Form 10-Q
Table of Contents

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

 

þ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2009

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number

1-33409

METROPCS COMMUNICATIONS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware    20-0836269

(State or other jurisdiction

of incorporation or organization)

  

(I.R.S. Employer

Identification No.)

2250 Lakeside Boulevard

Richardson, Texas

   75082-4304
(Address of principal executive offices)    (Zip Code)

(214) 570-5800

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer þ

  

Accelerated filer ¨

Non-accelerated filer ¨ (Do not check if a smaller reporting company)

  

Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No þ

On July 31, 2009, there were 352,148,874 shares of the registrant’s common stock, $0.0001 par value, outstanding.

 

 

 


Table of Contents

METROPCS COMMUNICATIONS, INC.

Quarterly Report on Form 10-Q

Table of Contents

 

     Page
PART I. FINANCIAL INFORMATION   

Item 1. Financial Statements (Unaudited)

  

Condensed Consolidated Balance Sheets as of June 30, 2009 and December 31, 2008

   1

Condensed Consolidated Statements of Income and Comprehensive Income for the Three and Six Months Ended June  30, 2009 and 2008

   2

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2009 and 2008

   3

Notes to Condensed Consolidated Interim Financial Statements

   4

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

   31

Item 3. Quantitative and Qualitative Disclosures About Market Risk

   55

Item 4. Controls and Procedures

   56
PART II. OTHER INFORMATION   

Item 1. Legal Proceedings

   57

Item 1A. Risk Factors

   57

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

  

Item 3. Defaults Upon Senior Securities

  

Item 4. Submission of Matters to a Vote of Security Holders

   59

Item 5. Other Information

  

Item 6. Exhibits

   59

SIGNATURES

   60

 

* No reportable information under this item.


Table of Contents

PART I.

FINANCIAL INFORMATION

Item 1. Financial Statements.

MetroPCS Communications, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except share and per share information)

(Unaudited)

 

     June 30,
2009
    December 31,
2008
 

CURRENT ASSETS:

    

Cash and cash equivalents

   $ 869,790      $ 697,948   

Short-term investments

     224,853        3   

Inventories, net

     99,877        155,955   

Accounts receivable (net of allowance for uncollectible accounts of $3,005 and $4,106 at June 30, 2009 and December 31, 2008, respectively)

     54,159        34,666   

Prepaid charges

     61,139        56,347   

Deferred charges

     48,920        49,716   

Deferred tax assets

     1,833        1,832   

Other current assets

     33,790        47,417   
                

Total current assets

     1,394,361        1,043,884   

Property and equipment, net

     3,038,984        2,847,751   

Long-term investments

     4,422        5,986   

FCC licenses

     2,447,269        2,406,596   

Microwave relocation costs

     18,487        16,478   

Other assets

     107,016        101,453   
                

Total assets

   $   7,010,539      $   6,422,148   
                

CURRENT LIABILITIES:

    

Accounts payable and accrued expenses

   $ 434,977      $ 568,432   

Current maturities of long-term debt

     18,309        17,009   

Deferred revenue

     171,690        151,779   

Other current liabilities

     4,832        5,136   
                

Total current liabilities

     629,808        742,356   

Long-term debt, net

     3,589,410        3,057,983   

Deferred tax liabilities

     441,625        389,509   

Deferred rents

     68,626        56,425   

Redeemable ownership interest

     7,062        6,290   

Other long-term liabilities

     127,972        135,262   
                

Total liabilities

     4,864,503        4,387,825   

COMMITMENTS AND CONTINGENCIES (See Note 14)

    

STOCKHOLDERS’ EQUITY:

    

Preferred stock, par value $0.0001 per share, 100,000,000 shares authorized; no shares of preferred stock issued and outstanding at June 30, 2009 and December 31, 2008

              

Common Stock, par value $0.0001 per share, 1,000,000,000 shares authorized, 352,089,057 and 350,918,272 shares issued and outstanding at June 30, 2009 and December 31, 2008, respectively

     35        35   

Additional paid-in capital

     1,609,436        1,578,972   

Retained earnings

     558,018        487,849   

Accumulated other comprehensive loss

     (21,453     (32,533
                

Total stockholders’ equity

     2,146,036        2,034,323   
                

Total liabilities and stockholders’ equity

   $ 7,010,539      $ 6,422,148   
                

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Table of Contents

MetroPCS Communications, Inc. and Subsidiaries

Condensed Consolidated Statements of Income and Comprehensive Income

(in thousands, except share and per share information)

(Unaudited)

 

    For the three months ended
June 30,
    For the six months ended
June 30,
 
    2009     2008     2009     2008  

REVENUES:

       

Service revenues

  $ 766,850      $ 598,562      $ 1,493,548      $ 1,160,532   

Equipment revenues

    92,762        80,245        161,393        180,629   
                               

Total revenues

    859,612        678,807        1,654,941        1,341,161   

OPERATING EXPENSES:

       

Cost of service (excluding depreciation and amortization expense of $80,253, $53,061, $152,572 and $101,717, shown separately below)

    268,733        206,140        514,308        394,614   

Cost of equipment

    227,400        160,088        452,419        360,245   

Selling, general and administrative expenses (excluding depreciation and amortization expense of $11,122, $7,827, $20,549 and $16,471, shown separately below)

    142,321        113,419        278,731        217,793   

Depreciation and amortization

    91,375        60,888        173,121        118,188   

Loss (gain) on disposal of assets

    14,010        2,628        (10,898     2,649   
                               

Total operating expenses

    743,839        543,163        1,407,681        1,093,489   
                               

Income from operations

    115,773        135,644        247,260        247,672   

OTHER EXPENSE (INCOME):

       

Interest expense

    70,535        45,664        128,967        93,083   

Accretion of put option in majority-owned subsidiary

    395        317        772        620   

Interest and other income

    (475     (5,372     (1,027     (15,254

Impairment loss on investment securities

    532        9,079        1,453        17,080   
                               

Total other expense

    70,987        49,688        130,165        95,529   

Income before provision for income taxes

    44,786        85,956        117,095        152,143   

Provision for income taxes

    (18,590     (35,491     (46,926     (62,159
                               

Net income

  $ 26,196      $ 50,465      $ 70,169      $ 89,984   
                               

Other comprehensive income:

       

Unrealized gains (losses) on available-for-sale securities, net of tax

    27        504        (112     504   

Unrealized gains (losses) on cash flow hedging derivatives, net of tax

    3,338        11,118        (3,627     (4,508

Reclassification adjustment for losses on cash flow hedging derivatives included in net income, net of tax

    8,097        3,124        14,819        4,842   
                               

Comprehensive income

  $ 37,658      $ 65,211      $ 81,249      $ 90,822   
                               

Net income per common share:

       

Basic

  $ 0.07      $ 0.14      $ 0.20      $ 0.26   
                               

Diluted

  $ 0.07      $ 0.14      $ 0.20      $ 0.25   
                               

Weighted average shares:

       

Basic

        351,912,464            349,051,983            351,503,933            348,608,037   
                               

Diluted

    357,087,331        356,177,866        356,940,117        355,440,059   
                               

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Table of Contents

MetroPCS Communications, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

     For the six months ended
June 30,
 
     2009     2008  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 70,169      $ 89,984   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

         173,121            118,188   

Provision for uncollectible accounts receivable

     111        121   

Deferred rent expense

     11,889        12,967   

Cost of abandoned cell sites

     4,607        2,322   

Stock-based compensation expense

     23,341        19,472   

Non-cash interest expense

     5,157        1,205   

(Gain) loss on disposal of assets

     (10,898     2,649   

Impairment loss on investment securities

     1,453        17,080   

Accretion of asset retirement obligations

     2,397        1,248   

Accretion of put option in majority-owned subsidiary

     772        620   

Deferred income taxes

     44,998        59,794   

Changes in assets and liabilities:

    

Inventories

     56,078        65,993   

Accounts receivable, net

     (19,604     (6,757

Prepaid charges

     (19,400     (17,920

Deferred charges

     796        3,300   

Other assets

     12,618        (335

Accounts payable and accrued expenses

     87,107        (46,872

Deferred revenue

     19,816        6,832   

Other liabilities

     1,465        1,527   
                

Net cash provided by operating activities

     465,993        331,418   

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Purchases of property and equipment

     (455,110     (388,502

Change in prepaid purchases of property and equipment

     14,608        24,446   

Proceeds from sale of property and equipment

     3,571        400   

Purchase of investments

     (261,856       

Proceeds from sale of investments

     37,500        37   

Purchases of and deposits for FCC licenses

     (11,692     (313,267

Proceeds from exchange of FCC licenses

     949          

Cash used in business acquisitions

            (25,162

Microwave relocation costs

     (679     (1,117
                

Net cash used in investing activities

     (672,709     (703,165

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Change in book overdraft

     (99,429     29,479   

Proceeds from 9 1/4% Senior Notes

     492,250          

Debt issuance costs

     (11,925       

Repayment of debt

     (8,000     (8,000

Payments on capital lease obligations

     (1,450       

Proceeds from exercise of stock options

     7,112        8,997   
                

Net cash provided by financing activities

     378,558        30,476   
                

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     171,842        (341,271

CASH AND CASH EQUIVALENTS, beginning of period

     697,948        1,470,208   
                

CASH AND CASH EQUIVALENTS, end of period

   $       869,790      $     1,128,937   
                

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Table of Contents

MetroPCS Communications, Inc. and Subsidiaries

Notes to Condensed Consolidated Interim Financial Statements

(Unaudited)

1. Basis of Presentation:

The accompanying unaudited condensed consolidated interim financial statements include the balances and results of operations of MetroPCS Communications, Inc. (“MetroPCS”) and its consolidated subsidiaries (collectively, the “Company”). MetroPCS indirectly owns, through its wholly-owned subsidiaries, 85% of the limited liability company member interest in Royal Street Communications, LLC (“Royal Street Communications”). The consolidated financial statements include the balances and results of operations of MetroPCS and its wholly-owned subsidiaries as well as the balances and results of operations of Royal Street Communications and its wholly-owned subsidiaries (collectively, “Royal Street”). The Company consolidates its interest in Royal Street in accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 46-R, “Consolidation of Variable Interest Entities,” (FASB Accounting Standards Codification (“ASC”) 810, “Consolidation”), because Royal Street is a variable interest entity and the Company will absorb all of Royal Street’s expected losses. All intercompany accounts and transactions between MetroPCS and its wholly-owned subsidiaries and Royal Street have been eliminated in the consolidated financial statements. The redeemable ownership interest in Royal Street is included in long-term liabilities. The condensed consolidated balance sheets as of June 30, 2009 and December 31, 2008, the condensed consolidated statements of income and comprehensive income and cash flows for the periods ended June 30, 2009 and 2008, and the related footnotes are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

The unaudited condensed consolidated financial statements included herein reflect all adjustments (consisting of normal, recurring adjustments) which are, in the opinion of management, necessary to state fairly the results for the interim periods presented. The results of operations for the interim periods presented are not necessarily indicative of the operating results to be expected for any subsequent interim period or for the fiscal year.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Federal Universal Service Fund (“FUSF”), E-911 and various other fees are assessed by various governmental authorities in connection with the services that the Company provides to its customers. The Company reports these fees on a gross basis in service revenues and cost of service on the accompanying statements of income and comprehensive income. For the three months ended June 30, 2009 and 2008, the Company recorded $39.3 million and $30.3 million, respectively, of FUSF, E-911 and other fees. For the six months ended June 30, 2009 and 2008, the Company recorded $76.6 million and $56.6 million, respectively, of FUSF, E-911 and other fees. Sales, use and excise taxes are reported on a net basis in selling, general and administrative expenses on the accompanying statements of income and comprehensive income.

2. Share-based Payments:

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment,” (“SFAS No. 123(R)”), (ASC 718, “Share-Based Payment,” (“ASC 718”)), the Company recognizes stock-based compensation expense in an amount equal to the fair value of share-based payments, which includes stock options granted and restricted stock awards to employees. The Company records stock-based compensation expense in cost of service and selling, general and administrative expenses. Stock-based compensation expense was approximately $12.7 million and $11.0 million for the three months ended June 30, 2009 and 2008, respectively. Cost of service for the three months ended June 30, 2009 and 2008 includes approximately $1.3 million and $0.7 million, respectively, of stock-based compensation. For the three months ended June 30, 2009 and 2008, selling, general and administrative expenses include $11.4 million and $10.3 million, respectively, of stock-based compensation. Stock-based compensation expense was $23.3 million and $19.5 million for the six months ended June 30, 2009 and 2008, respectively. Cost of service for the six months ended June 30, 2009 and 2008 includes $2.0 million and $1.2 million, respectively, of stock-based compensation. For the six months ended June 30, 2009 and 2008, selling, general and administrative expenses include $21.3 million and $18.3 million, respectively, of stock-based compensation.

 

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Table of Contents

MetroPCS Communications, Inc. and Subsidiaries

Notes to Condensed Consolidated Interim Financial Statements

(Unaudited)

 

Restricted Stock Awards

Restricted stock awards are share awards that entitle the holder to receive shares of the Company’s common stock which become fully tradable upon vesting. During the three and six months ended June 30, 2009, pursuant to the Amended and Restated MetroPCS 2004 Equity Incentive Compensation Plan, the Company issued 44,600 and 1,355,110, respectively, restricted stock awards to certain employees. The restricted stock awards granted generally vest on a four-year vesting schedule with 25% vesting on the first anniversary date of the award and the remainder pro-rata on a monthly or quarterly basis thereafter. The Company determined the grant-date fair value of the restricted stock awards granted to be $19.6 million based on the closing price of the Company’s common stock on the New York Stock Exchange on the grant dates. The estimated compensation cost of the restricted stock awards, which is equal to the fair value of the awards on the date of grant, will be recognized on a straight-line basis over the four-year vesting period.

3. Short-term Investments:

The Company invests its cash balances in, among other things, securities issued and fully guaranteed by the United States or any state, money market funds meeting certain criteria, and demand deposits. These investments are subject to credit, liquidity, market and interest rate risk. At June 30, 2009, the Company had invested a significant portion of its cash and cash equivalents in money market funds consisting of U.S. treasury securities with an original maturity of 90 days or less.

The Company’s short-term investments consist of securities classified as available-for-sale, which are stated at fair value. The securities include U.S. treasury securities with an original maturity of over 90 days. Unrealized gains, net of related income taxes, for available-for-sale securities are reported in accumulated other comprehensive 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.

Short-term investments, with an original maturity of over 90 days, consisted of the following (in thousands):

 

     As of June 30, 2009
     Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
    Aggregate
Fair
Value

Equity Securities

   $ 7    $    $ (4   $ 3

U.S. Treasury Securities

     224,386      464          —        224,850
                            

Total short-term investments

   $     224,393    $     464    $ (4   $     224,853
                            
     As of December 31, 2008
     Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
    Aggregate
Fair
Value

Equity Securities

   $ 7    $    $ (4   $ 3
                            

Total short-term investments

   $ 7    $    $ (4   $ 3
                            

The cost and aggregate fair values of short-term investments by contractual maturity at June 30, 2009 were as follows (in thousands):

 

     Amortized
Cost
   Aggregate
Fair
Value

Less than one year

   $   224,386    $   224,853
             

Total

   $   224,386    $   224,853
             

 

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Table of Contents

MetroPCS Communications, Inc. and Subsidiaries

Notes to Condensed Consolidated Interim Financial Statements

(Unaudited)

 

4. Derivative Instruments and Hedging Activities:

On November 21, 2006, MetroPCS Wireless, Inc. (“Wireless”) entered into a three-year interest rate protection agreement to manage the Company’s interest rate risk exposure and fulfill a requirement of Wireless’ senior secured credit facility, as amended, (the “Senior Secured Credit Facility”), pursuant to which Wireless may borrow up to $1.7 billion. The agreement covers a notional amount of $1.0 billion and effectively converts this portion of Wireless’ variable rate debt to fixed-rate debt at an annual rate of 7.169%. The interest rate protection agreement expires on February 1, 2010. This financial instrument is reported in other long-term liabilities at fair market value of $24.4 million as of June 30, 2009.

On April 30, 2008, Wireless entered into an additional two-year interest rate protection agreement to manage the Company’s interest rate risk exposure. The agreement was effective on June 30, 2008 and covers an aggregate notional amount of $500.0 million and effectively converts this portion of Wireless’ variable rate debt to fixed rate debt at an annual rate of 5.464%. The monthly interest settlement periods began on June 30, 2008. This agreement expires on June 30, 2010. This financial instrument is reported in other long-term liabilities at fair market value of approximately $12.5 million as of June 30, 2009.

In March 2009, Wireless entered into three separate two-year interest rate protection agreements to manage the Company’s interest rate risk exposure. These agreements are effective on February 1, 2010 and cover a notional amount of $1.0 billion and effectively convert this portion of Wireless’ variable rate debt to fixed rate debt at a weighted average annual rate of 4.381%. The monthly interest settlement periods will begin on February 1, 2010. These agreements expire on February 1, 2012. These financial instruments are reported in long-term investments and other long-term liabilities at fair market value of approximately $0.6 million and approximately $0.3 million, respectively, as of June 30, 2009.

The primary risk managed by using derivative instruments is interest rate risk. Interest rate protection agreements are entered into to manage interest rate risk associated with the Company’s variable-rate borrowings. The interest rate protection agreements have been designated as cash flow hedges. If a derivative is designated as a cash flow hedge and the hedging relationship qualifies for hedge accounting under the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended (“SFAS No. 133”), (ASC 815, “Derivatives and Hedging,” (“ASC 815”)), the effective portion of the change in fair value of the derivative is recorded in accumulated other comprehensive income (loss) and reclassified to interest expense in the period in which the hedged transaction affects earnings. The ineffective portion of the change in fair value of a derivative qualifying for hedge accounting is recognized in earnings in the period of the change. For the three months ended June 30, 2009, the change in fair value did not result in ineffectiveness.

At the inception of the cash flow hedges and quarterly thereafter, the Company performs an assessment to determine whether changes in the fair values or cash flows of the derivatives are deemed highly effective in offsetting changes in the fair values or cash flows of the hedged transaction. If at any time subsequent to the inception of the cash flow hedges, the assessment indicates that the derivative is no longer highly effective as a hedge, the Company will discontinue hedge accounting and recognize all subsequent derivative gains and losses in results of operations. The Company estimates that approximately $41.6 million of net losses that are reported in accumulated other comprehensive loss at June 30, 2009 are expected to be reclassified into earnings within the next 12 months.

Cross-default Provisions

The Company’s interest rate protection agreements contain cross-default provisions to the Company’s Senior Secured Credit Facility. The Company’s Senior Secured Credit Facility allows interest rate protection agreements to become secured if the counterparty to the agreement is a current lender under the facility. If the Company were to default on the Senior Secured Credit Facility, it would trigger these provisions, and the counterparties to the interest rate protection agreements could request immediate payment on interest rate protection agreements in net liability positions, similar to their existing rights as a lender. There are no collateral requirements in the interest rate protection agreements. The aggregate fair value of interest rate protection agreements with cross-default provisions that are in a net liability position on June 30, 2009 is $37.2 million.

 

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Table of Contents

MetroPCS Communications, Inc. and Subsidiaries

Notes to Condensed Consolidated Interim Financial Statements

(Unaudited)

 

Fair Values of Derivative Instruments

 

(in thousands)   Liability Derivatives  
    As of June 30, 2009     As of December 31, 2008  
    Balance Sheet Location   Fair Value     Balance Sheet Location   Fair Value  
Derivatives designated as hedging instruments under SFAS No. 133 (ASC 815)        

Interest rate protection agreements

  Long-term investments   $         585      Long-term investments   $           —   

Interest rate protection agreements

  Other long-term liabilities     (37,228   Other long-term liabilities     (54,963
                   
Total derivatives designated as hedging instruments under SFAS No. 133 (ASC 815)     $ (36,643     $ (54,963
                   

The Effect of Derivative Instruments on the Condensed Consolidated Statement of Income and Comprehensive Income

For the Three Months Ended June 30,

 

Derivatives in SFAS No. 133
(ASC 815) Cash Flow Hedging
Relationships
  Amount of Gain (Loss)
Recognized in OCI on Derivative
(Effective Portion)
 

Location of Gain
(Loss) Reclassified
from Accumulated
OCI into Income
(Effective Portion)

  Amount of Gain (Loss)
Reclassified from
Accumulated OCI into
Income (Effective Portion)
  2009   2008     2009   2008
Interest rate protection agreements   $ 5,463   $ 17,845   Interest expense   $ (13,253)   $ (4,857)
                         
Total   $ 5,463   $ 17,845     $ (13,253)   $ (4,857)
                         

The Effect of Derivative Instruments on the Condensed Consolidated Statement of Income and Comprehensive Income

For the Six Months Ended June 30,

 

Derivatives in SFAS No. 133
(ASC 815) Cash Flow Hedging
Relationships
  Amount of Gain (Loss)
Recognized in OCI on Derivative
(Effective Portion)
   

Location of Gain
(Loss) Reclassified
from Accumulated
OCI into Income
(Effective Portion)

  Amount of Gain (Loss)
Reclassified from
Accumulated OCI into
Income (Effective Portion)
 
  2009     2008       2009     2008  
Interest rate protection agreements   $ (5,960   $ (7,597   Interest expense   $ (24,281   $ (7,663
                                 
Total   $ (5,960   $ (7,597     $ (24,281   $ (7,663
                                 

5. Property and Equipment:

Property and equipment, net, consisted of the following (in thousands):

 

     June 30,
2009
    December 31,
2008
 

Construction-in-progress

   $ 304,902      $ 898,454   

Network infrastructure

     3,387,270        2,522,206   

Office equipment and software

     123,128        63,848   

Leasehold improvements

     54,272        47,784   

Furniture and fixtures

     12,267        10,273   

Vehicles

     444        311   
                
     3,882,283        3,542,876   

Accumulated depreciation and amortization

     (843,299     (695,125
                

Property and equipment, net

   $ 3,038,984      $ 2,847,751   
                

6. Long-term Investments:

During the year ended December 31, 2007, the Company made an original investment of $133.9 million in principal in ten auction rate securities with maturity dates through 2046, substantially all of which are secured by collateralized debt obligations with a portion of the underlying collateral being mortgage securities or related to mortgage securities. Consistent with the Company’s investment policy guidelines, the auction rate securities investments held by the Company all had AAA/Aaa credit ratings at the time of purchase. With the continuing

 

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Notes to Condensed Consolidated Interim Financial Statements

(Unaudited)

 

liquidity issues experienced in the global credit and capital markets, the auction rate securities held by the Company at June 30, 2009 continued to experience failed auctions as the amount of securities submitted for sale in the auctions exceeded the amount of purchase orders. Since July 2007, there have been no successful auctions for the auction rate securities held by the Company. In addition, all of the auction rate securities held by the Company have been downgraded or placed on credit watch with credit ratings ranging from ‘BBB/Ba1’ to ‘CC/C’ as of June 30, 2009. The Company has not sold any of its auction rate securities through June 30, 2009.

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 valuation models that rely exclusively on unobservable inputs, including those that are based on expected cash flow streams and collateral values, including assessments of counterparty credit quality, default risk underlying the security, discount rates and overall capital market liquidity. The valuation of the Company’s auction rate securities is subject to uncertainties that are difficult to predict. Factors that may impact the Company’s valuation include changes to credit ratings of the securities as well as the underlying assets supporting these securities, rates of default of the underlying assets, underlying collateral values, discount rates, counterparty risk and ongoing strength and quality of market credit and liquidity. The estimated market value of the Company’s auction rate security holdings at June 30, 2009 was approximately $3.8 million, which reflects a $130.1 million cumulative adjustment to the original principal value of $133.9 million. The estimated market value at December 31, 2008 was approximately $6.0 million, which reflected a $127.9 million adjustment to the aggregate principal value at that date. Each auction rate security continues to pay interest according to its stated term ranging from one month LIBOR plus .55% to one month LIBOR plus 2.5%. Due to the continued severity in the capital markets, deterioration of the credit quality of the underlying assets and the length of time until the auction rate securities mature, the Company believes that full recovery is not probable and has recorded an impairment charge of $0.5 million and $1.5 million during the three and six months ended June 30, 2009, respectively, reflecting an additional portion of the auction rate security holdings that the Company has concluded have an other-than-temporary decline in value.

Given the failed auctions, the Company’s auction rate securities are illiquid until there is a successful auction for them or the Company sells them. Accordingly, the entire amount of such remaining auction rate securities has been classified as a non-current asset and is presented in long-term investments on the accompanying condensed consolidated balance sheets as of June 30, 2009 and December 31, 2008. The Company may continue to incur additional impairments to its auction rate securities which may be up to the full remaining value of such auction rate securities.

7. FCC Licenses and Microwave Relocation Costs:

The Company operates wireless broadband mobile networks under licenses granted by the Federal Communications Commission (“FCC”) for a particular geographic area on spectrum allocated by the FCC for terrestrial wireless broadband services. In addition, in November 2006, the Company acquired a number of advanced wireless services (“AWS”) licenses which can be used to provide services comparable to the wireless broadband mobile services provided by the Company, and other advanced wireless services. In June 2008, the Company acquired a 700 MHz license that also can be used to provide similar services. The personal communications services (“PCS”) licenses previously included, and the AWS licenses currently include, the obligation and resulting costs to relocate existing fixed microwave users of the Company’s licensed spectrum if the Company’s use of its spectrum interferes with their systems and/or reimburse other carriers (according to FCC rules) that relocated prior users if the relocation benefits the Company’s system. Accordingly, the Company incurred costs related to microwave relocation in constructing its PCS and AWS networks.

The microwave relocation costs are recorded at cost. Although PCS, AWS and 700 MHz licenses are issued with a stated term, ten years in the case of the PCS licenses, fifteen years in the case of the AWS licenses and approximately ten and one-half years for 700 MHz licenses, the renewal of PCS, AWS and 700 MHz 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, AWS and 700 MHz licenses. As such, under the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” (ASC 350, “Intangibles-Goodwill and Other”), the Company does not amortize PCS, AWS and 700 MHz licenses and microwave relocation costs (collectively, its “indefinite-lived intangible assets”) as they are considered to have

 

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(Unaudited)

 

indefinite lives and together represent the cost of the Company’s spectrum. The Company is required to test indefinite-lived intangible assets 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 entity’s market value, legal factors, operating performance indicators, competition, sale or disposition of a significant portion of the business, or other factors.

Furthermore, if any of the indefinite-lived intangible assets are subsequently determined to have a finite useful life, such assets would be tested for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” (“SFAS No. 144”), (ASC 360, “Property, Plant, and Equipment,” (“ASC 360”)), and the intangible assets would then be amortized prospectively over the estimated remaining useful life. The Company completed its impairment test as of September 30, 2008 and the fair value of each of the indefinite-lived intangible assets was in excess of its carrying value. There also have been no subsequent indicators of impairment including those indicated in SFAS No. 144 (ASC 360), and accordingly, no subsequent interim impairment tests were performed.

The carrying value of FCC licenses and microwave relocation costs was $2.5 billion as of June 30, 2009.

Other Spectrum Acquisitions

During the three and six months ended June 30, 2009, the Company closed on various agreements for the acquisition and exchange of spectrum in the net aggregate amount of approximately $3.3 million and $10.3 million, respectively, in cash.

8. Accounts Payable and Accrued Expenses:

Accounts payable and accrued expenses consisted of the following (in thousands):

 

     June 30,
2009
   December 31,
2008

Accounts payable

   $ 145,914    $ 148,309

Book overdraft

     5,323      104,752

Accrued accounts payable

     120,364      178,085

Accrued liabilities

     25,318      15,803

Payroll and employee benefits

     26,192      34,047

Accrued interest

     42,351      33,521

Taxes, other than income

     63,135      46,705

Income taxes

     6,380      7,210
             

Accounts payable and accrued expenses

   $ 434,977    $ 568,432
             

9. Long-term Debt:

Long-term debt consisted of the following (in thousands):

 

     June 30,
2009
    December 31,
2008
 

9 1/4% Senior Notes

   $ 1,950,000      $ 1,400,000   

Senior Secured Credit Facility

     1,556,000        1,564,000   

Capital Lease Obligations

     138,064        91,343   
                

Total long-term debt

     3,644,064        3,055,343   

Add: unamortized (discount) premium on debt

     (36,345     19,649   
                

Total debt

     3,607,719        3,074,992   

Less: current maturities

     (18,309     (17,009
                

Total long-term debt

   $ 3,589,410      $ 3,057,983   
                

 

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Notes to Condensed Consolidated Interim Financial Statements

(Unaudited)

 

9 1/4% Senior Notes

On November 3, 2006, Wireless completed the sale of $1.0 billion of principal amount of 9 1/4% Senior Notes due 2014, (the “Initial Notes”). On June 6, 2007, Wireless completed the sale of an additional $400.0 million of 9 1/4% Senior Notes due 2014 (the “Additional Notes”) under the existing indenture at a price equal to 105.875% of the principal amount of such Additional Notes. On January 20, 2009, Wireless completed the sale of an additional $550.0 million of 9 1/4% Senior Notes due 2014 (the “New 9 1/4% Senior Notes” and, together with the Initial Notes and Additional Notes, the “9 1/4% Senior Notes”) at a price equal to 89.50% of the principal amount of such New 9 1/4% Senior Notes resulting in net proceeds of approximately $480.3 million. The net proceeds from the sale of the New 9 1 /4% Senior Notes will be used for general corporate purposes which could include working capital, capital expenditures, future liquidity needs, additional opportunistic spectrum acquisitions, corporate development opportunities and future technology initiatives.

The 9 1/4% Senior Notes are unsecured obligations and are guaranteed by MetroPCS, MetroPCS, Inc., and all of Wireless’ direct and indirect wholly-owned subsidiaries, but are not guaranteed by Royal Street. Interest is payable on the 9 1/4% Senior Notes on May 1 and November 1 of each year. Wireless may, at its option, redeem some or all of the 9 1/4% Senior Notes at any time on or after November 1, 2010 for the redemption prices set forth in the indentures governing the 9 1/4% Senior Notes. In addition, prior to November 1, 2009, Wireless may, at its option, redeem up to 35% of the aggregate principal amount of the 9 1/4% Senior Notes with the net cash proceeds of certain sales of equity securities. Wireless may also, at its option, prior to November 1, 2010, redeem some or all of the notes at the “make whole” price set forth in the indentures governing the 9 1/4% Senior Notes.

On January 20, 2009, Wireless entered into a registration rights agreement in connection with the consummation of the sale of the New 9 1/4% Senior Notes. Under the terms of the registration rights agreement, Wireless agreed to file a registration statement covering the New 9 1/4% Senior Notes on or before the 270th day after the New 9 1/4% Senior Notes’ issue date. Wireless also agreed to use commercially reasonable efforts to have such Registration Statement declared effective on or prior to the 300th day after the issue date of the New 9 1/4% Senior Notes. Alternatively, if Wireless is unable to consummate the Exchange Offer (as defined in the Registration Rights Agreement) or if holders of the New 9 1/4% Senior Notes cannot participate in the Exchange Offer for certain specified reasons, then Wireless and the Guarantors will use commercially reasonable efforts to file a shelf registration statement within the times specified in the Registration Rights Agreement to facilitate resale of the New 9 1/4% Senior Notes. All registration expenses will be paid by Wireless and the Guarantors. If (i) Wireless fails to file a registration statement by the applicable deadline, (ii) any such registration statement has not been declared effective by the SEC by the applicable deadline, (iii) the Exchange Offer has not been consummated by the applicable deadline or (iv) any registration statement required by the registration rights agreement is filed and declared effective but thereafter ceases to be effective or fails to be usable for its intended purpose without being cured under the terms of the registration rights agreement, then Wireless and the guarantors of the New 9 1/ 4% Senior Notes must pay each holder liquidated damages in an amount equal to $0.05 per week per $1,000 in principal amount of New 9 1/4% Senior Notes for each week or portion thereof that the default continues for the first 90-day period immediately following the occurrence of the default. The amount of liquidated damages increases by an additional $0.05 per week per $1,000 in principal amount of the New 9 1/4% Senior Notes with respect to each subsequent 90-day period until all defaults have been cured, up to a maximum amount of liquidated damages of $0.20 per week per $1,000 in principal amount of New 9 1/4% Senior Notes. On June 22, 2009, Wireless filed such required registration statement on Form S-4 (“the Exchange Offer Registration Statement”). On July 10, 2009, the SEC declared the Exchange Offer Registration Statement effective. The Exchange Offer is currently scheduled to expire at 5:00 p.m. New York City time on August 13, 2009, unless extended.

Senior Secured Credit Facility

On November 3, 2006, Wireless entered into the Senior Secured Credit Facility, which consists of a $1.6 billion term loan facility and a $100.0 million revolving credit facility. On November 3, 2006, Wireless borrowed $1.6 billion under the Senior Secured Credit Facility. The term loan facility is repayable in quarterly installments in annual aggregate amounts equal to 1% of the initial aggregate principal amount of $1.6 billion.

 

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The facilities under the Senior Secured Credit Facility are guaranteed by MetroPCS, MetroPCS, Inc. and each of Wireless’ direct and indirect present and future wholly-owned domestic subsidiaries. The facilities are not guaranteed by Royal Street, but Wireless pledged the promissory note that Royal Street has given it in connection with amounts borrowed by Royal Street from Wireless and the limited liability company member interest held in Royal Street Communications. The Senior Secured Credit Facility contains customary events of default, including cross-defaults. The obligations are also secured by the capital stock of Wireless as well as substantially all of Wireless’ present and future assets and the capital stock and substantially all of the assets of each of its direct and indirect present and future wholly-owned subsidiaries (except as prohibited by law and certain permitted exceptions), but excludes Royal Street.

The interest rate on the outstanding debt under the Senior Secured Credit Facility is variable. The rate as of June 30, 2009 was 6.455% (see Note 4).

Capital Lease Obligations

The Company has entered into various non-cancelable distributed antenna systems (“DAS”) capital lease agreements, with varying expiration terms through 2024, covering dedicated optical fiber. Assets and future obligations related to capital leases are included in the accompanying condensed consolidated balance sheets in property and equipment and long-term debt, respectively. Depreciation of assets held under capital leases is included in depreciation and amortization expense. As of June 30, 2009, the Company had approximately $138.1 million of capital lease obligations, with $2.3 million and $135.8 million recorded in current maturities of long-term debt and long-term debt, respectively.

10. Fair Value Measurements:

The Company has adopted the provisions of SFAS No. 157, “Fair Value Measurements,” (“SFAS No. 157”), (ASC 820, “Fair Value Measurements and Disclosures,” (“ASC 820”)), for financial assets and liabilities. SFAS No. 157 (ASC 820) became effective for financial assets and liabilities on January 1, 2008. The Company adopted the provisions of SFAS No. 157 (ASC 820) for non-financial assets and liabilities upon its effectiveness on January 1, 2009. SFAS No. 157 (ASC 820) defines fair value, thereby eliminating inconsistencies in guidance found in various prior accounting pronouncements, and increases disclosures surrounding fair value calculations.

SFAS No. 157 (ASC 820) establishes a three-tiered fair value hierarchy that prioritizes inputs to valuation techniques used in fair value calculations. The three levels of inputs are defined as follows:

 

   

Level 1 - Unadjusted quoted market prices for identical assets or liabilities in active markets that the Company has the ability to access.

 

   

Level 2 - Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; or valuations based on models where the significant inputs are observable (e.g., interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.

 

   

Level 3 - Valuations based on models where significant inputs are not observable. The unobservable inputs reflect the Company’s own assumptions about the assumptions that market participants would use.

SFAS No. 157 (ASC 820) requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs. If a financial instrument uses inputs that fall in different levels of the hierarchy, the instrument will be categorized based upon the lowest level of input that is significant to the fair value calculation. The Company’s financial assets and liabilities measured at fair value on a recurring basis include cash and cash equivalents, short and long-term investments securities and derivative financial instruments.

Included in the Company’s cash and cash equivalents are cash on hand, cash in bank accounts, investments in money market funds consisting of U.S. treasury securities with an original maturity of 90 days or less. Included in

 

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the Company’s short-term investments are securities classified as available-for-sale, which are stated at fair value. The securities include U.S. treasury securities with an original maturity of over 90 days. Fair value is determined based on observable quotes from banks and unadjusted quoted market prices from identical or similar securities in an active market at the reporting date. Significant inputs to the valuation are observable in the active markets and are classified as Level 1 in the hierarchy.

Included in the Company’s long-term investments securities are certain auction rate securities, some of which are secured by collateralized debt obligations with a portion of the underlying collateral being mortgage securities or related to mortgage securities. 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 valuation models that rely exclusively on unobservable Level 3 inputs including those that are based on expected cash flow streams and collateral values, including assessments of counterparty credit quality, default risk underlying the security, discount rates and overall capital market liquidity. The valuation of the Company’s investment portfolio is subject to uncertainties that are difficult to predict. Factors that may impact the Company’s valuation include changes to credit ratings of the securities as well as the underlying assets supporting those securities, rates of default of the underlying assets, underlying collateral values, discount rates, counterparty risk and ongoing strength and quality of market credit and liquidity. Significant inputs to the investments valuation are unobservable in the active markets and are classified as Level 3 in the hierarchy.

Included in the Company’s derivative financial instruments are interest rate swaps. Derivative financial instruments are valued in the market using discounted cash flow techniques. These techniques incorporate Level 1 and Level 2 inputs such as interest rates. These market inputs are utilized in the discounted cash flow calculation considering the instrument’s term, notional amount, discount rate and credit risk. Significant inputs to the derivative valuation for interest rate swaps are observable in the active markets and are classified as Level 2 in the hierarchy.

The following table summarizes assets and liabilities measured at fair value on a recurring basis at June 30, 2009, as required by SFAS No. 157 (ASC 820) (in thousands):

 

     Fair Value Measurements
     Level 1    Level 2    Level 3    Total

Assets

           

Cash and cash equivalents

   $ 869,790    $    $    $ 869,790

Short-term investments

     224,853                224,853

Long-term investments

               3,837      3,837

Derivative assets

          585           585
                           

Total assets at fair value

   $ 1,094,643    $ 585    $        3,837    $ 1,099,065
                           

Liabilities

           

Derivative liabilities

   $    $      37,228    $    $ 37,228
                           

Total liabilities at fair value

   $    $ 37,228    $    $ 37,228
                           

The following table summarizes the changes in fair value of the Company’s Level 3 assets, as required by SFAS No. 157 (ASC 820) (in thousands):

 

Fair Value Measurements of Assets Using Level 3 Inputs

   Long-Term Investments
     Three Months Ended
June 30, 2009
   Six Months Ended
June 30, 2009

Beginning balance

   $         4,612    $         5,986

Total losses (gains) (realized or unrealized):

     

Included in earnings

     532      1,453

Included in accumulated other comprehensive loss

     243      696

Transfers in and/or out of Level 3

         

Purchases, sales, issuances and settlements

         
             

Ending balance at June 30, 2009

   $ 3,837    $ 3,837
             

 

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Notes to Condensed Consolidated Interim Financial Statements

(Unaudited)

 

     Three Months Ended
June 30, 2009
   Six Months Ended
June 30, 2009
Losses included in earnings that are attributable to the change in unrealized losses relating to those assets still held at the reporting date as reported in impairment loss on investment securities in the condensed consolidated statements of income and comprehensive income    $532    $1,453

The following methods and assumptions 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 to the Company for debt of the same remaining maturities.

The estimated fair values of the Company’s financial instruments are as follows (in thousands):

 

     June 30, 2009    December 31, 2008
     Carrying
Amount
   Fair Value    Carrying
Amount
   Fair Value

Senior Secured Credit Facility

   $ 1,556,000    $ 1,485,980    $ 1,564,000    $ 1,251,200

9 1/4% Senior Notes

     1,950,000      1,930,500      1,400,000      1,239,000

Cash flow hedging derivatives

     36,643      36,643      54,963      54,963

Short-term investments

     224,850      224,850      3      3

Long-term investments

     3,837      3,837      5,986      5,986

11. Income Taxes:

Since December 31, 2008, there have been no changes in the amount of the Company’s unrecognized tax benefits. The Company accrued gross interest expense and penalties of $0.6 million and $1.2 million on unrecognized tax benefits during the three and six months ended June 30, 2009. A state examination is currently ongoing and the Company believes it is reasonably possible that the amount of unrecognized tax benefits in that state could significantly decrease within the next 12 months period. The gross unrecognized tax benefits for this position could decrease due to settlement with this state in an amount up to $2.7 million. In another state jurisdiction, the Company believes it is reasonably possible that the amount of unrecognized tax benefits in that state could significantly decrease within the next 12 months due to the expiration of the statute of limitations. The gross unrecognized tax benefits for this tax position could decrease due to the expiring statute in an amount up to $12.4 million. The Company does not anticipate that a proposed adjustment in either of the state jurisdictions would result in a material change to the Company’s financial position.

The Internal Revenue Service (“IRS”) is currently examining the 2005 and 2006 tax years of Royal Street Communications. Management anticipates the audit will be substantially complete during the year ending 2009 with no changes to the Company’s tax position.

In addition, there are several state income and franchise tax examinations that are currently in progress for the Company and/or certain of its subsidiaries for various tax years. Management does not believe these examinations will have a significant effect on the Company’s tax position.

During 2008, the Company invested in renewable energy products. The Company will account for its renewable energy investment tax credits in accordance with Accounting Principles Board Opinion No. 4, “Accounting for the Investment Credit,” (“APB 4”), (ASC 740, “Income Taxes,” (“ASC 740”)). APB 4 (ASC 740) provides an accepted accounting method for investment tax credits, known as the tax reduction method or the flow-through method, and treats the investment tax credit as a reduction of income tax expense in the year generated.

 

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12. Common Stock Options Issued to Directors:

Non-employee members of MetroPCS’ Board of Directors receive compensation for serving on the Board of Directors, as provided in MetroPCS’ Non-Employee Director Remuneration Plan (the “Remuneration Plan”). The Remuneration Plan provides that each non-employee director’s annual retainer, meeting fees and committee paid event fees will be paid in cash and each director will receive options to purchase common stock.

13. Net Income Per Common Share:

The following table sets forth the computation of basic and diluted net income per common share for the periods indicated (in thousands, except share and per share data):

 

     Three Months
Ended June 30,
   Six Months
Ended June 30,
     2009    2008    2009    2008

Basic EPS:

           

Net income applicable to common stock

   $ 26,196    $ 50,465    $ 70,169    $ 89,984

Amount allocable to common shareholders

     99.6%      100.0%      99.6%      100.0%
                           

Rights to undistributed earnings

   $ 26,098    $ 50,465    $ 69,906    $ 89,984
                           

Weighted average shares outstanding—basic

     351,912,464      349,051,983      351,503,933      348,608,037
                           

Net income per common share—basic

   $ 0.07    $ 0.14    $ 0.20    $ 0.26
                           

Diluted EPS:

           

Rights to undistributed earnings

   $ 26,098    $ 50,465    $ 69,906    $ 89,984
                           

Weighted average shares outstanding—basic

     351,912,464      349,051,983      351,503,933      348,608,037

Effect of dilutive securities:

           

Stock options

     5,174,867      7,125,883      5,436,184      6,832,022
                           

Weighted average shares outstanding—diluted

       357,087,331        356,177,866        356,940,117        355,440,059
                           

Net income per common share—diluted

   $ 0.07    $ 0.14    $ 0.20    $ 0.25
                           

On January 1, 2009, the Company adopted FASB Staff Position (FSP) Emerging Issues Task Force (EITF) 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities,” (“EITF No. 03-6-1”), (ASC 260, “Earnings Per Share,” (“ASC 260”)), which clarifies EITF No. 03-6, “Participating Securities and the Two-Class Method Under FAS No. 128,” (ASC 260). EITF No. 03-6-1 (ASC 260) provides that unvested share-based payment awards that contain rights to receive non-forfeitable dividends or dividend equivalents, whether paid or unpaid, are considered a “participating security” for purposes of computing earnings or loss per common share and the two-class method of computing earnings per share is required for all periods presented.

Under the restricted stock award agreements, unvested shares of restricted stock have rights to receive non-forfeitable dividends. For the three and six months ended June 30, 2009, the Company has calculated basic and diluted earnings per share under both the treasury stock method and the two-class method. There was not a significant difference in the per share amounts calculated under the two methods, and the two-class method is disclosed. There were no restricted stock awards issued prior to January 1, 2009. For the three and six months ended June 30, 2009, 1.3 million restricted common shares issued to employees have been excluded from the computation of basic net income per common share since the shares are not vested and remain subject to forfeiture.

For the three months ended June 30, 2009 and 2008, 16.3 million and 12.8 million, respectively, of stock options were excluded from the calculation of diluted net income per common share since the effect was anti-dilutive. For the six months ended June 30, 2009 and 2008, 15.4 million and 10.8 million, respectively, of stock options were excluded from the calculation of diluted net income per common share since the effect was anti-dilutive.

14. Commitments and Contingencies:

During the three months ended June 30, 2009, the Company entered into pricing agreements with various handset manufacturers for the purchase of wireless handsets at specified prices. The terms of these agreements expire on various dates through October 3, 2009. The total aggregate commitment outstanding under these pricing agreements is approximately $13.8 million as of June 30, 2009.

 

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Notes to Condensed Consolidated Interim Financial Statements

(Unaudited)

 

AWS Licenses Acquired in Auction 66

Spectrum allocated for AWS currently is utilized by a variety of categories of commercial and governmental users. To foster the orderly clearing of the spectrum, the FCC adopted a transition and cost sharing plan pursuant to which incumbent non-governmental users could be reimbursed for relocating out of the band and the costs of relocation would be shared by AWS licensees benefiting from the relocation. The FCC has established a plan where the AWS licensee and the incumbent non-governmental user are to negotiate voluntarily for three years and then, if no agreement has been reached, the incumbent licensee is subject to mandatory relocation where the AWS licensee can force the incumbent non-governmental licensee to relocate at the AWS licensee’s expense. The spectrum allocated for AWS currently is utilized also by governmental users. The FCC rules provide that a portion of the money raised in Auction 66 will be used to reimburse the relocation costs of governmental users from the AWS band. However, not all governmental users are obligated to relocate and some such users may delay relocation for some time. For the three months ended June 30, 2009 and 2008, the Company incurred approximately $1.1 million and $0.5 million in microwave relocation costs, respectively. For the six months ended June 30, 2009 and 2008, the Company incurred approximately $2.0 million and $0.9 million in microwave relocation costs, respectively.

FCC Katrina Order

In October 2007, the FCC adopted rules which, had they become effective, would have required the Company to maintain emergency backup power for certain minimum periods of time for various components of the Company’s systems. In July 2009, the United States Court of Appeals vacated these FCC backup power rules. However, the FCC has indicated that it plans to issue a Notice of Proposed Rulemaking (“NPRM”), to adopt revised backup power rules. At this time, the Company is unable to predict with any certainty when any such NPRM may be forthcoming from the FCC, whether the NPRM will result in the promulgation of new backup power or other requirements and, if so, whether any new rules may require the Company to purchase additional equipment, spend additional capital, seek and receive additional state and local permits, authorizations and approvals, and incur additional operating expenses to comply with the new rules and such costs could be material.

Litigation

The Company is involved in litigation from time to time, including litigation regarding intellectual property claims, that the Company considers to be in the normal course of business. The Company is not currently party to any pending legal proceedings that it believes would, individually or in the aggregate, have a material adverse effect on the Company’s financial condition, results of operations or liquidity.

15. Supplemental Cash Flow Information:

 

     Six Months Ended
June 30,
     2009    2008
     (in thousands)

Cash paid for interest

   $         113,036    $         109,438

Cash paid for income taxes

     2,640      2,140

Non-cash investing activities

The Company’s accrued purchases of property and equipment were approximately $18.2 million and $45.0 million for the six months ended June 30, 2009 and 2008, respectively. Included within the Company’s accrued purchases are estimates by management for construction services received based on a percentage of completion.

 

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Notes to Condensed Consolidated Interim Financial Statements

(Unaudited)

 

Assets acquired under capital lease obligations were $47.5 million and $26.8 million for the six months ended June 30, 2009 and 2008, respectively.

During the six months ended June 30, 2009, the Company exchanged $19.9 million in carrying value of FCC licenses with other parties. The FCC licenses received in these transactions were recorded at fair value.

16. Related-Party Transactions:

One of the Company’s current directors is a general partner of various investment funds affiliated with one of the Company’s greater than 5% stockholders. These funds own in the aggregate an approximate 17% interest in a company that provides services to the Company’s customers, including handset insurance programs and roadside assistance services. Pursuant to 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 and accrued expenses on the accompanying condensed consolidated balance sheets. The Company had the following transactions with this related party (in millions):

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     2009    2008    2009    2008

Fees received by the Company as compensation for providing billing and collection services

   $     1.9    $     1.8    $     3.8    $     3.6

Handsets sold to the related party

     3.8      4.4      7.2      7.4

 

     June 30,
2009
   December 31,
2008

Accruals for fees collected from customers

   $             3.6    $         3.7

Receivables from the related party included in accounts receivable

     1.6      0.8

One of the Company’s current directors is the chairman of an equity firm that holds various investment funds affiliated with one of the Company’s greater than 5% stockholders. The equity firm is affiliated with a current director of a company that provides wireless caller ID with name services to the Company. The Company paid approximately $0.2 million and $0.3 million to the company for these services during the three and six months ended June 30, 2009, respectively.

One of the Company’s current directors is a general partner of various investment funds affiliated with one of the Company’s greater than 5% stockholders. These funds own in the aggregate an approximate 15.6% interest in a company that provides advertising services to the Company. The Company paid approximately $1.1 million and $1.2 million to the company for these services during the three months ended June 30, 2009 and 2008, respectively. The Company paid approximately $2.5 million and $2.2 million to the company for these services during the six months ended June 30, 2009 and 2008, respectively.

17. Segment Information:

Operating segments are defined by SFAS No. 131, “Disclosure About Segments of an Enterprise and Related Information,” (“SFAS No. 131”), (ASC 280, “Segment Reporting,” (“ASC 280”)), as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is the Chairman of the Board, President and Chief Executive Officer.

As of June 30, 2009, the Company had thirteen operating segments based on geographic region within the United States: Atlanta, Boston, Dallas/Ft. Worth, Detroit, Las Vegas, Los Angeles, Miami, New York, Orlando/Jacksonville, Philadelphia, Sacramento, San Francisco and Tampa/Sarasota. Each of these operating segments provide wireless broadband mobile voice and data services and products to customers in its service areas. These services include unlimited local and long distance calling, voicemail, caller ID, call waiting, enhanced directory assistance, text messaging, picture and multimedia messaging, domestic and international long distance,

 

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Notes to Condensed Consolidated Interim Financial Statements

(Unaudited)

 

international text messaging, ringtones, games and content applications, unlimited directory assistance, ring back tones, nationwide roaming, mobile Internet browsing, mobile instant messaging, push e-mail, location based services, social networking services and other value-added services.

The Company aggregates its operating segments into two reportable segments: Core Markets and Northeast Markets. Effective January 1, 2009, the Company implemented a change to the composition of its reportable segments under SFAS No. 131 (ASC 280). The historical quarterly information for the three and six months ended June 30, 2008 presented below has been retrospectively adjusted to reflect this change.

 

   

Core Markets, which include Atlanta, Dallas/Ft. Worth, Detroit, Las Vegas, Los Angeles, Miami, Orlando/Jacksonville, Sacramento, San Francisco and Tampa/Sarasota, are aggregated because they are reviewed on an aggregate basis by the chief operating decision maker, they are similar in respect to their products and services, production processes, class of customer, method of distribution, and regulatory environment and currently exhibit similar financial performance and economic characteristics.

 

   

Northeast Markets, which include Boston, New York and Philadelphia, are aggregated because they are reviewed on an aggregate basis by the chief operating decision maker, they are similar in respect to their products and services, production processes, class of customer, method of distribution, and regulatory environment and have similar expected long-term financial performance and economic characteristics.

General corporate overhead, which includes expenses such as corporate employee labor costs, rent and utilities, legal, accounting and auditing expenses, is allocated equally across all operating segments. Corporate marketing and advertising expenses are allocated equally to the operating segments, beginning in the period during which the Company launches service in that operating segment. Expenses associated with the Company’s national data center and national operations center are allocated based on the average number of customers in each operating segment. There are no transactions between reportable segments.

Interest and certain other expenses, interest income and income taxes are not allocated to the segments in the computation of segment operating results for internal evaluation purposes.

 

Three Months Ended June 30, 2009

   Core Markets    Northeast
Markets
    Other     Total  
     (in thousands)  

Service revenues

   $   718,190    $    48,660      $      $   766,850   

Equipment revenues

     79,015      13,747               92,762   

Total revenues

     797,205      62,407               859,612   

Cost of service (1)

     221,075      47,658               268,733   

Cost of equipment

     182,475      44,925               227,400   

Selling, general and administrative expenses (1)

     109,479      32,842               142,321   

Segment Adjusted EBITDA (Deficit) (2)

     293,999      (60,168         

Depreciation and amortization

     62,194      21,382        7,799        91,375   

Loss on disposal of assets

     8,460      9        5,541        14,010   

Stock-based compensation expense

     9,822      2,851               12,673   

Income (loss) from operations

     213,522      (84,409     (13,340     115,773   

Interest expense

                    70,535        70,535   

Accretion of put option in majority-owned subsidiary

                 395        395   

Interest and other income

                 (475     (475

Impairment loss on investment securities

                 532        532   

Income (loss) before provision for income taxes

     213,522      (84,409     (84,327     44,786   

 

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Notes to Condensed Consolidated Interim Financial Statements

(Unaudited)

 

Three Months Ended June 30, 2008

   Core Markets    Northeast
Markets
    Other     Total  
     (in thousands)  

Service revenues

   $ 598,562    $      $      $ 598,562   

Equipment revenues

     80,245                    80,245   

Total revenues

     678,807                    678,807   

Cost of service (1)

     194,499      11,641               206,140   

Cost of equipment

     160,032      56               160,088   

Selling, general and administrative expenses (1)

     100,974      12,445               113,419   

Segment Adjusted EBITDA (Deficit) (2)

     232,011      (21,844         

Depreciation and amortization

     56,398      459        4,031        60,888   

Loss on disposal of assets

     2,627             1        2,628   

Stock-based compensation expense

     8,709      2,298               11,007   

Income (loss) from operations

     164,277      (24,601     (4,032     135,644   

Interest expense

                 45,664        45,664   

Accretion of put option in majority-owned subsidiary

                 317        317   

Interest and other income

                 (5,372     (5,372

Impairment loss on investment securities

                 9,079        9,079   

Income (loss) before provision for income taxes

     164,277      (24,601     (53,720     85,956   

Six Months Ended June 30, 2009

   Core Markets    Northeast
Markets
    Other     Total  
     (in thousands)  

Service revenues

   $ 1,421,397    $ 72,151      $      $   1,493,548   

Equipment revenues

     142,582      18,811               161,393   

Total revenues

     1,563,979      90,962               1,654,941   

Cost of service (1)

     428,552      85,756               514,308   

Cost of equipment

     376,561      75,858               452,419   

Selling, general and administrative expenses (1)

     214,558      64,173               278,731   

Segment Adjusted EBITDA (Deficit) (2)

     562,417      (129,593         

Depreciation and amortization

     127,297      32,171        13,653        173,121   

Loss (gain) on disposal of assets

     6,880      5        (17,783     (10,898

Stock-based compensation expense

     18,110      5,231               23,341   

Income (loss) from operations

     410,131      (167,001     4,130        247,260   

Interest expense

                    128,967        128,967   

Accretion of put option in majority-owned subsidiary

                 772        772   

Interest and other income

                 (1,027     (1,027

Impairment loss on investment securities

                 1,453        1,453   

Income (loss) before provision for income taxes

     410,131      (167,001     (126,035     117,095   

Six Months Ended June 30, 2008

   Core Markets    Northeast
Markets
    Other     Total  
     (in thousands)  

Service revenues

   $ 1,160,532    $      $      $ 1,160,532   

Equipment revenues

     180,629                    180,629   

Total revenues

       1,341,161                    1,341,161   

Cost of service (1)

     376,712         17,902               394,614   

Cost of equipment

     360,189      56               360,245   

Selling, general and administrative expenses (1)

     195,092      22,701               217,793   

Segment Adjusted EBITDA (Deficit) (2)

     424,553      (36,572         

Depreciation and amortization

     108,015      729        9,444        118,188   

Loss on disposal of assets

     2,645             4        2,649   

Stock-based compensation expense

     15,385      4,087               19,472   

Income (loss) from operations

     298,507      (41,387     (9,448     247,672   

Interest expense

                 93,083        93,083   

Accretion of put option in majority-owned subsidiary

                 620        620   

Interest and other income

                 (15,254     (15,254

Impairment loss on investment securities

                 17,080        17,080   

Income (loss) before provision for income taxes

     298,507      (41,387     (104,977     152,143   

 

 

(1) Cost of service for the three months ended June 30, 2009 and 2008 includes approximately $1.3 million and $0.7 million, respectively, of stock-based compensation disclosed separately. Cost of service for the six months ended June 30, 2009 and 2008 includes $2.0 million and $1.2 million, respectively, of stock-based compensation disclosed separately. Selling, general and administrative expenses for the three months ended June 30, 2009 and 2008 includes $11.4 million and $10.3 million, respectively, of stock-based compensation disclosed separately. Selling, general and administrative expenses for the six months ended June 30, 2009 and 2008 includes $21.3 million and $18.3 million, respectively, of stock-based compensation disclosed separately.

 

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Notes to Condensed Consolidated Interim Financial Statements

(Unaudited)

 

(2) Core and Northeast Markets Adjusted EBITDA (Deficit) is presented in accordance with SFAS No. 131 (ASC 280) as it is the primary financial measure utilized by management to facilitate evaluation of the Company’s ability to meet future debt service, capital expenditures and working capital requirements and to fund future growth.

The following table reconciles segment Adjusted EBITDA (Deficit) for the three and six months ended June 30, 2009 and 2008 to consolidated income before provision for income taxes:

 

     Three Months
Ended June 30,
    Six Months
Ended June 30,
 
     2009     2008     2009     2008  
     (in thousands)  

Segment Adjusted EBITDA (Deficit):

        

Core Markets Adjusted EBITDA

   $   293,999      $   232,011      $   562,417      $   424,553   

Northeast Markets Adjusted EBITDA Deficit

     (60,168     (21,844     (129,593     (36,572
                                

Total

     233,831        210,167        432,824        387,981   

Depreciation and amortization

     (91,375     (60,888     (173,121     (118,188

(Loss) gain on disposal of assets

     (14,010     (2,628     10,898        (2,649

Stock-based compensation expense

     (12,673     (11,007     (23,341     (19,472

Interest expense

     (70,535     (45,664     (128,967     (93,083

Accretion of put option in majority-owned subsidiary

     (395     (317     (772     (620

Interest and other income

     475        5,372        1,027        15,254   

Impairment loss on investment securities

     (532     (9,079     (1,453     (17,080
                                

Consolidated income before provision for income taxes

   $ 44,786      $ 85,956      $ 117,095      $ 152,143   
                                

18. Guarantor Subsidiaries:

In connection with Wireless’ sale of the 9 1/4% Senior Notes and the entry into the Senior Secured Credit Facility, MetroPCS and all of MetroPCS’ subsidiaries, other than Wireless and Royal Street (the “guarantor subsidiaries”), provided guarantees on the 9 1/4% Senior Notes and Senior Secured Credit Facility. These guarantees are full and unconditional as well as joint and several. Certain provisions of the Senior Secured Credit Facility and the indentures relating to the 9 1/4% Senior Notes restrict the ability of Wireless to loan funds to MetroPCS. However, Wireless is allowed to make certain permitted payments to MetroPCS under the terms of the Senior Secured Credit Facility and the indentures relating to the 9 1/4% Senior Notes. Royal Street (the “non-guarantor subsidiaries”) is not a guarantor of the 9 1/4% Senior Notes or the Senior Secured Credit Facility.

The following information presents condensed consolidating balance sheets as of June 30, 2009 and December 31, 2008, condensed consolidating statements of income for the three and six months ended June 30, 2009 and 2008, and condensed consolidating statements of cash flows for the six months ended June 30, 2009 and 2008 of the parent company (MetroPCS), the issuer (Wireless), the guarantor subsidiaries and the non-guarantor subsidiaries (Royal Street). Investments in subsidiaries held by the parent company and the issuer have been presented using the equity method of accounting.

 

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Notes to Condensed Consolidated Interim Financial Statements

(Unaudited)

 

Consolidated Balance Sheet

As of June 30, 2009

 

     Parent     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
      Eliminations       Consolidated  
     (in thousands)  

CURRENT ASSETS:

            

Cash and cash equivalents

   $ 638,904      $ 209,014      $ 672      $ 21,200      $      $ 869,790   

Short-term investments

     224,853                                    224,853   

Inventories, net

            88,341        11,536                      99,877   

Accounts receivable, net

            54,054               105               54,159   

Prepaid charges

            3,539        50,352        7,248               61,139   

Deferred charges

            48,920                             48,920   

Deferred tax assets

            1,833                             1,833   

Current receivable from subsidiaries

            319,904               13,641        (333,545       

Other current assets

     163        234        32,404        989               33,790   
                                                

Total current assets

     863,920        725,839        94,964        43,183        (333,545     1,394,361   

Property and equipment, net

            25,341        2,581,446        432,197               3,038,984   

Long-term investments

     3,836        586                             4,422   

Investment in subsidiaries

     690,028        1,945,911                      (2,635,939       

FCC licenses

            3,800        2,149,870        293,599               2,447,269   

Microwave relocation costs

                   18,487                      18,487   

Long-term receivable from subsidiaries

            828,442                      (828,442       

Other assets

            45,908        37,363        23,745               107,016   
                                                

Total assets

   $ 1,557,784      $ 3,575,827      $ 4,882,130      $ 792,724      $ (3,797,926   $ 7,010,539   
                                                

CURRENT LIABILITIES:

            

Accounts payable and accrued expenses

   $      $ 123,764      $ 283,550      $ 27,663      $      $ 434,977   

Current maturities of long-term debt

            16,000        2,287        22               18,309   

Current payable to subsidiaries

                   13,641        319,904        (333,545       

Deferred revenue

            31,414        140,276                      171,690   

Advances to subsidiaries

     (588,362     (1,257,722     1,846,084                        

Other current liabilities

            115        4,683        34               4,832   
                                                

Total current liabilities

     (588,362     (1,086,429     2,290,521        347,623        (333,545     629,808   

Long-term debt

            3,453,656        134,278        1,476               3,589,410   

Long-term payable to subsidiaries

                          828,442        (828,442       

Deferred tax liabilities

     110        441,515                             441,625   

Deferred rents

                   59,850        8,776               68,626   

Redeemable ownership interest

            7,062                             7,062   

Other long-term liabilities

            69,995        50,273        7,704               127,972   
                                                

Total liabilities

     (588,252     2,885,799        2,534,922             1,194,021        (1,161,987     4,864,503   

COMMITMENTS AND CONTINGENCIES (See Note 14)

            

STOCKHOLDERS’ EQUITY:

            

Preferred stock

                                          

Common stock

     35                                    35   

Additional paid-in capital

     1,609,436                      20,000        (20,000     1,609,436   

Retained earnings (deficit)

     558,018        712,179        2,347,208        (421,297     (2,638,090     558,018   

Accumulated other comprehensive (loss) income

     (21,453     (22,151                   22,151        (21,453
                                                

Total stockholders’ equity

     2,146,036        690,028        2,347,208        (401,297     (2,635,939     2,146,036   
                                                

Total liabilities and stockholders’ equity

   $      1,557,784      $     3,575,827      $      4,882,130      $ 792,724      $ (3,797,926   $      7,010,539   
                                                

 

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Notes to Condensed Consolidated Interim Financial Statements

(Unaudited)

Consolidated Balance Sheet

As of December 31, 2008

 

     Parent     Issuer     Guarantor
Subsidiaries
   Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  
     (in thousands)  

CURRENT ASSETS:

             

Cash and cash equivalents

   $ 598,823      $ 78,121      $ 624    $ 20,380      $                  —      $ 697,948   

Inventories, net

            144,784        11,171                    155,955   

Accounts receivable, net

            34,579             87               34,666   

Prepaid charges

            17,994        32,274      6,079               56,347   

Deferred charges

            49,716                           49,716   

Deferred tax asset

            1,832                           1,832   

Current receivable from subsidiaries

            244,212             10,467        (254,679       

Other current assets

     426        4,472        41,945      577               47,420   
                                               

Total current assets

     599,249        575,710        86,014      37,590        (254,679     1,043,884   

Property and equipment, net

            18,174        2,430,597      398,980               2,847,751   

Restricted cash and investments

                   4,250      325               4,575   

Long-term investments

     5,986                                  5,986   

Investment in subsidiaries

     610,581        1,760,327                    (2,370,908       

FCC licenses

                   2,112,997      293,599               2,406,596   

Microwave relocation costs

                   16,478                    16,478   

Long-term receivable from subsidiaries

     250,000        796,462                    (1,046,462       

Other assets

            37,391        34,544      24,943               96,878   
                                               

Total assets

   $ 1,465,816      $ 3,188,064      $ 4,684,880    $ 755,437      $ (3,672,049   $ 6,422,148   
                                               

CURRENT LIABILITIES:

             

Accounts payable and accrued expenses

   $      $ 195,619      $ 344,325    $ 28,488      $      $ 568,432   

Current maturities of long-term debt

            16,000        990      19               17,009   

Current payable to subsidiaries

                   10,467      244,212        (254,679       

Deferred revenue

            30,011        121,768                    151,779   

Advances to subsidiaries

     (568,507     (1,365,057     1,933,564                      

Other current liabilities

            30        5,106                    5,136   
                                               

Total current liabilities

     (568,507     (1,123,397     2,416,220      272,719        (254,679     742,356   

Long-term debt

            2,967,649        88,906      1,428               3,057,983   

Long-term payable to subsidiaries

            250,000             796,462        (1,046,462       

Deferred tax liabilities

            389,509                           389,509   

Deferred rents

                   49,850      6,575               56,425   

Redeemable ownership interest

            6,290                           6,290   

Other long-term liabilities

            87,432        41,377      6,453               135,262   
                                               

Total liabilities

     (568,507     2,577,483        2,596,353           1,083,637        (1,301,141     4,387,825   

COMMITMENTS AND CONTINGENCIES (See Note 14)

             

STOCKHOLDERS’ EQUITY:

             

Preferred stock

                                        

Common stock

     35                                  35   

Additional paid-in capital

     1,578,972                    20,000        (20,000     1,578,972   

Retained earnings (deficit)

     487,849        643,955        2,088,527      (348,200     (2,384,282     487,849   

Accumulated other comprehensive (loss) income

     (32,533     (33,374                 33,374        (32,533
                                               

Total stockholders’ equity

     2,034,323        610,581        2,088,527      (328,200     (2,370,908     2,034,323   
                                               

Total liabilities and stockholders’ equity

   $      1,465,816      $      3,188,064      $      4,684,880    $ 755,437      $ (3,672,049   $      6,422,148   
                                               

 

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Table of Contents

MetroPCS Communications, Inc. and Subsidiaries

Notes to Condensed Consolidated Interim Financial Statements

(Unaudited)

Consolidated Statement of Income

Three Months Ended June 30, 2009

 

     Parent     Issuer     Guarantor
Subsidiaries
   Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  
     (in thousands)  

REVENUES:

             

Service revenues

   $      $      $ 767,724    $ 40,032      $ (40,906   $ 766,850   

Equipment revenues

            3,777        88,985                    92,762   
                                               

Total revenues

            3,777        856,709      40,032        (40,906     859,612   

OPERATING EXPENSES:

             

Cost of service (excluding depreciation and amortization expense shown separately below)

                   283,525      26,114        (40,906     268,733   

Cost of equipment

            3,395        224,005                    227,400   

Selling, general and administrative expenses (excluding depreciation and amortization expense shown separately below)

            382        136,682      5,257               142,321   

Depreciation and amortization

            (7     79,645      11,737               91,375   

Loss on disposal of assets

                   13,815      195               14,010   
                                               

Total operating expenses

            3,770        737,672      43,303        (40,906     743,839   
                                               

Income (loss) from operations

            7        119,037      (3,271            115,773   

OTHER EXPENSE (INCOME):

             

Interest expense

            69,175        1,829      32,570        (33,039     70,535   

Earnings from consolidated subsidiaries

     (26,282     (81,362                 107,644          

Accretion of put option in majority-owned subsidiary

            395                           395   

Interest and other income

     (446     (33,073     10      (5     33,039        (475

Impairment loss on investment securities

     532                                  532   
                                               

Total other (income) expense

     (26,196     (44,865     1,839             32,565             107,644               70,987   

Income (loss) before provision for income taxes

     26,196        44,872        117,198      (35,836     (107,644     44,786   

Provision for income taxes

            (18,590                        (18,590
                                               

Net income (loss)

   $        26,196      $        26,282      $      117,198    $ (35,836   $ (107,644   $ 26,196   
                                               

 

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Table of Contents

MetroPCS Communications, Inc. and Subsidiaries

Notes to Condensed Consolidated Interim Financial Statements

(Unaudited)

Consolidated Statement of Income

Three Months Ended June 30, 2008

 

     Parent     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  
     (in thousands)  

REVENUES:

            

Service revenues

   $      $      $ 599,556      $ 26,887      $ (27,881   $ 598,562   

Equipment revenues

            4,396        75,849                      80,245   
                                                

Total revenues

            4,396        675,405        26,887        (27,881     678,807   

OPERATING EXPENSES:

            

Cost of service (excluding depreciation and amortization expense shown separately below)

                   212,129        21,892        (27,881     206,140   

Cost of equipment

            4,153        155,935                      160,088   

Selling, general and administrative expenses (excluding depreciation and amortization expense shown separately below)

            243        107,978        5,198               113,419   

Depreciation and amortization

            53        51,340        9,495               60,888   

Loss on disposal of assets

                   2,597        31               2,628   
                                                

Total operating expenses

            4,449        529,979        36,616        (27,881     543,163   
                                                

Income (loss) from operations

            (53     145,426        (9,729            135,644   

OTHER EXPENSE (INCOME):

            

Interest expense

            52,630        (6,126     25,724        (26,564     45,664   

Earnings from consolidated subsidiaries

     (55,401     (116,367                   171,768          

Accretion of put option in majority-owned subsidiary

            317                             317   

Interest and other income

     (4,143     (27,525     (37     (231     26,564        (5,372

Impairment loss on investment securities

     9,079                                    9,079   
                                                

Total other (income) expense

     (50,465     (90,945     (6,163            25,493             171,768               49,688   

Income (loss) before provision for income taxes

     50,465        90,892        151,589        (35,222     (171,768     85,956   

Provision for income taxes

            (35,491                          (35,491
                                                

Net income (loss)

   $        50,465      $        55,401      $      151,589      $ (35,222   $ (171,768   $ 50,465   
                                                

 

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Table of Contents

MetroPCS Communications, Inc. and Subsidiaries

Notes to Condensed Consolidated Interim Financial Statements

(Unaudited)

Consolidated Statement of Income

Six Months Ended June 30, 2009

 

     Parent     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  
     (in thousands)  

REVENUES:

            

Service revenues

   $      $      $ 1,495,316      $ 75,667      $ (77,435   $ 1,493,548   

Equipment revenues

            7,206        154,187                      161,393   
                                                

Total revenues

            7,206        1,649,503        75,667        (77,435     1,654,941   

OPERATING EXPENSES:

            

Cost of service (excluding depreciation and amortization expense shown separately below)

                   539,904        51,839        (77,435     514,308   

Cost of equipment

            6,721        445,698                      452,419   

Selling, general and administrative expenses (excluding depreciation and amortization expense shown separately below)

            485        267,622        10,624               278,731   

Depreciation and amortization

            102        148,569        24,450               173,121   

(Gain) loss on disposal of assets

                   (11,164     266               (10,898
                                                

Total operating expenses

            7,308            1,390,629        87,179        (77,435     1,407,681   
                                                

(Loss) income from operations

            (102     258,874        (11,512            247,260   

OTHER EXPENSE (INCOME):

            

Interest expense

            132,031        216        61,593        (64,873     128,967   

Earnings from consolidated subsidiaries

     (68,224     (185,584                   253,808          

Accretion of put option in majority-owned subsidiary

            772                             772   

Interest and other income

     (3,398     (62,471     (24     (7     64,873        (1,027

Impairment loss on investment securities

     1,453                                    1,453   
                                                

Total other (income) expense

     (70,169     (115,252     192                 61,586               253,808               130,165   

Income (loss) before provision for income taxes

     70,169               115,150        258,682        (73,098     (253,808     117,095   

Provision for income taxes

            (46,926                          (46,926
                                                

Net income (loss)

   $          70,169      $ 68,224      $ 258,682      $ (73,098   $ (253,808   $ 70,169   
                                                

 

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Table of Contents

MetroPCS Communications, Inc. and Subsidiaries

Notes to Condensed Consolidated Interim Financial Statements

(Unaudited)

 

Consolidated Statement of Income

Six Months Ended June 30, 2008

 

     Parent     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  
     (in thousands)  

REVENUES:

            

Service revenues

   $      $      $ 1,162,751      $ 39,737      $ (41,956   $ 1,160,532   

Equipment revenues

            7,403        173,226                      180,629   
                                                

Total revenues

            7,403        1,335,977        39,737        (41,956     1,341,161   

OPERATING EXPENSES:

            

Cost of service (excluding depreciation and amortization expense shown separately below)

                   394,984        41,586        (41,956     394,614   

Cost of equipment

            7,014        353,231                      360,245   

Selling, general and administrative expenses (excluding depreciation and amortization expense shown separately below)

            388        207,245        10,160               217,793   

Depreciation and amortization

            107        100,915        17,166               118,188   

Loss on disposal of assets

                   2,615        34               2,649   
                                                

Total operating expenses

            7,509        1,058,990        68,946        (41,956     1,093,489   
                                                

Income (loss) from operations

            (106     276,987        (29,209            247,672   

OTHER EXPENSE (INCOME):

            

Interest expense

            113,642        (17,541     46,366        (49,384     93,083   

Earnings from consolidated subsidiaries

     (96,146     (219,551                   315,697          

Accretion of put option in majority-owned subsidiary

            620                             620   

Interest and other income

     (10,918     (53,122     (64     (534     49,384        (15,254

Impairment loss on investment securities

     17,080                                    17,080   
                                                

Total other (income) expense

     (89,984     (158,411     (17,605     45,832             315,697        95,529   

Income (loss) before provision for income taxes

     89,984        158,305        294,592        (75,041     (315,697          152,143   

Provision for income taxes

            (62,159                          (62,159
                                                

Net income (loss)

   $        89,984      $        96,146      $      294,592      $ (75,041   $ (315,697   $ 89,984   
                                                

 

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Table of Contents

MetroPCS Communications, Inc. and Subsidiaries

Notes to Condensed Consolidated Interim Financial Statements

(Unaudited)

 

Consolidated Statement of Cash Flows

Six Months Ended June 30, 2009

 

     Parent     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  
     (in thousands)  

CASH FLOWS FROM OPERATING ACTIVITIES:

            

Net income (loss)

   $ 70,169      $ 68,224      $ 258,682      $ (73,098   $ (253,808   $ 70,169   

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

            

Depreciation and amortization

            102        148,569        24,450               173,121   

Provision for uncollectible accounts receivable

            111                             111   

Deferred rent expense

                   9,932        1,957               11,889   

Cost of abandoned cell sites

                   2,704        1,903               4,607   

Stock-based compensation expense

                   23,341                      23,341   

Non-cash interest expense

            5,164        (7                   5,157   

(Gain) loss on disposal of assets

                   (11,164     266               (10,898

Accretion of asset retirement obligations

                   2,059        338               2,397   

Accretion of put option in majority-owned subsidiary

            772                             772   

Impairment loss in investment securities

     1,453                                    1,453   

Deferred income taxes

            44,998                             44,998   

Changes in assets and liabilities

     185,703        (149,674     (11,163     (4,421     118,431        138,876   
                                                

Net cash provided by (used in) operating activities

     257,325        (30,303     422,953        (48,605     (135,377     465,993   

CASH FLOWS FROM INVESTING ACTIVITIES:

            

Purchases of property and equipment

            (4,710     (414,579     (35,821            (455,110

Change in prepaid purchases of property and equipment

            14,608                             14,608   

Proceeds from sale of plant and equipment

                   746        2,825               3,571   

Purchase of investments

     (261,856     (220,000                   220,000        (261,856

Proceeds from sale of investments

     37,500                                    37,500   

Purchases of and deposits for FCC licenses

            (3,800     (7,892                   (11,692

Proceeds from exchange of FCC licenses

                   949                      949   

Microwave relocation costs

                   (679                   (679
                                                

Net cash (used in) provided by investing activities

     (224,356     (213,902     (421,455     (32,996     220,000        (672,709

CASH FLOWS FROM FINANCING ACTIVITIES:

            

Change in book overdraft

            (97,227            (2,202            (99,429

Proceeds from long-term loan

                          220,000        (220,000       

Proceeds from 9 1/4% Senior Notes Due 2014

            492,250                             492,250   

Debt issuance costs

            (11,925                          (11,925

Repayment of debt

            (8,000            (127,853          127,853        (8,000

Payments on capital lease obligations

                   (1,450     (7,524     7,524        (1,450

Proceeds from exercise of stock options

     7,112                                    7,112   
                                                

Net cash provided by (used in) financing activities

     7,112        375,098        (1,450     82,421        (84,623     378,558   
                                                

INCREASE IN CASH AND CASH EQUIVALENTS

     40,081        130,893        48        820               171,842   

CASH AND CASH EQUIVALENTS, beginning of period

     598,823        78,121        624        20,380               697,948   
                                                

CASH AND CASH EQUIVALENTS, end of period

   $        638,904      $        209,014      $             672      $        21,200      $      $      869,790   
                                                

 

26


Table of Contents

MetroPCS Communications, Inc. and Subsidiaries

Notes to Condensed Consolidated Interim Financial Statements

(Unaudited)

 

Consolidated Statement of Cash Flows

Six Months Ended June 30, 2008

 

     Parent     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  
     (in thousands)  

CASH FLOWS FROM OPERATING ACTIVITIES:

            

Net income (loss)

   $ 89,984      $ 96,146      $ 294,592      $ (75,041   $ (315,697   $ 89,984   

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

            

Depreciation and amortization

            107        100,915        17,166               118,188   

Provision for uncollectible accounts receivable

            121                             121   

Deferred rent expense

                   11,134        1,833               12,967   

Cost of abandoned cell sites

                   1,068        1,254               2,322   

Stock-based compensation expense

                   19,472                      19,472   

Non-cash interest expense

            1,258        (50     24,880        (24,883     1,205   

Loss on disposal of assets

                   2,615        34               2,649   

Accretion of asset retirement obligations

                   974        274               1,248   

Accretion of put option in majority-owned subsidiary

            620                             620   

Impairment loss in investment securities

     17,080                                    17,080   

Deferred income taxes

            59,794                             59,794   

Changes in assets and liabilities

     (86,055     (189,370     (117,935     (16,102     415,230        5,768   
                                                

Net cash provided by (used in) operating activities

     21,009        (31,324     312,785        (45,702     74,650        331,418   

CASH FLOWS FROM INVESTING ACTIVITIES:

            

Purchases of property and equipment

            5,947        (338,720     (53,048     (2,681     (388,502

Change in prepaid purchases of property and equipment

            (2,555     27,001                      24,446   

Proceeds from sale of plant and equipment

                   186        214               400   

Proceeds from sale of investment

     37                                    37   

Purchases of and deposits for FCC licenses

            (313,267                          (313,267

Cash used in acquisitions

            (25,162                          (25,162

Microwave relocation costs

                   (1,117                   (1,117
                                                

Net cash used in investing activities

     37        (335,037     (312,650     (52,834     (2,681     (703,165

CASH FLOWS FROM FINANCING ACTIVITIES:

            

Change in book overdraft

            23,280               6,199               29,479   

Proceeds from long-term note to parent

                          170,000        (170,000       

Payments on capital lease obligations

                          (5,632     5,632          

Repayment of debt

            (8,000            (92,399              92,399        (8,000

Proceeds from exercise of stock options

     8,997                                    8,997   
                                                

Net cash provided by (used in) financing activities

     8,997        15,280               78,168        (71,969     30,476   
                                                

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     30,043        (351,081     135        (20,368            (341,271

CASH AND CASH EQUIVALENTS, beginning of period

     801,472        633,277        444        35,015               1,470,208   
                                                

CASH AND CASH EQUIVALENTS, end of period

   $        831,515      $        282,196      $               579      $          14,647      $      $     1,128,937   
                                                

 

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Table of Contents

MetroPCS Communications, Inc. and Subsidiaries

Notes to Condensed Consolidated Interim Financial Statements

(Unaudited)

 

19. Recent Accounting Pronouncements:

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,” (“SFAS No. 141(R)”), (ASC 805, “Business Combinations,” (“ASC 805”)), which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired. SFAS No. 141(R) (ASC 805) also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS No. 141(R) (ASC 805) was effective for financial statements issued for fiscal years beginning after December 15, 2008 and early adoption was prohibited. The implementation of this standard did not have a material impact on the Company’s financial condition, results of operations or cash flows.

In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements,” (“SFAS No. 160”), (ASC 810), which establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the non-controlling interest, changes in a parent’s ownership interest, and the valuation of retained non-controlling equity investments when a subsidiary is deconsolidated. SFAS No. 160 (ASC 810) also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. SFAS No. 160 (ASC 810) was effective for financial statements issued for fiscal years beginning after December 15, 2008 and early adoption was prohibited. The implementation of this standard did not have a material impact on the Company’s financial condition, results of operations or cash flows.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133,” (“SFAS No. 161”), (ASC 815). SFAS No. 161 (ASC 815) requires enhanced disclosures about a company’s derivative and hedging activities. These enhanced disclosures will discuss (a) how and why a company uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 (ASC 815) and its related interpretations and (c) how derivative instruments and related hedged items affect a company’s financial position, results of operations and cash flows. SFAS No. 161 (ASC 815) was effective for fiscal years beginning on or after November 15, 2008, with earlier adoption allowed. The implementation of this standard did result in enhanced disclosures, but did not affect the Company’s financial condition, results of operations or cash flows.

In April 2008, the FASB issued FSP SFAS No. 142-3, “Determination of the Useful Life of Intangible Assets,” (“FSP SFAS No. 142-3”), (ASC 350). FSP SFAS No. 142-3 (ASC 350) amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142 (ASC 350). FSP SFAS No. 142-3 (ASC 350) was effective for fiscal years beginning after December 15, 2008. The implementation of this standard did not affect the Company’s financial condition, results of operations or cash flows.

In June 2008, the FASB issued FSP EITF No. 03-6-1, (ASC 260). Under FSP EITF 03-6-1 (ASC 260), unvested share-based payment awards that contain rights to receive non-forfeitable dividends (whether paid or unpaid) are considered participating securities, and the two-class method of computing earnings per share is required for all periods presented. FSP EITF 03-6-1 (ASC 260) was effective for fiscal years beginning after December 15, 2008, and interim periods within those years. The implementation of this standard did not have a material impact on the Company’s financial condition, results of operations or cash flows.

In April 2009, the FASB issued FSP SFAS No. 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,” (“FSP SFAS No. 157-4”), (ASC 820). FSP SFAS No. 157-4 (ASC 820) provides additional guidance for estimating fair value in accordance with SFAS No. 157 (ASC 820) when the volume and level of activity for the asset or liability have significantly decreased. This FSP emphasizes that even if there has been a significant decrease in the volume or level of activity and regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same. FSP SFAS No. 157-4 (ASC 820) was effective for interim and annual reporting periods ending after June 15, 2009 and shall be applied prospectively. The implementation of this standard did not have a material impact on the Company’s financial condition, results of operations or cash flows.

 

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Table of Contents

MetroPCS Communications, Inc. and Subsidiaries

Notes to Condensed Consolidated Interim Financial Statements

(Unaudited)

 

In April 2009, the FASB issued FSP SFAS No. 115-2 and SFAS No. 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” (“FSP SFAS No. 115-2 and SFAS No. 124-2”), (ASC 320, “Investments,” (“ASC 320”)). FSP SFAS No. 115-2 and SFAS No. 124-2 (ASC 320) amends the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. FSP SFAS No. 115-2 and SFAS No. 124-2