UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10
GENERAL
FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or 12(g) of
the Securities Exchange Act of 1934
METROPCS COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware |
|
20-0836269 |
(State or other jurisdiction |
|
(I.R.S. Employer |
8144 Walnut Hill Lane, Suite 800
Dallas, Texas 75231-4388
(Address of Principal Executive Offices, including Zip Code)
(214) 265-2550
(Registrants Telephone Number, including Area Code)
Securities to be registered pursuant to Section 12(b) of the Act: None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.0001 per share
TABLE OF CONTENTS
i
Any statements made in this registration statement that are not statements of historical fact, including statements about our beliefs and expectations, are forward-looking statements and should be evaluated as such. Forward-looking statements include information concerning possible or assumed future results of operations, including statements that may relate to our plans, objectives, strategies, goals, future events, future revenues or performance, capital expenditures, financing needs and other information that is not historical information. These forward-looking statements often include words such as anticipate, expect, suggests, plan, believe, intend, estimates, targets, projects, should, may, will, forecast, and other similar expressions. These forward-looking statements are contained throughout this registration statement, including Business, Risk Factors, and Managements Discussion and Analysis of Financial Condition and Results of Operations. We base these forward-looking statements and 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 registration statement, you should understand that these forward-looking statements and projections are not guarantees of future performance or results. Although we believe that these forward-looking statements and projections were 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 control and reporting obligations of public companies;
our ability to manage our rapid growth, train additional personnel and improve our controls and procedures;
our ability to secure the necessary spectrum and network infrastructure equipment;
our ability to clear the spectrum in our Auction 66 Markets 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 our 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 under Risk Factors in the registration statement on Form S-1 filed as Exhibit 99.1 hereto.
The forward-looking statements and projections are subject to and involve risks, uncertainties and assumptions and you should not place undue reliance on these forward-looking statements and projections. All future written and oral forward-looking statements and projections attributable to us or persons acting on our behalf are expressly qualified in their entirety by our cautionary statements. We do not intend to, and do not undertake a duty to, update any forward-looking statement or projection in the future to reflect the occurrence of events or circumstances, except as required by law.
In this registration statement, unless the context indicates otherwise, references to MetroPCS, MetroPCS Communications, our Company, the Company, we, our, ours and us refer to MetroPCS Communications, Inc., a Delaware corporation, and its wholly-owned subsidiaries.
ii
INFORMATION REQUIRED IN REGISTRATION STATEMENT
(Cross-Reference Sheet Between Registration Statement on Form
S-1 Filed as Exhibit 99.1 hereto
and Items of this Registration Statement on Form 10)
The information required by this item is contained under the sections Prospectus Summary, Business and Where You Can Find More Information of the registration statement on Form S-1 filed as Exhibit 99.1 hereto (the IPO Registration Statement). Those sections are incorporated herein by reference.
The information required by this item is contained under the section Risk Factors of the IPO Registration Statement. That section is incorporated herein by reference.
The information required by this item is contained under the sections Selected Consolidated Financial Data and Managements Discussion and Analysis of Financial Condition and Results of Operations of the IPO Registration Statement. Those sections are incorporated herein by reference.
The information required by this item is contained under the section BusinessProperties of the IPO Registration Statement. That section is incorporated herein by reference.
Item 4. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as of September 30, 2006 regarding the beneficial ownership of each class of our outstanding capital stock by:
each of our directors;
each named executive officer;
all of our directors and executive officers as a group; and
each person known by us to beneficially own more than 5% of our outstanding shares of our common stock, par value $0.0001 (Common Stock) per share, Series D Preferred Stock, par value $0.0001 per share (Series D Preferred Stock), or Series E Preferred Stock, par value $0.0001 per share (Series E Preferred Stock, and together with the Series D Preferred Stock, the Preferred Stock).
The beneficial ownership information has been presented in accordance with the rules of the Securities and Exchange Commission (the SEC) and is not necessarily indicative of beneficial ownership for any other purpose. Unless otherwise indicated below and except to the extent authority is shared by spouses under applicable law, to our knowledge, each of the persons set forth below has sole voting and investment power with respect to all of the shares of each class or series of Common Stock and Preferred Stock shown as beneficially owned by them. The number of shares of Common Stock used to calculate each listed persons percentage ownership of each such class includes the shares of Common Stock underlying options, warrants or other convertible securities held by such person that are exercisable within 60 days after September 30, 2006. There are no currently outstanding options, warrants or other convertible securities exercisable for shares of Preferred Stock.
There were 52,071,221 shares of Common Stock, 3,500,993 shares of Series D Preferred Stock and 500,000 shares of Series E Preferred Stock outstanding as of September 30, 2006. Each share of Series D Preferred Stock will be converted into Common Stock upon (i) the completion of a Qualifying Public Offering (as defined in the Second Amended and Restated Stockholders Agreement, dated as of August 30, 2005, by and among the Company and its stockholders (the Stockholders Agreement)); (ii) the Common Stock trading (as in the case of a merger or consolidation of the Company with another company, other than as a sale or change of control of the Company, the
1
shares received in such merger or consolidation having traded immediately prior to such merger or consolidation) on a national securities exchange for a period of 30 consecutive trading days above a price implying a market valuation of the Series D Preferred Stock in excess of twice the initial purchase price of the Series D Preferred Stock, or (iii) the date specified by the holders of 662/3% of the Series D Preferred Stock. The Series D Preferred Stock is convertible into Common Stock at $9.40 per share, which per share amount is subject to adjustment under the terms of the Second Amended and Restated Certificate of Incorporation of MetroPCS Communications, Inc.
Each share of Series E Preferred Stock will be converted into Common Stock upon (i) the completion of a Qualifying Public Offering (as defined in the Stockholders Agreement); (ii) the Common Stock trading (or, in the case of a merger or consolidation of the Company with another company, other than as a sale or change of control of the Company, the shares received in such merger or consolidation having traded immediately prior to such merger or consolidation) on a national securities exchange for a period of 30 consecutive trading days above a price implying a market valuation of the Series D Preferred Stock over twice the Series D Preferred Stock initial purchase price; or (iii) the date specified by the holders of 662/3% of the outstanding Series E Preferred Stock. The Series E Preferred Stock is convertible into Common Stock at $27.00 per share, which per share amount is subject to adjustment under the terms of the Second Amended and Restated Certificate of Incorporation of MetroPCS Communications, Inc.
Each share of Series D Preferred Stock and Series E Preferred Stock accrues dividends at the rate of 6% per annum. If not previously converted, we are required to redeem all outstanding shares of Preferred Stock on July 17, 2015, at the liquidation preference of $100 per share plus accrued but unpaid dividends. Upon a conversion of Preferred Stock, whether at the option of the holder or upon an automatic conversion, all accrued but unpaid dividends are also converted into shares of Common Stock. Accordingly, the number and percentage of class of Common Stock columns set forth below include all shares issuable upon conversion of the Series D Preferred Stock and Series E Preferred Stock, as applicable, including all accrued but unpaid dividends as of September 30, 2006.
|
|
Common Stock |
|
Series D |
|
Series E |
|
||||||
|
|
Number |
|
Percentage |
|
Number |
|
Percentage |
|
Number |
|
Percentage |
|
Directors and Named Executive Officers: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Roger D. Linquist(2) |
|
2,927,003 |
|
2.74 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
J. Braxton Carter(3) |
|
96,298 |
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert A. Young(4) |
|
83,122 |
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark A. Stachiw(5) |
|
57,202 |
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Malcolm M. Lorang(6) |
|
230,798 |
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John Sculley(7) |
|
449,805 |
|
* |
|
5,053 |
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James F. Wade(8)(17) |
|
9,014,427 |
|
8.45 |
% |
664,080 |
|
18.97 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arthur C. Patterson(9) |
|
12,488,868 |
|
11.70 |
% |
329,387 |
|
9.41 |
% |
|
|
|
|
W. Michael Barnes(10) |
|
60,573 |
|
* |
|
|
|
|
|
|
|
|
|
C. Kevin Landry(11)(18) |
|
14,125,118 |
|
13.24 |
% |
401,342 |
|
11.46 |
% |
250,000 |
|
50.00 |
% |
James N. Perry, Jr.(12)(17) |
|
14,088,382 |
|
13.20 |
% |
400,112 |
|
11.43 |
% |
250,000 |
|
50.00 |
% |
Walker C. Simmons(13) |
|
|
|
|
|
|
|
|
|
|
|
|
|
All directors and executive officers as a group (12 persons) |
|
53,621,596 |
|
50.25 |
% |
1,799,974 |
|
51.41 |
% |
500,000 |
|
100 |
% |
2
|
|
Common Stock |
|
Series D |
|
Series E |
|
||||||
|
|
Number |
|
Percentage |
|
Number |
|
Percentage |
|
Number |
|
Percentage |
|
Beneficial Owners of More Than 5%: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accel Partners, et al(14)(9) |
|
12,014,788 |
|
11.26 |
% |
329,387 |
|
9.41 |
% |
|
|
|
|
Columbia Capital, et al(15) |
|
3,136,412 |
|
2.94 |
% |
225,000 |
|
6.43 |
% |
|
|
|
|
First Plaza Group Trust(16) |
|
7,823,783 |
|
7.33 |
% |
100,040 |
|
2.86 |
% |
|
|
|
|
M/C Venture Partners, et al(17)(8) |
|
9,014,427 |
|
8.45 |
% |
664,080 |
|
18.97 |
% |
|
|
|
|
Madison Dearborn Capital Partners IV,
L.P.(18)(12) |
|
14,088,382 |
|
13.20 |
% |
400,112 |
|
11.43 |
% |
250,000 |
|
50.00 |
% |
TA Associates, et al(19)(11) |
|
14,125,118 |
|
13.24 |
% |
401,342 |
|
11.46 |
% |
250,000 |
|
50.00 |
% |
* |
Represents less than 1% |
|
|
(1) |
Unless otherwise indicated, the address of each person is c/o MetroPCS Communications, Inc., 8144 Walnut Hill Lane, Suite 800, Dallas, Texas 75231. |
|
|
(2) |
Includes 182,388 shares of Common Stock issuable upon exercise of options granted under our equity compensation plans, 1,507,624 shares of Common Stock held directly by Mr. Linquist, and 1,236,991 shares of Common Stock held by Baltimore 8801 X Ltd. Partners, a partnership in which Mr. Linquist is a general partner. |
|
|
(3) |
Includes 78,514 shares of Common Stock issuable upon exercise of options granted under our equity compensation plans. |
|
|
(4) |
Includes 40,882 shares of Common Stock issuable upon exercise of options granted under our equity compensation plans. |
|
|
(5) |
Includes 57,202 shares of Common Stock issuable upon exercise of options granted under our equity compensation plans. |
|
|
(6) |
Includes 171,398 shares of Common Stock issuable upon exercise of options granted under our equity compensation plans. |
|
|
(7) |
Includes 183,669 shares of Common Stock issuable upon exercise of options granted under our equity compensation plans and 67,913 shares of Common Stock issuable upon the conversion of Series D Preferred Stock, which includes 14,158 shares issuable pursuant to accrued dividends. |
|
|
(8) |
Includes 8,915,395 shares of Common Stock issuable upon the conversion of Series D Preferred Stock, which includes 1,850,718 shares issuable pursuant to accrued dividends, and 94,419 shares of Common Stock issuable upon exercise of options granted under our equity compensation plans. All shares attributed to Mr. Wade are owned directly by M/C Venture Investors, LLC, M/C Venture Partners IV, LP, M/C Venture Partners V, LP, and Chestnut Venture Partners LP, with which Mr. Wade is affiliated and may be deemed to be a member of a group (hereinafter referred to as M/C Venture Partners, et al) under Section 13d-3 of the Securities Exchange Act of 1934, as amended (the Exchange Act) and may be deemed to share voting and/or investment power with respect to the shares owned by such entities. Mr. Wade disclaims beneficial ownership of such shares, except to the extent of his interest in such shares arising from his interests in M/C Venture Partners, et al. |
|
|
(9) |
Includes 112,508 shares of Common Stock issuable upon exercise of options granted to Mr. Patterson under our equity compensation plans and 2,796 shares of Common Stock held directly by Mr. Patterson. All other shares attributed to Mr. Patterson, including 3,609 shares of Common Stock issuable upon exercise of stock options granted under our equity compensation plans and 4,422,149 shares of Common Stock issuable upon the conversion of Series D Preferred Stock, which includes 918,038 shares issuable pursuant to accrued dividends, are owned directly by Accel Internet Fund III L.P., Accel Investors 94 L.P., Accel Investors 99 L.P., Accel IV L.P., Accel Keiretsu L.P., Accel VII L.P., ACP Family Partnership L.P., Ellmore C. Patterson Partners, BrandyTrust Private Equity Partners L.P., Brandywine-Anne Hyde Patterson c/o A.O. Choate, Brandywine-Anne Hyde Patterson Trust U/A 1-31-23, Brandywine-Caroline Choate de Chazal Trust U/A 2-10-56, Brandywine-David C. Patterson U/A 2-10-56, Brandywine-Jane C. Beck Trust U/A 2-10-56, Brandywine-Michael E. Patterson Trust U/A 2-10-56, Brandywine-Robert E. Patterson Trust U/A 2-10-56 and Brandywine-Thomas HC Patterson Trust U/A 2-10-56, with which Mr. Patterson is affiliated and may be deemed to be a member of a group under Section 13d-3 of the Exchange Act and may be deemed to share voting and/or investment power with respect to the shares owned by such entities. Mr. Patterson disclaims beneficial ownership of such shares, except to the extent of his interest in such shares arising from his interests in Accel Partners, et al. |
|
|
(10) |
Includes 54,489 shares of Common Stock issuable upon exercise of options granted under our equity compensation plans. |
|
|
(11) |
Includes 18,332 shares of Common Stock issuable upon exercise of stock options granted to Mr. Landry under our equity compensation plans. All other shares attributed to Mr. Landry, including 5,368,858 shares of Common Stock issuable upon the conversion of Series D Preferred Stock, which includes 1,099,268 shares issuable pursuant to accrued dividends, and 986,350 shares of Common Stock issuable upon the conversion of Series E Preferred Stock, which includes 60,426 shares of Common Stock issuable pursuant to accrued dividends are owned directly by TA Atlantic and |
3
|
Pacific V L.P., TA Investors II L.P., TA IX L.P., TA Strategic Partners Fund A L.P., TA Strategic Partners Fund B L.P. and TA/Atlantic and Pacific IV L.P., with which Mr. Landry is affiliated and may be deemed to be a member of a group (hereinafter referred to as TA Associates, et al) under Section 13d-3 of the Exchange Act and may be deemed to share voting and/or investment power with respect to the shares owned by such entities. Mr. Landry disclaims beneficial ownership of such shares, except to the extent of his interest in such shares arising from his interests in TA Associates, et al. |
|
|
(12) |
Includes 14,444 shares of Common Stock issuable upon exercise of options granted to Mr. Perry under our equity compensation plans. All other shares attributed to Mr. Perry, including 5,351,813 shares of Common Stock issuable upon the conversion of Series D Preferred Stock, which includes 1,095,304 shares issuable pursuant to accrued dividends, 986,352 shares of Common Stock issuable upon the conversion of Series E Preferred Stock, which includes 60,426 shares of Common Stock issuable pursuant to accrued dividends, and 3,611 shares of Common Stock issuable upon exercise of options granted under our equity compensation plans are held directly by Madison Dearborn Capital Partners IV, L.P., with which Mr. Perry is affiliated and may be deemed to be a member of a group (hereinafter referred to as Madison Dearborn Capital Partners IV, L.P., et al) under Section 13d-3 of the Exchange Act and may be deemed to share voting and/or investment power with respect to the shares owned by such entities. Mr. Perry disclaims beneficial ownership of such shares, except to the extent of his interest in such shares arising from his interests in Madison Dearborn Capital Partners IV, L.P., et al. |
|
|
(13) |
Walker Simmons does not own any shares or retain options granted under our equity compensation plans. |
|
|
(14) |
Accel Partners, et al (consisting of Accel Internet Fund III, LP, Accel Investors 94 LP, Accel Investors 99 LP, Accel IV LP, Accel Keiretsu LP, Accel VII LP, ACP Family Partnership LP and Ellmore C. Patterson Partners), may be deemed to be a group under Section 13d-3 of the Exchange Act. Includes 4,422,149 shares of Common Stock issuable upon the conversion of Series D Preferred Stock, which includes 918,038 shares issuable pursuant to accrued dividends, 116,117 shares of Common Stock issuable upon exercise of options granted under our equity compensation plans, 112,508 of which are held directly by Mr. Patterson, as discussed in Note 9 above. |
|
|
(15) |
Columbia Capital, et al (consisting of Columbia Capital Equity Partners III (QP) LP, Columbia Capital Equity Partners III (Cayman) LP, Columbia Capital Equity Partners III (AI) LP, Columbia Capital Investors III, LLC, and Columbia Capital Employee Investors III, LLC) may be deemed to be a group under Section 13d-3 of the Exchange Act. Includes 113,619 shares of Common Stock issuable upon exercise of options granted under our equity compensation plans and 3,017,901 shares of common stock issuable upon the conversion of Series D Convertible Preferred Stock, which includes 624,287 shares issuable pursuant to accrued dividends. |
|
|
(16) |
Includes 6,480,480 shares of Common Stock issuable upon the conversion of Series D Preferred Stock, which includes 279,049 shares issuable pursuant to accrued dividends. |
|
|
(17) |
M/C Venture Partners, et al (consisting of M/C Venture Investors, LLC, M/C Venture Partners IV, LP, M/C Venture Partners V, LP, and Chestnut Venture Partners LP) may be deemed to be a group under Section 13d-3 of the Exchange Act. Includes an aggregate of 94,419 shares of Common Stock issuable upon exercise of options granted under our equity compensation plans and 8,915,395 shares of Common Stock issuable upon the conversion of Series D Preferred Stock, which includes 1,850,718 shares issuable pursuant to accrued dividends. |
|
|
(18) |
Includes 18,055 shares of Common Stock issuable upon exercise of options granted under our equity compensation plans, 14,444 of which are held directly by Mr. Perry, 5,351,813 shares of Common Stock issuable upon the conversion of Series D Preferred Stock, which includes 1,095,304 shares issuable pursuant to accrued dividends, and 986,352 shares of Common Stock issuable upon the conversion of Series E Preferred Stock, which includes 60,426 shares of Common Stock issuable pursuant to accrued dividends. |
|
|
(19) |
TA Associates, et al (consisting of TA Atlantic and Pacific V L.P., TA Investors II L.P., TA IX L.P., TA Strategic Partners Fund A L.P., TA Strategic Partners Fund B L.P. and TA/Atlantic and Pacific IV L.P.) may be deemed to be a group under Section 13d-3 of the Exchange Act. Includes 18,332 shares of Common Stock issuable upon exercise of options granted under our equity compensation plans and held directly by Mr. Landry, 5,368,858 shares of Common Stock issuable upon the conversion of Series D Preferred Stock, which includes 1,099,268 shares issuable pursuant to accrued dividends, and 986,350 shares of Common Stock issuable upon the conversion of Series E Preferred Stock, which includes 60,426 shares of Common Stock issuable pursuant to accrued dividends. |
Item 5. Directors and Executive Officers
The information required by this item is contained under the section Management of the IPO Registration Statement. That section is incorporated herein by reference.
Item 6. Executive Compensation
The information required by this item is contained under the section Executive Compensation of the IPO Registration Statement. That section is incorporated herein by reference.
Item 7. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is contained under the sections Transactions with Related Persons and ManagementBoard Composition of the IPO Registration Statement. Those sections are incorporated herein by reference.
The information required by this item is contained under the section BusinessLegal Proceedings of the IPO Registration Statement. That section is incorporated herein by reference.
Item 9. Market Price of and Dividends on the Registrants Common Equity and Related Stockholder Matters
Information required by this item is contained under the sections Dividend Policy and Shares Eligible for Future Sales of the IPO Registration Statement. Those sections are incorporated herein by reference.
4
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of December 31, 2005 with respect to the shares of our Common Stock that may be issued under our existing equity compensation plans.
Plan Category |
|
Number of |
|
Weighted-average |
|
Number of securities |
|
|
Equity compensation plans approved by stockholders |
|
3,661,859 |
|
$ |
9.69 |
|
3,520,946 |
|
|
|
|
|
|
|
|
|
|
Equity compensation plans not approved by stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
3,661,859 |
|
$ |
9.69 |
|
3,520,946 |
|
Item 10. Recent Sales of Unregistered Securities
The information required by this item is contained under the section Item 15Recent Sales of Unregistered Securities of the IPO Registration Statement. That section is incorporated herein by reference.
Item 11. Description of Registrants Securities to be Registered
The following describes our Common Stock, Preferred Stock, second amended and restated certificate of incorporation (the Certificate of Incorporation) and bylaws, as amended (the Bylaws), currently in effect. This description is a summary only. We encourage you to read the complete text of our Certificate of Incorporation and Bylaws, which are incorporated by reference to Exhibits 3.1 and 3.2 to this registration statement.
Our authorized capital stock consists of 300 million shares of Common Stock, par value $0.0001 per share, and 25 million shares of Preferred Stock, par value $0.0001 per share, of which 4 million shares are designated as Series D Preferred Stock and 500,000 shares are designated as Series E Preferred Stock.
There is no public market for our Common Stock.
As of December 1, 2006, the Company had 184 Common Stockholders of record.
Common Stock
Holders of our Common Stock have the right to vote on every matter submitted to a vote of our stockholders other than any matter on which only the holders of Preferred Stock are entitled to vote separately as a class. There are no cumulative voting rights.
Subject to the rights of holders of all outstanding classes of stock having prior rights as to dividends, the holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by our board of directors out of corporate assets legally available for distribution. Subject to the rights of holders of all outstanding classes of stock having prior rights as to distributions, in the event of the liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to share ratably with the Preferred Stock on an as converted basis in all assets remaining after payment of liabilities, if any, then outstanding.
Our Certificate of Incorporation provides that the holders of shares of Common Stock have the right to vote on every matter submitted to a vote of stockholders, along with the Preferred Stock on an as converted basis, other than any matter on which only the holders of one or more classes or series of capital stock other than shares of Common Stock are entitled to vote separately as a class. The holders of shares of Common Stock are entitled to a vote, together with the Preferred Stock as a class, to elect members of the board of directors as shall be fixed by, or in the manner provided in, our Bylaws and the Stockholders Agreement.
5
If a holder of shares of Common Stock acquires additional shares of Common Stock or otherwise is attributed with ownership of shares that would cause the Company to violate (i) any requirement of the FCC regarding foreign ownership or (ii) any other rule or regulation of the FCC applicable to us, the Company may, at the option of our board of directors, redeem a sufficient number of shares of Common Stock to eliminate the violation from the stockholder or stockholders causing such violation by paying in cash therefore a sum equal to the redemption price (as discussed below).
The redemption price will be a price mutually determined by us and our stockholders, but if no agreement can be reached, the redemption price will be either:
75% of the fair market value of the Common Stock being redeemed, if the holder caused the FCC violation; or
100% of the fair market value of the Common Stock being redeemed, if the FCC violation was not caused by the holder.
For a discussion of the FCCs ownership restrictions, please see the information contained in BusinessOwnership Restrictions of the IPO Registration Statement, which section is incorporated herein by reference.
Series D Preferred Stock
In July 2000, MetroPCS, Inc. executed a Securities Purchase Agreement, which was subsequently amended (as so amended, the Series D Securities Purchase Agreement), pursuant to which MetroPCS, Inc. issued shares of series D preferred stock, par value $0.0001 per share. In July 2004, each share of MetroPCS, Inc. series D preferred stock was converted into a share of Series D Preferred Stock of the Company.
Dividends accrue at an annual rate of 6% of the liquidation value of $100 per share on the Series D Preferred Stock. Each share of Series D Preferred Stock will automatically convert into Common Stock upon (i) completion of a Qualifying Public Offering (as defined in the Stockholders Agreement), (ii) our Common Stock trading (or in the case of a merger or consolidation of the Company with another company, other than a sale or change of control of the Company, the shares received in such merger or consolidation having traded immediately prior to such merger and consolidation) on a national securities exchange for a period of 30 consecutive trading days above a price that implies a market valuation of the Series D Preferred Stock in excess of twice the initial purchase price of the Series D Preferred Stock, or (iii) the date specified by the holders of 662/3% of the outstanding Series D Preferred Stock. The Series D Preferred Stock and the accrued but unpaid dividends thereon are convertible into Common Stock at $9.40 per share of Common Stock, which per share amount is subject to adjustment in accordance with the terms of our Certificate of Incorporation. If not previously converted, we are required to redeem all outstanding shares of Series D Preferred Stock on July 17, 2015, at the liquidation value plus accrued but unpaid dividends.
The holders of Series D Preferred Stock, as a class with the holders of Common Stock and the Series E Preferred Stock, have the right to vote on all matters as if each share of Preferred Stock had been converted into Common Stock. In addition, the holders of Series D Preferred Stock, as a class, can nominate one member of our Board of Directors and the stockholders of the Company are obligated under the Stockholders Agreement to elect such nominee. Upon a liquidation event (as defined in our Certificate of Incorporation), each share of Series D Preferred Stock is entitled to a liquidation preference equal to the sum of:
the per share liquidation value, plus
the greater of:
the amount of all accrued and unpaid dividends and distributions on such share, and
the amount that would have been paid in respect of such share had it been converted into Common Stock immediately prior to the event that triggered payment of the liquidation preference, net of the liquidation value of the Series D Preferred Stock and the Series E Preferred Stock.
The Series D Securities Purchase Agreement defines a number of events of noncompliance. Upon an occurrence of an event of noncompliance, the holders of not less than 662/3% of the then outstanding shares of Series D Preferred Stock can request that the Company redeem the outstanding shares in an amount equal to the liquidation
6
value plus accrued but unpaid dividends. In addition, upon an occurrence of an event of noncompliance and during the Companys noncompliance, dividends on the Series D Preferred Stock, in lieu of the 6% dividends normally accruing, shall accrue at 10% per annum.
Series E Preferred Stock
In August 2005, the Company executed a Stock Purchase Agreement (the Series E Stock Purchase Agreement) pursuant to which the Company issued shares of Series E Preferred Stock. The Series E Preferred Stock ranks equally with the Series D Preferred Stock with respect to dividends, conversion rights and liquidation preferences. Dividends on the Series E Preferred Stock accrue at an annual rate of 6% of the liquidation value of $100 per share.
Each share of Series E Preferred Stock will be converted into Common Stock upon (i) the completion of a Qualifying Public Offering (as defined in the Stockholders Agreement), (ii) the Common Stock trading (or, in the case of a merger or consolidation of the Company with another company, other than as a sale or change of control of the Company, the shares received in such merger or consolidation having traded immediately prior to such merger or consolidation) on a national securities exchange for a period of 30 consecutive trading days above a price implying a market valuation of the Series D Preferred Stock over twice the Series D Preferred Stock initial purchase price, or (iii) the date specified by the holders of 662/3% of the outstanding Series E Preferred Stock. The Series E Preferred Stock is convertible into Common Stock at $27.00 per share, which per share amount is subject to adjustment in accordance with the terms of our Certificate of Incorporation. If not previously converted, we are required to redeem all outstanding shares of Series E Preferred Stock on July 17, 2015, at the liquidation preference of $100 per share plus accrued but unpaid dividends.
The holders of Series E Preferred Stock, as a class with the holders of Common Stock and the Series D Preferred Stock, have the right to vote on all matters as if each share of Preferred Stock had been converted into Common Stock. Upon a liquidation event (as defined in our Certificate of Incorporation), each share of Series E Preferred Stock is entitled to a liquidation preference equal to the sum of:
the per share liquidation value, plus
the greater of:
the amount of all accrued and unpaid dividends and distributions on such share, and
the amount that would have been paid in respect of such share had it been converted into Common Stock immediately prior to the event that triggered payment of the liquidation preference, net of the liquidation value of the Series D Preferred Stock and the Series E Preferred Stock.
The Series E Stock Purchase Agreement defines a number of events of noncompliance. Upon an occurrence of an event of noncompliance, the holders of not less than 662/3% of the then outstanding shares of Series E Preferred Stock can request that the Company redeem the outstanding shares at an amount equal to the liquidation value plus accrued but unpaid dividends. In addition, upon an occurrence of an event of noncompliance and during the Companys noncompliance, dividends on the Series E Preferred Stock, in lieu of the 6% dividends normally accruing, shall accrue at 10% per annum.
Anti-takeover Effects of Delaware Law
We are a Delaware corporation and are subject to Delaware law, which generally prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder for a period of three years after the time that the person became an interested stockholder, unless:
before such time the board of directors of the corporation approved either the business combination or the transaction in which the person became an interested stockholder;
upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested person owns at least 85% of the voting stock of the corporation outstanding at the time the
7
transaction commenced, excluding shares owned by persons who are directors and also officers of the corporation and by certain employee stock plans; or
at or after such time the business combination is approved by the board of directors of the corporation and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 662/3% of the outstanding voting stock of the corporation that is not owned by the interested stockholder.
A business combination generally includes mergers, asset sales and similar transactions between the corporation and the interested stockholder, and other transactions resulting in a financial benefit to the stockholder. An interested stockholder is a person:
who, together with affiliates and associates, owns 15% or more of the corporations outstanding voting stock; or
who is an affiliate or associate of the corporation and, together with his or her affiliates and associates, has owned 15% or more of the corporations outstanding voting stock within three years.
The provisions of Delaware law described above would make more difficult or discourage a proxy contest or acquisition of control by a holder of a substantial block of our stock or the removal of the incumbent board of directors. Such provisions could also have the effect of discouraging an outsider from making a tender offer or otherwise attempting to obtain control of our Company, even though such an attempt might be beneficial to us and our stockholders.
Limitations on Liability and Indemnification of Officers and Directors
Our Certificate of Incorporation and Bylaws:
eliminate the personal liability of directors for monetary damages resulting from breaches of fiduciary duty to the extent permitted by Delaware law, except (i) for any breach of a directors duty of loyalty to the Company or its shareholders, (ii) for acts or omissions not in good faith or which involved intentional misconduct or a knowing violation of law, or (iii) for any transaction from which the director derived any improper personal benefit; and
indemnify directors and officers to the fullest extent permitted by Delaware law, including in circumstances in which indemnification is otherwise discretionary.
We believe that these provisions are necessary to attract and retain qualified directors and officers.
We have also entered into separate indemnification agreements with each of our directors and officers under which we have agreed to indemnify, and to advance expenses to, each director and officer to the fullest extent permitted by applicable law with respect to liabilities they may incur in their capacities as directors and officers.
Corporate Opportunities
Our Certificate of Incorporation provides, as permitted by the Delaware General Corporation Act, that our non-employee directors have no obligation to offer us a corporate opportunity to participate in business opportunities presented to them or their respective affiliates even if the opportunity is one that we might reasonably have pursued, unless such corporate opportunity is offered to such director in his or her capacity as a director of our company. Stockholders will be deemed to have notice of and consented to this provision of our Certificate of Incorporation.
Listing of Common Stock
Our Common Stock is not listed on any stock market or exchange.
Item 12. Indemnification of Directors and Officers
The information required by this item is contained under the section Item 14Indemnification of Directors and Officers of the IPO Registration Statement. That section is incorporated herein by reference.
8
Item 13. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
|
Page |
Audited Consolidated Financial Statements: |
|
|
|
Report of Independent Registered Public Accounting FirmDeloitte & Touche LLP |
10 |
Report of Independent Registered Public Accounting FirmPricewaterhouseCoopers LLP |
11 |
Consolidated Balance Sheets as of December 31, 2005 and 2004 |
12 |
13 |
|
Consolidated Statements of Stockholders Equity for the years ended December 31, 2005, 2004 and 2003 |
14 |
Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003 |
16 |
17 |
|
|
|
Unaudited Interim Condensed Consolidated Financial Statements: |
|
|
|
Condensed Consolidated Balance Sheet as of September 30, 2006 |
54 |
55 |
|
56 |
|
Notes to Condensed Consolidated Interim Financial Statements |
57 |
9
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
MetroPCS Communications, Inc.
Dallas, Texas
We have audited the accompanying consolidated balance sheets of MetroPCS Communications, Inc. and subsidiaries (the Company) as of December 31, 2005 and 2004, and the related consolidated statements of income and comprehensive income, stockholders equity, and cash flows for the years then ended. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of MetroPCS Communications, Inc. as of December 31, 2005 and 2004, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP |
|
|
|
Dallas, Texas |
|
August 8, 2006 (January 3, 2007 as to Note 19) |
10
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of MetroPCS Communications, Inc.:
In our opinion, the consolidated statements of income and comprehensive income, stockholders equity and cash flows for the year ended December 31, 2003 present fairly, in all material respects, the results of operations, and cash flows of MetroPCS Communications, Inc. and its subsidiaries for the year ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
As discussed in Note 2 to the 2004 consolidated financial statements, (not presented herein) the Company has restated its consolidated financial statements for the year ended December 31, 2003.
/s/ PricewaterhouseCoopers LLP |
|
|
|
Dallas, TX |
February 25, 2004, except for Restatement of Consolidated Financial Statements under Note 2 for which the date is May 5, 2006 and for Earnings Per Share under Note 2 and Note 17 and Guarantor Subsidiaries under Note 19 for which the date is December 20, 2006
11
MetroPCS Communications, Inc. and Subsidiaries
As of December 31, 2005 and 2004
(in thousands, except share and per share information)
|
|
2005 |
|
2004 |
|
||
CURRENT ASSETS: |
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
112,709 |
|
$ |
22,477 |
|
Short-term investments |
|
390,422 |
|
36,964 |
|
||
Inventories, net |
|
39,431 |
|
33,717 |
|
||
Accounts receivable (net of allowance for uncollectible accounts of $2,383 and $2,323 at December 31, 2005 and 2004, respectively) |
|
16,028 |
|
9,101 |
|
||
Prepaid expenses |
|
21,430 |
|
7,023 |
|
||
Deferred charges |
|
13,270 |
|
9,225 |
|
||
Deferred tax asset |
|
2,122 |
|
3,574 |
|
||
Security deposits |
|
72 |
|
25,007 |
|
||
Other current assets |
|
16,618 |
|
9,470 |
|
||
Total current assets |
|
612,102 |
|
156,558 |
|
||
Property and equipment, net |
|
831,490 |
|
636,368 |
|
||
Restricted cash and investments |
|
2,920 |
|
2,293 |
|
||
Long-term investments |
|
5,052 |
|
|
|
||
PCS licenses |
|
681,299 |
|
154,144 |
|
||
Microwave relocation costs |
|
9,187 |
|
9,566 |
|
||
Other assets |
|
16,931 |
|
6,467 |
|
||
|
|
|
|
|
|
||
Total assets |
|
$ |
2,158,981 |
|
$ |
965,396 |
|
CURRENT LIABILITIES: |
|
|
|
|
|
||
Accounts payable and accrued expenses |
|
$ |
174,220 |
|
$ |
105,541 |
|
Current maturities of long-term debt |
|
2,690 |
|
14,310 |
|
||
Deferred revenue |
|
56,560 |
|
40,424 |
|
||
Other current liabilities |
|
2,147 |
|
2,745 |
|
||
Total current liabilities |
|
235,617 |
|
163,020 |
|
||
Long-term debt, net |
|
902,864 |
|
170,689 |
|
||
Deferred tax liabilities |
|
146,053 |
|
73,101 |
|
||
Deferred rents |
|
14,739 |
|
10,331 |
|
||
Redeemable minority interest |
|
1,259 |
|
1,008 |
|
||
Other long-term liabilities |
|
20,858 |
|
21,403 |
|
||
Total liabilities |
|
1,321,390 |
|
439,552 |
|
||
COMMITMENTS AND CONTINGENCIES (See Note 10) |
|
|
|
|
|
||
SERIES D CUMULATIVE CONVERTIBLE REDEEMABLE PARTICIPATING PREFERRED STOCK, par value $0.0001 per share, 4,000,000 shares designated, 3,500,993 shares issued and outstanding at December 31, 2005 and 2004; Liquidation preference of $426,382 and $405,376 at December 31, 2005 and 2004, respectively |
|
421,889 |
|
400,410 |
|
||
SERIES E CUMULATIVE CONVERTIBLE REDEEMABLE PARTICIPATING PREFERRED STOCK, par value $0.0001 per share, 500,000 shares designated, 500,000 shares issued and outstanding at December 31, 2005; Liquidation preference of $51,019 at December 31, 2005 |
|
47,796 |
|
|
|
||
STOCKHOLDERS EQUITY: |
|
|
|
|
|
||
Preferred stock, par value $0.0001 per share, 25,000,000 and 5,000,000 shares authorized at December 31, 2005 and 2004, 4,000,000 of which have been designated as Series D Preferred Stock and 500,000 of which have been designated as Series E Preferred Stock; no shares of preferred stock other than Series D & E Preferred Stock (presented above) issued and outstanding at December 31, 2005 and 2004 |
|
|
|
|
|
||
Common Stock, par value $0.0001 per share, 300,000,000 shares authorized, 51,775,698 and 43,431,927 shares issued and outstanding at December 31, 2005 and 2004, respectively |
|
5 |
|
4 |
|
||
Additional paid-in capital |
|
149,594 |
|
88,493 |
|
||
Subscriptions receivable |
|
|
|
(98 |
) |
||
Deferred compensation |
|
(178 |
) |
(3,331 |
) |
||
Retained earnings |
|
216,702 |
|
40,637 |
|
||
Accumulated other comprehensive income (loss) |
|
1,783 |
|
(271 |
) |
||
Total stockholders equity |
|
367,906 |
|
125,434 |
|
||
Total liabilities and stockholders equity |
|
$ |
2,158,981 |
|
$ |
965,396 |
|
The accompanying notes are an integral part of these consolidated financial statements.
12
MetroPCS Communications, Inc. and Subsidiaries
Consolidated Statements of Income and Comprehensive Income
For the years ended December 31, 2005, 2004 and 2003
(in thousands, except share and per share information)
|
|
2005 |
|
2004 |
|
2003 |
|
|||
REVENUES: |
|
|
|
|
|
|
|
|||
Service revenues |
|
$ |
872,100 |
|
$ |
616,401 |
|
$ |
369,851 |
|
Equipment revenues |
|
166,328 |
|
131,849 |
|
81,258 |
|
|||
Total revenues |
|
1,038,428 |
|
748,250 |
|
451,109 |
|
|||
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|||
Cost of service (exclusive of depreciation and amortization expense of $81,196, $57,572 and $39,379, shown separately below) |
|
283,212 |
|
200,806 |
|
122,211 |
|
|||
Cost of equipment |
|
300,871 |
|
222,766 |
|
150,832 |
|
|||
Selling, general and administrative expenses (exclusive of depreciation and amortization expense of $6,699, $4,629 and $3,049, shown separately below) |
|
162,476 |
|
131,510 |
|
94,073 |
|
|||
Depreciation and amortization |
|
87,895 |
|
62,201 |
|
42,428 |
|
|||
(Gain) loss on disposal of assets |
|
(218,203 |
) |
3,209 |
|
392 |
|
|||
Total operating expenses |
|
616,251 |
|
620,492 |
|
409,936 |
|
|||
Income from operations |
|
422,177 |
|
127,758 |
|
41,173 |
|
|||
OTHER EXPENSE (INCOME): |
|
|
|
|
|
|
|
|||
Interest expense |
|
58,033 |
|
19,030 |
|
11,115 |
|
|||
Accretion of put option in majority-owned subsidiary |
|
252 |
|
8 |
|
|
|
|||
Interest income |
|
(8,658 |
) |
(2,472 |
) |
(996 |
) |
|||
Loss (gain) on extinguishment of debt |
|
46,448 |
|
(698 |
) |
(603 |
) |
|||
Total other expense |
|
96,075 |
|
15,868 |
|
9,516 |
|
|||
Income before provision for income taxes and cumulative effect of change in accounting principle |
|
326,102 |
|
111,890 |
|
31,657 |
|
|||
Provision for income taxes |
|
(127,425 |
) |
(47,000 |
) |
(16,179 |
) |
|||
Income before cumulative effect of change in accounting principle |
|
198,677 |
|
64,890 |
|
15,478 |
|
|||
Cumulative effect of change in accounting principle, net of tax |
|
|
|
|
|
(120 |
) |
|||
Net income |
|
198,677 |
|
64,890 |
|
15,358 |
|
|||
Accrued dividends on Series D Preferred Stock |
|
(21,006 |
) |
(21,006 |
) |
(18,493 |
) |
|||
Accrued dividends on Series E Preferred Stock |
|
(1,019 |
) |
|
|
|
|
|||
Accretion on Series D Preferred Stock |
|
(473 |
) |
(473 |
) |
(473 |
) |
|||
Accretion on Series E Preferred Stock |
|
(114 |
) |
|
|
|
|
|||
Net income (loss) applicable to common stock |
|
$ |
176,065 |
|
$ |
43,411 |
|
$ |
(3,608 |
) |
|
|
|
|
|
|
|
|
|||
Net income |
|
$ |
198,677 |
|
$ |
64,890 |
|
$ |
15,358 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|||
Unrealized losses on available-for-sale securities, net of tax |
|
(28 |
) |
(240 |
) |
(72 |
) |
|||
Unrealized gain on cash flow hedging derivative, net of tax |
|
1,914 |
|
|
|
|
|
|||
Reclassification adjustment for losses included in net income, net of tax |
|
168 |
|
41 |
|
|
|
|||
Comprehensive income |
|
$ |
200,731 |
|
$ |
64,691 |
|
$ |
15,286 |
|
|
|
|
|
|
|
|
|
|||
Net income (loss) per common share: (See Note 17) |
|
|
|
|
|
|
|
|||
Basic |
|
|
|
|
|
|
|
|||
Income (loss) before cumulative effect of change in accounting principle |
|
$ |
2.12 |
|
$ |
0.55 |
|
$ |
(0.10 |
) |
Cumulative effect of change in accounting principle, net of tax |
|
|
|
|
|
(0.00 |
) |
|||
Net income (loss) per common share - basic |
|
$ |
2.12 |
|
$ |
0.55 |
|
$ |
(0.10 |
) |
Diluted |
|
|
|
|
|
|
|
|||
Income (loss) before cumulative effect of change in accounting principle |
|
$ |
1.87 |
|
$ |
0.46 |
|
$ |
(0.10 |
) |
Cumulative effect of change in accounting principle, net of tax |
|
|
|
|
|
(0.00 |
) |
|||
Net income (loss) per common share - diluted |
|
$ |
1.87 |
|
$ |
0.46 |
|
$ |
(0.10 |
) |
Weighted average shares: |
|
|
|
|
|
|
|
|||
Basic |
|
45,117,465 |
|
42,240,684 |
|
36,443,962 |
|
|||
Diluted |
|
51,203,530 |
|
50,211,229 |
|
36,443,962 |
|
The accompanying notes are an integral part of these consolidated financial statements.
13
MetroPCS Communications, Inc. and Subsidiaries
Consolidated Statements of Stockholders Equity
For the years ended December 31, 2005, 2004 and 2003
(in thousands, except share information)
|
|
Number |
|
Amount |
|
Additional |
|
Subscriptions |
|
Deferred |
|
Retained |
|
Accumulated |
|
Total |
|
|||||||
BALANCE, December 31, 2002 |
|
36,423,302 |
|
$ |
3 |
|
$ |
89,811 |
|
$ |
(86 |
) |
$ |
(2,199 |
) |
$ |
(18,132 |
) |
$ |
|
|
$ |
69,397 |
|
Exercise of Class B Common Stock options |
|
65,000 |
|
|
|
15 |
|
|
|
|
|
|
|
|
|
15 |
|
|||||||
Exercise of Class C Common Stock options |
|
5,946 |
|
|
|
28 |
|
|
|
|
|
|
|
|
|
28 |
|
|||||||
Exercise of Class C Common Stock warrants |
|
225,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Accrued interest on subscriptions receivable |
|
|
|
|
|
6 |
|
(6 |
) |
|
|
|
|
|
|
|
|
|||||||
Deferred compensation |
|
|
|
|
|
7,528 |
|
|
|
(7,528 |
) |
|
|
|
|
|
|
|||||||
Amortization of deferred compensation expense |
|
|
|
|
|
|
|
|
|
5,573 |
|
|
|
|
|
5,573 |
|
|||||||
Accrued dividends on Series D Preferred Stock |
|
|
|
|
|
(18,493 |
) |
|
|
|
|
|
|
|
|
(18,493 |
) |
|||||||
Accretion on Series D Preferred Stock |
|
|
|
|
|
(473 |
) |
|
|
|
|
|
|
|
|
(473 |
) |
|||||||
Net income |
|
|
|
|
|
|
|
|
|
|
|
15,358 |
|
|
|
15,358 |
|
|||||||
Unrealized loss on available-for-sale securities, net of reclassification adjustment and tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
(72 |
) |
(72 |
) |
|||||||
BALANCE, December 31, 2003 |
|
36,719,698 |
|
$ |
3 |
|
$ |
78,422 |
|
$ |
(92 |
) |
$ |
(4,154 |
) |
$ |
(2,774 |
) |
$ |
(72 |
) |
$ |
71,333 |
|
Exercise of Common Stock options |
|
211,976 |
|
|
|
416 |
|
|
|
|
|
|
|
|
|
416 |
|
|||||||
Exercise of Common Stock warrants |
|
6,500,340 |
|
1 |
|
43 |
|
|
|
|
|
|
|
|
|
44 |
|
|||||||
Reverse stock split-fractional shares redeemed |
|
(87 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Accrued interest on subscriptions receivable |
|
|
|
|
|
6 |
|
(6 |
) |
|
|
|
|
|
|
|
|
|||||||
Deferred stock-based compensation |
|
|
|
|
|
9,606 |
|
|
|
(9,606 |
) |
|
|
|
|
|
|
|||||||
Amortization of deferred stock-based compensation expense |
|
|
|
|
|
|
|
|
|
10,429 |
|
|
|
|
|
10,429 |
|
|||||||
Accrued dividends on Series D Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
(21,006 |
) |
|
|
(21,006 |
) |
|||||||
Accretion on Series D Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
(473 |
) |
|
|
(473 |
) |
|||||||
Net income |
|
|
|
|
|
|
|
|
|
|
|
64,890 |
|
|
|
64,890 |
|
|||||||
Unrealized loss on available-for-sale securities, net of reclassification adjustment and tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
(199 |
) |
(199 |
) |
|||||||
BALANCE, December 31, 2004 |
|
43,431,927 |
|
$ |
4 |
|
$ |
88,493 |
|
$ |
(98 |
) |
$ |
(3,331 |
) |
$ |
40,637 |
|
$ |
(271 |
) |
$ |
125,434 |
|
The accompanying notes are an integral part of these consolidated financial statements.
14
|
|
Number |
|
Amount |
|
Additional |
|
Subscriptions |
|
Deferred |
|
Retained |
|
Accumulated |
|
Total |
|
|||||||
Common Stock issued |
|
26,479 |
|
|
|
483 |
|
|
|
|
|
|
|
|
|
483 |
|
|||||||
Exercise of Common Stock options |
|
7,556,557 |
|
1 |
|
8,604 |
|
|
|
|
|
|
|
|
|
8,605 |
|
|||||||
Exercise of Common Stock warrants |
|
760,735 |
|
|
|
605 |
|
|
|
|
|
|
|
|
|
605 |
|
|||||||
Accrued interest on subscriptions receivable |
|
|
|
|
|
5 |
|
(5 |
) |
|
|
|
|
|
|
|
|
|||||||
Proceeds from repayment of subscriptions receivable |
|
|
|
|
|
|
|
103 |
|
|
|
|
|
|
|
103 |
|
|||||||
Forfeiture of unvested stock compensation |
|
|
|
|
|
(2,887 |
) |
|
|
2,887 |
|
|
|
|
|
|
|
|||||||
Deferred stock-based compensation |
|
|
|
|
|
2,330 |
|
|
|
(2,330 |
) |
|
|
|
|
|
|
|||||||
Amortization of deferred stock-based compensation expense |
|
|
|
|
|
|
|
|
|
2,596 |
|
|
|
|
|
2,596 |
|
|||||||
Accrued dividends on Series D Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
(21,006 |
) |
|
|
(21,006 |
) |
|||||||
Accrued dividends on Series E Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
(1,019 |
) |
|
|
(1,019 |
) |
|||||||
Accretion on Series D Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
(473 |
) |
|
|
(473 |
) |
|||||||
Accretion on Series E Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
(114 |
) |
|
|
(114 |
) |
|||||||
Tax benefits from the exercise of Common Stock options |
|
|
|
|
|
51,961 |
|
|
|
|
|
|
|
|
|
51,961 |
|
|||||||
Net income |
|
|
|
|
|
|
|
|
|
|
|
198,677 |
|
|
|
198,677 |
|
|||||||
Unrealized losses on available-for-sale securities, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
(28 |
) |
(28 |
) |
|||||||
Reclassification adjustment for losses included in net income, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
168 |
|
168 |
|
|||||||
Unrealized gain on cash flow hedging derivative, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
1,914 |
|
1,914 |
|
|||||||
BALANCE, December 31, 2005 |
|
51,775,698 |
|
$ |
5 |
|
$ |
149,594 |
|
$ |
|
|
$ |
(178 |
) |
$ |
216,702 |
|
$ |
1,783 |
|
$ |
367,906 |
|
The accompanying notes are an integral part of these consolidated financial statements.
15
MetroPCS Communications, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the years ended December 31, 2005, 2004 and 2003
(in thousands)
|
|
2005 |
|
2004 |
|
2003 |
|
|||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|||
Net income |
|
$ |
198,677 |
|
$ |
64,890 |
|
$ |
15,358 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|||
Cumulative effect of change in accounting principle |
|
|
|
|
|
120 |
|
|||
Depreciation and amortization |
|
87,895 |
|
62,201 |
|
42,428 |
|
|||
Provision for uncollectible accounts receivable |
|
129 |
|
125 |
|
110 |
|
|||
Deferred rent expense |
|
4,407 |
|
3,466 |
|
2,803 |
|
|||
Cost of abandoned cell sites |
|
725 |
|
1,021 |
|
824 |
|
|||
Non-cash compensation expense |
|
2,596 |
|
10,429 |
|
5,573 |
|
|||
Non-cash interest expense |
|
4,285 |
|
2,889 |
|
3,073 |
|
|||
(Gain) loss on disposal of assets |
|
(218,203 |
) |
3,209 |
|
392 |
|
|||
Loss (gain) on extinguishment of debt |
|
46,448 |
|
(698 |
) |
(603 |
) |
|||
(Gain) loss on sale of investments |
|
(190 |
) |
576 |
|
|
|
|||
Accretion of asset retirement obligation |
|
423 |
|
253 |
|
127 |
|
|||
Accretion of put option in majority-owned subsidiary |
|
252 |
|
8 |
|
|
|
|||
Deferred income taxes |
|
125,055 |
|
44,441 |
|
18,716 |
|
|||
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|||
Inventories |
|
(5,717 |
) |
(16,706 |
) |
(7,745 |
) |
|||
Accounts receivable |
|
(7,056 |
) |
(714 |
) |
(1,041 |
) |
|||
Prepaid expenses |
|
(2,613 |
) |
(1,933 |
) |
(182 |
) |
|||
Deferred charges |
|
(4,045 |
) |
(2,727 |
) |
(1,645 |
) |
|||
Other assets |
|
(5,580 |
) |
(2,243 |
) |
(4,131 |
) |
|||
Accounts payable and accrued expenses |
|
41,204 |
|
(31,304 |
) |
21,305 |
|
|||
Deferred revenue |
|
16,071 |
|
10,317 |
|
14,264 |
|
|||
Other liabilities |
|
(1,547 |
) |
2,879 |
|
2,859 |
|
|||
Net cash provided by operating activities |
|
283,216 |
|
150,379 |
|
112,605 |
|
|||
|
|
|
|
|
|
|
|
|||
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|||
Purchases of property and equipment |
|
(266,499 |
) |
(250,830 |
) |
(117,731 |
) |
|||
Change in prepaid purchases of property and equipment |
|
(11,800 |
) |
|
|
|
|
|||
Proceeds from sale of property and equipment |
|
146 |
|
|
|
6 |
|
|||
Purchase of other assets |
|
|
|
|
|
(35 |
) |
|||
Purchase of investments |
|
(739,482 |
) |
(158,672 |
) |
(209,149 |
) |
|||
Proceeds from sale of investments |
|
386,444 |
|
307,220 |
|
22,650 |
|
|||
Change in restricted cash and investments |
|
(107 |
) |
(1,511 |
) |
953 |
|
|||
Purchase of FCC licenses |
|
(503,930 |
) |
(62,025 |
) |
|
|
|||
Deposit to FCC for licenses |
|
|
|
(25,000 |
) |
(1,500 |
) |
|||
Proceeds from sale of FCC licenses |
|
230,000 |
|
|
|
|
|
|||
Microwave relocation costs |
|
|
|
(63 |
) |
(2,062 |
) |
|||
Net cash used in investing activities |
|
(905,228 |
) |
(190,881 |
) |
(306,868 |
) |
|||
|
|
|
|
|
|
|
|
|||
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|||
Change in book overdraft |
|
(565 |
) |
5,778 |
|
824 |
|
|||
Payment upon execution of cash flow hedging derivative |
|
(1,899 |
) |
|
|
|
|
|||
Proceeds from 103/4% Senior Notes Due 2011 |
|
|
|
|
|
145,500 |
|
|||
Proceeds from Credit Agreements |
|
902,875 |
|
|
|
|
|
|||
Proceeds from Bridge Credit Agreement |
|
540,000 |
|
|
|
|
|
|||
Proceeds from short-term notes payable |
|
|
|
1,703 |
|
|
|
|||
Debt issuance costs |
|
(29,480 |
) |
(164 |
) |
(876 |
) |
|||
Repayment of debt |
|
(754,662 |
) |
(14,215 |
) |
(9,077 |
) |
|||
Proceeds from minority interest in majority-owned subsidiary |
|
|
|
1,000 |
|
|
|
|||
Proceeds from repayment of subscriptions receivable |
|
103 |
|
|
|
|
|
|||
Proceeds from issuance of preferred stock, net of issuance costs |
|
46,662 |
|
5 |
|
65,537 |
|
|||
Proceeds from exercise of stock options and warrants |
|
9,210 |
|
460 |
|
43 |
|
|||
Net cash provided by (used in) financing activities |
|
712,244 |
|
(5,433 |
) |
201,951 |
|
|||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
|
90,232 |
|
(45,935 |
) |
7,688 |
|
|||
CASH AND CASH EQUIVALENTS, beginning of period |
|
22,477 |
|
68,412 |
|
60,724 |
|
|||
CASH AND CASH EQUIVALENTS, end of period |
|
$ |
112,709 |
|
$ |
22,477 |
|
$ |
68,412 |
|
The accompanying notes are integral part of these consolidated financial statements.
16
MetorPCS Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
1. Organization and Business Operations:
MetroPCS Communications, Inc. (MetroPCS), a Delaware corporation, together with its wholly- and majority-owned subsidiaries (the Company), is a wireless telecommunications carrier that offers wireless broadband personal communication services (PCS) as of December 31, 2005, primarily in the metropolitan areas of Atlanta, Miami, San Francisco, Sacramento and Tampa/Sarasota. The Company launched service in the Dallas/Ft. Worth metropolitan area in March 2006 and in the Detroit metropolitan area in April 2006. The Company initiated the commercial launch of its first market in January 2002. The Company sells products and services to customers through Company-owned retail stores as well as through relationships with independent retailers.
On February 25, 2004, MetroPCS, Inc. formed MetroPCS, a new wholly-owned subsidiary. In July 2004, MetroPCS, Inc. merged with a subsidiary of MetroPCS pursuant to a transaction that resulted in all of the capital stock (and the options and warrants related thereto) of MetroPCS, Inc. converting into capital stock (and options and warrants) of MetroPCS, and MetroPCS, Inc. becoming a wholly-owned subsidiary of MetroPCS.
On November 24, 2004, MetroPCS, through its wholly-owned subsidiaries, and C9 Wireless, LLC, an independent third-party, formed a limited liability company called Royal Street Communications, LLC (Royal Street), to bid on spectrum auctioned by the Federal Communications Commission (FCC) in Auction No. 58. The Company owns 85% of the limited liability company member interest of Royal Street, but may only elect two of the five members of Royal Streets management committee (See Note 3).
2. Summary of Significant Accounting Policies:
Consolidation
The accompanying consolidated financial statements include the balances and results of operations of MetroPCS and its wholly- and majority-owned subsidiaries. MetroPCS indirectly owns, through its wholly-owned subsidiaries, a majority interest in Royal Street, and its results of operations are consolidated with MetroPCS. The redeemable minority interest in Royal Street is included in long-term liabilities. All significant intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications of prior period amounts have been made to conform to current period presentation.
Use of Estimates in Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates. The most significant of such estimates used by the Company include:
allowance for uncollectible accounts receivable;
valuation of inventories;
estimated useful life of assets;
impairment of long-lived assets and indefinite-lived assets;
likelihood of realizing benefits associated with temporary differences giving rise to deferred tax assets;
reserves for uncertain tax positions;
estimated customer life in terms of amortization of certain deferred revenue; and
valuation of Common Stock.
Derivative Instruments and Hedging Activities
The Company accounts for its hedging activities under Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended (SFAS No. 133). The standard requires the Company to recognize all derivatives on the consolidated balance sheet at fair value. Changes in the fair value of derivatives are to be recorded each period in earnings or on the accompanying consolidated balance sheets in accumulated other comprehensive income (loss) depending on the type of hedged
17
transaction and whether the derivative is designated and effective as part of a hedged transaction. Gains or losses on derivative instruments reported in accumulated other comprehensive income (loss) must be reclassified to earnings in the period in which earnings are affected by the underlying hedged transaction and the ineffective portion of all hedges must be recognized in earnings in the current period. The Companys use of derivative financial instruments is discussed in Note 5.
Cash and Cash Equivalents
The Company includes as cash and cash equivalents (i) cash on hand, (ii) cash in bank accounts, (iii) investments in money market funds, and (iv) corporate bonds with an original maturity of 90 days or less.
Short-Term Investments
The Companys short-term investments consist of securities classified as available-for-sale, which are stated at fair value. The securities include corporate and government bonds with an original maturity of over 90 days and auction rate securities. Unrealized gains and losses, net of related income taxes, for available-for-sale securities are reported in accumulated other comprehensive income (loss), a component of stockholders equity, until realized. The estimated fair values of investments are based on quoted market prices as of the end of the reporting period (See Note 4).
Inventories
Substantially all of the Companys inventories are stated at the lower of average cost or market. Inventories consist mainly of handsets that are available for sale to customers and independent retailers.
Allowance for Uncollectible Accounts Receivable
The Company maintains allowances for uncollectible accounts for estimated losses resulting from the inability of independent retailers to pay for equipment purchases and for amounts estimated to be uncollectible from other carriers.
Prepaid Expenses
Prepaid expenses consisted of the following (in thousands):
|
|
2005 |
|
2004 |
|
||
|
|
|
|
|
|
||
Prepaid vendor purchases |
|
$ |
11,801 |
|
$ |
|
|
Prepaid rent |
|
6,347 |
|
4,065 |
|
||
Prepaid maintenance and support contracts |
|
1,393 |
|
609 |
|
||
Prepaid insurance |
|
1,020 |
|
1,855 |
|
||
Other |
|
869 |
|
494 |
|
||
|
|
|
|
|
|
||
Prepaid expenses |
|
$ |
21,430 |
|
$ |
7,023 |
|
18
Property and Equipment
Property and equipment, net, consisted of the following (in thousands):
|
|
2005 |
|
2004 |
|
||
|
|
|
|
|
|
||
Construction-in-progress |
|
$ |
98,078 |
|
$ |
25,460 |
|
Network infrastructure |
|
905,924 |
|
712,745 |
|
||
Office equipment |
|
17,059 |
|
9,139 |
|
||
Leasehold improvements |
|
16,608 |
|
12,145 |
|
||
Furniture and fixtures |
|
4,000 |
|
2,444 |
|
||
Vehicles |
|
118 |
|
|
|
||
|
|
1,041,787 |
|
761,933 |
|
||
|
|
|
|
|
|
||
Accumulated depreciation |
|
(210,297 |
) |
(125,565 |
) |
||
|
|
|
|
|
|
||
Property and equipment, net |
|
$ |
831,490 |
|
$ |
636,368 |
|
Property and equipment are stated at cost. Additions and improvements are capitalized, while expenditures that do not enhance or extend the assets useful life are charged to operating expenses as incurred. When the Company sells, disposes of or retires property and equipment, the related gains or losses are included in operating results. Depreciation is applied using the straight-line method over the estimated useful lives of the assets once the assets are placed in service, which are ten years for network infrastructure assets, three to seven years for office equipment, which includes computer equipment, three to seven years for furniture and fixtures and five years for vehicles. Leasehold improvements are amortized over the shorter of the remaining term of the lease and any renewal periods reasonably assured or the estimated useful life of the improvement. Maintenance and repair costs are charged to expense as incurred. The Company follows the provisions of SFAS No. 34, Capitalization of Interest Cost, with respect to its PCS licenses and the related construction of its network infrastructure assets. For the years ended December 31, 2005, 2004 and 2003, the Company capitalized interest in the amount of $3.6 million, $2.9 million and $0.1 million, respectively.
Restricted Cash and Investments
Restricted cash and investments consist of money market instruments and short-term investments. Short-term investments, which are held-to-maturity, are stated at cost plus accrued interest, which approximates market value, mature within twelve months and are comprised primarily of federal home loan mortgage notes, all denominated in U.S. dollars. In general, these investments are pledged as collateral against letters of credit used as security for payment obligations and are presented as current or non-current assets based on the terms of the underlying letters of credit.
Revenues and Cost of Revenues
The Companys wireless services are provided on a month-to-month basis and are paid in advance. Revenues from wireless services are recognized as services are rendered. Amounts received in advance are recorded as deferred revenue. Long-term deferred revenue is included in other long-term liabilities. Cost of service generally includes direct costs of operating the Companys networks.
Effective July 1, 2003, the Company adopted Emerging Issues Task Force (EITF) No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables, (EITF No. 00-21). The consensus also supersedes certain guidance set forth in U.S. Securities and Exchange Commission (SEC) Staff Accounting Bulletin Number 101, Revenue Recognition in Financial Statements, (SAB 101). SAB 101 was amended in December 2003 by Staff Accounting Bulletin Number 104, Revenue Recognition, (SAB 104). The consensus addresses the accounting for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. Revenue arrangements with multiple deliverables are divided into separate units of accounting and the consideration received is allocated among the separate units of accounting based on their relative fair values.
19
The Company determined that the sale of wireless services through its direct and indirect sales channels with an accompanying handset constitutes a revenue arrangement with multiple deliverables. Upon adoption of EITF No. 00-21, the Company began dividing these arrangements into separate units of accounting, and allocating the consideration between the handset and the wireless service based on their relative fair values. Consideration received for the handset is recognized as equipment revenue when the handset is delivered and accepted by the customer. Consideration received for the wireless service is recognized as service revenues when earned.
Equipment revenues arise from the sale of handsets and accessories. Revenues and related costs from the sale of handsets in the direct retail locations are recognized at the point of sale. Handsets shipped to independent retailers are recorded as deferred revenue and deferred cost upon shipment by the Company and are recognized as equipment revenues and related costs when service is activated by its customers. Revenues and related costs from the sale of accessories are recognized at the point of sale. The costs of handsets and accessories sold are recorded in cost of equipment.
Sales incentives offered without charge to customers related to the sale of handsets are recognized as a reduction of revenue when the related equipment revenue is recognized. At December 31, 2005, customers had the right to return handsets within 7 days or 60 minutes of usage, whichever occurred first. In January 2006, the Company expanded the terms of its return policy to allow customers the right to return handsets within 30 days or 60 minutes of usage, whichever occurs first.
Prior to July 1, 2003, activation fees were deferred and amortized over the estimated customer life. On October 1, 2003, the Company changed its estimated customer life from 25 months to 14 months, based on historical disconnect rates, resulting in an increase in activation revenues of $5.1 million in the fourth quarter of 2003 over amounts that would have been recognized using the prior estimated life.
Software Costs
In accordance with Statement of Position (SOP) 98-1, Accounting for Costs of Computer Software Developed or Obtained for Internal Use, (SOP 98-1), certain costs related to the purchase of internal use software are capitalized and amortized over the estimated useful life of the software. For the years ended December 31, 2005 and 2004, the Company capitalized approximately $2.7 million and $0.9 million, respectively, of purchased software costs under SOP 98-1, that is being amortized over a three-year life. The Company amortized computer software costs of approximately $0.8 million, $0.4 million and $0.3 million for the years ended December 31, 2005, 2004 and 2003, respectively. Capitalized software costs are classified as office equipment.
PCS Licenses and Microwave Relocation Costs
The Company operates broadband personal communication services networks under licenses granted by the FCC for a particular geographic area on spectrum allocated by the FCC for broadband PCS services. The PCS licenses included the obligation through April 2005 to relocate existing fixed microwave users of the Companys licensed spectrum if the Companys spectrum interfered with their systems and/or reimburse other carriers (according to FCC rules) that relocated prior users if the relocation benefits the Companys system. Additionally, as discussed in Note 10, the Company incurred costs related to microwave relocation in constructing its PCS network. The PCS licenses and microwave relocation costs are recorded at cost. Although PCS licenses are issued with a stated term, generally ten years, the renewal of PCS licenses is generally a routine matter without substantial cost and the Company has determined that no legal, regulatory, contractual, competitive, economic, or other factors currently exist that limit the useful life of its PCS licenses. As such, under the provisions of SFAS No. 142, Goodwill and Other Intangible Assets, the Company does not amortize PCS licenses and microwave relocation costs as they are considered to have indefinite lives and together represent the cost of the Companys spectrum. The Company is required to test indefinite-lived intangible assets, consisting of PCS licenses and microwave relocation costs, for impairment on an annual basis based upon a fair value approach. Indefinite-lived intangible assets must be tested between annual tests if events or changes in circumstances indicate that the asset might be impaired. These events or circumstances could include a significant change in the business climate, including a significant sustained decline in an entitys market value, legal factors, operating performance indicators, competition, sale or disposition of a significant portion of the business, or other factors. The Company completed its impairment tests during the third quarter and no impairment has been recognized through December 31, 2005.
20
Advertising and Promotion Costs
Advertising and promotion costs are expensed as incurred. Advertising costs totaled $25.6 million, $22.2 million and $21.5 million during the years ended December 31, 2005, 2004 and 2003, respectively.
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.
The Company establishes reserves when, despite the belief that the Companys tax return positions are fully supportable, the Company believes that certain positions it has taken might be challenged and ultimately might not be sustained. The Company adjusts these reserves in light of changing facts and circumstances. The Companys effective tax rate includes the impact of reserve positions and changes to reserves that the Company considers appropriate. A number of years may elapse before a particular matter, for which the Company has established a reserve, is finally resolved. Unfavorable settlement of any particular issue would require the use of cash. Favorable resolution would be recognized as a reduction to the effective rate in the year of resolution. Other long-term liabilities included tax reserves in the amount of $17.1 million and $18.9 million at December 31, 2005 and 2004, respectively. Accounts payable and accrued expenses included tax reserves in the amount of $4.1 million at December 31, 2005 (See Note 16).
Other Comprehensive Income
Unrealized gains and losses on available-for-sale securities and cash flow hedging derivatives are reported in accumulated other comprehensive income (loss) as a separate component of stockholders equity until realized. Realized gains and losses on available-for-sale securities are included in interest income. Gains or losses on cash flow hedging derivatives reported in accumulated other comprehensive income (loss) are reclassified to earnings in the period in which earnings are affected by the underlying hedged transaction.
Stock-Based Compensation
The Company follows the disclosure requirements of SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure, which amends the disclosure requirements of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123) to require prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.
As permitted by SFAS No. 123, the Company measures compensation expense for its stock-based employee compensation plans, described further in Note 14, using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25).
The Company has adopted the disclosure-only provisions of SFAS No. 123. The following table illustrates the effect on net income applicable to Common Stock (in thousands) and net income per common share 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 (See Note 14 for assumptions used in the fair value method):
21
|
|
2005 |
|
2004 |
|
2003 |
|
|||
|
|
|
|
|
|
|
|
|||
Net income (loss) applicable to Common Stockas reported |
|
$ |
176,065 |
|
$ |
43,411 |
|
$ |
(3,608 |
) |
Add: Amortization of deferred compensation determined under the intrinsic method for employee stock awards, net of tax |
|
1,584 |
|
6,036 |
|
2,725 |
|
|||
Less: Total stock-based employee compensation expense determined under the fair value method for employee stock awards, net of tax |
|
(3,227 |
) |
(5,689 |
) |
(1,642 |
) |
|||
|
|
|
|
|
|
|
|
|||
Net income (loss) applicable to Common Stockpro forma |
|
$ |
174,422 |
|
$ |
43,758 |
|
$ |
(2,525 |
) |
|
|
|
|
|
|
|
|
|||
Basic net income (loss) per common share: |
|
|
|
|
|
|
|
|||
As reported |
|
$ |
2.12 |
|
$ |
0.55 |
|
$ |
(0.10 |
) |
Pro forma |
|
$ |
2.10 |
|
$ |
0.55 |
|
$ |
(0.07 |
) |
Diluted net income (loss) per common share: |
|
|
|
|
|
|
|
|||
As reported |
|
$ |
1.87 |
|
$ |
0.46 |
|
$ |
(0.10 |
) |
Pro forma |
|
$ |
1.86 |
|
$ |
0.46 |
|
$ |
(0.07 |
) |
The pro forma amounts presented above may not be representative of the future effects on reported net income since the pro forma compensation expense is allocated over the periods in which options become exercisable, and new option awards may be granted each year.
Asset Retirement Obligations
The Company accounts for asset retirement obligations as determined by SFAS No. 143, Accounting for Asset Retirement Obligations (SFAS No. 143) and Financial Accounting Standards Board (FASB) Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143 (FIN No. 47). SFAS No. 143 and FIN No. 47 address financial accounting and reporting for legal obligations associated with the retirement of tangible long-lived assets and the related asset retirement costs. SFAS No. 143 requires that companies recognize the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the estimated useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The Company adopted SFAS No. 143 on January 1, 2003.
The Company is subject to asset retirement obligations associated with its cell site operating leases, which are subject to the provisions of SFAS No. 143 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 adoption of SFAS No. 143 resulted in a January 1, 2003 adjustment to record a $0.7 million increase in the carrying values of property and equipment with a corresponding increase in other long-term liabilities. In addition, $0.1 million of accretion, before taxes, was recorded to increase the liability to $0.8 million at adoption. The net effect was to record a loss of approximately $0.1 million as a cumulative effect adjustment resulting from a change in accounting principle in the Companys consolidated statements of income upon adoption on January 1, 2003.
22
The following table summarizes the Companys asset retirement obligation transactions (in thousands):
|
|
2005 |
|
2004 |
|
||
|
|
|
|
|
|
||
Beginning asset retirement obligations |
|
$ |
1,893 |
|
$ |
1,115 |
|
Liabilities incurred |
|
1,206 |
|
525 |
|
||
Accretion expense |
|
423 |
|
253 |
|
||
Ending asset retirement obligations |
|
$ |
3,522 |
|
$ |
1,893 |
|
Earnings Per Share
Basic earnings per share (EPS) are based upon the weighted average number of common shares outstanding for the period. Diluted EPS is computed in the same manner as EPS after assuming issuance of common stock for all potentially dilutive equivalent shares, whether exercisable or not.
The Series D Cumulative Convertible Redeeming Participating Preferred Stock and Series E Cumulative Convertible Redeeming Participating Preferred Stock are participating securities, such that in the event a dividend is declared or paid on the common stock, the Company must simultaneously declare and pay a dividend on the Series D Cumulative Convertible Redeeming Participating Preferred Stock and Series E Convertible Redeeming Participating Preferred Stock as if they had been converted into common stock. The EITFs Topic D-95, Effect of Participating Convertible Securities on the Computation of Basic Earnings per Share, requires that the preferred stock be included in the computation of basic earnings per share if the effect of inclusion is dilutive. The Companys accounting policy requires the use of the two-class method for its participating securities for earnings per share calculations.
Recent Accounting Pronouncements
In December 2003, the FASB issued a revised interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements, (FIN No. 46(R)), which replaces FASB Interpretation No. 46, Consolidation of Variable Interest Entities, (FIN No. 46). FIN No. 46(R) clarifies and expands current accounting guidance for variable interest entities. FIN No. 46 and FIN No. 46(R) are effective immediately for all variable interest entities created after January 31, 2003, and for variable interest entities prior to February 1, 2003, no later than the end of the first reporting period after March 15, 2004. The adoption of FIN No. 46 and FIN No. 46 (R) did not have a material impact on the Companys financial position or results of operations.
In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment (SFAS No. 123(R)). SFAS No. 123(R) requires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments, including stock options granted to employees. SFAS No. 123(R) replaces SFAS No. 123 and supersedes APB No. 25 and its related interpretations. This statement will be effective for awards granted, modified or settled in interim periods or fiscal years beginning after December 15, 2005. Although early adoption is allowed, the Company will adopt SFAS No. 123(R) as of the required effective date for calendar year companies, which is January 1, 2006. The Company estimates compensation expense related to the adoption of SFAS No. 123(R) to be approximately $10.6 million for the year ending December 31, 2006.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Correctionsa replacement of APB Opinion No. 20 and FASB Statement No. 3 (SFAS No. 154). SFAS No. 154 replaces APB Opinion No. 20, Accounting Changes (APB No. 20), and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS No. 154 requires retrospective application to prior periods financial statements of a voluntary change in accounting principle unless it is impracticable to determine either the period-specific effects or the cumulative effects of the change. APB No. 20 previously required that most voluntary changes in accounting principles be recognized by including in net income in the period of the change the cumulative effect of changing to the new accounting principle. SFAS No. 154 generally will not apply with respect to the adoption of new accounting standards, as new accounting standards usually include specific transition provisions, and will not override transition provisions contained in new or existing accounting literature. SFAS No. 154 is effective for fiscal years beginning
23
after December 15, 2005, and early adoption is permitted for accounting changes and error corrections made in years beginning after the date that SFAS No. 154 was issued. The adoption of this statement is not expected to have a material effect on the financial condition or results of operations of the Company.
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial 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 is not expected to have a material effect on the financial condition or results of operations of the Company.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial 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 is not expected to have a material effect on the financial condition or results of operations of the Company.
In July 2006, the FASB issued Interpretation No. 48 Accounting for Uncertainty in Income Taxes, (FIN No. 48), which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with SFAS No. 109. FIN No. 48 provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. The Company has not completed its evaluation of the effect of FIN No. 48.
In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in the Current Year Financial Statements, (SAB 108), which addresses how the effects of prior year uncorrected misstatements should be considered when quantifying misstatements in current year financial statements. SAB 108 requires companies to quantify misstatements using a balance sheet and income statement approach and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors. When the effect of initial adoption is material, companies may record the effect as a cumulative effect adjustment to beginning of year retained earnings. SAB 108 is effective for annual financial statements covering the first fiscal year ending after November 15, 2006. The Company is required to adopt this interpretation by December 31, 2006. The adoption of this statement is not expected to have a material effect on the financial condition or results of operations of the Company.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, (SFAS No. 157), which defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosure about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company will be required to adopt SFAS No. 157 in the first quarter of fiscal year 2008. The Company has not completed its evaluation of the effect of SFAS No. 157.
24
3. Majority-Owned Subsidiary:
On November 24, 2004, MetroPCS, through its wholly-owned subsidiaries, together with C9 Wireless, LLC, an independent, unaffiliated third-party, formed a limited liability company, Royal Street, that qualified to bid for closed licenses and to receive bidding credits as a very small business on open licenses in FCC Auction No. 58. MetroPCS indirectly owns 85% of the limited liability company member interest of Royal Street, but may elect only two of five members of the Royal Street management committee, which has the full power to direct the management of Royal Street. Royal Street holds all licenses won in Auction No. 58. At Royal Streets request and subject to Royal Streets control and direction, MetroPCS is constructing Royal Streets networks and has agreed to purchase, via a resale arrangement, as much as 85% of the engineered service capacity of Royal Streets networks. The results of Royal Streets operations are consolidated with those of MetroPCS and all intercompany balances have been eliminated.
C9 Wireless, LLC has a right to put its interests in Royal Street to MetroPCS at specific future dates based on a contractually determined amount (the Put Right). The Put Right represents an unconditional obligation of MetroPCS and its wholly-owned subsidiaries to purchase Royal Street interests from C9 Wireless, LLC. In accordance with SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, this obligation is recorded as a liability and is measured at each reporting date as the amount of cash that would be required to settle the obligation under the contract terms if settlement occurred at the reporting date.
4. Short-Term Investments:
Short-term investments consisted of the following (in thousands):
|
|
2005 |
|
||||||||||
|
|
Amortized |
|
Gross |
|
Gross |
|
Aggregate |
|
||||
United States government and agencies |
|
$ |
28,999 |
|
$ |
|
|
$ |
(241 |
) |
$ |
28,758 |
|
Auction rate securities |
|
333,819 |
|
|
|
|
|
333,819 |
|
||||
Corporate bonds |
|
27,788 |
|
57 |
|
|
|
27,845 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Total short-term investments |
|
$ |
390,606 |
|
$ |
57 |
|
$ |
(241 |
) |
$ |
390,422 |
|
25
|
|
2004 |
|
||||||||||
|
|
Amortized |
|
Gross |
|
Gross |
|
Aggregate |
|
||||
United States government and agencies |
|
$ |
29,995 |
|
$ |
|
|
$ |
(366 |
) |
$ |
29,629 |
|
Auction rate securities |
|
5,300 |
|
|
|
|
|
5,300 |
|
||||
Corporate bonds |
|
2,074 |
|
|
|
(39 |
) |
2,035 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Total short-term investments |
|
$ |
37,369 |
|
$ |
|
|
$ |
(405 |
) |
$ |
36,964 |
|
The cost and aggregate fair values of short-term investments by contractual maturity at December 31, 2005 were as follows (in thousands):
|
|
Amortized |
|
Aggregate |
|
||
|
|
|
|
|
|
||
Less than one year |
|
$ |
95,156 |
|
$ |
95,030 |
|
Due in 1 2 years |
|
2,000 |
|
1,942 |
|
||
Due in 2 5 years |
|
|
|
|
|
||
Due after 5 years |
|
293,450 |
|
293,450 |
|
||
|
|
|
|
|
|
||
Total |
|
$ |