S-1/A 1 ds1a.htm AMENDMENT NO. 5 TO FORM S-1 Amendment No. 5 to Form S-1
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As filed with the Securities and Exchange Commission on September 25, 2007

Registration No. 333-142524

 


SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


Amendment No. 5 to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 


Virgin Mobile USA, Inc.

(Exact name of registrant as specified in its charter)

 


 

Delaware   4812  

20-8826316

(State or other jurisdiction

of Incorporation)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

 


10 Independence Boulevard

Warren, NJ 07059

(908) 607-4000

(Address, including zip code, and telephone number, including area code, of registrants’ principal executive offices)

Peter Lurie, Esq.

General Counsel and Secretary

10 Independence Boulevard

Warren, NJ 07059

(908) 607-4000

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 


With copies to:

 

Alan M. Klein, Esq.

Joseph H. Kaufman, Esq.

Simpson Thacher & Bartlett LLP

425 Lexington Avenue

New York, NY 10017

(212) 455-2000

 

Phyllis G. Korff, Esq.

Skadden, Arps, Slate, Meagher & Flom LLP

4 Times Square

New York, NY 10036

(212) 735-3000

 


Approximate date of commencement of proposed sale to the public:    As soon as practicable after this Registration Statement is declared effective.

If any of the securities being registered on this Form are being offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

CALCULATION OF REGISTRATION FEE

 

Title of Each Class of Securities

to Be Registered

  Amount to be
Registered(1)
  Proposed Maximum
Offering Price Per Share
  Proposed Maximum
Aggregate Offering
Price(1)(2)
  Amount of
Registration Fee(2)(3)

Class A common stock, par value $.01 per share

  31,625,000 shares   $17.00   $537,625,000   $16,505.09
 
(1)   Includes 4,125,000 shares subject to the underwriters’ option to purchase additional shares, if any.
(2)   Estimated solely for the purpose of calculating the registration fee under Rule 457(a) of the Securities Act of 1933, as amended (the “Securities Act”).
(3)   Includes $15,534.20 previously paid.

 


The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 



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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

Subject to Completion, dated September 25, 2007

PROSPECTUS

27,500,000 Shares

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Class A Common Stock

 


This is an initial public offering by Virgin Mobile USA, Inc. We are offering 25,550,493 shares of Class A common stock to be sold in this offering. The selling stockholders identified in this prospectus are offering an additional 1,949,507 shares of Class A common stock. We will not receive any of the proceeds from the sale of the shares being sold in this offering by the selling stockholders.

We have three classes of authorized common stock. Sprint Nextel and the Virgin Group, our principal stockholders, will hold the other two classes of our common stock and immediately following the consummation of this offering will be able to exercise control over our management and affairs and all matters requiring stockholder approval. See “Description of Capital Stock”.

No public market currently exists for our Class A common stock. After pricing of this offering, we expect that the shares of Class A common stock will be listed on the New York Stock Exchange under the symbol “VM.” We expect the initial public offering price to be between $15.00 and $17.00 per share.

Investing in our Class A common stock involves risks. See “ Risk Factors” beginning on page 17 of this prospectus.

 

     Per Share    Total

Public offering price

   $                 $             

Underwriting discount

   $      $  

Proceeds to us (before expenses)

   $      $  

Proceeds to the selling stockholders (before expenses)

   $      $  

The estimated offering expenses payable by us, in addition to the underwriting discounts, are approximately $4.6 million.

Sprint Nextel has granted to the underwriters a 30-day option to purchase up to an additional 4,125,000 shares of Class A common stock on the same terms and conditions as set forth above, if the underwriters sell more than 27,500,000 shares of Class A common stock in this offering.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

Lehman Brothers, on behalf of the underwriters, will deliver the shares on or about                     , 2007.

 


 

LEHMAN BROTHERS    

MERRILL LYNCH & CO.

    BEAR, STEARNS & CO. INC.

 


 

RAYMOND JAMES   THOMAS WEISEL PARTNERS LLC

 

 

    , 2007.


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TABLE OF CONTENTS

 

Prospectus Summary

   1

Risk Factors

   17

Basis of Presentation

   39

Market and Industry Data and Forecasts

   40

Special Note Regarding Forward-Looking Statements

   41

Organizational Structure

   42

Use of Proceeds

   46

Dividend Policy

   48

Capitalization

   49

Dilution

   50

Unaudited Pro Forma Financial Information

   51

Selected Historical Financial and Other Data

   63

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   70

Industry Overview

   103

Business

   106

Management

   123

Principal and Selling Stockholders

   151

Certain Relationships and Related Transactions

   153

Description of Indebtedness

   168

Description of Capital Stock

   173

Shares Eligible for Future Sale

   179

Certain United States Federal Income and Estate Tax Consequences to Non-U.S. Holders

   181

Underwriting

   184

Validity of the Shares

   191

Experts

   191

Where You Can Find Additional Information

   191

Index to Financial Statements

   F-1

 


You should rely only on the information contained in this prospectus and any free writing prospectus prepared by us or any other information to which we have referred you. None of us, our subsidiaries or the selling stockholders has authorized anyone to provide you with information different from that contained in this prospectus. This prospectus may be used only for the purposes for which it has been published and no person has been authorized to give any information not contained in this prospectus. If you receive any other information, you should not rely on it. Neither we nor the selling stockholders are making an offer of these securities in any state where the offer is not permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the date of delivery of this prospectus or any sale of our stock.

Until                  , 2007 (25 days after the date of this prospectus), all dealers that buy, sell or trade in these securities, whether or not participating in this offer, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

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PROSPECTUS SUMMARY

This summary highlights selected information in this prospectus, but it may not contain all of the information that you should consider before deciding to invest in our Class A common stock. You should read this entire prospectus carefully, including the “Risk Factors” section and the financial statements, which are included elsewhere in this prospectus.

Unless we state otherwise or the context otherwise requires the terms (1) “we,” “us,” “our,” “VMU,” and the “Company,” refer to Virgin Mobile USA, Inc., a newly formed Delaware corporation, and its consolidated subsidiaries after giving effect to the reorganization transactions to be completed prior to the consummation of this offering as described in “Organizational Structure;” prior to the reorganization transactions, these terms refer to Virgin Mobile USA, LLC, a Delaware limited liability company through which we are currently conducting our operations; (2) “Sprint” and “Sprint Nextel” refer to Sprint Nextel Corporation, a Kansas corporation, and its affiliated entities; and (3) the “Virgin Group” refers to Virgin Group Holdings Limited, a British Virgin Islands limited company, and its affiliated entities. See “Basis of Presentation” for a description of additional defined terms used in this prospectus.

Our Company

We are a leading national provider of wireless communications services, offering prepaid, or pay-as-you-go, services targeted at the youth market. Our customers are attracted to our products and services because of our flexible monthly terms, easy to understand pricing structures, stylish handsets offered at affordable prices and relevant mobile data and entertainment content. We believe that the appeal of our brand and products and services extends beyond our target audience and estimate that approximately half of our current customers are ages 35 and over. We offer our products and services on a flat per-minute basis and on a monthly basis for specified quantities, or buckets, of minutes purchased in advance—in each case without requiring our customers to enter into long-term contracts or commitments.

We were founded as a joint venture between Sprint Nextel and the Virgin Group and launched our service nationally in July 2002, reaching one million customers in November 2003, within eighteen months of our national launch. We have continued to grow our customer base rapidly and, as of December 31, 2006, we served approximately 4.57 million customers, which we estimate represented approximately a 15% share of the pay-as-you-go market and a 19.0% increase over the 3.84 million customers we served as of December 31, 2005. As of June 30, 2007, we served approximately 4.83 million customers. Our revenues and net loss for the year ended December 31, 2006 were approximately $1.1 billion and $(36.7) million, respectively. Our revenues and net income for the six months ended June 30, 2007 were approximately $666.9 million and $26.5 million, respectively. As of June 30, 2007 and December 31, 2006, our members’ accumulated deficit was approximately $(614.4) million and $(643.9) million, respectively.

We market our products and services under the “Virgin Mobile” brand, which enjoys strong brand awareness and in 2004 was rated as one of the top “trendsetting” brands in any sector by The Intelligence Group’s Cassandra Report, which tracks youth trends in the United States. We have exclusive rights to use the Virgin Mobile brand for mobile voice and data services through 2027 in the United States, Puerto Rico and the U.S. Virgin Islands through our trademark license agreement with the Virgin Group.

We provide our services using the nationwide Sprint PCS network. We purchase wireless network services at a price based on Sprint Nextel’s cost of providing these services plus a specified margin under an agreement which runs through 2027. As a result, we are able to dedicate our resources to acquiring and servicing customers rather than to acquiring spectrum or building and maintaining a wireless network.

We believe that two key factors distinguish us from many of our competitors: our focus on the youth and pay-as-you-go segments of the U.S. wireless market and our mobile virtual network operator, or MVNO,

 

 

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business model. Our focus on the youth and pay-as-you-go segments of the U.S. wireless market allows us to tailor our products and services, advertising, customer care, distribution network and overall operations to the needs and desires of our target market, which we believe is underserved by wireless providers. We control our customers’ experience and all customer “touch points,” including brand image, pricing, mobile content, marketing, distribution and customer care. As an MVNO, however, we do not own or operate a physical network, which frees us from related capital expenditures and allows us to focus our resources and compete effectively against the major national wireless providers in our target market.

Competitive Strengths

We believe that the following key strengths enable us to compete effectively in the wireless telecommunications market:

Differentiated Market Approach.    We have been pioneers in the U.S. wireless industry, offering innovative, youth-oriented pay-as-you-go plans without long-term contracts or commitments. Our service plans, which include both flat per-minute rates and hybrid plans with monthly buckets of minutes purchased in advance, are attractive alternatives to traditional postpaid plans. Our stylish and affordable handsets and our voice and data service offerings are designed to make Virgin Mobile particularly appealing to the youth market.

Strong Brand.    Virgin Mobile is the number one brand for prepaid wireless services in the United States in awareness and purchase consideration among 14-34 year-olds, according to Gallagher Lee Brand Tracking (fourth quarter 2006), and was rated as one of the top ten “trendsetting” brands in any sector in the United States by the Cassandra Report in 2004. We believe that our customers identify with brands and products that reflect their values and our marketing efforts focus on leveraging the popular attributes of the Virgin brand: fun, style, good value and social responsibility. We have exclusive rights to use the Virgin Mobile brand through 2027 for mobile voice and data services in the United States, U.S. Virgin Islands and Puerto Rico through our trademark license agreement with the Virgin Group.

Extensive and Efficient Distribution.    Our nationwide distribution network is comprised of 130,000 third party retail stores that offer account replenishment, or Top-Up cards, including more than 35,000 retail locations that also sell our handsets. We distribute our products through leading national retailers, including Wal-Mart, Best Buy, RadioShack and Target, and generally receive favorable product positioning in their retail locations. Our products are designed to require minimal sales assistance, which enables us to distribute them cost-effectively through third party channels and eliminates the need to expend capital to build and operate our own retail stores.

Award-winning Customer Service.    Our award-winning customer service program, Virgin Mobile At Your Service, provides user-friendly and effective customer service through our call centers and our website. Our high quality of customer service helps us to retain customers. As a result, we believe that our churn is among the lowest in the prepaid segment of the wireless industry. We consistently receive high ratings in customer satisfaction surveys. In both 2006 and 2007, we were the sole recipient of the J.D. Power and Associates Award for wireless prepaid customer satisfaction.

Capital Efficient Business.    Our mobile virtual network operator, or MVNO, business model, easy-to-understand products and services, cost-efficient distribution channels and focused marketing strategy have made us one of the lowest cost operators in the wireless industry. As an MVNO, we have substantially lower capital expenditures than those of wireless service providers that own their networks. While we expect to continue to subsidize our handsets in order to acquire additional customers, we do not operate our own retail stores, which saves us substantial sales and distribution costs. In addition, we pay Sprint Nextel for wireless services only to the extent of our customers’ usage. As a result, we have a highly variable cost structure, which we believe has allowed us to reach profitability faster than if we were to maintain our own network.

 

 

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Proven and Committed Management Team.    We are led by a highly experienced management team, which has significant expertise in the telecommunications, Internet and e-commerce, media and entertainment, consumer products and retail industries. Many members of our management team have been with us since before our national launch and have been instrumental in developing and implementing our business model.

Business Strategy

We believe the following components of our business strategy will allow us to continue our growth and improve our profitability:

Focus on Fast-growing Segments of U.S. Wireless Market.    We focus on two fast-growing segments of the U.S. wireless market: youth and pay-as-you-go. We believe there is substantial demand in the United States for our straightforward and fun wireless communication services. According to the Yankee Group, in 2006, there were approximately 29.5 million pay-as-you-go wireless customers in the United States and such number is expected to grow to approximately 53.0 million by 2011, representing a 12.4% compound annual growth rate over the same period. We plan to continue to penetrate the youth segment and grow our market share by continuing to tailor our products, services and advertising message to this market, leveraging our brand through new and existing distribution channels and utilizing select youth-oriented media channels that specifically resonate with our target market, such as MTV, Vice, Facebook.com, MySpace.com and outdoor billboards and postings in key trendsetting neighborhoods.

Continue Product and Service Innovation.    We have a proven ability to innovate and adapt to our customers’ needs. For example, in 2006 we launched a suite of new service plans that were designed to be more attractive to higher-usage customers. These monthly bucket plans include anytime and night and weekend minutes without long-term contracts or commitments. At the same time, we launched mobile social networking and Sugar Mama, an innovative new program that enables our customers to earn minutes by viewing and rating advertisements online. We intend to continue our efforts to address our market’s evolving needs and to offer innovative and popular products and services ahead of our competitors.

Enhance our Brand Strength.    We aim to maintain and strengthen a vibrant brand image that resonates with our customers and distinguishes us from other wireless service providers. Our goal is to attract and retain customers through our youth-oriented marketing message and service offerings that are straightforward, flexible and a good value. For example, our marketing events in 2007 included the Virgin Festival by Virgin Mobile, a two-day event that drew approximately 72,000 fans to see major performing artists. We will continue to enhance our brand through targeted marketing, advertising, product packaging, point-of-sale materials and innovative services.

Leverage Our Scale and Infrastructure to Drive Profitable Growth.    As of June 30, 2007, in five years since our national launch, we had grown our customer base to approximately 4.83 million. We have built the infrastructure to support future growth in customers and usage while leveraging the advantages of our predominantly variable cost structure. As we continue to scale the business, we expect our growing customer base to translate into improved cost economies without the need for substantial capital investment.

Principal Owners

A substantial majority of our equity interests are presently owned by two well established companies—Sprint Nextel, which is the third largest wireless operator in the United States as measured by subscribers, and the Virgin Group, whose brand is globally recognized and whose branded companies generate approximately $20 billion in annual revenues. Upon completion of this offering and assuming that the underwriters do not exercise their over-allotment option to purchase additional shares, Sprint Nextel and the Virgin Group together will continue to hold interests representing a majority of our outstanding voting power and will continue to control us.

About Sprint Nextel.    Sprint Nextel offers a comprehensive range of wireless and wireline communications services bringing the freedom of mobility to consumers, businesses and government users. Sprint Nextel is

 

 

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widely recognized for developing, engineering and deploying innovative technologies, including two robust wireless networks serving more than 54 million subscribers at the end of the second quarter 2007; industry-leading mobile data services; instant national and international walkie-talkie capabilities; and a global Tier 1 Internet backbone.

About the Virgin Group.    Founded by entrepreneur Sir Richard Branson in 1970, the Virgin Group is a global organization active in seven main areas: media and telecommunications, transport and tourism, leisure and entertainment, financial services, retail, health and wellness, and renewable energy. The Virgin brand is one of the most well-known and well-respected in Britain. Worldwide, Virgin-branded companies together employ more than 35,000 people and generate revenues of approximately $20 billion annually. The Virgin Group is one of the leading MVNO operators worldwide and there are currently Virgin Mobile businesses operating in the U.K., Canada, Australia, France and South Africa which operate independently of VMU. The Virgin Group periodically organizes global forums for the management teams of the Virgin Mobile entities to share technical, product development and marketing best practices and learn from the experiences of other Virgin Mobile entities worldwide.

Selected Risk Factors and Potential Conflicts of Interest

We face a number of competitive challenges, risks and potential conflicts of interest. Investing in our common stock includes substantial risk. See “Risk Factors,” “Certain Relationships and Related Transactions” and “Underwriting” for a discussion of the factors you should consider before buying shares of our Class A common stock. Some of the more significant challenges, risks and potential conflicts include:

 

   

Short operating history. We have a limited operating and financial history and cannot be certain that our MVNO business model will be profitable or competitive. We have experienced, and may continue to experience, operating losses and significant fluctuations in our revenues and cash flows. If our revenues and earnings growth are not sustainable, we may not be able to generate the earnings necessary to fund our operations, continue to grow our business, satisfy our debt covenants or repay our debt obligations.

 

   

Competition in the wireless industry. The wireless communications market is extremely competitive, and competition for customers is increasing. We compete with (i) facilities-based wireless communications providers and their prepaid affiliates or brands, including Sprint Nextel and its Boost product; and (ii) other MVNOs. We also may face competition from providers of various emerging technologies. Most of our competitors have substantially greater resources and a larger market share than we have, and we may not be able to compete successfully with them.

 

   

Competitive pressure to reduce prices for our products and services. To remain competitive with existing and future competitors, we may be compelled to offer greater subsidies for our handsets, reduce the prices for our services or increase the available minutes that we offer under our prepaid monthly, or hybrid, service plans. The prices we charge our customers for services do not affect the amounts we pay to Sprint Nextel under the PCS services agreement, which is based on Sprint Nextel’s costs plus a margin on the services we purchase. As a result, any further subsidies or price reductions that we offer in order to remain competitive may reduce our margins and revenues, and may adversely affect our profitability and cash flows.

 

   

New service offerings. We cannot be certain that our new service offerings will be profitable or successful. In addition, our services currently depend on the nationwide Sprint PCS network, and we cannot guarantee that Sprint Nextel will make the necessary capital outlays or have sufficient spectrum capacity to deploy new services on that network. In addition, we may not be able to meet our customers’ demands for new services.

 

   

Customer turnover. Our rate of customer turnover, or “churn,” may be affected by several factors, including network coverage and connection quality; handset and network reliability issues; pricing; the ability to roam on wireless networks of other carriers; and customer care performance. We do not require long-term service

 

 

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contracts or impose early termination penalties. Accordingly, our customers can terminate service with us easily and transition to another carrier. Higher than expected customer turnover could result in increased costs and decreased revenues, which would have an adverse effect on our profitability and cash flows.

 

   

Significant amount of debt. The level of our indebtedness and restrictive debt covenants in our credit agreements could materially adversely affect our business. In 2005, we failed to satisfy a covenant in our prior credit facility, which resulted in a default under that credit facility and required us to amend and restate that facility. As a result of the default, we also experienced a liquidity shortfall and were unable to make timely payments to Sprint Nextel on amounts owed under the PCS services agreement. We have used debt to finance a significant portion of our operations. As of June 30, 2007, our total debt was $522 million and following this offering, on a pro forma basis, our total debt would have been $332 million.

 

   

Tax receivable agreements. We will be required to compensate Sprint Nextel and the Virgin Group for certain tax benefits. Our cash payments to Sprint Nextel and the Virgin Group may be substantial and may exceed our actual cash tax savings. In the alternative, instead of cash, we may be required to issue additional shares of our Class A common stock and our preferred stock to the Virgin Group as compensation for these tax benefits and issue additional limited partnership units to Sprint Nextel. Such issuances may be substantial and may exceed our actual cash tax savings. In addition, any such issuances of Class A common stock to the Virgin Group will dilute the ownership of Class A common stock.

 

   

Large number of shares eligible for future sale and for exchange. The market price of our Class A common stock could decline as a result of sales of a large number of shares of Class A common stock in the market after this offering or the perception that such sales could occur. Following this offering, a substantial number of shares of our Class A common stock will be eligible for resale from time to time, subject to certain contractual and Securities Act restrictions.

 

   

Use of proceeds. Affiliates of Merrill Lynch and Bear Stearns are lenders under our senior secured credit facility and will receive a significant portion of the proceeds that we will receive in this offering and use to repay those borrowings. Accordingly, this offering will be made in compliance with the applicable provisions of Rules 2710(h) and 2720 of the Conduct Rules of the National Association of Securities Dealers, Inc., or NASD, which require that the initial public offering price be no higher than recommended by a “qualified independent underwriter.”

 

   

Dilution. The book value of shares of our Class A common stock purchased in this offering will be immediately diluted. In addition, we expect that the payments in the form of Class A common stock that may be made to the Virgin Group pursuant to its tax receivable agreement may be substantial and will further dilute the Class A common stock purchased in this offering. See “Dilution.”

 

 


We were incorporated in Delaware on April 11, 2007. Our principal executive offices are located at 10 Independence Boulevard, Warren, NJ 07059 and our main telephone number is (908) 607-4000. Our principal website is virginmobileusa.com. Information contained on our website or that can be accessed through our website is not incorporated by reference in this prospectus.

 

 

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Organizational Structure

Prior to the closing of this offering, we will effect the reorganization described in “Organizational Structure” beginning on page 42.

Current Organizational Structure

Our operations are presently conducted by Virgin Mobile USA, LLC, a Delaware limited liability company owned by Sprint Nextel, the Virgin Group and two minority investors. The following diagram depicts our current organizational structure.

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Post-IPO Organizational Structure

Virgin Mobile USA, Inc. was formed in April 2007 for the purposes of this offering. Virgin Mobile USA, Inc. has not engaged in any business or other activities except in connection with its formation and the reorganization transactions which were effected for the purpose of tax efficiency, described under “Organizational Structure.” Following the reorganization transactions and this offering, Virgin Mobile USA, Inc. will be a holding company and will hold, directly and indirectly through Bluebottle USA Investments L.P. and Bluebottle USA Holdings L.P., partnership units in the Operating Partnership and all of the outstanding limited liability company interests of VMU GP, LLC. As an indirect owner of VMU GP1, LLC, the sole general partner of the Operating Partnership, Virgin Mobile USA, Inc. will operate and control all of the business and affairs of the Operating Partnership. Virgin Mobile USA, Inc. will consolidate the financial results of the Operating Partnership, and the ownership interest of Sprint Nextel in the Operating Partnership will be treated as a minority interest in our consolidated financial statements. Virgin Mobile USA, Inc., directly and through Holdings and its subsidiaries, and Sprint Nextel will be the only partners of the Operating Partnership after the reorganization transactions and this offering. The diagram below depicts our organizational structure immediately following the reorganization transactions and this offering.

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The Offering

 

Class A common stock offered by Virgin Mobile

25,550,493 shares

 

Class A common stock offered by selling stockholders

1,949,507 shares

 

    Total

27,500,000 shares

 

Class A common stock to be outstanding after this offering

53,026,302 shares (or 64,209,573 shares if Sprint Nextel exchanges all of its partnership units in the Operating Partnership for shares of Class A common stock and the Virgin Group converts all of its shares of Class C common stock into shares of Class A common stock)

 

Class B common stock to be outstanding after this offering

one share

 

Class C common stock to be outstanding after this offering

115,062 shares

 

Use of proceeds

We estimate that the net proceeds to us from this offering, based on an assumed initial public offering price per share of $16.00 (which is the midpoint of the estimated price range shown on the cover of this prospectus), after deducting underwriting discounts and estimated offering expenses, will be approximately $375.6 million. We will not receive any of the proceeds from the sale of shares by the selling stockholders and Virgin Mobile USA, Inc. will not retain any of the proceeds from this offering. See “Use of Proceeds.” Based on this assumed offering price:

 

   

We will use approximately $160.8 million of the net proceeds to us from this offering to pay Sprint Nextel for limited liability company interests representing approximately 16.7% of Virgin Mobile USA, LLC (which consideration will be based on the amount Sprint Nextel would have received had it converted such limited liability company interests into shares of our Class A common stock and sold such shares in this offering).

 

   

Virgin Mobile USA, Inc. will contribute a small part of its interest in Virgin Mobile USA, LLC to a newly formed entity, VMU GP1, LLC, in exchange for all of the interests in VMU GP1, LLC.

 

   

We will contribute the remaining net proceeds, along with the majority of our remaining portion of such limited liability company interests in Virgin Mobile USA, LLC (once such interests have been converted to limited partnership interests in the Operating Partnership), to Investments, which in turn will contribute such proceeds and interests to Holdings.

 

   

Holdings will use such proceeds to purchase from the Operating Partnership additional limited partnership units representing approximately 23.1% of the Operating Partnership.

 

 

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The Operating Partnership will use the sale proceeds (1) to repay a $150 million portion of the term loan outstanding under our senior secured credit facility, (2) to repay approximately $45 million of indebtedness owed to Sprint Nextel under the terms of our subordinated secured revolving credit facility and (3) for general corporate and other purposes.

Affiliates of Merrill Lynch and Bear Stearns are lenders under our senior secured credit facility and, based on an assumed initial public offering price per share of $16.00 (which is the midpoint of the estimated price range shown on the cover of this prospectus) will receive approximately 8.9% and 11.1%, respectively, of the proceeds to us of this offering used to repay those borrowings. See “Underwriting—NASD Regulations and Certain Relationships.”

 

Voting Rights

Each share of our Class A common stock will entitle its holder to one vote on all matters to be voted on by stockholders generally.

 

 

Sprint Nextel will be issued 1,250,000 shares of our Class A common stock (which will be sold in this offering) and one share of our Class B common stock. Class B common stock has no economic rights but will entitle the holder to a number of votes that is equal to the total number of shares of Class A common stock for which the partnership units that such holder holds in the Operating Partnership, as of the relevant record date for the VMU stockholder action, are exchangeable. Based on an assumed initial offering price per share of $16.00, we expect that immediately following this offering, such Class B common stock will entitle Sprint Nextel to 11,068,209 votes. The Operating Partnership units held by Sprint Nextel are convertible into Class A common stock at any time and are mandatorily convertible upon any transfer of such interests by Sprint Nextel, except to certain permitted transfers.

 

 

The Virgin Group will be issued 22,791,533 shares of our Class A common stock and 115,062 shares of our Class C common stock. Except for the convertibility of Class C common stock into Class A common stock, shares of Class A common stock and shares of Class C common stock will be identical, including with respect to voting rights. The shares of Class C common stock may be converted into shares of Class A common stock at any time at the option of the holder and will automatically convert into shares of Class A common stock upon any transfer of shares of Class C common stock by the Virgin Group, except certain permitted transfers.

 

 

See “Description of Capital Stock.”

 

Dividend Policy

We do not intend to pay any cash dividends on our common stock going forward, and instead intend to retain earnings, if any, for future operations and expansion.

 

 

See “Dividend Policy.”

 

 

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Proposed New York Stock Exchange symbol

VM

Unless we specifically state otherwise, the information in this prospectus does not give effect to:

 

   

any exercise by the underwriters of their over-allotment option to purchase an additional 4,125,000 shares of our Class A common stock from Sprint Nextel;

 

   

5,321,295 shares of our Class A common stock that underlie awards under our equity-based incentive plans anticipated to be outstanding at the time of this offering, including the Virgin Mobile USA 2007 Omnibus Stock Incentive Plan, or Omnibus Share Plan. See “Management—Compensation Discussion and Analysis—Equity-based Incentive Arrangements;” and

 

   

1,892,519 additional shares of our Class A common stock expected to be available for future grant under our proposed Omnibus Share Plan after the consummation of this offering. See “Management—Compensation Discussion and Analysis—Equity-based Incentive Arrangements.”

 

 

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SUMMARY FINANCIAL AND OTHER DATA

The following table sets forth the summary historical and other data for Virgin Mobile USA, LLC and pro forma financial data for Virgin Mobile USA, Inc. as of the dates and for the periods indicated. Virgin Mobile USA, Inc. is a recently formed holding company which has not engaged in any business or other activities except in connection with its formation and the reorganization transactions described elsewhere in this prospectus. Accordingly, all financial and other information herein relating to periods prior to the completion of the reorganization transactions is that of Virgin Mobile USA, LLC. The summary balance sheet data as of December 31, 2005 and 2006 and the statement of operations data for each of the years ended December 31, 2004, 2005 and 2006 have been derived from Virgin Mobile USA, LLC’s audited financial statements included elsewhere in this prospectus. The summary balance sheet data as of June 30, 2007 and the statement of operations data for the six months ended June 30, 2006 and 2007 have been derived from Virgin Mobile USA, LLC’s unaudited financial statements included elsewhere in this prospectus. The summary balance sheet data as of December 31, 2004 has been derived from Virgin Mobile USA, LLC’s audited financial statements not included in this prospectus. The summary balance sheet data as of June 30, 2006 has been derived from Virgin Mobile USA, LLC’s unaudited financial statements not included in this prospectus.

The summary unaudited pro forma financial information has been developed by application of pro forma adjustments to the historical consolidated financial statements appearing elsewhere in this prospectus. The summary unaudited pro forma financial information for the year ended December 31, 2006 and as of and for the six months ended June 30, 2007 gives effect, in the manner described under “Unaudited Pro Forma Financial Information” and the notes thereto to (i) the reorganization transactions together with the related equity-based awards, and (ii) this offering of Class A common stock by us and the use of proceeds therefrom, as if all such events occurred as of January 1, 2006 in the case of the unaudited pro forma condensed consolidated statement of operations data, and as if they had occurred on June 30, 2007, in the case of the unaudited pro forma condensed consolidated balance sheet data. The unaudited pro forma adjustments are based upon available information and certain assumptions that we believe are reasonable under the circumstances. The summary unaudited pro forma financial information is presented for informational purposes only and is not necessarily indicative of and does not purport to represent what our financial position or results of operations would actually have been had the transactions been consummated as of the dates indicated. In addition, the summary unaudited pro forma financial information is not necessarily indicative of our future financial condition or results of operations.

You should read the information contained in this table in conjunction with “Unaudited Pro Forma Financial Information,” “Selected Historical Financial and Other Data,” “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our historical audited financial statements and the accompanying notes and our interim financial statements and the accompanying notes included elsewhere in this prospectus.

 

 

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Pro Forma

 
                                 

Consolidated
Virgin Mobile USA, Inc.

 

(in thousands, except share per share
data and Other data unless
otherwise indicated)

 

Virgin Mobile USA, LLC

Fiscal Year Ended December 31,

    Virgin Mobile USA, LLC
Six Months Ended
June 30,
    Year Ended
December 31,
2006
   

Six Months
Ended

June 30, 2007

 
  2004     2005     2006     2006     2007      
          (Unaudited)    

(Unaudited)

 

Income statement data:

             

Operating revenue:

             

Net service revenue

  $ 567,006     $ 883,816     $ 1,020,055     $ 508,345     $ 632,050     $ 1,020,055     $ 632,050  

Net equipment revenue

    123,632       106,116       90,524       33,141       34,852       90,524       34,852  
                                                       

Total operating revenue

    690,638       989,932       1,110,579       541,486       666,902       1,110,579       666,902  

Operating expenses:

             

Cost of service (exclusive of depreciation and amortization)

    229,283       309,321       299,130       143,084       183,979       299,130       183,979  

Cost of equipment

    364,042       361,655       378,981       157,679       193,024       378,981       193,024  

Selling, general and administrative (exclusive of depreciation and amortization)

    253,178       346,470       401,732       187,365       219,405       405,859       220,420  

Loss (gain) from litigation

    —         29,981       (15,384 )     —         —         (15,384 )     —    

Depreciation and amortization

    12,891       19,413       28,381       13,124       16,731       28,381       16,731  
                                                       

Total operating expense

    859,394       1,066,840       1,092,840       501,252       613,139       1,096,967       614,154  
                                                       

Operating (loss)/income

    (168,756 )     (76,908 )     17,739       40,234       53,763       13,612       52,748  

Interest expense

    5,427       25,008       52,178       25,672       27,447       35,503       17,480  

Other (income)/expense

    (305 )     949       2,268       1,445       (200 )     2,268       (195 )

Minority interest

    —         —         —         —         —         (4,124 )     6,148  
                                                       

(Loss)/income before taxes

    (173,878 )     (102,865 )     (36,707 )     13,117       26,516       (20,035 )     29,315  

Income tax expense

    —         —         —         —         —         —         —    
                                                       

Net (loss)/income

  $ (173,878 )   $ (102,865 )   $ (36,707 )   $ 13,117     $ 26,516     $ (20,035 )   $ 29,315  
                                                       

Net (loss)/income per share:

             

Basic

    N/A       N/A       N/A       N/A       N/A     $ (0.38 )   $ 0.56  

Diluted

    N/A       N/A       N/A       N/A       N/A     $ (0.38 )   $ 0.54  

Weighted average common shares outstanding:

             

Basic

    N/A       N/A       N/A       N/A       N/A       52,611       52,611  

Diluted

    N/A       N/A       N/A       N/A       N/A       52,611       65,322  

Balance sheet data:

             

Cash and cash equivalents

  $ —       $ 18,562     $ —       $ 20,433     $ —         N/A     $ 24,757  

Total assets

  $ 165,361     $ 221,215     $ 276,939     $ 207,634     $ 255,767       N/A     $ 278,527  

Long-term debt

  $ —       $ —       $ 481,500     $ —       $ 478,500       N/A     $ 303,262  

Total debt

  $ 70,374     $ 497,500     $ 553,269     $ 479,000     $ 541,166       N/A     $ 332,000  

Members' deficit/Stockholders' equity

  $ (165,775 )   $ (621,683 )   $ (643,925 )   $ (602,578 )   $ (614,413 )     N/A     $ (292,833 )

Statement of cash flows data:

             

Net cash (used in)/provided by:

             

Operating activities

  $ (40,510 )   $ (1,678 )   $ (38,865 )   $ 36,740     $ 24,544      

Investing activities

  $ (26,288 )   $ (33,607 )   $ (34,453 )   $ (16,369 )   $ (12,691 )    

Financing activities

  $ 66,798     $ 53,847     $ 54,756     $ (18,500 )   $ (11,853 )    

Capital expenditures

  $ (26,288 )   $ (33,607 )   $ (34,453 )   $ (16,369 )   $ (12,691 )    

Other data (Unaudited):

             

Gross additions(a)

    2,328,830       2,666,194       3,013,781       1,052,784       1,666,992      

Churn(b)

    3.9 %     4.3 %     4.8 %     4.4 %     4.8 %    

Net customer additions(c)

    1,422,855       993,625       729,313       27,175       256,297      

End-of-period customers(d)

    2,851,152       3,844,777       4,574,090       3,871,952       4,830,387      

Adjusted EBITDA(e)(f) (in thousands)

  $ (133,567 )   $ (48,275 )   $ 47,884     $ 54,972     $ 72,884      

Average revenue per user(e)(g)

  $ 24.24     $ 22.54     $ 21.48     $ 21.61     $ 21.68      

CCPU(e)(h)

  $ 16.85     $ 14.94     $ 13.15     $ 12.74     $ 13.50      

CPGA(e)(i)

  $ 131.58     $ 118.62     $ 120.55     $ 145.91     $ 99.32      

(footnotes on following page)

 

 

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(a)   Gross additions represents the number of new customers that activated our handsets during a period, unadjusted for churn during the same period. In measuring gross additions, we begin with handset activations and exclude any customer that has replaced one of our handsets with another one, retailer returns, customers who have reactivated and fraudulent activations.
(b)   Churn is used to measure customer turnover on an average monthly basis. Churn is calculated as the ratio of the net number of customers that disconnect from our service during the period being measured to the weighted average number of customers during that period, divided by the number of months during the period being measured. The net number of customers that disconnect from our service is calculated as the total number of customers that disconnect less the adjustments noted under gross additions above. These adjustments are applied in order to arrive at a more meaningful measure of churn. The weighted average number of customers is the sum of the average number of customers for each day during the period being measured divided by the number of days in that period. Churn includes those pay-by-the-minute customers whom we automatically disconnect from our service when they have not replenished, or “Topped-Up,” their accounts for 150 days as well as those monthly customers whom we automatically disconnect when they have not paid their monthly recurring charge for 150 days (except for such monthly customers who replenish their account for less than the amount of their monthly recurring charge and, according to the terms of our monthly plans, may continue to use our services on a pay-by-the-minute basis), and such customers that voluntarily disconnect from our service prior to reaching 150 days since replenishing their account or paying their monthly recurring charge. We utilize 150 days in our calculation as it represents the last date upon which a customer who replenishes his or her account is still permitted to retain the same phone number. This calculation is consistent with the terms and conditions of our service offering. We believe churn is a useful metric to track changes in customer retention over time and to help evaluate how changes in our business and services offerings affect customer retention. In addition, churn is also useful for comparing our customer turnover to that of other wireless communications providers.
(c)   Net customer additions represents the number of new customers that activated our handsets during a period, adjusted for churn during the same period.
(d)   End-of-period customers are the total number of customers at the end of the period being measured.
(e)   We use several financial performance metrics, including Adjusted EBITDA, ARPU, CCPU and CPGA, which are not calculated in accordance with generally accepted accounting principles, or GAAP. A non-GAAP financial metric 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 operations 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. We believe that the non-GAAP financial metrics that we use are helpful in understanding our operating performance from period to period, and although not every company in the wireless communication industry defines these metrics in precisely the same way that we do, we believe that these metrics as we use them, facilitate comparisons with other wireless communication companies. These metrics should not be considered substitutes for any performance metric determined in accordance with GAAP.
(f)   Adjusted EBITDA is calculated as net (loss)/income plus interest expense, income tax expense, depreciation and amortization, non-cash compensation expense, equity issued to a member and debt extinguishment costs. We believe Adjusted EBITDA is a useful tool in evaluating performance because it eliminates items related to taxes, non-cash charges relating to depreciation and amortization as well as items relating to both the debt and equity portions of our capital structure. Adjustments relating to interest expense, income tax expense, depreciation and amortization are each customary adjustments in the calculation of supplemental measures of performance. We believe such adjustments are meaningful because they are indicators of our core operating results and our management uses them to evaluate our business. Specifically, our management uses them in its calculation of compensation targets, preparation of budgets and evaluations of performance. Similarly, we believe that the exclusion of non-cash compensation expense provides investors with a more meaningful indication of our performance as these non-cash charges relate to the equity portion of our capital structure and not our core operating performance. This exclusion is also consistent with how we calculate the measures we use for determining certain bonus compensation targets, preparing budgets and for other internal purposes. Finally, we believe that the exclusion of equity issued to a member and debt extinguishment costs is appropriate because these charges relate to the debt and equity portions of our capital structure and are not expected to be incurred in future periods.

We find Adjusted EBITDA to be useful as a measure for understanding the performance of our operations from period to period and although not every company in the wireless communication industry defines these metrics in precisely the

 

 

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same way that we do, we believe that this metric, as we use it, facilitates comparisons with other wireless communication companies. We use Adjusted EBITDA in our business operations to, among other things, evaluate the performance of our business, develop budgets and measure our performance against those budgets. We also believe that analysts and investors use Adjusted EBITDA as a supplemental measure to evaluate our company’s overall operating performance. However, Adjusted EBITDA has material limitations as an analytical tool and you should not consider this in isolation, or as a substitute for analysis of our results as reported under GAAP.

 

    The items we eliminate in calculating Adjusted EBITDA are significant to our business: (i) interest expense is a necessary element of our costs and ability to generate revenue because we incur interest expense related to any outstanding indebtedness, (ii) to the extent that we incur income tax expense it represents a necessary element of our costs and our ability to generate revenue because ongoing revenue generation is expected to result in future income tax expense, (iii) depreciation and amortization are necessary elements of our costs, (iv) non-cash compensation expense is expected to be a recurring component of our costs and we may be able to incur lower cash compensation costs to the extent that we grant non-cash compensation, (v) expense resulting from equity issued to a member represents an actual cost relating to a prior contractual obligation and (vi) expense related to debt extinguishment represents a necessary element of our costs to the extent we restructure indebtedness. Furthermore, any measure that eliminates components of our capital structure and the carrying costs associated with the fixed assets on our balance sheet has material limitations as a performance measure. In light of the foregoing limitations, we do not rely solely on Adjusted EBITDA as a performance measure and also consider our GAAP results. Adjusted EBITDA is not a measurement of our financial performance under GAAP and should not be considered as an alternative to net income, operating income or any other measures derived in accordance with GAAP. Because Adjusted EBITDA is not calculated in the same manner by all companies, it may not be comparable to other similarly titled measures used by other companies.

 

     Fiscal Year Ended December 31,     Six Months Ended June 30,
(in thousands)    2004     2005     2006             2006                    2007        
     (Unaudited)     (Unaudited)

Calculation of Adjusted EBITDA:

           

Net (loss)/income

   $ (173,878 )   $ (102,865 )   $ (36,707 )   $ 13,117    $  26,516

Plus:

           

Depreciation and amortization

     12,891       19,413       28,381       13,124      16,731

Interest expense

     5,427       25,008       52,178       25,672      27,447

Non-cash compensation expense

     5       1,475       2,563       1,590      2,190

Equity issued to a member

     21,988       7,623       —         —        —  

Debt extinguishment costs

     —         1,071       1,469       1,469      —  
                                     

Adjusted EBITDA

   $ (133,567 )   $ (48,275 )   $ 47,884     $ 54,972    $ 72,884
                                     

 

(g)   Average revenue per user, or ARPU, is used to measure and track the average revenue generated by our customers on a monthly basis. ARPU is calculated as net service revenue for the period divided by the weighted average number of customers for that period being measured, further divided by the number of months in the period being measured. The weighted average number of customers is the sum of the average customers for each day during the period measured divided by the number of days in that period. ARPU helps us to evaluate customer performance based on customer revenue and forecast our future service revenues.

 

    Fiscal Year Ended December 31,   Six Months Ended June 30,
(in thousands, except number of months and ARPU)   2004   2005   2006           2006                   2007        
        (Unaudited)       (Unaudited)

Calculation of ARPU:

         

Net service revenue

  $ 567,006   $ 883,816   $ 1,020,055   $ 508,345   $ 632,050

Divided by weighted average number of customers.

    1,949     3,268     3,957     3,921     4,859

Divided by number of months in the period

    12     12     12     6     6
                             

ARPU

  $ 24.24   $ 22.54   $ 21.48   $ 21.61   $ 21.68
                             

 

 

(footnotes continued on following page)

 

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(h)   Cash cost per user, or CCPU, is used to measure and track our costs to provide support for our services to our existing customers on an average monthly basis. The costs included in this calculation are our cost of service (exclusive of depreciation and amortization), excluding cost of service associated with initial customer acquisition, general and administrative expenses, excluding any marketing, selling, and distribution expenses associated with initial customer acquisition, non-cash compensation expense, net loss on equipment sold to existing customers, cooperative advertising expenses in support of existing customers and other (income) / expense, net of debt extinguishment costs. These costs are then divided by our weighted average number of customers for the period being measured, further divided by the number of months in the period being measured. CCPU helps us to assess our ongoing business operations on a per customer basis, and evaluate how changes in our business operations affect the support costs per customer. Given its use throughout the industry, CCPU also serves as a standard by which we compare our performance against that of other wireless communication companies.

 

 

    Fiscal Year Ended December 31,     Six Months Ended June 30,  
(in thousands, except number of months and CCPU)   2004     2005     2006             2006                     2007          
          (Unaudited)           (Unaudited)  

Calculation of CCPU:

         

Cost of service (exclusive of depreciation and amortization)

  $ 229,283     $ 309,321     $ 299,130     $ 143,084     $ 183,979  

Less: Cost of service associated with initial customer acquisition

    (7,367 )     (3,750 )     (1,968 )     (590 )     (1,125 )

Add: General and administrative expenses

    161,269       254,989       288,414       141,751       175,270  

Less: Non-cash compensation expense

    (5 )     (1,475 )     (2,563 )     (1,590 )     (2,190 )

Add: Net loss on equipment sold to existing customers

    11,259       22,291       38,042       15,061       36,475  

Add: Cooperative advertising expenses in support of existing customers

    —         4,620       2,362       2,040       1,390  

Add: Other (income) / expense, net of debt extinguishment costs

    (305 )     (122 )     799       (24 )     (200 )
                                       

Total CCPU costs

  $ 394,134     $ 585,874     $ 624,216     $ 299,732     $ 393,599  

Divided by weighted average number of customers

    1,949       3,268       3,957       3,921       4,859  

Divided by number of months in the period

    12       12       12       6       6  
                                       

CCPU

  $ 16.85     $ 14.94     $ 13.15     $ 12.74     $ 13.50  
                                       

 

 

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(i)   Cost per gross addition, or CPGA, is used to measure the cost of acquiring a new customer. The costs included in this calculation are our selling expenses, our net loss on equipment sales (cost of equipment less net equipment revenue), excluding the net loss on equipment sold to existing customers, equity issued to a member, cooperative advertising in support of existing customers and cost of service associated with initial customer acquisition. CPGA helps us to assess the efficiency of our customer acquisition methods and evaluate our sales and distribution strategies. CPGA also allows us to compare our average acquisition costs to those of other wireless communication companies.

 

     Fiscal Year Ended December 31,     Six Months Ended June 30,  
(in thousands, except CPGA)    2004     2005     2006             2006                     2007          
           (Unaudited)           (Unaudited)  

Calculation of CPGA:

          

Selling expenses

   $ 91,909     $ 91,481     $ 113,318     $ 45,614     $ 44,135  

Add: Cost of equipment

     364,042       361,655       378,981       157,679       193,024  

Less: Net equipment revenue

     (123,632 )     (106,116 )     (90,524 )     (33,141 )     (34,852 )

Less: Net loss on equipment sold to existing customers

     (11,259 )     (22,291 )     (38,042 )     (15,061 )     (36,475 )

Less: Equity issued to a member

     (21,988 )     (7,623 )     —         —         —    

Less: Cooperative advertising costs in support of existing customers

     —         (4,620 )     (2,362 )     (2,040 )     (1,390 )

Add: Cost of service associated with initial customer acquisition

     7,367       3,750       1,968       590       1,125  
                                        

Total CPGA costs

   $ 306,439     $ 316,236     $ 363,339     $ 153,641     $ 165,567  

Divided by gross additions

     2,329       2,666       3,014       1,053       1,667  
                                        

CPGA

   $ 131.58     $ 118.62     $ 120.55     $ 145.91     $ 99.32  
                                        

 

 

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RISK FACTORS

An investment in our Class A common stock involves a high degree of risk. You should carefully consider the risks described below, together with the other information in this prospectus, before deciding whether to purchase our Class A common stock.

Risks Related to Our Business

We have a short operating history which may not be indicative of our future performance and, if our revenue and earnings growth are not sustainable, we may not be able to generate the earnings necessary to fund our operations, continue to grow our business or repay our debt obligations.

We launched our service nationally in July 2002 and had no revenues before that time. Consequently, we have a limited operating and financial history upon which to evaluate our business model, financial performance and ability to succeed in the future. You should consider our prospects in light of the risks we may encounter, including risks and expenses faced by new companies competing in rapidly evolving and highly competitive markets. We cannot be certain that our MVNO business model or any specific products or services will be profitable or competitive in the long-term against larger, facilities-based wireless providers or other MVNOs. We also cannot predict whether our MVNO model will allow us to offer the wireless services that customers may demand in the future. We have experienced, and may continue to experience, significant fluctuations in our revenues and cash flows. If we are unable to achieve sufficient revenues and earnings from operations, our financial results will be adversely affected and we will not have sufficient cash to fund our current operations, sustain the continued growth of our business, satisfy our debt covenants or repay our debt obligations. Failure to satisfy our debt covenants (as has occurred in the past) or make any required payments could result in defaults under our credit agreements. We have experienced, and may continue to experience, operating losses. In the event that we do become profitable, we can provide no assurances that such profitability can or will be sustained in the future.

Competition in the wireless industry could adversely affect our revenues and profitability.

The wireless communications market is extremely competitive, and competition for customers is increasing. We compete with (i) facilities-based wireless communications providers and their prepaid affiliates or brands, including Sprint Nextel and its Boost product; and (ii) other MVNOs. We also may face competition from providers of an emerging technology known as Worldwide Interoperability for Microwave Access, or WiMax, which is capable of supporting wireless transmissions suitable for future mobility applications as well as devices offering voice over Internet protocol, or VoIP, telecommunication services in conjunction with WiFi technology. We do not have any agreements in place that would give us access to these emerging technologies.

Most of our competitors have substantially greater financial, technical, personnel and marketing resources and a larger market share than we have, and we may not be able to compete successfully against them or other wireless communications providers. Due to their size and bargaining power, our larger competitors obtain discounts for facilities, equipment, handsets, content, and services, potentially placing us at a competitive disadvantage. As consolidation in the industry creates even larger competitors, our competitors’ purchasing advantages may increase further, hampering our efforts to attract and retain customers. Certain of our competitors may also use their ownership of local wireline telecommunications facilities to introduce service features and calling plans, such as free wireless-to-landline calls, that we are unable to offer at similar cost. Their larger wireless customer bases may make discounted or free in-network calling (that we do not offer currently) more attractive than any similar service that we may offer. This may adversely affect our ability to compete against these competitors in the longer term.

Other prospective entrants in the wireless communications industry, such as cable operators, are beginning to offer bundled local, long distance, high-speed data, and television and video services. The ability of these providers to bundle telecommunications, Internet, and video with wireless services, as well as their financial strength and economies of scale, may enable them to offer wireless services at prices that are lower than the

 

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prices at which we can offer comparable services. If we cannot compete effectively with these service providers, our revenues, profits, cash flows and growth may be adversely affected.

The prepaid wireless marketplace has become increasingly competitive, with a number of new entrants providing service. Several of these providers have marketed their services to the youth-oriented customer demographics that we target. Our operating performance and financial results may be adversely affected if we are unable to successfully differentiate our services from those of such competitors.

We may face competitive pressure to reduce prices for our products and services, which may adversely affect our profitability and other financial results.

As competition in the U.S. wireless communications industry has increased, providers have lowered prices or increased the number of minutes available under monthly service plans to attract or retain customers. To remain competitive with existing and future competitors, we may be compelled to offer greater subsidies for our handsets, reduce the prices for our services or increase the available minutes that we offer under our prepaid monthly, or hybrid, service plans. The prices we charge our customers for services do not affect the amounts we pay to Sprint Nextel under the PCS services agreement, which is based on Sprint Nextel’s costs plus a margin on the services we purchase. As a result, any further subsidies or price reductions that we offer in order to remain competitive may reduce our margins and revenues, and may adversely affect our profitability and cash flows. In addition, when existing customers replace their handsets with new handsets, we incur losses related to the subsidy on the new handset without acquiring a new customer. The lower handset prices may also make our services more accessible to new, lower-value, customers with less disposable income available to spend on our services. In addition, as handset prices decline and handsets become more disposable, customers without contracts may change their wireless providers more frequently, thereby increasing our churn and resulting in higher acquisition costs to replace those customers. A shift to lower value or less loyal customers could have an adverse impact on our results of operations and cash flows.

Failure to develop future service offerings may limit our ability to compete effectively and grow our business.

An important part of our business strategy is the development and introduction of new voice and data services including, but not limited to, mobile data services. The success of our new service offerings will depend, in part, on our ability to anticipate and respond to varied and rapidly changing customer needs. In order to remain competitive in the U.S. wireless industry, we will need to introduce and commercialize these new services to our market on a timely basis. Our future service offerings may rely on new and unproven technology that may demand substantial capital outlays and utilize significant spectrum capacity. Our services currently depend on the nationwide Sprint PCS network, and we cannot guarantee that Sprint Nextel will make the necessary capital outlays or have sufficient spectrum capacity to deploy new services on that network.

To ensure that our services remain attractive to customers and competitive with those offered by other wireless communications providers, we may be required to modify, change, or adjust our service offerings or introduce new service offerings. For instance, we have launched several hybrid calling plans to compete more effectively with other wireless communications providers. We cannot be certain that our hybrid plans, or future service offerings, will be as profitable or successful as we have envisioned. A substantial portion of our recent gross additions have been under these hybrid plans. We cannot guarantee that the adoption and growth of these hybrid plans will continue or that we will be able to offer services under these hybrid plans in a profitable manner.

Higher than expected customer turnover could result in increased costs and decreased revenues, which would have an adverse effect on our profitability.

Many prepaid wireless service providers, including us, historically have experienced a high rate of customer turnover, or “churn.” A major element of our business strategy is offering customers wireless services without

 

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requiring long-term service contracts. In contrast, postpaid services providers generally require customers to enter into long-term service contracts that impose substantial early termination penalties. We do not require long-term service contracts or impose early termination penalties. Accordingly, our customers can terminate service with us easily and transition to another carrier. Although not every company in the wireless communication industry measures churn the same way that we do, we believe that we have a higher churn than our postpaid competitors. Our average monthly churn (as defined in “Prospectus Summary—Summary Financial and Other Data”) for the year ended December 31, 2006 was approximately 4.81%. While we expect a certain level of customer turnover, if actual churn levels were to exceed our current forecasts, it could reduce our revenues, cause our operating margins to diminish, and adversely impact profitability. In addition, our marketing costs to attract the replacement customers required to sustain our business plan could increase, further reducing our profits. Our churn may be affected by several factors, including the following:

 

   

network coverage and connection quality;

 

   

handset and network reliability issues, such as dropped and blocked calls;

 

   

handset pricing and selection;

 

   

the ability to roam on wireless networks of other carriers;

 

   

pricing and affordability of our services;

 

   

pricing of competitive services relative to ours; and

 

   

customer care performance.

As an MVNO, we do not control network access, network reliability or connection quality. Furthermore, our customers do not have the ability to roam on other wireless networks in areas where the nationwide Sprint PCS network, or those parts of that network provided by Sprint Nextel’s third party PCS affiliates, are not available. These and other factors, which are outside our control, may lead to increased churn.

Additionally, the regulations promulgated by the Federal Communications Commission, or FCC, require wireless providers, including us, to provide wireless number portability to their customers. Under these regulations, wireless providers must transfer, or “port,” the number of a departing customer to the customer’s new wireless carrier. These regulations could lead to increased churn as wireless customers now have the ability to retain their wireless telephone numbers despite changing wireless providers.

We may lose customers if we fail to keep up with rapid technological change occurring in the wireless industry.

The wireless communications industry is experiencing significant technological change, including ongoing improvements in the capacity and quality of digital technology, the development and commercial acceptance of wireless broadband data services, shorter development cycles for new products and enhancements, and changes in end-user requirements and preferences. These changes may cause uncertainty about future demand for our wireless services and may affect the prices that we will be able to charge for these services. Rapid changes in technology, moreover, may lead to the development of wireless communications services or alternative services that consumers prefer over our services. Our operational performance and financial results may be adversely affected if we are unable to deploy future technologies or services on a timely basis or at an acceptable cost.

In addition, our ability to subsidize handsets is limited because we do not require long-term contracts that may produce a more stable revenue stream. As a result, we do not offer the most expensive or technologically advanced handsets available to the market because the retail price of such handsets would be less attractive to our customers than those we offer without greater subsidies than those contemplated by our business model.

 

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Our business is seasonal, and we depend on fourth quarter customer additions; our results of operations for future periods will be affected negatively if we fail to deliver strong customer growth in the fourth quarter of any year.

The wireless business in the United States generally, and in the prepaid business in particular, is seasonal and is often disproportionately dependent on fourth quarter results. Our business has experienced a similar pattern and we expect this pattern to continue in the future. If our fourth quarter customer additions fail to meet our expectations, it could adversely affect our results of operations and cash flows.

Bulk handset purchase and trading schemes may curtail our ability to offer handsets at subsidized retail prices and thus limit our ability to acquire new customers or result in significant additional costs.

We acquire new customers in part by offering handsets for sale at significantly subsidized retail prices resulting in a loss to us on handset sales. In recent years, several third parties have purchased our less expensive handsets, reprogrammed them, and resold the handsets in bulk for use on other wireless communications providers’ networks. As a result of such bulk purchase and trading schemes, we do not realize wireless services revenue in connection with such handsets, which in the past has resulted in substantial losses to us. In addition, bulk purchases deplete inventory of retail stores available for sale to legitimate customers. We estimate that in 2005 and 2006, approximately 228,000 and 322,000 of our handsets were bought and resold in bulk, which resulted in a loss of approximately $25.4 million and $30.4 million, respectively, consisting primarily of loss subsidies and promotional expenses. For the six months ended June 30, 2007, we estimate that approximately 27,000 of our handsets were bought and resold in bulk, which resulted in a loss of approximately $1.9 million. For the six months ended June 30, 2006, we estimate that approximately 176,000 of our handsets were bought and resold in bulk, which resulted in a loss of approximately $27.1 million. We believe that such bulk purchase and trading schemes constitute breaches of the contractual terms of purchase of our handsets and the use of our services and that many activities of bulk handset traders infringe on our trademark rights, constitute illegal interference with our business, and constitute civil conspiracy, unjust enrichment and unfair competition. While we have aggressively pursued claims against such bulk purchasers, we cannot predict whether our efforts will be effective. We may be forced to raise our handset prices to deter future bulk purchase and trading activities, which may affect our ability to attract new customers. The continued bulk purchase and trading of our handsets may adversely affect our revenues, profitability and cash flows.

We have a significant amount of debt and are subject to restrictive debt covenants which could have important consequences related to the success of our business.

As of June 30, 2007, our total debt was $522 million and following this offering, on a pro forma basis, our total debt would have been $332 million. We have used debt to finance a significant portion of our operations. See “Use of Proceeds” and “Capitalization” for additional information. The level of our indebtedness could have important consequences, including:

 

   

making it more difficult for us to satisfy our obligations under our debt instruments;

 

   

limiting cash flow available for general corporate purposes, including capital expenditures and acquisitions, because a substantial portion of our cash flow from operations must be dedicated to servicing our debt;

 

   

limiting our ability to obtain additional debt financing in the future for working capital, capital expenditures or acquisitions;

 

   

limiting our flexibility to react to competitive and other changes in our industry and economic conditions generally; and

 

   

exposing us to risks inherent in interest rate fluctuations because all of our borrowings are at variable rates of interest (although we have entered into transactions to hedge a substantial portion of our interest rate risk, if market interest rates increase, our unhedged variable-rate debt will result in higher interest expense and adversely affect our cash flow).

 

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In 2005, we failed to satisfy a net service revenue covenant in our prior credit facility, which resulted in a default under that credit facility and required us to negotiate with our lenders to amend and restate that facility in July 2006. As a result of the default, we had no access to our $100 million revolving credit facility provided under our 2005 senior credit facilities, which resulted in a liquidity shortfall in 2006. As a result of the liquidity shortfall, we were unable to make timely payments to Sprint Nextel on amounts owed under the PCS services agreement, requiring us to negotiate with Sprint Nextel in order to receive additional time to make such payments and to pay interest on such late payments. In connection with the amendment and restatement of our 2005 senior credit facilities and our liquidity shortfall, Sprint Nextel and the Virgin Group provided us with our $100 million subordinated secured revolving credit facility which replaced the $100 million revolving credit facility previously provided by the third party lenders under our 2005 senior credit facilities. In connection with the reorganization transactions described under “Organizational Structure—Reorganization Transactions”, we will use approximately $45 million of proceeds to us from this offering to repay indebtedness owed to Sprint Nextel under the terms of our subordinated secured revolving credit facility. Following such repayment, Sprint Nextel will no longer be a lender under our subordinated secured revolving credit facility and the Virgin Group’s commitment under the facility will be increased to $75 million. Accordingly, the maximum borrowing amount under the subordinated secured revolving credit facility will be reduced from $100 million to $75 million following the offering.

Our senior secured credit facility and our subordinated secured revolving credit facility contain a number of restrictive covenants and require us to maintain specified financial ratios and satisfy financial condition tests. See “Description of Indebtedness—Senior Secured Credit Facility.” We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to us on acceptable terms or in an amount sufficient to enable us to pay interest or principal on our debt or to fund our other liquidity needs. In addition, our limited tangible assets may further limit our ability to obtain loans or access the debt capital markets. Failure to satisfy our debt covenants or make any required payments could result in defaults under our credit agreements.

We may incur significant additional indebtedness from time to time. If we incur additional indebtedness, the related risks we could face would be magnified.

Our products and services are sold primarily through third party retail distribution partners, and the success of our business will depend in part on maintaining our relationships with these partners.

Wireless products and services traditionally have been sold primarily in dedicated wireless retail stores, many branded with the name of the wireless communications provider. We have not operated, and do not plan to operate, branded stores dedicated to our wireless products and services. Instead, we sell our products and services through third-party distribution channels and through our website and our contact center.

Our four largest distribution partners account for a substantial majority of our sales. The success of our business depends in part on maintaining our relationships with these and other distribution partners and the terms of our distribution agreements with these partners. Our distribution agreements with retail partners generally have short terms and do not impose minimum purchase obligations on our distribution partners. We, on the other hand, have long-term supply contracts with manufacturers of our handsets. Accordingly, there is no assurance that our distribution partners will continue to distribute our products or distribute sufficient quantities to match our purchase obligations with our suppliers. If our distribution agreements expire or are terminated or if our distribution partners cease to distribute our products and services, we may not be able to establish alternative distribution channels for our products and services.

As an MVNO, we are dependent on Sprint Nextel for our wireless network and any disruptions to such network may adversely affect our business and financial results.

We are dependent on Sprint Nextel’s physical network. As an MVNO, we do not own spectrum or own or operate a physical network. Sprint Nextel is our exclusive wireless network provider. To be successful, we will

 

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need to continue to provide our customers with reliable service over the nationwide Sprint PCS network. We rely on Sprint Nextel and its third party PCS affiliates to maintain their wireless facilities and government authorizations and to comply with government policies and regulations. If Sprint Nextel or its third party PCS affiliates fail to do so, we may incur substantial losses. Delays or failure to add network capacity, or increased costs of adding capacity or operating the network, could limit our ability to increase our customer base, limit our ability to increase our revenues, or cause a deterioration of our operating margin. Some of the risks related to the nationwide Sprint PCS network and infrastructure include: physical damage to access lines, breaches of security, power surges or outages, software defects and disruptions beyond Sprint Nextel’s control, such as natural disasters and acts of terrorism, among others. The PCS services agreement with Sprint Nextel does not contain any contractual indemnification provisions relating to network outages or other disruptions. Any impact on the nationwide Sprint PCS network will have an adverse impact on our business and may adversely affect our financial condition, results of operations and cash flows.

We are dependent on third party PCS affiliates of Sprint Nextel. Third party PCS affiliates of Sprint Nextel provide network coverage in certain regions of the country. We are dependent on those third party PCS affiliates for coverage in those areas, and currently all such third party PCS affiliates allow Virgin Mobile to offer service in their regions. Every three years, these PCS affiliates have the right to discontinue the activation of service for our new customers in their respective regions and they may next make this election in July 2008. If they agree to continue to support our services, they must commit to a three-year term, after which they can again elect to discontinue the activation of service for new customers in their regions. In addition, such third party PCS affiliates have the right to stop providing their services to our new customers (1) if we launch services that are not pay-as-you-go services in such affiliate’s territory, (2) if we target customers outside the market segment of individuals up to and including thirty years old (3) upon a change of control of us or Sprint Nextel and (4) upon certain events of bankruptcy or dissolution of us or Sprint Nextel. In the year ended December 31, 2006, approximately 7.01% of our customers were located in such third party PCS affiliate territories and we generated approximately $108.6 million in revenues from such customers. In the six months ended June 30, 2007, approximately 6.53% of our customers were located in such third party PCS affiliate territories and we generated $29.3 million in revenues for such customers. The inability to provide service to customers within the third party PCS affiliates’ territories could have an adverse affect on our business and could adversely affect our financial condition, results of operations and cash flows.

We are dependent on technology used by Sprint Nextel. Wireless communications technology is evolving rapidly. A significant change in current wireless network technologies or the emergence of alternative technologies could reduce significantly our ability to offer a full range of data services, as compared to our competitors. If Sprint Nextel fails to keep up with these changes, we may lose customers or may not be able to attract new customers. In addition, our PCS services agreement with Sprint Nextel presently covers only our access to the nationwide Sprint PCS network using CDMA technology and may limit our ability to access other networks or services offered by Sprint Nextel now or in the future. If Sprint Spectrum migrates a significant number of customers to a successor network and ceases activation of new customers on the nationwide Sprint PCS network or a significant number of Sprint Spectrum’s activation of new voice and data customers are on a successor network, we will begin negotiations with Sprint Spectrum regarding a possible arrangement to provide us with access to that successor network. If at any time Sprint Spectrum offers terms and conditions for the use of the successor network that are substantially similar to those under the PCS services agreement, we must accept the offer. If after a specified negotiation period, we cannot reach an agreement with Sprint Spectrum, or Sprint Spectrum has not offered terms for the successor network that are substantially similar to those under the PCS services agreement, then we must elect to either (1) use the successor network exclusively at the same level of functionality as the nationwide PCS network at rates fixed at those applicable to us for the services on the CDMA network under the PCS services agreement or (2) terminate the agreement and continue to use the CDMA network for a period of approximately two years pursuant to the terms and conditions of the PCS services agreement, subject to a cap on rates at those applicable to us as of the beginning of the negotiation period. If we elect to terminate the agreement under (2) above, our exclusivity obligations cease and we may negotiate with other network providers to obtain mobile services during this period and thereafter. We may not be able to

 

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negotiate new terms with Sprint Nextel or negotiate for competitive terms with a third party provider of those services. In all cases, Sprint Spectrum reserves the right to discontinue providing services over the CDMA network after expiration of a two-year migration period and we will bear the costs (if any) of migrating end users to a new network if necessary.

If the PCS services agreement is terminated, we may be unable to obtain the wireless services necessary to operate our business.  Our PCS services agreement with Sprint Nextel expires in 2027. Sprint Nextel, however, may terminate the PCS services agreement prior to the expiration of its term due to various reasons specified in the PCS services agreement, including:

 

   

breach of the agreement by us;

 

   

acquisition of control of us by a specified competitor of Sprint Nextel; or

 

   

a specified competitor of the Virgin Group acquires control of us and Virgin Group terminates the Virgin trademark license agreement.

In case of either the expiration or termination of the Sprint PCS services agreement, we may be unable to reach a further agreement with Sprint Nextel and its third party PCS affiliates or with an alternate wireless communications provider to obtain the wireless services necessary to operate our business. In addition, transition to an alternative provider is limited to a provider with a CDMA network as our handsets are not capable of operating on all networks. Such a transition could be time-consuming and costly and we could lose a substantial number of customers during the transition period.

Our dependence on Sprint Nextel is not limited to our use of the nationwide Sprint PCS network.  We rely on Sprint Nextel and its third party PCS affiliates for other critical operational matters, including:

 

   

continued expansion and improvement by Sprint Nextel of the nationwide Sprint PCS network and its third party PCS affiliates’ networks, which is expected to require additional investment;

 

   

deployment of upgrades and maintenance of the nationwide Sprint PCS network by Sprint Nextel and its third party PCS affiliates;

 

   

maintenance by Sprint Nextel of its relationships with its third party PCS affiliates;

 

   

maintenance by Sprint Nextel and its third party PCS affiliates of FCC authorizations in good standing;

 

   

integration of new services into the nationwide Sprint PCS network;

 

   

certification of new handsets for use on the nationwide Sprint PCS network;

 

   

compliance with FCC, state E911 and other regulatory requirements;

 

   

obtaining telephone numbers;

 

   

maintenance of interconnection agreements; and

 

   

compliance with applicable laws and regulations including the Communications Assistance for Law Enforcement Act of 1994, or CALEA, network technical requirements.

We compete with Sprint Nextel’s products.  We compete with several of Sprint Nextel’s products, including its postpaid products and its prepaid Boost product. In addition, Sprint Nextel may from time to time create products or acquire interests in business that directly or indirectly compete with us. As a result, Sprint Nextel’s interests may be different from, or adverse to, ours.

Payments made to Sprint Nextel pursuant to the PCS services agreement are based on estimates, which may cause our reported quarterly results to be less reflective of our actual performance during a given period.

We purchase wireless network services at a price based on Sprint Nextel’s annual cost of providing these services plus a profit margin. Quarterly, we estimate the annual cost of such services and record an adjustment if the estimate is different from the actual costs billed to us by Sprint Nextel. Under the terms of the agreement,

 

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Sprint Nextel is required to provide us with a final assessment of their costs annually. In the event that our estimates for a given period are incorrect, we record an adjustment in the then-current period as a change to the estimate. Accordingly, our costs associated with network services may not be fully aligned with revenues during a given period to the extent of such adjustments and our reported quarterly results may not be fully reflective of our actual performance during a given period.

Sprint Nextel’s failure to obtain the proper licenses and governmental approvals from regulatory authorities would cause us to be unable to successfully operate our business.

The FCC licenses currently held by Sprint Nextel and its third party PCS affiliates to provide PCS services are subject to renewal and revocation. There is no guarantee that Sprint Nextel’s or its third party PCS affiliates’ PCS licenses will be renewed. The FCC requires all PCS licensees to meet certain requirements, including so-called “build-out” requirements, to retain their licenses. Sprint Nextel’s or its third party PCS affiliates’ failure to comply with certain FCC requirements in a given license area could result in the revocation of Sprint Nextel’s or such third party PCS affiliates’ PCS license for that geographic area.

We are dependent on our license agreement with the Virgin Group to use the Virgin Mobile brand.

We are party to a trademark license agreement with the Virgin Group pursuant to which we have exclusive rights to use the Virgin Mobile brand for wireless products and services in our coverage area through 2027. The Virgin Group may terminate the trademark license agreement prior to the expiration of its term due to various reasons specified in the agreement, including:

 

   

breach of the agreement by us;

 

   

acquisition of control of us by certain competitors of the Virgin Group; or

 

   

a specified competitor of Sprint Nextel acquires control of us and Sprint Nextel terminates the Sprint PCS services agreement.

Further, we are subject to certain requirements regarding customer service, including levels of overall customer satisfaction. Failure to satisfy these levels may result in termination of the trademark license agreement by the Virgin Group.

In case of either the expiration or termination of the Virgin trademark license agreement, we may be unable to reach a further acceptable agreement with the Virgin Group. Our inability to use the Virgin Mobile brand would have a material adverse effect on our operations.

We may be limited in our ability to grow our business and customer base unless we can continue to obtain network capacity at favorable rates and meet the growing demands on our business systems and processes.

To further expand our MVNO business, we must continue to obtain wireless network capacity at favorable rates and terms, provide adequate customer service and acquire and market a sufficient quantity and mix of handsets and related accessories. Our operating performance and ability to attract new customers may be adversely affected if we are unable to meet the increasing demands for our services in a timely and efficient manner, while adequately addressing the growing demands on our customer service, billing, and other back- office functions. Any change in our ability, or the ability of third parties with whom we contract, to provide these services also could adversely affect our operations and financial performance.

Our operations and growth could be adversely affected if our wireless data services do not perform satisfactorily.

We provide text, instant and picture messaging, email, ringtones, games, and other wireless data services marketed under the VirginXL and VirginXtras brand names. These non-voice mobile data services represent a significant portion of our revenues. Our future results may be adversely affected if these services are not utilized

 

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by a sufficient number of our customers or fail to produce sufficient levels of customer satisfaction and revenues. These services and features may not counter increasing competition and pricing pressure in the wireless voice market or markedly differentiate us from our competitors. We also may not realize our goals successfully if we fail to develop and deploy new wireless data applications for our customers, offer wireless data services profitably, or achieve a satisfactory level of customer acceptance and utilization of our wireless data services.

Our prepaid service offerings may not be successful in the long term.

Our prepaid services may not prove to be successful or profitable in the long term. In addition, a majority of the customers that purchase our prepaid services are lower-income, lower-usage customers. Our long-term success is dependent upon our sustained ability to generate sufficient revenue from our customers based on their use of our services and respond to churn by adding new customers. If we are unable to sustain or increase the revenue that we generate from our existing customers or obtain new customers to replace churned customers, our operational performance and financial results may be adversely affected.

We rely on third parties for equipment and services that are integral to our business.

We have entered into agreements with third-party contractors, including Kyocera Wireless Corp., LG Electronics MobileComm U.S.A., Inc., Motorola, Inc. and UTStarcom Personal Communications LLC, to provide equipment and services required for our operation, in addition to content development, product distribution, supply chain, handset sourcing, customer care and billing and payment processing. Some of these agreements contain termination provisions that allow for these agreements to be cancelled upon short or no notice. If these contracts are terminated and we are unable to renew them or negotiate agreements for replacement services with other providers at comparable rates, our business will suffer. Our handset inventory is currently acquired from only a few sources. In addition, our ability to control the efficiency, timeliness and quality of the services provided by our third party contractors is limited.

Our future success will depend in part on our ability to protect our intellectual property rights, and our inability to enforce these rights could cause us to lose sales and any competitive advantage we have.

Our success depends to a significant degree upon our ability to protect and preserve the proprietary aspects of our products and services and other intellectual property. We rely on the patent, trademark, copyright and trade secret laws of the United States and other countries, as well as nondisclosure agreements, to protect our intellectual property rights. However, we may be unable to prevent third parties from using our technology without our authorization, breaching any nondisclosure agreements with us, or independently developing technology that is similar to ours, particularly in those countries where the laws do not protect our proprietary rights as fully as in the United States. The use of our intellectual property or similar intellectual property by others could reduce or eliminate any competitive advantage we have developed, cause us to lose sales or otherwise harm our business. If it becomes necessary for us to resort to litigation to protect these rights, any proceedings could be burdensome and costly and we may not prevail.

We depend upon our senior management and our business may be adversely affected if we cannot retain them.

Our success depends upon the retention of our experienced senior management with specialized industry and technical knowledge. We might not be able to find qualified replacements for the members of our senior management team if their services were no longer available to us; accordingly, the loss of critical members of our senior management team could have a material adverse effect on our ability to effectively pursue our business. We only have “key man” life insurance for Daniel H. Schulman, our chief executive officer, and no other member of our senior management team.

 

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Difficulty hiring and retaining qualified personnel, costs associated with any workforce reductions and the potential impact of unionization and organizing activities could have an adverse effect on our costs and results of operations.

The success of our business depends in large part upon our ability to attract and retain highly skilled, knowledgeable and qualified managerial, professional, technical, sales and customer support personnel. If we are unable to recruit and retain qualified employees our results of operations could be adversely affected. In addition, in order to remain competitive we could decide to reduce our workforce to better align our cost structure with our economics or to otherwise reduce operating costs or improve efficiencies, which could lead to a decline in employee morale, reduced productivity and increased attrition. Furthermore, we may incur substantial costs relating to severance or similar payments in the event of a workforce reduction.

In addition, union organizing activities may occur, and the adverse impact of unionization and organizing activities on our costs and operating results could be substantial.

We may consider mergers, acquisitions or strategic investments, which may subject us to integration and other risks.

Historically, we have grown our business organically but, subject to our existing and future contractual obligations, we may in the future consider mergers, acquisitions or strategic investments to obtain increased market share or access to new technologies. Risks we may encounter include: (i) negotiation of potential acquisitions could cause us to incur significant costs; (ii) potential acquisitions may not contribute to our business strategy, or we may pay more than the real value of the assets or company being acquired; (iii) such acquired assets or operations may not result in sales or profits that justify the investments made in such acquisitions; (iv) we may have difficulty assimilating the acquired technologies or products into our products and services; (v) our relationship with current and new employees, customers and distributors could be impaired; (vi) our due diligence process may fail to identify technical problems, such as issues with the acquired company’s product quality or product structure; (vii) we may face contingencies related to product liability, intellectual property, financial disclosures and accounting practices or internal controls; (viii) potential acquisitions may result in litigation from terminated employees or third parties; (ix) potential acquisitions may divert our management’s attention from our existing operations; and (x) we may be unable to obtain the timely authorizations from governmental authorities to the extent required to complete such potential acquisitions pursuant to competition, antitrust or other laws. These factors could have a material adverse effect on our businesses, results of operations, financial condition or cash flows, particularly in the case of the acquisition of a larger company or a high number of acquisitions. To the extent that we issue shares in connection with future acquisitions, existing stockholders may be diluted and earnings per share may decrease. In addition, certain transactions may result in payments to Sprint Nextel and the Virgin Group under their respective tax receivable agreements.

Risks Related to Our Industry

Government regulations and taxation could increase our costs, limit our growth, and adversely affect our operations and financial results.

The licensing, operation and provision of wireless telecommunications systems and services are regulated by the FCC and, depending on the jurisdiction, state and local regulatory agencies. These regulatory authorities have established certain taxes and fees on the providers of wireless services. Although we remit all applicable federal and state regulatory fees, we currently do not recover these regulatory fees or our compliance costs directly from most of our customers. We may decide to pass these costs directly to all of our customers in the future, however, which may negatively affect our ability to attract and retain customers. Federal, state, and local taxation of our services also significantly increases our cost of doing business and affects our profitability.

The FCC and many states have established universal service fund (USF) programs to ensure that affordable, quality telecommunications services are available to all U.S. residents. Under the FCC’s current regulations,

 

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carriers, including us, must contribute to the federal USF program a variable percentage of interstate end-user telecommunications revenues. The FCC, however, has indicated that it may transition to a connections-based or numbers-based approach for USF contributions in the near future. Under such a system, carriers would contribute a per-customer flat fee for each connection or number that the carrier serves. While no final decision has been made by the FCC on transitioning to a connections-based or numbers-based USF contribution methodology, any such transition may require us to increase our rates, adversely affecting our profitability and hindering our ability to attract and retain customers. Generally, any connections-based or numbers-based regime that imposes a flat rate for all wireless users, without adjustment for or exception of lower usage customers, would be regressive and may adversely affect our customers, who on average have lower usage levels and lower incomes than those of postpaid services.

The FCC also has adopted rules requiring wireless providers to implement enhanced 911 (E-911) calling capabilities in two phases, the second of which requires carriers to provide automatic customer location information with a specified accuracy. Many state and local governments have imposed flat per-customer fees on wireless providers to support local implementation of this service. Although we remit all applicable E-911 fees, we do not currently recoup E-911 fees directly from most of our customers. Any increase in these fees may affect our operations and require us to raise our service rates, which may affect our ability to attract and retain customers. In the future, we also may seek to recover these fees from all of our customers, which may affect our ability to attract and retain customers. Moreover, any connections-based or numbers-based regime that imposes a flat rate for all wireless users, without adjustment for or exception of lower usage customers, would adversely affect our customers, who on average have lower usage levels and lower incomes than those of postpaid services.

While Section 332 of the Communications Act of 1934, as amended, generally preempts state and local regulation of wireless services, states have begun to regulate the practices of wireless providers by applying traditional consumer protection requirements to wireless services. The trend toward increasing the amount and applicability of these requirements greatly affects our ability to offer nationwide services. If a significant number of states were to extend consumer protection requirements to wireless services, it would alter significantly our business practices and impose additional costs on us. If we fail to comply with any of these government regulations, we may be subject to monetary sanctions, which could have a material adverse effect on our business.

Circumvention of security systems on our handsets may adversely affect our operational performance and financial results.

Software installed on handsets sold by many wireless providers, including us, prevents a customer from using a handset sold by one wireless provider on another wireless provider’s system. A recently issued federal regulation provides that circumvention of such software, when circumvention is accomplished for the sole purpose of lawfully connecting to a wireless telephone communication network, is exempt from the Digital Millennium Copyright Act’s prohibition against circumvention of technological measures that control access to copyrighted works. 37 C.F.R. § 201 (2006).

Like most wireless providers, we subsidize handsets with the expectation that the customer will use the handset on our wireless service and generate sufficient revenue to defray our upfront subsidy. Since we do not impose annual service contracts or early termination penalties, customers may terminate service with us at any time and transition to a new provider. Our financial results could be adversely affected if a significant number of our customers were encouraged by the regulation described above to transition to a new wireless communications provider before we were able to recoup our upfront handset subsidy.

In addition, while this regulation does not prevent us from relying on other legal theories, it has eliminated one claim that otherwise might have been brought against bulk purchasers of our handsets and may impair our ability to deter future bulk purchase and trading activities.

 

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Concern about alleged health risks relating to radio frequency emissions from wireless handsets may harm our prospects.

There have been suggestions that radio frequency emissions from wireless handsets may be linked to health concerns, including increased incidences of cancer. Although medical reviews have concluded that evidence does not support a finding of adverse health effects as a result of wireless handset use, some studies have suggested that radio frequency emissions may cause certain adverse biological effects. Research on these and other health concerns is ongoing and may demonstrate a link between radio frequency emissions and health concerns.

We and other wireless communications providers may be subject to litigation relating to these and other health concerns, including claims that handsets interfere with various electronic medical devices, such as hearing aids and pacemakers. Concerns over radio frequency emissions may also discourage the use of wireless handsets, which could have a material adverse effect on our business.

We and others in our industry are subject to allegations of intellectual property infringement which, if resolved against us, could reduce our revenues, cause us to lose customers or increase our costs.

Wireless communications providers have been the subject of third party allegations of intellectual property rights infringement and we cannot be certain that our products do not and will not infringe the intellectual property rights of others. In some instances, these third party allegations have progressed to lawsuits alleging infringement of patent and other rights. We have been and may again be a target of lawsuits alleging that our service offerings infringe third parties’ intellectual property rights. Any such allegations, whether or not meritorious, could result in costly litigation and divert the efforts of our legal staff and other personnel. While we will seek appropriate assurances and indemnification from vendors, if it is ultimately determined that a third party has enforceable intellectual property rights with respect to our services, it may adversely affect our results of operations or prevent us from offering our services. If we are found liable for infringement, we may be required to enter into licensing agreements (if available on acceptable terms or at all) or pay damages and cease making or selling certain products. In addition, we may need to redesign some of our service offerings to avoid future infringement liability.

Risks Related to Our Organizational Structure

Our only material asset after completion of this offering will be our units in the Operating Partnership, and we are accordingly dependent upon distributions from the Operating Partnership to pay our expenses, taxes and dividends (if and when declared by our board of directors).

Virgin Mobile USA, Inc. will be a holding company and will have no material assets other than its direct and indirect ownership of partnership units in the Operating Partnership. Virgin Mobile USA, Inc. has no independent means of generating revenue. To the extent that Virgin Mobile USA, Inc. needs funds, and the Operating Partnership is restricted from making such distributions under applicable law or regulation or under any present or future debt covenants, or is otherwise unable to provide such funds, it would materially adversely affect our business, liquidity, financial condition and results of operation.

Our corporate structure may result in conflicts of interest between our stockholders and the holders of our operating partnership units.

Our corporate structure is similar to that of an umbrella partnership real estate investment trust, or UPREIT, which means that we hold our assets and conduct substantially all of our operations through an operating limited partnership, and may in the future issue limited partnership units to third parties. Persons holding operating partnership units would have the right to vote on certain amendments to the partnership agreement of the Operating Partnership, as well as on certain other matters. Persons holding these voting rights may exercise them in a manner that conflicts with the interests of our stockholders. Circumstances may arise in the future when the interests of limited partners in our Operating Partnership conflict with the interests of our stockholders. As we

 

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control the general partner of the Operating Partnership, we have fiduciary duties to the limited partners of the Operating Partnership that may conflict with fiduciary duties our officers and directors owe to our stockholders. These conflicts may result in decisions that are not in the best interests of stockholders.

In addition, our amended and restated certificate of incorporation provides that neither Sprint Nextel nor the Virgin Group nor their respective affiliates has any duty to refrain from (i) engaging, directly or indirectly, in a corporate opportunity in the same or similar lines of business in which we now engage or propose to engage; or (ii) doing business with any of our clients, customers or vendors. In the event that either of Sprint Nextel or the Virgin Group acquires knowledge of a potential transaction or other business opportunity which may be a corporate opportunity for itself or its affiliates and for us or our affiliates, then neither Sprint Nextel nor the Virgin Group has any duty to communicate or offer such transaction or business opportunity to us and may take any such opportunity for themselves or offer it to another person or entity. Neither Sprint Nextel nor the Virgin Group nor any officer, director or employee thereof, shall be liable to us or to any of our stockholders (or any affiliates thereof) for breach of any fiduciary or other duty by engaging in any such activity and we waive and renounce any claim based on such activity. This provision applies even if the business opportunity is one that we might reasonably be deemed to have pursued or had the ability or desire to pursue if granted the opportunity to do so. Our amended and restated certificate of incorporation provides that any amendment or repeal of the provisions related to corporate opportunities described above requires the affirmative vote of 80% of the holders of the then-outstanding shares of our common stock.

We will be required to pay Sprint Nextel for the tax benefits relating to any additional tax depreciation or amortization deductions we may claim as a result of the tax basis step-up we receive in connection with our purchase from Sprint Nextel of units in the Operating Partnership prior to the consummation of this offering and subsequent exchanges by Sprint Nextel of its units in the Operating Partnership for shares of our common stock and related transactions with Sprint Nextel.

The amounts of the tax benefits we expect to receive and the amounts we will be required to pay may vary. Sprint Nextel will sell a portion of its interest in Virgin Mobile USA, LLC to Virgin Mobile USA, Inc. in consideration of approximately $160.8 million (which will be paid from the net proceeds to us from this offering). In addition, from time to time, Sprint Nextel may exchange partnership units in the Operating Partnership for shares of our Class A common stock. The initial sale and subsequent exchanges may result in increases in the tax bases of the assets of the Operating Partnership that would be allocated to Virgin Mobile USA, Inc. Any increase in tax basis that is attributable to an amortizable asset may reduce the amount of tax that we would otherwise be required to pay in the future. The amount of the benefit realized by us will vary depending on the amount, character and timing of our taxable income and there can be no assurances that any such benefit will be utilizable in whole or in part. See “Organizational Structure.”

We intend to enter into a tax receivable agreement with Sprint Nextel that will provide for the payment by us to Sprint Nextel of the amount of the actual cash savings, if any, in U.S. federal, state and local income tax that we actually realize as a result of these increases in tax basis. For purposes of the tax receivable agreement, cash savings in income tax generally will be computed by comparing our income tax liability (assuming no contribution of net operating losses by the Virgin Group) to the amount of such taxes that we would have been required to pay if (i) there had been no increase to the tax basis of the assets of the Operating Partnership as a result of the initial sale and future exchanges, (ii) we had not entered into the tax receivable agreement and (iii) the Virgin Group had not contributed any net operating losses. This amount will be adjusted under the terms of the tax receivable agreement to the extent that the aggregate hypothetical value of benefits contributed by both the Virgin Group and Sprint Nextel exceeds our actual cash tax savings from such benefits. The term of the tax receivable agreement will commence upon consummation of this offering and will continue until all such tax benefits have been utilized or expired, including the tax benefits derived from future exchanges.

It is expected that payments to Sprint Nextel will be substantial. While the actual amount and timing of payments under the tax receivable agreement will depend upon a number of factors, including the timing of the

 

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exchanges, the amount and timing of taxable income we generate in the future, our use of net operating loss carryovers, the portion of our payments under the tax receivable agreement constituting imputed interest and increases in the tax basis of our assets resulting in payments to Sprint Nextel, we expect that the payments that may be made to Sprint Nextel will be substantial. Assuming no material changes in the relevant tax law and that we earn significant taxable income to realize the full tax benefit of the increased amortization of our assets, we expect that future payments to Sprint Nextel, in respect of the initial purchase of interests of Virgin Mobile USA, LLC, to aggregate approximately $137.3 million. Future payments to Sprint Nextel in respect of subsequent exchanges would be in addition to this amount and are expected to be substantial. In addition, we will depend on distributions from the Operating Partnership to fund our payment obligations under the tax receivable agreement. Under the terms of the limited partnership agreement of the Operating Partnership, all distributions to fund such obligations are made to the partners pro rata in accordance with their respective percentage ownership interests in the Operating Partnership. Accordingly, every time we cause the Operating Partnership to make a distribution to us in order to fund our payment obligations to Sprint Nextel under the tax receivable agreement, the Operating Partnership will be required to make a corresponding distribution to Sprint Nextel. The payments under the tax receivable agreement are not conditioned upon Sprint Nextel’s continued ownership of us. We may need to incur debt to finance payments under the tax receivable agreement to the extent our cash resources are insufficient to meet our obligations under the tax receivable agreement as a result of timing discrepancies or otherwise.

In addition, although we are not aware of any issue that would cause the Internal Revenue Service, or IRS, to challenge the tax basis increases or other benefits arising under the tax receivable agreement, Sprint Nextel will not reimburse us for any payments previously made if such basis increases or other benefits are subsequently disallowed, although the amount of any tax savings subsequently disallowed will reduce any future payment otherwise owed to Sprint Nextel. As a result, in such circumstances we could make payments to Sprint Nextel under the tax receivable agreement in excess of our actual cash tax savings.

The timing of our payments to Sprint Nextel could be accelerated in certain circumstances and could exceed our actual cash savings. If we undergo a change in control and do not elect to terminate the tax receivable agreement as discussed below, cash savings in income tax will be computed as described above, but with the additional assumption that we have sufficient income in each subsequent year to claim all of the tax benefits attributable to the increase to the tax basis of the assets of the Operating Partnership and to utilize any loss carryovers attributable to such increase in basis. If we or our direct or indirect subsidiary transfers any asset to a corporation with which we do not file a consolidated tax return, we will be treated as having sold that asset in a taxable transaction for purposes of determining the cash savings in income tax under the tax receivable agreement. In addition, prior to agreeing to engage in any business combination, sale or purchase of assets, or reorganization outside the ordinary course of its business which would not constitute a change of control for purposes of the tax receivable agreement and which could adversely affect the expected value of the benefits payable to Sprint Nextel under the tax receivable agreement, we will be required to obtain the consent of Sprint Nextel, which consent may be conditioned upon our agreement to make a make-whole payment to Sprint Nextel to compensate Sprint Nextel for such reduction in benefits. Although not assured, we expect that the consideration that we will remit to Sprint Nextel will not exceed the tax liability that we otherwise would have been required to pay absent the contribution by Sprint Nextel of tax attributes as a result of the reorganization transactions and subsequent exchanges. However, such payments could be substantial and could exceed our actual cash tax savings under the tax receivable agreement.

The tax receivable agreement provides that in the event that we breach any of our material obligations under the tax receivable agreement, whether as a result of our failure to make any payment when due (subject to a specified cure period), failure to honor any other material obligation under the tax receivable agreement or by operation of law as a result of the rejection of the tax receivable agreement in a case commenced under the Bankruptcy Code or otherwise, then all our payment and other obligations under the tax receivable agreement will be accelerated and will become due and payable. Such payments could be substantial and could exceed our actual cash tax savings under the tax receivable agreement. Additionally, we have the right to terminate the tax receivable agreement with respect to previous exchanges (or, in certain circumstances, including if we undergo

 

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a change of control, with respect to all previous and future exchanges). If we terminate the tax receivable agreement, our payment and other obligations under the tax receivable agreement will be accelerated and will become due and payable. Although not assured, we expect that the consideration that we will remit to Sprint Nextel will not exceed the tax liability that we otherwise would have been required to pay absent the contribution by Sprint Nextel of tax attributes as a result of the reorganization transactions and subsequent exchanges. However, such payments could be substantial and could exceed our actual cash tax savings under the tax receivable agreement.

We will be required to pay the Virgin Group for the tax benefits relating to certain tax attributes contributed by the Virgin Group to us in connection with the reorganization transactions which payments may be required to be made by the issuance of additional shares of our Class A common stock and preferred stock or, in certain circumstances, in cash.

The amounts of the tax benefits we expect to receive and the amounts we will be required to pay may vary. In connection with the reorganization transactions the Virgin Group will contribute to Virgin Mobile USA, Inc. its interest in the predecessor of Investments, which will result in us receiving approximately $322.4 million of net operating losses accumulated by Investments. If utilized by us, these net operating losses will reduce the amount of tax that we would otherwise be required to pay in the future. The amount of benefit realized by us may vary depending on the amount, character and timing of our taxable income and there can be no assurances that any such benefit will be utilizable in whole or in part. In addition, section 382 of the Internal Revenue Code of 1986, as amended, imposes an annual limit on the ability of a corporation that undergoes an “ownership change” to use its net operating losses to reduce its tax liability. It is likely that an ownership change of Investments will occur as a result of this offering that would impose a limitation on the use of such net operating losses under section 382.

We intend to enter into a tax receivable agreement with the Virgin Group that, if the Virgin Group owns 50% or more of either the voting power or value of our stock upon the closing of this offering, will provide for the issuance by us subject to a cap to the Virgin Group of a number of shares of our Class A common stock equal to the quotient of (1) the amount of actual cash savings, if any, in U.S. federal, state and local income tax that we actually realize as a result of these net operating losses and (2) the greater of (A) the price per share of our Class A common stock at the time of such issuance and (B) the price per share of our Class A common stock in this offering. If the price per share of our Class A common stock at the time of such issuance is less than the price per share of Class A common stock in this offering, we will also be required to issue to the Virgin Group preferred stock with a liquidation preference equal to the difference of (1) the amount of actual cash savings realized by us, less (2) the market value of the shares of Class A common stock received by the Virgin Group in respect of such savings. Holders of the preferred stock will be entitled to receive quarterly cash dividends at a specified fixed rate. The preferred stock will be redeemable by us at our option at any time and will be mandatorily redeemable by us seven years after the issue date and will be classified as a liability on our balance sheet. Notwithstanding the foregoing, under the terms of the tax receivable agreement, if the Virgin Group owns less than 50% of the voting power and value of our stock upon the closing of this offering, the payments under the tax receivable agreement will be made in cash. Based on the anticipated terms of this offering, we expect that the payments under the tax receivable agreements will be made in cash. For purposes of the tax receivable agreement, cash savings in income tax generally will be computed by comparing our income tax liability (assuming no step-up in the basis of the assets attributable to exchanges by Sprint Nextel) to the amount of such taxes that we would have been required to pay had such net operating losses not been available to us and assuming no step-up in the basis of the assets attributable to exchanges by Sprint Nextel. This amount will be adjusted under the terms of the tax receivable agreement to the extent that the aggregate hypothetical value of benefits contributed by both the Virgin Group and Sprint Nextel exceed our actual cash tax savings from such benefits. The term of the tax receivable agreement will commence upon consummation of this offering and will continue until all such tax benefits have been utilized or expired, except in the event that the Virgin Group owns 50% or more of either the voting power or value of our stock

 

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upon the closing of this offering in which case the term will continue until the earlier of (i) the time all such tax benefits have been utilized or expired or (ii) twenty years from the date of the agreement.

It is expected that payments made to the Virgin Group will be substantial and, if payments are made in stock may dilute the ownership of Class A common stock. While payments made under the tax receivable agreement will depend upon a number of factors, including the price of shares of our Class A common stock at the time of the issuances if payment is made in stock, the amount and timing of taxable income we generate in the future, our use of additional amortization deductions attributable to our acquisition of units in the Operating Partnership from Sprint Nextel and the portion of our payments under the tax receivable agreement constituting imputed interest, we expect that the payments that may be made to the Virgin Group will be substantial and will dilute the ownership of the Class A common stock if payment is made in stock. Assuming no material changes in the relevant tax law and that we earn significant taxable income to realize the full tax benefit of the net operating losses contributed by the Virgin Group, we expect future payments to the Virgin Group to aggregate $128.9 million. Based on the midpoint of the estimated price range on the cover of this prospectus, this would represent 8,056,250 additional shares and would result in 3% dilution pro forma for the initial public offering if payment is made in stock. In addition, we will depend on distributions from the Operating Partnership to fund our cash payment obligations, if any, under the tax receivable agreement. Under the terms of the limited partnership agreement of the Operating Partnership, all distributions to fund such obligations are made to the partners pro rata in accordance with their respective percentage ownership interests in the Operating Partnership. Accordingly, every time we cause the Operating Partnership to make a distribution to us in order to fund our cash payment obligations to the Virgin Group under the tax receivable agreement, the Operating Partnership will be required to make a corresponding distribution to Sprint Nextel as long as it remains a limited partner. In addition, instead of payment in cash, we may be required to issue our Class A common stock or our preferred stock to the Virgin Group as described above. Under the terms of the limited partnership agreement of the Operating Partnership, every time we issue our Class A common stock or our preferred stock to the Virgin Group, the Operating Partnership will be required to issue additional limited partnership units to Sprint Nextel as long as it remains a limited partner. The payments under the tax receivable agreement are not conditioned upon the Virgin Group’s or its affiliates’ continued ownership of us.

Although we are not aware of any issue that would cause the IRS to challenge any benefits arising under the tax receivable agreement, the Virgin Group will not reimburse us for any payments previously made if such benefits were subsequently disallowed, although the amount of any tax savings subsequently disallowed will reduce any future payment otherwise owed to the Virgin Group. As a result, in such circumstances we could make payments to the Virgin Group under the tax receivable agreement in excess of our actual cash tax savings.

The timing of our payments to the Virgin Group could be accelerated in certain circumstances and our payments could exceed our actual cash savings. If we undergo a change in control and do not elect to terminate the tax receivable agreement as discussed below, cash savings in income tax will be computed as described above, but with the additional assumption that we have sufficient income in each subsequent year to utilize all of the remaining net operating losses, subject to any applicable limitations on the use of such net operating losses. If we or our direct or indirect subsidiary transfers any asset to a corporation with which we do not file a consolidated tax return, we will be treated as having sold that asset in a taxable transaction for purposes of determining the cash savings in income tax under the tax receivable agreement. In addition, prior to agreeing to engage in any business combination, sale or purchase of assets, or reorganization outside the ordinary course of its business which would not constitute a change of control for purposes of the tax receivable agreement and which could adversely affect the expected value of the benefits payable to the Virgin Group under the tax receivable agreement, we will be required to obtain the consent of the Virgin Group, which consent may be conditioned upon our agreement to make a make-whole payment to the Virgin Group to compensate the Virgin Group for such reduction in benefits. Although not assured, we expect that the consideration that we will remit to the Virgin Group will not exceed the tax liability that we otherwise would have been required to pay absent the contribution by the Virgin Group of tax attributes as a result of the reorganization transactions and subsequent exchanges. However, such payments could be substantial and could exceed our actual cash tax savings under the tax receivable agreement.

 

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The tax receivable agreement provides that in the event that we breach any of our material obligations under the tax receivable agreement, whether as a result of our failure to make any payment when due (subject to a specified cure period), failure to honor any other material obligation under the tax receivable agreement or by operation of law as a result of the rejection of the tax receivable agreement in a case commenced under the Bankruptcy Code or otherwise, then all our payment and other obligations under the tax receivable agreement will be accelerated and will become due and payable. Such payments could be substantial and could exceed our actual cash tax savings under the tax receivable agreement. Additionally, we have the right to terminate the tax receivable agreement, in which case our payment and other obligations under the tax receivable agreement will be accelerated and will become due and payable. Although not assured, we expect that the consideration that we will remit to the Virgin Group will not exceed the tax liability that we otherwise would have been required to pay absent the contribution by the Virgin Group of tax attributes as a result of the reorganization transactions and subsequent exchanges. However, such payments could be substantial and could exceed our actual cash tax savings under the tax receivable agreement.

Risks Related to Our Class A Common Stock and this Offering

There is no existing market for our common stock, and we do not know if one will develop to provide stockholders with adequate liquidity.

Prior to this offering, there has not been a public market for our Class A common stock. We cannot predict whether investor interest in our company will lead to the development of an active trading market on the New York Stock Exchange, or NYSE, or otherwise or how liquid any market that does develop might become. The initial public offering price for the shares of our Class A common stock will be determined by negotiations between us and the representative of the underwriters and may not be indicative of prices that will prevail in the open market following this offering.

Our share price may decline due to the large number of shares eligible for future sale and for exchange.

The market price of our Class A common stock could decline as a result of sales of a large number of shares of Class A common stock in the market after this offering or the perception that such sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. After the consummation of this offering, we will have 53,026,302 outstanding shares of Class A common stock. This number includes shares of our Class A common stock we are selling in this offering, which may be resold immediately in the public market. See “Shares Eligible for Future Sale.”

We have agreed with the underwriters not to dispose of or hedge any of our Class A common stock or securities convertible into or exchangeable for shares of our Class A common stock, subject to specified exceptions, during the period from the date of this prospectus continuing through the date 180 days after the date of this prospectus, except with the prior written consent of the underwriters. Subject to these agreements, we may issue and sell in the future additional shares of Class A common stock.

Immediately following the consummation of this offering, the Virgin Group will own 22,791,533 shares of our Class A common stock and 115,062 shares of our Class C common stock and Sprint Nextel will own one share of our Class B common stock and 11,068,209 partnership units in the Operating Partnership. Our amended and restated certificate of incorporation will allow the conversion of our Class C common stock into, and the exchange of partnership units in the Operating Partnership (other than those held by us) for, shares of our Class A common stock, in each case, on one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications. The Virgin Group and Sprint Nextel have agreed with the underwriters not to dispose of or hedge any of our Class A common stock or securities convertible into or exchangeable for shares of our Class A common stock (including shares of our Class C common stock and partnership units in the Operating Partnership), subject to specified exceptions, during the period from the date of

 

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this prospectus continuing through the date 180 days after the date of this prospectus, except with the prior written consent of the underwriters. After the expiration of the 180-day lock-up period, the shares of Class A common stock issuable upon conversion of Class C common stock and exchange of the partnership units in the Operating Partnership will be eligible for resale from time to time, subject to certain contractual and Securities Act restrictions.

The Virgin Group and Sprint Nextel have entered into a registration rights agreement with us. Under that agreement, after the expiration of the 180-day lock-up period, the Virgin Group and Sprint Nextel will have the ability to cause us to register the shares of our Class A common stock they could acquire upon conversion of Class C common stock or exchange of their partnership units in the Operating Partnership, as the case may be.

The market price of our Class A common stock may be volatile, which could cause stockholder investment value to decline or could subject us to litigation.

The market for equity securities worldwide experiences significant price and volume fluctuations that could result in a reduced market price of our Class A common stock, even if our operating performance is strong. In addition, general economic, market or political conditions could have an adverse effect on our stock price. Our Class A common stock price could also suffer significantly if our operating results are below the expectations of public market analysts and investors. Investors may be unable to resell their shares of our Class A common stock at or above the initial public offering price. When the market price of a company’s common stock drops significantly, stockholders sometimes institute securities class action lawsuits against the company. A securities class action lawsuit against us could cause us to incur substantial costs and could divert the time and attention of our management and other resources from our business.

If securities analysts do not publish research or reports about our business or if they downgrade our company or our sector, the price of our Class A common stock could decline.

The trading market for our Class A common stock will depend in part on the research and reports that industry or financial analysts publish about us or our business. We do not influence or control the reporting of these analysts. Furthermore, if one or more of the analysts who do cover us downgrades our company or our industry, or the stock of any of our competitors, the price of our Class A common stock could decline. If one or more of these analysts ceases coverage of our company, we could lose visibility in the market, which in turn could cause the price of our Class A common stock to decline.

The book value of shares of our Class A common stock purchased in this offering will be immediately diluted.

Based on an assumed initial offering price of $16 per share, which is the midpoint of the estimated price range, investors who purchase our Class A common stock in this offering will suffer immediate dilution of $22.20 per share in the pro forma net tangible book value per share after giving effect to the contemplated use of proceeds from this offering. See “Dilution.”

Transformation into a public company may increase our costs and disrupt the regular operations of our business.

This offering will have a significant transformative effect on us. Our business historically has operated as a privately owned company, and we expect to incur significant additional legal, accounting, reporting and other expenses as a result of having publicly traded common stock. We will also incur costs which we have not incurred previously, including, but not limited to, costs and expenses for directors fees, increased directors and officers insurance, investor relations, expenses for compliance with the Sarbanes-Oxley Act of 2002, as amended, and new rules implemented by the Securities and Exchange Commission, or the SEC, and NYSE, and various other costs of a public company.

 

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We also anticipate that we will incur costs associated with recently adopted corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002, as amended, as well as rules implemented by the SEC and NYSE. We expect these rules and regulations to increase our legal and financial compliance costs and make some management and corporate governance activities more time-consuming and costly. These rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage, and therefore could have an adverse impact on our ability to recruit and bring on a qualified independent board. We cannot predict or estimate the amount of additional costs we may incur as a result of these requirements or the timing of such costs.

The additional demands associated with being a public company may disrupt regular operations of our business by diverting the attention of some of our senior management team away from revenue producing activities to management and administrative oversight, adversely affecting our ability to attract and complete business opportunities and increasing the difficulty in both retaining professionals and managing and growing our businesses. Any of these effects could harm our business, financial condition and results of operations.

Our internal controls over financial reporting may not be effective and our independent registered public accounting firm may not be able to certify as to their effectiveness, which could have a significant and adverse effect on our business and reputation.

We intend to evaluate our internal controls over financial reporting in order to allow management to report on, and our independent registered public accounting firm to attest to, our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002, as amended, and rules and regulations of the SEC thereunder, which we refer to as “Section 404.” The process of documenting and testing our internal control procedures in order to satisfy the requirements of Section 404 requires annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent registered public accounting firm addressing these assessments. During the course of our testing, we may identify deficiencies which we may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act of 2002 for compliance with the requirements of Section 404.

In addition, if we fail to achieve and maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404. We are not currently required to furnish a report on our internal control over financial reporting pursuant to the SEC’s rules under Section 404. We expect that these rules will apply to us when we file our Annual Report on Form 10-K for our fiscal year ending in December 2008, which we will be required to file by March 2009. We cannot be certain as to the timing of completion of our evaluation, testing and any remediation actions or the impact of the same on our operations. If we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, our independent registered public accounting firm may not be able to certify as to the effectiveness of our internal control over financial reporting and we may be subject to sanctions, stock exchange delisting or investigation by regulatory authorities, such as the SEC. As a result, there could be a negative reaction in the financial markets due to a loss of confidence in the reliability of our financial statements. This could harm our reputation and cause us to lose existing customers or fail to gain new customers and otherwise negatively affect our financial condition, results of operations and cash flows. In addition, we may be required to incur costs in improving our internal control system and the hiring of additional personnel.

 

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We have identified material weaknesses in our internal controls over financial reporting within our revenue cycle as it relates to the reporting of recovery fees for certain air time taxes and regulatory charges and accrued revenues that, if not properly corrected, could result in material misstatements in our financial reporting.

In conjunction with the preparation of our financial statements for the six months ended June 30, 2007, we identified errors in our financial statements in the amount of $0.5 million, $(0.3) million, $(0.3) million and $3.8 million to our net income /(loss) for the years ended December 31, 2006, 2005 and 2004 and for the three months ended March 31, 2007, respectively. These errors, which we have determined to be material weaknesses in our internal controls over financial reporting, were primarily the result of system interface failures for recovery fees for certain airtime taxes and regulatory charges and accrued revenues, which overstated our net service revenue and overstated our cost of service in each period except for the three months ended March 31, 2007 which understated our net service revenue and overstated our cost of service. We corrected these errors through a restatement of our results included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for the three months ended March 31, 2007 and an out-of-period net adjustment amounting to $(0.1) million (comprised of the cumulative effect of prior year errors in the amount of $0.5 million, $(0.3) million and $(0.3) million for the years ended December 31, 2006, 2005 and 2004, respectively) reflected in our financial statements for the six months ended June 30, 2007 included elsewhere in this prospectus. We have not restated our financial statements for any period ended on or prior to December 31, 2006, as we do not believe that these errors were material to any interim or annual prior periods. The impact of the out-of-period adjustments in 2007 is not material to our financial statements for the three month period ended March 31, 2007, the six month period ended June 30, 2007 and our projected financial results for the year ending December 31, 2007. Additionally, we plan to restate our interim results previously reported for the three months ended March 31, 2007 when we file our quarterly report on Form 10-Q for the period ending March 31, 2008 to reflect those out-of-period charges.

A material weakness is defined by the standards issued by the Public Company Accounting Oversight Board as a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected. Our controls failed to detect the inaccurate reporting resulting from system interface failures for recovery fees for certain airtime taxes and regulatory charges and accrued revenues which affected several financial accounts including net service revenue, cost of sales, deferred revenue and accrued taxes. If our remediation is insufficient to address the material weaknesses, or if additional material weaknesses in our internal controls are discovered in the future, it may adversely affect our ability to assure timely and accurate financial statement reporting. As a result, our financial statements may contain material misstatements and could potentially result in a decline of our stock price.

The historical and pro forma financial information in this prospectus may not accurately predict our costs of operations in the future.

The historical financial information in this prospectus does not reflect the added costs we expect to incur as a public company or the resulting changes that will occur in our capital structure and operations. In preparing our pro forma financial information we have given effect to, among other items, the reorganization transactions described in “Organizational Structure” and “Description of Capital Stock”. The estimates we used in our pro forma financial information may not be similar to our actual experience as a public company. For more information on our historical financial information and pro forma financial information, see “Unaudited Pro Forma Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical financial statements included elsewhere in this prospectus.

 

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Because Sprint Nextel and the Virgin Group together control us and will continue to control or significantly influence us after this offering, the influence of our public stockholders over significant corporate actions will be limited, and conflicts of interest between Sprint Nextel and the Virgin Group and us or other investors could arise in the future.

After the consummation of this offering, Sprint Nextel and the Virgin Group will beneficially own interests together representing approximately 52.9% of our voting power, or approximately 46.5% of our voting power if the underwriters exercise in full their over-allotment option to purchase additional shares. As a result, Sprint Nextel and the Virgin Group together will retain control or significant influence over our decisions to enter into any material corporate transaction and will likely have the ability to prevent any transaction that requires the approval of stockholders regardless of whether or not our other stockholders or debtholders believe that any such transactions are in our own best interests. In addition, as described in “Certain Relationships and Related Transactions—Stockholders’ Agreement,” Sprint Nextel and the Virgin Group have rights with respect to certain actions involving our company. For example, Sprint Nextel and the Virgin Group could cause us to make, or prevent us from making, acquisitions that increase our indebtedness or sell revenue-generating assets. We compete with several of Sprint Nextel’s products, including its postpaid products and its prepaid Boost product. In addition, Sprint Nextel and the Virgin Group may from time to time acquire and hold interests in businesses that compete directly or indirectly with us. Sprint Nextel and the Virgin Group also may pursue acquisition or licensing opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. So long as Sprint Nextel and the Virgin Group continue to own a significant amount of our equity, even if such amount represents less than 50% of our voting power, or the rights under the stockholders’ agreement continue, they will continue to be able to influence significantly or effectively control our decisions.

Anti-takeover provisions in our charter documents and Delaware law could delay or prevent a change in control.

Provisions contained in our amended and restated certificate of incorporation and by-laws may delay or prevent a merger or acquisition that a stockholder may consider favorable by permitting our board of directors to issue one or more series of preferred stock, requiring advance notice for stockholder proposals and nominations, placing limitations, with the exceptions of Sprint Nextel and the Virgin Group, on convening stockholder meetings and not permitting written consents of stockholders. In addition, we are subject to provisions of the Delaware General Corporation Law that restrict certain business combinations with interested stockholders other than the Virgin Group and Sprint Nextel. These provisions may also discourage acquisition proposals or delay or prevent a change in control, which could harm our stock price. See “Description of Capital Stock.”

We may be required to make payments to the underwriters if participants in our reserved share program fail to pay for and accept shares which were subject to properly confirmed orders.

At our request, the underwriters have reserved for sale to our employees, directors and families and other related parties of employees and directors at the initial public offering price up to 3% of the shares of our Class A common stock being offered by this prospectus. We do not know if any of our employees, directors, families of employees and directors will choose to purchase all or any portion of the reserved shares, but any purchases they do make will reduce the number of shares available to the general public. If all of these reserved shares are not purchased, the underwriters will offer the remainder to the general public on the same terms as the other shares of our Class A common stock offered by this prospectus. In connection with the sale of these reserved shares, we have agreed to indemnify the underwriters against certain liabilities, including those that may be caused by the failure of the participants in the reserved share program to pay for and accept delivery of the shares of our Class A common stock which were subject to a properly confirmed agreement to purchase. As a result, we may be required to make payments to the underwriters if participants in the reserved share program fail to pay for and accept delivery of the shares of our Class A common stock which were subject to a properly confirmed agreement to purchase and, as a result, we must indemnify the underwriters against the possibility of such failure.

 

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We may be deemed a “controlled company” within the meaning of the New York Stock Exchange rules and, as a result, would be exempt from certain corporate governance requirements.

Upon completion of this offering, unless the underwriters exercise their over-allotment option to purchase additional shares, Sprint Nextel and the Virgin Group will continue to hold interests representing a majority of our outstanding voting power. So long as they maintain such a majority, we will be a “controlled company” within the meaning of corporate governance standards of NYSE. Under those standards, a company of which more than 50% of the voting power is held by another company or group is a “controlled company” and need not comply with certain requirements, including (1) the requirement that a majority of the board of directors consist of independent directors, (2) the requirement that there be a nominating and corporate governance committee composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities, (3) the requirement that there be a compensation committee composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities and (4) the requirement of an annual performance evaluation of the nominating/corporate governance and compensation committees. If we are eligible to do so following this offering, we intend to utilize each of these exemptions. As a result, we would not have a majority of independent directors on our board of directors, we would not have a nominating and corporate governance committee and our compensation committee would not consist entirely of independent directors. If we are no longer eligible to rely on the controlled company exception (including if the over-allotment option is exercised in full), we intend to comply with all applicable corporate governance requirements, but we will be able to rely on phase-in periods for certain of these requirements in accordance with NYSE rules. Accordingly, our stockholders may not have the same protections afforded to stockholders of companies that are subject to all NYSE corporate governance requirements.

 

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BASIS OF PRESENTATION

Unless we state otherwise or the context otherwise requires, the terms (1) “we,” “us,” “our,” “VMU,” and the “Company,” refer to Virgin Mobile USA, Inc., a newly formed Delaware corporation, and its consolidated subsidiaries after giving effect to the reorganization transactions to be completed prior to the consummation of this offering as described in “Organizational Structure;” prior to the reorganization transactions, these terms refer to Virgin Mobile USA, LLC, a Delaware limited liability company through which we are currently conducting our operations; (2) “Sprint” and “Sprint Nextel” refer to Sprint Nextel Corporation, a Kansas corporation, and its affiliated entities; and (3) the “Virgin Group” refers to Virgin Group Investments Limited, a British Virgin Islands limited company, and its affiliated entities.

After giving effect to the reorganization transactions and unless the context otherwise requires, the terms (1) “Investments” refers to Bluebottle USA Investments L.P., a Delaware limited partnership that is a wholly-owned subsidiary of Virgin Mobile USA, Inc. and the general partner of Holdings (as such term is defined below), (2) “Holdings” refers to Bluebottle USA Holdings L.P., a Delaware limited partnership that is an indirect, wholly-owned subsidiary of Virgin Mobile USA, Inc., (3) “VMU GP, LLC” refers to VMU GP, LLC, a Delaware limited liability company that is a wholly-owned subsidiary of Virgin Mobile USA, Inc. and the general partner of Investments, (4) “VMU GP1, LLC” refers to VMU GP1, LLC, a Delaware limited liability company that is a wholly-owned subsidiary of Holdings and the general partner of the Operating Partnership and (5) “Operating Partnership” refers to Virgin Mobile USA, L.P., a Delaware limited partnership and a subsidiary of Holdings through which we will conduct our operations following this offering.

References to “nationwide Sprint PCS network” refer to the nationwide wireless network using CDMA technology operated by Sprint Nextel and its third party PCS affiliates. References to “third party PCS affiliates” refer to third party wireless telecommunications service providers with which Sprint Nextel has contractual arrangements to provide wireless network services.

Unless we state otherwise, the information in this prospectus gives effect to the reorganization transactions described in “Organizational Structure.”

VMU is controlled and, if the underwriters do not exercise their over-allotment option to purchase additional shares, immediately following the consummation of this offering will continue to be controlled, by Sprint Nextel and the Virgin Group.

The “Virgin” name, the Virgin signature logo, the “Virgin Mobile” name and the Virgin Mobile logo are registered trademarks of Virgin Enterprises Limited and are used under license through our trademark license agreement with the Virgin Group described herein. See “Certain Relationships and Related Transactions—Virgin Trademark License Agreement.” Certain other products and services named in this prospectus are registered trademarks and service marks of VMU.

The “Sprint” and “Sprint PCS” names and “Sprint” and “Sprint PCS” logos are registered trademarks of Sprint Nextel and are used under license through our trademark license agreement with Sprint Nextel described herein. See “Certain Relationships and Related Transactions—Sprint Trademark License Agreement.”

 

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MARKET AND INDUSTRY DATA AND FORECASTS

This prospectus includes industry data and forecasts that we have prepared based, in part, upon industry data and forecasts obtained from industry publications and surveys and internal company surveys. Third party industry publications and surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable. The statements regarding our market position in this prospectus are based on information derived from market studies and research reports cited in this prospectus.

Although some of the companies that compete in our markets are publicly held as of the date of this prospectus, some are not. Accordingly, only limited public information is available with respect to our relative market strength or competitive position. Unless we state otherwise, our statements about our relative market strength and competitive position in this prospectus are based on our management’s belief, internal studies and our management’s knowledge of industry trends.

In this prospectus, unless we state otherwise, (1) references to the “Yankee Group” refer to the Yankee Group’s Market Adoption Monitor and Forecast published in 2007, (2) references to the “Cassandra Report” refer to The Intelligence Group’s Cassandra Report published in 2006 and (3) references to “Current Analysis” refer to Current Analysis, Inc.’s report published in 2007.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains certain forward-looking statements and information relating to us that are based on the beliefs of our management as well as assumptions made by, and information currently available to, us. These statements include, but are not limited to, statements about our strategies, plans, objectives, expectations, intentions, expenditures, and assumptions and other statements contained in this prospectus that are not historical facts. When used in this document, words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan” and “project” and similar expressions, as they relate to us are intended to identify forward-looking statements. These statements reflect our current views with respect to future events, are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Further, certain forward-looking statements are based upon assumptions as to future events that may not prove to be accurate.

Many factors could cause our actual results, performance or achievements to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements. These factors include, among other things:

 

   

changes to our business resulting from increased competition;

 

   

our ability to develop, introduce and market innovative products, services and applications;

 

   

our customer turnover rate, or “churn”;

 

   

bulk handset purchase and trading schemes;

 

   

changes in general economic, business, political and regulatory conditions;

 

   

availability and cost of the nationwide Sprint PCS network and Sprint Nextel’s costs associated with operating the network;

 

   

potential liability resulting from pending or future litigation, or from changes in the laws, regulations or policies;

 

   

the degree of legal protection afforded to our products;

 

   

changes in interest rates;

 

   

changes in the composition or restructuring of us or our subsidiaries and the successful completion of acquisitions, divestitures and joint venture activities; and

 

   

the various other factors discussed in the “Risk Factors” section of this prospectus.

Many of these factors are macroeconomic in nature and are, therefore, beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, our actual results, performance or achievements may vary materially from those described in this prospectus as anticipated, believed, estimated, expected, intended, planned or projected. We neither intend nor assume any obligation to update these forward-looking statements, which speak only as of their dates.

 

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ORGANIZATIONAL STRUCTURE

Reorganization Transactions

Prior to completion of this offering, we intend to complete an internal restructuring, to which we collectively refer in this prospectus as the reorganization transactions. Pursuant to the reorganization transactions, Virgin Mobile USA, LLC will convert into a Delaware limited partnership and become an indirect, majority-owned subsidiary of Virgin Mobile USA, Inc. Virgin Mobile USA, Inc. will serve as the holding company for the public’s common equity interests in our business following this offering.

We expect that the directors of Virgin Mobile USA, LLC will agree, subject to their fiduciary duties, to support and approve the reorganization transactions and this offering, prior to or simultaneously with the execution of the underwriting agreement relating to this offering. The final determination as to the completion, timing, structure and terms of these transactions and this offering will be based on financial and business considerations and prevailing market conditions.

The reorganization transactions are generally described below.

Presently, Virgin Mobile USA, LLC is owned by Sprint Nextel (through Sprint Ventures, Inc.), the Virgin Group (through Bluebottle USA Holdings L.P., or Holdings) and two other minority investors. The general partner of Holdings, Bluebottle USA Investments L.P., or Investments, owns a 99% interest in Holdings. The remaining 1% of Holdings is owned by a minority investor and VMUI, Inc., Holdings’ limited partners. Investments is indirectly 100% owned by the Virgin Group.

Prior to the consummation of this offering, Sprint Nextel will (1) contribute a portion of its interest in Virgin Mobile USA, LLC to Virgin Mobile USA, Inc. in consideration for one share of Class B common stock and 1,250,000 shares of Class A common stock (which will be sold in this offering) and (2) sell a portion of its interest in Virgin Mobile USA, LLC to Virgin Mobile USA, Inc. in consideration for $160.8 million, based on an assumed initial public offering price of $16.00 per share (which is the midpoint of the estimated price range shown on the cover page of this prospectus), which consideration will be based on the amount Sprint Nextel would have received had it converted such limited liability company interests into shares of our Class A common stock and sold such shares in this offering. In addition, we will use approximately $45 million of the proceeds to us from this offering to repay indebtedness owed to Sprint Nextel under the terms of our subordinated secured revolving credit facility. Minority investors in Virgin Mobile USA, LLC will contribute their respective interests in Virgin Mobile USA, LLC to Virgin Mobile USA, Inc. in consideration for shares of Class A common stock (a portion of which will be sold in this offering). The minority investor in Holdings will contribute its limited partnership interest in Holdings to Virgin Mobile USA, Inc. in consideration for 105,857 shares of Class A common stock. The Virgin Group will contribute its interests in Investments and its interests in a newly-formed entity, VMU GP, LLC, to Virgin Mobile USA, Inc. in consideration for 22,791,533 shares of Class A and 115,062 shares of Class C common stock, resulting in Virgin Mobile USA, Inc. becoming (directly and indirectly) the sole owner of Holdings, and VMUI, Inc. will be liquidated. Virgin Mobile USA, Inc. will contribute a small part of its interest in Virgin Mobile USA, LLC to a newly-formed entity, VMU GP1, LLC, in exchange for all of the interests in VMU GP1, LLC. Virgin Mobile USA, Inc. will then contribute all of its interests in VMU GP1, LLC to Investments, which in turn will contribute such interests to Holdings.

As a part of the reorganization transactions, Virgin Mobile USA, LLC will convert into a Delaware limited partnership and change its name to Virgin Mobile USA, L.P. As a result of such conversion, Virgin Mobile USA, Inc.’s and Holdings’ interests in Virgin Mobile USA, LLC will convert into a 82.8% limited partnership interest in Virgin Mobile USA, L.P., Sprint Nextel’s remaining interest in Virgin Mobile USA, LLC will convert into a 17.2% limited partnership interest in Virgin Mobile USA, L.P. exchangeable for Class A common stock, and VMU GP1, LLC’s interest in Virgin Mobile USA, LLC will convert into a general partnership interest in Virgin Mobile USA, L.P. VMU GP, LLC will be the general partner of Investments and will be wholly owned by Virgin Mobile USA, Inc. and VMU GP1, LLC will be the general partner of Virgin Mobile USA, L.P. and will be wholly owned by Holdings. Upon the consummation of this offering, based on an assumed initial public

 

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offering price of $16.00 per share (which is the midpoint of the estimated price rate shown on the cover page of this prospectus), we will use approximately $160.8 million of the net proceeds to us from this offering to pay Sprint Nextel for limited liability company interests representing approximately 16.7% of Virgin Mobile USA, LLC (which consideration will be based on the amount Sprint Nextel would have received had it converted such limited liability company interests into shares of our Class A common stock and sold such shares in this offering). We will contribute the remaining net proceeds, along with the majority of our remaining portion of such limited liability company interests in Virgin Mobile USA, LLC (once such interests have been converted to limited partnership interests in the Operating Partnership), to Investments, which in turn will contribute such proceeds and interests to Holdings. Holdings will use such proceeds to purchase from the Operating Partnership additional partnership units representing approximately 23.1% of the Operating Partnership. The Operating Partnership will use the sale proceeds (1) to repay a $150 million portion of the term loan outstanding under our senior secured credit facility, (2) to repay approximately $45 million of indebtedness owed to Sprint Nextel under the terms of our subordinated secured revolving credit facility and (3) for general corporate and other purposes. Following the repayment of indebtedness to Sprint Nextel under the subordinated secured revolving credit facility, Sprint Nextel will no longer be a lender under our subordinated secured revolving credit facility and the Virgin Group’s commitment under the facility will be increased to $75 million. Accordingly, the maximum borrowing amount under the subordinated secured revolving credit facility will be reduced from $100 million to $75 million following the offering. If the underwriters exercise any portion of their over-allotment option to purchase an additional 4,125,000 shares of our Class A common stock, Sprint Nextel will exchange additional limited partnership interests in Virgin Mobile USA, L.P. for Class A common stock of Virgin Mobile USA, Inc., which shares will then be sold by Sprint Nextel.

As a result of the reorganization transaction and this offering, Virgin Mobile USA, Inc., the issuer of Class A common stock in this offering, will be a holding company with no material assets other than 82.8% of the equity interest in Virgin Mobile USA, L.P. (89.2% if the underwriters’ over-allotment option is exercised in full) in the form of a general and limited partnership interest. The remaining 17.2% equity interest in Virgin Mobile USA, L.P. (10.8% if the underwriters’ over-allotment option is exercised in full) will be held by Sprint Nextel in the form of a limited partnership interest exchangeable for Class A common stock in Virgin Mobile USA, Inc. The sole business of Virgin Mobile USA, Inc. will be to hold its interest in Virgin Mobile USA, L.P. and to act, through its subsidiaries, as the managing general partner of Virgin Mobile USA, L.P., in which capacity it will generally control the management and operations of Virgin Mobile USA, L.P. Because Virgin Mobile USA, Inc. will only own 82.8% of the equity of Virgin Mobile USA, L.P., our net (loss)/income will be reduced by a minority interest expense to reflect the entitlement of Sprint Nextel to a portion of the Virgin Mobile USA, L.P.’s income (loss).

Upon completion of the reorganization transactions, the capital stock of Virgin Mobile USA, Inc. will consist of three classes of stock: (i) Class A common stock, entitled to one vote per share on all matters submitted to a vote of stockholders; (ii) Class B common stock, entitled to a number of votes per share on all matters submitted to a vote of stockholders that is equal to the total number of shares of Class A common stock for which the partnership units that Sprint Nextel holds in the Operating Partnership are exchangeable; and (iii) Class C common stock, entitled to one vote per share on all matters submitted to a vote of stockholders and convertible into our Class A common stock on a one-for-one basis at any time. See “Description of Capital Stock.” All shares issued in this offering will be shares of Class A common stock. Sprint Nextel and the Virgin Group, our principal stockholders, will be able to exercise control over our management and affairs and all matters requiring stockholder approval as a result of their ownership of 35.7% voting power in Virgin Mobile USA, Inc. (in the form of Class A common stock and Class C common stock) in the case of the Virgin Group and a 17.2% voting power (in the form of Class B common stock) in the case of Sprint Nextel.

In addition, as a part of the reorganization transactions, we expect to amend and restate our PCS services agreement and our trademark license agreement with Sprint Nextel, to amend and restate our trademark license agreement with the Virgin Group and to enter into tax receivable agreements and other agreements with Sprint Nextel and the Virgin Group. See “Certain Relationships and Related Transactions.”

 

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Effect of the Reorganization Transactions

As a result of the transactions described above, immediately following this offering:

 

   

Virgin Mobile USA, Inc., through its subsidiaries, will control Virgin Mobile USA, L.P., or the Operating Partnership, and will directly and indirectly hold 53,141,364 partnership units in the Operating Partnership;

 

   

Sprint Nextel will hold one share of our Class B common stock and 11,068,209 partnership units in the Operating Partnership (or 6,943,209 partnership units in the Operating Partnership if the underwriters exercise in full their option to purchase additional shares);

 

   

the Virgin Group will own 22,791,533 shares of our Class A common stock and 115,062 shares of our Class C common stock;

 

   

the minority investors will collectively own 2,734,770 shares of Class A common stock;

 

   

our public stockholders will collectively own 27,500,000 shares of Class A common stock (or 31,625,000 shares if the underwriters exercise in full their option to purchase additional shares);

 

   

through its holdings of our Class B common stock, Sprint Nextel will have approximately 17.2% of the voting power in Virgin Mobile USA, Inc. (or approximately 10.8% if the underwriters exercise in full their option to purchase additional shares);

 

   

through its holdings of our Class A common stock and our Class C common stock, the Virgin Group will have approximately 35.7% of the voting power in Virgin Mobile USA, Inc.; and

 

   

our public stockholders and minority investors collectively will have approximately 47.1% of the voting power in Virgin Mobile USA, Inc. (or approximately 53.5% if the underwriters exercise in full their option to purchase additional shares).

We will account for the reorganization transactions using a carryover basis as the reorganization transactions are premised on a non-substantive exchange in order to facilitate our initial public offering. This is consistent with FASB Technical Bulletin 85-5, “Issues Relating to Accounting for Business Combinations, including Costs of Closing Duplicate Facilities of an Acquirer; Stock Transactions between Companies under Common Control; Down-Stream Mergers, Identical Common Shares for a Pooling of Interests; and Pooling of Interests by Mutual and Cooperative Enterprises.” The management and governance rights and economic interests that the Virgin Group, Sprint Nextel and the minority interest holders held in Virgin Mobile USA, LLC before the reorganization transactions will not materially change as a result of the reorganization transactions until the consummation of this offering. The tax receivable agreements that have been developed for both the Virgin Group and Sprint Nextel are intended to offset the tax benefits that we would receive resulting from the reorganization actions of our principal stockholders and, although not assured, we expect that the consideration that we will remit to either the Virgin Group or Sprint Nextel will not exceed the tax liability that we otherwise would have been required to pay absent the contribution by the Virgin Group and Sprint Nextel of tax attributes as a result of the reorganization transactions and subsequent exchanges. Any future exchanges by Sprint Nextel of its limited partnership units for our common stock will be considered a recapitalization-restructuring and accounted for at historical cost.

Holding Company Structure

Following the reorganization transactions and this offering, Virgin Mobile USA, Inc., through its subsidiaries, will directly and indirectly hold 53,141,364 partnership units in the Operating Partnership.

As the indirect owner of VMU GP1, LLC, the sole general partner of the Operating Partnership, Virgin Mobile USA, Inc. will operate and control all of the business and affairs of the Operating Partnership. Virgin Mobile USA, Inc. will consolidate the financial results of the Operating Partnership and the ownership interest of

 

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Sprint Nextel in the Operating Partnership will be treated as a minority interest in Virgin Mobile USA, Inc’s consolidated financial statements. Virgin Mobile USA, Inc., directly and through Holdings, and Sprint Nextel will be the only partners of the Operating Partnership after this offering.

The holders of partnership units in the Operating Partnership, including Sprint Nextel and Virgin Mobile USA, Inc., will incur U.S. federal, state and local income taxes on their proportionate share of any net taxable income of the Operating Partnership. Except as noted below, net profits and net losses of the Operating Partnership will generally be allocated to its partners pro rata in accordance with their respective partnership units. In addition, the Operating Partnership may make distributions to Virgin Mobile USA, Inc. without pro rata distributions to other partners in order to pay (A) consideration, if any, for redemption, repurchase, acquisition, cancellation or termination of our Class A common stock or Class C common stock and (B) overhead and certain other fees and expenses. The respective number of units held by the partners in the Operating Partnership are subject to change, including upon an exchange by Sprint Nextel of partnership units for shares of our Class A common stock and upon any issuance of additional shares to the public, the proceeds of which are used to acquire additional units from the Operating Partnership. Because Investments, through its ownership of Holdings, has been allocated a disproportionate share of losses with respect to Holdings’ interest in Virgin Mobile USA, LLC, there is a taxable “minimum gain” associated with that interest. As a result of the contribution of that interest to Virgin Mobile USA, Inc., Virgin Mobile USA, Inc. through its subsidiaries will be allocated a disproportionate share of taxable income in future years with respect to its direct and indirect interest in the Operating Partnership. The remaining net profits and net losses will be allocated to Sprint Nextel. The partnership agreement of the Operating Partnership will provide for the ability of the Operating Partnership to make cash distributions to the holders of its partnership units. Presently, we do not intend to cause the Operating Partnership to make cash distributions to the holders of its partnership units for purposes of funding their tax obligations in respect of their allocated share of Operating Partnership income. If we elect to make such distributions in the future, these tax distributions will generally be computed based on our estimate of the net taxable income of the Operating Partnership allocable directly and indirectly to us multiplied by an assumed tax rate equal to the highest effective marginal combined U.S. federal, state and local income tax rate prescribed for a corporate resident of the state of New York (taking into account the nondeductibility of certain expenses and the character of our income) with proportionate distributions to each other holder of partnership units based on the relative interests of the partners at the date of the distribution. If we had effected the reorganization transactions on January 1, 2007, this assumed tax rate for 2007 would have been approximately 46%.

After this offering, the Operating Partnership may also elect to make distributions to Virgin Mobile USA, Inc. in order to pay expenses and fund dividends that the board of directors of Virgin Mobile USA, Inc. may declare on its common stock, if any. If such distributions are made to Virgin Mobile USA, Inc., Sprint Nextel will be entitled to receive equivalent distributions pro rata based on its partnership units in the Operating Partnership, subject to certain exceptions.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from this offering, based on an assumed initial public offering price per share of $16.00 (which is the midpoint of the estimated price range shown on the cover of this prospectus), after deducting underwriting discounts and estimated offering expenses, will be approximately $375.6 million. We will not receive any of the proceeds from the sale of shares by the selling stockholders and Virgin Mobile USA, Inc. will not retain any of the proceeds from this offering. Based on an assumed offering price of $16.00 per share:

 

   

We will use approximately $160.8 million of the net proceeds to us from this offering to pay Sprint Nextel for limited liability company interests representing approximately 16.7% of Virgin Mobile USA, LLC (which consideration will be based on the amount Sprint Nextel would have received had it converted such limited liability company interests into shares of our Class A common stock and sold such shares in this offering).

 

   

Virgin Mobile USA, Inc. will contribute a small part of its interest in Virgin Mobile USA, LLC to a newly formed entity, VMU GP1, LLC, in exchange for all of the interests in VMU GP1, LLC.

 

   

We will contribute the remaining net proceeds, along with the majority of our remaining portion of such limited liability company interests in Virgin Mobile USA, LLC (once such interests have been converted to limited partnership interests in the Operating Partnership), to Investments, which in turn will contribute such proceeds and interests to Holdings.

 

   

Holdings will use such proceeds to purchase from the Operating Partnership additional partnership units representing approximately 23.1% of the Operating Partnership.

 

   

The Operating Partnership will use the sale proceeds (1) to repay a $150 million portion of the term loan outstanding under our senior secured credit facility, (2) to repay approximately $45 million of indebtedness owed to Sprint Nextel under the terms of our subordinated secured revolving credit facility and (3) for general corporate and other purposes.

Our existing credit agreements consist of (i) a $479 million senior secured credit facility, which was originally entered into on July 14, 2005 and was amended and restated on July 19, 2006 and (ii) a $100 million subordinated secured revolving credit facility, which was entered into on July 19, 2006 in connection with the amendment and restatement of the senior secured credit facility. In connection with this offering, we expect to amend our senior secured credit facility and our subordinated secured revolving credit facility to allow the reorganization transactions and this offering. Following the amendment and the repayment of a $150 million portion of the term loan, the size of our senior secured credit facility will be permanently reduced to $329 million. In addition, following the repayment of approximately $45 million of indebtedness owed to Sprint Nextel under the terms of our subordinated secured revolving credit facility, Sprint Nextel will no longer be a lender under our subordinated secured revolving credit facility and the Virgin Group’s commitment under the facility will be increased to $75 million. Accordingly, the maximum borrowing amount under the subordinated secured revolving credit facility will be reduced from $100 million to $75 million following the offering. Under the terms of the senior secured credit facility, the term loan matures on December 14, 2010. The borrowings under the senior secured credit facility bear interest at a rate equal to an applicable margin plus, at our option, either (a) an ABR rate determined by reference to higher of (1) the prime rate of JPMorgan Chase Bank, N.A. and (2) the federal funds rate plus 0.5% or (b) a Eurodollar rate. Under the terms of the subordinated secured revolving credit facility, revolving loans mature on the earlier of (a) the date three months after the making of any revolving loan or the rollover of such revolving loan or (b) December 14, 2010. The borrowings under the subordinated secured revolving credit facility bear interest at a rate equal to an applicable margin plus a Eurodollar rate equal to 3-month LIBOR.

 

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As of June 30, 2007, we had outstanding borrowings of $442 million under our senior secured credit facility bearing interest at a rate of 10.31% and $80.0 million in borrowings under our subordinated secured revolving credit facility bearing interest at a weighted average rate of 10.31%. Proceeds from such borrowings have been used to make distributions to the members of Virgin Mobile USA, LLC and for general corporate purposes, including working capital.

Affiliates of Merrill Lynch and Bear Stearns are lenders under our senior secured credit facility and, based on an assumed initial public offering price per share of $16.00 (which is the midpoint of the estimated price range shown on the cover of this prospectus) will receive approximately 8.9% and 11.1%, respectively, of the proceeds to us of this offering used to repay those borrowings. See “Underwriting—NASD Regulations and Certain Relationships.” See “Description of Indebtedness” and “Certain Relationships and Related Transactions—Subordinated Secured Revolving Credit Facility.”

 

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DIVIDEND POLICY

We do not currently intend to pay any cash dividends on our Class A common stock and instead intend to retain earnings, if any, for future operations and debt reduction. If we do declare a dividend on our common stock at any time in the future, the Class B common stock will not be entitled to any dividend rights, but the Class A common stock and Class C common stock will be entitled to receive a pro rata share of any such dividend.

Virgin Mobile USA, Inc. will be a holding company and will have no material assets other than its ownership of partnership units in the Operating Partnership. If we declare a dividend at some point in the future, we intend to cause the Operating Partnership to make distributions to Virgin Mobile USA, Inc. in an amount sufficient to cover any such dividends. If the Operating Partnership makes such distributions, Sprint Nextel will be entitled to ratably receive equivalent distributions on its partnership units in the Operating Partnership, subject to certain exceptions.

Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions and other factors that our board of directors may deem relevant. In addition, the amounts available to us to pay cash dividends will be restricted by our senior secured credit facility and our subordinated secured revolving credit facility and may be further restricted by our future debt agreements.

 

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CAPITALIZATION

The following table sets forth the cash and cash equivalents and capitalization as of June 30, 2007 of Virgin Mobile USA, LLC on an actual basis and of Virgin Mobile USA, Inc. on a pro forma basis to reflect:

 

   

the reorganization transactions as described in “Organizational Structure”;

 

   

the sale of 27,500,000 shares of our Class A common stock in this offering at an assumed initial public offering price of $16.00, the midpoint of the estimated price range shown on the cover page of the prospectus, after deducting underwriting discounts and estimated offering expenses; and

 

   

the application of the net proceeds as described in “Use of Proceeds”.

You should read the information in this table in conjunction with our financial statements and the notes to those statements appearing elsewhere in this prospectus, “Selected Historical Financial and Other Data,” “Unaudited Pro Forma Financial Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

     As of June 30, 2007  
    

Actual

Virgin Mobile
USA, LLC

   

Pro Forma
Consolidated

Virgin Mobile
USA, Inc.

 
     (in millions, except share data)  

Cash and cash equivalents

   $ 0.0     $ 24.8  
                

Total debt:

    

Book cash overdraft

   $ 19.2     $ 19.2  

Term loan facility

     442.0       292.0  

Related party debt

     80.0       40.0  
                

Total debt

   $ 541.2     $ 351.2  

Minority interest

     —         (106.0 )

Stockholders’/members’ (deficit)/equity:

    

Class A common stock, par value $.01 per share, 200,000,000 shares authorized; 53,026,302 shares issued and outstanding, as adjusted for this offering

       0.5  

Class B common stock, par value $.01 per share, one share authorized; one share issued and outstanding, as adjusted for this offering

       —    

Class C common stock, par value $.01 per share, 999,999 shares authorized; 115,062 shares issued and outstanding, as adjusted for this offering

       —    

Additional paid-in capital

   $ 51.7     $ 260.0  

Accumulated deficit

     (667.8 )     (554.8 )

Accumulated other comprehensive income

     1.7       1.4  
                

Total stockholders’/members’ (deficit)/equity

   $ (614.4 )   $ (292.9 )
                

Total capitalization

   $ (73.2 )   $ (47.7 )
                

 

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DILUTION

If you invest in our Class A common stock, you will experience dilution to the extent of the difference between the initial public offering price per share of our Class A common stock and the pro forma net tangible book value per share of our Class A common stock after this offering. Dilution results from the fact that the per share offering price of the Class A common stock is substantially in excess of the book value per share attributable to the existing equity holders.

Our pro forma net tangible book value as of June 30, 2007 was approximately $(772.9) million, or $(15.66) per share of our Class A common stock. Pro forma net tangible book value represents the amount of total tangible assets less total liabilities and pro forma net tangible book value per share represents pro forma net tangible book value divided by the number of shares of Class A common stock outstanding, in each case, after giving effect to the transactions described under “Unaudited Pro Forma Financial Information” and assuming that Sprint Nextel exchanges all of its partnership units in the Operating Partnership for, and the Virgin Group converts all of its shares of Class C common stock into, newly-issued shares of our Class A common stock on a one-for-one basis.

After giving effect to the sale of 27,500,000 shares of Class A common stock in this offering at the assumed initial public offering price of $16.00 per share (the midpoint of the offering range) and other transactions described under “Unaudited Pro Forma Financial Information”, and assuming that Sprint Nextel exchanges all of its partnership units in the Operating Partnership for, and the Virgin Group converts all of its shares of Class C common stock into, newly-issued shares of our Class A common stock on the one-for-one basis, our pro forma as adjusted net tangible book value would have been $(398.9) million, or $(6.20) per share. This represents an immediate increase in net tangible book value (or a decrease in net tangible book deficit) of $9.46 per share to existing equityholders and an immediate dilution in net tangible book value of $22.20 per share to new investors.

The following table illustrates this dilution on a per share basis assuming the underwriters do not exercise their option to purchase additional shares:

 

Assumed initial public offering price per share

   $ 16.00  

Pro forma net tangible book value per share at June 30, 2007

     (15.66 )

Increase in pro forma net tangible book value per share attributable to new investors

     9.46  

Pro forma net tangible book deficit per share after this offering

     (6.20 )
        

Dilution in pro forma net tangible book value per share to new investors

   $ 22.20  
        

Each $1.00 increase or decrease in the offering price per share would increase or decrease the as adjusted pro forma net tangible book value by $0.43 per share and the dilution to new investors in the offering by $0.57 per share, assuming that the number of shares offered in this offering, as set forth on the cover page of this prospectus, remains the same. The pro forma information discussed above is for illustrative purposes only. Our net tangible book value following the completion of the offering is subject to adjustment based on the actual offering price of our common stock and other terms of this offering determined at pricing.

The following table summarizes, on the same pro forma basis as of June 30, 2007, the total number of shares of Class A common stock purchased from us, the total cash consideration paid to us and the average price per share paid by the existing equityholders and by new investors purchasing shares in this offering, assuming that all units held by the existing equity holders in Virgin Mobile USA, LLC have been converted into shares of our Class A common stock (amounts in thousands, except percentages and per share data):

 

     Shares Purchased     Total Consideration     Average Price
Per Share
      Number    Percent     Amount    Percent    

Existing equity holders

   38,659    60 %   $ 40,444    9 %   $ 1.05

New investors

   25,550    40 %     408,808    91 %   $ 16.00
                          

Total

   64,209    100 %   $ 449,252    100 %  
                          

 

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UNAUDITED PRO FORMA FINANCIAL INFORMATION

The following unaudited pro forma condensed consolidated balance sheet as of June 30, 2007 and unaudited pro forma condensed consolidated statement of operations for the year ended December 31, 2006 and six months ended June 30, 2007 present our consolidated financial position and consolidated results of operations to give pro forma effect to (i) the reorganization transactions described in “Organizational Structure”, together with the related equity-based awards described below and (ii) the sale of shares of our Class A common stock in this offering and the application of the net proceeds to us from this offering, as if all such transactions had been completed as of June 30, 2007 with respect to the unaudited pro forma condensed consolidated balance sheet and as of January 1, 2006 with respect to the unaudited pro forma condensed consolidated statement of operations.

The unaudited pro forma financial information includes pro forma adjustments that we believe are (i) directly attributable to the reorganization transactions and this offering, and (ii) factually supportable. With respect to the unaudited pro forma condensed consolidated statement of operations, the pro forma adjustments are expected to have a continuing impact on the consolidated results.

The pro forma adjustments principally give effect to the following items:

 

   

Reorganization Transactions.    Each of the reorganization transactions are described in “Organizational Structure.” Virgin Mobile USA, Inc. is a recently formed holding company incorporated for the purposes of this offering. We will consolidate Bluebottle USA Investments L.P. and its subsidiaries by virtue of our control of those entities. Since we believe that for accounting purposes the reorganization transactions, which will be completed to effect the initial public offering, have no economic substance and do not change the governance or voting rights of Sprint Nextel, the Virgin Group or the minority interest holders until the initial public offering, the acquisition of these entities will be treated as a non-substantive reorganization and accounted for at historical cost. Accordingly, the net assets of such entities will be reported in the unaudited pro forma condensed consolidated balance sheet at their historical cost as required under FASB Technical Bulletin 85-5 “Issues Relating to Accounting for Business Combinations, including Costs of Closing Duplicative Facilities of an Acquirer; Stock Transactions between Companies under Common Control; Down-Stream Mergers, Identical Common Shares for a pooling of Interests; and Pooling of Interests by Mutual and Cooperative Enterprises.” As described in “Organizational Structure,” Sprint Nextel will sell a portion of its limited liability company interest in Virgin Mobile USA, LLC to Virgin Mobile USA, Inc. prior to the consummation of this offering in consideration for approximately $160.8 million (which consideration will be paid from the net proceeds to us from this offering and which consideration will be based on the amount Sprint Nextel would have received had it converted such limited liability company interests into shares of our Class A common stock and sold such shares in this offering). A liability of $160.8 million to Sprint Nextel will be established as part of the reorganization transactions. This liability is expected to be settled by Virgin Mobile USA, Inc. at the time of this offering with a portion of the proceeds. In addition, these adjustments reflect the options on shares of our Class A common stock we may grant to holders of awards granted under the 2005 Stock Appreciation Rights Plan of Virgin Mobile USA, LLC and the potential conversion of outstanding, unexercised stock appreciation rights awarded under the 2002 Stock Appreciation Rights Plan and the 2006 Stock Appreciation Rights Plan of Virgin Mobile USA, LLC into non-qualified options on shares of our Class A common stock and the contingent issuance of Restricted Stock Unit Awards, in each case, at the time of this offering. See “Management—Compensation Discussion and Analysis—Equity-based Incentive Arrangements”.

 

   

The Offering.    These adjustments reflect the sale by us of 25,550,493 shares of Class A common stock in this offering and the use of the proceeds to us from this offering to (1) repay a $150 million portion of outstanding borrowings under our senior secured credit facility, (2) repay approximately $45 million of indebtedness owed to Sprint Nextel under the terms of our subordinated secured revolving credit facility (the pro forma adjustment was calculated based on a historical balance of $40 million as of June 30, 2007) and (3) pay Sprint Nextel for the limited liability company interests that we acquired as described

 

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in “Use of Proceeds”. Following the repayment for the subordinated secured revolving credit facility, Sprint Nextel will no longer be a lender under our subordinated secured revolving credit facility and the Virgin Group’s commitment under the facility will be increased to $75 million. Accordingly, the maximum borrowing amount under the subordinated secured revolving credit facility will be reduced from $100 million to $75 million following the offering.

The following unaudited pro forma financial information does not reflect any adjustments relating to our tax receivable agreements with Sprint Nextel and the Virgin Group, as described in “Certain Relationships and Related Transactions—Tax Receivable Agreements”, except for adjustments relating to the initial sale of limited liability company interests by Sprint Nextel to us as part of the reorganization transactions, since the amount and timing of the utilization of the tax benefits to us under those agreements is unknown at this time. However, any payments to Sprint Nextel and any payments of cash (or issuances of shares of Class A common stock or preferred stock) to the Virgin Group pursuant to their respective tax receivable agreements are expected to be accounted for as follows:

 

   

we will recognize a deferred tax asset relating to the increase in the tax bases of the assets owned by us, in the case of the tax receivable agreement with Sprint Nextel based on enacted tax rates at the date of the transactions giving rise to the increased tax bases;

 

   

we will evaluate the likelihood of realizing the benefits of such deferred tax asset and reduce the deferred tax asset with a valuation allowance if there is a more likely than not chance that the deferred tax asset will not be realized;

 

   

we will record a liability for the amount expected to be paid under the tax receivable agreement with Sprint Nextel or the tax receivable agreement with the Virgin Group, as the case may be, estimated using assumptions consistent with those we use in estimating the realizability of net deferred tax assets; and

 

   

any issuances of Class A common stock to the Virgin Group pursuant to the tax receivable agreement will result in dilution to the Class A common stockholders. The impact of such possible issuances has been excluded from the pro forma calculation of net loss per share as its effect is anti-dilutive.

The unaudited pro forma adjustments are based upon available information and assumptions that we believe are reasonable under the circumstances. The unaudited pro forma financial information is presented for informational purposes only and is not necessarily indicative of and does not purport to represent what our financial position or results of operations would actually have been had the transactions described above been consummated as of the dates indicated. In addition, the pro forma financial information is not necessarily indicative of our future financial condition or operating results.

You should read the information contained in this section in conjunction with “Organizational Structure”, “Selected Historical Financial and Other Data”, “Capitalization”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Certain Relationships and Related Transactions—Tax Receivable Agreements,” our historical audited financial statements and the accompanying notes and our interim financial statements and the accompanying notes included elsewhere in this prospectus.

 

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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

 

    As of June 30, 2007  
    Virgin Mobile
USA, LLC
    Bluebottle
USA
Investments,
L.P.
    Virgin Mobile
USA, Inc.(b)
  Pro Forma
adjustments—
Reorganization
Transactions
   

Pro Forma for
Reorganization

Transactions

    Pro Forma
adjustments—
Offering(c)
    Pro Forma    
Virgin Mobile    
USA, Inc.    
 
    (in thousands)  

Assets

             

Current assets:

             

Cash and cash equivalents

  $ —       $ 8     $ —     $ (8 )d   $ —       $ 24,757  f,j,k,l,m   $ 24,757  

Accounts receivable, net

    59,277       —         —       —         59,277       —         59,277  

Due from related parties

    8,288       —         —       —         8,288       —         8,288  

Other receivables

    5,330       —         —       —         5,330       —         5,330  

Inventories

    98,121       —         —       —         98,121       —         98,121  

Prepaid expenses and other current assets

    27,111       —         —       —         27,111       (656 )l,n     26,455  
                                                     

Total current assets

    198,127       8       —       (8 )     198,127       24,101       222,228  

Property and equipment, net

    47,488       —         —       —         47,488       —         47,488  

Other assets

    10,152       —         —       —    e     10,152       (1,341 )l,n     8,811  
                                                     

Total assets

  $ 255,767     $ 8     $ —     $ (8 )   $ 255,767     $ 22,760     $ 278,527  
                                                     

Liabilities and stockholders’/ members’ equity

             

Current liabilities:

             

Accounts payable

  $ 95,877     $ —       $ —     $ —       $ 95,877     $ —       $ 95,877  

Book cash overdraft

    19,166       —         —       —         19,166       —         19,166  

Due to related parties

    37,416       375       —       160,466  d,f     198,257       (160,841 )f     37,416  

Accrued expenses

    58,449       358       —       (358 )d     58,449       (412 )k     58,037  

Accrued taxes

    —         —         —       —         —         —         —    

Deferred revenue

    130,561       —         —       —         130,561       —         130,561  

Short-term debt

    —         —         —       —         —         —         —    

Related party debt

    —         33       —       (33 )d     —         —         —    

Current portion of long-term debt

    43,500       —         —       —         43,500       (14,762 )k     28,738  
                                                     

Total current liabilities

    384,969       766       —       160,075       545,810       (176,015 )     369,795  

Other liabilities

    6,711       —         —       (2,377 )h     4,334       —         4,334  

Long-term debt

    398,500       —         —       —         398,500       (135,238 )k     263,262  

Related party debt

    80,000       —         —         80,000       (40,000 )m     40,000  

Accumulated losses of unconsolidated companies in excess of investment

    —         417,372       —    

 


(417,372


)g

    —         —      

 


—  


 

                                                     

Total non-current liabilities

    485,211       417,372       —       (419,749 )     482,834       (175,238 )     307,596  

Minority interest

    —         —         —       (105,500 )h,i     (105,500 )     (531 )l,n     (106,031 )
                                                     

Total stockholders’/ members’ deficit(a)

    (614,413 )     (418,130 )     —       365,166       (667,377 )     374,544       (292,833 )
                                                     

Total liabilities and stockholders’/members’ equity

  $ 255,767     $ 8     $ —     $ (8 )   $ 255,767     $ 22,760     $ 278,527  
                                                     

(footnotes on following page)

 

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NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET


(a)   The following table reflects the impact on stockholders’ and members’ deficit, after adjusting for minority interests of $106.0 million, for the adjustments impacting the pro forma condensed consolidated balance sheet set out below:

 

    As of June 30, 2007 (in thousands)  
    Virgin
Mobile
USA,
LLC
   

Bluebottle

USA

Investments

L.P.

    Virgin
Mobile
USA,
Inc.
 

Pro Forma

adjustments—

Reorganization
Transactions

    Pro Forma for
Reorganization
   

Pro Forma
adjustments—

Offering

    Pro Forma
Virgin
Mobile
USA, Inc.
 

Stockholders’/members’ deficit:

             

Class A common stock, par value $0.01 per share, 200,000,000 shares authorized; 53,026,302 shares issued and outstanding, as adjusted for this offering

  $ —       $ —       $ —     $ —       $ —       $ 530  j   $ 530  

Class B common stock, par value $0.01 per share, 1 share authorized; 1 share issued and outstanding, as adjusted for this offering

    —         —         —       —         —         —         —    

Class C common stock, par value $0.01 per share, 999,999 shares authorized; 115,062 shares issued and outstanding, as adjusted for this offering

    —         —         —       —         —         1  j     1  

Additional paid-in capital

    51,673       —         —       (7,383 )d,f,h,i     44,290       215,720  j     260,010  

Accumulated deficit

    (667,825 )     (419,023 )     —       373,742  g,h,i     (713,106 )     158,293  l,n     (554,813 )

Accumulated other comprehensive income

    1,739       893       —       (1,193 )g,i     1,439       —         1,439  
                                                     

Total stockholders’/members’ deficit

  $ (614,413 )   $ (418,130 )     —     $ 365,166     $ (667,377 )   $ 374,544     $ (292,833 )
                                                     

 

(b)   Reflects the incorporation of Virgin Mobile USA, Inc. in April 2007.
(c)   Pro forma adjustments relating to this offering give effect to the following estimated sources and uses of funds:

 

(in thousands)

Sources

       

Uses

    

Sale by us of shares of Class A common stock

   $ 408,808   

Repayment of a portion of the senior secured credit facility

   $ 150,000

Sale by Selling Stockholders

     31,192   

Repayment to Sprint Nextel for subordinated revolving credit facility

    
40,000
     

Fees and expenses relating to this offering

     33,210
     

Payment to Sprint Nextel for limited liability company interests

     160,841
     

Proceeds to Selling Stockholders

     31,192
     

Cash for working capital purposes*

     24,757
                

Total Sources

   $ 440,000   

Total Uses

   $ 440,000
                
*   Note: Cash for working capital purposes includes $5 million that will be used to repay the additional borrowings under our subordinated secured revolving credit facility we made from Sprint Nextel after June 30, 2007.
(d)   Reflects the capital contribution to Bluebottle USA Investments L.P. by the Virgin Group to settle certain liabilities in connection with the reorganization transactions.
(e)   Reflects the recognition of a deferred tax asset relating to the increase in the tax bases of the assets owned by us arising from the initial sale by Sprint Nextel of a portion of its limited liability company units to us prior to this offering. The deferred tax asset has been reduced in full by a valuation allowance as their future realizability is uncertain since historically we have not generated net income.

(footnotes continued on following page)

 

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(f)   Reflects the net impact of our obligation to pay Sprint Nextel with a portion of the offering proceeds, and the subsequent repayment, of $160.8 million in relation to the acquisition of limited liability company units as described in “Organizational Structure”.
(g)   Reflects the elimination of the historical carrying value of Bluebottle USA Investments L.P.’s investment in Virgin Mobile USA, LLC.
(h)   Reflects the impact on equity of the conversion of outstanding, unexercised stock appreciation rights awarded under the 2006 Stock Appreciation Rights Plan of Virgin Mobile USA, LLC from liabilities to non-qualified options on our Class A common stock in conjunction with this offering.
(i)   Reflects the recording of minority interest for the portion of Virgin Mobile USA, L.P. that we do not own.
(j)   Reflects the sale by us of 25,550,493 million shares of Class A common stock at an assumed initial offering price of $16.00 per share (based on the midpoint of the estimated price range set forth on the cover of this prospectus), after deducting the underwriting discount relating to such shares and estimated offering costs of $33.2 million and the payment to Sprint Nextel of $160.8 million for a portion of its limited liability company interests purchased by us immediately prior to the offering.
(k)   Reflects the repayment of our senior secured credit facility using a portion of the net proceeds to us from this offering of $150 million. The adjustment reflects the elimination of $150 million of current and long-term debt and $0.4 million of related accrued interest payable.
(l)   Reflects the write-off of unamortized deferred financing fees of $1.8 million on the portion of our senior secured credit facility that has been paid down and a consent fee paid of $1.1 million for our senior secured credit facility, net of the related minority interest impact.
(m)   Reflects the repayment to Sprint Nextel of $40 million of indebtedness that is owed by Virgin Mobile USA, LLC under our subordinated secured revolving credit facility, which will be paid from the net proceeds to us from this offering. Our indebtedness to Sprint Nextel as of September 20, 2007 was approximately $45 million.
(n)   Reflects the write-off of unamortized deferred financing fees of $0.2 million related to the cancellation of the portion of our existing subordinated secured revolving credit facility with Sprint Nextel, net of the related minority interest impact.

 

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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

 

    Year Ended December 31, 2006 (in thousands, except per share data)  
    Virgin Mobile
USA, LLC
   

Bluebottle

USA

Investments

L.P.

    Virgin Mobile
USA, Inc.(a)
 

Pro Forma

adjustments—

Reorganization
Transactions

    Pro Forma for
Reorganization
   

Pro Forma
adjustments—

Offering

   

Pro Forma
Virgin

Mobile
USA, Inc.

 

Total operating revenue

  $ 1,110,579     $ —       $       —     $ —       $ 1,110,579     $ —       $ 1,110,579  

Operating expense

             

Cost of service and equipment (exclusive of depreciation and amortization)

    678,111       —         —       —         678,111       —         678,111  

Selling, general and administration expenses (exclusive of depreciation and amortization)

    401,732       232       —       3,895  b     405,859       —         405,859  

Gain from litigation

    (15,384 )     —         —       —         (15,384 )     —         (15,384 )

Depreciation and amortization

    28,381       —         —       —         28,381       —         28,381  
                                                     

Total operating expense

    1,092,840       232       —       3,895       1,096,967       —         1,096,967  
                                                     

Operating income / (loss)

    17,739       (232 )     —       (3,895 )     13,612       —         13,612  

Other expense / (income)

             

Equity in losses of investee

    —         17,307       —       (17,307 ) c     —         —         —    

Interest expense

    52,178       2       —       —         52,180       (16,677 ) f,g     35,503  

Other expense / (income)

    2,268       —         —       —         2,268       —         2,268  

Minority interest expense

    —         —         —       (6,999 ) b,d     (6,999 )     2,875  f,g     (4,124 )
                                                     

Total other expense

    54,446       17,309       —       (24,306 )     47,449       (13,802 )     33,647  
                                                     

(Loss) / income before income taxes

    (36,707 )     (17,541 )     —       20,411       (33,837 )     13,802       (20,035 )

Income tax (expense) / benefit(e)

    —         —         —       —         —         —         —    
                                                     

Net (loss) / income

  $ (36,707 )   $ (17,541 )   $ —     $ 20,411     $ (33,837 )   $ 13,802     $ (20,035 )
                                                     

Net loss per share:(h)

             

Basic

              $ (0.38 )

Diluted

              $ (0.38 )

Weighted average common shares outstanding:(h)

             

Basic

                52,611  

Diluted

                52,611  

(footnotes on following page)

 

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NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2006


(a)   Reflects the incorporation of Virgin Mobile USA, Inc. in April 2007.
(b)   Reflects the impact of the non-cash compensation expense as a result of converting outstanding Stock Appreciation Rights granted under the 2002 and 2006 SAR Plans into options on shares of our Class A common stock in connection with this reorganization together with the related minority interest impact, together with the impact of the non-cash compensation expense as a result of the options on shares of Class A common stock that may be issued to holders of awards granted under the 2005 SAR Plan, and the contingent issuance of Restricted Stock Unit Awards as a result of this offering, together with the related minority interest impact.
(c)   Reflects the elimination of Bluebottle USA Investments L.P.’s historical equity in income (loss) of Virgin Mobile USA, LLC.
(d)   Reflects the impact of the adjustments and the recording of minority interest expense for the portion of Virgin Mobile USA, L.P. that we do not own. Following this offering, as the owner of VMU GP1, LLC, the sole general partner of Virgin Mobile USA, L.P., we will operate and control all of the business and affairs of Virgin Mobile USA, L.P. We will consolidate the financial results of Virgin Mobile USA, L.P. and the 17.2% ownership interest of Sprint Nextel in Virgin Mobile USA, L.P. will be treated as a minority interest in our consolidated financial statements.
(e)   No income tax benefit has been recognized due to our history of net operating losses and the fact that any benefit recognized would require a full valuation allowance.

(f)

 

Represents the net reduction in interest expense resulting from the repayment of a $150 million portion of the term loan outstanding under the senior secured credit facility of $16.3 million as well as the amortization of associated deferred financing fees of $0.8 million and an associated tolling charge payable to the Virgin Group of $1.2 million in relation to our outstanding borrowings owed to them under the subordinated secured revolving credit facility, arising from the modification of that facility in connection with the reorganization transactions, together with the related minority interest impact.

(g)   Represents the reduction in interest expense of $0.8 million relating to the repayment to Sprint Nextel of a portion of the borrowings under our subordinated secured revolving credit facility, as well as the amortization of associated deferred financing fees of $0.1 million, together with the related minority interest impact.

 

(footnotes continued on following page)

 

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(h)   Pro forma basic earnings (loss) per share gives effect to the issuance of shares of Class A and Class C common stock in connection with this offering. Shares of Class C common stock are included in the calculation because they are convertible into shares of Class A common stock at any time on a one-for-one basis and have identical economic and equivalent dividend rights. The share of Class B common stock has no pro forma net earnings (loss) per share as it does not participate in our earnings or losses. For the purposes of pro forma net loss per share of Class A and Class C common stock for the year ended December 31, 2006, the weighted average shares outstanding and pro forma net loss available to holders of shares of Class A and Class C common stock on a basic and diluted basis, are calculated as shown below. We had a pro forma net loss for the year ended December 31, 2006, and accordingly the diluted loss per share is the same as the basic loss per share for that period, as any potentially dilutive securities would reduce the loss per share.

 

    

Year Ended

December 31, 2006

 
     Basic and Diluted  
     (all amounts in thousands,
except per share amounts)
 

Weighted average shares outstanding (i)

  

Virgin Mobile USA, Inc. shares of Class A common stock assumed to be outstanding

     52,496  

Virgin Mobile USA, Inc. shares of Class C common stock assumed to be outstanding

     115  
        

Weighted average shares outstanding

     52,611  
        

Basic and diluted pro forma net loss per share:

  

Pro forma net loss

   $ (20,035 )
        

Weighted average shares outstanding

     52,611  
        

Basic pro forma net loss per share of Class A and Class C common stock

   $ (0.38 )
        
 
  (i)   Assumes that all shares of Class A common stock and Class C common stock outstanding upon completion of this offering, whether or not vested and or subject to forfeiture, has been outstanding from January 1, 2006.

 

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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

 

   

Six Months Ended June 30, 2007 (in thousands, except per share data)

       
    Virgin Mobile
USA, LLC
    Bluebottle USA
Investments L.P.
    Virgin Mobile
USA, Inc. (a)
    Pro Forma
adjustments —
Reorganization
Transactions
   

Pro Forma

for
Reorganization

    Pro Forma
adjustments—
Offering
    Pro Forma
Virgin
Mobile
USA, Inc.
 

Total operating revenue

  $ 666,902     $ —       $ —       $ —       $ 666,902     $ —       $ 666,902  

Operating expense

             

Cost of service and equipment (exclusive of depreciation and amortization)

    377,003       —         —         —         377,003       —         377,003  

Selling, general and administration expenses (exclusive of depreciation and amortization)

    219,405       198       —         817  b     220,420       —         220,420  

Depreciation and amortization

    16,731       —         —         —         16,731       —         16,731  
                                                       

Total operating expense

    613,139       198       —         817       614,154       —         614,154  
                                                       

Operating income / (loss)

    53,763       (198 )     —         (817 )     52,748       —         52,748  

Other expense / (income)

             

Equity in income of investee

    —         (12,502 )     —         12,502  c     —         —         —    

Interest expense

    27,447       1       —         —         27,448       (9,968 ) f,g     17,480  

Other expense / (income)

    (200 )     5       —         —         (195 )     —         (195 )

Minority interest expense

    —         —         —         4,430  b,d     4,430       1,718  f,g     6,148  
                                                       

Total other expense / (income)

    27,247       (12,496 )     —         16,932       31,683       (8,250 )     23,433  
                                                       

Income / (loss) before income taxes

    26,516       12,298       —         (17,749 )     21,065       8,250       29,315  

Income tax (expense) / benefit(e)

    —         —         —         —         —         —         —    
                                                       

Net income / (loss)

  $ 26,516     $ 12,298     $       —       $ (17,749 )   $ 21,065     $ 8,250     $ 29,315  
                                                       

Net earnings per share: (h)

             

Basic

              $ 0.56  

Diluted

              $ 0.54  

Weighted average common shares outstanding: (h)

             

Basic

                52,611  

Diluted

                65,322  

(footnotes on following page)

 

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NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2007


(a)   Reflects the incorporation of Virgin Mobile USA, Inc. in April 2007.
(b)   Reflects the non-cash compensation expense impact as a result of converting outstanding Stock Appreciation Rights granted under the 2002 and 2006 SAR Plan into options on shares of our Class A common stock in connection with this reorganization with the related minority interest impact, together with the impact of the non-cash compensation expense as a result of the potential issuance of options on shares of Class A common stock that may be issued to holders of awards granted under the 2005 SAR Plan, and the contingent issuance of Restricted Stock Unit Awards as a result of this offering, together with the related minority interest impact.
(c)   Reflects the elimination of Bluebottle USA Investments L.P.’s historical equity in income (loss) of Virgin Mobile USA, LLC.
(d)   Reflects the recording of minority interest expense for the portion of Virgin Mobile USA, L.P. that we do not own. Following this offering, as the owner of VMU GP1, LLC, the sole general partner of Virgin Mobile USA, L.P., we will operate and control all of the business and affairs of Virgin Mobile USA, L.P. We will consolidate the financial results of Virgin Mobile USA, L.P. and the 17.2% ownership interest of Sprint Nextel in Virgin Mobile USA, L.P. will be treated as a minority interest in our consolidated financial statements.
(e)   No income tax benefit or expense has been recognized due to our history of net operating losses and the fact that any benefit recognized would require a full valuation allowance.

(f)

 

Represents the net reduction in interest expense resulting from the repayment of a $150 million portion of the term loan outstanding under the senior secured credit facility of $8 million as well as the amortization of associated deferred financing fees of $0.3 million and an associated tolling charge payable to the Virgin Group of $0.4 million in relation to our outstanding borrowings owed to them under the subordinated secured revolving credit facility, arising from the modification of that facility in connection with the reorganization transactions, together with the related minority interest impact.

(g)   Represents the reduction in interest expense of $2 million relating to the repayment to Sprint Nextel of a portion of the borrowings under our existing subordinated secured revolving credit facility, as well as the amortization of associated deferred financing fees of $27,000, together with the related minority interest impact.

 

(footnotes continued on following page)

 

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(h)   Pro forma basic earnings (loss) per share gives effect to the issuance of shares of Class A and Class C common stock in connection with this offering. Shares of Class C common stock are included in the calculation because they are convertible into shares of Class A common stock at any time on a one-for-one basis. The share of Class B common stock has no pro forma net earnings (loss) per share as it does not participate in our earnings or losses. For the purposes of pro forma net income per share of Class A and Class C common stock for the six months ended June 30, 2007, the weighted average shares outstanding and pro forma net income available to holders of shares of Class A and Class C common stock on a basic and diluted basis, are calculated as shown below:

 

    

Six Months Ended

June 30, 2007

     Basic    Diluted
     (all amounts in thousands,
except per share amounts)

Weighted average shares outstanding (i)

     

Virgin Mobile USA, Inc. shares of Class A common stock assumed to be outstanding

     52,496      52,496

Effect of dilutive securities:

     

Stock options (ii)

        1,190

Restricted stock units (iii)

        453

Virgin Mobile USA, LP units exchangeable into Virgin Mobile USA, Inc. shares of Class A common stock (iv)

        11,068

Virgin Mobile USA, Inc. shares of Class C common stock assumed to be outstanding

     115      115
             

Weighted average shares outstanding

     52,611      65,322
             

Basic and diluted pro forma net income per share:

     

Pro forma net income

   $ 29,315    $ 29,315

Add back Sprint Nextel’s minority interest, net of assumed corporate tax at enacted rates, attributable to Virgin Mobile USA, LP units exchangeable into Virgin Mobile USA, Inc. shares of Class A common stock (iv)

        6,148
             

Pro forma net income available to holders of shares of Class A and Class C common stock

   $ 29,315    $ 35,463
             

Weighted average shares outstanding

     52,611      65,322
             

Basic and diluted pro forma net income per share of Class A and Class C common stock

   $ 0.56    $ 0.54
             
 
  (i)   Assumes that all shares of Class A common stock and of Class C common stock outstanding upon completion of this offering, whether or not vested or subject to forfeiture, and Virgin Mobile USA, LP units, have been outstanding from January 1, 2006.
  (ii)   The potential issuance of options on shares of Class A common stock to holders of awards granted under the 2005 Stock Appreciation Rights Plan and the potential conversion of units granted under the 2002 and 2006 Stock Appreciation Rights Plans into options on shares of our Class A common stock has been included in the computation of diluted pro forma earnings per share using the treasury stock method.
  (iii)   The Restricted Stock Units granted on February 14, 2007, May 23, 2007 and the contingent issuance of Restricted Stock Unit Awards as a result of this offering are included in the computation of diluted pro forma earnings per share using the treasury stock method.
  (iv)  

Virgin Mobile USA, LP units held by Sprint Nextel are exchangeable into shares of Class A common stock on a one-for-one basis. These units are not included in the computation of basic earnings per

 

(footnotes continued on following page)

 

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share and are included in the computation of diluted pro forma net income per share of Class A and Class C common stock when the effect is dilutive using the if-converted method. Under the if-converted method, Sprint Nextel’s interest in income of Virgin Mobile USA, L.P. attributable to the units, net of assumed corporate income tax, is added to pro forma net income in the numerator of the computation and the Class A shares available from the assumed conversion of the Virgin Mobile USA, L.P. units, as if it had occurred at the beginning of the period, is added to the denominator.

Note

The following item, before the impact of minority interests, is not included in the pro forma adjustments as it is non-recurring and will not have a continuing impact on our results:

 

     (in thousands)

Consent fee in connection with our senior secured credit facility

   $ 1,082
      

 

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SELECTED HISTORICAL FINANCIAL AND OTHER DATA

The following table sets forth our selected historical financial and other data as of the dates and for the periods indicated. Virgin Mobile USA, Inc. is a recently formed holding company which has not engaged in any business or other activities except in connection with its formation and the reorganization transactions described elsewhere in this prospectus. Accordingly, for the purposes of this prospectus, all financial and other information herein relating to periods prior to the completion of the reorganization transactions is that of Virgin Mobile USA, LLC. The selected balance sheet data as of December 31, 2005 and 2006 and the selected statement of operations data for each of the years ended December 31, 2004, 2005 and 2006 have been derived from Virgin Mobile USA, LLC’s audited financial statements included elsewhere in this prospectus. The selected balance sheet data as of June 30, 2007 and the selected statement of operations data for the six months ended June 30, 2006 and 2007 have been derived from Virgin Mobile USA, LLC’s unaudited financial statements included elsewhere in this prospectus. The selected balance sheet data as of December 31, 2002, 2003 and 2004 and the selected statement of operations data for the years ended December 31, 2002 and 2003 have been derived from Virgin Mobile USA, LLC’s audited consolidated financial statements for such periods not included in this prospectus. The selected balance sheet data as of June 30, 2006 has been derived from Virgin Mobile USA, LLC’s unaudited financial statements not included in this prospectus.

The selected historical financial and other data presented below is not indicative of our results for any future periods. You should read the information in the table below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Unaudited Pro Forma Financial Information” and our historical audited financial statements and the accompanying notes and our interim financial statements and the accompanying notes included elsewhere in this prospectus.

 

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Virgin Mobile USA, LLC

Fiscal Year Ended December 31,

   

Virgin Mobile USA, LLC

Six Months Ended June 30,

 
(in thousands, except per share data
and Other data unless otherwise
indicated)
  2002     2003     2004     2005     2006             2006                     2007          

Income statement data:

              (Unaudited)  

Operating revenue:

             

Net service revenue

  $ 10,051     $ 189,457     $ 567,006     $ 883,816     $ 1,020,055     $ 508,345     $ 632,050  

Net equipment revenue

    16,628       96,351       123,632       106,116       90,524       33,141       34,852  
                                                       

Total operating revenue

    26,679       285,808       690,638       989,932       1,110,579       541,486       666,902  

Operating expenses:

             

Cost of service (exclusive of depreciation and amortization)

    10,502       104,753       229,283       309,321       299,130       143,084       183,979  

Cost of equipment

    60,782       221,008       364,042       361,655       378,981       157,679       193,024  

Selling, general and administrative (exclusive of depreciation and amortization)

    93,545       174,465       253,178       346,470       401,732       187,365       219,405  

Loss (gain) from litigation

    —         —         —         29,981       (15,384 )     —         —    

Depreciation and amortization

    5,371       8,672       12,891       19,413       28,381       13,124       16,731  
                                                       

Total operating expense

    170,200       508,898       859,394       1,066,840       1,092,840       501,252       613,139  
                                                       

Operating (loss)/income

    (143,521 )     (223,090 )     (168,756 )     (76,908 )     17,739       40,234       53,763  
                                                       

Interest expense

    663       2,806       5,427       25,008       52,178       25,672       27,447  

Other (income)/expense

    (113 )     (45 )     (305 )     949       2,268       1,445       (200 )
                                                       

Net (loss)/income

  $ (144,071 )   $ (225,851 )   $ (173,878 )   $ (102,865 )   $ (36,707 )   $ 13,117     $ 26,516  
                                                       

Balance sheet data:

(at period end)

             

Cash and cash equivalents

  $ 261     $ —       $ —       $ 18,562     $ —       $ 20,433     $ —    

Total assets

  $ 40,460     $ 90,744     $ 165,361     $ 221,215     $ 276,939     $ 207,634     $ 255,767  

Long-term debt

  $ —       $ —       $ —       $ —       $ 481,500     $ —       $ 478,500  

Total debt

  $ 7,889     $ 42,136     $ 70,374     $ 497,500     $ 553,269     $ 479,000     $ 522,000  

Members’ deficit

  $ (20,690 )   $ (87,176 )   $ (165,775 )   $ (621,683 )   $ (643,925 )   $ (602,578 )   $ (614,413 )

Statement of cash flows data:

             

Net cash (used in)/provided by:

             

Operating activities

  $ (58,756 )   $ (116,276 )   $ (40,510 )   $ (1,678 )   $ (38,865 )   $ 36,740     $ 24,544  

Investing activities

  $ (14,195 )   $ (12,890 )   $ (26,288 )   $ (33,607 )   $ (34,453 )   $ (16,369 )   $ (12,691 )

Financing activities

  $ 72,540     $ 128,905     $ 66,798     $ 53,847     $ 54,756     $ (18,500 )   $ (11,853 )

Capital expenditures

  $ (14,195 )   $ (12,890 )   $ (26,288 )   $ (33,607 )   $ (34,453 )   $ (16,369 )   $ (12,691 )

Other data (Unaudited):

             

Gross additions(a)

    305,764       1,348,617       2,328,830       2,666,194       3,013,781       1,052,784       1,666,992  

Churn(b)

    2.8 %     2.7 %     3.9 %     4.3 %     4.8 %     4.4 %     4.8 %

Net customer additions(c)

    294,337       1,133,960       1,422,855       993,625       729,313       27,175       256,297  

End-of-period customers(d)

    294,337       1,428,297       2,851,152       3,844,777       4,574,090       3,871,952       4,830,387  

Adjusted EBITDA(e)(f) (in thousands)

  $ (133,637 )   $ (214,373 )   $ (133,567 )   $ (48,275 )   $ 47,884     $ 54,972     $ 72,884  

Average revenue per user(e)(g)

  $ 25.00     $ 23.05     $ 24.24     $ 22.54     $ 21.48     $ 21.61     $ 21.68  

CCPU(e)(h)

  $ 139.22     $ 22.07     $ 16.85     $ 14.94     $ 13.15     $ 12.74     $ 13.50  

CPGA(e)(i)

  $ 286.67     $ 164.90     $ 131.58     $ 118.62     $ 120.55     $ 145.91     $ 99.32  

(footnotes appear on following page)

 

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(a)   Gross additions represents the number of new customers that activated our handsets during a period, unadjusted for churn, during the same period. In measuring gross additions, we begin with handset activations and exclude any customer who has replaced one of our handsets with another one, retailer returns, customers who have reactivated and fraudulent activations.
(b)   Churn is used to measure customer turnover on an average monthly basis. Churn is calculated as the ratio of the net number of customers that disconnect from our service during the period being measured to the weighted average number of customers during that period, divided by the number of months during the period being measured. The net number of customers that disconnect from our service is calculated as the total number of customers that disconnect less the adjustments noted under gross additions above. These adjustments are applied in order to arrive at a more meaningful measure of churn. The weighted average number of customers is the sum of the average number of customers for each day during the period being measured divided by the number of days in that period. Churn includes those pay-by-the-minute customers whom we automatically disconnect from our service when they have not replenished, or “Topped-Up,” their accounts for 150 days as well as those monthly customers whom we automatically disconnect when they have not paid their monthly recurring charge for 150 days (except for such monthly customers who replenish their account for less than the amount of their monthly recurring charge and, according to the terms of our monthly plans, may continue to use our services on a pay-by-the-minute basis), and such customers that voluntarily disconnect from our service prior to reaching 150 days since replenishing their account or paying their monthly recurring charge. We utilize 150 days in our calculation as it represents the last date upon which a customer who replenishes his or her account is still permitted to retain the same phone number. This calculation is consistent with the terms and conditions of our service offering. We believe churn is a useful metric to track changes in customer retention over time and to help evaluate how changes in our business and services offerings affect customer retention. In addition, churn is also useful for comparing our customer turnover to that of other wireless communications providers.
(c)   Net customer additions represents the number of new customers that activated our handsets during a period, adjusted for churn, during the same period.
(d)   End-of-period customers are the total number of customers at the end of the period being measured.
(e)   We use several financial performance metrics, including Adjusted EBITDA, ARPU, CCPU and CPGA, which are not calculated in accordance with GAAP. A non-GAAP financial metric 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 operations 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. We believe that the non-GAAP financial metrics that we use are helpful in understanding our operating performance from period to period, and although not every company in the wireless communication industry defines these metrics in precisely the same way that we do, we believe that these metrics as we use them facilitate comparisons with other wireless communication companies. These metrics should not be considered substitutes for any performance metric determined in accordance with GAAP.
(f)  

Adjusted EBITDA is calculated as net (loss)/income plus interest expense, income tax expense, depreciation and amortization, non-cash compensation expense, equity issued to a member and debt extinguishment costs. We believe Adjusted EBITDA is a useful tool in evaluating performance because it eliminates items related to taxes, non-cash charges relating to depreciation and amortization as well as items relating to both the debt and equity portions of our capital structure. Adjustments relating to interest expense, income tax expense, depreciation and amortization are each customary adjustments in the calculation of supplemental measures of performance. We believe such adjustments are meaningful because they are indicators of our core operating results and our management uses them to evaluate our business. Specifically, our management uses them in its calculation of compensation targets, preparation of budgets and evaluations of performance. Similarly, we believe that the exclusion of non-cash compensation expense provides investors

 

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with a more meaningful indication of our performance as these non-cash charges relate to the equity portion of our capital structure and not our core operating performance. This exclusion is also consistent with how we calculate the measures we use for determining certain bonus compensation targets, preparing budgets and for other internal purposes. Finally, we believe that the exclusion of equity issued to a member and debt extinguishment costs is appropriate because these charges relate to the debt and equity portions of our capital structure and are not expected to be incurred in future periods.

We find Adjusted EBITDA to be useful as a measure for understanding the performance of our operations from period to period and although not every company in the wireless communication industry defines these metrics in precisely the same way that we do, we believe that this metric, as we use it, facilitates comparisons with other wireless communication companies. We use Adjusted EBITDA in our business operations to, among other things, evaluate the performance of our business, develop budgets and measure our performance against those budgets. We also believe that analysts and investors use Adjusted EBITDA as a supplemental measure to evaluate our company’s overall operating performance. However, Adjusted EBITDA has material limitations as an analytical tool and you should not consider this in isolation, or as a substitute for analysis of our results as reported under GAAP. The items we eliminate in calculating Adjusted EBITDA are significant to our business: (i) interest expense is a necessary element of our costs and ability to generate revenue because we incur interest expense related to any outstanding indebtedness, (ii) to the extent that we incur income tax expense it represents a necessary element of our costs and our ability to generate revenue because ongoing revenue generation is expected to result in future income tax expense, (iii) depreciation and amortization are necessary elements of our costs, (iv) non-cash compensation expense is expected to be a recurring component of our costs and we may be able to incur lower cash compensation costs to the extent that we grant non-cash compensation, (v) expense resulting from equity issued to a member represents an actual cost relating to a prior contractual obligation and (vi) expense related to debt extinguishment represents a necessary element of our costs to the extent we restructure indebtedness. Furthermore, any measure that eliminates components of our capital structure and the carrying costs associated with the fixed assets on our balance sheet has material limitations as a performance measure. In light of the foregoing limitations, we do not rely solely on Adjusted EBITDA as a performance measure and also consider our GAAP results. Adjusted EBITDA is not a measurement of our financial performance under GAAP and should not be considered as an alternative to net income, operating income or any other measures derived in accordance with GAAP. Because Adjusted EBITDA is not calculated in the same manner by all companies, it may not be comparable to other similarly titled measures used by other companies.

 

   

Virgin Mobile USA, LLC

Fiscal Year Ended December 31,

    Six Months Ended
June 30,
(in thousands)   2002     2003     2004     2005     2006     2006   2007
    (Unaudited)

Calculation of Adjusted EBITDA:

             

Net (loss)/income

  $ (144,071 )   $ (225,851 )   $ (173,878 )   $ (102,865 )   $ (36,707 )   $ 13,117   $ 26,516

Plus:

             

Depreciation and amortization

    5,371       8,672       12,891       19,413       28,381       13,124     16,731

Interest expense

    663       2,806       5,427       25,008       52,178       25,672     27,447

Non-cash compensation expense

    —         —         5       1,475       2,563       1,590     2,190

Equity issued to a member

    4,400       —         21,988       7,623       —         —       —  

Debt extinguishment costs

    —         —         —         1,071       1,469       1,469     —  
                                                   

Adjusted EBITDA

  $ (133,637 )   $ (214,373 )   $ (133,567 )   $ (48,275 )   $ 47,884     $ 54,972   $ 72,884
                                                   

 

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(g)   Average revenue per user, or ARPU, is used to measure and track the average revenue generated by our customers on a monthly basis. ARPU is calculated as net service revenue for the period divided by the weighted average number of customers for that period being measured, further divided by the number of months in the period being measured. The weighted average number of customers is the sum of the average customers for each day during the period measured divided by the number of days in that period. ARPU helps us to evaluate customer performance based on customer revenue and forecast our future service revenues.

 

   

Virgin Mobile USA, LLC

Fiscal Year Ended December 31,

 

Six Months Ended
June 30,

(in thousands, except number of
months and ARPU)
  2002*   2003   2004   2005   2006   2006   2007
   

(Unaudited)

Calculation of ARPU:

             

Net service revenue

  $ 10,051   $ 189,457   $ 567,006   $ 883,816   $ 1,020,055   $ 508,345   $ 632,050

Divided by weighted average number of customers

    67     685     1,949     3,268     3,957     3,921     4,859

Divided by number of months in the period

    6     12     12     12     12     6     6
                                         

ARPU

  $ 25.00   $ 23.05   $ 24.24   $ 22.54   $ 21.48   $ 21.61   $  21.68
                                         

 

*   2002 weighted average number of customers and months in the period are from our launch in July 2002 through the end of the period.

 

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(h)   Cash cost per user, or CCPU, is used to measure and track our costs to provide support for our services to our existing customers on an average monthly basis. The costs included in this calculation are our cost of service (exclusive of depreciation and amortization), excluding cost of service associated with initial customer acquisition, general and administrative costs, excluding any marketing, selling, and distribution expenses associated with initial customer acquisition, non-cash compensation expense, net loss on equipment sold to existing customers, cooperative advertising expenses in support of existing customers and other (income) / expense, excluding debt extinguishment costs. These costs are then divided by our weighted average number of customers for that period being measured, further divided by the number of months in the period being measured. CCPU helps us to assess our ongoing business operations on a per customer basis, and evaluate how changes in our business operations affect the support costs per customer. Given its use throughout the industry, CCPU also serves as a standard by which we compare our performance against that of other wireless communication companies.

 

   

Virgin Mobile USA, LLC

Fiscal Year Ended December 31,

    Six Months Ended June 30,  
(in thousands, except number of
months and CCPU)
  2002*     2003     2004     2005     2006             2006                     2007          
   

(Unaudited)

 

Calculation of CCPU:

             

Cost of service (exclusive of depreciation and amortization)

  $ 10,502     $ 104,753     $ 229,283     $ 309,321     $ 299,130     $ 143,084     $ 183,979  

Less: Cost of service associated with initial customer acquisition

    (2,779 )     (13,143 )     (7,367 )     (3,750 )     (1,968 )     (590 )     (1,125 )

Add: General and administrative expenses

    48,357       89,820       161,269       254,989       288,414       141,751       175,270  

Less: Non-cash compensation expense

    —         —         (5 )     (1,475 )     (2,563 )     (1,590 )     (2,190 )

Add: Net loss on equipment sold to existing customers

    —         —         11,259       22,291       38,042       15,061       36,475  

Add: Cooperative advertising expenses in support of existing customers

    —         —         —         4,620       2,362       2,040       1,390  

Less: Other (income) expense, net of debt extinguishment costs

    (113 )     (45 )     (305 )     (122 )     799       (24 )     (200 )
                                                       

Total CCPU costs

  $ 55,967     $ 181,385     $ 394,134     $ 585,874     $ 624,216     $ 299,732     $ 393,599  

Divided by weighted average number of customers

    67       685       1,949       3,268       3,957       3,921       4,859  

Divided by number of months in the period

    6       12       12       12       12       6       6  
                                                       

CCPU

  $ 139.22     $ 22.07     $ 16.85     $ 14.94     $ 13.15     $ 12.74     $ 13.50  
                                                       

 

*   2002 weighted average number of customers and months in the period are from our launch in July 2002 through the end of the period.

 

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(i)   Cost per gross addition, or CPGA, is used to measure the cost of acquiring a new customer. The costs included in this calculation are our selling expenses, our net loss on equipment sales (cost of equipment less net equipment revenue), excluding the net loss on equipment sold to existing customers, equity issued to a member, cooperative advertising in support of existing customers and cost of service associated with initial customer acquisition. CPGA helps us to assess the efficiency of our customer acquisition methods and evaluate our sales and distribution strategies. CPGA also allows us to compare our average acquisition costs to those of other wireless communication companies.

 

   

Virgin Mobile USA, LLC

Fiscal Year Ended December 31,

    Six Months Ended June 30,  
(in thousands, except CPGA)   2002     2003     2004     2005     2006             2006                     2007          
   

(Unaudited)

 

Calculation of CPGA:

             

Selling expenses

  $ 45,188     $ 84,645     $ 91,909     $ 91,481     $ 113,318     $ 45,614     $ 44,135  

Add: Cost of equipment

    60,782       221,008       364,042       361,655       378,981       157,679       193,024  

Less: Net equipment revenue

    (16,628 )     (96,351 )     (123,632 )     (106,116 )     (90,524 )     (33,141 )     (34,852 )

Less: Net loss on equipment sold to existing customers

    —         —         (11,259 )     (22,291 )     (38,042 )     (15,061 )     (36,475 )

Less: Equity issued to a member

    (4,400 )     —         (21,988 )     (7,623 )     —         —         —    

Less: Cooperative advertising in support of existing customers

    —         —         —         (4,620 )     (2,362 )     (2,040 )     (1,390 )

Add: Cost of service associated with initial customer acquisition

    2,779       13,143       7,367       3,750       1,968       590       1,125  
                                                       

Total CPGA costs

  $ 87,721     $ 222,445     $ 306,439     $ 316,236     $ 363,339     $ 153,641     $ 165,567  

Divided by gross additions

    306       1,349       2,329       2,666       3,014       1,053       1,667  
                                                       

CPGA

  $ 286.67     $ 164.90     $ 131.58     $ 118.62     $ 120.55     $ 145.91     $ 99.32  
                                                       

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the respective financial statements and related footnotes of Bluebottle USA Investments L.P. and Virgin Mobile USA, LLC included in this prospectus. This discussion contains forward-looking statements that are subject to known and unknown risks and uncertainties. Actual results and the timing of events may differ significantly from those expressed or implied in such forward-looking statements due to a number of factors, including those included in the section entitled “Risk Factors” and elsewhere in this prospectus.

Introduction

We are a holding company formed for the purpose of this offering. Since we have not engaged in any business or other activities except in connection with our formation and the reorganization transactions described elsewhere in this prospectus, the following Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, focuses on the historical results of operations of our operating company, Virgin Mobile USA, LLC. The critical accounting policies and estimates and new accounting pronouncements apply to Virgin Mobile USA, LLC and Bluebottle USA Investments L.P. and, we expect, will apply to Virgin Mobile USA, Inc. going forward. The liquidity and capital resources, contractual obligations, commitments and contingencies, and quantitative and qualitative disclosures about market risk relate to Virgin Mobile USA, LLC only.

This MD&A is provided as a supplement to the financial statements and the related footnotes included elsewhere in the prospectus to help provide an understanding of our financial condition, changes in financial condition and results of our operations. The MD&A is organized as follows:

 

   

Company Overview.    This section provides a general description of our business and that of Bluebottle USA Investments L.P., as well as recent developments that we believe necessary to understand our financial condition and results of operations and to anticipate future trends in our business.

 

   

Critical Accounting Policies and Estimates.    This section discusses the accounting policies and estimates that we consider to be important to our financial condition and results of operations and which require significant judgment and estimates on the part of management in their application. In addition, all of our significant accounting policies (including our critical accounting policies) are summarized in Note 2 of our audited financial statements included elsewhere in the prospectus.

 

   

Results of Operations.    This section provides an analysis of Virgin Mobile USA, LLC’s results of operations for the years ended December 31, 2004, 2005 and 2006 and the six months ended June 30, 2006 and 2007.

 

   

Liquidity and Capital Resources.    This section provides an analysis of our cash flows for the years ended December 31, 2004, 2005 and 2006 and the six months ended June 30, 2006 and 2007, as well as a discussion of our financial condition and liquidity as of December 31, 2005 and 2006 and as of June 30, 2007. The discussion of our financial condition and liquidity includes summaries of our senior secured credit facility and our subordinated secured revolving credit facility and related covenants and the borrowings outstanding thereunder as of December 31, 2006 and June 30, 2007, as well as our available financial capacity under our subordinated secured revolving credit facility. We estimate that the net proceeds to us from this offering, based on an assumed initial public offering price per share of $16.00 (which is the midpoint of the estimated price range shown on the cover of this prospectus), after deducting underwriting discounts and estimated offering expenses, will be approximately $375.6 million. Based upon this assumed offering price, we will use approximately $160.8 million of the net proceeds to us from this offering to pay Sprint Nextel for limited liability company interests representing approximately 16.7 % of Virgin Mobile USA, LLC (which consideration will be based on the amount Sprint Nextel would have received had it converted such limited liability company interests into shares of our Class A common stock and sold such shares in this offering). Virgin Mobile USA, Inc. will contribute a small part of its interest in Virgin Mobile USA, LLC to a newly formed entity,

 

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VMU GP1, LLC, in exchange for all of the interests in VMU GP1, LLC. We will contribute the remaining net proceeds, along with the majority of our remaining portion of such limited liability company interests in Virgin Mobile USA, LLC (once such interests have been converted to limited partnership interests in the Operating Partnership), to Investments, which in turn will contribute such proceeds and interests to Holdings. Holdings will use such proceeds to purchase from the Operating Partnership additional partnership units representing approximately 23.1% of the Operating Partnership. The Operating Partnership will use the sale proceeds (1) to repay a $150 million portion of the term loan outstanding under our senior secured credit facility, (2) to repay approximately $45 million of indebtedness owed to Sprint Nextel under the terms of our subordinated secured revolving credit facility and (3) for general corporate and other purposes. Accordingly, Virgin Mobile USA, Inc. will not retain any proceeds from this offering. We will not receive any of the proceeds from the sale of shares by the selling stockholders.

 

   

Contractual Obligations, Commitments and Contingencies.    This section provides a discussion of our commitments (both firm and contingent) as of December 31, 2006 and June 30, 2007.

 

   

New Accounting Pronouncements.    This section describes new accounting requirements that could potentially impact our results of operations and financial statements.