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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the quarterly period ended September 30, 2005
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: 333-57715
SUNCOM WIRELESS, INC.
(Exact name of Registrant as specified in its charter)
| Delaware | 23-2930873 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. employer identification no.) |
1100 Cassatt Road
Berwyn, Pennsylvania 19312
(Address and zip code of principal executive offices)
(610) 651-5900
(Registrant’s telephone number, including area code)
Indicate by a 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 x No ¨
Indicate by a check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x.
As of October 31, 2005, 100 shares of the registrant’s common stock were outstanding.
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SUNCOM WIRELESS, INC.
THIRD QUARTER REPORT
| Page No. | ||||
| PART I. Financial Information | ||||
Item 1 | Financial Statements(unaudited) | |||
Consolidated Balance Sheets at December 31, 2004 and September 30, 2005 | 3 | |||
| 4 | ||||
Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2005 | 5 | |||
| 6 | ||||
Item 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 19 | ||
Item 3 | Quantitative and Qualitative Disclosures About Market Risk | 29 | ||
Item 4 | Controls and Procedures | 29 | ||
| Part II. Other Information | ||||
Item 1 | Legal Proceedings | 30 | ||
Item 2 | Unregistered Sales of Equity Securities and Use of Proceeds | 30 | ||
Item 3 | Defaults Upon Senior Securities | 30 | ||
Item 4 | Submission of Matters to a Vote of Security Holders | 30 | ||
Item 5 | Other Information | 30 | ||
Item 6 | Exhibits | 30 | ||
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PART I. FINANCIAL INFORMATION
| ITEM 1. | FINANCIAL STATEMENTS |
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except par value)
(Unaudited)
December 31, 2004 | September 30, 2005 | |||||||
ASSETS: | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 8,351 | $ | 20,061 | ||||
Short-term investments | 305,500 | 220,775 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $7,585 and $10,318, respectively | 79,290 | 91,894 | ||||||
Accounts receivable – roaming partners | 18,348 | 18,869 | ||||||
Due from related parties | 7,349 | 5,662 | ||||||
Inventory, net | 18,216 | 19,387 | ||||||
Prepaid expenses | 11,611 | 14,604 | ||||||
Other current assets | 10,806 | 23,397 | ||||||
Total current assets | 459,471 | 414,649 | ||||||
Long term assets: | ||||||||
Property and equipment, net | 814,127 | 700,986 | ||||||
Intangible assets, net | 984,052 | 913,243 | ||||||
Other long-term assets | 5,180 | 4,535 | ||||||
Total assets | $ | 2,262,830 | $ | 2,033,413 | ||||
LIABILITIES AND STOCKHOLDER’S EQUITY: | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 85,896 | $ | 93,066 | ||||
Accrued liabilities | 67,365 | 80,386 | ||||||
Current portion of long term debt | 3,484 | 2,826 | ||||||
Other current liabilities | 23,984 | 21,397 | ||||||
Total current liabilities | 180,729 | 197,675 | ||||||
Long-term debt: | ||||||||
Capital lease obligations | 269 | 1,029 | ||||||
Senior secured term loan | 247,500 | 245,625 | ||||||
Senior notes | 712,055 | 712,867 | ||||||
Total senior long-term debt | 959,824 | 959,521 | ||||||
Subordinated notes | 728,494 | 729,864 | ||||||
Total long-term debt | 1,688,318 | 1,689,385 | ||||||
Deferred income taxes, net | 139,321 | 147,134 | ||||||
Deferred revenue | 659 | 1,394 | ||||||
Deferred gain on sale of property and equipment | 19,099 | 51,966 | ||||||
Other long-term liabilities | 2,013 | 2,237 | ||||||
Total liabilities | 2,030,139 | 2,089,791 | ||||||
Commitments and contingencies | — | — | ||||||
Stockholder’s equity | ||||||||
Common stock, $0.01 par value, 1,000 shares authorized; 100 shares issued and outstanding as of December 31, 2004 and September 30, 2005 | — | — | ||||||
Additional paid-in capital | 560,934 | 562,383 | ||||||
Accumulated deficit | (313,417 | ) | (610,295 | ) | ||||
SunCom Wireless Holdings, Inc. common stock held in trust | (94 | ) | (188 | ) | ||||
Deferred compensation | (14,732 | ) | (8,278 | ) | ||||
Total stockholder’s equity | 232,691 | (56,378 | ) | |||||
Total liabilities and stockholder’s equity | $ | 2,262,830 | $ | 2,033,413 | ||||
See accompanying notes to financial statements.
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CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
| 2004 | 2005 | 2004 | 2005 | |||||||||
Revenues: | ||||||||||||
Service | $150,272 | $156,087 | $453,394 | $485,415 | ||||||||
Roaming | 43,971 | 34,287 | 116,127 | 81,096 | ||||||||
Equipment | 18,000 | 24,113 | 53,171 | 64,809 | ||||||||
Total revenue | 212,243 | 214,487 | 622,692 | 631,320 | ||||||||
Expenses: | ||||||||||||
Cost of service (excluding the below amortization, excluding depreciation and asset disposal of $40,455 and $67,580 for the three months ended September 30, 2004 and 2005, respectively, and $113,876 and $162,623 for the nine months ended September 30, 2004 and 2005, respectively, and excluding non-cash compensation of $322 and $216 for the three months ended September 30, 2004 and 2005, respectively, and $1,948 and $626 for the nine months ended September 30, 2004 and 2005, respectively) | 63,090 | 69,866 | 186,032 | 196,260 | ||||||||
Cost of equipment | 29,863 | 45,210 | 94,206 | 129,367 | ||||||||
Selling, general and administrative (excluding depreciation and asset disposal of $2,999 and $2,492 for the three months ended September 30, 2004 and 2005, respectively, and $10,602 and $8,360 for the nine months ended September 30, 2004 and 2005, respectively, and excluding non-cash compensation of $4,602 and $1,192 for the three months ended September 30, 2004 and 2005, respectively, and $14,470 and $7,183 for the nine months ended September 30, 2004 and 2005, respectively) | 54,768 | 93,853 | 177,821 | 260,910 | ||||||||
Non-cash compensation | 4,924 | 1,408 | 16,418 | 7,809 | ||||||||
Depreciation and asset disposal | 43,454 | 70,072 | 124,478 | 170,983 | ||||||||
Amortization | 3,489 | 14,288 | 7,091 | 46,860 | ||||||||
Income (loss) from operations | 12,655 | (80,210 | ) | 16,646 | (180,869 | ) | ||||||
Interest expense | (31,619 | ) | (37,382 | ) | (93,877 | ) | (111,148 | ) | ||||
Other expense | (52 | ) | (83 | ) | (52 | ) | (157 | ) | ||||
Interest and other income | 348 | 2,284 | 919 | 6,333 | ||||||||
Loss before taxes | (18,668 | ) | (115,391 | ) | (76,364 | ) | (285,841 | ) | ||||
Income tax provision | (3,478 | ) | (3,279 | ) | (10,335 | ) | (11,037 | ) | ||||
Net loss | ($22,146 | ) | ($118,670 | ) | ($86,699 | ) | ($296,878 | ) | ||||
See accompanying notes to financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
| Nine Months Ended September 30, | ||||||
| 2004 | 2005 | |||||
Cash flows from operating activities: | ||||||
Net loss | ($86,699 | ) | ($296,878 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities, net of effects from acquisitions and divestitures: | ||||||
Depreciation, asset disposal and amortization | 131,569 | 217,843 | ||||
Deferred income taxes | 9,079 | 10,201 | ||||
Accretion of interest | 2,542 | 3,648 | ||||
Bad debt expense | 5,357 | 7,613 | ||||
Non-cash compensation | 16,418 | 7,809 | ||||
Other non-operating losses | — | 157 | ||||
Change in operating assets and liabilities: | ||||||
Accounts receivable | (8,287 | ) | (2,802 | ) | ||
Inventory | 5,734 | (1,171 | ) | |||
Prepaid expenses and other current assets | (1,795 | ) | (20,330 | ) | ||
Intangible and other assets | 3,078 | 706 | ||||
Accounts payable | (12,567 | ) | 16,665 | |||
Accrued payroll and liabilities | (5,630 | ) | (1,286 | ) | ||
Deferred revenue | (436 | ) | (1,949 | ) | ||
Accrued interest | 15,867 | 15,465 | ||||
Other liabilities | (1,662 | ) | (568 | ) | ||
Net cash provided by (used in) operating activities | 72,568 | (44,877 | ) | |||
Cash flows from investing activities: | ||||||
Purchase of available for sale securities | (264,300 | ) | (860,525 | ) | ||
Proceeds from sale of available for sale securities | 266,850 | 945,250 | ||||
Proceeds from sale of property and equipment | 558 | 47,858 | ||||
Refund of FCC license deposit | — | 5,000 | ||||
Capital expenditures | (56,254 | ) | (78,172 | ) | ||
Other | (1,746 | ) | (959 | ) | ||
Net cash provided by (used in) investing activities | (54,892 | ) | 58,452 | |||
Cash flows from financing activities: | ||||||
Payments under senior secured term loan | — | (1,875 | ) | |||
Change in bank overdraft | (12,516 | ) | (752 | ) | ||
(Advances to) repayments from related party, net | (177 | ) | 1,687 | |||
Principal payments under capital lease obligations | (1,162 | ) | (897 | ) | ||
Other | (119 | ) | (28 | ) | ||
Net cash used in financing activities | (13,974 | ) | (1,865 | ) | ||
Net increase in cash and cash equivalents | 3,702 | 11,710 | ||||
Cash and cash equivalents, beginning of period | 3,366 | 8,351 | ||||
Cash and cash equivalents, end of period | $7,068 | $20,061 | ||||
Non-cash investing and financing activities | ||||||
Deferred stock compensation grants, net of forfeitures | $2,610 | $1,355 | ||||
Equipment acquired under capital lease obligation | — | 1,000 | ||||
Change in fair value of derivative instruments acting as a hedge | (1,867 | ) | — | |||
Change in capital expenditures included in accounts payable | 1,413 | (9,660 | ) | |||
Change in direct transaction costs included in accrued expenses | — | (503 | ) | |||
Asset retirement obligation accruals for property, plant and equipment | 19 | 21 | ||||
Adjustment to goodwill related to an exchange agreement, net | — | (15,425 | ) | |||
See accompanying notes to financial statements.
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NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
| (1) | Basis of Presentation |
The accompanying consolidated financial statements are unaudited and have been prepared by management. In the opinion of management, these consolidated financial statements contain all of the adjustments, consisting of normal recurring adjustments, necessary to state fairly, in summarized form, the financial position and the results of operations of SunCom Wireless, Inc. (“SunCom”). The results of operations for the three and nine months ended September 30, 2005 may not be indicative of the results that may be expected for the year ending December 31, 2005. The financial information presented herein should be read in conjunction with the consolidated financial statements for the year ended December 31, 2004, which include information and disclosures not included herein.
SunCom is a direct, wholly-owned subsidiary of SunCom Wireless Investment Co., LLC. (“SunCom Investment Company”). SunCom Investment Company is a direct, wholly-owned subsidiary of SunCom Wireless Holdings, Inc., formerly known as Triton PCS Holdings, Inc. (“Holdings”). Accordingly, SunCom and its subsidiaries are indirect, wholly-owned subsidiaries of Holdings. SunCom has no independent assets or operations, and all of SunCom’s subsidiaries, other than Triton PCS Property Company L.L.C. and Triton PCS License Company L.L.C., have guaranteed on a full, unconditional and joint and several basis SunCom’s 8 1/2% senior notes due 2013 (the “8 1/2% Notes”), its 9 3/8% senior subordinated notes due 2011 (the “9 3/8% Notes”) and its 8 3/4% senior subordinated notes due 2011 (the “8 3/4% Notes”). The 8 1/2% Notes are effectively subordinated in right of payment to all of SunCom’s senior secured debt, including its current senior secured term loan (the “Term Loan”). The 9 3/8% Notes and the 8 3/4% Notes constitute unsecured obligations of SunCom and rank subordinate in right of payment to all of SunCom’s existing and future senior debt, including the 8 1/2% Notes and the Term Loan.
The consolidated accounts include SunCom and its wholly-owned subsidiaries (collectively, the “Company”). All significant intercompany accounts or balances have been eliminated in consolidation.
Certain reclassifications have been made to prior period financial statements to conform to the current period presentation. Auction rate securities, historically classified as cash and cash equivalents, have been reclassified as marketable securities for the period ended September 30, 2004. This reclassification resulted in a decrease of $2.6 million to cash flows used in investing activities as a result of the net sales of auction rate securities in the period ended September 30, 2004.
| (2) | New Accounting Pronouncements |
In October 2005, the Financial Accounting Standards Board (the “FASB”) issued FASB Staff Position No. FAS 13-1, “Accounting for Rental Costs Incurred during a Construction Period” (“FSP No. 13-1”), to give guidance to a lessee on determining whether rental costs associated with operating leases may be capitalized during a construction period. Specifically, FSP No. 13-1stipulates that such costs shall be (a) recognized as rental expense, (b) included in income from continuing operations, and (c) allocated over the lease term according to the guidance in Statement of Financial Accounting Standards (“SFAS”) No. 13, “Accounting for Leases”, and FASB Technical Bulletin No. 85-3, “Accounting for Operating Leases with Scheduled Rent Increases”. The guidance in FSP No. 13-1 is effective for the first reporting period beginning after December 15, 2005, with early adoption permitted for financial statements or interim financial statements that have not yet been issued. The Company already accounts for such rental costs in accordance with FSP No. 13-1; therefore the issuance of FSP No. 13-1 will not have an additional impact on the Company’s consolidated financial statements.
On June 1, 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”). SFAS 154 replaces Accounting Principles Board Opinion No. 20, “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements”. SFAS 154 requires that a voluntary change in accounting principle be applied retrospectively to all prior period financial statements presented. SFAS 154 also requires that a change in method of depreciating or amortizing a long-lived non-financial asset be accounted for prospectively as a change in estimate, and correction of errors in previously issued financial statements should be termed a restatement. SFAS 154 is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. The Company does not expect this Statement to have a material effect on its financial statements or its results of operations.
On December 15, 2004, the FASB issued the revised SFAS No. 123, “Share-Based Payment” (“SFAS 123R”), which addresses the accounting for share-based payment transactions in which an entity obtains employee services in exchange for (a) equity instruments of the entity or (b) liabilities that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of such equity instruments. This statement eliminates the ability to account for employee share-based payment transactions using Accounting Principles Board Opinion No. 25 and requires instead that such transactions be accounted for using the grant-date fair value based method. SFAS 123R applies to all awards granted or modified after the Statement’s effective date. In addition, compensation cost for the unvested portion of previously granted awards that remain outstanding on the Statement’s effective date shall be recognized on or after the effective date, as the related services are
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SUNCOM WIRELESS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
rendered, based on the awards’ grant-date fair value as previously calculated for the pro-forma disclosure under SFAS 123. The requirements of SFAS 123R were to become effective as of the beginning of the third quarter of 2005; however, on April 14, 2005, the Securities and Exchange Commission (“SEC”) announced the adoption of a new rule that amends the compliance dates for SFAS 123R. The SEC’s new rule allows the Company to implement SFAS 123R as of January 1, 2006. The SEC’s new rule does not change the accounting required by SFAS No. 123R; it changes only the dates for compliance with the standard. The Company currently uses the grant-date fair value based method to account for Holdings’ restricted stock awards, and as such, does not expect this statement to have a material effect on its financial statements or its results of operations.
On November 24, 2004, the FASB issued SFAS No. 151, “Inventory Costs—an amendment of ARB 43, Chapter 4” (“SFAS 151”). This statement amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing”, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. This statement requires that those items be recognized as current-period charges. In addition, this Statement requires that allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. This Statement will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not expect this Statement to have a material effect on its financial statements or its results of operations.
On December 15, 2004, the FASB issued SFAS No. 153, “Exchanges of Non-Monetary Assets—An Amendment of APB Opinion No. 29” (“SFAS 153”). SFAS 153 amends APB Opinion No. 29, “Accounting for Non-Monetary Transactions”. The amendments made by SFAS 153 are based on the principle that exchanges of non-monetary assets should be measured based on the fair value of the assets exchanged. Further, the amendments eliminate the exception for non-monetary exchanges of similar productive assets and replace it with a general exception for exchanges of non-monetary assets that do not have commercial substance. The provisions in SFAS 153 are effective for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not expect this Statement to have a material effect on its financial statements or its results of operations.
In March 2005, the FASB issued Interpretation No. 47 (“FIN 47”), “Accounting for Conditional Asset Retirement Obligations – an interpretation of FASB Statement No. 143”. This Interpretation clarifies the term “conditional asset retirement obligation” as used in FASB No. 143 and requires a liability to be recorded if the fair value of the obligation can be reasonably estimated. The types of asset retirement obligations that are covered by this interpretation are those for which an entity has a legal obligation to perform an asset retirement activity; however, the timing and/or method of settling the obligation are conditional on a future event that may or may not be within the control of the entity. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. This Interpretation becomes effective no later than December 31, 2005. Because the Company currently records liabilities for conditional asset retirement obligations, it does not expect FIN 47 to have a material impact on its financial statements or results of operations.
| (3) | Stock Compensation |
During May 2005, Holdings granted 1,017,984 shares of restricted Class A common stock to certain management employees under Holdings’ Stock and Incentive Plan (the “Stock Incentive Plan”). These shares are subject to four-year vesting provisions. Deferred compensation of approximately $2.1 million was recorded based on the market value of the restricted shares at the date of grant.
During May 2005, Holdings granted 105,000 shares of restricted Class A common stock pursuant to Holdings’ Directors’ Stock and Incentive Plan to the non-employee directors serving on Holdings’ Board of Directors. All of these shares vest on August 15, 2007. Deferred compensation of approximately $0.2 million was recorded based on the market value of the restricted shares at the date of grant.
During the nine months ended September 30, 2005, certain employees who resigned their employment with the Company forfeited approximately $0.9 million of restricted stock and in so doing returned 66,753 shares of Holdings’ restricted Class A common stock originally issued under Holdings’ Stock Incentive Plan.
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SUNCOM WIRELESS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
| (4) | Property and Equipment |
The following table summarizes the Company’s property and equipment as of December 31, 2004 and September 30, 2005, respectively.
| December 31, 2004 | September 30, 2005 | |||||||
| (Dollars in thousands) | ||||||||
Property and equipment: | ||||||||
Land | $ | 313 | $ | 313 | ||||
Network infrastructure and equipment | 1,121,938 | 1,166,400 | ||||||
Furniture, fixtures and computer equipment | 88,832 | 96,242 | ||||||
Capital lease assets | 5,664 | 6,191 | ||||||
Construction in progress | 9,091 | 16,800 | ||||||
| $ | 1,225,838 | $ | 1,285,946 | |||||
Less accumulated depreciation | (411,711 | ) | (584,960 | ) | ||||
Property and equipment, net | $ | 814,127 | $ | 700,986 | ||||
In April 2004, the Company reviewed the estimated service lives of its time division multiple access (“TDMA”) wireless communications equipment. This review was undertaken as the result of the Company’s successful launch of its overlapping global system for mobile communications and general packet radio service (“GSM/GPRS”) network in all of its covered markets. Service lives were shortened to fully depreciate all TDMA equipment by the end of 2008. TDMA equipment acquired after April 1, 2004 had a useful life no longer than 57 months. The impact of this change for the quarter and nine months ended September 30, 2005 was an increase in depreciation expense and net loss of approximately $3.0 million and $9.0 million, respectively.
During the second quarter of 2005, the Company further accelerated depreciation on wireless communications equipment related to its TDMA network by shortening service lives to fully depreciate all TDMA equipment by the end of 2006. This additional depreciation resulted from a more aggressive migration from the Company’s TDMA network to its GSM/GPRS network than originally planned. The impact of this change for the three and nine months ended September 30, 2005 was an increase in depreciation expense and net loss of approximately $23.9 and $47.8 million, respectively.
| (5) | Detail of Certain Liabilities |
The following table summarizes certain current liabilities as of December 31, 2004 and September 30, 2005, respectively.
| December 31, 2004 | September 30, 2005 | |||||
| (Dollars in thousands) | ||||||
Accrued liabilities: | ||||||
Bank overdraft liability | $ | 13,509 | $ | 12,757 | ||
Accrued payroll and related expenses | 15,232 | 15,173 | ||||
Accrued expenses | 15,050 | 13,417 | ||||
Accrued interest | 23,574 | 39,039 | ||||
Total accrued liabilities | $ | 67,365 | $ | 80,386 | ||
Other current liabilities: | ||||||
Deferred revenue | $ | 13,012 | $ | 10,328 | ||
Deferred gain on sale of property and equipment | 920 | 2,319 | ||||
Security deposits | 7,498 | 8,750 | ||||
Other | 2,554 | — | ||||
Total other current liabilities | $ | 23,984 | $ | 21,397 | ||
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SUNCOM WIRELESS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
| (6) | Long-Term Debt |
The following table summarizes the Company’s borrowings as of December 31, 2004 and September 30, 2005, respectively.
| December 31, 2004 | September 30, 2005 | |||||
| (Dollars in thousands) | ||||||
Current portion of long-term debt: | ||||||
Current portion of capital lease obligations | $ | 984 | $ | 326 | ||
Current portion of senior secured term loan | 2,500 | 2,500 | ||||
Total current portion of long-term debt | 3,484 | 2,826 | ||||
Long-term debt: | ||||||
Capital lease obligations | $ | 269 | $ | 1,029 | ||
Senior secured term loan | 247,500 | 245,625 | ||||
8 1/2% senior notes | 712,055 | 712,867 | ||||
9 3/8% senior subordinated notes | 338,460 | 339,263 | ||||
8 3/4% senior subordinated notes | 390,034 | 390,601 | ||||
Total long-term debt | 1,688,318 | 1,689,385 | ||||
Total debt | $ | 1,691,802 | $ | 1,692,211 | ||
| (7) | Termination of Urban Comm – North Carolina, Inc. Acquisition |
During the third quarter of 2005, the Company exercised its termination right and cancelled its planned purchase of Urban Comm – North Carolina, Inc. (“Urban”). The pending agreement, which was finalized on October 28, 2004 but required the acceptance of Urban’s creditors and the approval of the Bankruptcy Court, called for the Company to acquire the outstanding stock of Urban, whose sole assets consist of FCC wireless licenses in 20 basic trading areas for $113.0 million in cash. During September 2005, the Company was refunded a $5.0 million deposit paid in 2004 related to the planned purchase.
| (8) | Purchase Accounting Adjustments |
On December 1, 2004, the Company completed a transaction with AT&T Wireless and Cingular Wireless that resulted in the exchange of wireless network properties, pursuant to which Cingular Wireless received the Company’s network assets and customers in Virginia and the Company received certain AT&T Wireless network assets and customers in North Carolina, Puerto Rico and the U.S. Virgin Islands, plus $175 million in cash. The original estimated value of the exchange, based on the fair value of the components valued by the Company with the assistance of an independent third party valuation company, was approximately $1.2 billion. The preliminary purchase price was adjusted in the first quarter of 2005 to reflect the working capital settlement in March 2005 and resolution of certain outstanding tax issues. As a result, the Company adjusted goodwill to reflect an $11.3 million increase in accounts receivable, a $1.7 million decrease in other current liabilities and a $2.4 million decrease in the deferred tax liability balance. The purchase price allocation is still preliminary due to the pending resolution of the GSM accounts receivable balance that will be transferred when AT&T Wireless’ former systems are integrated into the Company’s systems.
| (9) | Tower Sale |
On March 18, 2005, the Company agreed to sell 169 wireless communications towers located in North Carolina, South Carolina and Puerto Rico to Global Signal Acquisitions LLC, a wholly-owned subsidiary of Global Signal Inc. (“Global Signal”). As of September 30, 2005, the Company had completed the sale of 160 of these towers to Global Signal, including related assets and certain liabilities, for $50.8 million, reflecting a purchase price of approximately $0.3 million per site. The Company expects to complete the sale of the remaining nine towers in the fourth quarter of 2005.
On June 30, 2005, the Company entered into a master lease agreement with Global Signal, in which the Company agreed to pay Global Signal monthly rent for the continued use of space that the Company occupied on the towers prior to their sale. The lease has an initial term of ten years, plus three five-year renewal options. The monthly rental amount is subject to certain escalation clauses over the life of the initial lease and related options.
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SUNCOM WIRELESS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
The Company accounted for this sale-leaseback transaction in accordance with SFAS No. 98 “Accounting for Leases” and SFAS No. 28 “Accounting for Sales with Leasebacks”. The carrying value of the towers sold was $7.2 million. After deducting $0.5 million of selling costs, the gain on the sale of the towers was approximately $43.1 million, of which $7.9 million was recognized immediately in the statement of operations as a reduction to the depreciation and asset disposal line item, and $35.2 million was deferred and will be recognized over the term of the operating lease.
| (10) | Subscriber Sale |
On October 7, 2005, the Company entered into an agreement with Cingular Wireless, which was effective as of September 20, 2005, under which the Company transferred to Cingular Wireless 29,139 customers from SunCom’s North Carolina and Puerto Rico networks. The Company originally acquired the transferred customers pursuant to the December 2004 exchange of network assets between SunCom and Cingular Wireless, but the customers were maintained on Cingular’s billing system for transition purposes following the exchange. As consideration for the sale of these customers, Cingular agreed to pay SunCom $3.1 million and to effect a final settlement under the parties’ transitional billing arrangements for the affected customers. As a result of this transaction, the Company wrote-off approximately $8.2 million of subscriber intangible assets related to the transferred customers. After taking effect of the $3.1 million of proceeds, the Company recorded a loss of $5.1 million for the three months ended September 30, 2005, which is recorded in depreciation and asset disposal expense on the consolidated statement of operations.
| (11) | Related party transactions |
The Company makes payments on behalf of SunCom Investment Company and Holdings for certain business activities, including, but not limited to, administrative expenses, tax payments and direct costs of business transactions. As of September 30, 2005, the Company had recorded aggregate receivables from SunCom Investment Company and Holdings of approximately $5.7 million. These payments are due on demand.
| (12) | Segment Information |
In 2005, as a result of the Company’s acquisition of AT&T Wireless’ business in certain North Carolina markets, Puerto Rico and the U.S. Virgin Islands, the Company began operating as two reportable segments, which it operates and manages as strategic business units. Reportable segments are defined as components of an enterprise for which separate financial information is available and is evaluated regularly by the chief operating decision makers in deciding how to allocate resources and in assessing performance. The Company’s reporting segments are based upon geographic area of operation; one segment consists of the Company’s operations in the continental United States and the other consists of the Company’s operations in Puerto Rico and the U.S. Virgin Islands. The “Corporate and other” column below includes centralized services that largely support both segments. The Company’s reporting segments follow the same accounting policies used for the Company’s consolidated financial statements.
10
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SUNCOM WIRELESS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
Financial information by reportable business segment is as follows:
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
(dollars in thousands) | 2004 | 2005 | 2004 | 2005 | ||||||||||||
Revenues | ||||||||||||||||
Continental United States | $ | 212,243 | $ | 156,925 | $ | 622,692 | $ | 468,589 | ||||||||
Puerto Rico and U.S. Virgin Islands | — | 57,562 | — | 162,731 | ||||||||||||
Corporate and other | — | — | — | — | ||||||||||||
Consolidated | $ | 212,243 | $ | 214,487 | $ | 622,692 | $ | 631,320 | ||||||||
Depreciation and amortization | ||||||||||||||||
Continental United States | $ | 43,544 | $ | 64,818 | $ | 121,188 | $ | 160,731 | ||||||||
Puerto Rico and U.S. Virgin Islands | — | 16,639 | — | 48,257 | ||||||||||||
Corporate and other | 3,399 | 2,903 | 10,381 | 8,855 | ||||||||||||
Consolidated | $ | 46,943 | $ | 84,360 | $ | 131,569 | $ | 217,843 | ||||||||
Income (loss) from operations | ||||||||||||||||
Continental United States | $ | 26,920 | $ | (55,557 | ) | $ | 61,981 | $ | (115,115 | ) | ||||||
Puerto Rico and U.S. Virgin Islands | — | (12,262 | ) | — | (26,981 | ) | ||||||||||
Corporate and other | (14,265 | ) | (12,391 | ) | (45,335 | ) | (38,773 | ) | ||||||||
Consolidated | $ | 12,655 | $ | (80,210 | ) | $ | 16,646 | $ | (180,869 | ) | ||||||
A reconciliation from segment income (loss) from operations to consolidated loss before taxes is set forth below:
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
(dollars in thousands) | 2004 | 2005 | 2004 | 2005 | ||||||||||||
Total segment income (loss) from operations | $ | 12,655 | $ | (80,210 | ) | $ | 16,646 | $ | (180,869 | ) | ||||||
Unallocated amounts: | ||||||||||||||||
Interest expense | (31,619 | ) | (37,382 | ) | (93,877 | ) | (111,148 | ) | ||||||||
Other expense | (52 | ) | (83 | ) | (52 | ) | (157 | ) | ||||||||
Interest and other income | 348 | 2,284 | 919 | 6,333 | ||||||||||||
Consolidated loss before taxes | $ | (18,668 | ) | $ | (115,391 | ) | $ | (76,364 | ) | $ | (285,841 | ) | ||||
11
Table of Contents
SUNCOM WIRELESS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
| As of September 30, | ||||||
(in thousands, except subscribers) | 2004 | 2005 | ||||
Total assets | ||||||
Continental United States | $ | 1,307,944 | $ | 1,379,448 | ||
Puerto Rico and U.S. Virgin Islands | — | 383,824 | ||||
Corporate and other | 136,269 | 270,141 | ||||
Consolidated | $ | 1,444,213 | $ | 2,033,413 | ||
Subscribers | ||||||
Continental United States | 899,862 | 672,953 | ||||
Puerto Rico and U.S. Virgin Islands | — | 246,597 | ||||
Corporate and other | — | — | ||||
Consolidated | 899,862 | 919,550 | ||||
| Nine months ended September 30, | ||||||
| 2004 | 2005 | |||||
Capital expenditures | ||||||
Continental United States | $ | 51,726 | $ | 63,004 | ||
Puerto Rico and U.S. Virgin Islands | — | 7,283 | ||||
Corporate and other | 4,528 | 7,885 | ||||
Consolidated | $ | 56,254 | $ | 78,172 | ||
| (12) | Guarantor Financial Information |
The following tables set forth condensed consolidating financial information of SunCom (the “Parent Company”), for all of SunCom’s subsidiaries other than Triton PCS License Company L.L.C. and Triton PCS Property Company L.L.C. (collectively, the “Subsidiary Guarantors”) and Triton PCS License Company L.L.C. and Triton PCS Property Company L.L.C. (together, the “Subsidiary Non-Guarantors”). Set forth below are the balance sheet as of September 30, 2005 and December 31, 2004, the statement of operations for the three and nine months ended September 30, 2005 and 2004 and the statement of cash flows for the nine months ended September 30, 2005 and 2004 for the Parent Company, the Subsidiary Guarantors and the Subsidiary Non-Guarantors.
12
Table of Contents
SUNCOM WIRELESS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
Consolidating Balance Sheet as of December 31, 2004
(amounts in thousands)
| Parent Company | Subsidiary Guarantors | Subsidiary Non-Guarantors | Eliminations | Consolidated | |||||||||||||||
ASSETS: | |||||||||||||||||||
Current assets: | |||||||||||||||||||
Cash and cash equivalents | $ | 8,143 | $ | 208 | $ | — | $ | — | $ | 8,351 | |||||||||
Short-term investments | 305,500 | — | — | — | 305,500 | ||||||||||||||
Accounts receivable, net of allowance for doubtful accounts | 13 | 79,277 | — | — | 79,290 | ||||||||||||||
Accounts receivable – roaming partners | — | 18,348 | — | — | 18,348 | ||||||||||||||
Due from related parties | 1,976 | 5,373 | — | — | 7,349 | ||||||||||||||
Inventory, net | — | 18,216 | — | — | 18,216 | ||||||||||||||
Prepaid expenses | 71 | 6,470 | 5,070 | — | 11,611 | ||||||||||||||
Intercompany receivable | 7,119 | 241,299 | — | (248,418 | ) | — | |||||||||||||
Other current assets | 316 | 5,490 | 5,000 | — | 10,806 | ||||||||||||||
Total current assets | 323,138 | 374,681 | 10,070 | (248,418 | ) | 459,471 | |||||||||||||
Long term assets: | |||||||||||||||||||
Property and equipment, net | — | 813,814 | 313 | — | 814,127 | ||||||||||||||
Investments in subsidiaries | 1,616,466 | 393,397 | — | (2,009,863 | ) | — | |||||||||||||
Intangible assets, net | 7,210 | 194,988 | 781,854 | — | 984,052 | ||||||||||||||
Other long-term assets | — | 4,405 | 775 | — | 5,180 | ||||||||||||||
Total assets | $ | 1,946,814 | $ | 1,781,285 | $ | 793,012 | $ | (2,258,281 | ) | $ | 2,262,830 | ||||||||
LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT): | |||||||||||||||||||
Current liabilities: | |||||||||||||||||||
Accounts payable | $ | — | $ | 74,020 | $ | 11,876 | $ | — | $ | 85,896 | |||||||||
Accrued liabilities | 23,574 | 43,791 | — | — | 67,365 | ||||||||||||||
Current portion of long-term debt | 2,500 | 984 | — | — | 3,484 | ||||||||||||||
Other current liabilities | — | 23,984 | 248,418 | (248,418 | ) | 23,984 | |||||||||||||
Total current liabilities | 26,074 | 142,779 | 260,294 | (248,418 | ) | 180,729 | |||||||||||||
Long-term debt: | |||||||||||||||||||
Capital lease obligations | — | 269 | — | — | 269 | ||||||||||||||
Senior secured term loan | 247,500 | — | — | — | 247,500 | ||||||||||||||
Senior notes | 712,055 | — | — | — | 712,055 | ||||||||||||||
Total senior long-term debt | 959,555 | 269 | — | — | 959,824 | ||||||||||||||
Subordinated notes | 728,494 | — | — | — | 728,494 | ||||||||||||||
Total long-term debt | 1,688,049 | 269 | — | — | 1,688,318 | ||||||||||||||
Deferred income taxes, net | — | — | 139,321 | — | 139,321 | ||||||||||||||
Deferred revenue | — | 659 | — | — | 659 | ||||||||||||||
Deferred gain on sale of property and equipment | — | 19,099 | — | — | 19,099 | ||||||||||||||
Other long-term liabilities | — | 2,013 | — | — | 2,013 | ||||||||||||||
Total liabilities | 1,714,123 | 164,819 | 399,615 | (248,418 | ) | 2,030,139 | |||||||||||||
Commitments and contingencies | — | — | — | — | — | ||||||||||||||
Stockholder’s equity (deficit): | |||||||||||||||||||
Common Stock, $0.01 par value, 1,000 shares authorized; 100 shares issued and outstanding as of December 31, 2004 | — | — | — | — | — | ||||||||||||||
Additional paid-in-capital | 560,934 | 1,463,477 | 495,456 | (1,958,933 | ) | 560,934 | |||||||||||||
Accumulated deficit | (313,417 | ) | 152,989 | (102,059 | ) | (50,930 | ) | (313,417 | ) | ||||||||||
SunCom Wireless Holdings, Inc. common stock held in trust | (94 | ) | — | — | — | (94 | ) | ||||||||||||
Deferred compensation | (14,732 | ) | — | — | — | (14,732 | ) | ||||||||||||
Total stockholder’s equity (deficit) | 232,691 | 1,616,466 | 393,397 | (2,009,863 | ) | 232,691 | |||||||||||||
Total liabilities and stockholder’s equity (deficit) | $ | 1,946,814 | $ | 1,781,285 | $ | 793,012 | $ | (2,258,281 | ) | $ | 2,262,830 | ||||||||
13
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SUNCOM WIRELESS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
Consolidating Statement of Operations for the Three Months Ended September 30, 2004
(amounts in thousands)
| Parent Company | Subsidiary Guarantors | Subsidiary Non-Guarantors | Eliminations | Consolidated | |||||||||||||||
Revenues: | |||||||||||||||||||
Service | $ | — | $ | 150,272 | $ | — | $ | — | $ | 150,272 | |||||||||
Roaming | — | 43,971 | — | — | 43,971 | ||||||||||||||
Equipment | — | 18,000 | — | — | 18,000 | ||||||||||||||
Total revenue | — | 212,243 | — | — | 212,243 | ||||||||||||||
Expenses: | |||||||||||||||||||
Cost of service | — | 52,672 | 10,418 | — | 63,090 | ||||||||||||||
Cost of equipment | — | 29,863 | — | — | 29,863 | ||||||||||||||
Selling, general and administrative | 25 | 51,635 | 3,108 | — | 54,768 | ||||||||||||||
Non-cash compensation | — | 4,924 | — | — | 4,924 | ||||||||||||||
Depreciation and asset disposal | — | 43,454 | — | — | 43,454 | ||||||||||||||
Amortization | — | 3,489 | — | — | 3,489 | ||||||||||||||
Income (loss) from operations | (25 | ) | 26,206 | (13,526 | ) | — | 12,655 | ||||||||||||
Interest expense | (31,544 | ) | (75 | ) | — | — | (31,619 | ) | |||||||||||
Other expense | (52 | ) | — | — | — | (52 | ) | ||||||||||||
Interest and other income | 348 | — | — | — | 348 | ||||||||||||||
Income (loss) before taxes | (31,273 | ) | 26,131 | (13,526 | ) | — | (18,668 | ) | |||||||||||
Income tax provision | — | (425 | ) | (3,053 | ) | — | (3,478 | ) | |||||||||||
Net income (loss) before equity in earnings of subsidiaries | (31,273 | ) | 25,706 | (16,579 | ) | — | (22,146 | ) | |||||||||||
Equity in earnings of subsidiaries | 9,127 | (16,579 | ) | — | 7,452 | — | |||||||||||||
Net income (loss) | $ | (22,146 | ) | $ | 9,127 | $ | (16,579 | ) | $ | 7,452 | $ | (22,146 | ) | ||||||
Consolidating Statement of Operations for the Nine Months Ended September 30, 2004
(amounts in thousands)
| Parent Company | Subsidiary Guarantors | Subsidiary Non-Guarantors | Eliminations | Consolidated | |||||||||||||||
Revenues: | |||||||||||||||||||
Service | $ | — | $ | 453,394 | $ | — | $ | — | $ | 453,394 | |||||||||
Roaming | — | 116,127 | — | — | 116,127 | ||||||||||||||
Equipment | — | 53,171 | — | — | 53,171 | ||||||||||||||
Total revenue | — | 622,692 | — | — | 622,692 | ||||||||||||||
Expenses: | |||||||||||||||||||
Cost of service | — | 155,971 | 30,061 | — | 186,032 | ||||||||||||||
Cost of equipment | — | 94,206 | — | — | 94,206 | ||||||||||||||
Selling, general and administrative | 38 | 168,488 | 9,295 | — | 177,821 | ||||||||||||||
Non-cash compensation | — | 16,418 | — | — | 16,418 | ||||||||||||||
Depreciation and asset disposal | — | 124,478 | — | — | 124,478 | ||||||||||||||
Amortization | — | 7,091 | — | — | 7,091 | ||||||||||||||
Income (loss) from operations | (38 | ) | 56,040 | (39,356 | ) | — | 16,646 | ||||||||||||
Interest expense | (93,631 | ) | (246 | ) | — | — | (93,877 | ) | |||||||||||
Other expense | (52 | ) | — | — | — | (52 | ) | ||||||||||||
Interest and other income | 919 | — | — | — | 919 | ||||||||||||||
Income (loss) before taxes | (92,802 | ) | 55,794 | (39,356 | ) | — | (76,364 | ) | |||||||||||
Income tax provision | — | (1,256 | ) | (9,079 | ) | — | (10,335 | ) | |||||||||||
Net income (loss) before equity in earnings of subsidiaries | (92,802 | ) | 54,538 | (48,435 | ) | — | (86,699 | ) | |||||||||||
Equity in earnings of subsidiaries | 6,103 | (48,435 | ) | — | 42,332 | — | |||||||||||||
Net income (loss) | $ | (86,699 | ) | $ | 6,103 | $ | (48,435 | ) | $ | 42,332 | $ | (86,699 | ) | ||||||
14
Table of Contents
SUNCOM WIRELESS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
Consolidating Statement of Cash Flows for the Nine Months Ended September 30, 2004
(amounts in thousands)
| Parent Company | Subsidiary Guarantors | Subsidiary Non-Guarantors | Eliminations | Consolidated | ||||||||||||||||
Cash flows from operating activities: | ||||||||||||||||||||
Net cash provided by (used in) operating activities | $ | (74,899 | ) | $ | 185,834 | $ | (38,367 | ) | $ | — | $ | 72,568 | ||||||||
Cash flows from investing activities: | ||||||||||||||||||||
Purchase of available for sale securities | (264,300 | ) | — | — | — | (264,300 | ) | |||||||||||||
Proceeds from sale of available for sale securities | 266,850 | — | — | — | 266,850 | |||||||||||||||
Capital expenditures | — | (56,254 | ) | — | — | (56,254 | ) | |||||||||||||
Proceeds from sale of property and equipment, net | — | 558 | — | — | 558 | |||||||||||||||
Other | — | (1,746 | ) | — | — | (1,746 | ) | |||||||||||||
Investment in subsidiaries | (37,760 | ) | — | — | 37,760 | — | ||||||||||||||
Dividends received | 37,760 | — | — | (37,760 | ) | — | ||||||||||||||
Net intercompany loans | — | (113,519 | ) | — | 113,519 | — | ||||||||||||||
Net cash provided by (used in) investing activities | 2,550 | (170,961 | ) | — | 113,519 | (54,892 | ) | |||||||||||||
Cash flows from financing activities: | ||||||||||||||||||||
Change in bank overdraft | — | (12,516 | ) | — | — | (12,516 | ) | |||||||||||||
Capital contribution from parent | — | 37,760 | — | (37,760 | ) | — | ||||||||||||||
Advances to related party | — | (177 | ) | — | — | (177 | ) | |||||||||||||
Other | (119 | ) | — | — | — | (119 | ) | |||||||||||||
Dividends paid | — | (37,760 | ) | — | 37,760 | — | ||||||||||||||
Principal payment under capital lease obligations | — | (1,162 | ) | — | — | (1,162 | ) | |||||||||||||
Net intercompany loans | 75,152 | — | 38,367 | (113,519 | ) | — | ||||||||||||||
Net cash provided by (used in) financing activities | 75,033 | (13,855 | ) | 38,367 | (113,519 | ) | (13,974 | ) | ||||||||||||
Net increase in cash and cash equivalents | 2,684 | 1,018 | — | — | 3,702 | |||||||||||||||
Cash and cash equivalents, beginning of period | 2,914 | 452 | — | — | 3,366 | |||||||||||||||
Cash and cash equivalents, end of period | $ | 5,598 | $ | 1,470 | $ | — | $ | — | $ | 7,068 | ||||||||||
15
Table of Contents
SUNCOM WIRELESS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
Consolidating Balance Sheet as of September 30, 2005
(amounts in thousands)
| Parent Company | Subsidiary Guarantors | Subsidiary Non-Guarantors | Eliminations | Consolidated | ||||||||||||||||
ASSETS: | ||||||||||||||||||||
Current assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 14,765 | $ | 5,296 | $ | — | $ | $ | 20,061 | |||||||||||
Short-term investments | 220,775 | — | — | — | 220,775 | |||||||||||||||
Accounts receivable, net of allowance for doubtful accounts | — | 91,894 | — | — | 91,894 | |||||||||||||||
Accounts receivable – roaming partners | — | 18,869 | — | — | 18,869 | |||||||||||||||
Due from related parties | — | 5,662 | — | — | 5,662 | |||||||||||||||
Inventory, net | — | 19,387 | — | — | 19,387 | |||||||||||||||
Prepaid expenses | 15 | 7,129 | 7,460 | — | 14,604 | |||||||||||||||
Intercompany receivable | 7,464 | 284,232 | — | (291,696 | ) | — | ||||||||||||||
Other current assets | 326 | 23,071 | — | — | 23,397 | |||||||||||||||
Total current assets | 243,345 | 455,540 | 7,460 | (291,696 | ) | 414,649 | ||||||||||||||
Long term assets: | ||||||||||||||||||||
Property and equipment, net | — | 700,673 | 313 | — | 700,986 | |||||||||||||||
Investments in subsidiaries | 1,424,372 | 334,274 | — | (1,758,646 | ) | — | ||||||||||||||
Intangible assets, net | 6,250 | 127,527 | 779,466 | — | 913,243 | |||||||||||||||
Other long-term assets | — | 3,785 | 750 | — | 4,535 | |||||||||||||||
Total assets | $ | 1,673,967 | $ | 1,621,799 | $ | 787,989 | ($2,050,342 | ) | $ | 2,033,413 | ||||||||||
LIABILITIES AND STOCKHOLDER’S EQUITY (DEFICIT): | ||||||||||||||||||||
Current liabilities: | ||||||||||||||||||||
Accounts payable | $ | — | $ | 78,181 | $ | 14,885 | $ | — | $ | 93,066 | ||||||||||
Accrued liabilities | 39,489 | 40,897 | — | — | 80,386 | |||||||||||||||
Current portion of long-term debt | 2,500 | 326 | — | — | 2,826 | |||||||||||||||
Other current liabilities | — | 21,397 | 291,696 | (291,696 | ) | 21,397 | ||||||||||||||
Total current liabilities | 41,989 | 140,801 | 306,581 | (291,696 | ) | 197,675 | ||||||||||||||
Long-term debt: | ||||||||||||||||||||
Capital lease obligations | — | 1,029 | — | — | 1,029 | |||||||||||||||
Senior secured term loan | 245,625 | — | — | — | �� | 245,625 | ||||||||||||||
Senior notes | 712,867 | — | — | — | 712,867 | |||||||||||||||
Total senior long-term debt | 958,492 | 1,029 | — | — | 959,521 | |||||||||||||||
Subordinated notes | 729,864 | — | — | — | 729,864 | |||||||||||||||
Total long-term debt | 1,688,356 | 1,029 | — | — | 1,689,385 | |||||||||||||||
Deferred income taxes, net | — | — | 147,134 | — | 147,134 | |||||||||||||||
Deferred revenue | — | 1,394 | — | — | 1,394 | |||||||||||||||
Deferred gain on sale of property and equipment | — | 51,966 | — | — | 51,966 | |||||||||||||||
Other long-term liabilities | — | 2,237 | — | — | 2,237 | |||||||||||||||
Total liabilities | 1,730,345 | 197,427 | 453,715 | (291,696 | ) | 2,089,791 | ||||||||||||||
Commitments and contingencies | — | — | — | — | — | |||||||||||||||
Stockholder’s equity (deficit): | ||||||||||||||||||||
Common Stock, $0.01 par value, 1,000 shares authorized; 100 shares issued and outstanding as of September 30, 2005 | — | — | — | — | — | |||||||||||||||
Additional paid-in-capital | 562,383 | 1,508,995 | 495,456 | (2,004,451 | ) | 562,383 | ||||||||||||||
Accumulated deficit | (610,295 | ) | (84,623 | ) | (161,182 | ) | 245,805 | (610,295 | ) | |||||||||||
SunCom Wireless Holdings, Inc. common stock held in trust | (188 | ) | — | — | — | (188 | ) | |||||||||||||
Deferred compensation | (8,278 | ) | — | — | — | (8,278 | ) | |||||||||||||
Total stockholder’s equity (deficit) | (56,378 | ) | 1,424,372 | 334,274 | (1,758,646 | ) | (56,378 | ) | ||||||||||||
Total liabilities and stockholder’s equity (deficit) | $ | 1,673,967 | $ | 1,621,799 | $ | 787,989 | ($2,050,342 | ) | $ | 2,033,413 | ||||||||||
16
Table of Contents
SUNCOM WIRELESS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
Consolidating Statement of Operations for the Three Months Ended September 30, 2005
(amounts in thousands)
| Parent Company | Subsidiary Guarantors | Subsidiary Non-Guarantors | Eliminations | Consolidated | |||||||||||||||
Revenues: | |||||||||||||||||||
Service | $ | — | $ | 156,087 | $ | — | $ | — | $ | 156,087 | |||||||||
Roaming | — | 34,287 | — | — | 34,287 | ||||||||||||||
Equipment | — | 24,113 | — | — | 24,113 | ||||||||||||||
Total revenue | — | 214,487 | — | — | 214,487 | ||||||||||||||
Expenses: | |||||||||||||||||||
Cost of service | — | 56,058 | 13,808 | — | 69,866 | ||||||||||||||
Cost of equipment | — | 45,210 | — | — | 45,210 | ||||||||||||||
Selling, general and administrative | 23 | 90,354 | 3,476 | — | 93,853 | ||||||||||||||
Non-cash compensation | — | 1,408 | — | — | 1,408 | ||||||||||||||
Depreciation and asset disposal | — | 70,072 | — | — | 70,072 | ||||||||||||||
Amortization | — | 14,288 | — | — | 14,288 | ||||||||||||||
Loss from operations | (23 | ) | (62,903 | ) | (17,284 | ) | — | (80,210 | ) | ||||||||||
Interest expense | (37,321 | ) | (61 | ) | — | — | (37,382 | ) | |||||||||||
Other expense | — | (83 | ) | — | (83 | ) | |||||||||||||
Interest and other income | 2,205 | 79 | — | — | 2,284 | ||||||||||||||
Loss before taxes | (35,139 | ) | (62,968 | ) | (17,284 | ) | — | (115,391 | ) | ||||||||||
Income tax provision | — | (702 | ) | (2,577 | ) | — | (3,279 | ) | |||||||||||
Loss before equity in earnings of subsidiaries | (35,139 | ) | (63,670 | ) | (19,861 | ) | — | (118,670 | ) | ||||||||||
Equity in earnings of subsidiaries | (83,531 | ) | (19,861 | ) | — | 103,392 | — | ||||||||||||
Net income (loss) | ($118,670 | ) | ($83,531 | ) | ($19,861 | ) | $ | 103,392 | ($118,670 | ) | |||||||||
Consolidating Statement of Operations for the Nine Months Ended September 30, 2005
(amounts in thousands)
| Parent Company | Subsidiary Guarantors | Subsidiary Non-Guarantors | Eliminations | Consolidated | |||||||||||||||
Revenues: | |||||||||||||||||||
Service | $ | — | $ | 485,415 | $ | — | $ | — | $ | 485,415 | |||||||||
Roaming | — | 81,096 | — | — | 81,096 | ||||||||||||||
Equipment | — | 64,809 | — | — | 64,809 | ||||||||||||||
Total revenue | — | 631,320 | — | — | 631,320 | ||||||||||||||
Expenses: | |||||||||||||||||||
Cost of service | — | 157,168 | 39,092 | — | 196,260 | ||||||||||||||
Cost of equipment | — | 129,367 | — | — | 129,367 | ||||||||||||||
Selling, general and administrative | 70 | 251,010 | 9,830 | — | 260,910 | ||||||||||||||
Non-cash compensation | — | 7,809 | — | — | 7,809 | ||||||||||||||
Depreciation and asset disposal | — | 170,983 | — | — | 170,983 | ||||||||||||||
Amortization | — | 46,860 | — | — | 46,860 | ||||||||||||||
Loss from operations | (70 | ) | (131,877 | ) | (48,922 | ) | — | (180,869 | ) | ||||||||||
Interest expense | (110,968 | ) | (180 | ) | — | — | (111,148 | ) | |||||||||||
Other expense | — | (157 | ) | — | — | (157 | ) | ||||||||||||
Interest and other income | 6,254 | 79 | — | — | 6,333 | ||||||||||||||
Loss before taxes | (104,784 | ) | (132,135 | ) | (48,922 | ) | — | (285,841 | ) | ||||||||||
Income tax provision | — | (836 | ) | (10,201 | ) | — | (11,037 | ) | |||||||||||
Loss before equity in earnings of subsidiaries | (104,784 | ) | (132,971 | ) | (59,123 | ) | — | (296,878 | ) | ||||||||||
Equity in earnings of subsidiaries | (192,094 | ) | (59,123 | ) | — | 251,217 | — | ||||||||||||
Net income (loss) | ($296,878 | ) | ($192,094 | ) | ($59,123 | ) | $ | 251,217 | ($296,878 | ) | |||||||||
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SUNCOM WIRELESS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
Consolidating Statement of Cash Flows for the Nine Months Ended September 30, 2005
(amounts in thousands)
| Parent Company | Subsidiary Guarantors | Subsidiary Non-Guarantors | Eliminations | Consolidated | ||||||||||||||||
Cash flows from operating activities: | ||||||||||||||||||||
Net cash provided by (used in) operating activities | ($85,665 | ) | $ | 89,066 | ($48,278 | ) | $ | — | ($44,877 | ) | ||||||||||
Cash flows from investing activities: | ||||||||||||||||||||
Purchase of available for sale securities | (860,525 | ) | — | — | — | (860,525 | ) | |||||||||||||
Proceeds from sale of available for sale securities | 945,250 | — | — | — | 945,250 | |||||||||||||||
Proceeds from sale of property and equipment | — | 47,858 | — | — | 47,858 | |||||||||||||||
Refund of FCC license deposit | — | — | 5,000 | — | 5,000 | |||||||||||||||
Capital expenditures | — | (78,172 | ) | — | — | (78,172 | ) | |||||||||||||
Other | — | (959 | ) | — | — | (959 | ) | |||||||||||||
Investment in subsidiaries | (45,518 | ) | — | — | 45,518 | — | ||||||||||||||
Dividends received | 45,518 | — | — | (45,518 | ) | — | ||||||||||||||
Net intercompany loans | — | (50,767 | ) | — | 50,767 | — | ||||||||||||||
Net cash provided by (used in) investing activities | 84,725 | (82,040 | ) | 5,000 | 50,767 | 58,452 | ||||||||||||||
Cash flows from financing activities: | ||||||||||||||||||||
Payments under senior secured term loan | (1,875 | ) | — | — | — | (1,875 | ) | |||||||||||||
Change in bank overdraft | — | (752 | ) | — | — | (752 | ) | |||||||||||||
Other | (28 | ) | — | — | — | (28 | ) | |||||||||||||
Principal payment under capital lease obligations | — | (897 | ) | — | — | (897 | ) | |||||||||||||
Repayments from (advances to) related parties | 1,976 | (289 | ) | — | — | 1,687 | ||||||||||||||
Dividends paid | — | (45,518 | ) | — | 45,518 | — | ||||||||||||||
Capital contribution from parent | — | 45,518 | — | (45,518 | ) | — | ||||||||||||||
Net intercompany loans | 7,489 | — | 43,278 | (50,767 | ) | — | ||||||||||||||
Net cash provided by (used in) financing activities | 7,562 | (1,938 | ) | 43,278 | (50,767 | ) | (1,865 | ) | ||||||||||||
Net increase in cash and cash equivalents | 6,622 | 5,088 | — | — | 11,710 | |||||||||||||||
Cash and cash equivalents, beginning of period | 8,143 | 208 | — | — | 8,351 | |||||||||||||||
Cash and cash equivalents, end of period | $ | 14,765 | $ | 5,296 | $ | — | $ | — | $ | 20,061 | ||||||||||
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| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
General
In this section, the terms “SunCom,” “we,” “our” and similar terms refer collectively to SunCom Wireless, Inc., and its consolidated subsidiaries and “Holdings” refers to our parent corporation, SunCom Wireless Holdings, Inc., formerly known as Triton PCS Holdings, Inc. The following discussion and analysis is based upon our financial statements as of the dates and for the periods presented in this section. You should read this discussion and analysis in conjunction with our financial statements and the related notes contained elsewhere in this report.
Forward-Looking Statements
When used in this Form 10-Q and in future filings by us with the Securities and Exchange Commission, in our press releases and in oral statements made with the approval of an authorized executive officer of SunCom, statements concerning possible or assumed future results of operations of SunCom and those preceded by, followed by or that include the words “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of such terms and other comparable terminology (including confirmations by an authorized executive officer of SunCom or any such expressions made by a third party with respect to SunCom) are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Readers are cautioned not to place undue reliance on any such forward-looking statements, each of which speaks only as of the date made. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. For a discussion of certain risks and uncertainties that could affect our results of operations, liquidity and capital resources, see the “Risk Factors” section of our prospectus dated May 6, 2005, as filed with the Securities and Exchange Commission as part of a post-effective amendment to our registration statements covering our outstanding notes. We have no obligation to release publicly the result of any revisions, which may be made to any forward-looking statements to reflect anticipated or unanticipated events or circumstances occurring after the date of such statements.
Overview
We are a leading provider of digital wireless communications services in the southeastern United States, Puerto Rico and the U.S. Virgin Islands. As of September 30, 2005, our wireless communications network covered a population of approximately 14.3 million people in a contiguous geographic area encompassing portions of North Carolina, South Carolina, Tennessee, Georgia and Kentucky. In addition, we operate a wireless communications network covering a population of approximately 4.0 million people in Puerto Rico and the U.S. Virgin Islands.
SunCom provides its wireless communications services under the SunCom Wireless brand name. From 1998 until December 2004, we were a member of the AT&T Wireless network and a strategic partner with AT&T Wireless. Beginning in 1998, AT&T Wireless contributed personal communication services, orPCS, licenses to us covering various markets in the southeastern United States in exchange for an equity position in Holdings. As part of our transactions with AT&T Wireless, we were granted the right to be the exclusive provider of wireless mobility services co-branded with AT&T Corp. within our markets.
In October 2004, Cingular Wireless acquired all of the outstanding stock of AT&T Wireless through a merger of a Cingular Wireless subsidiary with and into AT&T Wireless. In connection with this transaction, SunCom, AT&T Wireless and Cingular Wireless (and/or certain of their subsidiaries) entered into various agreements to modify our relationships with AT&T Wireless. Under these agreements, AT&T Wireless surrendered to Holdings, following the October 2004 consummation of the AT&T Wireless-Cingular Wireless merger, all of the equity interests in Holdings held by AT&T Wireless, and the parties concurrently terminated the agreement under which AT&T Wireless had granted us the exclusive right to provide AT&T Wireless branded wireless services within our region. The termination of the exclusivity arrangement permits the new AT&T Wireless/Cingular Wireless entity the ability to offer service in markets where they were previously prohibited and provides us the opportunity to offer service in markets where we were previously prohibited.
In addition, in December 2004, SunCom and Cingular Wireless completed an exchange of wireless network properties, pursuant to which Cingular Wireless received our network assets and customers in Virginia and we received certain AT&T Wireless network assets and customers in North Carolina, Puerto Rico and the U.S. Virgin Islands, plus $175 million in cash. This exchange transaction transformed the geographic strategic focus of our wireless network by giving us substantial new presence in the Charlotte, Raleigh/Durham and Greensboro, North Carolina markets and entry into the Puerto Rico and U.S. Virgin Islands market. Our entry into these markets allows us to operate a contiguous footprint in the Carolinas and provides us with a greater ability to grow our subscriber base. The exchange transaction also poses certain uncertainties. For example, Puerto Rico and the U.S. Virgin Islands is a new market for us, and we may not be able to successfully integrate our operations and compete in the Puerto Rico and U.S. Virgin Islands market due to the general economic, business, political and social conditions in the Caribbean region, including the effects of world events and weather conditions on tourism in Puerto Rico and
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the U.S. Virgin Islands. We also expect that the acquired North Carolina, Puerto Rico and U.S. Virgin Islands markets will generate less roaming minutes and revenue than did our former Virginia market. In addition, we may be required to make capital expenditures to upgrade and enhance the existing PCS network in the acquired markets to the same technological standard of our global system for mobile communications and general packet radio service, orGSM/GPRS, network.
A decline in roaming revenue, largely as a result of the termination of our exclusivity arrangements with AT&T Wireless, has had, and will continue to have, a negative impact on our operating margins. By growing our subscriber base and the corresponding revenue from these subscribers, we plan to offset the decline in roaming revenue with an increase in service revenue. However, service revenue has significantly lower operating margin than the roaming revenue it will be replacing. In addition, incremental expenses related to the SunCom brand launch in our recently acquired North Carolina, Puerto Rico and the U.S. Virgin Islands markets and re-launch of the brand in our previously existing markets, has had, and in the near term will continue to have, a negative impact on our operating margins. Therefore, until we further leverage our fixed costs over a larger subscriber base, our operating results will likely be lower than comparable historic periods.
Additionally, 2005 operating results have been negatively impacted by the cost to migrate our recently acquired subscribers in North Carolina and Puerto Rico to our systems. Before migrating the acquired GSM/GPRS subscribers in these markets to our systems, we needed to ensure that each subscriber’s handset was compatible with our network and billing platform. Ensuring compatibility required that each subscriber’s handset was individually converted or replaced with a new handset. Costs associated with this process are reflected in our results of operations for the nine months ended September 30, 2005. This subscriber migration was completed in the third quarter of 2005. See “Results of Operations” for further discussion regarding our outlook on service and roaming revenue, cost of service, cost of equipment and selling, general and administrative expenses.
Our strategy is to provide extensive coverage to customers within our region, to offer our customers high-quality, innovative voice and data services with coast-to-coast coverage and to benefit from roaming revenues generated by other carriers’ wireless customers who roam into our covered area.
We believe our markets are strategically attractive because of their strong demographic characteristics for wireless communications services. According to the 2002 Paul Kagan Associates Report, our service area includes 12 of the top 100 markets in the country, with population densities that are higher than the national average. We currently provide wireless voice and data services over two overlapping networks. One network utilizes time division multiple access, orTDMA, technology, and the second network utilizes GSM/GPRS technology, which is capable of providing enhanced voice and data services.
Results of Operations
Three Months Ended September 30, 2005 Compared to the Three Months Ended September 30, 2004
Subscribers
Net subscriber additions were negative 16,417 and negative 19,211 for the three months ended September 30, 2005 and 2004, respectively. This change was driven primarily by an increase in gross subscriber additions, offset partially by higher subscriber churn. The quarter-over-quarter gross subscriber addition increase was the result of a significant marketing and branding initiative associated with our launch of the SunCom brand in the recently acquired North Carolina and Puerto Rico markets and the re-launch of the SunCom brand in our previously-owned markets. Total subscribers were 919,550 as of September 30, 2005, an increase of 19,688, or 2.2%, over our subscriber total as of September 30, 2004. The increase in total subscribers was attributable to the net subscriber increase of 71,430 resulting from the exchange transaction with AT&T Wireless and Cingular Wireless in December 2004, partially offset by the sale of 29,139 subscribers to Cingular Wireless in September 2005 and negative net subscriber additions since the fourth quarter of 2004.
Churn
Subscriber churn was 3.8% and 3.1% for the three months ended September 30, 2005 and 2004, respectively. This increase resulted primarily from increased voluntary subscriber deactivations due to the transition’s negative impact on the recently acquired subscribers in the North Carolina and Puerto Rico markets. In addition, there were approximately 10,000 prepaid subscribers acquired from Cingular Wireless in the exchange transaction that were deactivated as a result of completing the billing system migration and SunCom not offering a comparable prepaid product. Last, involuntary churn increased due to deactivations resulting from certain service offerings to credit challenged subscribers, which are prone to higher churn. Subscriber churn is calculated by dividing subscriber deactivations by our average subscriber base for the respective period. We believe that churn may decrease in the fourth quarter of 2005 as a result of the reduced impact of the exchange transaction with AT&T Wireless and Cingular Wireless.
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Average Revenue Per User
Average revenue per user, orARPU, was $54.60 and $55.32 for the three months ended September 30, 2005 and 2004, respectively. ARPU reflects the average amount billed to subscribers based on rate plan and calling feature offerings. ARPU is calculated by dividing service revenue, excluding service revenue credits made to existing subscribers and revenue not generated by wireless subscribers, by our average subscriber base for the respective period. For more details regarding our calculation of ARPU, refer to “Reconciliation of Non-GAAP Financial Measures” below. The ARPU decline of $0.72, or 1.3%, was primarily the result of a decrease in average access revenue per subscriber and a decrease in the amount of cost recovery fees billed as the result of our “Truth in Wireless” pricing strategy, partially offset by an increase in revenue from new features offered for an additional fee and an increase in billed airtime. Although airtime increased, it was negatively impacted in the current quarter due to higher than usual billing adjustments issued to subscribers as a result of the disruption caused by the migration of the recently acquired subscribers in North Carolina and Puerto Rico to our billing system. As the result of the anticipated mix of new rate plan offerings, we expect ARPU to remain relatively flat in the foreseeable future.
Revenues
Total revenue increased 1.1% to $214.5 million for the three months ended September 30, 2005 from $212.2 million for the three months ended September 30, 2004. Service revenue for the three months ended September 30, 2005 was $156.1 million, an increase of $5.8 million, or 3.9%, compared to $150.3 million for the three months ended September 30, 2004. The increase in service revenue was due primarily to a larger subscriber base offset by lower ARPU. We expect subscriber growth in the future, and hence, we expect service revenue to continue to increase. Roaming revenue was $34.3 million for the three months ended September 30, 2005, a decrease of $9.7 million, or 22.0%, compared to $44.0 million for the three months ended September 30, 2004. The decrease in roaming revenue was primarily the result of reductions in roaming rates and minutes of use associated with the termination of our previously existing AT&T Wireless roaming agreement and the amendment of our Cingular Wireless roaming agreement in October 2004. Although we expect the growth of the wireless industry to continue, we believe that our roaming revenues will decrease in the future due to the industry trend of declining roaming rates and the impact of AT&T Wireless’ merger with Cingular Wireless on our roaming traffic. Equipment revenue was $24.1 million for the three months ended September 30, 2005, an increase of $6.1 million, or 33.9%, compared to $18.0 million for the three months ended September 30, 2004. Equipment revenue includes the revenue earned on the sale of a handset or handset accessories to new and existing subscribers. The equipment revenue increase was due primarily to an increase in gross subscriber additions, an increase in handset sales to existing subscribers and an increase in handset prices resulting from the transition of TDMA handsets to GSM/GPRS handsets, which offer more advanced capabilities.
Cost of Service
Cost of service (excluding amortization, depreciation, asset disposal and non-cash compensation) was $69.9 million for the three months ended September 30, 2005, an increase of $6.8 million, or 10.8%, compared to $63.1 million for the three months ended September 30, 2004. This increase was primarily related to the increased costs of operating two fully-deployed network technologies over an expanded market footprint as a result of the exchange transaction with AT&T Wireless and Cingular Wireless in December 2004. Our expanded network and subscriber growth resulted in increased interconnect fees of $3.9 million and cell site and network repair and maintenance costs of $4.6 million. These increases were partially offset by a decline in incollect costs of $4.1 million resulting primarily from the termination of our AT&T Wireless roaming agreement and the amendment of our Cingular Wireless roaming agreement in October 2004, which resulted in lower per minute rates that are in line with current market rates. As a result of the variable components of cost of service, such as interconnect and toll, our cost of service may increase in conjunction with the growth of our subscriber base. Cost of service as a percentage of service revenue was 44.8% and 42.0% for the three months ended September 30, 2005 and 2004, respectively. The increase of 2.8% was attributable to higher network costs in certain areas, such as interconnect and cell site expenses, outpacing the increase in service revenue combined with a lower incollect rate per minute of use. Cost of service as a percentage of service revenue may decline in the future as we expect to leverage the fixed components of cost of service, such as cell site rent, against increased revenue.
Cost of Equipment
Cost of equipment was $45.2 million for the three months ended September 30, 2005, an increase of $15.3 million, or 51.2%, compared to $29.9 million for the three months ended September 30, 2004. Cost of equipment includes the cost associated with the sale of a handset or handset accessories to new and existing subscribers and the cost associated with providing certain acquired subscribers with a new handset prior to their migration to our systems. The increase in cost of equipment was largely a result of costs associated with providing certain subscribers in the acquired North Carolina and Puerto Rico markets with a new handset compatible with our systems. This migration resulted in approximately $7.7 million of equipment costs in the third quarter of 2005. In addition, sales to new subscribers increased as the result of higher gross subscriber additions, and sales to existing subscribers increased due to their transition from TDMA handsets to GSM/GPRS handsets.
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Selling, General and Administrative Expense
Selling, general and administrative expenses (excluding amortization, depreciation, asset disposal and non-cash compensation) were $93.9 million for the three months ended September 30, 2005, an increase of $39.1 million, or 71.4% compared to $54.8 million for the three months ended September 30, 2004. Selling expenses increased by $16.8 million, or 85.7%, primarily due to an increase in advertising and promotional costs of $10.0 million resulting from efforts to increase our advertising presence in markets we serve, higher commission expense of $4.3 million as the result of increased gross subscriber additions and higher fixed costs, such as retail store rent and personnel costs of $2.5 million due to increased sales distribution as the result of exchange transaction with AT&T Wireless and Cingular Wireless in December 2004. General and administrative expenses increased $22.3 million, or 63.4%, primarily due to increases in customer care costs of approximately $12.0 million, of which approximately $7.4 million was as a result of migrating recently acquired subscribers in North Carolina, Puerto Rico and the U.S. Virgin Islands to our systems. The incremental migration costs in customer care include such items as temporary help, temporary facilities, fees related to number porting and amounts paid to indirect agents to assist with the subscriber migration process. The remainder of the increase in customer care costs was largely due to outsourcing customer care in Puerto Rico. In addition, there was an incremental property tax expense of approximately $1.2 million related to higher property tax rates in the newly acquired Puerto Rico market when compared to our historic experience. Also, bad debt expense was approximately $2.4 million higher due to certain service offerings to credit challenged subscribers, and legal expense was approximately $1.6 million higher than the comparable period in 2004 due to the termination of our planned purchase of Urban Comm—North Carolina, Inc. and the related write-off of deferred legal fees. See Note 7 to our consolidated financial statements included in Item 1 of this Form 10-Q for more information. As a result of the variable components of selling, general and administrative expense, such as customer care personnel and billing costs, our selling, general and administrative expenses may increase as a function of the growth of our subscriber base. General and administrative expense as a percentage of service revenue was 36.8% and 23.4% for the three months ended September 30, 2005 and 2004, respectively. This 13.4% increase is primarily attributable to an increase in the expenses discussed above. Because we substantially completed the integration of our recently acquired North Carolina, Puerto Rico and U.S. Virgin Islands markets in the third quarter of 2005, general and administrative expenses as a percentage of service revenue should decline in the near term. General and administrative expense as a percent of service revenue may further decline in the future as we expect to leverage our fixed general and administrative costs, such as headcount and facilities costs, against increased revenue.
Cost Per Gross Addition
Cost per gross addition, orCPGA, was $453 and $415 for the three months ended September 30, 2005 and 2004, respectively. The CPGA increase of $38 was primarily the result of increased advertising and promotional spending in the third quarter of 2005 related to our efforts to increase our advertising presence in the markets we serve, partially offset by lower net equipment costs and greater leverage on fixed acquisition costs, such as salaries and rent, due to higher gross subscriber additions. CPGA is calculated by dividing the sum of equipment margin for handsets sold to new subscribers (equipment revenues less cost of equipment, which costs have historically exceeded the related revenues) and selling expenses related to adding new subscribers by total gross subscriber additions during the relevant period. Retail customer service expenses and the equipment margin on handsets sold to existing subscribers, including handset upgrade transactions, are excluded from CPGA, as these costs are incurred specifically for existing subscribers. For more details regarding our calculation of CPGA, refer to “Reconciliation of Non-GAAP Financial Measures” below.
Non-cash Compensation Expense
Non-cash compensation expense was $1.4 million for the three months ended September 30, 2005, a decrease of $3.5 million, or 71.4%, compared to $4.9 million for the three months ended September 30, 2004. Non-cash compensation represents the amortization of Holdings’ restricted stock, valued at the date of grant, over the applicable vesting period. In addition, contributions of Holdings’ Class A common stock made to our 401(k) savings plan are also included in non-cash compensation. The decrease reflects a lower average share price for recent grants as well as a decreased number of restricted Class A common shares vesting during the quarter, compared to the same period in 2004.
Depreciation, Asset Disposal and Amortization Expense
Depreciation, asset disposal and amortization expense was $84.4 million for the three months ended September 30, 2005, an increase of $37.5 million, or 80.0%, compared to $46.9 million for the three months ended September 30, 2004. This increase was primarily attributable to a $23.9 million increase in depreciation resulting from the acceleration of the depreciation of our TDMA wireless communications equipment. This acceleration resulted from the increased rate of the migration of our TDMA subscriber base to our overlapping next generation GSM/GPRS network in the second quarter of 2005, as well as a higher rate
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of churn for these customers during 2005 than was planned. The increase was also driven by a $10.8 million increase in amortization expense relating to the intangible assets acquired in the transactions with Cingular Wireless and AT&T Wireless during the fourth quarter of 2004, including subscriber lists, income leases and the SunCom brand. Last, we recognized a $5.1 million loss on the sale of 29,139 subscribers to Cingular Wireless on September 20, 2005. See Note 10 to our consolidated financial statements included in Item 1 of this Form 10-Q for more information.
Interest Expense
Interest expense was $37.4 million, net of capitalized interest of $0.3 million, for the three months ended September 30, 2005. Interest expense was $31.6 million, net of capitalized interest of $0.2 million, for the three months ended September 30, 2004. The increase of $5.8 million, or 18.4%, relates primarily to the increase of $4.3 million of interest expense on our $250 million senior secured term loan that was entered into in November 2004. In addition, we did not receive any benefit related to the interest rate swaps that were terminated in the third and fourth quarters of 2004. These terminated swaps decreased interest expense by $1.6 million in the three months ended September 30, 2004.
We had a weighted average interest rate of 8.47% for the three months ended September 30, 2005 on our average obligation for our senior and subordinated debt as well as our senior secured term loan, compared with an 8.30% weighted average interest rate for the three months ended September 30, 2004.
Other Expense
Other expense was $0.1 million for the three months ended September 30, 2005 and the three months ended September 30, 2004. Other expense for the three months ended September 30, 2005 consisted of additional costs related to the Cingular Wireless and AT&T Wireless exchange transaction consummated in the fourth quarter of 2004.
Interest and Other Income
Interest and other income was $2.3 million for the three months ended September 30, 2005, an increase of $2.0 million, compared to $0.3 million for the three months ended September 30, 2004. This increase was due primarily to higher average cash and short-term investment balances for the quarter ended September 30, 2005.
Income Tax Expense
Income tax expense was $3.3 million for the three months ended September 30, 2005, a decrease of $0.2 million, or 5.7%, compared to $3.5 million for the three months ended September 30, 2004.
Net Loss
Net loss was $118.7 million and $22.1 million for the three months ended September 30, 2005 and 2004, respectively. The net loss increase of $96.6 million resulted primarily from the items discussed above.
Nine Months Ended September 30, 2005 Compared to the Nine Months Ended September 30, 2004
Subscribers
Net subscriber additions were negative 3,056 and positive 5,203 for the nine months ended September 30, 2005 and 2004, respectively. This decrease was driven primarily by higher subscriber churn, partially offset by an increase in gross subscriber additions.
Churn
Subscriber churn was 3.3% and 2.7% for the nine months ended September 30, 2005 and 2004, respectively. This increase resulted primarily from increased voluntary subscriber deactivations due to the transition’s negative impact on the recently acquired subscribers in the North Carolina and Puerto Rico markets. In addition, involuntary churn increased due to deactivations resulting from certain service offerings to credit challenged subscribers, which are prone to higher churn. We believe that churn may decrease in the fourth quarter of 2005 as a result of the reduced impact of the exchange transaction with AT&T Wireless and Cingular Wireless.
Average Revenue Per User
ARPU was $55.73 and $55.58 for the nine months ended September 30, 2005 and 2004, respectively. ARPU reflects the average amount billed to subscribers based on rate plan and calling feature offerings. The ARPU increase of $0.15, or 0.3%,
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was primarily the result of an increase in revenue from new features offered for an additional fee and billed airtime, partially offset by a decrease in average access revenue per subscriber and a decrease in the amount of cost recovery fees billed as the result of our “Truth in Wireless” pricing strategy.
Revenues
Total revenue increased 1.4% to $631.3 million for the nine months ended September 30, 2005 from $622.7 million for the nine months ended September 30, 2004. Service revenue for the nine months ended September 30, 2005 was $485.4 million, an increase of $32.0 million, or 7.1%, compared to $453.4 million for the nine months ended September 30, 2004. The increase in service revenue was due primarily to a larger subscriber base and slightly higher ARPU. Roaming revenue was $81.1 million for the nine months ended September 30, 2005, a decrease of $35.0 million, or 30.1%, compared to $116.1 million for the nine months ended September 30, 2004. The decrease in roaming revenue was primarily the result of reductions in roaming rates and minutes of use associated with the termination of our previously existing AT&T Wireless roaming agreement and the amendment of our Cingular Wireless roaming agreement in October 2004. Equipment revenue was $64.8 million for the nine months ended September 30, 2005, an increase of $11.6 million, or 21.8%, compared to $53.2 million for the nine months ended September 30, 2004. The equipment revenue increase was due primarily to an increase in gross subscriber additions, an increase in handset sales to existing subscribers and an increase in handset prices resulting from the transition of TDMA handsets to GSM/GPRS handsets, which offer more advanced capabilities.
Cost of Service
Cost of service (excluding amortization, depreciation, asset disposal and non-cash compensation) was $196.3 million for the nine months ended September 30, 2005, an increase of $10.3 million, or 5.5%, compared to $186.0 million for the nine months ended September 30, 2004. This increase was primarily related to the increased costs of operating two fully deployed network technologies over an expanded market footprint as a result of the exchange transaction with AT&T Wireless and Cingular Wireless in December 2004. Our expanded network and subscriber growth resulted in increased interconnect fees of $11.3 million and cell site and network repair and maintenance costs of $14.7 million. These increases were partially offset by a decline in incollect costs of $17.0 million resulting primarily from the termination of our AT&T Wireless roaming agreement and the amendment of our Cingular Wireless roaming agreement in October 2004, which resulted in lower per minute rates that are in line with current market rates. As a result of the variable components of cost of service, such as interconnect and toll, our cost of service may increase in conjunction with the growth of our subscriber base. Cost of service as a percentage of service revenue was 40.4% and 41.0% for the nine months ended September 30, 2005 and 2004, respectively. The decline of 0.6% was attributable to increased service revenue and a lower incollect rate per minute of use, partially offset by higher network costs, such as interconnect and cell site expenses.
Cost of Equipment
Cost of equipment was $129.4 million for the nine months ended September 30, 2005, an increase of $35.2 million, or 37.4%, compared to $94.2 million for the nine months ended September 30, 2004. The increase in cost of equipment was largely a result of costs associated with providing certain subscribers in the acquired North Carolina and Puerto Rico markets with a new handset compatible with our systems. This migration resulted in approximately $18.5 million of equipment costs in the first nine months of 2005. In addition, sales to new subscribers increased as the result of higher gross subscriber additions, and sales to existing subscribers increased due to their transition from TDMA handsets to GSM/GPRS handsets.
Selling, General and Administrative Expense
Selling, general and administrative expenses (excluding amortization, depreciation, asset disposal and non-cash compensation) were $260.9 million for the nine months ended September 30, 2005, an increase of $83.1 million, or 46.7%, compared to $177.8 million for the nine months ended September 30, 2004. Selling expenses increased by $34.2 million, or 48.6%, primarily due to an increase in advertising and promotional costs of $23.7 million resulting from the launch of our SunCom brand, higher commission expense of $6.2 million as the result of increased gross subscriber additions and higher fixed costs, such as retail store rent and personnel costs of $4.3 million due to increased sales distribution as the result of an exchange transaction with AT&T Wireless and Cingular Wireless in December 2004. General and administrative expenses increased $48.9 million, or 45.4%, primarily due to increases in customer care costs of approximately $27.5 million, of which approximately $17.6 million was as a result of migrating recently acquired subscribers in North Carolina, Puerto Rico and the U.S. Virgin Islands to our systems. The incremental migration costs in customer care include such items as temporary help, temporary facilities, fees related to number porting and amounts paid to indirect agents to assist with the subscriber migration process. The remainder of the increase in customer care costs was largely due to outsourcing customer care in Puerto Rico. In addition, there was an incremental property tax expense of approximately $3.3 million related to higher property tax rates in the newly acquired Puerto Rico market when compared to our historic experience. Also, bad debt expense was approximately $2.3 million higher due to certain service offerings to credit challenged subscribers, and legal expense was approximately $1.5 million higher than the comparable period in 2004 due to the termination of our planned purchase of Urban Comm – North
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Carolina, Inc. and the related write-off of deferred legal fees. As a result of the variable components of selling, general and administrative expense, such as customer care personnel and billing costs, our selling, general and administrative expenses may increase as a function of the growth of our subscriber base. General and administrative expense as a percentage of service revenue was 32.2% and 23.7% for the nine months ended September 30, 2005 and 2004, respectively. This 8.5% increase is primarily attributable to an increase in the expenses discussed above.
Cost Per Gross Addition
CPGA was $447 and $418 for the nine months ended September 30, 2005 and 2004, respectively. The CPGA increase of $29 was primarily the result of increased advertising and promotional spending in the first nine months of 2005 related to our SunCom brand launch, partially offset by lower net equipment costs and greater leverage on fixed acquisition costs, such as salaries and rent, due to higher gross subscriber additions.
Non-cash Compensation Expense
Non-cash compensation expense was $7.8 million for the nine months ended September 30, 2005, a decrease of $8.6 million, or 52.4%, compared to $16.4 million for the nine months ended September 30, 2004. The decrease reflects a lower average share price for recent grants as well as a decreased number of Holdings’ restricted Class A common shares vesting during the period, compared to the same period in 2004.
Depreciation, Asset Disposal and Amortization Expense
Depreciation, asset disposal and amortization expense was $217.8 million for the nine months ended September 30, 2005, an increase of $86.2 million, or 65.5%, compared to $131.6 million for the nine months ended September 30, 2004. This increase was primarily attributable to a $47.8 million increase in depreciation resulting from the acceleration of the depreciation of our TDMA wireless communications equipment. This acceleration resulted from the increased rate of the migration of our TDMA subscriber base to our overlapping next generation GSM/GPRS network in the second quarter of 2005, as well as a higher rate of churn for these customers during 2005 than was planned. The increase was also driven by a $39.8 million increase in amortization expense relating to the intangible assets acquired in the transactions with Cingular Wireless and AT&T Wireless during the fourth quarter of 2004, including subscriber lists, income leases and the SunCom brand. Last, we recognized a $5.1 million loss on the sale of 29,139 subscribers to Cingular Wireless on September 20, 2005. See Note 10 to our consolidated financial statements included in Item 1 of this Form 10-Q for more information. These increases were partially offset by a $7.9 million gain recognized on the sale of 160 cell towers during the second and third quarters of 2005. See Note 9 to our consolidated financial statements included in Item 1 of this Form 10-Q for more information.
Interest Expense
Interest expense was $111.1 million, net of capitalized interest of $0.7 million, for the nine months ended September 30, 2005. Interest expense was $93.9 million, net of capitalized interest of $0.7 million, for the nine months ended September 30, 2004. The increase of $17.2 million, or 18.3%, relates primarily to the increase of $11.9 million of interest expense on our $250 million senior secured term loan that was entered into in November 2004. In addition, we did not receive any benefit related to the interest rate swaps that were terminated in the third and fourth quarters of 2004. These terminated swaps decreased interest expense by $5.5 million in the nine months ended September 30, 2004.
We had a weighted average interest rate of 8.40% for the nine months ended September 30, 2005 on our average obligation for our senior and subordinated debt as well as our senior secured term loan, compared with an 8.24% weighted average interest rate for the nine months ended September 30, 2004.
Other Expense
Other expense was $0.2 million for the nine months ended September 30, 2005, an increase of $0.1 million, compared to $0.1 million for the nine months ended September 30, 2004. Other expense for the nine months ended September 30, 2005 consisted of additional costs related to the Cingular Wireless and AT&T Wireless exchange transaction consummated in the fourth quarter of 2004.
Interest and Other Income
Interest and other income was $6.3 million for the nine months ended September 30, 2005, an increase of $5.4 million, compared to $0.9 million for the nine months ended September 30, 2004. This increase was due primarily to higher average cash and short-term investment balances for the period ended September 30, 2005.
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Income Tax Expense
Income tax expense was $11.0 million for the nine months ended September 30, 2005, an increase of $0.7 million, or 6.8%, compared to $10.3 million for the nine months ended September 30, 2004. The increase stems primarily from the recognition of a greater deferred tax liability associated with the licenses that we recently acquired in the exchange transaction with Cingular Wireless and AT&T Wireless in December 2004. Pursuant to our adoption of Statement of Financial Accounting Standards No. 142, we can no longer reasonably estimate the period of reversal, if any, for the deferred tax liabilities related to our licensing costs; therefore, we will continue to incur deferred tax expense as additional deferred tax liabilities associated with the amortization of the tax basis of our FCC licenses are incurred.
Net Loss
Net loss was $296.9 million and $86.7 million for the nine months ended September 30, 2005 and 2004, respectively. The net loss increase of $210.2 million resulted primarily from the items discussed above.
Liquidity and Capital Resources
As of September 30, 2005, we had $20.1 million in cash and cash equivalents, compared to $8.4 million in cash and cash equivalents at December 31, 2004. In addition, we had $220.8 million of short-term investments as of September 30, 2005, compared to $305.5 million of short-term investments as of December 31, 2004. Net working capital was $217.0 million as of September 30, 2005 and $278.7 million as of December 31, 2004. Included in net working capital is an increased subscriber accounts receivable balance. The majority of the increased subscriber receivable balance is due to an $11.3 million purchase accounting adjustment made in the first quarter of 2005. See Note 8 to our consolidated financial statements included in Item 1 of this Form 10-Q for more information. In addition, current subscriber billing practices in the acquired North Carolina and Puerto Rico markets, among other things, have the effect of increasing accounts receivable levels when compared to accounts receivable levels prior to the exchange transaction . This increase resulted from our continued practice of billing all subscribers in the Puerto Rico market and the acquired North Carolina subscribers in arrears, rather than in advance. As the acquired North Carolina subscriber base deactivates over time, we believe that the days sales outstanding may begin to decline as we replace these acquired subscribers with bill in advance subscribers. Cash used by operating activities was $44.9 million for the nine months ended September 30, 2005, an increase of $117.5 million, compared to $72.6 million provided by operating activities for the nine months ended September 30, 2004. The increase in cash used by operating activities stems primarily from decreased roaming revenue of $35.0 million, one-time transition costs of $37.0 million incurred during the nine months ended September 30, 2005 to integrate subscribers acquired in the North Carolina and Puerto Rico footprints onto our systems and increased advertising and promotional spending of $23.7 million related to the launch of the SunCom brand. These costs were partially offset by a decrease in cash used by working capital of $10.4 million. Cash provided by investing activities was $58.5 million for the nine months ended September 30, 2005, an increase of $113.4 million, compared to $54.9 million of cash used by investing activities in the nine months ended September 30, 2004. The increase in cash provided by investing activities was primarily driven by the receipt of $47.1 million in association with our sale of wireless communication towers to Global Signal Inc. during the second and third quarters of 2005. The remaining increase was related to a net increase of $82.2 million in auction rate security sales, offset partially by an increase in capital expenditures of $21.9 million. Cash used in financing activities was $1.9 million for the nine months ended September 30, 2005, a decrease of $12.1 million, or 86.4%, compared to $14.0 million for the nine months ended September 30, 2004. The decrease in cash used by financing activities relates primarily to a $11.8 million decrease in our change in bank overdraft, $1.7 million of repayments from related parties and a $0.3 million decrease in our principal payments under capital lease obligations, offset partially by $1.9 million of repayments of our senior secured term loan.
Liquidity
We believe that cash on hand and short-term investments will be sufficient to meet our projected cash requirements for at least the next twelve months. Although we estimate that cash, cash equivalents and short-term investments will be sufficient to finance our continued growth, we may have additional capital requirements, which could be substantial, for future upgrades and advances in new technology. If necessary, we may need to access external sources of capital including the issuance of public debt securities. Our need to obtain additional cash from external sources will be impacted by our ability to reduce costs and to continue to achieve subscriber and revenue growth.
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We may from time to time seek to retire our outstanding debt securities through cash purchases and/or exchanges for other securities, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
Reconciliation of Non-GAAP Financial Measures
We utilize certain financial measures that are not calculated in accordance with accounting principles generally accepted in the United States, orGAAP, to assess our financial performance. A non-GAAP financial measure is defined as a numerical measure of a company’s financial performance that (i) excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the comparable measure calculated and presented in accordance with GAAP in the statement of income or statement of cash flows; or (ii) includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the comparable measure so calculated and presented. The discussion of each non-GAAP financial measure we use in this report appears above under “Results of Operations”. A brief description of the calculation of each measure is included where the particular measure is first discussed. Our method of computation may or may not be comparable to other similarly titled measures of other companies. The following tables reconcile our non-GAAP financial measures with our financial statements presented in accordance with GAAP.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||
Average Revenue Per User (ARPU) | 2004 | 2005 | 2004 | 2005 | ||||||||||
| (Dollars in thousands, except ARPU) | ||||||||||||||
Service revenue | $ | 150,272 | $ | 156,087 | $ | 453,394 | $ | 485,415 | ||||||
Subscriber retention credits | 675 | 2,363 | 2,886 | 3,708 | ||||||||||
Revenue not generated by wireless subscribers | — | (4,094 | ) | — | (10,626 | ) | ||||||||
Adjusted service revenue | $ | 150,947 | $ | 154,356 | $ | 456,280 | $ | 478,497 | ||||||
Average subscribers | 909,468 | 942,328 | 912,080 | 953,960 | ||||||||||
ARPU | $ | 55.32 | $ | 54.60 | $ | 55.58 | $ | 55.73 | ||||||
We believe ARPU, which calculates the average service revenue billed to an individual subscriber, is a useful measure to evaluate our past billable service revenue and assist in forecasting our future billable service revenue. ARPU is exclusive of service revenue credits made to retain existing subscribers and revenue not generated by wireless subscribers. Service revenue credits are discretionary reductions of the amount billed to a subscriber. We have no contractual obligation to issue these credits; therefore, ARPU reflects the amount subscribers have contractually agreed to pay us based on their specific usage pattern. Revenue not generated by wireless subscribers, which primarily consists of Universal Service Fund program revenue, is excluded from our calculation of ARPU, as this revenue does not reflect amounts billed to subscribers. ARPU is calculated by dividing service revenue, exclusive of service revenue credits made to existing subscribers and revenue not generated by wireless subscribers, by our average subscriber base for the respective period. For quarterly periods, average subscribers is calculated by adding subscribers at the beginning of the quarter to subscribers at the end of the quarter and dividing by two; for year to date periods, average subscribers is calculated by adding the average subscriber amount calculated for the quarterly periods during the period and dividing by the number of quarters in the period.
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Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
Cost Per Gross Addition (CPGA) | 2004 | 2005 | 2004 | 2005 | ||||||||||||
| (Dollars in thousands, except CPGA) | ||||||||||||||||
Selling expenses | $ | 19,624 | $ | 36,442 | $ | 70,278 | $ | 104,512 | ||||||||
Total cost of equipment – transactions with new subscribers | 19,524 | 23,038 | 61,539 | 69,260 | ||||||||||||
CPGA operating expenses | $ | 39,148 | $ | 59,480 | $ | 131,817 | $ | 173,772 | ||||||||
Cost of service | $ | 63,090 | $ | 69,866 | $ | 186,032 | $ | 196,260 | ||||||||
Total cost of equipment – transactions with existing subscribers | 10,339 | 22,172 | 32,667 | 60,107 | ||||||||||||
General and administrative expense | 35,144 | 57,411 | 107,543 | 156,398 | ||||||||||||
Non-cash compensation | 4,924 | 1,408 | 16,418 | 7,809 | ||||||||||||
Depreciation and asset disposal | 43,454 | 70,072 | 124,478 | 170,983 | ||||||||||||
Amortization | 3,489 | 14,288 | 7,091 | 46,860 | ||||||||||||
Total operating expenses | $ | 199,588 | $ | 294,697 | $ | 606,046 | $ | 812,189 | ||||||||
CPGA operating expenses (from above) | $ | 39,148 | $ | 59,480 | $ | 131,817 | $ | 173,772 | ||||||||
Equipment revenue – transactions with new subscribers | (12,607 | ) | (17,766 | ) | (38,182 | ) | (48,379 | ) | ||||||||
CPGA costs, net | $ | 26,541 | $ | 41,714 | $ | 93,635 | $ | 125,393 | ||||||||
Gross subscriber additions | 63,948 | 92,068 | 223,758 | 280,370 | ||||||||||||
CPGA | $ | 415 | $ | 453 | $ | 418 | $ | 447 | ||||||||
We believe CPGA is a useful measure that quantifies the costs to acquire a new subscriber. This measure also provides a gauge to compare our average acquisition costs per new subscriber to that of other wireless communication providers. CPGA is calculated by dividing the sum of equipment margin for handsets sold to new subscribers (equipment revenue less cost of equipment, which costs have historically exceeded the related revenue) and selling expenses related to adding new subscribers by total gross subscriber additions during the relevant period. Retail customer service expenses are excluded from CPGA, as these costs are incurred specifically for existing subscribers.
Inflation
We do not believe that inflation has had a material impact on our operations.
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| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are highly leveraged and, as a result, our cash flows and earnings are exposed to fluctuations in interest rates. Our debt obligations are U.S. dollar denominated. Our market risk, therefore, is the potential loss arising from adverse changes in interest rates. As of September 30, 2005, our debt can be categorized as follows (in thousands):
Fixed interest rates: | |||
Senior notes | $ | 712,867 | |
Senior subordinated notes | $ | 729,864 | |
Subject to interest rate fluctuations: | |||
Senior secured term loan | $ | 248,125 |
Our interest rate risk management program focuses on minimizing exposure to interest rate movements, setting an optimal mixture of floating and fixed rate debt and minimizing liquidity risk.
Our cash and cash equivalents consist of short-term assets having initial maturities of three months or less, and our investments consist of auction rate securities with maturities of one year or less. While these investments are subject to a degree of interest rate risk, this risk is not considered to be material relative to our overall investment income position.
If interest rates rise over the remaining term of the senior secured term loan, we would realize increased annual interest expense of approximately $1.2 million for each 50 basis point increase in rates. If interest rates decline over the remaining term of the senior secured term loan, we would realize decreased annual interest expense of approximately $1.2 million for each 50 basis point decrease in rates.
| ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Controls and Procedures.
The Chief Executive Officer and the Chief Financial Officer of SunCom (its principal executive officer and principal financial officer, respectively), as well as the Controller have concluded, based on their evaluation as of September 30, 2005, that SunCom’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) are effective to ensure that information required to be disclosed by SunCom in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and include controls and procedures designed to ensure that information required to be disclosed by SunCom in such reports is accumulated and communicated to the Company’s management, including the Chief Executive Officer, Chief Financial Officer and the Controller, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Controls.
In December 2004, we completed an exchange transaction with Cingular Wireless and AT&T Wireless that resulted in SunCom receiving certain AT&T Wireless network assets and customers in North Carolina, Puerto Rico and the U.S. Virgin Islands. In conjunction with the closing of the exchange transaction, we entered into a transition services agreement with Cingular Wireless. As part of the transition services agreement, Cingular Wireless provides us with certain financial information on a monthly basis, and we utilize that information to record the financial activity of the acquired network assets and customers. We reconcile the financial information received to supporting schedules and records provided by Cingular Wireless but we rely on the veracity and completeness of the information and records provided by Cingular Wireless. The transition was substantially completed during the third quarter of 2005. As the transition of acquired customers and network assets continues over the next few months, we will review all processes and internal controls surrounding the recording of financial activity related to the transitioned assets. There were no changes to our internal controls over financial reporting related to our previously existing business that occurred during the nine months ended September 30, 2005 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II
| ITEM 1. | LEGAL PROCEEDINGS |
None.
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
None.
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
| ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
None.
| ITEM 5. | OTHER INFORMATION |
None.
| ITEM 6. | EXHIBITS |
Exhibit Number | Description | |
| 3.1 | Certificate of Incorporation of Triton PCS, Inc. (incorporated by reference to Exhibit 3.1 to the Form S-4/A, Amendment No. 1, Registration Statement of Triton PCS, Inc., File No. 333-57715). | |
| 3.2 | Amendments to Certificate of Incorporation of Triton PCS, Inc. changing the corporate name to SunCom Wireless, Inc. (incorporated by reference to Exhibit 3.2 to the Form 10-K of SunCom Wireless, Inc. for the year ended December 31, 2004). | |
| 3.3 | Bylaws of Triton PCS, Inc. (incorporated by reference to Exhibit 3.2 to the Form S-4/A Registration Statement, Amendment No. 1, of Triton PCS, Inc., File No. 333-57715). | |
| 4.1 | Indenture, dated as of January 19, 2001, among Triton PCS, Inc., the Guarantors party thereto and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.5 to Amendment No. 2 to the Form S-3 Registration Statement of Triton PCS Holdings, Inc., File No. 333-49974). | |
| 4.2 | Supplemental Indenture, dated as of November 18, 2004, by and among Triton PCS, Inc., Affiliate License Co., L.L.C. and The Bank of New York, to the Indenture, dated as of January 19, 2001, among Triton PCS, Inc., the Guarantors party thereto and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.3 to the Form 10-K of Triton PCS Holdings, Inc. for the year ended December 31, 2004). | |
| 4.3 | Supplemental Indenture, dated as of January 27, 2005, by and among Triton PCS, Inc., AWS Network Newco, LLC, SunCom Wireless International, LLC, SunCom Wireless Puerto Rico Operating Company, LLC, Triton Network Newco, LLC and The Bank of New York to the Indenture, dated as of January 19, 2001, among Triton PCS, Inc., the Guarantors party thereto and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.4 to the Form 10-K of Triton PCS Holdings, Inc. for the year ended December 31, 2004). | |
| 4.4 | Indenture, dated as of November 14, 2001, among Triton PCS, Inc., the Guarantors thereto and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.1 to the Form 8-K/A of Triton PCS Holdings, Inc. filed November 15, 2001). | |
| 4.5 | Supplemental Indenture, dated as of November 18, 2004, by and among Triton PCS, Inc., Affiliate License Co., L.L.C. and The Bank of New York to the Indenture, dated as of November 14, 2001, among Triton PCS, Inc., the Guarantors thereto and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.6 to the Form 10-K of Triton PCS Holdings, Inc. for the year ended December 31, 2004). | |
| 4.6 | Supplemental Indenture, dated as of January 27, 2005, by and among Triton PCS, Inc., AWS Network Newco, LLC, SunCom Wireless International, LLC, SunCom Wireless Puerto Rico Operating Company, LLC, Triton Network Newco, LLC and The Bank of New York to the Indenture, dated as of November 14, 2001, among Triton PCS, Inc., the Guarantors thereto and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.7 to the Form 10-K of Triton PCS Holdings, Inc. for the year ended December 31, 2004). | |
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| 4.7 | Indenture, dated as of June 13, 2003, among Triton PCS, Inc., the Guarantors thereto and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.1 to the Form 8-K/A of Triton PCS Holdings, Inc. filed June 16, 2003). | |
| 4.8 | Supplemental Indenture, dated as of November 18, 2004, by and among Triton PCS, Inc., Affiliate License Co., L.L.C. and The Bank of New York, to the Indenture, dated as of June 13, 2003, among Triton PCS, Inc., the Guarantors thereto and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.9 to the Form 10-K of Triton PCS Holdings, Inc. for the year ended December 31, 2004). | |
| 4.9 | Supplemental Indenture, dated as of January 27, 2005, by and among Triton PCS, Inc., AWS Network Newco, LLC, SunCom Wireless International, LLC, SunCom Wireless Puerto Rico Operating Company, LLC, Triton Network Newco, LLC and The Bank of New York, to the Indenture, dated as of June 13, 2003, among Triton PCS, Inc., the Guarantors thereto and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.10 to the Form 10-K of Triton PCS Holdings, Inc. for the year ended December 31, 2004). | |
| 10.1 | Term Loan Agreement, dated as of November 18, 2004, among Triton PCS, Inc., the lenders party thereto, Lehman Commercial Paper Inc., as Administrative Agent, and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Syndication Agent (incorporated by reference to Exhibit 10.1 to the Form 8-K of Triton PCS, Inc. filed November 23, 2004). | |
| 10.2 | Pledge Agreement, dated as of November 18, 2004, among Triton PCS, Inc., each Subsidiary of the Borrower party thereto, SunCom Wireless Investment Company LLC and Lehman Commercial Paper Inc., as Collateral Agent for the Secured Parties (incorporated by reference to Exhibit 10.2 to the Form 8-K of Triton PCS Holdings, Inc. filed November 23, 2004). | |
| 10.3 | Security Agreement, dated as of November 18, 2004, among Triton PCS, Inc., each Subsidiary of the Borrower party thereto and Lehman Commercial Paper Inc., as Collateral Agent for the Secured Parties (incorporated by reference to Exhibit 10.3 to the Form 8-K of Triton PCS Holdings, Inc. filed November 23, 2004). | |
| 10.4 | Guarantee Agreement, dated as of November 18, 2004, among each Subsidiary of Triton PCS, Inc. party thereto and Lehman Commercial Paper Inc., as Collateral Agent for the Secured Parties (incorporated by reference to Exhibit 10.4 to the Form 8-K of Triton PCS, Inc. filed November 23, 2004). | |
| 10.5 | Indemnity, Subrogation and Contribution Agreement, dated as of November 18, 2004, among Triton PCS, Inc., each Subsidiary of the Borrower party thereto and Lehman Commercial Paper Inc., as Collateral Agent for the Secured Parties (incorporated by reference to Exhibit 10.5 to the Form 8-K of Triton PCS Holdings, Inc. filed November 23, 2004). | |
| 31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended. | |
| 31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended. | |
| 31.3 | Certification of Controller pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended. | |
| 32.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended. | |
| 32.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended. | |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this amended report to be signed on its behalf by the undersigned thereunto duly authorized.
SUNCOM WIRELESS, INC. | ||||||||
Date: November 14, 2005 | By | /s/ MICHAEL E. KALOGRIS | ||||||
| Michael E. Kalogris | ||||||||
| Chief Executive Officer | ||||||||
| (principal executive officer) | ||||||||
Date: November 14, 2005 | By: | /s/ DAVID D. CLARK | ||||||
| David D. Clark | ||||||||
| Executive Vice President and Chief Financial Officer | ||||||||
| (principal financial officer) | ||||||||