Metro PCS 2007 Annual Report Download - page 18

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Royal Street Communications
In November 2004, we entered into a cooperative arrangement with C9 Wireless, LLC, or C9, an unaffiliated
very small business entrepreneur and, as part of that arrangement, acquired an 85% non-controlling interest in Royal
Street Communications, an entity controlled by C9. Royal Street Communications participated in FCC Auction 58
Auction 58, like other major auctions conducted by the FCC, was designed to allow small businesses, very small
businesses and other so called designated entities, or DEs, to acquire spectrum and construct wireless networks to
promote competition with existing carriers. To that end, the FCC designated certain blocks of wireless broadband
PCS spectrum for which only qualified DEs could apply. These restricted or “closed” licenses were not available to
other bidders who did not qualify as DEs. In addition, DEs were permitted to apply for and bid on “open” licenses
in competition with non-DEs but very small business DEs were given a bidding credit of 25% of the gross bid price.
Royal Street Communications qualified as a very small business DE and was granted in December 2005 certain
“closed” broadband PCS licenses and certain “open” broadband PCS licenses on which it received the 25% bidding
credit.
We own a non-controlling 85% limited liability company member interest in Royal Street Communications, and
we may elect only two of the five members to Royal Street Communications’ management committee, which has
the full power to direct the management of Royal Street Communications. C9 the unaffiliated very small business
entrepreneur, has control over the operations of Royal Street Communications and its wholly-owned subsidiaries, or,
collectively with Royal Street Communications, Royal Street, because it has the right to elect three of the five
members of Royal Street Communications’ management committee. C9 also has the right to put, or require us to
purchase, all or part of its ownership interest in Royal Street Communications, but due to regulatory restrictions, we
have no corresponding right to call, or require C9 to sell to us, C9’ s ownership interest in Royal Street
Communications. The put right has been structured so that its exercise will not adversely affect Royal Street
Communication’ s continued eligibility as a very small business designated entity during periods where such
eligibility is required. If C9 exercises its put right, we will be required to pay a fixed return on C9’ s invested capital
in Royal Street Communications, which fixed return diminishes annually beginning in the sixth year following the
grant of Royal Street’ s FCC licenses. These put rights expire in June 2012.
Royal Street Communications holds all of its licenses through its wholly-owned subsidiaries and has entered into
certain cooperative agreements with us relating to the financing, design, construction and operation of its networks.
The Royal Street agreements are based on a “wholesale model” in which Royal Street sells up to 85% of its
engineered service capacity on a wholesale basis to us, which we in turn market on a retail basis under the
MetroPCS brand to our customers. The remaining 15% of the engineered service capacity of Royal Street’ s network
is reserved by Royal Street to sell to other parties. In addition, the Royal Street agreements provide that MetroPCS,
at Royal Street’ s request and at all times subject to Royal Street’ s direction and control, will assist Royal Street in
building out its networks, provide information to Royal Street relating to the budgets and business plans as well as
arrange for administrative, clerical, accounting, credit, collection, operational, engineering, maintenance, repair, and
technical services. We do not own or control the Royal Street licenses.
Additionally, upon Royal Street’ s request, we have provided and will provide financing to Royal Street under a
loan agreement the proceeds of which are to be used for the acquisition of licenses, build out of licenses won in
Auction 58, operation of the Royal Street network infrastructure, and to make payments under the loan until Royal
Street has positive free cash flow. As of December 31, 2007, the maximum amount that Royal Street could borrow
from us under the loan agreement was approximately $680 million of which Royal Street had borrowed
$590 million from us under the loan agreement, approximately $196 million of which was borrowed in 2007. In
January 2008, Royal Street borrowed an additional $80 million from us under the loan agreement. Interest accrues
under the loan agreement at a rate equal to 11% per annum, compounded quarterly. As of December 31, 2007, Royal
Street has commenced repayment of that portion of the loan related to the Orlando, Lakeland-Winter Haven, and
Los Angeles metropolitan areas.
License Term
The broadband PCS and AWS licenses held by us and by Royal Street have an initial term of ten years for PCS
licenses and fifteen years for AWS licenses after the initial grant date (which varies by license), and, subject to
applicable conditions, may be renewed at the end of their terms. For example, the initial broadband PCS licenses for
San Francisco, Sacramento, Miami and Atlanta were granted in 1997, were renewed in 2007 and expire in January
2017, and the AWS licenses were granted in November 2007 and expire in November 2022, unless renewed. Each
FCC license is essential to our and Royal Street’ s ability to operate and conduct our and Royal Street’ s business in