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| PCS > SEC Filings for PCS > Form 10-K on 2-Mar-2009 | All Recent SEC Filings |
2-Mar-2009
Annual Report
ringtones, ring back tones, downloads, games and content applications, unlimited
directory assistance, location services and other value-added services. As of
December 31, 2008, approximately 80% of our customers have selected a $40 or
higher rate plan. Our flat-rate plans differentiate our service from the more
complex plans and long-term contract requirements of traditional wireless
carriers. In addition, the above products and services are offered by us in the
Royal Street markets under the MetroPCS brand.
Critical Accounting Policies and Estimates
On January 1, 2008, we adopted the provisions of Statement of Financial
Accounting Standards, or SFAS, No. 157, "Fair Value Measurements," or SFAS
No. 157, for financial assets and liabilities. SFAS No. 157 defines fair value,
thereby eliminating inconsistencies in guidance found in various prior
accounting pronouncements, and increases disclosures surrounding fair value
calculations. SFAS No. 157 establishes a three-tiered fair value hierarchy that
prioritizes inputs to valuation techniques used in fair value calculations. SFAS
No. 157 requires us 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 following discussion and analysis of our financial condition and results
of operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States of America, or GAAP. You should read this discussion and analysis
in conjunction with our consolidated financial statements and the related notes
thereto contained elsewhere in this report. The preparation of financial
statements in conformity with GAAP requires us to make estimates and assumptions
that affect the reported amounts of certain assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities at the
date of the financial statements. We base our estimates on historical experience
and on various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
Revenue Recognition
Our wireless services are provided on a month-to-month basis and are paid in
advance. We recognize revenues from wireless services as they are rendered.
Amounts received in advance are recorded as deferred revenue. Suspending service
for non-payment is known as hotlining. We do not recognize revenue on hotlined
customers.
Revenues and related costs from the sale of accessories are recognized at the
point of sale. The cost of handsets sold to indirect retailers are included in
deferred charges until they are sold to and activated by customers. Amounts
billed to indirect retailers for handsets are recorded as accounts receivable
and deferred revenue upon shipment by us and are recognized as equipment
revenues when service is activated by customers.
Our customers have the right to return handsets within a specified time or
within a certain amount of use, whichever occurs first. We record an estimate
for returns as contra-revenue at the time of recognizing revenue. Our assessment
of estimated returns is based on historical return rates. If our customers'
actual returns are not consistent with our estimates of their returns, revenues
may be different than initially recorded.
We follow the provisions of Emerging Issues Task Force or EITF, No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables," or EITF
No. 00-21. EITF No. 00-21, addresses the accounting for arrangements that
involve the delivery or performance of multiple products, services and/or rights
to use assets. Revenue arrangements with multiple deliverables are divided into
separate units of accounting and the consideration received is allocated among
the separate units of accounting using the residual method of accounting.
We determined that the sale of wireless services through our direct and
indirect sales channels with an accompanying handset constitutes revenue
arrangements with multiple deliverables. In accordance with EITF No. 00-21, we
divide these arrangements into separate units of accounting and allocate the
consideration between the handset and the wireless service using the residual
method of accounting. Consideration received for the wireless service is
recognized at fair value as service revenue when earned, and any remaining
consideration received is recognized as equipment revenue when the handset is
delivered and accepted by the customer.
Allowance for Uncollectible Accounts Receivable
We maintain allowances for uncollectible accounts for estimated losses
resulting from the inability of our independent retailers to pay for equipment
purchases and for amounts estimated to be uncollectible for intercarrier
compensation. We estimate allowances for uncollectible accounts from independent
retailers based on the length of time the receivables are past due, the current
business environment and our historical experience. If the financial condition
of a material portion of our independent retailers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required. In circumstances where we are aware of a specific
carrier's inability to meet its financial obligations to us, we record a
specific allowance for intercarrier compensation against amounts due; to reduce
the net recognized receivable to the amount we reasonably believe will be
collected. Total allowance for uncollectible accounts receivable as of
December 31, 2008 was approximately 12% of the total amount of gross accounts
receivable.
Inventories
We write down our inventory for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the
estimated market value or replacement cost based upon assumptions about future
demand and market conditions. Total inventory reserves for obsolescent and
unmarketable inventory were not significant as of December 31, 2008. If actual
market conditions are less favorable than those projected, additional inventory
write-downs may be required.
Deferred Income Tax Asset and Other Tax Reserves
We assess our deferred tax asset and record a valuation allowance, when
necessary, to reduce our deferred tax asset to the amount that is more likely
than not to be realized. We have considered future taxable income, taxable
temporary differences and ongoing prudent and feasible tax planning strategies
in assessing the need for the valuation allowance. Should we determine that we
would not be able to realize all or part of our net deferred tax asset in the
future, an adjustment to the deferred tax asset would be charged to earnings in
the period we made that determination.
We establish reserves when, despite our belief that our tax returns are fully
supportable, we believe that certain positions may be challenged and ultimately
modified. We adjust the reserves in light of changing facts and circumstances.
Our effective tax rate includes the impact of income tax related reserve
positions and changes to income tax reserves that we consider appropriate. A
number of years may elapse before a particular matter for which we have
established a reserve is finally resolved. Unfavorable settlement of any
particular issue may require the use of cash or a reduction in our net operating
loss carryforwards. Favorable resolution would be recognized as a reduction to
the effective rate in the year of resolution. Tax reserves as of December 31,
2008 were $37.6 million of which $5.2 million and $32.4 million are presented on
the consolidated balance sheet in accounts payable and accrued expenses and
other long-term liabilities, respectively.
On January 1, 2007, we adopted FASB Interpretation No. 48 "Accounting for
Uncertainty in Income Taxes," or FIN 48. FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in the financial statements in accordance
with SFAS No. 109. FIN 48 provides guidance on the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosures, and
transition. FIN 48 requires significant judgment in determining what constitutes
an individual tax position as well as assessing the outcome of each tax
position. Changes in judgment as to recognition or measurement of tax positions
can materially affect the estimate of the effective tax rate and consequently,
affect our operating results.
Property and Equipment
Depreciation on property and equipment is applied using the straight-line
method over the estimated useful lives of the assets once the assets are placed
in service, which are seven to ten years for network infrastructure assets,
three to ten years for capitalized interest, three to seven years for office
equipment, which includes computer equipment, three to seven years for furniture
and fixtures and five years for vehicles. Leasehold improvements are amortized
over the shorter of the remaining term of the lease and any renewal periods
reasonably assured or the estimated useful life of the improvement, whichever is
shorter. The estimated life of property and equipment is based on historical
experience with similar assets, as well as taking into account anticipated
technological or other changes. If technological changes were to occur more
rapidly than anticipated or in a different form than anticipated, the useful
lives assigned to these assets may need to be shortened, resulting in the
recognition of increased
depreciation expense in future periods. Likewise, if the anticipated
technological or other changes occur more slowly than anticipated, the life of
the assets could be extended based on the life assigned to new assets added to
property and equipment. This could result in a reduction of depreciation expense
in future periods.
We assess the impairment of long-lived assets whenever events or changes in
circumstances indicate the carrying value may not be recoverable. Factors we
consider important that could trigger an impairment review include significant
underperformance relative to historical or projected future operating results or
significant changes in the manner of use of the assets or in the strategy for
our overall business. The carrying amount of a long-lived asset is not
recoverable if it exceeds the sum of the undiscounted cash flows expected to
result from the use and eventual disposition of the asset. When we determine
that the carrying value of a long-lived asset is not recoverable, we measure any
impairment based upon a projected discounted cash flow method using a discount
rate we determine to be commensurate with the risk involved and would be
recorded as a reduction in the carrying value of the related asset and charged
to results of operations. If actual results are not consistent with our
assumptions and estimates, we may be exposed to an additional impairment charge
associated with long-lived assets. The carrying value of property and equipment
was approximately $2.8 billion as of December 31, 2008.
Long-Term Investments
We account for our investment securities in accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." At
December 31, 2008, all of the Company's long-term investment securities were
reported at fair value. Due to the lack of availability of observable market
quotes on our 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. See Note 10 to the consolidated financial statements included
elsewhere in this report.
Declines in fair value that are considered other-than-temporary are charged
to earnings and those that are considered temporary are reported as a component
of other comprehensive income in stockholders' equity. The Company has recorded
an impairment charge of $30.9 million during the year ended December 31, 2008,
reflecting the portion of the auction rate security holdings that the Company
has concluded have an other-than-temporary decline in value.
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. The
estimated market value of the Company's auction rate security holdings at
December 31, 2008 was approximately $6.0 million.
With the continuing liquidity issues experienced in the global credit and
capital markets, the auction rate securities held by the Company at December 31,
2008 continued to experience failed auctions as the amount of securities
submitted for sale in the auctions exceeded the amount of purchase orders. In
addition, all of the auction rate securities held by the Company have been
downgraded or placed on credit watch. The Company may incur additional
impairments to its auction rate securities which may be up to the full remaining
value of such auction rate securities.
FCC Licenses and Microwave Relocation Costs
We operate wireless broadband mobile networks under licenses granted by the
FCC for a particular geographic area on spectrum allocated by the FCC for
terrestrial wireless broadband mobile services. In November 2006, we acquired a
number of AWS licenses which can be used to provide wireless broadband mobile
services comparable to the PCS services provided by us, as well as other
advanced wireless services. In June 2008, we acquired a 700 MHz license that
also can be used to provide similar services. The PCS licenses previously
included, and the AWS licenses currently include, the obligation to relocate
existing fixed microwave users of our licensed spectrum if the use of our
spectrum interfered with their systems and/or reimburse other carriers
(according to FCC rules) that relocated prior users if the relocation benefits
our system. Additionally, we incurred costs related to microwave relocation in
constructing our PCS and AWS networks. The PCS, AWS and 700 MHz licenses and
microwave relocation costs are recorded at cost. Although FCC licenses are
issued with a stated term, ten years in the case of PCS licenses, fifteen years
in the case of AWS licenses and approximately 10.5 years for 700 MHz licenses,
the
renewal of PCS, AWS and 700 MHz licenses is generally a routine matter without
substantial cost and we have determined that no legal, regulatory, contractual,
competitive, economic, or other factors currently exist that limit the useful
life of our PCS, AWS and 700 MHz licenses. The carrying value of FCC licenses
and microwave relocation costs was approximately $2.4 billion as of December 31,
2008.
Our primary indefinite-lived intangible assets are our FCC licenses. Based on
the requirements of SFAS No. 142, "Goodwill and other Intangible Assets,"or SFAS
No. 142, we test investments in our FCC licenses for impairment annually or more
frequently if events or changes in circumstances indicate that the carrying
value of our FCC licenses might be impaired. We perform our annual FCC license
impairment test as of each September 30th. The impairment test consists of a
comparison of the estimated fair value with the carrying value. We estimate the
fair value of our FCC licenses using a discounted cash flow model. Cash flow
projections and assumptions, although subject to a degree of uncertainty, are
based on a combination of our historical performance and trends, our business
plans and management's estimate of future performance, giving consideration to
existing and anticipated competitive economic conditions. Other assumptions
include our weighted average cost of capital and long-term rate of growth for
our business. We believe that our estimates are consistent with assumptions that
marketplace participants would use to estimate fair value. We corroborate our
determination of fair value of the FCC licenses, using the discounted cash flow
approach described above, with other market-based valuation metrics.
Furthermore, we segregate our FCC licenses by regional clusters for the purpose
of performing the impairment test because each geographical region is unique. An
impairment loss would be recorded as a reduction in the carrying value of the
related indefinite-lived intangible asset and charged to results of operations.
Historically, we have not experienced significant negative variations between
our assumptions and estimates when compared to actual results. However, if
actual results are not consistent with our assumptions and estimates, we may be
required to record an impairment charge associated with indefinite-lived
intangible assets. Although we do not expect our estimates or assumptions to
change significantly in the future, the use of different estimates or
assumptions within our discounted cash flow model when determining the fair
value of our FCC licenses or using a methodology other than a discounted cash
flow model could result in different values for our FCC licenses and may affect
any related impairment charge. The most significant assumptions within our
discounted cash flow model are the discount rate, our projected growth rate and
management's future business plans. A change in management's future business
plans or disposition of one or more FCC licenses could result in the requirement
to test certain other FCC licenses. If any legal, regulatory, contractual,
competitive, economic or other factors were to limit the useful lives of our
indefinite-lived FCC licenses, we would be required to test these intangible
assets for impairment in accordance with SFAS No. 142 and amortize the
intangible asset over its remaining useful life.
For the license impairment test performed as of September 30, 2008, the fair
value of the FCC licenses was in excess of their carrying value. There have been
no indicators of impairment and no impairment has been recognized through
December 31, 2008.
Share-Based Payments
We account for share-based awards exchanged for employee services in
accordance with SFAS No. 123(R), "Share-Based Payment," or SFAS No. 123(R).
Under SFAS No. 123(R), share-based compensation cost is measured at the grant
date, based on the estimated fair value of the award, and is recognized as
expense over the employee's requisite service period.
We have granted nonqualified stock options. Most of our stock option awards
include a service condition that relates only to vesting. The stock option
awards generally vest in one to four years from the grant date. Compensation
expense is amortized on a straight-line basis over the requisite service period
for the entire award, which is generally the maximum vesting period of the
award.
The determination of the fair value of stock options using an option-pricing
model is affected by our common stock valuation as well as assumptions regarding
a number of complex and subjective variables. Prior to our initial public
offering, factors that our Board of Directors considered in determining the fair
market value of our common stock, included the recommendation of our finance and
planning committee and of management based on certain data, including discounted
cash flow analysis, comparable company analysis and comparable transaction
analysis, as well as contemporaneous valuation reports. After our initial public
offering, the Board of Directors uses the closing price of our common stock on
the date of grant as the fair market value for our common stock. The volatility
assumption is based on a combination of the historical volatility of our common
stock and the volatilities of similar companies over a period of time equal to
the expected term of the stock options. The volatilities of similar companies
are used in conjunction with our historical volatility because of the lack of
sufficient relevant history equal to the expected term. The expected term of
employee stock options represents the weighted-average period the
stock options are expected to remain outstanding. The expected term assumption
is estimated based primarily on the stock options' vesting terms and remaining
contractual life and employees' expected exercise and post-vesting employment
termination behavior. The risk-free interest rate assumption is based upon
observed interest rates on the grant date appropriate for the term of the
employee stock options. The dividend yield assumption is based on the
expectation of no future dividend payouts by us.
As share-based compensation expense under SFAS No. 123(R) is based on awards
ultimately expected to vest, it is reduced for estimated forfeitures. SFAS
No. 123(R) requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from
those estimates. We recognized stock-based compensation expense of approximately
$41.1 million, $28.0 million and $14.5 million for the years ended December 31,
2008, 2007 and 2006, respectively.
The value of the options is determined by using a Black-Scholes pricing model
that includes the following variables: 1) exercise price of the instrument, 2)
fair market value of the underlying stock on date of grant, 3) expected life, 4)
estimated volatility and 5) the risk-free interest rate. We utilized the
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