Metro PCS 2009 Annual Report Download - page 22

10
Royal Street
In November 2004, we entered into a cooperative arrangement with C9 Wireless, LLC, or C9, an unaffiliated
very small business entrepreneur and, as part of that arrangement, acquired an 85% non-controlling interest in Royal
Street Communications, an entity controlled by C9. Royal Street Communications participated in FCC Auction 58,
was the high bidder on, and was granted, 10 MHz of spectrum in the Los Angeles basic trading area, or BTA, and 10
MHz of spectrum in certain other BTAs in Northern Florida, including Orlando. Auction 58, like other major
auctions conducted by the FCC, was designed to allow small businesses, very small businesses and other so-called
designated entities, or DEs, to acquire spectrum and construct wireless networks to promote competition with
existing carriers. To that end, the FCC designated certain blocks of wireless broadband PCS spectrum, or “closed”
licenses, for which only qualified DEs could apply. In addition, DEs were permitted to apply for and bid on “open”
licenses in competition with non-DEs, but very small business DEs could receive a bidding credit of up to 25% of
the gross bid price. Royal Street Communications qualified as a very small business DE and was granted in
December 2005 certain “closed” broadband PCS licenses and certain “open” broadband PCS licenses on which it
received a 25% bidding credit. Subsequently, these licenses were assigned with the consent of the FCC to a series of
wholly-owned subsidiaries of Royal Street Communications. In February, 2010, we also entered into long-term
spectrum leases of 10 MHz of wireless broadband mobile spectrum to Royal Street in Los Angeles and certain
metropolitan areas in Northern Florida in order to facilitate the deployment of LTE by Royal Street in those
metropolitan areas.
We do not own or control the Royal Street licenses. We own a non-controlling 85% limited liability company
member interest in Royal Street Communications, and we may elect only two of the five members of Royal Street
Communications’ management committee, which has the full power to direct the management of Royal Street
Communications. C9 has control over the operations of Royal Street because it has the right to elect three of the five
members of Royal Street Communications’ management committee. C9 also has the right to put, or require us to
purchase, all or part of its ownership interest in Royal Street Communications, but due to regulatory restrictions, we
have no corresponding right to call, or require C9 to sell to us, C9’s ownership interest in Royal Street
Communications. The put right has been structured so that its exercise will not adversely affect Royal Street
Communications’ continued eligibility as a very small business DE during periods where such eligibility is required.
If C9 exercises its put right, we will be required to pay a fixed return on 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 become exercisable without discount later this year and expire in June 2012.
If C9 exercises its put rights, Royal Street Communications will become a wholly-owned subsidiary of MetroPCS.
Royal Street Communications holds all of its licenses and spectrum leases through its wholly-owned subsidiaries
and has entered into certain cooperative agreements with us relating to the financing, design, construction and
operation of its networks. The Royal Street agreements are based on a “wholesale model” in which Royal Street
sells up to 85% of its engineered service capacity to us on a wholesale basis, which we in turn market on a retail
basis under the MetroPCS brand to our customers. The remaining 15% of the engineered service capacity of Royal
Street’s network is reserved by Royal Street and may be sold 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 and provide information to Royal Street relating to its
budgets and business plans as well as arrange for administrative, clerical, accounting, credit, collection, operational,
engineering, maintenance, repair, and technical services.
Additionally, we have provided, and plan to continue to provide, financing to Royal Street, at Royal Street’s
request, under a loan agreement the proceeds of which are to be used for the acquisition of licenses, build out of its
licensed and spectrum lease areas, operation of the Royal Street network infrastructure, and to make payments under
the loan until Royal Street has positive free cash flow. As of December 31, 2009, the maximum amount that Royal
Street could borrow from us under the loan agreement was approximately $1.6 billion of which Royal Street had net
outstanding borrowings of approximately $1.1 billion from us, $168.3 million of which was incurred in 2009. On
February 17, 2010, we executed an amendment to the loan agreement which increased the amount available to Royal
Street under the loan agreement by an additional $874.0 million. Royal Street has incurred an additional $14.0
million in net borrowings through February 28, 2010. Interest accrues under the loan agreement at a rate equal to
11% per annum. As of December 31, 2009, Royal Street has commenced repayment on the loan related to the
Orlando, Lakeland-Winter Haven, Melbourne-Titusville, Gainesville and Los Angeles metropolitan areas.