01—Abstract
Summary
Summary of the 10-K filed May 12, 2006. Cited figures are marked; the original filing is the authoritative source.
This combined Form 10-K from MetroPCS Communications, Inc. and MetroPCS, Inc. covers fiscal year 2004 and is filed late, after a restatement of 2002 and 2003 results following an independent investigation into revenue understatement and material weaknesses in internal controls.
The filing is a catch-up report: the company's reporting obligation ended, and it never issued public equity. The company is a no-contract, flat-rate, prepaid wireless carrier in selected metro areas (San Francisco, Miami, Tampa-Sarasota, Atlanta, Sacramento, Dallas-Fort Worth, Detroit) with about 1.4 million customers at year-end 2004, up 43%. Full-year 2004 revenue was $748.2 milliona (up 66%), and net income was $64.9 million, versus $15.4 million restated for 2003.
Average monthly churn was 4.92%, ARPU rose to $41.13b, and CPGA was $103.78. Cash flow from operations was $150.4 million, while capex was $250.8 million. The balance sheet at year-end 2004 shows $22.5 million in cash, $37.0 million in short-term investments, $636.4 million in net property and equipment, and $154.1 million in PCS licenses, against $185.0 million of debt including $150 million in 10¾% Senior Notes.
Equity was $125.4 millionc. The filing is backward-looking in several respects: the company refinanced its debt in 2005 with $900 million of secured credit facilities, repurchased the Senior Notes, and subsequently completed Royal Street spectrum transactions. Investors should note that the filing contains significant forward-looking risks, including FCC designated-entity rule changes affecting the Royal Street arrangement, a pending AWS auction, dependence on a single infrastructure vendor (Lucent), and roaming and intercarrier compensation disputes.
The filing also documents governance and control weaknesses: management concluded that disclosure controls were not effective as of December 31, 2004, and five material weaknesses were identified in IT, accounting, tone at the top, revenue reporting, and income taxes. Auditor PricewaterhouseCoopers was dismissed in January 2006 and replaced by Deloitte & Touche. There is no public trading market for the equity, and the company has not paid dividends.
02—Key points
Key Highlights
- Revenue grew 66% to $748.2 million in 2004, driven by 422,000 net subscriber additions and a 10% increase in ARPU to $41.13.
- Net income rose to $64.9 million from a restated $15.4 million in 2003, though the 2004 results were affected by a $47.0 million tax provision.
- The company ended 2004 with about 1.4 million customers (up 43%) and an average monthly churn of 4.92%, up from 4.63% in 2003.
- Five material weaknesses were disclosed (IT controls, accounting controls, tone at the top, revenue reporting automation, and income taxes), and disclosure controls were judged ineffective at year-end 2004.
- Restatement of 2002 and 2003 financials followed an independent investigation into a $845,000 revenue understatement in Q1 2004 that led to the withdrawal of a planned IPO.
- Capital spending of $250.8 million was focused on network expansion, and year-end liquidity was limited to $22.5 million in cash plus $37.0 million in short-term investments against $185.0 million of debt.
- Regulatory exposure is significant: FCC designated-entity rule changes could affect the Royal Street wholesale structure, and the AWS auction and roaming/intercarrier compensation proceedings remain unresolved.
03—Questions
Frequently Asked Questions
Why was this 10-K filed so late, and what does it cover?
The filing is for fiscal year 2004 and was submitted in May 2006 to satisfy reporting obligations after a restatement. The company delayed its Q2 and Q3 2004 10-Qs and the planned IPO after an audit committee investigation found revenue understatements and control weaknesses. The company does not intend to file the missed 2004 10-Qs, so this 10-K is the primary annual disclosure for that period.
How healthy is the underlying business based on the reported metrics?
Growth was strong: revenue rose 66%, subscribers rose 43%, and ARPU increased 10%. Operating income was $127.8 million and operating cash flow was $150.4 million. However, churn increased, CPGA rose 3%, and the company said cash flow from operations could decline in 2005 because of growth investments such as handset subsidies and marketing.
What are the main risks for investors?
Key risks include reliance on a single network vendor (Lucent, which was being acquired by Alcatel), limited spectrum that may require costly upgrades, dependence on the Royal Street designated-entity structure that FCC rule changes could impair, a planned AWS auction with uncertain bidder visibility, roaming and intercarrier compensation disputes, and geographic concentration in hurricane-exposed Florida and California. Heavy future borrowing needs for spectrum purchases are also flagged.
Can investors buy or sell shares of this company?
No. There is no established public trading market for the common or preferred stock of MetroPCS Communications. The company has never paid cash dividends, and transfer is restricted under a stockholders agreement that includes co-sale rights. The company had about 51.8 million common shares outstanding as of March 31, 2006, held by roughly 216 beneficial owners.
04—Continue