TMUS

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 2004, for MetroPCS Communications, Inc. and its subsidiary MetroPCS, Inc. (collectively, the "Company"). The Company is a wireless telecommunications carrier offering no-contract, flat-rate, unlimited usage services in major U.S. metropolitan areas. The filing is a combined report for both entities following a July 2004 restructuring where MetroPCS became a wholly-owned subsidiary of MetroPCS Communications. The Company's planned Initial Public Offering (IPO) was withdrawn in August 2004 following the discovery of financial statement errors.

Key Financial Metrics (Year Ended Dec 31, 2004)

Key Performance Indicators:

• Subscribers: 1.4 million (End of period), representing a 43% increase from 2003.
• Average Revenue Per User (ARPU): $41.13 (up 10% from 2003).
• Churn Rate: 4.92% average monthly rate (up from 4.63% in 2003).
• Cost Per Gross Addition (CPGA): $103.78 (up 3% from 2003).

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 66% to $748.3 million, driven by a 67% increase in service revenues and a 62% increase in equipment revenues. This growth was fueled by the addition of approximately 422,000 net subscribers and a 10% increase in ARPU.
• Profitability: Net income surged 323% to $64.9 million, compared to $15.4 million in 2003. Operating income increased to $127.8 million from $41.2 million.
• Restatements: The Company restated its financial statements for 2002 and 2003 due to material weaknesses in internal controls. Errors included understated service revenues, improper inventory valuation, and incorrect revenue recognition methodologies. The 2004 financials reflect the adoption of corrected accounting policies.
• Debt Structure: While total debt decreased slightly, the Company faced a covenant waiver regarding the timely filing of quarterly reports due to the investigation into financial errors. The $150 million Senior Notes were later repurchased in May 2005 (subsequent to the reporting period).

Guidance, Outlook, Risks, and Unusual Items

Management Commentary and Outlook: Management expects continued rapid growth in subscribers and revenues. The Company plans to expand into new markets (Los Angeles, Orlando, Dallas, Detroit) and upgrade network technology (EV-DO Revision A) to support data services. However, the Company noted that accelerated near-term growth could adversely affect operating cash flows due to high customer acquisition costs.

Material Risks and Contingencies:

• Internal Control Weaknesses: The Company identified material weaknesses in its internal control over financial reporting, including deficiencies in IT controls, revenue reporting automation, and income tax accounting. An independent investigation concluded in June 2005, finding no intentional misconduct but confirming the need for a comprehensive remediation plan.
• Regulatory Risks: The Company relies heavily on FCC licenses. Changes in FCC rules regarding Designated Entities (DEs) and spectrum leasing (specifically regarding the Royal Street arrangement) could impact future expansion and require reimbursement of bidding credits.
• Competition: Intense competition from national carriers and prepaid MVNOs could lead to price reductions and increased churn. The Company's lack of a national roaming network is a competitive disadvantage.
• Single Vendor Dependence: Substantially all network infrastructure equipment is provided by Lucent Technologies. Any disruption in this relationship could materially affect operations.

Unusual Items:

• Withdrawn IPO: The planned IPO was withdrawn in August 2004 following the discovery of revenue understatement in Q1 2004.
• IRS Audit: The IRS commenced an audit of 2002 and 2003 tax returns in March 2005, primarily regarding depreciation expense. The Company has filed an appeal.

Important Facts for Investor Verification

• Restatement Validity: Verify the extent of the restatements for 2002 and 2003 and the specific adjustments made to revenue, inventory, and deferred taxes.
• Internal Control Remediation: Assess the progress of the remediation plan for internal control weaknesses identified in the independent investigation.
• Debt Covenants: Confirm the status of the Senior Notes and the waiver of reporting covenants, noting the subsequent repurchase of these notes in May 2005.
• Royal Street Arrangement: Review the risks associated with the wholesale agreement with Royal Street Communications, LLC, particularly regarding FCC Designated Entity rules and potential unjust enrichment payments.
• Churn Rate Trends: Monitor the increasing churn rate (4.92% in 2004 vs. 4.63% in 2003) and its impact on customer acquisition costs and profitability.