e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2006
OR
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o |
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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 Number
000-50869
METROPCS COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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20-0836269 |
(State or other jurisdiction
of incorporation or organization)
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(I.R.S. Employer
Identification No.) |
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8144 Walnut Hill Lane, Suite 800 |
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Dallas, Texas
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75231-4388 |
(Address of principal executive offices)
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(Zip Code) |
(214) 265-2550
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes o No þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer o Non-accelerated filer þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
Indicate by check mark whether the registrant has filed all documents and reports required to
be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Yes þ No o
On March 31, 2007, there were 157,135,815 shares of the registrants common stock, $0.0001 par value, outstanding.
METROPCS COMMUNICATIONS, INC.
Quarterly Report on Form 10-Q
Table of Contents
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* |
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No reportable information under this item. |
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements.
MetroPCS Communications, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except share information)
(Unaudited)
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June 30, |
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December 31, |
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2006 |
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2005 |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
136,591 |
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$ |
112,709 |
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Short-term investments |
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283,948 |
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390,422 |
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Inventories, net |
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29,108 |
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39,431 |
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Accounts receivable (net of allowance for
uncollectible accounts of $1,888 and
$2,383 at June 30, 2006 and December 31,
2005, respectively) |
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19,721 |
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16,028 |
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Prepaid expenses |
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25,252 |
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21,430 |
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Deferred charges |
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21,900 |
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13,270 |
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Deferred tax asset |
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2,122 |
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2,122 |
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Other current assets |
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16,278 |
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16,690 |
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Total current assets |
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534,920 |
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612,102 |
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Property and equipment, net |
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1,091,412 |
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831,490 |
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Restricted cash and investments |
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6,044 |
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2,920 |
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Long-term investments |
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7,102 |
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5,052 |
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FCC licenses |
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681,299 |
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681,299 |
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Microwave relocation costs |
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9,187 |
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9,187 |
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Other assets |
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16,328 |
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16,931 |
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Total assets |
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$ |
2,346,292 |
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$ |
2,158,981 |
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CURRENT LIABILITIES: |
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Accounts payable and accrued expenses |
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$ |
266,134 |
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$ |
174,220 |
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Current maturities of long-term debt |
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435 |
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2,690 |
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Deferred revenue |
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73,060 |
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56,560 |
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Other current liabilities |
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2,608 |
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2,147 |
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Total current liabilities |
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342,237 |
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235,617 |
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Long-term debt, net |
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902,687 |
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902,864 |
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Deferred tax liabilities |
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172,559 |
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146,053 |
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Deferred rents |
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18,115 |
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14,739 |
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Redeemable minority interest |
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3,620 |
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1,259 |
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Other long-term liabilities |
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23,025 |
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20,858 |
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Total liabilities |
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1,462,243 |
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1,321,390 |
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COMMITMENTS AND CONTINGENCIES (See Note 10) |
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SERIES D CUMULATIVE CONVERTIBLE REDEEMABLE
PARTICIPATING PREFERRED STOCK, par value
$0.0001 per share, 4,000,000 shares
designated, 3,500,993 shares issued and
outstanding at June 30, 2006 and December
31, 2005; Liquidation preference of $436,799
and $426,382 at June 30, 2006 and December
31, 2005, respectively |
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432,542 |
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421,889 |
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SERIES E CUMULATIVE CONVERTIBLE REDEEMABLE
PARTICIPATING PREFERRED STOCK, par value
$0.0001 per share, 500,000 shares
designated, 500,000 shares issued and
outstanding at June 30, 2006 and December
31, 2005; Liquidation preference of $52,507
and $51,019 at June 30, 2006 and December
31, 2005, respectively |
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49,453 |
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47,796 |
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STOCKHOLDERS EQUITY: |
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Preferred stock, par value $0.0001 per
share, 25,000,000 shares authorized,
4,000,000 of which have been designated as
Series D Preferred Stock and 500,000 of
which have been designated as Series E
Preferred Stock; no shares of preferred
stock other than Series D & E Preferred
Stock (presented above) issued and
outstanding at June 30, 2006 and December
31, 2005 |
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Common Stock, par value $0.0001 per share,
300,000,000 shares authorized,
156,065,994 and 155,327,094 shares issued
and outstanding at June 30, 2006 and
December 31, 2005, respectively |
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15 |
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15 |
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Additional paid-in capital |
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154,307 |
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149,584 |
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Deferred compensation |
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(178 |
) |
Retained earnings |
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245,750 |
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216,702 |
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Accumulated other comprehensive income |
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1,982 |
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1,783 |
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Total stockholders equity |
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402,054 |
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367,906 |
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Total liabilities and stockholders equity |
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$ |
2,346,292 |
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$ |
2,158,981 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
1
MetroPCS Communications, Inc. and Subsidiaries
Condensed Consolidated Statements of Income and Comprehensive Income
(in thousands, except share and per share information)
(Unaudited)
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For the three months ended |
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For the six months ended |
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June 30, |
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June 30, |
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2006 |
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2005 |
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2006 |
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2005 |
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REVENUES: |
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Service revenues |
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$ |
307,843 |
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$ |
212,697 |
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$ |
583,260 |
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$ |
409,595 |
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Equipment revenues |
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60,351 |
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37,992 |
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114,395 |
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77,050 |
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Total revenues |
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368,194 |
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250,689 |
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697,655 |
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486,645 |
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OPERATING EXPENSES: |
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Cost of service (excluding depreciation and amortization expense
of $29,433, $19,079, $54,289 and $37,010, shown separately below) |
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107,497 |
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65,944 |
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|
199,987 |
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129,678 |
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Cost of equipment |
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112,005 |
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65,287 |
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212,916 |
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133,389 |
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Selling, general and administrative expenses (excluding
depreciation and amortization expense of $2,883, $1,635, $5,287
and $2,974, shown separately below) |
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60,264 |
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39,342 |
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|
111,701 |
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|
77,191 |
|
Depreciation and amortization |
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32,316 |
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20,714 |
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|
59,576 |
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|
39,984 |
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Loss (gain) on disposal of assets |
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2,013 |
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(224,901 |
) |
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12,377 |
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(223,741 |
) |
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Total operating expenses |
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314,095 |
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(33,614 |
) |
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596,557 |
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156,501 |
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Income from operations |
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54,099 |
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284,303 |
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|
101,098 |
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330,144 |
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OTHER EXPENSE (INCOME): |
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Interest expense |
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21,713 |
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|
15,761 |
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42,597 |
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|
23,797 |
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Accretion of put option in majority-owned subsidiary |
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203 |
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|
62 |
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|
|
360 |
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|
125 |
|
Interest and other income |
|
|
(6,147 |
) |
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(1,215 |
) |
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|
(10,719 |
) |
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(1,772 |
) |
(Gain) loss on extinguishment of debt |
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|
(27 |
) |
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|
45,581 |
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(244 |
) |
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46,448 |
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Total other expense |
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15,742 |
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|
60,189 |
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31,994 |
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68,598 |
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Income before provision for income taxes |
|
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38,357 |
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224,114 |
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69,104 |
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261,546 |
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Provision for income taxes |
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(15,368 |
) |
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(87,632 |
) |
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(27,745 |
) |
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(102,265 |
) |
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Net income |
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22,989 |
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136,482 |
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41,359 |
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159,281 |
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Accrued dividends on Series D Preferred Stock |
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(5,237 |
) |
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(5,237 |
) |
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(10,417 |
) |
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|
(10,417 |
) |
Accrued dividends on Series E Preferred Stock |
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(748 |
) |
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(1,488 |
) |
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Accretion on Series D Preferred Stock |
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|
(118 |
) |
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|
(118 |
) |
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|
(236 |
) |
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|
(236 |
) |
Accretion on Series E Preferred Stock |
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(85 |
) |
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(170 |
) |
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Net income applicable to Common Stock |
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$ |
16,801 |
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$ |
131,127 |
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$ |
29,048 |
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$ |
148,628 |
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Net income |
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$ |
22,989 |
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$ |
136,482 |
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$ |
41,359 |
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$ |
159,281 |
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Other comprehensive income: |
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Unrealized (loss) gain on available-for-sale securities,
net of tax |
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(744 |
) |
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135 |
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(516 |
) |
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40 |
|
Unrealized (loss) gain on cash flow hedging derivative, net of tax |
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|
619 |
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1,230 |
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Reclassification adjustment for gains included in net
income, net of tax |
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(20 |
) |
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(515 |
) |
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Comprehensive income |
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$ |
22,844 |
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$ |
136,617 |
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$ |
41,558 |
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$ |
159,321 |
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Net income per common share: (See Note 9)
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Basic |
|
$ |
0.06 |
|
|
$ |
0.54 |
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|
$ |
0.11 |
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|
$ |
0.61 |
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Diluted |
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$ |
0.06 |
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$ |
0.46 |
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$ |
0.10 |
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$ |
0.53 |
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Weighted average shares: |
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Basic |
|
|
155,829,673 |
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|
130,339,496 |
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|
155,503,804 |
|
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|
130,333,712 |
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Diluted |
|
|
159,350,145 |
|
|
|
151,957,701 |
|
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|
159,318,289 |
|
|
|
151,927,946 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
2
MetroPCS Communications, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
|
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For the six months ended |
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|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
41,359 |
|
|
$ |
159,281 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
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|
Depreciation and amortization |
|
|
59,576 |
|
|
|
39,984 |
|
Provision for uncollectible accounts receivable |
|
|
111 |
|
|
|
(39 |
) |
Deferred rent expense |
|
|
3,376 |
|
|
|
1,827 |
|
Cost of abandoned cell sites |
|
|
638 |
|
|
|
107 |
|
Non-cash interest expense |
|
|
776 |
|
|
|
3,627 |
|
Loss (gain) on disposal of assets |
|
|
12,377 |
|
|
|
(223,741 |
) |
(Gain) loss on extinguishment of debt |
|
|
(244 |
) |
|
|
46,448 |
|
(Gain) loss on sale of investments |
|
|
(1,268 |
) |
|
|
49 |
|
Accretion of asset retirement obligation |
|
|
298 |
|
|
|
53 |
|
Accretion of put option in majority-owned subsidiary |
|
|
360 |
|
|
|
125 |
|
Deferred income taxes |
|
|
26,496 |
|
|
|
101,011 |
|
Stock-based compensation expense |
|
|
3,969 |
|
|
|
2,965 |
|
Changes in assets and liabilities: |
|
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|
|
|
|
|
|
Inventories |
|
|
10,295 |
|
|
|
14,958 |
|
Accounts receivable |
|
|
(3,804 |
) |
|
|
(1,305 |
) |
Prepaid expenses |
|
|
(3,074 |
) |
|
|
(1,585 |
) |
Deferred charges |
|
|
(8,631 |
) |
|
|
(1,906 |
) |
Other assets |
|
|
258 |
|
|
|
(2,363 |
) |
Accounts payable and accrued expenses |
|
|
38,066 |
|
|
|
5,586 |
|
Deferred revenue |
|
|
16,504 |
|
|
|
5,756 |
|
Other liabilities |
|
|
1,630 |
|
|
|
1,183 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
199,068 |
|
|
|
152,021 |
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(307,296 |
) |
|
|
(99,860 |
) |
Change in prepaid purchases of property and equipment |
|
|
(708 |
) |
|
|
|
|
Proceeds from sale of property and equipment |
|
|
25 |
|
|
|
123 |
|
Purchase of investments |
|
|
(537,806 |
) |
|
|
(333,281 |
) |
Proceeds from sale of investments |
|
|
645,834 |
|
|
|
68,350 |
|
Change in restricted cash and investments |
|
|
(3,174 |
) |
|
|
(220 |
) |
Purchases of FCC licenses |
|
|
|
|
|
|
(230,765 |
) |
Deposit to FCC for licenses |
|
|
|
|
|
|
(268,599 |
) |
Proceeds from sale of FCC licenses |
|
|
|
|
|
|
230,000 |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(203,125 |
) |
|
|
(634,252 |
) |
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Change in book overdraft |
|
|
27,717 |
|
|
|
8,034 |
|
Proceeds from Bridge Credit Agreement |
|
|
|
|
|
|
540,000 |
|
Payment upon execution of cash flow hedging derivative |
|
|
|
|
|
|
(1,899 |
) |
Proceeds from Credit Agreements |
|
|
|
|
|
|
750,000 |
|
Debt issuance costs |
|
|
(104 |
) |
|
|
(28,680 |
) |
Repayment of debt |
|
|
(2,011 |
) |
|
|
(753,079 |
) |
Proceeds from minority interest in majority-owned subsidiary |
|
|
2,000 |
|
|
|
|
|
Proceeds from exercise of stock options and warrants |
|
|
337 |
|
|
|
68 |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
27,939 |
|
|
|
514,444 |
|
|
|
|
|
|
|
|
INCREASE IN CASH AND CASH EQUIVALENTS |
|
|
23,882 |
|
|
|
32,213 |
|
CASH AND CASH EQUIVALENTS, beginning of period |
|
|
112,709 |
|
|
|
22,477 |
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of period |
|
$ |
136,591 |
|
|
$ |
54,690 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
MetroPCS Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)
1. Basis of Presentation:
The accompanying unaudited condensed consolidated interim financial statements include the
balances and results of operations of MetroPCS Communications, Inc. (MetroPCS) and its
consolidated subsidiaries (the Company). MetroPCS indirectly owns, through its wholly-owned
subsidiaries, 85% of the limited liability company member interest in Royal Street Communications,
LLC (Royal Street Communications). 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, because Royal Street is a variable interest entity and the Company
will absorb all of Royal Streets expected losses. All intercompany accounts and transactions
between the Company and Royal Street have been eliminated in the consolidated financial statements.
The redeemable minority interest in Royal Street is included in long-term liabilities. The
condensed consolidated interim balance sheets as of June 30, 2006 and December 31, 2005, the
condensed consolidated interim statements of income and comprehensive income and cash flows for the
periods ended June 30, 2006 and 2005, and the related footnotes are prepared in accordance with
accounting principles generally accepted in the United States of America (GAAP).
The unaudited condensed consolidated interim financial statements included herein reflect all
adjustments (consisting of normal, recurring adjustments) which are, in the opinion of management,
necessary to state fairly the results for the interim periods presented. The results of operations
for the interim periods presented are not necessarily indicative of the operating results to be
expected for any subsequent interim period or for the fiscal year.
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from
those estimates.
On March 14, 2007, the Companys board of directors approved a 3 for 1 stock split 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. Unless otherwise indicated, all share
numbers and per share prices included in the accompanying unaudited condensed consolidated interim
financial statements give effect to the stock split.
In accordance with Statement of Financial Accounting Standards (SFAS) No. 123(R),
Share-Based Payment, (SFAS No. 123(R)), the Company has recognized stock-based compensation
expense in an amount equal to the fair value of share-based payments, which includes stock options
granted to employees. SFAS No. 123(R) replaces SFAS No. 123, Accounting for Stock-Based
Compensation, (SFAS No. 123) and supersedes Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and its related interpretations (APB No. 25). The
Company adopted SFAS No. 123(R) on January 1, 2006. Stock-based compensation expense recognized
under SFAS No. 123(R) was $2.2 million and $4.0 million for the three and six months ended June 30,
2006, respectively.
2. Share-Based Payments:
Prior to the first quarter of 2006, the Company measured stock-based compensation expense for
its stock-based employee compensation plans using the intrinsic value method prescribed by APB No.
25, as allowed by SFAS No. 123.
Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS
No. 123(R) using the modified prospective transition method. Under that transition method,
compensation expense recognized beginning on that date includes: (a) compensation expense for all
share-based payments granted prior to, but not yet vested as of, January 1, 2006, based on the
grant-date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b)
compensation expense for all share-based payments granted on or after January 1, 2006, based on the
grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R). Although
there was no material impact on the Companys financial position, results of operations or cash
flows from the adoption of SFAS No. 123(R), the Company reclassified all deferred equity
compensation on the consolidated balance sheet to additional paid-in capital upon its adoption. The
period prior to the adoption of SFAS No. 123(R) does not reflect any restated amounts.
MetroPCS has two stock option plans (the Option Plans) under which it grants options to
purchase common stock of MetroPCS: the Second Amended and Restated 1995 Stock Option Plan, as
amended (1995 Plan), and the Amended and
4
MetroPCS Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)
Restated 2004 Equity Incentive Compensation Plan, as amended (2004 Plan). The 1995 Plan was
terminated in November 2005 and no further awards can be made under the 1995 Plan, but all options
granted before November 2005 will remain valid in accordance with their original terms. As of June
30, 2006, the maximum number of shares reserved for the 2004 Plan was 14,100,000 shares. In
December 2006, the 2004 Plan was amended to increase the number of shares of common stock reserved
for issuance under the plan from 14,100,000 to a total of 18,600,000 shares. In February 2007, the
2004 Plan was amended to increase the number of shares of common stock reserved for issuance under
the plan from 18,600,000 to a total of 40,500,000 shares. Vesting periods and terms for stock
option grants are determined by the plan administrator, which is MetroPCS Board of Directors for
the 1995 Plan and the Compensation Committee of the Board of Directors of MetroPCS for the 2004
Plan. No option granted under the 1995 Plan have a term in excess of fifteen years and no option
granted under the 2004 Plan shall have a term in excess of ten years. Options granted during the
three and six months ended June 30, 2006 and 2005 have a vesting period of three to four years.
Options granted under the 1995 Plan are exercisable upon grant. Shares received upon
exercising options prior to vesting are restricted from sale based on a vesting schedule. In the
event an option holders service with the Company is terminated, MetroPCS may repurchase unvested
shares issued under the 1995 Plan at the option exercise price. Options granted under the 2004
Plan are only exercisable upon vesting. Upon exercise of options under the Option Plans, new shares
of common stock are issued to the option holder.
The value of the options is determined by using a Black-Scholes pricing model that includes
the following variables: 1) exercise price of the instrument, 2) fair market value of the
underlying stock on date of grant, 3) expected life, 4) estimated volatility and 5) the risk-free
interest rate. The Company utilized the following weighted-average assumptions in estimating the
fair value of the options grants in the three and six months ended June 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected dividends |
|
|
0.00 |
% |
|
|
|
|
|
|
0.00 |
% |
|
|
0.00 |
% |
Expected volatility |
|
|
45.00 |
% |
|
|
|
|
|
|
45.00 |
% |
|
|
50.00 |
% |
Risk-free interest rate |
|
|
5.23 |
% |
|
|
|
|
|
|
4.77 |
% |
|
|
4.13 |
% |
Expected lives in years |
|
|
5.00 |
|
|
|
|
|
|
|
5.00 |
|
|
|
5.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average fair value of options: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted at fair value |
|
$ |
3.50 |
|
|
$ |
|
|
|
$ |
3.30 |
|
|
$ |
3.04 |
|
Weighted-average exercise price of options: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted at fair value |
|
$ |
7.54 |
|
|
$ |
|
|
|
$ |
7.21 |
|
|
$ |
6.31 |
|
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. The Company did not grant
any stock options during the three months ended June 30, 2005.
5
MetroPCS Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)
A summary of the status of the Companys Option Plans as of June 30, 2006 and 2005, and
changes during the periods then ended, is presented in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, |
|
|
2006 |
|
2005 |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
|
|
|
Average |
|
|
|
|
|
|
Exercise |
|
|
|
|
|
Exercise |
|
|
Shares |
|
Price |
|
Shares |
|
Price |
Outstanding, beginning of period |
|
|
14,502,210 |
|
|
$ |
4.18 |
|
|
|
32,448,855 |
|
|
$ |
0.92 |
|
Granted |
|
|
3,404,514 |
|
|
$ |
7.21 |
|
|
|
60,000 |
|
|
$ |
6.31 |
|
Exercised |
|
|
(168,105 |
) |
|
$ |
2.03 |
|
|
|
(45,855 |
) |
|
$ |
1.57 |
|
Forfeited |
|
|
(843,570 |
) |
|
$ |
3.30 |
|
|
|
(696,357 |
) |
|
$ |
4.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of period |
|
|
16,895,049 |
|
|
$ |
4.86 |
|
|
|
31,766,643 |
|
|
$ |
0.86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at period-end |
|
|
10,924,245 |
|
|
$ |
3.58 |
|
|
|
31,766,643 |
|
|
$ |
0.86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested at period-end |
|
|
8,070,396 |
|
|
|
|
|
|
|
28,256,484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about stock options outstanding at June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
Options Vested |
|
|
|
|
|
|
Weighted |
|
Weighted |
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
Average |
|
|
|
|
|
Average |
|
|
Number of |
|
Contractual |
|
Exercise |
|
Number of |
|
Exercise |
Exercise Price |
|
Shares |
|
Life (Years) |
|
Price |
|
Shares |
|
Price |
$0.08 $0.33 |
|
|
851,991 |
|
|
|
6.43 |
|
|
$ |
0.12 |
|
|
|
851,991 |
|
|
$ |
0.12 |
|
$1.57 $1.57 |
|
|
4,143,936 |
|
|
|
5.32 |
|
|
$ |
1.57 |
|
|
|
4,037,784 |
|
|
$ |
1.57 |
|
$1.80 $6.31 |
|
|
3,054,999 |
|
|
|
7.41 |
|
|
$ |
3.95 |
|
|
|
1,634,706 |
|
|
$ |
3.66 |
|
$6.67 $7.54 |
|
|
8,844,123 |
|
|
|
9.39 |
|
|
$ |
7.17 |
|
|
|
1,545,915 |
|
|
$ |
7.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,895,049 |
|
|
|
|
|
|
|
|
|
|
|
8,070,396 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In October 2005, Madison Dearborn Capital Partners and TA Associates consummated a tender
offer in which they purchased from existing stockholders shares of Series D Preferred Stock and
common stock in MetroPCS. In connection with this transaction, 22,102,287 options granted under
the Option Plans were exercised for 22,102,287 shares of common stock, resulting in a significant
decrease in options exercisable as of June 30, 2006 compared to options exercisable as of June 30,
2005.
During the three and six months ended June 30, 2005, 2,355 and 45,855 options granted under
the Option Plans were exercised for 2,355 and 45,855 shares of common stock, respectively. The
intrinsic value of these options was approximately $0 million and $0.2 million and total proceeds
were approximately $0 million and $0.1 million, respectively. During the three and six months ended
June 30, 2006, 1,422 and 168,105 options granted under the Option Plans were exercised for 1,422
and 168,105 shares of common stock, respectively. The intrinsic value of these options was
approximately $0 million and $0.9 million and total proceeds were approximately $0 million and $0.3
million for three and six months ended June 30, 2006, respectively.
As of June 30, 2006, options outstanding and exercisable under the Option Plans have a
weighted average remaining contractual life of 7.89 and 6.99 years, respectively.
6
MetroPCS Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)
The following table summarizes information about unvested stock option grants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average Grant- |
Stock Option Grants |
|
Shares |
|
Date Fair Value |
Unvested balance, January 1, 2006 |
|
|
7,582,659 |
|
|
$ |
3.00 |
|
Grants |
|
|
3,404,514 |
|
|
$ |
3.30 |
|
Vested shares |
|
|
(1,858,455 |
) |
|
$ |
2.81 |
|
Forfeitures |
|
|
(304,065 |
) |
|
$ |
2.98 |
|
|
|
|
|
|
|
|
|
|
Unvested balance, June 30, 2006 |
|
|
8,824,653 |
|
|
$ |
3.16 |
|
|
|
|
|
|
|
|
|
|
The Company determines fair value of stock option grants as the share price of the Companys
stock at grant-date. The weighted average grant-date fair value of the stock option grants for the
three months ended June 30, 2006 is $3.50. The weighted average grant-date fair value of the stock
option grants for the six months ended June 30, 2006 and 2005 is $3.30 and $3.04, respectively. The
weighted average exercise price of the stock options granted during the three months ended June 30,
2006 is $7.54. The weighted average exercise price of the stock options granted during the six
months ended June 30, 2006 and 2005 is $7.21 and $6.31, respectively.
The Company has recorded $2.2 million and $2.1 million of non-cash stock-based compensation
expense in the three months ended June 30, 2006 and 2005, respectively, and an income tax benefit
of approximately $0.9 million and $0.8 million, respectively. The Company has recorded $4.0
million and $3.0 million of non-cash stock compensation expense in the six months ended June 30,
2006 and 2005, respectively, and an income tax benefit of $1.6 million and $1.2 million,
respectively.
As of June 30, 2006, there was approximately $28.2 million of unrecognized compensation cost
related to unvested share-based compensation arrangements, which is expected to be recognized over
a weighted average period of approximately 1.55 years. Such costs were originally scheduled to be
recognized as follows: $5.8 million in the remainder of 2006, $9.5 million in 2007, $8.0 million in
2008, $4.2 million in 2009 and $0.7 million in 2010.
The total aggregate intrinsic value of stock options outstanding and exercisable as of June
30, 2006 was approximately $64.4 million and $55.5 million, respectively. The total fair value of
stock options that vested during the three months ended June 30, 2006 and 2005 was $2.2 million and
$1.1 million, respectively. The total fair value of stock options that vested during the six
months ended June 30, 2006 and 2005 was $5.2 million and $2.5 million, respectively.
The following table illustrates the effect on net income applicable to common stock (in
thousands, except per share data) as if the Company had elected to recognize compensation costs
based on the fair value at the date of grant for the Companys common stock awards consistent with
the provisions of SFAS No. 123:
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Six Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
June 30, 2005 |
|
|
June 30, 2005 |
|
|
Net income applicable to Common Stockas reported |
|
$ |
131,127 |
|
|
$ |
148,628 |
|
Add: Amortization of deferred compensation determined
under the intrinsic method for employee stock awards,
net of tax |
|
|
1,260 |
|
|
|
1,779 |
|
Less: Total stock-based employee compensation expense
determined under the fair value method for employee
stock awards, net of tax |
|
|
(604 |
) |
|
|
(1,166 |
) |
|
|
|
|
|
|
|
|
Net income applicable to Common Stockpro forma |
|
$ |
131,783 |
|
|
$ |
149,241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per common share: |
|
|
|
|
|
|
|
|
As reported |
|
$ |
0.54 |
|
|
$ |
0.61 |
|
|
|
|
|
|
|
|
Pro forma |
|
$ |
0.54 |
|
|
$ |
0.62 |
|
|
|
|
|
|
|
|
Diluted net income per common share: |
|
|
|
|
|
|
|
|
As reported |
|
$ |
0.46 |
|
|
$ |
0.53 |
|
|
|
|
|
|
|
|
Pro forma |
|
$ |
0.47 |
|
|
$ |
0.53 |
|
|
|
|
|
|
|
|
7
MetroPCS Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)
During the six month period ended June 30, 2006, the following awards were granted under the Companys Option Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
Weighted |
|
Weighted |
|
|
Number of |
|
Average |
|
Average |
|
Average |
|
|
Options |
|
Exercise |
|
Market Value |
|
Intrinsic Value |
Grants Made During the Quarter Ended |
|
Granted |
|
Price |
|
per Share |
|
per Share |
|
March 31, 2006 |
|
|
2,869,989 |
|
|
$ |
7.15 |
|
|
$ |
7.15 |
|
|
$ |
0.00 |
|
June 30, 2006 |
|
|
534,525 |
|
|
$ |
7.54 |
|
|
$ |
7.54 |
|
|
$ |
0.00 |
|
Compensation expense is recognized over the requisite service period for the entire
award, which is generally the maximum vesting period of the award.
The fair value of the common stock was determined contemporaneously with the option grants.
In December 2006, the Company amended stock option agreements of a former member of MetroPCS
Board of Directors to extend the contractual life of 405,054 vested common stock options until
December 31, 2006. This amendment will result in the recognition of additional non-cash stock-based
compensation expense of approximately $4.1 million in the fourth quarter of 2006.
In December 2006, in recognition of efforts related to the Companys pending initial public
offering and to align executive ownership with the Company, the Company made a special stock option
grant to its named executive officers and certain other eligible employees. The Company granted
stock options to purchase an aggregate of 6,885,000 shares of the Companys common stock to its
named executive officers and certain other officers and employees. The purpose of the grant was
also to provide retention of employees following the Companys initial public offering as well as
to motivate employees to return value to the Companys shareholders through future appreciation of
the Companys common stock price. The exercise price for the option grants is $11.33, which is the
fair market value of the Companys common stock on the date of the grant as determined by the
Companys board of directors. In determining the fair market value of the common stock,
consideration is given to the recommendations 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. The stock
options granted to the named executive officers other than the Companys CEO and senior vice
president and chief technology officer will generally vest on a four-year vesting schedule with 25%
vesting on the first anniversary date of the award and the remainder pro-rata on a monthly basis
thereafter. The stock options granted to the Companys CEO will vest on a three-year vesting
schedule with one-third vesting on the first anniversary date of the award and the remainder
pro-rata on a monthly basis thereafter. The stock options granted to the Companys senior vice
president and chief technology officer will vest over a two-year vesting schedule with one-half
vesting on the first anniversary of the award and the remainder pro-rata on a monthly basis
thereafter.
3. Property and Equipment:
Property and equipment, net, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Construction-in-progress |
|
$ |
173,448 |
|
|
$ |
98,078 |
|
Network infrastructure |
|
|
1,134,254 |
|
|
|
905,924 |
|
Office equipment |
|
|
24,508 |
|
|
|
17,059 |
|
Leasehold improvements |
|
|
20,194 |
|
|
|
16,608 |
|
Furniture and fixtures |
|
|
5,590 |
|
|
|
4,000 |
|
Vehicles |
|
|
145 |
|
|
|
118 |
|
|
|
|
|
|
|
|
|
|
|
1,358,139 |
|
|
|
1,041,787 |
|
Accumulated depreciation |
|
|
(266,727 |
) |
|
|
(210,297 |
) |
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
1,091,412 |
|
|
$ |
831,490 |
|
|
|
|
|
|
|
|
8
MetroPCS Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)
4. Accounts Payable and Accrued Expenses:
Accounts payable and accrued expenses consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Accounts payable |
|
$ |
44,986 |
|
|
$ |
29,430 |
|
Book overdraft |
|
|
37,637 |
|
|
|
9,920 |
|
Accrued accounts payable |
|
|
100,323 |
|
|
|
69,611 |
|
Accrued liabilities |
|
|
8,233 |
|
|
|
7,590 |
|
Payroll and employee benefits |
|
|
11,692 |
|
|
|
12,808 |
|
Accrued interest |
|
|
23,801 |
|
|
|
17,578 |
|
Taxes, other than income |
|
|
36,089 |
|
|
|
23,211 |
|
Income taxes |
|
|
3,373 |
|
|
|
4,072 |
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
$ |
266,134 |
|
|
$ |
174,220 |
|
|
|
|
|
|
|
|
5. Long-Term Debt:
Long-term debt consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Microwave relocation obligations |
|
$ |
435 |
|
|
$ |
2,690 |
|
Credit Agreements |
|
|
900,000 |
|
|
|
900,000 |
|
|
|
|
|
|
|
|
Total long-term debt |
|
|
900,435 |
|
|
|
902,690 |
|
Add: unamortized premium on debt |
|
|
2,687 |
|
|
|
2,864 |
|
|
|
|
|
|
|
|
Total debt |
|
|
903,122 |
|
|
|
905,554 |
|
Less: current maturities |
|
|
(435 |
) |
|
|
(2,690 |
) |
|
|
|
|
|
|
|
Total long-term debt |
|
$ |
902,687 |
|
|
$ |
902,864 |
|
|
|
|
|
|
|
|
Bridge Credit Agreement
In February 2005, MetroPCS Wireless, Inc. (Wireless) entered into a secured bridge credit
facility, dated as of February 22, 2005, as amended (Bridge Credit Agreement). The aggregate
credit commitments available under the Bridge Credit Agreement totaled $540.0 million. The lenders
funded $240.0 million and $300.0 million under the Bridge Credit Agreement in February 2005 and
March 2005, respectively.
The Bridge Credit Agreement provided that all borrowings were senior secured obligations of
Wireless and were guaranteed on a senior secured basis by MetroPCS, Inc. and its wholly-owned
subsidiaries (other than Wireless). The obligations under the Bridge Credit Agreement were secured
by security interests in substantially all of the assets of MetroPCS, Inc. and its wholly-owned
subsidiaries, including capital stock, except as prohibited by law and certain permitted
exceptions, as more fully described in the Security Agreement and the Pledge Agreement both dated
as of February 22, 2005, as amended.
In May 2005, Wireless repaid the aggregate outstanding principal balance under the Bridge
Credit Agreement of $540.0 million and accrued interest of $8.7 million. As a result, Wireless
recorded a loss on extinguishment of debt in the amount of approximately $10.4 million.
FCC Debt
On March 2, 2005, in connection with the sale of a 10 MHz portion of a 30 MHz PCS license in
the San Francisco-Oakland-San Jose, California basic trading area, the Company repaid the
outstanding principal balance of $12.2 million in debt payable to the FCC. This debt was incurred
in connection with the original acquisition of the 30 MHz PCS license for the San
Francisco-Oakland-San Jose basic trading area. The repayment resulted in a loss on extinguishment
of debt of $0.9 million.
9
MetroPCS Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)
On May 31, 2005, the Company repaid the remaining outstanding principal balance of $15.7
million in debt payable to the FCC. This debt was incurred in connection with the Companys
original PCS licenses acquired by the Company in the FCC auction in May 1996. The repayment
resulted in a loss on extinguishment of debt of approximately $1.0 million.
$150 Million 103/4% Senior Notes
On September 29, 2003, MetroPCS, Inc. completed the sale of $150.0 million of 103/4% Senior
Notes due 2011 (the 103/4% Senior Notes). MetroPCS, Inc. was subject to certain covenants set forth
in the indenture governing the 103/4% Senior Notes. On November 3, 2004, MetroPCS, Inc. received and
accepted consents from the holders of a majority of its 103/4% Senior Notes to a limited waiver, for
up to 180 days, of any default or event of default arising from a failure of the Company to comply
with a reporting covenant in the 103/4% Senior Notes. Accordingly, the reporting covenant was waived
until the close of business on May 2, 2005.
On May 10, 2005, holders of all of the 103/4% Senior Notes tendered their 103/4% Senior Notes in
response to MetroPCS, Inc.s cash tender offer and consent solicitation. As a result, MetroPCS,
Inc. executed a supplemental indenture governing the 103/4% Senior Notes to eliminate substantially
all of the restrictive covenants and event of default provisions in the indenture, to amend other
provisions of the indenture, and to waive any and all defaults and events of default that may have
existed under the indenture. On May 31, 2005, MetroPCS, Inc. purchased all of its outstanding 103/4%
Senior Notes in the tender offer. MetroPCS, Inc. paid the holders of the 103/4% Senior Notes $178.9 million plus accrued
interest of $2.7 million in the tender offer, resulting in a loss on extinguishment of debt of
$34.0 million.
First and Second Lien Credit Agreements
On May 31, 2005, MetroPCS, Inc. and Wireless, both wholly-owned subsidiaries of MetroPCS,
entered into a First Lien Credit Agreement, maturing May 31, 2011, and a Second Lien Credit
Agreement, maturing May 31, 2012 (collectively, the Credit Agreements), which provided for total
borrowings of up to $900.0 million. MetroPCS, Inc. and its wholly-owned subsidiaries also entered
into Guarantee and Collateral Agreements, dated as of May 31, 2005, in connection with the Credit
Agreements, in which the lenders hold a security interest in substantially all property, including
capital stock, now owned or at any time acquired by MetroPCS, Inc. and its wholly-owned
subsidiaries, except for certain permitted exceptions or as prohibited by law. Royal Street did not
enter into any Guarantee and Collateral Agreements in connection with the Credit Agreements,
however, MetroPCS pledged the intercompany promissory note that Royal Street Communications has given the Company
in connection with amounts borrowed by Royal Street Communications from Wireless as collateral. On May 31, 2005,
Wireless borrowed $500.0 million under the First Lien Credit Agreement and $250.0 million under the
Second Lien Credit Agreement.
On December 19, 2005, Wireless entered into amendments to the Credit Agreements and borrowed
an additional $50.0 million under the First Lien Credit Agreement and an additional $100.0 million
under the Second Lien Credit Agreement. Under the amendments to the Credit Agreements the total
amount available under the First Lien Credit Agreement increased by $330.0 million and the total
amount available under the Second Lien Credit Agreement increased by $220.0 million, for a total
increase in the amounts available under the Credit Agreements of $550.0 million.
Interest Rate Cap Agreement
On June 27, 2005, Wireless entered into a three-year interest rate cap agreement, as required
by its Credit Agreements, to mitigate the impact of interest rate changes on 50% of the aggregate
debt outstanding thereunder. This financial instrument is being accounted for in accordance with
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, (SFAS No. 133).
SFAS No. 133 addresses the accounting for financial instruments that are designated as cash flow
hedges and the effective portion of the change in value of the financial instrument is reported as
a component of the Companys other comprehensive income and reclassified into earnings in the same
periods during which the hedged transaction affects earnings. Comprehensive income is comprised of
net income and includes the impact of a deferred gain on the change in the fair value of the
financial instrument. Wireless paid $1.9 million upon execution of the agreement and the financial
instrument is reported in other current assets and long-term investments at fair market value,
which was $7.1 million and $5.1 million as of June 30, 2006 and December 31, 2005, respectively.
The change in fair value is reported in accumulated other comprehensive income on the condensed
consolidated interim balance sheets, net of income taxes.
10
MetroPCS Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)
6. Asset Retirement Obligations:
The Company accounts for asset retirement obligations as determined by SFAS No. 143,
Accounting for Asset Retirement Obligations, (SFAS No. 143) and FASB Interpretation No. 47,
Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No.
143, (FIN No. 47). SFAS No. 143 and FIN No. 47 address financial accounting and reporting for
legal obligations associated with the retirement of tangible long-lived assets and the related
asset retirement costs. SFAS No. 143 requires that companies recognize the fair value of a
liability for an asset retirement obligation in the period in which it is incurred. When the
liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of
the related long-lived asset. Over time, the liability is accreted to its present value each
period, and the capitalized cost is depreciated over the estimated useful life of the related
asset. Upon settlement of the liability, an entity either settles the obligation for its recorded
amount or incurs a gain or loss upon settlement.
The Company is subject to asset retirement obligations associated with its cell site operating
leases, which are subject to the provisions of SFAS No. 143 and FIN No. 47. Cell site lease
agreements may contain clauses requiring restoration of the leased site at the end of the lease
term to its original condition, creating an asset retirement obligation. This liability is
classified under other long-term liabilities. Landlords may choose not to exercise these rights as
cell sites are considered useful improvements. In addition to cell site operating leases, the
Company has leases related to switch site, retail, and administrative locations subject to the
provisions of SFAS No. 143 and FIN No. 47.
The following table summarizes the Companys asset retirement obligation transactions (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Beginning asset retirement obligations |
|
$ |
3,522 |
|
|
$ |
1,893 |
|
Liabilities incurred |
|
|
725 |
|
|
|
1,206 |
|
Accretion expense |
|
|
298 |
|
|
|
423 |
|
|
|
|
|
|
|
|
Ending asset retirement obligations |
|
$ |
4,545 |
|
|
$ |
3,522 |
|
|
|
|
|
|
|
|
7. Income Taxes:
The Company records income taxes pursuant to SFAS No. 109, Accounting for Income Taxes,
(SFAS No. 109). SFAS No. 109 uses an asset and liability approach to account for income taxes,
wherein deferred taxes are provided for book and tax basis differences for assets and liabilities.
In the event differences between the financial reporting basis and the tax basis of the Companys
assets and liabilities result in deferred tax assets, a valuation allowance is provided for a
portion or all of the deferred tax assets when there is sufficient uncertainty regarding the
Companys ability to recognize the benefits of the assets in future years.
Income before provision for income taxes for the six months ended June 30, 2005 included a
gain on the sale of a 10 MHz portion of the Companys 30 MHz PCS license in the San
Francisco-Oakland-San Jose basic trading area in the amount of $228.2 million. At December 31, 2005, the Company has approximately $228.7 million and $102.5
million of net operating loss carryforwards for federal and state income tax purposes,
respectively. The federal net operating loss will begin expiring in 2023. The state net operating
losses will begin to expire in 2013. The Company has been able to take advantage of accelerated
depreciation and like kind exchange gain deferral available under federal tax law, which has
created a significant deferred tax liability. The reversal of the timing differences which gave
rise to the deferred tax liability, future taxable income and future tax planning strategies will
allow the Company to benefit from the deferred tax assets. The Company has a valuation allowance of
$0.2 million and $0.2 million as of June 30, 2006 and December 31, 2005, relating primarily to
state net operating losses.
On May 18, 2006, the Texas Governor signed into law a Texas margin tax (H.B. No. 3) which
restructures the state business tax by replacing the taxable capital and earned surplus components
of the current franchise tax with a new taxable margin component. Because the tax base on the
Texas margin tax is derived from an income-based measure, the Company believes the margin tax is an
income tax and, therefore, the provisions of SFAS No. 109 regarding the recognition of deferred
taxes apply to the new margin tax. In accordance with SFAS No. 109, the effect on deferred tax
assets of a change in tax law should be included in tax expense attributable to continuing
operations in the period that includes the enactment date. Although the effective date of H.B. No.
3 is January 1, 2008, certain effects of the change should be reflected in the financial statements
of the first interim or annual reporting period that includes May 18, 2006. The Company has
determined that H.B. No. 3 did not have a material impact on the Companys financial condition or
results of operations.
11
MetroPCS Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)
Internal Revenue Service Audit
The Internal Revenue Service (the IRS) commenced an audit of MetroPCS 2002 and 2003 federal
income tax returns in March 2005. In October 2005 the IRS issued a 30-day letter which primarily
related to depreciation expense claimed on the returns under audit. The Company filed an appeal of
the auditors assessments in November 2005. The IRS appeals officer made the Company an offer to
settle all issues in July 2006. The expected net result of the settlement offer should create an
increase to 2002 taxable income of $3.9 million and an increase to the 2003 net operating loss of
$0.5 million. The increase to 2002 taxable income would be offset by net operating loss carryback
from 2003. The Company owes additional interest on the 2002 deferred taxes of approximately $0.1
million, but no additional tax or penalty. In addition, the IRS Joint Committee concluded its
review of the audit and issued a closing letter dated September 5, 2006.
8. Stockholders Equity:
Common Stock Issued to Directors
Non-employee members of MetroPCS Board of Directors receive compensation for serving on the
Board of Directors, as defined in MetroPCS Non-Employee Director Remuneration Plan. The annual
retainer provided under the Non-Employee Director Remuneration Plan may be paid, at the election of
each non-employee director, in cash, common stock, or a combination of cash and common stock.
During the six months ended June 30, 2006, non-employee members of the Board of Directors were
issued 43,845 shares of common stock as payment of their annual retainer.
9. Net Income Per Common Share:
The following table sets forth the computation of basic and diluted net income per common
share for the periods indicated (in thousands, except share and per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Basic EPSTwo Class Method: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
22,989 |
|
|
$ |
136,482 |
|
|
$ |
41,359 |
|
|
$ |
159,281 |
|
Accrued dividends and accretion: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series D Preferred Stock |
|
|
(5,355 |
) |
|
|
(5,355 |
) |
|
|
(10,653 |
) |
|
|
(10,653 |
) |
Series E Preferred Stock |
|
|
(833 |
) |
|
|
|
|
|
|
(1,658 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common stock |
|
$ |
16,801 |
|
|
$ |
131,127 |
|
|
$ |
29,048 |
|
|
$ |
148,628 |
|
Amount allocable to common shareholders |
|
|
57.1 |
% |
|
|
53.8 |
% |
|
|
57.0 |
% |
|
|
53.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Rights to undistributed earnings |
|
$ |
9,586 |
|
|
$ |
70,602 |
|
|
$ |
16,559 |
|
|
$ |
80,024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstandingbasic |
|
|
155,829,673 |
|
|
|
130,339,496 |
|
|
|
155,503,804 |
|
|
|
130,333,712 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common sharebasic |
|
$ |
0.06 |
|
|
$ |
0.54 |
|
|
$ |
0.11 |
|
|
$ |
0.61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rights to undistributed earnings |
|
$ |
9,586 |
|
|
$ |
70,602 |
|
|
$ |
16,559 |
|
|
$ |
80,024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstandingbasic |
|
|
155,829,673 |
|
|
|
130,339,496 |
|
|
|
155,503,804 |
|
|
|
130,333,712 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants |
|
|
69,488 |
|
|
|
3,216,678 |
|
|
|
296,952 |
|
|
|
3,215,634 |
|
Stock options |
|
|
3,450,985 |
|
|
|
18,401,527 |
|
|
|
3,517,533 |
|
|
|
18,378,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstandingdiluted |
|
|
159,350,145 |
|
|
|
151,957,701 |
|
|
|
159,318,289 |
|
|
|
151,927,946 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common sharediluted |
|
$ |
0.06 |
|
|
$ |
0.46 |
|
|
$ |
0.10 |
|
|
$ |
0.53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share is computed in accordance with EITF
03-6,Participating Securities and the Two-Class Method under FASB Statement No. 128 (EITF
03-6). Under EITF 03-6, the preferred stock is considered a participating security for purposes
of computing earnings or loss per common share and, therefore, the preferred stock is included in
the computation of basic and diluted net income (loss) per common share using the two-class method,
except during periods of net losses. When determining basic earnings per common share under EITF
03-6, undistributed earnings for a period are allocated to a participating security based on the
contractual participation rights of the security to share in those earnings as if all of the
earnings for the period had been distributed.
12
MetroPCS Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)
For the three months ended June 30, 2006 and 2005, 137.7 million and 131.0 million,
respectively, of convertible shares of Series D Preferred Stock were excluded from the calculation
of diluted net income per common share since the effect was anti-dilutive. For the six months
ended June 30, 2006 and 2005, 136.1 million and 129.4 million, respectively, of convertible shares
of Series D Preferred Stock were excluded from the calculation of diluted net income per common
share since the effect was anti-dilutive.
For the three months ended June 30, 2006, 5.8 million of convertible shares of Series E
Preferred Stock were excluded from the calculation of diluted net income per common share since the
effect was anti-dilutive. For the six months ended June 30, 2006, 5.7 million of convertible
shares of Series E Preferred Stock were excluded from the calculation of diluted net income per
common share since the effect was anti-dilutive.
10. Commitments and Contingencies:
The Company has entered into pricing agreements with various handset manufacturers for the
purchase of wireless handsets at specified prices. The terms of these agreements expire on various
dates during the year ending December 31, 2007. In addition, the Company entered into an agreement
with a handset manufacturer for the purchase of 475,000 handsets at a specified price by September
30, 2007.
EV-DO Revision A
The Company acquired spectrum in two of its markets during 2005 subject to certain
expectations communicated to the United States Department of Justice (the DOJ) about how it would
use such spectrum. As a result of a delay in the availability of EV-DO Revision A with VoIP, the
Company has redeployed EV-DO network assets at certain cell sites in those markets in order to
serve its existing customers. There have been no asserted claims or assessments to date and
accordingly, no liability was recorded as of June 30, 2006.
Litigation
The Company is involved in various claims and legal actions arising in the ordinary course of
business. The ultimate disposition of these matters is not expected to have a material adverse
impact on the Companys financial position, results of operations or liquidity.
The Company is involved in various claims and legal actions in relation to claims of patent
infringement. The ultimate disposition of these matters is not expected to have a material adverse
impact on the Companys financial position, results of operations or liquidity.
Rescission Offer
Certain options granted under the Companys 1995 Stock Option Plan and 2004 Equity Incentive
Plan may not have been exempt from registration or qualification under federal securities laws and
the securities laws of certain states. As a result, the Company is considering making a rescission
offer to the holders of certain options. If this rescission offer is made and accepted, the Company
could be required to make aggregate payments to the holders of these options of up to $2.6 million,
which includes statutory interest, based on options outstanding as of December 31, 2006. Federal
securities laws do not provide that a rescission offer will terminate a purchasers right to
rescind a sale of a security that was not registered as required. If any or all of the offerees
reject the rescission offer, the Company may continue to be liable for this amount under federal
and state securities laws. Management does not believe that this rescission offer will have a
material effect on the Companys results of operations, cash flows or financial position.
AWS Licenses Acquired in Auction 66
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 licensees benefiting
from the relocation. The FCC has established a plan where the AWS 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 where the AWS licensee can force the incumbent
non-governmental licensee to
13
MetroPCS Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)
relocate at the AWS licensees expense. The spectrum allocated for AWS currently is utilized
also by governmental users. The FCC rules provide that a portion of the money raised in Auction 66
will be used to reimburse the relocation costs of governmental users from the AWS band. However,
not all governmental users are obligated to relocate. The Company may incur costs to relocate the
incumbent licensees in the areas where it was granted licenses in Auction 66.
11. Supplemental Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
Six Months |
|
|
Ended June 30, |
|
|
2006 |
|
2005 |
|
|
(in thousands) |
Cash paid for interest |
|
$ |
23,643 |
|
|
$ |
17,886 |
|
Cash paid for income taxes |
|
|
525 |
|
|
|
|
|
Non-cash investing activities:
Net changes in the Companys accrued purchases of property, plant and equipment were $24.6
million and $21.9 million for the six months ended June 30, 2006 and 2005, respectively.
See Note 6 for the non-cash increase in the Companys asset retirement obligations.
Non-cash financing activities:
MetroPCS accrued dividends of $10.4 million and the $10.4 million related to the Series D
Preferred Stock for the six months ended June 30, 2006 and 2005, respectively.
MetroPCS accrued dividends of $1.5 million related to the Series E Preferred Stock for the six
months ended June 30, 2006.
12. Related-Party Transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Professional
services to a law
firm, a partner of
which was a
director of the
Company |
|
$ |
29 |
|
|
$ |
43 |
|
|
$ |
30 |
|
|
$ |
142 |
|
Professional
services to a law
firm, a partner of
which is related to
an officer of the
Company |
|
|
8 |
|
|
|
707 |
|
|
|
16 |
|
|
|
927 |
|
One of the Companys current directors is a general partner of various investment funds
affiliated with one of the Companys greater than 5% stockholders. These funds own in the aggregate
an approximate 17% interest in a company that provides services to the Companys customers,
including handset insurance programs and roadside assistance services. Pursuant to the Companys
agreement with this related party, the Company bills its customers directly for these services and
remits the fees collected from its customers for these services to the related party. During the
three months ended June 30, 2006 and 2005, the Company received a fee of approximately $0.6 million
and $0.6 million, respectively, as compensation for providing this billing and collection service.
During the six months ended June 30, 2006 and 2005, the Company received a fee of approximately
$1.1 million and $1.3 million, respectively, as compensation for providing this billing and
collection service. In addition, the Company also sells handsets to this related party. For the
three months ended June 30, 2006 and 2005, the Company sold approximately $3.5 million and $3.2
million in handsets, respectively, to the related party. For the six months ended June 30, 2006 and
2005, the Company sold approximately $6.7 million and $5.9 million in handsets, respectively, to
the related party. As of June 30, 2006 and December 31, 2005, the Company owed approximately $2.6 million and $2.1 million, respectively, to this related party for fees collected from its
customers that are included in accounts payable and accrued expenses on the accompanying
consolidated balance sheets. As of June 30, 2006 and December 31, 2005, receivables from this
related party in the amount of approximately $1.0 million and $0.7 million, respectively, are
included in accounts receivable.
14
MetroPCS Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)
13. Segment Information:
Operating segments are defined by SFAS No. 131 Disclosure About Segments of an Enterprise and
Related Information, (SFAS No. 131), as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief operating decision
maker in deciding how to allocate resources and in assessing performance. The Companys chief
operating decision maker is the Chairman of the Board and Chief Executive Officer.
At June 30, 2006, the Company had eight operating segments based on geographic region within
the United States: Atlanta, Dallas/Ft. Worth, Detroit, Miami, San Francisco, Sacramento,
Tampa/Sarasota/Orlando, and Los Angeles. Each of these operating segments provide wireless voice
and data services and products to customers in its service areas or is currently constructing a
network in order to provide these services. These services include unlimited local and long
distance calling, voicemail, caller ID, call waiting, text messaging, picture and multimedia
messaging, international long distance and text messaging, ringtones, games and content
applications, unlimited directory assistance, ring back tones, nationwide roaming and other
value-added services.
The Company aggregates its operating segments into two reportable segments: Core Markets and
Expansion Markets.
|
|
|
Core Markets, which include Atlanta, Miami, San Francisco, and Sacramento,
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 Dallas/Ft. Worth, Detroit,
Tampa/Sarasota/Orlando and Los Angeles, 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. |
The accounting policies of the operating segments are the same as those described in the
summary of significant accounting policies. General corporate overhead, which includes expenses
such as corporate employee labor costs, rent and utilities, legal, accounting and auditing
expenses, is allocated equally across all operating segments. Corporate marketing and advertising
expenses are allocated equally to the operating segments, beginning in the period during which the
Company launches service in that operating segment. Expenses associated with the Companys national
data center are allocated based on the average number of customers in each operating segment. There
are no transactions between reportable segments.
Interest expense, interest income, gain/loss on extinguishment of debt and income taxes are
not allocated to the segments in the computation of segment operating profit for internal
evaluation purposes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expansion |
|
|
|
|
Three Months Ended June 30, 2006 |
|
Core Markets |
|
Markets |
|
Other |
|
Total |
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenues |
|
$ |
281,143 |
|
|
$ |
26,700 |
|
|
$ |
|
|
|
$ |
307,843 |
|
Equipment revenues |
|
|
48,559 |
|
|
|
11,792 |
|
|
|
|
|
|
|
60,351 |
|
Total revenues |
|
|
329,703 |
|
|
|
38,492 |
|
|
|
|
|
|
|
368,194 |
|
Cost of
service (1) |
|
|
82,205 |
|
|
|
25,292 |
|
|
|
|
|
|
|
107,497 |
|
Cost of equipment |
|
|
82,716 |
|
|
|
29,289 |
|
|
|
|
|
|
|
112,005 |
|
Selling,
general and administrative
expenses (2) |
|
|
38,004 |
|
|
|
22,260 |
|
|
|
|
|
|
|
60,264 |
|
Adjusted EBITDA (deficit) (3) |
|
|
127,182 |
|
|
|
(36,596 |
) |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
26,664 |
|
|
|
4,944 |
|
|
|
708 |
|
|
|
32,316 |
|
Stock-based compensation expense |
|
|
405 |
|
|
|
1,753 |
|
|
|
|
|
|
|
2,158 |
|
Income (loss) from operations |
|
|
98,817 |
|
|
|
(44,010 |
) |
|
|
(708 |
) |
|
|
54,099 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
21,713 |
|
|
|
21,713 |
|
Accretion of put option in majority-owned subsidiary |
|
|
|
|
|
|
|
|
|
|
203 |
|
|
|
203 |
|
Interest and other income |
|
|
|
|
|
|
|
|
|
|
(6,147 |
) |
|
|
(6,147 |
) |
Loss on extinguishment of debt |
|
|
|
|
|
|
|
|
|
|
(27 |
) |
|
|
(27 |
) |
Income (loss) before provision for income taxes |
|
|
98,817 |
|
|
|
(44,010 |
) |
|
|
(16,450 |
) |
|
|
38,357 |
|
15
MetroPCS Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expansion |
|
|
|
|
Three Months Ended June 30, 2005 |
|
Core Markets |
|
Markets |
|
Other |
|
Total |
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenues |
|
$ |
212,697 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
212,697 |
|
Equipment revenues |
|
|
37,992 |
|
|
|
|
|
|
|
|
|
|
|
37,992 |
|
Total revenues |
|
|
250,689 |
|
|
|
|
|
|
|
|
|
|
|
250,689 |
|
Cost of service |
|
|
64,801 |
|
|
|
1,143 |
|
|
|
|
|
|
|
65,944 |
|
Cost of equipment |
|
|
65,287 |
|
|
|
|
|
|
|
|
|
|
|
65,287 |
|
Selling, general and administrative expenses |
|
|
38,380 |
|
|
|
962 |
|
|
|
|
|
|
|
39,342 |
|
Adjusted EBITDA (deficit) (3) |
|
|
84,321 |
|
|
|
(2,105 |
) |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
20,069 |
|
|
|
243 |
|
|
|
402 |
|
|
|
20,714 |
|
Stock-based compensation expense |
|
|
2,100 |
|
|
|
|
|
|
|
|
|
|
|
2,100 |
|
Income (loss) from operations |
|
|
58,857 |
|
|
|
(2,348 |
) |
|
|
227,794 |
|
|
|
284,303 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
15,761 |
|
|
|
15,761 |
|
Accretion of put option in majority-owned subsidiary |
|
|
|
|
|
|
|
|
|
|
63 |
|
|
|
63 |
|
Interest and other income |
|
|
|
|
|
|
|
|
|
|
(1,215 |
) |
|
|
(1,215 |
) |
Gain on extinguishment of debt |
|
|
|
|
|
|
|
|
|
|
45,581 |
|
|
|
45,581 |
|
Income (loss) before provision for income taxes |
|
|
58,857 |
|
|
|
(2,348 |
) |
|
|
167,604 |
|
|
|
224,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core |
|
Expansion |
|
|
|
|
Six Months Ended June 30, 2006 |
|
Markets |
|
Markets |
|
Other |
|
Total |
|
|
(in thousands) |
Service revenues |
|
$ |
545,741 |
|
|
$ |
37,519 |
|
|
$ |
|
|
|
$ |
583,260 |
|
Equipment revenues |
|
|
98,606 |
|
|
|
15,789 |
|
|
|
|
|
|
|
114,395 |
|
Total revenues |
|
|
644,347 |
|
|
|
53,308 |
|
|
|
|
|
|
|
697,655 |
|
Cost of service(1) |
|
|
161,137 |
|
|
|
38,850 |
|
|
|
|
|
|
|
199,987 |
|
Cost of equipment |
|
|
173,644 |
|
|
|
39,272 |
|
|
|
|
|
|
|
212,916 |
|
Selling, general and administrative expenses(2) |
|
|
75,480 |
|
|
|
36,221 |
|
|
|
|
|
|
|
111,701 |
|
Adjusted EBITDA (deficit)(3) |
|
|
236,302 |
|
|
|
(59,282 |
) |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
51,671 |
|
|
|
6,491 |
|
|
|
1,414 |
|
|
|
59,576 |
|
Stock-based compensation expense |
|
|
2,216 |
|
|
|
1,753 |
|
|
|
|
|
|
|
3,969 |
|
Income (loss) from operations |
|
|
170,390 |
|
|
|
(67,878 |
) |
|
|
(1,414 |
) |
|
|
101,098 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
42,597 |
|
|
|
42,597 |
|
Accretion of put option in majority-owned subsidiary |
|
|
|
|
|
|
|
|
|
|
360 |
|
|
|
360 |
|
Interest income |
|
|
|
|
|
|
|
|
|
|
(10,719 |
) |
|
|
(10,719 |
) |
Loss on extinguishment of debt |
|
|
|
|
|
|
|
|
|
|
(244 |
) |
|
|
(244 |
) |
Income (loss) before provision for income taxes |
|
|
170,390 |
|
|
|
(67,878 |
) |
|
|
(33,408 |
) |
|
|
69,104 |
|
Capital expenditures |
|
|
117,350 |
|
|
|
184,810 |
|
|
|
5,136 |
|
|
|
307,296 |
|
Total assets |
|
|
774,828 |
|
|
|
531,001 |
|
|
|
1,040,463 |
|
|
|
2,346,292 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core |
|
Expansion |
|
|
|
|
Six Months Ended June 30, 2005 |
|
Markets |
|
Markets |
|
Other |
|
Total |
|
|
(in thousands) |
Service revenues |
|
$ |
409,595 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
409,595 |
|
Equipment revenues |
|
|
77,050 |
|
|
|
|
|
|
|
|
|
|
|
77,050 |
|
Total revenues |
|
|
486,645 |
|
|
|
|
|
|
|
|
|
|
|
486,645 |
|
Cost of service |
|
|
128,263 |
|
|
|
1,415 |
|
|
|
|
|
|
|
129,678 |
|
Cost of equipment |
|
|
133,389 |
|
|
|
|
|
|
|
|
|
|
|
133,389 |
|
Selling, general and administrative expenses(2) |
|
|
75,601 |
|
|
|
1,590 |
|
|
|
|
|
|
|
77,191 |
|
Adjusted EBITDA (deficit)(3) |
|
|
152,357 |
|
|
|
(3,005 |
) |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
39,065 |
|
|
|
248 |
|
|
|
671 |
|
|
|
39,984 |
|
Stock-based compensation expense |
|
|
2,965 |
|
|
|
|
|
|
|
|
|
|
|
2,965 |
|
Income (loss) from operations |
|
|
105,848 |
|
|
|
(3,253 |
) |
|
|
227,549 |
|
|
|
330,144 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
23,797 |
|
|
|
23,797 |
|
Accretion of put option in majority-owned subsidiary |
|
|
|
|
|
|
|
|
|
|
125 |
|
|
|
125 |
|
Interest income |
|
|
|
|
|
|
|
|
|
|
(1,772 |
) |
|
|
(1,772 |
) |
Loss on extinguishment of debt |
|
|
|
|
|
|
|
|
|
|
46,448 |
|
|
|
46,448 |
|
Income (loss) before provision for income taxes |
|
|
105,848 |
|
|
|
(3,253 |
) |
|
|
158,951 |
|
|
|
261,546 |
|
Capital expenditures |
|
|
80,133 |
|
|
|
18,686 |
|
|
|
1,041 |
|
|
|
99,860 |
|
Total assets |
|
|
670,515 |
|
|
|
298,934 |
|
|
|
872,062 |
|
|
|
1,841,511 |
|
|
|
|
(1) |
|
Cost of service for the three and six months ended
June 30, 2006 includes $0.5 million and $0.5 million,
respectively, of non-cash
compensation disclosed separately. |
|
(2) |
|
Selling, general and administrative expenses include non-cash compensation disclosed
separately. For the three and six months ended June 30, 2006, selling, general and administrative
expenses include $1.7 million and $3.5 million, respectively, of non-cash compensation. |
|
(3) |
|
Adjusted EBITDA is presented in accordance with SFAS No. 131 as it is the primary financial
measure utilized by management to facilitate evaluation of each segments ability to meet
future debt service, capital expenditures and working capital requirements and to fund future
growth. |
16
MetroPCS Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)
The following table reconciles segment Adjusted EBITDA (deficit) for the three and six months
ended June 30, 2006 and 2005 to consolidated income before provision for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Segment Adjusted EBITDA (Deficit): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Markets Adjusted EBITDA |
|
$ |
127,182 |
|
|
$ |
84,321 |
|
|
$ |
236,302 |
|
|
$ |
152,357 |
|
Expansion Markets Adjusted EBITDA (Deficit) |
|
|
(36,596 |
) |
|
|
(2,105 |
) |
|
|
(59,282 |
) |
|
|
(3,005 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
90,586 |
|
|
|
82,216 |
|
|
|
177,020 |
|
|
|
149,352 |
|
Depreciation and amortization |
|
|
(32,316 |
) |
|
|
(20,714 |
) |
|
|
(59,576 |
) |
|
|
(39,984 |
) |
Loss (gain) on disposal of assets |
|
|
(2,013 |
) |
|
|
224,901 |
|
|
|
(12,377 |
) |
|
|
223,741 |
|
Non-cash compensation expense |
|
|
(2,158 |
) |
|
|
(2,100 |
) |
|
|
(3,969 |
) |
|
|
(2,965 |
) |
Interest expense |
|
|
(21,713 |
) |
|
|
(15,761 |
) |
|
|
(42,597 |
) |
|
|
(23,797 |
) |
Accretion of put option in majority-owned subsidiary |
|
|
(203 |
) |
|
|
(63 |
) |
|
|
(360 |
) |
|
|
(125 |
) |
Interest and other income |
|
|
6,147 |
|
|
|
1,215 |
|
|
|
10,719 |
|
|
|
1,772 |
|
(Gain) loss on extinguishment of debt |
|
|
27 |
|
|
|
(45,581 |
) |
|
|
244 |
|
|
|
(46,448 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated income before provision for income
taxes |
|
$ |
38,357 |
|
|
$ |
224,113 |
|
|
$ |
69,104 |
|
|
$ |
261,546 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14. Recent Accounting Pronouncements:
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial
Instrumentsan amendment of FASB Statements No. 133 and 140 (SFAS No. 155). SFAS No. 155
permits fair value remeasurement for any hybrid financial instrument that contains an embedded
derivative that otherwise would require bifurcation, clarifies which interest-only strips and
principal-only strips are not subject to the requirements of SFAS No. 133, establishes a
requirement to evaluate interests in securitized financial assets to identify interests that are
freestanding derivatives or that are hybrid financial instruments that contain an embedded
derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of
subordination are not embedded derivatives, and amends FASB Statement No. 140 to eliminate the
prohibition on a qualifying special purpose entity from holding a derivative financial instrument
that pertains to a beneficial interest other than another derivative financial instrument. SFAS No.
155 is effective for all financial instruments acquired or issued after the beginning of an
entitys first fiscal year that begins after September 15, 2006. The adoption of this statement did
not have any impact on the financial condition or results of operations of the Company.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assetsan
amendment of FASB Statement No. 140 (SFAS No. 156). SFAS No. 156 amends SFAS No. 140 to require
that all separately recognized servicing assets and servicing liabilities be initially measured at
fair value, if practicable. SFAS No. 156 permits, but does not require, the subsequent measurement
of separately recognized servicing assets and servicing liabilities at fair value. Under SFAS No. 156, an entity can elect subsequent fair value measurement to account for its
separately recognized servicing assets and servicing liabilities. Adoption of SFAS No. 156 is
required as of the beginning of the first fiscal year that begins after September 15, 2006. The
adoption of this statement did not have any impact on the financial condition or results of
operations of the Company.
In July 2006, the FASB issued Interpretation No. 48 Accounting for Uncertainty in Income
Taxes, (FIN No. 48), which clarifies the accounting for uncertainty in income taxes recognized
in the financial statements in accordance with SFAS No. 109. FIN No. 48 provides guidance on the
financial statement recognition and measurement of a tax position taken or expected to be taken in
a tax return. FIN No. 48 also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosures, and transition. FIN No. 48 is effective for
fiscal years beginning after December 15, 2006. While the Companys analysis of the impact of this
Interpretation is not yet completed, the Company does not anticipate it will have a material effect
on the financial condition or results of operations of the Company.
17
MetroPCS Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)
In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin No. 108, Considering the Effects of Prior Year Misstatements When Quantifying
Misstatements in the Current Year Financial Statements, (SAB 108), which addresses how the
effects of prior year uncorrected misstatements should be considered when quantifying misstatements
in current year financial statements. SAB 108 requires companies to quantify misstatements using a
balance sheet and income statement approach and to evaluate whether either approach results in
quantifying an error that is material in light of relevant quantitative and qualitative factors.
When the effect of initial adoption is material, companies may record the effect as a cumulative
effect adjustment to beginning of year retained earnings. SAB 108 is effective for annual financial
statements covering the first fiscal year ending after November 15, 2006. The Company is required
to adopt this interpretation by December 31, 2006. The adoption of this statement did not have any
impact on the financial condition or results of operations of the Company.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, (SFAS No. 157),
which defines fair value, establishes a framework for measuring fair value in GAAP and expands
disclosure about fair value measurements. SFAS No. 157 is effective for fiscal years beginning
after November 15, 2007 and interim periods within those fiscal years. The Company will be required
to adopt SFAS No. 157 in the first quarter of fiscal year 2008. The Company has not completed its
evaluation of the effect of SFAS No. 157.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities Including an amendment of FASB Statement No. 115, (SFAS No. 159), which
permits entities to choose to measure many financial instruments and certain other items at fair
value. The objective of SFAS No. 159 is to improve financial reporting by providing entities with
the opportunity to mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159
is effective for fiscal years beginning after November 15, 2007. The Company will be required to
adopt SFAS No. 159 on January 1, 2008. The Company has not completed its evaluation of the effect
of SFAS No. 159.
15. Subsequent Events:
$1.25 Billion Exchangeable Senior Secured Credit Agreement
In July 2006, MetroPCS II, Inc. (MetroPCS II), a wholly-owned subsidiary of MetroPCS,
entered into an Exchangeable Senior Secured Credit Agreement and Guaranty Agreement, dated as of
July 13, 2006 (Secured Bridge Credit Facility). On that same date, MetroPCS II and one of its
wholly-owned subsidiaries, MetroPCS AWS, LLC, also entered into a related Security Agreement, and
MetroPCS II, MetroPCS AWS, LLC, and MetroPCS IIs immediate parent, MetroPCS III, Inc., also
entered into a related Pledge Agreement. Under the Security Agreement, the lenders under the
Secured Bridge Credit Facility hold a security interest in substantially all property, including
capital stock, now owned or at any time acquired by the parties to that agreement, except for
certain permitted exceptions or as prohibited by law. Under the terms of the Pledge Agreement, the
lenders under the Secured Bridge Credit Facility hold a security interest in the capital stock of
the subsidiaries of the parties to the Pledge Agreement.
The aggregate credit commitments available under the Secured Bridge Credit Facility total
$1.25 billion. The Secured Bridge Credit Facility provides that all borrowings are senior secured
obligations of MetroPCS II and all borrowings are guaranteed by certain subsidiaries of MetroPCS
II. On July 14, 2006, the lenders funded $200.0 million under the Secured Bridge Credit Facility.
On October 3, 2006, the lenders funded an additional $80.0 million under the Secured Bridge Credit
Facility. On October 18, 2006, the lenders funded the remaining $970.0 million available under the
Secured Bridge Credit Facility.
On November 3, 2006, MetroPCS II repaid the aggregate outstanding principal balance under the
Secured Bridge Credit Facility of $1.25 billion and accrued interest of $5.9 million. As a result,
the Company recorded a loss on extinguishment of debt of approximately $7.0 million.
18
MetroPCS Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)
$250 Million Exchangeable Senior Unsecured Credit Agreement
In October 2006, MetroPCS IV, Inc. entered into an exchangeable unsecured bridge credit
facility ( Unsecured Bridge Credit Facility). The aggregate credit commitments available under
the Unsecured Bridge Credit Facility total $250.0 million. The Unsecured Bridge Credit Facility
contains certain restrictive covenants that may restrict the operations of the Companys
subsidiaries and the ability of its subsidiaries to incur additional indebtedness. Failure to
comply with those covenants could result in a default that could cause the acceleration of all
amounts due under the Unsecured Bridge Credit Facility. On October 18, 2006, the lenders funded the
$250.0 million available under the Unsecured Bridge Credit Facility.
On
November 3, 2006, MetroPCS IV, Inc. repaid the aggregate outstanding principal balance under the
Unsecured Bridge Credit Facility of $250.0 million and accrued interest of $1.2 million. As a
result, the Company recorded a loss on extinguishment of debt of approximately $2.4 million.
Auction 66
The FCC auctioned 90 MHz of spectrum to be used for Advanced Wireless Services in Auction 66
which commenced on August 9, 2006. MetroPCS AWS, LLC, a wholly-owned subsidiary of MetroPCS II,
Inc., filed an application with the FCC to participate in Auction 66 and the application was
accepted for filing. On July 17, 2006, MetroPCS AWS, LLC submitted an upfront payment to the FCC in
the amount of $200.0 million to qualify to participate in Auction 66.
Auction 66 concluded on September 21, 2006 and the Company was declared the high bidder on
licenses covering a total population of 117 million, with total aggregate winning bids of $1.4
billion. These new expansion opportunities cover six of the 25 largest metropolitan markets in the
United States and include the entire east coast corridor from Philadelphia to Boston, including New York City, as well as the entire states of New York, Connecticut and
Massachusetts. In the western United States, these new expansion opportunities cover a geographic
area including the San Diego, Portland, Seattle and Las Vegas metropolitan areas. The balance of
the licenses supplements or expands the geographic boundaries of our existing operations in
Dallas/Ft. Worth, Detroit, Los Angeles, San Francisco and Sacramento.
On October 18, 2006, the Company paid the FCC the remaining $1.2 billion for the purchase of
the Auction 66 licenses on which the Company had been announced as the high bidder. On November
29, 2006, the FCC awarded the Auction 66 licenses to the Company.
Orlando Market Launch
The Company launched service in the Orlando metropolitan area and certain parts of Northern
Florida on November 1, 2006.
$1.0 Billion 91/4% Senior Notes
On November 3, 2006, Wireless completed the sale of $1.0 billion of 91/4% Senior Notes due 2014
(91/4% Senior Notes). The 91/4% Senior Notes are unsecured obligations and are guaranteed by
MetroPCS, MetroPCS, Inc., and all of Wireless direct and indirect wholly-owned subsidiaries, but
are not guaranteed by Royal Street. Interest is payable on the 91/4% Senior Notes on May 1 and
November 1 of each year, beginning with May 1, 2007. Wireless may, at its option, redeem some or
all of the 91/4% Senior Notes at any time on or after November 1, 2010 for the redemption prices set
forth in the indenture governing the 91/4% Senior Notes. In addition, Wireless may also redeem up to
35% of the aggregate principal amount of the 91/4% Senior Notes with the net cash proceeds of certain
sales of equity securities. The net proceeds of the offering were approximately $978.0 million
after underwriter fees and other debt issuance costs of $22.0 million. The net proceeds from the
sale of the 91/4% Senior Notes, together with the borrowings under Wireless senior secured credit
facility, pursuant to which Wireless may borrow up to $1.7 billion, as amended, (the Senior
Secured Credit Facility), were used to repay amounts owed under the Credit Agreements, Secured
Bridge Credit Facility and Unsecured Bridge Credit Facility, and to pay related premiums, fees and
expenses, as well as for general corporate purposes.
Senior Secured Credit Facility
On November 3, 2006, Wireless entered into the Senior Secured Credit Facility, pursuant to
which Wireless may borrow up to $1.7 billion. The Senior Secured Credit Facility consists of a $1.6
billion term loan facility and a $100.0 million revolving credit facility. The term loan facility
will be repayable in quarterly installments in annual aggregate amounts equal
19
MetroPCS Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)
to 1% of the initial aggregate principal amount of $1.6 billion. The term loan facility will
mature in seven years and the revolving credit facility will mature in five years. On November 3,
2006, Wireless borrowed $1.6 billion under the Senior Secured Credit Facility. The net proceeds
from the borrowings under the Senior Secured Credit Facility, together with the sale of the 91/4%
Senior Notes, were used to repay amounts owed under the Credit Agreements, Secured Bridge Credit
Facility and Unsecured Bridge Credit Facility, and to pay related premiums, fees and expenses, as
well as for general corporate purposes
The facilities under the Senior Secured Credit Facility are guaranteed by MetroPCS, MetroPCS,
Inc. and each of Wireless direct and indirect present and future wholly-owned domestic
subsidiaries. The facilities are not guaranteed by Royal Street, but Wireless pledged the
promissory note that Royal Street Communications had given it in connection with amounts borrowed by Royal Street Communications
from Wireless and the limited liability company member interest held in Royal Street Communications . The Senior
Secured Credit Facility contains customary events of default, including cross defaults. The
obligations are also secured by the capital stock of Wireless as well as substantially all of
Wireless present and future assets and each of its direct and indirect present and future
wholly-owned subsidiaries (except as prohibited by law and certain permitted exceptions) but
excludes Royal Street.
First and Second Lien Credit Agreements
On November 3, 2006, Wireless paid the lenders under the Credit Agreements $931.5 million,
which included a premium of approximately $31.5 million, plus accrued interest of $8.6 million to
extinguish the aggregate outstanding principal balance under the Credit Agreements. As a result,
Wireless recorded a loss on extinguishment of debt in the amount of approximately $42.7 million.
Restructuring
On November 3, 2006, in connection with the closing of the sale of the 91/4% Senior Notes, the
entry into the Senior Secured Credit Facility and the repayment of all amounts outstanding under
the Credit Agreements, the Secured Bridge Credit Facility and the Unsecured Bridge Credit Facility,
the Company consummated a restructuring transaction. As a result of the restructuring transaction,
Wireless became a wholly-owned direct subsidiary of MetroPCS, Inc. (formerly MetroPCS V, Inc.),
which is a wholly-owned direct subsidiary of MetroPCS. MetroPCS and MetroPCS, Inc., along with each
of Wireless wholly-owned subsidiaries (which excludes Royal Street), guarantee the 91/4% Senior
Notes and the obligations under the Senior Secured Credit Facility. MetroPCS, Inc. pledged the
capital stock of Wireless as security for the obligations under the Senior Secured Credit Facility.
All of the Companys PCS licenses and AWS licenses and the Companys interest in Royal Street are
held by Wireless and its wholly-owned subsidiaries.
Interest Rate Protection Agreement
On November 21, 2006, Wireless entered into a three-year interest rate protection agreement to
manage the Companys interest rate risk exposure and fulfill a requirement of its Senior Secured
Credit Facility. The agreement is effective on February 1, 2007, covers a notional amount of $1.0
billion and effectively converts this portion of Wireless variable rate debt to fixed rate debt at
an annual rate of 7.419%. The quarterly interest settlement periods begin on February 1, 2007. The
interest rate protection agreement expires on February 1, 2010.
Termination of Interest Rate Cap Agreement
On November 21, 2006, Wireless terminated its interest rate cap agreement that was required by
its Credit Agreements. Wireless received approximately $4.3 million upon termination of the
agreement. The proceeds from the termination of the agreement approximated its carrying value.
Amendment to Senior Secured Credit Facility
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%.
Stock Split
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.
20
MetroPCS Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)
Stockholder Rights Plan
In connection with the Companys proposed initial public offering, on March 27, 2007, the
Company adopted a Stockholder Rights Plan. Under the Stockholder Rights Plan, each share of the
Companys common stock includes one right to purchase one one-thousandth of a share of series A
junior participating preferred stock. The rights will separate from the common stock and become
exercisable (1) ten calendar days after public announcement that a person or group of affiliated or
associated persons has acquired, or obtained the right to acquire, beneficial ownership of 15% of
the Companys outstanding common stock or (2) ten business days following the start of a tender
offer or exchange offer that would result in a persons acquiring beneficial ownership of 15% of
the Companys outstanding common stock. A 15% beneficial owner is referred to as an acquiring
person under the Stockholder Rights Plan.
21
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Any statements made in this report that are not statements of historical fact, including
statements about our beliefs and expectations, are forward-looking statements within the meaning of
the Private Securities Reform Act of 1995, as amended, and should be evaluated as such.
Forward-looking statements include information concerning possible or assumed future results of
operations, including statements that may relate to our plans, objectives, strategies, goals,
future events, future revenues or performance, capital expenditures, financing needs and other
information that is not historical information. These forward-looking statements often include
words such as anticipate, expect, suggests, plan, believe, intend, estimates,
targets, projects, should, may, will, forecast, and other similar expressions. These
forward-looking statements are contained throughout this report, including Managements Discussion
and Analysis of Financial Condition and Results of Operations.
We base these forward-looking statements or projections on our current expectations, plans and
assumptions that we have made in light of our experience in the industry, as well as our
perceptions of historical trends, current conditions, expected future developments and other
factors we believe are appropriate under the circumstances. As you read and consider this 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 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:
|
|
|
the highly competitive nature of our industry; |
|
|
|
|
the rapid technological changes in our industry; |
|
|
|
|
our ability to maintain adequate customer care and manage our churn rate; |
|
|
|
|
our ability to sustain the growth rates we have experienced to date; |
|
|
|
|
our ability to access the funds necessary to build and operate our Auction 66 Markets; |
|
|
|
|
the costs associated with being a public company and our ability to comply with the
internal financial and disclosure controls and reporting obligations of public
companies; |
|
|
|
|
our ability to manage our rapid growth, train additional personnel and improve our
financial and disclosure controls and procedures; |
|
|
|
|
our ability to secure the necessary spectrum and network infrastructure equipment; |
|
|
|
|
our ability to clear the Auction 66 Market spectrum of incumbent licensees; |
|
|
|
|
our ability to adequately enforce or protect our intellectual property rights; |
|
|
|
|
governmental regulation of our services and the costs of compliance and any failure
to comply with such regulations; |
|
|
|
|
our capital structure, including our indebtedness amounts; |
|
|
|
|
changes in consumer preferences or demand for our products; |
|
|
|
|
our inability to attract and retain key members of management; and |
|
|
|
|
other factors described in this report under Risk Factors. |
The forward-looking statements and projections are subject to and involve risks, uncertainties
and assumptions and you should not place undue reliance on these forward-looking statements and
projections. All future written and oral forward-
22
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.
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. 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 in this report 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 January
4, 2007, we filed a registration statement for an initial public offering of our common stock. We
expect to consummate the offering during the second quarter of 2007. We have applied to have our
common stock listed on the New York Stock Exchange under the symbol PCS effective upon the
consummation of our currently pending initial public offering.
We are a wireless telecommunications carrier that currently offers wireless broadband personal
communication services, or PCS, primarily in the greater Atlanta, Dallas/Ft. Worth, Detroit, Miami,
San Francisco, Sacramento and Tampa/Sarasota/Orlando metropolitan areas. We launched service in the
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; and Orlando in November 2006. In 2005, Royal Street Communications, LLC,
or Royal Street Communications, and with its wholly-owned subsidiaries, (Royal Street), a company
in which we own 85% of the limited liability company member interests and with which we have a
wholesale arrangement allowing us to sell MetroPCS-branded services to the public, was granted
licenses by the Federal Communications Commission, or FCC, in Los Angeles and various metropolitan
areas throughout northern Florida. Royal Street is in the process of constructing its network
infrastructure in its licensed metropolitan areas. We commenced commercial services in Orlando and
certain portions of northern Florida in November 2006 and we expect to begin offering services in
Los Angeles in the second or third quarter of 2007 through our arrangements with Royal Street.
As a result of the significant growth we have experienced since we launched operations, our
results of operations to date are not necessarily indicative of the results that can be expected in
future periods. Moreover, we expect that our number of customers will continue to increase, which
will continue to contribute to increases in our revenues and operating expenses. In November 2006,
we were granted advanced wireless services, or AWS, licenses covering a total unique population of
approximately 117 million for an aggregate purchase price of approximately $1.4 billion.
Approximately 69 million of the total licensed population associated with our Auction 66 licenses
represents expansion opportunities in geographic areas outside of our Core and Expansion Markets,
which we refer to as our Auction 66 Markets. These new expansion opportunities in our Auction 66
Markets cover six of the 25 largest metropolitan areas in the United States. The balance of our
Auction 66 Markets, which cover a population of approximately 48 million, supplements or expands
the geographic boundaries of our existing operations in Dallas/Ft. Worth, Detroit, Los Angeles, San
Francisco and Sacramento. We currently plan to focus on building out approximately 40 million of
the total population in our Auction 66 Markets with a primary focus on the New York, Philadelphia,
Boston and Las Vegas metropolitan areas. Of the approximate 40 million total population, we are
targeting launch of operations with an initial covered population of approximately 30 to 32 million
by late 2008 or early 2009. Total estimated capital expenditures to the launch of these operations
are expected to be between $18 and $20 per covered population, which equates to a total capital
investment of approximately $550 million to $650 million. Total estimated expenditures, including
capital expenditures, to become free cash flow positive, defined as Adjusted EBITDA less capital
expenditures, is expected to be approximately $29 to $30 per covered population, which equates to
$875 million to $1.0 billion based on an estimated initial covered population of approximately 30
to 32 million. We believe that our existing cash, cash equivalents and short-term investments,
proceeds from our currently pending initial public offering, and our anticipated cash flows from
operations will be sufficient to fully fund this planned expansion.
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, through flat rate monthly 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 nationwide long distance service,
voicemail, caller ID, call waiting, text messaging, mobile Internet browsing, push e-mail and
picture and multimedia messaging. We offer flat rate monthly plans at $30, $35, $40, $45 and $50.
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 discontinued at the end of the month that
was paid for by the customer.
23
For additional fees, we also provide international long distance and
text messaging, ringtones, games and content applications, unlimited directory assistance, ring
back tones, nationwide roaming and other value-added services. As of June
30, 2006, over 80% of our customers have selected either our $40 or $45 rate plans. 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. Our arrangements with Royal Street are based on a
wholesale model under which we purchase network capacity from Royal Street to allow us to offer our
standard products and services in the Royal Street markets to MetroPCS customers under the MetroPCS
brand name.
Critical Accounting Policies and Estimates
There have been no material changes in our critical accounting policies and estimates from
those disclosed in Item 7. Managements Discussion and Analysis of Financial Condition and Results
of OperationsCritical Accounting Policies and Estimates of our Form 10-K filed with the SEC on
March 30, 2007.
Customer Recognition and Disconnect Policies
When a new customer subscribes to our service, the first month of service and activation fee
is included with the handset purchase. Under GAAP, we are required to allocate the purchase price
to 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. Prior to January
23, 2006, we offered our customers the Metro Promise, which allowed a customer to return a newly
purchased handset for a full refund prior to the earlier of 7 days or 60 minutes of use. Beginning
on January 23, 2006, we expanded the terms of the Metro Promise to allow a customer to return a
newly purchased handset for a full refund prior to the earlier of 30 days or 60 minutes of use.
Customers who return their phones under the 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.
Revenues
We derive our revenues from the following sources:
Service. We sell wireless broadband PCS services. The various types of service revenues
associated with wireless broadband PCS for our customers include monthly recurring charges for
airtime, monthly recurring charges for optional features (including nationwide long distance and
text messaging, ringtones, games and content applications, unlimited directory assistance, ring
back tones and nationwide roaming) and charges for long distance service. Service revenues also
include intercarrier compensation and nonrecurring activation service charges to customers.
Equipment. We sell wireless broadband PCS 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:
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Cell Site Costs. We incur expenses for the rent of cell sites, network
facilities, engineering operations, field technicians and related utility and
maintenance charges. |
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|
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. |
24
|
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|
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. We purchase wireless broadband PCS handsets and accessories from
third-party vendors to resell to our customers and independent retailers in connection with our
services. We subsidize the sale of handsets to encourage the sale and use of our services. We do
not manufacture any of this equipment.
Selling, General and Administrative Expenses. Our selling expense includes 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 expense
includes 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 selling, general and administrative expenses associated with employee
stock options which is measured at the date of grant, based on the estimated fair value of the
award. Prior to the adoption of SFAS No. 123(R), we recorded stock-based compensation expense at
the end of each reporting period with respect to our variable stock options.
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 ten
years for network infrastructure assets and 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.
Income Taxes. As a result of our operating losses and accelerated depreciation available
under federal tax laws, we have paid no federal income taxes through June 30, 2006. In addition,
we have paid an immaterial amount of state income tax through June 30, 2006.
Seasonality
Our customer activity is influenced by seasonal effects related to traditional retail selling
periods and other factors that arise from our target customer base. Based on historical results, we
generally expect net customer additions to be strongest in the first and fourth quarters. Softening
of sales and increased customer turnover, or churn, in the second and third quarters of the year
usually combine to result in fewer net customer additions. However, sales activity and churn can be
strongly affected by the launch of new markets and promotional activity, which have the ability to
reduce or outweigh certain seasonal effects.
Operating Segments
Operating segments are defined by Statement of Financial Accounting Standards (SFAS) No.
131 Disclosure About Segments of an Enterprise and Related Information, (SFAS No. 131), as
components of an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to allocate resources and
in assessing performance. Our chief operating decision maker is the Chairman of the Board and
Chief Executive Officer.
As of June 30, 2006, we had eight operating segments based on geographic region within the
United States: Atlanta, Dallas/Ft. Worth, Detroit, Miami, San Francisco, Sacramento,
Tampa/Sarasota/Orlando and Los Angeles. Each of these operating segments provide wireless voice
and data services and products to customers in its service areas or is currently constructing a
network in order to provide these services. These services include unlimited local and long
distance calling, voicemail, caller ID, call waiting, text messaging, picture and multimedia
messaging, international long distance and text messaging, ringtones, games and content
applications, unlimited directory assistance, ring back tones, nationwide roaming, mobile Internet
browsing and other value-added services.
25
We aggregate our operating segments into two reportable segments: Core Markets and Expansion
Markets.
|
|
|
Core Markets, which include Atlanta, Miami, San Francisco, and Sacramento, 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 Dallas/Ft. Worth, Detroit, Tampa/Sarasota/Orlando
and Los Angeles, 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. |
The accounting policies of the operating segments are the same as those described in the
summary of significant accounting policies. General corporate overhead, which includes expenses
such as corporate employee labor costs, rent and utilities, legal, accounting and auditing
expenses, is allocated equally across all operating segments. Corporate marketing and advertising
expenses are allocated equally to the operating segments, beginning in the period during which we
launch service in that operating segment. Expenses associated with our national data center are
allocated based on the average number of customers in each operating segment. There are no
transactions between reportable segments.
Interest expense, interest income, gain/loss on extinguishment of debt and income taxes are
not allocated to the segments in the computation of segment operating profit for internal
evaluation purposes.
26
Results of Operations
Three Months Ended June 30, 2006 Compared to Three Months Ended June 30, 2005
Set forth below is a summary of certain financial information by reportable operating segment
for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
|
|
|
Ended June 30, |
|
|
|
|
Reportable Operating Segment Data |
|
2006 |
|
|
2005 |
|
|
Change |
|
|
|
(in thousands) |
|
|
|
|
|
REVENUES: |
|
|
|
|
|
|
|
|
|
|
|
|
Service revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Core Markets |
|
$ |
281,143 |
|
|
$ |
212,697 |
|
|
|
32 |
% |
Expansion Markets |
|
|
26,700 |
|
|
|
|
|
|
|
* |
* |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
307,843 |
|
|
$ |
212,697 |
|
|
|
45 |
% |
|
|
|
|
|
|
|
|
|
|
Equipment revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Core Markets |
|
$ |
48,559 |
|
|
$ |
37,992 |
|
|
|
28 |
% |
Expansion Markets |
|
|
11,792 |
|
|
|
|
|
|
|
* |
* |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
60,351 |
|
|
$ |
37,992 |
|
|
|
59 |
% |
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (excluding depreciation and amortization
disclosed separately below) (1): |
|
|
|
|
|
|
|
|
|
|
|
|
Core Markets |
|
$ |
82,205 |
|
|
$ |
64,801 |
|
|
|
27 |
% |
Expansion Markets |
|
|
25,292 |
|
|
|
1,143 |
|
|
|
* |
* |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
107,497 |
|
|
$ |
65,944 |
|
|
|
63 |
% |
|
|
|
|
|
|
|
|
|
|
Cost of equipment: |
|
|
|
|
|
|
|
|
|
|
|
|
Core Markets |
|
$ |
82,716 |
|
|
$ |
65,287 |
|
|
|
27 |
% |
Expansion Markets |
|
|
29,289 |
|
|
|
|
|
|
|
* |
* |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
112,005 |
|
|
$ |
65,287 |
|
|
|
72 |
% |
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses (excluding
depreciation and amortization disclosed separately
below) (1): |
|
|
|
|
|
|
|
|
|
|
|
|
Core Markets |
|
$ |
38,004 |
|
|
$ |
38,380 |
|
|
|
(1 |
)% |
Expansion Markets |
|
|
22,260 |
|
|
|
962 |
|
|
|
* |
* |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
60,264 |
|
|
$ |
39,342 |
|
|
|
53 |
% |
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA (Deficit) (2): |
|
|
|
|
|
|
|
|
|
|
|
|
Core Markets |
|
$ |
127,182 |
|
|
$ |
84,321 |
|
|
|
51 |
% |
Expansion Markets |
|
|
(36,596 |
) |
|
|
(2,105 |
) |
|
|
* |
* |
Depreciation and amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
Core Markets |
|
$ |
26,664 |
|
|
$ |
20,069 |
|
|
|
33 |
% |
Expansion Markets |
|
|
4,944 |
|
|
|
243 |
|
|
|
* |
* |
Other |
|
|
708 |
|
|
|
402 |
|
|
|
76 |
% |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
32,316 |
|
|
$ |
20,714 |
|
|
|
56 |
% |
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Core Markets |
|
$ |
405 |
|
|
$ |
2,100 |
|
|
|
(81 |
)% |
Expansion Markets |
|
|
1,753 |
|
|
|
|
|
|
|
* |
* |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,158 |
|
|
$ |
2,100 |
|
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Core Markets |
|
$ |
98,817 |
|
|
$ |
58,857 |
|
|
|
68 |
% |
Expansion Markets |
|
|
(44,010 |
) |
|
|
(2,348 |
) |
|
|
* |
* |
Other |
|
|
(708 |
) |
|
|
227,794 |
|
|
|
(100 |
)% |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
54,099 |
|
|
$ |
284,303 |
|
|
|
(81 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
** |
|
Not meaningful. The Expansion Markets reportable segment had no significant
operations during 2005. |
|
(1) |
|
Cost of service and selling, general and administrative expenses include
stock-based compensation expense. For the three months ended June 30, 2006, cost of
service includes $0.5 million and selling, general and administrative expenses includes
$1.7 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. See Operating Segments. |
Service Revenues. Service revenues increased $95.1 million, or 45%, to $307.8 million
for the three months ended June 30, 2006 from $212.7 million for the three months ended June 30,
2005. The increase is due to increases in Core Markets and Expansion Markets service revenues as
follows:
27
|
|
|
Core Markets. Core Markets service revenues increased $68.4 million, or 32%, to
$281.1 million for the three months ended June 30, 2006 from $212.7 million for the
three months ended June 30, 2005. The increase in
service revenues is primarily attributable to net additions of approximately 474,000
customers accounting for $61.3 million of the Core Markets increase, coupled with the
migration of existing customers to higher priced rate plans accounting for $7.1 million
of the Core Markets increase. |
|
|
|
|
The increase in customers migrating to higher priced rate plans is primarily the result
of our emphasis on offering additional services under our $45 rate plan which includes
unlimited nationwide long distance and various unlimited data features. In addition,
this migration is expected to continue as our higher priced rate plans become more
attractive to our existing customer base. |
|
|
|
|
Expansion Markets. Expansion Markets service revenues were $26.7 million for the
three months ended June 30, 2006. These revenues were attributable to the launch of
the Tampa/Sarasota metropolitan area in October 2005, the Dallas/Ft. Worth metropolitan
area in March 2006 and the Detroit metropolitan area in April 2006. |
Equipment Revenues. Equipment revenues increased $22.4 million, or 59%, to $60.4 million
for the three months ended June 30, 2006 from $38.0 million for the three months ended June 30,
2005. The increase is due to increases in Core Markets and Expansion Markets equipment revenues as
follows:
|
|
|
Core Markets. Core Markets equipment revenues increased $10.6 million, or 28%, to
$48.6 million for the three months ended June 30, 2006 from $38.0 million for the three
months ended June 30, 2005. The increase in equipment revenues is primarily
attributable to the sale of higher priced handset models accounting for $7.1 million of
the increase, coupled with the increase in gross customer additions during the quarter
of approximately 30,000 customers, which accounted for $3.5 million of the increase. |
|
|
|
|
Expansion Markets. Expansion Markets equipment revenues were $11.8 million for
the three months ended June 30, 2006. These revenues were attributable to the launch
of the Tampa/Sarasota metropolitan area in October 2005, the Dallas/Ft. Worth
metropolitan area in March 2006 and the Detroit metropolitan area in April 2006. |
Cost of Service. Cost of service increased $41.6 million, or 63%, to $107.5 million for the
three months ended June 30, 2006 from $65.9 million for the three months ended June 30, 2005. 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 $17.4 million, or 27%, to
$82.2 million for the three months ended June 30, 2006 from $64.8 million for the three
months ended June 30, 2005. The increase in cost of service was primarily attributable
to a $3.7 million increase in long distance costs, a $2.4 million increase in federal
universal service fund, or FUSF fees, a $2.4 million increase in E-911 fees, a $2.0
million increase in intercarrier compensation, a $1.8 million increase in cell site and
switch facility lease expense, a $1.3 million increase in customer service expense, and
a $1.1 million increase in employee costs, all of which are a result of the 29% growth
in our Core Markets customer base and the addition of approximately 43 cell sites to
our existing network infrastructure. |
|
|
|
|
Expansion Markets. Expansion Markets cost of service increased $24.2 million to
$25.3 million for the three months ended June 30, 2006 from $1.1 million for the three
months ended June 30, 2005. These increases were primarily attributable to the launch
of the Tampa/Sarasota metropolitan area in October 2005, the Dallas/Ft. Worth
metropolitan area in March 2006 and the Detroit metropolitan area in April 2006. The
increase in cost of service were primarily attributable to $5.7 million increase in
cell site and switch facility lease expense, a $3.8 million increase in employee costs,
a $2.1 million increase in intercarrier compensation, $1.8 million in customer service
expense and $1.7 million in long distance costs. |
Cost of Equipment. Cost of equipment increased $46.7 million, or 72%, to $112.0 million for
the three months ended June 30, 2006 from $65.3 million for the three months ended June 30, 2005.
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 $17.4 million, or 27%, to
$82.7 million for the three months ended June 30, 2006 from $65.3 million for the three
months ended June 30, 2005. The increase in equipment cost is primarily attributable
to the sale of higher cost handset models accounting for $11.4 million of the increase.
The increase in gross customer additions during the quarter of approximately 30,000
customers as well as the sale of new handsets to existing customers accounted for $6.0
million of the increase. |
28
|
|
|
Expansion Markets. Expansion Markets cost of equipment were $29.3 million for the
three months ended June 30, 2006. This cost is attributable to the launch of the
Tampa/Sarasota metropolitan area in October 2005, the Dallas/Ft. Worth metropolitan
area in March 2006 and the Detroit metropolitan area in April 2006. |
Selling, General and Administrative Expenses. Selling, general and administrative expenses
increased $20.9 million, or 53%, to $60.3 million for the three months ended June 30, 2006 from
$39.4 million for the three months ended June 30, 2005. 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 decreased
$0.4 million, or 1%, to $38.0 million for the three months ended June 30, 2006 from
$38.4 million for the three months ended June 30, 2005. Selling expenses increased by
$2.5 million, or approximately 17% for the three months ended June 30, 2006 compared to
the three months ended June 30, 2005. General and administrative expenses decreased
$2.9 million, or approximately 12% for the three months ended June 30, 2006 compared to
the same period in 2005. The increase in selling expenses is primarily due to an
increase in advertising and market research expenses which were incurred to support the
growth in the Core Markets. This increase in selling expenses was offset by a decrease
in general and administrative expenses, which were higher during the
three months ended June 30, 2005 because they included legal and
accounting expenses associated with
an internal investigation related to material weaknesses in our internal control over
financial reporting as well as financial statement audits related to our restatement
efforts. |
|
|
|
|
Expansion Markets. Expansion Markets selling, general and administrative expenses
increased $21.3 million to $22.3 million for the three months ended June 30, 2006 from
$1.0 million for the three months ended June 30, 2005. Selling expenses increased by
$9.4 million for the three months ended June 30, 2006 compared to the three months
ended June 30, 2005. This increase is related to marketing and advertising expenses as
well as increased employee costs associated with the launch of the Tampa/Sarasota
metropolitan area in October 2005, the Dallas/Ft. Worth metropolitan area in March 2006
and the Detroit metropolitan area in April 2006. General and administrative expenses
increased by $11.9 million for the three months ended June 30, 2006 compared to the
same period in 2005 due to labor, rent, legal and professional fees and various
administrative expenses incurred in relation to the launch of the Tampa/Sarasota
metropolitan area in October 2005, the Dallas/Ft. Worth metropolitan area in March 2006
and the Detroit metropolitan area in April 2006 and build-out expenses related to the
Orlando and Los Angeles metropolitan areas. |
Depreciation and Amortization. Depreciation and amortization expense increased
$11.6 million, or 56%, to $32.3 million for the three months ended June 30, 2006 from $20.7 million
for the three months ended June 30, 2005. 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 $6.6
million, or 33%, to $26.7 million for the three months ended June 30, 2006 from $20.1
million for the three months ended June 30, 2005. The increase related primarily to an
increase in network infrastructure assets placed into service between June 30, 2005 and
June 30, 2006. We added approximately 283 cell sites in our Core Markets during this
period to increase the capacity of our existing network and expand our footprint. |
|
|
|
|
Expansion Markets. Expansion Markets depreciation and amortization expense
increased $4.7 million to $4.9 million for the three months ended June 30, 2006 from
$0.2 million for the three months ended June 30, 2005. The increase is attributable to
network infrastructure assets placed into service as a result of the launch of the
Tampa/Sarasota, Dallas/Ft. Worth and Detroit metropolitan areas. |
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
|
Ended June 30, |
|
|
Consolidated Data |
|
2006 |
|
2005 |
|
Change |
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss (gain) on disposal of assets |
|
$ |
2,013 |
|
|
$ |
(224,901 |
) |
|
|
101 |
% |
(Gain) loss on extinguishment of debt |
|
|
(27 |
) |
|
|
45,581 |
|
|
|
(100 |
)% |
Interest expense |
|
|
21,713 |
|
|
|
15,761 |
|
|
|
38 |
% |
Provision for income taxes |
|
|
15,368 |
|
|
|
87,632 |
|
|
|
(82 |
)% |
Net income |
|
|
22,989 |
|
|
|
136,482 |
|
|
|
(83 |
)% |
Loss (Gain) on Disposal of Assets. In May 2005, we completed the sale of a 10 MHz
portion of our 30 MHz PCS license in the San Francisco-Oakland-San Jose basic trading area for cash
consideration of $230.0 million. The sale of PCS spectrum resulted in a gain on disposal of asset
in the amount of $228.2 million.
(Gain) Loss on Extinguishment of Debt. In May 2005, we repaid all of the outstanding debt
under our FCC notes, 103/4% Senior Notes and bridge credit agreement. As a result, we recorded a
$1.9 million loss on the extinguishment of FCC notes; a $34.0 million loss on extinguishment of the
103/4% Senior Notes; and a $10.4 million loss on the extinguishment of the bridge credit agreement.
Interest Expense. Interest expense increased $5.9 million, or 38%, to $21.7
million for the three months ended June 30, 2006 from $15.8 million for the three months ended June
30, 2005. The increase in interest expense was primarily due to increased average
principal balance outstanding as a result of additional borrowings of $150.0 million in the fourth
quarter of 2005 under our First Lien Credit Agreement, maturing May 31, 2011, and our Second Lien
Credit Agreement, maturing May 31, 2012 (collectively the Credit Agreements). Interest expense
also increased due to the weighted average interest rate increasing to 10.64% for the three months
ended June 30, 2006 compared to 8.34% for the three months ended June 30, 2005. The increase in
interest expense was partially offset by the capitalization of $2.1 million of interest during the
three months ended June 30, 2006, compared to $0.9 million of interest capitalized during the same
period in 2005. 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 our additional Expansion Markets.
Provision for Income Taxes. Income tax expense for three months ended June 30, 2006
decreased to $15.4 million, which is approximately 40% of our income before provision for income
taxes. For the three months ended June 30, 2005 the provision for income taxes was $87.6 million,
or approximately 40% of income before provision for income taxes. The three months ended June 30,
2005 included a gain on the sale of a 10 MHz portion of our 30 MHz license in the San
Francisco-Oakland-San Jose basic trading area in the amount of $228.2 million.
Net Income. Net income decreased $113.5 million, or 83%, to $23.0 million for the three
months ended June 30, 2006 compared to $136.5 million for the three months ended June 30, 2005.
The significant decrease is primarily attributable to our non-recurring sale of a 10 MHz portion of
our 30 MHz PCS license in the San Francisco-Oakland-San Jose basic trading area in May 2005 for
cash consideration of $230.0 million. The sale of PCS spectrum resulted in a gain on disposal of
assets in the amount of $139.2 million, net of income taxes.
30
Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005
Set forth below is a summary of certain financial information by reportable operating segment
for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months |
|
|
|
|
|
|
Ended June 30, |
|
|
|
|
Reportable Operating Segment Data |
|
2006 |
|
|
2005 |
|
|
Change |
|
|
|
(in thousands) |
|
|
|
|
|
REVENUES: |
|
|
|
|
|
|
|
|
|
|
|
|
Service revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Core Markets |
|
$ |
545,741 |
|
|
$ |
409,595 |
|
|
|
33 |
% |
Expansion Markets |
|
|
37,519 |
|
|
|
|
|
|
|
* |
* |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
583,260 |
|
|
$ |
409,595 |
|
|
|
42 |
% |
|
|
|
|
|
|
|
|
|
|
Equipment revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Core Markets |
|
$ |
98,606 |
|
|
$ |
77,050 |
|
|
|
28 |
% |
Expansion Markets |
|
|
15,789 |
|
|
|
|
|
|
|
* |
* |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
114,395 |
|
|
$ |
77,050 |
|
|
|
48 |
% |
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (excluding depreciation and amortization
disclosed separately below) (1): |
|
|
|
|
|
|
|
|
|
|
|
|
Core Markets |
|
$ |
161,137 |
|
|
$ |
128,263 |
|
|
|
26 |
% |
Expansion Markets |
|
|
38,850 |
|
|
|
1,415 |
|
|
|
* |
* |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
199,987 |
|
|
$ |
129,678 |
|
|
|
54 |
% |
|
|
|
|
|
|
|
|
|
|
Cost of equipment: |
|
|
|
|
|
|
|
|
|
|
|
|
Core Markets |
|
$ |
173,644 |
|
|
$ |
133,389 |
|
|
|
30 |
% |
Expansion Markets |
|
|
39,272 |
|
|
|
|
|
|
|
* |
* |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
212,916 |
|
|
$ |
133,389 |
|
|
|
60 |
% |
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses (excluding
depreciation and amortization disclosed separately
below) (1): |
|
|
|
|
|
|
|
|
|
|
|
|
Core Markets |
|
$ |
75,480 |
|
|
$ |
75,601 |
|
|
|
|
% |
Expansion Markets |
|
|
36,221 |
|
|
|
1,590 |
|
|
|
* |
* |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
111,701 |
|
|
$ |
77,191 |
|
|
|
45 |
% |
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA (Deficit) (2): |
|
|
|
|
|
|
|
|
|
|
|
|
Core Markets |
|
$ |
236,302 |
|
|
$ |
152,357 |
|
|
|
55 |
% |
Expansion Markets |
|
|
(59,282 |
) |
|
|
(3,005 |
) |
|
|
* |
* |
Depreciation and amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
Core Markets |
|
$ |
51,671 |
|
|
$ |
39,065 |
|
|
|
32 |
% |
Expansion Markets |
|
|
6,491 |
|
|
|
248 |
|
|
|
* |
* |
Other |
|
|
1,414 |
|
|
|
671 |
|
|
|
111 |
% |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
59,576 |
|
|
$ |
39,984 |
|
|
|
49 |
% |
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Core Markets |
|
$ |
2,216 |
|
|
$ |
2,965 |
|
|
|
(25 |
)% |
Expansion Markets |
|
|
1,753 |
|
|
|
|
|
|
|
* |
* |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,969 |
|
|
$ |
2,965 |
|
|
|
34 |
% |
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Core Markets |
|
$ |
170,390 |
|
|
$ |
105,848 |
|
|
|
61 |
% |
Expansion Markets |
|
|
(67,878 |
) |
|
|
(3,253 |
) |
|
|
* |
* |
Other |
|
|
(1,414 |
) |
|
|
227,549 |
|
|
|
(101 |
)% |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
101,098 |
|
|
$ |
330,144 |
|
|
|
(69 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
** |
|
Not meaningful. The Expansion Markets reportable segment had no significant
operations during 2005. |
|
(1) |
|
Cost of service and selling, general and administrative expenses include
stock-based compensation expense. For the six months ended June 30, 2006, cost of
service includes $0.5 million and selling, general and administrative expenses includes
$3.5 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. See Operating Segments. |
Service Revenues. Service revenues increased $173.7 million, or 42%, to $583.3 million
for the six months ended June 30, 2006 from $409.6 million for the six months ended June 30, 2005.
The increase is due to increases in Core Markets and Expansion Markets service revenues as follows:
31
|
|
|
Core Markets. Core Markets service revenues increased $136.2 million, or 33%, to
$545.8 million for the six months ended June 30, 2006 from $409.6 million for the six
months ended June 30, 2005. The increase in service revenues is primarily attributable to net additions of approximately 474,000
customers accounting for $118.0 million of the Core Markets increase, coupled with the
migration of existing customers to higher priced rate plans accounting for $18.2 million
of the Core Markets increase. |
The increase in customers migrating to higher priced rate plans is primarily the result of
our emphasis on offering additional services under our $45 rate plan which includes
unlimited nationwide long distance and various unlimited data features. In addition, this
migration is expected to continue as our higher priced rate plans become more attractive
to our existing customer base.
|
|
|
Expansion Markets. Expansion Markets service revenues were $37.5 million for the six
months ended June 30, 2006. These revenues were attributable to the launch of the
Tampa/Sarasota metropolitan area in October 2005, the Dallas/Ft. Worth metropolitan area
in March 2006 and the Detroit metropolitan area in April 2006 |
Equipment Revenues. Equipment revenues increased $37.3 million, or 48%, to $114.4 million
for the six months ended June 30, 2006 from $77.1 million for the six months ended June 30, 2005.
The increase is due to increases in Core Markets and Expansion Markets equipment revenues as
follows:
|
|
|
Core Markets. Core Markets equipment revenues increased $21.5 million, or 28%, to
$98.6 million for the six months ended June 30, 2006 from $77.1 million for the six months
ended June 30, 2005. The increase in equipment revenues is primarily attributable to the
sale of higher priced handset models accounting for $8.8 million of the increase, coupled
with the increase in gross customer additions during the quarter of approximately 113,000,
which accounted for $12.7 million of the increase. |
|
|
|
|
Expansion Markets. Expansion Markets equipment revenues were $15.8 million for the
six months ended June 30, 2006. These revenues were attributable to the launch of the
Tampa/Sarasota metropolitan area in October 2005, the Dallas/Ft. Worth metropolitan area
in March 2006 and the Detroit metropolitan area in April 2006. |
Cost of Service. Cost of service increased $70.3 million, or 54%, to $200.0 million for the
six months ended June 30, 2006 from $129.7 million for the six months ended June 30, 2005. 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 $32.8 million, or 26%, to
$161.1 million for the six months ended June 30, 2006 from $128.3 million for the six
months ended June 30, 2005. The increase was mainly attributable to a $6.9 million
increase in long distance costs, a $4.1 million increase in intercarrier compensation, a
$3.6 million increase in cell site and switch facility lease expense, a $3.5 million
increase in customer service expense, and a $2.2 million increase in employee costs, all
of which are as a result of the 29% growth in our customer base and the addition of 106
cell sites to our existing network infrastructure. |
|
|
|
|
Expansion Markets. Expansion Markets cost of service increased $37.5 million to
$38.9 million for the six months ended June 30, 2006 from $1.4 million for the six months
ended June 30, 2005. The increase was attributable to the launch of the Tampa/Sarasota
metropolitan area in October 2005, the Dallas/Ft. Worth metropolitan area in March 2006
and the Detroit metropolitan area in April 2006, which contributed net additions of
approximately 246,800 customers during the six months ended June 30, 2006. These
activities resulted in a $9.4 million increase in cell site and switch facility lease
expense, a $6.8 million increase in employee costs, $3.9 million increase in intercarrier
compensation, $2.5 million in customer service expense and $2.4 million in long distance
costs. |
Cost of Equipment. Cost of equipment increased $79.5 million, or 60%, to $212.9 million for
the six months ended June 30, 2006 from $133.4 million for the six months ended June 30, 2005. 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
$40.2 million, or 30%, to
$173.6 million for the six months ended June 30, 2006 from $133.4 million for the six
months ended June 30, 2005. The increase in equipment cost is primarily attributable to
the sale of higher cost handset models accounting for $18.2 million of the increase. The
increase in gross customer additions during the six months ended of approximately 113,000
customers as well as the sale of new handsets to existing customers accounted for $22.0
million of the increase. |
|
|
|
|
Expansion Markets. Expansion Markets cost of equipment was $39.3 million for the six
months ended June 30, 2006. This cost is attributable to the launch of the Tampa/Sarasota
metropolitan area in October 2005, the Dallas/Ft. Worth metropolitan area in March 2006
and the Detroit metropolitan area in April 2006. |
32
Selling, General and Administrative Expenses. Selling, general and administrative expenses
increased $34.5 million, or 45%, to $111.7 million for the six months ended June 30, 2006 from
$77.2 million for the six months ended June 30, 2005. 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 remained
relatively flat with only a slight decrease of $0.1 million to $75.5 million for the six
months ended June 30, 2006 from $75.6 million for the six months ended June 30, 2005.
Selling expenses increased by $4.0 million, or approximately 14% for the first six months
of 2006 compared to the six months ended June 30, 2005. General and administrative
expenses decreased by $4.1 million, or approximately 9% for the six months ended June 30,
2006 compared to the same period in 2005. General and administrative expenses were higher
in 2005 as they included substantial legal and accounting expenses associated with an
internal investigation related to material weaknesses in our internal control over
financial reporting as well as financial statement audits related to our restatement
efforts, all of which is reflected in a decrease of approximately $2.3 million in legal
and accounting and auditing expenses during 2006. |
|
|
|
|
Expansion Markets. Expansion Markets selling, general and administrative expenses
increased $34.6 million to $36.2 million for the six months ended June 30, 2006 from $1.6
million for the six months ended June 30, 2005. Selling expenses increased by $14.1
million for the first six months of 2006 compared to the six months ended June 30, 2005.
This increase is related to marketing and advertising expenses associated with the launch
of the Dallas/Ft. Worth and Detroit metropolitan areas. General and administrative
expenses increased by $20.5 million for the six months ended June 30, 2006 compared to the
same period in 2005 due to labor, rent, legal and professional fees and various
administrative expenses incurred in relation to the launch of the Dallas/Ft. Worth,
Detroit and Tampa/Sarasota metropolitan areas and build-out expenses related to Orlando
and Los Angeles. |
Depreciation and Amortization. Depreciation and amortization expense increased $19.6
million, or 49%, to $59.6 million for the six months ended June 30, 2006 from $40.0 million for the
six months ended June 30, 2005. 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 $12.6
million, or 32%, to $51.7 million for the six months ended June 30, 2006 from $39.1
million for the six months ended June 30, 2005. The increase related primarily to an
increase in network infrastructure assets placed into service during the six months ended
December 31, 2005 and the six months ended June 30, 2006, compared to the same period in
2005. We added 106 cell sites in our Core Markets in the first six months of 2006 to
increase the capacity of our existing network and expand our footprint. |
|
|
|
|
Expansion Markets. Expansion Markets depreciation and amortization expense increased
$6.2 million to $6.5 million for the six months ended June 30, 2006 from $0.3 million for
the six months ended June 30, 2005. The increase is attributable to network infrastructure
assets placed into service as a result of the launch of the Tampa/Sarasota, Dallas/Ft.
Worth and Detroit metropolitan areas. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months |
|
|
|
|
Ended June 30, |
|
|
Consolidated Data |
|
2006 |
|
2005 |
|
Change |
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss (gain) on disposal of assets |
|
$ |
12,377 |
|
|
$ |
(223,741 |
) |
|
|
106 |
% |
(Gain) loss on extinguishment of debt |
|
|
(244 |
) |
|
|
46,448 |
|
|
|
(101 |
)% |
Interest expense |
|
|
42,597 |
|
|
|
23,797 |
|
|
|
79 |
% |
Provision for income taxes |
|
|
27,745 |
|
|
|
102,265 |
|
|
|
(73 |
)% |
Net income |
|
|
41,359 |
|
|
|
159,281 |
|
|
|
(74 |
)% |
Loss (Gain) on Disposal of Assets. In May 2005, we completed the sale of a 10 MHz
portion of our 30 MHz PCS license in the San Francisco-Oakland-San Jose basic trading area for cash
consideration of $230.0 million. The sale of PCS spectrum resulted in a gain on disposal of asset
in the amount of $228.2 million.
(Gain) Loss on Extinguishment of Debt. In May 2005, we repaid all of the outstanding debt
under our FCC notes, 103/4% Senior Notes and bridge credit agreement. As a result, we recorded a $1.9
million loss on the extinguishment of the FCC notes; a $34.0 million loss on extinguishment of the
103/4% Senior Notes and a $10.4 million loss on the extinguishment of the bridge credit agreement.
Interest Expense. Interest expense increased $18.8 million, or 79%, to $42.6
million for the six months ended June 30, 2006 from $23.8 million for the six months ended June 30,
2005. The increase in interest expense was primarily due to increased average principal
balance outstanding as a result of additional borrowings of $600.0 million in the second
33
quarter of 2005 and an additional $150.0 million in the fourth quarter of 2005 under our First Lien
Credit Agreement, maturing May 31, 2011, and our Second Lien Credit Agreement, maturing May 31,
2012 (collectively the Credit Agreements). Interest expense also increased due to the weighted
average interest rate increasing to 10.52% for the six months ended June 30, 2006 compared to 8.74%
for the six months ended June 30, 2005. The increase in interest expense was partially offset by
the capitalization of $4.0 million of interest during the six months ended June 30, 2006, compared
to $1.4 million of interest capitalized during the same period in 2005. 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 our
additional Expansion Markets.
Provision for Income Taxes. Income tax expense for six months ended June 30, 2006 decreased
to $27.7 million, which is approximately 40% of our income before provision for income taxes. For
the six months ended June 30, 2005 the provision for income taxes was $102.3 million, or
approximately 39% of income before provision for income taxes. The six months ended June 30, 2005
included a gain on the sale of a 10 MHz portion of our 30 MHz PCS license in the San
Francisco-Oakland-San Jose basic trading area in the amount of $228.2 million.
Net Income. Net income decreased $117.9 million, or 74%, to $41.4 million for the six months
ended June 30, 2006 compared to $159.3 million for the six months ended June 30, 2005. The
significant decrease is primarily attributable to our non-recurring sale of a 10 MHz portion of our
30 MHz PCS license in the San Francisco-Oakland-San Jose basic trading area in May 2005 for cash
consideration of $230.0 million. The sale of PCS spectrum resulted in a gain on disposal of assets
in the amount of $139.2 million, net of income taxes.
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. 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 consolidated metric information for the three and six months ended
June 30, 2005 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Six Months |
|
|
Ended June 30, |
|
Ended June 30, |
|
|
2005 |
|
2006 |
|
2005 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customers: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period |
|
|
1,645,174 |
|
|
|
2,418,909 |
|
|
|
1,645,174 |
|
|
|
2,418,909 |
|
Net additions |
|
|
77,205 |
|
|
|
248,850 |
|
|
|
246,441 |
|
|
|
494,288 |
|
Churn: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average monthly rate |
|
|
5.1 |
% |
|
|
4.5 |
% |
|
|
4.7 |
% |
|
|
4.5 |
% |
ARPU |
|
$ |
42.32 |
|
|
$ |
42.86 |
|
|
$ |
42.44 |
|
|
$ |
42.98 |
|
CPGA |
|
$ |
101.63 |
|
|
$ |
122.20 |
|
|
$ |
100.85 |
|
|
$ |
114.56 |
|
CPU |
|
$ |
18.50 |
|
|
$ |
19.78 |
|
|
$ |
18.90 |
|
|
$ |
19.93 |
|
Customers. Net customer additions were 248,850 for the three months ended June 30,
2006, compared to 77,205 for the three months ended June 30, 2005, an increase of 222.0%. Net
customer additions were 494,288 for the six months ended June 30, 2006, compared to 246,441 for the
six months ended June 30, 2005, an increase of 101%. Total customers were 2,418,909 as of June 30,
2006, an increase of 47% over the customer total as of June 30, 2005 and 26% over the customer
total as of December 31, 2005.
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 1 to 2 year
contract with significant early termination fees. Average monthly churn represents (a) the number
of customers who have been disconnected from our system during the measurement period less the
number of customers who have reactivated service, divided by (b) the sum of the average monthly
number of customers during such period. We classify delinquent customers as churn after they have
been delinquent for 30 days. In addition, when an existing customer establishes a new account in
connection with the purchase of an upgraded or replacement phone and does not identify themselves
as an existing customer, we count that phone leaving service as a churn
34
and the new phone entering service as a gross customer addition. Churn for the three months ended June 30, 2006 was 4.5% compared to 5.1% for the three months ended June 30, 2005. Churn for the six months ended
June 30, 2006 was 4.5% compared to 4.7% for the six months ended June 30, 2005. Based upon a
change in the allowable return period from 7 days to 30 days, we revised our definition of gross
customer additions to exclude customers that discontinue service in the first 30 days of service.
This revision reduces deactivations and gross customer additions commencing March 23, 2006, and
reduces churn. We estimated that churn computed under the original 7 day allowable return period
would have been 5.2% and 4.8% for the three and six months ended June 30, 2006, respectively.
Average Revenue Per User. ARPU represents (a) service revenues less activation revenues,
E-911, Federal Universal Service Fund, or FUSF, and vendors compensation charges for the
measurement period, divided by (b) the sum of the average monthly number of customers during such
period. ARPU was $42.86 and $42.32 for the three months ended June 30, 2006 and 2005,
respectively, an increase of $0.54, or 1%. ARPU was $42.98 and $42.44 for the six months ended
June 30, 2006 and 2005, respectively, an increase of $0.54, or 1%. The increase in ARPU was
primarily the result of attracting customers to higher priced service plans, which include
unlimited nationwide long distance for $40 per month as well as unlimited nationwide long distance
and certain calling and data features on an unlimited basis for $45 per month.
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 activation revenues and
equipment revenues associated with transactions with new customers during the measurement period by
(b) gross customer additions during such period. Retail customer service expenses and equipment
margin on handsets sold to existing customers when they are identified, including handset upgrade
transactions, are excluded, as these costs are incurred specifically for existing customers. CPGA
costs have increased to $122.20 for the three months ended June 30, 2006 from $101.63 for the three
months ended June 30, 2005, which was primarily driven by the selling expenses associated with the
launch of the Tampa/Sarasota, Dallas/Ft. Worth and Detroit metropolitan areas. CPGA costs have
increased to $114.56 for the six months ended June 30, 2006 from $100.85 for the six months ended
June 30, 2005, which was primarily driven by the selling expenses associated with the launch of the
Tampa/Sarasota, Dallas/Ft. Worth and Detroit metropolitan areas. In addition, on January 23, 2006,
we revised the terms of our return policy from 7 days to 30 days, and as a result we revised our
definition of gross customer additions to exclude customers that discontinue service in the first
30 days of service. The estimated effect of this revision, commencing March 23, 2006, reduces
deactivations and gross customer additions and increases CPGA. CPGA computed under the original 7
day allowable return period would have been $113.11 and $109.51 for the three and six months ended
June 30, 2006, respectively.
Cost Per User. CPU is the 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 (which includes the gain or loss on sale of handsets to existing customers and
costs associated with handset replacements and repairs (other than warranty costs which are the
responsibility of the handset manufacturers)), divided by the sum of the average monthly number of
customers during such period. CPU for the three months ended June 30, 2006 and 2005 was $19.78 and
$18.50, respectively. CPU for the six months ended June 30, 2006 and 2005 was $19.93 and $18.90,
respectively. We continue to achieve cost benefits due to the increasing scale of our business.
However these benefits have been offset by a combination of the construction and launch expenses
associated with our Expansion Markets, which contributed approximately $4.01 and $3.56 of
additional CPU for the three and six months ended June 30, 2006, respectively. In addition, CPU
has increased historically due to costs associated with higher ARPU service plans such as those
related to unlimited nationwide long distance.
Core Markets Performance Measures
Set forth below is a summary of certain key performance measures for the periods indicated for
our Core Markets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Six Months |
|
|
Ended June 30, |
|
Ended June 30, |
|
|
2005 |
|
2006 |
|
2005 |
|
2006 |
|
|
($ in thousands) |
Core Markets Customers: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period |
|
|
1,645,174 |
|
|
|
2,119,168 |
|
|
|
1,645,173 |
|
|
|
2,119,168 |
|
Net additions |
|
|
77,205 |
|
|
|
63,618 |
|
|
|
246,441 |
|
|
|
247,503 |
|
Core Markets Adjusted EBITDA |
|
$ |
84,321 |
|
|
$ |
127,182 |
|
|
$ |
152,357 |
|
|
$ |
236,302 |
|
Core Markets Adjusted
EBITDA as a Percent of
Service Revenues |
|
|
39.6 |
% |
|
|
45.2 |
% |
|
|
37.2 |
% |
|
|
43.3 |
% |
35
We launched our service initially in 2002 in the greater Miami, Atlanta, Sacramento and
San Francisco metropolitan areas. Our Core Markets have a licensed population of approximately 25
million, of which our networks currently cover approximately 22 million. In addition, we had
positive adjusted earnings before interest, taxes, depreciation and amortization, gain/loss on disposal of assets, accretion of put option in majority-owned
subsidiary, gain/loss on extinguishment of debt, cumulative effect of change in accounting
principle and non-cash stock-based compensation, or Adjusted EBITDA, in our Core Markets after only
four full quarters of operations.
Customers. Net customer additions in our Core Markets were 63,618 for the three months
ended June 30, 2006, compared to 77,205 for the three months ended June 30, 2005. Net customer
additions in our Core Markets were 247,503 for the six months ended June 30, 2006, compared to
246,441 for the six months ended June 30, 2005. Total customers were 2,119,168 as of June 30,
2006, an increase of 29% over the customer total as of June 30, 2005 and 14% over the customer
total as of December 31, 2005. This increase is primarily attributable to the continued demand for
our service offering.
Adjusted EBITDA. Adjusted EBITDA is presented in accordance with SFAS No. 131 as it is the
primary performance metric for which our reportable segments are evaluated and it is utilized by
management to facilitate evaluation of our ability to meet future debt service, capital
expenditures and working capital requirements and to fund future growth. For the three months
ended June 30, 2006, Core Markets Adjusted EBITDA was $127.2 million compared to $84.3 million for
the same period in 2005. For the six months ended June 30, 2006, Core Markets Adjusted EBITDA was
$236.3 million compared to $152.4 million for the same period in 2005. We continue to experience
increases in Core Markets Adjusted EBITDA as a result of continued customer growth and cost
benefits due to the increasing scale of our business in the Core Markets.
Adjusted EBITDA as a Percent of Service Revenues. Adjusted EBITDA as a percent of service
revenues is calculated by dividing Adjusted EBITDA by total service revenues. Core Markets
Adjusted EBITDA as a percent of service revenues for the three months ended June 30, 2006 and 2005
were 45.2% and 39.6%, respectively. Core Markets Adjusted EBITDA as a percent of service revenues
for the six months ended June 30, 2006 and 2005 were 43.3% and 37.2%, respectively. Consistent
with the increase in Core Markets Adjusted EBITDA, we continue to experience corresponding
increases in Core Markets Adjusted EBITDA as a percent of service revenues due to the growth in
service revenues as well as cost benefits due to the increasing scale of our business in the Core
Markets.
Expansion Markets Performance Measures
Set forth below is a summary of certain key performance measures for the periods indicated for
our Expansion Markets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Six Months |
|
|
Ended June 30, |
|
Ended June 30, |
|
|
2005 |
|
2006 |
|
2005 |
|
2006 |
|
|
($ in thousands) |
Expansion Markets Customers: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period |
|
|
|
|
|
|
299,741 |
|
|
|
|
|
|
|
299,741 |
|
Net additions |
|
|
|
|
|
|
185,232 |
|
|
|
|
|
|
|
246,785 |
|
Expansion Markets Adjusted
EBITDA (Deficit) |
|
$ |
(2,105 |
) |
|
$ |
(36,596 |
) |
|
$ |
(3,005 |
) |
|
$ |
(59,282 |
) |
Customers. Net customer additions in our Expansion Markets were 185,232 for the three
months ended June 30, 2006. Net customer additions in our Expansion Markets were 246,785 for the
six months ended June 30, 2006. Total customers were 299,741 as of June 30, 2006, an increase of
466% over the customer total as of December 31, 2005. The increase in customers was primarily
attributable to the launch of the Tampa/Sarasota metropolitan area in October 2005, the launch of
the Dallas/Ft. Worth metropolitan area in March 2006 and the launch of the Detroit metropolitan
area in April 2006.
Adjusted EBITDA Deficit. 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 three months
ended June 30, 2006, Expansion Markets Adjusted EBITDA deficit was $36.6 million compared to $2.1
million for the same period in 2005. For the six months ended June 30, 2006, Expansion Markets
Adjusted EBITDA deficit was $59.3 million compared to $3.0 million for the same period in 2005.
The increases in Adjusted EBITDA deficit, when compared to the same periods in the previous year,
are attributable to the launch of the Tampa/Sarasota metropolitan area in October 2005, the launch
of the Dallas/Ft. Worth metropolitan area in March 2006 and the Detroit metropolitan area in April
2006, as well as expenses associated with the construction of the Orlando and Los Angeles
metropolitan areas.
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
36
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.
Average revenue per user, or ARPU, cost per gross addition, or CPGA, and cost per user, or
CPU, are non-GAAP financial measures utilized by our management to judge our ability to meet our
liquidity requirements and to evaluate our operating performance. We believe these measures are
important in understanding the performance of our operations from period to period, and although
every company in the wireless industry does not define each of these measures in precisely the same
way, we believe that these measures (which are common in the wireless industry) facilitate key
liquidity and operating performance comparisons with other companies in the wireless industry. The
following tables reconcile our non-GAAP financial measures with our financial statements presented
in accordance with GAAP.
ARPU We utilize average revenue per user, or ARPU, to evaluate our per-customer service
revenue realization and to assist in forecasting our future service revenues. ARPU is calculated
exclusive of activation revenues, as these amounts are a component of our costs of acquiring new
customers and are included in our calculation of CPGA. ARPU is also calculated exclusive of E-911,
FUSF and vendors compensation charges, as these are generally pass through charges that we collect
from our customers and remit to the appropriate government agencies.
Average number of customers for any measurement period is determined by dividing (a) the sum
of the average monthly number of customers for the measurement period by (b) the number of months
in such period. Average monthly number of customers for any month represents the sum of the number
of customers on the first day of the month and the last day of the month divided by two. The
following table shows the calculation of ARPU for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
|
(in thousands, |
|
|
|
except average numbers of customers and ARPU) |
|
Calculation of Average Revenue Per User (ARPU): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenues |
|
$ |
212,697 |
|
|
$ |
307,843 |
|
|
$ |
409,595 |
|
|
$ |
583,260 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Activation revenues |
|
|
(1,656 |
) |
|
|
(1,979 |
) |
|
|
(3,237 |
) |
|
|
(3,903 |
) |
E-911, FUSF and vendors compensation charges |
|
|
(6,286 |
) |
|
|
(10,752 |
) |
|
|
(12,362 |
) |
|
|
(19,710 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net service revenues |
|
$ |
204,755 |
|
|
$ |
295,112 |
|
|
$ |
393,996 |
|
|
$ |
559,647 |
|
Divided by: Average number of customers |
|
|
1,612,932 |
|
|
|
2,295,249 |
|
|
|
1,547,385 |
|
|
|
2,170,180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ARPU |
|
$ |
42.32 |
|
|
$ |
42.86 |
|
|
$ |
42.44 |
|
|
$ |
42.98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CPGA We utilize cost per gross customer addition, or CPGA, to assess the efficiency of
our distribution strategy, validate the initial capital invested in our customers and determine the
number of months to recover our customer acquisition costs. This measure also allows us to compare
our average acquisition costs per new customer to those of other wireless broadband PCS providers.
Activation revenues and 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.
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
|
(in thousands, except gross customer |
|
|
|
|
|
|
|
additions and CPGA) |
|
|
|
|
|
Calculation of Cost Per Gross Addition (CPGA): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses |
|
$ |
14,482 |
|
|
$ |
26,437 |
|
|
$ |
28,597 |
|
|
$ |
46,734 |
|
Less: Activation revenues |
|
|
(1,656 |
) |
|
|
(1,979 |
) |
|
|
(3,237 |
) |
|
|
(3,903 |
) |
Less: Equipment revenues |
|
|
(37,992 |
) |
|
|
(60,351 |
) |
|
|
(77,050 |
) |
|
|
(114,395 |
) |
Add: Equipment revenue not associated with new
customers |
|
|
17,767 |
|
|
|
26,904 |
|
|
|
34,433 |
|
|
|
51,768 |
|
Add: Cost of equipment |
|
|
65,287 |
|
|
|
112,005 |
|
|
|
133,389 |
|
|
|
212,916 |
|
Less: Equipment costs not associated with new
customers |
|
|
(24,881 |
) |
|
|
(34,669 |
) |
|
|
(46,961 |
) |
|
|
(70,033 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross addition expenses |
|
$ |
33,007 |
|
|
$ |
68,347 |
|
|
$ |
69,171 |
|
|
$ |
123,087 |
|
Divided by: Gross customer additions |
|
|
324,777 |
|
|
|
559,309 |
|
|
|
685,856 |
|
|
|
1,074,462 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CPGA |
|
$ |
101.63 |
|
|
$ |
122.20 |
|
|
$ |
100.85 |
|
|
$ |
114.56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CPU Cost per user, or CPU, is cost of service and general and administrative costs
(excluding applicable non-cash stock-based compensation expense included in cost of service and
general and administrative expense) plus net loss on equipment transactions unrelated to initial
customer acquisition (which includes the gain or loss on sale of handsets to existing customers and
costs associated with handset replacements and repairs (other than warranty costs which are the
responsibility of the handset manufacturers)) exclusive of E-911, FUSF and vendors compensation
charges, divided by the sum of the average monthly number of customers during such period. CPU does
not include any depreciation and amortization expense. Management uses CPU as a tool to evaluate
the non-selling cash expenses associated with ongoing business operations on a per customer basis,
to track changes in these non-selling cash costs over time, and to help evaluate how changes in our
business operations affect non-selling cash costs per customer. In addition, CPU provides
management with a useful measure to compare our non-selling cash costs per customer with those of
other wireless providers. We believe investors use CPU primarily as a tool to track changes in our
non-selling cash costs over time and to compare our non-selling cash costs to those of other
wireless providers. Other wireless carriers may calculate this measure differently. The following
table reconciles total costs used in the calculation of CPU to cost of service, which we consider
to be the most directly comparable GAAP financial measure to CPU.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
|
(in thousands, except average number |
|
|
|
|
|
|
|
of customers and CPU) |
|
|
|
|
|
Calculation of Cost Per User (CPU): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service |
|
$ |
65,944 |
|
|
$ |
107,497 |
|
|
$ |
129,678 |
|
|
$ |
199,987 |
|
Add: General and administrative expense |
|
|
24,860 |
|
|
|
33,827 |
|
|
|
48,594 |
|
|
|
64,967 |
|
Add: Net loss on equipment
transactions unrelated to initial
customer acquisition |
|
|
7,114 |
|
|
|
7,765 |
|
|
|
12,528 |
|
|
|
18,266 |
|
Less: Stock-based compensation
expense included in cost of service
and general and administrative
expense |
|
|
(2,100 |
) |
|
|
(2,158 |
) |
|
|
(2,965 |
) |
|
|
(3,969 |
) |
Less: E-911, FUSF and vendors
compensation revenues |
|
|
(6,286 |
) |
|
|
(10,752 |
) |
|
|
(12,362 |
) |
|
|
(19,710 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs used in the calculation of CPU |
|
$ |
89,532 |
|
|
$ |
136,179 |
|
|
$ |
175,473 |
|
|
$ |
259,541 |
|
Divided by: Average number of customers |
|
|
1,612,932 |
|
|
|
2,295,249 |
|
|
|
1,547,385 |
|
|
|
2,170,180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CPU |
|
$ |
18.50 |
|
|
$ |
19.78 |
|
|
$ |
18.90 |
|
|
$ |
19.93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity and Capital Resources
Our principal sources of liquidity are our existing cash, cash equivalents and short-term
investments, cash generated from operations, proceeds from our recent sale of 91/4% senior notes and
our senior secured credit facility. At June 30, 2006, we had a total of approximately $420.5
million in cash, cash equivalents and short-term investments.
Our strategy has been to offer our services in major metropolitan areas and their surrounding
areas, which we refer to as clusters. We are seeking opportunities to enhance our current market
clusters and to provide service in new geographic areas. From time to time, we may purchase
spectrum and related assets from third parties or the FCC. We participated as a bidder in FCC
Auction 66 and in November 2006 we were granted eight licenses for a total aggregate purchase price
of approximately $1.4 billion.
38
As a result of the acquisition of the spectrum licenses from Auction 66 and the opportunities
that these licenses provide for us to expand our operations into major metropolitan markets, we
will require significant additional capital in the future to finance the construction and initial
operating costs associated with such licenses, including clearing costs associated with
non-governmental incumbent licenses which we currently estimate to be between approximately $40
million and $60 million. 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
approximately 40 million of the total population in our Auction 66 Markets with a primary focus on
the New York, Philadelphia, Boston and Las Vegas metropolitan areas. Of the approximate 40 million
total population, we are targeting launch of operations with an initial covered population of
approximately 30 to 32 million by late 2008 or early 2009. Total estimated capital expenditures to
the launch of these operations are expected to be between $18 and $20 per covered population which
equates to a total capital investment of approximately $550 million to $650 million. Total
estimated expenditures, including capital expenditures, to become free cash flow positive, defined
as Adjusted EBITDA less capital expenditures, are expected to be approximately $29 to $30 per
covered population, which equates to $875 million to $1.0 billion based on an estimated initial
covered population of approximately 30 to 32 million. We believe that our existing cash, cash
equivalents and short-term investments, proceeds from our currently pending initial public
offering, and our anticipated cash flows from operations will be sufficient to fully fund this
planned expansion. Moreover, we have made no commitments for capital expenditures and we have the
ability to reduce the rate of capital expenditure deployment.
The construction of our network and the marketing and distribution of our wireless
communications products and services have required, and will continue to require, substantial
capital investment. Capital outlays have included license acquisition costs, capital expenditures
for construction of our network infrastructure, costs associated with clearing and relocating
non-governmental incumbent licenses, funding of operating cash flow losses incurred as we launch
services in new metropolitan areas and other working capital costs, debt service and financing fees
and expenses. Our capital expenditures for the first six months of 2006 were approximately $307.3
million and aggregate capital expenditures for 2005 were approximately $266.5 million. These
expenditures were primarily associated with the construction of the network infrastructure in our
Expansion Markets and our efforts to increase the service area and capacity of our existing Core
Markets network through the addition of cell sites and switches. We believe the increased service
area and capacity in existing markets will improve our service offering, helping us to attract
additional customers and increase revenues. In addition, we believe our new Expansion Markets have
attractive demographics which will result in increased revenues.
As of June 30, 2006, we owed an aggregate of $900 million under our Credit Agreements. In
addition, in connection with our payment of the purchase price for the Auction 66 licenses in
October 2006, certain of our subsidiaries borrowed $1.25 billion under a secured bridge credit
facility and an additional $250 million under an unsecured bridge credit facility. See Bridge
Credit Facilities below. The funds borrowed under the bridge credit facilities were used
primarily to pay the aggregate purchase price of approximately $1.4 billion for the Auction 66
licenses. In November 2006, we consummated the sale of $1.0 billion in aggregate principal amount
of 91/4% senior notes and entered into a senior secured credit facility, pursuant to which we may
borrow up to $1.7 billion. We borrowed $1.6 billion under our senior secured credit facility
concurrently with the closing of the sale of the 91/4% senior notes and used the amount borrowed,
together with the net proceeds from the sale of the 91/4% senior notes, to repay all amounts owed
under the Credit Agreements and the bridge credit facilities and to pay the related premiums, fees
and expenses and we intend to use the remaining amounts for general corporate purposes.
Our senior secured credit facility calculates consolidated Adjusted EBITDA as: consolidated
net 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 minus interest and other income and non-cash items
increasing consolidated net income.
We consider Adjusted EBITDA, as defined above, to be an important indicator to investors
because it provides information related to our ability to provide cash flows to meet future debt
service, capital expenditures and working capital requirements and fund future growth. We present
this discussion of Adjusted EBITDA because covenants in our senior secured credit facility contain
ratios based on this measure. If our Adjusted EBITDA were to decline below certain levels,
covenants in our senior secured credit facility that are based on Adjusted EBITDA, including our
maximum senior secured leverage ratio covenant, may be violated and could cause, among other
things, an inability to incur further indebtedness and in certain circumstances a default or
mandatory prepayment under our senior secured credit facility. Our maximum senior secured leverage ratio is required to be less than 4.5 to 1.0 based on Adjusted EBITDA plus
the impact of certain new markets. The maximum senior secured leverage ratio is calculated as the
ratio of senior secured indebtedness to Adjusted EBITDA, as defined by our senior secured credit
facility. In addition, consolidated Adjusted EBITDA is also utilized, among
39
other measures, to
determine managements compensation levels. Adjusted EBITDA is not a measure calculated in
accordance with GAAP, and should not be considered a substitute for, operating income (loss), net
income (loss), or any other measure of financial performance reported in accordance with GAAP. In
addition, Adjusted EBITDA should not be construed as an alternative to, or more meaningful than
cash flows from operating activities, as determined in accordance with GAAP.
The following table shows the calculation of consolidated Adjusted EBITDA, as defined in our
senior secured credit facility for the six months ended June 30, 2005 and 2006.
|
|
|
|
|
|
|
|
|
|
|
Six Months |
|
|
|
Ended June 30, |
|
|
|
2005 |
|
|
2006 |
|
|
|
(in thousands) |
|
Calculation of Consolidated Adjusted EBITDA: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
159,281 |
|
|
$ |
41,359 |
|
Adjustments: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
39,984 |
|
|
|
59,576 |
|
(Gain) loss on disposal of assets |
|
|
(223,741 |
) |
|
|
12,377 |
|
Stock-based compensation expense (1) |
|
|
2,965 |
|
|
|
3,969 |
|
Interest expense |
|
|
23,797 |
|
|
|
42,597 |
|
Accretion of put option in majority-owned
subsidiary (1) |
|
|
125 |
|
|
|
360 |
|
Interest and other income |
|
|
(1,772 |
) |
|
|
(10,719 |
) |
Loss (gain) on extinguishment of debt |
|
|
46,448 |
|
|
|
(244 |
) |
Provision for income taxes |
|
|
102,265 |
|
|
|
27,745 |
|
|
|
|
|
|
|
|
Consolidated Adjusted EBITDA |
|
$ |
149,352 |
|
|
$ |
177,020 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents a non-cash expense. |
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 six months ended June 30, 2005 and 2006.
|
|
|
|
|
|
|
|
|
|
|
Six Months |
|
|
|
Ended June 30, |
|
|
|
2005 |
|
|
2006 |
|
|
|
(in thousands) |
|
Reconciliation of Net Cash Provided by
Operating Activities to Consolidated Adjusted
EBITDA: |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
152,021 |
|
|
$ |
199,068 |
|
Adjustments: |
|
|
|
|
|
|
|
|
Interest expense |
|
|
23,797 |
|
|
|
42,597 |
|
Non-cash interest expense |
|
|
(3,627 |
) |
|
|
(776 |
) |
Interest and other income |
|
|
(1,772 |
) |
|
|
(10,719 |
) |
Provision for uncollectible accounts receivable |
|
|
39 |
|
|
|
(111 |
) |
Deferred rent expense |
|
|
(1,827 |
) |
|
|
(3,376 |
) |
Cost of abandoned cell sites |
|
|
(107 |
) |
|
|
(638 |
) |
Accretion of asset retirement obligation |
|
|
(53 |
) |
|
|
(298 |
) |
Loss (gain) on sale of investments |
|
|
(49 |
) |
|
|
1,268 |
|
Provision for income taxes |
|
|
102,265 |
|
|
|
27,745 |
|
Deferred income taxes |
|
|
(101,011 |
) |
|
|
(26,496 |
) |
Changes in working capital |
|
|
(20,324 |
) |
|
|
(51,244 |
) |
|
|
|
|
|
|
|
Consolidated Adjusted EBITDA |
|
$ |
149,352 |
|
|
$ |
177,020 |
|
|
|
|
|
|
|
|
In connection with the closing of the sale of the 91/4% senior notes, the entry into our
senior secured credit facility and the repayment of all amounts outstanding under our Credit
Agreements and bridge credit facilities, we consummated a concurrent restructuring transaction. As
a result of the restructuring transaction, MetroPCS Wireless, Inc. became a wholly-owned direct
subsidiary of MetroPCS, Inc. (formerly MetroPCS V, Inc.), which is a wholly-owned direct subsidiary
of MetroPCS Communications, Inc. MetroPCS Communications, Inc. and MetroPCS, Inc. guaranteed the
91/4% senior notes and the obligations under the senior secured credit facility. MetroPCS, Inc. also
pledged the capital stock of MetroPCS Wireless, Inc. as security for the obligations under the senior secured credit facility. All of our FCC
licenses and our 85% limited liability company member interest in
Royal Street Communications are now held by
MetroPCS Wireless, Inc. and its wholly-owned subsidiaries.
40
Operating Activities
Cash provided by operating activities was $199.1 million during the six months ended June 30,
2006 compared to $152.0 million during the six months ended June 30, 2005. The increase was
primarily attributable to a 160% increase in net income during the six months ended June 30, 2006
compared to the six months ended June 30, 2005, adjusted for the $228.2 million gain on the sale of
a 10 MHz portion of our 30 MHz PCS license for the San Francisco-Oakland-San Jose basic trading
area. The timing of payments on accounts payable and accrued expenses in the six months ended June
30, 2006, as well as an increase in deferred revenues as a result of the increase in customers
during the six months ended June 30, 2006 compared to the six months ended June 30, 2005 also
contributed to the increase in cash provided by operating activities.
Investing Activities
Cash used in investing activities was $203.1 million during the six months ended June 30, 2006
compared to $634.3 million during the six months ended June 30, 2005. The decrease was due
primarily to a $499.4 million decrease in purchases of FCC licenses, partially offset by a $207.4
million increase in purchases of property and equipment related to the construction of the
Expansion Markets.
Financing Activities
Cash provided by financing activities was $27.9 million during the six months ended June 30,
2006 compared to $514.4 million during the six months ended June 30, 2005. This decrease was due
primarily to the net proceeds from the Credit Agreements during the first six months of 2005.
First and Second Lien Credit Agreements
As of June 30, 2006, there was a total of $900 million outstanding under the Credit
Agreements, which is reported as long-term debt on the consolidated balance sheets included
elsewhere in this report.
The terms of the Credit Agreements required us to enter into an interest rate cap agreement in
an amount equal to at least 50% of the aggregate debt outstanding thereunder. On June 27, 2005, we
entered into a three-year interest rate cap agreement to mitigate the impact of interest rate
changes. An interest rate cap represents a right to receive cash if interest rates rise above a
contractual strike rate. At June 30, 2006, the interest rate cap agreement had a notional value of
$450.0 million and we will receive payments on a semiannual basis if the six-month LIBOR interest
rate exceeds 3.75% through January 1, 2007 and 6.00% through the agreement maturity date of July 1,
2008. We paid $1.9 million upon execution of the interest rate cap agreement. This financial
instrument is reported in long-term investments at fair market value on the consolidated balance
sheets included elsewhere in this report, which was $7.1 million as of June 30, 2006.
On November 3, 2006, we paid the lenders under the Credit Agreements $931.5 million plus
accrued interest of $8.6 million to extinguish the aggregate outstanding principal balance under
the Credit Agreements. As a result, we recorded a loss on extinguishment of debt in the amount of
approximately $42.7 million.
On November 21, 2006, we terminated the interest rate cap agreement that was required by our
Credit Agreements. We received approximately $4.3 million upon termination of the agreement. The
proceeds from the termination of the agreement approximated carrying value and accordingly, no gain
or loss was recognized upon disposition.
Bridge Credit Facilities
In July 2006, MetroPCS II, Inc., or MetroPCS II, an indirect wholly-owned subsidiary of
MetroPCS Communications, Inc. (which has since merged into MetroPCS Wireless, Inc.), entered into
an Exchangeable Senior Secured Credit Agreement and Guaranty Agreement, dated as of July 13, 2006,
or the secured bridge credit facility. The aggregate credit commitments available under the secured
bridge credit facility total $1.25 billion. On July 14, 2006, the lenders funded $200.0 million
under the secured bridge credit facility. On October 3, 2006, the lenders funded an additional
$80.0 million under the secured bridge credit facility. On October 18, 2006, the lenders funded
the remaining $970.0 million under the secured bridge credit facility.
On November 3, 2006, MetroPCS II repaid the aggregate outstanding principal balance under the
secured bridge credit facility of $1.25 billion and accrued interest of $5.9 million. As a result,
MetroPCS II recorded a loss on extinguishment of debt of approximately $7.0 million.
In October 2006, MetroPCS IV, Inc., an indirect wholly-owned subsidiary of MetroPCS
Communications, Inc. (which has since merged into MetroPCS Wireless, Inc.), entered into an
additional Exchangeable Senior Unsecured Bridge Credit Facility, or the unsecured bridge credit
facility. The aggregate credit commitments available under the unsecured bridge credit facility
total $250 million. On October 18, 2006, the lenders funded the $250 million available under the
unsecured bridge credit facility.
41
On November 3, 2006, MetroPCS IV, Inc. repaid the aggregate outstanding principal balance
under the unsecured bridge credit facility of $250.0 million and accrued interest of $1.2 million.
As a result, MetroPCS IV, Inc. recorded a loss on extinguishment of debt of approximately $2.4
million.
Senior Secured Credit Facility
MetroPCS Wireless, Inc., a wholly-owned subsidiary of MetroPCS, entered into the senior
secured credit facility on November 3, 2006. The senior secured credit facility consists of a $1.6
billion term loan facility and a $100 million revolving credit facility. The term loan facility is
repayable in quarterly installments in annual aggregate amounts equal to 1% of the initial
aggregate principal amount of $1.6 billion. The term loan facility will mature seven years
following the date of its execution in November 2006. The revolving credit facility will mature
five years following the date of its execution in November 2006.
The facilities under the senior secured credit agreement are guaranteed by MetroPCS
Communications, Inc., MetroPCS, Inc. and each of MetroPCS Wireless, Inc.s direct and indirect
present and future wholly-owned domestic subsidiaries. The facilities are not guaranteed by Royal
Street, but MetroPCS Wireless, Inc. pledged the promissory note that Royal
Street Communications had given it in connection with amounts borrowed by Royal Street Communications from MetroPCS Wireless,
Inc. and the non-controlling 85% limited liability company member interest we hold in Royal Street Communications.
The senior secured credit facility contains customary events of default, including cross defaults.
The obligations are also secured by the capital stock of MetroPCS Wireless, Inc. as well as
substantially all of MetroPCS Wireless, Inc.s present and future assets and each of its direct and
indirect present and future wholly-owned subsidiaries (except as prohibited by law and certain
permitted exceptions).
Under the senior secured credit agreement, MetroPCS Wireless, Inc. will be subject to certain
limitations, including limitations on its ability to incur additional debt, make certain restricted
payments, sell assets, make certain investments or acquisitions, grant liens and pay dividends.
MetroPCS Wireless, Inc. is also subject to certain financial covenants, including maintaining a
maximum senior secured consolidated leverage ratio and, under certain circumstances, maximum
consolidated leverage and minimum fixed charge coverage ratios. There is no prohibition on our
ability to make investments in or loan money to Royal Street.
Amounts outstanding under our senior secured credit facility bear interest at a LIBOR rate
plus a margin as set forth in the facility and the terms of the senior secured credit facility
require us to enter into interest rate hedging agreements that fix the interest rate in an amount
equal to at least 50% of our outstanding indebtedness, including the notes.
On November 21, 2006, MetroPCS Wireless, Inc. entered into a three-year interest rate
protection agreement to manage its interest rate risk exposure and fulfill a requirement of its
senior secured credit facility. The agreement is effective on February 1, 2007, covers a notional
amount of $1.0 billion and effectively converts this portion of MetroPCS Wireless, Inc.s variable
rate debt to fixed rate debt at an annual rate of 7.419%, leaving $600.0 million in variable rate
debt. The interest rate protection agreement expires on February 1, 2010.
On February 20, 2007, MetroPCS Wireless, Inc. 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%.
91/4% Senior Notes Due 2014
On November 3, 2006, MetroPCS Wireless, Inc. also consummated the sale of $1.0 billion
principal amount of its 91/4% senior notes due 2014. The 91/4% senior notes are unsecured obligations
and are guaranteed by MetroPCS Communications, Inc., MetroPCS, Inc., and all of MetroPCS Wireless,
Inc.s direct and indirect wholly-owned subsidiaries, but are not guaranteed by Royal Street.
Interest is payable on the 91/4% senior notes on May 1 and November 1 of each year, beginning with
May 1, 2007. MetroPCS Wireless, Inc. may, at its option, redeem some or all of the 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, MetroPCS Wireless, Inc. 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.
42
Capital Expenditures and Other Asset Acquisitions and Dispositions
Capital Expenditures. We and Royal Street incurred approximately $550.7 million in
capital expenditures for the year ending December 31, 2006. We and Royal Street currently expect to
incur approximately $650 million in capital expenditures for the year ending December 31, 2007 in
our Core and Expansion Markets.
During the six months ended June 30, 2006, we and Royal Street incurred $307.3 million in
capital expenditures. These capital expenditures were primarily for the expansion and improvement
of our existing network infrastructure and costs associated with the construction of the Expansion
Markets.
During the year ended December 31, 2005, we had $266.5 million in capital expenditures. These
capital expenditures were primarily for the expansion and improvement of our existing network
infrastructure and costs associated with the construction of the Tampa/Sarasota, Dallas/Ft. Worth
and Detroit Expansion Markets.
Other Acquisitions and Dispositions. On May 11, 2005, we completed the sale of a 10 MHz
portion of our 30 MHz PCS license in the San Francisco-Oakland-San Jose basic trading area for cash
consideration of $230.0 million. The sale was structured as a like-kind exchange under Section 1031
of the Internal Revenue Code of 1986, as amended, through which our right, title and interest in
and to the divested PCS spectrum was exchanged for the PCS spectrum acquired in Dallas/Ft. Worth,
Texas and Detroit, Michigan through a license purchase agreement for an aggregate purchase price of
$230.0 million. The purchase of the PCS spectrum in Dallas/Ft. Worth and Detroit was accomplished
in two steps with the first step of the exchange occurring on February 23, 2005 and the second step
occurring on May 11, 2005 when we consummated the sale of 10 MHz of PCS spectrum for the San
Francisco-Oakland-San Jose basic trading area. The sale of PCS spectrum resulted in a gain on
disposal of asset in the amount of $228.2 million.
On July 7, 2005, we acquired a 10 MHz F-Block PCS license for Grayson and Fannin counties in
the basic trading area of Sherman-Denison, Texas for an aggregate purchase price of $0.9 million.
On August 12, 2005, we closed on the purchase of a 10 MHz F-Block PCS license in the basic
trading area of Bakersfield, California for an aggregate purchase price of $4.0 million.
On December 21, 2005, the FCC granted Royal Street Communications 10 MHz of PCS spectrum in the Los Angeles,
California; Orlando, Lakeland-Winter Haven, Jacksonville, Melbourne-Titusville, and Gainesville,
Florida basic trading areas. Royal Street Communications, as the high bidder in Auction 58, had previously paid
approximately $294.0 million to the FCC for these PCS licenses.
On August 7, 2006, we acquired a 10 MHz PCS license in the basic trading area of Ocala,
Florida in exchange for a 10 MHz portion of our 30 MHz PCS license in the basic trading area of
Athens, Georgia. We paid $0.2 million at the closing of this agreement.
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. These new licenses cover six of the 25
largest metropolitan areas in the United States. The east coast expansion opportunities include the
entire east coast corridor from Philadelphia to Boston, including New York City, as well as the
entire states of New York, Connecticut and Massachusetts. In the western United States, the new
expansion opportunities include the San Diego, Portland, Seattle and Las Vegas metropolitan areas.
The balance supplements or expands the geographic boundaries of our existing operations in
Dallas/Ft. Worth, Detroit, Los Angeles, San Francisco and Sacramento.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Inflation
We believe that inflation has not materially affected our operations.
Effect of New Accounting Standards
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial
Instruments an amendment of FASB Statements No. 133 and 140 (SFAS No. 155). SFAS No. 155
permits fair value remeasurement for any hybrid financial instrument that contains an embedded
derivative that otherwise would require bifurcation, clarifies which interest-only strips and
principal-only strips are not subject to the requirements of SFAS No. 133, establishes a
requirement to evaluate interests in securitized financial assets to identify interests that
are freestanding derivatives or that are
43
hybrid financial instruments that contain an embedded
derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of
subordination are not embedded derivatives, and amends FASB Statement No. 140 to eliminate the
prohibition on a qualifying special purpose entity from holding a derivative financial instrument
that pertains to a beneficial interest other than another derivative financial instrument. SFAS No.
155 is effective for all financial instruments acquired or issued after the beginning of an
entitys first fiscal year that begins after September 15, 2006. The adoption of this statement did
not have any impact on our financial condition or results of operations.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets
an amendment of FASB Statement No. 140 (SFAS No. 156). SFAS No. 156 amends SFAS No. 140 to
require that all separately recognized servicing assets and servicing liabilities be initially
measured at fair value, if practicable. SFAS No. 156 permits, but does not require, the subsequent
measurement of separately recognized servicing assets and servicing liabilities at fair value.
Under SFAS No. 156, an entity can elect subsequent fair value measurement to account for its
separately recognized servicing assets and servicing liabilities. Adoption of SFAS No. 156 is
required as of the beginning of the first fiscal year that begins after September 15, 2006. The
adoption of this statement did not have any impact on our financial condition or results of
operations.
In July 2006, the FASB issued Interpretation No. 48 Accounting for Uncertainty in Income
Taxes, (FIN No. 48), which clarifies the accounting for uncertainty in income taxes recognized
in the financial statements in accordance with SFAS No. 109. FIN No. 48 provides guidance on the
financial statement recognition and measurement of a tax position taken or expected to be taken in
a tax return. FIN No. 48 also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosures, and transition. FIN No. 48 is effective for
fiscal years beginning after December 15, 2006. While our analysis of the impact of this
Interpretation is not yet complete, we do not anticipate it will have a material effect on our
financial condition or results of operations.
In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin No. 108, Considering the Effects of Prior Year Misstatements When Quantifying
Misstatements in the Current Year Financial Statements, (SAB 108), which addresses how the
effects of prior year uncorrected misstatements should be considered when quantifying misstatements
in current year financial statements. SAB 108 requires companies to quantify misstatements using a
balance sheet and income statement approach and to evaluate whether either approach results in
quantifying an error that is material in light of relevant quantitative and qualitative factors.
When the effect of initial adoption is material, companies may record the effect as a cumulative
effect adjustment to beginning of year retained earnings. SAB 108 is effective for annual financial
statements covering the first fiscal year ending after November 15, 2006. We are required to adopt
this interpretation by December 31, 2006. The adoption of this statement did not have any impact on
our financial condition or results of operations.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, (SFAS No. 157),
which defines fair value, establishes a framework for measuring fair value in GAAP and expands
disclosure about fair value measurements. SFAS No. 157 is effective for fiscal years beginning
after November 15, 2007 and interim periods within those fiscal years. We will be required to adopt
SFAS No. 157 in the first quarter of fiscal year 2008. We have not completed our evaluation of the
effect of SFAS No. 157.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities Including an amendment of FASB Statement No. 115, (SFAS No. 159),
which permits entities to choose to measure many financial instruments and certain other items at
fair value. The objective of SFAS No. 159 is to improve financial reporting by providing entities
with the opportunity to mitigate volatility in reported earnings caused by measuring related assets
and liabilities differently without having to apply complex hedge accounting provisions. SFAS No.
159 is effective for fiscal years beginning after November 15, 2007. We will be required to adopt
SFAS No. 159 on January 1, 2008. We have not completed our evaluation of the effect of SFAS No.
159.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the potential loss arising from adverse changes in market prices and rates,
including interest rates. We do not routinely enter into derivatives or other financial instruments
for trading, speculative or hedging purposes, unless it is required by our credit agreements. We do
not currently conduct business internationally, so we are generally not subject to foreign currency
exchange rate risk.
At June 30, 2006, we had $900.0 million in outstanding indebtedness under our Credit
Agreements that bears interest at floating rates tied to a fixed spread to the London Inter Bank
Offered Rate. The interest rates on the outstanding debt under our Credit Agreements as of June 30,
2006 were 9.50% for the First Lien Credit Agreement and 12.00% for the
Second Lien Credit Agreement. If market interest rates increase 100 basis points over the
rates in effect at June 30, 2006, annual interest expense would increase $9.0 million.
44
The terms of our Credit Agreements required that we enter into an interest rate cap agreement
in an amount equal to at least 50% of the aggregate debt outstanding thereunder. In June 2005, we
entered into a three-year interest rate cap agreement to reduce the impact of interest rate changes
on $450.0 million of the debt outstanding under the Credit Agreements. Under the terms of the
interest rate cap agreement, we will receive payments on a semi-annual basis if the six-month LIBOR
interest rate exceeds 3.75% through January 1, 2007 and 6.00% through the agreement maturity date
of July 1, 2008. We paid $1.9 million upon execution of the three-year interest rate cap agreement.
Item 4. 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(e), 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 June 30, 2006, the end of the period covered by this
report. In designing and evaluating the disclosure controls and procedures, 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 June 30, 2006, in timely making known to
them material information relating to us and our consolidated subsidiaries required to be disclosed
in our reports filed or submitted under the Securities Exchange Act of 1934, as amended.
Changes in Internal Control Over Financial Reporting
There were no changes in the Companys internal control over financial reporting that occurred
during the quarter ended June 30, 2006 that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial reporting.
45
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
On June 14, 2006, Leap Wireless International, Inc. and Cricket Communications, Inc., or
collectively Leap, filed suit against us in the United States District Court for the Eastern
District of Texas, Marshall Division, Civil Action No. 2-06CV-240-TJW and amended on June 16, 2006,
for infringement of U.S. Patent No. 6,813,497 Method for Providing Wireless Communication Services
and Network and System for Delivering of Same, or the 497 Patent, issued to Leap. The complaint
seeks both injunctive relief and monetary damages for our alleged infringement of such patent. On
August 3, 2006, we (i) answered the complaint, (ii) raised a number of affirmative defenses, and
(iii) together with two related entities, counterclaimed against Leap and several related entities
and certain current and former employees of Leap and certain of its related entities, including
Leaps CEO. We have also tendered Leaps claims to the manufacturer of our network infrastructure
equipment for indemnity and defense. In our counterclaims, we claim that we do not infringe any
valid or enforceable claim of the 497 Patent. Certain of the Leap defendants, including its CEO,
answered our counterclaims on October 13, 2006. In its answer, Leap and its CEO denied our
allegations and asserted affirmative defenses to our counterclaims. In connection with denying a
motion to dismiss by certain individual defendants, the court concluded that our claims against
those defendants were compulsory counterclaims. On April 3, 2007 the Court held a Scheduling
Conference at which the Court set the date for the claim construction hearing for January 2008 and
the trial date for August 2008. We plan to vigorously defend against Leaps claims relating to the
497 Patent.
If Leap were successful in its claim for injunctive relief, we could be enjoined from
operating our business in the manner we currently operate, which could require us to expend
additional capital to change certain of our technologies and operating practices, or could prevent
us from offering some or all of our services using some or all of our existing systems. In
addition, if Leap were successful in its claim for monetary damage, we could be forced to pay Leap
substantial damages for past infringement and/or ongoing royalties on a portion of our revenues,
which could materially adversely impact our financial performance.
On August 15, 2006, we filed a separate action in the California Superior Court, Stanislaus
County, Case No. 382780, against Leap and others for unfair competition, misappropriation of trade
secrets, interference with contracts, breach of contract, intentional interference with prospective
business advantage, and trespass. In this suit we seek monetary and punitive damages and injunctive
relief. Defendants responded to our complaint by filing demurrers on or about January 5, 2007
requesting that the Court dismiss the complaint. On February 1, 2007, the Court granted the
demurrers in part and granted us leave to amend the complaint. We filed a First Amended Complaint
on February 27, 2007. Defendants response to the First
Amended Complaint was due March 28, 2007.
Defendants responded by filing demurrers on March 28, 2007, requesting that the Court dismiss our
First Amended Complaint. The demurrers are set for hearing on May 2, 2007. We intend to vigorously
prosecute this complaint.
On September 22, 2006, Royal Street filed a separate action in the United States District
Court for the Middle District of Florida, Tampa Division, Civil Action No. 8:06-CV-01754-T-23TBM,
seeking a declaratory judgment that Leaps 497 Patent is invalid and not being infringed upon by
Royal Street. Leap responded to Royal Streets complaint by filing a motion to dismiss Royal
Streets complaint for lack of subject matter jurisdiction or, in the alternative, that the action
be transferred to the United States District Court for the Eastern District of Texas, Marshall
Division where Leap has brought suit against us under the same patent. Royal Street has responded
to this motion. The Court has set a trial date in October 2008.
In addition, 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 other pending legal proceedings that we believe would, individually or in
the aggregate, have a material adverse effect on our financial condition or results of operations.
Item 1A. Risk Factors
There have been no material changes in our risk factors from those disclosed in Item 1A. Risk
Factors of our Form 10-K filed with the SEC on March 30, 2007.
Item 4.
Submission of Matters to a Vote of Security Holders
In May 2006, we sought the written consent of the holders of Series D
Preferred Stock to the designation of the representative of such
shareholders to our Board of Directors in accordance with the
Companys Second Amended and Restated Stockholders Agreement,
dated as of August 30, 2005 (the Stockholders
Agreement). On May 31, 2006, we received the written consent of
the holders of greater than a majority of our outstanding Series D
Preferred Stock approving Mr. Walker Simmons as their designee to our
Board of Directors. In accordance with the Stockholders Agreement,
Mr, Simmons was appointed to our Board of Directors on June 28, 2006.
Item 5. Other Information
In July 2006, MetroPCS II, Inc., a wholly-owned subsidiary of the Company (which has since
merged into MetroPCS Wireless, Inc.), entered into an Exchangeable Senior Secured Credit Agreement
and Guaranty Agreement, dated as of
46
July 13, 2006, or the secured bridge credit facility. The aggregate credit commitments available
under the secured bridge credit facility total $1.25 billion. On July 14, 2006, the lenders funded
$200.0 million under the secured bridge credit facility. On October 3, 2006, the lenders funded an
additional $80.0 million under the secured bridge credit facility. On October 18, 2006, the
lenders funded the remaining $970.0 million under the secured bridge credit facility. The funds
borrowed under the bridge credit facilities were used primarily to pay the aggregate purchase price
of approximately $1.4 billion for the licenses we acquired in FCC Auction 66.
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.
Item 6. Exhibits
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
|
|
31.1 |
|
|
Certifications of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
31.2 |
|
|
Certifications of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
32.1 |
|
|
Certification of Chief Executive Officer 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 Chief Financial Officer 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. |
47
SIGNATURES
Pursuant to the requirements 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.
|
|
Date: April 9, 2007 |
By: |
/s/ Roger D. Linquist
|
|
|
|
Roger D. Linquist |
|
|
|
President and Chief Executive Officer |
|
|
|
|
|
|
|
|
|
|
Date: April 9, 2007 |
By: |
/s/ J. Braxton Carter
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J. Braxton Carter |
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Senior Vice President and Chief Financial Officer |
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INDEX TO EXHIBITS
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Exhibit |
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Number |
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Description |
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31.1 |
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Certifications of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2 |
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Certifications of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1 |
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Certification of Chief Executive Officer 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. |
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32.2 |
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Certification of Chief Financial Officer 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. |