e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2007
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number
001-33349
Clearwire Corporation
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Delaware
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56-2408571
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(State Of
Incorporation)
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(I.R.S.
ID)
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4400 CARILLON POINT, KIRKLAND, WASHINGTON 98033
(425) 216-7600
Securities registered pursuant to Section 12(b) of the
Act:
CLASS A COMMON STOCK
Securities registered pursuant to Section 12(g) of the
Act:
NONE
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes o No þ
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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. 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. (Check one):
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Large accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ
(Do not check if a smaller reporting company)
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Smaller reporting
company o
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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
As of June 30, 2007, the aggregate market value of the
registrants common stock held by non-affiliates of the
registrant was approximately $1,465,893,274 based on the closing
sale price as reported on the NASDAQ National Market System. As
of March 3, 2008, there were 135,600,714 shares of
Class A common stock outstanding and 28,596,685 shares
of Class B common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to
shareholders in connection with the Annual Meeting of
Shareholders to be held on May 21, 2008 are incorporated by
reference into Part III.
CLEARWIRE
CORPORATION AND SUBSIDIARIES
ANNUAL
REPORT ON
FORM 10-K
For The Fiscal Year Ended December 31, 2007
Table of Contents
CLEARWIRE
CORPORATION AND SUBSIDIARIES
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on
Form 10-K,
including the Managements Discussion and Analysis of
Financial Condition and Results of Operations contains
forward-looking statements that represent our
beliefs, projections and predictions about future events. These
statements are necessarily subjective and involve known and
unknown risks, uncertainties and other important factors that
could cause our actual results, performance or achievements, or
industry results, to differ materially from any future results,
performance or achievement described in or implied by such
statements. Actual results may differ materially from the
expected results described in our forward-looking statements,
including with respect to the correct measurement and
identification of factors affecting our business or the extent
of their likely impact, the accuracy and completeness of
publicly available information relating to the factors upon
which our business strategy is based or the success of our
business.
You should review carefully the section entitled Risk
Factors for a discussion of these and other risks that
relate to our business.
PART I
Our
Company
We build and operate next generation wireless broadband networks
that enable fast, simple, portable, reliable and affordable
Internet communications. Our wireless broadband networks cover
entire communities and deliver a high-speed Internet connection
that not only creates a new communications path into the home or
office, but also provides a broadband connection anytime and
anywhere within our coverage area. We intend to evolve our
networks and the services we provide to facilitate a greater
range of mobile communications services than we currently offer.
Beginning in the second half of 2008, we expect to deploy the
standards based mobile WiMAX service, which is based on the IEEE
mobile Worldwide Interoperability of Microwave Access
802.16e-2005
standards in our new markets. We believe mobile WiMAX will
enable us to offer fixed, portable and mobile services over a
single network. As mobile WiMAX is a standards based technology,
we expect manufacturers to offer a number of handheld
communications and consumer electronic devices that will be
enabled to communicate using our mobile WiMAX network. These
devices could include notebook computers, ultra mobile personal
computers, or UMPCs, personal data assistants, or PDAs, gaming
consoles, MP3 players, and other handheld devices.
Our current service is both competitive with and complementary
to existing wireline and wireless networks. Our subscribers may
access the same rich content, applications and services as
subscribers of wireline broadband services, while also
experiencing much of the freedom and flexibility that large
scale wireless networks enable. We believe our current pre-WiMAX
network combines some of the best features of cellular, cable
modem, digital subscriber line, or DSL, and wireless fidelity,
or Wi-Fi, networks into a single service offering that legacy
networks do not currently match. As our capabilities evolve with
the introduction of mobile WiMAX, we also expect to develop and
offer additional innovative and differentiated products and
services. Our Voice over Internet Protocol, or VoIP, telephony
service and over the air PC card are examples of services and
products that complement our current wireless broadband offering.
Our current wireless broadband Internet access service is:
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Fast. We offer connectivity speeds that
typically exceed cellular networks and we believe are
competitive with wireline broadband offerings.
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Simple. Our services are easy to acquire and
use, with little or no professional installation typically
required.
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Portable. Unlike wired networks, our customers
can access our network from anywhere within our coverage area.
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Reliable. We use licensed radio frequencies,
or spectrum, which enables us to minimize interference common on
certain wireless networks that use unlicensed or shared radio
frequencies.
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Affordable. We offer a value proposition that
is competitive while recognizing the unique benefits of our
service offerings.
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We were founded by telecommunications pioneer Craig O. McCaw,
our Chairman, in October 2003, and we launched our first market
in August 2004. By December 31, 2007, we offered our
services to more than 16.3 million people in the United
States and Europe. As of December 31, 2007, our network in
the United States is deployed in 46 markets and covers an
estimated 13.6 million people. Our markets range from major
metropolitan areas to small, rural communities, and all sizes in
between. As of December 31, 2007, we also offered our
wireless broadband services in Ghent and Brussels, Belgium,
Dublin, Ireland and Seville, Spain, where our network covers
approximately 2.7 million people.
We conduct our operations through our domestic and international
subsidiaries. For information regarding the geographic
distribution of our total revenues and total long-lived assets,
see Note 16, Business Segments, of our consolidated
financial statements. Our operations in the United States are
primarily conducted through our subsidiary, Clearwire
U.S. LLC, and our spectrum leases and licenses in the
United States are primarily held by separate holding companies.
Internationally, our operations are conducted through Clearwire
International, LLC, our wholly-owned subsidiary, which
indirectly holds investments in Europe and Mexico.
Subscribers have rapidly adopted our services as we have grown
from approximately 62,000 wireless broadband Internet
subscribers as of December 31, 2005 to approximately
394,000 as of December 31, 2007. We believe that
substantially all of the households we cover in the U.S. have
access to cable modem
and/or DSL
Internet services, leading us to conclude that our rapid
subscriber growth rates reflect the mass market appeal and
robust customer demand for our differentiated services, even in
the presence of highly competitive wireline broadband
alternatives. With the advent of mobile WiMAX and the expected
introduction of mobile WiMAX in mobile devices in the second
half of 2008, we believe demand for our services will expand
from the current cable/DSL replacement business to more
traditional wireless uses.
Our pre-WiMAX network, utilized in the markets in which we
offered our services as of December 31, 2007, relies on
network infrastructure equipment that is based on
non-line-of-sight, or NLOS, Orthogonal Frequency
Division Multiplexing, or OFDM, Expedience technologies
acquired from Motorola, Inc. We intend to deploy a network based
on the mobile WiMAX standard in all new markets, and we expect
to commercially launch the first of those markets in the second
half of 2008. In addition, we expect manufacturers to offer a
number of handheld communications and consumer electronic
devices that will be enabled to communicate using our mobile
WiMAX network.
In addition, we and Intel Corporation, or Intel, have agreed to
jointly develop, promote and market a mobile WiMAX service
offering as a co-branded service available over Clearwires
mobile WiMAX network in the United States. This service
will target users of notebook computers, UMPCs, and other mobile
computing devices containing Intel microprocessors.
We are an early stage company, and as such we are investing
heavily in building our network and acquiring other assets
necessary to expand our business. As a result, we have a history
of operating losses and expect to have significant losses in the
future. As of December 31, 2007, our accumulated deficit
was approximately $1.19 billion, and our total indebtedness
was approximately $1.26 billion. We believe our cash and
short-term and long-term investments afford us adequate
liquidity for at least the next 12 months, although we may
raise additional capital or refinance existing indebtedness
during this period if acceptable terms are available. We expect
to require substantial additional capital in the future to fund
our business and our success and viability will depend on our
ability to raise additional capital on reasonable terms.
Business
Strategy
We intend to continue to grow our business by pursuing the
following strategies:
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Deploy our service in new markets and increase our subscriber
base rapidly. We intend to deploy our network in
markets in the United States and Europe that we find attractive.
We believe that this deployment
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will enable us to continue to increase our subscriber base. We
expect to deploy mobile WiMAX technology in our new markets
beginning in the second half of 2008 in the United States and
when commercially available in other countries and, over time,
migrate our existing markets to the same technology. The timing
and extent of our new market roll-outs will largely be
determined by access to additional funding.
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Build our spectrum position. We intend to
continue acquiring spectrum in the United States and in other
countries, thereby increasing the number of markets in which we
may offer our services in the future.
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Enhance mobility. We will continue to focus on
enhancing the mobility of our services and to work with vendors
to introduce devices that will optimize the mobile capabilities
of our WiMAX network. In October 2007 we introduced a PC card
for our pre-WiMAX network that facilitates greater portable
access to our services. We further believe that commercial
deployment of mobile WiMAX technology will lead to the
development and availability of mobile products that are
compatible with our mobile WiMAX network.
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Offer premium value added services. We intend
to generate incremental revenues, leverage our cost structure
and improve subscriber retention by offering a variety of
premium services. As of December 31, 2007, we offered VoIP
telephony services in 41 markets, and plan to expand this
offering to our remaining domestic markets in 2008. We also
offered a PC card for use within our existing pre-WiMAX network
in all of our markets by the end of 2007. Additional products
and services such as a WiMAX PC card, ExpressCard, USB driven
devices and other products and services are expected over the
course of 2008.
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Services
We offer our services in both U.S. and international markets.
Our services consist primarily of providing wireless broadband
connectivity, but in 41 of our domestic markets, we also offer
VoIP telephony services. Our service revenue accounted for
virtually all of total revenues. Prior to the launch of our
first market in August 2004, equipment and other revenue
accounted for all of our total revenues. Domestic sales
accounted for approximately 81% of our service revenue for the
year ended December 31, 2007, while our international sales
accounted for approximately 19%, of service revenue over the
same period. We began introducing VoIP telephony services in a
limited number of our United States markets in 2006 and
completed a much broader deployment in 2007. VoIP subscribers
are now beginning to ramp at an increasing pace.
United
States Wireless Broadband Services
We offer subscribers a fast, simple, portable, reliable and
affordable way to connect to the Internet. In our domestic
markets, we offer subscribers a choice of service plans designed
to accommodate users that require greater access speeds or more
email addresses and web hosting accounts. As of
December 31, 2007, our primary service plans for our
current wireless broadband services in the United States include:
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Download
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Upload
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Speed to
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Speed From
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Base Rate
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Service Plan
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End-User
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End-User
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($/month)*
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Additional Features
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ClearValue
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Up to 768 Kbps
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Up to 256 Kbps
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$24.99-$39.99
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3 email addresses
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ClearPremium
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Up to 1.5 Mbps
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Up to 256 Kbps
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$34.99-$49.99
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5 email addresses
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ClearPremium Plus
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Up to 2.0 Mbps
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Up to 256 Kbps
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$44.99-$69.99
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5 email addresses
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PC Card
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Up to 1.5 Mbps
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Up to 256 Kbps
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$59.99
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5 email addresses
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ClearBusiness
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Up to 1.5 Mbps
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Up to 256 Kbps
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$49.99-$69.99
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8 email addresses,
1 static IP address
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Excludes monthly modem lease fee of $4.99 and monthly PC card
lease fee of $6.99, where applicable, and excludes introductory
and promotional rates and rate packages. |
We believe that our subscribers are attracted to our current
wireless broadband services primarily because our networks
combine certain features of cable modem, DSL and cellular
networks into a single service offering at an
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attractive price. While we serve a large variety of subscribers,
we believe that the majority of our subscriber base can be
divided into the following broad categories:
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subscribers who require a portable or mobile high-speed Internet
connection, such as
on-the-go
professionals, field salespeople, contractors, police and fire
personnel and others;
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subscribers who value the flexibility of a portable or mobile
wireless broadband service;
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subscribers who desire a simple way to obtain and use high-speed
Internet access at a reasonable price; and
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subscribers who are dissatisfied with other service offerings,
often because of perceived or actual poor quality of service,
slow speeds, price, the requirement to participate in undesired
bundled offers, difficulty of installation or unsatisfactory
customer service.
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Based on a subscriber survey we conducted in the fourth quarter
of 2007, approximately 66% of our new domestic subscribers in
that quarter reported they were subscribers of either DSL or
cable modem service at the time that they subscribed for our
services, while approximately 25% of our new domestic
subscribers in that month were Internet users migrating from
dial up to broadband and a small minority of our new domestic
subscribers were subscribers of other services or they were
first time Internet subscribers. As of December 31, 2007,
approximately 62% of our U.S. subscribers had selected one
of our premium offerings, such as ClearPremium or ClearPremium
Plus.
New subscribers to our ClearValue, ClearPremium, ClearPremium
Plus and ClearBusiness service plans generally sign a service
contract with a one or two year term. We typically charge an
activation fee of $50, which is usually waived for subscribers
signing a two-year contract. Other variations on rate plans,
promotions, terms and fees may be offered through certain of our
distribution partners.
We recently began to offer alternative payment plans to address
the specific needs of some of our subscribers. For example, in
2007 we introduced a
month-to-month
no contract option for our ClearPremium service, which is
well-suited for subscribers who either do not meet our credit
requirements or who anticipate needing our service for a limited
period of time, such as military personnel or students. These
subscribers are not required to sign a contract, but they are
charged a higher monthly fee than the price paid by subscribers
who enter into a contract. Additionally, in lieu of signing a
contract, our subscribers have the option of receiving the lower
contract rate by prepaying an amount equal to the fees for
12 months of our services.
Our subscribers generally make their payments through an
automatic charge to a credit or debit card. We believe automatic
billing reduces our transaction costs, permits us to bill in
advance, which serves to reduce our bad debt and accounts
receivable expenses, and improves subscriber retention and
renewal rates. We generally have not accepted other forms of
payment. We expect to begin accepting cash payments at Clearwire
retail outlets in 2008 as we anticipate implementing a point of
sale system in late 2008, for those subscribers who like the
convenience of cash.
To use our current services, our subscribers must obtain one of
our modems or PC cards. Our subscribers generally lease a modem
from us at a rate of $4.99 per month or a PC card at $6.99 per
month. We also offer modems and PC cards for sale to those
subscribers who prefer to own rather than lease. We require
subscribers under our no contract payment plan to purchase a
modem or PC card in order to subscribe for our broadband
services.
International
Wireless Broadband Services
We expect to continue to leverage the product development
initiatives of our domestic operations in establishing our
service offerings in our international markets. We currently
offer wireless broadband services similar to our domestic
service through our subsidiaries in Belgium, Ireland and Spain.
Our equity investees offer a comparable wireless broadband
service in their markets in Denmark and Mexico.
In our international markets, we currently offer subscribers a
choice of service plans designed to accommodate users that
require faster access speeds or a greater number of email
addresses and web hosting accounts. The
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specific service plans and pricing offered in a particular
market depend on a variety of factors, including, among others,
service offerings by competitors in that market. The service
plans offered are summarized below:
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Download Speed to
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Upload Speed from
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Base Rate
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Market
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Service Plan
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End-User
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End-User
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(/mo incl. VAT)
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Brussels, Belgium
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Freedom Light
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Up to 1.0 Mbps
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Up to 128 Kbps
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28.99
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Freedom Premium
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Up to 3.0 Mbps
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Up to 256 Kbps
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38.99
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Ghent, Belgium
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Freedom Light
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Up to 1.0 Mbps
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Up to 128 Kbps
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28.99
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Freedom Premium
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Up to 3.0 Mbps
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Up to 256 Kbps
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38.99
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Dublin, Ireland
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Clear Start
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Up to 512 Kbps
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Up to 128 Kbps
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24.95
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Clear Freedom
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Up to 1.0 Mbps
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Up to 128 Kbps
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29.95
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Clear Performer
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Up to 2.0 Mbps
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Up to 128 Kbps
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49.95
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Clear Business
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Up to 2.5 Mbps
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Up to 256 Kbps
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79.95
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Seville, Spain
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instanet
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Up to 1.0 Mbps
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Up to 128 Kbps
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34.68
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As in our domestic markets, we continue to evaluate the service
plans offered in each of our international markets. As we deploy
our services in new markets internationally, the service plans
in those markets may vary from our current offerings based on
factors such as the local competitive environment and the
demands of the subscribers we intend to target in that market.
Our international subscribers generally make payments through an
automatic charge to their bank account, credit card or debit
card, which provides similar benefits as our domestic billing
process.
Voice-over-Internet-Protocol
Telephony Service
As a part of our plan to offer value-added services to increase
subscriber demand and generate incremental revenue from our
wireless broadband subscribers, in April 2006, we began offering
VoIP telephony services in a limited number of our domestic
markets, which we call Clearwire Internet Phone Service. As of
December 31, 2007, we had launched our VoIP telephony
services more broadly in 41 out of our 46 domestic markets. We
plan to introduce our VoIP telephony service in the remaining
domestic markets in 2008. We continue to explore options for
deploying VoIP telephony services in our international markets,
but we do not have specific plans to deploy VoIP telephony
services in those markets in the near term.
In our domestic VoIP markets, we are currently offering a single
VoIP telephony service plan that provides subscribers with
unlimited local and long distance calling, including calls
within the United States, Canada, and Puerto Rico, for a fixed
monthly fee of $34.99 per month with various promotional
discounts available. Our VoIP telephony service permits calls
outside these countries on a
charge-per-call
basis. Our VoIP telephony service package includes enhanced
calling features such as voice mail, call waiting, 3-way calling
and caller ID. In addition, our subscribers can set a range of
telephony options online, such as call forwarding and call
blocking. We provide optional email notification of voicemail
messages through which a subscriber may choose to receive a
voicemail message attached as a file to an email message.
Our VoIP telephony service is facilities-based, which means that
the service is provided across our network and switches through
infrastructure we control. We believe this allows us to deliver
better average call quality than is generally available on non
facilities-based VoIP systems, while using less data capacity.
Future
Mobile WiMAX Services
We expect to be able to offer services over our mobile WiMAX
network in our new markets that we place in commercial operation
in the second half of 2008 and beyond similar to the fixed and
portable wireless high-speed Internet access and VoIP telephony
services we currently offer our existing subscribers, but with a
greater emphasis on a mobile true broadband
experience. We believe that manufacturers will have an interest
in equipping a broad array of handheld communications and
consumer electronic devices with mobile WiMAX chipsets, which
may include notebook computers, UMPCs, PDAs, gaming consoles,
MP3 players, and other productivity and
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entertainment devices. As these products are introduced, we
intend to explore offering new services designed to take
advantage of the capabilities of these devices.
Beyond our existing and expected future fixed, portable and
mobile service offerings, we and Intel have entered into a
strategic collaboration agreement to develop, deploy and market
a co-branded mobile WiMAX service in the United States that
will target users of certain notebook computers, UMPCs and other
mobile computing devices containing Intel microprocessors. Both
of the parties have committed to make certain contributions to
the development, promotion and marketing of this service, which
will be available only over our planned mobile WiMAX network.
Markets
Served and Deployment
United
States Markets
We use the term market to refer to one or more
municipalities in a geographically distinct location in which we
provide our services. Our markets range from major metropolitan
areas to small, rural communities, and markets of all sizes in
between.
We pursue market clustering opportunities which allow our
customers to roam in areas of regional interest. A clustering
strategy can also deliver cost efficiencies and sales and
marketing synergies compared to areas in which markets are not
deployed in a geographic cluster.
As of December 31, 2007, we offered our services in 46
markets in the United States covering an estimated
13.6 million people and we had approximately 350,000
subscribers in the United States. Our launched markets are
listed as follows:
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Aberdeen, WA
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Greensboro/Winston-Salem, NC
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Redding, CA
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Abilene, TX
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Jacksonville, FL
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Reno, NV
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Amarillo, TX
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Killeen/Temple, TX
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Richmond, VA
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Anchorage, AK
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Klamath Falls, OR
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Rochester, NY
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Bellingham, WA
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Lewiston, ID
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Roseburg, OR
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Bend, OR
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Longview, TX
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Seattle/Tacoma, WA
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Boise, ID
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Lubbock, TX
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St Cloud, MN
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Charlotte, NC
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Maui, HI*
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Stockton, CA
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Chico, CA
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Medford, OR
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Syracuse, NY
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Corpus Christi, TX
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Merced, CA
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Tri-Cities, WA
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Dayton, OH
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Midland/Odessa, TX
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Visalia, CA
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Daytona Beach, FL
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Modesto, CA
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Waco, TX
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Duluth, MN
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Nashville, TN
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Wenatchee, W A
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Eau Claire, WI
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Oahu, HI*
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Wichita Falls, TX
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Eugene, OR
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Raleigh, NC
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Yakima, WA
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Grants Pass, OR
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These markets are operated by Clearwire Hawaii Partners LLC, an
entity in which Clearwire U.S. LLC held a 78.6% membership
interest as of December 31, 2007. |
International
Markets and Deployment
Outside the United States, we use categories of criteria similar
to those we apply inside the United States to determine the
markets in which to deploy. With respect to our equity
investees, we work in conjunction with our
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partners in making these determinations. As of December 31,
2007, we, through our consolidated subsidiaries and equity
investees, offered our services in the following countries:
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|
Approximate
|
Country
|
|
Percentage Owned(1)
|
|
Subsidiaries
|
|
|
|
|
Belgium (Brussels and Ghent)
|
|
|
100.0
|
%
|
Ireland (Dublin)
|
|
|
97.6
|
%
|
Spain (Seville)
|
|
|
100.0
|
%
|
Equity Investees
|
|
|
|
|
Denmark(2)
|
|
|
38.2
|
%
|
Mexico(3)
|
|
|
29.2
|
%
|
|
|
|
(1) |
|
Approximate percentage owned in European countries assumes 100%
ownership of Clearwire Europe B.V., or Clearwire Europe, a
direct subsidiary of Clearwire Corporation through which we
conduct our European operations. A group of consultants hold
approximately two percent of the current share capital of
Clearwire Europe, pending an exchange of interest in Clearwire
Europe B.V. The interest held by these consultants may be
diluted if we or any third parties make additional equity
contributions to Clearwire Europe unless the consultants
exercise preemptive rights to make their pro-rata share of such
contributions. |
|
(2) |
|
Services offered under the Clearwire brand and trademark. |
|
(3) |
|
Services similar to ours offered under the MVS Net and
E-go brand. |
As of December 31, 2007, we had approximately 44,000
subscribers in Belgium, Ireland and Spain.
Sales and
Marketing
Our marketing efforts include reliance on a full range of
integrated marketing campaigns and sales activities, including
advertising, direct marketing, public relations and events to
support our direct sales teams, company-owned retail stores,
mall and mobile kiosks, authorized representatives and resellers.
We believe we have a strong local presence in our markets, which
enhances our ability to design marketing campaigns tailored to
the preferences of the local community. We advertise across a
broad range of media, including print, billboards, online, and
radio and television broadcast media with television only
recently introduced selectively in some of our larger markets.
We also conduct community awareness campaigns that focus on
grass-roots marketing efforts, and host local community events
where potential subscribers can experience our service. Our
direct marketing efforts have included direct mailings and
delivering door hangers to potential subscribers in our network
coverage area.
We use multiple distribution channels to reach potential
subscribers, including:
Direct. We have hired salespeople to sell our
services directly to consumers. Our salespeople also set up
mobile kiosks at local community and sporting events and near
retail establishments or educational institutions to demonstrate
our services. Each of these salespeople carries a supply of
modems, so that a new subscriber can activate his or her account
and receive equipment while at the mobile kiosk. As of
December 31, 2007, we employed approximately 520
salespeople in the United States. We generally compensate these
employees on a salary plus commission basis. Our direct sales
teams are expanding their focus to include acquiring small and
medium sized business accounts as subscribers, particularly with
the introduction of the PC cards.
Indirect. Our indirect sales channels include
a variety of authorized representatives, such as traditional
cellular retailers, satellite television dealers and computer
sales and repair stores. These authorized representatives
typically operate retail stores but, subject to our approval,
can also extend their sales efforts online. Authorized
representatives assist in developing awareness of and demand for
our service by promoting our services and brand as part of their
own advertising and direct marketing campaigns. We compensate
these dealers solely on the basis of commission. As of
December 31, 2007, we had approximately 1,830 authorized
representatives in the United States.
8
We also offer our services pursuant to distribution agreements
through national retail chains, and we believe that the
percentage of our total sales from this indirect sales channel
will continue to increase.
Clearwire owned and operated retail. We market
our products and services through a number of Clearwire-operated
retail outlets, including retail stores, but primarily kiosks
located in malls and shopping centers. We generally compensate
these employees on an hourly basis plus commissions.
Internet and telephone sales. We direct
prospective subscribers to our website or our telesales centers
in our advertising. Our website is a fully functional sales
channel where subscribers can check pricing and service
availability, research service plans and activate accounts using
a credit card. Prospective subscribers can also call into one of
our telesales centers to activate service.
Wholesale distribution. We intend to sell our
wireless broadband Internet services at wholesale rates to
strategic distribution partners, who as part of their agreements
with us can re-market our services under their own brand name,
under our brand name or on a co-branded basis.
Customer
Service and Technical Support
We typically initiate each customer subscription through a
credit or debit card approval process. In our domestic markets,
we also check the subscribers credit and, depending on the
result, may require the customer to purchase the wireless modem.
Once we have an approved form of payment, we activate service
and make an initial charge on the card to cover the activation
fee and the first month of service. Finally, we establish
monthly recurring, automatic card charges for the duration of
the subscribers relationship with us. All of our
subscriber invoices are electronic.
We believe reliable customer service and technical support are
critical to attracting and retaining subscribers and we
currently provide the following support for all subscribers:
|
|
|
|
|
Toll-free, live telephone and email-based assistance available
seven days a week;
|
|
|
|
Resources on our website that cover frequently asked questions
and provide signal and networking tips;
|
|
|
|
Online account access and, for VoIP subscribers, web-based
resources that allow them to control their telephony features
and settings; and
|
|
|
|
A network of service technicians available to provide
on-site
customer assistance and technical support.
|
In October 2006, we opened a call center in Las Vegas, Nevada
currently staffed with approximately 230 customer service
and technical support personnel. In April 2007, we opened a
second call center in Milton, Florida currently staffed with
approximately 190 customer service representatives. We believe
that having our own internal customer service and technical
support personnel enables us to deliver a consistent, high
quality customer service, thereby improving subscriber retention.
Currently, some of our customer care operations are outsourced
to a third-party vendor. However, we provide our own internal
customer care services for calls regarding complicated technical
support and retention issues.
Our
Networks
Pre-WiMAX
Network
Our pre-WiMAX network, in both our domestic and international
markets, relies on the Expedience wireless broadband access
system that supports delivery of any
IP-compatible
broadband applications, including high-speed Internet access and
VoIP telephony services. This system, which is manufactured by
NextNet Wireless, Inc., a wholly-owned subsidiary of Motorola,
is comprised of base station transceivers, a network management
system, and modems used by our subscribers. Expedience operates
over our spectrum in the 2.5 GHz band in the
United States and in the 3.5 GHz band in Europe. We
believe that the Expedience system has certain key advantages
over competing technologies that are currently available, such
as:
|
|
|
|
|
simple self-installation by subscribers and provisioning of
modems, with no software installation required on the
subscribers computer;
|
9
|
|
|
|
|
easy network and tower installation and deployment requirements;
|
|
|
|
flexible and scalable architecture that can service large
metropolitan or small rural areas;
|
|
|
|
ability to provide overlapping coverage from multiple sites for
reliable and robust connectivity; and
|
|
|
|
enhanced reliability and reduced latency provided by linking our
towers via a microwave mesh network that carries the majority of
our backhaul traffic over licensed and unlicensed frequencies.
|
Mobile
WiMAX Network
Once we have successfully completed our current mobile WiMAX
field trials, we expect to deploy a mobile WiMAX technology
network in our subsequent markets and, over time, migrate our
existing markets to the mobile WiMAX network. The mobile WiMAX
network is based on the IEEE mobile Worldwide Interoperability
of Microwave Access 802.16e-2005 standard. Upon adopting the
mobile WiMAX standard, we believe our mobile WiMAX network will
continue to support fixed, portable and mobile service offerings
using a network architecture that shares the key advantages of
our current pre-WiMAX network.
Technology
Expedience
Technology
The Expedience system is a wireless
IP-based,
Ethernet platform built around an OFDM and Time
Division Duplex, or TDD, physical layer, which allows us to
address two challenges that face wireless carriers, namely NLOS
performance and frequency utilization.
OFDM is a physical layer protocol for NLOS broadband networks
that uses a large number of individual carriers and a process of
mapping a users data to those carriers to leverage the
presence of multi-path to transmit and receive data robustly in
the NLOS service environment. OFDM is preferable to single
carrier technologies for addressing multi-path and
frequency-selective fading in a broadband channel.
TDD allows upstream and downstream links to the network to exist
on the same radio frequency channel, meaning that there is no
need to use multiple channels or to have guard-bands between
downstream and upstream channels. Thus, TDD enables wireless
broadband access systems to be deployed on any channel in the
radio frequency band, making it flexible for carriers to manage
non-contiguous spectrum, such as the spectrum managed by our
company. TDD also allows a service provider to maximize spectrum
utilization by allocating up and down link resources appropriate
to the traffic pattern over a given market.
Pre-WiMAX
Network Components
The Expedience customer premise equipment (CPE) that
operates on our pre-WiMAX network is a NLOS wireless modem
that connects to any
IP-based
device, such as a computer, using a standard Ethernet
connection. It is simple to install and requires no service
provider configuration or support and no software download or
installation. A subscriber need only connect the CPE to an
external power source and to the subscribers computer. In
addition to the Expedience CPE, in October 2007 we began
offering our True
Broadbandtm
PC card in all of our U.S. markets.
The Expedience base station allows for 360 degree coverage by
employing multiple transceivers and antennas on a single tower
to maximize subscriber density and spectral efficiency. This
setup is scalable, expandable and flexible, allowing us to
control costs to promote efficient expansion as our subscriber
base grows. Our base stations generally are located on existing
communications towers, but can also be placed on rooftops of
buildings and other elevated locations. We generally lease our
tower locations from third parties.
We also use a network management system that incorporates a
complete set of management tools to enable the configuration,
management, monitoring and reporting of all network status
elements. This system provides secure, centralized and remote
configuration of base stations, CPE, switches and other network
elements. The system reports to and alerts our system
administrators to alarms and faults, and monitors system
performance down to the individual CPE. It supports customizable
report generation to track network performance, utilization and
capacity.
10
Mobile
WiMAX Technology
Mobile WiMAX is an all
IP-based
technology and, like Expedience, is optimized for
high-throughput, real-time data applications. Mobile WiMAX is
based on the IEEE
802.16e-2005
standard and will operate in our 2.5 GHz and 3.5 GHz
spectrum bands.
Similar to our current pre-WiMAX network, we expect our planned
mobile WiMAX network to be a wireless
IP-based,
Ethernet platform designed around an OFDM and TDD physical
layer, to address NLOS performance and frequency utilization
issues. We expect that mobile WiMAX will meet all of our
anticipated requirements for mobile Internet usage, as we
believe it will support multiple handoff mechanisms,
power-saving mechanisms for mobile devices, advanced quality of
service and low latency for improved support of real-time
applications, and advanced authorization, authentication and
accounting functionality.
Our mobile WiMAX network is expected to consist of many of the
same primary elements as Expedience, and will include base
station transceivers, a backhaul network connected to point of
presence (POP) traffic aggregation sites, an Operations,
Administration, Maintenance and Provisioning (OAMP) system and
subscriber devices. For subscribers, we expect that mobile WiMAX
enabled chipsets will initially be included in NLOS modems
similar to the Expedience CPE and in PC cards. Eventually, we
anticipate manufacturers to sell a number of handheld
communications and consumer electronic devices with embedded
WiMAX chipsets that will be enabled to communicate using our
mobile WiMAX network, such as notebook computers, UMPCs, PDAs,
gaming consoles and MP3 players and other handheld devices.
On May 21, 2007, we announced the successful completion of
the first phase of our first mobile WiMAX field trials. The
field trial in the Portland, Oregon suburb of Hillsboro jointly
conducted with Intel and Motorola is using infrastructure
equipment based on the IEEE 802.16e standard and is relying on
our spectrum in the 2.5GHz frequency band. The first phase of
the field trial focused on coverage, capacity and speed
associated with the air interface. The first phase achieved the
coverage, capacity and speed guidelines as set by the WiMAX
Forum, an industry-led, not-for-profit organization formed to
certify and promote the compatibility and interoperability of
broadband wireless products based on the IEEE 802.16e standard.
The first phase of the field trial covered 15 square miles
in Hillsboro using a mobile WiMAX laptop card, the first to be
based on WiMAX. We then expanded coverage in Portland to include
more than 40 cell sites encompassing an area of approximately
145 square miles. This is one of the largest WiMAX field
tests in the United States. Based on the initial success of
these trials, we expect that all future domestic markets will be
deployed with WiMAX technology.
Spectrum
Our network operates over licensed spectrum in our U.S. and
international markets. Although several broadband technologies
can operate in unlicensed or public access spectrum, we believe
using licensed spectrum enables us to provide a consistently
higher quality of service to our subscribers, without the
interference that is typically associated with unlicensed
frequency bands.
United
States
In the United States, licensed spectrum is governed by FCC rules
that restrict interference from other licensees and spectrum
users, providing some protection against interruption and
degradation of service. Under FCC rules, unlicensed spectrum
users do not have exclusive use of any frequencies, may not
cause interference with the operations of any licensed operators
and may suffer interference from others using licensed
frequencies in overlapping geographic areas, making quality and
availability of their services unpredictable.
We are designing our network in the United States to operate
primarily on spectrum located within the 2496 to 2690 Megahertz
(MHz) band, or 2.5 Gigahertz (GHz) band,
which is designated for Broadband Radio Service, or BRS, and
Educational Broadband Service, or EBS. Most BRS and EBS licenses
are allocated in a scheme that provides for overlapping circular
territories with a
35-mile
radius. Under current FCC rules, the BRS and EBS band in each
territory is generally divided into 33 channels consisting of a
total of 186 MHz of spectrum, with an additional eight MHz
of guard band spectrum. Prior to the adoption of the current FCC
rules, BRS and EBS licenses were referred to, respectively, as
Multichannel Multipoint Distribution services, or MMDS, and
Instructional Television Fixed Services, or ITFS, licenses and
were divided into 33 channels consisting of 198 MHz of
spectrum.
11
Under current FCC rules, we can access BRS spectrum either
through outright ownership of a BRS license issued by the FCC or
through a leasing arrangement with a BRS license holder. The FCC
rules limit eligibility to hold EBS licenses to accredited
educational institutions and certain governmental, religious and
nonprofit entities, but permit those license holders to lease up
to 95% of their capacity for non-educational purposes.
Therefore, although we cannot hold an EBS license, we can access
EBS spectrum through a long-term leasing arrangement with a
license holder. EBS leases entered into prior to
January 10, 2005, may remain in effect for up to
15 years and may be renewed and assigned in accordance with
the terms of those leases. The initial term of EBS leases
entered into after January 10, 2005, is required by FCC
rules to be coterminous with the term of the license. In
addition, these leases typically give the leaseholder the right
to participate in and monitor compliance by the license holder
with FCC rules and regulations. Our EBS spectrum leases
typically have an initial term equal to the remaining term of
the EBS license, with an option to renew the lease for up to
three renewal terms of ten years or less with respect to a final
renewal term, for a total lease term of up to 30 years. In
addition, we generally have a right of first refusal for a
period of time after our leases expire to match another
partys offer to lease the same spectrum. Our leases are
generally transferable.
Since our formation, we have focused on acquiring BRS licenses
and leases, as well as EBS leases, in markets throughout the
United States. As of December 31, 2007, we believe that we
are the second largest holder of licensed spectrum in the
2.5 GHz band in the United States. As of December 31,
2007, we owned or leased, or had entered into agreements to
acquire or lease, approximately 15.1 billion Megahertz
population (MHz-POPs) of spectrum in the United
States. Of our approximately 15.1 billion MHz-POPs of
spectrum in the United States, we estimate that we own
approximately 24% with the remainder leased from third-parties,
generally under lease terms of up to 30 years. When the
FCCs current rules for the 2.5 GHz band in the United
States are fully implemented, the MHz for certain channels
within this band will decrease from 6 MHz to 5.5 MHz.
As our network is designed to operate using 5 MHz channels,
this regulatory change will not adversely affect our ability to
deliver our services but will cause a proportionate reduction of
our calculated MHz-POPs.
Our pending spectrum acquisition agreements are subject to
various closing conditions, some of which are outside of our
control and, as a result, we may not acquire all of the spectrum
that is subject to these agreements. Nearly all of such closing
conditions relate either to licensee or FCC consents, which we
expect are likely to be granted. A limited number of our pending
acquisition agreements are subject to closing conditions
involving the resolution of bankruptcy or similar proceedings.
As of December 31, 2007, we have minimum purchase
commitments of approximately $57.8 million to acquire new
spectrum.
We engineer our networks to optimize both the service that we
offer and the number of subscribers to whom we can offer
service. Consequently, we currently will not launch our services
in a market using our current technology unless we control a
minimum of six channels of spectrum that contain at least
5 MHz of spectrum each. However, we expect the spectral
efficiency of technologies we deploy to continue to evolve, and
as a result, we may decide to deploy our services in some
markets with less spectrum. Alternatively, we could find that
new technologies and subscriber usage patterns require us to
have more spectrum available in our markets.
We are actively pursuing opportunities to acquire additional
licensed spectrum in new markets and to add depth of spectrum
where we require additional channels to deploy our services. We
generally purchase and lease licensed spectrum for cash and, in
some instances and subject to applicable securities laws, common
stock or warrants. We have found that, in some instances, we
have an advantage over other bidders because we have a
demonstrated track record of using the spectrum to deploy
wireless broadband services as opposed to simply warehousing
spectrum rights. We also may pay commissions or issue shares,
stock options or warrants to brokers who locate and secure
spectrum for us. We have recently observed a significant
increase in the cost of acquiring spectrum in the United States,
and we expect this trend to continue as the supply of available
licensed spectrum diminishes.
International
We currently hold spectrum rights in Belgium, Germany, Ireland,
Poland, Romania and Spain. Our equity investees also control
spectrum in Denmark and Mexico. In each of Germany, Poland,
Romania and Spain, our licenses cover the entire country. Our
licenses in Belgium and Ireland cover a significant portion of
the countries
12
populations. We believe that each of the frequencies are or will
be suitable for our service. A summary of the spectrum rights
held by our subsidiaries and our equity investees is below,
including the frequency band in which the spectrum is held, an
estimate of the population covered by our spectrum in each
country and the total MHz-POPs of our spectrum. We intend to
continue to expand our international spectrum holdings. We
currently have a dedicated team of professionals actively
pursuing new spectrum opportunities and we are negotiating to
acquire additional spectrum in countries throughout Europe.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensed
|
|
|
|
|
Frequency
|
|
Population(1)
|
|
MHz-POPs(2)
|
Country
|
|
(GHz)
|
|
(In millions)
|
|
(In millions)
|
|
Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
Belgium
|
|
|
3.5
|
|
|
|
10.4
|
|
|
|
1,040.0
|
|
Germany
|
|
|
3.5
|
|
|
|
82.5
|
|
|
|
3,465.0
|
|
Ireland
|
|
|
3.5
|
|
|
|
1.5
|
|
|
|
127.5
|
|
Poland
|
|
|
3.6
|
|
|
|
38.1
|
|
|
|
1,066.8
|
|
Romania
|
|
|
3.5
|
|
|
|
21.6
|
|
|
|
1,209.6
|
|
Spain
|
|
|
3.5
|
|
|
|
45.1
|
|
|
|
1,804.0
|
|
Equity Investees
|
|
|
|
|
|
|
|
|
|
|
|
|
Denmark
|
|
|
3.5
|
|
|
|
5.4
|
|
|
|
205.2
|
|
Mexico
|
|
|
2.5
|
|
|
|
81.0
|
|
|
|
N/A
|
|
|
|
|
(1) |
|
Estimates based on country population data derived from the
Economist Intelligence Unit database, except for Denmark,
Ireland and Mexico, which are based on census or other market
information gathered by us or our affiliates regarding the
number of residents within the licensed coverage area. |
|
(2) |
|
Represents the amount of our spectrum in a given area, measured
in MHz, multiplied by the estimated population of that area. |
As in the United States, we engineer our international networks
to optimize the number of users that the network can support
while providing sufficient capacity and bandwidth. Thus far we
have chosen not to launch our services in a market using our
current technology unless we control a minimum of 30 MHz of
spectrum. However, we expect the spectral efficiency of
technologies we deploy to continue to evolve, and as a result,
we may decide to deploy our services in some markets with less
spectrum. Alternatively, we could find that new technologies and
subscriber usage patterns require us to have more spectrum
available in our markets.
Research
and Development
Our research and development efforts have focused on the design
of our network, enhancements to the capabilities of our network
and the evolution of our service offerings. A significant
portion of our development efforts involves working with the
suppliers of our network infrastructure and subscriber
equipment. We introduced a PC card developed in conjunction with
Motorola in October 2007. At the same time, we are working with
Intel, Motorola and other vendors to develop network components
and subscriber equipment for our mobile WiMAX network, including
an ongoing mobile WiMAX trial in Portland, Oregon. We expect to
continue these efforts in the future.
We spent approximately $1.4 million on research and
development activities during the year ended December 31,
2007.
Suppliers
Motorola, which acquired our former NextNet subsidiary in August
2006, is currently the only supplier of certain network
components and subscriber equipment for the Expedience system
deployed on our pre-WiMAX network. Thus, we are dependent on
Motorola to produce the equipment and software we need for our
pre-WiMAX network in a timely manner. Moreover, we are parties
to a number of commercial agreements with Motorola that
13
limit our ability to use other equipment suppliers under certain
circumstances, not only for our pre-WiMAX network, but also for
our mobile WiMAX network.
Competition
The market for broadband services is highly competitive and
includes companies that offer a variety of services using a
number of different technological platforms, such as cable
modems, DSL, third-generation, or 3G, cellular, satellite,
wireless Internet service and other emerging technologies. We
compete with these companies on the basis of the speed, ease of
use, portability, reliability, and price of our respective
services.
Our principal competitors include cable and DSL operators,
wireless telephone providers, Wi-Fi and, prospectively, WiMAX
providers, satellite providers and others.
Cable
Modem and DSL Services
We compete with companies that provide Internet connectivity
through cable modems or DSL. Principal competitors include cable
companies, such as Time Warner Cable, Inc. and Comcast
Corporation, as well as incumbent telephone companies, such as
AT&T Inc., Qwest Communications International, Inc. and
Verizon Communications, Inc.
Cellular
and PCS Services
Cellular and PCS carriers are seeking to expand their capacity
to provide data and voice services that are superior to ours.
These providers have substantially broader geographic coverage
than we have and, for the foreseeable future, than we expect to
have. If one or more of these providers can deploy technologies
that compete effectively with our services, the mobility and
coverage offered by these carriers will provide even greater
competition than we currently face. Carriers such as AT&T
and Verizon Wireless have announced plans to deploy Long Term
Evolution technologies, or LTE, which, when developed, may
deliver performance that is similar to, or better than, mobile
WiMAX technology.
Wireless
Broadband Service Providers
We also face competition from other wireless broadband service
providers that use licensed spectrum. Moreover, if our
technology is successful and garners widespread support, we
expect these and other competitors to adopt or modify our
technology or develop a technology similar to ours. We believe
that, as network infrastructure based on mobile WiMAX technology
becomes commercially available and manufacturers develop and
sell handheld communications and consumer electronic devices
that are enabled to communicate using mobile
WiMAX networks, other network operators will introduce
mobile WiMAX services comparable to ours in both our domestic
and international markets. For example, Sprint Nextel
Corporation has announced its intention to deploy a mobile WiMAX
network.
Satellite
Satellite providers like Wild Blue Communications, Inc. and
Hughes Communications, Inc. offer broadband data services that
address a niche market, mainly less densely populated areas that
are unserved or underserved by competing service providers.
Although satellite offers service to a large geographic area,
latency caused by the time it takes for the signal to travel to
and from the satellite may challenge the ability to provide some
services, such as VoIP, and reduces the size of the addressable
market.
WISPs
and Wi-Fi
We also compete with other wireless Internet service providers,
or WISPs, that use unlicensed spectrum. In addition to these
commercial operators, many local governments, universities and
other governmental or quasi-governmental entities are providing
or subsidizing Wi-Fi networks over unlicensed spectrum, in some
cases at no cost to the user. Unlicensed spectrum may be subject
to interference from other users of the spectrum, which can
14
result in disruptions and interruptions of service. We rely
exclusively on licensed spectrum for our network and do not
expect significant competition from providers using unlicensed
spectrum to deliver services to their customers.
International
In our international markets, we generally face competition from
incumbent telecommunications companies that provide their own
wireless broadband or VoIP telephony services, as well as from
other companies that provide Internet connectivity services.
Although in certain European countries, incumbent
telecommunications companies may have a dominant market share
based on their past status as the single operator of
telecommunications services in a particular country, these
incumbent telecommunications companies rely on systems initially
designed for voice transmission which have been upgraded to
provide wireless broadband services.
Other
We believe other emerging technologies may also enter the
broadband services market. For example, certain Internet service
providers are working with electric distribution utilities to
install broadband over power line, or BPL, technology on
electric distribution lines to provide broadband services. These
Internet service and BPL providers are potential competitors.
BPL technology may turn electrical lines into large unshielded
transmitting antennas that would allow transmission of data over
these lines, but could potentially create interference with some
wireless networks.
Regulatory
Matters
Overview
The regulatory environment relating to our business and
operations is evolving. A number of legislative and regulatory
proposals under consideration by federal, state and local
governmental entities may lead to the repeal, modification or
introduction of laws or regulations that could affect our
business. Significant areas of existing and potential regulation
for our business include broadband Internet access,
telecommunications, VoIP spectrum regulation and Internet
taxation.
Broadband
Internet Access Regulation
The result of recent court decisions and the FCCs 2005
classification of wireline broadband Internet access service as
an information service, rather than a
telecommunications service is that both DSL and
cable modem providers are entitled to retain exclusive use of
their broadband Internet access lines without having to open
them up to competing Internet service providers. This regulatory
framework may encourage independent Internet service providers
to explore other options for broadband Internet access,
including wireless services.
On September 23, 2005 the FCC released an Internet Policy
Statement outlining its general views toward ensuring that
broadband networks are widely deployed, open, affordable and
accessible to all consumers. It adopted four principles to
encourage broadband deployment and preserve and promote the open
and interconnected nature of the public Internet, and suggested
that it would incorporate these principles into its ongoing
policy-making activities. On March 22, 2007, the Commission
initiated an inquiry into the performance of the broadband
marketplace under the Commissions 2005 Internet Policy
Statement. In this inquiry, the FCC also seeks comment on
whether the Policy Statement should incorporate a new principle
of nondiscrimination and, if so, how such a nondiscrimination
principle would be defined and applied. On January 14,
2008, the Commission sought comment on two petitions related to
its Internet Policy Statement seeking Commission determinations
that further define its four broadband principles as well as
what practices constitute reasonable broadband network management
On November 7, 2006, the FCC issued an order classifying
BPL Internet access service as an information
service. Like cable modem and DSL service, the broadband
transmission component of BPL Internet access service is not
required to be offered as a telecommunications service.
On March 22, 2007, the Commission adopted a Declaratory
Ruling that wireless broadband services are information services
regulated under Title I of the Communications Act and that
mobile wireless broadband
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Internet access service is not a commercial mobile
service under section 332 of the Act, even when it
uses mobile technologies.
Telecommunications
Regulation
The FCC has classified Internet access services generally as
interstate information services rather than as
telecommunications services regulated under
Title II of the Communications Act. Accordingly, many
regulations that apply to telephone companies and other common
carriers currently do not apply to our wireless broadband
Internet access service. For example, we are not currently
required to contribute a percentage of gross revenues from our
Internet access services to universal service funds, or USF,
used to support local telephone service and advanced
telecommunications services for schools, libraries and rural
health care facilities.
Internet access providers also are not required to file tariffs
with the FCC, setting forth the rates, terms, and conditions of
their Internet access service offerings. The FCC, however, is
currently considering whether to impose various consumer
protection obligations, similar to Title II obligations, on
broadband Internet access providers, including DSL, cable modem
and wireless broadband providers. These requirements may include
obligations related to
truth-in-billing,
slamming, discontinuing service, customer proprietary network
information and federal USF mechanisms. The FCC is also
considering whether to impose automatic roaming obligations on
wireless broadband service providers similar to the obligations
currently imposed on commercial mobile radio services, or CMRS,
providers. Internet access providers are currently subject to
generally applicable state consumer protection laws enforced by
state Attorneys General and general Federal Trade Commission, or
FTC, consumer protection rules.
The FCC has not yet classified interconnected VoIP services as
either information services or telecommunications services under
the Communications Act. In November 2004, the Commission
determined that regardless of their regulatory classification,
certain interconnected VoIP services qualify as interstate
services with respect to economic regulation. The FCC preempted
state regulations that address such issues as entry
certification, tariffing, and E911 requirements, as applied to
certain interconnected VoIP services. On March 21, 2007,
the U.S. Court of Appeals for the Eighth Circuit affirmed
the FCCs November 2004 Order with respect to these VoIP
services, particularly those having portable or nomadic
capability. The jurisdictional classification of other types of
interconnected VoIP services, particularly fixed
services, remains uncertain at this time.
In June 2006, the FCC determined that all
interconnected VoIP services are required to
contribute a percentage of interstate gross revenues to USF
beginning October 1, 2006. On June 1, 2007, the
U.S. Court of Appeals for the District of Columbia Circuit
upheld the FCCs order that interconnected VoIP providers
contribute to the Universal Service Fund on the basis of a 64.9%
safe harbor or on the basis of actual traffic studies. The court
vacated the portions of the order mandating that VoIP providers
using traffic studies get the traffic studies pre-approved by
the FCC. Our VoIP service qualifies as interconnected
VoIP for purposes of USF regulation and therefore is
subject to this fee which may be passed on to our subscribers.
We have incorporated this fee requirement into our VoIP billing
system and collect and remit federal USF payments.
The FCC is conducting a comprehensive proceeding to address all
types of
IP-enabled
services, including interconnected VoIP service, and to consider
what regulations, if any, should be applied to such services, as
use of broadband services becomes more widespread. In June 2005,
the FCC adopted the first set of regulations in this
comprehensive
IP-enabled
proceeding, imposing E911-related requirements on interconnected
VoIP service providers as a condition of offering such service
to consumers. The FCC defined interconnected VoIP
service as voice service that: (i) enables real-time,
two-way voice communications; (ii) requires a broadband
connection from the users location; (iii) requires
IP-compatible
CPE; and (iv) permits users generally to receive calls that
originate on and terminate to the public switched telephone
network, or PSTN. Effective November 28, 2005, all
interconnected VoIP providers are required to transmit, via the
wireline E911 network, all 911 calls, as well as a call-back
number and the callers registered location for each call,
to the appropriate public safety answering point, or PSAP,
provided that the PSAP is capable of receiving and processing
that information. In addition, all interconnected VoIP providers
must have a process to obtain a subscribers registered
location prior to activating service, and a process to allow
their subscribers to update their registered location
immediately if the subscriber moves the service to a different
location. Interconnected VoIP providers are also required to
prominently and in
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plain English advise subscribers of the manner in which dialing
911 using VoIP service is different from dialing 911 service
using traditional telephone service, and to provide warning
labels with VoIP CPE. On May 31, 2007, the Commission
initiated a proceeding proposing to adopt additional E911
obligations for providers of interconnected VoIP service that a
customer may use at more than one location including a
requirement to automatically identify subscribers physical
locations through an automatic location technology that meets
the same accuracy standards that apply to providers of CMRS. The
Commission has also proposed to tighten the current accuracy
standards into a single, technology neutral standard and to
clarify the geographic area over which wireless E911 providers
must satisfy the E911 accuracy requirements. E911 service is
also subject to E911 funding obligations in certain states.
On April 2, 2007, the FCC released an Order imposing,
pursuant to its ancillary authority under Title I, the
Communications Acts Section 222 Customer Proprietary
Network Information, or CPNI, requirements on interconnected
VoIP providers. CPNI includes call detail information about a
customer gained by the service provider as a result of providing
the service, and includes such information as telephone numbers
called, duration of such calls, and calling patterns. In this
same Order, the Commission adopted new CPNI obligations designed
to prevent fraud, unauthorized access to a customers CPNI,
and other abuses of customer privacy, including specific
required customer and law enforcement notification, annual
certification, and explicit consent requirements. These new CPNI
rules which become effective on December 8, 2007 are
applicable to all providers subject to Section 222,
including interconnected VoIP providers, such as Clearwire.
On May 31, 2007, the FCC also adopted new rules requiring
interconnected VoIP service and equipment providers to comply
with the same disability-access regulations that apply to
traditional telephony service and equipment under
Section 255 of the Communications Act, including the
designation of an agent for the receipt and handling of
accessibility complaints and inquiries. In addition, the FCC
adopted requirements that interconnected VoIP providers
contribute to the Telecommunications Relay Service, or TRS fund,
and provide
711-dialing
for hearing and speech-impaired individuals to reach a local TRS
provider pursuant to Section 225 of the Act. While these
requirements became effective on October 5, 2007, the FCC
waived two specific TRS requirements for interconnected VoIP
providers for 6 months the requirement to
transmit 711 calls to a geographically appropriate relay
provider and the requirement that a traditional TRS provider
route emergency-related VoIP 711 calls to the geographically
appropriate PSAPs. The commission also sought comment on various
requests for a more permanent waiver of the TRS rules to VoIP
providers.
On November 8, 2007, the FCC released an order extending
local number portability (LNP) requirements to interconnected
VoIP providers and clarifying that local exchange carriers,
(LECs), and CMRS providers have an obligation to port numbers to
VoIP providers. At the same time the FCC requested comment on
extending porting timeframes to VoIP providers, among other
requirements. These rules become effective March 24, 2008.
The FCC is considering additional regulations, including what
intercarrier compensation regime should apply to interconnected
VoIP traffic over the PSTN. Accordingly, our costs to provide
VoIP service may increase, which will impact our pricing
decisions vis-à-vis our competitors and our profit margins,
if any.
On August 5, 2005, the FCC adopted an Order finding that
both facilities-based broadband Internet access providers and
interconnected VoIP providers are subject to CALEA, which
requires service providers covered by that statute to build
certain law enforcement surveillance assistance capabilities
into their communications networks and to maintain CALEA-related
system security policies and procedures. On May 3, 2006,
the FCC adopted an additional Order addressing the CALEA
compliance obligations of these providers. In that order the
FCC: (i) affirmed the May 14, 2007
assistance-capability compliance deadline; (ii) indicated
compliance standards are to be developed by the industry within
the telecommunications standards setting bodies working together
with law enforcement; (iii) permitted the use of certain
third parties to satisfy CALEA compliance obligations;
(iv) restricted the availability of compliance extensions;
(v) concluded that facilities-based broadband Internet
access providers and interconnected VoIP providers are
responsible for any CALEA development and implementation costs;
(vi) declared that the FCC may pursue enforcement action,
in addition to remedies available through the courts, against
any non-compliant provider; and (vii) adopted interim
progress report filing requirements. The FCC required
facilities-based broadband Internet access providers and
interconnected VoIP providers to comply with CALEAs
assistance-capability requirements by May 14, 2007. We
believe we have taken the necessary actions to be in compliance
with these requirements.
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Regulatory policies applicable to broadband Internet access,
VoIP and other
IP-services
are continuing to develop, and it is possible that our broadband
Internet access and VoIP services could be subject to additional
regulations in the future. The extent of the regulations that
will ultimately be applicable to these services and the impact
of such regulations on the ability of providers to compete are
currently unknown.
Spectrum
Regulation
The FCC routinely reviews its spectrum policies and may change
its position on spectrum allocations from time to time. On
July 29, 2004, the FCC issued rules revising the band plan
for BRS and EBS and establishing more flexible technical and
service rules to facilitate wireless broadband operations in the
2495 to 2690 MHz band. The FCC adopted new rules that
(i) expand the permitted uses of EBS and BRS spectrum so as
to facilitate the provision of high-speed data and voice
services accessible to mobile and fixed users on channels that
previously were used primarily for one-way video delivery to
fixed locations; and (ii) change some of the frequencies on
which BRS and EBS operations are authorized to enable more
efficient operations. These new rules streamlined licensing and
regulatory burdens associated with the prior service rules and
created a PCS-like framework for geographic
licensing and interference protection. Under the new rules,
existing holders of BRS and EBS licenses and leases generally
have exclusive rights over use of their assigned frequencies to
provide commercial wireless broadband services to residences,
businesses, educational and governmental entities within their
geographic markets. These rules also require BRS licensees,
including us, to bear their own expenses in transitioning to the
new band plan and, if they are seeking to initiate a transition,
to pay the costs of transitioning EBS licensees to the new band
plan. The transition rules also provide a mechanism for
reimbursement of transaction costs by other operators in the
market. Additionally, the Commission expanded the scope of its
spectrum leasing rules and policies to allow BRS and EBS
licensees to enter into flexible, long-term spectrum leases.
On April 21, 2006, the FCC issued an Order adopting
comprehensive rules for relocating incumbent BRS operations in
the 2150 to 2162 MHz band. These rules will further
facilitate the transition to the new 2.5 GHz band plan.
This Order is currently subject to Petitions for Reconsideration
and judicial appeal.
On April 27, 2006, the FCC released a further Order
revising and clarifying its BRS/EBS rules. Petitions for
Reconsideration of this Order are pending. Significantly, the
FCC generally reaffirmed the flexible technical and operational
rules upon which our systems are designed and operating. The FCC
clarified the process of transitioning from the old spectrum
plan to the new spectrum plan, but reduced the transition area
from large major economic areas, to smaller, more
manageable basic trading areas. Proponents seeking
to initiate a transition to the new band plan will be given a
30-month
timeframe within which to notify the FCC of their intent to
initiate a transition, followed by a
3-month
planning period and an
18-month
transition completion period. In markets where no proponent
initiates a transition, licensees will be permitted to
self-transition to the new band plan. The FCC adopted a
procedure whereby the proponent will be reimbursed for the value
it adds to a market through reimbursement by other commercial
operators in a market, on a pro-rata basis, after the transition
is completed and the FCC has been notified.
The FCC also clarified the procedure by which BRS and EBS
licensees must demonstrate substantial service, and required
them to demonstrate substantial service by May 1, 2011.
Substantial service showings demonstrate to the FCC that a
licensee is not warehousing spectrum, but rather is using the
spectrum to provide actual service to subscribers. If a BRS or
EBS licensee fails to demonstrate substantial service by
May 1, 2011, its license may be canceled and made available
for re-licensing.
The FCC reaffirmed its decision to permit mobile satellite
service providers to operate in the 2496 to 2500 MHz band
on a shared, co-primary basis with BRS licensees. It also
concluded that spectrum sharing in the 2496 to 2500 MHz
band between BRS licensees and a limited number of incumbent
licensees, such as broadcast auxiliary service, fixed microwave,
and public safety licensees, is feasible. It therefore declined
to require the relocation of those incumbent licensees in the
2496 to 2500 MHz band. Additionally, the FCC reaffirmed its
conclusion that BRS licensees can share the 2496 to
2500 MHz band with industrial, scientific, and medical, or
ISM, devices because ISM devices typically operate in a
controlled environment and use frequencies closer to
2450 MHz. The FCC also reaffirmed its decision to permit
low-power, unlicensed devices to operate in the 2655 to
2690 MHz band, but emphasized that unlicensed devices in
the band may not cause harmful interference to licensed BRS
operations.
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Previously, low-power, unlicensed devices were permitted to
operate in the 2500 to 2655 MHz band, but not in the 2655
to 2690 MHz band.
Finally, the FCC reaffirmed the application of its spectrum
leasing rules and policies to BRS and EBS, and ruled that new
EBS spectrum leases may provide for a maximum term (including
initial and renewal terms) of 30 years. The FCC further
required that new EBS spectrum leases with terms of
15 years or longer must allow the EBS licensee to review
its educational use requirements every five years, beginning at
the fifteenth year of the lease.
We believe that the FCCs BRS/EBS rules will enable us to
pursue our long-term business strategy, although it is possible
that these rules may be interpreted in a manner materially and
adversely to our business. In addition, these rules may be
amended in a manner that materially and adversely affects our
business.
In June, 2006, the Federal Aviation Administration
(FAA), proposed regulations governing potential
interference to navigable airspace from certain FCC-licensed
radio transmitting devices, including 2.5 GHz transmitters.
These regulations would require FAA notice and approval for new
or modified transmitting facilities. If adopted, these
regulations could substantially increase the administrative
burden and costs involved in deploying our service.
In certain international markets, our subsidiaries are subject
to rules that provide that, if the subsidiarys wireless
service is discontinued or impaired for a specified period of
time, the spectrum rights may be revoked.
Internet
Taxation
The Internet Tax Freedom Act, which was signed into law in
October 2007, renewed and extended until November 2014 a
moratorium on taxes on Internet access and multiple,
discriminatory taxes on electronic commerce under the Internet
Tax Freedom Act. This moratorium was scheduled to expire in
November 2007, and its extension preserved the
grandfathering of states that taxed Internet access
prior to October 1998 to allow them to continue to do so. The
moratorium does not apply to taxes levied or measured on net
income, net worth or property value and does not extend to a tax
on telecommunications services. Certain states have enacted
various taxes on Internet access or electronic commerce, and
selected states taxes are being contested. State tax laws
may not be successfully contested and future state and federal
laws imposing taxes or other regulations on Internet access and
electronic commerce may arise, any of which could increase the
cost of our services and could materially and adversely affect
our business.
Intellectual
Property
We review our technological developments with our technology
staff and business units to identify and capture innovative and
novel features of our core technology that provide us with
commercial advantages and file patent applications as necessary
to protect these features both in the United States and
elsewhere. We hold 30 granted U.S. patents (two of which
are jointly held), and we also have ten pending U.S. patent
applications. For our wireless broadband network, the patents
and applications cover features and functionality, including the
ability to manage device power output to ensure frequency
stabilization, as well as the ability to manage network output
and infrastructure in a dynamic output environment to produce,
among other things, reliable network uptime. We hold 21 granted
patents and have 17 pending patent applications in various
foreign jurisdictions. Assuming that all maintenance fees and
annuities continue to be paid, the patents expire on various
dates from 2017 until 2027. Clearwire and the
associated Clearwire corporate logo, ClearBusiness,
ClearPremium, ClearClassic and
ClearValue are among our registered trademarks in
the United States, and we have issued or pending trademark
registrations covering all countries of the European Union and
eight other jurisdictions.
Employees
As of December 31, 2007 we had approximately
1,590 employees in the United States and approximately
400 employees in our international operations. This total
does not include employees of our equity investees.
Our employees enter into agreements containing confidentiality
restrictions. We have never had a work stoppage and no employees
are represented by a labor organization. We believe our employee
relations are good.
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Our
Corporate Information
We are a Delaware corporation. Our principal executive offices
are located at 4400 Carillon Point, Kirkland, Washington 98033,
and our telephone number is
(425) 216-7600.
Our website address is
http://www.clearwire.com.
Unless otherwise indicated, all of the share numbers and per
share prices in this report give effect to a reverse stock split
that became effective on March 1, 2007. Upon the
effectiveness of the reverse split, every three shares of our
Class A common stock were combined into one share of
Class A common stock and every three shares of our
Class B common stock were combined into one share of
Class B common stock. The shares of Class A common
stock issuable on exercise of the warrants and the exercise
price were subject to a proportionate adjustment. As used in
this report, the term common stock means our
Class A common stock and the term capital stock
means our Class A and Class B common stock, unless
otherwise specified.
We are
an early stage company, we have a history of operating losses
and we expect to continue to realize significant net losses for
the foreseeable future.
Clearwire is at an early stage of development and business
strategy implementation. We have recorded a net loss in each
reporting period since our inception, and we cannot anticipate
with certainty what our earnings, if any, will be in any future
period. However, we expect to continue to incur significant net
losses as we develop and deploy our network in new and existing
markets, expand our services and pursue our business strategy.
We intend to invest significantly in our business before we
expect cash flow from operations will be adequate to cover our
anticipated expenses. In addition, at this stage of our
development we are subject to the following risks:
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our results of operations may fluctuate significantly, which may
adversely affect the value of an investment in our Class A
common stock;
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we may be unable to develop and deploy our network, expand our
services, meet the objectives we have established for our
business strategy or grow our business profitably, if at all;
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because of our limited operating history, it may be difficult to
predict accurately our key operating and performance metrics
utilized in budgeting and operational decisions; and
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our network and related technologies may fail or the quality and
number of services we are able to provide may decline if our
network operates at maximum capacity for an extended period of
time or fails to perform to our expectations.
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If we are unable to execute our business strategy and grow our
business, either as a result of the risks identified in this
section or for any other reason, our business, prospects,
financial condition and results of operations will be materially
and adversely affected.
If we
do not obtain additional financing, our business prospects,
financial condition and results of operations will be adversely
affected.
We believe our cash, cash equivalents and marketable securities
afford us adequate liquidity for at least the next
12 months to fund operating losses, capital expenditures,
working capital and current spectrum acquisition commitments,
although we may raise additional capital during this period if
acceptable terms are available. We also expect to require
substantial additional capital in the long-term to fund our
business, including further operating losses, network expansion
plans and spectrum acquisitions, and our success and viability
will depend on our ability to raise such additional capital on
reasonable terms. The amount and timing of our long-term capital
needs will depend in part on the extent of our network
deployment, which we may adjust based on available capital and,
to a lesser degree, based on the schedule on which mobile WiMAX
products become available, both of which are difficult to
estimate at this time. If we cannot secure sufficient additional
funding we may forego strategic opportunities or delay, scale
back and eliminate network deployments, operations, spectrum
acquisitions and investments. Additionally, as our operations
grow and expand, it may become more difficult to modulate our
business plans and strategies based on the availability of
funding.
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We may not be able to secure adequate additional financing when
needed on acceptable terms or at all. To raise additional
capital, we may issue additional equity securities in public or
private offerings, potentially at a price lower than the market
price of our Class A common stock at the time of such
issuance. We will likely seek significant additional debt
financing, in the short-term and the long-term, and, as a
result, will likely incur significant interest expense. Our
existing level of debt may make it more difficult for us to
obtain this debt financing, may reduce the amount of money
available to finance our operations and other business
activities, may expose us to the risk of increasing interest
rates, may make us more vulnerable to general economic downturns
and adverse industry conditions, and may reduce our flexibility
in planning for, or responding to, changing business and
economic conditions. We also may decide to sell additional debt
or equity securities in our domestic or international
subsidiaries, which may dilute our ownership interest in or
reduce or eliminate our income, if any, from those entities. The
recent turmoil in the economy, and the world-wide financial
markets in particular, may make it more difficult for us to
obtain necessary additional capital or financing on acceptable
terms.
Our
substantial indebtedness and restrictive debt covenants could
limit our financing options and liquidity position and may limit
our ability to grow our business.
In 2007, we borrowed $1.25 billion under a senior term loan
facility. We used a portion of the proceeds to repay and retire
existing loans and secured notes. The remainder of the proceeds
will be used for expansion plans, spectrum acquisition, and
general working capital purposes. Our senior term loan facility
provides for quarterly principal payments, with the remaining
balance due on the final maturity date. In general, borrowings
under the facility bear interest based, at our option, at either
the Euro dollar rate or on an alternate base rate, in each case
plus margin. We also borrowed $10.0 million from BCE Nexxia
Corporation, an affiliate of Bell Canada, in June 2006 in
connection with the build-out and deployment of our VoIP
infrastructure.
Our substantial indebtedness could have important consequences
to the holders of our common stock, such as:
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we may not be able to obtain additional financing to fund
working capital, operating losses, capital expenditures or
acquisitions, including spectrum acquisitions, on terms
acceptable to us or at all;
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we may be unable to refinance our indebtedness on terms
acceptable to us, or at all;
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our substantial indebtedness may make us more vulnerable to
economic downturns and limit our ability to withstand
competitive pressures; and
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cash flows from operations and investing activities have been
negative since inception and will continue to be so for some
time, and our remaining cash, if any, may be insufficient to
operate our business.
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Additionally, covenants in the credit agreement governing our
term loan facility impose operating and financial restrictions
on us. These restrictions prohibit or limit our ability, and the
ability of our subsidiaries, to, among other things:
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pay dividends to our stockholders;
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incur, or cause certain of our subsidiaries to incur, additional
indebtedness;
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permit liens on or conduct sales of any assets pledged as
collateral;
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sell all or substantially all of our assets or consolidate or
merge with or into other companies;
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repay existing indebtedness; and
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engage in transactions with affiliates.
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A breach of any of these covenants could result in a default
under our senior term loan facility. If a default causes our
debt repayment obligations to be accelerated, our assets may be
insufficient to repay the amount due in full. If we are unable
to repay or refinance those amounts, the collateral agent for
our senior term loan facility could proceed against the assets
pledged to secure these obligations, which include substantially
all of our assets.
These restrictions may limit our ability to obtain additional
financing, withstand downturns in our business and take
advantage of business opportunities. Moreover, we may seek
additional debt financing on terms that include
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more restrictive covenants, may require repayment on an
accelerated schedule or may impose other obligations that limit
our ability to grow our business, acquire needed assets, or take
other actions we might otherwise consider appropriate or
desirable.
We
have committed to deploy a wireless broadband network using
mobile WiMAX technologies under certain circumstances, even if
there are alternative technologies available in the future that
would be technologically superior or more cost
effective.
Under the terms of our strategic collaboration agreement with
Intel, we have committed to use commercially reasonable efforts
to deploy a mobile WiMAX based network once mobile WiMAX
equipment is commercially available and satisfies certain
technical performance criteria. While we have initiated field
trials of mobile WiMAX jointly conducted with Intel and
Motorola, we cannot assure you that commercial quantities of
mobile WiMAX equipment that meets our requirements will become
available on the schedule we expect, or at all, or that vendors
will continue to develop and produce mobile WiMAX equipment in
the long term. Other competing technologies, such as Long Term
Evolution, or LTE, and Ultra Mobile Broadband, or UMB, may be
developed that have advantages over mobile WiMAX, and operators
of other networks based on those competing technologies may be
able to deploy their networks at a lower cost and more quickly
than the cost and speed with which we deploy our networks, which
may allow those operators to compete more effectively.
Additionally, if other network operators, such as Sprint Nextel
in the U.S., do not continue to deploy mobile WiMAX, equipment
manufacturers may be unwilling to invest the time, money and
resources necessary to further develop infrastructure equipment
and end user devices that meet our business needs. Furthermore,
we are depending on wide scale deployments of mobile WiMAX
networks to drive equipment volumes up and pricing down.
Additionally, mobile WiMAX may not perform as we expect, once
deployed on a commercial basis, and therefore we may not be able
to deliver the quality or types of service we expect. The
process of switching our current markets from Expedience
technology to mobile WiMAX may cost more or be more difficult to
undertake than we expect. We also may discover unanticipated
costs associated with deploying and maintaining our network or
delivering services we must offer in order to remain
competitive. These risks could reduce our subscriber growth,
increase our costs of providing services or increase our churn.
Churn is an industry term we use to measure the rate at which
subscribers terminate service. We calculate this metric by
dividing the number of subscribers who terminate their service
in a given month by the average number of subscribers during
that month, in each case excluding those who subscribe for and
terminate our service within 30 days for any reason or in
the first 90 days of service under certain circumstances.
If
third parties fail to develop and deliver the equipment that we
need for both our existing and future networks, we may be unable
to execute our business strategy or operate our
business.
We currently depend on third parties to develop and deliver
complex systems, software and hardware products and components
for our network in a timely manner, at a high level of quality.
Motorola is our sole supplier of equipment and software for the
Expedience system currently deployed in our pre-WiMAX network,
which was developed by NextNet. The Expedience system consists
of network components used by us and subscriber equipment used
by our subscribers. To successfully execute our business
strategy, Motorola must not only continue to produce the
Expedience system, including the software and hardware
components, and deliver it when needed by us, but must also
continue to further upgrade and evolve the technology for our
business to remain competitive until we fully deploy mobile
WiMAX technologies. Any failure by Motorola to meet these needs
may impair our ability to execute our business strategy and our
ability to operate our business.
For our planned mobile WiMAX deployment, we are relying on third
parties, including Motorola, to develop the network components
and subscriber equipment necessary to build and operate our
mobile WiMAX networks. As mobile WiMAX is a new and highly
sophisticated technology, we cannot be certain that these third
parties will be successful in their development efforts. The
development process for mobile WiMAX network components and
subscriber equipment may be lengthy, has been subject to some
short term delays and may still encounter more significant
delays. If these third parties are unable or unwilling to
develop mobile WiMAX network components and subscriber equipment
on a timely basis that perform according to our expectations, we
may be unable to deploy
22
mobile WiMAX on our networks when we expect, or at all. If we
are unable to deploy mobile WiMAX in a timely manner, we may be
unable to execute our business strategy and our prospects and
results of operations would be harmed.
Many
of our competitors are better established and have significantly
greater resources than we have, which may make it difficult to
attract and retain subscribers.
The market for broadband, voice and related services is highly
competitive, and we compete with several other companies within
each of our markets. Many of our competitors are well
established with larger and better developed networks and
support systems, longer-standing relationships with customers
and suppliers, greater name recognition and greater financial,
technical and marketing resources than we have. Our competitors
may subsidize competing services with revenue from other sources
and, thus, may offer their products and services at prices lower
than ours. Our competitors may also reduce the prices of their
services significantly or may offer broadband connectivity
packaged with other products or services. For example, a number
of broadband providers recently offered significant price
reductions on their services. We may not be able to reduce our
prices or otherwise combine our services with other products or
services to remain competitive with these offerings, which may
make it more difficult to attract and retain subscribers.
Our competitors include:
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cable operators offering high-speed Internet connectivity
services and voice communications;
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incumbent and competitive local exchange carriers providing DSL
services over their existing wide, metropolitan and local area
networks;
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3G cellular, PCS and other wireless providers offering wireless
broadband services and capabilities, including developments in
existing cellular and PCS technology that may increase network
speeds or have other advantages over our services, and the
introduction of future technologies such as Long Term
Evolution or LTE, which may enable these providers to
offer services that are comparable or superior to ours;
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Internet service providers offering
dial-up
Internet connectivity;
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municipalities and other entities operating Wi-Fi networks, some
of which are free or subsidized;
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providers of VoIP and other telephony services;
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wireless Internet service providers using licensed or unlicensed
spectrum;
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satellite and fixed wireless service providers offering or
developing broadband Internet connectivity and VoIP telephony;
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electric utilities and other providers offering or planning to
offer broadband Internet connectivity over power lines; and
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Resellers, mobile virtual network operators, or MVNOs, or
wholesalers providing wireless Internet or other wireless
services using infrastructure developed and operated by others.
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We expect other existing and prospective competitors to adopt
technologies or business plans similar to ours, or seek other
means to develop services competitive with ours, particularly if
our services prove to be attractive in our target markets. For
example, Sprint Nextel has announced its intention to deploy a
mobile WiMAX network, and we believe has begun a soft launch of
its mobile WiMAX service in three markets. Sprint Nextel may
have substantially greater resources available than we do, which
may give them certain advantages over us. Sprint Nextel may
deploy their network in some of the same markets in which we
have deployed or plan to deploy our network. Sprint Nextel or
other operators may deploy their network faster or more broadly
than we do, thereby obtaining a time to market advantage over
us. There can be no assurances that there will be sufficient
customer demand for services offered over mobile WiMAX networks
in the same markets to allow multiple operators, if any, to
succeed. Additionally, AT&T and Verizon Wireless have
announced plans to deploy LTE technology. This service may be
viewed as having certain advantages over mobile WiMAX and may
provide significant competition to WiMAX.
23
We and
our independent public accountants have both identified material
weaknesses and other significant deficiencies in our internal
control over financial reporting during 2005 and 2006. As of
December 31, 2007, we have remediated our material
weaknesses and other significant deficiencies. If we fail to
continue to establish and maintain an effective system of
internal control, we may not be able to report our financial
results accurately or to prevent fraud. Any inability to report
and file our financial results in an accurate and timely manner
could harm our business and adversely impact the trading price
of our Class A common stock.
We produce our consolidated financial statements in accordance
with the requirements of generally accepted accounting
principles in the United States (U.S. GAAP).
Effective internal controls are necessary to provide reliable
financial reports and prevent fraud. If we cannot provide
reliable financial reports or prevent fraud, we may not be able
to manage our business as effectively as we would if an
effective control environment existed, and our business, brand
and reputation with investors may be harmed. We have in the past
discovered, and may in the future discover, areas of our
internal control that need improvement.
We and our independent public accountants identified material
weaknesses in our internal controls during 2005 and 2006. A
material weakness is a deficiency or combination of deficiencies
in internal control over financial reporting such that there is
a reasonable possibility that a material misstatement of the
companys annual or interim financial statements will not
be prevented or detected on a timely basis.
As more fully discussed in Item 9A of this report, Control
and Procedures, in 2007 we remediated our material weaknesses
and significant deficiencies identified during 2005 and 2006. In
addition, based on the work we performed during 2007 on our
internal control over financial reporting, we have not
identified any new material weaknesses as of December 31,
2007. If we do not continue to maintain the controls and
procedures we have established, we could have additional
weaknesses or deficiencies in the future.
We may
experience difficulties in constructing, upgrading and
maintaining our network, which could adversely affect customer
satisfaction, increase subscriber churn and reduce our
revenues.
Our success depends on developing and providing services that
give subscribers a high quality experience. We expect to expend
significant resources in constructing, maintaining and improving
our network. Additionally, as the number of subscribers using
our network increases, as the usage habits of our subscribers
change and as we increase our service offerings, we may need to
upgrade our network to maintain or improve the quality of our
services. If we do not successfully maintain or implement
upgrades to our network, the quality of our services may decline
and the rate of our subscriber churn may increase.
We may experience quality deficiencies, cost overruns and delays
with our construction, maintenance and upgrade projects,
including the portions of those projects not within our control.
The construction of our network requires permits and approvals
from numerous governmental bodies, including municipalities and
zoning boards. Such entities often limit the expansion of
transmission towers and other construction necessary for our
network. Failure to receive approvals in a timely fashion can
delay new market deployments and upgrades in existing markets
and raise the cost of completing construction projects. In
addition, we typically are required to obtain rights from land,
building and tower owners to install the antennas and other
equipment that provide our service to our subscribers. We may
not be able to obtain, on terms acceptable to us or at all, the
rights necessary to construct our network and expand our
services.
We also may face challenges in managing and operating our
network. These challenges include ensuring the availability of
subscriber equipment that is compatible with our network and
managing sales, advertising, customer support, and billing and
collection functions of our business while providing reliable
network service that meets our subscribers expectations.
Our failure in any of these areas could adversely affect
customer satisfaction, increase subscriber churn, increase our
costs, decrease our revenues and otherwise have a material
adverse effect on our business, prospects, financial condition
and results of operations.
24
If we
do not obtain and maintain rights to use licensed spectrum in
one or more markets, we may be unable to operate in these
markets, which could adversely affect our ability to execute our
business strategy.
To offer our services using licensed spectrum both in the United
States and internationally, we depend on our ability to acquire
and maintain sufficient rights to use spectrum through ownership
or long-term leases in each of the markets in which we operate
or intend to operate. Obtaining the necessary amount of licensed
spectrum in these markets can be a long and difficult process
that can be costly and require a disproportionate amount of our
resources. We may not be able to acquire, lease or maintain the
spectrum necessary to execute our business strategy. In
addition, we have in the past and may continue to spend
significant resources to acquire spectrum in additional or
existing markets, even if the amount of spectrum actually
acquired in certain markets is not adequate to deploy our
network on a commercial basis in all such markets.
Using licensed spectrum, whether owned or leased, poses
additional risks to us, including:
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inability to satisfy build-out or service deployment
requirements upon which some of our spectrum licenses or leases
are, or may be, conditioned;
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adverse changes to regulations governing our spectrum rights;
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inability to use a portion of the spectrum we have acquired or
leased due to interference from licensed or unlicensed operators
in our band or in adjacent bands;
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refusal by the FCC or one or more foreign licensing authorities
to recognize our acquisition or lease of spectrum licenses from
others or our investments in other license holders;
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inability to offer new services or to expand existing services
to take advantage of new capabilities of our network resulting
from advancements in technology due to regulations governing our
spectrum rights;
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inability to control leased spectrum due to contractual disputes
with, or the bankruptcy or other reorganization of, the license
holders, or third parties;
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failure of the FCC or other regulators to renew our spectrum
licenses as they expire and our failure to obtain extensions or
renewals of spectrum leases on acceptable terms before they
expire;
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failure to obtain extensions or renewals of spectrum leases, or
an inability to renegotiate such leases, on terms acceptable to
us before they expire;
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potentially significant increases in spectrum prices, because of
increased competition for the limited supply of licensed
spectrum both in the United States and internationally; and
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invalidation of our authorization to use all or a significant
portion of our spectrum, resulting in, among other things,
impairment charges related to assets recorded for such spectrum.
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We expect the FCC to make additional spectrum available from
time to time, including 60 MHz of spectrum in the
700 MHz band. The FCC is currently conducting an auction
for the 700 MHz band spectrum. Additionally, other
companies hold spectrum rights that could be made available for
lease or sale. The availability of additional spectrum in the
marketplace could change the market value of spectrum rights
generally and, as a result, may adversely affect the value of
our spectrum assets.
Interruption
or failure of our information technology and communications
systems could impair our ability to provide our services, which
could damage our reputation and harm our operating
results.
We have experienced service interruptions in some markets in the
past and may experience service interruptions or system failures
in the future. Any service interruption adversely affects our
ability to operate our business and could result in an immediate
loss of revenues. If we experience frequent or persistent system
or network failures, our reputation and brand could be
permanently harmed. We may make significant capital expenditures
in an effort to increase the reliability of our systems, but
these capital expenditures may not achieve the results we expect.
25
Our services depend on the continuing operation of various
information technology and communications systems, some of which
are not within our control. Any damage to or failure of these
systems could result in interruptions in our service.
Interruptions in our service could reduce our revenues and
profits, and our brand could be damaged if people believe our
network is unreliable. Our systems are vulnerable to damage or
interruption from earthquakes, terrorist attacks, floods, fires,
power loss, telecommunications failures, computer viruses,
computer denial of service attacks or other attempts to harm our
systems, and similar events. Some of our systems are not fully
redundant, and our disaster recovery planning may not be
adequate. The occurrence of a natural disaster or unanticipated
problems at our network centers could result in lengthy
interruptions in our service and adversely affect our operating
results.
Acquisitions,
investments and other strategic transactions could result in
operating difficulties, dilution and distractions from our core
business.
We have entered, and may in the future enter, into strategic
transactions, including strategic supply and service agreements
and acquisitions of other assets and businesses. Any such
transactions can be risky, may require a disproportionate amount
of our management and financial resources and may create
unforeseen operating difficulties or expenditures, including:
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difficulties in integrating acquired technologies and operations
into our business while maintaining uniform standards, controls,
policies and procedures;
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obligations imposed on us by counterparties in such transactions
that limit our ability to obtain additional financing, our
ability to compete in geographic areas or specific lines of
business, or other aspects of our operational flexibility;
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increasing cost and complexity of assuring the implementation
and maintenance of adequate internal control and disclosure
controls and procedures, and of obtaining the reports and
attestations required under the Securities Exchange Act of 1934;
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Increasing cost and complexity in the correct application of
U.S. GAAP;
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difficulties in consolidating and preparing our financial
statements due to poor accounting records, weak financial
controls and, in some cases, procedures at acquired entities not
based on U.S. GAAP particularly those entities in which we
lack control; and
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inability to predict or anticipate market developments and
capital commitments relating to the acquired company, business
or technology.
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In the past, some of our business acquisitions have given rise
to significant deficiencies in financial reporting controls in
certain areas such as cash, inventory, fixed assets, prepaid
site rentals, value-added tax receivables and depreciation
expense, as well as inconsistent preparation of monthly routine
elimination entries that resulted in intercompany transactions
not properly eliminated in consolidation at year end.
In addition, acquisitions of, and investments in, businesses
organized outside the United States often can involve additional
risks, including:
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difficulties, as a result of distance, language, legal or
culture differences, in developing, staffing and managing
foreign operations;
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lack of control over our equity investees and other business
relationships;
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currency exchange rate fluctuations;
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longer payment cycles;
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credit risk and higher levels of payment fraud;
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foreign exchange controls that might limit our control over, or
prevent us from repatriating, cash generated outside the United
States;
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potentially adverse tax consequences;
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expropriation or nationalization of assets;
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differences in regulatory requirements that may make it
difficult to offer all of our services;
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unexpected changes in regulatory requirements;
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difficulties in foreign corporate law that have and may create
additional administrative burdens and legal risks;
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increased management time and resources to manage overseas
operations;
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trade barriers and import and export restrictions; and
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political or social unrest and economic instability.
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The anticipated benefit of any of our strategic transactions may
never materialize. Future investments, acquisitions or
dispositions, or similar arrangements could result in dilutive
issuances of our equity securities, the incurrence of debt,
contingent liabilities or amortization expenses, or write-offs
of goodwill, any of which could harm our financial condition.
Any such transactions may require us to obtain additional equity
or debt financing, which may not be available on favorable
terms, or at all. We have experienced certain of these risks in
connection with our acquisitions and investments in the past,
and the occurrence of any of these risks in the future may have
a material adverse effect on our business. Additionally, the
uncertainty in the credit markets may adversely affect the value
and liquidity of some of our short-term investments. For a more
detailed discussion of this issue, see Note 5, Short-Term
Investments, in the notes to our consolidated financial
statements.
A
number of our significant business arrangements are between us
and parties that have an investment in or a fiduciary duty to
our company, and the terms of those arrangements may not be
beneficial to us.
We are party to a number of services, development, supply and
licensing agreements with parties that have an ownership or
fiduciary relationship with us, including agreements between us
and Intel, Motorola, and Bell Canada. These relationships may
create actual or potential conflicts of interest, and may cause
the parties to these arrangements to make decisions or take
actions that do not reflect our best interests.
Our commercial agreements with Motorola, Intel and Bell Canada
were entered into concurrently with purchases of our shares of
capital stock by each of these entities or their affiliates.
None of these agreements restrict these parties from entering
into similar arrangements with other parties. Neither Intel,
Motorola or any of our other debt or equity security holders,
nor any of their respective affiliates, are obligated to
purchase equity from, or contribute or lend funds to, us or any
of our subsidiaries or equity investees.
The
industries in which we operate are continually evolving, which
makes it difficult to evaluate our future prospects and
increases the risk of your investment. Our products and services
may become obsolete, and we may not be able to develop
competitive products or services on a timely basis or at
all.
The broadband services industry is characterized by rapid
technological change, competitive pricing, frequent new service
introductions, evolving industry standards and changing
regulatory requirements. Additionally, our planned deployment of
mobile WiMAX depends on the development of network equipment and
subscriber devices based on the mobile WiMAX standard. Although
we have begun mobile WiMAX field trials which have yielded
positive initial results, each of these development efforts
faces a number of continuing technological and operational
challenges. We believe that our success depends on our ability
to anticipate and adapt to these and other challenges and to
offer competitive services on a timely basis. We face a number
of difficulties and uncertainties associated with our reliance
on future technological development, such as:
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existing service providers may use more traditional and
commercially proven means to deliver similar or alternative
services;
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new service providers may use more efficient, less expensive
technologies, including products not yet invented or developed;
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consumers may not subscribe to our services;
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we may not be able to realize economies of scale;
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we may be unable to respond successfully to advances in
competing technologies in a timely and cost-effective manner;
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we may lack the financial and operational resources necessary to
enable migration toward mobile WiMAX technology and the
development and deployment of network components and software
that do not currently exist and that may require substantial
upgrades to or replacements of existing infrastructure; and
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existing, proposed or undeveloped technologies may render our
existing or planned services less profitable or obsolete.
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As our services and those offered by our competitors develop,
businesses and consumers, including our current subscribers, may
not accept our services as an attractive alternative to other
means of receiving wireless broadband services.
We
rely on highly skilled executives and other personnel. If we
cannot retain and motivate key personnel, we may be unable to
implement our business strategy.
Our future success depends largely on the expertise and
reputation of Mr. McCaw and the members of our senior
management team, including Benjamin G. Wolff, Chief Executive
Officer, Perry S. Satterlee, President and Chief Operating
Officer, John Saw, our Chief Technology Officer, Scott
Richardson, our Chief Strategy Officer, R. Gerard Salemme,
our Executive Vice President for Strategy, Policy and External
Affairs, and John A. Butler, our Chief Financial Officer. In
addition, we intend to hire additional highly skilled
individuals to staff our operations in the United States and
internationally. Loss of any of our key personnel or the
inability to recruit and retain qualified individuals for our
domestic and international operations could adversely affect our
ability to implement our business strategy and operate our
business.
In addition, to successfully introduce our services in new
markets and grow our business in existing domestic and
international markets, we rely on the skills of our general
managers in these markets. If we cannot hire, train and retain
motivated and well-qualified individuals to serve as general
managers in our markets, we may face difficulties in attracting,
recruiting and retaining various sales and support personnel in
those markets, which may lead to difficulties in growing our
subscriber base.
Certain
aspects of our VoIP telephony services differ from traditional
telephone service, which may limit the attractiveness of our
services.
We intend to continue to offer VoIP telephony as a value added
service with our wireless broadband Internet service. Our VoIP
telephony services differ from traditional phone service in
several respects, including:
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our subscribers may experience lower call quality than they
experience with traditional wireline telephone companies,
including static, echoes and transmission delays;
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our subscribers may experience higher dropped-call rates than
they experience with traditional wireline telephone companies;
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a power loss or Internet access interruption may cause our
service to be interrupted.
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If our subscribers do not accept the differences between our
VoIP telephony services and traditional telephone service, they
may not adopt or keep our VoIP telephony services or our other
services, or may choose to retain or return to service provided
by traditional telephone companies.
Although we are compliant with the Federal Communication
Commissions (FCC) November 28, 2005
mandate that all interconnected VoIP providers transmit all 911
calls to the appropriate public safety answering point
(PSAP), our VoIP emergency calling service is
significantly more limited than the emergency calling services
offered by traditional telephone companies. Our VoIP emergency
calling service can transmit to a dispatcher at a PSAP only the
location information that the subscriber has registered with us,
which may at times be different from the actual location at the
time of the call due to the portability of our services. As a
result, if our
28
subscribers fail to properly register or update their registered
locations, our emergency calling systems may not assure that the
appropriate PSAP is reached and may cause significant delays, or
even failures, in callers receipt of emergency assistance.
Our failure to develop or operate an adequate emergency calling
service could subject us to substantial liabilities and may
result in delays in subscriber adoption of our VoIP services or
our other services, abandonment of our services by subscribers,
and litigation costs, damage awards and negative publicity, any
of which could harm our business, prospects, financial condition
or results of operations.
Finally, potential changes by the FCC to current intercarrier
compensation mechanisms could result in significant changes to
our costs of providing VoIP telephony, thereby eliminating
pricing benefits between VoIP telephony services and traditional
telephone services and our potential profitability.
Our
activities outside the United States operate in a competitive
environment different than the environment within the United
States. Any difficulties in managing these businesses could
occupy a disproportionate amount of our managements
attention and disrupt our operations.
We operate or hold spectrum outside of the United States through
our subsidiaries in Belgium, Ireland, Germany, Poland, Romania
and Spain and through equity investees in Denmark and Mexico. We
may elect to pursue additional opportunities in certain
international markets through acquisitions and strategic
alliances. Our activities outside the United States operate in
different environments than we face in the United States,
particularly with respect to competition. Due to these
differences, our activities outside the United States may
require a disproportionate amount of our management and
financial resources, which could disrupt our operations and
adversely affect our business elsewhere.
In a number of international markets, we face substantial
competition from local service providers that offer or may offer
their own wireless broadband or VoIP telephony services and from
other companies that provide Internet connectivity services. We
may face heightened challenges in gaining market share,
particularly in certain European countries, where a large
portion of the population already has broadband Internet
connectivity and incumbent companies already have a dominant
market share in their service areas. Furthermore, foreign
providers of competing services may have a substantial advantage
over us in attracting subscribers due to a more established
brand, greater knowledge of local subscribers preferences
and access to significant financial or strategic resources.
In addition, in some international markets, foreign governmental
authorities may own or control the incumbent telecommunications
companies operating under their jurisdiction. Established
relationships between government-owned or government-controlled
telecommunications companies and their traditional local
telecommunications providers often limit access of third parties
to these markets. The successful expansion of our international
operations in some markets may depend on our ability to locate,
form and maintain strong relationships with established local
communication services and equipment providers. Failure to
establish these relationships or to market or sell our products
and services successfully could limit our ability to attract
subscribers to our services.
We may
be unable to protect our intellectual property, which could
reduce the value of our services and our brand.
Our ability to compete effectively depends on our ability to
protect our proprietary network and system designs. We may not
be able to safeguard and maintain our proprietary rights. We
rely on patents, trademarks and policies and procedures related
to confidentiality to protect our intellectual property. Some of
our intellectual property, however, is not covered by any of
these protections.
Our pending patent applications may not be granted or, in the
case of patents issued or to be issued, the claims allowed may
not be sufficiently broad to protect our intellectual property.
Even if all of our patent applications were issued and were
sufficiently broad, our patents may be challenged or
invalidated. In addition, the United States Patent and Trademark
Office may not grant federal registrations based on our pending
trademark applications. Even if federal registrations are
granted, these trademark rights may be challenged. Moreover,
patent and trademark applications filed in foreign countries may
be subject to laws, rules and procedures that are substantially
different from those of the United States, and any foreign
patents may be difficult and expensive to obtain and enforce. We
could, therefore, incur substantial costs in prosecuting patent
and trademark infringement suits or otherwise protecting our
intellectual property rights.
29
We
could be subject to claims that we have infringed on the
proprietary rights of others, which claims would likely be
costly to defend, could require us to pay damages and could
limit our ability to use necessary technologies in the
future.
Competitors or other persons may have independently developed or
patented technologies or processes that are substantially
equivalent or superior to ours or that are necessary to permit
us to deploy and operate our network, whether based on
Expedience or mobile WiMAX technology, or to offer additional
services, such as VoIP, or competitors may develop or patent
such technologies or processes in the future. These persons may
claim that our services and products infringe on these patents
or other proprietary rights. For instance, certain third parties
claim that they hold patents relating to certain aspects of
mobile WiMAX and VoIP technology. These third parties may seek
to enforce these patent rights against the operators of mobile
WiMAX networks and VoIP telephony service providers, such as us.
Defending against infringement claims, even meritless ones,
would be time consuming, distracting and costly. If we are found
to be infringing the proprietary rights of a third party, we
could be enjoined from using such third partys rights, may
be required to pay substantial royalties and damages, and may no
longer be able to use the intellectual property subject to such
rights on acceptable terms or at all. Failure to obtain licenses
to intellectual property held by third parties on reasonable
terms, or at all, could delay or prevent the development or
deployment of our services and could cause us to expend
significant resources to develop or acquire non-infringing
intellectual property.
If our
data security measures are breached, subscribers may perceive
our network and services as not secure.
Our network security and the authentication of our subscriber
credentials are designed to protect unauthorized access to data
on our network. Because techniques used to obtain unauthorized
access to or to sabotage networks change frequently and may not
be recognized until launched against us, we may be unable to
anticipate or implement adequate preventive measures against
unauthorized access or sabotage. Consequently, unauthorized
parties may overcome our network security and obtain access to
data on our network, including on a device connected to our
network. In addition, because we operate and control our network
and our subscribers Internet connectivity, unauthorized
access or sabotage of our network could result in damage to our
network and to the computers or other devices used by our
subscribers. An actual or perceived breach of network security,
regardless of our responsibility, could harm public perception
of the effectiveness of our security measures, adversely affect
our ability to attract and retain subscribers, expose us to
significant liability and adversely affect our business
prospects.
Our
business depends on a strong brand, and if we do not maintain
and enhance our brand, our ability to attract and retain
subscribers may be impaired and our business and operating
results adversely affected.
We believe that our brand is a critical part of our business.
Maintaining and enhancing our brand may require us to make
substantial investments with no assurance that these investments
will be successful. If we fail to promote and maintain the
Clearwire brand, or if we incur significant expenses
to promote the brand and are still unsuccessful in maintaining a
strong brand, our business, prospects, operating results and
financial condition may be adversely affected. We anticipate
that maintaining and enhancing our brand will become
increasingly important, difficult and expensive.
We are
subject to extensive regulation that could limit or restrict our
activities and adversely affect our ability to achieve our
business objectives. If we fail to comply with these
regulations, we may be subject to penalties, including fines and
suspensions, which may adversely affect our financial condition
and results of operations.
Our acquisition, lease, maintenance and use of spectrum licenses
are extensively regulated by federal, state, local and foreign
governmental entities. These regulations are subject to change
over time. In addition, a number of other federal, state, local
and foreign privacy, security and consumer laws also apply to
our business, including our interconnected VoIP telephony
service. These regulations and their application are subject to
continual change as new legislation, regulations or amendments
to existing regulations are adopted from time to time by
governmental or regulatory authorities, including as a result of
judicial interpretations of such laws and regulations. For
example,
30
it is also possible that the FCC could subject our capital stock
to foreign ownership limitations. If our capital stock were to
become subject to such limitations, owners of our capital stock
may become subject to obligatory redemption provisions, such as
those in our certificate of incorporation. Such restrictions may
also decrease the value of our stock by reducing the pool of
potential investors in our company and making the acquisition of
control of us by potential foreign investors more difficult.
Current regulations directly affect the breadth of services we
are able to offer and may impact the rates, terms and conditions
of our services. Regulation of companies that offer competing
services, such as cable and DSL providers and incumbent
telecommunications carriers, also affects our business
indirectly.
In order to provide interconnected VoIP service we
need to obtain, on behalf of our customers, North American
Numbering Plan telephone numbers, the availability of which may
be limited in certain geographic areas of the United States and
subject to other regulatory restrictions. As an
interconnected VoIP and facilities-based wireless
broadband provider, we were required under FCC rules, by May
2007, to comply with the Communications Assistance for Law
Enforcement Act (CALEA), which requires service
providers to build certain capabilities into their networks and
to accommodate wiretap requests from law enforcement agencies.
In addition, the FCC or other regulatory authorities may in the
future restrict our ability to manage subscribers use of
our network, thereby limiting our ability to prevent or manage
subscribers excessive bandwidth demands. To maintain the
quality of our network and user experience, we manage our
network by limiting the bandwidth used by our subscribers
applications, in part by restricting the types of applications
that may be used over our network. These practices are set forth
in our Acceptable Use Policy. Some providers and users of these
applications have objected to this practice. If the FCC or other
regulatory authorities were to adopt regulations that constrain
our ability to employ bandwidth management practices, excessive
use of bandwidth-intensive applications would likely reduce the
quality of our services for all subscribers. A decline in the
quality of our services could harm our business, or even result
in litigation from dissatisfied subscribers.
In certain of our international markets, we may require a
license for the use of regulated radio frequencies from
national, provincial or local regulatory authorities before
providing our services. Where required, regulatory authorities
may have significant discretion in granting the licenses and in
determining the conditions for use of the frequencies covered by
the licenses, and are often under no obligation to renew the
licenses when they expire. Additionally, even where we currently
hold a license or successfully obtain a license in the future,
we may be required to seek modifications to the license or the
regulations applicable to the license to implement our business
strategy. For example, in certain international markets, the
licenses we hold, and the applicable rules and regulations,
currently do not specifically permit us to provide mobile
services. Thus, prior to offering mobile services to our
subscribers in those markets, absent action by the regulatory
authorities to modify the licenses and applicable rules, we may
need to obtain the approval of the proper regulatory authorities.
The breach of a license or applicable law, even if inadvertent,
can result in the revocation, suspension, cancellation or
reduction in the term of a license or the imposition of fines.
In addition, regulatory authorities may grant new licenses to
third parties, resulting in greater competition in territories
where we already have rights to licensed spectrum. In order to
promote competition, licenses may also require that third
parties be granted access to our bandwidth, frequency capacity,
facilities or services. We may not be able to obtain or retain
any required license, and we may not be able to renew our
licenses on favorable terms, or at all.
Our wireless broadband and VoIP telephony services may become
subject to greater state or federal regulation in the future.
The scope of the additional regulations that may apply to VoIP
telephony services providers and the impact of such regulations
on providers competitive position are presently unknown.
We are
a controlled company within the meaning of the
Nasdaq Marketplace Rules and, as a result, rely on exemptions
from certain corporate governance requirements.
As of December 31, 2007, Mr. McCaw and Intel Capital
Corporation, a wholly owned subsidiary of Intel Corporation, and
their respective affiliates together beneficially own shares
representing a majority voting power of our outstanding capital
stock. Affiliates of Mr. McCaw and Intel Capital are
parties to a voting agreement that effectively permits
Mr. McCaw, through Eagle River Holdings, LLC, or ERH, to
designate four of our directors and Intel Capital to designate
two of our directors as long as Intel Capital and its affiliates
hold at least 15% of our
31
outstanding capital stock and one of our directors as long as
Intel Capital and its affiliates hold at least 7.5% of our
outstanding capital stock. Because of the voting agreement and
their aggregate voting power, Mr. McCaw and Intel Capital
share the ability to elect a majority of our directors.
As a result of the combined voting power of Mr. McCaw and
Intel Capital and their voting agreement, we rely on exemptions
from certain Nasdaq corporate governance standards. Under the
Nasdaq Marketplace Rules, a company of which more than 50% of
the voting power is held by a single person or a group of people
is a controlled company and may elect not to comply
with certain Nasdaq Global Select Market corporate governance
requirements, including (1) the requirement that a majority
of the board of directors consist of independent directors,
(2) the requirement that the compensation of officers be
determined, or recommended to the board of directors for
determination, by a majority of the independent directors or a
compensation committee comprised solely of independent directors
and (3) the requirement that director nominees be selected,
or recommended for the board of directors selection, by a
majority of the independent directors or a nominating committee
comprised solely of independent directors with a written charter
or board resolution addressing the nomination process. Unless we
choose to no longer rely on these exemptions in the future, you
will not have the same protections afforded to stockholders of
companies that are subject to all of the Nasdaq Global Select
Market corporate governance requirements.
Mr. McCaw
and Intel Capital are our largest stockholders, and as a result
they can exert control over us and may have actual or potential
interests that may diverge from yours.
As of December 31, 2007, Mr. McCaw and his affiliates
own Class A common stock and Class B common stock
representing approximately 48% of our combined voting power.
Intel Capital and its affiliates own Class A common stock
and Class B common stock representing approximately 30% of
our combined voting power as of that date. By virtue of a voting
agreement, Mr. McCaw, and Intel Capital, along with their
respective affiliates, collectively own Class A common
stock and Class B common stock representing approximately
78% of our combined voting power. Mr. McCaw and Intel
Capital may have interests that diverge from those of other
holders of our capital stock. As a result, ERH and Intel Capital
may vote their shares of capital stock to cause us to take
actions that may conflict with your best interests as a
stockholder, which could adversely affect our results of
operations and the trading price of our Class A common
stock. Further, under the provisions of our fourth amended and
restated certificate of incorporation, Mr. McCaw and Intel
Capital, along with their respective affiliates, may, without
causing conversion to Class A common stock, transfer their
shares of Class B common stock to certain affiliated
parties or to any unaffiliated party that provides a voting
proxy over the transferred shares of Class B common stock.
This would allow Mr. McCaw and Intel Capital, along with
their respective affiliates, to retain the right to exercise the
voting power attributed to any shares of Class B common
stock which they sell or transfer so long as they have been
granted a proxy associated with such shares. Moreover, subject
to their fiduciary duty obligations, the directors appointed by
Mr. McCaw, Intel Capital and Bell Canada, so long as they
represent a majority of directors present at any meeting at
which an action is taken, acting together could cause us to
issue shares of Class B common stock or other classes of
common or preferred stock to persons or in a manner that would
further concentrate the voting control of or, in the case of
preferred stock, that could convey economic preferences over,
our Class A common stock.
Through his control of ERH, Mr. McCaw has the ability to
exert significant influence over our management, affairs and all
matters requiring stockholder approval, including the approval
of significant corporate transactions, a sale of our company,
decisions about our capital structure and, subject to our
agreements with Bell Canada and Intel Capital, the composition
of our board of directors. Furthermore, in addition to
Mr. McCaw, certain members of our management team are
employed by, or have interests in, ERH, including
Mr. Wolff, our Chief Executive Officer, who serves as
President of ERH. Under the voting agreement between Intel
Capital and ERH, each party has agreed to vote its shares in
favor of four directors designated by ERH and for two directors
designated by Intel Capital, for so long as Intel Capital holds
at least 15% of our outstanding capital stock, and for one
director designated by Intel Capital, for so long as Intel
Capital holds at least 7.5% of our outstanding capital stock.
Intel currently has the right to designate two directors,
although it has only designated one director to our board at
this time. ERHs right to cause Intel to vote its shares in
favor of four individuals designated by ERH is not subject to
any minimum share ownership requirement. Under the voting
agreement, ERH will retain these rights even if ERH no longer
holds any
32
shares of our capital stock. In addition, if all of ERHs
shares of our Class B common stock were to convert into
Class A common stock and Intel Capital did not convert any
of their shares of our Class B common stock to Class A
common stock, Intel Capital would beneficially own shares of
common stock representing approximately 50% of our voting power.
As a result, Intel Capital would be able to exercise effective
control over our company, subject to Intel Capitals voting
agreement with ERH.
Since
our initial public offering in March 2007, the market price of
our common stock has been and may continue to be
volatile.
The trading price of our Class A common stock following the
offering has been volatile and could be subject to further
fluctuations in price in response to various factors, some of
which are beyond our control. These factors include:
|
|
|
|
|
quarterly variations in our results of operations or those of
our competitors, either alone or in comparison to analysts
expectations;
|
|
|
|
announcements by us or our competitors of acquisitions, new
products, significant contracts, commercial relationships or
capital commitments;
|
|
|
|
announcements by us regarding the entering into, or termination
of, material transactions;
|
|
|
|
disruption to our operations or those of other companies
critical to our network operations;
|
|
|
|
the emergence of new competitors or new technologies;
|
|
|
|
market perceptions relating to the deployment of mobile WiMAX
Networks by other operators, including Sprint Nextel;
|
|
|
|
our ability to develop and market new and enhanced products on a
timely basis;
|
|
|
|
seasonal or other variations in our subscriber base;
|
|
|
|
commencement of, or our involvement in, litigation;
|
|
|
|
availability of additional spectrum;
|
|
|
|
dilutive issuances of our stock or the stock of our
subsidiaries, or the incurrence of additional debt including
upon the exercise of outstanding warrants and options;
|
|
|
|
changes in our board or management;
|
|
|
|
adoption of new or different accounting standards;
|
|
|
|
changes in governmental regulations or the status of our
regulatory approvals;
|
|
|
|
changes in earnings estimates or recommendations by securities
analysts;
|
|
|
|
announcements regarding mobile WiMAX and other technical
standards;
|
|
|
|
the availability or perceived availability of additional capital
and market perceptions relating to our access to such capital;
|
|
|
|
general economic conditions and slow or negative growth of
related markets.
|
In addition, the stock market in general, and the market for
shares of technology companies in particular, has experienced
price and volume fluctuations that have often been unrelated or
disproportionate to the operating performance of those
companies. We expect the price of our Class A common stock
will be subject to continued volatility. In addition, in the
past, following periods of volatility in the trading price of a
companys securities, securities class action litigation or
shareholder derivative suits have often been instituted against
those companies. Such litigation, if instituted against us,
could result in substantial costs and divert our
managements attention and resources.
33
|
|
ITEM 1B.
|
Unresolved
Staff Comments
|
We have received no written comments regarding our periodic or
current reports from the staff of the SEC that were issued
180 days or more preceding the end of our fiscal year 2007
that remain unresolved.
Our executive offices are currently located in Kirkland,
Washington, where we lease approximately 68,500 square feet
of space. The lease will continue until 2013.
We believe that substantially all of our property and equipment
is in good condition, subject to normal wear and tear. We
believe that our current facilities have sufficient capacity to
meet the projected needs of our business for the next twelve
months.
The following table lists our significant properties and the
inside square footage of those properties:
|
|
|
|
|
|
|
Approximate Size
|
City, State
|
|
(Square Feet)
|
|
Kirkland, WA (headquarters and administrative)
|
|
|
68,500
|
|
Milton, FL (call center)
|
|
|
40,000
|
|
Las Vegas, NV (call center)
|
|
|
30,000
|
|
Henderson, NV (administrative and warehouse space)
|
|
|
29,000
|
|
Vienna, Austria (shared service center)
|
|
|
4,500
|
|
We lease additional office space in many of our current and
planned markets. We also lease approximately 85 retail
stores and mall kiosks. Our retail stores, excluding mall
kiosks, range in size from approximately 480 square feet to
1,500 square feet, with leases having terms typically from
three to seven years. Internationally we have offices in
Bucharest, Romania, Brussels, Belgium, Dublin, Ireland, Madrid,
Spain and Warsaw, Poland.
|
|
ITEM 3.
|
Legal
Proceedings
|
We are a party to various pending judicial and administrative
proceedings. Our management and legal counsel have reviewed the
probable outcome of these proceedings, the costs and expenses
reasonably expected to be incurred, the availability and limits
of our insurance coverage, and our established liabilities.
While the outcome of the pending proceedings cannot be predicted
with certainty, based on our review, we believe that any
unrecorded liability that may result will not have a material
adverse effect on our liquidity, financial condition or results
of operations.
|
|
ITEM 4.
|
Submission
of Matters to a Vote of Security Holders
|
There were no matters submitted to a vote of stockholders during
the fourth quarter of fiscal year 2007.
34
PART II
|
|
ITEM 5.
|
Market
for Registrants Common Equity, Related Stockholder
Matters, and Issuer Purchases of Equity Securities
|
Market
Prices of Common Stock
Our common stock is traded on the Nasdaq Global Market under the
symbol CLWR. The following table sets forth the high
and low sales prices of our common stock as reported on the
Nasdaq Global Market:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2007
|
|
|
High
|
|
Low
|
|
Quarter Ended March 31, 2007 (beginning on March 8,
2007)
|
|
$
|
24.62
|
|
|
$
|
20.02
|
|
Quarter Ended June 30, 2007
|
|
$
|
25.01
|
|
|
$
|
16.44
|
|
Quarter Ended September 31, 2007
|
|
$
|
33.30
|
|
|
$
|
20.65
|
|
Quarter Ended December 31, 2007
|
|
$
|
23.89
|
|
|
$
|
12.17
|
|
The last reported sales price of our common stock on the Nasdaq
Global Market on March 3, 2008 was $14.50.
As of March 3, 2008 there were 253 holders of record
of our common stock. As many of our shares of common stock are
held by brokers and other institutions on behalf of
shareholders, we are unable to estimate the total number of
beneficial holders of our common stock represented by these
record holders.
Dividend
Policy
Our policy has been to retain cash to fund future growth.
Accordingly, we have not paid dividends and do not anticipate
declaring dividends on our common stock in the foreseeable
future. The covenants in our senior term loan facility limit our
ability to declare dividends.
Unregistered
Securities Sold in 2007
All information regarding the sale of any unregistered
securities in 2007 has been previously disclosed in the
Companys
Form 10-Q
Filings.
35
Performance
Graph
The graph below compares the annual percentage change in the
cumulative total return on the Companys Common Stock with
the Nasdaq Composite Index and the Nasdaq Telecom Index. The
graph shows the value as of December 31, 2007, of $100
invested on March 8, 2007 in our common stock, the Nasdaq
Composite Index and the Nasdaq Telecom Index.
Comparison
of Cumulative Total Returns
Among Clearwire Corporation, Nasdaq Composite Index, and Nasdaq
Telecom Index
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3/8/2007
|
|
|
|
3/30/2007
|
|
|
|
4/30/2007
|
|
|
|
5/31/2007
|
|
|
|
6/29/2007
|
|
|
|
7/31/2007
|
|
|
|
8/31/2007
|
|
|
|
9/28/2007
|
|
|
|
10/31/2007
|
|
|
|
11/30/2007
|
|
|
|
12/31/2007
|
|
Clearwire
|
|
|
$
|
100.00
|
|
|
|
$
|
83.14
|
|
|
|
$
|
72.83
|
|
|
|
$
|
79.20
|
|
|
|
$
|
99.23
|
|
|
|
$
|
115.88
|
|
|
|
$
|
86.92
|
|
|
|
$
|
99.27
|
|
|
|
$
|
83.39
|
|
|
|
$
|
63.24
|
|
|
|
$
|
55.69
|
|
Nasdaq Composite
Index
|
|
|
$
|
100.00
|
|
|
|
$
|
101.42
|
|
|
|
$
|
105.75
|
|
|
|
$
|
109.08
|
|
|
|
$
|
109.03
|
|
|
|
$
|
106.61
|
|
|
|
$
|
108.74
|
|
|
|
$
|
113.14
|
|
|
|
$
|
119.74
|
|
|
|
$
|
111.44
|
|
|
|
$
|
111.08
|
|
Nasdaq Telecom
Index
|
|
|
$
|
100.00
|
|
|
|
$
|
100.59
|
|
|
|
$
|
103.85
|
|
|
|
$
|
107.00
|
|
|
|
$
|
110.46
|
|
|
|
$
|
111.35
|
|
|
|
$
|
116.72
|
|
|
|
$
|
122.51
|
|
|
|
$
|
126.01
|
|
|
|
$
|
111.35
|
|
|
|
$
|
108.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM 6.
|
Selected
Financial Data
|
The following selected consolidated historical financial data
are derived from our audited financial statements. The
consolidated balance sheet data as of December 31, 2007 and
2006 and the consolidated statement of operations data for the
years ended December 31, 2007, 2006 and 2005 are derived
from our audited financial statements and related notes that are
included elsewhere in this report. The consolidated balance
sheet data as of December 31, 2005, 2004 and 2003 and the
consolidated statement of operations for the year ended
December 31, 2004 and 2003 are derived from our audited
financial statements and related notes which are not included in
this report. The information set forth below should be read in
conjunction with our historical financial statements,
36
including the notes thereto, and Managements
Discussion and Analysis of Financial Condition and Results of
Operations, included elsewhere in this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27-Oct-03
|
|
|
|
Year Ended December 31,
|
|
|
(Inception) to
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
31-Dec-03
|
|
|
|
(In thousands, except per share data)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues(1)
|
|
|
151,440
|
|
|
|
100,181
|
|
|
|
33,454
|
|
|
|
15,278
|
|
|
|
25
|
|
Total operating expenses(2)
|
|
|
650,455
|
|
|
|
338,296
|
|
|
|
160,688
|
|
|
|
48,392
|
|
|
|
1,396
|
|
Operating Loss
|
|
|
(499,015
|
)
|
|
|
(238,115
|
)
|
|
|
(127,234
|
)
|
|
|
(33,114
|
)
|
|
|
(1,371
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(727,466
|
)
|
|
$
|
(284,203
|
)
|
|
$
|
(139,950
|
)
|
|
$
|
(33,042
|
)
|
|
$
|
(1,371
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share, basic and diluted
|
|
$
|
(4.58
|
)
|
|
$
|
(2.93
|
)
|
|
$
|
(1.97
|
)
|
|
$
|
(0.90
|
)
|
|
$
|
(0.88
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, basic and diluted
|
|
|
158,737
|
|
|
|
97,085
|
|
|
|
71,075
|
|
|
|
36,791
|
|
|
|
1,555
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures(3)
|
|
$
|
361,861
|
|
|
$
|
191,747
|
|
|
$
|
132,724
|
|
|
$
|
12,815
|
|
|
$
|
64
|
|
|
|
|
(1) |
|
Increase in revenues is due primarily to the increase in our
subscriber base as we have grown from approximately 62,000
wireless broadband Internet subscribers as of December 31,
2005 to approximately 394,000 as of December 31, 2007. |
|
(2) |
|
2007 and 2006 include the impact of SFAS No. 123(R) of
$42.8 million and $14.2 million, respectively. 2007
includes the gain on sale of NextNet of $19.8 million.
Employee expenses increased year over year as headcount has
increased to approximately 1,990 employees at
December 31, 2007 compared to approximately
1,240 employees at December 31, 2006 and approximately
620 at December 31, 2005. |
|
(3) |
|
Increase in capital expenditures is due to increased network
build-out related to our expansion into new markets. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
(In thousands)
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network covered population:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States(1)
|
|
|
13,550
|
|
|
|
8,551
|
|
|
|
3,788
|
|
|
|
480
|
|
|
|
|
|
International(2)
|
|
|
2,726
|
|
|
|
995
|
|
|
|
765
|
|
|
|
|
|
|
|
|
|
Network covered households:(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
5,420
|
|
|
|
3,447
|
|
|
|
1,515
|
|
|
|
192
|
|
|
|
|
|
International
|
|
|
1,095
|
|
|
|
409
|
|
|
|
326
|
|
|
|
|
|
|
|
|
|
Subscribers:(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
350
|
|
|
|
184
|
|
|
|
56
|
|
|
|
4
|
|
|
|
|
|
International
|
|
|
44
|
|
|
|
22
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents our estimate of the number of natural persons
resident in the geographic areas in which our wireless broadband
service is commercially available. Our calculation of covered
population in the United States is based on our estimate of
covered households multiplied by 2.5 persons per household. |
|
(2) |
|
Represents our estimate of the number of natural persons
resident in the geographic areas in which our wireless broadband
service is commercially available for our consolidated
subsidiaries only, and excludes data regarding our equity
investees. Our calculation of covered population is based on
estimates from the Economist Intelligence Unit database covered
households multiplied by 2.3, 3.0 and 2.9 persons per
household for Ghent and Brussels, Belgium, Dublin, Ireland,
and Seville, Spain, respectively. |
37
|
|
|
(3) |
|
Represents our estimate of the number of single residence homes,
apartments and condominium units in the geographic areas in
which our wireless broadband service is commercially available.
Our estimate is based on information extrapolated from 2000 U.S.
census data and other market information. |
|
(4) |
|
Represents the number of individuals and business or
governmental entities receiving wireless broadband connectivity
through our network. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and investments
|
|
$
|
1,032,396
|
|
|
$
|
1,101,674
|
|
|
$
|
125,648
|
|
|
$
|
91,438
|
|
|
$
|
2,721
|
|
Property, plant and equipment, net
|
|
|
572,329
|
|
|
|
302,798
|
|
|
|
145,584
|
|
|
|
13,126
|
|
|
|
892
|
|
Total assets
|
|
|
2,685,969
|
|
|
|
2,068,373
|
|
|
|
627,918
|
|
|
|
263,305
|
|
|
|
29,229
|
|
Long-term debt (net of discount of $0, $110,007, $50,385, $0 and
$0)
|
|
|
1,234,375
|
|
|
|
644,438
|
|
|
|
209,961
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,163,832
|
|
|
|
1,257,609
|
|
|
|
318,692
|
|
|
|
241,370
|
|
|
|
27,841
|
|
|
|
ITEM 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion and analysis summarizes the
significant factors affecting our consolidated results of
operations, financial condition and liquidity position for the
years ended December 31, 2007, 2006 and 2005 and should be
read in conjunction with our consolidated financial statements
and related notes included elsewhere in this filing. The
following discussion and analysis contains forward-looking
statements that reflect our plans, estimates and beliefs. Our
actual results could differ materially from those discussed in
the forward-looking statements. Factors that could cause or
contribute to these differences include those discussed below
and elsewhere in this annual report on
Form 10-K,
particularly in the section entitled Risk
Factors.
Forward-Looking
Statements
Statements and information included in this Annual Report on
Form 10-K
by Clearwire Corporation (Clearwire, we,
us, or our) that are not purely
historical are forward-looking statements within the safe
harbor provisions of the Private Securities Litigation
Reform Act of 1995.
Forward-looking statements in this Annual Report on
Form 10-K
represent our beliefs, projections and predictions about future
events. These statements are necessarily subjective and involve
known and unknown risks, uncertainties and other important
factors that could cause our actual results, performance or
achievements, or industry results, to differ materially from any
future results, performance or achievement described in or
implied by such statements. Actual results may differ materially
from the expected results described in our forward-looking
statements, including with respect to the correct measurement
and identification of factors affecting our business or the
extent of their likely impact, the accuracy and completeness of
publicly available information relating to the factors upon
which our business strategy is based or the success of our
business.
When used in this report, the words believe,
expect, anticipate, intend,
estimate, evaluate, opinion,
may, could, future,
potential, probable, if,
will and similar expressions generally identify
forward-looking statements.
Recent
Developments and Overview
We build and operate wireless broadband networks that enable
fast, simple, portable, reliable and affordable communications.
Our networks cover entire communities, delivering a wireless
high-speed Internet connection and enabling other services and
features that create a new communications path into the home or
office. We provide a portable broadband connection that delivers
high speed Internet access and enables premium services, such as
VoIP telephony, anytime and anywhere within our coverage area
Our pre-WiMAX network relies on network infrastructure equipment
that is based on non-line-of-sight, or NLOS, Orthogonal
Frequency Division Multiplexing, or OFDM, Expedience
technologies, from Motorola, Inc. We
38
intend to deploy networks based on the IEEE mobile Worldwide
Interoperability of Microwave Access
802.16e-2005,
or mobile WiMAX, standard in all new markets. As with our
current
pre-WiMAX
network infrastructure equipment, we expect mobile WiMAX
technology to support fixed, portable and mobile service
offerings using a single network architecture. In addition, as
mobile WiMAX is a standards-based technology, we anticipate
manufacturers will offer a number of handheld communications and
consumer electronic devices that will be enabled to communicate
using our mobile WiMAX network, including notebook computers,
ultramobile personal computers, or UMPCs, personal data
assistants, or PDAs, gaming consoles, MP3 players, and other
handheld devices. We expect to launch our first mobile WiMAX
markets in the second half of 2008, provided the WiMAX
technologies satisfactorily pass our ongoing field trials.
We launched our first broadband market in August 2004 and are
growing rapidly in terms of the number of markets served, number
of people covered by our network, and number of total
subscribers. As of December 31, 2007 we offered our service
for sale to an estimated 13.6 million people, or POPs, in
the United States and to nearly 2.7 million POPs
internationally in Ghent and Brussels, Belgium; Dublin, Ireland;
and Seville, Spain.
We believe that our subscriber growth rates reflect robust
customer demand for our services. We ended 2007 with
approximately 394,000 total subscribers worldwide representing a
91.3% increase in subscribers or approximately 188,000 net
new subscribers from the approximately 206,000 total subscribers
we had as of December 31, 2006. Our subscriber base grew by
332,000 from the approximately 62,000 total subscribers we had
as of December 31, 2005.
As of December 31, 2007, we had approximately 350,000
customers in the United States, representing an increase of
166,000 or 90.2% increase from the approximately 184,000
U.S. subscribers we had as of December 31, 2006. This
also represents a 294,000 increase from the approximately 56,000
U.S. subscribers we had as of December 31, 2005.
Internationally, we ended 2007 with approximately 44,000
customers, representing a 22,000 or 100.0% increase from the
approximately 22,000 subscribers we had as of December 31,
2006 and a 38,000 increase from the approximately 6,000
subscribers we had as of December 31, 2005.
We are investing heavily in building networks and growing our
subscriber base. Our efforts also include offering premium
services and applications in order to make our service more
attractive, such as VoIP telephony and our recently introduced
PC card. This expansion will require significant capital
expenditures as well as increased sales and marketing expenses,
and will likely be accompanied by significant operating losses
over the next five years or more as we expand the area covered
by our network and invest to build our brand and develop
subscriber loyalty. We expect to launch additional markets in
the United States during 2008. If introduced on the schedule we
anticipate, these market launches would expand our covered
population in the United States to approximately 20.0 to
22.0 million in 2008. We believe we may have 510,000 to
530,000 total subscribers in both our U.S. and
international markets by the end of 2008.
We believe that we have the second largest spectrum position in
the 2.5 GHz
(2496-2690 MHz)
band in the United States with a spectrum portfolio that as of
December 31, 2007 includes approximately 15.1 billion
MHz-POPs, an industry metric that represents the amount of
spectrum in a given area, measured in Megahertz, multiplied by
the estimated population of that area. In Europe, as of
December 31, 2007, we held approximately 8.7 billion
MHz-POPs of spectrum, predominantly in the 3.5 GHz band, in
Belgium, Germany, Ireland, Poland, Romania and Spain. We plan to
continue acquiring spectrum in markets that we believe are
attractive for our service offerings. If demand increases for
spectrum rights, our spectrum acquisition costs may increase,
which may afford an advantage to competitors with greater
capital resources.
We engineer our networks to optimize both the services that we
offer and the number of subscribers to whom we can offer
service. Consequently, we have not launched our services in a
market using our current technology unless we control a minimum
of six channels of spectrum that contain at least 5 MHz of
spectrum each. However, we expect the spectral efficiency of
technologies we deploy to continue to evolve, and as a result,
we may decide to deploy our services in some markets with less
spectrum. Alternatively, we could find that new technologies and
subscriber usage patterns require us to have more spectrum
available in our markets.
As a result of continued expansion and ongoing spectrum
acquisitions, we expect to require significant additional
capital, which we intend to raise through subsequent equity
offerings, by increasing our debt, or a combination of the two.
As of December 31, 2007, our total assets were
$2.69 billion and our stockholders equity
39
was $1.16 billion, which compares to total assets of
$2.07 billion and stockholders equity of
$1.26 billion at December 31, 2006. Our unrestricted
cash and cash equivalents and unrestricted short-term and
long-term investments were $1.03 billion and
$1.10 billion at December 31, 2007 and 2006,
respectively. As a consequence of the particularly turbulent
financial markets of late, we cannot offer assurances that the
necessary capital to achieve our current plan will be available
on attractive terms or at all, and we plan to manage our use of
capital by adjusting the rate at which we build our network,
acquire spectrum and deploy our services.
As we have concentrated our financial and management resources
on expanding the geographic footprint of our network and the
availability of our services, we have incurred net losses of
$727.5 million, $284.2 million and $140.0 million
for the years ended December 31, 2007, 2006 and 2005,
respectively.
On May 29, 2007, we closed an agreement with BellSouth
Corporation to acquire for an aggregate price of
$300.0 million all interests in SFT Spectrum, LLC and BWC
Spectrum, LLC, which collectively held all of
AT&T Inc.s leases and licenses for 2.5 GHz
spectrum. These entities were wholly-owned subsidiaries of
BellSouth Corporation, which is wholly-owned by AT&T, Inc.
as a result of a merger that closed in December 2006. Based on
the terms of the agreement, the acquisition was treated as a
purchase of assets under Emerging Issues Task Force
(EITF) Issue
No. 98-3,
Determining Whether a Nonmonetary Transaction Involves
Receipt of Productive Assets or of a Business. We finalized
the allocation estimates during the third quarter of 2007 and
recorded $196.8 million as purchased spectrum rights and
$103.2 million as leased spectrum based on the fair values
of the owned and leased spectrum.
In an effort to simplify our capital structure, access
incremental borrowing availability, and extend our debt
maturities, on July 3, 2007, we entered into a senior term
loan facility providing for loans of up to $1.0 billion. We
borrowed $379.3 million under the senior term loan facility
on the date of closing and repaid obligations under the
$125.0 million term loan, including fees and costs
attributable to the senior term loan facility. On
August 15, 2007, we borrowed the remaining amount of
approximately $620.7 million under the senior term loan
facility, and fully retired our senior secured notes, originally
due 2010, for a price of 102.5% of the aggregate principal
amount outstanding of approximately $620.7 million plus
accrued and unpaid interest to the date of redemption and the
remaining portion of the interest escrow. The $1.0 billion
senior secured term loan facility provides for quarterly
amortization payments aggregating an annual amount equal to
1.00% of the original principal amount of the term loans prior
to the maturity date, with the remaining balance due on
July 3, 2012. In general, borrowings under the new senior
term loan facility bear interest based, at our option, at either
the Eurodollar rate or an alternate base rate, in each case plus
a margin. The rate of interest for borrowings under the new
senior term loan facility is the Eurodollar rate plus 6.00% or
the alternate base rate plus 5.00%, with interest payable
quarterly with respect to alternate base rate loans, and with
respect to Eurodollar loans, interest is payable in arrears at
the end of each applicable period, but at least every three
months. In connection with the repayment of the
$125.0 million term loan and the retirement of the
$620.7 million senior secured notes due 2010, we recorded a
$159.2 million loss on extinguishment of debt, which was
primarily due to the write-off of the unamortized portion of the
proceeds allocated to the warrants originally issued in
connection with the senior secured notes and the related
deferred financing costs. In connection with the
$1.0 billion senior term loan facility, we recorded a
deferred financing cost of $27.7 million which is being
amortized over the five year term of the loan.
On November 2, 2007, we entered into an Amendment to
provide us with an additional $250.0 million in term loans
under our senior term loan facility. We recorded a deferred
financing cost of $2.5 million related to this additional
funding, which is being amortized over the remaining term of the
loan. This additional funding, which closed on the same date,
increases the size of our senior secured term loan facility to
$1.25 billion. We will use the proceeds to further support
our expansion plans and for general corporate purposes. The
material terms of the incremental term loans are the same as the
terms of the loans under the original senior term loan facility.
In an effort to reduce interest expense on our senior term loan
facility, in January 2008, we entered into two interest rate
swaps to hedge our forward three-month LIBOR indexed variable
interest payments. The first swap was entered on January 4,
2008, effective March 5, 2008, to pay a fixed rate of
3.6225% and to receive the three-month LIBOR on a notional value
of $300.0 million for three years. The second swap was
entered on January 7, 2008, effective March 5, 2008,
to pay a fixed rate of 3.5% and to receive the three-month LIBOR
on a notional value of
40
$300.0 million for two years. In accordance with Statement
of Financial Accounting Standards (SFAS)
No. 133, Accounting for Derivative Instruments and
Hedging Activities (SFAS No. 133), its
amendments and related guidance, we will treat the interest rate
swaps as cash-flow hedges and will record the fair
value of the swaps at the end of each calendar quarter,
beginning March 31, 2008.
At December 31, 2007, we held available for sale short-term
and long-term investments with a fair value of a total of
$155.6 million and a cost of $162.9 million, of which
investments with a fair value of $88.6 million and a cost
of $95.9 million were in auction rate securities and an
investment with a fair value of $7.5 million and a cost of
$7.5 million was in commercial paper issued by a structured
investment vehicle for which an insolvency event has been
declared. We recorded an
other-than-temporary
impairment loss on this investment of $2.5 million during
2007.
Auction rate securities are variable rate debt instruments whose
interest rates are reset approximately every 30 or
90 days through an auction process. Beginning in August
2007, the auctions failed to attract buyers and sell orders
could not be filled. Current market conditions do not allow us
to estimate when the auctions will resume. While we continue to
earn interest on these investments at the maximum contractual
rate, until the auctions resume, the investments are not liquid
and we may not have access to these funds until a future auction
on these investments is successful. At December 31, 2007,
the estimated fair value of these auction rate securities no
longer approximates cost and we recorded other-than-temporary
impairment losses and realized losses on our auction rate
securities of $32.3 million for the year ended
December 31, 2007. For certain other auction rate
securities, we recorded an unrealized loss of $7.3 million
in other comprehensive income reflecting the decline in the
estimated fair value of these securities. We consider these
declines in fair value to be temporary given our consideration
of the collateral underlying these securities and our conclusion
that the declines are related to changes in interest rates
rather than any credit concerns related to the underlying
assets. Additionally, we believe we have the intent and ability
to hold the investments until maturity or for a period of time
sufficient to allow for any anticipated recovery in market value.
Business
Segments
The Company complies with the requirements of
SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, which establishes annual
and interim reporting standards for an enterprises
operating segments and related disclosures about its products,
services, geographic areas and major customers. Operating
segments are defined as components of an enterprise for which
separate financial information is available that is evaluated
regularly by the chief operating decision makers in deciding how
to allocate resources and in assessing performance. Operating
segments can be aggregated for segment reporting purposes so
long as certain aggregation criteria are met. The Company
defines the chief operating decision makers as our Chief
Executive Officer, Chief Operating Officer and Chief
Financial Officer. As our business continues to mature, the
Company assesses how it views and operates the business. As a
result, in the fourth quarter of 2007 the Company was organized
into two reportable business segments: the United States and the
International business. See Note 16, Business Segments, for
further discussion.
Critical
Accounting Policies
Our discussion and analysis of our financial condition and
results of operations are based upon our financial statements,
which have been prepared in accordance with accounting
principles generally accepted in the United States. The
preparation of these consolidated financial statements requires
us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. On an
ongoing basis, we evaluate our estimates used, including those
related to investments, long-lived assets, goodwill and
intangible assets, including spectrum, share-based compensation,
and deferred tax asset valuation allowance.
Our accounting policies require management to make complex and
subjective judgments. By their nature, these judgments are
subject to an inherent degree of uncertainty. These judgments
are based on our historical experience, terms of existing
contracts, observance of trends in the industry, information
provided by our customers and information available from other
outside sources, as appropriate. Additionally, changes in
accounting estimates
41
are reasonably likely to occur from period to period. These
factors could have a material impact on our financial
statements, the presentation of our financial condition, changes
in financial condition or results of operations.
In consultation with our board of directors, we have identified
the following accounting policies that we believe are key to an
understanding of our financial statements: revenue recognition;
impairments of long-lived assets; impairments of goodwill and
intangible assets with indefinite useful lives; share-based
compensation; valuation of common stock; accounting for spectrum
licenses and leases; the deferred tax asset valuation allowance
and investments.
Revenue
Recognition
We recognize revenue in accordance with Staff Accounting
Bulletin, or SAB, No. 104, Revenue Recognition, when all of
the following conditions exist: (i) persuasive evidence of
an arrangement exists in the form of an accepted purchase order;
(ii) delivery has occurred, based on shipping terms, or
services have been rendered; (iii) the price to the buyer
is fixed or determinable, as documented on the accepted purchase
order; and (iv) collectibility is reasonably assured.
We primarily earn service revenue by providing access to our
wireless broadband network. Also included in service revenue are
revenue from optional services, including VoIP service, personal
and business email and static Internet Protocol. Activation fees
are charged to customers when initiating a service subscription.
We apply EITF Issue
No. 00-21,
Accounting for Revenue Arrangements with Multiple
Deliverables, to account for revenue arrangements with
activation and service components. These arrangements are
allocated among the separate units of accounting based on the
relative fair values if the deliverables in the arrangement meet
certain criteria.
Service revenue from customers for the wireless broadband and
optional services are billed in advance and recognized ratably
over the service period. Activation fees charged to the customer
are deferred and recognized as service revenue on a
straight-line basis over the expected life of the customer
relationship, which we have estimated to be 3.5 years. This
expected life was determined based on our assessment of industry
averages and our assessment of data on the duration of a
customer life and average monthly churn.
Revenue associated with the shipment of CPE and other equipment
to our customers is recognized when title and risk of loss
transfers to the customer. Generally, the risks of ownership and
title pass when product is delivered to our customer. Shipping
and handling costs billed to customers are recorded to service
revenue.
Prior to our sale of NextNet in August 2006, we primarily earned
equipment revenue from sales to third party network providers of
base stations, CPE, related infrastructure, system services and
software maintenance contracts.
With the NextNet arrangements that included multiple elements
including software, such as the sale of a base station with a
software maintenance contract, we applied the accounting
guidance in accordance with Statement of Position, or SOP,
No. 97-2,
Software Revenue Recognition. Revenue was allocated to
each element of the transaction based upon its fair value as
determined by vendor specific objective evidence. Vendor
specific objective evidence of fair value for all elements of an
arrangement was based upon the normal pricing and discounting
practices for those products and services when sold separately.
Revenue was deferred for any undelivered elements and revenue
was recognized when the product was delivered or over the period
in which the service is performed. If we could not objectively
determine the fair value of any undelivered element included in
the bundled product and software maintenance arrangements,
revenue was deferred until all elements were delivered and
services had been performed, or until fair value could be
objectively determined for any remaining undelivered elements.
If the fair value of a delivered element had not been
established, we would use the residual method to record revenue
if the fair value of all undelivered elements was determinable.
Under the residual method, the fair value of the undelivered
elements was deferred and the remaining portion of the
arrangement fee was allocated to the delivered elements and was
recognized as revenue.
42
Fees for software maintenance services were typically billed
annually in advance of performance of the services with
provisions for subsequent annual renewals. We deferred the
related revenues and recognized them ratably over the respective
maintenance terms, which typically were one to two years.
Impairments
of Long-lived Assets
We review our long-lived assets to be held and used, including
property, plant and equipment and intangible assets with
definite useful lives, for recoverability whenever an event or
change in circumstances indicates that the carrying amount of
such long-lived asset or group of long-lived assets may not be
recoverable. Such circumstances include, but are not limited to
the following:
|
|
|
|
|
a significant decrease in the market price of the asset;
|
|
|
|
a significant change in the extent or manner in which the asset
is being used;
|
|
|
|
a significant change in the business climate that could affect
the value of the asset;
|
|
|
|
a current period loss combined with projections of continuing
losses associated with use of the asset;
|
|
|
|
a significant change in our business or technology strategy,
such as a switch to mobile WiMAX wireless broadband network;
|
|
|
|
a significant change in our managements views of growth
rates for our business; and
|
|
|
|
a significant change in the anticipated future economic and
regulatory conditions and expected technological availability.
|
We frequently evaluate whether such events and circumstances
have occurred. As our losses to date are a direct result of
expanding our business to support our growth, we have not
considered our losses to date as an event that indicates that
the carrying amount of our long-lived assets may not be
recoverable. In addition, there have been no other impairment
indicators for any of our asset groups. When such events or
circumstances exist, we would determine the recoverability of
the assets carrying value by estimating the undiscounted
future net cash flows (cash inflows less associated cash
outflows) that are directly associated with and that are
expected to arise as a direct result of the use of the asset.
For purposes of recognition and measurement, we group our
long-lived assets at the lowest level for which there are
identifiable cash flows that are largely independent of the cash
flows of other assets and liabilities.
If the total of the expected undiscounted future net cash flows
is less than the carrying amount of the asset, a loss, if any,
is recognized for the difference between the fair value of the
asset and its carrying value.
Changes in technology used in our business, such as a transition
to mobile WiMAX, may result in an impairment in the value or a
change in the estimated useful life of our Expedience network
equipment already placed in service. If and when such a change
occurs, we may be required to record an impairment charge to
reduce the carrying amount of equipment in service to its fair
value,
and/or to
accelerate the useful life of the respective equipment. This may
result in an increase in periodic depreciation expense over the
remaining useful life of the equipment, or, in appropriate
instances, a write off of a portion or the entire net book value
of the equipment.
Impairments
of Goodwill and Intangible Assets with Indefinite Useful
Lives
We assess the impairment of goodwill and intangible assets with
indefinite useful lives at least annually, or whenever an event
or change in circumstances indicates that the carrying value of
such asset or group of assets may not be recoverable. Factors we
consider important, any of which could trigger an impairment
review, include:
|
|
|
|
|
significant underperformance relative to expected historical or
projected future operating results;
|
|
|
|
significant changes in our use of the acquired assets or the
strategy for our overall business; and
|
|
|
|
significant negative industry or economic trends.
|
43
Our owned spectrum licenses in the United States, Belgium and
Ireland have indefinite useful lives, and were evaluated for
impairment testing purposes as a single unit of accounting for
each country, in accordance with EITF Issue
No. 02-7,
Unit of Accounting for Testing Impairment of Indefinite-Lived
Intangible Assets.
We complete a two-step process to determine the amount of
goodwill impairment. The first step involves comparison of the
fair value of the reporting unit to its carrying value to
determine if any impairment exists. If the fair value of the
reporting unit is less than the carrying value, goodwill is
considered to be impaired and the second step is performed. The
second step involves comparison of the implied fair value of
goodwill to its carrying value. The implied fair value of
goodwill is determined by allocating fair value to the various
assets and liabilities within the reporting unit in the same
manner goodwill is recognized in a business combination. In
calculating an impairment charge, the fair value of the impaired
reporting units are estimated using a discounted cash flow
valuation methodology or by reference to recent comparable
transactions. In making our assessment, we rely on a number of
factors, including operating results, business plans, economic
projections, and anticipated future cash flows. There are
inherent uncertainties related to these factors and judgment in
applying these factors to our goodwill impairment test. We
performed our annual impairment tests of goodwill as of
October 1, 2007, and concluded that there was no impairment
of our goodwill.
Our intangible assets with indefinite useful lives in the United
States and Internationally consist mainly of our spectrum
licenses originally issued by the FCC, trade names and
trademarks. The impairment test for intangible assets with
indefinite useful lives consists of a comparison of the fair
value of an intangible asset with its carrying amount. If the
carrying amount of an intangible asset exceeds its fair value,
an impairment loss will be recognized in an amount equal to that
excess. The fair value is determined by estimating the
discounted future cash flows that are directly associated with,
and that are expected to arise as a direct result of the use and
eventual disposition of, the asset. We performed our annual
impairment test of indefinite lived intangible assets for each
country of operation as of October 1, 2007, and concluded
that there was no impairment of these intangible assets.
Share-Based
Compensation
We account for our share-based compensation in accordance with
SFAS No. 123(R), Share-Based Payment
(SFAS No. 123(R)), which requires the
measurement and recognition of compensation expense for all
share-based awards made to employees and directors based on
estimated fair values. We recognize compensation costs, net of a
forfeiture rate, for those shares expected to vest on a graded
vesting schedule over the requisite service period of the award,
which is generally the option vesting term of four years. We
recognized $42.8 million, $14.2 million, and
$2.5 million of stock-based compensation expense for the
years ended December 31, 2007, 2006 and 2005, respectively.
As of December 31, 2007, there was $88.6 million of
total unrecognized stock-based compensation cost, the majority
of which will be recognized over approximately the next
2 years. Going forward, stock-based compensation expenses
may increase as we issue additional equity-based awards to
continue to attract and retain key employees.
We issue incentive awards to our employees through stock-based
compensation consisting of stock options and restricted stock
units, or RSUs. The value of RSUs is determined using the fair
value method, which in this case, is based on the number of
shares granted and the quoted price of our common stock on the
date of grant. In determining the fair value of stock options,
we use the Black-Scholes valuation model, or BSM, to estimate
the fair value of stock options which requires complex and
judgmental assumptions including estimated stock price
volatility, employee exercise patterns (expected life of the
option) and future forfeitures. The computation of expected
volatility is based on an average historical volatility from
common shares of a group of our peers as well as our own
historical volatility. The expected life of options granted is
based on the simplified calculation of expected life, described
in SAB No. 107, Share-Based Payment, due to
lack of option exercise history. If any of the assumptions used
in the BSM change significantly, share-based compensation
expense may differ materially for future grants as compared to
the current period. See Note 13, Share-Based Payments, of
our consolidated financial statements for additional information.
SFAS No. 123(R) also requires that we recognize
compensation expense for only the portion of stock options or
RSUs that are expected to vest. Therefore, we apply estimated
forfeiture rates that are derived from historical
44
employee termination behavior. If the actual number of
forfeitures differs from those estimated by management,
additional adjustments to stock-based compensation expense may
be required in future periods.
Valuation
of Common Stock
Prior to our initial public offering, members of our management
possessing the requisite valuation experience estimated the fair
value of our capital stock in connection with our stock option
grants, stock awards, and other equity based compensation
arrangements. We did not obtain contemporaneous valuations
prepared by an unrelated valuation specialist at the time of
each stock option issuance because we believe our management
possessed the requisite valuation expertise to prepare a
reasonable estimate of the fair value of the interests at the
time of each issuance since inception.
The determination of the fair value of our common stock prior to
our initial public offering required management to make
judgments that were complex and inherently subjective.
Management used the market approach to estimate the value of our
enterprise at each date options were granted and at each
reporting date. Under the market approach, a transaction-based
method was used to estimate the value of our enterprise based on
transactions involving capital stock with unrelated investors
and other third parties. This approach assumes that such
transactions constitute the best evidence as to the fair value
of our common stock.
Sales of our capital stock for cash during the years ended
December 31, 2007, 2006 and 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
Price per Share
|
|
|
Gross Proceeds
|
|
|
March 2005
|
|
|
9,957,837
|
|
|
$
|
12.00
|
|
|
$
|
119,494,048
|
|
June 2005
|
|
|
1,666,666
|
(1)
|
|
$
|
12.00
|
|
|
|
20,000,000
|
|
August/October 2006
|
|
|
58,602,978
|
(2)
|
|
$
|
18.00
|
|
|
|
1,054,853,604
|
|
March 2007
|
|
|
24,000,000
|
|
|
$
|
25.00
|
|
|
|
600,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
94,227,481
|
|
|
|
|
|
|
$
|
1,794,347,652
|
|
|
|
|
(1) |
|
Of this amount, 1,273,593 shares were sold to a related
party. |
|
(2) |
|
Of this amount, 4,655,706 shares were sold to a related
party. |
Additionally, we used the best information available to
corroborate our determination, including events affecting the
fair value of our common stock during the year, such as:
|
|
|
|
|
the implementation of our business strategy, including the
achievement of significant qualitative and quantitative
milestones relating to, among others things, the number of
markets launched, subscriber growth, revenue growth, spectrum
licenses acquired or leased, employee growth and the execution
of strategic transactions;
|
|
|
|
the exercise price of warrants for the purchase of our common
stock issued to both related parties and third parties;
|
|
|
|
the terms of cash sale transactions for the purchase of our
common stock by related parties; and
|
|
|
|
the terms of non-cash transactions in which related parties
received our common stock as consideration.
|
In evaluating each of these events, we assumed that such
transactions provided additional corroborating evidence as to
the fair value of our capital stock. For those transactions
involving related parties, the facts and circumstances present
were reviewed to evaluate whether the terms of these agreements
differed materially from those that would have existed in an
arms-length transaction with an unrelated party. This evaluation
was performed by comparing those related party transactions to
similar transactions with unrelated parties.
We further corroborated the estimate of fair value by
calculating the enterprise value using the income approach at
various points throughout the year. The income approach applies
an appropriate discount rate to an estimate of the future cash
flows based on our forecasts of revenues, costs and capital
expenditures. Given that we are an early stage company,
forecasting these cash inflows and outflows required us to make
judgments that were substantially more complex and inherently
more subjective than those that would be required in a mature
business.
45
As such, we determined that the market approach was a more
accurate method of estimating fair value and relied on the
income approach for corroboration only.
Accounting
for Spectrum Licenses and Leases
We have two types of arrangements for spectrum licenses in the
United States: direct licenses from the FCC which we own and
leases or subleases from third parties that own or lease one or
more FCC licenses.
The owned FCC licenses in the United States and internationally
are accounted for as intangible assets with indefinite lives in
accordance with the provisions of SFAS No. 142,
Goodwill and Other Intangible Assets
(SFAS No. 142). In accordance with
SFAS No. 142, intangible assets with indefinite useful
lives are not amortized but must be assessed for impairment
annually or more frequently if an event indicates that the asset
might be impaired. We performed our annual impairment test of
indefinite lived intangible assets as of October 1, 2007
and concluded that there was no impairment of these intangible
assets. For leases involving significant up-front payments, we
account for such payments as prepaid spectrum license fees.
We account for the spectrum lease arrangements as executory
contracts which are similar to operating leases. For leases
containing scheduled rent escalation clauses we record minimum
rental payments on a straight-line basis over the terms of the
leases, including the renewal periods as appropriate.
Deferred
Tax Asset Valuation Allowance
A valuation allowance is provided for deferred tax assets if it
is more likely than not that these items will either expire
before we are able to realize their benefit, or that future
deductibility is uncertain. In accordance with
SFAS No. 109, Accounting for Income Taxes, we
record net deferred tax assets to the extent we believe these
assets will more likely than not be realized. In making such
determination, we consider all available positive and negative
evidence, including our limited operating history, scheduled
reversals of deferred tax liabilities, projected future taxable
income/loss, tax planning strategies and recent financial
performance. We have recorded a valuation allowance for net
deferred tax assets, which was approximately $441.4 million
and $170.8 million as of December 31, 2007 and 2006,
respectively.
Investments
SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities, and SAB No. 59,
Accounting for Non-current Marketable Equity Securities,
provide guidance on determining when an investment is
other-than-temporarily impaired. We classify marketable debt and
equity securities that are available for current operations as
short-term available-for-sale investments, and are stated at
fair value. Unrealized gains and losses are recorded as a
separate component of accumulated other comprehensive income
(loss). Losses are recognized when a decline in fair value is
determined to be other-than-temporary. Realized gains and losses
are determined on the basis of the specific identification
method. We review our short-term and long-term investments on an
ongoing basis for indicators of other-than-temporary impairment,
and this determination requires significant judgment.
We have an investment portfolio comprised of marketable debt and
equity securities including commercial paper, corporate bonds,
municipal bonds, auction rate securities and other securities.
The value of these securities is subject to market volatility
for the period we hold these investments and until their sale or
maturity. We recognize realized losses when declines in the fair
value of our investments below their cost basis are judged to be
other-than-temporary. In determining whether a decline in fair
value is other-than-temporary, we consider various factors
including market price (when available), investment ratings, the
financial condition and near-term prospects of the issuer, the
length of time and the extent to which the fair value has been
less than our cost basis, and our intent and ability to hold the
investment until maturity or for a period of time sufficient to
allow for any anticipated recovery in market value. We make
significant judgments in considering these factors. If it is
judged that a decline in fair value is other-than-temporary, the
investment is valued at the current estimated fair value and a
realized loss equal to the decline is reflected in the
consolidated statement of operations.
In determining fair value, we use quoted prices in active
markets where such prices are available, or we use models to
estimate fair value using various methods including the market,
income and cost approaches. For
46
investments where we use models to estimate fair value in the
absence of quoted market prices, we often utilize certain
assumptions that market participants would use in pricing the
investment, including assumptions about risk and or the risks
inherent in the inputs to the valuation technique. These inputs
are readily observable, market corroborated, or unobservable
Company inputs.
We estimated the fair value of securities without quoted market
prices using internally generated pricing models that require
various inputs and assumptions. We believe that our pricing
models, inputs and assumptions are what market participants
would use in pricing the securities. We maximize the use of
observable inputs to the pricing models where quoted market
prices from securities and derivatives exchanges are available
and reliable. We typically receive external valuation
information for U.S. Treasuries, other U.S. Government
and Agency securities, as well as certain corporate debt
securities, money market funds and certificates of deposit. We
also use certain unobservable inputs that cannot be validated by
reference to a readily observable market or exchange data and
rely, to a certain extent, on managements own assumptions
about the assumptions that market participants would use in
pricing the security. Our internally generated pricing models
may include our own data and require us to use our judgment in
interpreting relevant market data, matters of uncertainty and
matters that are inherently subjective in nature. We use many
factors that are necessary to estimate market values, including,
interest rates, market risks, market spreads, and timing of cash
flows, market liquidity, and review of underlying collateral and
principal, interest and dividend payments. The use of different
judgments and assumptions could result in different
presentations of pricing and security prices could change
significantly based on market conditions.
47
Results
of Operations
The following table sets forth certain operating data for the
periods presented (in thousands except per share data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
|
|
$
|
151,440
|
|
|
$
|
67,598
|
|
|
$
|
8,451
|
|
Equipment and other (includes related party sales of $0,
$15,546, and $9,728)
|
|
|
|
|
|
|
32,583
|
|
|
|
25,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
151,440
|
|
|
|
100,181
|
|
|
|
33,454
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods and services (exclusive of a portion of
depreciation and amortization shown separately below):
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (includes related party costs of $2,877, $606
and $0)
|
|
|
107,281
|
|
|
|
50,438
|
|
|
|
13,086
|
|
Cost of equipment (includes related party costs of $0, $8,914
and $1,843)
|
|
|
|
|
|
|
19,674
|
|
|
|
10,483
|
|
Selling, general and administrative expense
|
|
|
360,666
|
|
|
|
214,669
|
|
|
|
106,211
|
|
Research and development
|
|
|
1,397
|
|
|
|
8,890
|
|
|
|
9,639
|
|
Depreciation and amortization
|
|
|
84,694
|
|
|
|
40,902
|
|
|
|
11,913
|
|
Spectrum lease expense
|
|
|
96,417
|
|
|
|
23,516
|
|
|
|
9,356
|
|
Gain on sale of NextNet
|
|
|
|
|
|
|
(19,793
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
650,455
|
|
|
|
338,296
|
|
|
|
160,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING LOSS
|
|
|
(499,015
|
)
|
|
|
(238,115
|
)
|
|
|
(127,234
|
)
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
65,736
|
|
|
|
30,429
|
|
|
|
6,605
|
|
Interest expense
|
|
|
(96,279
|
)
|
|
|
(72,280
|
)
|
|
|
(14,623
|
)
|
Foreign currency gains, net
|
|
|
363
|
|
|
|
235
|
|
|
|
20
|
|
Loss on extinguishment of debt
|
|
|
(159,193
|
)
|
|
|
|
|
|
|
|
|
Other-than-temporary impairment loss and realized loss on
investments
|
|
|
(35,020
|
)
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
|
1,801
|
|
|
|
2,150
|
|
|
|
300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net
|
|
|
(222,592
|
)
|
|
|
(39,466
|
)
|
|
|
(7,698
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS BEFORE INCOME TAXES, MINORITY INTEREST AND LOSSES FROM
EQUITY INVESTEES
|
|
|
(721,607
|
)
|
|
|
(277,581
|
)
|
|
|
(134,932
|
)
|
Income tax provision
|
|
|
(5,427
|
)
|
|
|
(2,981
|
)
|
|
|
(1,459
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS BEFORE MINORITY INTEREST AND LOSSES FROM EQUITY INVESTEES
|
|
|
(727,034
|
)
|
|
|
(280,562
|
)
|
|
|
(136,391
|
)
|
Minority interest in net loss of consolidated subsidiaries
|
|
|
4,244
|
|
|
|
1,503
|
|
|
|
387
|
|
Losses from equity investees
|
|
|
(4,676
|
)
|
|
|
(5,144
|
)
|
|
|
(3,946
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(727,466
|
)
|
|
$
|
(284,203
|
)
|
|
$
|
(139,950
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share, basic and diluted
|
|
$
|
(4.58
|
)
|
|
$
|
(2.93
|
)
|
|
$
|
(1.97
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, basic and diluted
|
|
|
158,737
|
|
|
|
97,085
|
|
|
|
71,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
Year
Ended December 31, 2007 Compared to Year Ended
December 31, 2006
Revenue. Service revenue is primarily
generated from subscription and modem lease fees for our
wireless broadband service. Revenue from our acquired
businesses, activation fees and fees for other services such as
email, VoIP, and web hosting services are also included in
service revenue. Our equipment and other revenue include sales
of NextNet equipment through the date of sale of NextNet in
August 2006.
Total revenue increased $51.2 million to
$151.4 million in 2007 from $100.2 million in 2006.
This includes an $83.8 million increase in service revenue
as we increased our subscriber base, offset partially by a
decrease in equipment revenue of $32.6 million from our
NextNet operations due to the sale of NextNet in August 2006.
Service revenues were $151.4 million in the year ended
December 31, 2007 compared to $67.6 million in the
year ended December 31, 2006. As of December 31, 2007,
we operated in 46 U.S. markets and four international
markets covering a geographic area containing approximately
16.3 million people. This is compared to 34 U.S. and
two international markets covering approximately
9.6 million people as of December 31, 2006. Total
subscribers in all markets grew from approximately 206,000 as of
December 31, 2006 to approximately 394,000 as of
December 31, 2007, primarily due to continued subscriber
growth in existing markets and the additional markets launched
during 2007. We expect service revenues to increase in 2008 as
we expect our subscribers to increase to approximately 510,000
to 530,000.
Revenue in the U.S. represented 81.2% and international
represented 18.8% of total revenue in 2007 compared to 83.3% and
16.7% in 2006, respectively. This increase was due primarily to
the increase in subscribers internationally which grew 102.5%
over the prior year compared to an 89.9% increase in
U.S. subscribers.
Equipment and other revenue in the year ended December 31,
2007 decreased from the year ended December 31, 2006 due to
the sale of NextNet in August 2006.
Cost of goods and services. Service costs
primarily include costs associated with tower rents, direct
Internet access costs and back haul costs, which is the
transporting of data traffic between distributed sites and a
central point in the market or Point of Presence
(POP). Our cost of equipment consists of costs
incurred for equipment manufactured by NextNet through August
2006.
There were no costs related to equipment in the year ended
December 31, 2007 due to the sale of NextNet in August 2006.
Total cost of goods and services increased $37.2 million to
$107.3 million in 2007 from $70.1 million in 2006.
Cost of services were $107.3 million in the year ended
December 31, 2007 compared to $50.4 million in the
year ended December 31, 2006. These increases were
primarily due to an increase in the number of sites on-air,
direct internet access and related back haul costs, as the
number of on-air sites increased to approximately 2,360 at
December 31, 2007 compared to approximately 1,310 at
December 31, 2006. In both 2007 and 2006, in anticipation
of build-out and future market launches, we also had tower lease
expenses for markets under construction.
As a percentage of service revenue, cost of service decreased to
70.8% in the year ended December 31, 2007 from 74.6% in the
year ended December 31, 2006, primarily as a result of our
costs of services rising at a slower rate as compared to our
revenues generated from our increased subscriber base. While our
cost of service will increase as we continue to expand our
network, we anticipate that cost of service as a percent of
revenue will fluctuate due to new market launches and growth in
subscribers. Based on the Companys current circumstances,
most of our 2008 new market launches are scheduled for late in
the year. As a consequence we expect steady improvement in cost
of service as a percentage of revenue during the first part of
the year, with some reduction late in the year as new market
launches occur.
U.S. cost of goods and services represented approximately
88.1% and international represented approximately 11.9% of total
cost of goods and services in 2007 compared to approximately
87.2% and approximately 12.8% in 2006, respectively. This
increase in U.S. costs of goods and services as a percent
of total cost of goods and services is due primarily to increase
lease and site costs related to an increased number of sites
being built out in the U.S. as compared to international.
49
Selling, general and administrative
expense. Selling, general and administrative
expense primarily includes: salaries and benefits, sales
commissions, travel expenses and related facilities costs for
the following personnel: sales, marketing, network deployment,
executive, finance, information technology, human resource and
legal. It also includes costs associated with advertising, trade
shows, public relations, promotions and other market development
programs and third-party professional service fees.
Selling, general and administrative expense was
$360.7 million for the year ended December 31, 2007 as
compared to $214.7 million in the year ended
December 31, 2006. The increase of $146.0 million was
due primarily to a $98.6 million increase in employee
compensation and related costs, including facilities costs,
resulting from higher employee headcount of approximately
1,990 employees at December 31, 2007 compared to
approximately 1,240 employees at December 31, 2006.
These additional employees were hired as a result of bringing
customer care in-house, new market deployments, and to support
the overall growth of our business. In addition for the year
ended December 31, 2007 as compared to the year ended
December 31, 2006, there was a $13.1 million increase
in professional fees, due to expenses for business development
projects and compliance efforts with Sarbanes Oxley; a
$10.8 million increase in advertising expenses related to
the expansion of our business and new market launches; an
$8.9 million increase in third party commissions as we sold
more services through third party providers; and an increase of
$5.1 million associated with bad debt and collection fees
and bank fees. The remaining increase of $9.5 million
resulted from increases in other miscellaneous expenses
primarily arising out of growth in our business.
As a result of expense controls, slower growth in headcount and
fewer planned market launches in 2008, we expect that our
selling, general, and administrative expenses will begin to
flatten over the course of the year. We expect that any
increases will primarily be related to marketing expenses
necessary to support our growth and our efforts to build brand
awareness through advertising and promotional activities, and
our network expansion.
Research and development. Research and
development expenses consist of salaries and related benefits
for our development personnel. Research and development expense
was $1.4 million and $8.9 million for the years ended
December 31, 2007 and 2006, respectively. This decrease was
due to prior period expenses related to NextNet product research
that were not recurring in 2007 due to the sale of NextNet in
August 2006. Research and development expenses may increase in
2008 as a result of system and technical development efforts
related to implementation of mobile WiMAX.
Depreciation and amortization. Depreciation
and amortization expense increased to $84.7 million for the
year ended December 31, 2007 from $40.9 million for
the year ended December 31, 2006. This increase was
primarily due to the additional network build-out and the cost
of CPE related to our expansion into new markets and associated
subscriber growth. Capital expenditures for depreciable
property, plant and equipment increased to $361.9 million
for the year ended December 31, 2007 from
$191.7 million for the year ended December 31, 2006.
The majority of these expenditures relate to the construction of
our network and purchases of base station equipment.
Spectrum lease expense. Spectrum lease expense
increased by $72.9 million to $96.4 million for the
year ended December 31, 2007 from $23.5 million for
the year ended December 31, 2006. Total spectrum lease
expense increased as a direct result of a significant increase
in the number of spectrum leased held by us, including the
additional spectrum from the BellSouth transaction, as well as
an increase in the cost of new spectrum leases. As certain of
our leases include escalation clauses, we are required to record
expense on a straight-line basis over the term of these leases,
including renewal periods where appropriate, which in
combination with the significant lease obligation paid up front
results in significant non-cash lease expenses. We expect
spectrum lease expense to continue to increase.
Gain on sale of NextNet. In August 2006 we
sold our NextNet operations and recorded a gain on sale of
$19.8 million.
Interest income. We recognized
$65.7 million of interest income for the year ended
December 31, 2007 compared to $30.4 million for the
year ended December 31, 2006. This increase of
$35.3 million was primarily due to the higher balances of
short-term and long-term investments held during 2007 compared
to 2006.
Interest expense. We incurred
$96.3 million of interest expense in year ended
December 31, 2007 compared to $72.3 million for the
year ended December 31, 2006. This increase in interest
expenses was primarily due to an increase in debt, as debt
increased by $611.2 million to $1.26 billion at
December 31, 2007 from $645.7 million at
50
December 31, 2006. We recorded amortization of original
issuance discount of $14.0 million for the year ended
December 31, 2007 compared to $15.8 million for the
year ended December 31, 2006. We recorded amortization of
deferred financing costs related to our secured notes and senior
term loan facility of $6.7 million for the year ended
December 31, 2007 compared to $3.9 million for the
year ended December 31, 2006. These amounts were partially
offset by capitalized interest of $29.0 million for year
ended December 31, 2007 compared to $16.6 million for
the year ended December 31, 2006.
Loss on extinguishment of debt. In connection
with the retirement of the $620.7 million senior secured
notes due 2010 and the repayment of the $125.0 million term
loan, we recorded a $159.2 million loss on extinguishment
of debt, which was primarily due to the write-off of the
unamortized portion of the proceeds allocated to the warrants
originally issued in connection with the senior secured notes
and the related deferred financing costs.
Other-than-temporary impairment loss and realized loss on
investments The increase in the
other-than-temporary impairment loss and realized loss on
investment securities of $35.0 million for the year ended
December 31, 2007, as compared to the year ended
December 31, 2006, is primarily due to the recognition of a
decline in value of investment securities which we determined to
be other than temporary. At December 31, 2007, we held
available for sale short-term and long-term investments with a
fair value of $155.6 million and a cost of
$162.9 million.
Included in our investments were auction rate securities with a
fair value of $88.6 million and a cost of
$95.9 million. Auction rate securities are variable rate
debt instruments whose interest rates are reset approximately
every 30 or 90 days through an auction process. The auction
rate securities are classified as available for sale and are
recorded at fair value. At December 31, 2007, the estimated
fair value of these auction rate securities no longer
approximates cost and we recorded other-than-temporary
impairment losses and realized losses on our auction rate
securities of $32.3 million for the year ended
December 31, 2007. For certain other auction rate
securities, we recorded an unrealized loss of $7.3 million
in other comprehensive income reflecting the decline in the
estimated fair value of these securities. We consider these
declines in fair value to be temporary given our consideration
of the collateral underlying these securities and our conclusion
that the declines are related to changes in interest rates
rather than any credit concerns related to the underlying
assets. Additionally, we have the intent and ability to hold the
investments until maturity or for a period of time sufficient to
allow for any anticipated recovery in market value.
The Companys investments in auction rate securities
represent interests in collateralized debt obligations supported
by preferred equity securities of small to medium sized
insurance companies and financial institutions and asset backed
capital commitment securities supported by high grade, short
term commercial paper and a put option from a monoline insurance
company. These auction rate securities were rated AAA/Aaa or
AA/Aa by Standard & Poors and Moodys rating
services at the time of purchase and their ratings have not
changed as of December 31, 2007. With regards to the asset
backed capital commitment securities, both rating agencies have
placed the issuers ratings under review for possible
downgrade.
In addition to the above mentioned securities, we hold one
commercial paper security issued by a structured investment
vehicle that was placed in receivership in September 2007 for
which an insolvency event was declared by the receiver in
October 2007. The Issuer invests in residential and commercial
mortgages and other structured credits. Some of the assets
consist of sub-prime mortgages. At December 31, 2007, the
estimated fair value of this security was $7.5 million
based on prices provided from our internally generated pricing
models and our evaluation of the value of the underlying
collateral and our position in the structured investment
vehicle. During 2007 we had realized other-than-temporary
impairment losses of $2.5 million related to this
commercial paper security. A restructuring plan for this
security is expected by mid 2008.
As issuers and counterparties to the Companys investments
announce financial results in the coming quarters, it is
possible that the Company may record additional losses and
realize losses that are currently unrealized. The Company will
continue to monitor its investments for substantive changes in
relevant market conditions,
51
substantive changes in the financial condition and performance
of the investments issuers and other substantive changes
in these investments.
The stated maturity of these securities is longer than
10 years; however, because we considered them to be highly
liquid and available for operations, our convention was to use
the next auction date, which occurs every 30 to 90 days, as
the effective maturity date and these securities were recorded
as short-term investments. Current market conditions do not
allow the Company to estimate when the auctions for its auction
rate securities will resume. As a result, during 2007 the
Company reclassified its auction rate securities from short-term
investments to long-term investments.
Other income (expense), net. In the year ended
December 31, 2007 we had approximately $1.8 million in
other income compared to approximately $2.2 million in
other expenses in the year ended December 31, 2006.
Income tax provision. We incurred
$5.4 million of income tax expense in 2007 as compared to
$3.0 million in 2006. The expense represents the
recognition of a deferred tax liability related to the
accounting for FCC licenses we own. Owned FCC licenses are
amortized over 15 years for U.S. tax purposes but,
since these licenses have an indefinite life under accounting
principals generally accepted in the United States, they are not
amortized for financial statement reporting purposes. This
ongoing difference between the financial statements and tax
amortization treatment resulted in our deferred income tax
expense.
Losses from equity investees. During the year
ended December 31, 2007, we had approximately
$4.7 million in losses from equity investees compared to
approximately $5.1 million in losses in year ended
December 31, 2006. This decrease was primarily due to the
growth in the aggregate subscriber base offset by the increasing
overhead costs to grow the businesses and the impact of a
weakening U.S. dollar.
Minority interest in net loss of consolidated
subsidiaries. During the year ended
December 31, 2007, we allocated approximately
$4.2 million in losses on our consolidated subsidiaries to
minority interests, compared to approximately $1.5 million
in losses allocated to minority interests in the year ended
December 31, 2006. This increase in amount of losses
assigned to minority interests was primarily due to the addition
of a minority partner for our Hawaii operations.
Year
Ended December 31, 2006 Compared to Year Ended
December 31, 2005
Revenue. Total revenues increased
$66.7 million to $100.2 million in 2006 from
$33.5 million in 2005. This result includes a
$59.1 million increase in service revenue as we increased
our subscriber base, as well as a $7.6 million increase in
equipment revenue derived from NextNet operations.
U.S. revenue represented approximately 83.3% of total
revenue and international represented approximately 16.7% of
total revenue in 2006 compared to approximately 95.7% and
approximately 4.3% in 2005, respectively.
Service revenue. As of December 31, 2006,
we operated in 34 U.S. markets and two international
markets covering a geographic area containing approximately
9.6 million people. Total subscribers in all markets grew
from approximately 62,300 as of December 31, 2005 to
approximately 206,200 as of December 31, 2006, generating
service revenue of approximately $67.6 million in 2006 as
compared to $8.5 million in 2005. This $59.1 million
increase reflects net increases of 84,800 subscribers in markets
launched prior to January 1, 2006, and 59,100 subscribers
in the nine markets launched during 2006. Of these nine new
markets, seven were launched in the second half of 2006.
Equipment and other revenue. Our equipment and
other revenue includes sales of NextNet equipment through the
date of sale in August 2006. Equipment and other revenue
increased approximately $7.6 million, to $32.6 million
for the eight-month period ending on the date of sale from
$25.0 million for the full year of 2005. This increase is
primarily due to an increase in the volume of sales of CPE and
other units to Inukshuk, Inc., a joint venture between Rogers
Cable Enterprises and Bell Canada, through an arrangement with
Flux Fixed Wireless, LLC, an entity controlled by
Mr. McCaw. Total related party sales increased
$5.8 million to $15.5 million in 2006 from
$9.7 million in 2005. The remainder of the increase is a
result of an increase in overall sales volume across our
customer base.
52
Cost of goods and services. Total cost of
goods and services increased $46.5 million to
$70.1 million in 2006, from $23.6 million in 2005.
U.S. cost of goods and services represented approximately
87.2% and international represented approximately 12.8% of total
cost of goods and services in 2006 compared to approximately
94.0% and approximately 6.0% in 2005, respectively.
Cost of service. As a result of the expansion
in 2006 of our wireless broadband network and related subscriber
growth, cost of service increased to $50.4 million in 2006
as compared to $13.1 million in 2005. The increase is due
to an increase in costs for towers leased and related back haul
costs, the number of subscribers using our service, and
additional markets served. As a percentage of service revenue,
cost of service decreased to 74.6% in 2006 from 154.8% in 2005,
primarily as a result of the revenue generated from our
increased subscriber base.
Cost of equipment. Our cost of equipment
consists of costs incurred for equipment manufactured by NextNet
through August 29, 2006. Following the increase in the
number of CPE units sold in 2006, cost of equipment increased
$9.2 million to $19.7 million for the eight months we
owned NextNet in 2006, as compared to $10.5 million in
2005. As a percentage of equipment and other revenue, cost of
equipment increased to 60.4% in 2006 from 41.9% in 2005, as a
result of a full year of sales in 2005 to Flux Fixed Wireless, a
related party, which had higher overall margins, as compared to
eight months in 2006, due to the sale of NextNet. As a result of
our sale of NextNet, we do not currently expect to incur any
future material cost of equipment.
Selling, general and administrative
expense. Selling, general and administrative
expense increased $108.5 million, or 102.1%, to
$214.7 million in 2006 from $106.2 million in 2005.
The overall increase is due primarily to employee compensation
and related costs, including facilities costs due to higher
employee headcount, additional marketing and advertising
expenses related to the expansion of our business, increases in
third party commission expenses; and higher professional fee
expenses. Employee and related compensation expense increased
$63.4 million due to headcount increases to support the
overall growth of our business. Our total employee headcount
increased from approximately 622 at December 31, 2005 to
approximately 1,240 at December 31, 2006. Marketing and
advertising expense increased $20.5 million as we expanded
our number of markets from 27 to 36 and increased our subscriber
base from 62,300 at December 31, 2005 to 206,200 at
December 31, 2006. Facilities expenses increased
$6.2 million in connection with the headcount increase and
market expansion. Third party commission expenses increased
$5.5 million as we sold more services through third party
providers. Professional fees, which include legal, accounting
and other costs related to regulatory compliance, increased
$5.3 million to $20.9 million in 2006 from
$15.6 million in 2005 resulting primarily from costs
associated with our prior withdrawn registration statement and
general growth in our legal, accounting and regulatory needs
caused by our growth. Other costs increased $7.5 million
and included expenses related to our new call center.
Research and development expense. Research and
development expense decreased $749,000, or 7.8%, to
$8.9 million in 2006 from $9.6 million in 2005. The
decrease was due primarily from the sale of NextNet in August
2006.
Depreciation and amortization
expense. Depreciation and amortization expense
increased $29.0 million to $40.9 million in 2006 from
$11.9 million in 2005, primarily due to increased network
build-out and deployed CPE costs related to our expansion into
new markets and associated subscriber growth. Capital
expenditures for depreciable property, plant and equipment
increased $59.0 million to $191.7 million in 2006 from
$132.7 million in 2005. The majority of these expenditures
relate to the construction of our network and purchases of base
station equipment.
Changes in technology customarily used in our business, such as
a transition to mobile WiMAX, may result in an impairment in the
value or a change in the estimated useful life of our pre-WiMAX
network equipment already placed in service. If such a change
occurs, we may be required to record an impairment charge to
reduce the carrying amount of equipment in service to its fair
value, and to accelerate the useful life of the respective
equipment, resulting in an increase in periodic depreciation
expense over the remaining useful life of the equipment, or, in
appropriate instances, to write off the entire unamortized value.
53
Spectrum lease expense. Spectrum lease expense
increased $14.1 million to $23.5 million in 2006 from
$9.4 million in 2005. As certain of our leases include
escalation clauses, we are required to record expense on a
straight-line basis over the term of these leases, including
renewal periods where appropriate. Total spectrum lease expense
increased as a direct result of an increase in the number of
spectrum licenses leased as part of the deployment of our
wireless broadband network.
Gain on sale of NextNet. The sale of NextNet
in August 2006 resulted in a gain of $19.8 million,
comprised of net proceeds from the sale of $47.1 million
less the book value of net assets sold of $26.1 million and
transaction related costs of $1.2 million.
Operating loss. As a result of the above,
operating loss increased from $127.2 million in 2005 to
$238.1 million in 2006.
Interest income. We recognized
$30.4 million of interest income in 2006 compared to
$6.6 million in 2005. This increase is due to an increase
in our total short-term and long-term investments.
Interest expense, net. We incurred
$72.3 million of net interest expense in 2006 compared to
$14.6 million in 2005. This increase in net interest
expense is due to the issuance in August 2005 of senior secured
notes, due 2010, in an aggregate principal amount of
$260.3 million, and the issuance in February 2006 of
additional senior secured notes, due 2010, in an aggregate
principal amount of $360.4 million, as well as additional
loans totaling $135.0 million. We recorded interest expense
totaling $69.1 million, including $63.2 million
related to our senior secured notes in 2006. We also recorded
amortization of original issuance discount of $15.8 million
and deferred financing costs of $3.9 million related to our
senior secured notes. These amounts were partially offset by
capitalized interest of $16.6 million in 2006. In the year
ended December 31, 2005, we recorded interest expense
totaling $11.6 million related to our notes,
$4.4 million of amortization of original issuance discount,
and deferred financing costs of $898,000, partially offset by
$2.3 million of capitalized interest.
Other income (expense), net. We recognized
$2.2 million of other income in 2006 as compared to
$300,000 of other income in 2005. This increase was due
primarily to the sale of spectrum assets in 2006.
Income tax provision. We incurred
$3.0 million of income tax expense in 2006 as compared to
$1.5 million in 2005. The expense represents the
recognition of a deferred tax liability related to the
accounting for FCC licenses we own. Owned FCC licenses are
amortized over 15 years for U.S. tax purposes but,
since these licenses have an indefinite life, they are not
amortized for financial statement reporting purposes. The
ongoing difference between the financial statements and tax
amortization treatment resulted in our recording a deferred
income tax expense of $3.0 million 2006.
Losses from equity investees, net. Losses from
equity investees net increased $1.2 million to
$5.1 million in 2006 from $3.9 million in 2005. The
increase is due to continued losses from our equity investee MVS
Net S.A. de C.V. in Mexico, as well as losses from our equity
investee Danske Telecom A/S in Denmark that we invested in
during June 2005.
Net loss. As a result of the above, our net
loss increased to $284.2 million in 2006 as compared to
$140.0 million in 2005.
Liquidity
and Capital Resource Requirements
Based upon our current plans, we believe that our existing cash,
cash equivalents and marketable securities will be sufficient to
cover our estimated liquidity needs for at least the next twelve
months, although we may raise additional capital during that
period if available on terms we believe are attractive. Our
long-term economic model is designed to allow replicable,
scalable individual market builds so that we can increase or
decrease our market deployment schedule based on available
funds. As a result, the amount and timing of our long-term
capital needs will depend on the extent of our network
deployment and, to a lesser degree, on the schedule on which
mobile WiMAX technologies become commercially available. As our
business is in its early stages, we regularly evaluate our plans
and strategy, and these evaluations often result in changes,
some of which may be material and may significantly modify our
cash requirements. These changes in our plans or strategy may
include the introduction of new features or services,
significant or enhanced distribution arrangements, investments
in infrastructure,
54
acquisition of other companies, or any combination of the
foregoing. Additionally, as our operations grow and expand, it
may become more difficult to modulate our business plans and
strategies based on the availability of funding. We will likely
seek significant additional debt financing or refinance existing
indebtedness, in both the short-term and the long-term, to
continue to fund our liquidity needs and capital resource
requirements.
The following table presents a summary of our cash flows and
beginning and ending cash balances for the years ended
December 31, 2007, 2006 and 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Cash used in operating activities
|
|
$
|
(522,135
|
)
|
|
$
|
(233,154
|
)
|
|
$
|
(96,655
|
)
|
Cash used in investing activities
|
|
|
(46,294
|
)
|
|
|
(867,557
|
)
|
|
|
(275,300
|
)
|
Cash provided by financing activities
|
|
|
1,007,571
|
|
|
|
1,504,213
|
|
|
|
389,181
|
|
Effect of foreign currency exchange rates on cash and cash
equivalents
|
|
|
(420
|
)
|
|
|
5,340
|
|
|
|
(636
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
438,722
|
|
|
|
408,842
|
|
|
|
16,590
|
|
Cash and cash equivalents at beginning of period
|
|
|
438,030
|
|
|
|
29,188
|
|
|
|
12,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
876,752
|
|
|
$
|
438,030
|
|
|
$
|
29,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Activities
Net cash used in operating activities increased by
$288.9 million to $522.1 million in the year ended
December 31, 2007, from $233.2 million in the year
ended December 31, 2006. The increase in cash used in
operations is due primarily to an increase in all operating
expenses as we continue to expand our business. This increase in
cash used was partially offset by an increase in cash received
from customers, which increased to $155.0 million in 2007
from $104.9 million in 2006. This increase was primarily
due to an increase in our subscriber base as we continued to
both increase subscribers in our existing markets as well as
adding 14 new markets in 2007.
Net cash used in operating activities increased by
$136.5 million to $233.2 million in 2006, from
$96.7 million in 2005. Cash received from customers was
$104.9 million in 2006 compared to $31.6 million in
2005. This increase was due to an increase in the number of our
subscribers as we launched our service in nine new markets in
2006. This increase was offset by increases in all operating
expenses, most significantly general and administrative and
sales and marketing expenses, including employee compensation,
professional fees and facilities and advertising expense, due to
the expansion of our wireless broadband network as well as a
significant increase in the number of markets served.
Investing
Activities
During the year ended December 31, 2007, net cash used in
investing activities was $46.3 million compared to
$867.6 million during the year ended December 31, 2006
representing an $821.3 million decrease in net cash used.
This decrease in cash used in 2007 was primarily the result of
an increase in sales of short-term and long-term investments of
$1.18 billion. This decrease was partially offset by an
increase in cash paid for property, plant and equipment of
$170.1 million as we continued investing in building our
wireless broadband network, as well as an increase in cash paid
for spectrum and other intangible assets of $155.3 million,
which is due primarily to the 2007 purchase of owned spectrum
from BellSouth of $196.8 million.
Net cash used in investing activities increased by
$592.3 million to $867.6 million in 2006 from
$275.3 million in 2005. We launched nine new markets in
2006, and, as a result, invested $259.4 million in
deploying our wireless broadband network and acquiring
additional spectrum licenses in 2006, as compared to
$157.0 million in 2005, an increase of $102.4 million.
Purchases of short-term and restricted investments, net of sales
or maturities, increased by $522.6 million to
$599.4 million in 2006 from $76.8 million in 2005.
Also contributing to this increase was an increase in cash paid
to acquire businesses which totaled $49.6 million in 2006
compared to $27.8 million in 2005, an increase of
$21.8 million due to an increase in spectrum acquisitions,
as well as the issuance of $4.1 million in notes receivable
in 2006, while we did no such issuance in 2005. These
expenditures were partially offset by the net proceeds received
on the sale of NextNet totaling $47.1 million and a
reduction of $11.5 million in cash invested in our equity
investees.
55
Financing
Activities
Net cash provided by financing activities was $1.0 billion
for the year ended December 31, 2007 compared to
$1.5 billion for the year ended December 31, 2006.
During 2007 our financing activities consisted primarily of cash
proceeds received from the issuance of $1.25 billion in
debt and from the $556.0 million net proceeds from our IPO.
This increase in cash received from financing activities was
partially offset by principal payments and financing fees on our
senior secured notes and other indebtedness.
Net cash provided by financing activities increased
$1.1 billion to $1.5 billion in 2006 from
$389.2 million in 2005. In 2006 we received
$1.0 billion of net proceeds from the issuance of common
stock, $360.4 million from the issuance of our senior
secured notes, due 2010, and $135.0 million in connection
with our commercial loan and other indebtedness.
Contractual
Obligations
The contractual obligations presented in the table below
represent our estimates of future payments under fixed
contractual obligations and commitments as of December 31,
2007. Changes in our business needs or interest rates, as well
as actions by third parties and other factors, may cause these
estimates to change. Because these estimates are complex and
necessarily subjective, our actual payments in future periods
are likely to vary from those presented in the table. The
following table summarizes our contractual obligations, other
than those listed below, including principal and interest
payments under our debt obligations and payments under our
spectrum lease obligations, as of December 31, 2007 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 1
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligations
|
|
Total
|
|
|
Year
|
|
|
1 - 3 Years
|
|
|
3 - 5 Years
|
|
|
Over 5 Years
|
|
|
Long-term debt obligations
|
|
$
|
1,256,875
|
|
|
$
|
22,500
|
|
|
$
|
25,000
|
|
|
$
|
1,209,375
|
|
|
$
|
|
|
Interest payments(1)
|
|
|
605,153
|
|
|
|
136,889
|
|
|
|
269,646
|
|
|
|
198,618
|
|
|
|
|
|
Operating lease obligations
|
|
|
2,060,539
|
|
|
|
87,320
|
|
|
|
173,898
|
|
|
|
170,259
|
|
|
|
1,629,062
|
|
Spectrum lease obligations
|
|
|
1,761,256
|
|
|
|
39,226
|
|
|
|
79,168
|
|
|
|
85,113
|
|
|
|
1,557,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total(2)(3)(4)
|
|
$
|
5,683,823
|
|
|
$
|
285,935
|
|
|
$
|
547,712
|
|
|
$
|
1,663,365
|
|
|
$
|
3,186,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Our interest payment obligations are calculated for all years
using an interest rate of approximately 11% based on our
weighted-average interest rate at December 31, 2007. |
|
(2) |
|
Excludes $51.6 million remaining under our commitment to
purchase no less than $150.0 million of infrastructure
products and subscriber products from Motorola through
August 29, 2008 under the terms of the commercial
agreements that were entered into on August 29, 2006.
Please see Note 3 to our Consolidated Financial Statements
for further details. |
|
(3) |
|
Excludes obligations of approximately $57.8 million under
pending spectrum acquisition agreements at December 31,
2007. |
|
(4) |
|
Excludes $89.8 million of capital and service credit
commitments related to certain spectrum lease agreements. |
We do not have any obligations that meet the definition of an
off-balance-sheet arrangement that have or are reasonably likely
to have a material effect on our financial statements.
Recent
Accounting Pronouncements
SFAS No. 141(R) In December 2007,
the Financial Accounting Standards Board (FASB)
issued SFAS No. 141 (revised 2007), Business
Combinations (SFAS No. 141(R)). In
SFAS No. 141(R), the FASB retained the fundamental
requirements of SFAS No. 141 to account for all
business combinations using the acquisition method (formerly the
purchase method) and for an acquiring entity to be identified in
all business combinations. The new standard requires the
acquiring entity in a business combination to recognize all (and
only) the assets acquired and liabilities assumed in the
transaction; establishes the acquisition-date fair value as the
measurement objective for all assets acquired and liabilities
assumed; requires transaction costs to be expensed as
56
incurred; and requires the acquirer to disclose to investors and
other users all of the information they need to evaluate and
understand the nature and financial effect of the business
combination. SFAS No. 141(R) is effective for annual
periods beginning on or after December 15, 2008.
Accordingly, any business combinations we engage in will be
recorded and disclosed following existing GAAP until
January 1, 2009. We expect SFAS No. 141(R) will
have an impact on our consolidated financial statements when
effective, but the nature and magnitude of the specific effects
will depend upon the nature, terms and size of the acquisitions
we consummate after the effective date.
SFAS No. 160 In December 2007, the
FASB issued SFAS No. 160, Noncontrolling Interests
in Consolidated Financial Statements
(SFAS No. 160).
SFAS No. 160 amends Accounting Research
Bulletin No. 51, Consolidated Financial Statements,
and requires all entities to report noncontrolling
(minority) interests in subsidiaries within equity in the
consolidated financial statements, but separate from the parent
shareholders equity. SFAS No. 160 also requires
any acquisitions or dispositions of noncontrolling interests
that do not result in a change of control to be accounted for as
equity transactions. Further, SFAS No. 160 requires
that a parent recognize a gain or loss in net income when a
subsidiary is deconsolidated. SFAS No. 160 is
effective for annual periods beginning on or after
December 15, 2008. We are currently evaluating whether the
adoption of SFAS No. 160 will have a material impact
on our financial statements.
SFAS No. 159 In February 2007, the
FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities
(SFAS No. 159). SFAS No. 159
permits entities to choose, at specified election dates, to
measure eligible items at fair value (fair value
option) and to report in earnings unrealized gains and
losses on those items for which the fair value option has been
elected. SFAS No. 159 also requires entities to
display the fair value of those assets and liabilities on the
face of the balance sheet. SFAS No. 159 establishes
presentation and disclosure requirements designed to facilitate
comparisons between entities that choose different measurement
attributes for similar types of assets and liabilities.
SFAS No. 159 is effective as of the beginning of an
entitys first fiscal year beginning after
November 15, 2007. We do not believe the adoption of this
pronouncement will have a material impact on our financial
statements.
SFAS No. 157 In September 2006, the
FASB issued SFAS No. 157, Fair Value Measurements
(SFAS No. 157). SFAS No. 157
defines fair value, establishes a framework for measuring fair
value and expands disclosure of fair value measurements.
SFAS No. 157 applies under other accounting
pronouncements that require or permit fair value measurements
and accordingly, does not require any new fair value
measurements. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after
November 15, 2007. In February 2008, the effective date of
SFAS No. 157 was delayed for one year by Final FASB
Staff Position (FSP)
No. FAS 157-2,
Effective Date of FASB Statement No. 157, for
certain non-financial assets and non-financial liabilities,
except those that are recognized or disclosed at fair value in
the financial statements on a recurring basis (at least
annually). The Company is currently evaluating the impact of
this pronouncement on its financial statements.
|
|
ITEM 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Market risk is the potential loss arising from adverse changes
in market rates and prices, such as interest rates, foreign
currency exchange rates and changes in the market value of
investments.
Interest
Rate Risk
Our primary interest rate risk is associated with our new senior
term loan facility. We have a total outstanding balance on our
senior term loan facility of $1.25 billion at
December 31, 2007. The rate of interest for borrowings
under the senior term loan facility is the Eurodollar rate plus
6.00% or the alternate base rate plus 5.00%, with interest
payable quarterly with respect to alternate base rate loans, and
with respect to Eurodollar loans, interest is payable in arrears
at the end of each applicable period, but at least every three
months. The weighted average interest rate under this facility
was 11.06% at December 31, 2007. A one percent increase in
the interest rate on the outstanding principal balance at
December 31, 2007, would increase our annual interest
expense by approximately $12.5 million per year.
In an effort to reduce interest expense on our senior term loan
facility, in January 2008, the Company entered into two interest
rate swaps to hedge its forward three-month LIBOR indexed
variable interest payments in an effort to reduce interest
expense. The first swap was entered on January 4, 2008,
effective March 5, 2008, to pay a fixed
57
rate of 3.6225% and to receive the three-month LIBOR on a
notional value of $300.0 million for three years. The
second swap was entered on January 7, 2008, effective
March 5, 2008, to pay a fixed rate of 3.5% and to receive
the three month LIBOR on a notional value of $300.0 million
for two years. In accordance with SFAS No. 133, its
amendments and related guidance, the Company will treat the
interest rate swaps as cash-flow hedges and will
record the fair value of the swaps at the end of each calendar
quarter, starting March 31, 2008.
Foreign
Currency Exchange Rates
We are exposed to foreign currency exchange rate risk as it
relates to our international operations. We currently do not
hedge our currency exchange rate risk and, as such, we are
exposed to fluctuations in the value of the U.S. dollar
against other currencies. Our international subsidiaries and
equity investees generally use the currency of the jurisdiction
in which they reside, or local currency, as their functional
currency. Assets and liabilities are translated at exchange
rates in effect as of the balance sheet date and the resulting
translation adjustments are recorded as a separate component of
accumulated other comprehensive income (loss). Income and
expense accounts are translated at the average monthly exchange
rates during the reporting period. The effects of changes in
exchange rates between the U.S. Dollar and the currency in
which a transaction is denominated are recorded as foreign
currency transaction gains (losses) as a component of net loss.
We do not expect the effects of changes in exchange rates to be
material.
Investment
Risk
At December 31, 2007, we held available-for-sale short-term
and long-term investments with a fair value of
$155.6 million and a cost of $162.9 million, of which
investments with a fair value of $88.6 million and a cost
of $95.9 million were auction rate securities and
$67.0 million were government and agency issues, bonds and
commercial paper. We regularly review the carrying value of our
short-term and long-term investments and identify and record
losses when events and circumstances indicate that declines in
the fair value of such assets below our accounting basis are
other-than-temporary, which we experienced with our auction rate
securities during the year ended December 31, 2007. The
fair values of our investments are subject to significant
fluctuations due to volatility of the credit markets in general,
company-specific circumstances, and changes in general economic
conditions. Based on the fair value of the auction rate
securities we held at December 31, 2007 of
$88.6 million, an assumed 15%, 30%, and 50% adverse change
to market prices of these securities would result in a
corresponding decline in total fair value of approximately
$13.3 million, $26.6 million, or $44.3 million.
Beginning in August 2007, the auctions failed to attract buyers
and sell orders could not be filled. Current market conditions
are such that we are unable to estimate when the auctions will
resume. While we continue to earn interest on these investments
at the maximum contractual rate, the estimated fair value of
these auction rate securities no longer approximates cost and
until the auctions are successful the investments are not
liquid. We may not have access to these funds until a future
auction on these investments is successful.
Our investments in auction rate securities represent interests
in collateralized debt obligations supported by preferred equity
securities of small to medium sized insurance companies and
financial institutions and asset backed capital commitment
securities supported by high grade, short term commercial paper
and a put option from a monoline insurance company. These
auction rate securities were rated AAA/Aaa or AA/Aa by
Standard & Poors and Moodys rating services at
the time of purchase and their ratings have not changed as of
December 31, 2007. However, some of the securities remain
subject to review for possible downgrade. Any downgrade may
result in further declines in the estimated fair value of the
securities as a result of the perceived increase in risk
associated with an investment in the securities.
In addition to the above mentioned securities, the Company holds
one commercial paper security issued by a structured investment
vehicle that was placed in receivership in September 2007 for
which an insolvency event was declared by the receiver in
October 2007. The Issuer invests in residential and commercial
mortgages and other structured credits including sub-prime
mortgages. Based on information received from the receiver, we
expect a restructuring plan for this security to be implemented
by mid 2008. This restructuring plan may result in an additional
decline in the estimated fair value of our investments.
58
|
|
ITEM 8.
|
Financial
Statements and Supplementary Data
|
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
59
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Clearwire
Corporation
Kirkland, Washington
We have audited the accompanying consolidated balance sheets of
Clearwire Corporation and subsidiaries (the Company)
as of December 31, 2007 and 2006, and the related
consolidated statements of operations, stockholders
equity, and cash flows for each of the three years in the period
ended December 31, 2007. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Clearwire Corporation and subsidiaries as of December 31,
2007 and 2006, and the results of their operations and their
cash flows for each of the three years in the period ended
December 31, 2007, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 2 to the consolidated financial
statements, the Company changed its method of accounting for
stock-based compensation upon adoption of Statement of Financial
Accounting Standards Board Statement No. 123(R),
Share-Based Payment.
|
|
|
|
|
/s/ Deloitte &
Touche LLP
|
Seattle, Washington
March 11, 2008
60
CLEARWIRE
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except share and per share data)
|
|
|
ASSETS
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
876,752
|
|
|
$
|
438,030
|
|
Short-term investments
|
|
|
67,012
|
|
|
|
663,644
|
|
Restricted cash
|
|
|
1,077
|
|
|
|
10,727
|
|
Restricted investments
|
|
|
|
|
|
|
69,401
|
|
Accounts receivable, net of allowance of $787 and $753
|
|
|
3,677
|
|
|
|
2,774
|
|
Notes receivable short-term, related party
|
|
|
2,134
|
|
|
|
4,409
|
|
Inventory
|
|
|
2,312
|
|
|
|
1,398
|
|
Prepaids and other assets
|
|
|
36,748
|
|
|
|
19,219
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
989,712
|
|
|
|
1,209,602
|
|
Property, plant and equipment, net
|
|
|
572,329
|
|
|
|
302,798
|
|
Restricted cash
|
|
|
11,603
|
|
|
|
117
|
|
Restricted investments
|
|
|
|
|
|
|
16,269
|
|
Long-term investments
|
|
|
88,632
|
|
|
|
|
|
Notes receivable long-term, related party
|
|
|
4,700
|
|
|
|
|
|
Prepaid spectrum license fees
|
|
|
457,741
|
|
|
|
241,151
|
|
Spectrum licenses and other intangible assets, net
|
|
|
480,003
|
|
|
|
222,980
|
|
Goodwill
|
|
|
35,666
|
|
|
|
30,908
|
|
Investments in equity investees
|
|
|
14,602
|
|
|
|
14,983
|
|
Other assets
|
|
|
30,981
|
|
|
|
29,565
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
2,685,969
|
|
|
$
|
2,068,373
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
102,447
|
|
|
$
|
108,216
|
|
(includes related party balances of $4,521 and $6,799)
|
|
|
|
|
|
|
|
|
Deferred rent
|
|
|
24,805
|
|
|
|
6,986
|
|
Deferred revenue
|
|
|
10,010
|
|
|
|
5,599
|
|
Due to affiliate
|
|
|
2
|
|
|
|
532
|
|
Current portion of long-term debt
|
|
|
22,500
|
|
|
|
1,250
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
159,764
|
|
|
|
122,583
|
|
Long-term debt, net of discount of $0 and $110,007
|
|
|
1,234,375
|
|
|
|
644,438
|
|
Other long-term liabilities
|
|
|
114,492
|
|
|
|
42,385
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,508,631
|
|
|
|
809,406
|
|
MINORITY INTEREST
|
|
|
13,506
|
|
|
|
1,358
|
|
COMMITMENTS AND CONTINGENCIES (NOTE 11)
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Preferred stock, par value $0.0001, 5,000,000 shares
authorized; no shares issued or outstanding
|
|
|
|
|
|
|
|
|
Common stock, par value $0.0001, and additional paid-in capital,
350,000,000 shares authorized; Class A, 135,567,269
and 109,325,236 shares issued and outstanding
|
|
|
2,098,155
|
|
|
|
1,474,759
|
|
Class B, 28,596,685 shares issued and outstanding
|
|
|
234,376
|
|
|
|
234,376
|
|
Common stock and warrants payable
|
|
|
|
|
|
|
166
|
|
Deferred compensation
|
|
|
|
|
|
|
(116
|
)
|
Accumulated other comprehensive income
|
|
|
17,333
|
|
|
|
6,990
|
|
Accumulated deficit
|
|
|
(1,186,032
|
)
|
|
|
(458,566
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,163,832
|
|
|
|
1,257,609
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
|
|
$
|
2,685,969
|
|
|
$
|
2,068,373
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
61
CLEARWIRE
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share data)
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
|
|
$
|
151,440
|
|
|
$
|
67,598
|
|
|
$
|
8,451
|
|
Equipment and other (includes related party sales of $0, $15,546
and $9,728)
|
|
|
|
|
|
|
32,583
|
|
|
|
25,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
151,440
|
|
|
|
100,181
|
|
|
|
33,454
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods and services (exclusive of a portion of
depreciation and amortization shown below):
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (includes related party costs of $2,877, $606
and $0)
|
|
|
107,281
|
|
|
|
50,438
|
|
|
|
13,086
|
|
Cost of equipment (includes related party costs of $0, $8,914
and $1,853)
|
|
|
|
|
|
|
19,674
|
|
|
|
10,483
|
|
Selling, general and administrative expense
|
|
|
360,666
|
|
|
|
214,669
|
|
|
|
106,211
|
|
Research and development
|
|
|
1,397
|
|
|
|
8,890
|
|
|
|
9,639
|
|
Depreciation and amortization
|
|
|
84,694
|
|
|
|
40,902
|
|
|
|
11,913
|
|
Spectrum lease expense
|
|
|
96,417
|
|
|
|
23,516
|
|
|
|
9,356
|
|
Gain on sale of NextNet
|
|
|
|
|
|
|
(19,793
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
650,455
|
|
|
|
338,296
|
|
|
|
160,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING LOSS
|
|
|
(499,015
|
)
|
|
|
(238,115
|
)
|
|
|
(127,234
|
)
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
65,736
|
|
|
|
30,429
|
|
|
|
6,605
|
|
Interest expense
|
|
|
(96,279
|
)
|
|
|
(72,280
|
)
|
|
|
(14,623
|
)
|
Foreign currency gains, net
|
|
|
363
|
|
|
|
235
|
|
|
|
20
|
|
Loss on extinguishment of debt
|
|
|
(159,193
|
)
|
|
|
|
|
|
|
|
|
Other-than-temporary impairment loss and realized loss on
investments
|
|
|
(35,020
|
)
|
|
|
|
|
|
|
|
|
Other income, net
|
|
|
1,801
|
|
|
|
2,150
|
|
|
|
300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net
|
|
|
(222,592
|
)
|
|
|
(39,466
|
)
|
|
|
(7,698
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS BEFORE INCOME TAXES, MINORITY INTEREST AND LOSSES FROM
EQUITY INVESTEES
|
|
|
(721,607
|
)
|
|
|
(277,581
|
)
|
|
|
(134,932
|
)
|
Income tax provision
|
|
|
(5,427
|
)
|
|
|
(2,981
|
)
|
|
|
(1,459
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS BEFORE MINORITY INTEREST AND LOSSES FROM EQUITY INVESTEES
|
|
|
(727,034
|
)
|
|
|
(280,562
|
)
|
|
|
(136,391
|
)
|
Minority interest in net loss of consolidated subsidiaries
|
|
|
4,244
|
|
|
|
1,503
|
|
|
|
387
|
|
Losses from equity investees
|
|
|
(4,676
|
)
|
|
|
(5,144
|
)
|
|
|
(3,946
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(727,466
|
)
|
|
$
|
(284,203
|
)
|
|
$
|
(139,950
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share, basic and diluted
|
|
$
|
(4.58
|
)
|
|
$
|
(2.93
|
)
|
|
$
|
(1.97
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, basic and diluted
|
|
|
158,737
|
|
|
|
97,085
|
|
|
|
71,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
62
CLEARWIRE
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
|
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Class A
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Common
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Class B
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Stock,
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Common
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Warrants and
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Stock and
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Accumulated
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Additional
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Additional
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Common
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Other
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Total
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Paid
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Paid
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Stock and
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Comprehensive
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Total
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Comprehensive
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In Capital
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In Capital
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Warrants
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Deferred
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Income
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Accumulated
|
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Stockholders
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Income
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Shares
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Amounts
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Shares
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Amounts
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Payable
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Compensation
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(Loss)
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Deficit
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Equity
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(Loss)
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(In thousands)
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Balances at January 1, 2005
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43,053
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$
|
218,411
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|
18,691
|
|
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$
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56,073
|
|
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$
|
3,354
|
|
|
$
|
(2,320
|
)
|
|
$
|
265
|
|
|
$
|
(34,413
|
)
|
|
$
|
241,370
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$
|
(32,777
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)
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Net loss
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|
|
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|
|
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(139,950
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)
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(139,950
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)
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(139,950
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)
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Foreign currency translation adjustment
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(636
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)
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(636
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)
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(636
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)
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Unrealized loss on short-term investments
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(111
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)
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(111
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)
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(111
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)
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Common stock issued, net of costs
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13,133
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157,600
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78
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157,678
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Warrants issued
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59,563
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2,541
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62,104
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Common stock and warrants payable
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|
|
|
|
|
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(4,305
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)
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(4,305
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)
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Deferred stock-based compensation
|
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|
|
|
|
|
881
|
|
|
|
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|
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(881
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)
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|
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Amortization of deferred stock-based compensation
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|
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|
|
|
|
|
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|
|
|
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|
|
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2,542
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|
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|
|
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2,542
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Balances at December 31, 2005
|
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56,186
|
|
|
|
436,455
|
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|
18,691
|
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|
56,073
|
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|
1,668
|
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|
|
(659
|
)
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(482
|
)
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(174,363
|
)
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318,692
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(140,697
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)
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Net loss
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|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
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|
|
(284,203
|
)
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|
|
(284,203
|
)
|
|
|
(284,203
|
)
|
Foreign currency translation adjustment
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|
|
|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
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|
|
7,522
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|
|
|
|
|
|
|
7,522
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|
|
|
7,522
|
|
Unrealized loss on short-term investments
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
(50
|
)
|
|
|
|
|
|
|
(50
|
)
|
|
|
(50
|
)
|
Common stock issued, net of costs
|
|
|
53,056
|
|
|
|
946,766
|
|
|
|
9,906
|
|
|
|
178,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,125,069
|
|
|
|
|
|
Warrants issued
|
|
|
|
|
|
|
77,261
|
|
|
|
|
|
|
|
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|
|
|
(1,851
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,410
|
|
|
|
|
|
Common stock and warrants payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
349
|
|
|
|
|
|
Deferred stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
543
|
|
|
|
|
|
|
|
|
|
|
|
543
|
|
|
|
|
|
Stock-based compensation
|
|
|
83
|
|
|
|
14,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2006
|
|
|
109,325
|
|
|
|
1,474,759
|
|
|
|
28,597
|
|
|
|
234,376
|
|
|
|
166
|
|
|
|
(116
|
)
|
|
|
6,990
|
|
|
|
(458,566
|
)
|
|
|
1,257,609
|
|
|
|
(276,731
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(727,466
|
)
|
|
|
(727,466
|
)
|
|
|
(727,466
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,561
|
|
|
|
|
|
|
|
17,561
|
|
|
|
17,561
|
|
Unrealized loss on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(42,238
|
)
|
|
|
|
|
|
|
(42,238
|
)
|
|
|
(42,238
|
)
|
Reclassification adjustment for other-than- temporary impairment
loss and realized loss on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,020
|
|
|
|
|
|
|
|
35,020
|
|
|
|
35,020
|
|
Common stock issued from IPO, net
|
|
|
24,000
|
|
|
|
556,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
556,005
|
|
|
|
|
|
Common stock issued for spectrum
|
|
|
233
|
|
|
|
4,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,200
|
|
|
|
|
|
Warrants issued
|
|
|
|
|
|
|
17,194
|
|
|
|
|
|
|
|
|
|
|
|
(166
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,028
|
|
|
|
|
|
Options and warrants exercised
|
|
|
1,937
|
|
|
|
4,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,849
|
|
|
|
|
|
Cashless option exercises and other stock transactions
|
|
|
39
|
|
|
|
(618
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(618
|
)
|
|
|
|
|
Deferred stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
116
|
|
|
|
|
|
|
|
|
|
|
|
116
|
|
|
|
|
|
Restricted stock compensation
|
|
|
33
|
|
|
|
286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
286
|
|
|
|
|
|
Share-based compensation
|
|
|
|
|
|
|
41,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2007
|
|
|
135,567
|
|
|
$
|
2,098,155
|
|
|
|
28,597
|
|
|
$
|
234,376
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
17,333
|
|
|
$
|
(1,186,032
|
)
|
|
$
|
1,163,832
|
|
|
$
|
(717,123
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
63
CLEARWIRE
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(727,466
|
)
|
|
$
|
(284,203
|
)
|
|
$
|
(139,950
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for uncollectible accounts
|
|
|
4,915
|
|
|
|
885
|
|
|
|
368
|
|
Depreciation and amortization
|
|
|
84,694
|
|
|
|
40,902
|
|
|
|
11,913
|
|
Amortization of prepaid license fees
|
|
|
37,884
|
|
|
|
6,273
|
|
|
|
2,914
|
|
Amortization of deferred financing costs and accretion of debt
discount
|
|
|
20,707
|
|
|
|
19,754
|
|
|
|
5,279
|
|
Deferred income taxes
|
|
|
5,412
|
|
|
|
2,960
|
|
|
|
1,459
|
|
Share-based compensation
|
|
|
42,771
|
|
|
|
14,246
|
|
|
|
2,542
|
|
Minority interest
|
|
|
(4,244
|
)
|
|
|
(1,503
|
)
|
|
|
(387
|
)
|
Losses from equity investees, net
|
|
|
4,676
|
|
|
|
5,144
|
|
|
|
3,946
|
|
Loss on extinguishment of debt
|
|
|
159,193
|
|
|
|
|
|
|
|
|
|
Other-than-temporary impairment loss and realized loss on
investments
|
|
|
35,020
|
|
|
|
|
|
|
|
|
|
Loss (gain) on other asset disposals
|
|
|
850
|
|
|
|
(1,915
|
)
|
|
|
841
|
|
Gain on sale of equity investment
|
|
|
(2,213
|
)
|
|
|
|
|
|
|
|
|
Gain on sale of business, net of cash
|
|
|
|
|
|
|
(19,793
|
)
|
|
|
|
|
Changes in assets and liabilities, net of effects from
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid spectrum license fees
|
|
|
(235,479
|
)
|
|
|
(64,638
|
)
|
|
|
(25,040
|
)
|
Inventory
|
|
|
(914
|
)
|
|
|
(1,913
|
)
|
|
|
6,005
|
|
Accounts receivable
|
|
|
(5,387
|
)
|
|
|
(686
|
)
|
|
|
(4,306
|
)
|
Prepaids and other assets
|
|
|
(17,841
|
)
|
|
|
(10,687
|
)
|
|
|
(4,445
|
)
|
Accounts payable
|
|
|
11,198
|
|
|
|
389
|
|
|
|
14,027
|
|
Accrued expenses and other liabilities
|
|
|
64,619
|
|
|
|
61,447
|
|
|
|
35,309
|
|
Due to affiliate
|
|
|
(530
|
)
|
|
|
184
|
|
|
|
(7,130
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(522,135
|
)
|
|
|
(233,154
|
)
|
|
|
(96,655
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment
|
|
|
(361,861
|
)
|
|
|
(191,747
|
)
|
|
|
(132,724
|
)
|
Payments for acquisitions of spectrum licenses and other
|
|
|
(222,920
|
)
|
|
|
(67,665
|
)
|
|
|
(24,279
|
)
|
Purchases of available-for-sale investments
|
|
|
(1,294,484
|
)
|
|
|
(1,143,079
|
)
|
|
|
(368,160
|
)
|
Sales or maturities of available-for-sale investments
|
|
|
1,760,246
|
|
|
|
575,845
|
|
|
|
350,429
|
|
Investments in equity investees
|
|
|
(5,293
|
)
|
|
|
(2,161
|
)
|
|
|
(13,737
|
)
|
Issuance of notes receivable, related party
|
|
|
(2,000
|
)
|
|
|
(4,105
|
)
|
|
|
|
|
Restricted cash
|
|
|
(1,836
|
)
|
|
|
(1,830
|
)
|
|
|
(3,704
|
)
|
Restricted investments
|
|
|
85,670
|
|
|
|
(30,324
|
)
|
|
|
(55,346
|
)
|
Business acquisitions, net of cash acquired
|
|
|
(7,066
|
)
|
|
|
(49,576
|
)
|
|
|
(27,779
|
)
|
Proceeds from sale of business, net of cash
|
|
|
|
|
|
|
47,085
|
|
|
|
|
|
Proceeds from sale of equity investment and other assets
|
|
|
3,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(46,294
|
)
|
|
|
(867,557
|
)
|
|
|
(275,300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock for IPO and other, net
|
|
|
556,005
|
|
|
|
1,030,683
|
|
|
|
139,609
|
|
Proceeds from issuance of common stock for option and warrant
exercises
|
|
|
4,849
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of debt
|
|
|
1,250,000
|
|
|
|
495,350
|
|
|
|
260,346
|
|
Financing fees
|
|
|
(69,462
|
)
|
|
|
(21,820
|
)
|
|
|
(10,774
|
)
|
Principal payments on long-term debt
|
|
|
(748,821
|
)
|
|
|
|
|
|
|
|
|
Contributions from minority interests
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
1,007,571
|
|
|
|
1,504,213
|
|
|
|
389,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency exchange rates on cash and cash
equivalents
|
|
|
(420
|
)
|
|
|
5,340
|
|
|
|
(636
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
438,722
|
|
|
|
408,842
|
|
|
|
16,590
|
|
CASH AND CASH EQUIVALENTS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
438,030
|
|
|
|
29,188
|
|
|
|
12,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
$
|
876,752
|
|
|
$
|
438,030
|
|
|
$
|
29,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW DISCLOSURES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock and warrants issued for spectrum licenses
|
|
$
|
21,379
|
|
|
$
|
63,891
|
|
|
$
|
22,137
|
|
Common stock and warrants issued for business acquisitions
|
|
|
15
|
|
|
|
32,013
|
|
|
|
428
|
|
Cash paid for taxes
|
|
|
15
|
|
|
|
21
|
|
|
|
|
|
Cash paid for interest
|
|
|
119,793
|
|
|
|
53,541
|
|
|
|
|
|
Notes receivable exchanged for spectrum licenses
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
Fixed asset purchases in accounts payable
|
|
|
17,449
|
|
|
|
3,327
|
|
|
|
11,044
|
|
Non-cash dividends to related party
|
|
|
1,465
|
|
|
|
2,384
|
|
|
|
34
|
|
See notes to consolidated financial statements.
64
CLEARWIRE
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
1.
|
Description
of Business
|
The
Business
The consolidated financial statements include the accounts of
Clearwire Corporation, a Delaware corporation, and its
wholly-owned and majority-owned or controlled subsidiaries
(collectively, the Company or
Clearwire). Clearwire was formed on October 27,
2003 and is an international provider of wireless broadband
services. Clearwire delivers high-speed wireless broadband
services to individuals, small businesses, public safety
organizations, and others in a growing number of markets through
its advanced network. As of December 31, 2007, the Company
offered its services in 46 markets throughout the United States
and four markets internationally. Prior to August 29, 2006,
Clearwire, through its wholly-owned subsidiary, NextNet
Wireless, Inc. (NextNet), developed, manufactured,
and sold equipment that enabled the deployment of broadband
wireless networks. NextNet is currently the sole supplier of
base station and customer premise equipment that Clearwire uses
to provide its services. On August 29, 2006, Clearwire sold
NextNet to Motorola, Inc. (Motorola). As part of the
agreement with Motorola, the Company agreed to use Motorola as
an exclusive supplier of certain infrastructure and subscriber
equipment for a specified period of time, subject to Motorola
continuing to satisfy certain requirements and other conditions.
See Note 3, Significant Transactions, for additional
information
On January 19, 2007, the Companys Board of Directors
approved a reverse stock split, which was approved by the
Companys stockholders on February 16, 2007. The
reverse stock split became effective March 1, 2007. Upon
the effectiveness of the reverse stock split, each three shares
of Class A common stock were combined into one share of
Class A common stock and each three shares of Class B
common stock were combined into one share of Class B common
stock. All share and per share amounts in the consolidated
financial statements have been retroactively adjusted for all
periods presented to give effect to the reverse stock split.
Business
Segments
The Company complies with the requirements of Statement of
Financial Accounting Standards (SFAS) No. 131,
Disclosures about Segments of an Enterprise and Related
Information (SFAS No. 131), which
establishes annual and interim reporting standards for an
enterprises operating segments and related disclosures
about its products, services, geographic areas and major
customers. Operating segments are defined as components of an
enterprise for which separate financial information is available
that is evaluated regularly by the chief operating decision
makers in deciding how to allocate resources and in assessing
performance. Operating segments can be aggregated for segment
reporting purposes so long as certain aggregation criteria are
met. The Company defines the chief operating decision makers as
our Chief Executive Officer, Chief Operating Officer and the
Chief Financial Officer. As its business continues to
mature, the Company assesses how it views and operates the
business. As a result, in the fourth quarter of 2007 the Company
changed how its chief operating decision makers assess the
business and the Company is now organized into two reportable
business segments: the United States and the International
business. See Note 16, Business Segments, for additional
discussion.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Basis
of Presentation
The accompanying financial statements have been prepared in
accordance with accounting principles generally accepted in the
United States of America and pursuant to the rules and
regulations of the Securities and Exchange Commission (the
SEC).
Principles of Consolidation The consolidated
financial statements include all of the assets, liabilities and
results of operations of the Companys wholly-owned and
majority-owned or controlled subsidiaries. Investments in
entities that the Company does not control, but for which it has
the ability to exercise significant influence over operating and
financial policies, are accounted for under the equity method.
All intercompany transactions are eliminated in consolidation.
65
CLEARWIRE
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Use of Estimates The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States of America (GAAP)
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts
of revenues and expenses during the reporting period. Due to the
inherent uncertainty involved in making those estimates, actual
results could materially differ.
Significant estimates inherent in the preparation of the
accompanying financial statements include the application of
purchase accounting including the valuation of acquired assets
and liabilities, valuation of investments, the valuation of the
Companys common stock, the amortization period of prepaid
spectrum license fees, allowance for doubtful accounts,
depreciation and equity granted to third parties and employees.
Cash and Cash Equivalents Cash and cash
equivalents consist of time deposits and highly liquid
short-term investments with original maturities of three months
or less. Cash and cash equivalents exclude cash that is
contractually restricted for operational purposes. The Company
maintains cash and cash equivalent balances with financial
institutions that exceed federally insured limits. The Company
has not experienced any losses related to these balances, and
management believes its credit risk related to these balances to
be minimal.
Restricted Cash Restricted cash is classified
as a current or noncurrent asset based on its designated
purpose. As of December 31, 2007, the Company had
restricted cash of $12.7 million. The majority of this
restricted cash related primarily to the Companys
outstanding letters of credit.
Investments SFAS No. 115,
Accounting for Certain Investments in Debt and Equity
Securities, and Staff Accounting Bulletin (SAB)
No. 59, Accounting for Non-current Marketable Equity
Securities, provide guidance on determining when an
investment is other-than-temporarily impaired. The Company
classifies marketable debt and equity securities that are
available for current operations as short-term
available-for-sale investments, and these securities are stated
at fair value. Unrealized gains and losses are recorded as a
separate component of accumulated other comprehensive income
(loss). Losses are recognized when a decline in fair value is
determined to be other-than-temporary. Realized gains and losses
are determined on the basis of the specific identification
method. The Company reviews its short-term and long-term
investments on an ongoing basis for indicators of
other-than-temporary impairment, and this determination requires
significant judgment.
The Company has an investment portfolio comprised of marketable
debt and equity securities including commercial paper, corporate
bonds, municipal bonds, auction rate securities and other
securities. The value of these securities is subject to market
volatility during the period the investments are held and until
their sale or maturity. The Company recognizes realized losses
when declines in the fair value of our investments below their
cost basis are judged to be other-than-temporary. In determining
whether a decline in fair value is other-than-temporary, the
Company considers various factors including market price (when
available), investment ratings, the financial condition and
near-term prospects of the issuer, the length of time and the
extent to which the fair value has been less than the cost
basis, and the Companys intent and ability to hold the
investment until maturity or for a period of time sufficient to
allow for any anticipated recovery in market value. The Company
makes significant judgments in considering these factors. If it
is judged that a decline in fair value is other-than-temporary,
the investment is valued at the current estimated fair value and
a realized loss equal to the decline is reflected in the
consolidated statement of operations.
In determining fair value, the Company uses quoted prices in
active markets where such prices are available, or models to
estimate the fair value using various methods including the
market, income and cost approaches. For investments where models
are used to estimate fair value in the absence of quoted market
prices, the Company often utilizes certain assumptions that
market participants would use in pricing the investment,
including assumptions about risk and or the risks inherent in
the inputs to the valuation technique. These inputs are readily
observable, market corroborated, or unobservable Company inputs.
66
CLEARWIRE
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company estimates the fair value of securities without
quoted market prices using internally generated pricing models
that require various inputs and assumptions. The Company
believes that its pricing models, inputs and assumptions are
what market participants would use in pricing the securities.
The Company maximizes the use of observable inputs to the
pricing models where quoted market prices from securities and
derivatives exchanges are available and reliable. The Company
typically receives external valuation information for
U.S. Treasuries, other U.S. Government and Agency
securities, as well as certain corporate debt securities, money
market funds and certificates of deposit. The Company also uses
certain unobservable inputs that cannot be validated by
reference to a readily observable market or exchange data and
relies, to a certain extent, on managements own
assumptions about the assumptions that market participant would
use in pricing the security. The Companys internally
generated pricing models may include its own data and require
the Company to use its judgment in interpreting relevant market
data, matters of uncertainty and matters that are inherently
subjective in nature. The Company uses many factors that are
necessary to estimate market values, including, interest rates,
market risks, market spreads, and timing of cash flows, market
liquidity, and review of underlying collateral and principal,
interest and dividend payments. The use of different judgments
and assumptions could result in different presentations of
pricing and security prices could change significantly based on
market conditions.
Restricted Investments Restricted investments
consist of U.S. government securities. At December 31,
2006 restricted investments represented securities held as
collateral for the interest payments through November 15,
2007 related to the Companys long-term debt. These
securities are classified as held-to-maturity and are stated at
amortized cost. Gross unrealized losses on these investments
were $244,000 at December 31, 2006. There were no gross
unrealized gains as of December 31, 2006. As a result of
repayment of long-term debt, there is no remaining collateral
requirement and no balance in restricted investments at
December 31, 2007.
Fair Value of Financial Instruments The
Company has determined the estimated fair value of financial
instruments using available market information and management
judgment. Accordingly, these estimates are not necessarily
indicative of the amounts that could be realized in a current
market exchange. The carrying amounts of cash and cash
equivalents, accounts and notes receivable, accounts payable,
accrued expenses and due to affiliates are reasonable estimates
of their fair values based on the liquidity of these financial
instruments and their short-term nature. The Company does not
hold or issue any financial instruments for trading purposes.
See Note 10, Long-Term Debt, for the fair value of
long-term debt.
Accounts Receivable Accounts receivable are
stated at amounts due from customers net of an allowance for
doubtful accounts. The Company specifically provides allowances
for customers with known disputes or collectibility issues. The
remaining reserve recorded in the allowance for doubtful
accounts is the Companys best estimate of the amount of
probable losses in the remaining accounts receivable based upon
an evaluation of the age of receivables and historical
experience. The allowance for doubtful accounts was
approximately $787,000 and $753,000 as of December 31, 2007
and 2006, respectively.
Inventory Inventory primarily consists of
finished goods and is stated at the lower of cost or net
realizable value. Cost is determined under the
first-in,
first-out inventory method. The Company records inventory
write-downs for obsolete and slow-moving items based on
inventory turnover trends and historical experience.
Property, Plant and Equipment Property, plant
and equipment and improvements that extend the useful life of an
asset are stated at cost, net of accumulated depreciation.
Depreciation is calculated on a straight-line basis over the
estimated useful lives of the assets. The Company capitalizes
costs of additions and improvements, including direct costs of
constructing property, plant and equipment and interest costs
related to construction. The estimated useful life of property,
plant and equipment are determined based on historical usage of
that or similar equipment, with consideration given to
technological changes and industry trends that could impact the
network architecture and asset utilization. Leasehold
improvements are recorded at cost and amortized over the lesser
of their estimated useful lives or the related lease term.
Maintenance and repairs are expensed as incurred.
67
CLEARWIRE
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Internally Developed Software Clearwire
capitalizes costs related to computer software developed or
obtained for internal use in accordance with Statement of
Position (SOP)
No. 98-1,
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. Software obtained for internal
use has generally been enterprise-level business and finance
software customized to meet specific operational needs. Costs
incurred in the application development phase are capitalized
and amortized over the useful life of the software, which is
generally three years. Costs recognized in the preliminary
project phase and the post-implementation phase are expensed as
incurred.
Intangible Assets Intangible assets consist
primarily of Federal Communications Commission (FCC)
spectrum licenses and other intangible assets related to
Clearwires acquisition of NextNet in March 2004, which was
subsequently disposed in August 2006, and Banda Ancha S.A.
(BASA) in December 2005 and February 2006. As
further described in Note 7, Spectrum Licenses, Goodwill
and Other Intangible Assets, the Company accounts for its
spectrum licenses and other intangible assets in accordance with
the provisions of SFAS No. 142, Goodwill and Other
Intangible Assets (SFAS No. 142). In
accordance with SFAS No. 142, intangible assets with
indefinite useful lives are not amortized but must be assessed
for impairment annually or more frequently if an event indicates
that the asset might be impaired. The Company performed its
annual impairment test of indefinite lived intangible assets on
October 1, 2007 and concluded that there was no impairment
of these intangible assets.
Goodwill Goodwill represents the excess of
the purchase price over the estimated fair value of net assets
acquired from Clearwires acquisitions. In accordance with
SFAS No. 142, the Company completes a two-step process
to determine the amount of goodwill impairment. The first step
involves comparison of the fair value of the reporting unit to
its carrying value to determine if any impairment exists. If the
fair value of the reporting unit is less than the carrying
value, goodwill is considered to be impaired and the second step
is performed. The second step involves comparison of the implied
fair value of goodwill to its carrying value. The implied fair
value of goodwill is determined by allocating fair value to the
various assets and liabilities within the reporting unit in the
same manner goodwill is recognized in a business combination. In
calculating an impairment charge, the fair value of the impaired
reporting units are estimated using a discounted cash flow
valuation methodology or by reference to recent comparable
transactions. In making this assessment, the Company relies on a
number of factors, including operating results, business plans,
economic projections, and anticipated future cash flows. There
are inherent uncertainties related to these factors and judgment
in applying these factors to the goodwill impairment test. The
Company performed its annual impairment tests of goodwill as of
October 1, 2007, and concluded that there was no impairment
of goodwill.
Long-Lived Assets Long-lived assets to be
held and used, including property, plant and equipment and
intangible assets with definite useful lives, are assessed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. If
the total of the expected undiscounted future cash flows is less
than the carrying amount of the asset, a loss, if any, is
recognized for the difference between the fair value and
carrying value of the assets. Impairment analyses, when
performed, are based on the Companys business and
technology strategy, managements views of growth rates for
its business, anticipated future economic and regulatory
conditions and expected technological availability. For purposes
of recognition and measurement, the Company groups its
long-lived assets at the lowest level for which there are
identifiable cash flows which are largely independent of other
assets and liabilities.
Deferred Financing Costs Deferred financing
costs consists primarily of investment banking fees, legal,
accounting and printing costs associated with the issuance of
the Companys long-term debt. Deferred financing fees are
amortized over the life of the corresponding debt facility. In
relation to the issuances of the long-term debt discussed in
Note 10, Long-Term Debt, the Company incurred
$30.2 million of deferred financing costs in 2007 for its
$1.25 billion senior term loan facility entered into during
2007 and an additional $39.3 million related to the
repayment of its $125.0 million term loan and the
retirement of its $620.7 million senior secured notes due
2010, compared to $21.8 million in 2006. For the years
ended December 31, 2007 and 2006, $6.7 million and
$3.9 million,
68
CLEARWIRE
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
respectively of total deferred financing costs were amortized
using the effective interest method and included in interest
expense, net.
Interest Capitalization The Company follows
the provisions of SFAS No. 34, Capitalization of
Interest Cost (SFAS No. 34), with
respect to its FCC licenses and the related construction of its
network infrastructure assets. Capitalization commences with
pre-construction period administrative and technical activities,
which includes obtaining leases, zoning approvals and building
permits, and ceases when the construction is substantially
complete and available for use (generally when a market is
launched). Interest is capitalized on property, plant and
equipment, improvements under construction, and FCC spectrum
licenses accounted for as intangible assets with indefinite
useful lives. Interest capitalization is based on rates
applicable to borrowings outstanding during the period and the
weighted average balance of qualified assets under construction
during the period. Capitalized interest is reported as a cost of
the network assets and amortized over the useful life of those
assets.
Comprehensive Loss Comprehensive loss
consists of two components, net loss and other comprehensive
income (loss). Other comprehensive income (loss) refers to
revenue, expenses, gains and losses that under generally
accepted accounting principles are recorded as an element of
stockholders equity but are excluded from net loss. The
Companys other comprehensive income (loss) is comprised of
foreign currency translation adjustments from its subsidiaries
not using the U.S. dollar as their functional currency and
unrealized gains and losses on marketable securities categorized
as available-for-sale.
Income Taxes The Company accounts for income
taxes in accordance with the provisions of
SFAS No. 109, Accounting for Income Taxes,
which requires that deferred income taxes be determined based on
the estimated future tax effects of differences between the
financial statement and tax basis of assets and liabilities
using the tax rates expected to be in effect when the temporary
differences reverse. Valuation allowances, if any, are recorded
to reduce deferred tax assets to the amount considered more
likely than not to be realized. We also apply FASB
Interpretation Number 48 (FIN 48) which
prescribes a recognition threshold that a tax position is
required to meet before being recognized in the financial
statements.
Revenue Recognition The Company primarily
earns service revenue by providing access to its high-speed
wireless network. Also included in service revenue are equipment
rentals and optional services, including personal and business
email and static Internet Protocol. Service revenue from
customers are billed in advance and recognized ratably over the
service period. Revenues associated with the shipment of
customer premise equipment (CPE) and other equipment
to customers are recognized when title and risk of loss
transferred to the customer. Shipping and handling costs billed
to customers are recorded to service revenue.
The Company recognizes revenues in accordance with SAB 104,
Revenue Recognition, and Emerging Issues Task Force
(EITF) Issue
No. 00-21,
Accounting for Revenue Arrangements with Multiple
Deliverables. EITF Issue
No. 00-21
addresses how to account for arrangements that may involve the
delivery or performance of multiple products, services
and/or
rights to use assets. Revenue arrangements with multiple
deliverables are required to be divided into separate units of
accounting based on the deliverables relative fair value if the
deliverables in the arrangement meet certain criteria.
Activation fees charged to the customer are deferred and
recognized as service revenues on a straight-line basis over the
average expected life of the customer relationship of
3.5 years.
Revenue is deferred for any undelivered elements and revenue is
recognized when the product is delivered or over the period in
which the service is performed. If the Company cannot
objectively determine the fair value of any undelivered element
included in the bundled product and software maintenance
arrangements, revenue is deferred until all elements are
delivered and services have been performed, or until fair value
can objectively be determined for any remaining undelivered
elements.
Through August 2006, the Company earned equipment revenue
primarily from sales of CPE and related infrastructure, system
services and software maintenance contracts by the
Companys formerly wholly-owned subsidiary, NextNet (See
Note 3, Significant Transactions). In arrangements that
included multiple elements,
69
CLEARWIRE
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
including software, such as the sale of a NextNet base station
with a software maintenance contract, the Company applied the
accounting guidance in accordance with SOP
No. 97-2,
Software Revenue Recognition. Revenue was allocated to
each element of the transaction based upon its fair value as
determined by vendor specific objective evidence
(VSOE). VSOE of fair value for all elements of an
arrangement was based upon the normal pricing and discounting
practices for those products and services when sold separately.
Software maintenance services included technical support and the
right to receive unspecified upgrades and enhancements on a
when-and-if
available basis. Fees for software maintenance services were
typically billed annually in advance of performance of the
services with provisions for subsequent annual renewals. The
related revenues were deferred and recognized ratably over the
respective maintenance terms, which typically were one to two
years.
Product Warranty NextNet, a wholly-owned
subsidiary until sold in August 2006, sold base station
equipment and CPE to third parties. NextNet generally warranted
new technology equipment sold to the purchaser to be free from
defects in material and workmanship for two years for system
infrastructure and one year for CPE. A warranty provision was
made for estimated product repair at the time of the sale based
upon the Companys historical trends. In connection with
the sale of NextNet to Motorola, the Company retained
responsibility for a portion of the warranty costs on equipment
sold during the period that NextNet was a wholly-owned
subsidiary of the Company, and therefore, maintained a liability
related to this obligation through August 2007. Information
about warranty cost and warranty liability is as follows (in
thousands):
|
|
|
|
|
Balance January 1, 2006
|
|
$
|
234
|
|
Provision
|
|
|
1,636
|
|
Costs incurred
|
|
|
(522
|
)
|
Liability transferred upon sale of NextNet
|
|
|
(338
|
)
|
|
|
|
|
|
Balance December 31, 2006
|
|
|
1,010
|
|
Provision
|
|
|
|
|
Costs incurred
|
|
|
(408
|
)
|
Write-off of remaining liability transferred upon sale of NextNet
|
|
|
(602
|
)
|
|
|
|
|
|
Balance December 31, 2007
|
|
$
|
|
|
|
|
|
|
|
Advertising Costs Advertising costs are
expensed as incurred. Advertising expense was
$49.2 million, $38.4 million and $13.8 million
for the years ended December 31, 2007, 2006 and 2005,
respectively.
Research and Development Research and
development costs are expensed as incurred.
Net Loss per Share The Company calculates net
loss per share in accordance with SFAS No. 128,
Earnings Per Share
(SFAS No. 128). Under the
provisions of SFAS No. 128, basic net loss per common
share is computed by dividing income or loss available to common
stockholders by the weighted-average number of common shares
outstanding during the period. Diluted net loss per common share
is computed by dividing income or loss available to common
stockholders by the weighted-average number of common and
dilutive common stock equivalents outstanding during the period.
Common stock equivalents typically consist of the common stock
issuable upon the exercise of outstanding stock options,
warrants and restricted stock using the treasury stock method.
The effects of potentially dilutive common stock equivalents are
excluded from the calculation of diluted loss per share if their
effect is antidilutive.
Accounting Change: Share-Based
Compensation On January 1, 2006, the
Company adopted SFAS No. 123(R), Share-Based
Payment (SFAS No. 123(R)), which
requires the measurement and recognition of compensation expense
for all share-based awards made to employees and directors based
on estimated fair values.
70
CLEARWIRE
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As the Company was considered a nonpublic entity at the date of
adoption and used the minimum value method for pro forma
disclosures under SFAS No. 123, Accounting for
Stock-Based Compensation
(SFAS No. 123), the Company is
required to apply the prospective transition method and has
estimated the fair value of options granted on or after
January 1, 2006 using the Black-Scholes option pricing
model. The Company has applied the provisions of
SFAS No. 123(R) to employee stock options granted,
modified, repurchased, cancelled or settled on or after
January 1, 2006. The estimate of compensation expense
requires complex and subjective assumptions, including the
Companys stock price volatility, employee exercise
patterns (expected life of the options), future forfeitures, and
related tax effects.
Prior to the adoption of SFAS No. 123(R), the Company
accounted for share-based compensation expense in accordance
with Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees
(APB No. 25), and related
Interpretations, as permitted by SFAS No. 123.
Total share-based compensation expense recorded during the year
ended December 31, 2007 was $42.8 million compared to
$14.2 million during December 31, 2006. Of these
amounts, $42.7 million and $12.5 million for the years
ended December 31, 2007 and 2006, respectively, related to
option grants recorded under SFAS No. 123(R) and
$113,000 and $1.7 million under APB No. 25 for grants
before January 1, 2006 for which the requisite service was
not fully satisfied as of January 1, 2006.
Operating Leases The Company has operating
leases for certain facilities, equipment and spectrum licenses
for use in its operations. Certain of the Companys
spectrum licenses are leased from third-party holders of
Educational Broadband Service (EBS) spectrum
licenses granted by the Federal Communications Commission
(FCC). EBS licenses authorize the provision of
certain communications services on the EBS channels in certain
markets throughout the United States. The Company accounts for
these spectrum leases as executory contracts which are similar
to operating leases. Leases that are pending FCC approval are
not amortized until final approval is received and are included
in prepaid spectrum license fees in the accompanying
consolidated balance sheets. The Company accounts for its leases
in accordance with SFAS No. 13, Accounting for
Leases, and Financial Accounting Standards Board
(FASB) Technical
Bulletin 85-3,
Accounting for Operating Leases with Scheduled Rent Increases
(as amended). For leases containing scheduled rent
escalation clauses the Company records minimum rental payments
on a straight-line basis over the terms of the leases, including
the renewal periods as appropriate. For leases containing tenant
improvement allowances and rent incentives, the Company records
deferred rent, which is a liability, and that deferred rent is
amortized over the term of the lease, including the renewal
periods as appropriate, as a reduction to rent expense.
Foreign Currency The Companys
international subsidiaries generally use their local currency as
their functional currency. Assets and liabilities are translated
at exchange rates in effect at the balance sheet date. Resulting
translation adjustments are recorded as a separate component of
accumulated other comprehensive (loss) income. Income and
expense accounts are translated at the average monthly exchange
rates. The effects of changes in exchange rates between the
designated functional currency and the currency in which a
transaction is denominated are recorded as foreign currency
transaction gains (losses) and recorded in the consolidated
statement of operations.
Concentration of Risk The Company believes
that the geographic diversity of its customer base and retail
nature of its product minimizes the risk of incurring material
losses due to concentrations of credit risk.
NextNet, the Companys previously wholly-owned subsidiary,
purchased by Motorola on August 29, 2006, is currently the
sole supplier of the base stations and CPE the Company uses to
provide services to its customers. If NextNet is unable to
continue to develop or provide the equipment on a timely
cost-effective basis, the Company may not be able to adequately
service existing customers or add new customers and offer
competitive pricing.
71
CLEARWIRE
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Recent
Accounting Pronouncements
SFAS No. 141(R) In December 2007,
the FASB issued SFAS No. 141 (revised 2007),
Business Combinations
(SFAS No. 141(R)). In
SFAS No. 141(R), the FASB retained the fundamental
requirements of SFAS No. 141 to account for all
business combinations using the acquisition method (formerly the
purchase method) and for an acquiring entity to be identified in
all business combinations. However, the new standard requires
the acquiring entity in a business combination to recognize all
(and only) the assets acquired and liabilities assumed in the
transaction; establishes the acquisition-date fair value as the
measurement objective for all assets acquired and liabilities
assumed; requires transaction costs to be expensed as incurred;
and requires the acquirer to disclose to investors and other
users all of the information they need to evaluate and
understand the nature and financial effect of the business
combination. SFAS No. 141(R) is effective for annual
periods beginning on or after December 15, 2008.
Accordingly, any business combinations will be recorded and
disclosed following existing GAAP until January 1, 2009.
The Company expects that SFAS No. 141(R) will have an
impact on its consolidated financial statements when effective,
but the nature and magnitude of the specific effects will depend
upon the nature, terms and size of the acquisitions consummated
after the effective date.
SFAS No. 160 In December 2007, the
FASB issued SFAS No. 160, Noncontrolling Interests
in Consolidated Financial Statements
(SFAS No. 160).
SFAS No. 160 amends Accounting Research
Bulletin No. 51, Consolidated Financial Statements,
and requires all entities to report noncontrolling
(minority) interests in subsidiaries within equity in the
consolidated financial statements, but separate from the parent
shareholders equity. SFAS No. 160 also requires
any acquisitions or dispositions of noncontrolling interests
that do not result in a change of control to be accounted for as
equity transactions. Further, SFAS No. 160 requires
that a parent recognize a gain or loss in net income when a
subsidiary is deconsolidated. SFAS No. 160 is
effective for annual periods beginning on or after
December 15, 2008. The Company is currently evaluating
whether the adoption of SFAS No. 160 will have a
material impact on its consolidated financial statements.
SFAS No. 159 In February
2007, the FASB issued SFAS No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities
(SFAS No. 159). SFAS No. 159
permits entities to choose, at specified election dates, to
measure eligible items at fair value (fair value
option) and to report in earnings unrealized gains and
losses on those items for which the fair value option has been
elected. SFAS No. 159 also requires entities to
display the fair value of those assets and liabilities on the
face of the balance sheet. SFAS No. 159 establishes
presentation and disclosure requirements designed to facilitate
comparisons between entities that choose different measurement
attributes for similar types of assets and liabilities.
SFAS No. 159 is effective as of the beginning of an
entitys first fiscal year beginning after
November 15, 2007. The Company does not believe the
adoption of this pronouncement will have a material impact on
its consolidated financial statements.
SFAS No. 157 In September 2006, the
FASB issued SFAS No. 157, Fair Value Measurements
(SFAS No. 157). SFAS No. 157
defines fair value, establishes a framework for measuring fair
value and expands disclosure of fair value measurements.
SFAS No. 157 applies under other accounting
pronouncements that require or permit fair value measurements
and accordingly, does not require any new fair value
measurements. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after
November 15, 2007. In February 2008, the effective date of
SFAS No. 157 was delayed for one year by Final FASB
Staff Position
No. FAS 157-2,
Effective Date of FASB Statement No. 157, for
certain non-financial assets and non-financial liabilities,
except those that are recognized or disclosed at fair value in
the financial statements on a recurring basis (at least
annually). The Company is currently evaluating the impact of
this pronouncement on its financial statements.
72
CLEARWIRE
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
3.
|
Significant
Transactions
|
Acquisitions
During the year ended December 31, 2007, the Company
acquired 100% of the interests of RiverCity Software Solutions,
LLC and RiverCity IntraISP, LLC from RiverCity Internet Group,
for an aggregate purchase price of $7.6 million, net of
cash acquired of $361,000, comprised of $7.4 million in
cash, of which $500,000 is remaining to be paid, and $178,000 of
transaction related costs. RiverCity Software Solutions, LLC and
RiverCity IntraISP, LLC specialize in providing billing, online
support services and customer relationship management software
solutions to the communications and services industry.
For the year ended December 31, 2006, the Company purchased
various companies through both asset and share purchase
agreements. The total aggregate purchase price was approximately
$81.6 million comprised of $49.1 million in cash,
common stock valued at $32.0 million and $520,000 of
transaction related costs. The assets purchased were primarily
spectrum licenses and other minor assets and liabilities and
included the assumption of spectrum and tower lease agreements.
Purchase transactions are subject to purchase price allocation
adjustments due to contingency resolution and final
determination of fair values for up to one year after close.
Although the total amount ultimately settled and paid could
change, the Company does not believe that any change would be
material to its consolidated financial statements or results of
operations. The Company accounts for its acquisitions using the
purchase method in accordance with SFAS No. 141,
Business Combinations. Pro-forma information is not
included for acquisitions completed in 2007 and 2006 as they
were not material to the consolidated financial statements of
the Company.
The total aggregate consideration and purchase price allocation
for all of the Companys acquisitions, for the years ended
December 31, 2007 and 2006, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Purchase Consideration
|
|
|
|
|
|
|
|
|
Cash paid, net of cash acquired
|
|
$
|
6,888
|
|
|
$
|
49,056
|
|
Common stock and warrants issued and payable
|
|
|
|
|
|
|
32,013
|
|
Purchase price payable
|
|
|
500
|
|
|
|
|
|
Transaction-related costs
|
|
|
178
|
|
|
|
520
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,566
|
|
|
$
|
81,589
|
|
|
|
|
|
|
|
|
|
|
Purchase Price Allocation
|
|
|
|
|
|
|
|
|
Current and noncurrent assets
|
|
$
|
323
|
|
|
$
|
6,078
|
|
Prepaid spectrum license fees
|
|
|
|
|
|
|
19,288
|
|
Spectrum and intangible assets
|
|
|
8,300
|
|
|
|
47,395
|
|
Goodwill
|
|
|
1,158
|
|
|
|
20,723
|
|
Current and other long-term liabilities
|
|
|
(2,215
|
)
|
|
|
(11,895
|
)
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
7,566
|
|
|
$
|
81,589
|
|
|
|
|
|
|
|
|
|
|
Dispositions
NextNet On June 30, 2006 Clearwire and
Motorola executed a Stock Purchase Agreement in which Motorola
agreed to purchase 100% of the outstanding NextNet stock for a
purchase price of $50.0 million in cash. The sale of
NextNet resulted in a gain of $19.8 million, comprised of
aggregate proceeds from the sale of
73
CLEARWIRE
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$47.1 million less the book value of net assets sold of
$26.1 million and transaction related costs of
$1.2 million, which consists of legal fees and employee
related termination costs. The transaction closed on
August 29, 2006.
The carrying value of the assets and liabilities sold during
2006 are as follows (in thousands):
|
|
|
|
|
Inventory
|
|
$
|
8,895
|
|
Property, plant and equipment
|
|
|
4,620
|
|
Other current and long-term assets
|
|
|
8,387
|
|
Intangible assets
|
|
|
5,211
|
|
Goodwill
|
|
|
9,352
|
|
|
|
|
|
|
Total assets
|
|
|
36,465
|
|
|
|
|
|
|
Current liabilities
|
|
|
9,888
|
|
Other long-term liabilities
|
|
|
490
|
|
|
|
|
|
|
Total liabilities
|
|
|
10,378
|
|
|
|
|
|
|
Net assets disposed
|
|
$
|
26,087
|
|
|
|
|
|
|
In connection with the sale of NextNet, Clearwire and Motorola
also entered into agreements for the purchase of certain
infrastructure and supply inventory from NextNet (Supply
Agreement). These agreements cover a number of topics,
including, but not limited to, certain technology development
projects and future Clearwire purchase commitments and a maximum
Motorola pricing schedule for network equipment from NextNet.
The aggregate price paid by Clearwire in any calendar year will
be no less favorable than the aggregate price paid by other
customers contemporaneously buying similar or lesser aggregate
purchases. Clearwire is committed to purchase no less than
$150.0 million of equipment products from Motorola in the
first two years after the effective date of the Supply
Agreement. Clearwire is also committed to purchase no less than
25.0% of its Worldwide Interoperability for Microwave Access
(WiMAX) subscriber handsets from Motorola as long as
the capabilities and costs of the handsets (and the availability
of such handsets) are equal for a given product in similar
quantities or service offered by Motorola and another supplier
or suppliers. These commitments are effective for an initial
term of eight years and will be automatically renewed for
consecutive one year terms unless either party notifies the
other party in writing of its intent to terminate the agreements
at least one hundred and twenty days prior to the expiration of
the initial term or any renewal thereof. Clearwire has also
committed to use Motorola as its 100.0% exclusive supplier for
specified Wireless Broad Band Infrastructure products until the
fifth anniversary date of the agreement. After the fifth
anniversary date the commitment is reduced to 51.0% until the
term ends on August 29, 2014. For the period from the
effective date of the agreement of August 29, 2006, through
December 31, 2007, total purchases from Motorola under
these agreements were $98.4 million. The remaining
commitment was $51.6 million at December 31, 2007.
Due to Clearwires continuing involvement in NextNet
through the various agreements described above, the sale of
NextNet was not classified as discontinued operations in the
financial statements as it did not meet the discontinued
operations criteria specified in SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets and EITF Issue
No. 03-13,
Applying the Conditions in Paragraph 42 of
SFAS No. 144 in Determining whether to report
Discontinued Operations.
Financing
In an effort to simply its capital structure, access incremental
borrowing availability, and extend debt maturities, on
July 3, 2007, the Company entered into a senior term loan
facility providing for loans of up to $1.0 billion. The
Company borrowed $379.3 million under the senior term loan
facility on the date of closing and repaid obligations under its
existing $125.0 million term loan and fees and costs
attributable to the senior term loan facility. The remainder is
being used for capital expenditures, working capital and general
corporate purposes. On
74
CLEARWIRE
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
August 15, 2007, the Company borrowed the remaining amount
of approximately $620.7 million under the senior term loan
facility, and fully retired the senior secured notes, originally
due 2010, for a price of 102.5% of the aggregate principal
amount outstanding of approximately $620.7 million plus
accrued and unpaid interest to the date of redemption and the
remaining portion of the interest escrow. The $1.0 billion
senior secured term loan facility provides for quarterly
amortization payments aggregating an annual amount equal to
1.00% of the original principal amount of the term loans prior
to the maturity date, with the remaining balance due on
July 3, 2012. In general, borrowings under the senior term
loan facility bear interest based, at the Companys option,
at either the Eurodollar rate or an alternate base rate, in each
case plus a margin. The rate of interest for borrowings under
the new senior term loan facility is the Eurodollar rate plus
6.00% or the alternate base rate plus 5.00%, with interest
payable quarterly with respect to alternate base rate loans, and
with respect to Eurodollar loans, interest is payable in arrears
at the end of each applicable period, but at least every three
months. The weighted average rate under this facility was 11.06%
at December 31, 2007. See Note 10, Long-Term Debt, for
additional discussion.
On November 2, 2007, the Company entered into an
Incremental Facility Amendment (the Amendment) with
Morgan Stanley Senior Funding, Inc, as administrative agent,
term lender and co-lead arranger, Wachovia Bank N.A. as
term lender, and Wachovia Capital Markets, LLC, as co-lead
arranger, which amended the Credit Agreement dated July 3,
2007 (the Credit Agreement) to provide an additional
$250.0 million in term loans. This additional funding,
which closed on the same date, increases the size of the
Companys senior secured term loan facility to
$1.25 billion. The Company will use the additional proceeds
to further support its expansion plans and for general corporate
purposes. The material terms of the incremental term loans are
the same as the terms of the loans under the original senior
secured term loan facility.
In connection with the repayment of the $125.0 million term
loan and the retirement of the $620.7 million senior
secured notes due 2010, the Company recorded a
$159.2 million loss on extinguishment of debt, which was
primarily due to the write-off of the unamortized portion of the
proceeds allocated to the warrants originally issued in
connection with the senior secured notes and the related
deferred financing costs. In connection with the
$1.0 billion senior term loan facility, the Company
recorded deferred financing cost of $27.7 million which is
being amortized over the five year term of the loan. In
connection with the Amendment, the Company recorded additional
deferred financing costs of $2.5 million which are being
amortized over the remaining term of the loan.
The senior term loan facility contains financial, affirmative
and negative covenants that the Company believes are usual and
customary for a senior secured credit agreement. The negative
covenants in the new senior secured term loan facility include,
among other things, limitations (each of which shall be subject
to standard and customary and other exceptions for financings of
this type) on its ability to: declare dividends and make other
distributions, redeem or repurchase its capital stock, prepay,
redeem or repurchase certain subordinated indebtedness, make
loans or investments (including acquisitions), incur additional
indebtedness, grant liens, enter into sale-leaseback
transactions, modify the terms of subordinated debt or certain
other material agreements, change its fiscal year, restrict
dividends from our subsidiaries or restrict liens, enter into
new lines of business, recapitalize, merge, consolidate or enter
into certain acquisitions, sell our assets, and enter into
transactions with its affiliates.
Other
Agreements
BellSouth On May 29, 2007, the Company
closed an agreement with BellSouth Corporation to acquire for an
aggregate price of $300.0 million all interests in SFT
Spectrum, LLC and BWC Spectrum, LLC, which collectively held all
of AT&T Inc.s leases and licenses for 2.5 GHz
spectrum. These entities were wholly-owned subsidiaries of
BellSouth Corporation, which is wholly-owned by AT&T, Inc.
as a result of a merger that closed in December 2006. Based on
the terms of the agreement, the acquisition was treated as a
purchase of assets under EITF Issue
No. 98-3,
Determining Whether a Nonmonetary Transaction Involves
Receipt of Productive Assets or of a Business. The Company
finalized the allocation estimates during the third quarter and
recorded $196.8 million as purchased spectrum rights and
$103.2 million as leased spectrum based on the fair values
of the owned and leased spectrum.
75
CLEARWIRE
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Subscription Agreement Clearwire and Motorola
signed a Subscription Agreement on June 30, 2006, under
which Motorola agreed to purchase 16,666,666 shares of
Clearwires Class A common stock at $18.00 per share
for a purchase price of $300.0 million. The agreement with
Motorola includes certain limited anti-dilution features. The
transaction closed on August 29, 2006.
Common Stock Purchase Agreement Clearwire and
Intel Capital Corporation (Intel Capital), a
Delaware corporation and wholly owned subsidiary of Intel
Corporation (Intel), signed a Common Stock Purchase
Agreement on June 28, 2006, under which Intel Capital
agreed to purchase a total of 33,333,333 shares of
Clearwires Class A and Class B common stock,
23,427,601 shares and 9,905,732 shares, respectively,
at $18.00 per share for a total purchase price of
$600.0 million. The agreement includes certain limited
anti-dilution features which would terminate upon the closing of
the Companys initial public offering. The transaction
closed on August 29, 2006.
Concurrently with the Common Stock Purchase Agreement, Clearwire
and Intel entered into a mobile WiMAX network Collaboration
Agreement (Collaboration Agreement). Under the
Collaboration Agreement, Clearwire agreed to use commercially
reasonable efforts to develop and deploy a mobile WiMAX network
in the United States, and Intel agreed to use commercially
reasonable efforts to cause certain WiMAX capable end user
devices to be compatible for use on Clearwires network.
Preemptive Rights Exercises In August 2006,
in connection with the exercise of preemptive rights triggered
by the sale of common stock to Intel and Motorola described
above, Clearwire entered into subscription agreements with the
holders of its outstanding stock of the sale of an aggregate of
8,603,116 shares of Clearwires Class A Common
Stock at $18.00 per share for an aggregate purchase price of
$154.9 million. The agreements include certain limited
anti-dilution features. The transactions closed in August and
October of 2006.
Agreements with Bell Canada In March 2005,
Bell Canada (Bell), a Canadian telecommunications
company which is a subsidiary of BCE Inc. (BCE),
purchased 8,333,333 shares of Clearwires Class A
common stock for $100.0 million. At the time of Bells
investment in Clearwire, Bell, Clearwire and Eagle River
Holdings, LLC (ERH) also entered into a separate
agreement and Bell and BCE Nexxia Corporation (BCE
Nexxia), an affiliate of Bell, entered into a Master
Supply Agreement (Master Supply Agreement) dated
March 16, 2005 with Clearwire.
Under the Master Supply Agreement, Bell and BCE Nexxia provide
or arrange for the provision of hardware, software, procurement
services, management services and other components necessary for
Clearwire to provide Voice over Internet Protocol
(VoIP) services to their subscribers in the United
States and provide day-to-day management and operation of the
components and services necessary for Clearwire to provide these
VoIP services. Clearwire has agreed to use Bell Canada and BCE
Nexxia exclusively to provide such service unless such agreement
violates the rights of third parties under its existing
agreements. Bell and BCE Nexxia are Clearwires and its
affiliates preferred providers of these services and
applications in markets beyond the United States, to the extent
permitted under its existing agreements. In addition to these
services, the Master Supply Agreement grants Bell and BCE Nexxia
certain rights with respect to future service offerings by
Clearwire and its affiliates. Under the Master Supply Agreement,
BCE Nexxia and Bell will be compensated by Clearwire either in
shares of Clearwires Class A common stock or cash.
Total fees paid for new subscribers under the Master Supply
Agreement were $112,000, $0 and $0 for the years ended
December 31, 2007, 2006 and 2005, respectively. Amounts
paid for supplies, equipment and other services purchased
through Bell Canada or BCE were $6.0 million,
$7.5 million and $15.4 million for the years ended
December 31, 2007, 2006 and 2005, respectively. The Master
Supply Agreement can be terminated for convenience on twelve
months notice by either party at any time beginning on or after
October 1, 2007. On October 29, 2007, the Company
delivered a notice of termination of the Master Supply Agreement
to BCE Nexxia and the agreement should terminate on
October 29, 2008, unless it is extended by the parties.
76
CLEARWIRE
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During 2004, the Company entered into two agreements with ITFS
Spectrum Advisors, LLC (ISA) and ITFS Spectrum
Consultants LLS (ISC). The agreements provided for
payment to ISA and ISC in the form of warrants to purchase
additional shares of Class A common stock in exchange for
ISA and ISC providing opportunities for Clearwire to purchase or
lease additional spectrum. Each of the agreements specifies a
maximum consideration available under the agreement and, in
2005, the maximum consideration under the agreement with ISA was
reached.
For the years ended December 31, 2007 and 2006, ISC earned
approximately $181,000 and $400,000, respectively. During 2007
and 2006, $181,000 and $65,000 was paid in cash, respectively,
and warrants to purchase 7,138 and 18,973 shares of
Class A common stock, valued at $116,000 and $196,000, were
issued, respectively. The maximum consideration under the
agreement with ISC was reached in 2007. As of December 31,
2007, there was no payable remaining related to these agreements.
|
|
4.
|
Investments
in Equity Investees
|
The Companys ownership interests in equity investees,
accounted for under the equity method, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
Danske Telecom A/S (Danske)
|
|
|
38.2
|
%
|
|
|
38.2
|
%
|
|
|
38.2
|
%
|
MVS Net S.A. de C.V. (MVS Net)
|
|
|
29.2
|
%
|
|
|
26.7
|
%
|
|
|
26.7
|
%
|
Denmark Danske, a public limited company in
Denmark is a telecommunications services provider holding
spectrum licenses covering most of the major markets in Denmark.
Danske offers wireless broadband Internet services to consumers
and businesses in multiple markets in Denmark over a network
deploying NextNet equipment. Clearwire acquired an equity
interest in Danske in 2005 and has invested a total of
$12.2 million through December 31, 2007. Revenues and
related cost of goods and services sold to Danske by NextNet
through August 29, 2006 have been eliminated.
Clearwires investment in Danske has been reduced by
$6.1 million for its proportionate share of losses since
inception, of which approximately $2.6 million,
$3.3 million and $288,000 was incurred during the years
ended December 31, 2007, 2006 and 2005, respectively. Total
assets and total liabilities of Danske at December 31, 2007
were $27.5 million and $20.4 million. Total assets and
total liabilities of Danske at December 31, 2006 were
$36.8 million and $19.0 million.
Mexico MVS Net, S.A. de C.V. (MVS
Net) is a Mexican telecommunications company in which
Clearwire acquired an equity interest in 2004 and has invested a
total of $30.3 million through December 31, 2007.
Revenues and related costs of goods and services sold to MVS Net
by NextNet through August 29, 2006 have been eliminated.
Clearwires investment in MVS Net has been reduced by
$8.7 million for its proportionate share of losses since
inception, of which approximately $2.2 million,
$1.9 million, and $3.7 million was incurred during the
years ended December 31, 2007, 2006 and 2005, respectively.
Total assets and total liabilities of MVS Net at
December 31, 2007 were $25.2 million and
$16.7 million. Total assets and total liabilities of MVS
Net at December 31, 2006 were $28.1 million and
$16.7 million.
77
CLEARWIRE
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Investments as of December 31, 2007 and 2006 consist of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
|
Gross Unrealized
|
|
|
Gross Unrealized
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Short-term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$
|
7,500
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
7,500
|
|
|
$
|
90,232
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
90,232
|
|
Corporate bonds
|
|
|
7,970
|
|
|
|
15
|
|
|
|
|
|
|
|
7,985
|
|
|
|
226,316
|
|
|
|
15
|
|
|
|
(85
|
)
|
|
|
226,246
|
|
US Government and Agency Issues
|
|
|
51,544
|
|
|
|
3
|
|
|
|
(20
|
)
|
|
|
51,527
|
|
|
|
64,270
|
|
|
|
21
|
|
|
|
(26
|
)
|
|
|
64,265
|
|
Municipal bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91,975
|
|
|
|
|
|
|
|
|
|
|
|
91,975
|
|
Auction rate securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
116,575
|
|
|
|
|
|
|
|
|
|
|
|
116,575
|
|
Other securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74,351
|
|
|
|
|
|
|
|
|
|
|
|
74,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
67,014
|
|
|
$
|
18
|
|
|
$
|
(20
|
)
|
|
$
|
67,012
|
|
|
$
|
663,719
|
|
|
$
|
36
|
|
|
$
|
(111
|
)
|
|
$
|
663,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate securities
|
|
|
95,922
|
|
|
|
|
|
|
|
(7,290
|
)
|
|
|
88,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
95,922
|
|
|
$
|
|
|
|
$
|
(7,290
|
)
|
|
$
|
88,632
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable debt and equity securities that are available for
current operations are classified as short-term
available-for-sale
investments, and are stated at fair value. Auction rate
securities without readily determinable market values are
classified as long-term available-for-sale investments and are
stated at fair value. Unrealized gains and losses are recorded
as a separate component of accumulated other comprehensive
income (loss). Realized losses are recognized when a decline in
fair value is determined to be
other-than-temporary.
Realized gains and losses are determined on the basis of the
specific identification method. Gross realized losses were
$5.8 million for 2007, and there were no significant
realized losses in 2006 or 2005. There were no significant gains
in 2007, 2006, or 2005.
The cost and fair value of investments at December 31,
2007, by contractual
years-to-maturity,
are presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Due within one year
|
|
$
|
67,014
|
|
|
$
|
67,012
|
|
Due ten years or greater
|
|
|
41,280
|
|
|
|
33,990
|
|
No contractual maturites
|
|
|
54,642
|
|
|
|
54,642
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
162,936
|
|
|
$
|
155,644
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes investments that have unrealized
losses as of December 31, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than
|
|
|
Greater Than
|
|
|
|
|
|
|
12 Months
|
|
|
12 Months
|
|
|
Total
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
US Government and Agency Issues
|
|
$
|
49,328
|
|
|
$
|
(20
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
49,328
|
|
|
$
|
(20
|
)
|
Auction rate securities
|
|
|
29,160
|
|
|
|
(7,290
|
)
|
|
|
|
|
|
|
|
|
|
|
29,160
|
|
|
|
(7,290
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
78,488
|
|
|
$
|
(7,310
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
78,488
|
|
|
$
|
(7,310
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
CLEARWIRE
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
At December 31, 2007, the Company held available for sale
short-term and long-term investments with a total fair value of
$155.6 million and a cost of $162.9 million. During
the year ended December 31, 2007, the Company incurred
other-than-temporary
impairment losses and realized losses of $35.0 million
related to a decline in the estimated fair values of a number of
short-term and long-term investment securities. Included in the
Companys investments were auction rate securities with a
fair value of $88.6 million and a cost of
$95.9 million. Auction rate securities are variable rate
debt instruments whose interest rates are reset approximately
every 30 or 90 days through an auction process. The auction
rate securities are classified as available for sale and are
recorded at fair value.
Beginning in August 2007, the auctions failed to attract buyers
and sell orders could not be filled. Due to current market
conditions, the Company is unable to estimate when the auctions
will resume. When an auction fails, the security resets to a
maximum rate as determined in the security documents. These
rates vary from LIBOR + 84 basis points to LIBOR +
100 basis points. While the Company continues to earn
interest on these investments at the maximum contractual rate,
until the auctions resume, the investments are not liquid and it
may not have access to these funds until a future auction on
these investments is successful. At December 31, 2007, the
estimated fair value of these auction rate securities no longer
approximates cost and the Company recorded
other-than-temporary
impairment losses and realized losses on its auction rate
securities of $32.3 million for the year ended
December 31, 2007. For certain other auction rate
securities, the Company recorded an unrealized loss of
$7.3 million in other comprehensive income reflecting the
decline in the estimated fair value of these securities. The
Company considers these declines in fair value to be temporary
given its consideration of the collateral underlying these
securities and its conclusion that the declines are related to
changes in interest rates rather than any credit concerns
related to the underlying assets. Additionally, the Company has
the intent and ability to hold the investments until maturity or
for a period of time sufficient to allow for any anticipated
recovery in market value.
In addition to the above mentioned securities, the Company holds
one commercial paper security issued by a structured investment
vehicle that was placed in receivership in September 2007 for
which an insolvency event was declared by the receiver in
October 2007. The Issuer invests in residential and commercial
mortgages and other structured credits including
sub-prime
mortgages. At December 31, 2007, the estimated fair value
of this security was $7.5 million based on the
Companys internally generated pricing models. During 2007
the Company recognized losses of $2.5 million related to
this commercial paper security. A restructuring plan for this
security is expected by mid 2008.
The Company estimated the fair value of these securities using
internally generated pricing models that require various inputs
and assumptions and the Company also uses various methods
including market, income and cost approaches. Based on these
approaches, the Company often utilizes certain assumptions that
market participants would use in pricing the investment,
including assumptions about risk and or the risks inherent in
the inputs to the valuation technique. These inputs are readily
observable, market corroborated, or unobservable. The Company
maximizes the use of observable inputs to the pricing models
where quoted market prices from securities and derivatives
exchanges are available and reliable. The Company typically
receives external valuation information for
U.S. Treasuries, other U.S. Government and Agency
securities, as well as certain corporate debt securities, money
market funds and certificates of deposit. The Company also uses
certain unobservable inputs that cannot be validated by
reference to a readily observable market or exchange data and
relies, to a certain extent, on managements own
assumptions about the assumptions that market participant would
use in pricing the security. In these instances, fair value is
determined by analysis of historical and forecasted cash flows,
default probabilities and recovery rates, time value of money
and discount rates considered appropriate given the level of
risk in the security and associated investor yield requirements.
Extrapolation or other methods are applied to observable market
or other data to estimate assumptions that are not observable.
The internally derived values are compared to values received
from brokers for reasonableness. The Companys internally
generated pricing models may include its own data and require us
to use judgment in interpreting relevant market data, matters of
uncertainty and matters that are inherently subjective in
nature. The use of different judgments and assumptions could
result in different presentations of pricing and security prices
could change significantly based on market conditions.
79
CLEARWIRE
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Companys investments in auction rate securities
represent interests in collateralized debt obligations supported
by preferred equity securities of small to medium sized
insurance companies and financial institutions and asset backed
capital commitment securities supported by high grade, short
term commercial paper and a put option from a monoline insurance
company. These auction rate securities were rated AAA/Aaa or
AA/Aa by Standard & Poors and Moodys rating
services at the time of purchase and their ratings have not
changed as of December 31, 2007. With regards to the asset
backed capital commitment securities, both rating agencies have
placed the issuers ratings under review for possible
downgrade.
As issuers and counterparties to the Companys investments
announce financial results in the coming quarters, it is
possible that the Company may record additional losses and
realize losses that are currently unrealized. The Company will
continue to monitor its investments for substantive changes in
relevant market conditions, substantive changes in the financial
condition and performance of the investments issuers and
other substantive changes in these investments.
The stated maturity of these securities is longer than
10 years; however, because we considered them to be highly
liquid and available for operations, our convention was to use
the next auction date, which occurs every 30 to 90 days, as
the effective maturity date and these securities were recorded
as short-term investments. Current market conditions do not
allow the Company to estimate when the auctions for its auction
rate securities will resume. As a result, during 2007 the
Company reclassified its auction rate securities from short-term
investments to long-term investments.
|
|
6.
|
Property,
Plant and Equipment
|
Property, plant and equipment as of December 31, 2007 and
2006 consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Network and base station equipment
|
|
$
|
305,635
|
|
|
$
|
161,875
|
|
Customer premise equipment
|
|
|
89,120
|
|
|
|
47,700
|
|
Furniture, fixtures and equipment
|
|
|
55,548
|
|
|
|
20,546
|
|
Leasehold improvements
|
|
|
13,488
|
|
|
|
8,340
|
|
Construction in progress
|
|
|
233,120
|
|
|
|
112,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
696,911
|
|
|
|
351,130
|
|
Less: accumulated depreciation
|
|
|
(124,582
|
)
|
|
|
(48,332
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
572,329
|
|
|
$
|
302,798
|
|
|
|
|
|
|
|
|
|
|
The Company follows the provisions of SFAS No. 34 with
respect to its owned FCC licenses and the related construction
of its network infrastructure assets. Capitalization commences
with pre-construction period administrative and technical
activities, which includes obtaining leases, zoning approvals
and building permits, and ceases when the construction is
substantially complete and available for use generally when a
market is launched.
Interest capitalized for the years ended December 31, 2007
and 2006 was $29.0 million and $16.6 million,
respectively. Depreciation expense for the years ended
December 31, 2007, 2006 and 2005 was $80.3 million,
$38.5 million and $10.9 million, respectively.
80
CLEARWIRE
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
7.
|
Spectrum
Licenses, Goodwill, and Other Intangible Assets
|
Spectrum licenses, goodwill, and other intangible assets as of
December 31, 2007 and 2006 consisted of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
|
Average Life
|
|
|
Value
|
|
|
Amortization
|
|
|
Value
|
|
|
Value
|
|
|
Amortization
|
|
|
Value
|
|
|
Goodwill
|
|
|
Indefinite
|
|
|
$
|
35,666
|
|
|
$
|
|
|
|
$
|
35,666
|
|
|
$
|
30,908
|
|
|
$
|
|
|
|
$
|
30,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangibles:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Spectrum licenses
|
|
|
Indefinite
|
|
|
|
397,972
|
|
|
|
|
|
|
|
397,972
|
|
|
|
157,260
|
|
|
|
|
|
|
|
157,260
|
|
Trade names and trademarks
|
|
|
Indefinite
|
|
|
|
120
|
|
|
|
|
|
|
|
120
|
|
|
|
34
|
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total indefinite-lived intangibles
|
|
|
|
|
|
|
398,092
|
|
|
|
|
|
|
|
398,092
|
|
|
|
157,294
|
|
|
|
|
|
|
|
157,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Definite-lived intangibles:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Existing technology
|
|
|
5 years
|
|
|
|
3,713
|
|
|
|
(371
|
)
|
|
|
3,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
|
5 years
|
|
|
|
5,169
|
|
|
|
(691
|
)
|
|
|
4,478
|
|
|
|
335
|
|
|
|
(74
|
)
|
|
|
261
|
|
Patents and other
|
|
|
12 years
|
|
|
|
1,466
|
|
|
|
(396
|
)
|
|
|
1,070
|
|
|
|
1,427
|
|
|
|
(193
|
)
|
|
|
1,234
|
|
Spectrum licenses
|
|
|
16 years
|
|
|
|
78,125
|
|
|
|
(5,194
|
)
|
|
|
72,931
|
|
|
|
65,814
|
|
|
|
(1,797
|
)
|
|
|
64,017
|
|
Noncompete agreements
|
|
|
3 years
|
|
|
|
250
|
|
|
|
(160
|
)
|
|
|
90
|
|
|
|
250
|
|
|
|
(76
|
)
|
|
|
174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total definite-lived intangibles
|
|
|
|
|
|
|
88,723
|
|
|
|
(6,812
|
)
|
|
|
81,911
|
|
|
|
67,826
|
|
|
|
(2,140
|
)
|
|
|
65,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total spectrum and intangibles
|
|
|
|
|
|
$
|
486,815
|
|
|
$
|
(6,812
|
)
|
|
$
|
480,003
|
|
|
$
|
225,120
|
|
|
$
|
(2,140
|
)
|
|
$
|
222,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The changes in the carrying value of goodwill for the years
ended December 31, 2007 and 2006 is as follows (in
thousands):
|
|
|
|
|
January 1, 2006
|
|
$
|
16,623
|
|
Goodwill acquired during the period including effects of foreign
|
|
|
|
|
currency translation of $2.9 million
|
|
|
23,637
|
|
Goodwill related to business dispositions
|
|
|
(9,352
|
)
|
|
|
|
|
|
December 31, 2006
|
|
|
30,908
|
|
Goodwill acquired during the period including effects of foreign
|
|
|
|
|
currency translation of $3.6 million
|
|
|
4,758
|
|
|
|
|
|
|
December 31, 2007
|
|
$
|
35,666
|
|
|
|
|
|
|
Based on the identified intangible assets recorded as of
December 31, 2007, future amortization of intangible
assets, not including spectrum leases pending FCC approval, is
expected to be as follows (in thousands):
|
|
|
|
|
2008
|
|
$
|
5,721
|
|
2009
|
|
|
6,846
|
|
2010
|
|
|
6,757
|
|
2011
|
|
|
6,709
|
|
2012
|
|
|
5,859
|
|
Thereafter
|
|
|
50,019
|
|
|
|
|
|
|
Total
|
|
$
|
81,911
|
|
|
|
|
|
|
81
CLEARWIRE
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Actual amortization expense to be reported in future periods
could differ from these estimates as a result of new intangible
asset acquisitions, impairments, changes in useful lives and
other relevant factors.
For the years ended December 31, 2007, 2006 and 2005, the
Company recorded amortization of $4.4 million,
$2.5 million and $964,000, respectively, on spectrum
licenses and other intangibles.
Purchased Spectrum Rights and other intangibles
Spectrum licenses, which are issued on both a site-specific
and a wide-area basis, authorize wireless carriers to use radio
frequency spectrum to provide service to certain geographical
areas in the United States and internationally. These licenses
are generally acquired by the Company either directly from the
governmental authority in the applicable country, which in the
United States is the Federal Communications Commission
(FCC), or through a business combination or an asset
purchase, and are considered indefinite-lived intangible assets,
except for the licenses acquired in Poland, Spain, Germany and
Romania which are considered definite-lived intangible assets
due to limited license renewal history within these countries.
During the year ended December 31, 2007, the Company paid
consideration of $226.7 million relating to purchased
spectrum rights, which was comprised of $222.5 million in
cash and $4.2 million in the form of warrants and common
stock. Of this cash paid during December 31, 2007,
$196.8 million related to the purchased spectrum rights
acquired from BellSouth Corporation (see Note 3,
Significant Transactions, for additional information regarding
BellSouth). Also, during the year ended December 31, 2007,
the Company acquired intangibles related to acquisitions of
$8.3 million, of which $4.6 million was allocated to
customer relationships and $3.7 million was allocated to
existing technology, and paid an additional $373,000 in cash
relating to other intangible assets, primarily customer
relationships.
During the year ended December 31, 2006 the Company paid
consideration of $88.5 million, comprised of
$88.2 million in cash and $300,000 in the form of warrants
and common stock, to purchase spectrum rights.
Prepaid Spectrum License Fees - The Company also
leases spectrum from third parties who hold the spectrum
licenses. These leases are accounted for as executory contracts,
which are treated like operating leases. Consideration paid to
third-party holders of these leased licenses at the inception of
a lease agreement is accounted for as prepaid spectrum license
fees and is expensed over the term of the lease agreement,
including renewal terms, as applicable. Future commitments under
these leases are disclosed in Note 11.
During the year ended December 31, 2007, consideration paid
relating to prepaid spectrum license fees was
$256.5 million, which was comprised of $239.4 million
in cash and $17.1 million in the form of warrants and
common stock. Cash paid related to the purchase of leased
spectrum from BellSouth was $103.2 million. In addition,
during 2007, the Company received $6.0 million in cash
relating to the sale of spectrum licenses.
During the year ended December 31, 2006, cash consideration
paid relating to prepaid spectrum license fees was
$148.7 million, comprised of $85.0 million in cash and
$63.7 million in the value of warrants and common stock.
For the years ended December 31, 2007, 2006, and 2005, the
Company recorded amortization of $37.9 million,
$6.3 million and $2.9 million, respectively, of leased
spectrum.
82
CLEARWIRE
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
8.
|
Accounts
Payable and Accrued Expenses
|
Accounts payable and accrued expenses as of December 31,
2007 and 2006 consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Accounts payable
|
|
$
|
42,327
|
|
|
$
|
41,710
|
|
Accrued interest
|
|
|
11,643
|
|
|
|
27,272
|
|
Salaries and benefits
|
|
|
17,697
|
|
|
|
12,095
|
|
Other
|
|
|
30,780
|
|
|
|
27,139
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
102,447
|
|
|
$
|
108,216
|
|
|
|
|
|
|
|
|
|
|
Components of deferred tax assets and liabilities as of
December 31, 2007 and 2006 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Current deferred tax assets
|
|
$
|
6,981
|
|
|
$
|
4,233
|
|
|
|
|
|
|
|
|
|
|
Noncurrent deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
|
430,345
|
|
|
|
184,771
|
|
Other
|
|
|
21,535
|
|
|
|
5,012
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
458,861
|
|
|
|
194,016
|
|
Valuation allowance
|
|
|
(441,432
|
)
|
|
|
(170,797
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
17,429
|
|
|
|
23,219
|
|
|
|
|
|
|
|
|
|
|
Noncurrent deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Spectrum licenses
|
|
|
33,673
|
|
|
|
28,938
|
|
Property, equipment and other long-term assets
|
|
|
25,791
|
|
|
|
7,150
|
|
Bond issuance cost warrant valuation
|
|
|
753
|
|
|
|
4,225
|
|
Other intangibles
|
|
|
|
|
|
|
124
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
60,217
|
|
|
|
40,437
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
42,788
|
|
|
$
|
17,218
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, the Company had federal tax net
operating loss carryforwards in the United States of
approximately $969.2 million. A portion of the net
operating loss carryforward will be subject to certain annual
limitations imposed under Section 382 of the Internal
Revenue Code of 1986. The net operating loss carryforwards begin
to expire in 2021. The Company had approximately
$224.2 million of tax net operating loss carryforwards in
foreign jurisdictions as of December 31, 2007. Of the
$224.2 million of tax net operating loss carryforwards in
foreign jurisdictions, $114.9 million has no statutory
expiration date, $94.5 million begins to expire in 2015,
and the remainder of $14.8 million begins to expire in 2010.
The Company has recorded a valuation allowance against a
substantial portion of the deferred tax assets. Management has
reviewed the facts and circumstances, including the limited
history and the projected future tax losses, and determined that
it is appropriate to reduce a portion of the gross deferred tax
assets. The remaining deferred tax asset will be reduced by
schedulable deferred tax liabilities. The net deferred tax
liabilities are related
83
CLEARWIRE
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
to certain intangible assets, including certain spectrum assets,
which are not amortized for book purposes. The net change in the
valuation allowance for the years ended December 31, 2007,
2006 and 2005 was an increase of $270.6 million,
$103.7 million, and $48.4 million, respectively. Net
noncurrent deferred tax liabilities of $43.1 million are
included in other long-term liabilities as of December 31,
2007.
The Company incurs significant deferred tax liabilities related
to the spectrum licenses. Since there is no amortization on
certain acquired spectrum licenses for book purposes and the
Company cannot estimate the amount, if any, of deferred tax
liabilities related to those acquired spectrum licenses which
will reverse in future periods, the valuation allowance has been
increased accordingly. The Company continues to amortize
acquired spectrum licenses for federal income tax purposes. The
ongoing difference between book and tax amortization resulted in
an additional deferred income tax provision of approximately
$5.4 million for the year ended December 31, 2007.
The income tax provision consists of the following for the year
ended December 31, 2007, 2006 and 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Current taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
$
|
107
|
|
|
$
|
21
|
|
|
$
|
|
|
Federal
|
|
|
|
|
|
|
|
|
|
|
|
|
State
|
|
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current taxes
|
|
|
208
|
|
|
|
21
|
|
|
|
|
|
Deferred taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
|
(121
|
)
|
|
|
|
|
|
|
|
|
Federal
|
|
|
4,985
|
|
|
|
2,582
|
|
|
|
1,389
|
|
State
|
|
|
355
|
|
|
|
378
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred taxes
|
|
|
5,219
|
|
|
|
2,960
|
|
|
|
1,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
$
|
5,427
|
|
|
$
|
2,981
|
|
|
$
|
1,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The income tax rate computed using the federal statutory rates
is reconciled to the reported effective income tax rate as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
Federal statutory income tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State income taxes (net of federal benefit)
|
|
|
2.4
|
|
|
|
3.0
|
|
|
|
0.3
|
|
Other, net
|
|
|
(1.2
|
)
|
|
|
(2.6
|
)
|
|
|
(2.6
|
)
|
Valuation allowance
|
|
|
(36.9
|
)
|
|
|
(36.4
|
)
|
|
|
(33.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
(0.7
|
)%
|
|
|
(1.0
|
)%
|
|
|
(1.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company adopted the provisions of FASB Interpretation Number
48 (FIN 48) on January 1, 2007.
FIN 48 clarifies the accounting for income taxes by
prescribing a recognition threshold that a tax position is
required to meet before being recognized in the financial
statements. FIN 48 also provides guidance or derecognition,
measurement, classification, interest and penalties, accounting
in interim periods, disclosure and transition.
As of January 1, 2007, the Company had no unrecognized tax
benefits and there was no effect on its financial condition or
results of operations as a result of implementing FIN 48.
There have been no changes to the Companys liability for
unrecognized tax benefits during the year ended
December 31, 2007.
84
CLEARWIRE
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company and its Subsidiaries file income tax returns in the
U.S. Federal jurisdiction and various state and foreign
jurisdictions. As of the date of adoption of FIN 48 and the
year ended December 31, 2007, the tax returns for 2003
through 2006 remain open to examination by the Internal Revenue
Service and various state tax authorities. In addition, the
Company has acquired U.S. and foreign entities which
operated prior to 2003. Most of the acquired entities generated
losses for income tax purposes and remain open to examination by
U.S. and foreign tax authorities as far back as 1998.
The Companys policy is to recognize any interest and
penalties related to unrecognized tax benefits as a component of
income tax expense. As of the date of adoption of
FIN No. 48 and the year ended December 31, 2007,
the Company had accrued no interest or penalties related to
uncertain tax positions.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
11% Senior Secured Notes due in 2010, principal at
maturity: $260.3 million
|
|
$
|
|
|
|
$
|
215,601
|
|
11% Additional Senior Secured Notes due in 2010, principal at
maturity: $360.4 million
|
|
|
|
|
|
|
295,087
|
|
Secured $125.0 million loan from Morgan Stanley Senior
Funding, Inc. due in August 2009, 1% of principal due annually;
residual at maturity
|
|
|
|
|
|
|
125,000
|
|
$1.25 billion Senior Term Loan facility, due in 2012, 1% of
principal due annually; resididual at maturity
|
|
|
1,246,875
|
|
|
|
|
|
Secured $10.0 million loan from BCE Nexxia Corporation due
in July 2008, principal at maturity: $10.0 million
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,256,875
|
|
|
|
645,688
|
|
Less: current portion
|
|
|
(22,500
|
)
|
|
|
(1,250
|
)
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
1,234,375
|
|
|
$
|
644,438
|
|
|
|
|
|
|
|
|
|
|
Senior Term Loan facility In an effort to
simplify its capital structure, access incremental borrowing
availability, and extend debt maturities, on July 3, 2007,
the Company entered into a senior term loan facility providing
for loans of up to $1.0 billion. The Company borrowed
$379.3 million under the senior term loan facility on the
date of closing and repaid obligations under the
$125.0 million term loan and fees and costs attributable to
the senior term loan facility. On August 15, 2007, the
Company borrowed the remaining amount of approximately
$620.7 million under the senior term loan facility, and
fully retired its senior secured notes, originally due 2010, for
a price of 102.5% of the aggregate principal amount outstanding
of approximately $620.7 million plus accrued and unpaid
interest to the date of redemption and the remaining portion of
the interest escrow. The $1.0 billion senior secured term
loan facility provides for quarterly amortization payments
aggregating an annual amount equal to 1.00% of the original
principal amount of the term loans prior to the maturity date,
with the remaining balance due on July 3, 2012. In general,
borrowings under the senior term loan facility bear interest
based, at the Companys option, at either the Eurodollar
rate or an alternate base rate, in each case plus a margin. The
rate of interest for borrowings under the new senior term loan
facility is the Eurodollar rate plus 6.00% or the alternate base
rate plus 5.00%, with interest payable quarterly with respect to
alternate base rate loans, and with respect to Eurodollar loans,
interest is payable in arrears at the end of each applicable
period, but at least every three months. The weighted average
rate under this facility was 11.06% at December 31, 2007.
In connection with the repayment of the $125.0 million term
loan and the retirement of the $620.7 million senior
secured notes due 2010, the Company recorded a
$159.2 million loss on extinguishment of debt, which was
85
CLEARWIRE
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
primarily due to the write-off of the unamortized portion of the
proceeds allocated to the warrants originally issued in
connection with the senior secured notes and the related
deferred financing costs. In connection with the
$1.0 billion senior term loan facility, the Company
recorded a deferred financing cost of $27.7 million which
is being amortized over the five year term of the loan.
On November 2, 2007, the Company entered into an
Incremental Facility Amendment (the Amendment) with
Morgan Stanley Senior Funding, Inc, as administrative agent,
term lender and co-lead arranger, Wachovia Bank N.A. as term
lender, and Wachovia Capital Markets, LLC, as co-lead arranger,
which amended the Credit Agreement dated July 3, 2007 (the
Credit Agreement) to provide the Company with an
additional $250.0 million in term loans. The Company
recorded a deferred financing cost of $2.5 million related
to this additional funding, which is being amortized over the
remaining term of the loan. This additional funding, which
closed on the same date, increases the size of the
Companys senior secured term loan facility to
$1.25 billion. The Company will use the additional proceeds
to further support its expansion plans and for general corporate
purposes. The material terms of the incremental term loans are
the same as the terms of the loans under the original senior
secured term loan facility.
As of December 31, 2007, $1.25 billion in aggregate
principal amount was outstanding under the senior secured term
loan facility, with an approximate fair market value of
$1.20 billion.
The senior term loan facility contains financial, affirmative
and negative covenants that the Company believes are usual and
customary for a senior secured credit agreement. The negative
covenants in the new senior secured term loan facility include,
among other things, limitations (each of which shall be subject
to standard and customary and other exceptions for financings of
this type) on its ability to: declare dividends and make other
distributions, redeem or repurchase its capital stock, prepay,
redeem or repurchase certain subordinated indebtedness, make
loans or investments (including acquisitions), incur additional
indebtedness, grant liens, enter into sale-leaseback
transactions, modify the terms of subordinated debt or certain
other material agreements, change its fiscal year, restrict
dividends from our subsidiaries or restrict liens, enter into
new lines of business, recapitalize, merge, consolidate or enter
into certain acquisitions, sell our assets, and enter into
transactions with its affiliates.
Term Loan In August 2006, Clearwire signed a
loan agreement with Morgan Stanley Senior Funding, Inc., Merrill
Lynch Capital Corporation, and JP Morgan Chase Bank, N.A. for a
term loan in the amount of $125.0 million. The loan was
secured by certain spectrum assets of Clearwire entities, as
specified in the loan agreement. The loan was set to mature in
August 2009 and the proceeds of the loan were available for
general corporate purposes. This note was repaid in July 2007
with the proceeds from the Senior-term loan facility.
BCE Nexxia Corporation Financing As required
under the Master Supply Agreement with Bell and BCE Nexxia and
in order to assist funding capital expenses and
start-up
costs associated with the deployment of VOIP services, BCE
Nexxia agreed to make available to Clearwire financing in the
amount of $10.0 million. BCE Nexxia funded the entire
amount on June 7, 2006. The loan is secured by a security
interest in the telecommunications equipment and property
related to VoIP and bears interest at 7.00% per annum and is due
and payable in full on July 19, 2008. At December 31,
2007, the Company had $1.2 million of accrued interest
related to the BCE Nexxia loan. The loan balance outstanding as
of December 31, 2007 was $10.0 million, with an
approximate fair market value of $9.7 million.
11% Senior Secured Notes due 2010 In
August 2005 the Company completed the sale of
$260.3 million in principal amount of senior secured notes
(the Notes) due 2010. In connection with the sale of
the Notes, the Company also issued warrants (the
Warrants) to the purchasers of the Notes entitling
them to purchase up to 6,942,552 shares of the
Companys Class A common stock. In addition, the
Company granted the purchasers of the Notes a one-time option to
acquire up to an equivalent amount of additional Notes and
Warrants for a period of 180 days following the issuance of
the Notes. This option was exercised in February 2006 when the
Company completed the sale of $360.4 million senior secured
notes to new and existing holders. In connection with the sale
of the additional notes, the Company also issued 9,609,334
Warrants to the purchasers of the additional notes entitling
86
CLEARWIRE
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
them to purchase shares of the Companys Class A
common stock. The terms of the Warrants are substantially
identical to the original warrants. In August 2007, the Company
fully retired the Senior Secured Notes.
Terms of the Warrants Holders of Warrants
issued in connection with the Notes and Additional Notes may
exercise their Warrants at any time at an exercise price of
$15.00. The Company granted the holders of the Warrants
registration rights covering the shares subject to issuance
under the Warrants. The Warrants expire on August 5, 2010.
In connection with the registration rights agreement, the
Company filed a resale registration statement, which was
effective on August 28, 2007, on
Form S-1
registering the resale of shares of Class A common stock
issuable upon the exercise of the Warrants. The Company must
maintain the registration statement in effect (subject to
certain suspension periods) for at least two years. If the
Company fails to meet its obligations to maintain that
registration statement, the Company will be required to pay to
each affected Warrant holder an amount in cash equal to 2% of
the purchase price of such holders Warrants. In the event
that the Company fails to make such payments in a timely manner,
the payments will bear interest at a rate of 1% per month until
paid in full. This registration rights agreement also provides
for incidental registration rights in connection with follow-on
offerings, other than issuances pursuant to a business
combination transaction or employee benefit plan. The Company
does not consider payment of any such penalty to be probable as
of December 31, 2007, and has therefore not recorded a
liability for this contingency.
Interest Expense, net Interest expense, net,
included in the Companys consolidated statements of
operations, consists of the following for the years ended
December 31, 2007, 2006 and 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Interest expense
|
|
$
|
104,550
|
|
|
$
|
69,116
|
|
|
$
|
11,605
|
|
Amortization of deferred financing costs
|
|
|
6,703
|
|
|
|
3,934
|
|
|
|
898
|
|
Amortization of long-term debt discount
|
|
|
14,004
|
|
|
|
15,820
|
|
|
|
4,381
|
|
Capitalized interest
|
|
|
(28,978
|
)
|
|
|
(16,590
|
)
|
|
|
(2,261
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
96,279
|
|
|
$
|
72,280
|
|
|
$
|
14,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.
|
Commitments
and Contingencies
|
The Companys commitments for non-cancelable operating
leases consist mainly of leased spectrum license fees, office
space, equipment and certain of its network equipment situated
on leased sites, including land, towers and rooftop locations.
Certain of the leases provide for minimum lease payments,
additional charges and escalation clauses. Leased spectrum
agreements have initial terms of up to 30 years. Other
operating leases generally have initial terms of five years with
multiple renewal options for additional five-year terms totaling
20 to 25 years.
87
CLEARWIRE
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Future minimum payments under spectrum license and operating
lease obligations (including all optional renewal periods on
operating leases) as of December 31, 2007, are as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leased
|
|
|
Operating
|
|
|
|
|
Years Ending December 31,
|
|
Spectrum
|
|
|
Lease
|
|
|
Total
|
|
|
2008
|
|
$
|
39,226
|
|
|
$
|
87,320
|
|
|
$
|
126,546
|
|
2009
|
|
|
39,253
|
|
|
|
87,030
|
|
|
|
126,283
|
|
2010
|
|
|
39,915
|
|
|
|
86,868
|
|
|
|
126,783
|
|
2011
|
|
|
40,045
|
|
|
|
85,363
|
|
|
|
125,408
|
|
2012
|
|
|
45,068
|
|
|
|
84,896
|
|
|
|
129,964
|
|
Thereafter, including all renewal periods
|
|
|
1,557,749
|
|
|
|
1,629,062
|
|
|
|
3,186,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,761,256
|
|
|
$
|
2,060,539
|
|
|
$
|
3,821,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent expense under operating leases was $77.6 million,
$35.0 million, and $10.5 million for the years ended
December 31, 2007, 2006 and 2005, respectively.
In addition to the leased spectrum commitments above, in
connection with various spectrum lease agreements the Company
has commitments to provide Clearwire services to the lessors in
launched markets, and reimbursement of capital equipment and
third-party service expenditures of the lessors over the term of
the lease. During the year ended December 31, 2007, the
Company satisfied $642,000 related to these commitments for the
year ending December 31, 2007. The maximum remaining
commitment at December 31, 2007 is $89.8 million and
is expected to be incurred over the term of the related lease
agreements, which range from
15-30 years.
Under the terms of the Supply Agreement that was entered into
between Clearwire and Motorola on August 29, 2006,
Clearwire is committed to purchase no less than
$150.0 million of infrastructure equipment and other
products from Motorola in the first two years after the
effective date of August 29, 2006, subject to Motorola
continuing to satisfy certain performance requirements and other
conditions. The Company is also committed to purchase from
Motorola, all Expedience modems and Expedience PC cards it
provides to its subscribers for a period of five years and 51%
of such products until the term of the agreement is completed on
August 29, 2014, if certain conditions are met. For the
period from the effective date of the agreement through
December 31, 2007, total purchases from Motorola under
these agreements were $98.4 million. The remaining
commitment was $51.6 million at December 31, 2007.
As of December 31, 2007, the Company has minimum purchase
agreements of approximately $57.8 million to acquire new
spectrum.
Contingencies During 2007, a cash payment of
$17.0 million was received in connection with the sale of
one of the Companys investments, which was sold at a loss
to a third party. Under certain circumstances, the Company may
be required to return all or part of the payment to the
counterparty to this transaction, and as such this amount has
been recorded as a long-term liability.
In the normal course of business, Clearwire is party to various
pending judicial and administrative proceedings. While the
outcome of the pending proceedings cannot be predicted with
certainty, Management believes that any unrecorded liability
that may result will not to have a material adverse effect on
our liquidity, financial condition or results of operations.
Indemnity Agreements Flux Fixed Wireless, LLC
(FFW), wholly owned by Mr. McCaw and ERH, and
Clearwire entered into an Indemnification Agreement, dated
November 13, 2003, pursuant to which Clearwire agreed to
indemnify, defend and hold harmless FFW and any of its
directors, officers, partners, employees, agents and spouses and
each of its and their affiliates (each, an
Indemnitee) to the fullest extent permitted by law
for any claims made against an Indemnitee by reason of the fact
that Indemnitee is, was or may be deemed a stockholder,
director, officer, employee, controlling person, agent or
fiduciary of Clearwire or any subsidiary of Clearwire.
88
CLEARWIRE
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Clearwire is obligated to pay the expenses of any Indemnitee in
connection with any claims which are subject to the agreement.
Clearwire is currently a party to, or contemplating entering
into, similar indemnification agreements with certain other of
its officers and each of the other members of its Board of
Directors. No liabilities have been recorded in the consolidated
balance sheets for any indemnification agreements.
In August 2006, Intel Capital completed its purchase from
Clearwire of 23,427,601 shares of Class A common stock
and 9,905,732 shares of Class B common stock at $18.00
per share for a total purchase price of $600.0 million,
pursuant to a Common Stock Purchase Agreement.
In August 2006, Clearwire entered into subscription agreements
with the holders of its outstanding stock for the sale of an
aggregate of 8,603,116 shares of Clearwires
Class A common stock at $18.00 per share for an aggregate
purchase price of $154.9 million. The agreements include
certain limited anti-dilution features. The transactions closed
on August 29, 2006, except for one agreement covering the
sale of 1,222,222 shares which closed in October 2006.
On March 13, 2007, the Company completed the sale of
24,000,000 shares of its Class A common stock in its
initial public offering. The shares were sold in the offering at
a price of $25.00 per share, and the Company received net
proceeds of $555.2 million, net of underwriters
discount, commissions and other fees of $44.8 million. The
Company has used these proceeds for market and network
expansion, spectrum acquisitions and general corporate purposes.
Under Clearwires Certificate of Incorporation, as amended,
it has the authority to issue 355,000,000 shares of capital
stock as follows:
|
|
|
|
|
300,000,000 shares of Class A common stock, par value
$0.0001 per share;
|
|
|
|
50,000,000 shares of Class B common stock, par value
$0.0001 per share; and
|
|
|
|
5,000,000 shares of preferred stock, par value $0.0001 per
share.
|
The following is a summary description of the Companys
common stock:
Class A common stock The holders of
Class A common stock are entitled to one vote per share, on
each matter submitted to a vote by the stockholders.
Class B common stock The holders of
Class B common stock are entitled to ten votes per share,
on each matter submitted to a vote by the stockholders.
Class B common stock is convertible at any time at the
option of its holders into shares of Class A common stock.
Each share of Class B common stock is convertible into one
share of Class A common stock.
Preferred stock May be divided into one or
more series. Each series will have the preferences, limitations
and relative rights as determined by the Board of Directors. No
series of preferred stock have been designated by the Board of
Directors.
Ranking With respect to rights on
liquidation, dissolution or similar events, each holder of
Class A and Class B common stock will receive the same
amount of consideration per share, except that Class B
common stock holders may receive securities in the transactions
with terms that entitle them to ten votes per share.
Common stock and warrants payable The Company
engaged several parties to obtain spectrum on its behalf in
exchange for rights to receive its common stock and warrants. As
the rights are earned over the period of an acquisition of
spectrum, these obligations can be outstanding for a period of
time until FCC approval or other
89
CLEARWIRE
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
milestones are met. The Company records common stock and
warrants payable to recognize the timing difference when
consideration has been received by the Company, but it has not
yet issued securities to the counterparty.
On January 19, 2007, Clearwires Board of Directors
adopted the 2007 Stock Compensation Plan (the 2007
Plan), which authorizes the Company to grant incentive
stock options, non-qualified stock options, stock appreciation
rights, restricted stock, restricted stock units, and other
stock awards to its employees, directors and consultants. The
2007 Plan was adopted by the Companys stockholders on
February 16, 2007. There are 15,000,000 shares of
Class A common stock authorized under the 2007 Plan.
Options granted under the 2007 Plan generally vest ratably over
four years and expire no later than ten years after the date of
grant. Shares to be awarded under the 2007 Plan will be made
available at the discretion of the Compensation Committee of the
Board of Directors from authorized but unissued shares,
authorized and issued shares reacquired and held as treasury
shares, or a combination thereof. At December 31, 2007
there were 8,558,574 shares available for grant under the
2007 Stock Option Plan.
Prior to the 2007 Plan, the Company had the following
share-based arrangements: The Clearwire Corporation 2003 Stock
Option Plan (the 2003 Stock Option Plan) and The
Clearwire Corporation Stock Appreciation Rights Plan (the
SAR Plan). No additional stock options will be
granted under the Companys 2003 Stock Option Plan.
The Company applies SFAS 123(R) to new awards and to awards
modified, repurchased, or cancelled after January 1, 2006.
Share-based compensation expense is based on the estimated
grant-date fair value and is recognized net of a forfeiture rate
on those shares expected to vest over a graded vesting schedule
on a straight-line basis over the requisite service period for
each separately vesting portion of the award as if the award
was, in-substance, multiple awards.
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model using the
assumptions disclosed for the years ended December 31,
2007, 2006 and 2005. The volatility used to calculate the fair
value of non-employee stock option grants for 2007, 2006 and
2005 and employee stock option grants for 2007 and 2006 is based
on both average historical volatility from common shares of a
group of the Companys peers and the Companys own
historical volatility. There is a 0% expected dividend yield as
there are no plans to pay future dividends. The expected life of
options granted is based on the simplified calculation of
expected life, described in the Securities and Exchange
Commissions Staff Accounting Bulletin No. 107,
or SAB No. 107, Share-Based Payment, due to
lack of option exercise history. The risk-free interest rate is
based on the zero-coupon U.S Treasury bond, with a term equal to
the expected life of the options.
Compensation cost recognized for these plans for the year ended
December 31, 2007, 2006 and 2005 is presented as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Cost of service
|
|
$
|
138
|
|
|
$
|
819
|
|
|
$
|
204
|
|
Selling, general and administrative
|
|
|
42,633
|
|
|
|
13,427
|
|
|
|
2,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
42,771
|
|
|
$
|
14,246
|
|
|
$
|
2,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Options
Prior to January 1, 2006, the Company accounted for
share-based compensation under the recognition and measurement
provisions of APB 25. Stock options granted at prices below fair
market value at the date of grant were considered compensatory,
and compensation expense has been deferred and is being
recognized over the option vesting period using the graded
vesting method. Compensation expense is based on the excess of
the fair market value of the underlying common stock at the date
of grant over the exercise price of the option.
90
CLEARWIRE
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company also granted stock options to employees of entities
under common control who performed services to the Company to
purchase shares of the Companys Class A common stock.
In accordance with EITF Issue
No. 00-23,
Issues Related to the Accounting for Stock Compensation Under
APB No. 25, Accounting for Stock Issued to Employees, and
FASB Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation, and
SFAS No. 123(R), the fair value of such options was
recorded as a dividend and a charged against additional paid-in
capital on the line item, deferred share-based compensation. A
total of $1.5 million, $2.4 million, and $34,000 was
recorded, as a dividend, for the years ended December 31,
2007, 2006 and 2005, respectively.
During the year ended December 31, 2007 the Company granted
727,000 options to non-employee consultants, of which 250,000
were forfeited. These options are adjusted to current fair value
each quarter during their vesting periods as services are
rendered. During the year ended December 31, 2007, the
Company recognized $345,000 expense and had $2.3 million of
unamortized expense as of December 31, 2007 related to
these options. Expense for the year ended December 31, 2006
was $1.3 million.
A summary of option activity from January 1, 2005 through
December 31, 2007 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
|
|
Weighted-
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Value As of
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Term
|
|
|
12/31/2007
|
|
|
|
Options
|
|
|
Price
|
|
|
(Years)
|
|
|
(In millions)
|
|
|
Options outstanding January 1, 2005
|
|
|
6,906,406
|
|
|
$
|
4.59
|
|
|
|
9.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,215,311
|
|
|
|
10.74
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(168,859
|
)
|
|
|
6.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding December 31, 2005
|
|
|
7,952,858
|
|
|
|
5.58
|
|
|
|
8.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
3,942,304
|
|
|
|
16.95
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(568,048
|
)
|
|
|
10.84
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(56,709
|
)
|
|
|
4.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding December 31, 2006
|
|
|
11,270,405
|
|
|
|
9.30
|
|
|
|
8.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
7,014,662
|
|
|
|
23.72
|
|
|
|
|
|
|
|
|
|
SARS converted to options
|
|
|
106,302
|
|
|
|
17.64
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(1,328,100
|
)
|
|
|
20.32
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(720,315
|
)
|
|
|
6.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding December 31, 2007
|
|
|
16,342,954
|
|
|
$
|
14.83
|
|
|
|
7.8
|
|
|
$
|
55.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable outstanding December 31, 2007
|
|
|
6,261,909
|
|
|
$
|
6.85
|
|
|
|
6.4
|
|
|
$
|
46.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest
December 31, 2007
|
|
|
14,656,393
|
|
|
$
|
14.15
|
|
|
|
7.6
|
|
|
$
|
54.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The intrinsic value of options exercised during the year ended
December 31, 2007, was $11.0 million as compared to
$760,000 during the year ended December 31, 2006. The
intrinsic value is calculated as the difference between the
estimated fair value of the Companys common stock at
December 31, 2007 or on the date of exercise and the
exercise price of the stock options on the date of grant.
91
CLEARWIRE
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Information regarding stock options outstanding and exercisable
as of December 31, 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Life
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Remaining
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
Exercise Prices
|
|
Options
|
|
|
(Years)
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
|
$2.25
|
|
|
312,498
|
|
|
|
5.9
|
|
|
$
|
2.25
|
|
|
|
312,498
|
|
|
$
|
2.25
|
|
$3.00
|
|
|
1,865,112
|
|
|
|
4.9
|
|
|
|
3.00
|
|
|
|
1,760,359
|
|
|
|
3.00
|
|
$6.00
|
|
|
4,019,909
|
|
|
|
6.8
|
|
|
|
6.00
|
|
|
|
3,006,050
|
|
|
|
6.00
|
|
$12.00 $15.00
|
|
|
1,726,315
|
|
|
|
7.5
|
|
|
|
14.28
|
|
|
|
609,430
|
|
|
|
14.02
|
|
$16.02
|
|
|
311,000
|
|
|
|
9.9
|
|
|
|
16.02
|
|
|
|
|
|
|
|
|
|
$18.00
|
|
|
2,237,341
|
|
|
|
8.4
|
|
|
|
18.00
|
|
|
|
568,616
|
|
|
|
18.00
|
|
$20.16
|
|
|
122,000
|
|
|
|
9.8
|
|
|
|
20.16
|
|
|
|
|
|
|
|
|
|
$23.30
|
|
|
2,093,300
|
|
|
|
9.4
|
|
|
|
23.30
|
|
|
|
|
|
|
|
|
|
$23.52
|
|
|
808,164
|
|
|
|
9.3
|
|
|
|
24.24
|
|
|
|
4,956
|
|
|
|
24.00
|
|
$25.00 $25.33
|
|
|
2,847,315
|
|
|
|
8.8
|
|
|
|
25.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
16,342,954
|
|
|
|
7.8
|
|
|
$
|
14.83
|
|
|
|
6,261,909
|
|
|
$
|
6.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model using the
following assumptions for the years ended December 31,
2007, 2006 and 2005:
|
|
|
|
|
|
|
|
|
Employee
|
|
Non-Employee
|
|
|
2007
|
|
2006
|
|
2005
|
|
Expected volatility
|
|
57.07% - 64.68%
|
|
66.15% - 78.62%
|
|
80.31%
|
Expected dividend yield
|
|
|
|
|
|
|
Expected life (in years)
|
|
6.25
|
|
6.25
|
|
10
|
Risk-free interest rate
|
|
4.26% - 5.00%
|
|
4.45% - 4.92%
|
|
4.20% - 4.23%
|
Weighted average fair value per option at grant date
|
|
$14.59
|
|
$11.53
|
|
$15.36
|
During the third and fourth quarters of 2007, an estimate of
7.5% was used for the annual forfeiture rate based on the
Companys historical experience since inception. Prior to
third quarter 2007, the estimated annual forfeiture rate was
6.4%. During the year ended 2006, an estimate of 3% was used for
the annual forfeiture rate.
Expense recorded related to stock options in the year ended
December 31, 2007 was $40.1 million compared to
$11.8 million for the year ended December 31, 2006.
The total unrecognized share-based compensation costs related to
non-vested stock options outstanding at December 31, 2007
was $77.8 million and is expected to be recognized over a
weighted average period of approximately 2 years.
Restricted
Stock Awards
In the year ended December 31, 2007 and 2006, the Company
issued 33,333 shares and 83,333 shares of restricted
stock, respectively, with a weighted average grant date fair
value of $25.00 and $15.00, respectively, to certain senior
officers which vest in equal annual installments over a two-year
period. The Company also agreed to reimburse the officers for
the personal income tax liability associated with the restricted
stock. Compensation expense related to these restricted stock
grants was $750,000, $1.0 million and $1.0 million for
the years ended December 31, 2007, 2006 and 2005,
respectively.
92
CLEARWIRE
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of the restricted stock activity for the year ended
December 31, 2006 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Grant-Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Restricted stock outstanding January 1, 2005
|
|
|
333,333
|
|
|
$
|
6.00
|
|
Granted
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock outstanding December 31, 2005
|
|
|
333,333
|
|
|
|
6.00
|
|
Granted
|
|
|
83,333
|
|
|
|
15.00
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock outstanding December 31, 2006
|
|
|
416,666
|
|
|
|
7.80
|
|
Granted
|
|
|
33,333
|
|
|
|
25.00
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock outstanding December 31, 2007
|
|
|
449,999
|
|
|
$
|
9.07
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, the number of restricted shares
outstanding was 449,999 shares and there was $543,000 of
total unrecognized compensation cost related to the unvested
restricted stock, which is expected to be recognized over a
weighted-average period of approximately 1 year. During the
year ended December 31, 2007, 41,667 restricted shares
vested, with a fair value of approximately $625,000.
Restricted
Stock Units
During the year ended December 31, 2007, the Company
granted 400,000 restricted stock units to certain officers and
employees under the 2007 Plan. All restricted stock units vest
over a four-year period. Under SFAS 123(R), the fair value
of the Companys restricted stock units is based on the
grant-date fair market value of the common stock, which equals
the grant date market price.
A summary of the restricted stock unit activity for the year
ended December 31, 2007 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Grant-Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Restricted stock units outstanding January 1,
2007
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
400,000
|
|
|
|
23.30
|
|
Forfeited
|
|
|
(5,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units outstanding December 31,
2007
|
|
|
395,000
|
|
|
$
|
23.30
|
|
|
|
|
|
|
|
|
|
|
The total fair value of grants during 2007 was
$9.3 million. Compensation expense related to the
restricted stock units during the year ended December 31,
2007 was $1.1 million, net of forfeitures. As of
December 31, 2007, there were 395,000 units
outstanding and total unrecognized compensation cost of
$8.0 million, which is expected to be recognized over a
weighted-average period of approximately 2 years. At
December 31, 2007, none of these units were vested.
SAR
Plan
The SAR Plan was adopted in January 2006 and provides for the
granting of up to 166,666 stock appreciation rights. The stock
appreciation rights generally vest ratably over four years and
expire no later than ten years after the date of grant. The SAR
Plan allows holders of these rights to share in the appreciation
of the fair value of the
93
CLEARWIRE
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Companys Class A common stock. Settlement of these
rights will be in cash, but these rights may be replaced at the
Companys discretion with an equivalent number of
nonqualified options.
The Company accounts for the SAR Plan grants under
SFAS No. 123(R) and records these grants as liability
awards, as settlement is anticipated to be in cash. The SARs are
remeasured at fair value each reporting period until the awards
are settled in accordance with SFAS No. 123(R). The
fair value is determined in the same manner as a stock option
granted under the Stock Option Plan using the same assumptions
and option-pricing model to estimate the fair value.
Compensation expense for each period until settlement is based
on the change (or a portion of the change, depending on the
percentage of the requisite service that has been rendered at
the reporting date) in the fair value for each reporting period.
During the year ended December 31, 2007, no SARs were
granted, 39,652 SARs were forfeited and 600 were exercised. For
the year ended December 31, 2006, 167,685 SARs were granted
between $15.00 and $18.00 and 21,131 were forfeited. The Company
recorded $398,000 and $178,000, net of forfeitures, of
share-based compensation expense for SARs grants for the years
ended December 31, 2007 and 2006, respectively.
As of October 1, 2007, all outstanding SARs were converted
to non-qualified stock options under the 2007 Stock Option Plan.
The SARs were converted to options at the fourth quarter
remeasured fair value.
Warrants
During the year ended December 31, 2007, the Company issued
1,407,139 warrants at a weighted average exercise price of
$37.99 to purchase the Companys Class A common stock
in connection with the acquisition of spectrum or assets. At
December 31, 2007 there were 17,806,220 warrants
outstanding and exercisable with a weighted average exercise
price of $16.57.
A summary of warrant activity from January 1, 2005 to
December 31, 2007 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Weighted-
|
|
|
Remaining
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Term
|
|
|
|
Warrants
|
|
|
Price
|
|
|
(Years)
|
|
|
Warrants outstanding January 1, 2005
|
|
|
1,099,508
|
|
|
$
|
7.80
|
|
|
|
8.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
7,811,105
|
|
|
|
13.74
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants outstanding December 31, 2005
|
|
|
8,910,613
|
|
|
|
13.02
|
|
|
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
9,892,022
|
|
|
|
14.94
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants outstanding December 31, 2006
|
|
|
18,802,635
|
|
|
|
14.02
|
|
|
|
4.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,407,139
|
|
|
|
37.99
|
|
|
|
|
|
Exercised
|
|
|
(1,882,887
|
)
|
|
|
7.59
|
|
|
|
|
|
Cancelled
|
|
|
(520,667
|
)
|
|
|
15.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants outstanding December 31, 2007
|
|
|
17,806,220
|
|
|
$
|
16.57
|
|
|
|
3.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable outstanding December 31, 2007
|
|
|
17,806,220
|
|
|
$
|
16.57
|
|
|
|
3.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94
CLEARWIRE
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The fair value of warrants granted is estimated on the date of
grant using the Black-Scholes option pricing model using the
following average assumptions for the years ended
December 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
Expected volatility
|
|
64.68% - 88.54%
|
|
73.76% - 88.54%
|
|
78.62% - 80.31%
|
Expected dividend yield
|
|
|
|
|
|
|
Contractual life (in years)
|
|
5-10
|
|
5-10
|
|
6
|
Risk-free interest rate
|
|
3.05% - 4.81%
|
|
3.05% - 5.16%
|
|
3.89% - 4.61%
|
Weighted average fair value per warrant at issuance date
|
|
$12.07
|
|
$9.84
|
|
$12.27
|
Basic and diluted loss per share has been calculated in
accordance with SFAS No. 128 for the years ended
December 31, 2007, 2006 and 2005. As the Company had a net
loss in each of the periods presented, basic and diluted net
loss per common share are the same.
The computations of diluted loss per share for the years ended
December 31, 2007, 2006 and 2005, did not include the
effects of the following options, shares of nonvested restricted
stock, restricted stock units and warrants as the inclusion of
these securities would have been antidilutive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
Stock options
|
|
|
14,249,467
|
|
|
|
11,270,405
|
|
|
|
7,952,858
|
|
Nonvested restricted stock
|
|
|
62,877
|
|
|
|
83,333
|
|
|
|
166,666
|
|
Restricted Stock Units
|
|
|
101,247
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
18,064,035
|
|
|
|
18,802,635
|
|
|
|
8,910,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,477,626
|
|
|
|
30,156,373
|
|
|
|
17,030,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss consists of two components, net loss and
other comprehensive loss. Other comprehensive income refers to
revenue, expenses, gains and losses that under generally
accepted accounting principles are recorded as an element of
stockholders equity but are excluded from net loss. The
Companys other comprehensive income is comprised of
foreign currency translation adjustments from the Companys
subsidiaries not using the U.S. dollar as their functional
currency and unrealized gains and losses on marketable
securities categorized as available-for-sale.
Total comprehensive loss was $717.1 million,
$276.7 million, and $140.7 million for the years ended
December 31, 2007, 2006 and 2005, respectively. The primary
differences between net loss as reported and comprehensive loss
are foreign currency translation adjustments and net unrealized
losses from available-for-sale investments.
The components of accumulated other comprehensive income were as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Net unrealized loss on available-for-sale investments
|
|
$
|
(7,292
|
)
|
|
$
|
(74
|
)
|
Cumulative foreign currency translation adjustment
|
|
|
24,625
|
|
|
|
7,064
|
|
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive income
|
|
$
|
17,333
|
|
|
$
|
6,990
|
|
|
|
|
|
|
|
|
|
|
95
CLEARWIRE
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company complies with the requirements of
SFAS No. 131, which establishes annual and interim
reporting standards for an enterprises operating segments
and related disclosures about its products, services, geographic
areas and major customers. Operating segments are defined as
components of an enterprise for which separate financial
information is available that is evaluated regularly by the
chief operating decision makers in deciding how to allocate
resources and in assessing performance. Operating segments can
be aggregated for segment reporting purposes so long as certain
aggregation criteria are met. The Company defines the chief
operating decision makers as its Chief Executive Officer, Chief
Operating Officer and the Chief Financial Officer. As our
business continues to mature, the Company assesses how it views
and operates the business. As a result, in the fourth quarter of
2007, the Company was organized into two reportable business
segments: the United States and the International business.
The Company reports business segment information as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
United States
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
122,906
|
|
|
$
|
83,401
|
|
|
$
|
32,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods and services (exclusive of items shown separately
below)
|
|
|
94,541
|
|
|
|
61,145
|
|
|
|
22,165
|
|
Operating expenses
|
|
|
389,227
|
|
|
|
183,029
|
|
|
|
108,328
|
|
Depreciation and amortization
|
|
|
69,095
|
|
|
|
35,083
|
|
|
|
10,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
552,863
|
|
|
|
279,257
|
|
|
|
141,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(429,957
|
)
|
|
|
(195,856
|
)
|
|
|
(109,109
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
28,534
|
|
|
|
16,780
|
|
|
|
1,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods and services (exclusive of items shown separately
below)
|
|
|
12,740
|
|
|
|
8,967
|
|
|
|
1,404
|
|
Operating expenses
|
|
|
69,253
|
|
|
|
44,253
|
|
|
|
16,878
|
|
Depreciation and amortization
|
|
|
15,599
|
|
|
|
5,819
|
|
|
|
1,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
97,592
|
|
|
|
59,039
|
|
|
|
19,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(69,058
|
)
|
|
|
(42,259
|
)
|
|
|
(18,125
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating loss
|
|
|
(499,015
|
)
|
|
|
(238,115
|
)
|
|
|
(127,234
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
(222,592
|
)
|
|
|
(39,466
|
)
|
|
|
(7,698
|
)
|
Income tax provision
|
|
|
(5,427
|
)
|
|
|
(2,981
|
)
|
|
|
(1,459
|
)
|
Minority interest in net loss of consolidated subsidiaries
|
|
|
4,244
|
|
|
|
1,503
|
|
|
|
387
|
|
Losses from equity investees
|
|
|
(4,676
|
)
|
|
|
(5,144
|
)
|
|
|
(3,946
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(727,466
|
)
|
|
$
|
(284,203
|
)
|
|
$
|
(139,950
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
320,134
|
|
|
$
|
168,607
|
|
|
$
|
123,249
|
|
International
|
|
|
41,727
|
|
|
|
23,140
|
|
|
|
9,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
361,861
|
|
|
$
|
191,747
|
|
|
$
|
132,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96
CLEARWIRE
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Long-lived assets(a)
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
1,350,418
|
|
|
$
|
661,444
|
|
International
|
|
|
150,555
|
|
|
|
103,782
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,500,973
|
|
|
$
|
765,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Consists of property, plant and equipment and prepaid spectrum
and spectrum licenses attributable to the business segment. |
|
|
17.
|
Related
Party Transactions
|
Clearwire has a number of strategic and commercial relationships
with third-parties that have had a significant impact on
Clearwires business, operations and financial results.
These relationships have been with ERH, Motorola, Inc.
(Motorola), Intel Corporation (Intel),
Hispanic Information and Telecommunications Network, Inc.
(HITN), ITFS Spectrum Advisors, LLC
(ISA), ITFS Spectrum Consultants LLC
(ISC) and Bell Canada (Bell), all of
which are or have been related parties.
Relationships among Certain Stockholders, Directors, and
Officers of Clearwire As of December 31,
2007, ERH is the holder of approximately 65% of Clearwires
outstanding Class B common stock and approximately 13% of
Clearwires outstanding Class A common stock. Eagle
River Inc. (ERI) is the manager of ERH. Each entity
is controlled by Craig McCaw. Mr. McCaw and his affiliates
have significant investments in other telecommunications
businesses, some of which may compete with Clearwire currently
or in the future. Mr. McCaw and his affiliates will likely
continue to make additional investments in telecommunications
businesses.
ERH also held 0% as of December 31, 2007 and 3.1% of the
Companys long-term debt as of December 31, 2006, as a
result of the retirement of all senior secured notes on
August 15, 2007 as described in Note 3. As of
December 31, 2006, the notes held by ERH had a
$23.0 million face value, or $19.3 million net of
discounts for warrants. As of December 31, 2007 and
December 31, 2006 ERH held a warrant entitling it to
purchase 613,333 shares of the Companys Class A
common stock. The exercise price of the warrant is $15.00 per
share. The Warrants expire in 2010.
In the years ended December 31, 2007, 2006 and 2005, ERH
earned interest relating to the notes in the amount of
$1.6 million, $4.1 million and $3.1 million,
respectively. ERH received payments in the amount of
$2.5 million and $3.8 million for accrued interest
during the years ended December 31, 2007 and 2006. During
the year ended December 31, 2005, there were no interest
payments made.
Certain officers and directors of Clearwire provide additional
services to ERH, ERI and their affiliates for which they are
separately compensated by such entities. Any compensation paid
to such individuals by ERH, ERI
and/or their
affiliates for their services is in addition to the compensation
paid by Clearwire.
Advisory Services Agreement Clearwire and ERI
were parties to an Advisory Services Agreement, dated
November 13, 2003 (the Advisory Services
Agreement). Under the Advisory Services Agreement, ERI
provided Clearwire with certain advisory and consulting
services, including without limitation, advice as to the
development, ownership and operation of communications services,
advice concerning long-range planning and strategy for the
development and growth of Clearwire, advice and support in
connection with its dealings with federal, state and local
regulatory authorities, advice regarding employment, retention
and compensation of employees and assistance in short-term and
long-term financial planning. The parties terminated this
agreement effective January 31, 2007.
97
CLEARWIRE
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In exchange for the services, Clearwire historically paid ERI an
annual advisory fee of $800,000 plus any out-of-pocket expenses
incurred by ERI. The annual advisory fee covered certain
overhead expenses incurred by ERI on behalf of Clearwire,
including expenses related to providing administrative support
and office space to Messrs. McCaw, the Companys
Chairman, and Wolff, the Companys Chief Executive Officer,
and compensation for services provided to Clearwire by certain
personnel of ERI. During the years ended December 31, 2007,
2006 and 2005, the Company paid ERI fees of $67,000, $800,000
and $800,000, respectively, and expense reimbursements of
$278,000, $949,000 and $296,000, respectively, under this
agreement. Beginning February 2007, Mr. McCaw has received
annual compensation directly from Clearwire in his capacity as
the Companys Chairman of $300,000 per year, plus expense
reimbursements.
Pursuant to the origination of the Advisory Services Agreement
in 2003, Clearwire also issued to ERH warrants to purchase
375,000 shares of the Companys Class A common
stock at an exercise price of $3.00 per share, which may be
exercised any time within 10 years of the issuance of the
warrants. As of December 31, 2007, the remaining life of
the warrant was 5.9 years.
Nextel Undertaking Clearwire and
Mr. McCaw entered into an agreement and undertaking in
November 2003, pursuant to which Clearwire agreed to comply with
the terms of a separate agreement between Mr. McCaw and
Nextel Communications, Inc. (Nextel), so long as the
Company was a controlled affiliate of Mr. McCaw
as defined therein, certain terms of which were effective until
October 2006. Under the agreement with Mr. McCaw, Nextel
had the right to swap certain channels of owned or leased
Broadband Radio Service (BRS) or Educational
Broadband Service (EBS) spectrum with entities
controlled by Mr. McCaw, including Clearwire. While the
agreement was still effective, Nextel notified the Company of
its request to swap certain channels, which is currently
pending. There were no payments made to Nextel under this
agreement in the year ended December 31, 2007.
Intel Collaboration Agreement On
June 28, 2006, Clearwire entered into a collaboration
agreement with Intel, to develop, deploy and market a co-branded
mobile WiMAX service offering in the United States, that will
target users of certain WiMAX enabled notebook computers,
ultramobile PCs, and other mobile computing devices containing
Intel microprocessors. Both parties have committed to make
certain contributions to the development, promotion and
marketing of this service, which will be available only over the
Companys mobile WiMAX network.
The Company and Intel have agreed to share the revenues received
from subscribers using Intel mobile computing devices on the
Companys domestic mobile WiMAX network. Intel will also
receive a one time fixed payment for each new Intel mobile
computing device activated on the Companys domestic mobile
WiMAX network once the Company has successfully achieved
substantial mobile WiMAX network coverage across the United
States. Through December 31, 2007, Clearwire has not been
required to make any payments to Intel under this agreement.
Motorola Agreements Simultaneously with the
sale of NextNet to Motorola, Clearwire and Motorola entered into
commercial agreements pursuant to which the Company agreed to
purchase certain infrastructure and supply inventory from
Motorola. Under these agreements, Clearwire is committed to
purchase no less than $150.0 million of network
infrastructure equipment, modems, PC cards and other products
from Motorola on or before August 29, 2008, subject to
Motorola continuing to satisfy certain performance requirements
and other conditions. The Company is also committed to purchase
certain types of network infrastructure products, modems and PC
cards it provides to its subscribers exclusively from Motorola
for a period of five years and, thereafter, 51% until the term
of the agreement is completed on August 29, 2014, as long
as certain conditions are satisfied. For the years ended
December 30, 2007 and 2006 total purchases from Motorola
under these agreements were $73.0 million and
$25.4 million, respectively. The remaining commitment was
$51.6 million at December 31, 2007.
HITN and its Affiliates During 2004, the
Company entered into two agreements with ITFS Spectrum Advisors,
LLC (ISA) and ITFS Spectrum Consultants LLS
(ISC). The founder and president of HITN was
98
CLEARWIRE
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
formerly a member of Clearwires Board of Directors and is
an owner of ISA and ISC, which are also affiliates of HITN. The
agreements provided for payment to be provided to ISA and ISC in
the form of warrants to purchase additional shares of
Class A common stock in exchange for ISA and ISC providing
opportunities for Clearwire to purchase or lease additional
spectrum. Each of the agreements specifies a maximum
consideration available under the agreement and, in 2005, the
maximum consideration under the agreement with ISA was reached.
For the years ended December 31, 2007 and 2006, ISC earned
approximately $181,000 and $400,000, respectively. During 2007
and 2006, $181,000 and $65,000 was paid in cash, respectively,
and warrants to purchase 7,138 and 18,973 shares of
Class A common stock, valued at $116,000 and $196,000, were
issued, respectively. The maximum consideration under the
agreement with ISC was reached in 2007. As of December 31,
2007 there was no payable remaining related to these agreements.
Agreements with Bell Canada In March 2005,
Bell, a Canadian telecommunications company which is a
subsidiary of BCE purchased 8,333,333 shares of
Clearwires Class A common stock for
$100.0 million. At the time of the investment, Bell and BCE
Nexxia, an affiliate of Bell, entered into a Master Supply
Agreement (Master Supply Agreement) dated
March 16, 2005 with Clearwire. Under the Master Supply
Agreement, Bell and BCE Nexxia provide or arrange for the
provision of hardware, software, procurement services,
management services and other components necessary for Clearwire
to provide VoIP services to their subscribers in the United
States and provide day-to-day management and operation of the
components and services necessary for Clearwire to provide these
VoIP services. Clearwire will pay to Bell Canada or BCE Nexxia a
flat fee for each new subscriber of its VoIP telephony
services. Clearwire has agreed to use Bell Canada and BCE Nexxia
exclusively to provide such service unless such agreement
violates the rights of third parties under its existing
agreements. Total fees paid for new subscribers under the Master
Supply Agreement were $112,000, $0 and $0 for the years ended
December 31, 2007, 2006 and 2005, respectively. Amounts
paid for supplies, equipment and other services purchased
through Bell Canada or BCE were $6.0 million,
$7.5 million and $15.4 million for the years ended
December 31, 2007, 2006 and 2005, respectively. The Master
Supply Agreement can be terminated for convenience on twelve
months notice by either party at any time beginning on or after
October 1, 2007. On October 29, 2007, the Company
delivered a notice of termination of the Master Supply Agreement
to BCE Nexxia and the agreement should terminate on
October 29, 2008 unless it is extended by the parties.
As required under the Master Supply Agreement with Bell and BCE
Nexxia and in order to assist funding capital expenses and
start-up
costs associated with the deployment of VoIP services, BCE
agreed to make available to Clearwire financing in the amount of
$10.0 million. BCE funded the entire amount on June 7,
2006. The loan is secured by a security interest in the
telecommunications equipment and property related to VoIP and
bears interest at 7.00% per annum and is due and payable in full
on July 19, 2008.
99
CLEARWIRE
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
18.
|
Quarterly
Financial Information (unaudited)
|
Summarized quarterly financial information for the years ended
December 31, 2007 and 2006 is as follows (in thousands,
except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
Year Ended
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
December 31,
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
29,275
|
|
|
$
|
35,484
|
|
|
$
|
41,297
|
|
|
$
|
45,384
|
|
|
$
|
151,440
|
|
Gross profit(1)
|
|
|
12,540
|
|
|
|
12,171
|
|
|
|
12,029
|
|
|
|
7,419
|
|
|
|
44,159
|
|
Operating loss
|
|
|
(86,189
|
)
|
|
|
(110,319
|
)
|
|
|
(142,526
|
)
|
|
|
(159,981
|
)
|
|
|
(499,015
|
)
|
Net loss
|
|
|
(92,635
|
)
|
|
|
(118,085
|
)
|
|
|
(328,637
|
)
|
|
|
(188,109
|
)
|
|
|
(727,466
|
)
|
Net loss per common share, basic and diluted
|
|
$
|
(0.64
|
)
|
|
$
|
(0.72
|
)
|
|
$
|
(2.01
|
)
|
|
$
|
(1.15
|
)
|
|
$
|
(4.58
|
)
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
22,748
|
|
|
$
|
26,791
|
|
|
$
|
26,899
|
|
|
$
|
23,743
|
|
|
$
|
100,181
|
|
Gross profit(1)
|
|
|
8,886
|
|
|
|
5,683
|
|
|
|
8,196
|
|
|
|
7,304
|
|
|
|
30,069
|
|
Operating loss
|
|
|
(45,150
|
)
|
|
|
(61,336
|
)
|
|
|
(42,979
|
)
|
|
|
(88,650
|
)
|
|
|
(238,115
|
)
|
Net loss
|
|
|
(55,279
|
)
|
|
|
(76,809
|
)
|
|
|
(59,763
|
)
|
|
|
(92,352
|
)
|
|
|
(284,203
|
)
|
Net loss per common share, basic and diluted
|
|
$
|
(0.73
|
)
|
|
$
|
(1.01
|
)
|
|
$
|
(0.61
|
)
|
|
$
|
(0.67
|
)
|
|
$
|
(2.93
|
)
|
|
|
|
(1) |
|
Gross profit excludes a portion of depreciation and amortization
included in operating loss. |
Interest
Rate Swaps
In January 2008, the Company entered into two interest rate
swaps to hedge its forward three-month LIBOR indexed variable
interest payments in an effort to reduce interest expense. The
first swap was entered on January 4, 2008, effective
March 5, 2008, to pay a fixed rate of 3.6225% and to
receive the three-month LIBOR on a notional value of
$300.0 million for three years. The second swap was entered
on January 7, 2008, effective March 5, 2008, to pay a
fixed rate of 3.5% and to receive the three-month LIBOR on a
notional value of $300.0 million for two years. In
accordance with SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, its
amendments and related guidance, the Company will treat the
interest rate swaps as cash-flow hedges and will
record the fair value of the swaps at the end of each calendar
quarter, starting March 31, 2008.
100
|
|
ITEM 9.
|
Changes
In and Disagreements with Accountants on Accounting and
Financial Disclosure
|
Not applicable.
|
|
ITEM 9A.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that
are designed to ensure that information required to be disclosed
in our reports filed under the Exchange Act is recorded,
processed, summarized and reported within the time periods
specified in the SECs rules and forms. Disclosure controls
and procedures include controls and procedures designed to
ensure that such information is accumulated and communicated to
our management, including our Chief Executive Officer (CEO),
Chief Operating Officer (COO), Chief Financial Officer (CFO) and
Chief Accounting Officer (CAO), as appropriate, to allow timely
decisions regarding required financial disclosure.
Our management, under the supervision and with the participation
of our CEO, COO, CFO and CAO, has completed an evaluation of the
effectiveness of the design and operation of our disclosure
controls and procedures (as defined in
Rule 13a-15(e)
under the Exchange Act) as of the end of the fiscal year ended
December 31, 2007. Based on our evaluation of the
effectiveness of the design and operation of our disclosure
controls and procedures, which included remediation of the
material weaknesses and significant deficiencies described
below, our management, including our CEO, COO CFO and CAO,
concluded that as of December 31, 2007, the Companys
disclosure controls and procedures were effective.
Report of
Management on Internal Control over Financial
Reporting
Our management is responsible for establishing and maintaining
effective internal control over our financial reporting, as that
term is defined under
Rule 13a-15(f)
promulgated under the Securities Exchange Act of 1934. Internal
control over financial reporting refers to the process designed
by, or under the supervision of, our CEO, COO, CFO, and CAO and
effected by our board of directors, management and other
personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles, and includes those
policies and procedures that:
|
|
|
|
|
pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions
of our assets;
|
|
|
|
provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and
that receipts and expenditures are being made only in accordance
with authorization of our management and directors; and
|
|
|
|
provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on the financial
statements.
|
Due to inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. In addition,
projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become ineffective
because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In connection with the audit of our consolidated financial
statements for the years ended December 31, 2006 and 2005,
both we and our independent public accountants identified
material weaknesses, as well as, several significant
deficiencies, with respect to our internal control over
financial reporting. A material weakness is a deficiency, or
combination of deficiencies, in internal control over financial
reporting, such that there is a reasonable possibility that a
material misstatement of the Companys annual or interim
financial statements will not be prevented or detected on a
timely basis. A significant deficiency is a deficiency, or
combination of deficiencies, in internal control over financial
reporting that is less severe than a material weakness, yet
important enough to merit attention by those responsible for
oversight of the Companys financial reporting.
101
One of the material weaknesses in 2005 related to our lack of
sufficient review of our accounting for non-routine and complex
transactions, specifically accounting for equity-method
investments and issuance of debt with detachable warrants. The
other material weakness related to a lack of proper cutoff of
accounts payable and accrued expenses. These errors resulted in
material adjustments and reclassifications to our consolidated
financial statements. In addition, as of December 31, 2005
there were numerous significant deficiencies identified.
During 2006, we identified a material weakness in internal
controls related to a lack of properly designed internal control
over the preparation and review of the financial statements.
This caused us to restate our consolidated financial statements
for the nine month periods ended September 30, 2006 and
2005 (not included herein), and for the year ended
December 31, 2005 (not included herein) related to our
allocation methodology between cost of services and cost of
equipment. Additionally, we restated our unaudited statement of
cash flows for the nine months ended September 30, 2006
(not included herein) for an error relating to the
classification of amounts paid for leased spectrum assets, which
were inappropriately classified as investing rather than
operating activities.
During the year ended December 31, 2006 we noted
significant deficiencies related to account reconciliations and
related reviews; a lack of automation of our accounting for
share-based payments, and ineffective controls relating to
processes to ensure consistent communication of modifications in
stock option grants to accounting personnel responsible for
accounting for such modifications, accounting for leases and
deferred rent, and information security.
Managements
Remediation Initiatives
With respect to the material weakness identified in 2005
relating to the accounts payable cutoff, we have completed our
remediation efforts. In the 1st quarter of 2007, we
centralized the receipt and processing of invoice transactions
in the accounts payable department. Our month end close
procedures have been modified to include a detailed review of
vendor invoices received at or subsequent to a reporting period
to ensure the accuracy and completeness of our accounts payable.
Additionally, we established a cross departmental team that
completed the implementation of a comprehensive set of policies
and procedures that standardized, for example, supplier setup,
proper entry by invoice type into the accounts payable system,
adherence to signing authorities, check run processing, vendor
refunds and the month end reconciliation procedures for accounts
payable and accrued expenses.
With respect to financial reporting and review of non-routine
and complex accounting issues, we have completed our remediation
efforts. We have increased the total number of staff within the
accounting department and strengthened the accounting technical
capability of that team. In April 2007, we hired a Chief
Accounting Officer who has significant experience in leading an
accounting function at a publicly held company and in overseeing
the internal controls over financial reporting. He also has
thorough knowledge and experience with technical accounting,
U.S.GAAP and SEC reporting requirements. All significant
technical and complex accounting and financial reporting issues
are subject to a process in which the issue is thoroughly
researched, discussed and concluded upon by management. The
results of this process are formalized into a Technical
Accounting Memorandum that presents
managements analysis and conclusion to all significant
issues impacting accounting and financial reporting. When
addressing technical and complex accounting issues, we use, at
times, a nationally recognized accounting firm to advise us with
respect to these transactions.
With respect to the material weakness in internal controls
related to a lack of properly designed internal control over the
preparation and review of the financial statements, we have
completed our remediation efforts. We have a defined process for
the review and approval of the financial statements. According
to an internally-generated published SEC filing schedule, the
financial statements are subject to multiple levels of review
with internal senior level management and external parties
before being declared ready for filing. Further, a file is
created for each SEC filing that provides detailed supporting
documentation for all amounts and disclosures in the filing. All
comments and questions received when preparing the financial
statements are version controlled to ensure they are addressed.
With respect to our significant deficiency related to account
reconciliations and related reviews, we have completed our
remediation efforts. We have implemented several policies and
procedures that are required to be followed by the accounting
staff during the month end close process to ensure that all
journal entry transactions are
102
recorded consistently, are authorized and reviewed by higher
level accounting personnel and include the appropriate level of
supporting documentation prior to being posted into the general
ledger. All balance sheet accounts are required to be reconciled
monthly to supporting documentation and, as applicable,
subsidiary ledgers. Further, the accounting staff is required to
review the balance and activity in the corresponding income
statement account(s) to the balance sheet account being
reconciled. Lastly, all account reconciliations are subject to a
review by an individual one level above the preparer.
With respect to our significant deficiency on the lack of
automation of our accounting for share-based payments and the
ineffective controls relating to processes to ensure consistent
communication of modifications in stock option grants to
accounting personnel responsible for accounting for such
modifications, we have completed our remediation efforts. We
implemented a software program to automate the accounting for
share based payments and the modifications of stock option
grants. With respect to our significant deficiency on leases and
deferred rent, we have completed our remediation efforts through
the implementation of monthly internal control procedures to
ensure that all leases have been recorded and that all changes
in a lease status during a period are examined and all required
changes are made to the accounting records.
With the Information Technology department, we have completed
our remediation efforts. We have implemented stronger controls
to address the authentication of information security and the
responsibilities within significant applications. This includes
process improvements to ensure that new hires are granted the
minimum amount of security access to key financial systems, to
ensure this security access remains at appropriate levels across
time by conducting periodic security reviews, to ensure that
security access is removed in a timely manner when individuals
leave the company and to ensure the computing environments and
facilities remain secure.
After consideration of the remediation efforts described above,
we have concluded that as of December 31, 2007, the
material weaknesses disclosed with the audit of our consolidated
financial statements for the years ended December 31, 2006
and 2005 included in our Registration Statement on
Form S-1/A
dated March 7, 2007, have been remediated. In addition,
based on the work we performed during 2007 on our internal
control over financial reporting, we have not identified any new
material weaknesses as of December 31, 2007. This annual
report does not include an attestation report of the
companys registered public accounting firm due to a
transition period established by rules of the Securities and
Exchange Commission for newly public companies.
|
|
ITEM 9B.
|
Other
Information
|
None
PART III
|
|
ITEM 10.
|
Directors,
Executive Officers and Corporate Governance
|
The information required by Item 10 will be included in the
Companys 2008 Proxy Statement (the Proxy
Statement) under the heading Information About Our
Directors and Executive Officers and is incorporated
herein by reference. The Proxy Statement will be filed with the
Securities and Exchange Commission pursuant to
Regulation 14A within 120 days of the end of the
Corporations 2007 fiscal year.
|
|
ITEM 11.
|
Executive
Compensation
|
The information required by Item 11 will be included in the
Proxy Statement under the headings Information About Our
Directors and Executive Officers Compensation of the
Board, Compensation of Executive Officers and
Report of the Compensation Committee on Executive
Compensation, and is incorporated herein by reference.
103
|
|
ITEM 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information required by Item 12 will be included in the
Proxy Statement under the headings Equity Compensation
Plan Information, and Beneficial Ownership of Common
Stock and is incorporated herein by reference.
|
|
ITEM 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The information required by Item 13 will be included in the
Proxy Statement under the heading Information About Our
Directors and Executive Officers Related Party
Transactions, and is incorporated herein by reference.
|
|
ITEM 14.
|
Principal
Accounting Fees and Services
|
The information required by Item 14 will be included in the
Proxy Statement under the heading Ratification of
Selection of Independent Auditors and is incorporated by
reference herein.
PART IV
|
|
ITEM 15.
|
Exhibits
and Financial Statement Schedules
|
(a) Financial Statements and Schedules
The financial statements are set forth under Item 8 of this
Annual Report on
Form 10-K.
Financial statement schedules have been omitted since they are
either not required, not applicable, or the information is
otherwise included.
(b) Exhibit Listing
See the Exhibit Index immediately following the signature page
of this Annual Report on
Form 10-K.
104
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this Report to be signed on its behalf by the undersigned,
thereunto duly authorized, as of March 13, 2008.
CLEARWIRE CORPORATION
Benjamin G. Wolff
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons
on behalf of the registrant and in the capacities indicated as
of March 13, 2008.
|
|
|
|
|
Signature
|
|
Title
|
|
|
|
|
/s/ CRAIG
O. MCCAW
Craig
O. McCaw
|
|
Chairman of the Board
|
|
|
|
/s/ BENJAMIN
G. WOLFF
Benjamin
G. Wolff
|
|
Director
(Principal Executive Officer)
|
|
|
|
/s/ JOHN
A. BUTLER
John
A. Butler
|
|
Chief Financial Officer
(Principal Financial Officer)
|
|
|
|
/s/ ROBERT
M. DELUCIA
Robert
M. DeLucia
|
|
Chief Accounting Officer
(Principal Accounting Officer)
|
|
|
|
/s/ NICOLAS
KAUSER
Nicolas
Kauser
|
|
Director
|
|
|
|
/s/ R.
GERARD SALEMME
R.
Gerard Salemme
|
|
Director
|
|
|
|
/s/ DAVID
PERLMUTTER
David
Perlmutter
|
|
Director
|
|
|
|
/s/ PETER
L. S. CURRIE
Peter
L. S. Currie
|
|
Director
|
|
|
|
/s/ RICHARD
EMERSON
Richard
Emerson
|
|
Director
|
|
|
|
/s/ MICHAEL
J. SABIA
Michael
J. Sabia
|
|
Director
|
|
|
|
/s/ STUART
M. SLOAN
Stuart
M. Sloan
|
|
Director
|
|
|
|
/s/ MICHELANGELO
A. VOLPI
Michelangelo
A. Volpi
|
|
Director
|
105
EXHIBIT INDEX
|
|
|
|
|
|
3
|
.1
|
|
Fourth Amended and Restated Certificate of Incorporation of
Clearwire Corporation (Incorporated herein by reference to
Exhibit 3.1 of Amendment Number 4 to Clearwire
Corporations Registration Statement on
Form S-1
filed February 20, 2007).
|
|
3
|
.2
|
|
Amended and Restated Bylaws (Incorporated herein by reference to
Exhibit 3.2 of Amendment Number 4 to Clearwire
Corporations Registration Statement on
Form S-1
filed February 20, 2007)
|
|
4
|
.1
|
|
Form of stock certificate for Class A common stock
(Incorporated herein by reference to Exhibit 4.1 of
Amendment Number 4 to Clearwire Corporations Registration
Statement on
Form S-1
filed February 20, 2007).
|
|
4
|
.2
|
|
Amended and Restated Stockholders Agreement dated March 16,
2004 among Clearwire Corporation and the parties thereto
(Incorporated herein by reference to Exhibit 4.2 to
Clearwire Corporations Registration Statement on
Form S-1
filed December 19, 2006).
|
|
4
|
.3
|
|
Registration Rights Agreement dated November 13, 2003 among
Flux U.S. Corporation, Clearwire Holdings, Inc. and Hispanic
Information and Telecommunications Network, Inc (Incorporated
herein by reference to Exhibit 4.3 to Clearwire
Corporations Registration Statement on
Form S-1
filed December 19, 2006).
|
|
4
|
.4
|
|
Registration Rights Agreement dated March 16, 2004 among
Clearwire Corporation and the parties thereto (Incorporated
herein by reference to Exhibit 4.4 to Clearwire
Corporations Registration Statement on
Form S-1
filed December 19, 2006).
|
|
4
|
.5
|
|
Registration Rights Agreement dated August 5, 2005 among
Clearwire Corporation and certain buyers of the Senior Secured
Notes (Incorporated herein by reference to Exhibit 4.5 to
Clearwire Corporations Registration Statement on
Form S-1
filed December 19, 2006).
|
|
4
|
.6
|
|
Investor Rights Agreement dated August 29, 2006 among
Clearwire Corporation, Intel Pacific, Inc. and Motorola, Inc.
(Incorporated herein by reference to Exhibit 4.6 of
Amendment Number 5 to Clearwire Corporations Registration
Statement on
Form S-1
filed March 7, 2007).
|
|
4
|
.7
|
|
Securities Purchase Agreement dated August 5, 2005 among
Clearwire Corporation and the buyers of the Senior Secured
Notes, as amended February 16, 2006 (Incorporated herein by
reference to Exhibit 4.7 to Clearwire Corporations
Registration Statement on
Form S-1
filed December 19, 2006).
|
|
4
|
.8
|
|
Indenture dated August 5, 2005 among Clearwire Corporation,
Clearwire LLC, Fixed Wireless Holdings, LLC, NextNet Wireless,
Inc. and The Bank of New York, as Trustee, as supplemented
February 16, 2006 (Incorporated herein by reference to
Exhibit 4.8 to Clearwire Corporations Registration
Statement on
Form S-1,
filed on July 5, 2007).
|
|
4
|
.9
|
|
Form of Senior Secured Note, due 2010 (Incorporated herein by
reference to Exhibit 4.9 to Clearwire Corporations
Registration Statement on
Form S-1
filed December 19, 2006).
|
|
4
|
.10
|
|
Form of Warrant (Incorporated herein by reference to
Exhibit 4.10 to Clearwire Corporations Registration
Statement on
Form S-1
filed December 19, 2006).
|
|
9
|
.1
|
|
Voting Agreement dated August 29, 2006 between Clearwire
Corporation, Intel Pacific, Inc., Intel Capital Corporation and
Eagle River Holdings, LLC (Incorporated herein by reference to
Exhibit 9.1 of Amendment No. 1 to Clearwire
Corporations Registration Statement on
Form S-1
filed January 8, 2007).
|
|
10
|
.1
|
|
Advisory Services Agreement dated November 13, 2003 between
Flux U.S. Corporation and COM Holdings, LLC (Incorporated herein
by reference to Exhibit 10.1 to Clearwire
Corporations Registration Statement on
Form S-1
filed December 19, 2006).
|
|
10
|
.2
|
|
Indemnification Agreement dated November 13, 2003 among
Flux Fixed Wireless, LLC and Flux U.S. Corporation (Incorporated
herein by reference to Exhibit 10.2 to Clearwire
Corporations Registration Statement on
Form S-1
filed December 19, 2006).
|
|
10
|
.3
|
|
Form of Indemnification Agreement (Incorporated herein by
reference to Exhibit 10.3 to Clearwire Corporations
Registration Statement on
Form S-1
filed December 19, 2006).
|
|
10
|
.4
|
|
Letter Agreement dated April 1, 2004 between Clearwire
Corporation and Ben Wolff (Incorporated herein by reference to
Exhibit 10.4 to Clearwire Corporations Registration
Statement on
Form S-1
filed December 19, 2006).
|
106
|
|
|
|
|
|
10
|
.5
|
|
Letter Agreement dated April 26, 2004 between Clearwire
Corporation and Nicolas Kauser (Incorporated herein by reference
to Exhibit 10.5 to Clearwire Corporations
Registration Statement on
Form S-1
filed December 19, 2006).
|
|
10
|
.6
|
|
Letter Agreement dated April 27, 2004 between Clearwire
Corporation and R. Gerard Salemme (Incorporated herein by
reference to Exhibit 10.6 to Clearwire Corporations
Registration Statement on
Form S-1
filed December 19, 2006).
|
|
10
|
.7
|
|
Employment Agreement dated June 28, 2004 between Clearwire
Corporation and Perry Satterlee (Incorporated herein by
reference to Exhibit 10.7 to Clearwire Corporations
Registration Statement on
Form S-1
filed December 19, 2006).
|
|
10
|
.8
|
|
Letter Agreement dated March 2, 2005 between Clearwire
Corporation and John Butler (Incorporated herein by reference to
Exhibit 10.8 to Clearwire Corporations Registration
Statement on
Form S-1
filed December 19, 2006).
|
|
10
|
.9
|
|
Clearwire Corporation 2003 Stock Option Plan, as amended
(Incorporated herein by reference to Exhibit 10.9 to
Clearwire Corporations Registration Statement on
Form S-1
filed December 19, 2006).
|
|
10
|
.10
|
|
Agreement dated March 5, 2003 among Nextel Communications,
Inc., Digital Radio, LLC and Craig O. McCaw (Incorporated herein
by reference to Exhibit 10.10 of Amendment Number 1 to
Clearwire Corporations Registration Statement on
Form S-1
filed January 8, 2007).
|
|
10
|
.11
|
|
Amendment to Agreement dated March 5, 2003, dated
October 3, 2003, among Nextel Communications, Inc., Digital
Radio, L.L.C. and Craig O. McCaw (Incorporated herein by
reference to Exhibit 10.11 of Amendment Number 1 to
Clearwire Corporations Registration Statement on
Form S-1
filed January 8, 2007).
|
|
10
|
.12
|
|
Agreement and Undertaking dated November 13, 2003 between
Flux U.S. Corporation and Craig O. McCaw (Incorporated herein by
reference to Exhibit 10.12 of Amendment Number 1 to
Clearwire Corporations Registration Statement on
Form S-1
filed January 8, 2007).
|
|
10
|
.13
|
|
Master Spectrum Acquisition Agreement dated November 13,
2003 between Flux U.S. Corporation and Hispanic Information and
Telecommunications Network, Inc (Incorporated herein by
reference to Exhibit 10.13 to Clearwire Corporations
Registration Statement on
Form S-1
filed December 19, 2006).
|
|
10
|
.14
|
|
First Addendum and Amendment to the Master Spectrum Acquisition
Agreement dated March 29, 2004 between Clearwire
Corporation and Hispanic Information and Telecommunications
Network, Inc. (Incorporated herein by reference to
Exhibit 10.14 to Clearwire Corporations Registration
Statement on
Form S-1
filed December 19, 2006).
|
|
10
|
.15
|
|
ITFS Capacity Use and Royalty Agreement dated November 13,
2003 between Hispanic Information and Telecommunications
Network, Inc. and Fixed Wireless Holdings, LLC (Incorporated
herein by reference to Exhibit 10.15 to Clearwire
Corporations Registration Statement on
Form S-1
filed December 19, 2006).
|
|
10
|
.16
|
|
Spectrum Access and Loan Facility Agreement dated May 24,
2005 among Clearwire Corporation, Hispanic Information and
Telecommunications Network, Inc. and HITN Spectrum, LLC
(Incorporated herein by reference to Exhibit 10.16 to
Clearwire Corporations Registration Statement on
Form S-1
filed December 19, 2006).
|
|
10
|
.17
|
|
Warrant Agreement dated November 13, 2003 by and between
Flux U.S Corporation and ITFS Spectrum Advisors LLC
(Incorporated herein by reference to Exhibit 10.17 to
Clearwire Corporations Registration Statement on
Form S-1
filed December 19, 2006).
|
|
10
|
.18
|
|
Letter Agreement dated March 29, 2004 from Clearwire
Corporation to ITFS Spectrum Advisors LLC (Incorporated herein
by reference to Exhibit 10.18 to Clearwire
Corporations Registration Statement on
Form S-1
filed December 19, 2006).
|
|
10
|
.19
|
|
Spectrum Acquisition Consulting Agreement dated February 1,
2005 by and between Clearwire Corporation and ITFS Spectrum
Consultants LLC (Incorporated herein by reference to
Exhibit 10.19 to Clearwire Corporations Registration
Statement on
Form S-1
filed December 19, 2006).
|
|
10
|
.20
|
|
Letter Agreement dated February 1, 2005 from Clearwire
Corporation to ITFS Spectrum Consultants LLC (Incorporated
herein by reference to Exhibit 10.20 of Amendment
No. 5 to Clearwire Corporations Registration
Statement on
Form S-1
filed March 7, 2007).
|
|
10
|
.21
|
|
Amendment and Consent dated February 1, 2005 between
Clearwire Corporation to ITFS Spectrum Advisors LLC and ITFS
Spectrum Consultants LLC (Incorporated herein by reference to
Exhibit 10.21 to Clearwire Corporations Registration
Statement on
Form S-1
filed December 19, 2006).
|
107
|
|
|
|
|
|
10
|
.22
|
|
Second Amendment and Consent dated April 26, 2006, by and
among Clearwire Corporation and ITFS Spectrum Consultants LLC
(Incorporated herein by reference to Exhibit 10.22 to
Clearwire Corporations Registration Statement on
Form S-1
filed December 19, 2006).
|
|
10
|
.23
|
|
Spectrum Option Agreement dated March 29, 2004 between
Clearwire Corporation and Hispanic Information and
Telecommunications Network, Inc. (Incorporated herein by
reference to Exhibit 10.23 of Amendment No. 5 to
Clearwire Corporations Registration Statement on
Form S-1
filed March 7, 2007).
|
|
10
|
.24
|
|
EBS Capacity Use and Royalty Agreement dated September 15,
2005 between Hispanic Information and Telecommunications
Network, Inc. and Clearwire Spectrum Holdings LLC. (Incorporated
herein by reference to Exhibit 10.24 of Amendment
No. 5 to Clearwire Corporations Registration
Statement on
Form S-1
filed March 7, 2007).
|
|
10
|
.25
|
|
Form of Subscription Agreement dated August 18, 2006
(Incorporated herein by reference to Exhibit 10.25 of
Amendment No. 1 to Clearwire Corporations
Registration Statement on
Form S-1
filed January 8, 2007).
|
|
10
|
.26
|
|
Market Operation, Spectrum Lease and Sublicense Agreement dated
October 22, 2004 by and among the Sprint subsidiaries
listed on
Schedule R-1
and Fixed Wireless Holdings, LLC (Incorporated herein by
reference to Exhibit 10.26 of Amendment No. 6 to
Clearwire Corporations Registration Statement on
Form S-1
filed March 7, 2007).
|
|
10
|
.27
|
|
Subscription Agreement dated March 8, 2005 between
Clearwire Corporation and Bell Canada (Incorporated herein by
reference to Exhibit 10.29 of Amendment No. 1 to
Clearwire Corporations Registration Statement on
Form S-1
filed January 8, 2007).
|
|
10
|
.28
|
|
Master Supply Agreement dated March 16, 2005 among
Clearwire Corporation, Clearwire LLC, Bell Canada and BCE Nexxia
Corporation (Incorporated herein by reference to
Exhibit 10.30 of Amendment No. 5 to Clearwire
Corporations Registration Statement on
Form S-1
filed March 7, 2007).
|
|
10
|
.29
|
|
Side Agreement dated March 16, 2005 between Clearwire
Corporation, Eagle River Holdings, LLC and Bell Canada
(Incorporated herein by reference to Exhibit 10.31 of
Amendment No. 5 to Clearwire Corporations
Registration Statement on
Form S-1
filed March 7, 2007).
|
|
10
|
.30
|
|
Credit Agreement dated July 19, 2005 between Clearwire
Corporation and Bell Canada, as amended February 2006
(Incorporated herein by reference to Exhibit 10.32 to
Clearwire Corporations Registration Statement on
Form S-1
filed December 19, 2006).
|
|
10
|
.31
|
|
Security Agreement dated July 19, 2005 between Clearwire
Corporation and Bell Canada (Incorporated herein by reference to
Exhibit 10.33 to Clearwire Corporations Registration
Statement on
Form S-1
filed December 19, 2006).
|
|
10
|
.32
|
|
Movable Hypothec Agreement dated July 19, 2005 between
Clearwire Corporation and Bell Canada (Incorporated herein by
reference to Exhibit 10.34 to Clearwire Corporations
Registration Statement on
Form S-1
filed December 19, 2006).
|
|
10
|
.33
|
|
Subscription Agreement dated June 30, 2006 between
Motorola, Inc. and the Clearwire Corporation (Incorporated
herein by reference to Exhibit 10.46 of Amendment
No. 1 to Clearwire Corporations Registration
Statement on
Form S-1
filed January 8, 2007).
|
|
10
|
.34
|
|
Side Agreement dated June 30, 2006 between Motorola, Inc.
and the Clearwire Corporation (Incorporated herein by reference
to Exhibit 10.47 of Amendment No. 1 to Clearwire
Corporations Registration Statement on
Form S-1
filed January 8, 2007).
|
|
10
|
.35
|
|
Amended and Restated Limited Liability Company Agreement dated
July 12, 2006, between Clearwire US LLC and Shichinin LLC
(Incorporated herein by reference to Exhibit 10.48 of
Amendment No. 1 to Clearwire Corporations
Registration Statement on
Form S-1
filed January 8, 2007).
|
|
10
|
.36
|
|
Common Stock Purchase Agreement dated June 28, 2006 between
Clearwire Corporation and Intel Pacific, Inc. (Incorporated
herein by reference to Exhibit 10.51 of Amendment
No. 5 to Clearwire Corporations Registration
Statement on
Form S-1
filed March 7, 2007).
|
|
10
|
.37
|
|
Mobile Wimax Network Collaboration Agreement dated June 28,
2006 between Clearwire Corporation and Intel Corporation
(Incorporated herein by reference to Exhibit 10.52 of
Amendment No. 5 to Clearwire Corporations
Registration Statement on
Form S-1
filed March 7, 2007).
|
|
10
|
.38
|
|
Stock Purchase Agreement dated June 30, 2006 between
Motorola, Inc., Clearwire Corporation and NextNet Wireless, Inc.
(Incorporated herein by reference to Exhibit 10.53 of
Amendment No. 1 to Clearwire Corporations
Registration Statement on
Form S-1
filed January 8, 2007).
|
108
|
|
|
|
|
|
10
|
.39
|
|
Clearwire Corporation 2007 Annual Performance Bonus Plan
(Incorporated herein by reference to Exhibit 10.54 of
Amendment No. 2 to Clearwire Corporations
Registration Statement on
Form S-1
filed January 30, 2007).
|
|
10
|
.40
|
|
Wireless Broadband System Services Agreement dated
August 29, 2006 between Motorola and Clearwire US LLC
(Incorporated herein by reference to Exhibit 10.55 of
Amendment No. 5 to Clearwire Corporations
Registration Statement on
Form S-1
filed March 7, 2007).
|
|
10
|
.41
|
|
Wireless Broadband System Infrastructure Agreement dated
August 29, 2006 between Motorola and Clearwire US LLC
(Incorporated herein by reference to Exhibit 10.56 of
Amendment No. 5 to Clearwire Corporations
Registration Statement on
Form S-1
filed March 7, 2007).
|
|
10
|
.42
|
|
Wireless Broadband CPE Supply Agreement dated August 29,
2006 between Motorola and Clearwire US LLC (Incorporated herein
by reference to Exhibit 10.57 of Amendment No. 5 to
Clearwire Corporations Registration Statement on
Form S-1
filed March 7, 2007).
|
|
10
|
.43
|
|
Side Letter Agreement dated June 28, 2006 between Intel
Pacific, Inc., Eagle River Holdings, LLC and Clearwire
Corporation (Incorporated herein by reference to
Exhibit 10.58 of Amendment No. 1 to Clearwire
Corporations Registration Statement on
Form S-1
filed January 8, 2007).
|
|
10
|
.44
|
|
Master Royalty and Use Agreement dated July 31, 2006
between Clearwire Spectrum Holdings II LLC, Chicago
Instructional Technology Foundation, Inc., Denver Area
Educational Telecommunications Consortium, Inc., Instructional
Telecommunications Foundation, Inc., North American Catholic
Educational Programming Foundation, Inc., Portland Regional
Educational Telecommunications Corporation, Twin Cities Schools
Telecommunications Group, Inc., and other licensees who may
become parties to the agreement (Incorporated herein by
reference to Exhibit 10.59 of Amendment No. 5 to
Clearwire Corporations Registration Statement on
Form S-1
filed March 7, 2007).
|
|
10
|
.45
|
|
Master Royalty and Use Agreement dated October 4, 2006
between Clearwire Spectrum Holdings II LLC and Hispanic
Information and Telecommunications Network, Inc. (Incorporated
herein by reference to Exhibit 10.60 of Amendment
No. 5 to Clearwire Corporations Registration
Statement on
Form S-1
filed March 7, 2007).
|
|
10
|
.46
|
|
Educational Broadband Service Long Term De Facto Transfer Lease
Agreement dated December 22, 2006 (Incorporated herein by
reference to Exhibit 10.63 of Amendment No. 5 to
Clearwire Corporations Registration Statement on
Form S-1
filed March 7, 2007).
|
|
10
|
.47
|
|
Office Lease Agreement dated October 12, 2006, between
Carillon Properties (Landlord) and Clearwire Corporation
(Tenant) (Incorporated herein by reference to Exhibit 10.64
to Clearwire Corporations Registration Statement on
Form S-1
filed December 19, 2006).
|
|
10
|
.48
|
|
Securities Purchase Agreement dated December 7, 2005 among
BASA Holding Iberia S.L.U., Clearwire Corporation and Clearwire
Europe S.A.R.L. (Incorporated herein by reference to
Exhibit 10.65 to Clearwire Corporations Registration
Statement on
Form S-1
filed December 19, 2006).
|
|
10
|
.49
|
|
Investment Agreement, dated December 7, 2005, by and
between Banda Ancha S.A., BASA Holding Iberia S.L.U. and
Clearwire Europe S.A.R.L. (Incorporated herein by reference to
Exhibit 10.66 to Clearwire Corporations Registration
Statement on
Form S-1
filed December 19, 2006).
|
|
10
|
.50
|
|
Indemnification Agreement dated December 7, 2005 among BASA
Holding Iberia S.L.U., Clearwire Corporation and Clearwire
Europe S.A.R.L. (Incorporated herein by reference to
Exhibit 10.67 to Clearwire Corporations Registration
Statement on
Form S-1
filed December 19, 2006).
|
|
10
|
.51
|
|
Clearwire Corporation 2007 Stock Compensation Plan (Incorporated
herein by reference to Exhibit 10.70 of Amendment
No. 2 to Clearwire Corporations Registration
Statement on
Form S-1
filed January 30, 2007).
|
|
10
|
.52
|
|
Stock and Asset Purchase Agreement by and among BellSouth
Corporation, Clearwire Spectrum Holdings II LLC, Clearwire
Corporation and AT&T Inc. dated as of February 15,
2007 Plan (Incorporated herein by reference to
Exhibit 10.71 of Amendment No. 4 to Clearwire
Corporations Registration Statement on
Form S-1
filed February 20, 2007).
|
|
10
|
.53
|
|
Credit Agreement among Clearwire Corporation, the several
lenders from time to time parties hereto, Merrill Lynch, Pierce,
Fenner & Smith Incorporated and Citigroup Global
Markets, Inc., as Co-Documentation Agents, JPMorgan Chase Bank,
N.A., as Syndication Agent and Morgan Stanley Senior Funding,
Inc., as Administrative Agent, dated as of July 3, 2007
(Incorporated by reference to Exhibit 10.1 to Clearwire
Corporations
Form 8-K
filed July 5, 2007).
|
109
|
|
|
|
|
|
10
|
.54
|
|
Incremental Facility Amendment among Clearwire Corporation,
Morgan Stanley Senior Funding, Inc., as administrative agent,
Wachovia Bank N.A., as a Tranche C Term Lender, and Morgan
Stanley Senior Funding, Inc. and Wachovia Capital Markets, LLC,
as lead arrangers (Incorporated by reference to
Exhibit 10.1 to Clearwire Corporations
Form 8-K
filed on November 2, 2007).
|
|
10
|
.55
|
|
Form of Stock Option Agreement (Incorporated by reference to
Exhibit 10.1 to Clearwire Corporations
Form 8-K
filed February 20, 2008).
|
|
10
|
.56
|
|
Form of Restricted Stock Unit Award Agreement (Incorporated by
reference to Exhibit 10.2 to Clearwire Corporations
Form 10-Q
filed November 14, 2007).
|
|
21
|
.1*
|
|
List of subsidiaries.
|
|
23
|
.1*
|
|
Consent of Deloitte & Touche LLP.
|
|
31
|
.1*
|
|
Certification of Chief Executive Officer required by
Section 302 of the Sarbanes Oxley Act of 2002.
|
|
31
|
.2*
|
|
Certification of Chief Financial Officer required by
Section 302 of the Sarbanes Oxley Act of 2002.
|
|
32
|
.1
|
|
Certification of Chief Executive Officer required by
Section 906 of the Sarbanes Oxley Act of 2002.
|
|
32
|
.2
|
|
Certification of Chief Financial Officer required by
Section 906 of the Sarbanes Oxley Act of 2002.
|
|
|
|
* |
|
Indicates a document being filed with this
Form 10-K. |
|
** |
|
Flux U.S. Corporation changed its name to Clearwire Corporation
effective February 24, 2004, and as a result all references
to Flux U.S. Corporation in this index are now to Clearwire
Corporation. |
|
|
|
This certification is furnished with this
Form 10-K
and will not be deemed filed for purposes of
Section 18 of the Exchange Act, or otherwise subject to the
liability of that section. |
110