10-Q 1 mpcs2012-q310xq.htm FORM 10-Q MPCS 2012-Q3 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number
1-33409
METROPCS COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
20-0836269
(State or other jurisdiction
 
(I.R.S. Employer
of incorporation or organization)
 
Identification No.)
 
 
2250 Lakeside Boulevard
 
 
Richardson, Texas
 
75082-4304
(Address of principal executive offices)
 
(Zip Code)
(214) 570-5800
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
 
Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
On October 19, 2012, there were 364,103,435 shares of the registrant’s common stock, $0.0001 par value, outstanding.



METROPCS COMMUNICATIONS, INC.
Quarterly Report on Form 10-Q
Table of Contents
 
Page
PART I. FINANCIAL INFORMATION
 
 
 
 
 
 
PART II. OTHER INFORMATION
 
*
*
*
 ———————————— 
*
No reportable information under this item.



Part I.
FINANCIAL INFORMATION
Item 1. Financial Statements
MetroPCS Communications, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except share and per share information)
(Unaudited)
 
 
September 30,
2012
 
December 31,
2011
CURRENT ASSETS:
 
 
 
 
Cash and cash equivalents
 
$
2,057,339

 
$
1,943,282

Short-term investments
 
507,943

 
299,972

Inventories
 
312,632

 
239,648

Accounts receivable (net of allowance for uncollectible accounts of $490 and $601 at September 30, 2012 and December 31, 2011, respectively)
 
95,263

 
78,023

Prepaid expenses
 
80,040

 
55,712

Deferred charges
 
71,590

 
74,970

Deferred tax assets
 
7,666

 
7,214

Other current assets
 
52,349

 
44,772

Total current assets
 
3,184,822

 
2,743,593

Property and equipment, net
 
4,197,399

 
4,017,999

Restricted cash and investments
 
2,076

 
2,576

Long-term investments
 
1,679

 
6,319

FCC licenses
 
2,562,315

 
2,539,041

Other assets
 
123,618

 
173,403

Total assets
 
$
10,071,909

 
$
9,482,931

CURRENT LIABILITIES:
 
 
 
 
Accounts payable and accrued expenses
 
$
450,087

 
$
512,346

Current maturities of long-term debt
 
36,112

 
33,460

Deferred revenue
 
232,307

 
245,705

Other current liabilities
 
66,144

 
25,212

Total current liabilities
 
784,650

 
816,723

Long-term debt, net
 
4,731,174

 
4,711,021

Deferred tax liabilities
 
1,008,870

 
817,106

Deferred rents
 
133,272

 
120,028

Other long-term liabilities
 
91,496

 
90,453

Total liabilities
 
6,749,462

 
6,555,331

COMMITMENTS AND CONTINGENCIES (See Note 10)
 

 

STOCKHOLDERS’ EQUITY:
 
 
 
 
Preferred stock, par value $0.0001 per share, 100,000,000 shares authorized; no shares of preferred stock issued and outstanding at September 30, 2012 and December 31, 2011
 

 

Common stock, par value $0.0001 per share, 1,000,000,000 shares authorized, 363,875,489 and 362,460,395 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively
 
36

 
36

Additional paid-in capital
 
1,815,315

 
1,784,273

Retained earnings
 
1,521,925

 
1,159,418

Accumulated other comprehensive loss
 
(4,625
)
 
(9,295
)
Less treasury stock, at cost, 965,021 and 602,881 treasury shares at September 30, 2012 and December 31, 2011, respectively
 
(10,204
)
 
(6,832
)
Total stockholders’ equity
 
3,322,447

 
2,927,600

Total liabilities and stockholders’ equity
 
$
10,071,909

 
$
9,482,931

The accompanying notes are an integral part of these condensed consolidated financial statements.

1


MetroPCS Communications, Inc. and Subsidiaries
Condensed Consolidated Statements of Income and Comprehensive Income
(in thousands, except share and per share information)
(Unaudited)
 
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
 
 
 
 
2012
 
2011
 
2012
 
2011
REVENUES:
 
 
 
 
 
 
 
 
Service revenues
 
$
1,121,957

 
$
1,131,054

 
$
3,439,678

 
$
3,294,563

Equipment revenues
 
137,203

 
74,334

 
377,252

 
314,654

Total revenues
 
1,259,160

 
1,205,388

 
3,816,930

 
3,609,217

OPERATING EXPENSES:
 
 
 
 
 
 
 
 
Cost of service (excluding depreciation and amortization expense of $142,892, $120,362, $408,852 and $347,645 shown separately below)
 
373,032

 
382,033

 
1,130,377

 
1,089,480

Cost of equipment
 
265,940

 
343,473

 
1,002,726

 
1,095,269

Selling, general and administrative expenses (excluding depreciation and amortization expense of $20,197, $18,947, $60,406 and $54,883 shown separately below)
 
163,409

 
162,459

 
507,497

 
486,786

Depreciation and amortization
 
163,089

 
139,309

 
469,258

 
402,528

Loss on disposal of assets
 
1,452

 
1,283

 
4,618

 
2,731

Total operating expenses
 
966,922

 
1,028,557

 
3,114,476

 
3,076,794

Income from operations
 
292,238

 
176,831

 
702,454

 
532,423

OTHER EXPENSE (INCOME):
 
 
 
 
 
 
 
 
Interest expense
 
66,655

 
69,511

 
206,224

 
193,051

Interest income
 
(460
)
 
(531
)
 
(1,208
)
 
(1,557
)
Other (income) expense, net
 
(105
)
 
(93
)
 
(418
)
 
(534
)
Gain on settlement
 
(52,500
)
 

 
(52,500
)
 

Loss on extinguishment of debt
 

 

 

 
9,536

Total other expense
 
13,590

 
68,887

 
152,098

 
200,496

Income before provision for income taxes
 
278,648

 
107,944

 
550,356

 
331,927

Provision for income taxes
 
(85,981
)
 
(38,618
)
 
(187,849
)
 
(121,887
)
Net income
 
$
192,667

 
$
69,326

 
$
362,507

 
$
210,040

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Unrealized gains on available-for-sale securities, net of tax of $49, $25, $100 and $127, respectively
 
3,512

 
40

 
3,593

 
204

Unrealized losses on cash flow hedging derivatives, net of tax benefit of $1,002, $5,790, $3,608 and $13,713, respectively
 
(1,748
)
 
(9,286
)
 
(5,913
)
 
(22,060
)
Reclassification adjustment for gains on available-for-sale securities included in net income, net of tax of $33, $47, $58 and $169, respectively
 
(56
)
 
(75
)
 
(96
)
 
(272
)
Reclassification adjustment for losses on cash flow hedging derivatives included in net income, net of tax benefit of $1,301, $2,468, $4,324 and $6,587, respectively
 
2,254

 
3,956

 
7,086

 
10,596

Total other comprehensive income (loss)
 
3,962

 
(5,365
)
 
4,670

 
(11,532
)
Comprehensive income
 
$
196,629

 
$
63,961

 
$
367,177

 
$
198,508

Net income per common share:
 
 
 
 
 
 
 
 
Basic
 
$
0.53

 
$
0.19

 
$
0.99

 
$
0.58

Diluted
 
$
0.52

 
$
0.19

 
$
0.99

 
$
0.57

Weighted average shares:
 
 
 
 
 
 
 
 
Basic
 
363,584,552

 
362,019,205

 
363,190,434

 
359,763,082

Diluted
 
365,019,836

 
364,865,226

 
364,440,115

 
363,717,798


The accompanying notes are an integral part of these condensed consolidated financial statements.

2


MetroPCS Communications, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
 
 
For the Nine Months Ended September 30,
 
 
 
 
2012
 
2011
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
Net income
 
$
362,507

 
$
210,040

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
469,258

 
402,528

Provision for uncollectible accounts receivable
 
3,155

 
382

Deferred rent expense
 
13,432

 
13,457

Cost of abandoned cell sites
 
1,357

 
650

Stock-based compensation expense
 
28,756

 
32,142

Non-cash interest expense
 
5,563

 
6,141

Loss on disposal of assets
 
4,618

 
2,731

Gain on settlement
 
(52,500
)
 

Loss on extinguishment of debt
 

 
9,536

Gain on sale of investments
 
(154
)
 
(441
)
Accretion of asset retirement obligations
 
4,900

 
4,198

Deferred income taxes
 
191,243

 
119,290

Changes in assets and liabilities:
 
 
 
 
Inventories
 
(72,984
)
 
14,047

Accounts receivable, net
 
(17,152
)
 
(7,373
)
Prepaid expenses
 
(24,279
)
 
(16,289
)
Deferred charges
 
3,379

 
2,307

Other assets
 
16,469

 
24,755

Accounts payable and accrued expenses
 
(82,100
)
 
(90,087
)
Deferred revenue
 
(13,398
)
 
19,225

Other liabilities
 
6,398

 
6,421

Net cash provided by operating activities
 
848,468

 
753,660

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
Purchases of property and equipment
 
(588,332
)
 
(699,625
)
Change in prepaid purchases of property and equipment
 
39,330

 
(65,241
)
Proceeds from sale of property and equipment
 
897

 
845

Purchases of investments
 
(692,147
)
 
(462,289
)
Proceeds from maturity of investments
 
492,500

 
537,500

Proceeds from gain on settlement
 
52,500

 

Change in restricted cash and investments
 
500

 
300

Acquisitions of FCC licenses and microwave clearing costs
 
(22,998
)
 
(4,003
)
Cash used in asset acquisitions
 

 
(7,495
)
Net cash used in investing activities
 
(717,750
)
 
(700,008
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Change in book overdraft
 
9,131

 
14,081

Proceeds from debt issuance, net of discount
 

 
1,497,500

Debt issuance costs
 

 
(15,351
)
Repayment of debt
 
(19,042
)
 
(17,945
)
Retirement of senior secured credit facility debt
 

 
(535,792
)
Payments on capital lease obligations
 
(6,668
)
 
(6,222
)
Purchase of treasury stock
 
(3,373
)
 
(4,359
)
Proceeds from exercise of stock options
 
3,291

 
58,666

Net cash (used in) provided by financing activities
 
(16,661
)
 
990,578

INCREASE CASH AND CASH EQUIVALENTS
 
114,057

 
1,044,230

CASH AND CASH EQUIVALENTS, beginning of period
 
1,943,282

 
796,531

CASH AND CASH EQUIVALENTS, end of period
 
$
2,057,339

 
$
1,840,761


The accompanying notes are an integral part of these condensed consolidated financial statements.

3

MetroPCS Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)


1.
Basis of Presentation:
The accompanying unaudited condensed consolidated interim financial statements include the balances and results of operations of MetroPCS Communications, Inc. (“MetroPCS”) and its consolidated subsidiaries (collectively, the “Company”).
The condensed consolidated balance sheets as of September 30, 2012 and December 31, 2011, the condensed consolidated statements of income and comprehensive income and cash flows for the periods ended September 30, 2012 and 2011, and the related footnotes are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
The unaudited condensed consolidated financial statements included herein reflect all adjustments (consisting of normal, recurring adjustments) which are, in the opinion of management, necessary to state fairly the results for the interim periods presented. The results of operations for the interim periods presented are not necessarily indicative of the operating results to be expected for any subsequent interim period or for the fiscal year.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The Company has thirteen operating segments based on geographic regions within the United States: Atlanta, Boston, Dallas/Ft. Worth, Detroit, Las Vegas, Los Angeles, Miami, New York, Orlando/Jacksonville, Philadelphia, Sacramento, San Francisco and Tampa/Sarasota. In accordance with the provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 280 (Topic 280, “Segment Reporting”), the Company aggregates its thirteen operating segments into one reportable segment.
Federal Universal Service Fund (“FUSF”), E-911 and various other fees are assessed by various governmental authorities in connection with the services that the Company provides to its customers. The Company offers a family of service plans, which include all applicable taxes and regulatory fees (“tax inclusive plans”). The Company reports regulatory fees for the tax inclusive plans in cost of service on the accompanying condensed consolidated statements of income and comprehensive income. When the Company separately assesses these regulatory fees on its customers for those service plans that do not include taxes or regulatory fees, the Company reports these regulatory fees on a gross basis in service revenues and cost of service on the accompanying condensed consolidated statements of income and comprehensive income. For the three months ended September 30, 2012 and 2011, the Company recorded $9.3 million and $16.8 million, respectively, of FUSF, E-911 and other fees on a gross basis. For the nine months ended September 30, 2012 and 2011, the Company recorded $34.5 million and $52.3 million, respectively, of FUSF, E-911 and other fees on a gross basis. Sales, use and excise taxes for all service plans are reported on a net basis in selling, general and administrative expenses on the accompanying condensed consolidated statements of income and comprehensive income.

Recent Accounting Pronouncements

In July 2012, the FASB issued Accounting Standards Update ("ASU") 2012-02, "Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment," allowing entities to make a qualitative evaluation about the likelihood of impairment of an indefinite-lived intangible asset to determine whether the quantitative test is required, as opposed to required annual quantitative impairment testing.  The amendment was effective for interim and annual impairment tests performed for fiscal years beginning after September 15, 2012.  Early adoption is permitted. The Company did not elect to utilize a qualitative assessment and has performed the annual quantitative impairment test as of September 30, consistent with prior years.  The implementation of this standard is not expected to affect the Company's financial condition, results of operations, or cash flows.
2.
Asset Acquisition:
In October 2010, the Company entered into an asset purchase agreement to acquire 10 MHz of AWS spectrum and certain related network assets adjacent to the Northeast metropolitan areas for a total purchase price of $49.2 million. In November 2010, the Company closed on the acquisition of the network assets and paid a total of $41.1 million in cash. In February 2011, the Company closed on the acquisition of the 10 MHz of AWS spectrum and paid $8.0 million in cash. In June 2011, the Company completed its final settlement of costs and received $0.5 million in cash as reimbursement for pre-acquisition

4

MetroPCS Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)

payments made on behalf of the seller. The Company used the relative fair values of the assets acquired to allocate the purchase price, of which $35.6 million was allocated to property and equipment and $13.6 million was allocated to Federal Communications Commission (“FCC”) licenses.
3.
Short-term Investments:

The Company’s short-term investments consist of securities classified as available-for-sale, which are stated at fair value. The securities include U.S. Treasury securities and certain auction rate securities with an original maturity of over 90 days. Unrealized gains, net of related income taxes, for available-for-sale securities are reported in accumulated other comprehensive income (loss), a component of stockholders’ equity, until realized. The estimated fair values of investments are based on quoted market prices as of the end of the reporting period. The U.S. Treasury securities reported as of September 30, 2012 have contractual maturities of less than one year.
Short-term investments, with an original maturity of over 90 days, consisted of the following (in thousands):
 
 
As of September 30, 2012
 
 
Amortized
Cost
 
Unrealized
Gain in
Accumulated
OCI
 
Unrealized
Loss in
Accumulated
OCI
 
Aggregate
Fair
Value
Equity securities
 
$
7

 
$

 
$
(6
)
 
$
1

U.S. Treasury securities
 
499,731

 
142

 

 
499,873

Auction rate securities
 
1,210

 
6,859

 

 
8,069

Total short-term investments
 
$
500,948

 
$
7,001

 
$
(6
)
 
$
507,943

 
 
 
As of December 31, 2011
 
 
Amortized
Cost
 
Unrealized
Gain in
Accumulated
OCI
 
Unrealized
Loss in
Accumulated
OCI
 
Aggregate
Fair
Value
Equity securities
 
$
7

 
$

 
$
(6
)
 
$
1

U.S. Treasury securities
 
299,939

 
32

 

 
299,971

Total short-term investments
 
$
299,946

 
$
32

 
$
(6
)
 
$
299,972


In October 2012, the Company sold certain auction rate securities for approximately $8.1 million in cash. Accordingly, the Company classified the auction rate securities sold in October 2012 as short-term investments as of September 30, 2012.
4.
Derivative Instruments and Hedging Activities:
In October 2010, MetroPCS Wireless, Inc. (“Wireless”) entered into three separate two-year interest rate protection agreements to manage its interest rate risk exposure under Wireless’ senior secured credit facility, as amended (the “Senior Secured Credit Facility”). These agreements were effective on February 1, 2012 and cover a notional amount of $950.0 million and effectively convert this portion of Wireless’ variable rate debt to fixed rate debt at a weighted average annual rate of 4.908%. These agreements expire on February 1, 2014.
In April 2011, Wireless entered into three separate three-year interest rate protection agreements to manage its interest rate risk exposure under its Senior Secured Credit Facility. These agreements were effective on April 15, 2011 and cover a notional amount of $450.0 million and effectively convert this portion of Wireless’ variable rate debt to fixed rate debt at a weighted average annual rate of 5.242%. These agreements expire on April 15, 2014.
Interest rate protection agreements are entered into to manage interest rate risk associated with Wireless’ variable-rate borrowings under the Senior Secured Credit Facility. The interest rate protection agreements have been designated as cash flow hedges. If a derivative is designated as a cash flow hedge and the hedging relationship qualifies for hedge accounting under the provisions of ASC 815 (Topic 815, “Derivatives and Hedging”), the effective portion of the change in fair value of the derivative is recorded in accumulated other comprehensive income (loss) and reclassified to interest expense in the period in which the hedged transaction affects earnings. The ineffective portion of the change in fair value of a derivative qualifying for hedge accounting is recognized in earnings in the period of the change. For the three and nine months ended September 30,

5

MetroPCS Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)

2012, the change in fair value did not result in ineffectiveness.
At the inception of the cash flow hedges and quarterly thereafter, the Company performs an assessment to determine whether changes in the fair values or cash flows of the derivatives are deemed highly effective in offsetting changes in the fair values or cash flows of the hedged transaction. If at any time subsequent to the inception of the cash flow hedges, the assessment indicates that the derivative is no longer highly effective as a hedge, the Company will discontinue hedge accounting and recognize all subsequent derivative gains and losses in results of operations. The Company estimates that approximately $13.6 million of net losses that are reported in accumulated other comprehensive loss at September 30, 2012 are expected to be reclassified into earnings within the next 12 months.
Cross-default Provisions
Wireless’ interest rate protection agreements contain cross-default provisions to its Senior Secured Credit Facility. Wireless’ Senior Secured Credit Facility allows interest rate protection agreements to become secured if the counterparty to the agreement is a current lender under the Senior Secured Credit Facility. If Wireless were to default on the Senior Secured Credit Facility, it would trigger these provisions, and the counterparties to the interest rate protection agreements could request immediate payment on interest rate protection agreements in net liability positions, similar to their existing rights as a lender. There are no collateral requirements in the interest rate protection agreements. The aggregate fair value of interest rate protection agreements with cross-default provisions that are in a net liability position as of September 30, 2012 is $19.1 million.
Fair Values of Derivative Instruments
(in thousands)
 
Liability Derivatives
 
 
As of September 30, 2012
 
As of December 31, 2011
 
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Derivatives designated as hedging
instruments under ASC 815
 
 
 
 
 
 
 
 
Interest rate protection agreements
 
Other current liabilities
 
$
(13,630
)
 
Other current liabilities
 
$
(11,644
)
Interest rate protection agreements
 
Other long-term liabilities
 
(5,496
)
 
Other long-term liabilities
 
(9,371
)
Total derivatives designated as
hedging instruments under ASC
815
 
 
 
$
(19,126
)
 
 
 
$
(21,015
)

The Effect of Derivative Instruments on the Condensed Consolidated Statement of Income and Comprehensive Income
For the Three Months Ended September 30,
Derivatives in ASC 815 Cash
Flow Hedging Relationships
 
Amount of Gain (Loss)
Recognized in OCI on Derivative
(Effective Portion)
 
Location of Gain (Loss) Reclassified from
Accumulated OCI into
Income (Effective Portion)
 
Amount of Gain (Loss)
Reclassified from
Accumulated OCI into
Income (Effective Portion)
 
2012
 
2011
 
2012
 
2011
Interest rate protection agreements
 
$
(2,751
)
 
$
(15,076
)
 
Interest expense
 
$
(3,555
)
 
$
(6,424
)
 
The Effect of Derivative Instruments on the Condensed Consolidated Statement of Income and Comprehensive Income
For the Nine Months Ended September 30,
Derivatives in ASC 815 Cash
Flow Hedging Relationships
 
Amount of Gain (Loss)
Recognized in OCI on Derivative
(Effective Portion)
 
Location of Gain (Loss) Reclassified from
Accumulated OCI into
Income (Effective Portion)
 
Amount of Gain (Loss)
Reclassified from
Accumulated OCI into
Income (Effective Portion)
 
2012
 
2011
 
2012
 
2011
Interest rate protection agreements
 
$
(9,521
)
 
$
(35,774
)
 
Interest expense
 
$
(11,410
)
 
$
(17,182
)
 
5.
Intangible Assets:

The Company operates wireless broadband mobile networks under licenses granted by the FCC for a particular geographic area on spectrum allocated by the FCC for terrestrial wireless broadband services. The Company holds personal communications services (“PCS”) licenses, advanced wireless services (“AWS”) licenses, 700 MHz licenses and microwave licenses granted or acquired on various dates. The PCS licenses previously included, and the AWS licenses currently include, the obligation and resulting costs to relocate existing fixed microwave users of the Company's licensed spectrum if the

6

MetroPCS Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)

Company's use of its spectrum interferes with their systems and/or reimburse other carriers (according to FCC rules) that relocated prior users if the relocation benefits the Company's system. Accordingly, the Company incurs costs related to microwave relocation in constructing its PCS and AWS networks. FCC Licenses and related microwave relocation costs are recorded at cost.
The change in the carrying value of intangible assets during the nine months ended September 30, 2012 is as follows (in thousands):
 
 
FCC Licenses
 
Microwave
Relocation
Costs
Balance at January 1, 2012
 
$
2,513,770

 
$
25,271

Additions
 
21,946

 
1,328

Disposals
 

 

Balance at September 30, 2012
 
$
2,535,716

 
$
26,599


Although PCS, AWS, 700 MHz and microwave licenses are issued with a stated term between ten and fifteen years, the renewal of PCS, AWS, 700 MHz and microwave licenses is generally a routine matter without substantial cost and the Company has determined that no legal, regulatory, contractual, competitive, economic, or other factors currently exist that limit the useful life of its PCS, AWS, 700 MHz and microwave licenses. As such, under the provisions of ASC 350, (Topic 350, “Intangibles-Goodwill and Other”), the Company's PCS, AWS, 700 MHz and microwave licenses and microwave relocation costs (collectively, the "indefinite-lived intangible assets") are not amortized because they are considered to have indefinite lives, but are tested at least annually for impairment.

In accordance with the requirements of ASC 350, the Company performs its annual indefinite-lived intangible assets impairment test as of each September 30 or more frequently if events or changes in circumstances indicate that the carrying value of the indefinite-lived intangible assets might be impaired. The impairment test consists of a comparison of estimated fair value with the carrying value. The Company estimates the fair value of its indefinite-lived intangible assets using a direct value methodology. The direct value approach determines fair value using a discounted cash flow model. Cash flow projections involve assumptions by management that include a degree of uncertainty, including future cash flows, long-term growth rates, appropriate discount rates, and other inputs. The Company believes that its estimates are consistent with assumptions that marketplace participants would use to estimate fair value. An impairment loss would be recorded as a reduction in the carrying value of the related indefinite-lived intangible assets and charged to results of operations.

For the purpose of performing the annual impairment test as of September 30, 2012, the indefinite-lived intangible assets were aggregated and combined into a single unit of accounting, consistent with the management of the business on a national scope. No impairment was recognized as a result of the test performed at September 30, 2012 as the fair value of the indefinite-lived intangible assets was in excess of the carrying value. Although the Company does not expect its estimates or assumptions to change significantly in the future, the use of different estimates or assumptions within the discounted cash flow model when determining the fair value of the indefinite-lived intangible assets or using a methodology other than a discounted cash flow model could result in different values for the indefinite-lived intangible assets and may affect any related impairment charge. The most significant assumptions within the Company's discounted cash flow model are the discount rate, the projected growth rate, and projected cash flows. A one percent decline in annual revenue, a one percent decline in annual net cash flows or a one percent increase in discount rate would not result in an impairment as of September 30, 2012.

Furthermore, if any of the indefinite-lived intangible assets are subsequently determined to have a finite useful life, such assets would be tested for impairment in accordance with ASC 360 (Topic 360, “Property, Plant, and Equipment”), and the intangible assets would then be amortized prospectively over the estimated remaining useful life.

Other Spectrum Acquisitions

During the nine months ended September 30, 2012, the Company closed on the acquisition of microwave spectrum in the net aggregate amount of $21.9 million in cash.

7

MetroPCS Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)

6.
Supplemental Balance Sheet Information:
 
 
September 30, 2012
 
December 31, 2011
 
 
(in thousands)
Other current liabilities:
 
 
 
 
Deferred vendor credits (1)
 
$
40,209

 
$

Derivative liabilities
 
13,630

 
11,644

Other
 
12,305

 
13,568

 
 
$
66,144

 
$
25,212

 ————————————
(1)
Deferred vendor credits consists of credit memos received from a vendor that will be earned upon the return of certain network equipment.
7.
Long-term Debt:
Long-term debt consisted of the following (in thousands):
 
 
September 30,
2012
 
December 31,
2011
Senior Secured Credit Facility
 
$
2,452,873

 
$
2,471,916

7 7/8% Senior Notes
 
1,000,000

 
1,000,000

5/8% Senior Notes
 
1,000,000

 
1,000,000

Capital Lease Obligations
 
322,204

 
281,167

Total long-term debt
 
4,775,077

 
4,753,083

Add: unamortized discount on debt
 
(7,791
)
 
(8,602
)
Total debt
 
4,767,286

 
4,744,481

Less: current maturities
 
(36,112
)
 
(33,460
)
Total long-term debt
 
$
4,731,174

 
$
4,711,021

7 7/8% Senior Notes due 2018
In September 2010, Wireless completed the sale of $1.0 billion of principal amount of 7 7/8% Senior Notes due 2018 (“7 7/8% Senior Notes”). The terms of the 7 7/8% Senior Notes are governed by the indenture, the first supplemental indenture, dated September 21, 2010, and the third supplemental indenture, dated December 23, 2010, among Wireless, the guarantors party thereto and the trustee. The net proceeds of the sale of the 7 7/8% Senior Notes were $974.0 million after underwriter fees, discounts and other debt issuance costs of $26.0 million.
6 5/8% Senior Notes due 2020
In November 2010, Wireless completed the sale of $1.0 billion of principal amount of 6 5/8% Senior Notes due 2020 (“6 5/8% Senior Notes”). The terms of the 6 5/8% Senior Notes are governed by the indenture, the second supplemental indenture, dated November 17, 2010, and the fourth supplemental indenture, dated December 23, 2010, among Wireless, the guarantors party thereto and the trustee. The net proceeds of the sale of the 6 5/8% Senior Notes were $988.1 million after underwriter fees, discounts and other debt issuance costs of approximately $11.9 million.
Senior Secured Credit Facility
In November 2006, Wireless entered into the senior secured credit facility, which consisted of a $1.6 billion term loan facility and a $100.0 million revolving credit facility. The term loan facility was repayable in quarterly installments in annual aggregate amounts equal to 1% of the initial aggregate principal amount of $1.6 billion.
In July 2010, Wireless entered into an Amendment and Restatement and Resignation and Appointment Agreement (the “Amendment”) which amended and restated the senior secured credit facility to, among other things, extend the maturity of $1.0 billion of existing term loans (“Tranche B-2 Term Loans”) under the senior secured credit facility to November 2016, increase the interest rate to LIBOR plus 3.50% on the extended portion only and reduce the revolving credit facility from $100.0 million to $67.5 million. The remaining term loans (“Tranche B-1 Term Loans”) under the senior secured credit facility

8

MetroPCS Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)

were to mature in November 2013 and the interest rate continued to be LIBOR plus 2.25%. This modification did not result in a loss on extinguishment of debt.
In March 2011, Wireless entered into an Amendment and Restatement Agreement (the “New Amendment”) which further amended and restated the Senior Secured Credit Facility. The New Amendment amended the Senior Secured Credit Facility to, among other things, provide for a new tranche of term loans in the amount of $500.0 million (“Tranche B-3 Term Loans”), with an interest rate of LIBOR plus 3.75% which will mature in March 2018, and increase the interest rate to LIBOR plus 3.821% on the existing Tranche B-1 Term Loans and Tranche B-2 Term Loans. The Tranche B-3 Term Loans are repayable in quarterly installments of $1.25 million. In addition, the aggregate amount of the revolving credit facility was increased from $67.5 million to $100.0 million and the maturity of the revolving credit facility was extended to March 2016. The net proceeds from the Tranche B-3 Term Loans were $490.2 million after underwriter fees, discounts and other debt issuance costs of approximately $9.8 million.
The New Amendment also modified certain limitations under the Senior Secured Credit Facility, including limitations on Wireless' ability to incur additional debt, make certain restricted payments, sell assets, make certain investments or acquisitions, grant liens and pay dividends. In addition, Wireless is no longer subject to certain financial covenants, including maintaining a maximum senior secured consolidated leverage ratio, except under certain circumstances.

In May 2011, Wireless entered into an Incremental Commitment Agreement (the “Incremental Agreement”) which supplements the Senior Secured Credit Facility to provide for an additional $1.0 billion of Tranche B-3 Term Loans (the “Incremental Tranche B-3 Terms Loans”). The Incremental Tranche B-3 Term Loans have an interest rate of LIBOR plus 3.75% and will mature in March 2018. The Incremental Tranche B-3 Term Loans are repayable in quarterly installments of $2.5 million. A portion of the proceeds from the Incremental Tranche B-3 Term Loans was used to prepay the $535.8 million in outstanding principal under the Tranche B-1 Term Loans, with the remaining proceeds to be used for general corporate purposes, including opportunistic spectrum acquisitions. The net proceeds from the Incremental Tranche B-3 Term Loans were $455.5 million after prepayment of the Tranche B-1 Term Loans, underwriter fees, and other debt issuance costs of approximately $7.9 million. The prepayment of the Tranche B-1 Term Loans resulted in a loss on extinguishment of debt in the amount of $9.5 million. The Incremental Agreement did not modify the interest rate, maturity date or any of the other terms of the Senior Secured Credit Facility applicable to the Tranche B-2 Term Loans or the existing Tranche B-3 Term Loans.
The facilities under the Senior Secured Credit Facility are guaranteed by MetroPCS, MetroPCS, Inc. and each of Wireless’ direct and indirect present and future wholly-owned domestic subsidiaries. The Senior Secured Credit Facility contains customary events of default, including cross-defaults. The obligations under the Senior Secured Credit Facility are also secured by the capital stock of Wireless as well as substantially all of Wireless’ present and future assets and the capital stock and substantially all of the assets of each of its direct and indirect present and future wholly-owned subsidiaries (except as prohibited by law and certain permitted exceptions).
The interest rate on the outstanding debt under the Senior Secured Credit Facility is variable. The weighted average rate as of September 30, 2012 was 4.614%, which includes the impact of the interest rate protection agreements (See Note 4).
Capital Lease Obligations
The Company has entered into various non-cancelable capital lease agreements, with varying expiration terms through 2027. Assets and future obligations related to capital leases are included in the accompanying condensed consolidated balance sheets in property and equipment and long-term debt, respectively. Depreciation of assets held under capital leases is included in depreciation and amortization expense. As of September 30, 2012, the Company had $10.7 million and $311.5 million of capital lease obligations recorded in current maturities of long-term debt and long-term debt, respectively.
8.
Fair Value Measurements:
The Company follows the provisions of ASC 820 (Topic 820, “Fair Value Measurements and Disclosures”) which establishes a three-tiered fair value hierarchy that prioritizes inputs to valuation techniques used in fair value calculations. The three levels of inputs are defined as follows:
 

9

MetroPCS Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)

Level 1 - Unadjusted quoted market prices for identical assets or liabilities in active markets that the Company has the ability to access.
Level 2 - Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; or valuations based on models where the significant inputs are observable (e.g., interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.
Level 3 - Valuations based on models where significant inputs are not observable. The unobservable inputs reflect the Company’s own assumptions about the assumptions that market participants would use.
ASC 820 requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs. If a financial instrument uses inputs that fall in different levels of the hierarchy, the instrument will be categorized based upon the lowest level of input that is significant to the fair value calculation. The Company’s financial assets and liabilities measured at fair value on a recurring basis include cash and cash equivalents, short and long-term investments securities and derivative financial instruments.
 
Included in the Company’s cash equivalents are investments in money market funds consisting of U.S. Treasury securities with an original maturity of 90 days or less. Included in the Company’s short-term investments are securities classified as available-for-sale, which are stated at fair value. These securities include U.S. Treasury securities with an original maturity of over 90 days. Fair value is determined based on observable quotes from banks and unadjusted quoted market prices from identical securities in an active market at the reporting date. Significant inputs to the valuation are observable in the active markets and are classified as Level 1 in the hierarchy.
Included in the Company’s short-term and long-term investments are certain auction rate securities, some of which are secured by collateralized debt obligations with a portion of the underlying collateral being mortgage securities or related to mortgage securities. Due to the lack of availability of observable market quotes on the Company’s investment portfolio of auction rate securities, the fair value was estimated based on valuation models that rely exclusively on unobservable Level 3 inputs including those that are based on expected cash flow streams and collateral values, including assessments of counterparty credit quality, default risk underlying the security, discount rates and overall capital market liquidity. The valuation of the Company’s investment portfolio is subject to uncertainties that are difficult to predict. Factors that may impact the Company’s valuation include changes to credit ratings of the securities as well as the underlying assets supporting those securities, rates of default of the underlying assets, underlying collateral values, discount rates, counterparty risk and ongoing strength and quality of market credit and liquidity. Significant inputs to the investments valuation are unobservable in the active markets and are classified as Level 3 in the hierarchy.
Included in the Company’s derivative financial instruments are interest rate swaps. Derivative financial instruments are valued in the market using discounted cash flow techniques. These techniques incorporate Level 1 and Level 2 inputs such as interest rates. These market inputs are utilized in the discounted cash flow calculation considering the instrument’s term, notional amount, discount rate and credit risk. Significant inputs to the derivative valuation for interest rate swaps are observable in the active markets and are classified as Level 2 in the hierarchy.
The following table summarizes assets and liabilities measured at fair value on a recurring basis at September 30, 2012, as required by ASC 820 (in thousands):
 
 
Fair Value Measurements
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
Cash equivalents
 
$
1,903,369

 
$

 
$

 
$
1,903,369

Short-term investments
 
499,874

 

 
8,069

 
507,943

Restricted cash and investments
 
2,076

 

 

 
2,076

Long-term investments
 

 

 
1,679

 
1,679

Total assets measured at fair value
 
$
2,405,319

 
$

 
$
9,748

 
$
2,415,067

Liabilities
 

 

 

 

Derivative liabilities
 
$

 
$
19,126

 
$

 
$
19,126

Total liabilities measured at fair value
 
$

 
$
19,126

 
$

 
$
19,126

 

10

MetroPCS Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)

The following table summarizes assets and liabilities measured at fair value on a recurring basis at December 31, 2011, as required by ASC 820 (in thousands):
 
 
Fair Value Measurements
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
Cash equivalents
 
$
1,815,538

 
$

 
$

 
$
1,815,538

Short-term investments
 
299,972

 

 

 
299,972

Restricted cash and investments
 
2,576

 

 

 
2,576

Long-term investments
 

 

 
6,319

 
6,319

Total assets measured at fair value
 
$
2,118,086

 
$

 
$
6,319

 
$
2,124,405

Liabilities
 

 

 

 

Derivative liabilities
 
$

 
$
21,015

 
$

 
$
21,015

Total liabilities measured at fair value
 
$

 
$
21,015

 
$

 
$
21,015

The following table summarizes the changes in fair value of the Company’s net derivative liabilities included in Level 2 assets (in thousands):
Fair Value Measurements of Net Derivative Liabilities Using Level 2 Inputs
 
Net Derivative Liabilities
 
 
Three Months Ended September 30,
 
 
2012
 
2011
Beginning balance
 
$
19,930

 
$
18,249

Total losses (realized or unrealized):
 

 

Included in earnings (1)
 
3,555

 
6,424

Included in accumulated other comprehensive loss
 
(2,751
)
 
(15,076
)
Transfers in and/or out of Level 2
 

 

Purchases, sales, issuances and settlements
 

 

Ending balance
 
$
19,126

 
$
26,901

 ————————————
(1)
Losses included in earnings that are attributable to the reclassification of the effective portion of those derivative liabilities still held at the reporting date as reported in interest expense in the condensed consolidated statements of income and comprehensive income.
Fair Value Measurements of Net Derivative Liabilities Using Level 2 Inputs
 
Net Derivative Liabilities
 
 
Nine Months Ended September 30,
 
 
2012
 
2011
Beginning balance
 
$
21,015

 
$
8,309

Total losses (realized or unrealized):
 
 
 
 
Included in earnings (2)
 
11,410

 
17,182

Included in accumulated other comprehensive loss
 
(9,521
)
 
(35,774
)
Transfers in and/or out of Level 2
 

 

Purchases, sales, issuances and settlements
 

 

Ending balance
 
$
19,126

 
$
26,901

 ————————————
(2)
Losses included in earnings that are attributable to the reclassification of the effective portion of those derivative liabilities still held at the reporting date as reported in interest expense in the condensed consolidated statements of income and comprehensive income.

11

MetroPCS Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)

The following table summarizes the changes in fair value of the Company’s Level 3 assets (in thousands):
Fair Value Measurements of Assets Using Level 3 Inputs
 
Investments
 
 
Three Months Ended September 30,
 
 
2012
 
2011
Beginning balance
 
$
6,319

 
$
6,319

Total losses (realized or unrealized):
 

 

Included in earnings
 

 

Included in accumulated other comprehensive loss
 
3,429

 

Transfers in and/or out of Level 3
 

 

Purchases, sales, issuances and settlements
 

 

Ending balance
 
$
9,748

 
$
6,319


Fair Value Measurements of Assets Using Level 3 Inputs
 
Investments
 
 
Nine Months Ended September 30,
 
 
2012
 
2011
Beginning balance
 
$
6,319

 
$
6,319

Total losses (realized or unrealized):
 
 
 
 
Included in earnings
 

 

Included in accumulated other comprehensive loss
 
3,429

 

Transfers in and/or out of Level 3
 

 

Purchases, sales, issuances and settlements
 

 

Ending balance
 
$
9,748

 
$
6,319

The carrying value of the Company’s financial instruments, with the exception of long-term debt including current maturities, reasonably approximate the related fair values as of September 30, 2012 and December 31, 2011. The fair value of the Company’s long-term debt, excluding capital lease obligations, is estimated based on the quoted market prices for the same issues or on the current rates offered to the Company for debt of the same remaining maturities and are classified as Level 1 in the hierarchy. As of September 30, 2012, the carrying value and fair value of long-term debt, including current maturities, were approximately $4.5 billion and $4.6 billion, respectively. As of December 31, 2011, the carrying value and fair value of long-term debt, including current maturities, were approximately $4.5 billion and $4.4 billion, respectively.
 
Although the Company has determined the estimated fair value amounts using available market information and commonly accepted valuation methodologies, considerable judgment is required in interpreting market data to develop fair value estimates. The fair value estimates are generally based on information available at September 30, 2012 and December 31, 2011.  As such, the Company’s estimates are not necessarily indicative of the amount that the Company, or holders of the instruments, could realize in a current market exchange and current estimates of fair value could differ significantly.

12

MetroPCS Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)

9.
Net Income Per Common Share:
The following table sets forth the computation of basic and diluted net income per common share for the periods indicated (in thousands, except share and per share data):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2012
 
2011
 
2012
 
2011
Basic EPS:
 
 
 
 
 
 
 
 
Net income applicable to common stock
 
$
192,667

 
$
69,326

 
$
362,507

 
$
210,040

Amount allocable to common shareholders
 
99.5
%
 
99.1
%
 
99.4
%
 
99.1
%
Rights to undistributed earnings
 
$
191,617

 
$
68,686

 
$
360,166

 
$
208,106

Weighted average shares outstanding—basic
 
363,584,552

 
362,019,205

 
363,190,434

 
359,763,082

Net income per common share—basic
 
$
0.53

 
$
0.19

 
$
0.99

 
$
0.58

Diluted EPS:
 

 

 

 

Rights to undistributed earnings
 
$
191,617

 
$
68,686

 
$
360,166

 
$
208,106

Weighted average shares outstanding—basic
 
363,584,552

 
362,019,205

 
363,190,434

 
359,763,082

Effect of dilutive securities:
 

 

 

 

Stock options
 
1,435,284

 
2,846,021

 
1,249,681

 
3,954,716

Weighted average shares outstanding—diluted
 
365,019,836

 
364,865,226

 
364,440,115

 
363,717,798

Net income per common share—diluted
 
$
0.52

 
$
0.19

 
$
0.99

 
$
0.57

In accordance with ASC 260 (Topic 260, “Earnings Per Share”), unvested share-based payment awards that contain rights to receive non-forfeitable dividends or dividend equivalents, whether paid or unpaid, are considered a “participating security” for purposes of computing earnings or loss per common share and the two-class method of computing earnings per share is required for all periods presented. Under certain of the Company's restricted stock award agreements, unvested shares of restricted stock have rights to receive non-forfeitable dividends. In accordance with ASC 260, those unvested restricted stock awards are considered a “participating security” for purposes of computing earnings per common share and are therefore included in the computation of basic and diluted earnings per common share.
For the three and nine months ended September 30, 2012 and 2011, the Company has calculated diluted earnings per share under both the treasury stock method and the two-class method. There was not a significant difference in the per share amounts calculated under the two methods, and the two-class method is disclosed. For the three and nine months ended September 30, 2012, approximately 2.0 million and 2.4 million of restricted common shares issued to employees have been excluded from the computation of basic net income per common share since the shares are not vested and remain subject to forfeiture. For the three and nine months ended September 30, 2011, approximately 3.4 million of restricted common shares issued to employees were excluded from the computation of basic net income per common share since the shares were not vested and remained subject to forfeiture.
For the three months ended September 30, 2012 and 2011, 25.6 million and 18.5 million, respectively, of stock options were excluded from the calculation of diluted net income per common share since the effect was anti-dilutive. For the nine months ended September 30, 2012 and 2011, 25.3 million and 17.8 million, respectively, of stock options were excluded from the calculation of diluted net income per common share since the effect was anti-dilutive.
10.
Commitments and Contingencies:

The Company has entered into a broadband services agreement with a carrier for backhaul and interconnect facilities at specified prices. The term of this agreement expires in 2017. The minimum commitment under this pricing agreement is approximately $164.1 million.
Pricing Agreements

The Company entered into pricing agreements with a handset manufacturer for the purchase of wireless handsets at specified prices. These agreements expire on various dates through December 31, 2012. The total aggregate commitment outstanding under these pricing agreements is approximately $24.2 million as of September 30, 2012.


13

MetroPCS Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)

Gain on Settlement

In September 2012, the Company settled arbitration and litigation proceedings related to certain securities.  Pursuant to the terms of the confidential settlement agreement, the Company received $52.5 million in cash in exchange for the release of all current and future claims that the Company may have relating to the sale of such securities to the Company, and the Company retains the rights to sell its investment in such securities at a later date.

Litigation

The Company is involved in litigation from time to time, including litigation regarding intellectual property claims, that it considers to be in the normal course of business. Legal proceedings are inherently unpredictable, and the legal proceedings in which the Company is involved often present complex legal and factual issues. The Company intends to vigorously defend against litigation in which it is involved and, where appropriate, engage in discussions to resolve these legal proceedings on terms favorable to the Company. The Company believes that any amounts which parties to such litigation allege it is liable for are not necessarily meaningful indicators of potential liability or any relief, such as injunctive relief, which parties to such litigation seek, are not necessarily meaningful indicators whether such relief will be granted. The Company determines whether it should accrue an estimated loss for a contingency in a particular legal proceeding by assessing whether a loss is probable and can be reasonably estimated. The Company reassesses its views on estimated losses on a quarterly basis to reflect the impact of any developments in the legal proceedings in which it is involved. It is possible, however, that the business, financial condition, results of operations, and liquidity in future periods could be materially adversely affected by increased expenses, including legal and litigation expenses, significant settlement costs, relief granted or agreed to, and/or unfavorable damage awards relating to such legal proceedings. Other than the matters listed below the Company is not currently party to any pending legal proceedings that it believes could, individually or in the aggregate, have a material adverse effect on the business, financial condition, results of operations or liquidity.
MetroPCS, its Board of directors, and an officer, among others, (collectively, the "defendants") have been named as defendants in a series of putative shareholder class and/or derivative actions filed in Delaware and Texas (the “Merger Litigation”) relating to the entry into a Business Combination Agreement, dated October 3, 2012 (the “Business Combination Agreement”), by and between Deutsche Telekom AG, an Aktiengesellschaft organized in Germany (“Deutsche Telekom”), T-Mobile Global Zwischenholding GmbH, a Gesellschaft mit beschrankter Haftung organized in Germany and a direct wholly-owned subsidiary of Deutsche Telekom (“Global”), T-Mobile Global Holding GmbH, a Gesellschaft mit beschrankter Haftung organized in Germany and a direct wholly-owned subsidiary of Global (“Holding”), T-Mobile USA, Inc., a Delaware corporation and direct wholly-owned subsidiary of Holding (“T-Mobile”) and the Company wherein MetroPCS agreed to (1) engage in a recapitalization which entails a reverse stock split and cash payment to shareholders, (2) take Deutsche Telekom's interest in T-Mobile, and (3) issue stock to Deutsche Telekom (the “Transaction”). The Merger Litigation includes: (i) a putative class action lawsuit filed by Paul Benn, an alleged MetroPCS shareholder, on October 11, 2012 in the Court of Chancery in the State of Delaware, Civil Action No. 7938 (the “Benn Action”); (ii) a putative class action lawsuit filed by Joseph Marino, an alleged MetroPCS shareholder, on October 11, 2012 in the Court of Chancery in the State of Delaware, Civil Action No. 7940 (the “Marino Action”) (the Benn Action and Marino Actions together, the “Delaware Merger Actions”); (iii) a putative class action and shareholder derivative action filed by Adam Golovoy, an alleged MetroPCS shareholder, on October 10, 2012 in the County Court at Law No. 1, Dallas County, Texas, Civil Action No. CC-12-06144 (the “Golovoy Action”); and (iv) a putative class action and shareholder derivative action filed by Nagendra Polu and Fred Lorquet, who are alleged MetroPCS shareholders, on October 10, 2012 in the County Court at Law No. 5, Dallas County, Texas, Civil Action No. CC-12-06170 (the “Polu-Lorquet Action”) (the Golovoy Action and Polu-Lorquet Actions together, the “Texas Merger Actions”). The various plaintiffs in the Merger Litigation allege that the defendants breached their fiduciary duties by failing to obtain sufficient value for MetroPCS shareholders in the Transaction, to establish a process that adequately protected the interests of MetroPCS shareholders, and to adequately ensure that no conflicts of interest occurred. The plaintiffs in the Merger Litigation also allege that the defendants breached their fiduciary duties by agreeing to certain terms in the Business Combination Agreement that allegedly restricted the defendants' ability to obtain a more favorable offer, including the “no solicitation,” “superior proposal,” and termination fee provisions, and that those provisions, together with the Company's Rights Agreement and a Support Agreement between Deutsche Telekom and Madison Dearborn Partners, constitute breaches of the defendants' fiduciary duties. The plaintiffs in the Merger Litigation seek injunctive relief, unspecified compensatory and/or rescissory damages, unspecified punitive damages, attorney's fees, other expenses, and costs. All of the plaintiffs in the Merger Litigation seek a determination that their alleged claims may be asserted on a class-wide basis. In addition, the plaintiffs in the Texas Merger Actions also assert putative derivative claims, as shareholders on behalf of the Company, against the individually named defendants for breach of fiduciary duty, abuse of control, gross mismanagement, unjust enrichment and corporate waste

14

MetroPCS Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)

in connection with the Transaction. Additional similar putative class and/or derivative suits may be filed. Due to the complex nature of the legal and factual issues involved in these actions, the outcome is not presently determinable. If the various actions in the Merger Litigation were to proceed beyond the pleading stage, MetroPCS could be required to incur substantial defense costs and expenses and/or be required to pay substantial damages or settlement costs, and could divert management's attention, all of which could materially adversely affect the Company's business, financial condition and operating results. The Company intends to vigorously defend against the claims in the Merger Litigation.
11.
Supplemental Cash Flow Information:
 
 
Nine Months Ended September 30,
 
 
2012
 
2011
 
 
(in thousands)
Cash paid for interest
 
$
206,490

 
$
183,728

Cash paid for income taxes
 
4,724

 
4,113

Non-cash investing and financing activities
The Company’s accrued purchases of property and equipment were $136.6 million and $136.5 million as of September 30, 2012 and 2011, respectively. Included within the Company’s accrued purchases are estimates by management for construction services received based on a percentage of completion.
Assets acquired under capital lease obligations were $47.9 million and $25.0 million for the nine months ended September 30, 2012 and 2011, respectively.
During the nine months ended September 30, 2012, the Company returned obsolete network infrastructure assets to one of its vendors in exchange for $14.7 million in credits towards the purchase of additional network infrastructure assets with the vendor.
12.
Related-Party Transactions:

A private equity fund affiliated with one of the Company's greater than 5% stockholders owns:
A less than 20% interest in a company that provides services to the Company's customers, including handset insurance programs. Pursuant to the Company's agreement with this related-party, the Company bills its customers directly for these services and remits the fees collected from its customers for these services to the related-party. In addition, the Company receives compensation for selling handsets to the related-party;
A less than 20% equity interest in a company that provides advertising services to the Company; and
A less than 60% interest in a company that provides distributed antenna systems ("DAS") leases and maintenance to wireless carriers, including the Company. These DAS leases are accounted for as capital or operating leases in the Company's financial statements. This company is no longer a related party as of April 2012 because it is no longer owned by the affiliated fund.
Transactions associated with the related-parties described above are included in various line items in the accompanying condensed consolidated balance sheets, condensed consolidated statements of income and comprehensive income, and condensed consolidated statements of cash flows. The following tables summarize the transactions with related-parties (in millions):
 
 
September 30,
2012
 
December 31,
2011
Network service fees included in prepaid expenses
 
$

 
$
1.5

Receivables from related-party included in other current assets
 
3.5

 
0.7

DAS equipment included in property and equipment, net
 

 
383.1

Deferred network service fees included in other assets
 

 
8.2

Payments due to related-party included in accounts payable and accrued expenses
 
6.0

 
6.6

Current portion of capital lease obligations included in current maturities of long-term debt
 

 
7.1

Non-current portion of capital lease obligations included in long-term debt, net
 

 
240.1

Deferred DAS service fees included in other long-term liabilities
 

 
1.4


15

MetroPCS Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)

 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2012
 
2011
 
2012
 
2011
Fees received by the Company as compensation included in service revenues
 
$
2.9

 
$
2.9

 
$
8.7

 
$
8.2

Fees received by the Company as compensation included in equipment revenues
 
9.8

 
4.9

 
24.1

 
16.2

Fees paid by the Company for services and related expenses included in cost of service
 

 
3.3

 
3.6

 
9.6

Fees paid by the Company for services included in selling, general and administrative expenses
 
1.9

 
0.6

 
4.7

 
3.2

DAS equipment depreciation included in depreciation expense
 

 
8.7

 
9.6

 
27.2

Capital lease interest included in interest expense
 

 
4.9

 
5.2

 
14.3

 
 
Nine Months Ended September 30,
 
 
2012
 
2011
Capital lease payments included in financing activities
 
$
1.4

 
$
5.5

13.
Guarantor Subsidiaries:
In connection with Wireless’ 7 7/8% Senior Notes, 6 5/8% Senior Notes, and the Senior Secured Credit Facility, MetroPCS, together with its wholly owned subsidiaries, MetroPCS, Inc., and each of Wireless’ direct and indirect present and future wholly-owned domestic subsidiaries (the “guarantor subsidiaries”), provided guarantees which are full and unconditional as well as joint and several. Certain provisions of the Senior Secured Credit Facility, and the indentures and the supplemental indentures relating to the 7 7/8% Senior Notes and 6 5/8% Senior Notes restrict the ability of Wireless to loan funds or make payments to MetroPCS or MetroPCS, Inc. However, Wireless is allowed to make certain permitted payments to MetroPCS under the terms of the Senior Secured Credit Facility, and the indentures and the supplemental indentures relating to the 7 7/8% Senior Notes and 6 5/8% Senior Notes.
The following information presents condensed consolidating balance sheet information as of September 30, 2012 and December 31, 2011, condensed consolidating statement of income and comprehensive income information for the three and nine months ended September 30, 2012 and 2011, and condensed consolidating statement of cash flows information for the nine months ended September 30, 2012 and 2011 of the parent company (MetroPCS), the issuer (Wireless), and the guarantor subsidiaries. Investments in subsidiaries held by the parent company and the issuer have been presented using the equity method of accounting.

Subsequent to the issuance of the Company's consolidated financial statements on Form 10-Q for the period ended September 30, 2011, management identified certain errors in the presentation of the condensed consolidating statement of cash flows information contained in this footnote. The errors were the result of certain cash equivalent money market investments being incorrectly reported in the Parent column of the condensed consolidating balance sheet information that should have been reported in the Issuer column at September 30, 2011 which resulted in a cash inflow from changes in advances from affiliates being reported in the Parent column and a corresponding cash outflow from changes in advances from affiliates being reported in the Issuer column of the condensed consolidating statement of cash flows information. Accordingly, the comparative historical condensed consolidating statement of cash flows information presented herein has been corrected. The "Guarantor Subsidiaries" and "Consolidated" columns were not impacted by these corrections. This reporting error did not have any impact on the Company's condensed consolidated statement of cash flows for the nine months ended September 30, 2011. The impact to the comparative historical condensed consolidating statement of cash flows for the nine months ended September 30, 2011 is as follows:


16

MetroPCS Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)

 
 
Parent
As
Previously
Reported
 
Parent
As
Corrected
 
Issuer
As
Previously Reported
 
Issuer
As
Corrected
 
Eliminations
As
Previously Reported
 
Eliminations
As
Corrected
 
 
(in thousands)
Change in advances - affiliates
 
679,885

 
18,039

 
(689,633
)
 
264,367

 
9,748

 
(282,406
)
Net cash provided by (used in) investing activities
 
755,096

 
93,250

 
(760,364
)
 
193,636

 
9,478

 
(282,406
)
Change in advances - affiliates
 
292,154

 

 

 

 
(9,748
)
 
282,406

Net cash provided by (used in) financing activities
 
346,461

 
54,307

 
942,493

 
942,493

 
(9,748
)
 
282,406

Increase (decrease) in cash and cash equivalents
 
1,102,487

 
148,487

 
(58,237
)
 
895,763

 

 

Cash and cash equivalents, end of period
 
1,610,336

 
656,336

 
229,705

 
1,183,705

 

 


Condensed Consolidating Balance Sheet Information
As of September 30, 2012
 
 
 
Parent
 
Issuer
 
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
(in thousands)
CURRENT ASSETS:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
515,380

 
$
1,541,231

 
$
728

 
$

 
$
2,057,339

Short-term investments
 
507,943

 

 

 

 
507,943

Inventories
 

 
295,287

 
17,345

 

 
312,632

Prepaid expenses
 
89

 
2,421

 
77,530

 

 
80,040

Advances to subsidiaries
 
695,842

 

 

 
(695,842
)
 

Other current assets
 
67

 
194,567

 
32,234

 

 
226,868

Total current assets
 
1,719,321

 
2,033,506

 
127,837

 
(695,842
)
 
3,184,822

Property and equipment, net
 

 
1,017

 
4,196,382

 

 
4,197,399

Long-term investments
 
1,679

 

 

 

 
1,679

Investment in subsidiaries
 
1,607,677

 
5,417,110

 

 
(7,024,787
)
 

FCC licenses
 

 
3,800

 
2,558,515

 

 
2,562,315

Other assets
 

 
97,689

 
30,183

 
(2,178
)
 
125,694

Total assets
 
$
3,328,677

 
$
7,553,122

 
$
6,912,917

 
$
(7,722,807
)
 
$
10,071,909

CURRENT LIABILITIES:
 
 
 
 
 
 
 
 
 
 
Advances from subsidiaries
 

 
260,898

 
434,944

 
(695,842
)
 

Other current liabilities
 

 
246,594

 
538,056

 

 
784,650

Total current liabilities
 

 
507,492

 
973,000

 
(695,842
)
 
784,650

Long-term debt, net
 

 
4,419,692

 
311,482

 

 
4,731,174

Deferred credits
 
6,230

 
1,004,818

 
133,272

 
(2,178
)
 
1,142,142

Other long-term liabilities
 

 
13,443

 
78,053

 

 
91,496

Total liabilities
 
6,230

 
5,945,445

 
1,495,807

 
(698,020
)
 
6,749,462

STOCKHOLDERS’ EQUITY:
 
 
 
 
 
 
 
 
 
 
Common stock
 
36

 

 

 

 
36

Other stockholders’ equity
 
3,322,411

 
1,607,677

 
5,417,110

 
(7,024,787
)
 
3,322,411

Total stockholders’ equity
 
3,322,447

 
1,607,677

 
5,417,110

 
(7,024,787
)
 
3,322,447

Total liabilities and stockholders’ equity
 
$
3,328,677

 
$
7,553,122

 
$
6,912,917

 
$
(7,722,807
)
 
$
10,071,909

 

17

MetroPCS Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)

Condensed Consolidating Balance Sheet Information
As of December 31, 2011
 
 
 
Parent
 
Issuer
 
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
(in thousands)
CURRENT ASSETS:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
657,289

 
$
1,285,266

 
$
727

 
$

 
$
1,943,282

Short-term investments
 
299,972

 

 

 

 
299,972

Inventories
 

 
226,124

 
13,524

 

 
239,648

Prepaid expenses
 

 
386

 
55,326

 

 
55,712

Advances to subsidiaries
 
671,193

 
245,866

 

 
(917,059
)
 

Other current assets
 
96

 
179,855

 
25,028

 

 
204,979

Total current assets
 
1,628,550

 
1,937,497

 
94,605

 
(917,059
)
 
2,743,593

Property and equipment, net
 

 
1,378

 
4,016,621

 

 
4,017,999

Long-term investments
 
6,319

 

 

 

 
6,319

Investment in subsidiaries
 
1,297,957

 
4,728,985

 

 
(6,026,942
)
 

FCC licenses
 

 
3,800

 
2,535,241

 

 
2,539,041

Other assets
 

 
137,985

 
39,612

 
(1,618
)
 
175,979

Total assets
 
$
2,932,826

 
$
6,809,645

 
$
6,686,079

 
$
(6,945,619
)
 
$
9,482,931

CURRENT LIABILITIES:
 
 
 
 
 
 
 
 
 
 
Advances from subsidiaries
 

 

 
917,059

 
(917,059
)
 

Other current liabilities
 

 
243,247

 
573,476

 

 
816,723

Total current liabilities
 

 
243,247

 
1,490,535

 
(917,059
)
 
816,723

Long-term debt, net
 

 
4,437,924

 
273,097

 

 
4,711,021

Deferred credits
 
5,226

 
813,498

 
120,028

 
(1,618
)
 
937,134

Other long-term liabilities
 

 
17,019

 
73,434

 

 
90,453

Total liabilities
 
5,226

 
5,511,688

 
1,957,094

 
(918,677
)
 
6,555,331

STOCKHOLDERS’ EQUITY:
 
 
 
 
 
 
 
 
 
 
Common stock
 
36

 

 

 

 
36

Other stockholders’ equity
 
2,927,564

 
1,297,957

 
4,728,985

 
(6,026,942
)
 
2,927,564

Total stockholders’ equity
 
2,927,600

 
1,297,957

 
4,728,985

 
(6,026,942
)
 
2,927,600

Total liabilities and stockholders’ equity
 
$
2,932,826

 
$
6,809,645

 
$
6,686,079

 
$
(6,945,619
)
 
$
9,482,931

 


18

MetroPCS Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)

Condensed Consolidating Statement of Income Information
Three Months Ended September 30, 2012
 
 
 
Parent
 
Issuer
 
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
(in thousands)
REVENUES:
 
 
 
 
 
 
 
 
 
 
Total Revenues
 
$

 
$
9,026

 
$
1,257,474

 
$
(7,340
)
 
$
1,259,160

OPERATING EXPENSES:
 
 
 
 
 
 
 
 
 
 
Cost of revenues
 

 
8,263

 
638,049

 
(7,340
)
 
638,972

Selling, general and administrative expenses
 

 
763

 
162,646

 

 
163,409

Other operating expenses
 

 
53

 
164,488

 

 
164,541

Total operating expenses
 

 
9,079

 
965,183

 
(7,340
)
 
966,922

(Loss) income from operations
 

 
(53
)
 
292,291

 

 
292,238

OTHER EXPENSE (INCOME):
 
 
 
 
 
 
 
 
 
 
Interest expense
 

 
62,798

 
3,857

 

 
66,655

Non-operating (income) expenses
 
(52,911
)
 
(3
)
 
(151
)
 

 
(53,065
)
Earnings from consolidated subsidiaries
 
(139,756
)
 
(287,870
)
 

 
427,626

 

Total other (income) expense
 
(192,667
)
 
(225,075
)
 
3,706

 
427,626

 
13,590

Income (loss) before provision for income taxes
 
192,667

 
225,022

 
288,585

 
(427,626
)
 
278,648

Provision for income taxes
 

 
(85,266
)
 
(715
)
 

 
(85,981
)
Net income (loss)
 
$
192,667

 
$
139,756

 
$
287,870

 
$
(427,626
)
 
$
192,667

Total other comprehensive income (loss)
 
3,962

 
506

 

 
(506
)
 
3,962

Comprehensive income (loss)
 
$
196,629

 
$
140,262

 
$
287,870

 
$
(428,132
)
 
$
196,629


Condensed Consolidating Statement of Income Information
Three Months Ended September 30, 2011
 
 
 
Parent
 
Issuer
 
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
(in thousands)
REVENUES:
 
 
 
 
 
 
 
 
 
 
Total Revenues
 
$

 
$
4,558

 
$
1,208,170

 
$
(7,340
)
 
$
1,205,388

OPERATING EXPENSES:
 
 
 
 
 
 
 
 
 
 
Cost of revenues
 

 
4,180

 
728,666

 
(7,340
)
 
725,506

Selling, general and administrative expenses