC will determine if the home country extends
reciprocal treatment, called effective 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 established internal procedures to ascertain the nature and extent of our
foreign ownership, and
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we believe that the indirect ownership of our equity by foreign entities is below the
benchmarks established by the Communications Act. If we were to have foreign ownership in excess of
the limits, we have the right to acquire that portion of the foreign investment which places us
over the foreign ownership restriction.
Designated Entity Requirements
The FCC has established rules that are designed to promote the granting of spectrum licenses
to small and very small businesses, entrepreneurs and other DEs. Some licenses, called closed
licenses, have been set aside solely for DEs to acquire at auction. DEs also can qualify for
bidding discounts of varying amounts (e.g., 15% or 25%) when acquiring licenses available to all
parties, called open licenses, at auction. We are an investor in Royal Street Communications, which
is a very small business DE that must meet and continue to abide by the FCCs DE requirements until
at least December 2010.
Among other requirements, the FCC DE rules create a control test that obligates the eligible
small or very small business members of a DE licensee to maintain de facto (actual) and de jure
(legal) control of the business and license. 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 if the
existing licensee ceases to be qualified as a DE, the licensee may lose all closed licenses which
are not constructed, and may be required to refund to the FCC some or all of the bidding credit
received for all open licenses, based on a five-year straight-line discount repayment schedule
commencing from the grant date. For example, in Auction 58, Royal Street Communications received a
bidding credit equal to approximately $94 million relating to open licenses it acquired as result
of that auction. If Royal Street were found to no longer qualify as a DE during the initial
five-year term of its licenses, it would be required to repay a portion of the bidding credit using
the five-year straight-line repayment schedule from December 2005. Moreover, any closed licenses
which are transferred by Royal Street, or if Royal Street is found to no longer qualify as a DE,
prior to the five-year anniversary of their initial grant, or December 2010, also may be subject to
an unjust enrichment payment. Revocation also could occur if any license is not constructed on a
timely basis or not constructed prior to Royal Street no longer qualifying as a DE. All of Royal
Streets licenses are closed licenses except for its Los Angeles and Gainesville basic trading area
licenses. Royal Street already has constructed the systems authorized by its open license for Los
Angeles license and its closed licenses in the Orlando, Lakeland-Winter Haven, and
Melbourne-Titusville basic trading areas.
In 2006, the FCC adopted new DE requirements that apply to all licenses initially granted
after April 25, 2006, or New DE Requirements. First, the FCC found that an entity that enters into
an impermissible material relationship, which includes any arrangement whereby a DE leases or
resells more than fifty percent of the capacity of its spectrum or network to third parties, will
be ineligible for an award of DE benefits and subject 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 or licensee for more than
25% of the applicants total spectrum capacity on a license-by-license basis will be considered to
have an attributable interest in the applicant or licensee. Royal Streets existing relationships
with us are grandfathered and Royal Street is not subject to the New DE Requirements with respect
to its existing licenses which were granted before April 25, 2006. However, the New DE Requirements
will not permit Royal Street 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, resell services to us on
those licenses on the same basis as the existing arrangements, or materially change its existing
arrangements with us, without making itself ineligible for DE benefits.
Further, the FCC has adopted rules requiring a DE to seek approval for any change in
circumstances that may 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 FCCs
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 DE benefits. Royal Street has filed all of its required annual reports with the
FCC. The FCC also indicated that it will step up its audit program of DEs.
Several interested parties have filed appeals of the New DE Requirements. These appeals are
ongoing. The relief sought by the petitioners in their underlying appeals includes overturning the
results of Auctions 66 (AWS-1) and 73 (700 MHz). If the petitioners are ultimately successful in
obtaining this relief, any licenses granted to us as a result of Auction 66 and/or 73 may be
revoked. Our payments to the FCC for the revoked 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
paid to the FCC for the AWS-1 and 700 MHz licenses and we will have incurred clearing,
construction, and other
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expenses with respect to the AWS-1 licenses, but would not receive interest or any
compensation for our clearing, construction, and other activities on the spectrum. We have
constructed our Las Vegas, Philadelphia and New York metropolitan networks on AWS-1 spectrum and we
only have AWS-1 spectrum in these markets. If we lost our AWS-1 licenses, we would cease being able
to provide service in those metropolitan areas where we have already launched service and would not
be able to launch service in those markets where we have not yet launched service. We are unable at
this time to predict the likely outcome of the challenges to the New DE Requirements or any further
appeal and unable to predict the impact on the licenses granted in Auction 66 and Auction 73. We
also are unable to predict whether the litigation will result in any changes to the New DE
Requirements or to the DE program generally, and, if there are changes, whether or not any such
changes will be beneficial or detrimental to our interests.
In connection with the changes to the DE rules, the FCC also is considering whether additional
restrictions should be adopted in its DE program. We do not know what additional changes, if any,
will be made to the DE program as a result of this further rulemaking. Based on the FCCs prior
rulings, we do not expect any further 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.
General Regulatory Obligations
The Communications Act and the FCCs rules impose a number of requirements on wireless
broadband mobile services licensees, which affect our cost of doing business and that could have a
material effect on our business, operations, and financial results. Further, a failure to meet or
maintain compliance with the Communications Act and the FCCs rules could subject us to fines,
forfeitures, penalties, license revocations, or other sanctions, including the imposition of
mandatory reporting requirements, limitation on our ability to participate in future FCC auctions
or acquisitions of spectrum, and compliance programs and corporate monitors.
CMRS Classification. Our wireless broadband mobile services are classified at the federal
level as CMRS. The FCC regulates providers of CMRS services as common carriers, which subjects us
to many requirements under the Communications Act and FCC rules and regulations. The FCC, however,
has exempted CMRS services from some typical common carrier regulations, such as tariff and
interstate certification filings, which allows us to respond more quickly to competition in the
marketplace. The FCC also is required by federal law to reduce unreasonable disparities in the
regulatory treatment of similar wireless broadband mobile services, such as cellular, broadband
PCS, AWS, 700 MHz, and Enhanced Specialized Mobile Radio, or ESMR, services, and federal law
preempts state rate and entry regulation of CMRS providers.
The FCC permits wireless broadband mobile services licensees to offer fixed services on a
co-primary basis along with mobile services. This facilitates the provision of wireless local loop
service by CMRS licensees using wireless links to provide local telephone service. The extent of
lawful state regulation of such wireless local loop service is undetermined. While we do not
presently offer a fixed service, our network can accommodate such an offering. We continue to
evaluate our service offerings, and may offer a fixed service at some point in the future.
Spectrum Clearing. 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 transition and cost sharing plan pursuant to which incumbent non-governmental users could
be reimbursed for relocating out of the band and the costs of relocation would be shared by AWS-1
licensees benefiting from the relocation. The FCC has established a plan where the AWS-1 licensee
and the incumbent non-governmental user are to negotiate voluntarily for three years and then, if
no agreement has been reached, the incumbent licensee is subject to mandatory relocation procedures
in which the AWS-1 licensee can relocate the incumbent non-governmental licensee at the AWS-1
licensees expense. The spectrum allocated for AWS-1 also currently is utilized by certain
governmental users, many of whom are required over time to relocate from the AWS-1 spectrum.
However, in some cases, not all governmental users are obligated to relocate and in other cases
incumbent users are not obligated to relocate for some period of time, with varying time frames for
relocation.
Spectrum allocated for 700 MHz currently is occupied by existing analog television broadcast
licensees and certain wireless microphone users. Licensees granted 700 MHz licenses are not
obligated to pay for the relocation of existing analog television broadcast licensees. By federal
law, all existing analog television broadcast licenses are obligated to vacate the 700 MHz spectrum
by the digital television transition date, currently scheduled for June 12, 2009. We cannot be
certain that Congress will not alter the present digital television transition date to a later date
to
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alleviate certain problems with the analog to digital TV conversion. In addition, the FCC has
not yet established final procedures and deadlines, including cost obligations for, wireless
microphones users to vacate the band.
E-911 Service. The FCC requires CMRS providers to implement basic 911 and enhanced, 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 become equipped to handle E-911 calls.
E-911 services allow state and local emergency service providers to better identify and locate
wireless callers, including callers using special devices for the hearing impaired. The network
equipment and handsets we utilize are capable of meeting the FCCs E-911 requirements and we have
constructed facilities to implement these capabilities in markets where we have had requests from
local public safety emergency service providers and are in the process of constructing E-911
facilities in the markets we launched recently. Because we employ a handset-based location
technology, the FCC also has rules that require us to ensure that specified percentages of the
handsets in service on our systems are location capable and meet certain location accuracy
standards. The FCC actively monitors the compliance by CMRS carriers with E-911 requirements. For
example, MetroPCS was notified on October 10, 2008, by the FCC that it is investigating the
compliance by MetroPCS with its E-911 obligations. In response, MetroPCS has provided the FCC with
information which we believe shows our compliance with our E-911 obligations; however, the matter
is still pending at this time. The FCC has in the past and may in the future, impose substantial
fines and forfeitures on wireless broadband mobile carriers for their failure to comply with the
FCCs E-911 rules and could impose other sanctions, including revocation of licenses or the
imposition of mandatory reporting requirements, license conditions, and compliance programs. The
FCC also has rules under which wireless broadband mobile carriers may be required to offer priority
E-911 services to the public safety agencies under certain circumstances. States in which we do
business may limit or eliminate our ability to recover our E-911 costs. However, federal
legislation also may limit our liability for uncompleted 911 calls to a similar level to wireline
carriers in our markets.
The FCC is considering various alternative proposals for wireless E-911 Phase II location
accuracy and reliability and an FCC order currently is circulating at the FCC. We are unable at
this time to predict the likely outcome of this proceeding. These E-911 requirements may require us
to expend additional capital and resources. The FCC also has left open the possibility of further
requirements.
Communications Assistance for Law Enforcement Act (CALEA). Federal law requires CMRS carriers
to assist law enforcement agencies with lawful wiretaps, and imposes wiretap-related record-keeping
and personnel-related obligations. Historically, our customer base may have been, and may continue
to be, subject to a greater percentage of law enforcement requests than those of other carriers
and, as a result, our compliance expenses may be proportionately greater.
Number Administration. Because demand is increasing for a finite pool of telephone numbers,
the FCC has adopted number pooling rules that govern how telephone numbers are allocated. Number
pooling is mandatory inside the wireline rate centers that are located in counties included in the
top 100 MSAs. We have implemented number pooling procedures and support pooled number roaming in
all of our metropolitan areas which are in the top 100 MSAs. The FCC also has authorized states to
supplement federal numbering requirements in certain respects and some of the states where we
provide service have been authorized by the FCC to engage in limited numbering administration. Our
ability to access telephone numbers on a timely basis is important for our ability to continue to
grow our business.
Number Portability. The FCC has ordered all telecommunications carriers, including CMRS
carriers, to support telephone number portability which enables subscribers to keep their telephone
numbers when they change telecommunications carriers, whether 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 keep their telephone numbers when they switch to a new carrier. Outside of the top 100 MSAs,
CMRS carriers receiving a request to allow end users to keep their telephone numbers must be
capable of doing so within six months of the request. All CMRS carriers are required to support
nationwide roaming for customers retaining their numbers.
Interconnection. FCC rules provide that all telecommunications carriers are obligated upon
reasonable request to interconnect directly or indirectly with the facilities and networks of other
telecommunications carriers. All local exchange carriers also must, upon request, enter into mutual
or reciprocal compensation arrangements with CMRS carriers for the exchange of intra-MTA traffic,
under which each carrier compensates the other for terminated intra-MTA traffic originating on the
compensating carriers network. Further, at a CMRS carriers request, incumbent local exchange
carriers must exchange intra-MTA traffic with CMRS carriers at rates based on the FCCs costing
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rules or rates set by state public utility commissions applying the FCCs rules. CMRS carriers
also have an obligation to engage in voluntary negotiation and may be subject to arbitration with
incumbent local exchange carriers similar to those imposed on the incumbent local exchange carriers
pursuant to Section 252 of the Communications Act. Once an incumbent local exchange carrier
requests negotiation of an interconnection arrangement, both carriers are obligated to begin paying
the FCCs default rates for all intra-MTA traffic exchanged after the request for negotiation.
CMRS carriers generally are obligated to pay reasonable compensation to a local exchange
carrier in connection with intra-MTA traffic originated by the CMRS carrier and terminated by the
LEC. While these rules provide that local exchange carriers may not charge CMRS carriers for
facilities used by CMRS carriers to terminate local exchange 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. Since
2005, no local exchange carrier has been permitted to impose on a going-forward basis rates by
state tariff for the termination of a CMRS carriers intra-MTA traffic. We generally have been
successful in negotiating arrangements with carriers with whom we exchange intra-MTA traffic;
however, our business could be adversely affected if the rates some carriers charge us for
terminating our customers intra-MTA traffic ultimately prove to be higher than anticipated.
Further, the rules governing 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, when they might take effect and whether they will be
beneficial or detrimental to us.
Access. In order to offer long distance services to our customers, we resell the long distance
services provided by third parties. Those third parties are obligated to pay compensation to the
telecommunications carriers who terminate our subscribers long distance calls. Historically, CMRS
carriers generally have not been entitled to receive direct access payments for the long distance
calls they terminate, but must pay access charges to other telecommunications carriers for calls
they terminate. In October 2007, the FCC initiated a proceeding to determine whether the FCCs
current rules ensure that the rates for switched access services charged by local exchange carriers
are just and reasonable. In the proceeding, the FCC is investigating certain traffic stimulation
activities of local exchange carriers which are alleged to generate excessive fees for switched
access traffic. The FCC also seeks comment on whether sharing of access revenues is appropriate.
The FCC also asked parties to address whether carriers are adopting traffic stimulation strategies
with respect to other forms of intercarrier compensation, which would include compensation for
intra-MTA traffic delivered by CMRS carriers to local exchange carriers. We and others have asked
the FCC to cap the amount of compensation paid to local exchange carriers for traffic that is
grossly imbalanced. If the FCC adopts such proposed limitations, it could reduce the amount of
compensation we are obligated to pay local exchange carriers, may affect the amount of access
sharing revenue we receive. The rules governing access generally are under review by the FCC in a
rulemaking proceeding and we cannot be certain whether or not there will be material changes to the
applicable rules and, if there are changes, when they may take effect and whether they will be
beneficial or detrimental to us.
Universal Service Fund (USF). The FCC has adopted rules requiring interstate communications
carriers, including CMRS carriers, to make an equitable and non-discriminatory contribution to a
Universal Service Fund, or USF, that reimburses communications carriers who are providing
subsidized basic communications services to underserved areas and users. The FCC requires carriers
providing both intrastate and interstate services to determine their percentage of traffic which is
interstate and the FCC has also adopted a safe-harbor percentage of interstate traffic for CMRS
carriers. We have made these FCC-required payments using the safe-harbor. The FCC prohibits
carriers from recovering administrative costs related to administering the required universal
service fund assessments. The FCCs rules require that carriers USF recovery charges to customers
not exceed the assessment rate the carrier pays times the proportion of interstate
telecommunications revenue on the bill. The FCC has rulemaking proceedings pending in which it is
considering a comprehensive reform of the manner in which it assesses carrier USF contributions,
how carriers may recover their costs from customers and how USF funds will be distributed among and
between states, carriers and services. Some of these proposals may cause the amount of USF
contributions required from us and our customer to increase.
Eligible Telecommunications Carriers. Wireless broadband mobile carriers may be designated as
Eligible Telecommunications Carriers, or ETCs, and may receive universal service support for
providing service to customers using wireless service in high cost areas. Certain competing
wireless broadband mobile carriers operating in states where we operate have obtained or applied
for ETC status. Their 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 that is
subsidized by the universal service fund. The FCC is considering altering, reducing, or capping the
amount of universal support received by CMRS ETC providers. In May 2008, the FCC adopted an interim
cap on payments to
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ETCs under the USF, pending comprehensive reform that is now under consideration by the
agency. We may decide in the future to apply for an ETC designation in certain qualifying high cost
areas where we provide wireless services, though our ability to qualify may be affected by ongoing
changes and possible future limitations in the program. If we are approved, these payments would be
an additional revenue source that we could use to support the services we provide in high cost
areas.
Regulatory Fees. We are obligated to pay certain annual regulatory fees and assessments to
support FCC wireless industry regulation, as well as fees supporting federal universal service
programs, number portability, regional database costs, centralized telephone numbering
administration, telecommunications relay service for the hearing-impaired and application filing
fees. These fees are subject to change periodically by the FCC.
Equal Access. CMRS carriers are exempt from the obligation to provide equal access to
interstate long distance carriers. However, the FCC has the authority to impose rules requiring
unblocked access through carrier identification codes or 800/888 numbers to long distance carriers
so CMRS customers are not denied access to their chosen long distance carrier, if the FCC
determines the public interest so requires. Our customers have access to alternative long distance
carriers using toll-free numbers.
Customer Proprietary Network Information (CPNI). FCC rules impose restrictions on a
telecommunications carriers use of customer proprietary network information, or CPNI, without
prior customer approval, including restrictions on the use of information related to a customers
location. The FCC has imposed substantial fines on certain wireless carriers for their failure to
comply with the FCCs CPNI rules. The FCC previously conducted a broadscale 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 based on personal knowledge that the CMRS carrier was in compliance
with all CPNI rules and the filing of such a certificate has now become an annual requirement. We
provided the certificate in February 2006 and have provided the required annual certificates since
then.
Revised CPNI rules became effective in December 2007 that required us to make certain changes
to our business practices or processes. Among other things, CMRS carriers now must take reasonable
measures to discover and protect against pretexting and, in enforcement proceedings, the FCC will
infer from evidence of unauthorized disclosures of CPNI that reasonable protections were not taken.
The FCC also is seeking comment on additional CPNI regulations.
Congress and state legislators also may pass legislation governing the use and protection of
CPNI and other personal information. For example, Congress enacted the Telephone Records and
Privacy Protection Act of 2006, which imposes criminal penalties upon persons who purchase without
a customers consent, or use fraud to gain unauthorized access to, telephone records. In addition,
certain states have enacted, and other states in the future may enact, legislature relating to
customer personal information. The recent and pending legislation (if enacted) may require us to
change how we protect our customers CPNI and other personal information.
Services to Persons With Disabilities. Telecommunications carriers are required to make their
services accessible to persons with disabilities. These FCC rules generally require service
providers to offer equipment and services accessible to and usable by persons with disabilities, if
readily achievable, and to comply with FCC-mandated complaint/grievance procedures. These rules are
largely untested and are subject to interpretation through the FCCs complaint process. While these
rules principally focus on requirements that must be met by the manufacturers of wireless
equipment, we are required to have a certain percentage of our handsets be hearing aid compatible
and we have annual reporting requirements. Because of the ongoing consolidation in the digital
wireless handset manufacturers industry and in the wireless industry, we may have difficulty
securing the necessary handsets in order to meet any additional FCC requirements. In addition,
since we are required to offer these hearing aid-compatible wireless phones for each air interface
we provide, this requirement may limit our ability to offer services using new air interfaces other
than CDMA 1XRTT, may limit the number of handsets we can offer, or may increase the costs of
handsets for those new air interfaces. Further, to the extent that the costs of such handsets are
more than non-hearing aid-compatible digital wireless handsets, demand for our services may
decrease, the number of wireless phones we can offer to our customers may decline, or our selling
costs may increase if we choose to subsidize the cost of the hearing aid-compatible handsets.
Backup Power Requirements. In October 2007, the FCC adopted rules which, if they had taken
effect, would have required us to maintain emergency backup power for a minimum of twenty-four
hours for certain of our equipment that is normally powered from local commercial power located
inside mobile switching offices, and eight hours for
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certain of our equipment that are normally powered from local commercial power and at other
locations, including cell sites and DAS nodes. Various aspects of the rules were challenged in
court and before the Office of Management and Budget, or OMB. As a result, the rules have not taken
effect and are not being enforced, and the FCC has indicated that it plans to seek comment on
revised backup power rules applicable to wireless providers. We are unable to predict with any
certainty the likely outcome of any proceeding regarding backup power rules. In addition, if we are
required to secure additional state or local permits or authorization, it could delay the
construction of any new cell sites or distributed antenna systems, or DAS systems, and launch of
services in new metropolitan areas.
Siting Issues. The location and construction of wireless antennas, DAS systems and nodes, base
stations and towers are subject to FCC and Federal Aviation Administration, or FAA, regulations,
federal environmental regulation, and other federal, state, and local regulations. With respect to
AWS-1 sites, we must notify the FAA when we add AWS-1 frequencies to existing sites that already
have been determined not to be a hazard to air navigation by the FAA. Antenna structures used by us
and other wireless providers also are subject to FCC 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, until the wireless provider has filed an environmental assessment with and obtained
approval from the FCC or a local agency. Processing of environmental assessments can delay
construction of antenna facilities, particularly if the FCC or local agency determines that
additional information is required or if community opposition arises. In addition, several
environmental groups have requested various changes to the FCCs environmental processing rules,
challenged specific environmental assessments as failing statutory requirements and sought to have
the FCC conduct a comprehensive assessment of antenna tower construction environmental effects. The
FCC also has been ordered by the Court of Appeals for the DC Circuit to further consider the impact
that communications facilities, including wireless towers and antennas, may have on migratory
birds, and the FCC has initiated a proceeding to do so. In the meantime, there are a variety of
federal and state court actions in which citizen and environmental groups have sought to deny
individual tower approvals based upon potential adverse impacts to migratory birds. Although we
almost exclusively 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 on our costs of such access.
Tower Lighting and Painting. The FCC has established rules requiring certain towers and other
structures to be painted and lighted to minimize the hazard to air navigation. In addition, we are
obligated to notify the FAA if the lighting at a tower which is required to be lighted is no longer
lighted. A failure to abide by these requirements could result in the imposition of fines and
forfeitures or other liability if an accident occurs. We generally collocate on existing towers
and structures and do not have the right to paint or control the lighting at the site but still
could be held accountable if the lighting and painting requirements are not met.
Radio Frequency Limits. The FCC sets limits on radio frequency, or RF, emissions from cell
sites and has rules that establish procedures intended to protect persons from RF hazards. We have
policies in place to ensure compliance with these applicable limits at cell sites where we have
operations, but we cannot guarantee that we are in compliance at each cell site. Any noncompliance
could have an impact on our operations at a particular cell site.
Emergency Warning. The FCC has adopted technical standards, protocols, procedures, and other
requirements under the Warning, Alert, and Response Network Act, or WARN Act, to govern emergency
alerting standards for CMRS providers which voluntarily elect to participate. We have elected to
participate in the voluntary emergency alert program. This election may cause us to incur costs and
expenses and our customers may be required to purchase new handsets. Under the adopted rules, if a
CMRS carrier elects to participate, the carrier must notify customers of the availability of
emergency alerts but may not charge separately for the alerting capability and the CMRS carriers
liability related to, or any harm resulting from, the transmission of, or failure to transmit, an
emergency alert is limited. If we decide to withdraw from participation at a later date, our
customers may decide to terminate their service with us. The FCC also is considering the
feasibility of requiring wireless providers to distribute emergency information and the FCC may
change its requirements for the rules under the WARN Act, which additional requirements or changes
would cause us to incur additional costs and expenses.
Roaming. The FCC long has required CMRS providers to permit customers of other carriers to
roam manually on their networks, for example, by supplying a credit card number, provided that
the roaming customers handset is technically capable of accessing the roamed-on network. More
recently, the FCC has ruled that automatic roaming also is a common carrier obligation for CMRS
carriers. This ruling requires CMRS carriers to provide automatic roaming services to other CMRS
carriers upon reasonable request and on a just, reasonable, and non-discriminatory
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basis pursuant to Sections 201 and 202 of the Communications Act. This automatic roaming
obligation extends to services such as ours that are real-time, two-way switched voice or data
services that are interconnected with the public switched network and utilize an in-network
switching facility that enables the provider to reuse frequencies and accomplish seamless hand-offs
of subscriber calls. Automatic roaming rights are important to us because we provide service in a
limited number of metropolitan areas in the United States and must rely on other carriers in order
to offer roaming services outside our existing metropolitan areas. The FCC rules, however, do not
require carriers to provide automatic roaming to areas where the roamers home carrier holds
licenses or otherwise has spectrum usage rights. This in-market limitation may preclude our
customers from receiving automatic roaming in large portions of the United States where we recently
acquired licenses but have not yet built networks or offer services and do not have existing
long-term roaming agreements, such as the geographic areas included in our AWS-1 and 700 MHz
licenses. The limitation of automatic roaming rights to areas in which we do not hold or lease
spectrum could limit our ability to renew or extend our existing roaming agreements. We and other
carriers have filed petitions for reconsideration of this limitation, but we are unable at this
time to predict with any certainty the likely outcome of these reconsideration requests.
The FCC also has not extended the automatic roaming obligation to services that are classified
as information services (such as high speed Internet services) or to services that are not CMRS but
the FCC is seeking comment on whether the roaming obligation should be extended to such
non-interconnected services or features. We cannot predict the likely outcome or timing of this
proceeding. If the FCC does not adopt an automatic roaming requirement for non-interconnected
services or features, such as information services, high speed broadband services, and broadband
Internet access services, we could have difficulty attracting and retaining certain groups of
customers.
In its recent approval of the Verizon Wireless purchase of Alltel Wireless, the FCC imposed
conditions that allow carriers like us who have roaming agreements with both Verizon Wireless and
Alltel Wireless to use either agreement to govern all traffic exchanged with the post-merger
Verizon Wireless for at least four years after the date of the closing of the transaction. We have
opted to elect the Alltel Wireless roaming agreement to govern all of our roaming traffic with the
combined Verizon Wireless-Alltel, though Verizon Wireless may take the position that our right to
elect the Alltel Wireless agreement only applies to the rate and not to other terms and conditions.
We and others have asked the Commission to clarify these requirements, to extend the four-year
commitment to seven years and to require post-merger Verizon Wireless to offer automatic roaming
for data services and features on a non-discriminatory basis. We are unable at this time to predict
with any certainty the likely outcome of these reconsideration requests.
Wireless Open Access. A provider of VoIP services has asked the FCC to issue a declaratory
ruling that would give wireless broadband mobile customers the right to utilize any device of their
choice to access a wireless broadband mobile network as long as the device did not cause
interference or network degradation and the FCC has placed this request on public notice. The
petition also seeks to enable customers to run applications of their choice on wireless broadband
mobile networks. This so-called Wireless Carterfone Rule is opposed by many wireless broadband
mobile companies, including us and CTIA. The proponent also requested that the FCC initiate
proceedings to determine whether the current practices of wireless broadband mobile carriers
comport with the Communications Act. We cannot be certain as to the likely outcome of this
proceeding, but the imposition by the FCC of Open Network Platform requirements on a portion of the
700 MHz spectrum indicates some support at the agency for a Wireless Carterfone Rule, and such
support may increase in the future. The adoption of such a rule for existing networks could permit
third parties to run applications on our network that consume large amounts of airtime and/or
bandwidth. Our fixed price, unlimited service is not well-suited to such applications and a mandate
of this nature could substantially impede our business.
Network Management. In November 2007, a digital content company asked the FCC to prohibit
broadband network operators from blocking, degrading or unreasonably discriminating against lawful
Internet applications, context or technologies. In August 2008, the FCC ruled that Comcast
Corporation violated the FCCs policy regarding reasonable broadband network management by
discriminating against certain types of network traffic. This ruling currently is on appeal. At
this point, we cannot predict the likely outcome of the appeal. We also are unable to predict this
rulings impact on us, or whether the FCC will initiate similar investigations against other
broadband providers, including wireless providers.
White Spaces. In November 2008, the FCC adopted rules to allow unlicensed radio transmitters
to operate in the unused broadcast digital television spectrum, or White Spaces. The FCCs rules
provide for both fixed and personal/portable devices to operate in the White Spaces on an
unlicensed basis, subject to various protections to existing users of the spectrum. It is possible
that entities may offer services in the White Spaces that could compete
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with services offered by us. We are unable to predict the impact of allowing the use of White
Spaces for wireless broadband mobile services on our business or the competitive effect of these
new rules.
Regulatory Classifications. The FCC has found that wireless broadband Internet access service
offered at speeds in excess of 200 kbps in at least one direction is an information service under
the Communications Act, and thus essentially unregulated. In addition, the FCC has found that the
transmission component of wireless broadband Internet access service meets the definition of
telecommunications under the Communications Act and that the offering of a telecommunications
transmission component as part of a functionally integrated Internet access service offering is not
a regulated telecommunications service under the Communications Act. Further, the FCC has found
that mobile wireless broadband Internet access service is not a commercial mobile service under
Section 332 of the Communications Act. Carriers offering mobile wireless broadband Internet access
services are not considered common carriers and have no common carrier obligations with respect to
this service. Accordingly, as a result of such classification decisions, we and our competitors
have greater flexibility in establishing the terms and conditions, including pricing, of this
service.
In January 2008, the FCC solicited comments on whether text messages and short codes are
common carrier services to which CMRS carriers must provide non-discriminatory access. We cannot
predict the likely outcome of this proceeding, the likely timing of an FCC ruling, or the effect
that such a requirement would have on us.
Outage Reporting. The FCC requires all telecommunications carriers to report outages to the
FCC. These reporting requirements affect the way we track and gather data regarding system outages
and repair outages, and potentially subject us to fines and forfeitures if we fail to make timely
reports.
Other federal regulation
Copyright Protection. The Digital Millennium Copyright Act, or DMCA, prohibits the
circumvention of technological measures employed to protect a copyrighted work, or access control.
However, under the DMCA, the Copyright Office of the Library of Congress, or the Copyright Office,
has the authority to exempt certain activities which otherwise might be prohibited by that section
for a period of three years. In November 2006, the Copyright Office granted an exemption to the
DMCA to allow circumvention of 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. This
exemption is effective through October 27, 2009 unless extended by the Copyright Office. We and
others have filed comments asking the Copyright Office to extend this, or a substantially similar
exemption, for another three-year period. Other interested parties, including the principal
wireless industry association, or CTIA, have opposed any extension of this exemption. We are unable
to predict with any certainty the likely outcome of the Copyright Offices determination.
We have implemented a service called MetroFlash that enables new customers under certain
circumstances to unlock their existing CDMA handsets, reprogram them to operate on our networks,
and to connect them to our network. If a significant number of new customers are attracted to our
service as a result of this service and we are unable to continue this service, either because of
the failure of the Copyright Office to extend the exemption or because of complaints against us by
other third parties, it could adversely affect our ability to continue to attract new customers to
our service.
Economic Stimulus. Congress recently enacted the American Recovery and Reinvestment Act of
2009, or the Recovery Act, which provides, among other things, for an aggregate appropriation of
$7.2 billion to fund grants to provide access to broadband service to consumers residing in rural,
unserved or underserved areas of the United States. The grants are available to, among others,
wireless broadband mobile carriers. Grants of up to 80% of the total cost of the project may be
used to fund broadband infrastructure projects in certain instances. A significant portion of
these funds is expected to be made available in 2009 and 2010. We, our competitors, and new
entrants may decide to apply for the Recovery Act funds. The details regarding the terms and
conditions of any such grants are unsettled and the usefulness of these funds to us is uncertain.
If our competitors or new entrants receive grants, this could allow them to provide service at
lower rates, to have lower costs to provide service, or to provide service in areas that we could
not serve economically without support from these grants. If we seek and receive these grants, we
could use these funds to provide service in areas that we traditionally have not served, to reduce
our costs to provide service in certain areas, and to lower our service prices.
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Other. Our operations also are subject to various other regulations, including those
regulations promulgated by the Federal Trade Commission, the Federal Aviation Administration, the
Environmental Protection Agency, the Occupational Safety and Health Administration and state and
local regulatory agencies and legislative bodies.
State, local and other regulation
The Communications Act preempts state or local regulation of market entry or rates charged by
any CMRS provider. As a result, we are free to establish rates and offer new products and services
with minimum state regulation. However, states and local agencies may regulate other terms and
conditions of wireless service, and certain states where we operate have adopted rules and
regulations to which we are subject, primarily focusing upon consumer protection issues and
resolution of customer complaints. In 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, ultimately increasing state regulatory
authority over the wireless industry. To the extent that applicable rules differ from state to
state, our costs of compliance may go up and our ability to have uniform policies and practices
throughout our business may be impaired. State and local governments also may manage public rights
of way and can require fair and reasonable compensation from telecommunications carriers, including
CMRS providers, for the use of such rights of any, so long as the government publicly discloses
such compensation.
Various decisions have been rendered by, and other proceedings are pending before, state
public utility commissions and courts pertaining to the extent to which the FCCs preemptive rights
over CMRS rates and entry prevent states from regulating aspects of wireless service, such as
billing policies and other consumer issues. Depending upon the ultimate resolution of these
proceedings, which we cannot predict at this time, our services may be subject to additional state
regulation which could cause us to incur additional costs.
The location and construction of wireless antennas, DAS systems and nodes, base stations and
towers are subject to state and local environmental regulations, zoning, permitting, land use and
other regulation. Before we can put a DAS node or site into commercial operation, we, or the tower
owner in the case of leased sites, must obtain all necessary zoning and building permit approvals.
The time needed to obtain necessary zoning approvals, building permits and other state and local
permits varies from market to market and state to state and, in some cases, may materially delay
our ability to provide service. Variations also exist in local zoning processes. Further, certain
cities and municipalities impose severe restrictions and limitations on the placement of wireless
facilities which may impede our ability to provide service in some areas. In addition, in order to
deploy DAS systems, our DAS provider may need to obtain authorization from a local municipality. In
at least one instance, such authorization is subject to challenge. Actions of this nature could
have an adverse effect on our ability to construct and launch service in new metropolitan areas or
to expand service in existing markets. Further, we may be subject to environmental compliance
regulations with respect to the operation of standby power generators, batteries and fuel storage
for our telecommunications equipment. 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 DAS systems, reduce the service
provided to our customers, and affect our ability to attract and retain customers. Local zoning and
building ordinances also may make it difficult for us to comply with certain federal requirements,
such as the backup power requirements under consideration by the FCC.
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.
Certain 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, other states and municipalities may adopt similar restrictions in the future, and one
national organization is advocating a total ban on the use of wireless phones while driving. If
state and local governments in areas where we conduct business adopt regulations restricting the
use of wireless handsets while driving, we could experience reduced demand for our services.
Certain states in which we provide service are in the process of reviewing proposed
legislation that would require persons selling prepaid wireless services, such as ours, to verify a
customers identity using government identification. We currently do not require our subscribers to
provide a government issued identification to initiate
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service with us. If such legislation is passed, it could have a material adverse affect on our
business, financial condition or operating results.
Future Regulation
From time to time, federal, state or local government regulators enact new or revise existing
legislation or regulations that could affect us, either beneficially or adversely. Ongoing changes
in the political and financial climate may foster increased legislation or regulation. We cannot
assure you that federal, state or local governments will not enact legislation or that the FCC or
other federal, state or local regulators will not adopt regulations or take other actions that
might adversely affect us.
Item 1A. Risk Factors
Risks Related to Our Business
Our business strategy may not succeed in the long term.
We offer unlimited wireless broadband mobile services on a paid-in-advance basis for flat
monthly rates without requiring a long-term service contract or a credit check. This approach to
marketing wireless broadband mobile services may not prove to be successful in the long term. Some
companies that offered this type of service in the past were not successful. From time to time, we
evaluate our products, service offerings and the demands of our target customers and may, as a
result, amend, change, discontinue or adjust our products, service offerings or initiate or offer
new permanent, trial or promotional product or service offerings. These new or changed product and
service offerings may not be successful or prove to be profitable.
A failure to meet the demands of our customers, could adversely affect our business, financial
condition and operating results.
Customer demand for our products and services could be impacted by numerous factors including
the different types of products and services offered, service content, technology, handset options,
service areas, network quality, customer perceptions, customer care levels and the prices and range
of service plans and products. Managing these factors and customers expectations of these factors
is essential in attracting and retaining customers. We must continually incur costs in order to
improve and enhance our products and services to remain competitive, which may include costs to
expand the capacity and coverage of our network, costs to replace or migrate to new vendors or
services, purchase additional spectrum, purchase necessary infrastructure equipment, handsets and
related accessories to meet customer needs and secure the necessary governmental approvals and
renewals for our operations. Delays or failure to purchase additional spectrum or to make these
enhancements to our products, services or network, could limit our ability to meet customer
expectations. Further, even if we continually upgrade and maintain our networks and enhance our
products and services, there can be no assurance that our existing customers will not switch to
another wireless provider. If we are unable to meet customer expectations as to these factors, we
may have difficulty attracting and retaining customers, which could impair our financial
performance and could have an adverse effect on our business, financial condition and operating
results.
We may not be successful in continuing to grow our customer base.
Our business plan assumes continued growth in our customer base. Our ability to continue the
growth of our customer base and achieve the customer penetration levels that we currently believe
are possible with our business model in our markets is subject to a number of risks, including:
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increased competition from existing competitors or new competitors; |
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higher than anticipated churn in our markets; |
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our inability to increase our network capacity in areas we currently serve to meet
increasing customer demand and our inability due to limitations in customer service, billing
and other systems to meet customer expectations and demands; |
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our inability to continue to offer products or services which our current or prospective
customers want; |
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our inability to launch service in new metropolitan areas; |
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our inability to attract and retain indirect agents and dealers for our products and
services; |
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our inability to increase the relevant coverage areas in our existing markets to expand our
roaming arrangements to areas that are important to us, or to allow us to offer services at
rates which are attractive to, our current and prospective customers; |
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unfavorable United States economic conditions, which may have a disproportionate negative
impact on portions of our customer base; |
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changes in the demographics of our markets; and |
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adverse changes in the legislative and regulatory environment that may limit our ability to
grow our customer base. |
If we are unable to achieve the aggregate levels of customer penetration that we currently
believe are possible with our business model, our ability to continue to increase our customer base
and revenues at the rates we currently expect may be limited and we may fail to achieve additional
economies of scale. Any failure to achieve the penetration levels we currently believe are possible
and to successfully increase our customer base may have a material adverse impact on our business,
financial condition and operating results.
Our business is seasonal and our operating results for future periods will be affected negatively
if we fail to have strong customer growth in the first and fourth quarters.
Our business is seasonal, with our largest number of subscribers typically being added in the
first and fourth quarters. If we fail to meet our expectations for customer additions in the first
or fourth quarter, it could have a negative impact on our business, financial condition and
operating results.
Failing to manage our churn rate or experiencing a higher rate of customer turnover than we have
forecasted could adversely affect our business, financial condition and operating results.
Our customers do not have long-term contracts and can discontinue their service at any time
without penalty. We expect our churn rate to be higher than postpay wireless carriers. If we
experience an even higher rate of churn than we expect, we could experience reduced revenues and
increased marketing costs to attract replacement customers required to sustain our business plan,
which could reduce our profit margin and could reduce the cash available to construct and operate
new markets. In addition, we may not be able to profitably replace customers who leave our service
or replace them at all. Our rate of customer churn can be affected by a number of factors,
including the following:
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network issues, including network coverage, network reliability, dropped and blocked calls,
and network availability; |
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lack of competitive regional and nationwide roaming and the inability of our customers to
cost-effectively roam onto other wireless networks; |
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affordability and general economic conditions; |
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supplier or vendor failures; |
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customer care concerns; |
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handset issues, including lack of early access to the newest handsets, handset prices and
handset problems; |
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wireless number portability requirements that allow customers to keep their wireless phone
numbers when switching between service providers; |
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our inability to offer bundled services or new services offered by our competitors; and |
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competitive offers by other producers. |
We cannot assure you that our strategies to address customer churn will be successful. If we
experience a rate of customer churn higher than we expect 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.
Our operations require continued capital expenditures and a failure to have access to capital
could materially adversely affect our business, financial condition and operating results.
Our business strategy involves expanding into and competing in major metropolitan areas, all
of which have significant established competition from other providers. To compete effectively, we
must continue to upgrade and enhance our network and services. As a result, we have invested and
expect to continue to invest a significant amount of capital in the future to construct, maintain,
upgrade and operate our network, billing, customer care and information systems, to implement our
business plans, including our fourth generation network, and to support future growth of our
wireless business.
Historically, we have been able to fund capital expenditures and service our debt from cash
generated from our operations and various debt and equity offerings. We may require additional
capital to fund our long-term business plan, including operating losses, network expansion,
servicing of our debt and possible spectrum acquisitions. Our success and viability will depend on
our ability to maintain and increase revenues and to raise additional capital, when and if needed,
on reasonable terms. We may not be able to arrange additional financing, whether debt, equity or
otherwise, to fund our future needs on terms acceptable to us or at all. Our ability to arrange
additional financing will depend on, among other factors, our credit ratings, financial and
operating performance, general economic, financial, competitive, legislative and regulatory
conditions and prevailing capital market conditions. Many of these factors are beyond our control.
Failure to obtain suitable financing when needed could, among other things, result in our inability
to continue to expand our businesses as planned or to meet competitive challenges; forego strategic
opportunities; delay and/or reduce network deployments and capital expenditures, operations,
spectrum acquisitions and investments; and restructure or refinance our indebtedness prior to
maturity or sell additional equity or seek additional debt financing. We cannot assure you that our
business will generate sufficient cash flow from operations, or that future borrowings, including
borrowings under our senior secured credit facility, will be available to us in an amount
sufficient to enable us to pay our indebtedness or to fund our working capital and other liquidity
needs, or at all. Further, as our operations grow, it may be more difficult to adapt and modify
our business plan based on the availability of funding. If we incur significant additional
indebtedness, or if we do not continue to generate sufficient cash from our operations, our credit
ratings could be adversely affected, which would likely increase our future borrowing costs and
could affect our ability to access capital.
We face intense competition from other telecommunications providers and new entrants in the
marketplace.
We compete directly in each of our markets with wireless, wireline, cable, satellite, Internet
and other communications providers. 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 a larger market share than we have, which may affect our ability to compete
successfully. These competitors often have established relationships with a larger base of current
and potential customers. These advantages may allow our competitors to offer service for lower
prices, market to broader customer segments, and offer service over larger geographic areas which
may have a material adverse effect on our business, financial condition and operating results.
Some of our competitors may have, or may in the future, take advantage of governmental programs
which may allow them to offer services for lower prices, have lower costs, or provide service in
areas which may be diseconomic for us to serve without taking advantage of such programs. If we
choose not to or are unable to participate in such governmental programs and our competitors
participate, our competitors could offer services for lower prices, have lower costs, or provide
service in areas which are diseconomic for us to serve without taking advantage of such programs,
which could have a material adverse effect on our business, financial condition, or operating
results.
Some of our competitors in the telecommunications and related industries have undertaken joint
ventures, mergers and strategic alliances that have provided them with greater access to capital,
access to wider geographic territory, access to greater spectrum, access to technical, marketing,
sales, purchasing and distribution resources and more attractive bundles of services. Recent joint
ventures, mergers and strategic alliances in the wireless industry have resulted in, and if the
trend continues, will continue to foster larger competitors over time and our operating results
could be adversely affected and our ability to grow may be hindered. Many of our competitors with
greater access
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to capital and production and distribution resources have also entered into exclusive deals
with vendors, including handset vendors. As handset selection and pricing are increasingly
important to customers, the lack of availability to us of the latest and most popular handsets as a
result of these exclusive dealings could put us at a significant competitive disadvantage and could
make it more difficult for us to attract and retain our customers. Similarly, we believe we pay
more, on average, than other national carriers for our handsets and if this continues we could be
forced to subsidize the price of our handsets which could adversely affect our financial condition
and operating results. Many of our competitors also use third party dealers to market and sell
their products and services. Competition for dealers is intense. We may have difficulty attracting
and retaining dealers and any inability to do so could have an adverse effect on our ability to
attract and retain customers which could have material adverse effect on our business, financial
condition and operating results.
Additionally, the FCC in the past has taken, and may in the future take, steps to make
additional spectrum available for wireless services in each of our metropolitan areas. Any auction
and licensing of new spectrum 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 be able to
offer with the licenses we hold or to which we have access due to technological or economic
constraints. Also, the FCC has taken, and in the future may take, regulatory actions designed to
provide greater capacity and flexibility to other licensees, including our competitors. In
addition, some companies in non-telecommunications businesses, including energy companies and
utility companies are also expanding their services to offer communications and broadband services.
We cannot control most of these factors and the continuing consolidation and resulting economies of
scale and access to greater resources and additional competition could result in greater product,
service, pricing and cost disadvantages to us which could have a material adverse affect on our
business, financial condition and operating results.
We may face increasing competitive pricing and service bundling.
The competitive pressures of the wireless telecommunications industry have caused, and may
continue to cause, other carriers to offer unlimited service plans or service plans with
increasingly large bundles of minutes of use at increasingly lower prices or fixed monthly prices.
All of our national wireless broadband mobile competitors and certain of our regional competitors
currently are offering unlimited fixed-rate service plans in the markets where we operate and plan
to operate and this may cause other wireless competitors to also offer unlimited fixed-rate service
plans. Since we primarily serve major metropolitan areas where the national wireless broadband
mobile carriers are also offering services, we may be subject to more competition than the wireless
broadband mobile industry generally and subject to greater commercial disadvantage. Further,
market prices for wireless broadband mobile services have declined over time and may continue to
decline with increased competition. Moreover, certain carriers we compete against, or may compete
against in the future, offer additional services, such as wireline phone service, cable or
satellite television, media and Internet, and are capable of bundling their wireless services with
these other services in a package of services that we may not be able to duplicate at competitive
prices. In response to all the competitive offerings in the marketplace and falling market prices,
we have added, and in the future may be required to add, additional select features to our existing
service plans in our metropolitan areas, and we may consider additional targeted promotional
activities and reduced pricing as well as subsidizing the cost of handsets or increasing payments
to our indirect dealers as we evaluate and respond to the competitive environment going forward.
As a result, we expect that increased competition may result in more competitive pricing, slower
growth, higher costs and increased churn of our customer base, as well as the possibility of having
to change our service plans, increase our handset subsidies, and increase our dealer payments in
response to competition, which may adversely affect our business, financial condition and operating
results.
The wireless industry is experiencing rapid technological change.
The wireless telecommunications industry has been, and we believe will continue to be,
characterized by significant technological change, including the rapid development and introduction
of new technologies, products, and services, such as voice-over Internet protocol, or VoIP,
push-to-talk services, location based services, such as global positioning satellite, or GPS,
mapping technology, social networking services, and high speed data services, including streaming
audio, streaming video, mobile gaming, advertisement paid services, video conferencing and other
applications. These technological advances, evolving industry standards, ongoing improvements in
the capacity and the quality of digital technology, such as the implementation and development of
third generation, or 3G technology, wideband technologies such as WiFi or WiMax which do not rely
on FCC-licensed spectrum, or the development of fourth generation, or 4G technology, such as long
term evolution, or LTE, and the development of data and broadband capabilities, could cause the
technology used by us on our wireless broadband mobile network to become less competitive or
obsolete. Additionally, VoIP is an emerging technological trend that could result in a
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decrease in demand for switched telephone services, such as those we currently provide. The
resulting technological development of WiFi or WiMax enabled handsets permitting customers to
communicate using voice and data services with their handset using this VoIP technology in any area
equipped with a wireless Internet connection, or hot spot, would potentially allow 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 approaching universal coverage. Further, the development of new equipment, such as
femtocells, could allow our competitors to offer increased usage without increased cost thus
reducing our cost advantage.
Thus, our continued success will depend, in part, on our ability to anticipate or adapt to
these and future technological changes and to offer, on a timely basis, services that meet customer
demands. For us to keep pace with these technological changes and remain competitive, we must
continue to make significant capital expenditures to our networks and/or 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. We cannot assure you that we will obtain access to new technology, such as LTE, on a
timely basis, on satisfactory terms, or that we will have adequate spectrum, or be able to acquire
additional spectrum, to offer new services or implement new technologies. If we do not offer these
services, we may have difficulty attracting and retaining customers. Further, we cannot predict the
effect of technological changes on our business. We also cannot be certain that the choices we make
regarding technology and new service offerings will prove to be successful in the market place or
will achieve their intended results. All of these factors could have a material adverse effect on
our business, financial condition and operating results.
We are dependent on certain network technology improvements which may not occur, or may be
materially delayed.
Most national wireless broadband mobile carriers have greater spectrum capacity than we do
that can be used to support 3G and 4G services. These national wireless broadband mobile carriers
are currently investing substantial capital to deploy the necessary equipment to deliver 3G
enhanced services and have invested in additional spectrum to deliver 4G services. Two of our
national wireless broadband mobile competitors acquired a significant portion of the 700 MHz
spectrum recently auctioned by the FCC. This 700 MHz spectrum is considered by some industry
experts to be particularly desirable due to its propagation characteristics. The national wireless
broadband mobile carriers in many instances on average have more spectrum in each of the
metropolitan areas in which we operate, or plan to operate, than we or Royal Street do. Our
limited spectrum may require us to secure more cell sites to provide equivalent service (including
data services based on EV-DO or LTE technology), spend greater capital compared to our competitors,
deploy more expensive network equipment, such as six-sector antennas, EV-DO Revision A with VoIP or
LTE, deploy equipment sooner than our competitors, require us to use DAS systems or make us more
dependent on improvements in handsets, such as EVRC-B or 4G capable handsets. There can be no
assurance that the additional technology improvements will be developed by our existing
infrastructure provider, such improvements will be delivered when needed at cost-effective prices,
that such technology improvements will deliver our projected network efficiency improvements, or
that we can secure adequate tower sites or additional spectrum or have access to DAS systems.
If projected or anticipated technology improvements are not achieved, or are not achieved in
the timeframes in which we need such improvements, or at the costs we anticipate or can afford, or
are not developed by our existing suppliers, we may not have adequate spectrum in certain
metropolitan areas, which may limit our ability to increase 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, which could
have a material adverse effect on our business, financial condition and operating results.
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We may be unable to acquire additional spectrum in the future at a reasonable cost.
Because we offer unlimited calling services for a fixed rate, our customers tend, on average,
to use our services more than the customers of other wireless broadband mobile carriers. We believe
that the average minutes of use of our customers 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, LTE, EVRC-B or 4G handsets and intelligent antennas.
Nevertheless, in the future we may need to acquire additional spectrum in order to maintain our
quality of service, to meet increasing customer demands or to allow the deployment of these
technologies. However, we cannot assure you that additional spectrum will be made available by the
FCC on a timely basis on terms and conditions or under service rules that we consider to be
suitable for our commercial uses or that we will be able to acquire additional spectrum at a
reasonable cost. In addition, the FCC may impose conditions on the use of new wireless broadband
mobile spectrum, such as heightened build-out requirements or open access requirements that may
make it less attractive to, or less economical for, us. If additional spectrum is unavailable on
reasonable terms and conditions when needed, unavailable at a reasonable cost, or unavailable
without conditions that impose significant costs on us, we may not be able to continue to increase
our customer base, meet the requirements of our customers usage of our services or to offer new
services and as a result we could lose customers or revenues, which could materially adversely
affect our business, financial condition, or operating results.
We may be unable to successfully develop and incorporate additional wireless data services into
our service offerings in the future.
Wireless broadband mobile data services are increasingly becoming a meaningful component of
many wireless broadband mobile carriers strategies and financial results. The national wireless
broadband mobile carriers have invested (and we expect will continue to invest) significant
resources to develop and deliver these on new data services to their customers. As market prices
for wireless voice services continue to decline, if we are unable to offer such new data services
we may not have additional revenue to offset the decline in wireless voice revenues. Similarly, as
customers increasingly demand wireless broadband mobile data services as part of the core feature
set of their wireless services, the failure to offer such services could reduce sales and increase
churn. Currently, we offer limited wireless data offerings which are not as robust as those offered
by some of our competitors and may never be. In addition, we have not and may not gain access to
certain of the proprietary data content available to national wireless broadband mobile operators.
If we are unable in the future to successfully incorporate the most advanced wireless data
services, including certain 3G and 4G technologies, into our service offerings or gain access to
popular content, our customer additions and ARPU could decrease and our churn could increase. In
addition, there can be no assurance that we can provide wireless broadband mobile data services on
a profitable basis or that vendors will develop and make available to companies of our size popular
applications and handsets with features, functionality and pricing desired by customers.
Furthermore, we rely on third parties to provide us access to most data, music and video services
and access to new handsets to deliver these advanced services. If we are unable to obtain access to
such services, incorporate such services into our service offerings, or purchase handsets at a
reasonable cost and on a timely basis in the future, it could have a material adverse effect on our
business, financial condition and operating results.
We may undertake mergers, acquisitions or strategic transactions that could result in operating
difficulties, dilution and distraction from our business.
Historically we have expanded our markets through the purchase of spectrum. In the future, we
may expand the markets in which we operate through the acquisition of selected spectrum or
operating markets from other telecommunication service providers, the acquisition of additional
spectrum from FCC auctions, and the acquisition of other telecommunication service providers;
through direct investments; or through strategic transactions. Any such transactions can be very
risky, may require a disproportionate amount of our management and financial resources, may divert
managements attention, and may create various operating difficulties and expenditures, among which
may include:
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uncertain revenues and expenses, with the result that we may not realize the growth in
revenues, anticipated cost structure, profitability, or return on investment that we expect; |
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difficulty integrating the acquired technologies, services, spectrum, products, operations
and personnel of the acquired businesses while maintaining uniform standards, controls,
policies and procedures; |
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disruption of ongoing business; |
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impact on our cash and available credit lines for use in financing future growth and
working capital needs; |
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obligations imposed on us by counterparties in such transactions that limit our ability to
obtain additional financing, our ability to compete in geographic areas or specific lines of
business, or other aspects of our operational flexibility; |
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increasing cost and complexity of assuring the implementation and maintenance of adequate
internal control and disclosure controls and procedures, and of obtaining the reports and
attestations required under the Exchange Act; |
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inability to attract and retain key personnel; |
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impairment of relationships with employees, customers or vendors; |
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difficulties in consolidating and preparing our financial statements due to poor accounting
records, weak financial controls and, in some cases, procedures at acquired entities not
based on U.S. GAAP particularly those entities in which we lack control; and |
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inability to predict or anticipate market developments and capital commitments relating to
the acquired company, business or technology. |
The anticipated benefit to us of any strategic transaction, acquisition or merger may never
materialize. Future investments, acquisitions or dispositions, or similar arrangements could result
in dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities or
amortization expenses, or write-offs of goodwill, any of which could have an adverse effect on our
business, financial condition and operating results. Any such transactions may require us to obtain
additional equity or debt financing, which may not be available on acceptable terms, or at all.
Business, political, regulatory and economic factors may significantly affect our operations, the
manner in which we conduct our business and slow our rate of growth.
The United States economy has deteriorated significantly and may be depressed for the
foreseeable future. Our business could be affected by the economic conditions as well as consumer
spending in the areas in which we operate. These factors are outside of our control. As economic
conditions deteriorate, our services may be disproportionately and adversely affected due to the
generally lower per capita income of our customer base (versus the national facility-based wireless
broadband mobile carriers) that may be disproportionately affected by any disruption in the United
States economy, including an economic downturn or recession. In addition, a number of our customers
work in industries which may be disproportionately affected by an economic slowdown or recession.
More generally, adverse changes in the economy are likely to negatively affect our customers
ability to pay for existing services and to decrease their interest in purchasing new services. The
resulting impact of such economic conditions on consumer spending could have a material adverse
effect on demand for our services and on our business, financial condition and operating results.
Additionally, due to changes in the political climate as a result of the outcome of recent
state elections and the Presidential election in the United States, we cannot predict with any
certainty the nature and extent of the changes in federal, state and local laws, regulations and
policy we will face, or the effect of such elections on any pending legislation, such as the
immigration laws and policy. Any increased regulation, new policy initiatives, increased taxes or
any other changes in federal law may have an adverse effect on our business, financial condition
and operating results.
Recent disruptions in the financial markets could adversely affect our ability to obtain debt or
equity on reasonable terms or at all.
The wireless industry is a capital intensive business. To date, we have used internally
generated funds and the funds from the sale of debt and equity to finance our growth and build out
of our existing and planned metropolitan areas. If our current cash and excess internally
generated cash flows are insufficient to fund our business plan, improve and expand our network
infrastructure and services, participate in new opportunities, engage in acquisitions of additional
spectrum or businesses or participate in future FCC auctions, or service our debt, we may be forced
to
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sell additional equity, seek additional debt financing, borrow additional amounts under our
existing senior secured credit facility, refinance our existing indebtedness, or delay certain of
our planned expansion or other initiatives, additions of capacity, and technological advances.
Additionally, our senior secured credit facility includes a revolving line of credit that is to be
funded by a number of commercial and investment banks. The deteriorating worldwide economic
conditions, the banking crisis, and tightening capital markets may affect whether our lenders are
able to honor their commitments to fund our revolving line of credit should we need to draw on such
line of credit to pursue new opportunities, engage in acquisitions, or purchase additional
spectrum. Should we need to access the market for additional funds the competitiveness of the
wireless telecommunications industry, the volatility and demand of the capital markets, and the
continued uncertainty in the credit and capital markets may make it more difficult and costly for
us to raise capital through the issuance of any equity securities or incur any additional debt or
refinance existing debt on terms acceptable to us or at all and there can be no assurance that
sufficient funds will be available to us under our existing indebtedness or otherwise. Further,
should we need to raise additional capital, the foreign ownership restrictions mandated by the FCC,
and applicable to us, could limit our ability to attract additional equity financing outside the
United States. If we were able to obtain funds, it may not be on terms and conditions acceptable
to us, which could limit or preclude our ability to pursue new opportunities, engage in
acquisitions, or purchase additional spectrum, thus limiting our ability to expand our business
which could have a material adverse effect on our business, financial condition and operating
results.
We are exposed to counterparty risk in our senior secured credit facility and related interest
rate protection agreements.
We have entered into interest rate protection agreements to manage the Companys interest rate
risk exposure by fixing a portion of the interest expense we pay on our long-term debt under our
senior secured credit facility. There is considerable turmoil in the world economy and banking
markets which could affect whether the counterparties to such interest rate protection agreements
are able to honor their agreements. If the counterparties fail to honor their commitments, we
could experience higher interest rates, which could have a material adverse effect on our business, financial condition and operating
results. In addition, if the counterparties fail to honor their commitments, we also may be
required to replace such interest rate protection agreements with new interest rate protection
agreements in an amount equal to that portion of our long-term debt under our senior secured credit
facility and indentures governing our senior notes, which is not fixed and which is less than 50%
of our total long-term debt under our senior secured credit facility and indentures governing our
senior notes, and such replacement interest rate protection agreements may be at higher rates than
our current interest rate protection agreements. Further, if we are unable to enter into new
interest rate protection agreements, the lenders may claim we are in default under the terms of our
senior secured credit facility, which could have a material adverse effect on our business,
financial condition and operating results.
The investment of our substantial cash balances are subject to risk.
We can and have historically invested our substantial cash balances in, among other things,
securities issued and fully guaranteed by the United States or any state, highly rated commercial
paper and auction rate securities, money market funds meeting certain criteria, and demand
deposits. These investments are subject to credit, liquidity, market and interest rate risk. Such
risks may result in a loss of liquidity, substantial impairment to our investments, realization of
substantial future losses, or a complete loss of the investment in the long-term which may have a
material adverse effect on our business, financial condition, operating results and liquidity.
We currently are migrating our billing services to a new vendor.
We recently entered into an agreement with a new billing services provider, Amdocs Software
Systems Limited and Amdocs, Inc., or Amdocs, under which, subject to certain exclusions, Amdocs
will be our exclusive supplier of billing services in North America. Amdocs is in the
process of implementing the new billing services and migrating our customers from our existing
billing platform to the Amdocs platform. If Amdocs does not perform its obligations under the
agreement, ceases to continue to develop, or substantially delays development of, new features or
billing services or ceases to support its existing billing systems, we may be unable to secure
alternative billing services from another provider or providers in a timely manner, for a
reasonable cost or otherwise, which could have a material adverse effect on our business, financial
condition, and operating results. Our prior billing services vendor, Verisign, also has sold its
billing services business to another third party billing services vendor and we have amended our
contract with this new third party billing services vendor to include certain transition services.
If this third party billing services vendor fails to continue to provide the services that Verisign
previously provided prior to our transition to Amdocs, if the third party billing services vendor
fails to provide the agreed upon transition services, or if we are unable to transition our billing
services to Amdocs in a timely manner, we may not be able to bill our customers, provide customer
care, grow our business, report financial results, or manage our business and we may have increased
churn, all of which could have a material and adverse effect on our business, financial condition
and operating results.
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We and our suppliers may be subject to claims of infringement.
The technologies used in the telecommunications industry are protected by a wide array of
patents and other intellectual property rights. As a result, third parties may assert infringement
claims against us or our suppliers from time to time based on our or their general business
operations, the equipment, software or services we or they use or provide, or the specific
operation of our wireless networks or service. Our suppliers may be subject to infringement claims
that if proven could preclude the supplier from supplying us with the products and services we
require to run our business or offer our services, require the supplier to change the products and
services they provide to us in a way which could have a material adverse effect on us, or cause the
supplier to increase the charges for their products and services to us. We cannot guarantee that
we will be fully protected against all losses associated with an infringement claim involving our
manufacturers, licensors and suppliers who provide us with the equipment, software and technology
that we use in our business. In addition, our suppliers may be unable to pay any damages or honor
their indemnification obligations to us, which may result in us having to bear such losses. We may
also have to buy equipment and services from other third party suppliers or pay royalties to the
holders of intellectual property rights.
Moreover, we may be subject to claims that products, software and services provided by
different vendors which we combine with products or with services provided by other vendors or with
our own services in order to offer services to our customers are infringing on the rights of
others, and we may not have any indemnification protection from our vendors for these claims.
Further, we have been, and in the future may be, subject to claims that certain business processes
we use, services we provide, or products we create may infringe on 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
managements 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),
requiring us to pay royalties for prior periods, requiring us or our suppliers to redesign our or
their business operation, processes, systems, services or products to avoid claims of infringement,
or requiring us to purchase products and services from different vendors or not sell certain
products or services. If a claim is found to be valid or if we or our suppliers cannot successfully
negotiate a required royalty or license agreement, we could be forced to pay substantial damages,
including potentially treble damages, we could be subject to an injunction that could disrupt our
business, prevent us from offering some or all of our products or services and cause us to incur
losses of customers or revenues, any or all of which could be material and could adversely affect
our business, financial condition and operating results.
Substantially all of our network infrastructure equipment is manufactured or provided by a single
infrastructure vendor.
Substantially all of our PCS and AWS network infrastructure equipment is manufactured or
provided by Alcatel Lucent, formerly known as Lucent Technologies, Inc. We have entered into an
agreement with Alcatel Lucent to provide us with PCS and AWS CDMA system products and services,
including without limitation, wireless base stations, switches, power, cable and transmission
equipment and services The agreement does not cover any other non-AWS or non-PCS spectrum we may
acquire in the future, including our spectrum in the 700 MHz band or other technologies, such as
LTE. 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 work with
Alcatel Lucents equipment and software, or may require the expenditure of additional capital,
which may be material. The communications equipment market has been subject to recent economic
turmoil. If Alcatel Lucent ceases to develop, or substantially delays development of, new products
or ceases to support existing equipment and software, or experiences problems which prevent Alcatel
Lucent from performing its obligations under the agreement, we may be required to spend significant
amounts of money to replace such equipment and software, may not be able to offer new products or
services, and may not be able to compete effectively in our markets. If we fail to continue
purchasing our PCS and AWS 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 would have a material adverse effect on our business, financial condition and
operating results.
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We rely on third-parties to provide products, software and services that are integral to our
business.
Sophisticated financial, management, information network management and billing systems are
vital to our business. We currently rely on internal systems and third-party vendors to develop and
to provide all of these systems. We have entered into agreements with third-party suppliers to
provide products, software and services that are integral to our business, such as customer care,
financial reporting, network management, billing and payment processing. We purchase a substantial
portion of the products, software and services from only a few major suppliers and we generally
rely on one key vendor in each area. Some of these agreements may be terminated upon relatively
short notice. In addition, our plans for developing and implementing our financial information and
billing systems rely to some extent on the design, development and delivery of products, software
and services by third-party vendors. Our right to use these systems is dependent on agreements with
third-party vendors and these systems may not perform as anticipated. Our base stations are
installed on leased cell site facilities or on leased DAS nodes in connection with DAS systems. A
significant portion of these cell sites and all DAS systems are leased from a small number of cell
site and DAS system providers generally under master agreements.
If our suppliers terminate their agreements with us, experience interruptions or other
problems delivering products, software or services to us on a timely basis or at all, it may cause
us to have difficulty providing services to or billing our customers, developing, delivering, and
deploying new products and services and/or upgrading, maintaining, improving our networks, or
generating accurate or timely financial reports and information. 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. The loss, termination or expiration of these
agreements or our inability to renew them at all or on favorable terms or negotiate agreements with
other providers at comparable rates could harm our business. Our reliance on others to provide
essential products, software, and services on our behalf also gives us less control over the
efficiency, timeliness and quality of these products, software and services. If our master
agreement with one of our cell site or DAS providers were to terminate, or if the cell site or DAS
system providers were to experience severe financial difficulties or file for bankruptcy, or if one
of these cell site or DAS system providers were unable to support our use of its cell sites or DAS
systems, we would have to find new sites or rebuild the affected portion of our network. In
addition, the concentration of our cell site leases and DAS systems with a limited number of cell
site and DAS system providers could adversely affect our business, financial condition and
operating results if we are unable to renew our expiring leases or DAS system agreements with these
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 or DAS
systems were to consolidate with other cell site or DAS systems companies, they may be unable to
honor obligations to us or have the ability to raise prices which could materially affect our
profitability. If a material number of cell sites or DAS systems were no longer available for our
use, it could have a material adverse effect on our business, financial condition and operating
results.
Additionally, our business model utilizes and relies upon indirect distribution outlets
including a range of local, regional and national mass market dealers and retailers allowing us to
reach the largest number of potential customers in our metropolitan areas at a relatively low cost.
Many of our dealers own and operate more than one location and may operate in more than one of our
metropolitan areas. Because these third party dealers are the primary contact between us and our
customers in many instances, including in connection with accepting payment for our services on our
behalf, they play an important role in our ability to grow our business and in customer retention.
With the recent deterioration of the United States economy and the credit markets, which may
continue for the foreseeable future, some of our dealers and vendors may be unable to continue
their operations or secure funds for their continued operations. Further, due to the present
economic conditions, we may be unable to find participants in our local markets that would qualify
or be able to open a dealer location to replace closed operations. Since we rely on such third
parties to provide some of our services, any bankruptcy, termination, switch or disruption in
service by such third parties or diminution in the number of such third parties could be costly and
affect operating efficiencies and our ability to attract and retain customers which could have a
material adverse effect on our business, financial condition and operating results.
We utilize a limited number of DAS providers.
We currently use, and plan to continue to use, DAS systems in lieu of traditional cell sites
to provide service to certain critical portions of new metropolitan areas in which we plan to build
and in supplementing or adding capacity to existing systems. The use of DAS systems will result in
an acceleration of capital expenditures compared to our traditional metropolitan builds without DAS
systems. In order to construct DAS systems, the DAS provider will be required to obtain necessary
authority from the relevant state and local regulatory authorities and to secure certain
agreements, such as right of way agreements, in order to construct or operate the DAS systems. In
addition, the DAS system provider may be required to construct a transport network as part of their
construction of the DAS systems. These DAS systems may be leased and/or licensed from third party
suppliers. We utilize a
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limited number of DAS system providers. Some of the DAS system providers we are using have
not previously constructed or been authorized to construct DAS systems in certain of our new
metropolitan areas so there may be unforeseen obstacles and delays in constructing the DAS systems
in those metropolitan areas. In addition, the authorization of the DAS provider to construct DAS
systems may be subject to challenge and injunctive relief, resulting in delay and material costs in
providing alternative coverage in the affected metropolitan areas. In addition, DAS systems also
pose particular compliance challenges with regard to any backup power requirements that may be
adopted by the FCC, which, if adopted could have a material adverse effect on our ability to comply
with applicable laws, could require us to spend significant amounts of additional capital, and
could have a material adverse effect on our business, financial condition and operating results.
We may be unable to obtain the roaming and other services we need from other carriers at rates
that allow us to remain competitive or at all.
Many of our competitors have more extensive 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 and allow them to offer unlimited fixed-rate local, regional, and nationwide
roaming plans on their existing networks over a larger area than we can offer. We do not have as
extensive a network as the national wireless broadband mobile carriers, 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, they generally cover voice
but not data services, and some of these agreements may be terminated on relatively short notice.
As the wireless industry has consolidated, and may continue to consolidate in the future, we may
have increased difficulty entering into new roaming agreements with other technically compatible
carriers or replacing our existing roaming agreements. In addition, we believe the rates we are
charged by certain carriers in some instances are higher than the rates they charge to other
roaming partners. Further, many of the wireless carriers against whom we compete have service area
footprints substantially larger than our footprint.
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. The FCC recently clarified that CMRS providers
must offer automatic roaming services on just, reasonable and non-discriminatory terms, but found
that a CMRS provider is not required to offer roaming services in any geographic area for which a
requesting carrier holds a license or other spectrum usage rights, even if the requesting carrier
has not yet built its system. The FCC also has not extended full roaming rights to roaming
services that are classified as information services (such as high speed wireless Internet access
services), or for roaming services that are not classified as CMRS (such as non-interconnected
services). If we are unable to enter into or maintain roaming agreements for roaming services that
our customers want at reasonable rates, including in areas where we have licenses or lease spectrum
but have not constructed facilities, we may be unable to compete effectively and attract and retain
customers, and we may lose revenues. We also may be unable to continue to receive roaming services
in areas in which we hold licenses or lease spectrum after the expiration or termination of our
existing roaming agreements. We also may be obligated to allow customers of other technically
compatible carriers to roam automatically on our systems, which may enhance their ability to
compete with us. If these risks occur, it may have a material adverse effect on our business,
financial condition and operating results.
We may incur higher than anticipated intercarrier compensation costs.
When our customers use our service to call customers of other carriers, in certain
circumstances we are required to pay the carrier that serves the called party, and any intermediary
or transit carrier, for the use of their networks. An ongoing FCC rulemaking proceeding is
examining whether a unified intercarrier compensation regime should be established for all traffic
exchanged between all carriers, including CMRS carriers such as us. New intercarrier compensation
rules, if adopted, may result in increases in the charges we are required to pay other carriers for
terminating calls on their networks, increase the costs of or difficulty in negotiating new
agreements with carriers, and decrease the amount of revenue we receive for terminating calls from
other carriers on our network. Any such changes may have a materially adverse effect on our
business, financial condition and operating results.
Some carriers who terminate calls originated by our customers have sought, and others may
seek, to impose termination charges on us that we consider to be unreasonably high and have
threatened to pursue, or have initiated or may initiate, claims against us to recover these
charges. The outcome of these claims is uncertain. A determination that we are liable for
additional terminating compensation payments could subject us to additional claims by other
carriers. Further, legal and business considerations may inhibit our ability or willingness to
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traffic to telecommunication carriers who demand unreasonable payments. In addition, certain
transit carriers have taken the position that they can charge market rates for transit services,
which rates may in some instances be significantly higher than our current rates or the rates we
are willing to pay. We may be obligated to pay these higher rates and/or purchase services from
others or engage in direct connection, which may result in higher costs which could materially
affect our business, financial condition, and operating results.
A significant portion of our revenue is derived from geographic areas susceptible to natural and
other disasters.
Our markets in California, Texas and Florida represent a substantial portion of our business.
These same states, however, have a history of natural disasters which may adversely affect our
operations in those states. 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. We cannot provide any assurance that
the business interruption insurance we have will cover all losses we may experience as a result of
a natural disaster or terrorist attack, that the insurance carrier will be solvent or that the
insurance carrier will pay all claims made by us. If our networks cease operating for any
substantial period of time and any business interruption insurance we have does not pay, we may
lose revenue and customers, and may have difficulty attracting new customers in the future, which
could materially adversely affect our business, financial condition and operating results.
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, including our chief
executive officer, Roger Linquist. None of our managing key executives has an employment contract,
so any such executive officers may leave at any time subject to forfeiture of any unpaid
performance awards and any unvested options. We believe that our future success depends in
substantial part on our continued ability to attract and retain highly knowledgeable, qualified
executive, technical and management personnel. We believe that competition for highly qualified
management, technical and sales personnel is intense, and there can be no assurance that we will
retain our key management, technical and sales employees, that we will be successful in attracting,
assimilating or retaining other highly qualified management, technical and sales personnel in the
future sufficient to support our continued growth, or that we will be successful in replacing any
of our key management, technical and sales personnel that may retire or cease to be employed by us.
We have experienced occasional difficulties in recruiting qualified personnel and there can be no
assurance that we will not experience such difficulties in the future. The departure or retirement
of, or our inability to attract or retain, highly qualified executive, technical and management
personnel, including the chief executive officer, could materially and adversely affect our
business, financial condition and operating results.
Recent political changes could have an adverse effect on our relationship with our workforce.
None of our employees is covered by a collective bargaining agreement or represented by an
employee union. With the recent changes in the party affiliation of the President of the United
States and the changes in composition of Federal and state legislatures, legislation may be enacted
which could impose additional requirements on us or make it easier for union organizing activities.
If our employees become represented by an employee union, it may make it more difficult for us to
manage our business and to attract and retain new employees and may increase our cost of doing
business. Having our employees become represented by an employee union or having additional
requirements related to our employees imposed on us could have a material adverse effect on our
business, financial condition and operating results.
We are subject to numerous surcharges and fees from federal, state and local governments, and the
applicability and the amount of these fees is subject to great uncertainty.
Telecommunications providers pay a variety of surcharges and fees on their gross revenues from
interstate and intrastate services, including federal Universal Service Fund, or USF, fees and
common carrier regulatory fees. The division of our services between interstate services and
intrastate services, including the divisions associated with the federal USF fees, is a matter of
interpretation and may in the future be contested by the FCC or state authorities. The FCC also may
change in the future the basis on which federal USF fees are charged. The Federal government and
many states also apply transaction-based taxes to sales of our products and services and to our
purchases of telecommunications services from various carriers. In addition, state regulators and
local governments have imposed and may continue to impose various surcharges, taxes and fees on our
services. The applicability of these surcharges and fees to our services is uncertain in many cases
and jurisdictions may contest whether we have
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assessed and remitted those monies correctly. Periodically state and federal regulators may
increase or change the surcharges and fees we currently pay. In some instances we pass through
these charges to our customers. However, Congress, the FCC, state regulatory agencies or state
legislatures may limit our ability to pass through to our customers transaction based tax
liabilities, regulatory surcharges and regulatory fees imposed on us. 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 or increase our cost to provide service which could have a material adverse effect on
our business, financial condition or operating results.
Concerns about whether wireless telephones pose health and safety risks may lead to the adoption
of new regulations or lawsuits which could decrease demand for our services.
Media reports and some studies have suggested that radio frequency emissions from wireless
handsets may be linked to various health concerns, including cancer, or 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 various 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 would follow. In addition to
health concerns, safety concerns have been raised with respect to the use of wireless handsets
while driving. Certain 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, and other states and municipalities may do so in the future.
If consumers health concerns over radio frequency emissions increase, consumers may be
discouraged from using wireless handsets or services, regulators may impose restrictions or
increased requirements on the location and operation of cell sites, the use or design of wireless
telephones may restrict the use of wireless handsets while driving, or may require that all
wireless telephones include an earpiece that would enable the use of wireless telephones without
holding them against the users head. Such legislation or regulation could increase the cost of our
wireless handsets, reduce demand for our products and services, and increase other operating
expenses, or could expose wireless providers to further litigation, which, even if not successful,
may be costly to defend and could divert managements attention from our business. 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 adversely affect us
through a reduction in customers or a reduction in the availability of financing in the future. If
any of these risks occur, it could have a material adverse effect on our business, financial
condition and operating results.
System failures, security breaches and the unauthorized use of or interference with our network
could cause delays or interruptions of service, increase our cost of operations, and result in
harm to our business reputation which could cause us to lose customers.
To be successful, we must provide our customers reliable, trustworthy service. We rely upon
our networks and the networks of other providers to support all of our services. Some of the risks
to our networks and infrastructure which may prevent us from providing reliable service include:
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power surges or outages; |
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equipment failure; |
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vendor or supplier failures or delays; |
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software defects; |
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viruses and other attacks by hackers; |
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unauthorized use of our or our providers networks; |
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human error; |
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disruptions beyond our control, including disruptions caused by terrorist activities,
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failures in operational support systems. |
Network disruptions may cause interruptions in service or reduced capacity for customers,
either of which could cause us to lose customers and incur expenses. Further, our administrative
and capital costs associated with detecting, monitoring and reducing the incidence of fraud, or the
costs to replace or repair the network, may be substantial, thus causing our costs to provide
service to increase. Fraudulent use of our network may also 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 and impair our service resulting in higher churn as our competitors systems may
not experience similar problems.
Additionally, 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, misappropriate
or modify confidential personal information concerning our subscribers. In addition, misuse of our
customer information could result in harm to our customers and legal actions against us and to
additional harm perpetrated by third-parties who are given access to the consumer data. This could
damage our reputation which could have a material adverse effect on our business, financial
condition and operating results.
Risks Related to Legal and Regulatory Matters
Our ability to provide service to our customers and generate revenues could be harmed by adverse
regulatory action.
Our FCC licenses are major assets that we use to provide our services. Our FCC licenses are
subject to revocation and we may be subject to fines, forfeitures, penalties or other sanctions,
including the imposition of mandatory reporting requirements, license conditions, the imposition of
corporate monitors, and limitations on our ability to participate in future FCC auctions, if the
FCC were to find that we are not in compliance with its rules or the requirements of the
Communications Act. We must renew our FCC licenses periodically. Renewal applications are subject
to FCC review and public comment to ensure that licensees meet their licensing requirements and
comply with other applicable FCC requirements, rules and regulations. If we fail to file for
renewal of any particular license at the appropriate time, or fail to meet any regulatory
requirements for renewal, including construction and substantial service requirements, we could be
denied a license renewal. In addition, many of our licenses are subject to interim or final
construction requirements and there is no guarantee that the FCC will find our construction, or the
construction of prior licensees, sufficient to meet the applicable construction requirement. If
the FCC finds that our construction, or the construction of prior licensees, is insufficient, the
FCC could terminate our license. For all PCS, AWS and 700 MHz licenses, the FCC also requires that
a licensee provide substantial service in order to receive a renewal expectancy. There is no
guarantee that the FCC will find the completed system construction sufficient to meet the build out
or renewal requirement. Additionally, while incumbent licensees enjoy a certain renewal expectancy
if they provide substantial service, the substantial service standard is not well articulated and
there is no guarantee that the FCC will conclude that we are providing substantial service, that we
are entitled to a renewal expectancy, or will renew all or any of our licenses, without the
imposition of adverse conditions. In addition, a failure to comply with applicable license
conditions or regulatory requirements could result in revocation or termination of our licenses, in
the loss of rights to serve unbuilt areas and/or fines and forfeitures. The FCC may also impose
additional regulatory requirements or conditions on our licenses or our business. Such additional
regulatory requirements or conditions could increase the cost of doing business, could cause
disruption to existing networks, and could require us to make substantial investments. Any loss or
impairment of any of these licenses, failure to renew, fines and forfeitures, or the imposition of
conditions could have a material adverse effect on our business, financial condition and operating
results.
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We may be unable to obtain necessary governmental authorizations and permits on reasonable terms
and conditions.
Our ability to operate our business is dependent on, among other things, our ability to obtain
governmental authorizations and permits in the planning, construction and operation of our
networks. Obtaining governmental authorizations and permits can be very time sensitive and require
compliance with administrative and procedural rules. To remain competitive, we must obtain such
authorizations and permits on a timely basis, at a reasonable cost and on acceptable terms and
conditions. If we cannot obtain the necessary governmental authorizations and permits at all or on
reasonable terms and conditions, we may incur substantial costs associated with finding an
alternate, viable resolution, relocating sites and infrastructure, writing off cost and expenses
associated with sites we are unable to use, and we may experience a delay or impairment in the
provisioning of our services which could have a material adverse effect on our business, financial
condition and operating results.
We are subject to significant federal and state regulation.
The FCC regulates the licensing, construction, modification, operation, ownership, sale and
interconnection of wireless communications systems, as do some state and local regulatory agencies.
We cannot assure you that the FCC or any state or local agencies having jurisdiction over our
business will not impose new or revised regulatory requirements, new or increased costs or require
changes in our current or planned operations. State regulatory agencies also are increasingly
focused on the quality of service and support that wireless carriers provide to their customers and
several agencies have proposed or enacted new and potentially burdensome regulations in this area.
We also cannot assure you that the Communications Act, from which the FCC obtains its authority,
will not in its current state result in the imposition of additional costs for compliance or be
further amended in a manner that could be adverse to us. For instance, the FCC restricts the
ownership levels held by foreign nationals or their representatives, a foreign government or its
representative or any corporation organized under the laws of a foreign country, and as a public
company, the costs and results of compliance with such restrictions may have a material adverse
effect on our business, financial condition or operating results. Further, with the recent change
in party affiliation of the President of the United States and changes in the composition of
Federal and stated legislatures there may be additional legislative or regulatory changes that
affect our business. The FCC also may change its rules, which could result in adverse consequences
to our business, including harmful interference to our existing networks and spectrum. For
example, the FCC recently proposed to allocate 20 or 25 MHz of spectrum for a nationwide broadband
network operating in spectrum adjacent or proximate to the existing allocated and licensed AWS
spectrum, including spectrum for which we are licensed. The FCC also has proposed service rules
for 10 MHz of spectrum for AWS services operating in spectrum adjacent to the existing PCS
spectrum. The technical rules proposed by the FCC for these blocks of spectrum may result in
interference to our existing and planned PCS and AWS networks which could cause our customers to
experience dropped calls and degraded call quality while using our system. With the exception of
the Boston-Worcester, Massachusetts/New Hampshire/Rhode Island/Vermont Economic Area, we are
licensed for or have access to only AWS and PCS spectrum in our metropolitan areas and therefore we
would be unable to use other frequency bands to avoid any such interference. If, as a result of
interference, our customers experience a significant increase in dropped calls or significantly
degraded service, we could experience higher churn and we may have difficulty adding additional
customers, which could have an adverse effect on our business, our financial condition and
operating results. In addition, the interference may cause our networks to have reduced capacity
which may require us to incur additional costs of adding cell sites or DAS nodes and to spend
additional capital.
Our operations also are subject to various other regulations, including certain regulations
promulgated by the Federal Trade Commission, the Federal Aviation Administration, the Environmental
Protection Agency, the Occupational Safety and Health Administration and state and local regulatory
agencies and legislative bodies. Adverse decisions or regulations of these regulatory bodies could
negatively impact our operations and costs of doing business. Because of our smaller size,
governmental regulations and orders can disproportionately increase our costs and affect our
competitive position compared to other larger telecommunications providers. We are unable to
predict the scope, pace or financial impact of regulations and other policy changes that could be
adopted by the various governmental entities that oversee portions of our business. As previously
noted herein, a variety of changes in regulatory policies are under consideration and depending
upon the outcomes, the changes could materially adversely effect our business, financial condition,
or operating results.
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Compliance with current or future federal, state, or local laws, regulations, rules, and
ordinances could have a material adverse effect on our business, financial condition, or operating
results, including but not limited to, increasing our operating expenses or costs, requiring us to
obtain new or additional authorizations or permits, requiring us to change our business and
customer service processes, limiting our ability to attract and retain certain customer segments,
increasing the costs of our services to our customers, requiring system and network upgrades,
requiring us to hire additional employees, and requiring us to spend significant additional
capital. A failure to meet or maintain compliance with federal, state or local regulations, laws,
rules or ordinances also could have a material adverse effect on our business, financial condition,
or operating results, including, but not limited to, subjecting us to fines, forfeitures,
penalties, license revocations, or other sanctions, including the imposition of mandatory reporting
requirements, limitation on our ability to participate in future FCC auctions or acquisitions of
spectrum, and compliance programs and corporate monitors. In addition, a material failure to
comply with regulations or statutory requirements may limit our ability to draw certain amounts
under our senior secured credit facility or could result in a default under our indebtedness.
The structure of the transaction with Royal Street Communications creates risks because Royal
Street Communications may be required to pay back credits received in the grant of its open
licenses or to forfeit closed licenses.
Royal Street Communications acquired its PCS licenses as a DE. As a result, Royal Street
Communications received a bidding credit equal to approximately $94 million for its open PCS
licenses and was granted certain closed licenses in Florida for which DEs were the only qualified
applicants. Subject to certain non-controlling investor protections in Royal Street
Communications limited liability company agreement, C9 has control over the operations of Royal
Street because it has the right to elect three of the five members of Royal Street Communications
management committee, which have the full power to direct the management of Royal Street
Communications. However, the Royal Street Communications business plan may become so closely
aligned with our business plan that there is a risk the FCC may find Royal Street Communications to
have relinquished control over its licenses to us in violation of FCC requirements. In 2006 the
FCC made changes to the DE rules which preclude the wholesale arrangements we have with Royal
Street Communications on a prospective basis, but the FCC grandfathered our existing wholesale
relationship. Further, the FCC has an ongoing proceeding seeking to determine what additional
changes, if any, may be required or appropriate to its DE program and aspects of the DE program
remain subject to challenge in federal courts of appeal. While the FCC has grandfathered the
existing arrangements between Royal Street Communications and us, there can be no assurance that
any changes that may be required with respect 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.
If the FCC were to determine that Royal Street has failed to exercise the requisite control over
its licenses and thus lost its status as a DE, Royal Street 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, which was December 2005, and it could lose some or all of the licenses only available to
DEs which have not yet been constructed, which includes several of its licenses in Florida. If
Royal Street lost those licenses or was required to repay the bidding credits it received, it could
have a material and adverse effect on our business, financial condition and operating results.
Royal Street owns certain licenses that we do not control and that may never be sold to us.
Our agreements with Royal Street Communications allow us in accordance with applicable laws
and regulations to actively participate in the development of the Royal Street licenses and
networks, and we have the right to purchase, on a wholesale basis, 85% of the engineered capacity
provided by the Royal Street systems and to resell those services on a retail basis under our
brand. We, however, do not control Royal Street or the Royal Street licenses. C9, an unaffiliated
third party, has the ability through June 2012 to require us to purchase, or put, all or part of
its ownership interest in Royal Street Communications, but we have no corresponding right to
require C9 to sell to us, or call, its ownership interest in Royal Street Communications to us. C9
might not exercise its put rights or, if it does, we do not know when such exercise may occur.
Further, the FCCs rules restrict our ability to acquire or control Royal Street during the period
that Royal Street must maintain its eligibility as a 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.
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Spectrum for which we have been granted licenses as a result of AWS Auction 66 and Auction 73 is
subject to certain legal challenges, which may ultimately result in the FCC revoking our licenses.
We were required by the applicable FCC rules to pay the full purchase price of approximately
$1.4 billion and $313.3 million to the FCC for the licenses we were granted as a result of Auction
66 and Auction 73, respectively, even though there are ongoing challenges to some aspects of the
final auction rules as they relate to DE participation in the auctions. Several interested parties
are appealing these rules in the U.S. Courts and are seeking, among other relief, to overturn the
results of Auction 66 and Auction 73. We are unable at this time to predict with certainty the
likely outcome of these challenges. If the courts invalidate either auction, we could lose the
licenses granted to us as a result of the auctions and would have no assurance of being able to
reacquire the licenses in a subsequent re-auction. While we would likely receive a refund of the
payments made to the FCC for the spectrum should either auction be overturned, we would not be
reimbursed for time, money and efforts spent to clear the spectrum, expenses incurred to build
systems operating on the spectrum, the interest expenses incurred by us prior to the refund, the
losses associated with launching the markets on this spectrum, or the loss of revenue and profits
associated with these markets. In addition, there could be a delay in us receiving a refund of our
payments until the appeal is final. If the results of either auction were overturned and we receive
a refund, the delay in the return of our money, the interest we would have incurred without
reimbursement, the loss of any amounts spent to develop the licenses in the interim, which could be
substantial, and the loss of the ability to provide service in the metropolitan areas covered by
such licenses, may materially and adversely affect our business, financial condition and operating
results.
Legal actions by the Copyright Office of the Library of Congress and by third parties may have an
adverse effect on our distribution strategy.
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 carriers system.
The Copyright Office of the Library of Congress, or Copyright Office, has adopted an exemption that
allows a person to 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. Based
in part on this exemption, we have implemented a flashing service which allows new customers to
unlock their existing handsets and connect them to our network. The anti-circumvention exemption
is due to expire in October 2009, is subject to review in pending proceedings before the Library of
Congress, and may not be extended. In addition, one carrier has alleged that our flashing program
infringes and dilutes their trademarks and service marks and that we are inducing the breach of
their agreements with their customers. If a significant number of new customers are attracted to
our service as a result of our flashing service and we are unable to continue such service, it
could adversely affect our ability to continue to attract new customers to our service and could
impose additional costs on us, which could have a material adverse effect on our business,
financial condition and operating results. The unlocking rules also may allow customers who are
dissatisfied with their current service to utilize the services of our competitors or us 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 are 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, and which could have a
material adverse effect on our business, financial condition and operating results.
General Matters
Our stock price has historically been and may continue to be volatile and you may lose all or some
of your investment.
The trading prices of the securities of telecommunications companies have been highly
volatile. Accordingly, the trading price of our common stock has been, and is likely to be, subject
to wide fluctuations. Our stock price may fluctuate in reaction to a number of events and factors
that may include, among other things:
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actual or anticipated fluctuations in our or our competitors operating and financial
results; |
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changes in, or our failure to meet, securities analysts expectations; |
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entry of new competitors into our markets; |
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introduction of new products and services by us or our competitors or changes in service
plans or pricing by us or our competitors, including the introduction of unlimited fixed-rate
plans by our competitors; |
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challenges to our intellectual property rights or claims that we infringe the intellectual
property rights of others; |
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conditions and trends in the communications and high technology markets; |
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mergers, acquisitions, strategic alliances or significant agreements by us or by our
competitors; |
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sales of our common stock by our directors, executive officers or affiliates or significant
stockholders; |
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volatility in stock market prices and volumes, which is particularly common among
securities of telecommunications companies; |
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the general state of the U.S. and world economies; |
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the announcement, commencement, bidding and closing of auctions for new spectrum or
acquisitions of other businesses; and |
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recruitment or departure of key personnel. |
In addition, in recent months, 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 the telecommunications 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 that have little or nothing to
do with our business, financial condition and operating results.
Your ownership interest could be diluted by future issuances of shares that our Board has the
authority to issue, and such future issuances or sales of such shares may adversely affect the
market price of MetroPCS common stock.
We have registered all shares of common stock that we may issue under our stock option and
performance award plans; thus, when we issue shares under these plans, the shares can be freely
sold in the public market subject to any requirements under the Securities Act. We also have
granted certain of our stockholders the right to require us to register their shares of our common
stock. If we propose to register any additional securities under the Securities Act, either for
our own account or for the account of security holders exercising registration rights, the number
of shares subject to registration could increase and your interest could be significantly diluted
and the sale of these shares may have a negative impact on the market price for our common stock.
Further, the sale of a substantial amount of our common stock, or the possibility of such a sale,
including sales by significant stockholders or executives of the Company, may reduce the market
price of our common stock and could impede our ability to raise future capital through the issuance
of equity securities at a time and at a price we deem appropriate.
If we fail to manage our planned growth effectively and maintain an effective system of internal
controls, we may not be able to accurately report our financial results or prevent fraud.
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. Effective internal controls are
necessary for us to provide reliable financial reports and effectively prevent fraud. Because of
inherent limitations, internal controls over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions or that the degree
of compliance with the policies and procedures may deteriorate. Previously, we failed to adequately
implement financial controls and management systems. We publicly acknowledged deficiencies in our
financial reporting as early as August 2004, and have made changes in our controls and systems that
are designed to address these deficiencies. Our expected growth will also require stringent
control of costs, diligent management of our network infrastructure and our 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, and the design and implementation of financial and management controls. Our
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growth will challenge the capacity and abilities of existing employees and future employees at
all levels of our business and the controls and systems we have implemented. 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 and inadequate internal
controls could also cause investors to lose confidence in our reported financial information which
could have a negative effect on the trading price of our stock.
The value of our FCC 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
the value of our licenses may continue to fluctuate as the FCC continues to auction, and make
available through regulatory flexibility, additional substantial amounts of spectrum. The impact of
these future actions and auctions on license values is uncertain. There can be no assurance of 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 was to decline significantly, we could be forced to
record non-cash impairment charges which could impact our ability to borrow additional funds. 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.
Declines in our operating performance could ultimately result in an impairment of our
indefinite-lived assets, including FCC licenses, or our long-lived assets, including property and
equipment.
We assess potential impairments to our long-lived assets, including property and equipment and
certain intangible assets, when there is evidence that events or changes in circumstances indicate
that the carrying value may not be recoverable. We assess potential impairments to indefinite-lived
intangible assets, including FCC licenses, annually and when there is evidence that events or
changes in circumstances indicate that an impairment condition may exist. If we do not achieve our
planned operating results, this may ultimately result in a non-cash impairment charge related to
our long-lived and/or our indefinite-lived intangible assets. A significant impairment loss could
have a material adverse effect on our operating results and on the carrying value of our FCC
licenses and/or our long-lived assets on our balance sheet.
We may be unable to service our debt and to refinance our indebtedness before maturity.
Our ability to meet our existing or future debt obligations and to reduce our indebtedness
will depend on our future performance and the other cash requirements of our business. Our
performance, to a certain extent, is subject to general economic conditions, financial,
competitive, business, political, regulatory and other factors that are beyond our control. In
addition, our ability to borrow funds in the future to make payment on our debt will depend on the
satisfaction of covenants in our senior secured credit facility, the indentures governing our
senior notes, other debt agreements and other agreements we may enter into in the future.
Specifically, we will need to maintain certain financial ratios and satisfy financial condition
tests. We cannot assure you that we will continue to generate sufficient cash flow from operations
at or above current levels 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 repay all of
our indebtedness timely. As a result, we believe we may need to refinance all or a portion of our
remaining existing indebtedness prior to its maturity. Disruptions in the financial markets could
make it more difficult to obtain debt or equity financing on reasonable terms or at all. We cannot
assure you that we will be able to service our debt or refinance any or all of our indebtedness on
favorable or commercially reasonable terms, or at all.
Our senior secured credit facility and the indentures governing our senior notes include
restrictive covenants that limit our operating flexibility.
Our senior secured credit facility and indentures governing our senior notes impose material
operating and financial restrictions on us. These restrictions, subject in certain cases to
ordinary course of business and other exceptions, may limit our ability to engage in some
transactions, including the following:
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incurring additional debt; |
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paying dividends, redeeming capital stock or making other restricted payments or
investments; |
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selling or buying assets, properties or licenses; |
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developing assets, properties or licenses which we have or in the future may procure; |
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creating liens on assets; |
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participating in future FCC auctions of spectrum or private sales of spectrum or
purchasing businesses; |
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merging, consolidating or disposing of assets; |
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|
entering into transactions with affiliates; and |
|
|
|
|
placing restrictions on the ability of subsidiaries (other than Royal Street and its
subsidiaries) to pay dividends or make other payments. |
Under the senior secured credit facility, we are also subject to financial maintenance
covenants with respect to our senior secured leverage and in certain circumstances total maximum
consolidated leverage and certain minimum fixed charge coverage ratios. These restrictions could
limit our ability to obtain debt financing, repurchase stock, refinance or pay principal on our
outstanding debt, complete acquisitions for cash or debt or react to changes in our operating
environment or the economy. Any future debt that we incur may contain similar or more restrictive
covenants.
Any failure to comply with the restrictions of the senior secured credit facility or the
indentures governing our senior notes, or certain current and any subsequent financing agreements
may result in an event of default under these agreements, which in turn may result in defaults or
acceleration of obligations under these agreements and other agreements, giving our lenders the
right to terminate any commitments they had made to provide us with further funds and to require us
to repay all amounts then outstanding.
Our substantial indebtedness could adversely affect our business, financial condition and
operating results and our senior creditors would have a prior secured claim to any collateral
securing the debt owed to them.
Our ability to make payments on our debt and to fund operations and significant planned
capital expenditures will depend on our ability to generate cash in the future. Our substantial
debt service obligations could have important material consequences to you, including the
following:
|
|
|
limiting our ability to borrow money or sell stock to fund working capital, capital
expenditures, debt service requirements, acquisitions, technological initiatives and other
general corporate purposes; |
|
|
|
|
making it more difficult for us to make payments on our indebtedness; |
|
|
|
|
increasing our vulnerability to general economic and industry conditions; |
|
|
|
|
limiting our flexibility in planning for, or reacting to, changes in our business or the
telecommunications industry; |
|
|
|
|
limiting our ability to increase our capital expenditures to roll out new services; |
|
|
|
|
limiting our ability to purchase additional spectrum or develop new metropolitan areas in
the future; |
|
|
|
|
reducing the amount of cash available for working capital needs, capital expenditures for
existing and new markets and other corporate purposes by requiring us to dedicate a
substantial portion of our cash flow from operations to the payment of principal of, and
interest on, our indebtedness; and |
|
|
|
|
placing us at a competitive disadvantage to our competitors who are less leveraged than
we are. |
Any of these risks could impair our ability to fund our operations or limit our ability to
expand our business as planned, which could have a material adverse effect on our business,
financial condition, and operating results.
Further, although we have substantial indebtedness, we may still be able to incur
significantly more debt as market conditions permit, which could further reduce the cash we have
available to invest in our operations, as a result of our increased debt service obligations. The
terms of the agreements governing our long-term indebtedness, subject to specified limitations,
allow for the incurrence of additional indebtedness by us and our subsidiaries. In
46
addition, funding remains available under the revolving credit facility portion of the senior
secured credit facility. The more leveraged we become, the more we, and in turn the holders of our
securities, become exposed to the risks described above. Additionally, the secured creditors
received a pledge of all of the equity of MetroPCS Wireless, Inc., or Wireless, and of its existing
and future direct and indirect subsidiaries, where most of our assets and all of our operations and
business results are generated and generally have a lien on all of the assets of Wireless and these
subsidiaries.
Settlements, judgments, restraints on our current or future manner of doing business or legal
costs resulting from pending or future litigation could have an adverse effect on our business,
financial condition, and operating results.
We are regularly involved in a number of legal proceedings before various state and federal
courts and the FCC. Such legal proceedings can be complex, costly, protracted and highly disruptive
to business operations by diverting the attention and energies of management and other key
personnel. Also, changes in the law or legal interpretations can affect the outcome of existing
rules. The assessment of the outcome of legal proceedings, including our potential liability, if
any, is a highly subjective process that requires judgments about future events which are not
within our control. The outcome of litigation, including amounts ultimately received or paid upon
settlement or other resolution of litigation and other contingencies may differ materially from
amounts accrued in the financial statements. In addition, litigation or similar proceedings could
impose restraints on our current or future manner of doing business. Such potential outcomes could
have a material adverse effect on our business financial condition, of operating results, or
ability to do business.
We are currently controlled by a limited number of stockholders, and their interests may be
different from yours.
A certain portion of the voting power of our capital stock is concentrated in the hands of a
few shareholders some of which are members of our board of directors. As a result, if such persons
act together, they may have the ability to significantly influence whether required consents can be
obtained and may have substantial control over all matters submitted to our stockholders for
approval, including the election and removal of directors, changes in our capital structure,
governance, shareholder approvals and the approval of any merger, consolidation or sales of all or
substantially all of our assets. These stockholders may have different interests than the other
holders of our common stock and may make decisions that are adverse to your interests.
Our stockholder rights plan could prevent a change in control of our Company in instances in which
some stockholders may believe a change in control is in their best interests.
We have a stockholder rights plan, or Rights Plan. Pursuant to the Rights Plan, we have issued
to our stockholders one preferred stock purchase right for each outstanding share of our common
stock as of March 27, 2007. Each right, when exercisable, will entitle its holder to purchase from
us a unit consisting of one one-thousandth of a share of series A junior participating preferred
stock at $66.67 per share. Our Rights Plan is intended to protect stockholders in the event of an
unfair or coercive offer to acquire our Company and to provide our board of directors with adequate
time to evaluate unsolicited offers. The Rights Plan may prevent or make takeovers or unsolicited
corporate transactions more difficult. The Rights Plan will cause substantial dilution to a person
or group that attempts to acquire us on terms that our board of directors does not believe are in
our best interests and those of our stockholders and may discourage, delay or prevent a merger or
acquisition that stockholders may consider favorable, including transactions in which stockholders
might otherwise receive a premium for their shares.
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 of certain of our significant stockholders.
Those stockholders and their respective affiliates may invest in entities that directly or
indirectly compete with us, companies in which they are currently invested may already compete with
us, or companies in which we transact business. 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 the directors or officers
relationship or interest as to the transaction are disclosed to our board of directors and a
majority of our disinterested directors approves the transaction, (2) the material facts relating
to the directors or officers relationship or interest as to the transaction are disclosed to our
stockholders
47
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, our non-employee directors are not required to offer us any corporate opportunity of
which they become aware and could take any such opportunity for themselves or offer it to other
companies in which they have an investment, unless such opportunity is expressly offered to them in
their capacity as a director of our Company.
Our certificate of incorporation, bylaws and Delaware corporate law contain provisions which could
delay or prevent a change in control even if the change in control would be beneficial to our
stockholders.
Delaware law, as well as our certificate of incorporation and bylaws, contains provisions that
could delay or prevent a change in control of our Company, even if it were beneficial to our
stockholders to do so. These provisions also could limit the price that investors might be willing
to pay in the future for shares of our common stock. These provisions:
|
|
|
authorize the issuance of preferred stock that can be created and issued by the board of
directors without prior stockholder approval to increase the number of outstanding shares and
deter or prevent a takeover attempt; |
|
|
|
|
prohibit stockholder action by written consent, requiring all stockholder actions to be
taken at a meeting of our stockholders; |
|
|
|
|
require stockholder meetings to be called only by the President or at the written request
of a majority of the directors then in office and not the stockholders; |
|
|
|
|
prohibit cumulative voting in the election of directors, which would otherwise allow less
than a majority of stockholders to elect director candidates; |
|
|
|
|
provide that our board of directors is divided into three classes, each serving three-year
terms; and |
|
|
|
|
establish advance notice requirements for nominations for election to the board of
directors or for proposing matters that can be acted upon by stockholders at stockholder
meetings. |
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.
Any of the foregoing events or other events could cause revenues, customer additions,
operating income, capital expenditures and other financial or statistical information to vary from
our forward-looking estimates by a material amount.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We currently maintain our executive offices in Richardson, Texas, and regional offices in
Alameda, California; Folsom, California; Irvine, California; Norcross, Georgia; Plano, Texas;
Livonia, Michigan; Sunrise, Florida; Tampa, Florida; Orlando, Florida; Las Vegas, Nevada;
Chelmsford, Massachusetts; Hawthorne, New York; and Ft. Washington, Pennsylvania. As of December
31, 2008, we also operated 127 retail stores throughout our metropolitan areas. Our executive
offices, all of our regional offices, switch sites, retail stores and virtually all of our cell
sites are leased from unaffiliated third parties. We believe these properties, which are being used
for their intended purposes, are adequate and well-maintained.
48
Item 3. Legal Proceedings
We are involved in litigation from time to time, including litigation regarding intellectual
property claims that we consider to be in the normal course of business. We are not currently party
to any pending legal proceedings that we believe would, individually or in the aggregate, have a
material adverse effect on our financial condition, cash flows or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
|
|
|
Item 5. |
|
Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Market Information
Our common stock began trading on April 19, 2007 on the New York Stock Exchange under the
symbol PCS. Prior to April 19, 2007, there was no established public trading market for our
common stock. The following table sets forth for the periods indicated the high and low composite
per share prices as reported by the New York Stock Exchange.
|
|
|
|
|
|
|
|
|
|
|
High |
|
Low |
Fiscal year ended December 31, 2007 |
|
|
|
|
|
|
|
|
Second quarter |
|
$ |
36.68 |
|
|
$ |
27.40 |
|
Third quarter |
|
|
40.33 |
|
|
|
24.15 |
|
Fourth quarter |
|
|
27.85 |
|
|
|
15.10 |
|
Fiscal year ended December 31, 2008 |
|
|
|
|
|
|
|
|
First quarter |
|
$ |
18.72 |
|
|
$ |
14.50 |
|
Second quarter |
|
|
21.83 |
|
|
|
17.08 |
|
Third quarter |
|
|
17.92 |
|
|
|
12.98 |
|
Fourth quarter |
|
|
15.98 |
|
|
|
10.71 |
|
Holders
As of January 30, 2009, the closing price of our common stock was $13.59 per share, there were
350,999,607 shares of our common stock outstanding, and there were over 18,000 holders of record of
our common stock.
Dividends
We have never paid or declared any regular cash dividends on our common stock and do not
intend to declare or pay regular cash dividends on our common stock in the foreseeable future. The
terms of our senior secured credit facility and the indentures related to our 91/4% senior notes
restrict our ability to declare or pay dividends. We currently intend to retain 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, if any, and the amount of any dividends in light
of:
|
|
|
any applicable contractual restrictions limiting our ability to pay dividends; |
|
|
|
|
our earnings and cash flows; |
|
|
|
|
our capital requirements; |
|
|
|
|
our future needs for cash; |
|
|
|
|
our financial condition; and |
|
|
|
|
other factors our board of directors deems relevant. |
49
Equity Compensation Plan Information
The following table provides information as of December 31, 2008 with respect to shares of
MetroPCS Communications common stock issuable under our equity compensation plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities to be |
|
|
|
|
|
|
Number of Securities |
|
|
|
Issued Upon Exercise of |
|
|
Weighted Average Exercise |
|
|
Remaining Available for Future |
|
|
|
Outstanding Options, |
|
|
Price of Outstanding Options, |
|
|
Issuance Under Equity |
|
Plan Category |
|
Warrants and Rights |
|
|
Warrants and Rights |
|
|
Compensation Plans |
|
Equity Compensation Plans
Approved by Stockholders (1) |
|
|
30,677,588 |
|
|
$ |
13.21 |
|
|
|
13,552,419 |
|
Equity Compensation Plans Not
Approved by Stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
30,677,588 |
|
|
$ |
13.21 |
|
|
|
13,552,419 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Consists of the Second Amended and Restated 1995 Stock Option Plan of MetroPCS, Inc., as
amended, and the Amended and Restated MetroPCS Communications, Inc. 2004 Equity Incentive
Compensation Plan. |
Non-Employee 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 receive compensation for serving on the board
of directors. In 2008, the Compensation Committee of the Board of Directors amended and restated
the Remuneration Plan (the 2008 Remuneration Plan) to be more competitive with the market and to
be more reflective of the Companys status as a public company. As of December 31, 2008,
compensation to be paid pursuant to the 2008 Remuneration Plan to non-employee directors of our
Company included annual retainers, stock options, board meeting fees, and committee paid event
fees.
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
We did not repurchase any equity securities during the period covered by this report.
50
Item 6. Selected Financial Data
The following tables set forth selected consolidated financial data. We derived our selected
consolidated financial data as of and for the years ended December 31, 2004, 2005, 2006, 2007 and
2008 from our consolidated financial statements. The historical selected financial data may not be
indicative of future performance and should be read in conjunction with Managements Discussion
and Analysis of Financial Condition and Results of Operations and Risk Factors in this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2004 |
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
|
(In Thousands, Except Share and Per Share Data) |
|
Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenues |
|
$ |
616,401 |
|
|
$ |
872,100 |
|
|
$ |
1,290,947 |
|
|
$ |
1,919,197 |
|
|
$ |
2,437,250 |
|
Equipment revenues |
|
|
131,849 |
|
|
|
166,328 |
|
|
|
255,916 |
|
|
|
316,537 |
|
|
|
314,266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
748,250 |
|
|
|
1,038,428 |
|
|
|
1,546,863 |
|
|
|
2,235,734 |
|
|
|
2,751,516 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (excluding depreciation and
amortization disclosed separately below) |
|
|
200,806 |
|
|
|
283,212 |
|
|
|
445,281 |
|
|
|
647,510 |
|
|
|
857,295 |
|
Cost of equipment |
|
|
222,766 |
|
|
|
300,871 |
|
|
|
476,877 |
|
|
|
597,233 |
|
|
|
704,648 |
|
Selling, general and administrative expenses
(excluding depreciation and amortization disclosed
separately below) |
|
|
131,510 |
|
|
|
162,476 |
|
|
|
243,618 |
|
|
|
352,020 |
|
|
|
447,582 |
|
Depreciation and amortization |
|
|
62,201 |
|
|
|
87,895 |
|
|
|
135,028 |
|
|
|
178,202 |
|
|
|
255,319 |
|
Loss (gain) on disposal of assets |
|
|
3,209 |
|
|
|
(218,203 |
) |
|
|
8,806 |
|
|
|
655 |
|
|
|
18,905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
620,492 |
|
|
|
616,251 |
|
|
|
1,309,610 |
|
|
|
1,775,620 |
|
|
|
2,283,749 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
127,758 |
|
|
|
422,177 |
|
|
|
237,253 |
|
|
|
460,114 |
|
|
|
467,767 |
|
Other expense (income): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
19,030 |
|
|
|
58,033 |
|
|
|
115,985 |
|
|
|
201,746 |
|
|
|
179,398 |
|
Accretion of put option in majority-owned subsidiary |
|
|
8 |
|
|
|
252 |
|
|
|
770 |
|
|
|
1,003 |
|
|
|
1,258 |
|
Interest and other income |
|
|
(2,472 |
) |
|
|
(8,658 |
) |
|
|
(21,543 |
) |
|
|
(63,936 |
) |
|
|
(23,170 |
) |
Impairment loss on investment securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97,800 |
|
|
|
30,857 |
|
(Gain) loss on extinguishment of debt |
|
|
(698 |
) |
|
|
46,448 |
|
|
|
51,518 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense |
|
|
15,868 |
|
|
|
96,075 |
|
|
|
146,730 |
|
|
|
236,613 |
|
|
|
188,343 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
|
111,890 |
|
|
|
326,102 |
|
|
|
90,523 |
|
|
|
223,501 |
|
|
|
279,424 |
|
Provision for income taxes |
|
|
(47,000 |
) |
|
|
(127,425 |
) |
|
|
(36,717 |
) |
|
|
(123,098 |
) |
|
|
(129,986 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
64,890 |
|
|
|
198,677 |
|
|
|
53,806 |
|
|
|
100,403 |
|
|
|
149,438 |
|
Accrued dividends on Series D Preferred Stock |
|
|
(21,006 |
) |
|
|
(21,006 |
) |
|
|
(21,006 |
) |
|
|
(6,499 |
) |
|
|
|
|
Accrued dividends on Series E Preferred Stock |
|
|
|
|
|
|
(1,019 |
) |
|
|
(3,000 |
) |
|
|
(929 |
) |
|
|
|
|
Accretion on Series D Preferred Stock |
|
|
(473 |
) |
|
|
(473 |
) |
|
|
(473 |
) |
|
|
(148 |
) |
|
|
|
|
Accretion on Series E Preferred Stock |
|
|
|
|
|
|
(114 |
) |
|
|
(339 |
) |
|
|
(106 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to Common Stock |
|
$ |
43,411 |
|
|
$ |
176,065 |
|
|
$ |
28,988 |
|
|
$ |
92,721 |
|
|
$ |
149,438 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share(1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share basic |
|
$ |
0.18 |
|
|
$ |
0.71 |
|
|
$ |
0.11 |
|
|
$ |
0.29 |
|
|
$ |
0.43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share diluted |
|
$ |
0.15 |
|
|
$ |
0.62 |
|
|
$ |
0.10 |
|
|
$ |
0.28 |
|
|
$ |
0.42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares(1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
126,722,051 |
|
|
|
135,352,396 |
|
|
|
155,820,381 |
|
|
|
287,692,280 |
|
|
|
349,395,285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
150,633,686 |
|
|
|
153,610,589 |
|
|
|
159,696,608 |
|
|
|
296,337,724 |
|
|
|
355,380,111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2004 |
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
|
(In Thousands) |
|
Other Financial Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
150,379 |
|
|
$ |
283,216 |
|
|
$ |
364,761 |
|
|
$ |
589,306 |
|
|
$ |
447,490 |
|
Net cash used in investment activities |
|
|
(190,881 |
) |
|
|
(905,228 |
) |
|
|
(1,939,665 |
) |
|
|
(517,088 |
) |
|
|
(1,294,275 |
) |
Net cash (used in) provided by financing activities |
|
|
(5,433 |
) |
|
|
712,244 |
|
|
|
1,623,693 |
|
|
|
1,236,492 |
|
|
|
74,525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2004 |
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
|
(In Thousands) |
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents & short-term investments |
|
$ |
59,441 |
|
|
$ |
503,131 |
|
|
$ |
552,149 |
|
|
$ |
1,470,208 |
|
|
$ |
697,948 |
|
Property and equipment, net |
|
|
636,368 |
|
|
|
831,490 |
|
|
|
1,256,162 |
|
|
|
1,891,411 |
|
|
|
2,847,751 |
|
Total assets |
|
|
965,396 |
|
|
|
2,158,981 |
|
|
|
4,153,122 |
|
|
|
5,806,130 |
|
|
|
6,422,148 |
|
Long-term debt (including current maturities) |
|
|
184,999 |
|
|
|
905,554 |
|
|
|
2,596,000 |
|
|
|
3,002,177 |
|
|
|
3,074,992 |
|
Series D Cumulative Convertible Redeemable Participating Preferred Stock |
|
|
400,410 |
|
|
|
421,889 |
|
|
|
443,368 |
|
|
|
|
|
|
|
|
|
Series E Cumulative Convertible Redeemable Participating Preferred Stock |
|
|
|
|
|
|
47,796 |
|
|
|
51,135 |
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
125,434 |
|
|
|
367,906 |
|
|
|
413,245 |
|
|
|
1,848,746 |
|
|
|
2,034,323 |
|
|
|
|
(1) |
|
See Note 19 to the consolidated financial statements included
elsewhere in this report for an explanation of the calculation of
basic and diluted net income per common share. The calculation of
basic and diluted net income per common share for the years ended
December 31, 2004 and 2005 is not included in Note 19 to the
consolidated financial statements. |
51
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
Company Overview
Except as expressly stated, the financial condition and results of operations discussed
throughout Managements Discussion and Analysis of Financial Condition and Results of Operations
are those of MetroPCS Communications, Inc. and its consolidated subsidiaries, including MetroPCS
Wireless, Inc. and Royal Street Communications, LLC. 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. Unless otherwise
indicated, all share numbers and per share prices give effect to a 3 for 1 stock split effected by
means of a stock dividend of two shares of common stock for each share of common stock issued and
outstanding at the close of business on March 14, 2007. On April 18, 2007, the registration
statement for our initial public offering became effective and our common stock began trading on
the New York Stock Exchange under the symbol PCS on April 19, 2007. We consummated our initial
public offering of our common stock on April 24, 2007.
We are a wireless telecommunications carrier that currently offers wireless services primarily
in the greater Atlanta, Boston, Dallas/Ft. Worth, Detroit, Las Vegas, Los Angeles, Miami, New York,
Orlando/Jacksonville, Philadelphia, San Francisco, Sacramento and Tampa/Sarasota metropolitan
areas. We launched service in the greater Atlanta, Miami and Sacramento metropolitan areas in the
first quarter of 2002; in San Francisco in September 2002; in Tampa/Sarasota in October 2005; in
Dallas/Ft. Worth in March 2006; in Detroit in April 2006; in Orlando in November 2006; in Los
Angeles in September 2007; in Las Vegas in March 2008; in Jacksonville in April 2008; in
Philadelphia in July 2008; and in New York and Boston in February 2009. In 2005, Royal Street
Communications, LLC, or Royal Street Communications, and with its wholly-owned subsidiaries, or
collectively, Royal Street, was granted licenses by the Federal Communications Commission, or FCC,
in Los Angeles and various metropolitan areas throughout northern Florida. We own 85% of the
limited liability company member interests in Royal Street Communications, but may only elect two
of the five members of Royal Street Communications management committee. We have a wholesale
arrangement with Royal Street under which we purchase up to 85% of the engineered capacity of Royal
Streets systems allowing us to sell our standard products and services under the MetroPCS brand to
the public. Royal Street has constructed, or 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 in Los Angeles in September 2007 through
our arrangements with Royal Street. Additionally, upon Royal Streets request, we have provided
and will provide financing to Royal Street under a loan agreement. As of December 31, 2008, the
maximum amount that Royal Street could borrow from us under the loan agreement was approximately
$1.0 billion of which Royal Street had net outstanding borrowings of $905.0 million through
December 31, 2008. On February 17, 2009, we executed an amendment to the loan agreement which
increased the amount available to Royal Street under the loan agreement by an additional $550.0
million. Royal Street has incurred an additional $14.2 million in net borrowings through February
23, 2009.
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. We currently plan
to focus on building out networks to cover approximately 40 million of total population during
2009-2010 including the launch of the Boston and New York metropolitan areas in February 2009.
We sell products and services to customers through our Company-owned retail stores as well as
indirectly through relationships with independent retailers. We offer service which allows our
customers to place unlimited local calls from within our local service area and to receive
unlimited calls from any area while in our local service area, under simple and affordable flat
monthly rate service plans starting at $30 per month. For an additional $5 to $20 per month, our
customers may select a service plan that offers additional services, such as unlimited voicemail,
caller ID, call waiting, enhanced directory assistance, unlimited text messaging, mobile Internet
browsing, push e-mail, social networking services, location based services, mobile instant
messaging, picture and multimedia messaging and the ability to place unlimited long distance calls
from within our local service calling area to any number in the continental United States. We
offer flat-rate monthly plans at $30, $35, $40, $45 and $50, as well as Family Plans which offer
discounts to our monthly plans for multiple lines. All of these plans require payment in advance
for one month of service. If no payment is made in advance for the following month of service,
service is suspended at the end of the month that was paid for by the customer and terminated if
the customer does not pay within thirty days. For additional fees, we also provide international
long distance and international text messaging,
52
ringtones, ring back tones, downloads, games and content applications, unlimited directory
assistance, location services and other value-added services. As of December 31, 2008,
approximately 80% of our customers have selected a $40 or higher rate plan. Our flat-rate plans
differentiate our service from the more complex plans and long-term contract requirements of
traditional wireless carriers. In addition, the above products and services are offered by us in
the Royal Street markets under the MetroPCS brand.
Critical Accounting Policies and Estimates
On January 1, 2008, we adopted the provisions of Statement of Financial Accounting Standards,
or SFAS, No. 157, Fair Value Measurements, or SFAS No. 157, for financial assets and liabilities.
SFAS No. 157 defines fair value, thereby eliminating inconsistencies in guidance found in various
prior accounting pronouncements, and increases disclosures surrounding fair value calculations.
SFAS No. 157 establishes a three-tiered fair value hierarchy that prioritizes inputs to valuation
techniques used in fair value calculations. SFAS No. 157 requires us to maximize the use of
observable inputs and minimize the use of unobservable inputs. If a financial instrument uses
inputs that fall in different levels of the hierarchy, the instrument will be categorized based
upon the lowest level of input that is significant to the fair value calculation.
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, 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 report. The preparation of financial statements
in conformity with GAAP requires us to make estimates and assumptions that affect the reported
amounts of certain assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities at the date of 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.
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. Suspending 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.
Our customers have the right to return handsets within a specified time or within a certain
amount of use, whichever occurs first. 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.
We follow the provisions of Emerging Issues Task Force or EITF, No. 00-21, Accounting for
Revenue Arrangements with Multiple Deliverables, or EITF No. 00-21. EITF No. 00-21, addresses the
accounting for 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 using the residual method of accounting.
We determined that the sale of wireless services through our direct and indirect sales
channels with an accompanying handset constitutes revenue arrangements with multiple deliverables.
In accordance with EITF No. 00-21, we divide these arrangements into separate units of accounting
and allocate the consideration between the handset and the wireless service using the residual
method of accounting. Consideration received for the wireless service is recognized at fair value
as service revenue when earned, and any remaining consideration received is recognized as equipment
revenue when the handset is delivered and accepted by the customer.
53
Allowance for Uncollectible Accounts Receivable
We maintain allowances for uncollectible accounts for estimated losses resulting from the
inability of our independent retailers to pay for equipment purchases and for 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 independent 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 carriers inability to meet its financial obligations to us, we record a
specific allowance 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 as of December 31, 2008 was approximately 12% of the total amount of gross
accounts receivable.
Inventories
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 as of December 31, 2008. 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 earnings 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 may require the use of 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. Tax reserves as of December 31, 2008 were $37.6
million of which $5.2 million and $32.4 million are presented on the consolidated balance sheet in
accounts payable and accrued expenses and other long-term liabilities, respectively.
On January 1, 2007, we adopted FASB Interpretation No. 48 Accounting for Uncertainty in
Income Taxes, or FIN 48. FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in the financial statements in accordance with SFAS No. 109. FIN 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 48 also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosures, and transition. FIN 48 requires significant
judgment in determining what constitutes an individual tax position as well as assessing the
outcome of each tax position. Changes in judgment as to recognition or measurement of tax positions
can materially affect the estimate of the effective tax rate and consequently, affect our operating
results.
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 seven to ten
years for network infrastructure assets, three to ten years for 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 of the lease and any renewal periods reasonably assured or the
estimated useful life of the improvement, whichever is shorter. 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
54
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.
We assess the impairment of long-lived 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 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 approximately $2.8 billion as of December 31, 2008.
Long-Term Investments
We account for our investment securities in accordance with SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities. At December 31, 2008, all of the Companys
long-term investment securities were reported at fair value. Due to the lack of availability of
observable market quotes on our investment portfolio of auction rate securities, the fair value was
estimated based on valuation models that rely exclusively on unobservable inputs including those
that are based on expected cash flow streams and collateral values, including assessments of
counterparty credit quality, default risk underlying the security, discount rates and overall
capital market liquidity. See Note 10 to the consolidated financial statements included elsewhere
in this report.
Declines in fair value that are considered other-than-temporary are charged to earnings and
those that are considered temporary are reported as a component of other comprehensive income in
stockholders equity. The Company has recorded an impairment charge of $30.9 million during the
year ended December 31, 2008, reflecting the portion of the auction rate security holdings that the
Company has concluded have an other-than-temporary decline in value.
The valuation of the Companys investment portfolio is subject to uncertainties that are
difficult to predict. Factors that may impact the Companys valuation include changes to credit
ratings of the securities as well as the underlying assets supporting those securities, rates of
default of the underlying assets, underlying collateral values, discount rates, counterparty risk
and ongoing strength and quality of market credit and liquidity. The estimated market value of the
Companys auction rate security holdings at December 31, 2008 was approximately $6.0 million.
With the continuing liquidity issues experienced in the global credit and capital markets, the
auction rate securities held by the Company at December 31, 2008 continued to experience failed
auctions as the amount of securities submitted for sale in the auctions exceeded the amount of
purchase orders. In addition, all of the auction rate securities held by the Company have been
downgraded or placed on credit watch. The Company may incur additional impairments to its auction
rate securities which may be up to the full remaining value of such auction rate securities.
FCC Licenses and Microwave Relocation Costs
We operate wireless broadband mobile networks under licenses granted by the FCC for a
particular geographic area on spectrum allocated by the FCC for terrestrial wireless broadband
mobile services. In November 2006, we acquired a number of AWS licenses which can be used to
provide wireless broadband mobile services comparable to the PCS services provided by us, as well
as other advanced wireless services. In June 2008, we acquired a 700 MHz license that also can be
used to provide similar services. The PCS licenses previously included, and the AWS licenses
currently include, the obligation to relocate existing fixed microwave users of our licensed
spectrum if the use of 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 and AWS
networks. The PCS, AWS and 700 MHz licenses and microwave relocation costs are recorded at cost.
Although FCC licenses are issued with a stated term, ten years in the case of PCS licenses, fifteen
years in the case of AWS licenses and approximately 10.5 years for 700 MHz licenses, the
55
renewal of PCS, AWS and 700 MHz 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, AWS and 700 MHz licenses. The
carrying value of FCC licenses and microwave relocation costs was approximately $2.4 billion as of
December 31, 2008.
Our primary indefinite-lived intangible assets are our FCC licenses. Based on the requirements
of SFAS No. 142, Goodwill and other Intangible Assets,or SFAS No. 142, we test investments in our
FCC licenses for impairment annually or more frequently if events or changes in circumstances
indicate that the carrying value of our FCC licenses might be impaired. We perform our annual FCC
license impairment test as of each September 30th. The impairment test consists of a comparison of
the estimated fair value with the carrying value. We estimate the fair value of our FCC licenses
using a discounted cash flow model. Cash flow projections and assumptions, although subject to a
degree of uncertainty, are based on a combination of our historical performance and trends, our
business plans and managements estimate of future performance, giving consideration to existing
and anticipated competitive economic conditions. Other assumptions include our weighted average
cost of capital and long-term rate of growth for our business. We believe that our estimates are
consistent with assumptions that marketplace participants would use to estimate fair value. We
corroborate our determination of fair value of the FCC licenses, using the discounted cash flow
approach described above, with other market-based valuation metrics. Furthermore, we segregate our
FCC licenses by regional clusters for the purpose of performing the impairment test because 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.
Historically, we have not experienced significant negative variations between our assumptions and
estimates when compared to actual results. However, if actual results are not consistent with our
assumptions and estimates, we may be required to record an impairment charge associated with
indefinite-lived intangible assets. Although we do not expect our estimates or assumptions to
change significantly in the future, the use of different estimates or assumptions within our
discounted cash flow model when determining the fair value of our FCC licenses or using a
methodology other than a discounted cash flow model could result in different values for our FCC
licenses and may affect any related impairment charge. The most significant assumptions within our
discounted cash flow model are the discount rate, our projected growth rate and managements future
business plans. A change in managements future business plans or disposition of one or more FCC
licenses could result in the requirement to test certain other FCC licenses. If any legal,
regulatory, contractual, competitive, economic or other factors were to limit the useful lives of
our indefinite-lived FCC licenses, we would be required to test these intangible assets for
impairment in accordance with SFAS No. 142 and amortize the intangible asset over its remaining
useful life.
For the license impairment test performed as of September 30, 2008, the fair value of the FCC
licenses was in excess of their carrying value. There have been no
indicators of impairment and no impairment has been recognized through
December 31, 2008.
Share-Based Payments
We account for share-based awards exchanged for employee services in accordance with SFAS No.
123(R), Share-Based Payment, or 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 the award, and is
recognized as expense over the employees requisite service period.
We have granted 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 valuation as well as assumptions regarding a number of complex and subjective
variables. Prior to our initial public offering, factors that our Board of Directors considered in
determining the fair market value of our common stock, included the recommendation of our finance
and planning committee and of management based on certain data, including discounted cash flow
analysis, comparable company analysis and comparable transaction analysis, as well as
contemporaneous valuation reports. After our initial public offering, the Board of Directors uses
the closing price of our common stock on the date of grant as the fair market value for our common
stock. The volatility assumption is based on a combination of the historical volatility of our
common stock and the volatilities of similar companies over a period of time equal to the expected
term of the stock options. The volatilities of similar companies are used in conjunction with our
historical volatility because of the lack of sufficient relevant history equal to the expected
term. The expected term of employee stock options represents the weighted-average period the
56
stock options are expected to remain outstanding. The expected term assumption is estimated
based primarily on the stock options vesting terms and remaining contractual life and employees
expected exercise and post-vesting employment termination behavior. The risk-free interest rate
assumption is based upon observed interest rates on the grant date appropriate for the term of the
employee stock options. The dividend yield assumption is based on the expectation of no future
dividend payouts by us.
As share-based compensation expense under SFAS No. 123(R) is based on awards ultimately
expected to vest, it is reduced for estimated forfeitures. SFAS No. 123(R) requires forfeitures to
be estimated at the time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. We recognized stock-based compensation expense of
approximately $41.1 million, $28.0 million and $14.5 million for the years ended December 31, 2008,
2007 and 2006, respectively.
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. We utilized the following weighted-average assumptions in estimating the fair value
of the options grants for the years ended December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
|
|
2008 |
|
2007 |
Expected dividends |
|
|
0.00 |
% |
|
|
0.00 |
% |
Expected volatility |
|
|
45.20 |
% |
|
|
42.69 |
% |
Risk-free interest rate |
|
|
2.49 |
% |
|
|
4.54 |
% |
Expected lives in years |
|
|
5.00 |
|
|
|
5.00 |
|
Weighted-average fair value of options: |
|
|
|
|
|
|
|
|
Granted at below fair value |
|
$ |
|
|
|
$ |
|
|
Granted at fair value |
|
$ |
6.95 |
|
|
$ |
9.89 |
|
Weighted-average exercise price of options: |
|
|
|
|
|
|
|
|
Granted at below fair value |
|
$ |
|
|
|
$ |
|
|
Granted at fair value |
|
$ |
16.36 |
|
|
$ |
22.41 |
|
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.
Compensation expense is recognized over the requisite service period for the entire award,
which is generally the maximum vesting period of the award.
Customer Recognition and Disconnect Policies
When a new customer subscribes to our service, the first month of service is included with the
handset purchase. Under GAAP, we are required to allocate the purchase price to the handset and to
the wireless service revenue. Generally, the amount allocated to the handset will be less than our
cost, and this difference is included in Cost Per Gross Addition, or CPGA. We recognize new
customers as gross customer additions upon activation of service. We offer our customers the Metro
Promise, which allows 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 Metro Promise
are reflected as a reduction to gross customer additions. Customers monthly service payments are
due in advance every month. Our customers must pay their monthly service amount by the payment date
or their service will be 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 customers 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 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.
57
Revenues
We derive our revenues from the following sources:
Service. We sell wireless broadband mobile services. The various types of service revenues
associated with wireless broadband mobile for our customers include monthly recurring charges for
airtime, monthly recurring charges for optional features (including nationwide long distance,
unlimited text messaging, international text messaging, voicemail, downloads, ringtones, games and
content applications, unlimited directory assistance, enhanced directory assistance, ring back
tones, mobile Internet browsing, mobile instant messaging, push e-mail and nationwide roaming) and
charges for long distance service. Service revenues also include intercarrier compensation and
nonrecurring reactivation service charges to customers.
Equipment. We sell wireless broadband mobile handsets and accessories that are used by our
customers in connection with our wireless services. This equipment is also sold to our independent
retailers to facilitate distribution to our customers.
Costs and Expenses
Our costs and expenses include:
Cost of Service. The major components of our cost of service are:
|
|
|
Cell Site Costs. We incur expenses for the rent of cell sites, network facilities,
engineering operations, field technicians and related utility and maintenance charges. |
|
|
|
|
Intercarrier Compensation. We pay charges to other telecommunications companies for
their transport and termination of calls originated by our customers and destined for
customers of other networks. These variable charges are based on our customers usage and
generally applied at pre-negotiated rates with other carriers, although some carriers have
sought to impose such charges unilaterally. |
|
|
|
|
Variable Long Distance. We pay charges to other telecommunications companies for long
distance service provided to our customers. These variable charges are based on our
customers usage, applied at pre-negotiated rates with the long distance carriers. |
Cost of Equipment. Cost of equipment primarily includes the cost of handsets and accessories
purchased from third-party vendors to resell to our customers and independent retailers in
connection with our services. We do not manufacture any of this equipment.
Selling, General and Administrative Expenses. Our selling expenses include advertising and
promotional costs associated with marketing and selling to new customers and fixed charges such as
retail store rent and retail associates salaries. General and administrative expenses include
support functions including, technical operations, finance, accounting, human resources,
information technology and legal services. We record stock-based compensation expense in cost of
service and in selling, general and administrative expenses for expense associated with employee
stock options, which is measured at the date of grant, based on the estimated fair value of the
award.
Depreciation and Amortization. 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 seven to
ten years for network infrastructure assets, three to ten years for 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
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 Income. Interest expense includes interest incurred on our
borrowings, amortization of debt issuance costs and amortization of discounts and premiums on
long-term debt. Interest income is earned primarily on our cash and cash equivalents.
58
Income Taxes. For the year ended December 31, 2008, we paid no federal income taxes, whereas
for the years ended December 31, 2007 and 2006, we paid approximately $0.3 million and $2.7
million, respectively, in federal income taxes. In addition, we have paid $2.7 million, $1.1
million and an immaterial amount of state income tax during the years ended December 31, 2008, 2007
and 2006, respectively.
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 and surrounding metropolitan areas and promotional activity,
which could reduce or outweigh certain seasonal effects.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Additions |
|
Subscribers |
|
|
Core |
|
Expansion |
|
|
|
|
|
Core |
|
Expansion |
|
|
MetroPCS Subscriber Statistics |
|
Markets |
|
Markets |
|
Consolidated |
|
Markets |
|
Markets |
|
Consolidated |
|
|
(In 000s) |
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1 |
|
|
184 |
|
|
|
61 |
|
|
|
245 |
|
|
|
2,056 |
|
|
|
114 |
|
|
|
2,170 |
|
Q2 |
|
|
63 |
|
|
|
186 |
|
|
|
249 |
|
|
|
2,119 |
|
|
|
300 |
|
|
|
2,419 |
|
Q3 |
|
|
55 |
|
|
|
143 |
|
|
|
198 |
|
|
|
2,174 |
|
|
|
443 |
|
|
|
2,617 |
|
Q4 |
|
|
127 |
|
|
|
198 |
|
|
|
324 |
|
|
|
2,301 |
|
|
|
640 |
|
|
|
2,941 |
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1 |
|
|
184 |
|
|
|
270 |
|
|
|
454 |
|
|
|
2,485 |
|
|
|
910 |
|
|
|
3,395 |
|
Q2 |
|
|
58 |
|
|
|
97 |
|
|
|
155 |
|
|
|
2,543 |
|
|
|
1,007 |
|
|
|
3,550 |
|
Q3 |
|
|
36 |
|
|
|
78 |
|
|
|
114 |
|
|
|
2,578 |
|
|
|
1,086 |
|
|
|
3,664 |
|
Q4 |
|
|
81 |
|
|
|
218 |
|
|
|
299 |
|
|
|
2,659 |
|
|
|
1,304 |
|
|
|
3,963 |
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1 |
|
|
137 |
|
|
|
315 |
|
|
|
452 |
|
|
|
2,796 |
|
|
|
1,619 |
|
|
|
4,415 |
|
Q2 |
|
|
19 |
|
|
|
164 |
|
|
|
183 |
|
|
|
2,815 |
|
|
|
1,783 |
|
|
|
4,598 |
|
Q3 |
|
|
30 |
|
|
|
219 |
|
|
|
249 |
|
|
|
2,846 |
|
|
|
2,001 |
|
|
|
4,847 |
|
Q4 |
|
|
141 |
|
|
|
378 |
|
|
|
519 |
|
|
|
2,987 |
|
|
|
2,380 |
|
|
|
5,367 |
|
Operating Segments
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. Our chief operating
decision maker is the President, Chief Executive Officer and Chairman of the Board.
As of December 31, 2008, we had thirteen operating segments based on geographic region within
the United States: Atlanta, Boston, Dallas/Ft. Worth, Detroit, Las Vegas, Los Angeles, Miami, New
York, Orlando/Jacksonville, Philadelphia, Sacramento, San Francisco, and Tampa/Sarasota. Each of
these operating segments provide wireless broadband mobile 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, enhanced directory assistance, text messaging, picture and multimedia messaging,
domestic and international long distance, international text messaging, ringtones, games and
content applications, unlimited directory assistance, ring back tones, nationwide roaming, mobile
Internet browsing, mobile instant messaging, push e-mail, location based services, social
networking services and other value-added services.
We aggregate our operating segments into two reportable segments: Core Markets and Expansion
Markets.
|
|
|
Core Markets, which include Atlanta, Miami, Sacramento and San Francisco, are
aggregated because they are reviewed on an aggregate basis by the chief operating decision
maker, they are similar in respect to their products and services, production processes,
class of customer, method of distribution, and regulatory environment and currently exhibit
similar financial performance and economic characteristics. |
|
|
|
|
Expansion Markets, which include Boston, Dallas/Ft. Worth, Detroit, Las Vegas, Los
Angeles, New York, Orlando/Jacksonville, Philadelphia, and Tampa/Sarasota are aggregated
because they are reviewed on an aggregate basis by the chief operating decision maker, they
are similar in respect to their products and services, production processes, class of
customer, method of distribution, and regulatory environment and have similar expected
long-term financial performance and economic characteristics. |
59
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 and national operations center are
allocated based on the average number of customers in each operating segment. There are no
transactions between reportable segments.
Interest and certain other expenses, interest income and income taxes are not allocated to the
segments in the computation of segment operating profit for internal evaluation purposes.
60
Results of Operations
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
Set forth below is a summary of certain financial information by reportable operating segment
for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Reportable Operating Segment Data |
|
2008 |
|
|
2007 |
|
|
Change |
|
|
|
(in thousands) |
|
|
|
|
|
REVENUES: |
|
|
|
|
|
|
|
|
|
|
|
|
Service revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Core Markets |
|
$ |
1,504,870 |
|
|
$ |
1,414,917 |
|
|
|
6 |
% |
Expansion Markets |
|
|
932,380 |
|
|
|
504,280 |
|
|
|
85 |
% |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,437,250 |
|
|
$ |
1,919,197 |
|
|
|
27 |
% |
|
|
|
|
|
|
|
|
|
|
Equipment revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Core Markets |
|
$ |
186,263 |
|
|
$ |
220,364 |
|
|
|
(15 |
)% |
Expansion Markets |
|
|
128,003 |
|
|
|
96,173 |
|
|
|
33 |
% |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
314,266 |
|
|
$ |
316,537 |
|
|
|
(1 |
)% |
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (excluding
depreciation and amortization
disclosed separately below) (1): |
|
|
|
|
|
|
|
|
|
|
|
|
Core Markets |
|
$ |
437,765 |
|
|
$ |
439,162 |
|
|
|
0 |
% |
Expansion Markets |
|
|
419,530 |
|
|
|
208,348 |
|
|
|
101 |
% |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
857,295 |
|
|
$ |
647,510 |
|
|
|
32 |
% |
|
|
|
|
|
|
|
|
|
|
Cost of equipment: |
|
|
|
|
|
|
|
|
|
|
|
|
Core Markets |
|
$ |
374,777 |
|
|
$ |
385,100 |
|
|
|
(3 |
)% |
Expansion Markets |
|
|
329,871 |
|
|
|
212,133 |
|
|
|
56 |
% |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
704,648 |
|
|
$ |
597,233 |
|
|
|
18 |
% |
|
|
|
|
|
|
|
|
|
|
Selling, general and
administrative expenses
(excluding depreciation and
amortization disclosed
separately below) (1): |
|
|
|
|
|
|
|
|
|
|
|
|
Core Markets |
|
$ |
171,819 |
|
|
$ |
167,542 |
|
|
|
3 |
% |
Expansion Markets |
|
|
275,763 |
|
|
|
184,478 |
|
|
|
50 |
% |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
447,582 |
|
|
$ |
352,020 |
|
|
|
27 |
% |
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA (2): |
|
|
|
|
|
|
|
|
|
|
|
|
Core Markets |
|
$ |
720,334 |
|
|
$ |
654,112 |
|
|
|
10 |
% |
Expansion Markets |
|
|
62,799 |
|
|
|
12,883 |
|
|
|
387 |
% |
Depreciation and amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
Core Markets |
|
$ |
130,695 |
|
|
$ |
117,344 |
|
|
|
11 |
% |
Expansion Markets |
|
|
106,410 |
|
|
|
53,851 |
|
|
|
98 |
% |
Other |
|
|
18,214 |
|
|
|
7,007 |
|
|
|
160 |
% |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
255,319 |
|
|
$ |
178,202 |
|
|
|
43 |
% |
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Core Markets |
|
$ |
13,562 |
|
|
$ |
10,635 |
|
|
|
28 |
% |
Expansion Markets |
|
|
27,580 |
|
|
|
17,389 |
|
|
|
59 |
% |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
41,142 |
|
|
$ |
28,024 |
|
|
|
47 |
% |
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Core Markets |
|
$ |
557,425 |
|
|
$ |
529,194 |
|
|
|
5 |
% |
Expansion Markets |
|
|
(71,440 |
) |
|
|
(58,818 |
) |
|
|
21 |
% |
Other |
|
|
(18,218 |
) |
|
|
(10,262 |
) |
|
|
78 |
% |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
467,767 |
|
|
$ |
460,114 |
|
|
|
2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Cost of service and selling, general and administrative expenses include stock-based
compensation expense. For the year ended December 31, 2008, cost of service includes $2.9
million and selling, general and administrative expenses includes $38.2 million of stock-based
compensation expense. For the year ended December 31, 2007, cost of service includes $1.8
million and selling, general and administrative expenses includes $26.2 million of stock-based
compensation expense. |
|
(2) |
|
Core and Expansion Markets Adjusted EBITDA is presented in accordance with SFAS No. 131 as it
is the primary financial measure 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. |
61
Service Revenues. Service revenues increased $518.1 million, or approximately 27%, to $2.4
billion for the year ended December 31, 2008 from $1.9 billion for the year ended December 31,
2007. The increase is due to increases in Core Markets and Expansion Markets service revenues as
follows:
|
|
|
Core Markets. Core Markets service revenues increased $90.0 million, or 6%, to $1.5
billion for the year ended December 31, 2008 from $1.4 billion for the year ended December
31, 2007. The increase in service revenues is primarily attributable to net customer
additions of approximately 328,000 customers for the year ended December 31, 2008, which
accounted for approximately $157.3 million of the Core Markets increase. This increase was
partially offset by the higher participation in our Family Plans as well as reduced revenue
from certain features included in our service plans that were previously provided a la
carte, accounting for an approximately $56.2 million decrease. In addition, consolidated
pass through charges revenue increased $40.9 million during the year ended December 31,
2008 compared to the same period in 2007. This increase is primarily attributable to a 35%
increase in our consolidated customer base since December 31, 2007 and higher federal
universal service fund, or FUSF, rates. Beginning on January 1, 2008, a portion of these
revenues were allocated to the Expansion Markets in the amount of $52.2 million resulting
in a net decrease of $11.3 million in the Core Markets for the year ended December 31, 2008
compared to the same period in 2007. |
|
|
|
|
Expansion Markets. Expansion Markets service revenues increased $428.1 million, or
approximately 85%, to $932.4 million for the year ended December 31, 2008 from $504.3
million for the year ended December 31, 2007. The increase in service revenues is primarily
attributable to net customer additions of approximately 1.1 million customers for the year
ended December 31, 2008, which accounted for approximately $417.4 million of the Expansion
Markets increase. This increase was partially offset by the higher participation in our
Family Plans as well as reduced revenue from certain features included in our service plans
that were previously provided a la carte, accounting for an approximately $46.3 million
decrease. In addition, pass through charges revenue increased $52.2 million during the
year ended December 31, 2008 compared to the same period in 2007 due to the allocation of a
portion of these revenues to the Expansion Markets beginning on January 1, 2008. |
Equipment Revenues. Equipment revenues decreased $2.3 million, or approximately 1%, to $314.3
million for the year ended December 31, 2008 from $316.6 million for the year ended December 31,
2007. The decrease is due primarily to a decrease in Core Markets equipment revenues, partially
offset by an increase in Expansion Markets equipment revenues as follows:
|
|
|
Core Markets. Core Markets equipment revenues decreased $34.1 million, or 15%, to
$186.3 million for the year ended December 31, 2008 from $220.4 million for the year ended
December 31, 2007. The decrease in equipment revenues is primarily attributable to a lower
average price of handsets activated reducing equipment revenues by $36.4 million, partially
offset by an increase in upgrade handset sales to existing customers accounting for a $1.7
million increase in equipment revenues. |
|
|
|
|
Expansion Markets. Expansion Markets equipment revenues increased $31.8 million, or
33%, to $128.0 million for the year ended December 31, 2008 from $96.2 million for the year
ended December 31, 2007. The increase in equipment revenues is primarily attributable to
an increase in gross customer additions which accounted for $31.1 million of the Expansion
Markets increase, coupled with an increase in upgrade handset sales to existing customers
accounting for a $26.0 million increase. These increases in equipment revenues were
partially offset by a lower average price of handsets activated which accounted for a $28.2
million decrease. |
Cost of Service. Cost of service increased $209.8 million, or approximately 32%, to $857.3
million for the year ended December 31, 2008 from $647.5 million for the year ended December 31,
2007. The increase is due primarily to an increase in Expansion Markets cost of service, partially
offset by a decrease in Core Markets cost of service as follows:
|
|
|
Core Markets. Core Markets cost of service decreased $1.4 million to $437.8 million for
the year ended December 31, 2008 from $439.2 million for the year ended December 31, 2007.
Core Markets cost of service (excluding pass through charges) increased $13.6 million, or
4%, to $353.0 million for the year ended December 31, 2008 from $339.4 million for the year
ended December 31, 2007. The increase was primarily attributable to the 12% growth in our
Core Markets customer base and the deployment of additional network infrastructure during
the twelve months ended December 31, 2008. In addition, consolidated pass through
|
62
charges increased $37.1 million during the year ended December 31, 2008 compared to the same
period in 2007. This increase is primarily attributable to a 35% increase in our
consolidated customer base since December 31, 2007 and higher FUSF rates. On January 1,
2008, we began allocating a portion of these expenses to the Expansion Markets. The portion
of the pass through charges that were allocated to the Expansion Markets during the year
ended December 31, 2008 was $52.1 million, resulting in a net decrease of $15.0 million in
the Core Markets for the year ended December 31, 2008 when compared to the same period in
2007.
|
|
|
Expansion Markets. Expansion Markets cost of service increased $211.2 million, or 101%,
to $419.5 million for the year ended December 31, 2008 from $208.3 million for the year
ended December 31, 2007. Expansion Markets cost of service (excluding pass through charges)
increased $159.1 million, or approximately 77%, to $364.8 million for the year ended
December 31, 2008 from $205.7 million for the year ended December 31, 2007. This increase
was primarily attributable to the approximately 83% growth in our Expansion Markets
customer base, coupled with expenses associated with the launch of service in new markets
well as the build-out expenses related to the New York and Boston metropolitan areas. In
addition, pass through charges increased approximately $52.1 million during the year ended
December 31, 2008 compared to the same period in 2007 due to the allocation of a portion of
these expenses to the Expansion Markets beginning on January 1, 2008. |
Cost of Equipment. Cost of equipment increased $107.4 million, or 18%, to $704.6 million for
the year ended December 31, 2008 from $597.2 million for the year ended December 31, 2007. The
increase is due primarily to an increase in Expansion Markets cost of equipment, partially offset
by a decrease in Core Markets cost of equipment as follows:
|
|
|
Core Markets. Core Markets cost of equipment decreased $10.3 million, or approximately
3%, to $374.8 million for the year ended December 31, 2008 from $385.1 million for the year
ended December 31, 2007. The decrease in Core Markets cost of equipment is primarily
attributable to a lower average cost of handsets activated reducing cost of equipment by
$15.3 million, partially offset by an increase in upgrade handset sales to existing
customer accounting for a $2.1 million increase. |
|
|
|
|
Expansion Markets. Expansion Markets cost of equipment increased $117.7 million, or
approximately 56%, to $329.8 million for the year ended December 31, 2008 from $212.1
million for the year ended December 31, 2007. The increase in Expansion Markets cost of
equipment is primarily attributable to an increase in gross customer additions which
accounted for $87.4 million, coupled with an increase in upgrade handset sales to existing
customers accounting for $37.0 million. These increases were partially offset by a lower
average cost of handsets sales reducing cost of equipment by $12.5 million. |
Selling, General and Administrative Expenses. Selling, general and administrative expenses
increased $95.6 million, or 27%, to $447.6 million for the year ended December 31, 2008 from $352.0
million for the year ended December 31, 2007. The increase is due to increases in Core Markets and
Expansion Markets selling, general and administrative expenses as follows:
|
|
|
Core Markets. Core Markets selling, general and administrative expenses increased $4.3
million, or approximately 3%, to $171.8 million for the year ended December 31, 2008 from
$167.5 million for the year ended December 31, 2007. Selling expenses increased by $5.2
million, or approximately 7%, for the year ended December 31, 2008 compared to the year
ended December 31, 2007. The increase in selling expenses is primarily attributable to a
$2.9 million increase in marketing and advertising expenses as well as higher employee
related costs of $3.3 million incurred to support the growth in the Core Markets. General
and administrative expenses decreased by $3.4 million, or 4% for the year ended December
31, 2008 as compared to the year ended December 31, 2007. This was due primarily to a
decrease in various administrative expenses incurred as a result of cost benefits achieved
due to the increasing scale of our business in the Core Markets. In addition, stock-based
compensation expense increased $2.9 million for the year ended December 31, 2008 as
compared to the same period in 2007. See Stock-Based Compensation Expense. |
63
|
|
|
Expansion Markets. Expansion Markets selling, general and administrative expenses
increased $91.3 million, or approximately 50%, to $275.8 million for the year ended
December 31, 2008 from $184.5 million for the year ended December 31, 2007. Selling
expenses increased by $54.0 million, or 72%, for the year ended December 31, 2008 compared
to the year ended December 31, 2007. This increase is primarily due to a $16.6 million
increase in marketing and advertising expenses incurred to support the growth in the
Expansion Markets as well as higher employee related costs of $17.6 million to support the
growth and buildout of the Expansion Markets. General and administrative expenses
increased by $27.7 million, or approximately 30%, for the year ended December 31, 2008
compared to the same period in 2007 primarily due to the approximately 83% growth in our
Expansion Markets customer base, including the launch of service in new markets, as well as
the build-out expenses related to the New York and Boston metropolitan areas. In addition,
an increase of $10.2 million in stock-based compensation expense contributed to the
increase in the Expansion Markets. See Stock-Based Compensation Expense. |
Depreciation and Amortization. Depreciation and amortization expense increased $77.1 million,
or 43%, to $255.3 million for the year ended December 31, 2008 from $178.2 million for the year
ended December 31, 2007. The increase is primarily due to increases in Core Markets and Expansion
Markets depreciation expense as follows:
|
|
|
Core Markets. Core Markets depreciation and amortization expense increased $13.4
million, or 11%, to $130.7 million for the year ended December 31, 2008 from $117.3 million
for the year ended December 31, 2007. The increase related primarily to an increase in
network infrastructure assets placed into service during the year ended December 31, 2008
to support the continued growth in the Core Markets. |
|
|
|
|
Expansion Markets. Expansion Markets depreciation and amortization expense increased
$52.5 million, or approximately 98%, to $106.4 million for the year ended December 31, 2008
from $53.9 million for the year ended December 31, 2007. The increase related primarily to
an increase in network infrastructure assets placed into service during the year ended
December 31, 2008 driven primarily by the launch of service in new markets. |
Stock-Based Compensation Expense. Stock-based compensation expense increased $13.1 million, or
approximately 47%, to $41.1 million for the year ended December 31, 2008 from $28.0 million for the
year ended December 31, 2007. The increase is due primarily to increases in Core Markets and
Expansion Markets stock-based compensation expense as follows:
|
|
|
Core Markets. Core Markets stock-based compensation expense increased $2.9 million, or
approximately 28%, to $13.5 million for the year ended December 31, 2008 from $10.6 million
for the year ended December 31, 2007. The increase is primarily related to additional stock
options granted to employees in these markets throughout the year ended December 31, 2008. |
|
|
|
|
Expansion Markets. Expansion Markets stock-based compensation expense increased $10.2
million, or approximately 59%, to $27.6 million for the year ended December 31, 2008 from
$17.4 million for the year ended December 31, 2007. The increase is primarily related to
additional stock options granted to employees in these markets throughout the year ended
December 31, 2008. |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Data |
|
2008 |
|
2007 |
|
Change |
|
|
(in thousands) |
|
|
|
|
Loss on disposal of assets |
|
$ |
18,905 |
|
|
$ |
655 |
|
|
|
* |
* |
Interest expense |
|
|
179,398 |
|
|
|
201,746 |
|
|
|
(11 |
)% |
Interest and other income |
|
|
(23,170 |
) |
|
|
(63,936 |
) |
|
|
(64 |
)% |
Impairment loss on investment securities |
|
|
30,857 |
|
|
|
97,800 |
|
|
|
(68 |
)% |
Provision for income taxes |
|
|
129,986 |
|
|
|
123,098 |
|
|
|
6 |
% |
Net income |
|
|
149,438 |
|
|
|
100,403 |
|
|
|
49 |
% |
Loss on Disposal of Assets. Loss on disposal of assets increased $18.3 million to $18.9
million for the year ended December 31, 2008 from $0.6 million for the year ended December 31,
2007. During the year ended December 31, 2008, we recorded a loss on disposal of assets related to
certain network equipment and construction costs that were retired. The majority of the loss was
related to the transfer of network switching equipment to a new location which resulted in the
write-off of the associated construction and installation costs and certain other network equipment
that had no future value to the new location.
64
Interest Expense. Interest expense decreased $22.3 million, or 11%, to $179.4 million for the
year ended December 31, 2008 from $201.7 million for the year ended December 31, 2007. The
decrease in interest expense was primarily due to the capitalization of $64.2 million of interest
during the twelve months ended December 31, 2008, compared to $34.9 million of interest capitalized
during the same period in 2007. We capitalize interest costs associated with our FCC 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 FCC 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 new markets. In addition, our weighted average interest
rate decreased to 7.78% for the twelve months ended December 31, 2008 compared to 8.15% for the
twelve months ended December 31, 2007 as a result of a decrease in the borrowing rates under the
senior secured credit facility. Average debt outstanding for the twelve months ended December 31,
2008 and 2007 was $3.0 and $2.8 billion, respectively. The increase in average debt outstanding
was due to the issuance of an additional $400.0 million principal amount of our 91/4% senior notes in
June 2007.
Interest and Other Income. Interest and other income decreased $40.7 million, or
approximately 64%, to $23.2 million for the year ended December 31, 2008 from $63.9 million for the
year ended December 31, 2007. The decrease in interest and other income was primarily due to the
Company investing substantially all of its cash and cash equivalents in money market funds
consisting of U.S. treasury securities rather than in short-term investments as the Company has
done historically. In addition, interest income decreased due to lower cash balances when compared
to 2007 as well as a decrease on the return on our cash balances as a result of a decrease in
interest rates.
Impairment Loss on Investment Securities. We can and have historically invested our
substantial cash balances in, among other things, securities issued and fully guaranteed by the
United States or the states, highly rated commercial paper and auction rate securities, money
market funds meeting certain criteria, and demand deposits. These investments are subject to
credit, liquidity, market and interest rate risk. During the year ended December 31, 2007, we made
an original investment of $133.9 million in principal in certain auction rate securities that were
rated AAA/Aaa at the time of purchase, substantially all of which are secured by collateralized
debt obligations with a portion of the underlying collateral being mortgage securities or related
to mortgage securities. With the continued liquidity issues experienced in global credit and
capital markets, the auction rate securities held by us at December 31, 2008 continue to experience
failed auctions as the amount of securities submitted for sale in the auctions exceeds the amount
of purchase orders. We recognized an additional other-than-temporary impairment loss on investment
securities in the amount of $30.9 million during the year ended December 31, 2008.
Provision for Income Taxes. Income tax expense was $130.0 million and $123.1 million for the
years ended December 31, 2008 and 2007, respectively. The effective tax rate was 46.5% and 54.4%
for the years ended December 31, 2008 and 2007, respectively. Our effective rates differ from the
statutory federal rate of 35.0% due to state and local taxes, non-deductible expenses and an
increase in the valuation allowance related to the impairment loss recognized on investment
securities.
Net Income. Net income increased $49.0 million, or approximately 49%, to $149.4 million for
the year ended December 31, 2008 compared to $100.4 million for the year ended December 31, 2007.
The increase in net income was primarily attributable to an increase in income from operations, a
decrease in interest expense and a decrease in the impairment loss on investment securities. These
items were partially offset by lower interest and other income for the year ended December 31,
2008.
65
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
Set forth below is a summary of certain financial information by reportable operating segment
for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Reportable Operating Segment Data |
|
2007 |
|
|
2006 |
|
|
Change |
|
|
|
(in thousands) |
|
|
|
|
|
REVENUES: |
|
|
|
|
|
|
|
|
|
|
|
|
Service revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Core Markets |
|
$ |
1,414,917 |
|
|
$ |
1,138,019 |
|
|
|
24 |
% |
Expansion Markets |
|
|
504,280 |
|
|
|
152,928 |
|
|
|
230 |
% |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,919,197 |
|
|
$ |
1,290,947 |
|
|
|
49 |
% |
|
|
|
|
|
|
|
|
|
|
Equipment revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Core Markets |
|
$ |
220,364 |
|
|
$ |
208,333 |
|
|
|
6 |
% |
Expansion Markets |
|
|
96,173 |
|
|
|
47,583 |
|
|
|
102 |
% |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
316,537 |
|
|
$ |
255,916 |
|
|
|
24 |
% |
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (excluding
depreciation and amortization
disclosed separately below) (1): |
|
|
|
|
|
|
|
|
|
|
|
|
Core Markets |
|
$ |
439,162 |
|
|
$ |
338,923 |
|
|
|
30 |
% |
Expansion Markets |
|
|
208,348 |
|
|
|
106,358 |
|
|
|
96 |
% |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
647,510 |
|
|
$ |
445,281 |
|
|
|
45 |
% |
|
|
|
|
|
|
|
|
|
|
Cost of equipment: |
|
|
|
|
|
|
|
|
|
|
|
|
Core Markets |
|
$ |
385,100 |
|
|
$ |
364,281 |
|
|
|
6 |
% |
Expansion Markets |
|
|
212,133 |
|
|
|
112,596 |
|
|
|
88 |
% |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
597,233 |
|
|
$ |
476,877 |
|
|
|
25 |
% |
|
|
|
|
|
|
|
|
|
|
Selling, general and
administrative expenses
(excluding depreciation and
amortization disclosed
separately below)(1): |
|
|
|
|
|
|
|
|
|
|
|
|
Core Markets |
|
$ |
167,542 |
|
|
$ |
158,100 |
|
|
|
6 |
% |
Expansion Markets |
|
|
184,478 |
|
|
|
85,518 |
|
|
|
116 |
% |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
352,020 |
|
|
$ |
243,618 |
|
|
|
44 |
% |
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA (Deficit)(2): |
|
|
|
|
|
|
|
|
|
|
|
|
Core Markets |
|
$ |
654,112 |
|
|
$ |
492,773 |
|
|
|
33 |
% |
Expansion Markets |
|
|
12,883 |
|
|
|
(97,214 |
) |
|
|
113 |
% |
Depreciation and amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
Core Markets |
|
$ |
117,344 |
|
|
$ |
109,626 |
|
|
|
7 |
% |
Expansion Markets |
|
|
53,851 |
|
|
|
21,941 |
|
|
|
145 |
% |
Other |
|
|
7,007 |
|
|
|
3,461 |
|
|
|
102 |
% |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
178,202 |
|
|
$ |
135,028 |
|
|
|
32 |
% |
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Core Markets |
|
$ |
10,635 |
|
|
$ |
7,725 |
|
|
|
38 |
% |
Expansion Markets |
|
|
17,389 |
|
|
|
6,747 |
|
|
|
158 |
% |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
28,024 |
|
|
$ |
14,472 |
|
|
|
94 |
% |
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Core Markets |
|
$ |
529,194 |
|
|
$ |
367,109 |
|
|
|
44 |
% |
Expansion Markets |
|
|
(58,818 |
) |
|
|
(126,387 |
) |
|
|
53 |
% |
Other |
|
|
(10,262 |
) |
|
|
(3,469 |
) |
|
|
196 |
% |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
460,114 |
|
|
$ |
237,253 |
|
|
|
94 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Cost of service and selling, general and administrative expenses include stock-based
compensation expense. For the year ended December 31, 2007, cost of service includes $1.8
million and selling, general and administrative expenses includes $26.2 million of stock-based
compensation expense. For the year ended December 31, 2006, cost of service includes $1.3
million and selling, general and administrative expenses includes $13.2 million of stock-based
compensation expense. |
|
(2) |
|
Core and Expansion Markets Adjusted EBITDA (Deficit) is presented in accordance with SFAS No.
131 as it is the primary financial measure 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. |
66
Service Revenues. Service revenues increased $628.3 million, or 49%, to $1.9 billion for the
year ended December 31, 2007 from $1.3 billion for the year ended December 31, 2006. The increase
is due to increases in Core Markets and Expansion Markets service revenues as follows:
|
|
|
Core Markets. Core Markets service revenues increased $276.9 million, or 24%, to $1.4
billion for the year ended December 31, 2007 from $1.1 billion for the year ended December
31, 2006. The increase in service revenues is primarily attributable to net additions of
approximately 358,000 customers for the year ended December 31, 2007, which accounted for
$213.2 million of the Core Markets increase, coupled with the migration of existing
customers to higher priced rate plans accounting for $10.0 million of the Core Markets
increase. In addition, pass through charges revenue increased approximately $53.7 million
during the year ended December 31, 2007 compared to the same period in 2006 primarily as a
result of the increase in customers during the year ended December 31, 2007 and higher FUSF
rates. |
|
|
|
|
Expansion Markets. Expansion Markets service revenues increased $351.4 million, or
230%, to $504.3 million for the year ended December 31, 2007 from $152.9 million for the
year ended December 31, 2006. The increase in service revenues is primarily attributable to
net additions of approximately 664,000 customers for the year ended December 31, 2007,
which accounted for $361.1 million of the Expansion Markets increase, partially offset by
the migration of existing customers to lower priced rate plans accounting for a decrease of
$9.7 million. |
Equipment Revenues. Equipment revenues increased $60.6 million, or 24%, to $316.5 million for
the year ended December 31, 2007 from $255.9 million for the year ended December 31, 2006. The
increase is due to increases in Core Markets and Expansion Markets equipment revenues as follows:
|
|
|
Core Markets. Core Markets equipment revenues increased $12.0 million, or 6%, to $220.3
million for the year ended December 31, 2007 from $208.3 million for the year ended
December 31, 2006. The increase in Core Markets equipment revenues is attributable to an
increase in gross additions of approximately 130,000 customers for the year ended December
31, 2007 offset by the sale of lower priced handsets, which accounted for $1.9 million of
the Core Markets increase, as well as an increase in handset sales to existing customers
accounting for $7.1 million of the Core Markets increase. |
|
|
|
|
Expansion Markets. Expansion Markets equipment revenues increased $48.6 million, or
102%, to $96.2 million for the year ended December 31, 2007 from $47.6 million for the year
ended December 31, 2006. The increase in Expansion Markets equipment revenues is
attributable to an increase in gross additions of approximately 529,000 customers for the
year ended December 31, 2007 offset by the sale of lower priced handsets, which accounted
for $24.8 million of the Expansion Markets increase, as well as an increase in handset
sales to existing customers accounting for $21.3 million of the Expansion Markets increase. |
Cost of Service. Cost of service increased $202.2 million, or 45%, to $647.5 million for the
year ended December 31, 2007 from $445.3 million for the year ended December 31, 2006. The increase
is due to increases in Core Markets and Expansion Markets cost of service as follows:
|
|
|
Core Markets. Core Markets cost of service increased $100.2 million, or 30%, to $439.1
million for the year ended December 31, 2007 from $338.9 million for the year ended
December 31, 2006. Core Markets cost of service (excluding pass through charges) increased
$46.3 million, or 16%, to $338.5 million for the year ended December 31, 2007 from $292.2
million for the year ended December 31, 2006. The increase is primarily attributable to
the 16% growth in our Core Markets customer base and the deployment of additional network
infrastructure during the twelve months ended December 31, 2007. In addition, pass through
charges increased approximately $53.9 million during the year ended December 31, 2007
compared to the same period in 2006 primarily as a result of the increase in customers
during the year ended December 31, 2007 and higher FUSF rates. |
|
|
|
|
Expansion Markets. Expansion Markets cost of service increased $102.0 million, or 96%,
to $208.4 million for the year ended December 31, 2007 from $106.4 million for the year
ended December 31, 2006. The increase was attributable to the launch of service in the Los
Angeles metropolitan area in September 2007 as well as net additions in the Expansion
Markets of approximately 664,000 customers during the year ended December 31, 2007. |
67
Cost of Equipment. Cost of equipment increased $120.3 million, or 25%, to $597.2 million for
the year ended December 31, 2007 from $476.9 million for the year ended December 31, 2006. The
increase is due to increases in Core Markets and Expansion Markets cost of equipment as follows:
|
|
|
Core Markets. Core Markets cost of equipment increased $20.8 million, or 6%, to $385.1
million for the year ended December 31, 2007 from $364.3 million for the year ended
December 31, 2006. The increase in Core Markets equipment costs is attributable to the
increase in gross customer additions during the year ended December 31, 2007 of
approximately 130,000 customers as compared to the same period in 2006, which accounted for
$14.4 million of the increase. In addition, cost of equipment sales to existing customers
increased $4.5 million for the year ended December 31, 2007. |
|
|
|
|
Expansion Markets. Expansion Markets cost of equipment increased $99.5 million, or 88%,
to $212.1 million for the year ended December 31, 2007 from $112.6 million for the year
ended December 31, 2006. The increase in Expansion Markets equipment costs is attributable
to the increase in gross customer additions during the year ended December 31, 2007 of
approximately 529,000 customers as compared to the same period in 2006, which accounted for
$66.7 million of the increase. In addition, cost of equipment sales to existing customers
increased $31.7 million for the year ended December 31, 2007. |
Selling, General and Administrative Expenses. Selling, general and administrative expenses
increased $108.4 million, or 44%, to $352.0 million for the year ended December 31, 2007 from
$243.6 million for the year ended December 31, 2006. The increase is due to increases in Core
Markets and Expansion Markets selling, general and administrative expenses as follows:
|
|
|
Core Markets. Core Markets selling, general and administrative expenses increased $9.4
million, or 6%, to $167.5 million for the year ended December 31, 2007 from $158.1 million
for the year ended December 31, 2006. Selling expenses increased by $8.8 million, or
approximately 13%, for the year ended December 31, 2007 compared to the year ended December
31, 2006. The increase in selling expenses is primarily due to a $4.0 million increase in
marketing and advertising expenses as well as higher labor costs of $2.8 million incurred
to support the growth in the Core Markets. General and administrative expenses remained
relatively flat for the year ended December 31, 2007 compared to the same period in 2006. |
|
|
|
|
Expansion Markets. Expansion Markets selling, general and administrative expenses
increased $99.0 million, or 116%, to $184.5 million for the year ended December 31, 2007
from $85.5 million for the year ended December 31, 2006. Selling expenses increased by
$39.7 million, or approximately 113%, for the year ended December 31, 2007 compared to the
year ended December 31, 2006. This increase is primarily due to a $22.6 million increase in
marketing and advertising expenses related to the growth in the Expansion Markets as well
as higher labor costs of $11.4 million. General and administrative expenses increased by
$59.3 million, or approximately 118% for the year ended December 31, 2007 compared to the
same period in 2006 primarily due to an increase in various administrative expenses
incurred in relation to the growth in the Expansion Markets, including the launch of
service in the Los Angeles metropolitan area and build-out expenses related to the New
York, Philadelphia, Boston and Las Vegas metropolitan areas. In addition, stock-based
compensation expense increased $10.1 million. See Stock-Based Compensation Expense. |
Depreciation and Amortization. Depreciation and amortization expense increased $43.2 million,
or 32%, to $178.2 million for the year ended December 31, 2007 from $135.0 million for the year
ended December 31, 2006. The increase is primarily due to increases in Core Markets and Expansion
Markets depreciation expense as follows:
|
|
|
Core Markets. Core Markets depreciation and amortization expense increased $7.7
million, or 7%, to $117.3 million for the year ended December 31, 2007 from $109.6 million
for the year ended December 31, 2006. The increase related primarily to an increase in
network infrastructure assets placed into service during the year ended December 31, 2007. |
|
|
|
|
Expansion Markets. Expansion Markets depreciation and amortization expense increased
$31.9 million, or 145%, to $53.8 million for the year ended December 31, 2007 from $21.9
million for the year ended December 31, 2006. The increase related primarily to an increase
in network infrastructure assets placed into service during the year ended December 31,
2007 which was significantly impacted by the launch of service in the Los Angeles
metropolitan area in September 2007. |
68
Stock-Based Compensation Expense. Stock-based compensation expense increased $13.5 million, or
94%, to $28.0 million for the year ended December 31, 2007 from $14.5 million for the year ended
December 31, 2006. The increase is due primarily to increases in Core Markets and Expansion Markets
stock-based compensation expense as follows:
|
|
|
Core Markets. Core Markets stock-based compensation expense increased $2.9 million, or
38%, to $10.6 million for the year ended December 31, 2007 from $7.7 million for the year
ended December 31, 2006. The increase is primarily related to an increase in stock options
granted to employees in these markets throughout the year ended December 31, 2007. |
|
|
|
|
Expansion Markets. Expansion Markets stock-based compensation expense increased $10.6
million, or 158%, to $17.4 million for the year ended December 31, 2007 from $6.8 million
for the year ended December 31, 2006. The increase is primarily related to an increase in
stock options granted to employees in these markets throughout the year ended December 31,
2007. |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Data |
|
2007 |
|
2006 |
|
Change |
|
|
(in thousands) |
|
|
|
|
Loss on disposal of assets |
|
$ |
655 |
|
|
$ |
8,806 |
|
|
|
(93 |
)% |
Interest expense |
|
|
201,746 |
|
|
|
115,985 |
|
|
|
74 |
% |
Loss on extinguishment of debt |
|
|
|
|
|
|
51,518 |
|
|
|
100 |
% |
Impairment loss on investment securities |
|
|
97,800 |
|
|
|
|
|
|
|
100 |
% |
Provision for income taxes |
|
|
123,098 |
|
|
|
36,717 |
|
|
|
235 |
% |
Net income |
|
|
100,403 |
|
|
|
53,806 |
|
|
|
87 |
% |
Loss on Disposal of Assets. Loss on disposal of assets decreased $8.1 million, or
approximately 93%, to $0.7 million for the year ended December 31, 2007 from $8.8 million for the
year ended December 31, 2006 primarily as a result of a gain on disposal of assets from the sale of
certain network infrastructure assets related to a change in network technology related to our cell
sites in certain markets. The gain was offset by a $3.0 million loss on the termination of a lease
agreement during the year ended December 31, 2007. During the year ended December 31, 2006,
certain network technology related to our cell sites in certain markets was retired and replaced
with new technology, resulting in a loss on disposal of assets.
Interest Expense. Interest expense increased $85.7 million, or 74%, to $201.7 million for the
twelve months ended December 31, 2007 from $116.0 million for the twelve months ended December 31,
2006. The increase in interest expense was primarily due to an increased average principal balance
outstanding as a result of borrowings of $1.6 billion under our senior secured credit facility and
the issuance of $1.0 billion of 91/4% senior notes due 2014, or initial notes, during the fourth
quarter of 2006. The Company also issued an additional $400.0 million of 91/4% senior notes, or
additional notes, during the second quarter of 2007. The Company had average debt outstanding for
the twelve months ended December 31, 2007 of $2.8 billion. The average debt outstanding for the
twelve months ending December 31, 2006 was $1.3 billion. The weighted average interest rate
decreased to 8.15% for the twelve months ended December 31, 2007 compared to 10.30% for the twelve
months ended December 31, 2006 as a result of a decrease in the borrowing rates under the senior
secured credit facility, issuance of the initial notes and the additional notes, collectively
referred to as the 91/4% senior notes, and the impact of the interest rate hedge. The increase in
interest expense was partially offset by the capitalization of $34.9 million of interest during the
twelve months ended December 31, 2007, compared to $17.5 million of interest capitalized during the
same period in 2006. We capitalize interest costs associated with our FCC 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 FCC licenses and construction in progress involved in those markets
and the duration of the construction process. We expect capitalized interest to continue to be
significant during the construction of the markets associated with the AWS licenses we were granted
in November 2006 as a result of Auction 66.
Loss on Extinguishment of Debt. In November 2006, we repaid all amounts outstanding under our
first and second lien credit agreements and the exchangeable secured and unsecured bridge credit
agreements. As a result, we recorded a loss on extinguishment of debt in the amount of
approximately $42.7 million of the first and second lien credit agreements and an approximately
$9.4 million loss on the extinguishment of the exchangeable secured and unsecured bridge credit
agreements.
Impairment Loss on Investment Securities. We can and have historically invested our
substantial cash balances in, among other things, securities issued and fully guaranteed by the
United States or any state, highly rated commercial paper and auction rate securities, money market
funds meeting certain criteria, and demand deposits.
69
These investments are subject to credit, liquidity, market and interest rate risk. We made
investments of $133.9 million in certain AAA rated auction rate securities some of which are
secured by collateralized debt obligations with a portion of the underlying collateral being
mortgage securities or related to mortgage securities. With the liquidity issues experienced in
global credit and capital markets, the auction rate securities held by us at December 31, 2007 have
experienced multiple failed auctions as the amount of securities submitted for sale in the auctions
has exceeded the amount of purchase orders. As a result, we recognized an other-than-temporary
impairment loss on investment securities in the amount of $97.8 million during the year ended
December 31, 2007.
Provision for Income Taxes. Income tax expense for the year ended December 31, 2007 increased
to $123.1 million, which is approximately 55% of our income before provision for income taxes. The
provision for income taxes for the year ended December 31, 2007 includes a tax valuation allowance
on the impairment loss on investment securities equal to 15% of our income before provision in
income taxes. For the year ended December 31, 2006 the provision for income taxes was $36.7
million, or approximately 41% of income before provision for income taxes.
Net Income. Net income increased $46.6 million, or 87%, to $100.4 million for the year ended
December 31, 2007 compared to $53.8 million for the year ended December 31, 2006. The increase is
primarily attributable to a 35% growth in customers during the year ended December 31, 2007 as well
as cost benefits achieved due to the increasing scale of our business in the Core and Expansion
Markets. In addition, the increase in net income is due to a 197% increase in interest income as a
result of the significant increase in our cash balances due to proceeds from our initial public
offering and additional funding under our 91/4% senior notes. However, these benefits were partially
offset by an increase in interest expense due to an increase in the Companys average debt
outstanding for the year ended December 31, 2007 compared to the same period in 2006 as well as the
$97.8 million impairment loss on investment securities.
Performance Measures
In 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. Effective December 31, 2008, we
revised our definition of ARPU to include activation revenues. Activation revenues are related to
the reactivation of accounts that have previously disconnected and we believe that these revenues
are more appropriately presented as a component of ARPU rather than a reduction to CPGA. Prior year
measures have been restated to reflect this revision. For a reconciliation of Non-GAAP performance
measures and a further discussion of the measures, please read Reconciliation of Non-GAAP
Financial Measures below.
The following table shows annual metric information for 2006, 2007 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2006 |
|
2007 |
|
2008 |
Customers: |
|
|
|
|
|
|
|
|
|
|
|
|
End of period |
|
|
2,940,986 |
|
|
|
3,962,786 |
|
|
|
5,366,833 |
|
Net additions |
|
|
1,016,365 |
|
|
|
1,021,800 |
|
|
|
1,404,047 |
|
Churn: |
|
|
|
|
|
|
|
|
|
|
|
|
Average monthly rate |
|
|
4.6 |
% |
|
|
4.7 |
% |
|
|
4.7 |
% |
ARPU |
|
$ |
43.26 |
|
|
$ |
43.31 |
|
|
$ |
41.39 |
|
CPGA |
|
$ |
121.12 |
|
|
$ |
127.97 |
|
|
$ |
127.21 |
|
CPU |
|
$ |
19.65 |
|
|
$ |
18.33 |
|
|
$ |
18.17 |
|
Customers. Net customer additions were 1,404,047 for the year ended December 31, 2008,
compared to 1,021,800 for the year ended December 31, 2007. Total customers were 5,366,833 as of
December 31, 2008, an increase of 35% over the customer total as of December 31, 2007. The increase
in total customers is primarily attributable to the continued demand for our service offerings and
the launch of our services in new markets. Net customer additions were 1,021,800 for the year ended
December 31, 2007, compared to 1,016,365 for the year ended December 31, 2006. Total customers were
3,962,786 as of December 31, 2007, an increase of 35% over the customer total as of December 31,
2006. The increase in total customers in 2007 was largely attributable to the continued demand for
our service offerings and the launch of our services in new markets.
70
Churn. As we do not require a long-term service contract, our churn percentage is expected to
be higher than 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 the phone leaving service as a churn and the new phone entering
service as a gross customer addition. Churn remained flat for the year ended December 31, 2008 at
4.7%. Churn for the year ended December 31, 2007 was 4.7% compared to 4.6% for the year ended
December 31, 2006. The 0.1% increase in churn was due to normal historical trends related to the
maturity of our markets coupled with continued disconnects from the significant increase in gross
additions in the first quarter of 2007 compared to the first quarter of 2006. 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 churn in the second and third quarters of the year usually combine to result in fewer net
customer additions during these quarters. See Seasonality.
Average Revenue Per User. ARPU represents (a) service revenues less pass through charges for
the measurement period, divided by (b) the sum of the average monthly number of customers during
such period. ARPU was $41.39 and $43.31 for the years ended December 31, 2008 and 2007,
respectively. The $1.92 decrease in ARPU was primarily attributable to higher participation in our
Family Plans as well as reduced revenue from certain features included in our service plans that
were previously provided a la carte. ARPU increased $0.05 during 2007 from $43.26 for the year
ended December 31, 2006. At December 31, 2008, approximately 80% of our customers were on the $40
or higher rate plan.
Cost Per Gross Addition. CPGA is determined by dividing (a) selling expenses plus the total
cost of equipment associated with transactions with new customers less 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. CPGA has decreased to
$127.21 for the year ended December 31, 2008 from $127.97 for the year ended December 31, 2007,
which was primarily driven by a 33% increase in gross additions, partially offset by an increase in
selling expenses associated with the continued customer growth in our Expansion Markets and the
launch of service in new markets. CPGA increased to $127.97 for the year ended December 31, 2007
from $121.12 for the year ended December 31, 2006, which was primarily driven by the selling
expenses and equipment subsidy associated with the customer growth in our Expansion Markets as well
as selling expenses associated with the launch of service in new markets.
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 initial
customer acquisition, divided by the sum of the average monthly number of customers during such
period. CPU for the years ended December 31, 2008 and 2007 was $18.17 and $18.33, respectively. CPU
for the year ended December 31, 2006 was $19.65. We continue to achieve cost benefits due to the
increasing scale of our business. However, these benefits have been partially offset by a
combination of the construction and launch expenses associated with our Expansion Markets, which
contributed approximately $3.91, $3.36 and $3.42 of additional CPU for the years ended December 31,
2008, 2007 and 2006, respectively.
The following table shows consolidated quarterly metric information for the years ended
December 31, 2007 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
|
June 30, |
|
September 30, |
|
December 31, |
|
March 31, |
|
June 30, |
|
September 30, |
|
December 31, |
|
|
2007 |
|
2007 |
|
2007 |
|
2007 |
|
2008 |
|
2008 |
|
2008 |
|
2008 |
Customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period |
|
|
3,395,203 |
|
|
|
3,549,916 |
|
|
|
3,664,218 |
|
|
|
3,962,786 |
|
|
|
4,414,519 |
|
|
|
4,598,049 |
|
|
|
4,847,314 |
|
|
|
5,366,833 |
|
Net additions |
|
|
454,217 |
|
|
|
154,713 |
|
|
|
114,302 |
|
|
|
298,568 |
|
|
|
451,733 |
|
|
|
183,530 |
|
|
|
249,265 |
|
|
|
519,519 |
|
Churn:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average monthly
rate |
|
|
4.0 |
% |
|
|
4.8 |
% |
|
|
5.2 |
% |
|
|
4.8 |
% |
|
|
4.0 |
% |
|
|
4.5 |
% |
|
|
4.8 |
% |
|
|
5.1 |
% |
ARPU |
|
$ |
44.01 |
|
|
$ |
43.44 |
|
|
$ |
43.05 |
|
|
$ |
42.83 |
|
|
$ |
42.51 |
|
|
$ |
42.05 |
|
|
$ |
40.73 |
|
|
$ |
40.52 |
|
CPGA |
|
$ |
111.75 |
|
|
$ |
128.86 |
|
|
$ |
130.38 |
|
|
$ |
141.42 |
|
|
$ |
125.00 |
|
|
$ |
140.82 |
|
|
$ |
128.21 |
|
|
$ |
119.82 |
|
CPU |
|
$ |
18.56 |
|
|
$ |
18.01 |
|
|
$ |
17.81 |
|
|
$ |
18.93 |
|
|
$ |
18.86 |
|
|
$ |
18.23 |
|
|
$ |
18.18 |
|
|
$ |
17.55 |
|
71
Core Markets Performance Measures
Set forth below is a summary of certain key performance measures for the periods indicated for
our Core Markets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2006 |
|
2007 |
|
2008 |
|
|
(Dollars in thousands) |
Core Markets Customers: |
|
|
|
|
|
|
|
|
|
|
|
|
End of period |
|
|
2,300,958 |
|
|
|
2,658,905 |
|
|
|
2,986,876 |
|
Net additions |
|
|
429,293 |
|
|
|
357,947 |
|
|
|
327,971 |
|
Core Markets Adjusted EBITDA |
|
$ |
492,773 |
|
|
$ |
654,112 |
|
|
$ |
720,334 |
|
Core Markets Adjusted EBITDA as a Percent of Service Revenues |
|
|
43.3 |
% |
|
|
46.2 |
% |
|
|
47.9 |
% |
Our Core Markets have a licensed population of approximately 28 million. As of December 31,
2008, our networks in our Core Markets cover a population of approximately 23 million.
Customers. Net customer additions in our Core Markets were 327,971 for the year ended
December 31, 2008, compared to 357,947 for the year ended December 31, 2007. Total customers were
2,986,876 as of December 31, 2008, an increase of 12% over the customer total as of December 31,
2007. Net customer additions in our Core Markets were 357,947 for the year ended December 31,
2007, bringing our total customers to approximately 2.7 million as of December 31, 2007, an
increase of 16% over the total customers as of December 31, 2006. The increase in total customers
is primarily attributable to the continued demand for our service offerings.
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 year ended
December 31, 2008, Core Markets Adjusted EBITDA was $720.3 million compared to $654.1 million for
the year ended December 31, 2007. For the year ended December 31, 2006, Core Markets Adjusted
EBITDA was $492.8 million. 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.
Adjusted EBITDA as a Percent of Service Revenues. 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 year ended December 31, 2008 and 2007 was 47.9% and
46.2%, respectively. Core Markets Adjusted EBITDA as a percent of service revenues for the year
ended December 31, 2006 was 43.0%. Consistent with the increase in Core Markets Adjusted EBITDA, we
continue to experience corresponding increases in Core Markets Adjusted EBITDA as a percent of
service revenues due to the growth in service revenues as well as cost benefits due to the
increasing scale of our business in the Core Markets.
The following table shows a summary of certain quarterly key performance measures for the
periods indicated for our Core Markets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
|
June 30, |
|
September 30, |
|
December 31, |
|
March 31, |
|
June 30, |
|
September 30, |
|
December 31, |
|
|
2007 |
|
2007 |
|
2007 |
|
2007 |
|
2008 |
|
2008 |
|
2008 |
|
2008 |
|
|
(Dollars in thousands) |
Core Markets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customers: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period |
|
|
2,484,811 |
|
|
|
2,542,290 |
|
|
|
2,578,019 |
|
|
|
2,658,905 |
|
|
|
2,795,916 |
|
|
|
2,815,353 |
|
|
|
2,845,732 |
|
|
|
2,986,876 |
|
Net additions |
|
|
183,853 |
|
|
|
57,479 |
|
|
|
35,729 |
|
|
|
80,886 |
|
|
|
137,011 |
|
|
|
19,437 |
|
|
|
30,379 |
|
|
|
141,144 |
|
Core Markets Adjusted EBITDA |
|
$ |
150,321 |
|
|
$ |
167,869 |
|
|
$ |
170,984 |
|
|
$ |
164,938 |
|
|
$ |
170,526 |
|
|
$ |
187,335 |
|
|
$ |
182,189 |
|
|
$ |
180,284 |
|
Core Markets Adjusted
EBITDA as a Percent of
Service Revenues |
|
|
44.6 |
% |
|
|
47.1 |
% |
|
|
47.7 |
% |
|
|
45.4 |
% |
|
|
46.2 |
% |
|
|
49.6 |
% |
|
|
49.0 |
% |
|
|
46.7 |
% |
72
Expansion Markets Performance Measures
Set forth below is a summary of certain key performance measures for the periods indicated for
our Expansion Markets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2006 |
|
2007 |
|
2008 |
|
|
(Dollars in thousands) |
Expansion Markets Customers: |
|
|
|
|
|
|
|
|
|
|
|
|
End of period |
|
|
640,028 |
|
|
|
1,303,881 |
|
|
|
2,379,957 |
|
Net additions |
|
|
587,072 |
|
|
|
663,853 |
|
|
|
1,076,076 |
|
Expansion Markets Adjusted EBITDA (Deficit) |
|
$ |
(97,214 |
) |
|
$ |
12,883 |
|
|
$ |
62,799 |
|
Expansion Markets Adjusted EBITDA as a Percent of Service Revenues |
|
|
n/m |
|
|
|
2.6 |
% |
|
|
6.7 |
% |
Our Expansion Markets have a licensed population of approximately 122 million. As of December
31, 2008, our networks in our Expansion Markets cover a population of approximately 41 million.
Customers. Net customer additions in our Expansion Markets were 1,076,076 for the year ended
December 31, 2008, compared to 663,853 for the year ended December 31, 2007, an increase of 62%.
Total customers were 2,379,957 as of December 31, 2008, an increase of approximately 83% over total
customers as of December 31, 2007. The increase in total customers in the Expansion Markets is
primarily attributable to the continued demand for our service offerings as well as the continued
expansion of our service coverage area existing Expansion Markets and our recent launches of
service in new markets. Net customer additions increased to 663,853 for the year ended December
31, 2007 from 587,072 for the year ended December 31, 2006 due to the continued demand for our
service offerings and the launch of our services in new markets.
Adjusted EBITDA (Deficit). Adjusted EBITDA (Deficit) 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 year ended
December 31, 2008, Expansion Markets Adjusted EBITDA was $62.8 million compared to an Adjusted
EBITDA of $12.9 million for the year ended December 31, 2007. The increase in Adjusted EBITDA,
when compared to the previous year, was attributable to cost benefits achieved due to the
increasing scale of our business, partially offset by construction and launch expenses associated
primarily with the launch of service in new markets and expenses related to the build out of the
New York and Boston metropolitan areas. Adjusted EBITDA deficit for the year ended December 31,
2006 was $97.2 million. The increase in Adjusted EBITDA for the year ended December 31, 2007, when
compared to the year ended December 31, 2006, was attributable to the growth in service revenues in
our existing Expansion Markets as well as the achievement of cost benefits due to the increasing
scale of our business in the Expansion Markets offset by significant expenses related to the
buildout and launch of service new markets.
Adjusted EBITDA as a Percent of Service Revenues. Adjusted EBITDA as a percent of service
revenues is calculated by dividing Adjusted EBITDA by total service revenues. Expansion Markets
Adjusted EBITDA as percent of service revenues for the year ended December 31, 2008 and 2007 was
6.7% and 2.6%, respectively. Consistent with the increase in Expansion Markets Adjusted EBITDA, we
continue to experience corresponding increases in Expansion Markets Adjusted EBITDA as a percent of
service revenues due to the growth in service revenues as well as cost benefits due to the
increasing scale of our business in the Expansion Markets, partially offset by construction and
launch expenses associated with new markets.
The following table shows a summary of certain quarterly key performance measures for the
periods indicated for our Expansion Markets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
|
June 30, |
|
September 30, |
|
December 31, |
|
March 31, |
|
June 30, |
|
September 30, |
|
December 31, |
|
|
2007 |
|
2007 |
|
2007 |
|
2007 |
|
2008 |
|
2008 |
|
2008 |
|
2008 |
|
|
(Dollars in thousands) |
Expansion Markets Customers: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period |
|
|
910,392 |
|
|
|
1,007,626 |
|
|
|
1,086,199 |
|
|
|
1,303,881 |
|
|
|
1,618,603 |
|
|
|
1,782,696 |
|
|
|
2,001,582 |
|
|
|
2,379,957 |
|
Net additions |
|
|
270,364 |
|
|
|
97,234 |
|
|
|
78,573 |
|
|
|
217,682 |
|
|
|
314,722 |
|
|
|
164,093 |
|
|
|
218,886 |
|
|
|
378,375 |
|
Expansion Markets Adjusted
EBITDA (Deficit) |
|
$ |
(1,005 |
) |
|
$ |
12,576 |
|
|
$ |
13,516 |
|
|
$ |
(12,205 |
) |
|
$ |
7,288 |
|
|
$ |
22,832 |
|
|
$ |
18,699 |
|
|
$ |
13,980 |
|
Expansion Markets Adjusted
EBITDA as a Percent of
Service Revenues |
|
|
n/m |
|
|
|
10.2 |
% |
|
|
10.3 |
% |
|
|
n/m |
|
|
|
3.8 |
% |
|
|
10.3 |
% |
|
|
7.8 |
% |
|
|
5.0 |
% |
73
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 companys 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
income 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.
ARPU, CPGA, and 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 utilize ARPU to evaluate our per-customer service revenue realization and to assist
in forecasting our future service revenues. ARPU is calculated exclusive of 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
|
(In thousands, except average number of customers and ARPU) |
|
Calculation of Average Revenue Per User
(ARPU): |
|
|
|
|
|
|
|
|
|
|
|
|
Service revenues |
|
$ |
1,290,947 |
|
|
$ |
1,919,197 |
|
|
$ |
2,437,250 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
Pass through charges |
|
|
(45,640 |
) |
|
|
(95,946 |
) |
|
|
(136,801 |
) |
|
|
|
|
|
|
|
|
|
|
Net service revenues |
|
$ |
1,245,307 |
|
|
$ |
1,823,251 |
|
|
$ |
2,300,449 |
|
|
|
|
|
|
|
|
|
|
|
Divided by: |
|
|
|
|
|
|
|
|
|
|
|
|
Average number of customers |
|
|
2,398,682 |
|
|
|
3,508,497 |
|
|
|
4,631,168 |
|
|
|
|
|
|
|
|
|
|
|
ARPU |
|
$ |
43.26 |
|
|
$ |
43.31 |
|
|
$ |
41.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
June 30, |
|
|
September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2007 |
|
|
2007 |
|
|
2007 |
|
|
|
(In thousands, except average number of customers and ARPU) |
|
Calculation of Average Revenue Per User (ARPU): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenues |
|
$ |
439,516 |
|
|
$ |
479,341 |
|
|
$ |
489,131 |
|
|
$ |
511,209 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass through charges |
|
|
(20,271 |
) |
|
|
(25,721 |
) |
|
|
(25,215 |
) |
|
|
(24,740 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net service revenues |
|
$ |
419,245 |
|
|
$ |
453,620 |
|
|
$ |
463,916 |
|
|
$ |
486,469 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Divided by: Average number of customers |
|
|
3,175,284 |
|
|
|
3,480,780 |
|
|
|
3,592,045 |
|
|
|
3,785,880 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ARPU |
|
$ |
44.01 |
|
|
$ |
43.44 |
|
|
$ |
43.05 |
|
|
$ |
42.83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
June 30, |
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2008 |
|
|
2008 |
|
|
2008 |
|
|
|
(In thousands, except average number of customers and ARPU) |
|
Calculation of Average Revenue Per User (ARPU): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenues |
|
$ |
561,970 |
|
|
$ |
598,562 |
|
|
$ |
610,691 |
|
|
$ |
666,028 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass through charges |
|
|
(26,554 |
) |
|
|
(30,583 |
) |
|
|
(31,445 |
) |
|
|
(48,220 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net service revenues |
|
$ |
535,416 |
|
|
$ |
567,979 |
|
|
$ |
579,246 |
|
|
$ |
617,808 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Divided by: Average number of customers |
|
|
4,198,794 |
|
|
|
4,501,980 |
|
|
|
4,741,043 |
|
|
|
5,082,856 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ARPU |
|
$ |
42.51 |
|
|
$ |
42.05 |
|
|
$ |
40.73 |
|
|
$ |
40.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
CPGA We utilize 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 allows us to compare our average acquisition costs
per new customer to those of other wireless broadband mobile providers. Equipment revenues related
to new customers are deducted from selling expenses 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, |
|
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
|
(In thousands, except gross customer additions and CPGA) |
|
Calculation of Cost Per Gross Addition (CPGA): |
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses |
|
$ |
104,620 |
|
|
$ |
153,065 |
|
|
$ |
212,293 |
|
Less: Equipment revenues |
|
|
(255,916 |
) |
|
|
(316,537 |
) |
|
|
(314,266 |
) |
Add: Equipment revenue not associated with new customers |
|
|
114,392 |
|
|
|
142,822 |
|
|
|
149,029 |
|
Add: Cost of equipment |
|
|
476,877 |
|
|
|
597,233 |
|
|
|
704,648 |
|
Less: Equipment costs not associated with new customers. |
|
|
(155,930 |
) |
|
|
(192,153 |
) |
|
|
(244,311 |
) |
|
|
|
|
|
|
|
|
|
|
Gross addition expenses |
|
$ |
284,043 |
|
|
$ |
384,430 |
|
|
$ |
507,393 |
|
|
|
|
|
|
|
|
|
|
|
Divided by: Gross customer additions |
|
|
2,345,135 |
|
|
|
3,004,177 |
|
|
|
3,988,692 |
|
|
|
|
|
|
|
|
|
|
|
CPGA |
|
$ |
121.12 |
|
|
$ |
127.97 |
|
|
$ |
127.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
June 30, |
|
|
September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2007 |
|
|
2007 |
|
|
2007 |
|
|
|
(In thousands, except gross customer additions and CPGA) |
|
Calculation of Cost Per Gross Addition (CPGA): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses |
|
$ |
30,106 |
|
|
$ |
33,365 |
|
|
$ |
35,625 |
|
|
$ |
53,969 |
|
Less: Equipment revenues |
|
|
(97,170 |
) |
|
|
(71,835 |
) |
|
|
(67,607 |
) |
|
|
(79,925 |
) |
Add: Equipment revenue not associated with new
customers |
|
|
42,009 |
|
|
|
33,892 |
|
|
|
31,590 |
|
|
|
35,330 |
|
Add: Cost of equipment |
|
|
173,308 |
|
|
|
133,439 |
|
|
|
131,179 |
|
|
|
159,308 |
|
Less: Equipment costs not associated with new
customers |
|
|
(55,169 |
) |
|
|
(43,795 |
) |
|
|
(43,254 |
) |
|
|
(49,936 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross addition expenses |
|
$ |
93,084 |
|
|
$ |
85,066 |
|
|
$ |
87,533 |
|
|
$ |
118,746 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Divided by: Gross customer additions |
|
|
832,983 |
|
|
|
660,149 |
|
|
|
671,379 |
|
|
|
839,666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CPGA |
|
$ |
111.75 |
|
|
$ |
128.86 |
|
|
$ |
130.38 |
|
|
$ |
141.42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
June 30, |
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2008 |
|
|
2008 |
|
|
2008 |
|
|
|
(In thousands, except gross customer additions and CPGA) |
|
Calculation of Cost Per Gross Addition (CPGA): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses |
|
$ |
46,647 |
|
|
$ |
53,180 |
|
|
$ |
58,916 |
|
|
$ |
53,551 |
|
Less: Equipment revenues |
|
|
(100,384 |
) |
|
|
(80,245 |
) |
|
|
(76,030 |
) |
|
|
(57,606 |
) |
Add: Equipment revenue not associated with new
customers |
|
|
45,803 |
|
|
|
37,613 |
|
|
|
33,295 |
|
|
|
32,318 |
|
Add: Cost of equipment |
|
|
200,158 |
|
|
|
160,088 |
|
|
|
160,538 |
|
|
|
183,864 |
|
Less: Equipment costs not associated with new customers |
|
|
(72,212 |
) |
|
|
(58,993 |
) |
|
|
(56,891 |
) |
|
|
(56,215 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross addition expenses |
|
$ |
120,012 |
|
|
$ |
111,643 |
|
|
$ |
119,828 |
|
|
$ |
155,912 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Divided by: Gross customer additions |
|
|
960,083 |
|
|
|
792,823 |
|
|
|
934,607 |
|
|
|
1,301,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CPGA |
|
$ |
125.00 |
|
|
$ |
140.82 |
|
|
$ |
128.21 |
|
|
$ |
119.82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CPU 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 expenses) plus net loss on equipment transactions unrelated to initial
customer acquisition exclusive of pass through 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, although 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.
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
|
(In thousands, except average number of customers and CPU) |
|
Calculation of Cost Per User (CPU): |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service |
|
$ |
445,281 |
|
|
$ |
647,510 |
|
|
$ |
857,295 |
|
Add: General and administrative expenses |
|
|
138,998 |
|
|
|
198,955 |
|
|
|
235,289 |
|
Add: Net loss on equipment transactions
unrelated to initial customer
acquisition |
|
|
41,538 |
|
|
|
49,331 |
|
|
|
95,282 |
|
Less: Stock-based compensation expense
included in cost of service and general
and administrative expense |
|
|
(14,472 |
) |
|
|
(28,024 |
) |
|
|
(41,142 |
) |
Less: Pass through charges |
|
|
(45,640 |
) |
|
|
(95,946 |
) |
|
|
(136,801 |
) |
|
|
|
|
|
|
|
|
|
|
Total costs used in the calculation of CPU |
|
$ |
565,705 |
|
|
$ |
771,826 |
|
|
$ |
1,009,923 |
|
|
|
|
|
|
|
|
|
|
|
Divided by: Average number of customers |
|
|
2,398,682 |
|
|
|
3,508,497 |
|
|
|
4,631,168 |
|
|
|
|
|
|
|
|
|
|
|
CPU |
|
$ |
19.65 |
|
|
$ |
18.33 |
|
|
$ |
18.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
June 30, |
|
|
September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2007 |
|
|
2007 |
|
|
2007 |
|
|
|
(In thousands, except average number of customers and CPU) |
|
Calculation of Cost Per User (CPU): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service |
|
$ |
145,335 |
|
|
$ |
162,227 |
|
|
$ |
163,671 |
|
|
$ |
176,277 |
|
Add: General and administrative expenses |
|
|
42,831 |
|
|
|
49,352 |
|
|
|
48,871 |
|
|
|
57,900 |
|
Add: Net loss on equipment transactions
unrelated to initial customer
acquisition |
|
|
13,160 |
|
|
|
9,903 |
|
|
|
11,664 |
|
|
|
14,606 |
|
Less: Stock-based compensation expense
included in cost of service and general
and administrative expense |
|
|
(4,211 |
) |
|
|
(7,653 |
) |
|
|
(7,107 |
) |
|
|
(9,053 |
) |
Less: Pass through charges |
|
|
(20,271 |
) |
|
|
(25,721 |
) |
|
|
(25,215 |
) |
|
|
(24,740 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs used in the calculation of CPU |
|
$ |
176,844 |
|
|
$ |
188,108 |
|
|
$ |
191,884 |
|
|
$ |
214,990 |
|
Divided by: Average number of customers |
|
|
3,175,284 |
|
|
|
3,480,780 |
|
|
|
3,592,045 |
|
|
|
3,785,880 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CPU |
|
$ |
18.56 |
|
|
$ |
18.01 |
|
|
$ |
17.81 |
|
|
$ |
18.93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
June 30, |
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2008 |
|
|
2008 |
|
|
2008 |
|
|
|
(In thousands, except average number of customers and CPU) |
|
Calculation of Cost Per User (CPU): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service |
|
$ |
188,473 |
|
|
$ |
206,140 |
|
|
$ |
219,423 |
|
|
$ |
243,259 |
|
Add: General and administrative expenses |
|
|
57,727 |
|
|
|
60,239 |
|
|
|
57,738 |
|
|
|
59,584 |
|
Add: Net loss on equipment transactions
unrelated to initial customer
acquisition |
|
|
26,409 |
|
|
|
21,380 |
|
|
|
23,596 |
|
|
|
23,897 |
|
Less: Stock-based compensation expense
included in cost of service and general
and administrative expense |
|
|
(8,465 |
) |
|
|
(11,007 |
) |
|
|
(10,782 |
) |
|
|
(10,888 |
) |
Less: Pass through charges |
|
|
(26,554 |
) |
|
|
(30,583 |
) |
|
|
(31,445 |
) |
|
|
(48,220 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs used in the calculation of CPU |
|
$ |
237,590 |
|
|
$ |
246,169 |
|
|
$ |
258,530 |
|
|
$ |
267,632 |
|
Divided by: Average number of customers |
|
|
4,198,794 |
|
|
|
4,501,980 |
|
|
|
4,741,043 |
|
|
|
5,082,856 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CPU |
|
$ |
18.86 |
|
|
$ |
18.23 |
|
|
$ |
18.18 |
|
|
$ |
17.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity and Capital Resources
Our principal sources of liquidity are our existing cash and cash equivalents and cash
generated from operations. At December 31, 2008, we had a total of approximately $697.9 million in
cash and cash equivalents. Over the last year, the capital and credit markets have become
increasingly volatile as a result of adverse economic and financial conditions that have triggered
the failure and near failure of a number of large financial services companies and a global
recession. We believe that this increased volatility and global recession may make it difficult to
obtain additional financing or sell additional equity or debt securities. We believe that, based
on our current level of cash and cash equivalents and anticipated cash flows from operations, the
current adverse economic and financial conditions in the credit and capital markets will not have a
material adverse impact on our liquidity, cash flow, financial flexibility or our ability to fund our
operations in the near-term.
We have historically invested our substantial cash balances in, among other things, securities
issued and fully guaranteed by the United States or the states, highly rated commercial paper and
auction rate securities, money market funds meeting certain criteria, and demand deposits. These
investments are subject to credit, liquidity, market and interest rate risk. At December 31, 2008,
we had invested substantially all of our cash and cash equivalents in money market funds consisting
of U.S. treasury securities.
76
During the year ended December 31, 2007, we made an original investment of $133.9 million in
principal in certain auction rate securities, substantially all of which are secured by
collateralized debt obligations with a portion of the underlying collateral being mortgage
securities or related to mortgage securities. Consistent with our investment policy guidelines,
the auction rate securities investments held by us all had AAA/Aaa credit ratings at the time of
purchase. With the continued liquidity issues experienced in global credit and capital markets,
the auction rate securities held by us at December 31, 2008 continue to experience failed auctions
as the amount of securities submitted for sale in the auctions exceeds the amount of purchase
orders. In addition, all of the auction rate securities held by us have been downgraded or placed
on credit watch.
The estimated market value of our auction rate security holdings at December 31, 2008 was
approximately $6.0 million, which reflects a $127.9 million
cumulative adjustment to the original principal
value of $133.9 million. The estimated market value at December 31, 2007 was approximately $36.1
million, which reflected a $97.8 million adjustment to the aggregate principal value at that date.
Although the auction rate securities continue to pay interest according to their stated terms,
based on valuation models that rely exclusively on unobservable inputs, we recorded an impairment
charge of $30.9 million and $97.8 million during the years ended December 31, 2008 and 2007,
respectively, reflecting an additional portion of our auction rate security holdings that we have
concluded have an other-than-temporary decline in value. The offsetting increase in fair value of
approximately $0.8 million is reported in accumulated other comprehensive loss in the consolidated
balance sheets.
Historically, given the liquidity created by auctions, our auction rate securities were
presented as current assets under short-term investments on our balance sheet. Given the failed
auctions, our auction rate securities are illiquid until there is a successful auction for them or
we sell them. Accordingly, the entire amount of such remaining auction rate securities has been
reclassified from current to non-current assets and is presented in long-term investments on our
balance sheet as of December 31, 2008 and 2007. The $6.0 million estimated market value at
December 31, 2008 does not materially impact our liquidity and is not included in our approximately
$697.9 million in cash and cash equivalents as of December 31, 2008. We may incur additional
impairments to our auction rate securities which may be up to the full remaining value of such
auction rate securities. Management believes that any future additional impairment charges will
not have a material effect on our liquidity.
On April 24, 2007, MetroPCS Communications consummated an initial public offering of its
common stock. MetroPCS Communications sold 37,500,000 shares of common stock at a price per share
of $23.00 (less underwriting discounts and commissions), which resulted in net proceeds to MetroPCS
Communications of approximately $818.3 million. In addition, selling stockholders sold an aggregate
of 20,000,000 shares of common stock, including 7,500,000 shares sold pursuant to the exercise by
the underwriters of their over-allotment option. MetroPCS Communications did not receive any
proceeds from the sale of shares of common stock by the selling stockholders; however, MetroPCS
Communications did receive proceeds of approximately $3.8 million from the exercise of options to
acquire common stock which was sold in the initial public offering. Concurrent with the initial
public offering by MetroPCS Communications, all outstanding shares of preferred stock of MetroPCS
Communications, including accrued but unpaid dividends as of April 23, 2007, were converted into
150,962,644 shares of common stock. On June 6, 2007, MetroPCS Wireless, Inc., or Wireless,
consummated the sale of the additional notes in the aggregate principal amount of $400.0 million.
The proceeds from the sale of the additional notes were approximately $421.0 million. On January
20, 2009, Wireless consummated the sale of $550.0 million of 91/4% senior notes due 2014, or new
notes. The net proceeds from the sale of the new notes was approximately $480.5 million. The net
proceeds will be used for general corporate purposes which could include working capital, capital
expenditures, future liquidity needs, additional opportunistic spectrum acquisitions, corporate
development opportunities and future technology initiatives.
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. As a result of the acquisition of
spectrum licenses 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. 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 operating costs associated with such
license area. We currently plan to focus on building out networks to cover approximately 40
million of total population during 2009-2010 including the launch of the Boston and New York
metropolitan areas in February 2009. Our initial launch dates will be accomplished in phases in
the larger metropolitan areas. Our future builds will entail a more extensive use of distributed
antenna systems, or DAS, systems than we have deployed in the past. This, along with other
factors, could result in an increase in the
77
total capital expenditures per covered population to initially launch operations. We believe
that our existing cash, cash equivalents and our anticipated cash flows from operations will be
sufficient to fully fund this planned expansion.
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 years ended December 31, 2008, 2007 and 2006 were
approximately $954.6 million, $767.7 million and $550.7 million, respectively. 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 December 31, 2008, we owed an aggregate of approximately $3.0 billion under our senior
secured credit facility and 91/4% senior notes. As of December 31, 2008, we owed approximately $91.3
million under our capital lease obligations.
Our senior secured credit facility calculates consolidated Adjusted EBITDA as: consolidated
net income plus 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 Communications, Inc. minus interest and other income and non-cash
items increasing consolidated net income.
We
consider consolidated 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
consolidated Adjusted EBITDA because covenants in our senior secured credit facility contain ratios based on
this measure. Other wireless carriers may calculate consolidated Adjusted EBITDA differently. If our consolidated Adjusted
EBITDA were to decline below certain levels, covenants in our senior secured credit facility that
are based on consolidated 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 consolidated Adjusted
EBITDA plus the impact of certain new markets. The lenders under our senior secured credit facility
use the senior secured leverage ratio to measure our ability to meet our obligations on our senior
secured debt by comparing the total amount of such debt to our consolidated Adjusted EBITDA, which our lenders
use to estimate our cash flow from operations. The senior secured leverage ratio is calculated as
the ratio of senior secured indebtedness to consolidated Adjusted EBITDA, as defined by our senior secured
credit facility. For the twelve months ended December 31, 2008, our senior secured leverage ratio
was 1.95 to 1.0, which means for every $1.00 of consolidated Adjusted EBITDA we had $1.95 of senior secured
indebtedness. In addition, consolidated Adjusted EBITDA is also utilized, among other measures, to
determine managements compensation levels. Consolidated 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, consolidated 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.
78
The following table shows the calculation of our consolidated Adjusted EBITDA, as defined in
our senior secured credit facility, for the years ended December 31, 2006, 2007 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
|
(In Thousands) |
|
Calculation of Consolidated Adjusted EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
53,806 |
|
|
$ |
100,403 |
|
|
$ |
149,438 |
|
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
135,028 |
|
|
|
178,202 |
|
|
|
255,319 |
|
Loss on disposal of assets |
|
|
8,806 |
|
|
|
655 |
|
|
|
18,905 |
|
Stock-based compensation expense(1) |
|
|
14,472 |
|
|
|
28,024 |
|
|
|
41,142 |
|
Interest expense |
|
|
115,985 |
|
|
|
201,746 |
|
|
|
179,398 |
|
Accretion of put option in majority-owned subsidiary(1) |
|
|
770 |
|
|
|
1,003 |
|
|
|
1,258 |
|
Interest and other income |
|
|
(21,543 |
) |
|
|
(63,936 |
) |
|
|
(23,170 |
) |
Loss on extinguishment of debt |
|
|
51,518 |
|
|
|
|
|
|
|
|
|
Impairment loss on investment securities |
|
|
|
|
|
|
97,800 |
|
|
|
30,857 |
|
Provision for income taxes |
|
|
36,717 |
|
|
|
123,098 |
|
|
|
129,986 |
|
|
|
|
|
|
|
|
|
|
|
Consolidated Adjusted EBITDA |
|
$ |
395,559 |
|
|
$ |
666,995 |
|
|
$ |
783,133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents a non-cash expense, as defined by our senior secured credit facility. |
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, 2006, 2007 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
|
(In Thousands) |
|
Reconciliation of Net Cash Provided by
Operating Activities to Consolidated Adjusted
EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
364,761 |
|
|
$ |
589,306 |
|
|
$ |
447,490 |
|
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
115,985 |
|
|
|
201,746 |
|
|
|
179,398 |
|
Non-cash interest expense |
|
|
(6,964 |
) |
|
|
(3,259 |
) |
|
|
(2,550 |
) |
Interest and other income |
|
|
(21,543 |
) |
|
|
(63,936 |
) |
|
|
(23,170 |
) |
Provision for uncollectible accounts receivable |
|
|
(31 |
) |
|
|
(129 |
) |
|
|
(8 |
) |
Deferred rent expense |
|
|
(7,464 |
) |
|
|
(13,745 |
) |
|
|
(20,646 |
) |
Cost of abandoned cell sites |
|
|
(3,783 |
) |
|
|
(6,704 |
) |
|
|
(8,592 |
) |
Accretion of asset retirement obligation |
|
|
(769 |
) |
|
|
(1,439 |
) |
|
|
(3,542 |
) |
Gain on sale of investments |
|
|
2,385 |
|
|
|
10,506 |
|
|
|
|
|
Provision for income taxes |
|
|
36,717 |
|
|
|
123,098 |
|
|
|
129,986 |
|
Deferred income taxes |
|
|
(32,341 |
) |
|
|
(118,524 |
) |
|
|
(124,347 |
) |
Changes in working capital |
|
|
(51,394 |
) |
|
|
(49,925 |
) |
|
|
209,114 |
|
|
|
|
|
|
|
|
|
|
|
Consolidated Adjusted EBITDA |
|
$ |
395,559 |
|
|
$ |
666,995 |
|
|
$ |
783,133 |
|
|
|
|
|
|
|
|
|
|
|
Operating Activities
Cash provided by operating activities decreased $141.8 million to $447.5 million during the
year ended December 31, 2008 from $589.3 million for the year ended December 31, 2007. The
decrease was primarily attributable to a decrease in working capital during the year ended December
31, 2008 compared to the same period in 2007, partially offset by an approximately 49% increase in
net income as a result of the growth experienced over the last twelve months.
Cash provided by operating activities increased $224.5 million to $589.3 million during the
year ended December 31, 2007 from $364.8 million for the year ended December 31, 2006. The increase
was primarily attributable to an 87% increase in net income as well as a 266% increase in deferred
income taxes during the year ended December 31, 2007 compared to the same period in 2006.
Cash provided by operating activities increased $81.6 million to $364.8 million during the
year ended December 31, 2006 from $283.2 million for the year ended December 31, 2005. The increase
was primarily attributable to the timing of payments on accounts payable and accrued expenses for
the year ended December 31, 2006 as well as an increase in deferred revenues due to an
approximately 53% increase in customers during the year ended December 31, 2006 compared to the
same period in 2005.
79
Investing Activities
Cash used in investing activities was $1.3 billion during the year ended December 31, 2008
compared to $517.1 million during the year ended December 31, 2007. The increase was due primarily
to $328.5 million in purchases of FCC licenses, $25.2 million in cash used for business
acquisitions, a $186.9 million increase in purchases of property and equipment which was primarily
related to construction in the Expansion Markets, and $267.2 million in net proceeds from the sale
of investments during the year ended December 31, 2007 that did not recur during the year ended
December 31, 2008.
Cash used in investing activities was $517.1 million during the year ended December 31, 2007
compared to $1.9 billion during the year ended December 31, 2006. The decrease was mainly due to
$1.4 billion in purchases of FCC licenses during the year ended December 31, 2006 that did not
recur in 2007 as well as a $264.7 million increase in net proceeds from the sale of investments,
partially offset by a $217.0 million increase in purchases of property and equipment.
Cash used in investing activities was $1.9 billion during the year ended December 31, 2006
compared to $905.2 million during the year ended December 31, 2005. The increase was due primarily
to an $887.7 million increase in purchases of FCC licenses and a $284.3 million increase in
purchases of property and equipment, partially offset by a $355.5 million decrease in net purchases
of investments.
Financing Activities
Cash provided by financing activities was $74.5 million for the year ended December 31, 2008
compared to $1.2 billion for year ended December 31, 2007. The decrease was due primarily to
$818.3 million in net proceeds from the Companys initial public offering that was completed in
April 2007 and $420.4 million in net proceeds from the issuance of the additional notes in June
2007 that occurred during the year ended December 31, 2007 compared to the year ended December 31,
2008.
Cash provided by financing activities was $1.2 billion for the year ended December 31, 2007
compared to $1.6 billion for the year ended December 31, 2006. The decrease was due primarily to a
decrease in proceeds from various financing activities during the year ended December 31, 2007
compared to the year ended December 31, 2006. Financing activities during the year ended December
31, 2007 included $818.3 million in net proceeds from the companys initial public offering that
was completed in April 2007 and $421.0 million in net proceeds from the sale of additional notes in
June 2007.
Cash provided by financing activities was $1.6 billion for the year ended December 31, 2006
compared to $712.2 million for the year ended December 31, 2005. The increase was due primarily to
net proceeds from the senior secured credit facility and the issuance of the 91/4% senior notes in
the aggregate principal amount of $1.0 billion.
First and Second Lien Credit Agreements
On November 3, 2006, we paid the lenders under the first and second lien credit agreements
$931.5 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, 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
first and second lien credit agreements. We received approximately $4.3 million upon termination of
the agreement. The proceeds from the termination of the agreement approximated its carrying value.
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 Wireless), 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 were $1.25 billion and were fully funded.
80
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 Wireless), 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 were $250.0
million and were fully funded.
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
Wireless, an indirect wholly-owned subsidiary of MetroPCS Communications, Inc., entered into
the Senior Secured Credit Facility on November 3, 2006, or senior secured credit facility. 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 in November 2013. The revolving credit facility will mature in November
2011.
The facilities under the senior secured credit agreement are guaranteed by MetroPCS
Communications, Inc., MetroPCS, Inc. and each of Wireless direct and indirect present and future
wholly-owned domestic subsidiaries. The facilities are not guaranteed by Royal Street, but Wireless
has pledged the promissory note given by Royal Street in connection with amounts borrowed by Royal
Street from Wireless 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 Wireless as well as
substantially all of the present and future assets of Wireless 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, Wireless 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. Wireless 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, Wireless 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 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 7.169%. The
quarterly interest settlement periods began on February 1, 2007. The interest rate protection
agreement expires on February 1, 2010.
On February 20, 2007, Wireless entered into an amendment to the senior secured credit
facility. Under the amendment, the margin used to determine the senior secured credit facility
interest rate was reduced to 2.25% from 2.50%.
On April 30, 2008, Wireless entered into an additional two-year interest rate protection
agreement to manage its interest rate risk exposure. The agreement was effective on June 30, 2008
and covers a notional amount of $500.0 million and effectively converts this portion of Wireless
variable rate debt to fixed rate debt at an annual rate of 5.464%. The monthly interest settlement
periods began on June 30, 2008. The interest rate protection agreement expires on June 30, 2010.
81
91/4% Senior Notes Due 2014
On November 3, 2006, Wireless consummated the sale of $1.0 billion principal amount of its
initial senior notes. On June 6, 2007, Wireless consummated the sale of an additional $400.0
million principal amount of additional notes. The initial senior notes and the additional notes are
referred to together as the 91/4% senior notes. The 91/4% senior notes are unsecured obligations and
are guaranteed by MetroPCS Communications, Inc., MetroPCS, Inc., and all of Wireless direct and
indirect wholly-owned domestic restricted subsidiaries, but are not guaranteed by Royal Street.
Interest is payable on the initial senior notes on May 1 and November 1 of each year, beginning
with May 1, 2007, with respect to the initial senior notes, and beginning on November 1, 2007 with
respect to the additional notes. 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, including the sale of common stock.
On January 14, 2009, Wireless completed the sale of the new notes at a price equal to 89.50%
of the principal amount of such new notes. On January 20, 2009, Wireless consummated the sale of
the new notes resulting in net proceeds of $480.5 million. The net proceeds from the sale of the
new notes will be used for general corporate purposes which could include working capital, capital
expenditures, future liquidity needs, additional opportunistic spectrum acquisitions, corporate
development opportunities and future technology initiatives. The new 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. Interest is payable on
the new notes on May 1 and November 1 of each year, beginning on May 1, 2009.
Capital Lease Obligations
We have entered into various non-cancelable DAS capital lease agreements, with expirations
through 2024, covering dedicated optical fiber. Assets and future obligations related to capital
leases are included in the accompanying consolidated balance sheet in property and equipment and
long-term debt, respectively. Depreciation of assets held under capital lease obligations is
included in depreciation and amortization expense.
Capital Expenditures and Other Asset Acquisitions and Dispositions
Capital Expenditures. We and Royal Street currently expect to incur capital expenditures in
the range of $0.7 billion to $0.9 billion on a consolidated basis for the year ending December 31,
2009. We plan to focus on building out networks to cover approximately 40 million of total
population during 2009-2010, including the launch of the Boston and New York metropolitan areas in
February 2009.
During the year ended December 31, 2008, we and Royal Street incurred $954.6 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 new markets.
During the year ended December 31, 2007, we and Royal Street incurred $767.7 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 new markets.
During the year ended December 31, 2006, we had $550.7 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 new markets.
Other Acquisitions and Dispositions. On November 29, 2006, we were granted AWS licenses as a
result of FCC Auction 66, for a total aggregate purchase price of approximately $1.4 billion.
On December 21, 2007, we executed an agreement with PTA Communications, Inc., or PTA, to
purchase 10 MHz of PCS spectrum from PTA for the basic trading area of Jacksonville, Florida. We
also entered into agreements with NTCH, Inc. (dba Cleartalk PCS) and PTA-FLA, Inc. for the purchase
of certain of their assets used in providing PCS wireless telecommunications services in the
Jacksonville market. On January 17, 2008, we closed on the acquisition of the assets and paid a
total of $18.6 million in cash for these assets, exclusive of transaction costs. On May 13, 2008,
we closed on the purchase of the 10 MHz of spectrum from PTA for the basic trading area of
Jacksonville, Florida for consideration of $6.5 million in cash.
82
We participated as a bidder in Auction 73 and on June 26, 2008, we were granted one 12 MHz 700
MHz license for an aggregate purchase price of approximately $313.3 million. The 700 MHz License
supplements the 10 MHz of advanced wireless spectrum previously granted to us in the
Boston-Worcester, Massachusetts/New Hampshire/Rhode Island/Vermont Economic Area as a result of
Auction 66.
On various dates in 2008, we consummated agreements for spectrum acquisitions from
third-parties in the aggregate amount of approximately $15.3 million.
On September 26, 2008, we entered into a spectrum exchange agreement covering licenses in
certain markets with Leap Wireless International, Inc. (Leap Wireless) with Leap Wireless
acquiring an additional 10 MHz of spectrum in San Diego and Fresno, California; Seattle, Washington
and certain other Washington and Oregon markets, and we will acquire an additional 10 MHz of
spectrum in Shreveport-Bossier City, Louisiana; Lakeland-Winter Haven, Florida; and Dallas-Ft.
Worth, Texas and certain other North Texas markets, with consummation subject to customary closing
conditions.
On various dates in 2008, we entered into agreements for the acquisition of spectrum from
third parties in the aggregate amount of approximately $8.3 million. Consummation of these
acquisitions is conditioned upon customary closing conditions, including approval by the FCC.
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, 2008. See Note 12 to our annual consolidated financial statements included elsewhere
in this report.
|
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|
|
|
|
|
|
|
|
|
|
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Payments Due by Period |
|
|
|
|
|
|
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Less |
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|
|
|
|
|
|
|
|
|
More |
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|
|
|
|
|
Than |
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|
|
|
|
|
|
|
|
|
Than |
|
|
|
Total |
|
|
1 Year |
|
|
1 - 3 Years |
|
|
3 - 5 Years |
|
|
5 Years |
|
|
|
(In thousands) |
|
Contractual Obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, including current portion |
|
$ |
2,964,000 |
|
|
$ |
16,000 |
|
|
$ |
32,000 |
|
|
$ |
1,516,000 |
|
|
$ |
1,400,000 |
|
Interest expense on long-term debt(1) |
|
|
1,232,843 |
|
|
|
230,269 |
|
|
|
457,444 |
|
|
|
437,213 |
|
|
|
107,917 |
|
Alcatel Lucent purchase commitment |
|
|
21,600 |
|
|
|
21,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual tax obligations (2) |
|
|
2,773 |
|
|
|
2,773 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations |
|
|
186,499 |
|
|
|
10,213 |
|
|
|
21,357 |
|
|
|
22,658 |
|
|
|
132,271 |
|
Operating leases |
|
|
1,753,010 |
|
|
|
204,296 |
|
|
|
419,156 |
|
|
|
398,231 |
|
|
|
731,327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash contractual obligations |
|
$ |
6,160,725 |
|
|
$ |
485,151 |
|
|
$ |
929,957 |
|
|
$ |
2,374,102 |
|
|
$ |
2,371,515 |
|
|
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|
|
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|
|
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|
(1) |
|
Interest expense on long-term debt includes future interest payments on outstanding obligations
under our senior secured credit facility and 9 1/4% senior notes. The senior secured credit facility
bears interest at a floating rate tied to a fixed spread to the London Inter Bank Offered Rate. The
interest expense presented in this table is based on the rates at December 31, 2008 which was
6.443% for the senior secured credit facility. |
|
(2) |
|
Represents the liability reported in accordance with the Companys adoption of the provisions
of FIN 48. Due to the high degree of uncertainty regarding the timing of potential future cash
outflows associated with these liabilities, other than the items included in the table above, the
Company was unable to make a reasonably reliable estimate of the amount and period in which these
remaining liabilities might be paid. Accordingly, unrecognized tax benefits of $16.6 million as of
December 31, 2008, have been excluded from the contractual obligations table above. For further
information related to unrecognized tax benefits, see Note 18, Income Taxes, to the consolidated
financial statements included in this Report. |
Inflation
We believe that inflation has not materially affected our operations.
83
Effect of New Accounting Standards
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, (SFAS No.
141(R)), which establishes principles and requirements for how an acquirer recognizes and measures
in its financial statements the identifiable assets acquired, the liabilities assumed, any
noncontrolling interest in the acquiree and the goodwill acquired. SFAS No. 141(R) also
establishes disclosure requirements to enable the evaluation of the nature and financial effects of
the business combination. SFAS No. 141(R) is effective for financial statements issued for fiscal
years beginning after December 15, 2008 and early adoption is prohibited. The implementation of
this standard will not have a material impact on our financial condition or results of operations.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements, (SFAS No. 160), which establishes accounting and reporting standards for
ownership interests in subsidiaries held by parties other than the parent, the amount of
consolidated net income attributable to the parent and to the noncontrolling interest, changes in a
parents ownership interest, and the valuation of retained noncontrolling equity investments when a
subsidiary is deconsolidated. SFAS No. 160 also establishes disclosure requirements that clearly
identify and distinguish between the interests of the parent and the interests of the
noncontrolling owners. SFAS No. 160 is effective for financial statements issued for fiscal years
beginning after December 15, 2008 and early adoption is prohibited. The implementation of this
standard will not have a material impact on our financial condition or results of operations.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities, an amendment of FASB Statement No. 133, (SFAS No. 161). SFAS No. 161
requires enhanced disclosures about a companys derivative and hedging activities. These enhanced
disclosures will discuss (a) how and why a company uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under FASB Statement No. 133 and its related
interpretations and (c) how derivative instruments and related hedged items affect a companys
financial position, results of operations and cash flows. SFAS No. 161 is effective for fiscal
years beginning on or after November 15, 2008, with earlier adoption allowed. The implementation
of this standard did not have a material impact on our financial condition or results of
operations.
In April 2008, the FASB issued FSP SFAS No. 142-3, Determination of the Useful Life of
Intangible Assets, (FSP SFAS No. 142-3). FSP SFAS No. 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. FSP SFAS
No. 142-3 is effective for fiscal years beginning after December 15, 2008. The implementation of
this standard did not have a material impact on our financial condition or results of operations.
In October 2008, the FASB issued FSP SFAS No. 157-3 Determining Fair Value of a Financial
Asset in a Market That Is Not Active, (FSP SFAS No. 157-3). FSP SFAS No. 157-3 clarified the
application of SFAS No. 157 in an inactive market. It demonstrates how the fair value of a
financial asset is determined when the market for that financial asset is inactive. FSP SFAS No.
157-3 was effective upon issuance, including prior periods for which financial statements had not
been issued. The implementation of this standard did not have a material impact on our financial
condition or results of operations.
In November 2008, the FASB issued EITF No. 08-6, Equity Method Investment Accounting
Considerations, (EITF No. 08-6). EITF No. 08-6 clarifies the accounting treatment for certain
transactions and impairment considerations involving equity method investments. EITF No. 08-6 is
effective for fiscal years and interim periods beginning on or after December 15, 2008, consistent
with the effective dates of SFAS No. 141(R) and SFAS No. 160. The implementation of this standard
did not have a material impact on our financial condition or results of operations.
84
Item 7A. 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 hedging interest rate risk
exposure or is required by our senior secured credit facility. We do not currently conduct
business internationally, so we are generally not subject to foreign currency exchange rate risk.
As of December 31, 2008, we had approximately $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 2.25%. The interest rate on the outstanding debt under our
senior secured credit facility as of December 31, 2008 was 6.443%. 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 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 rate of 7.169%. The quarterly interest settlement periods began on
February 1, 2007. The interest rate swap agreement expires in 2010. On April 30, 2008, to manage
our interest rate risk exposure, we entered into a two-year interest rate protection agreement.
The agreement was effective on June 30, 2008, covers a notional amount of $500.0 million and
effectively converts this portion of our variable rate debt to fixed rate debt at an annual rate of
5.464%. The monthly interest settlement periods began on June 30, 2008. The interest rate
protection agreement expires on June 30, 2010. If market LIBOR rates increase 100 basis points
over the rates in effect at December 31, 2008, annual interest expense on the approximately $64.0
million in variable rate debt would increase approximately $0.6 million.
Item 8. Financial Statements and Supplementary Data
The information required by this item is included in Part IV, Item 15(a)(1) and are presented
beginning on Page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our Exchange Act reports is recorded, processed, summarized and
reported as required by the SEC and that such information is accumulated and communicated to
management, including our CEO and CFO, as appropriate, to allow for appropriate and timely
decisions regarding required disclosure. Our management, with participation by our CEO and CFO,
has designed the Companys disclosure controls and procedures to provide reasonable assurance of
achieving these desired objectives. As required by SEC Rule 13a-15(b), we conducted an evaluation,
with the participation of our CEO and CFO, of the effectiveness of the design and operation of our
disclosure controls and procedures as of December 31, 2008, the end of the period covered by this
report. In designing and evaluating the disclosure controls and
procedures (as defined by SEC Rule 13a-15(e), our management
recognizes that any controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving the desired control objectives, and management is
necessarily required to apply judgment in evaluating the cost-benefit relationship of possible
controls and objectives. Based upon that evaluation, our CEO and CFO have concluded that our
disclosure controls and procedures are effective as of
December 31, 2008.
Managements Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting. Our internal controls over financial reporting are designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles in the United States.
85
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree or compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of management, including our CEO and CFO, we
conducted an evaluation of the effectiveness of internal control over financial reporting as of
December 31, 2008. In conducting this evaluation, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control
Integrated Framework. Based on our evaluation and those criteria, our internal control over
financial reporting was effective as of December 31, 2008.
The effectiveness of internal control over financial reporting as of December 31, 2008, has
been audited by Deloitte & Touche LLP, the independent registered public accounting firm who also
audited our consolidated financial statements. Deloitte & Touches attestation report on the
effectiveness of our internal control over financial reporting appears on page F-2.
Changes in Internal Control Over Financial Reporting
There were no changes in the Companys internal control over financial reporting that occurred
during the Companys fiscal quarter ended December 31, 2008 that have materially affected, or are
reasonably likely to materially affect, the Companys internal control over financial reporting.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item is incorporated by reference to the definitive Proxy
Statement for the 2009 Annual Meeting of our Stockholders, which will be filed with the Securities
and Exchange Commission, or SEC, no later than 120 days after December 31, 2008.
Item 11. Executive Compensation
The information required by this item is incorporated by reference to the definitive Proxy
Statement for the 2009 Annual Meeting of our Stockholders, which will be filed with the SEC no
later than 120 days after December 31, 2008.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information required by this item is incorporated by reference to the definitive Proxy
Statement for the 2009 Annual Meeting of our Stockholders, which will be filed with the SEC no
later than 120 days after December 31, 2008.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated by reference to the definitive Proxy
Statement for the 2009 Annual Meeting of our Stockholders, which will be filed with the SEC no
later than 120 days after December 31, 2008.
Item 14. Principal Accounting Fees and Services
The information required by this item is incorporated by reference to the definitive Proxy
Statement for the 2009 Annual Meeting of our Stockholders, which will be filed with the SEC no
later than 120 days after December 31, 2008.
86
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) Financial Statements, Schedules and Exhibits
|
(1) |
|
Financial Statements The following financial statements of MetroPCS Communications,
Inc. are filed as a part of this Form 10-K on the pages indicated: |
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|
Page |
Audited Consolidated Financial Statements: |
|
|
Report of Independent Registered Public Accounting Firm
|
|
F-1 |
Consolidated Balance Sheets as of December 31, 2008 and 2007
|
|
F-3 |
Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2008, 2007 and 2006
|
|
F-4 |
Consolidated Statements of Stockholders Equity for the years ended December 31, 2008, 2007 and 2006
|
|
F-5 |
Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006
|
|
F-7 |
Notes to Consolidated Financial Statements
|
|
F-8 |
|
|
|
Exhibit No. |
|
Description |
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. (Filed as Exhibit 2.1(a) to
MetroPCS Communications, Inc.s Registration Statement on Form
S-1 (SEC File No. 333-139793), filed on January 4, 2007, and
incorporated by reference herein). |
|
|
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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. (Filed as
Exhibit 2.1(b) to MetroPCS Communications, Inc.s Registration
Statement on Form S-1 (SEC File No. 333-139793), filed on
January 4, 2007, and incorporated by reference herein). |
|
|
|
3.1
|
|
Third Amended and Restated Certificate of Incorporation of
MetroPCS Communications, Inc. (Filed as Exhibit 3.1 to
Amendment No. 2 to MetroPCS Communications, Inc.s
Registration Statement on Form S-1/A (SEC File No.
333-139793), filed on February 27, 2007, and incorporated by
reference herein). |
|
|
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3.2(a)
|
|
Third Amended and Restated Bylaws of MetroPCS Communications,
Inc. (Filed as Exhibit 3.2 to Amendment No. 2 to MetroPCS
Communications, Inc.s Registration Statement on Form S-1/A
(SEC File No. 333-139793), filed on February 27, 2007, and
incorporated by reference herein). |
|
|
|
3.2(b)
|
|
Amendment No. 1 to Third Amended and Restated Bylaws of
MetroPCS Communications (Filed as Exhibit 3.1 to MetroPCS
Communications, Inc.s Current Report on Form 8-K, filed on
June 28, 2007, and incorporated by reference herein). |
|
|
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3.2(c)
|
|
Amendment No. 2 to the Third Amended and Restated Bylaws of
MetroPCS Communications, Inc. (Filed as Exhibit 3.1 to
MetroPCS Communications, Inc.s Current Report on Form 8-K,
filed on November 13, 2008, and incorporated by reference
herein). |
|
|
|
3.3
|
|
MetroPCS Communications, Inc. Revised Code of Ethics. (Filed
as Exhibit 14.1 to MetroPCS Communications, Inc.s Current
Report on Form 8-K, filed on February 08, 2008, and
incorporated by reference herein). |
|
|
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4.1
|
|
Form of Certificate of MetroPCS Communications, Inc. Common
Stock. (Filed as Exhibit 4.1 to Amendment No. 4 to MetroPCS
Communications, Inc.s Registration Statement on Form S-1/A
(SEC File No. 333-139793), filed on April 3, 2007, and
incorporated by reference herein). |
|
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4.2
|
|
Rights Agreement, dated as of March 29, 2007, between MetroPCS
Communications, Inc. and American Stock Transfer & Trust
Company, as Rights Agent, which includes the form of
Certificate of Designation of Series A Junior Participating
Preferred Stock of MetroPCS Communications, Inc. as Exhibit A,
the form of Rights Certificate as Exhibit B and the Summary of
Rights as Exhibit C (Filed as Exhibit 4.1 to MetroPCS
Communications, Inc.s Current Report on Form 8-K, filed on
March 30, 2007, and incorporated by reference herein). |
|
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10.1
|
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Amended and Restated MetroPCS Communications, Inc. 2004 Equity
Incentive Compensation Plan (Filed as Exhibit 10.1(a) to
Amendment No. 2 to MetroPCS Communications, Inc.s
Registration Statement on Form S-1/A (SEC File No.
333-139793), filed on February 27, 2007, and incorporated by
reference herein). |
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10.2(a)
|
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Second Amended and Restated 1995 Stock Option Plan of
MetroPCS, Inc. (Filed as Exhibit 10.1(d) to MetroPCS
Communications, Inc.s Registration Statement on Form S-1 (SEC
File No. 333-139793), filed on January 4, 2007, and
incorporated by reference herein). |
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10.2(b)
|
|
First Amendment to the Second Amended and Restated 1995 Stock
Option Plan of MetroPCS, Inc. (Filed as Exhibit 10.1(e) to
MetroPCS Communications, Inc.s Registration Statement on Form
S-1 (SEC File No. 333-139793), filed on January 4, 2007, and
incorporated by reference herein). |
87
|
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Exhibit No. |
|
Description |
10.2(c)
|
|
Second Amendment to the Second Amended and Restated 1995 Stock
Option Plan of MetroPCS, Inc. (Filed as Exhibit 10.1(f) to
MetroPCS Communications, Inc.s Registration Statement on Form
S-1 (SEC File No. 333-139793), filed on January 4, 2007, and
incorporated by reference herein). |
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10.3
|
|
Registration Rights Agreement, effective as of April 24, 2007,
by and among MetroPCS Communications, Inc. and the
stockholders listed therein. (Filed as Exhibit 10.2 to
MetroPCS Communications, Inc.s Registration Statement on Form
S-1/A (SEC File No. 333-139793), filed on April 11, 2007, and
incorporated by reference herein). |
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10.4
|
|
Form of Officer and Director Indemnification Agreement (Filed
as Exhibit 10.4 to Amendment No. 2 to MetroPCS Communications,
Inc.s Registration Statement on Form S-1/A (SEC File No.
333-139793), filed on February 27, 2007, and incorporated by
reference herein). |
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10.5(a)
|
|
General Purchase Agreement, effective as of June 6, 2005, by
and between MetroPCS Wireless, Inc. and Lucent Technologies
Inc. (Filed as Exhibit 10.5(a) to Amendment No. 2 to MetroPCS
Communications, Inc.s Registration Statement on Form S-1/A
(SEC File No. 333-139793), filed on February 27, 2007, and
incorporated by reference herein). |
|
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10.5(b)
|
|
Amendment No. 1 to the General Purchase Agreement, effective
as of September 30, 2005, by and between MetroPCS Wireless,
Inc. and Lucent Technologies Inc. (Filed as Exhibit 10.5(b) to
Amendment No. 2 to MetroPCS Communications, Inc.s
Registration Statement on Form S-1/A (SEC File No.
333-139793), filed on February 27, 2007, and incorporated by
reference herein). |
|
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10.5(c)
|
|
Amendment No. 2 to the General Purchase Agreement, effective
as of November 10, 2005, by and between MetroPCS Wireless,
Inc. and Lucent Technologies Inc. (Filed as Exhibit 10.5(c) to
Amendment No. 2 to MetroPCS Communications, Inc.s
Registration Statement on Form S-1/A (SEC File No.
333-139793), filed on February 27, 2007, and incorporated by
reference herein). |
|
|
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10.5(d)
|
|
Amendment No. 3 to the General Purchase Agreement, effective
as of December 3, 2007, by and between MetroPCS Wireless, Inc.
and Lucent Technologies Inc. (Filed as Exhibit 10.4(d) to
MetroPCS Communications, Incs Annual Report on Form 10-K (SEC
File No. 001-33409), filed on February 29, 2008, and
incorporated by reference herein). |
|
|
|
10.6
|
|
Amended and Restated Services Agreement, executed on December
15, 2005 as of November 24, 2004, by and between MetroPCS
Wireless, Inc. and Royal Street Communications, LLC, including
all amendments thereto (Filed as Exhibit 10.6 to Amendment No.
2 to MetroPCS Communications, Inc.s Registration Statement on
Form S-1/A (SEC File No. 333-139793), filed on February 27,
2007, and incorporated by reference herein). |
|
|
|
10.7(a)
|
|
Second Amended and Restated Credit Agreement, executed on
December 15, 2005 as of December 22, 2004, by and between
MetroPCS Wireless, Inc. and Royal Street Communications, LLC,
including all amendments thereto (Filed as Exhibit 10.7 to
Amendment No. 2 to MetroPCS Communications, Inc.s
Registration Statement on Form S-1/A (SEC File No.
333-139793), filed on February 27, 2007, and incorporated by
reference herein). |
|
|
|
10.7(b)
|
|
Second Amendment to the Second Amended and Restated Credit
Agreement, entered into as of August 29, 2007, by and between
Royal Street Communications, LLC, Royal Street Communications
California, LLC, Royal Street BTA 262, LLC, Royal Street
Communications Florida, LLC, Royal Street BTA 159, LLC, Royal
Street BTA 212, LLC, Royal Street BTA 239, LLC, Royal Street
BTA 289, LLC and Royal Street BTA 336, LLC and MetroPCS
Wireless, Inc. (Filed as Exhibit 10.18 to MetroPCS
Communications, Inc.s Registration Statement on Form S-4/A,
Amendment No. 1 (SEC File No. 333-142955), filed on October 2,
2007, and incorporated by reference herein). |
|
|
|
10.7(c)
|
|
Third Amendment to the Second Amended and Restated Credit
Agreement, entered into as of April 2, 2008, by and between
Royal Street Communications, LLC, Royal Street Communications
California, LLC, Royal Street BTA 262, LLC, Royal Street
Communications Florida, LLC, Royal Street BTA 159, LLC, Royal
Street BTA 212, LLC, Royal Street BTA 239, LLC, Royal Street
BTA 289, LLC and Royal Street BTA 336, LLC and MetroPCS
Wireless, Inc. (Filed as Exhibit 10.1 to MetroPCS
Communications, Inc.s Quarterly Report on Form 10-Q (SEC File
No. 001-33409), filed on August 8, 2008, and incorporated by
reference herein). |
|
|
|
10.7(d)
|
|
Fourth Amendment to the Second Amended and Restated Credit
Agreement, entered into as of June 12, 2008, by and between
Royal Street Communications, LLC, Royal Street Communications
California, LLC, Royal Street BTA 262, LLC, Royal Street
Communications Florida, LLC, Royal Street BTA 159, LLC, Royal
Street BTA 212, LLC, Royal Street BTA 239, LLC, Royal Street
BTA 289, LLC and Royal Street BTA 336, LLC and MetroPCS
Wireless, Inc. (Filed as Exhibit 10.2 to MetroPCS
Communications, Inc.s Quarterly Report on Form 10-Q (SEC File
No. 001-33409), filed on August 8, 2008, and incorporated by
reference herein). |
|
|
|
10.7(e)*
|
|
Fifth Amendment to the Second Amended and Restated Credit
Agreement, entered into as of February 17, 2009, by and
between Royal Street Communications, LLC, Royal Street
Communications California, LLC, Royal Street BTA 262, LLC,
Royal Street Communications Florida, LLC, Royal Street BTA
159, LLC, Royal Street BTA 212, LLC, Royal Street BTA 239,
LLC, Royal Street BTA 289, LLC and Royal Street BTA 336, LLC
and MetroPCS Wireless, Inc. |
88
|
|
|
Exhibit No. |
|
Description |
10.8
|
|
Amended and Restated Pledge Agreement, executed on December
15, 2005 as of December 22, 2004, by and between Royal Street
Communications, LLC and MetroPCS Wireless, Inc., including all
amendments thereto (Filed as Exhibit 10.8 to Amendment No. 2
to MetroPCS Communications, Inc.s Registration Statement on
Form S-1/A (SEC File No. 333-139793), filed on February 27,
2007, and incorporated by reference herein). |
|
|
|
10.9
|
|
Amended and Restated Security Agreement, executed on December
15, 2005 as of December 22, 2004, by and between Royal Street
Communications, LLC and MetroPCS Wireless, Inc., including all
amendments thereto (Filed as Exhibit 10.9 to Amendment No. 2
to MetroPCS Communications, Inc.s Registration Statement on
Form S-1/A (SEC File No. 333-139793), filed on February 27,
2007, and incorporated by reference herein). |
|
|
|
10.10
|
|
Amended and Restated Limited Liability Company Agreement of
Royal Street Communications, LLC, 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 thereto (Filed as Exhibit 10.10 to Amendment No. 2
to MetroPCS Communications, Inc.s Registration Statement on
Form S-1/A (SEC File No. 333-139793), filed on February 27,
2007, and incorporated by reference herein). |
|
|
|
10.11
|
|
Master Equipment and Facilities Lease Agreement, executed as
of May 17, 2006, by and between MetroPCS Wireless, Inc. and
Royal Street Communications, LLC, including all amendments
thereto (Filed as Exhibit 10.11 to Amendment No. 2 to MetroPCS
Communications, Inc.s Registration Statement on Form S-1/A
(SEC File No. 333-139793), filed on February 27, 2007, and
incorporated by reference herein). |
|
|
|
10.12
|
|
Amended and Restated Credit Agreement, dated as of February
20, 2007, among MetroPCS Wireless, Inc., as borrower, the
several lenders from time to time parties thereto, Bear
Stearns Corporate Lending Inc., as administrative agent and
syndication agent, Bear, Stearns & Co. Inc., as sole lead
arranger and joint book runner, Merrill Lynch, Pierce, Fenner
& Smith Incorporated, as joint book runner and Banc of America
Securities LLC, as joint book runner (Filed as Exhibit 10.12
to Amendment No. 2 to MetroPCS Communications, Inc.s
Registration Statement on Form S-1/A (SEC File No.
333-139793), filed on February 27, 2007, and incorporated by
reference herein). |
|
|
|
10.13
|
|
Purchase Agreement, dated October 26, 2006, among MetroPCS
Wireless, Inc., the Guarantors as defined therein and Bear,
Stearns & Co. Inc., Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Banc of America Securities LLC (Filed as
Exhibit 10.13 to Amendment No. 1 to MetroPCS Communications,
Inc.s Registration Statement on Form S-1/A (SEC File No.
333-139793), filed on February 13, 2007, and incorporated by
reference herein). |
|
|
|
10.14
|
|
Registration Rights Agreement, dated as of November 3, 2006,
by and among MetroPCS Wireless, Inc., the Guarantors as
defined therein and Bear, Stearns & Co. Inc., Merrill Lynch,
Pierce, Fenner & Smith Incorporated and Banc of America
Securities LLC (Filed as Exhibit 10.14 to Amendment No. 1 to
MetroPCS Communications, Inc.s Registration Statement on Form
S-1/A (SEC File No. 333-139793), filed on February 13, 2007,
and incorporated by reference herein). |
|
|
|
10.15(a)
|
|
Indenture, dated as of November 3, 2006, among MetroPCS
Wireless, Inc., the Guarantors as defined therein and The Bank
of New York Trust Company, N.A., as trustee (Filed as Exhibit
10.15 to Amendment No. 1 to MetroPCS Communications, Inc.s
Registration Statement on Form S-1/A (SEC File No.
333-139793), filed on February 13, 2007, and incorporated by
reference herein). |
|
|
|
10.15(b)
|
|
Supplemental Indenture, dated as of February 6, 2007, among
the Guaranteeing Subsidiaries as defined therein, the other
Guarantors as defined in the Indenture referred to therein and
The Bank of New York Trust Company, N.A., as trustee under the
Indenture referred to therein (Filed as Exhibit 10.16 to
Amendment No. 1 to MetroPCS Communications, Inc.s
Registration Statement on Form S-1/A (SEC File No.
333-139793), filed on February 13, 2007, and incorporated by
reference herein). |
|
|
|
10.15(c)
|
|
Supplemental Indenture, dated as of December 11, 2007, between
the Guaranteeing Subsidiary as defined therein and The Bank of
New York Trust Company, N.A., as trustee under the Indenture
referred to therein. (Filed as Exhibit 10.14(c) to MetroPCS
Communications, Incs Annual Report on Form 10-K (SEC File No.
001-33409), filed on February 29, 2008, and incorporated by
reference herein). |
|
|
|
10.16
|
|
Purchase Agreement, dated May 31, 2007, among MetroPCS
Wireless, Inc., the Guarantors as defined therein and Bear,
Stearns & Co. Inc. (Filed as Exhibit 10.1 to MetroPCS
Communications, Inc.s Current Report on Form 8-K filed on
June 6, 2007, and incorporated by reference herein). |
|
|
|
10.17
|
|
Registration Rights Agreement, dated as of June 6, 2007, by
and among MetroPCS Wireless, Inc., the Guarantors as defined
therein and Bear, Stearns & Co. Inc. (Filed as Exhibit 10.1 to
MetroPCS Communications, Inc.s Current Report on Form 8-K,
filed on June 11, 2007, and incorporated by reference herein). |
|
|
|
10.18
|
|
Managed Services Agreement, entered into on September 15, 2008
and effective as of April 8, 2008, by and between MetroPCS
Wireless, Inc. and Amdocs Software Systems Limited and Amdocs,
Inc. (Filed as Exhibit 10.1 to MetroPCS Communications, Inc.s
Quarterly Report on Form 10-Q (SEC File No. 001-33409), filed
on November 10, 2008, and incorporated by reference herein). |
89
|
|
|
Exhibit No. |
|
Description |
10.19
|
|
Purchase Agreement, dated as of January 14, 2009, by and among
MetroPCS Wireless, Inc., the Guarantors (as defined therein),
J.P. Morgan Securities Inc., Banc of America Securities LLC,
and HSBC Securities (USA) Inc. (Filed as Exhibit 1.1 to
MetroPCS Communications, Inc.s Current Report on Form 8-K,
filed on January 21, 2009, and incorporated by reference
herein). |
|
|
|
10.20
|
|
Indenture, dated as of January 20, 2009, by and among MetroPCS
Wireless, Inc., the Guarantors (as defined therein) and The
Bank of New York Mellon Trust Company, N.A., as trustee.
(Filed as Exhibit 10.1 to MetroPCS Communications, Inc.s
Current Report on Form 8-K, filed on January 21, 2009, and
incorporated by reference herein). |
|
|
|
10.21
|
|
Registration Rights Agreement, dated as of January 20, 2009,
by and among MetroPCS Wireless, Inc., the Guarantors (as
defined therein), J.P. Morgan Securities Inc., Banc of America
Securities LLC, and HSBC Securities (USA) Inc. (Filed as
Exhibit 10.2 to MetroPCS Communications, Inc.s Current Report
on Form 8-K, filed on January 21, 2009, and incorporated by
reference herein). |
|
|
|
21.1*
|
|
Subsidiaries of Registrant. |
|
|
|
23.1*
|
|
Consent of Deloitte & Touche LLP. |
|
|
|
24.1*
|
|
Power of Attorney, pursuant to which amendments to this Form
10-K may be filed, is included on the signature page contained
in Part IV of the Form 10-K. |
|
|
|
31.1*
|
|
Certification of Roger D. Linquist, President, Chief Executive
Officer and Chairman of the Board of MetroPCS Communications,
Inc. as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. |
|
|
|
31.2*
|
|
Certification of J. Braxton Carter, Executive Vice President
and Chief Financial Officer of MetroPCS Communications, Inc.
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002. |
|
|
|
32.1*
|
|
Certification of Roger D. Linquist, President, Chief Executive
Officer and Chairman of the Board of MetroPCS Communications,
Inc. pursuant to 18 U.S.C., Section 1350,as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. Pursuant to
SEC Release 34-47551, this Exhibit is furnished to the SEC and
shall not be deemed to be filed. |
|
|
|
32.2*
|
|
Certification of J. Braxton Carter, Executive Vice President
and Chief Financial Officer of MetroPCS Communications, Inc.
pursuant to 18 U.S.C., Section 1350,as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. Pursuant to SEC
Release 34-47551, this Exhibit is furnished to the SEC and
shall not be deemed to be filed. |
90
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
|
|
METROPCS COMMUNICATIONS, INC.
(Registrant)
|
|
|
By: |
/s/ ROGER D. LINQUIST
|
|
|
|
Roger D. Linquist |
|
|
|
President, Chief Executive Officer and
Chairman of the Board |
|
|
|
|
|
|
Date: March 2, 2009 |
|
|
91
Power of Attorney
KNOW 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 power of substitution and resubstitution, for him in any and all capacities,
to sign this Annual Report on Form 10-K and any and all amendments or supplements 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 Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
/s/ ROGER D. LINQUIST
|
|
|
|
/s/ J. BRAXTON CARTER |
|
|
|
|
|
Roger D. Linquist
|
|
|
|
J. Braxton Carter |
President, Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
|
|
|
|
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer) |
|
|
|
|
|
/s/ CHRISTINE B. KORNEGAY
|
|
|
|
/s/ W. MICHAEL BARNES |
|
|
|
|
|
Christine B. Kornegay
|
|
|
|
W. Michael Barnes |
Vice President, Controller and Chief
Accounting Officer
(Principal Accounting Officer)
|
|
|
|
Director |
|
|
|
|
|
/s/ JOHN F. CALLAHAN, JR.
|
|
|
|
/s/ C. KEVIN LANDRY |
|
|
|
|
|
John F. Callahan, Jr.
|
|
|
|
C. Kevin Landry |
Director
|
|
|
|
Director |
|
|
|
|
|
/s/ ARTHUR C. PATTERSON
|
|
|
|
/s/ JAMES N. PERRY, JR. |
|
|
|
|
|
Arthur C. Patterson
|
|
|
|
James N. Perry, Jr. |
Director
|
|
|
|
Director |
92
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
MetroPCS Communications, Inc.
Richardson, Texas
We have audited the accompanying consolidated balance sheets of MetroPCS Communications, Inc. and
subsidiaries (the Company) as of December 31, 2008 and 2007, and the related consolidated
statements of income and comprehensive income, stockholders equity and cash flows for each of the
three years in the period ended December 31, 2008. These financial statements are the
responsibility of the Companys 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. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes 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 subsidiaries as of December 31, 2008
and 2007, and the results of its operations and its cash flows for each of the three years in the
period ended December 31, 2008, in conformity with accounting principles generally accepted in the
United States of America.
As
discussed in Note 10 to the consolidated financial statements, the Company changed its method of
accounting for fair value measurements of financial assets and liabilities as of January 1, 2008
and as discussed in Note 2 for uncertainty in income taxes as of January 1, 2007.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the Companys internal control over financial reporting as of December 31,
2008, based on the criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27,
2009 expressed an unqualified opinion on the Companys internal control over financial reporting.
/s/ Deloitte & Touche LLP
February 27, 2009
Dallas, Texas
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
MetroPCS Communications, Inc.
Richardson, Texas
We have audited the internal control over financial reporting of MetroPCS Communications, Inc. and
subsidiaries (the Company) as of December 31, 2008, based on the criteria established in Internal
Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The Companys management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Managements report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on the Companys internal control
over financial reporting based on our audit.
We conducted our audit 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 effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed by, or under the
supervision of, the companys principal executive and principal financial officers, or persons
performing similar functions, and effected by the companys board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A companys internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material misstatements due to
error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2008, based on the criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets as of December 31, 2008, and the related
consolidated statements of income and comprehensive income, stockholders equity, and the cash
flows for each of the three years in the period ended December 31, 2008, of the Company and our
report dated February 27, 2009 expressed an unqualified opinion on those financial statements
(which expresses an unqualified opinion and includes an explanatory paragraph relating to a change
in the method of accounting for fair value measurements of financial assets and liabilities as of
January 1, 2008 and for uncertainty in income taxes as of January 1, 2007).
/s/ Deloitte & Touche LLP
February 27, 2009
Dallas, Texas
F-2
MetroPCS Communications, Inc. and Subsidiaries
Consolidated Balance Sheets
As of December 31, 2008 and 2007
(in thousands, except share and per share information)
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
CURRENT ASSETS: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
697,948 |
|
|
$ |
1,470,208 |
|
Inventories, net |
|
|
155,955 |
|
|
|
109,139 |
|
Accounts receivable (net of allowance for
uncollectible accounts of $4,106 and $2,908
at December 31, 2008 and 2007, respectively) |
|
|
34,666 |
|
|
|
31,809 |
|
Prepaid charges |
|
|
56,347 |
|
|
|
60,469 |
|
Deferred charges |
|
|
49,716 |
|
|
|
34,635 |
|
Deferred tax assets |
|
|
1,832 |
|
|
|
4,920 |
|
Other current assets |
|
|
47,420 |
|
|
|
21,704 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
1,043,884 |
|
|
|
1,732,884 |
|
Property and equipment, net |
|
|
2,847,751 |
|
|
|
1,891,411 |
|
Restricted cash and investments |
|
|
4,575 |
|
|
|
320 |
|
Long-term investments |
|
|
5,986 |
|
|
|
36,050 |
|
FCC licenses |
|
|
2,406,596 |
|
|
|
2,072,895 |
|
Microwave relocation costs |
|
|
16,478 |
|
|
|
10,105 |
|
Other assets |
|
|
96,878 |
|
|
|
62,465 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
6,422,148 |
|
|
$ |
5,806,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES: |
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
$ |
568,432 |
|
|
$ |
439,449 |
|
Current maturities of long-term debt |
|
|
17,009 |
|
|
|
16,000 |
|
Deferred revenue |
|
|
151,779 |
|
|
|
120,481 |
|
Other current liabilities |
|
|
5,136 |
|
|
|
4,560 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
742,356 |
|
|
|
580,490 |
|
Long-term debt, net |
|
|
3,057,983 |
|
|
|
2,986,177 |
|
Deferred tax liabilities |
|
|
389,509 |
|
|
|
290,128 |
|
Deferred rents |
|
|
56,425 |
|
|
|
35,779 |
|
Redeemable minority interest |
|
|
6,290 |
|
|
|
5,032 |
|
Other long-term liabilities |
|
|
135,262 |
|
|
|
59,778 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
4,387,825 |
|
|
|
3,957,384 |
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES (See Note 12) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY: |
|
|
|
|
|
|
|
|
Preferred stock, par value $0.0001 per
share, 100,000,000 shares authorized; no
shares of preferred stock issued and
outstanding at December 31, 2008 and 2007 |
|
|
|
|
|
|
|
|
Common Stock, par value $0.0001 per share,
1,000,000,000 shares authorized, 350,918,272
and 348,108,027 shares issued and
outstanding at December 31, 2008 and 2007,
respectively |
|
|
35 |
|
|
|
35 |
|
Additional paid-in capital |
|
|
1,578,972 |
|
|
|
1,524,769 |
|
Retained earnings |
|
|
487,849 |
|
|
|
338,411 |
|
Accumulated other comprehensive loss |
|
|
(32,533 |
) |
|
|
(14,469 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
2,034,323 |
|
|
|
1,848,746 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
6,422,148 |
|
|
$ |
5,806,130 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-3
MetroPCS Communications, Inc. and Subsidiaries
Consolidated Statements of Income and Comprehensive Income
For the Years Ended December 31, 2008, 2007 and 2006
(in thousands, except share and per share information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
REVENUES: |
|
|
|
|
|
|
|
|
|
|
|
|
Service revenues |
|
$ |
2,437,250 |
|
|
$ |
1,919,197 |
|
|
$ |
1,290,947 |
|
Equipment revenues |
|
|
314,266 |
|
|
|
316,537 |
|
|
|
255,916 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
2,751,516 |
|
|
|
2,235,734 |
|
|
|
1,546,863 |
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of depreciation and amortization expense
of $225,911, $157,387 and $122,606, shown separately below) |
|
|
857,295 |
|
|
|
647,510 |
|
|
|
445,281 |
|
Cost of equipment |
|
|
704,648 |
|
|
|
597,233 |
|
|
|
476,877 |
|
Selling, general and administrative expenses (exclusive of
depreciation and amortization expense of $29,408, $20,815 and
$12,422, shown separately below) |
|
|
447,582 |
|
|
|
352,020 |
|
|
|
243,618 |
|
Depreciation and amortization |
|
|
255,319 |
|
|
|
178,202 |
|
|
|
135,028 |
|
Loss on disposal of assets |
|
|
18,905 |
|
|
|
655 |
|
|
|
8,806 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
2,283,749 |
|
|
|
1,775,620 |
|
|
|
1,309,610 |
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
467,767 |
|
|
|
460,114 |
|
|
|
237,253 |
|
OTHER EXPENSE (INCOME): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
179,398 |
|
|
|
201,746 |
|
|
|
115,985 |
|
Accretion of put option in majority-owned subsidiary |
|
|
1,258 |
|
|
|
1,003 |
|
|
|
770 |
|
Interest and other income |
|
|
(23,170 |
) |
|
|
(63,936 |
) |
|
|
(21,543 |
) |
Impairment loss on investment securities |
|
|
30,857 |
|
|
|
97,800 |
|
|
|
|
|
Loss on extinguishment of debt |
|
|
|
|
|
|
|
|
|
|
51,518 |
|
|
|
|
|
|
|
|
|
|
|
Total other expense |
|
|
188,343 |
|
|
|
236,613 |
|
|
|
146,730 |
|
Income before provision for income taxes |
|
|
279,424 |
|
|
|
223,501 |
|
|
|
90,523 |
|
Provision for income taxes |
|
|
(129,986 |
) |
|
|
(123,098 |
) |
|
|
(36,717 |
) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
149,438 |
|
|
|
100,403 |
|
|
|
53,806 |
|
Accrued dividends on Series D Preferred Stock |
|
|
|
|
|
|
(6,499 |
) |
|
|
(21,006 |
) |
Accrued dividends on Series E Preferred Stock |
|
|
|
|
|
|
(929 |
) |
|
|
(3,000 |
) |
Accretion on Series D Preferred Stock |
|
|
|
|
|
|
(148 |
) |
|
|
(473 |
) |
Accretion on Series E Preferred Stock |
|
|
|
|
|
|
(106 |
) |
|
|
(339 |
) |
|
|
|
|
|
|
|
|
|
|
Net income applicable to common stock |
|
$ |
149,438 |
|
|
$ |
92,721 |
|
|
$ |
28,988 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
149,438 |
|
|
$ |
100,403 |
|
|
$ |
53,806 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on available-for-sale securities, net of tax |
|
|
830 |
|
|
|
6,640 |
|
|
|
(1,211 |
) |
Unrealized (losses) gains on cash flow hedging derivatives, net
of tax |
|
|
(30,438 |
) |
|
|
(13,614 |
) |
|
|
1,959 |
|
Reclassification adjustment for losses (gains) included in net
income, net of tax |
|
|
11,544 |
|
|
|
(8,719 |
) |
|
|
(1,307 |
) |
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
131,374 |
|
|
$ |
84,710 |
|
|
$ |
53,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share: (See Note 19) |
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share basic |
|
$ |
0.43 |
|
|
$ |
0.29 |
|
|
$ |
0.11 |
|
|
|
|
|
|
|
|
|
|
|
Net income per common share diluted |
|
$ |
0.42 |
|
|
$ |
0.28 |
|
|
$ |
0.10 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
349,395,285 |
|
|
|
287,692,280 |
|
|
|
155,820,381 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
355,380,111 |
|
|
|
296,337,724 |
|
|
|
159,696,608 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-4
MetroPCS Communications, Inc. and Subsidiaries
Consolidated Statements of Stockholders Equity
For the Years Ended December 31, 2008, 2007 and 2006
(in thousands, except share information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Number |
|
|
|
|
|
|
Paid-In |
|
|
Deferred |
|
|
Retained |
|
|
Comprehensive |
|
|
|
|
|
|
of Shares |
|
|
Amount |
|
|
Capital |
|
|
Compensation |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Total |
|
BALANCE, December 31, 2005 |
|
|
155,327,094 |
|
|
$ |
15 |
|
|
$ |
149,584 |
|
|
$ |
(178 |
) |
|
$ |
216,702 |
|
|
$ |
1,783 |
|
|
$ |
367,906 |
|
Common Stock issued |
|
|
49,725 |
|
|
|
|
|
|
|
314 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
314 |
|
Exercise of Common Stock options |
|
|
1,148,328 |
|
|
|
1 |
|
|
|
2,743 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,744 |
|
Exercise of Common Stock warrants |
|
|
526,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reversal of deferred compensation upon
adoption of SFAS No. 123(R) |
|
|
|
|
|
|
|
|
|
|
(178 |
) |
|
|
178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
14,472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,472 |
|
Accrued dividends on Series D Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,006 |
) |
|
|
|
|
|
|
(21,006 |
) |
Accrued dividends on Series E Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,000 |
) |
|
|
|
|
|
|
(3,000 |
) |
Accretion on Series D Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(473 |
) |
|
|
|
|
|
|
(473 |
) |
Accretion on Series E Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(339 |
) |
|
|
|
|
|
|
(339 |
) |
Reduction due to the tax impact of Common
Stock option forfeitures |
|
|
|
|
|
|
|
|
|
|
(620 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(620 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,806 |
|
|
|
|
|
|
|
53,806 |
|
Unrealized losses on available-for-sale
securities, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,211 |
) |
|
|
(1,211 |
) |
Unrealized gains on cash flow hedging
derivatives, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,959 |
|
|
|
1,959 |
|
Reclassification adjustment for gains
included in net income, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,307 |
) |
|
|
(1,307 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2006 |
|
|
157,052,097 |
|
|
$ |
16 |
|
|
$ |
166,315 |
|
|
$ |
|
|
|
$ |
245,690 |
|
|
$ |
1,224 |
|
|
$ |
413,245 |
|
Common Stock issued |
|
|
31,230 |
|
|
|
|
|
|
|
354 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
354 |
|
Exercise of Common Stock options |
|
|
2,562,056 |
|
|
|
|
|
|
|
9,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,706 |
|
Issuance of Common Stock through initial
public offering, net of issuance costs |
|
|
37,500,000 |
|
|
|
4 |
|
|
|
818,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
818,266 |
|
Conversion of Series D Preferred Stock |
|
|
144,857,320 |
|
|
|
14 |
|
|
|
449,999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
450,013 |
|
Conversion of Series E Preferred Stock |
|
|
6,105,324 |
|
|
|
1 |
|
|
|
52,170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,171 |
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
28,024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,024 |
|
Accrued dividends on Series D Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,499 |
) |
|
|
|
|
|
|
(6,499 |
) |
Accrued dividends on Series E Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(929 |
) |
|
|
|
|
|
|
(929 |
) |
Accretion on Series D Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(148 |
) |
|
|
|
|
|
|
(148 |
) |
Accretion on Series E Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(106 |
) |
|
|
|
|
|
|
(106 |
) |
Reduction due to the tax impact of Common
Stock option forfeitures |
|
|
|
|
|
|
|
|
|
|
(61 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(61 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,403 |
|
|
|
|
|
|
|
100,403 |
|
Unrealized gains on available-for-sale
securities, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,640 |
|
|
|
6,640 |
|
Unrealized losses on cash flow hedging
derivatives, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,614 |
) |
|
|
(13,614 |
) |
Reclassification adjustment for gains
included in net income, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,719 |
) |
|
|
(8,719 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2007 |
|
|
348,108,027 |
|
|
$ |
35 |
|
|
$ |
1,524,769 |
|
|
$ |
|
|
|
$ |
338,411 |
|
|
$ |
(14,469 |
) |
|
$ |
1,848,746 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-5
MetroPCS Communications, Inc. and Subsidiaries
Consolidated Statements of Stockholders Equity (Continued)
For the Years Ended December 31, 2008, 2007 and 2006
(in thousands, except share information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Number |
|
|
|
|
|
|
Paid-In |
|
|
Deferred |
|
|
Retained |
|
|
Comprehensive |
|
|
|
|
|
|
of Shares |
|
|
Amount |
|
|
Capital |
|
|
Compensation |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Total |
|
Exercise of Common Stock options |
|
|
2,810,245 |
|
|
|
|
|
|
|
12,582 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,582 |
|
Stock-based compensation expense |
|
|
|
|
|
|
|
|
|
|
41,454 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,454 |
|
Tax impact of Common Stock
option exercises and
forfeitures |
|
|
|
|
|
|
|
|
|
|
167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
167 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
149,438 |
|
|
|
|
|
|
|
149,438 |
|
Unrealized gains on
available-for-sale securities,
net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
830 |
|
|
|
830 |
|
Unrealized losses on cash flow
hedging derivatives, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30,438 |
) |
|
|
(30,438 |
) |
Reclassification adjustment for
losses included in net income,
net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,544 |
|
|
|
11,544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2008 |
|
|
350,918,272 |
|
|
$ |
35 |
|
|
$ |
1,578,972 |
|
|
$ |
|
|
|
$ |
487,849 |
|
|
$ |
(32,533 |
) |
|
$ |
2,034,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-6
MetroPCS Communications, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2008, 2007 and 2006
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
149,438 |
|
|
$ |
100,403 |
|
|
$ |
53,806 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
255,319 |
|
|
|
178,202 |
|
|
|
135,028 |
|
Provision for uncollectible accounts receivable |
|
|
8 |
|
|
|
129 |
|
|
|
31 |
|
Deferred rent expense |
|
|
20,646 |
|
|
|
13,745 |
|
|
|
7,464 |
|
Cost of abandoned cell sites |
|
|
8,592 |
|
|
|
6,704 |
|
|
|
3,783 |
|
Stock-based compensation expense |
|
|
41,142 |
|
|
|
28,024 |
|
|
|
14,472 |
|
Non-cash interest expense |
|
|
2,550 |
|
|
|
3,259 |
|
|
|
6,964 |
|
Loss on disposal of assets |
|
|
18,905 |
|
|
|
655 |
|
|
|
8,806 |
|
Loss on extinguishment of debt |
|
|
|
|
|
|
|
|
|
|
51,518 |
|
Gain on sale of investments |
|
|
|
|
|
|
(10,506 |
) |
|
|
(2,385 |
) |
Impairment loss on investment securities |
|
|
30,857 |
|
|
|
97,800 |
|
|
|
|
|
Accretion of asset retirement obligation |
|
|
3,542 |
|
|
|
1,439 |
|
|
|
769 |
|
Accretion of put option in majority-owned subsidiary |
|
|
1,258 |
|
|
|
1,003 |
|
|
|
770 |
|
Deferred income taxes |
|
|
124,347 |
|
|
|
118,524 |
|
|
|
32,341 |
|
Changes in assets and liabilities, net of impact of acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
Inventories |
|
|
(46,816 |
) |
|
|
(16,275 |
) |
|
|
(53,320 |
) |
Accounts receivable |
|
|
(2,865 |
) |
|
|
(3,797 |
) |
|
|
(12,143 |
) |
Prepaid charges |
|
|
(15,102 |
) |
|
|
(6,887 |
) |
|
|
(6,538 |
) |
Deferred charges |
|
|
(15,081 |
) |
|
|
(8,126 |
) |
|
|
(13,239 |
) |
Other assets |
|
|
(43,556 |
) |
|
|
(11,345 |
) |
|
|
(9,231 |
) |
Accounts payable and accrued expenses |
|
|
(119,166 |
) |
|
|
63,884 |
|
|
|
108,492 |
|
Deferred revenue |
|
|
31,294 |
|
|
|
30,013 |
|
|
|
33,957 |
|
Other liabilities |
|
|
2,178 |
|
|
|
2,458 |
|
|
|
3,416 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
447,490 |
|
|
|
589,306 |
|
|
|
364,761 |
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(954,612 |
) |
|
|
(767,709 |
) |
|
|
(550,749 |
) |
Change in prepaid purchases of property and equipment |
|
|
15,645 |
|
|
|
(19,992 |
) |
|
|
(5,262 |
) |
Proceeds from sale of property and equipment |
|
|
856 |
|
|
|
3,759 |
|
|
|
3,021 |
|
Purchase of investments |
|
|
|
|
|
|
(3,358,427 |
) |
|
|
(1,269,919 |
) |
Proceeds from sale of investments |
|
|
37 |
|
|
|
3,625,648 |
|
|
|
1,272,424 |
|
Change in restricted cash and investments |
|
|
|
|
|
|
294 |
|
|
|
2,406 |
|
Purchases of and deposits for FCC licenses |
|
|
(328,519 |
) |
|
|
|
|
|
|
(1,391,586 |
) |
Cash used in business acquisitions |
|
|
(25,162 |
) |
|
|
|
|
|
|
|
|
Microwave relocation costs |
|
|
(2,520 |
) |
|
|
(661 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(1,294,275 |
) |
|
|
(517,088 |
) |
|
|
(1,939,665 |
) |
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Change in book overdraft |
|
|
79,353 |
|
|
|
4,111 |
|
|
|
11,368 |
|
Proceeds from bridge credit agreements |
|
|
|
|
|
|
|
|
|
|
1,500,000 |
|
Proceeds from Senior Secured Credit Facility |
|
|
|
|
|
|
|
|
|
|
1,600,000 |
|
Proceeds from 91/4% Senior Notes Due 2014 |
|
|
|
|
|
|
423,500 |
|
|
|
1,000,000 |
|
Proceeds from initial public offering |
|
|
|
|
|
|
862,500 |
|
|
|
|
|
Cost of raising capital |
|
|
|
|
|
|
(44,234 |
) |
|
|
|
|
Debt issuance costs |
|
|
|
|
|
|
(3,091 |
) |
|
|
(58,789 |
) |
Repayment of debt |
|
|
(16,000 |
) |
|
|
(16,000 |
) |
|
|
(2,437,985 |
) |
Payments on capital lease obligations |
|
|
(1,410 |
) |
|
|
|
|
|
|
|
|
Proceeds from minority interest in majority-owned subsidiary |
|
|
|
|
|
|
|
|
|
|
2,000 |
|
Proceeds from termination of cash flow hedging derivative |
|
|
|
|
|
|
|
|
|
|
4,355 |
|
Proceeds from exercise of stock options and warrants |
|
|
12,582 |
|
|
|
9,706 |
|
|
|
2,744 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
74,525 |
|
|
|
1,236,492 |
|
|
|
1,623,693 |
|
|
|
|
|
|
|
|
|
|
|
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |
|
|
(772,260 |
) |
|
|
1,308,710 |
|
|
|
48,789 |
|
CASH AND CASH EQUIVALENTS, beginning of year |
|
|
1,470,208 |
|
|
|
161,498 |
|
|
|
112,709 |
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of year |
|
$ |
697,948 |
|
|
$ |
1,470,208 |
|
|
$ |
161,498 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are integral part of these consolidated financial statements.
F-7
MetroPCS Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
1. Organization and Business Operations:
MetroPCS Communications, Inc. (MetroPCS), a Delaware corporation, together with its
consolidated subsidiaries (the Company), is a wireless telecommunications carrier that offers
wireless broadband mobile services. As of December 31, 2008, the Company offered services
primarily in the metropolitan areas of Atlanta, Dallas/Ft. Worth, Detroit, Las Vegas, Los Angeles,
Miami, Orlando/Jacksonville, Philadelphia, San Francisco, Sacramento and Tampa/Sarasota. In
February 2009, the Company launched service in the Boston and New York metropolitan areas. The
Company sells products and services to customers through Company-owned retail stores as well as
through relationships with independent retailers.
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 Communications), to bid on spectrum auctioned by the FCC in Auction 58. The
Company owns 85% of the limited liability company member interest of Royal Street Communications,
but may only elect two of the five members of Royal Street Communications management committee
(See Note 4). The consolidated financial statements include the balances and results of operations
of MetroPCS and its wholly-owned subsidiaries as well as the balances and results of operations of
Royal Street Communications and its wholly-owned subsidiaries (collectively, Royal Street). The
Company consolidates its interest in Royal Street in accordance with Financial Accounting Standards
Board (FASB) Interpretation No. 46-R, Consolidation of Variable Interest Entities, (FIN
46(R)). Royal Street qualifies as a variable interest entity under FIN 46(R) because the Company
is the primary beneficiary of Royal Street and will absorb all of Royal Streets expected losses.
The redeemable minority interest in Royal Street is included in long-term liabilities. All
intercompany accounts and transactions between the Company and Royal Street have been eliminated in
the consolidated financial statements.
On March 14, 2007, the Companys Board of Directors approved a 3 for 1 stock split of the
Companys common stock effected by means of a stock dividend of two shares of common stock for each
share of common stock issued and outstanding on that date. All share, per share and conversion
amounts relating to common stock and stock options included in the accompanying consolidated
financial statements have been retroactively adjusted to reflect the stock split.
On April 24, 2007, MetroPCS consummated its initial public offering (the Offering) of
57,500,000 shares of common stock priced at $23.00 per share (less underwriting discounts and
commissions). MetroPCS offered 37,500,000 shares of common stock and certain of MetroPCS existing
stockholders offered 20,000,000 shares of common stock in the Offering, which included 7,500,000
shares sold by MetroPCS existing stockholders pursuant to the underwriters exercise of their
over-allotment option. Concurrent with the Offering, all outstanding shares of preferred stock,
including accrued but unpaid dividends, were converted into 150,962,644 shares of common stock. The
shares began trading on April 19, 2007 on the New York Stock Exchange under the symbol PCS.
2. Summary of Significant Accounting Policies:
Consolidation
The accompanying consolidated financial statements include the balances and results of
operations of MetroPCS and its wholly- and majority-owned subsidiaries. All intercompany balances
and transactions have been eliminated in consolidation.
F-8
MetroPCS Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Operating Segments
SFAS No. 131 Disclosure About Segments of an Enterprise and Related Information, (SFAS No.
131), establishes standards for the way that public business enterprises report information about
operating segments in annual financial statements. At December 31, 2008, the Company had thirteen
operating segments based on geographic regions within the United States: Atlanta, Boston,
Dallas/Ft. Worth, Detroit, Las Vegas, Los Angeles, Miami, New York, Orlando/Jacksonville,
Philadelphia, San Francisco, Sacramento and Tampa/Sarasota. The Company aggregates its operating
segments into two reportable segments: Core Markets and Expansion Markets (See Note 20).
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 used by the Company include:
|
|
|
allowance for uncollectible accounts receivable; |
|
|
|
|
valuation of inventories; |
|
|
|
|
valuation of investment securities; |
|
|
|
|
estimated useful life of assets; |
|
|
|
|
accrued property, plant and equipment for the percentage of construction services
received; |
|
|
|
|
impairment of long-lived assets and indefinite-lived assets; |
|
|
|
|
likelihood of realizing benefits associated with temporary differences giving rise to
deferred tax assets; |
|
|
|
|
reserves for uncertain tax positions; |
|
|
|
|
estimated customer life in terms of amortization of certain deferred revenue; |
|
|
|
|
valuation of common stock prior to the Offering; and |
|
|
|
|
stock-based compensation expense. |
Derivative Instruments and Hedging Activities
The Company accounts for its hedging activities under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended (SFAS No. 133). The standard requires the Company
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 hedges must be recognized in earnings in the
current period. The Companys use of derivative financial instruments is discussed in Note 6.
F-9
MetroPCS Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
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) treasury securities with an original
maturity of 90 days or less.
Inventories
Substantially all of the Companys inventories are stated at the lower of average cost or
market. Inventories consist mainly of handsets that are available for sale to customers and
independent retailers.
Allowance for Uncollectible Accounts Receivable
The Company maintains allowances for uncollectible accounts for estimated losses resulting
from the inability of independent retailers to pay for equipment purchases and for amounts
estimated to be uncollectible from other carriers. The following table summarizes the changes in
the Companys allowance for uncollectible accounts (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Balance at beginning of period |
|
$ |
2,908 |
|
|
$ |
1,950 |
|
|
$ |
2,383 |
|
Additions: |
|
|
|
|
|
|
|
|
|
|
|
|
Charged to expense |
|
|
8 |
|
|
|
129 |
|
|
|
31 |
|
Direct reduction to revenue and other accounts |
|
|
1,337 |
|
|
|
1,037 |
|
|
|
929 |
|
Deductions |
|
|
(147 |
) |
|
|
(208 |
) |
|
|
(1,393 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
4,106 |
|
|
$ |
2,908 |
|
|
$ |
1,950 |
|
|
|
|
|
|
|
|
|
|
|
Prepaid Charges
Prepaid charges consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
Prepaid vendor purchases |
|
$ |
17,829 |
|
|
$ |
37,054 |
|
Prepaid rent |
|
|
23,689 |
|
|
|
13,996 |
|
Prepaid maintenance and support contracts |
|
|
4,482 |
|
|
|
3,961 |
|
Prepaid insurance |
|
|
2,165 |
|
|
|
2,162 |
|
Prepaid advertising |
|
|
2,331 |
|
|
|
264 |
|
Other |
|
|
5,851 |
|
|
|
3,032 |
|
|
|
|
|
|
|
|
Prepaid charges |
|
$ |
56,347 |
|
|
$ |
60,469 |
|
|
|
|
|
|
|
|
Property and Equipment
Property and equipment, net, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
Construction-in-progress |
|
$ |
898,454 |
|
|
$ |
393,282 |
|
Network infrastructure |
|
|
2,522,206 |
|
|
|
1,901,119 |
|
Office equipment |
|
|
63,848 |
|
|
|
44,059 |
|
Leasehold improvements |
|
|
47,784 |
|
|
|
33,410 |
|
Furniture and fixtures |
|
|
10,273 |
|
|
|
7,833 |
|
Vehicles |
|
|
311 |
|
|
|
207 |
|
|
|
|