e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: September 30, 2007
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-33349
CLEARWIRE CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware
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56-2408571 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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4400 Carillon Point |
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Kirkland, Washington
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98033 |
(Address of principal executive office)
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(zip code) |
(425) 216-7600
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer o Accelerated Filer o Non-Accelerated Filer þ
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
The number of shares outstanding of the registrants Class A common stock as of November 9, 2007
was 135,557,147. The number of shares outstanding of the registrants Class B common stock as of
November 9, 2007 was 28,596,685.
CLEARWIRE
CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2007
Table of Contents
1
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
CLEARWIRE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
(unaudited)
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September 30, |
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December 31, |
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2007 |
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2006 |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
714,283 |
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$ |
438,030 |
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Short-term investments |
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303,033 |
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663,644 |
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Restricted cash |
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13,985 |
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10,727 |
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Restricted investments |
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69,401 |
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Accounts receivable, net of allowance of $1,947 and $753 |
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3,498 |
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2,774 |
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Notes receivable, related party |
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6,557 |
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4,409 |
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Inventory |
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3,749 |
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1,398 |
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Prepaids and other assets |
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34,727 |
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19,219 |
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Total current assets |
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1,079,832 |
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1,209,602 |
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Property, plant and equipment, net |
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519,366 |
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302,798 |
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Restricted cash |
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182 |
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117 |
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Restricted investments |
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16,269 |
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Prepaid spectrum license fees |
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426,960 |
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241,151 |
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Spectrum licenses and other intangible assets, net |
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465,579 |
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222,980 |
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Goodwill |
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33,424 |
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30,908 |
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Investments in equity investees |
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15,350 |
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14,983 |
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Other assets |
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30,777 |
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29,565 |
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TOTAL ASSETS |
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$ |
2,571,470 |
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$ |
2,068,373 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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CURRENT LIABILITIES: |
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Accounts payable and accrued expenses
(includes related party balances of $4,289 and $6,799) |
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$ |
111,044 |
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$ |
108,216 |
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Deferred rent |
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16,245 |
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6,986 |
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Deferred revenue |
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8,801 |
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5,599 |
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Due to affiliate |
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13 |
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532 |
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Current portion of long-term debt |
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20,000 |
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1,250 |
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Total current liabilities |
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156,103 |
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122,583 |
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Long-term debt, net of discount of $0 and $110,007 |
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990,000 |
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644,438 |
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Other long-term liabilities |
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87,066 |
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42,385 |
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Total liabilities |
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1,233,169 |
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809,406 |
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MINORITY INTEREST |
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13,234 |
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1,358 |
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COMMITMENTS
AND CONTINGENCIES (NOTE 8) |
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STOCKHOLDERS EQUITY |
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Preferred stock, par value $0.0001, 5,000,000 shares
authorized; no shares issued or outstanding |
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Common stock, par value $0.0001, and additional paid-in
capital, 350,000,000 shares authorized; Class A,
135,514,463 and 109,325,236 shares issued and outstanding |
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2,084,173 |
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1,474,759 |
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Class B, 28,596,685 shares issued and outstanding |
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234,376 |
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234,376 |
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Common stock and warrants payable |
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166 |
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Deferred compensation |
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(116 |
) |
Accumulated other comprehensive income |
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4,441 |
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6,990 |
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Accumulated deficit |
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(997,923 |
) |
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(458,566 |
) |
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Total stockholders equity |
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1,325,067 |
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1,257,609 |
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
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$ |
2,571,470 |
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$ |
2,068,373 |
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See accompanying notes to Unaudited Condensed Consolidated Financial Statements.
2
CLEARWIRE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2007 |
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2006 |
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2007 |
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2006 |
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REVENUES: |
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Service |
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$ |
41,297 |
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$ |
18,962 |
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$ |
106,056 |
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$ |
43,855 |
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Equipment and other (includes related party
sales of $0, $3,278, $0 and $15,546) |
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7,937 |
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32,583 |
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|
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Total revenues |
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41,297 |
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|
26,899 |
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106,056 |
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76,438 |
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OPERATING EXPENSES: |
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Cost of goods and services (exclusive of
items shown
separately below): |
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Cost of service (includes related party
costs of $815, $0, $2,205 and $0) |
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29,268 |
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13,387 |
|
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|
69,316 |
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|
33,999 |
|
Cost of equipment (includes related
party costs of $0, $2,222, $0 and $8,914) |
|
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|
5,316 |
|
|
|
|
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19,674 |
|
Selling, general and administrative expense |
|
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103,424 |
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52,166 |
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259,456 |
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|
142,532 |
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Research and development |
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|
194 |
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|
|
2,603 |
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|
1,217 |
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|
8,470 |
|
Depreciation and amortization |
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22,659 |
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|
|
9,538 |
|
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|
58,558 |
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|
26,372 |
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Spectrum lease expense |
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28,278 |
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|
6,661 |
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|
56,543 |
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|
14,649 |
|
Gain on sale of NextNet |
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(19,793 |
) |
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|
(19,793 |
) |
|
|
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|
|
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|
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Total operating expenses |
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183,823 |
|
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|
69,878 |
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|
445,090 |
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225,903 |
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|
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|
|
|
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OPERATING LOSS |
|
|
(142,526 |
) |
|
|
(42,979 |
) |
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|
(339,034 |
) |
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(149,465 |
) |
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OTHER INCOME (EXPENSE): |
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Interest income |
|
|
16,596 |
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|
|
6,249 |
|
|
|
52,006 |
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|
13,135 |
|
Interest expense |
|
|
(28,813 |
) |
|
|
(19,312 |
) |
|
|
(76,542 |
) |
|
|
(49,741 |
) |
Foreign currency translation gains (losses),
net |
|
|
292 |
|
|
|
(20 |
) |
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|
224 |
|
|
|
(20 |
) |
Loss on extinguishment of debt |
|
|
(159,193 |
) |
|
|
|
|
|
|
(159,193 |
) |
|
|
|
|
Other-than-temporary impairment loss on
investments |
|
|
(14,208 |
) |
|
|
|
|
|
|
(14,208 |
) |
|
|
|
|
Other income (expense), net |
|
|
453 |
|
|
|
(821 |
) |
|
|
2,197 |
|
|
|
1,426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net |
|
|
(184,873 |
) |
|
|
(13,904 |
) |
|
|
(195,516 |
) |
|
|
(35,200 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS BEFORE INCOME TAXES, MINORITY
INTEREST AND LOSSES FROM EQUITY INVESTEES |
|
|
(327,399 |
) |
|
|
(56,883 |
) |
|
|
(534,550 |
) |
|
|
(184,665 |
) |
Income tax provision |
|
|
(1,198 |
) |
|
|
(648 |
) |
|
|
(3,927 |
) |
|
|
(1,875 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS BEFORE MINORITY INTEREST AND LOSSES
FROM EQUITY INVESTEES |
|
|
(328,597 |
) |
|
|
(57,531 |
) |
|
|
(538,477 |
) |
|
|
(186,540 |
) |
Losses from equity investees, net |
|
|
(1,034 |
) |
|
|
(2,042 |
) |
|
|
(3,841 |
) |
|
|
(5,757 |
) |
Minority interest in net loss (income) of
consolidated
subsidiaries |
|
|
994 |
|
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|
(190 |
) |
|
|
2,961 |
|
|
|
446 |
|
|
|
|
|
|
|
|
|
|
|
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NET LOSS |
|
$ |
(328,637 |
) |
|
$ |
(59,763 |
) |
|
$ |
(539,357 |
) |
|
$ |
(191,851 |
) |
|
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|
|
|
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|
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|
|
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|
|
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Net loss per common share, basic and diluted |
|
$ |
(2.01 |
) |
|
$ |
(0.61 |
) |
|
$ |
(3.44 |
) |
|
$ |
(2.30 |
) |
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|
|
|
|
|
|
|
|
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|
Weighted average common shares outstanding,
basic and diluted |
|
|
163,586 |
|
|
|
97,854 |
|
|
|
156,940 |
|
|
|
83,595 |
|
|
|
|
|
|
|
|
|
|
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|
See accompanying notes to Unaudited Condensed Consolidated Financial Statements.
3
CLEARWIRE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
|
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|
|
|
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|
|
|
Nine months ended |
|
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
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|
Net loss |
|
$ |
(539,357 |
) |
|
$ |
(191,851 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
Provision for uncollectible accounts |
|
|
3,631 |
|
|
|
614 |
|
Depreciation and amortization |
|
|
58,558 |
|
|
|
26,372 |
|
Amortization of prepaid license fees |
|
|
16,962 |
|
|
|
4,301 |
|
Amortization of deferred financing costs and accretion of debt discount |
|
|
19,234 |
|
|
|
13,044 |
|
Deferred income taxes |
|
|
3,901 |
|
|
|
1,875 |
|
Share-based compensation |
|
|
28,600 |
|
|
|
8,366 |
|
Minority interest |
|
|
(2,961 |
) |
|
|
(446 |
) |
Losses from equity investees, net |
|
|
3,841 |
|
|
|
5,757 |
|
Loss on extinguishment of debt |
|
|
159,193 |
|
|
|
|
|
Other-than-temporary impairment loss on investments |
|
|
14,208 |
|
|
|
|
|
Loss (gain) on other asset disposals |
|
|
531 |
|
|
|
(1,885 |
) |
Gain on sale of equity investment |
|
|
(2,213 |
) |
|
|
|
|
Gain on sale of business |
|
|
|
|
|
|
(19,793 |
) |
Changes in assets and liabilities, net of effects from acquisitions: |
|
|
|
|
|
|
|
|
Prepaid spectrum license fees |
|
|
(183,776 |
) |
|
|
(50,510 |
) |
Inventory |
|
|
(2,331 |
) |
|
|
(1,823 |
) |
Accounts receivable |
|
|
(3,954 |
) |
|
|
648 |
|
Prepaids and other assets |
|
|
(15,716 |
) |
|
|
(2,710 |
) |
Accounts payable |
|
|
26,544 |
|
|
|
(2,584 |
) |
Accrued expenses and other liabilities |
|
|
17,136 |
|
|
|
31,057 |
|
Due to affiliate |
|
|
(519 |
) |
|
|
13 |
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(398,488 |
) |
|
|
(179,555 |
) |
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment |
|
|
(279,198 |
) |
|
|
(129,032 |
) |
Payments for acquisitions of spectrum licenses and other |
|
|
(212,353 |
) |
|
|
(34,701 |
) |
Purchases of short-term investments |
|
|
(1,144,293 |
) |
|
|
(655,903 |
) |
Sales or maturities of short-term investments |
|
|
1,478,252 |
|
|
|
385,389 |
|
Purchase of minority interest |
|
|
(1,173 |
) |
|
|
|
|
Investments in equity investees |
|
|
(5,293 |
) |
|
|
(2,161 |
) |
Issuance of notes receivable, related party |
|
|
(2,000 |
) |
|
|
(4,105 |
) |
Restricted cash |
|
|
(3,323 |
) |
|
|
(735 |
) |
Restricted investments |
|
|
85,670 |
|
|
|
(33,328 |
) |
Business acquisitions, net of cash acquired |
|
|
(7,067 |
) |
|
|
(44,806 |
) |
Proceeds from sale of equity investment |
|
|
2,250 |
|
|
|
47,085 |
|
Proceeds from sale of other assets |
|
|
1,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(87,528 |
) |
|
|
(472,297 |
) |
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock for IPO and other, net |
|
|
556,005 |
|
|
|
1,031,167 |
|
Proceeds from issuance of common stock for option and warrant exercises |
|
|
4,610 |
|
|
|
|
|
Proceeds from issuance of debt |
|
|
1,000,000 |
|
|
|
495,350 |
|
Deferred financing fees |
|
|
(66,954 |
) |
|
|
(21,820 |
) |
Principal payments on long-term debt |
|
|
(745,696 |
) |
|
|
|
|
Contributions from minority interests |
|
|
15,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
762,965 |
|
|
|
1,504,697 |
|
Effect of foreign currency exchange rates on cash and cash equivalents |
|
|
(696 |
) |
|
|
2,231 |
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
276,253 |
|
|
|
855,076 |
|
CASH AND CASH EQUIVALENTS: |
|
|
|
|
|
|
|
|
Beginning of period |
|
|
438,030 |
|
|
|
29,188 |
|
|
|
|
|
|
|
|
End of period |
|
$ |
714,283 |
|
|
$ |
884,264 |
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW DISCLOSURES: |
|
|
|
|
|
|
|
|
Common stock and warrants issued for spectrum licenses |
|
$ |
21,379 |
|
|
$ |
41,981 |
|
Common stock and warrants issued for business acquisitions |
|
$ |
15 |
|
|
$ |
25,022 |
|
Cash paid for taxes |
|
$ |
24 |
|
|
$ |
|
|
Cash paid for interest |
|
$ |
91,229 |
|
|
$ |
49,253 |
|
Fixed asset purchases in accounts payable |
|
$ |
10,672 |
|
|
$ |
6,849 |
|
Non-cash dividends to related party |
|
$ |
1,465 |
|
|
$ |
2,384 |
|
See accompanying notes to Unaudited Condensed Consolidated Financial Statements.
4
CLEARWIRE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A |
|
|
Class B |
|
|
Common |
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
Common Stock, Warrants and |
|
|
Common Stock and |
|
|
stock |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Total |
|
|
Comprehensive |
|
|
|
Additional Paid In Capital |
|
|
Additional Paid In Capital |
|
|
and warrants |
|
|
Deferred |
|
|
Comprehensive |
|
|
Accumulated |
|
|
Stockholders |
|
|
Income |
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
payable |
|
|
Compensation |
|
|
Income (Loss) |
|
|
Deficit |
|
|
Equity |
|
|
(Loss) |
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(539,357 |
) |
|
|
(539,357 |
) |
|
|
(539,357 |
) |
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,895 |
|
|
|
|
|
|
|
9,895 |
|
|
|
9,895 |
|
Unrealized loss on short-term investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(26,652 |
) |
|
|
|
|
|
|
(26,652 |
) |
|
|
(26,652 |
) |
Reclassification
adjustment for other-than-temporary impairment loss
on investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,208 |
|
|
|
|
|
|
|
14,208 |
|
|
|
14,208 |
|
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 |
|
|
1,884 |
|
|
|
4,610 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,610 |
|
|
|
|
|
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 |
|
|
|
|
|
|
27,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at September 30, 2007 |
|
|
135,514 |
|
|
$ |
2,084,173 |
|
|
|
28,597 |
|
|
$ |
234,376 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
4,441 |
|
|
$ |
(997,923 |
) |
|
$ |
1,325,067 |
|
|
$ |
(541,906 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to Unaudited Condensed Consolidated Financial Statements.
5
CLEARWIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. Description of Business and Basis of Presentation
The Business
The condensed 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, which operates as one business
segment, delivers high-speed wireless broadband services to individuals, small businesses, and
others in a growing number of markets through its advanced network. As of September 30, 2007, the
Company offered its services in 44 markets throughout the United States and 4 markets
internationally.
On March 13, 2007, the Company completed its initial public offering (IPO) of its Class A
common stock in which a total of 24,000,000 shares of Class A common shares were sold and issued at
a price of $25.00 per share. The Company raised a total of $600.0 million in gross proceeds, or
approximately $555.2 million in net proceeds after deducting underwriting discounts, commissions
and other IPO fees of $44.8 million. The Company has used these proceeds for market and network
expansion, spectrum acquisitions and general corporate purposes.
Basis of Presentation
The accompanying condensed consolidated 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). Certain information
and note disclosures normally included in annual financial statements have been condensed or
omitted for interim financial information in accordance with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. These unaudited condensed consolidated financial statements should be read
in conjunction with the financial statements contained in the Companys Registration Statement on
Form S-1/A (Registration No. 333-139468) dated March 7, 2007 (Form S-1). In the opinion of
management, these unaudited condensed consolidated financial statements reflect all adjustments,
consisting of normal and recurring adjustments and accruals, necessary for a fair presentation of
our financial condition, results of operations and cash flows for the periods presented.
Due to the sale of its former subsidiary, NextNet Wireless, Inc. (NextNet), to Motorola,
Inc. (Motorola) on August 29, 2006, the Company modified its segment reporting under the
requirements of Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures about
Segments of an Enterprise and Related Information, from the two segments previously reported to
operating as one reporting segment.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of Clearwire and its
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
balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America, requires the use of
estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. The estimates are based on historical
experience, current conditions and various other assumptions believed to be reasonable under the
circumstances. The estimates form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources, as well as identifying and
assessing appropriate accrual and disclosure treatment with respect to commitments and
contingencies. Actual results may differ significantly from these estimates. To the extent that
there are material differences between these estimates and actual results, the presentation of the
financial condition or results of operations may be affected.
6
CLEARWIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(continued)
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, spectrum licenses, valuation of investments, allowance for doubtful accounts,
depreciation and the fair value of shares granted to employees and third parties.
Recent Accounting Pronouncements
SFAS No. 159 In February 2007, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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 is
currently evaluating the impact of this pronouncement 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. The Company is currently evaluating the impact of this
pronouncement on its financial statements.
2. Summary of Significant Accounting Policies
There have been no significant changes in the Companys significant accounting policies during
the nine months ended September 30, 2007 as compared to the significant accounting policies
described in the Companys Registration Statement on Form S-1/A (Registration No. 333-139468) filed
on March 7, 2007.
3. Significant Transactions
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. The remainder is being used for capital
expenditures, working capital and general corporate purposes. On 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 new $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 the Companys option, at either the Eurodollar
rate or an alternate base rate, in each case plus a margin. The initial 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, 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 new $1.0 billion debt, the company
recorded deferred financing cost of $27.6 million which is being amortized over the five year term
of the loan.
See Note 16. Subsequent Events for an increase in the senior term loan facility of $250.0
million, which closed on November 2, 2007.
7
CLEARWIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(continued)
On June 21, 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
$7.9 million. RiverCity Software Solutions, LLC and RiverCity IntraISP, LLC specialize in providing
billing, online support services (OSS) and customer relationship management (CRM) software
solutions to the communications and services industry. The acquisition was accounted for using the
purchase method in accordance with SFAS No. 141, Business Combinations.
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 Emerging Issues Task Force (EITF) 98-3,
Determining Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or of a
Business (EITF 98-3). Of the $300.0 million paid to acquire these spectrum leases and licenses,
the Company allocated $196.8 million to the owned licenses and $103.2 million to the leased
licenses based on the estimated fair values of the assets acquired.
4. Short-Term Investments
Short-term investments as of September 30, 2007 consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007 |
|
|
December 31, 2006 |
|
|
|
Gross Unrealized |
|
|
Gross Unrealized |
|
Security |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
Commercial paper |
|
$ |
29,880 |
|
|
$ |
8 |
|
|
$ |
(8 |
) |
|
$ |
29,880 |
|
|
$ |
90,232 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
90,232 |
|
Corporate bonds |
|
|
113,987 |
|
|
|
19 |
|
|
|
(114 |
) |
|
|
113,892 |
|
|
|
226,316 |
|
|
|
15 |
|
|
|
(85 |
) |
|
|
226,246 |
|
Municipal bonds |
|
|
51,109 |
|
|
|
25 |
|
|
|
|
|
|
|
51,134 |
|
|
|
156,245 |
|
|
|
21 |
|
|
|
(26 |
) |
|
|
156,240 |
|
Auction rate securities |
|
|
114,575 |
|
|
|
|
|
|
|
(12,447 |
) |
|
|
102,128 |
|
|
|
116,575 |
|
|
|
|
|
|
|
|
|
|
|
116,575 |
|
Other securities |
|
|
6,000 |
|
|
|
|
|
|
|
(1 |
) |
|
|
5,999 |
|
|
|
74,351 |
|
|
|
|
|
|
|
|
|
|
|
74,351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
315,551 |
|
|
$ |
52 |
|
|
$ |
(12,570 |
) |
|
$ |
303,033 |
|
|
$ |
663,719 |
|
|
$ |
36 |
|
|
$ |
(111 |
) |
|
$ |
663,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. Unrealized gains and
losses are recorded as a separate component of accumulated other comprehensive income (loss).
Unrealized 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.
At September 30, 2007, the Company held a total of $303.0 million in available for sale, short
term investments of which $102.1 million were auction rate securities. Auction rate securities are
variable rate debt instruments whose interest rates are reset approximately every 28 days through
an auction process with the underlying securities that have contractual maturities greater than ten
years. The auction rate securities are classified as available for sale and are recorded at fair
value. Typically, the carrying value of auction rate securities approximates fair value due to the
frequent resetting of the interest rates through the auction rate
process. At September 30,
2007, the Company held auction rate securities that recently
failed to settle in the auction process. While the Company continues to earn interest on these
investments at the maximum contractual rate, the estimated market value of these auction rate
securities no longer approximates par value. Accordingly, the Company has recorded these
investments at their estimated fair value and recorded an unrealized loss on these
securities of $12.4 million in other comprehensive income, reflecting the decline in the estimated
fair value of these securities. With the exception of one auction rate security that we determined
losses to be other than temporary, the Company has concluded that no other-than-temporary
impairment losses occurred in the auction rate securities in the three and nine months ended
September 30, 2007 due to the fact that the decline in market value is due to general market
conditions, these investments are of high credit quality with credit ratings of AA or higher, and
the Company has the intent and ability to hold these investments until the anticipated recovery in
market value occurs. Given the current market volatility, the Company
will continue to monitor its short-term investments for substantive changes in relevant market conditions, substantive changes in financial condition and/or performance of the investments'
issuers or other substantive changes in these investments. The Company may be required to record
additional realized loss for impairment if the decline in fair value is determined to be other-than-temporary.
During the three months ended September 30, 2007, the Company incurred other-than-temporary
impairment losses of $14.2 million related to a decline in values of investment securities which
were determined to be other than
8
CLEARWIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(continued)
temporary.
The Company estimated the fair value of these securities mainly based
on prices provided by broker-dealers. These prices could change
significantly based on market conditions. There were no realized gains and losses for the three and nine months ended September
30, 2006.
5. Property, Plant and Equipment
Property, plant and equipment as of September 30, 2007 and December 31, 2006 consisted of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Network and base station equipment |
|
$ |
262,026 |
|
|
$ |
161,875 |
|
Customer premise equipment |
|
|
78,952 |
|
|
|
47,700 |
|
Furniture, fixtures and equipment |
|
|
44,567 |
|
|
|
20,546 |
|
Leasehold improvements |
|
|
12,324 |
|
|
|
8,340 |
|
Construction in progress |
|
|
221,993 |
|
|
|
112,669 |
|
|
|
|
|
|
|
|
|
|
|
619,862 |
|
|
|
351,130 |
|
Less: accumulated depreciation |
|
|
(100,496 |
) |
|
|
(48,332 |
) |
|
|
|
|
|
|
|
|
|
$ |
519,366 |
|
|
$ |
302,798 |
|
|
|
|
|
|
|
|
Interest
capitalized for the quarters ended September 30, 2007 and 2006
was $4.9 million and
$5.1 million, respectively. For the nine months ended September 30, 2007 and 2006 interest
capitalized was $13.8 million and $11.2 million, respectively. Depreciation expense for the
quarters ended September 30, 2007 and 2006 was $21.5 million and $8.5 million, respectively.
Depreciation expense for the nine months ended September 30, 2007 and 2006 was $55.4 million and
$24.6 million, respectively.
6. Spectrum Licenses, Goodwill, and Other Intangible Assets
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.
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.
During the quarter ended September 30, 2007 the Company paid cash consideration of $17.4
million relating to purchased spectrum rights. During the nine months ended September 30, 2007, the
Company paid consideration relating to purchased spectrum rights of $216.3 million, which was
comprised of $212.1 million in cash, of which $196.8 million related to the purchased spectrum
rights acquired from BellSouth, and $4.2 million in the form of warrants and common stock. Also,
during the nine months ended September 30, 2007, the Company paid $250,000 in cash relating to
other intangible assets.
During the quarter ended September 30, 2007, cash consideration paid relating to leased
spectrum was $18.4 million. During the nine month period ended September 30, 2007, the Company paid
consideration relating to leased spectrum rights of $206.7 million, which was comprised of
$189.6 million in cash, of which $103.2 million related to the purchase of leased spectrum from
BellSouth and $17.1 million in the form of warrants and common stock. Also, during the nine months
ended September 30, 2007, the Company received $6.0 million in cash relating to sale of leased
spectrum.
For the quarters ended September 30, 2007 and 2006, the Company recorded amortization of $11.6
million and $1.7 million, respectively, on prepaid spectrum license fees and $1.2 million and $1.0
million, respectively, on spectrum licenses and other intangibles. For the nine months ended
September 30, 2007 and 2006, the Company recorded
9
CLEARWIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(continued)
amortization of $17.0 million and $4.3 million,
respectively, on prepaid spectrum license fees and $3.2 million and $1.8 million, respectively, on
spectrum licenses and other intangibles.
During the second quarter ended 2007, the Company acquired spectrum from BellSouth Corporation
for an aggregate price of $300.0 million. Of these amounts, the Company preliminarily allocated
$180.0 million to purchased spectrum rights and $120.0 million to leased spectrum. During the
third quarter 2007, the Company finalized the allocation estimates and recorded $196.8 million as
purchased spectrum rights and $103.2 million as leased spectrum.
7. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses as of September 30, 2007 and December 31, 2006 consisted
of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Accounts payable |
|
$ |
56,189 |
|
|
$ |
41,710 |
|
Accrued interest |
|
|
6,788 |
|
|
|
27,272 |
|
Salaries and benefits |
|
|
18,635 |
|
|
|
12,095 |
|
Other |
|
|
29,432 |
|
|
|
27,139 |
|
|
|
|
|
|
|
|
|
|
$ |
111,044 |
|
|
$ |
108,216 |
|
|
|
|
|
|
|
|
8. Commitments and Contingencies
The Companys commitments for non-cancellable operating leases consist mainly of leases of
spectrum licenses, 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 and generally have initial terms,
including renewal options, of up to 30 years.
Future cash payments under spectrum license and operating lease obligations (including
optional renewal periods) as of September 30, 2007 for the nine months remaining in 2007 and
subsequent calendar years are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leased |
|
|
Operating |
|
|
|
|
Years Ending December 31, |
|
Spectrum |
|
|
Lease |
|
|
Total |
|
2007, remaining as of September 30 |
|
$ |
8,438 |
|
|
$ |
15,870 |
|
|
$ |
24,308 |
|
2008 |
|
|
34,581 |
|
|
|
62,502 |
|
|
|
97,083 |
|
2009 |
|
|
34,522 |
|
|
|
62,724 |
|
|
|
97,246 |
|
2010 |
|
|
35,005 |
|
|
|
62,116 |
|
|
|
97,121 |
|
2011 |
|
|
34,867 |
|
|
|
61,896 |
|
|
|
96,763 |
|
Thereafter, including all renewal periods |
|
|
1,364,337 |
|
|
|
1,195,203 |
|
|
|
2,559,540 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,511,750 |
|
|
$ |
1,460,311 |
|
|
$ |
2,972,061 |
|
|
|
|
|
|
|
|
|
|
|
Clearwire has various legal claims and other contingent matters outstanding. Management
believes that any ultimate liability arising from these actions will not have a material adverse
impact on Clearwires financial condition or results of operations.
9. Income Taxes
The Company adopted the provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes (FIN 48), on January 1, 2007. FIN No. 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 No. 48 also provides
guidance on derecognition, measurement, classification, interest and penalties, accounting in
interim periods, disclosure and transition.
10
CLEARWIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(continued)
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
nine months ended September 30, 2007.
The Company has recorded a valuation allowance against a significant portion of its
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
record a valuation allowance for deferred tax assets that will not be reduced by schedulable
deferred tax liabilities.
The Company and its subsidiaries file income tax returns in the US federal jurisdiction
and various state and foreign jurisdictions. As of the date of adoption of FIN 48, 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 US 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 US and foreign tax authorities as far back as 1998.
The Company does not anticipate any material affect to the financial statements as a result of
these examinations.
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 48, the
Company had accrued no interest or penalties related to uncertain tax positions.
10. Stockholders Equity
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 accompanying condensed consolidated financial statements have been retroactively
adjusted for all periods presented to give effect to the reverse stock split.
On March 13, 2007, the Company completed the sale of 24,000,000 shares of its Class A common
stock in its IPO. 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 IPO fees of $44.8 million. The Company has used these proceeds for market and network
expansion, spectrum acquisitions and general corporate purposes.
As a result of its IPO, the Company filed a Registration Statement on Form S-1 (Registration
No. 333-144357), that went effective on August 28, 2007, covering the resale of up to
14,973,024 shares of the Companys Class A common stock. All 14,973,024 shares of Class A common
stock are issuable on exercise of warrants registered and are offered by the selling stockholders.
The Company does not receive any part of the proceeds from the sale of common stock by the selling
stockholders. If all the shares of common stock are issued upon exercise of outstanding warrants
without using any applicable cashless exercise provisions, we will receive $224,595,360 in cash
from the warrant holders, assuming the exercise price of the warrants is not adjusted. Any proceeds
received by us from the exercise of the warrants will be used by us for general corporate purposes
as provided. All such warrants include net exercise, or cashless exercise, provisions that may
reduce or eliminate the cash proceeds we receive upon exercise of such warrants; however, any such
reduction also will have the effect of reducing the number of shares of Class A common stock issued
in net exercise transactions.
11. Share-Based Payments
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 September 30, 2007 there
were 8,645,336 shares available for
grant under the 2007 Stock Option Plan.
11
CLEARWIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(continued)
Stock Options
The Company applies SFAS No. 123 (revised 2004), Share-Based Payment (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.
Compensation cost recognized for these plans for the three months and nine months ended
September 30, 2007 and 2006 is presented as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Cost of service |
|
$ |
21 |
|
|
$ |
31 |
|
|
$ |
53 |
|
|
$ |
717 |
|
Selling, general and administrative |
|
|
10,378 |
|
|
|
4,357 |
|
|
|
28,547 |
|
|
|
7,649 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10,399 |
|
|
$ |
4,388 |
|
|
$ |
28,600 |
|
|
$ |
8,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 three and nine months ended September
30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
Nine months ended September 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Expected volatility |
|
|
58.28 |
% |
|
68.44% |
|
57.07% - 64.68% |
|
68.44% - 78.62% |
Expected dividend yield |
|
|
|
|
|
|
|
|
|
|
Expected life (in years) |
|
|
6.25 |
|
|
6.25 |
|
6.25 |
|
6.25 |
Risk-free interest rate |
|
|
4.80 |
% |
|
4.72% - 4.87% |
|
4.46% - 5.00% |
|
4.45% - 4.92% |
Weighted average fair value per option at grant date |
|
$ |
13.91 |
|
|
$11.95 |
|
$15.06 |
|
$11.53 |
During the third quarter 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 three and nine months ended September 30, 2007, the Company granted 2,942,950
options and 6,456,662 options, respectively, at a weighted average exercise price of $23.59 and
$24.29, respectively. During the three and nine months ended September 30, 2006, the Company
granted 2,458,246 options and 3,832,474 options, respectively, at a weighted average exercise price
of $18.00 and $16.92, respectively.
As of September 30, 2007, a total of 16,392,768 options were outstanding at a weighted average
exercise price of $14.95, of which 5,391,598 options were exercisable at a weighted average
exercise price of $6.67. The total unrecognized share-based compensation costs related to
non-vested stock options outstanding at September 30, 2007 was $90.0 million and is expected to be
recognized over a weighted average period of 2.2 years.
The Company also granted stock options to employees of entities under common control who
performed services to purchase shares of the Companys Class A common stock. For the three and
nine months ended September 30, 2007, the Company recorded dividends of $401,000 and $1.5 million,
respectively. For the three and nine months ended September 30, 2006 the Company recorded dividends
of $1.6 million and $2.4 million, respectively.
Restricted Stock Awards
There were no grants of restricted stock during the three months ended September 30, 2007.
During the nine months ended September 30, 2007, the Company issued 33,333 shares of restricted
stock to a certain senior officer at a valuation price of $25.00 per share, which vests over a
four-year period. Compensation expense related to restricted stock grants was $187,000 and
$234,000 for the quarters ended September 30, 2007 and 2006, respectively. For the nine months
ended September 30, 2007 and 2006, compensation expense related to restricted stock awards was
$628,000 and $797,000, respectively. As of September 30, 2007, the number of restricted shares
outstanding was 449,999 shares and
12
CLEARWIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(continued)
there was $674,000 of total unrecognized compensation cost
related to the unvested restricted stock, which is expected to be recognized over a
weighted-average period of 1.3 years.
Restricted Stock Units
During the three months ended September 30, 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 of $23.30 per share. The total fair value was $9.3 million. Compensation expense related to
the restricted stock units during the quarter end September 30, 2007 was $168,000, net of
forfeitures. As of September 30, 2007, there were 400,000 units outstanding and total unrecognized
compensation cost of $9.1 million, which is expected to be recognized over a weighted-average
period of 2.7 years.
SAR Plan
The Company accounts for stock appreciation rights (SARs) under SFAS No. 123(R) and, as
settlement is anticipated to be in cash, records these grants as liability awards. The SARs are
remeasured at fair value each reporting period until the awards are settled using the same
assumptions as a stock option granted under the 2003 Stock Option Plan.
There were no grants during the first nine months of 2007. The Company recorded $119,000 and
$34,000, net of forfeitures, of share-based compensation expense related to SARs during the
quarters ended September 30, 2007 and 2006, respectively. For the nine months ended September 30,
2007 and 2006 the share-based compensation expense related to SARs was $398,000 and $67,000,
respectively. The share-based compensation liability at September 30, 2007 for the requisite
service that has been rendered was $577,000 and was included in other long-term liabilities. As of
October 1, 2007, all outstanding SARs were converted to non-qualified stock options under the 2007
Stock Option Plan.
Warrants
There were no warrants granted during the three months ended September 30, 2007. During the
nine months ended September 30, 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 business
acquisitions and the acquisition of spectrum or assets. At September 30, 2007 there were 17,806,217
warrants outstanding and exercisable with a weighted average exercise price of $16.57.
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 three and nine months ended
September 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
Nine months ended September 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Expected volatility |
|
|
N/A |
|
|
73.76% to 88.54% |
|
64.68% to 88.54% |
|
73.76% to 88.54% |
Expected dividend yield |
|
|
N/A |
|
|
|
|
|
|
|
Contract life (in years) |
|
|
N/A |
|
|
5-10 |
|
5-10 |
|
5-10 |
Risk-free interest rate |
|
|
N/A |
|
|
3.98% - 5.16% |
|
3.05% - 4.81% |
|
3.05% - 5.16% |
Weighted average fair value per warrant at issuance date |
|
|
N/A |
|
|
$10.31 |
|
$12.07 |
|
$9.84 |
12. Net Loss Per Share
Basic and diluted loss per share has been calculated in accordance with SFAS No. 128, Earnings
Per Share, for the three and nine months ended September 30, 2007 and 2006. As the Company had a
net loss in each of the periods presented, basic and diluted net loss per common share are the
same.
13
CLEARWIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(continued)
The computations of diluted loss per share for the three and nine months ended September 30,
2007 and 2006, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Stock options |
|
|
14,394,765 |
|
|
|
9,946,257 |
|
|
|
13,535,389 |
|
|
|
9,341,131 |
|
Nonvested restricted stock |
|
|
74,999 |
|
|
|
83,333 |
|
|
|
76,800 |
|
|
|
65,018 |
|
Restricted Stock Units |
|
|
73,533 |
|
|
|
|
|
|
|
24,780 |
|
|
|
|
|
Warrants |
|
|
18,153,770 |
|
|
|
17,545,558 |
|
|
|
18,150,917 |
|
|
|
15,889,739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,697,067 |
|
|
|
27,575,148 |
|
|
|
31,787,886 |
|
|
|
25,295,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13. Comprehensive Loss
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, unrealized gains and losses on marketable securities categorized as
available-for-sale, and other-than-temporary impairment losses on available-for-sale securities.
Total
comprehensive loss was $334.6 million and $53.2 million for the three months ended
September 30, 2007 and 2006, respectively. For the nine months ended September 30, 2007 and 2006
total comprehensive loss was $541.9 million and $187.6 million, respectively. The primary
differences between net loss as reported and comprehensive loss are foreign currency translation
adjustments, unrealized losses and other-than-temporary losses from available-for-sale investments.
The components of accumulated other comprehensive income were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Net unrealized loss on available-for-sale investments |
|
$ |
(26,726 |
) |
|
$ |
(74 |
) |
Other-than-temporary impairment loss on investments |
|
|
14,208 |
|
|
|
|
|
Cumulative foreign currency translation adjustment |
|
|
16,959 |
|
|
|
7,064 |
|
|
|
|
|
|
|
|
Total accumulated other comprehensive income |
|
$ |
4,441 |
|
|
$ |
6,990 |
|
|
|
|
|
|
|
|
14. Geographic Information
The Company reports geographical information for revenue and long-lived assets as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue (a) |
|
|
Revenue (a) |
|
|
Long-lived Assets (b) |
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
|
September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
United States |
|
$ |
33,424 |
|
|
$ |
22,120 |
|
|
$ |
85,598 |
|
|
$ |
65,150 |
|
|
$ |
1,273,452 |
|
|
$ |
661,444 |
|
Europe |
|
|
7,873 |
|
|
|
4,779 |
|
|
|
20,458 |
|
|
|
11,288 |
|
|
|
128,925 |
|
|
|
103,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
41,297 |
|
|
$ |
26,899 |
|
|
$ |
106,056 |
|
|
$ |
76,438 |
|
|
$ |
1,402,377 |
|
|
$ |
765,226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Revenues are attributed to geographic areas based on the location of the customer. |
|
(b) |
|
Consists of property, plant and equipment and prepaid spectrum and spectrum licenses
attributable to the geographic area based on location. |
15. 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 Eagle River Holdings, LLC (ERH), Motorola, Inc. (Motorola), Intel
Corporation (Intel), Hispanic Information and
14
CLEARWIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(continued)
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
September 30, 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 3.1% of the Companys long-term debt as of December 31, 2006 and 0% as of
September 30, 2007 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 consisted of $23.0 million face
value, or $19.3 million net of discounts for warrants. As of September 30, 2007 and December 31,
2006 ERH held warrants 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.
ERH earned interest relating to the notes in the amount of $316,000 and $673,000 for the three
months ended September 30, 2007 and 2006, respectively. For the nine months ended September 30,
2007 and 2006, ERH earned interest relating to the notes in the amount of $1.6 million and
$3.2 million, respectively. ERH received payments in the amount of $1.3 million and $1.3 million
for accrued interest during the quarter ended September 30, 2007 and 2006. During the nine months
ended September 30, 2007 and 2006, ERH received payments of
$2.5 million and $3.8 million,
respectively, for accrued interest.
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.
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 three months ended September 30, 2007 and 2006, the Company paid ERI
fees of $0 and $200,000, respectively, and expense reimbursements of
$142,000 and $127,000,
respectively, under this agreement. During the nine months ended September 30, 2007 and 2006, the
Company paid ERI fees of $67,000 and $600,000, respectively, and expense reimbursements of $257,000
and $679,000, 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 September 30, 2007, the remaining life of the warrant was 6.1 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
15
CLEARWIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(continued)
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 first nine months of
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 September 30, 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 three and nine months ended September 30, 2007, total purchases from Motorola under these
agreements were $30.4 million and $64.1 million, respectively. The remaining commitment was
$60.5 million at September 30, 2007.
HITN and its Affiliates In November 2003, the Company entered into a Master Spectrum
Agreement (MSA) with a third-party EBS license holder, the Hispanic Information and
Telecommunications Network, Inc. The founder and president of HITN was formerly a member of
Clearwires Board of Directors. The MSA provides for terms under which HITN leases excess capacity
on certain of its EBS spectrum licenses to Clearwire. The licenses covered under the MSA include
all of the spectrum rights acquired in the Clearwire Spectrum Corporation acquisition, plus access
to an additional twelve markets in the United States. For each market leased by HITN to the Company
under the MSA, the Company and HITN enter into a separate lease agreement which contains additional
lease terms. The initial lease term is 15 years with one renewal for an additional 15 years. The
MSA also provides for additional shares of Class A common stock to be issued to HITN upon Clearwire
reaching certain financial milestones.
In March 2004, the MSA between Clearwire and HITN was amended to provide, among other things,
additional leased EBS spectrum capacity in an additional major metropolitan market. Clearwire and
HITN also entered into a spectrum option agreement (the Option Agreement) whereby Clearwire has
an option to enter into leases of spectrum for which HITN has pending EBS license applications upon
grant of those licenses by the FCC. The lease terms and conditions would be similar to those under
the MSA.
Subsequent to the MSA, the Company entered into two other related agreements with ISA and ISC.
The founder and president of HITN, was formerly a member of Clearwires Board of Directors, 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 has been reached.
For the three and nine months ended September 30, 2007, ISC earned no revenues in each period,
respectively, and received cash of $0 and $39,000, respectively. During the three months ended
September 30, 2006, ISC earned no revenues. For the nine months ended September 30, 2006, ISC
earned approximately $250,000, of which $63,000 was payable in cash and the remainder payable in
warrants to purchase 12,491 shares of Class A common stock valued at $187,000.
16
CLEARWIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(continued)
Agreements with Bell Canada In March 2005, 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 the investment, 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 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. 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. Total payments to Bell for the nine months ended September 30, 2007 and 2006 were $53,000 and
$0, respectively. On October 19, 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% per annum and is
due and payable in full on July 19, 2008.
16. Subsequent Events
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 senior secured 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 net proceeds of $247.5
million, after expenses and fees payable in connection with the loan, to further support its
expansion plans, spectrum acquisitions and for general corporate purposes. The material terms of
the additional senior secured term loans are the same as the terms of the loans under the original
senior secured term loan facility.
On
July 19, 2007 Clearwire and Sprint Nextel entered into a letter
of intent to jointly construct a nationwide mobile broadband
network using mobile WiMAX technology. Over the course of the
parties discussions on definite documents,
Clearwire and Sprint concluded that the joint build transaction originally contemplated by the
letter of intent was likely to introduce a level of additional complexity to
each partys business that would be inconsistent with each companys focus on simplicity and the
customer experience. Consequently, the parties agreed to terminate their obligations under
the letter of intent. While the parties continue their discussions regarding the best means to accomplish the
benefits that were expected under the letter of intent, there can be
no assurance that such discussions between Clearwire and Sprint
will continue or that any transaction or agreement between the parties will
be concluded.
17
CLEARWIRE CORPORATION AND SUBSIDIARIES
Item 2. 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 three and
nine months ended September 30, 2007 and 2006 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 quarterly report on Form 10-Q, particularly in the
section entitled Risk Factors.
Forward-Looking Statements
Statements and information included in this Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q 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, and similar
expressions generally identify forward-looking statements.
Overview and Recent Developments
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 Voice over Internet
Protocol (VoIP) telephony, anytime and anywhere within our coverage area
Our network currently relies on network infrastructure equipment that is based on proprietary
non-line-of-sight, or NLOS, Orthogonal Frequency Division Multiplexing, or OFDM Expedience
technologies, from Motorola, Inc. We have committed to deploy networks based on the IEEE mobile
Worldwide Interoperability of Microwave Access 802.16e-2005, or mobile WiMAX, standard once mobile
WiMAX equipment is commercially available and meets our requirements. As with our current
Expedience network infrastructure equipment, we expect mobile WiMax technology, once it becomes
commercially available and meets certain standards, to support fixed, portable and mobile service
offerings using a single network architecture. In addition, as mobile WiMAX is a standards-based
technology, we expect manufacturers to eventually 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 PCs, personal data assistants, or
PDAs, gaming consoles, MP3 players, and other handheld devices. However, because mobile WiMAX
technologies are not yet commercially available, we cannot provide any assurance that we will be
able to deploy mobile WiMAX technologies in our network or that mobile WiMAX will be competitive
with other available technologies.
We launched our first 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
September 30, 2007 we offered our service for sale to an estimated 12.2 million people, or POPs,
and we also offered
our service for sale to nearly 2.6 million POPs internationally in Ghent and Brussels, Belgium,
Dublin, Ireland and Seville, Spain.
We believe that our subscriber growth rates reflect robust customer demand of our services. We
ended the quarter with approximately 348,000 total subscribers worldwide representing a 16%
increase in subscribers or approximately 49,000 net new subscribers
from the approximately 299,000
total subscribers we had as of the end of the second quarter of
18
CLEARWIRE CORPORATION AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
2007, and
a 69% or approximately
142,000 net increase in subscribers from the approximately 206,000 total subscribers
we had as of December 31, 2006. We experienced a 115% or an approximate 186,000 net increase
in subscribers from the approximately 162,000 total subscribers we had as of September 30, 2006.
Net subscriber additions represent the number of new subscribers added less subscribers deactivated
from our network.
We
ended the third quarter of 2007 with approximately 312,000 customers in the United States,
representing a 42,000 or 16% increase from the approximately 270,000 U.S. subscribers we had as of
the end of the second quarter of 2007 and a 168,000 or 117% increase from the approximately 144,000
U.S. subscribers we had as of September 30, 2006.
Internationally,
we ended the third quarter of 2007 with approximately 36,000
customers, representing a 7,000 or 24% increase from the
approximately 29,000 subscribers we had as of the end of the second
quarter of 2007 and a 18,000 or 100% increase from the approximately
18,000 subscribers we had as of September 30, 2006.
For the quarters ended September 30, 2007 and September 30, 2006, we experienced an average
monthly churn of approximately 2.3% and 2.4%, respectively. Churn refers to the percentage of our
existing customers who terminate service in a given 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. For the nine months ended September 30, 2007 and September 30,
2006, the average monthly churn was approximately 2.0% and 1.9%, respectively. Given our limited
operating history, our current rate of churn may not be representative of the churn we may
experience in the future.
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 cards. 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 and in Europe during the
remainder of 2007 and 2008. We believe our operations could result in as many as 375,000 to 400,000
total subscribers in both our U.S. and international markets by the end of 2007.
We believe that we have the second largest spectrum position in the 2.5 GHz (2495-2690 MHz)
band in the United States with a spectrum portfolio that as of September 30, 2007 includes
approximately 14.5 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 September 30, 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 is 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 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, thus we will not launch our services today in many of
the markets in which we hold 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.
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 September 30, 2007, our total assets were
$2.6 billion and our stockholders equity was $1.3 billion, which compares to total assets of
$2.1 billion and stockholders equity of $1.3 billion at December 31, 2006. Our cash and cash
equivalents and short-term unrestricted investments at September 30, 2007 was $1.0 billion and $1.1
billion at December 31, 2006. 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 uses of
capital by adjusting the rate at which we build our network, acquire spectrum and deploy our
services. Additionally, our current plans may be revised or modified depending on the outcome of
the negotiations with Sprint regarding the creation of a joint nationwide mobile WiMAX network.
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
$328.6 million and $59.8 million for the
19
CLEARWIRE CORPORATION AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
three months ended September 30, 2007 and 2006,
respectively, and $539.4 million and $191.9 million for the nine months ended September 30, 2007
and 2006, respectively.
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 and fees and costs attributable to the senior term loan facility. The remainder will
be used for capital expenditures, working capital and general corporate purposes. 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 new $1.0
billion senior secured term loan facility provides for quarterly amortization payments aggregating
an annual amount equal to 1% 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 initial 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 new $1.0 billion debt, the
company recorded a deferred financing cost of $27.6 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. 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.
At September 30, 2007, the Company held a total of $303.0 million in available for sale, short
term investments, of which $102.1 million were auction rate securities. Auction rate securities are
variable rate debt instruments whose interest rates are reset approximately every 28 days through
an auction process with the underlying securities that have contractual maturities greater than ten
years. The auction rate securities are classified as available for sale and are recorded at fair
value. Typically, the carrying value of auction rate securities approximates fair value due to the
frequent resetting of the interest rates through the auction rate
process. At September 30,
2007, the Company held auction rate securities that recently
failed to settle in the auction process. While the Company continues to earn interest on these
investments at the maximum contractual rate, the estimated market value of these auction rate
securities no longer approximates par value. Accordingly, the Company has recorded these
investments at their estimated fair value of and recorded an unrealized loss on these
securities of $12.4 million in other comprehensive income, reflecting the decline in the estimated
fair value of these securities.
With
the exception of one noted auction rate securities for which we determined losses
to be other than temporary, the Company has concluded that no other-than-temporary impairment
losses occurred in the auction rate securities in the three and nine months ended September 30,
2007 due to the fact that the decline in market value is due to general market conditions, these
investments are of high credit quality with credit ratings of AA or higher, and the Company has the
intent and ability to hold these investments until the anticipated
recovery in market value occurs. Given the current market volatility,
the Company will continue to monitor its short-term investments for
substantive changes in relevant market conditions, substantive
changes in financial condition and/or performance of the investments'
issuers or other substantive changes in those investments. The Company may
be required to record additional realized loss for impairment if the decline
in fair value is determined to be other-than-temporary.
During the three months ended September 30, 2007, the Company incurred other-than-temporary
impairment losses of $14.2 million related to a decline in
values of investment securities. The Company estimated the fair value
of these securities mainly based on prices provided by
broker-dealers. These prices could change significantly based on
market conditions.
20
CLEARWIRE CORPORATION AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based
upon our condensed consolidated 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 the valuation of 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 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.
Note 2 to the Consolidated Financial Statements in our Registration Statement on Form S-1
(Registration No. 333-139468) includes a summary of the significant accounting policies or methods
used in the preparation of our condensed consolidated financial statements. We believe the
following items require the most significant judgments and often involve complex estimates.
Revenue Recognition
We recognize revenue in accordance with Staff Accounting Bulletin No. 104, Revenue
Recognition, (SAB No. 104) 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 apply Emerging Issues Task Force (EITF) Issue No. 00-21, Accounting for Revenue
Arrangements with Multiple Deliverables, (EITF No. 00-21) to account for revenue arrangements
with multiple deliverables. 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 other optional services are
billed in advance and recognized 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 historical industry averages. Given our limited history we
believe that these averages represent the best indicator of our future duration of customer life.
As we develop more history of contract renewals, our estimate of the expected life of our customer
relationship may change. Any change will be reflected prospectively beginning in the period that
the change in estimate occurs.
Sales discounts, primarily discounts on list prices of equipment sold, are generally
classified as a reduction of revenues in accordance with EITF Issue No. 01-09, Accounting for
Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendors Products), and
are recognized when the related revenue is recognized.
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 No. 97-2, Software Revenue Recognition (SOP No. 97-2).
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
performed, or until fair value could objectively be determined for any remaining undelivered
elements. If the fair value of a delivered element had not been established, we used the residual
method to record revenue if the fair value of all undelivered elements was determinable. Under the
residual method, the
21
CLEARWIRE CORPORATION AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
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.
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. We deferred the related revenues and recognized them ratably over the
respective maintenance terms, which typically were one to two years.
Share-Based Compensation
We recognize share-based compensation costs in accordance with Statement of Financial
Accounting Standards (SFAS) No. 123 (R), Share-Based Payment, (SFAS No. 123(R)), which
established the use of the fair value based method of accounting for share-based compensation
arrangements as of the date of grant. We recognize compensation costs, net of a forfeiture rate,
for those shares expected to vest, which is generally the option vesting term of four years. We use
the Black-Scholes valuation model to estimate the fair value of stock awards. See Note 10,
Share-Based Payments to our condensed consolidated financial statements for additional
information.
Accounting for Spectrum Licenses and Leases
We have two types of arrangements for spectrum licenses in the United States, purchase of
direct licenses issued by 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 and our licenses for spectrum in Ireland
and Belgium 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 perform our annual impairment test of indefinite lived intangible assets as of
October 1 of each year.
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
applicable. For leases involving significant up-front payments, we account for such payments as
prepaid spectrum license fees and they are expensed over the term of the lease agreement including
renewal terms as applicable.
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 (SFAS No.
109), 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. The
Company has recorded a valuation allowance against a significant portion of the deferred tax
assets.
22
CLEARWIRE CORPORATION AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
Results of Operations
The following table sets forth certain operating data for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
REVENUES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service |
|
$ |
41,297 |
|
|
$ |
18,962 |
|
|
$ |
106,056 |
|
|
$ |
43,855 |
|
Equipment and other (includes related party
sales of $0,
$3,278, $0 and $15,546) |
|
|
|
|
|
|
7,937 |
|
|
|
|
|
|
|
32,583 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
41,297 |
|
|
|
26,899 |
|
|
|
106,056 |
|
|
|
76,438 |
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods and services (exclusive of
items shown
separately below): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (includes related party
costs of $815, $0,
$2,205 and $0) |
|
|
29,268 |
|
|
|
13,387 |
|
|
|
69,316 |
|
|
|
33,999 |
|
Cost of equipment (includes related
party costs of $0,
$2,222, $0 and $8,914 ) |
|
|
|
|
|
|
5,316 |
|
|
|
|
|
|
|
19,674 |
|
Selling, general and administrative expense |
|
|
103,424 |
|
|
|
52,166 |
|
|
|
259,456 |
|
|
|
142,532 |
|
Research and development |
|
|
194 |
|
|
|
2,603 |
|
|
|
1,217 |
|
|
|
8,470 |
|
Depreciation and amortization |
|
|
22,659 |
|
|
|
9,538 |
|
|
|
58,558 |
|
|
|
26,372 |
|
Spectrum lease expense |
|
|
28,278 |
|
|
|
6,661 |
|
|
|
56,543 |
|
|
|
14,649 |
|
Gain on sale of NextNet |
|
|
|
|
|
|
(19,793 |
) |
|
|
|
|
|
|
(19,793 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
183,823 |
|
|
|
69,878 |
|
|
|
445,090 |
|
|
|
225,903 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING LOSS |
|
|
(142,526 |
) |
|
|
(42,979 |
) |
|
|
(339,034 |
) |
|
|
(149,465 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
16,596 |
|
|
|
6,249 |
|
|
|
52,006 |
|
|
|
13,135 |
|
Interest expense |
|
|
(28,813 |
) |
|
|
(19,312 |
) |
|
|
(76,542 |
) |
|
|
(49,741 |
) |
Foreign currency translation gains
(losses), net |
|
|
292 |
|
|
|
(20 |
) |
|
|
224 |
|
|
|
(20 |
) |
Loss on extinguishment of debt |
|
|
(159,193 |
) |
|
|
|
|
|
|
(159,193 |
) |
|
|
|
|
Other-than-temporary impairment loss on
investments |
|
|
(14,208 |
) |
|
|
|
|
|
|
(14,208 |
) |
|
|
|
|
Other income (expense), net |
|
|
453 |
|
|
|
(821 |
) |
|
|
2,197 |
|
|
|
1,426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net |
|
|
(184,873 |
) |
|
|
(13,904 |
) |
|
|
(195,516 |
) |
|
|
(35,200 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS BEFORE INCOME TAXES, MINORITY
INTEREST AND LOSSES FROM EQUITY INVESTEES |
|
|
(327,399 |
) |
|
|
(56,883 |
) |
|
|
(534,550 |
) |
|
|
(184,665 |
) |
Income tax provision |
|
|
(1,198 |
) |
|
|
(648 |
) |
|
|
(3,927 |
) |
|
|
(1,875 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS BEFORE MINORITY INTEREST AND LOSSES
FROM EQUITY INVESTEES |
|
|
(328,597 |
) |
|
|
(57,531 |
) |
|
|
(538,477 |
) |
|
|
(186,540 |
) |
Losses from equity investees, net |
|
|
(1,034 |
) |
|
|
(2,042 |
) |
|
|
(3,841 |
) |
|
|
(5,757 |
) |
Minority interest in net loss (income) of
consolidated
subsidiaries |
|
|
994 |
|
|
|
(190 |
) |
|
|
2,961 |
|
|
|
446 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS |
|
$ |
(328,637 |
) |
|
$ |
(59,763 |
) |
|
$ |
(539,357 |
) |
|
$ |
(191,851 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share, basic and diluted |
|
$ |
(2.01 |
) |
|
$ |
(0.61 |
) |
|
$ |
(3.44 |
) |
|
$ |
(2.30 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding,
basic and diluted |
|
|
163,586 |
|
|
|
97,854 |
|
|
|
156,940 |
|
|
|
83,595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
Service revenues were $41.3 million in the third quarter of 2007 compared to $19.0 million in
the third quarter of 2006. For the nine months ended September 30, 2007 and 2006 service revenues
were $106.1 million and $43.9 million,
respectively. These increases were primarily due to the increase in our subscriber base. As of
September 30, 2007, we operated in 44 U.S. markets and four international markets covering a
geographic area containing approximately 14.8 million people. This is compared to 32 U.S. and two
international markets covering approximately 6.6 million people as of September 30, 2006. Total
subscribers in all markets grew from approximately 162,000 as of September 30, 2006 to
23
CLEARWIRE CORPORATION AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
approximately 348,000 as of September 30, 2007, primarily due to continued subscriber growth in
existing markets and the addition of 12 markets launched during the first nine months of 2007.
Equipment and other revenue in the third quarter 2007 decreased from the third quarter 2006 due to
the sale of NextNet in August 2006. Service revenue from our acquired businesses was approximately
$4.4 million in the third quarter of 2007 compared to $3.3 million in the third quarter of 2006.
For the nine months ended September 30, 2007 and 2006 service revenue from our acquired businesses
was approximately $11.3 million and $8.3 million, respectively.
Cost of goods and services. Service costs primarily include costs associated with tower rents,
network costs and traffic back haul, 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.
Cost of services were $29.3 million in the third quarter of 2007 compared to $13.4 million in
the third quarter of 2006, and $69.3 million and $34.0 million, respectively, for the nine months
ended September 30, 2007 and 2006. These increases were primarily due to an increase in the number
of towers leased and related traffic back haul costs, the number of subscribers using our service,
and additional markets served. Service gross margin was 29.1% in the third quarter of 2007 compared
to 29.4% in third quarter of 2006. Service gross margin for the nine months ended September 31,
2007 increased to 34.6% for the nine months ending September 30, 2007 from 22.5% for the nine
months ending 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.
Overall
gross profit increased to $12.0 million for the three months ended September 30, 2007
from $8.2 million for the third quarter of 2006 and to $36.7 million for the nine months ended
September 30, 2007 from $22.8 million for the nine months ended September 30, 2006. Overall gross
margin was 29.1% for the third quarter of 2007 compared to 30.5% for the third quarter 2006. For
the nine months ended September 30, 2007 and 2006, overall gross margin was 34.6% and 29.8%
respectively. These increases were primarily due to growth in our subscriber base. We anticipate
that gross margin will fluctuate due to new market launches, while our cost of service will
increase as we continue to expand our network. There were no costs
related to equipment in the third
quarter or the first nine months of 2007 due to the sale of NextNet in August 2006.
Selling, general and administrative expense. Selling, general and administrative expense
includes primarily salaries and benefits, sales commissions, travel expenses and related facilities
costs for our sales, marketing, network deployment, executive, finance, information technology,
human resource and legal personnel. It also includes costs associated with advertising, trade
shows, public relations and other market development programs and third-party professional service
fees.
Selling, general and administrative expense was $103.4 million for the quarter ended
September 30, 2007 as compared to $52.2 million for the quarter ended September 30, 2006. The
increase of $51.2 million was due primarily to a $30.5 million increase in employee compensation
and related costs, including facilities costs, resulting from higher employee headcount of
approximately 1,900 employees at September 30, 2007 compared to
approximately 1,075 employees at
September 30, 2006. These additional employees were hired to support the overall growth of our
business. In addition for the quarter ended September 30, 2007 as compared to the quarter ended
September 30, 2006, there was a $9.1 million increase in professional fees resulting from legal and
accounting fees related to work performed on business development projects and costs associated
with our compliance with Sarbanes Oxley; a $6.3 million increase in advertising expenses related to
the expansion of our business; and $2.4 million increase in third party commissions as we sold more
services through third party providers. The remaining increase of
$2.9 million resulted from
increases in other miscellaneous expenses primarily arising out of
growth in the company's business.
For the nine months ended September 30, 2007 and 2006, selling, general and administrative
expense was $259.5 million and $142.5 million, respectively, resulting in an increase of $117.0
million. The increase was due primarily to a $77.3 million increase in employee compensation and
related costs, including facilities costs, resulting from higher employee headcount to support the
overall growth of our business. In addition, there was a $11.4 million increase in professional
fees related to increased filings and business development activities as well as an increase in
audit related fees and costs related to Sarbanes Oxley compliance efforts; advertising expense
increased $10.5 million related to increased advertising as we increase sales; third party
commissions increased $6.7 million as sales increased; increased costs related to credit card
processing, collections and bad debt expense of $4.0 million; an increase of $1.1 million in
24
CLEARWIRE CORPORATION AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
inventory
obsolescence; and other miscellaneous expenses which increased by
$6.0 million, primarily as a result of growth in the Company's
business.
We expect that our selling, general, and administrative expenses will increase in future
periods. We expect that these increases will primarily be related to wages and related employment
costs, facility costs and 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 $194,000 and $1.2
million for the three and nine months ended September 30, 2007 compared to $2.6 million and $8.5
million for the three and nine months ended September 30, 2006. These decreases were 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.
Depreciation and amortization. Depreciation and amortization expense increased to
$22.7 million and $58.6 million for the three and nine months ended September 30, 2007,
respectively, from $9.5 million and $26.4 million for the three and nine months ended September 30,
2006, respectively. These increases were primarily due to the additional network build-out and the
cost of customer premise equipment (CPE) related to our expansion into new markets and associated
subscriber growth. Capital expenditures for depreciable property, plant and equipment increased to
$114.6 million and $279.2 million, respectively, for the three and nine months ended September 30,
2007 from $45.8 million and $129.0 million, respectively, for the three and nine months ended
September 30, 2006. The majority of these expenditures relate to the construction of our network
and purchases of base station equipment.
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, to write off a portion of the entire net book value of the equipment.
Spectrum lease expense. Spectrum lease expense increased to $28.3 million and $56.5 million
for the three and nine months ended September 30, 2007 from $6.7 million and $14.6 million for the
three and nine months ended September 30, 2006. 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 by us. We expect spectrum lease expense to continue to increase.
Interest income. We recognized $16.6 million and $52.0 million of interest income for the
three and nine months ended September 30, 2007 compared to $6.2 million and $13.1 million for the
three and nine months ended September 30, 2006. These increases were primarily due to the higher
balances of short-term investments held during the three and nine months of 2007 compared to the
three and nine months of 2006.
Interest expense. We incurred $28.8 million of interest expense in the third quarter of 2007
compared to $19.3 million for the third quarter of 2006 and $76.5 million in the first nine months
of 2007 compared to $49.7 million in the first nine months of 2006. These increases in interest
expenses were primarily due to an increase in debt from the $1.0 billion senior term loan obtained
during third quarter 2007.
We
recorded interest expense totaling $28.8 million and $71.1 million related to our secured
notes for the three and nine months ended September 30, 2007, respectively, compared to
$18.2 million and $47.9 million related to our secured notes for the three and nine months ended
September 30, 2006, respectively. We recorded amortization of original issuance discount of
$2.9 million and $14.0 million for the three and nine months ended September 30, 2007,
respectively, compared to $4.9 million and $10.6 million for the three and nine months ended
September 30, 2006, respectively. We recorded amortization of original deferred financing costs
related to our secured notes of $2.0 million and $5.2 million, respectively, for the three and nine
months ended September 30, 2007 and $1.3 million and $2.4 million, respectively, for the three and
nine months ended September 30, 2006. These amounts were partially offset
25
CLEARWIRE CORPORATION AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
by
capitalized interest of $4.9 million and $13.8 million for the three and nine months ended
September 30, 2007, respectively, and $5.1 million and $11.2 million for the three and nine months
ended September 30, 2006, respectively.
Loss on extinguishment of debt. 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.
Other-than-temporary impairment losses on investments The increase in the other-than-temporary
impairment loss on investment securities of $14.2 million for the three and nine months ended
September 30, 2007, as compared to September 30, 2006, is primarily due to the recognition of a
decline in value of investment securities which we determined to be other than temporary.
Other income (expense), net. In the third quarter of 2007, we had approximately $453,000 in
other income compared to approximately $821,000 in other expenses in the third quarter of 2006. For
the nine months ended September 30, 2007 and 2006, we had other income of approximately $2.2
million and $1.4 million, respectively.
Losses from equity investees, net. In the third quarter of 2007, we had approximately $1.0
million in losses from equity investees compared to approximately $2.0 million in losses in the
third quarter of 2006. For the nine months ended September 30, 2007 and 2006, we had losses from
equity investees of approximately $3.8 million and $5.8 million, respectively. These decreases were
primarily due to the growth in the aggregate subscriber base and related business performance of
the equity investees.
Cash Flow Analysis
The following table presents a summary of our cash flows and beginning and ending cash
balances for the nine months ended September 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
Cash used in operating activities |
|
$ |
(398,488 |
) |
|
$ |
(179,555 |
) |
Cash used in investing activities |
|
|
(87,528 |
) |
|
|
(472,297 |
) |
Cash provided by financing activities |
|
|
762,965 |
|
|
|
1,504,697 |
|
Effect of foreign currency exchange rates on cash and cash equivalents |
|
|
(696 |
) |
|
|
2,231 |
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
276,253 |
|
|
|
855,076 |
|
Cash and cash equivalents at beginning of period |
|
|
438,030 |
|
|
|
29,188 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
714,283 |
|
|
$ |
884,264 |
|
|
|
|
|
|
|
|
Operating Activities
Net cash used in operating activities increased by $218.9 million to $398.5 million in the
nine months ended September 30, 2007, from $179.6 million in the nine months ended September 30,
2006. Cash received from customers was $108.5 million in the first nine months of 2007 compared to
$84.4 million in the first nine months of 2006, which was primarily from our NextNet operations,
resulting in a $24.1 million increase in cash provided. This increase was due to an increase in our
subscriber base as we continued to increase subscribers in our existing markets as well as we added
12 new markets in the first nine months of 2007. This addition to cash was offset by increases
in all operating expenses, most significantly general and administrative, and sales and marketing
expenses. These increases included employee compensation, professional fees, facilities and
advertising expense, due to the expansion of our wireless broadband network as well as an increase
in the number of markets served.
Investing Activities
During the nine months ended September 30, 2007, net cash used in investing activities was
$87.5 million compared to $472.3 million during the nine months ended September 30, 2006, resulting
in a decrease of $384.8 million. This decrease in cash used was due primarily to an increase in
proceeds received from sales and maturities of short-term and restricted investments, net of
purchases, of $721.0 million as short-term and restricted
investments decreased from $743.8 million
at December 31, 2006 to $317.0 million at September 30, 2007. In addition there was a $37.7 million
decrease in cash used to acquire businesses, $2.1 million reduction in related party notes issued
and $1.0 million in proceeds received from sale of other assets. This decrease in cash used in
investing activities was partially
26
CLEARWIRE CORPORATION AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
offset by an increase of $327.9 million in cash invested in building our wireless broadband
network and acquiring additional spectrum licenses in the first nine months of 2007 as compared to
the first nine months of 2006 as we launched 12 new markets in the first nine months of 2007.
Adding to this partial offset is a decrease of $44.8 million in proceeds received from the sale of
an equity investment, as well as, increases in investments made in equity investees of $3.1 million as we
continue to invest in our international subsidiaries, and purchase of
minority interest in one of our subsidiaries of $1.2 million.
Financing Activities
Net cash provided by financing activities decreased by $741.7 million to $763.0 million for
the nine months ended September 30, 2007 from $1.5 billion for the nine months ended September 30,
2006. This reduction is due primarily to payments made on long-term debt of $745.7 million as the
Company fully retired the senior secured notes and paid related interest. Also contributing to the
reduction in cash provided from financing activities is a reduction
of cash received of $470.6
million resulting from fewer proceeds received from stock issuances. The reduction in cash received from financing was offset partially by an increase of
$459.6 million from $933.1 million net proceeds received from the issuance of a $1.0 billion senior
term loan facility entered into during the first nine months of 2007 compared to net proceeds of
$473.5 million from the issuance of the senior secured and other notes in the first nine months of
2006. In addition there was $15.0 million received from a minority partner in the first nine months
of 2007 and none during the first nine months of 2006.
Liquidity and Capital Resource Requirements
Based upon our current plans, we believe that our existing cash, cash equivalents and
marketable securities together with the incremental proceeds from our senior term loan facility
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, which factors are difficult to estimate at this time.
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, acquisition of other companies, or any combination of the foregoing. We will likely
seek significant additional debt financing, in both the short-term and the long-term, to continue
to fund our liquidity needs and capital resource requirements.
Recent Accounting Pronouncements
SFAS No. 159 In February 2007, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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 are currently
evaluating the impact of this pronouncement on our 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. We are currently evaluating the impact of this
pronouncement on our consolidated financial statements.
27
CLEARWIRE CORPORATION AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
Item 3. 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 new senior term loan facility of $1.0 billion at September 30,
2007. The interest rate on the new senior term loan facility is based, at our option, at either the
Eurodollar rate, indexed to the LIBOR or an ABR indexed to the higher of 0.5% in excess of the
federal funds rate or the rate that the administrative agent announces from time to time as its
prime or base commercial lending rate. The weighted average interest rate under the new senior term
loan facility was 11.57% at September 30, 2007. A one percent increase in the interest rate on the
outstanding principal balance at September 30, 2007, would increase our annual interest expense by
approximately $10.0 million per year.
We have short-term investments that are subject to interest rate risk that may impact the
return on those investments. We do not expect our operating results, financial condition or cash
flows to be materially affected by changes in market interest rates.
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 September 30, 2007, our recorded basis in our short-term available-for-sale investments
was $303.0 million of which $102.1 million was auction rate securities and $200.9 million was
bonds, commercial paper and other securities. We regularly review the carrying value of our
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 an auction rate securities during the three months ended September 30, 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 September 30, 2007 of
$102.1 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 $15.3 million, $30.6
million, or $45.9 million.
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CLEARWIRE CORPORATION AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Company management, along with our Chief Executive Officer, Chief Financial Officer and Chief
Accounting Officer have evaluated the effectiveness of our disclosure controls and procedures as
of the end of the period covered by this report pursuant to Rule 13a-15(b) under the Securities
Exchange Act of 1934 (the Exchange Act). Based on that evaluation and in light of our material
weaknesses noted in our Registration Statement on Form S-1/A dated March 7, 2007, our Chief
Executive Officer, Chief Financial Officer and Chief Accounting Officer have concluded that, as of
the end of the period covered by this report, our disclosure controls and procedures are not
effective; however, we have performed detailed account reconciliation reviews and additional
analyses of the balance sheet and income statement accounts as well as closing and other
post-closing procedures to ensure the condensed consolidated financial statements were prepared in
accordance with generally accepted accounting principles. Accordingly, we believe that the
condensed consolidated financial statements included in this report do fairly present, in all
material respects, our financial position, results of operations and cash flows for the periods
presented.
Changes in Internal Controls
As previously disclosed in connection 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, both we and our independent public accountants identified material weaknesses,
as well as significant deficiencies, with respect to our internal controls over financial
reporting. In light of the material weaknesses and significant deficiencies noted, we have taken a
number of steps to address and improve our internal controls over financial reporting.
During the first nine months of 2007 and through the filing of this Quarterly Report, we have
continued our remediation efforts to address the material weaknesses and significant deficiencies
from prior years.
With respect to the material weaknesses, we have undertaken the following actions:
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In order to address the material weakness identified in 2005 relating to the accounts
payable cutoff, we have identified several areas for improvement. 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 review of vendor invoices to
ensure completeness of accounts payable. Additionally, we have established a cross
departmental team to implement improved policies and procedures for the procurement and
payment processes that is also addressing the proper recording of accounts payable and
accrued expenses. |
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With respect to financial reporting and complex accounting issues, we have increased the
total number of staff within our department as well as the technical capability of that
team. We hired a Chief Accounting Officer during 2007 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 and US GAAP reporting requirements. To improve the quality of our
month end close process, we have implemented several policies and procedures that are
required to be followed by the accounting staff to ensure that all transactions are
recorded consistently, are authorized and reviewed by higher level accounting personnel and
include the appropriate level of supporting documentation. |
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We have also significantly increased management oversight and review of the financial
information and engaged a nationally recognized accounting firm to advise us, as necessary,
with respect to accounting for complex and unusual transactions. |
With respect to the significant deficiencies, we have undertaken the following actions:
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In the third quarter, we implemented a software program to automate the accounting for
share based payments and the modifications of stock option grants. Additionally, the
accounting for leases has been automated and procedures have been implemented to ensure we
have properly accounted for all leases as of a month end. |
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With the information technology department, we continue to enhance our resources and
control environment. Related to information security, we have implemented stronger front
end controls to address authentication and responsibilities within significant
applications. Our technology group and internal compliance team, working |
29
CLEARWIRE CORPORATION AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
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with our third party providers, has completed an evaluation of access control procedures
such as user access reviews and segregation of duties analysis, within and across
applications. |
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Additionally, we have completed an annual assessment process which includes fraud risk
and enterprise risk assessments where we have documented risks that are unique to our
business for our domestic and international operations. We are evaluating our existing
controls to mitigate those risks and have examined whether there are gaps or deficiencies
in these controls that require remediation. For the remainder of 2007, we are remediating
those gaps or deficiencies and controls to help reduce the underlying risks. |
We believe that the changes in accounting, processes and people as described above will address and
ultimately remedy the material weaknesses and the significant deficiencies in our internal control
over financial reporting. We continue to review processes, procedures and systems and will
implement additional measures as appropriate. Our remediation plan is expected to be accomplished
over time and we cannot offer any assurances that our initiatives will ultimately be successful.
30
CLEARWIRE CORPORATION AND SUBSIDIARIES
PART II OTHER INFORMATION
Item 1. 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
to have a material adverse effect on our liquidity, financial condition or results of operations.
Item 1A. Risk Factors
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.
We have only recently begun to implement our business strategy. We have recorded a net loss in
each reporting period since our inception. As Clearwire is at an early stage of development, we
cannot anticipate with certainty what our earnings, if any, will be in any future period. However,
we expect 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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it may be difficult to predict accurately our key operating and performance metrics
because of our limited operating history; 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. |
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, together with the incremental
cash provided by our senior term loan facility, afford us adequate liquidity for at least the next
12 months, although we may raise additional capital during this period if acceptable terms are
available. In addition to our cash needs for the next 12 months to fund operating losses, capital
expenditures, working capital and acquisition commitments, we also expect to enter into additional
spectrum acquisition agreements in the future. We also expect to require substantial additional
capital in the long-term to fund our business, and our success and viability will depend on our
ability to raise additional capital on reasonable terms.
The amount and timing of our long-term capital needs will depend 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 technologies become available, which factors are difficult to
estimate at this time. We may not be able to secure adequate additional financing when needed on
acceptable terms or at all. To execute our business strategy, 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
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CLEARWIRE CORPORATION AND SUBSIDIARIES
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. 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.
Certain holders of our warrants are entitled to pre-emptive rights in unregistered equity
offerings completed within one year after the date of our initial public offering, which may delay
or otherwise adversely affect our ability to raise additional funds.
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 vendors
currently expect mobile WiMAX equipment to be commercially available in the near term, we cannot
assure you that commercial quantities of mobile WiMAX equipment meeting our requirements will be
available on this schedule or that they will be successfully developed at all. Other competing
technologies may be developed that have advantages over mobile WiMAX, and operators of other
networks based on these competing technologies may be able to deploy their networks at a lower cost
than that incurred in deploying a mobile WiMAX network, which may allow those operators to compete
more effectively. Additionally, if other network operators do not adopt and deploy mobile WiMAX,
equipment manufacturers may be unwilling to invest the time and money necessary to develop
infrastructure equipment and end user devices that meet our business needs. Furthermore, we are
depending on the wide scale deployment of mobile WiMAX networks to drive an adequate volume of
demand which we expect will support reasonably priced equipment. As a result, our commitment to
deploy mobile WiMAX technology on our network may lead to problems acquiring new subscribers and
dissatisfaction among our existing subscribers, either of which would harm our prospects, financial
condition and results of operations.
Additionally, mobile WiMAX may not perform as we expect, or as well as our existing Expedience
technology, and therefore we may not be able to deliver the quality or types of service 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 on our 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 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
and Intel, 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. Even if
these parties are successful, the development process for mobile WiMAX network components and
subscriber equipment may be lengthy and subject to significant delays. If these third parties are
unable 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 mobile WiMAX on our networks when
we expect,
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CLEARWIRE CORPORATION AND SUBSIDIARIES
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. We may not be able to reduce our
prices or otherwise combine our services with other products or services, which may make it more
difficult to attract and retain subscribers.
Many of our competitors are better established or have greater financial resources than we
have. 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; |
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Internet service providers offering dial-up Internet connectivity; |
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municipalities and other entities operating WiFi 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 providing wireless Internet or other wireless services using
infrastructure developed and operated by others. |
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. Sprint has substantially greater resources than we
do, giving them certain advantages over us. Sprint may deploy their network in some of the same
markets in which we have deployed or plan to deploy our network. In either case, Sprint 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.
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CLEARWIRE CORPORATION AND SUBSIDIARIES
Our substantial indebtedness and restrictive debt covenants could limit our financing options
and liquidity position and may limit our ability to grow our business.
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 our obligations under our $125.0 million term loan, the fees and costs attributable to the
senior term loan facility and the remainder will be used for general working capital purposes. We
borrowed the remaining amount of approximately $620.7 million under the new senior term loan
facility on August 15, 2007, to retire our senior secured notes due 2010. 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 new senior term loan facility bear interest based,
at our option, at either the Euro dollar rate or on an alternate base rate, in each case plus
margin. On November 2, 2007, we amended the senior term loan facility to provide the Company with
an additional $250 million in term loans. This additional funding increases the size of our senior
secured term loan facility to an aggregate of $1.25 billion. We plan to use the additional
proceeds to further support our expansion plans, spectrum acquisition and for general corporate
purposes.
We also borrowed $10.0 million from BCE Nexxia, 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 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. |
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. |
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 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.
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CLEARWIRE CORPORATION AND SUBSIDIARIES
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. If
we fail 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.
Prior to our initial public offering in March 2007, we were a private company and did not file
reports with the SEC. As a public reporting company we are required, among other things, to
maintain a system of effective control over financial reporting. We produce our consolidated
financial statements in accordance with the requirements of generally accepted accounting
principles in the United States (U.S. GAAP), but our internal control may not currently meet all
of the standards applicable to companies with publicly traded securities.
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. As a result, our current internal
control deficiencies may adversely affect our financial condition, results of operation and access
to capital. 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 have identified material weaknesses in our internal
controls during 2005 and 2006. A material weakness is a significant deficiency that, by itself or
in combination with other control deficiencies, results in more than a remote likelihood that a
material misstatement in our annual or interim financial statements will not be prevented or
detected.
In 2005, we determined that there were material weaknesses related to our lack of sufficient
review of our accounting for nonroutine and complex transactions and a lack of proper cutoff of
accounts payable and accrued expenses. The weakness for nonroutine and complex transactions
specifically included accounting for equity-method investments and issuance of debt with detachable
warrants. During 2006, we determined that a material weakness in internal controls existed because
of a lack of properly designed internal control over the preparation and review of the financial
statements. We have also identified other significant deficiencies in our internal controls.
If we do not establish and maintain an effective system of internal control and address and
remediate our material weaknesses and other significant deficiencies, the reliability of our
periodic reports on Form 10-Q and annual report on Form 10-K may be compromised. This may result in
a restatement of our financial statements, such as past restatements of our financial statements
for the nine months ended September 30, 2005 and 2006 and for the years ended December 31, 2004 and
2005. In addition, reporting any material weakness may negatively impact investors perception of
us. We have allocated, and will continue to allocate, significant additional resources to
remediating any deficiencies in our internal control. We are in the process of addressing and
remedying the identified material weaknesses in internal control over financial reporting, as well
as all other identified significant deficiencies. However, elements of our remediation plan can
only be accomplished over time, and our initiatives ultimately may not result in an effective
internal control environment.
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 |
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CLEARWIRE CORPORATION AND SUBSIDIARIES
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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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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. |
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. |
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 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 4 Short-Term Investments on
page 8.
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CLEARWIRE CORPORATION AND SUBSIDIARIES
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 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 system rollouts 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.
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 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 may spend
significant resources to acquire spectrum, 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 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 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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CLEARWIRE CORPORATION AND SUBSIDIARIES
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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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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. |
We expect the FCC to make additional spectrum available from time to time, including 60 MHz of
spectrum in the 700 MHz band. Congress has directed that the FCC conduct an auction for the 700 MHz
band spectrum no later than January 28, 2008. 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 to increase the reliability of our
systems, but these capital expenditures may not achieve the results we expect.
Our services depend on the continuing operation of our information technology and
communications systems. 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.
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 your best interests.
We pay Mr. McCaw, in his capacity as our Chairman, annual compensation of $300,000 per year
plus expense reimbursements. In addition, Mr. McCaw and his affiliates face only limited
restrictions on their ability to compete with us. Because these limitations are not universal,
there may arise conflicts of interest that restrict or inhibit our ability to operate our business,
make acquisitions and obtain financing. Furthermore, in addition to Mr. McCaw, certain members of
our management team are also employed by, or have interests in, ERH or its affiliates or one of Mr.
McCaws other investments, including Mr. Wolff, our Chief Executive Officer who serves as President
of ERH.
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 restricts these parties from entering into similar arrangements with other
parties. Neither Mr. McCaw, ERH, 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.
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CLEARWIRE CORPORATION AND SUBSIDIARIES
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. For example, we introduced a PC Card compatible with our current Expedience
technology in October 2007. Additionally, our planned deployment of mobile WiMAX depends on the
development of network equipment and subscriber devices based on the mobile WiMAX standard. 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. |
As our services and those offered by our competitors develop, businesses and consumers 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 Executive Officer of our operations in the United States, 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 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.
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CLEARWIRE CORPORATION AND SUBSIDIARIES
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; and |
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at this time we do not offer local number portability to our subscribers. |
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.
Additionally, 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 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. Furthermore, 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
intend to continue to pursue 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. In addition, we have
only recently begun to assemble a management team dedicated to addressing our international
business operations. 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.
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
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CLEARWIRE CORPORATION AND SUBSIDIARIES
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.
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 independently develop or patent 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. 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 a target, 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
harmed.
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
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CLEARWIRE CORPORATION AND SUBSIDIARIES
maintain the Clearwire brand, or if we incur significant expenses in this effort, our
business, prospects, operating results and financial condition may be harmed. 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, 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 limit the bandwidth used by our subscribers applications, in part by restricting
the types of applications that may be used over our network. 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 results 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.
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CLEARWIRE CORPORATION AND SUBSIDIARIES
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 September 30, 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 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 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 no longer rely on these exemptions, 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 September 30, 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. 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. 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 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
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CLEARWIRE CORPORATION AND SUBSIDIARIES
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:
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quarterly variations in our results of operations or those of our competitors, either alone or in
comparison to analysts expectations; |
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announcements by us or our competitors of acquisitions, new products, significant contracts,
commercial relationships or capital commitments; |
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announcements by us regarding the entering into, or
termination of, material transactions; |
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disruption to our operations or those of other companies critical to our network operations; |
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the emergence of new competitors or new technologies; |
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our ability to develop and market new and enhanced products on a timely basis; |
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seasonal or other variations in our subscriber base; |
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commencement of, or our involvement in, litigation; |
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availability of additional spectrum; |
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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; |
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changes in our board or management; |
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adoption of new or different accounting standards; |
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changes in governmental regulations or the status of our regulatory approvals; |
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changes in earnings estimates or recommendations by securities analysts; |
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announcements regarding mobile WiMAX and other technical standards; and |
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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.
44
CLEARWIRE CORPORATION AND SUBSIDIARIES
Item 6. Exhibits
EXHIBIT INDEX
3.1 |
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Fourth Amended and Restated Certificate of Incorporation of Clearwire Corporation.* |
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3.2 |
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Amended and Restated Bylaws.* |
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4.1 |
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Form of stock certificate for Class A common stock.* |
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4.2 |
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Amended and Restated Stockholders Agreement dated March 16, 2004 among Clearwire Corporation and the
parties thereto.* |
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4.3 |
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Registration Rights Agreement dated November 13, 2003 among Flux U.S. Corporation, Clearwire Holdings,
Inc. and Hispanic Information and Telecommunications Network, Inc.* |
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4.4 |
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Registration Rights Agreement dated March 16, 2004 among Clearwire Corporation and the parties thereto.* |
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4.5 |
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Registration Rights Agreement dated August 5, 2005 among Clearwire Corporation and certain buyers of
the Senior Secured Notes.* |
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4.6 |
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Investor Rights Agreement dated August 29, 2006 among Clearwire Corporation, Intel Pacific, Inc. and
Motorola, Inc.* |
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4.7 |
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Securities Purchase Agreement dated August 5, 2005 among Clearwire Corporation and the buyers of the
Senior Secured Notes, as amended February 16, 2006.* |
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4.8 |
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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.** |
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4.10 |
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Form of Warrant.* |
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10.1 |
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Form of Stock Option Agreement |
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10.2 |
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Form of Restricted Stock Unit Award Agreement |
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31.1 |
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Certification of Chief Executive Officer required by Rule 13a-14(b) or Rule 15d-14(a) and Section 302
of the Sarbanes Oxley Act of 2002. |
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31.2 |
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Certification of Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(a) and Section 302
of the Sarbanes Oxley Act of 2002. |
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32.1 |
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Certification of Chief Executive Officer required by Rule 13a-14(b) or Rule 15d-14(b) and Section 906
of the Sarbanes Oxley Act of 2002, 18 U.S.C. Section 1350. |
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32.2 |
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Certification of Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) and Section 906
of the Sarbanes Oxley Act of 2002, 18 U.S.C. Section 1350. |
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* |
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Incorporated by Reference to Clearwires Registration Statement on Form S-1 (Registration No. 333-139468), as
amended. |
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** |
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Incorporated by reference to Clearwires Registration Statement on Form S-1 (Registration No. 333-144357) as amended. |
45
CLEARWIRE CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements 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.
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CLEARWIRE CORPORATION
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Date: November 14, 2007 |
/s/ JOHN A. BUTLER
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John A. Butler |
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Chief Financial Officer |
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46