Metro PCS 2007 Annual Report Download

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ANNUAL REPORT 2007
NYSE: PCS
www.metropcs.com

Table of contents

  • Page 1
    ANNUAL REPORT 2007 NYSE: PCS www.metropcs.com

  • Page 2
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  • Page 3
    ... 2,000 minutes per month, or in other words, well over an hour every day. MetroPCS' current service area covers a population of approximately 60 million consumers across the United States. We expect to continue to increase our subscriber base in 2008 while at the same time building out our network...

  • Page 4
    ... given current debt and equity market conditions. We continue to invest in building and expanding our network and launching service in new markets. In September of 2007, we launched service in Los Angeles, our largest market to date. This launch required months of hard work and planning and...

  • Page 5
    ...future growth potential. We anticipate that by mid-2009 we will offer service in 9 of the top 12 markets in the U.S. including Philadelphia, Boston and New York City. When fully built, the addition of service within these metropolitan areas in the Northeast, will add approximately 60% to our current...

  • Page 6
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  • Page 7
    ...stock and in each of the indexes on *4/18/2007 and its relative performance is tracked through 12/31/2007. MetroPCS' IPO prospectus is dated 4/18/07. The Company commenced trading with the opening of the market on 4/19/07. COMPARISON OF 8 MONTH CUMULATIVE TOTAL RETURN* Among MetroPCS Communications...

  • Page 8
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  • Page 9
    ...June 29, 2007, the aggregate market value of the registrant' s voting and non-voting common stock held by nonaffiliates of the registrant was approximately $6,429,900,754, based on the closing price of MetroPCS Communications, Inc. common stock on the New York Stock Exchange on June 29, 2007, of $33...

  • Page 10
    ... Beneficial Owners and Management and Related Stockholder Matters ...83 Item 13. Certain Relationships and Related Transactions, and Director Independence...83 Item 14. Principal Accountant Fees and Services ...83 PART IV...84 Item 15. Exhibits, Financial Statement Schedules and Reports on Form...

  • Page 11
    ......F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM...F-2 Consolidated Balance Sheets ...F-3 Consolidated Statements of Income and Comprehensive Income...F-4 Consolidated Statements of Stockholders' Equity...F-5 Consolidated Statements of Cash Flows ...F-7 Notes to Consolidated Financial...

  • Page 12
    ... throughout this annual report, including the "Business," "Regulation," "Risk Factors," and "Management' s Discussion and Analysis of Financial Condition and Results of Operations." We base the forward-looking statements or projections made in this report on our current expectations, plans and...

  • Page 13
    ...1. Business General We offer wireless broadband personal communication services, or PCS, on a no long-term contract, flat-rate, unlimited usage basis in the San Francisco, Miami, Los Angeles, Atlanta, Sacramento, Tampa/Sarasota/Orlando, Dallas/Ft. Worth, and Detroit metropolitan areas, which include...

  • Page 14
    ... pricing. As of December 31, 2007, our customers, in the aggregate across all metropolitan areas we currently serve, averaged over 2,000 minutes of use per month. Remain One of the Lowest Cost Wireless Service Providers in the United States. We believe our operating strategy and network design...

  • Page 15
    ... directory assistance and other value-added services. All service plans are "paidin-advance" and do not require a long-term contract. Our customers also have access, on a pay-in-advance basis, to nationwide roaming. Data Services. Our data services include services provided through the Binary...

  • Page 16
    ...(2) (3) POPs based on 2005 population data and increased based on annualized POP growth rates from 2005 Kagan Research, LLC. License granted to Royal Street. In December 2007, we entered into an agreement to acquire 10 MHz of PCS spectrum for the Jacksonville BTA from PTA Communications, Inc., which...

  • Page 17
    ... our Auction 66 Markets, which currently cover a population of approximately 42 million, supplements or expands the geographic boundaries of our existing operations in Dallas/Ft. Worth, Detroit, San Francisco and Sacramento, and Royal Street Communication' s license area in Los Angeles. We intend to...

  • Page 18
    ..., or DEs, to acquire spectrum and construct wireless networks to promote competition with existing carriers. To that end, the FCC designated certain blocks of wireless broadband PCS spectrum for which only qualified DEs could apply. These restricted or "closed" licenses were not available to other...

  • Page 19
    ... information requests. Network Operations We and Royal Street operate 1xRTT CDMA networks in all of the metropolitan areas where we have launched service, which networks consists of switching centers and cell sites. A switching center serves several purposes, including routing calls, managing call...

  • Page 20
    ... based mobile virtual network operators, or MVNOs, that contract with wireless network operators to provide a separately branded wireless service. These MVNOs typically also charge by the minute rather than offering flat-rate unlimited service plans. In addition, several large satellite companies...

  • Page 21
    ...companies also are expanding their services to offer telecommunications services. As competition develops, we may add additional features or services to our existing service plans, or make other changes to our service plans. Seasonality Our customer activity is influenced by seasonal effects related...

  • Page 22
    ...licensees must operate, the timing and scope of network construction, the rates, terms and conditions of service, the protection and use of customer information, roaming policies, the provision of certain services, such as E-911, and the interconnection of communications networks. Broadband Spectrum...

  • Page 23
    ...wireless coverage to 35% of the licensed geographic area in four years and 70% of the licensed geographic area by the end of the license term. Licensees of the REAG license blocks are required to cover at least 40% of the population of the licensed area in four years and 75% of the population of the...

  • Page 24
    ...such request could adversely affect our business, results of operations, and financial condition. The FCC allows FCC licenses and service areas to be subdivided geographically or by bandwidth, with each divided license covering a smaller service area and/or including less spectrum. Any such division...

  • Page 25
    ...relationship it currently has with us for any future FCC auctions and receive DE benefits, including bidding credits. In addition, Royal Street will not be able to acquire any additional DE licenses in the future, resell services to us on those licenses on the same basis as the existing arrangements...

  • Page 26
    ... Regulatory Obligations The Communications Act and the FCC' s rules impose on wireless licensees a number of requirements, which affect our cost of doing business and have a material effect on our business, operations, and financial results. Our wireless broadband PCS and AWS services are classified...

  • Page 27
    ... effect on our business, operations and financial results. Number Portability. The FCC has ordered all telecommunications carriers, including CMRS carriers, to support telephone number portability which enables subscribers to keep their telephone numbers when they change telecommunications carriers...

  • Page 28
    ... change service providers by limiting the amount of information the existing carrier can require before it is required to release the telephone number to the new provider. In addition, all CMRS carriers are required to support nationwide roaming for customers retaining their numbers. We currently...

  • Page 29
    ... costs related to administering the required universal service fund assessments. The FCC' s rules require that carriers' USF recovery charges to customers not exceed the assessment rate the carrier pays times the proportion of interstate telecommunications revenue on the bill. We currently...

  • Page 30
    ... adopt rules that require carriers to limit data retention; and what steps, if any, the FCC should take to secure the privacy of customer information secured on mobile communications devices. If material rule changes are adopted, compliance with the FCC' s new rules may impose additional costs on us...

  • Page 31
    ... would grant a waiver or that alternate locations would be available that would enable us to come into compliance. Ultimately, we could be forced to discontinue service from some sites or in some areas due to the new rules. An industry group and several wireless carriers have filed an appeal of the...

  • Page 32
    ... networks or offer services, such as the Auction 66 Markets. Automatic roaming rights are important to us because we provide service in a limited number of metropolitan areas in the United States and must rely on other carriers in order to offer roaming services outside our existing metropolitan...

  • Page 33
    ...to use our network to provide competing text or short code services. State, Local and Other Regulation The Communications Act preempts state or local regulation of market entry or rates charged by any CMRS provider. As a result, we are free to establish rates and offer new products and services with...

  • Page 34
    ... service in existing markets. A failure or inability to obtain necessary zoning approvals or state permits, or to satisfy environmental rules, may make construction impossible or infeasible on a particular site, might adversely affect our network design, increase our network design costs, require...

  • Page 35
    ... Related to Our Business Our business strategy may not succeed in the long term. We offer unlimited wireless services for flat monthly rates without requiring a long-term service contract. This approach to marketing wireless services may not prove to be successful in the long term. Some companies...

  • Page 36
    ...to their subscribers at a lower cost than we can offer and allow them to offer unlimited fixed-rate roaming plans on their existing networks over a larger area than we can offer. We do not have a national network, and we must pay fees to other carriers who provide roaming services and who carry long...

  • Page 37
    ...communicate using voice and data services with their handset using VoIP technology in any area equipped with a wireless Internet connection, or hot spot, potentially allowing more carriers to offer larger bundles of minutes while retaining low prices and the ability to offer attractive roaming rates...

  • Page 38
    ... to support our billing system on a cost effective basis or at all or we are unable to transition our billing services to a new vendor before the end of the transition period, we may not be able to bill our customers, provide customer care, grow our business, report financial results, or manage our...

  • Page 39
    ... enjoined from operating our business in the manner we operate currently, which could require us to redesign our current billing or other systems, to expend additional capital to change certain of our technologies and operating practices, or could prevent us from offering certain of our services. In...

  • Page 40
    ... vendors could increase our cost and affect our operating efficiencies. We have entered into agreements with third-party suppliers to provide equipment, software and services that are integral to our business, such as customer care, financial reporting, billing and payment processing. We purchase...

  • Page 41
    ... carriers. If we experience a higher rate of churn, we could experience reduced revenues and increased marketing costs to attract the replacement customers required to sustain our business plan, which could reduce our profit margin and could reduce the cash available to construct and operate new...

  • Page 42
    ... of our networks, or require us to construct the affected area using traditional cell sites which could result in duplicate or excess costs and could result in substantial delays. Any delay in the launch of new metropolitan areas or in the expansion of service in existing metropolitan areas, could...

  • Page 43
    ... period of time. We and Royal Street may have insufficient spectrum in our existing and new markets to meet customer demand or to offer new services that our competitors may be able to offer. Most national wireless carriers have greater spectrum capacity than we do that can be used to support...

  • Page 44
    ... compensation costs, which could increase our costs and reduce our profit margin. When our customers use our service to call customers of other carriers, we may be required to pay the carrier that serves the called party and any intermediary or transit carrier for the use of their networks. The...

  • Page 45
    ... of costs, diligent management of our network infrastructure and our growth, increased capital requirements, increased costs associated with marketing activities, the ability to attract and retain qualified management, technical and sales personnel and the training and management of new personnel...

  • Page 46
    ... and management personnel, including the chief executive officer, could materially and adversely affect our business operations, financial performance, and stock price. The Department of Justice has informally stated that it would carefully scrutinize any statement by us in support of any future...

  • Page 47
    ... provide service or plan to provide service have passed laws prohibiting the use of wireless phones while driving or requiring the use of wireless headsets and other states and municipalities may do so in the future. If state and local governments in areas where we conduct business adopt regulations...

  • Page 48
    ... affect our business by imposing new costs, requiring changes in our current or planned operations, slowing our growth, requiring us to change the way we do business, or requiring us to make additional investments, all of which could materially and adversely affect our business and financial results...

  • Page 49
    ...to elect three of the five members of Royal Street Communications' management committee, which have the full power to direct the management of Royal Street. However, the Royal Street business plan may become so closely aligned with our business plan that there is a risk the FCC may find Royal Street...

  • Page 50
    ... fees imposed on us to our customers. We may or may not be able to recover some or all of those taxes from our customers and the amount of taxes may deter demand for our services or increase our cost to provide service which could have a material adverse effect in our business, results of operation...

  • Page 51
    ... companies, including companies in the telecommunications industry. The changes frequently occur irrespective of the operating performance of the affected companies. Hence, the trading price of our common stock could fluctuate based upon factors that have little or nothing to do with our business...

  • Page 52
    ... or coercive offer to acquire our Company and to provide our board of directors with adequate time to evaluate unsolicited offers. The Rights Plan may prevent or make takeovers or unsolicited corporate transactions more difficult. The Rights Plan will cause substantial dilution to a person or group...

  • Page 53
    ...; Chelmsford, Massachusetts; Hawthorne, New York; and Ft. Washington, Pennsylvania. As of December 31, 2007, we also operated over 100 retail stores throughout our metropolitan areas. All of our regional offices, switch sites, retail stores and virtually all of our cell site facilities are leased...

  • Page 54
    ... Communications currently operate, which could require us and Royal Street Communications to expend additional capital to change certain technologies and operating practices, or could prevent both us and Royal Street Communications from offering some or all of the services we each provide using...

  • Page 55
    ... None. PART II Item 5. Market Price for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information Our common stock began trading on April 19, 2007 on the New York Stock Exchange under the symbol "PCS." Prior to April 19, 2007, there was no...

  • Page 56
    ... financial condition; and other factors our board of directors deems relevant. Equity Compensation Plan Information The following table provides information as of December 31, 2007 with respect to shares of MetroPCS Communications' common stock issuable under our equity compensation plans. Number...

  • Page 57
    ...0.15 $ 126,722,051 150,633,686 2003 Other Financial Data: Net cash provided by operating activities ...Net cash used in investment activities ...Net cash provided by (used in) financing activities...$ 112,605 $ (306,868) 201,951 2004 Year Ended December 31, 2005 2006 (In Thousands) 283,216 $ (905...

  • Page 58
    ...stock began trading on the New York Stock Exchange under the symbol "PCS" on April 19, 2007. We consummated our initial public offering of our common stock on April 24, 2007. We are a wireless telecommunications carrier that currently offers wireless broadband personal communication services, or PCS...

  • Page 59
    ... our local service calling area to any number in the continental United States. We offer flat-rate monthly plans at $30, $35, $40, $45 and $50. All of these plans require payment in advance for one month of service. If no payment is made in advance for the following month of service, service is...

  • Page 60
    ... retailers based on the length of time the receivables are past due, the current business environment and our historical experience. If the financial condition of a material portion of our independent retailers were to deteriorate, resulting in an impairment of their ability to make payments...

  • Page 61
    ...the Company' s long-term investment securities were reported at fair value. Due to the lack of availability of observable market quotes on the Company' s investment portfolio of auction rate securities, the fair value was estimated based on our broker-dealer valuation models and an internal analysis...

  • Page 62
    ... Costs We operate broadband PCS networks under licenses granted by the FCC for a particular geographic area on spectrum allocated by the FCC for broadband PCS services. In addition, in November 2006, we acquired a number of AWS licenses which can be used to provide services comparable to the PCS...

  • Page 63
    ...offering, the Board of Directors uses the closing price of our common stock on the date of grant as the fair market value for our common stock. The volatility assumption is based on a combination of the historical volatility of our common stock and the volatilities of similar companies over a period...

  • Page 64
    ... the maximum vesting period of the award. Customer Recognition and Disconnect Policies When a new customer subscribes to our service, the first month of service and activation fee is included with the handset purchase. Under GAAP, we are required to allocate the purchase price to the handset...

  • Page 65
    ... selling to new customers and fixed charges such as retail store rent and retail associates' salaries. General and administrative expense includes support functions including, technical operations, finance, accounting, human resources, information technology and legal services. We record stock-based...

  • Page 66
    ... amount of state income tax during the years ended December 31, 2007 and 2006, respectively. Seasonality Our customer activity is influenced by seasonal effects related to traditional retail selling periods and other factors that arise from our target customer base. Based on historical results...

  • Page 67
    ... segments. Corporate marketing and advertising expenses are allocated equally to the operating segments, beginning in the period during which we launch service in that operating segment. Expenses associated with our national data center are allocated based on the average number of customers in each...

  • Page 68
    ... Year Ended December 31, 2007 Compared to Year Ended December 31, 2006 Set forth below is a summary of certain financial information by reportable operating segment for the periods indicated: Reportable Operating Segment Data 2007 2006 (in thousands) Change REVENUES: Service revenues: Core Markets...

  • Page 69
    ... of existing customers to higher priced rate plans accounting for $10.0 million of the Core Markets increase. In addition, E-911, Federal Universal Service Fund, or FUSF, vendor' s compensation and activation revenues increased approximately $53.7 million during the year ended December 31, 2007...

  • Page 70
    ... to the same period in 2006, which accounted for $14.4 million of the increase. In addition, cost of equipment sales to existing customers increased $4.5 million and accessories cost increased $1.9 million for the year ended December 31, 2007. Expansion Markets. Expansion Markets cost of equipment...

  • Page 71
    ... $3.0 million loss on the termination of a lease agreement during the year ended December 31, 2007. During the year ended December 31, 2006, certain network technology related to our cell sites in certain markets was retired and replaced with new technology, resulting in a loss on disposal of assets...

  • Page 72
    ... to a 35% growth in customers during the year ended December 31, 2007 as well as cost benefits achieved due to the increasing scale of our business in the Core and Expansion Markets. In addition, the increase in net income is due to a 197% increase in interest income as a result of the significant...

  • Page 73
    ... for the year ended December 31, 2005. The increase in service revenues is primarily attributable to net additions of approximately 430,000 customers accounting for $199.2 million of the Core Markets increase, coupled with the migration of existing customers to higher price rate plans accounting for...

  • Page 74
    ...various unlimited data features. In addition, this migration is expected to continue as our higher priced rate plans become more attractive to our existing customer base. • Expansion Markets. Expansion Markets service revenues increased $149.5 million to $152.9 million for the year ended December...

  • Page 75
    ...as well as the sale of new handsets to existing customers accounted for $25.9 million of the increase. Expansion Markets. Expansion Markets costs of equipment increased $105.4 million to $112.6 million for the year ended December 31, 2006 from $7.2 million for the year ended December 31, 2005. These...

  • Page 76
    ..., 2005. The increase related to network infrastructure assets that were placed into service as a result of the launch of the Dallas/Ft. Worth metropolitan area, the Detroit metropolitan area, and expansion of the Tampa/Sarasota area to include the Orlando metropolitan area. Stock-Based Compensation...

  • Page 77
    ... sum of the average monthly number of customers during such period. We classify delinquent customers as churn after they have been delinquent for 30 days. In addition, when an existing customer establishes a new account in connection with the purchase of an upgraded or replacement phone and does not...

  • Page 78
    ... monthly number of customers during such period. CPU for the years ended December 31, 2007 and 2006 was $18.33 and $19.65, respectively. CPU for the year ended December 31, 2005 was $19.57. We continue to achieve cost benefits due to the increasing scale of our business. However, these benefits...

  • Page 79
    ... debt, cumulative effect of change in accounting principle and non-cash stock-based compensation, or Adjusted EBITDA, in our Core Markets after only four full quarters of operations. Customers. Net customer additions in our Core Markets were 357,947 for the year ended December 31, 2007, compared to...

  • Page 80
    ... of cost benefits due to the increasing scale of our business in the Expansion Markets offset by significant expenses related to the buildout and launch of service in the Los Angeles metropolitan area and the buildout of our Auction 66 Markets. Adjusted EBITDA deficit for the year ended December...

  • Page 81
    ... last day of the month divided by two. The following table shows the calculation of ARPU for the periods indicated. Year Ended December 31, 2005 2006 2007 (In thousands, except average number of customers and ARPU) Calculation of Average Revenue Per User (ARPU): Service revenues ...Less: Activation...

  • Page 82
    ... by customers at the time their service is activated that reduce our acquisition cost of those customers. Additionally, equipment costs associated with existing customers, net of related revenues, are excluded as this measure is intended to reflect only the acquisition costs related to new customers...

  • Page 83
    ... of the average monthly number of customers during such period. CPU does not include any depreciation and amortization expense. Management uses CPU as a tool to evaluate the non-selling cash expenses associated with ongoing business operations on a per customer basis, to track changes in these non...

  • Page 84
    Year Ended December 31, 2005 2006 2007 (In thousands, except average number of customers and CPU) Calculation of Cost Per User (CPU): Cost of service ...Add: General and administrative expense ...Add: Net loss on equipment transactions unrelated to initial customer acquisition ...Less: Stock-based ...

  • Page 85
    ... to its auction rate securities. Management believes that any future additional impairment charges will not have a material effect on our liquidity. On April 24, 2007, MetroPCS Communications consummated an initial public offering of its common stock. MetroPCS Communications sold 37,500,000...

  • Page 86
    ...existing Core Markets network through the addition of cell sites and switches. We believe the increased service area and capacity in existing markets will improve our service offering, helping us to attract additional customers and increase revenues. In addition, we believe our new Expansion Markets...

  • Page 87
    ... to a significant increase in net income, including a $228.2 million gain on the sale of a 10 MHz portion of our 30MHz PCS license for the San Francisco - Oakland - San Jose basic trading area, and the timing of payments on accounts payable and accrued expenses in the year ended December 31, 2005...

  • Page 88
    ...in purchases of property and equipment, partially offset by proceeds of $230.0 million from the sale of a 10 MHz portion of our 30 MHz PCS license for the San Francisco-Oakland-San Jose basic trading area. Financing Activities Cash provided by financing activities was $1.2 billion for the year ended...

  • Page 89
    ... agreement to manage its interest rate risk exposure and fulfill a requirement of its senior secured credit facility. The agreement covers a notional amount of $1.0 billion and effectively converts this portion of MetroPCS Wireless, Inc.' s variable rate debt to fixed-rate debt at an annual rate...

  • Page 90
    ...and $375 million in cash to acquire assets to support our networks in existing markets or markets we are building, including assets related to the acquisition of, conversion of, buildout of, and launch of service in, Jacksonville, Florida. During the year ended December 31, 2007, we and Royal Street...

  • Page 91
    ... above. For further information related to unrecognized tax benefits, see Note 16, "Income Taxes," to the consolidated financial statements included in this Report. Inflation We believe that inflation has not materially affected our operations. Effect of New Accounting Standards In September 2006...

  • Page 92
    ... changes in market prices and rates, including interest rates. We do not routinely enter into derivatives or other financial instruments for trading, speculative or hedging purposes, unless it is required by our senior secured credit facility. We do not currently conduct business internationally...

  • Page 93
    ... variable rate debt would increase approximately $5.8 million. Item 8. Financial Statements and Supplementary Data The information required by this item is included in Part IV, Item 15(a)(1) and are presented beginning on Page F-1. Item 9. Changes in and Disagreements with Accountants on Accounting...

  • Page 94
    ..., the Company' s internal control over financial reporting. Item 9B. Other Information None. PART III Item 10. Directors, Executive Officers and Corporate Governance The information required by this item is incorporated by reference to the definitive Proxy Statement for the 2008 Annual Meeting of...

  • Page 95
    ...of Cash Flows for the years ended December 31, 2007, 2006 and 2005 ...Notes to Consolidated Financial Statements... F-1 F-2 F-3 F-4 F-7 F-8 (2) 2.1(a) Exhibits Description Exhibit No. Agreement and Plan of Merger, dated as of April 6, 2004, by and among MetroPCS Communications, Inc., MPCS Holdco...

  • Page 96
    ... of Officer and Director Indemnification Agreement (Filed as Exhibit 10.4 to Amendment No. 2 to MetroPCS Communications, Inc.' s Registration Statement on Form S-1/A (SEC File No. 333-139793), filed on February 27, 2007, and incorporated by reference herein). General Purchase Agreement, effective as...

  • Page 97
    ...Bank of New York Trust Company, N.A., as trustee under the Indenture referred to therein. Purchase Agreement, dated May 31, 2007, among MetroPCS Wireless, Inc., the Guarantors as defined therein and Bear, Stearns & Co. Inc. (Filed as Exhibit 10.1 to MetroPCS Communications, Inc.' s Current Report on...

  • Page 98
    ... 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. METROPCS COMMUNICATIONS, INC. (Registrant) By: /s/ ROGER D. LINQUIST Roger D. Linquist President, Chief Executive Officer and Chairman of the Board Date: February 29, 2008 87

  • Page 99
    ... the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ ROGER D. LINQUIST Roger D. Linquist President and Chief Executive Officer, and Chairman of the Board...

  • Page 100
    ... of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for uncertainty in income taxes as of...

  • Page 101
    ... in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our...

  • Page 102
    ...Communications, Inc. and Subsidiaries Consolidated Balance Sheets As of December 31, 2007 and 2006 (in thousands, except share and per share information) 2007 2006 CURRENT ASSETS: Cash and cash equivalents ...Short-term investments ...Restricted short-term investments...Inventories, net ...Accounts...

  • Page 103
    ... Communications, Inc. and Subsidiaries Consolidated Statements of Income and Comprehensive Income For the Years Ended December 31, 2007, 2006 and 2005 (in thousands, except share and per share information) 2007 2006 2005 REVENUES: Service revenues ...Equipment revenues...Total revenues...OPERATING...

  • Page 104
    ... Accretion on Series E Preferred Stock...- Tax benefits from the exercise of Common Stock options...- Net income ...- Unrealized losses on available-forsale securities, net of tax...- Reclassification adjustment for losses included in net income, net of tax...- Unrealized gain on cash flow hedging...

  • Page 105
    MetroPCS Communications, Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity - (Continued) For the Years Ended December 31, 2007, 2006 and 2005 (in thousands, except share information) Accumulated Other Comprehensive Income (Loss) Number of Shares Additional Paid-In Capital ...

  • Page 106
    ... from sale of FCC licenses ...Microwave relocation costs...Net cash used in investing activities...CASH FLOWS FROM FINANCING ACTIVITIES: Change in book overdraft...Payment upon execution of cash flow hedging derivative ...Proceeds from bridge credit agreements ...Proceeds from Senior Secured Credit...

  • Page 107
    ... in long-term liabilities. All intercompany accounts and transactions between the Company and Royal Street have been eliminated in the consolidated financial statements. On March 14, 2007, the Company' s Board of Directors approved a 3 for 1 stock split of the Company' s common stock effected by...

  • Page 108
    ... business enterprises report information about operating segments in annual financial statements. At December 31, 2007, the Company had twelve operating segments based on geographic regions within the United States: Atlanta, Boston, Dallas/Ft. Worth, Detroit, Las Vegas, Los Angeles, Miami, New York...

  • Page 109
    ..., net of related income taxes, for available-for-sale securities are reported in accumulated other comprehensive income, 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. Historically...

  • Page 110
    ... Company' s long-term investment securities were reported at fair value. Due to the lack of availability of observable market quotes on the Company' s investment portfolio of auction rate securities, the fair value was estimated based on the Company' s broker-dealer valuation models and an internal...

  • Page 111
    ... cost of service on the accompanying statements of income and comprehensive income. For the years ended December 31, 2007, 2006 and 2005, the Company recorded approximately $94.0 million, $44.3 million and $24.6 million, respectively, of FUSF and E-911 fees. Sales, use and excise taxes are reported...

  • Page 112
    ... accounting in interim periods, disclosures, and transition issues. The adoption of FIN 48 did not have a significant impact on the Company' s financial statements. There was no cumulative effect adjustment related to adopting FIN 48. Other Comprehensive Income Unrealized gains on available-for-sale...

  • Page 113
    MetroPCS Communications, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2007, 2006 and 2005 Stock-Based Compensation Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123(R), "Share-Based Payment," ("SFAS No. 123(R)"), ...

  • Page 114
    ... 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...

  • Page 115
    ... Communications' control and direction, MetroPCS is assisting in the construction of Royal Street' s networks and has agreed to purchase, via a resale arrangement, as much as 85% of the engineered service capacity of Royal Street' s networks. The Company' s consolidated financial statements include...

  • Page 116
    ...auction rate securities continue to pay interest according to their stated terms, based on statements received from the Company' s broker and an analysis of other-than-temporary impairment factors, the Company has recorded an impairment charge of $97.8 million during the year ended December 31, 2007...

  • Page 117
    ...rate protection agreement expires on February 1, 2010. This financial instrument is reported in other long-term liabilities at fair market value of approximately $23.5 million as of December 31, 2007. The net change in fair value of $13.6 million is reported in accumulated other comprehensive income...

  • Page 118
    ... 2005, the Company closed on the purchase of a 10 MHz F-Block PCS license in the basic trading area of Bakersfield, California for an aggregate purchase price of $4.0 million. On December 21, 2005, the FCC granted Royal Street Communications 10 MHz of spectrum in the Los Angeles, California; Orlando...

  • Page 119
    ...42,882 4,874 325,681 8. Long-Term Debt: Long-term debt consisted of the following (in thousands): 2007 2006 9¼% Senior Notes ...$ Senior Secured Credit Facility...Total ...Add: unamortized premium on debt ...Total debt...Less: current maturities ...Total long-term debt ...$ 1,400,000 $ 1,580,000...

  • Page 120
    MetroPCS Communications, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2007, 2006 and 2005 licenses in the FCC auction in May 1996. The repayment resulted in a loss on extinguishment of debt of $1.0 million. $150 Million 10¾% Senior Notes On September 29, 2003, ...

  • Page 121
    ... five years. The net proceeds from the borrowings under the Senior Secured Credit Facility, together with the sale of the Initial Notes, were used to repay amounts owed under the credit agreements, secured bridge credit facility and unsecured bridge credit facility, and to pay related premiums, fees...

  • Page 122
    ... Financial Statements December 31, 2007, 2006 and 2005 The interest rate on the outstanding debt under the Senior Secured Credit Facility is variable. The rate as of December 31, 2007 was 7.329%. On November 21, 2006, Wireless entered into a three-year interest rate protection agreement to manage...

  • Page 123
    ...in cash to acquire assets to support its networks in existing markets or markets the Company is building, including assets related to the acquisition of, conversion of, buildout of, and launch of service in Jacksonville, Florida. The Company has an agreement with Lucent Technologies, Inc., or Lucent...

  • Page 124
    ... could be enjoined from operating its business in the manner in which it currently operates, which could require the Company to expend additional capital to change certain technologies and operating practices, or could prevent it from offering some or all of our services using some or all of its...

  • Page 125
    ...operating its business in the manner it operates currently, which could require the Company to redesign its current billing or other systems, to expend additional capital to change certain of its technologies and operating practices, or could prevent the Company from offering certain of its services...

  • Page 126
    ...director. During the years ended December 31, 2007 and 2006, non-employee members of the Board of Directors were issued 31,230 and 49,725 shares of common stock, respectively, as payment of their annual retainer. Stockholder Rights Plan On March 27, 2007, in connection with the Offering, the Company...

  • Page 127
    ... price of the instrument, 2) fair market value of the underlying stock on date of grant, 3) expected life, 4) estimated volatility and 5) the risk-free interest rate. The Company utilized the following weighted-average assumptions in estimating the fair value of the option grants in the years ended...

  • Page 128
    ... those of traded options, the use of the Black-Scholes option pricing model may not provide a reliable estimate of the fair value of employee stock options. A summary of the status of the Company' s Option Plans as of December 31, 2007, 2006 and 2005, and changes during the periods then ended, is...

  • Page 129
    ... to purchase its common stock under the 1995 Plan at exercise prices which MetroPCS believes were below the fair market value of its common stock at the time of grant. In December 2005, MetroPCS offered to amend the stock option grants of all affected employees by increasing the exercise price of...

  • Page 130
    ... Notes to Consolidated Financial Statements December 31, 2007, 2006 and 2005 The Company has recorded $28.0 million, $14.5 million and $2.6 million of non-cash stock-based compensation expense in the years ended December 31, 2007, 2006 and 2005, respectively, and an income tax benefit of $11...

  • Page 131
    ... but may make discretionary or profit-sharing contributions. The Company has made no contributions to the savings plan through December 31, 2007. 16. Income Taxes: The provision for taxes on income consisted of the following (in thousands): 2007 2006 2005 Current: Federal...State ... $ 257 $ 4,317...

  • Page 132
    ... its net operating loss carry forwards for financial reporting purposes due to the Company' s inability to realize excess tax benefits under SFAS 123(R) until such benefits reduce income taxes payable. The federal net operating loss will begin to expire in 2023. The state net operating losses will...

  • Page 133
    ..., facts, and circumstances existing at that time. An unfavorable result under audit may reduce the amount of federal and state net operating losses the Company has available for carry forward to offset future taxable income, or may increase the amount of tax due for the period under audit, resulting...

  • Page 134
    ... in the financial statements of the first interim or annual reporting period that includes July 12 and September 30, 2007. The Company has recorded a deferred tax liability and offsetting asset of $4.4 million as of December 31, 2007 relating to the MBT Act and future deduction. 17. Net Income Per...

  • Page 135
    ..., Detroit, Las Vegas, Los Angeles, Miami, New York, Philadelphia, San Francisco, Sacramento and Tampa/Sarasota/Orlando. Each of these operating segments provide wireless voice and data services and products to customers in its service areas or is currently constructing a network in order to provide...

  • Page 136
    ... of debt and income taxes are not allocated to the segments in the computation of segment operating profit for internal evaluation purposes. Year Ended December 31, 2007 Core Markets Expansion Markets Other Total Service revenues ...Equipment revenues...Total revenues...Cost of service(1)...Cost of...

  • Page 137
    MetroPCS Communications, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2007, 2006 and 2005 Year Ended December 31, 2005 Core Markets Expansion Markets Other Total Service revenues ...Equipment revenues...Total revenues...Cost of service ...Cost of equipment...Selling...

  • Page 138
    ... a guarantor of the 91/4% Senior Notes or the Senior Secured Credit Facility. The following information presents condensed consolidating balance sheets as of December 31, 2007 and 2006, condensed consolidating statements of income for the years ended December 31, 2007, 2006 and 2005, and condensed...

  • Page 139
    ......Total assets ...$ CURRENT LIABILITIES: Accounts payable and accrued expenses ...$ Current maturities of long-term debt...Deferred revenue ...Advances to subsidiaries ...Other current liabilities ...Total current liabilities ...Long-term debt ...Long-term note to parent...Deferred tax liabilities...

  • Page 140
    ... assets ...CURRENT LIABILITIES: Accounts payable and accrued expenses ...Current maturities of long-term debt...Deferred revenue ...Advances to subsidiaries ...Other current liabilities ...Total current liabilities ...Long-term debt ...Long-term note to parent...Deferred tax liabilities...Deferred...

  • Page 141
    MetroPCS Communications, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2007, 2006 and 2005 Consolidated Statement of Income Year Ended December 31, 2007 Parent REVENUES: Service revenues...Equipment revenues...Total revenues ...OPERATING EXPENSES: Cost of service (...

  • Page 142
    MetroPCS Communications, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2007, 2006 and 2005 Consolidated Statement of Income Year Ended December 31, 2006 Parent REVENUES: Service revenues...Equipment revenues...Total revenues ...OPERATING EXPENSES: Cost of service (...

  • Page 143
    MetroPCS Communications, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2007, 2006 and 2005 Consolidated Statement of Income Year Ended December 31, 2005 Parent REVENUES: Service revenues...Equipment revenues...Total revenues ...OPERATING EXPENSES: Cost of service (...

  • Page 144
    ... income taxes ...Stock-based compensation expense...Changes in assets and liabilities...Net cash provided by (used in) operating activities ...CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment...Change in prepaid purchases of property and equipment...Proceeds from sale...

  • Page 145
    ... income taxes ...Stock-based compensation expense...Changes in assets and liabilities...Net cash provided by (used in) operating activities ...CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment...Change in prepaid purchases of property and equipment...Proceeds from sale...

  • Page 146
    ...Deferred income taxes ...Stock-based compensation expense...Changes in assets and liabilities...Net cash (used in) provided by operating activities ...CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment Change in prepaid purchases of property and equipment ...Proceeds from sale...

  • Page 147
    ...the Company' s agreement with this related party, the Company bills its customers directly for these services and remits the fees collected from its customers for these services to the related party. Accruals for the fees that the Company collected from its customers are included in accounts payable...

  • Page 148
    ...were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Long-Term Debt The fair value of the Company' s long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered...

  • Page 149
    ... of Officer and Director Indemnification Agreement (Filed as Exhibit 10.4 to Amendment No. 2 to MetroPCS Communications, Inc.' s Registration Statement on Form S-1/A (SEC File No. 333-139793), filed on February 27, 2007, and incorporated by reference herein). General Purchase Agreement, effective as...

  • Page 150
    ... Bank of New York Trust Company, N.A., as trustee under the Indenture referred to therein. Purchase Agreement, dated May 31, 2007, among MetroPCS Wireless, Inc., the Guarantors as defined therein and Bear, Stearns & Co. Inc. (Filed as Exhibit 10.1 to MetroPCS Communications, Inc.' s Current 10.11...

  • Page 151
    ... 10.1 to MetroPCS Communications, Inc.' s Current Report on Form 8-K, filed on June 11, 2007, and incorporated by reference herein). Second Amendment to the Second Amended and Restated Credit Agreement, entered into as of August 29, 2007, by and between Royal Street Communications, LLC, Royal Street...

  • Page 152
    ...Roger D. Linquist, certify that: 1. 2. I have reviewed this annual report on Form 10-K of MetroPCS Communications, Inc.; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the...

  • Page 153
    ...J. Braxton Carter, certify that: 1. 2. I have reviewed this annual report on Form 10-K of MetroPCS Communications, Inc.; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the...

  • Page 154
    ... with the Annual Report of MetroPCS Communications, Inc. (the "Company") on Form 10-K for the period ending December 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Roger D. Linquist, President and Chief Executive Officer of the Company, certify...

  • Page 155
    ... with the Annual Report of MetroPCS Communications, Inc. (the "Company") on Form 10-K for the period ending December 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, J. Braxton Carter, Executive Vice President and Chief Financial Officer of the...

  • Page 156
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  • Page 157
    ... Technology Officer Robert A. Young Senior Vice President, Market Operations, Northeast Christine B. Kornegay Vice President, Controller and Chief Accounting Officer John J. Olsen Vice President and Chief Information Officer Keith D. Terreri Vice President Finance and Treasurer Board of Directors...

  • Page 158
    ... Investor Information A copy of the Company's 2007 Annual Report on Form 10-K filed with the SEC is included in this annual report. A copy of any exhibit listed in the exhibit index to the Company's Annual Report on Form 10-K or any other SEC filing is available by visiting the investor relations...

  • Page 159
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  • Page 160
    MetroPCS Communications, Inc. NYSE: PCS www.metropcs.com Corporate Headquarters 2250 Lakeside Blvd. Richardson, TX 75082