LEAP-Sep 2012 Q3-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-Q
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(Mark One) |
R | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the quarterly period ended September 30, 2012 |
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the transition period from to |
Commission File Number: 001-34865
Leap Wireless International, Inc.
(Exact name of registrant as specified in its charter)
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Delaware | 33-0811062 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
5887 Copley Drive, San Diego, CA | 92111 |
(Address of Principal Executive Offices)
| (Zip Code)
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(858) 882-6000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
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 R No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes R No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer R | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o |
| (Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No R
The number of shares outstanding of the registrant's common stock on October 30, 2012 was 79,146,455.
LEAP WIRELESS INTERNATIONAL, INC.
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended September 30, 2012
TABLE OF CONTENTS
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PART I - FINANCIAL INFORMATION | |
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PART II - OTHER INFORMATION | |
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PART I
FINANCIAL INFORMATION
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Item 1. | Financial Statements |
LEAP WIRELESS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
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| | | | | | | |
| September 30, 2012 | | December 31, 2011 |
| (Unaudited) | | |
Assets | | | |
Cash and cash equivalents | $ | 446,362 |
| | $ | 345,243 |
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Short-term investments | 176,672 |
| | 405,801 |
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Inventories | 67,823 |
| | 116,957 |
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Deferred charges | 45,090 |
| | 57,979 |
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Other current assets | 159,270 |
| | 134,457 |
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Total current assets | 895,217 |
| | 1,060,437 |
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Property and equipment, net | 1,870,270 |
| | 1,957,374 |
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Wireless licenses | 1,788,363 |
| | 1,788,970 |
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Assets held for sale (Note 8) | 186,467 |
| | 204,256 |
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Goodwill (Note 2) | 31,886 |
| | 31,886 |
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Intangible assets, net | 28,283 |
| | 41,477 |
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Other assets | 67,663 |
| | 68,290 |
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Total assets | $ | 4,868,149 |
| | $ | 5,152,690 |
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Liabilities and Stockholders' Equity | | | |
Accounts payable and accrued liabilities | $ | 321,874 |
| | $ | 460,278 |
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Current maturities of long-term debt | — |
| | 21,911 |
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Other current liabilities | 250,770 |
| | 256,357 |
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Total current liabilities | 572,644 |
| | 738,546 |
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Long-term debt, net | 3,204,393 |
| | 3,198,749 |
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Deferred tax liabilities | 340,147 |
| | 333,804 |
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Other long-term liabilities | 176,507 |
| | 172,366 |
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Total liabilities | 4,293,691 |
| | 4,443,465 |
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Redeemable non-controlling interests | 69,905 |
| | 95,910 |
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Commitments and contingencies (Note 12) |
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Stockholders' equity: | | | |
Preferred stock - authorized 10,000,000 shares, $.0001 par value; no shares issued and outstanding | — |
| | — |
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Common stock - authorized 160,000,000 shares, $.0001 par value; 79,213,684 and 78,924,049 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively | 8 |
| | 8 |
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Additional paid-in capital | 2,180,105 |
| | 2,175,436 |
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Accumulated deficit | (1,674,870 | ) | | (1,561,417 | ) |
Accumulated other comprehensive loss | (690 | ) | | (712 | ) |
Total stockholders' equity | 504,553 |
| | 613,315 |
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Total liabilities and stockholders' equity | $ | 4,868,149 |
| | $ | 5,152,690 |
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See accompanying notes to condensed consolidated financial statements.
LEAP WIRELESS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited and in thousands, except per share data)
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
Revenues: | | | | | | | |
Service revenues | $ | 722,022 |
| | $ | 717,296 |
| | $ | 2,247,305 |
| | $ | 2,099,794 |
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Equipment revenues | 51,950 |
| | 45,983 |
| | 139,058 |
| | 203,937 |
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Total revenues | 773,972 |
| | 763,279 |
| | 2,386,363 |
| | 2,303,731 |
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Operating expenses: | | | | | | | |
Cost of service (exclusive of items shown separately below) | 266,401 |
| | 255,899 |
| | 784,267 |
| | 736,714 |
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Cost of equipment | 203,846 |
| | 190,364 |
| | 623,366 |
| | 602,836 |
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Selling and marketing | 88,111 |
| | 79,895 |
| | 260,912 |
| | 276,908 |
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General and administrative | 85,997 |
| | 83,899 |
| | 270,588 |
| | 271,387 |
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Depreciation and amortization | 161,821 |
| | 144,904 |
| | 462,847 |
| | 407,715 |
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Impairments and other charges (Note 6) | 14,753 |
| | 23,693 |
| | 14,753 |
| | 24,324 |
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Total operating expenses | 820,929 |
| | 778,654 |
| | 2,416,733 |
| | 2,319,884 |
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Gain (loss) on sale or disposal of assets, net | 128,366 |
| | (678 | ) | | 127,565 |
| | (5,673 | ) |
Operating income (loss) | 81,409 |
| | (16,053 | ) | | 97,195 |
| | (21,826 | ) |
Equity in net income (loss) of investees, net | (203 | ) | | 764 |
| | (69 | ) | | 2,953 |
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Interest income | 62 |
| | 59 |
| | 119 |
| | 182 |
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Interest expense | (67,308 | ) | | (67,028 | ) | | (201,333 | ) | | (187,770 | ) |
Other expense, net | — |
| | 32 |
| | — |
| | — |
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Income (loss) before income taxes | 13,960 |
| | (82,226 | ) | | (104,088 | ) | | (206,461 | ) |
Income tax benefit (expense) | 12,908 |
| | (11,899 | ) | | (9,365 | ) | | (32,546 | ) |
Net income (loss) | 26,868 |
| | (94,125 | ) | | (113,453 | ) | | (239,007 | ) |
Accretion of redeemable non-controlling interests and distributions, net of tax | (1,853 | ) | | 25,295 |
| | (1,561 | ) | | 8,755 |
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Net income (loss) attributable to common stockholders | $ | 25,015 |
| | $ | (68,830 | ) | | $ | (115,014 | ) | | $ | (230,252 | ) |
Income (loss) per share attributable to common stockholders: | | | | | | | |
Basic | $ | 0.32 |
| | $ | (0.90 | ) | | $ | (1.49 | ) | | $ | (3.01 | ) |
Diluted | $ | 0.32 |
| | $ | (0.90 | ) | | $ | (1.49 | ) | | $ | (3.01 | ) |
Shares used in per share calculations: | | | | | | | |
Basic | 77,402 |
| | 76,537 |
| | 77,213 |
| | 76,470 |
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Diluted | 77,524 |
| | 76,537 |
| | 77,213 |
| | 76,470 |
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Other comprehensive income (loss): | | | | | | | |
Net income (loss) | $ | 26,868 |
| | $ | (94,125 | ) | | $ | (113,453 | ) | | $ | (239,007 | ) |
Net unrealized holding gains (losses) on investments and other | 11 |
| | (9 | ) | | 23 |
| | — |
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Comprehensive income (loss) | $ | 26,879 |
| | $ | (94,134 | ) | | $ | (113,430 | ) | | $ | (239,007 | ) |
See accompanying notes to condensed consolidated financial statements.
LEAP WIRELESS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)
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| | | | | | | |
| Nine Months Ended September 30, |
| 2012 | | 2011 |
Operating activities: | | | |
Net cash provided by operating activities | $ | 149,025 |
| | $ | 268,134 |
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Investing activities: | | | |
Acquisition of a business | — |
| | (850 | ) |
Purchases of property and equipment | (371,558 | ) | | (289,304 | ) |
Change in prepayments for purchases of property and equipment | (1,940 | ) | | (2,281 | ) |
Purchases of wireless licenses and spectrum clearing costs | (3,625 | ) | | (3,535 | ) |
Proceeds from sales of wireless licenses and operating assets, net | 154,021 |
| | 1,887 |
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Purchases of investments | (268,854 | ) | | (521,909 | ) |
Sales and maturities of investments | 497,762 |
| | 214,726 |
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Dividend received from equity investee | — |
| | 11,606 |
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Change in restricted cash | (760 | ) | | (920 | ) |
Net cash provided by (used in) investing activities | 5,046 |
| | (590,580 | ) |
Financing activities: | | | |
Proceeds from the issuance of long-term debt | — |
| | 396,772 |
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Repayment of long-term debt | (21,911 | ) | | (15,089 | ) |
Payment of debt issuance costs | (296 | ) | | (7,177 | ) |
Proceeds from issuance of common stock | 483 |
| | 712 |
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Proceeds from sale lease-back financing | — |
| | 25,815 |
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Payments made to joint venture partners | (27,566 | ) | | (2,523 | ) |
Other | (3,662 | ) | | (2,115 | ) |
Net cash provided by (used in) financing activities | (52,952 | ) | | 396,395 |
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Net increase in cash and cash equivalents | 101,119 |
| | 73,949 |
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Cash and cash equivalents at beginning of period | 345,243 |
| | 350,790 |
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Cash and cash equivalents at end of period | $ | 446,362 |
| | $ | 424,739 |
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Supplementary disclosure of cash flow information: | | | |
Cash paid for interest | $ | (151,519 | ) | | $ | (123,653 | ) |
Cash paid for income taxes | $ | (3,943 | ) | | $ | (3,494 | ) |
See accompanying notes to condensed consolidated financial statements.
LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Leap Wireless International, Inc. ("Leap"), a Delaware corporation, together with its subsidiaries and consolidated joint ventures, is a wireless communications carrier that offers digital wireless services in the United States under the "Cricket®" brand. Cricket service offerings provide customers with unlimited nationwide wireless services for a flat rate without requiring a fixed-term contract or a credit check. The Company's primary service is Cricket Wireless, which offers customers unlimited nationwide voice and data services for a flat monthly rate. Leap conducts operations through its subsidiaries and has no independent operations or sources of income other than interest income and through dividends, if any, from its subsidiaries.
Cricket service is offered by Cricket Communications, Inc. ("Cricket"), a wholly-owned subsidiary of Leap. Cricket service is also offered in South Texas by the Company's joint venture, STX Wireless Operations, LLC ("STX Operations"), which Cricket controls through a 75.75% controlling membership interest in its parent company STX Wireless, LLC ("STX Wireless"). In addition, as of September 30, 2012, Cricket owned an 85% non-controlling membership interest in Savary Island Wireless, LLC ("Savary Island"), which holds wireless spectrum in the upper Midwest portion of the U.S. and which leases a portion of that spectrum to Cricket. On October 1, 2012, Cricket acquired the remaining 15% controlling membership interest in Savary Island that it did not previously own, and accordingly, Savary Island and its wholly owned subsidiaries became direct and indirect wholly owned subsidiaries of Cricket. For more information regarding the ventures described above, see "Note 8. Significant Acquisitions and Other Transactions."
Leap, Cricket and their subsidiaries and consolidated joint ventures are collectively referred to herein as the "Company."
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Note 2. | Basis of Presentation and Significant Accounting Policies |
Basis of Presentation
The accompanying interim condensed consolidated financial statements have been prepared without audit, in accordance with the instructions to Form 10-Q and therefore do not include all information and footnotes required by accounting principles generally accepted in the United States of America ("GAAP") for a complete set of financial statements. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2011. In the opinion of management, the unaudited financial information for the interim periods presented reflects all adjustments necessary for a fair presentation of the Company's results for the periods presented, with such adjustments consisting only of normal recurring adjustments. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results could differ from management's estimates and operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year.
Principles of Consolidation
The condensed consolidated financial statements include the operating results and financial position of Leap and its wholly-owned subsidiaries and consolidated joint ventures. As of September 30, 2012, the Company consolidated its non-controlling interest in Savary Island in accordance with the authoritative guidance for the consolidation of variable interest entities because Savary Island was a variable interest entity and, among other things, the Company had an agreement with Savary Island's other member which established a specified purchase price in the event that the member exercised its right to sell its membership interest to the Company. Subsequent to September 30, 2012, Savary Island became a wholly owned subsidiary of the Company. The Company consolidates STX Wireless in accordance with the authoritative guidance for consolidations based on the voting interest model. All intercompany accounts and transactions have been eliminated in the condensed consolidated financial statements.
Segment and Geographic Data
The Company operates in a single operating segment and a single reporting unit as a wireless communications carrier that offers digital wireless services in the United States. As of and for the three and nine months ended September 30, 2012 and 2011, all of the Company's revenues and long-lived assets related to operations in the United States.
Revenues
The Company's business revenues principally arise from the sale of wireless services, devices (handsets and broadband modems) and accessories. Wireless services are provided primarily on a month-to-month basis. The Company's customers are required to pay for their service in advance and the Company does not require customers to sign fixed-term contracts or pass a credit check. Service revenues are recognized only after payment has been received and services have been rendered.
When the Company activates service for a new customer, it often sells that customer a device along with a period of service. In accordance with the authoritative guidance for revenue arrangements with multiple deliverables, the sale of a device along with service constitutes a multiple element arrangement. Under this guidance, once a company has determined the best estimate of selling price of the elements in the sales transaction, the total consideration received from the customer must be allocated among those elements on a relative selling price basis. Applying the guidance to these transactions results in the Company recognizing the total consideration received, less amounts allocated to the wireless service period (generally the customer's monthly service plan), as equipment revenue.
Amounts allocated to equipment revenues and related costs from the sale of devices are recognized when service is activated by new customers. Revenues and related costs from the sale of devices and accessories to existing customers are recognized at the point of sale. The costs of devices and accessories sold are recorded in cost of equipment. In addition to devices that the Company sells directly to its customers at Cricket-owned stores, the Company sells devices to third-party dealers, including nationwide retailers. These dealers then sell the devices to the ultimate Cricket customer, similar to the sale made at a Cricket-owned store. Sales of devices to third-party dealers are recognized as equipment revenues only when service is activated by customers, since the level of price reductions and commissions ultimately available to such dealers is not reliably estimable until the devices are sold by such dealers to customers. Thus, revenues from devices sold to third-party dealers are recorded as deferred equipment revenue and the related costs of the devices are recorded as deferred charges upon shipment of the devices by the Company. The deferred charges are recognized as equipment costs when the related equipment revenue is recognized, which occurs when service is activated by the customer.
The Company has entered into an arrangement with a third-party logistics provider to manage the planning, purchasing and fulfillment of handsets and other devices. If fully implemented, the arrangement could result in the Company's third-party dealers, including nationwide retailers, purchasing handsets and other devices directly from the logistics provider, and the Company, in most cases, would not hold title to, or have ownership in, the related device inventory shipped to its dealers. As a result, the Company would not record deferred equipment revenues or deferred charges on its balance sheet related to devices purchased by third-party dealers. Therefore, upon customer activation of these handsets and other devices, the Company would no longer record equipment revenue or cost of equipment. Amounts paid to the logistics provider would be recorded as deferred costs upon shipment of devices to the dealers and would be recognized in cost of equipment when service is activated by the customer. Handsets and other devices purchased by company-owned stores would continue to be accounted for as inventory until sold and activated by the customers, at which time equipment revenue and the related cost of equipment will be recognized. The Company intends to finalize its implementation plans and certain other aspects of the arrangement with the logistics provider during the first half of 2013.
Through a third-party provider, the Company's customers may elect to participate in an extended warranty program for devices they purchase. The Company recognizes revenue on replacement devices sold to its customers under the program when the customer purchases the device.
The Company participates in the federal government's Lifeline program and is designated as an eligible telecommunications carrier in certain states in which it provides wireless services. Under this program, the Company offers discounted wireless services to qualified customers and generally receives reimbursement for a portion of the subsidized services. The Company recognizes revenue under this program only after payment has been received from the customer, amounts eligible for reimbursement have been determined and services have been rendered.
Sales incentives offered to customers and commissions and sales incentives offered to the Company's third-party dealers are recognized as a reduction of revenue when the related service or equipment revenue is recognized. Customers have limited rights to return devices and accessories based on time and/or usage, and customer returns of devices and accessories have historically been insignificant.
Amounts billed by the Company in advance of customers' wireless service periods are not reflected in accounts receivable or deferred revenue since collectability of such amounts is not reasonably assured. Deferred revenue consists primarily of cash
received from customers in advance of their service period and deferred equipment revenue related to devices sold to third-party dealers.
Universal Service Fund, E-911 and other telecommunications-related regulatory fees are assessed by various federal and state governmental agencies in connection with the services that the Company provides to its customers. The service plans the Company currently offers are "all-inclusive" of telecommunications and regulatory fees, in that the Company does not separately bill and collect amounts owed and remitted to government agencies from its customers. For the Company's legacy service plans, which are not "all-inclusive," the Company separately bills and collects from its customers amounts owed and remitted to government agencies. Regulatory fees and telecommunications taxes separately billed and collected from the Company's customers are recorded in service revenues. Amounts owed to government agencies are recorded in cost of service. During the three and nine months ended September 30, 2012, the total amount of regulatory fees and telecommunications taxes separately billed and collected from customers and recorded in service revenues was $1.5 million and $8.3 million, respectively. During the three and nine months ended September 30, 2011, the total amount of regulatory fees and telecommunications taxes separately billed and collected from customers and recorded in service revenues was $6.4 million and $27.3 million, respectively. Sales, use and excise taxes for all service plans are reported on a net basis.
Restricted Cash, Cash Equivalents and Short-Term Investments
The Company has set aside certain amounts of cash, cash equivalents and short term investments to satisfy certain contractual obligations and has classified such amounts as restricted in its condensed consolidated balance sheets. Restricted cash, cash equivalents and short-term investments are included in either other current assets or other assets, depending on the nature of the underlying contractual obligation. As of September 30, 2012, the Company had approximately $3.6 million and $9.5 million of restricted cash, cash equivalents and short-term investments included in other current assets and other assets, respectively. As of December 31, 2011, the Company had approximately $3.6 million and $8.8 million of restricted cash, cash equivalents and short-term investments included in other current assets and other assets, respectively.
Goodwill
The Company records the excess of the purchase price over the fair value of net assets acquired in a business combination as goodwill. As of September 30, 2012 and December 31, 2011, goodwill of $31.9 million primarily represented the excess of the purchase price over the fair value of the net assets acquired by STX Wireless in connection with the formation of the joint venture. For more information regarding the joint venture, see "Note 8. Significant Acquisitions and Other Transactions."
Impairment of Long-Lived Assets
The Company assesses potential impairments to its long-lived assets, including property and equipment and certain intangible assets, when there is evidence that events or changes in circumstances indicate that their respective carrying values may not be recoverable. An impairment loss may be required to be recognized when the undiscounted cash flows expected to be generated by a long-lived asset (or group of such assets) are less than its carrying value. Any required impairment loss would be measured as the amount by which the asset’s carrying value exceeds its fair value and would be recorded as a reduction in the carrying value of the related asset and charged to results of operations. There were no events or circumstances that occurred during the three and nine months ended September 30, 2012 or September 30, 2011 that indicated that the carrying value of any long-lived assets may not be recoverable.
Impairment of Indefinite-Lived Intangible Assets
The Company assesses potential impairments to its indefinite-lived intangible assets, including wireless licenses and goodwill, on an annual basis or when there is evidence that events or changes in circumstances indicate an impairment condition may exist. In addition, on a quarterly basis, the Company evaluates the triggering event criteria outlined in the authoritative guidance for goodwill and other intangible assets to determine whether events or changes in circumstances indicate that an impairment condition may exist. The Company's annual impairment test is conducted each year during the third quarter.
Wireless Licenses
As of September 30, 2012 and December 31, 2011, the carrying value of the Company's and Savary Island's wireless licenses (excluding assets held for sale) was $1.8 billion. Wireless licenses to be disposed of by sale are carried at the lower of their carrying value or fair value less costs to sell. As of September 30, 2012, wireless licenses with carrying values and fair values of $186.5 million and $293.2 million, respectively, were classified as assets held for sale. Additionally, as of December 31, 2011, wireless
licenses with carrying values and fair values of $204.3 million and $338.1 million, respectively, were classified as assets held for sale. These related transactions are more fully described in "Note 8. Significant Acquisitions and Other Transactions."
For purposes of testing impairment, the Company's wireless licenses in its operating markets are combined into a single unit of account because management believes that utilizing these wireless licenses as a group represents the highest and best use of the assets, and the value of the wireless licenses would not be significantly impacted by a sale of one or a portion of the wireless licenses, among other factors. Savary Island's wireless licenses cover geographic areas that include Cricket operating markets, and as such, are classified as operating wireless licenses for purposes of the Company's impairment test. The Company's non-operating licenses are tested for impairment on an individual basis because these licenses are not functioning as part of a group with licenses in the Company's operating markets. As of September 30, 2012, the carrying values of the Company's and Savary Island's operating and non-operating wireless licenses were $1,745.7 million and $42.6 million, respectively.
An impairment loss would be recognized on the Company's and Savary Island's operating wireless licenses when the aggregate fair value of the wireless licenses is less than their aggregate carrying value and is measured as the amount by which the licenses' aggregate carrying value exceeds their aggregate fair value. An impairment loss would be recognized on the Company's non-operating wireless licenses when the fair value of a wireless license is less than its carrying value and is measured as the amount by which the license's carrying value exceeds its fair value. Any required impairment loss would be recorded as a reduction in the carrying value of the relevant wireless licenses and charged to results of operations. As more fully described below, the fair value of the Company's and Savary Island's wireless licenses was determined using Level 3 inputs in accordance with the authoritative guidance for fair value measurements.
The valuation method the Company uses to determine the fair value of its and Savary Island's wireless licenses is the market approach. Under this method, the Company determines fair value by reviewing sales prices of other wireless licenses of similar size and type that have been recently sold through government auctions and private transactions. As part of this market-level analysis, the fair value of each wireless license is also evaluated and adjusted for developments or changes in legal, regulatory and technical matters, and for demographic and economic factors, such as population size, unemployment rates, composition, growth rate and density, household and disposable income, and composition and concentration of the market's workforce in industry sectors identified as wireless-centric (for example, real estate, transportation, professional services, agribusiness, finance and insurance).
In connection with the Company's 2012 annual impairment test, the aggregate fair value and carrying value of the Company's and Savary Island's operating wireless licenses were $2,415.0 million and $1,745.7 million, respectively, as of September 30, 2012. No impairment charges were recorded during the three and nine months ended September 30, 2012 or September 30, 2011 with respect to the Company's and Savary Island's operating wireless licenses as the aggregate fair value of these licenses exceeded their aggregate carrying value as of such dates. If the fair value of the Company's and Savary Island's operating wireless licenses had declined by 10%, the Company would not have recognized any impairment loss.
In connection with the Company's 2012 annual impairment test, the aggregate fair value and carrying value of the Company's non-operating wireless licenses were $77.9 million and $42.6 million, respectively, as of September 30, 2012. The Company did not record any impairment charges during the three and nine months ended September 30, 2012 to reduce the carrying value of any non-operating wireless license to its estimated fair value. If the fair value of the Company's non-operating wireless licenses had each declined by 10%, the Company would have recognized an impairment loss of approximately $0.1 million. The Company recorded an impairment charge of $0.4 million during the three and nine months ended September 30, 2011 to reduce the carrying value of certain non-operating wireless licenses to their estimated fair values.
Goodwill
The Company assesses its goodwill for impairment annually at the reporting unit level by applying a fair value test. This fair value test involves a two-step process. The first step is to compare the book value of the Company's net assets to their fair value. If the fair value is determined to be less than book value, a second step is performed to measure the amount of the impairment, if any.
In connection with the annual test in 2012, the Company based its determination of fair value primarily upon its average market capitalization for the month of August 2012, plus a control premium. Average market capitalization is calculated based upon the average number of shares of Leap common stock outstanding during such month and the average closing price of Leap common stock during such month. The Company considered the month of August to be an appropriate period over which to measure average market capitalization in 2012 because trading prices during that period reflected market reaction to the Company's most recently announced financial and operating results, announced early in the month of August.
In conducting the annual impairment test during the third quarter of 2012, the Company applied a control premium of 30% to its average market capitalization. The Company believes that consideration of a control premium is customary in determining fair value and is contemplated by the applicable accounting guidance. The Company believes that its consideration of a control premium was appropriate because it believes that its market capitalization does not fully capture the fair value of its business as a whole or the additional amount an assumed purchaser would pay to obtain a controlling interest in the Company. The Company determined the amount of the control premium as part of its third quarter 2012 testing based upon relevant transactional experience and an assessment of market, economic and other factors. Depending on the circumstances, the actual amount of any control premium realized in any transaction involving the Company could be higher or lower than the control premium the Company applied.
As of September 30, 2012, the carrying value of the Company’s goodwill was $31.9 million. Based upon its annual impairment test conducted during the third quarter of 2012, the value of the Company’s net assets as of August 31, 2012 was $527.5 million and the fair value of the Company, based upon its average market capitalization during the month of August and an assumed control premium of 30%, was $573.5 million. As such, the Company determined that no impairment condition existed and was not required to perform the second step of the goodwill impairment test.
The closing price of Leap common stock was $6.81 on September 28, 2012 and Leap's market capitalization was above the Company's book value as of such date. Since that time, the closing price of Leap common stock has ranged from a high of $7.59 per share to a low of $5.18 per share. If the price of Leap common stock continues to trade at or near current levels or certain triggering events were to occur, the Company may be required to perform the second step of its goodwill impairment test on an interim basis to determine the fair value of its net assets, which may require the Company to recognize a non-cash impairment charge for some or all of the $31.9 million carrying value of its goodwill.
Recent Accounting Pronouncements
In July 2012, the FASB issued Accounting Standards Update No. 2012-02, "Testing Indefinite-Lived Intangible Assets for Impairment" ("ASU 2012-02"). ASU 2012-02 simplifies the requirements for testing for indefinite-lived intangible assets other than goodwill and permits an entity to first assess qualitative factors to determine whether it is necessary to perform a quantitative fair value test. This new guidance is effective for the Company beginning in the first quarter of 2013 and will be applied prospectively. The Company anticipates that the adoption of this standard will not have a material impact on the Company or its condensed consolidated financial statements.
| |
Note 3. | Supplementary Balance Sheet Information (in thousands): |
|
| | | | | | | |
| September 30, 2012 | | December 31, 2011 |
| | | |
Other current assets: | | | |
Accounts receivable, net(1) | $ | 103,624 |
| | $ | 86,736 |
|
Prepaid expenses | 38,339 |
| | 28,327 |
|
Other | 17,307 |
| | 19,394 |
|
| $ | 159,270 |
| | $ | 134,457 |
|
Property and equipment, net(2): | | | |
Network equipment | $ | 3,382,571 |
| | $ | 3,246,027 |
|
Computer hardware and software | 514,538 |
| | 455,873 |
|
Construction-in-progress | 165,358 |
| | 99,705 |
|
Other | 109,243 |
| | 111,510 |
|
| 4,171,710 |
| | 3,913,115 |
|
Accumulated depreciation | (2,301,440 | ) | | (1,955,741 | ) |
| $ | 1,870,270 |
| | $ | 1,957,374 |
|
Intangible assets, net: | | | |
Customer relationships | $ | 50,435 |
| | $ | 57,782 |
|
Trademarks | 37,000 |
| | 37,000 |
|
| 87,435 |
| | 94,782 |
|
Accumulated amortization of customer relationships | (37,569 | ) | | (33,704 | ) |
Accumulated amortization of trademarks | (21,583 | ) | | (19,601 | ) |
| $ | 28,283 |
| | $ | 41,477 |
|
Accounts payable and accrued liabilities: | | | |
Trade accounts payable | $ | 138,989 |
| | $ | 306,881 |
|
Accrued payroll and related benefits | 75,704 |
| | 66,229 |
|
Other accrued liabilities | 107,181 |
| | 87,168 |
|
| $ | 321,874 |
| | $ | 460,278 |
|
Other current liabilities: | | | |
Deferred service revenue(3) | $ | 102,950 |
| | $ | 113,768 |
|
Deferred equipment revenue(4) | 25,328 |
| | 43,793 |
|
Accrued sales, telecommunications, property and other taxes payable | 3,576 |
| | 22,380 |
|
Accrued interest | 98,006 |
| | 58,553 |
|
Other | 20,910 |
| | 17,863 |
|
| $ | 250,770 |
| | $ | 256,357 |
|
____________
| |
(1) | Accounts receivable, net, consists primarily of (i) amounts billed to third-party dealers for devices and accessories, (ii) amounts due from the Company's third-party logistics provider for devices sold from the Company to the supplier, (iii) amounts due from the federal government in connection with the Lifeline program, and (iv) amounts due from service providers related to interconnect and roaming agreements, net of an allowance for doubtful accounts. |
| |
(2) | As of September 30, 2012 and December 31, 2011, approximately $44.2 million and $32.3 million of assets were held by the Company under capital lease arrangements, respectively. Accumulated amortization relating to these assets totaled $21.4 million and $18.5 million as of September 30, 2012 and December 31, 2011, respectively. |
| |
(3) | Deferred service revenue consists primarily of cash received from customers in advance of their service period. |
| |
(4) | Deferred equipment revenue relates to devices sold to third-party dealers which have not yet been purchased and activated by customers. |
| |
Note 4. | Fair Value of Financial Instruments and Non-Financial Assets |
Fair Value of Financial Instruments
The authoritative guidance for fair value measurements defines fair value for accounting purposes, establishes a framework for measuring fair value and provides disclosure requirements regarding fair value measurements. The guidance defines fair value as an exit price, which is the price that would be received upon the sale of an asset or paid upon the transfer of a liability in an orderly transaction between market participants at the measurement date. The degree of judgment utilized in measuring the fair value of assets and liabilities generally correlates to the level of pricing observability. Assets and liabilities with readily available, actively quoted prices or for which fair value can be measured from actively quoted prices in active markets generally have more pricing observability and require less judgment in measuring fair value. Conversely, assets and liabilities that are rarely traded or not quoted have less pricing observability and are generally measured at fair value using valuation models that require more judgment. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency of the asset, liability or market and the nature of the asset or liability.
The Company has categorized its assets and liabilities measured at fair value into a three-level hierarchy in accordance with the authoritative guidance for fair value measurements. Assets and liabilities measured at fair value using quoted prices in active markets for identical assets or liabilities are generally categorized as Level 1; assets and liabilities measured at fair value using observable market-based inputs or unobservable inputs that are corroborated by market data for similar assets or liabilities are generally categorized as Level 2; and assets and liabilities measured at fair value using unobservable inputs that cannot be corroborated by market data are generally categorized as Level 3. Assets and liabilities presented at fair value in the Company's condensed consolidated balance sheets are generally categorized as follows:
| |
Level 1: | Quoted prices in active markets for identical assets or liabilities. The Company did not have any Level 1 assets or liabilities as of September 30, 2012 or December 31, 2011. |
| |
Level 2: | Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The Company's Level 2 assets as of September 30, 2012 and December 31, 2011 included its cash equivalents, its short-term investments in obligations of the U.S. government and government agencies and its short-term investments in commercial paper. |
| |
Level 3: | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Such assets and liabilities may have values determined using pricing models, discounted cash flow methodologies, or similar techniques, and include instruments for which the determination of fair value requires significant management judgment or estimation. The Company did not have any Level 3 assets or liabilities as of September 30, 2012 or December 31, 2011. |
The following tables set forth by level within the fair value hierarchy the Company's assets and liabilities that were recorded at fair value as of September 30, 2012 and December 31, 2011 (in thousands). As required by the guidance for fair value measurements, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Thus, assets and liabilities categorized as Level 3 may be measured at fair value using inputs that are observable (Levels 1 and 2) and unobservable (Level 3). Management's assessment of the significance of a particular input to the fair value measurement requires judgment, which may affect the valuation of assets and liabilities and their placement within the fair value hierarchy levels.
|
| | | | | | | | | | | | | | | |
| At Fair Value as of September 30, 2012 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| | | | | | | |
Assets: | | | | | | | |
Money market funds | $ | — |
| | $ | 66,590 |
| | $ | — |
| | $ | 66,590 |
|
Commercial paper | — |
| | 85,973 |
| | — |
| | 85,973 |
|
U.S. government or government agency securities | — |
| | 142,195 |
| | — |
| | 142,195 |
|
Total | $ | — |
| | $ | 294,758 |
| | $ | — |
| | $ | 294,758 |
|
|
| | | | | | | | | | | | | | | |
| At Fair Value as of December 31, 2011 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| | | | | | | |
Assets: | | | | | | | |
Money market funds | $ | — |
| | $ | 224,383 |
| | $ | — |
| | $ | 224,383 |
|
Commercial paper | — |
| | 165,202 |
| | — |
| | 165,202 |
|
U.S. government or government agency securities | — |
| | 293,610 |
| | — |
| | 293,610 |
|
Total | $ | — |
| | $ | 683,195 |
| | $ | — |
| | $ | 683,195 |
|
Assets in the tables above are reported on the condensed consolidated balance sheets as components of cash and cash equivalents, short-term investments, other current assets and other assets.
Unrealized gains (losses) are presented in accumulated other comprehensive loss within stockholders' equity in the condensed consolidated balance sheets. Realized gains (losses) are presented in other income (expense), net in the condensed consolidated statements of comprehensive income.
Cash Equivalents and Short-Term Investments
As of September 30, 2012 and December 31, 2011, all of the Company's short-term investments were debt securities with contractual maturities of less than one year and were classified as available-for-sale. The fair value of the Company's cash equivalents, short-term investments in obligations of the U.S. government and government agencies and its short-term investments in commercial paper is determined using observable market-based inputs for similar assets, which primarily include yield curves and time-to-maturity factors. Such investments are therefore considered to be Level 2 items.
Available-for-sale securities were comprised as follows as of September 30, 2012 and December 31, 2011 (in thousands):
|
| | | | | | | |
| As of September 30, 2012 |
| Cost | | Fair Value |
| | | |
Money market funds | $ | 66,590 |
| | $ | 66,590 |
|
Commercial paper | 85,973 |
| | 85,973 |
|
U.S. government or government agency securities | 142,195 |
| | 142,195 |
|
| $ | 294,758 |
| | $ | 294,758 |
|
|
| | | | | | | |
| As of December 31, 2011 |
| Cost | | Fair Value |
| | | |
Money market funds | $ | 224,383 |
| | $ | 224,383 |
|
Commercial paper | 165,201 |
| | 165,202 |
|
U.S. government or government agency securities | 293,626 |
| | 293,610 |
|
| $ | 683,210 |
| | $ | 683,195 |
|
Long-Term Debt
The Company reports its long-term debt obligations at amortized cost; however, for disclosure purposes, the Company is required to measure the fair value of outstanding debt on a recurring basis. The fair value of the Company's outstanding long-term debt is determined primarily by using quoted prices in active markets and was $3,293.4 million and $3,073.6 million as of September 30, 2012 and December 31, 2011, respectively. The Company's debt was considered to be a Level 1 item for disclosure purposes.
Assets Measured at Fair Value on a Nonrecurring Basis
As of September 30, 2012, there were no non-financial assets that were measured and recorded at fair value on a non-recurring basis. As of December 31, 2011, non-financial assets that were measured and recorded at fair value on a non-recurring basis consisted of non-operating wireless licenses in the amount of $9.1 million, the carrying value of which had been reduced to fair value during the three and nine months ended September 30, 2011, resulting in an impairment charge of $0.4 million.
| |
Note 5. | Long-Term Debt, net |
Long-term debt, net as of September 30, 2012 and December 31, 2011 was comprised of the following (in thousands):
|
| | | | | | | |
| September 30, 2012 | | December 31, 2011 |
| | | |
Convertible senior notes due 2014 | $ | 250,000 |
| | $ | 250,000 |
|
Unsecured senior notes due 2015 (1) | 300,000 |
| | 300,000 |
|
Non-negotiable promissory note due 2015 | — |
| | 21,911 |
|
Senior secured notes due 2016 | 1,100,000 |
| | 1,100,000 |
|
Unamortized discount on $1,100 million senior secured notes due 2016 | (25,272 | ) | | (29,601 | ) |
Unsecured senior notes due 2020 | 1,600,000 |
| | 1,600,000 |
|
Unamortized discount on $1,600 million unsecured senior notes due 2020 | (20,335 | ) | | (21,650 | ) |
| 3,204,393 |
| | 3,220,660 |
|
Current maturities of long-term debt | — |
| | (21,911 | ) |
| $ | 3,204,393 |
| | $ | 3,198,749 |
|
| |
(1) | As discussed further below, on October 10, 2012, Cricket entered into a $400 million senior secured term loan facility and in connection therewith issued a notice of redemption to redeem all of the unsecured senior notes due 2015 in accordance with the indenture governing the notes at a redemption price of 105% of the principal amount thereof, plus accrued and unpaid interest to the redemption date. |
Credit Agreement
Subsequent to the end of the quarter, on October 10, 2012, Cricket entered into a credit agreement (the "Credit Agreement") with respect to a $400 million senior secured term loan facility, which was fully drawn at closing and matures in October 2019. Outstanding borrowings under the Credit Agreement bear interest at the London Interbank Offered Rate ("LIBOR") plus 3.50% (subject to a LIBOR floor of 1.25% per annum) or at the bank base rate plus 2.50% (subject to a base rate floor of 2.25% per annum), as selected by Cricket. Borrowings under the Credit Agreement must be repaid in 27 quarterly installments of $1.0 million each, commencing on March 31, 2013, followed by a final installment of $373.0 million at maturity. Net proceeds from the term loan facility will be used to redeem all of Cricket's $300 million in aggregate principal amount of outstanding 10.0% unsecured senior notes due 2015 and for general corporate purposes.
Borrowings under the Credit Agreement are guaranteed by Leap and each of its existing and future wholly owned domestic subsidiaries (other than Cricket, which is the borrower) that guarantees any indebtedness of Leap, Cricket or any subsidiary guarantor or that constitutes a "significant subsidiary" as defined in Regulation S-X under the Securities Act of 1933, as amended (subject to certain exceptions).
Borrowings under the Credit Agreement are effectively senior to all of Leap's, Cricket's and the guarantors' existing and future unsecured indebtedness (including Cricket's $1,900 million aggregate principal amount of unsecured senior notes and, in the case of Leap, Leap's $250 million aggregate principal amount of convertible senior notes), as well as to all of Leap's, Cricket's and the guarantors' obligations under any permitted junior lien debt that may be incurred in the future, in each case to the extent of the value of the collateral securing the obligations under the Credit Agreement.
Borrowings under the Credit Agreement are secured on a first-priority basis, equally and ratably with Cricket's 7.75% senior secured notes due 2016 and any future parity lien debt, by liens on substantially all of the present and future personal property of Leap, Cricket and the guarantors, except for certain excluded assets and subject to permitted liens (including liens on the collateral securing any future permitted priority debt). Under the Credit Agreement, Leap, Cricket and the guarantors are permitted to incur liens securing indebtedness for borrowed money in an aggregate principal amount outstanding (including the aggregate principal amount outstanding of the 7.75% senior secured notes due 2016) of up to the greater of $1,750 million and 3.5 times Leap's consolidated cash flow (excluding the consolidated cash flow of Cricket Music Holdco, LLC ("Cricket Music") (a wholly-owned subsidiary of Cricket that holds certain hardware, software and intellectual property relating to Cricket's Muve Music® service)) for the prior four fiscal quarters.
Borrowings under the Credit Agreement are effectively junior to all of Leap's, Cricket's and the guarantors' obligations under any permitted priority debt that may be incurred in the future (up to the lesser of 0.30 times Leap's consolidated cash flow (excluding the consolidated cash flow of Savary Island, STX Wireless and Cricket Music) for the prior four fiscal quarters and $300 million in aggregate principal amount outstanding), to the extent of the value of the collateral securing such permitted priority debt, as well as to existing and future liabilities of Leap's and Cricket's subsidiaries that are not guarantors (including Savary Island, STX Wireless and Cricket Music and their respective subsidiaries). In addition, borrowings under the Credit Agreement are senior in right of payment to any of Leap's, Cricket's and the guarantors' future subordinated indebtedness.
Cricket has the right to prepay borrowings under the Credit Agreement, in whole or in part, at any time without premium or penalty, except that prepayments in connection with a repricing transaction occurring on or prior to October 10, 2013 are subject to a prepayment premium of 1.00% of the principal amount of the borrowings so prepaid.
Under the Credit Agreement, Leap and its restricted subsidiaries are subject to certain limitations, including limitations on their ability to: incur additional debt or sell assets, make certain investments, grant liens and pay dividends and make certain other restricted payments. In addition, Cricket will be required to pay down the facility under certain circumstances if Leap and its restricted subsidiaries issue debt, sell assets or property, receive certain extraordinary receipts or generate excess cash flow (as defined in the Credit Agreement).
The Credit Agreement also provides for an event of default upon the occurrence of a change of control, which includes the acquisition of beneficial ownership of 35% or more of Leap's equity securities (other than a transaction where immediately after such transaction Leap will be a wholly owned subsidiary of a person of which no person or group is the beneficial owner of 35% or more of such person's voting stock), a sale of all or substantially all of the assets of Leap and its restricted subsidiaries and a change in a majority of the members of Leap's board of directors that is not approved by the board. If the indebtedness under the Credit Agreement was accelerated prior to maturity as a result of such change of control, this would give rise to an event of default under the indentures governing the Company's secured and unsecured senior notes and convertible notes.
Senior Notes
Convertible Senior Notes Due 2014
In June 2008, Leap issued $250 million of unsecured convertible senior notes due 2014 in a private placement to institutional buyers. The notes bear interest at the rate of 4.50% per year, payable semi-annually in cash in arrears, which interest payments commenced in January 2009. The notes are Leap's general unsecured obligations and rank equally in right of payment with all of Leap's existing and future senior unsecured indebtedness and senior in right of payment to all indebtedness that is contractually subordinated to the notes. The notes are structurally subordinated to the existing and future claims of Leap's subsidiaries' creditors, including under the Credit Agreement and the secured and unsecured senior notes described above and below. The notes are effectively junior to all of Leap's existing and future secured obligations, including those under the Credit Agreement and the senior secured notes due 2016 described above and below, to the extent of the value of the assets securing such obligations.
Holders may convert their notes into shares of Leap common stock at any time on or prior to the third scheduled trading day prior to the maturity date of the notes, July 15, 2014. If, at the time of conversion, the applicable stock price of Leap common stock is less than or equal to approximately $93.21 per share, the notes will be convertible into 10.7290 shares of Leap common stock per $1,000 principal amount of the notes (referred to as the "base conversion rate"), subject to adjustment upon the occurrence of certain events. If, at the time of conversion, the applicable stock price of Leap common stock exceeds approximately $93.21 per share, the conversion rate will be determined pursuant to a formula based on the base conversion rate and an incremental share factor of 8.3150 shares per $1,000 principal amount of the notes, subject to adjustment.
Leap may be required to repurchase all outstanding notes in cash at a repurchase price of 100% of the principal amount of the notes, plus accrued and unpaid interest, if any, thereon to the repurchase date if (1) any person acquires beneficial ownership, directly or indirectly, of shares of Leap's capital stock that would entitle the person to exercise 50% or more of the total voting power of all of Leap's capital stock entitled to vote in the election of directors, (2) Leap (i) merges or consolidates with or into any other person, another person merges with or into Leap, or Leap conveys, sells, transfers or leases all or substantially all of its assets to another person or (ii) engages in any recapitalization, reclassification or other transaction in which all or substantially all of Leap common stock is exchanged for or converted into cash, securities or other property, in each case subject to limitations and excluding in the case of (1) and (2) any merger or consolidation where at least 90% of the consideration consists of shares of common stock traded on NYSE, ASE or NASDAQ, (3) a majority of the members of Leap's board of directors ceases to consist of individuals who were directors on the date of original issuance of the notes or whose election or nomination for election was previously approved by the board of directors, (4) Leap is liquidated or dissolved or holders of common stock approve any plan or proposal for its liquidation or dissolution or (5) shares of Leap common stock are not listed for trading on any of the New York
Stock Exchange, the NASDAQ Global Market or the NASDAQ Global Select Market (or any of their respective successors). Leap may not redeem the notes at its option.
Unsecured Senior Notes Due 2015
In June 2008, Cricket issued $300 million of 10.0% unsecured senior notes due 2015 in a private placement to institutional buyers. The notes bear interest at the rate of 10.0% per year, payable semi-annually in cash in arrears, which interest payments commenced in January 2009. The notes are guaranteed on an unsecured senior basis by Leap and each of its existing and future domestic subsidiaries (other than Cricket, which is the issuer of the notes) that guarantees indebtedness for borrowed money of Leap, Cricket or any subsidiary guarantor. The notes and the guarantees are Leap's, Cricket's and the guarantors' general senior unsecured obligations and rank equally in right of payment with all of Leap's, Cricket's and the guarantors' existing and future unsubordinated unsecured indebtedness. The notes and the guarantees are effectively junior to Leap's, Cricket's and the guarantors' existing and future secured obligations, including those under the Credit Agreement and the senior secured notes due 2016 described above and below, to the extent of the value of the assets securing such obligations, as well as to existing and future liabilities of Leap's and Cricket's subsidiaries that are not guarantors (including Savary Island, STX Wireless and Cricket Music and their respective subsidiaries). In addition, the notes and the guarantees are senior in right of payment to any of Leap's, Cricket's and the guarantors' future subordinated indebtedness.
The notes may be redeemed, in whole or in part, at any time at a redemption price of 105.0% and 102.5% of the principal amount thereof if redeemed during the twelve months beginning on July 15, 2012 and 2013, respectively, or at 100% of the principal amount if redeemed during the twelve months beginning on July 15, 2014 or thereafter, plus accrued and unpaid interest, if any, thereon to the redemption date. If a "change of control" occurs (which includes the acquisition of beneficial ownership of 35% or more of Leap's equity securities, a sale of all or substantially all of the assets of Leap and its restricted subsidiaries and a change in a majority of the members of Leap's board of directors that is not approved by the board), each holder of the notes may require Cricket to repurchase all of such holder's notes at a purchase price equal to 101% of the principal amount of the notes, plus accrued and unpaid interest, if any, thereon to the repurchase date.
Subsequent to the end of the quarter, Cricket issued a notice of redemption on October 10, 2012 to redeem all of the notes in accordance with the indenture governing the notes at a redemption price of 105% of the principal amount thereof, plus accrued and unpaid interest to the redemption date. The redemption date specified in the notice of redemption is November 9, 2012.
Non-Negotiable Promissory Note Due 2015
Cricket service was previously offered in greater Chicago and Southern Wisconsin by Denali Spectrum, LLC ("Denali"), an entity in which the Company owned an 82.5% non-controlling membership interest. In December 2010, Cricket purchased the remaining 17.5% controlling membership interest in Denali that it did not previously own. As part of the purchase price, Cricket issued a five-year $45.5 million non-negotiable promissory note in favor of the former holder of such controlling membership interest, which was scheduled to mature on December 27, 2015. Interest on the outstanding principal balance of the note varied from year to year at rates ranging from approximately 5.0% to 8.3% and compounded annually. Under the note, Cricket was required to make principal payments of $8.5 million per year, with the remaining principal balance and all accrued interest payable at maturity. Cricket's obligations under the note were secured on a first-lien basis by certain assets of Savary Island. As December 31, 2011, $21.9 million in principal amount of indebtedness was outstanding under the note.
As discussed in further detail in "Note 8. Significant Acquisitions and Other Transactions," on August 28, 2012 Savary Island sold Cellco Partnership d/b/a Verizon Wireless ("Verizon Wireless") certain AWS spectrum in various markets for $172 million pursuant to a license purchase agreement. A portion of the spectrum that Savary Island sold to Verizon Wireless was secured by a lien in favor of the holder of the non-negotiable promissory note. Accordingly, in connection with the closing of the Verizon Wireless transaction, the Company repaid the balance of the non-negotiable promissory note in full on August 28, 2012.
Senior Secured Notes Due 2016
In June 2009, Cricket issued $1,100 million of 7.75% senior secured notes due 2016 in a private placement to institutional buyers at an issue price of 96.134% of the principal amount, which notes were exchanged in December 2009 for identical notes that had been registered with the SEC. The $42.5 million discount to the net proceeds the Company received in connection with the issuance of the notes has been recorded in long-term debt, net in the condensed consolidated financial statements and is being accreted as an increase to interest expense over the term of the notes. At September 30, 2012, the effective interest rate on the notes was 7.93%, which includes the effect of the discount accretion.
The notes bear interest at the rate of 7.75% per year, payable semi-annually in cash in arrears, which interest payments commenced in November 2009. The notes are guaranteed on a senior secured basis by Leap and each of its existing and future domestic subsidiaries (other than Cricket, which is the issuer of the notes) that guarantees any indebtedness of Leap, Cricket or any subsidiary guarantor. The notes and the guarantees are Leap's, Cricket's and the guarantors' senior secured obligations and are equal in right of payment with all of Leap's, Cricket's and the guarantors' existing and future unsubordinated indebtedness.
The notes and the guarantees are effectively senior to all of Leap's, Cricket's and the guarantors' existing and future unsecured indebtedness (including Cricket's $1,900 million aggregate principal amount of unsecured senior notes and, in the case of Leap, Leap's $250 million aggregate principal amount of convertible senior notes), as well as to all of Leap's, Cricket's and the guarantors' obligations under any permitted junior lien debt that may be incurred in the future, in each case to the extent of the value of the collateral securing the notes and the guarantees.
The notes and the guarantees are secured on a first-priority basis, equally and ratably with the Credit Agreement and any future parity lien debt, by liens on substantially all of the present and future personal property of Leap, Cricket and the guarantors, except for certain excluded assets and subject to permitted liens (including liens on the collateral securing any future permitted priority debt). Under the senior secured notes indenture, Leap, Cricket and the guarantors are permitted to incur debt under existing and future secured credit facilities in an aggregate principal amount outstanding (including the aggregate principal amount outstanding of the notes and under the Credit Agreement) of up to the greater of $1,500 million and 2.5 times Leap's consolidated cash flow (excluding the consolidated cash flow of Savary Island, STX Wireless and Cricket Music) for the prior four fiscal quarters.
The notes and the guarantees are effectively junior to all of Leap's, Cricket's and the guarantors' obligations under any permitted priority debt that may be incurred in the future (up to the lesser of 0.30 times Leap's consolidated cash flow (excluding the consolidated cash flow of Savary Island, STX Wireless and Cricket Music) for the prior four fiscal quarters and $300 million in aggregate principal amount outstanding), to the extent of the value of the collateral securing such permitted priority debt, as well as to existing and future liabilities of Leap's and Cricket's subsidiaries that are not guarantors (including Savary Island, STX Wireless and Cricket Music and their respective subsidiaries). In addition, the notes and the guarantees are senior in right of payment to any of Leap's, Cricket's and the guarantors' future subordinated indebtedness.
The notes may be redeemed, in whole or in part, at any time, at a redemption price of 105.813%, 103.875% and 101.938% of the principal amount thereof if redeemed during the twelve months beginning on May 15, 2012, 2013 and 2014, respectively, or at 100% of the principal amount if redeemed during the twelve months beginning on May 15, 2015 or thereafter, plus accrued and unpaid interest thereon to the redemption date.
If a "change of control" occurs (which includes the acquisition of beneficial ownership of 35% or more of Leap's equity securities (other than a transaction where immediately after such transaction Leap will be a wholly-owned subsidiary of a person of which no person or group is the beneficial owner of 35% or more of such person's voting stock), a sale of all or substantially all of the assets of Leap and its restricted subsidiaries and a change in a majority of the members of Leap's board of directors that is not approved by the board), each holder of the notes may require Cricket to repurchase all of such holder's notes at a purchase price equal to 101% of the principal amount of the notes, plus accrued and unpaid interest thereon to the repurchase date.
Unsecured Senior Notes Due 2020
In November 2010, Cricket issued $1,200 million of 7.75% unsecured senior notes due 2020 in a private placement to institutional buyers at an issue price of 98.323% of the principal amount, which were exchanged in January 2011 for identical notes that had been registered with the SEC. The $20.1 million discount to the net proceeds the Company received in connection with the issuance of the notes has been recorded in long-term debt, net in the condensed consolidated financial statements and is being accreted as an increase to interest expense over the term of the notes. In May 2011, Cricket issued an additional $400 million of 7.75% unsecured senior notes due 2020 in a private placement to institutional buyers at an issue price of 99.193% of the principal amount, which were exchanged in November 2011 for identical notes that had been registered with the SEC. The $3.2 million discount to the net proceeds the Company received in connection with the issuance of the additional notes was recorded in long-term debt, net in the condensed consolidated financial statements and is being accreted as an increase to interest expense over the term of the notes. At September 30, 2012, the effective interest rates on the initial $1,200 million tranche and the additional $400 million tranche of the notes were 7.86% and 7.81%, respectively, both of which include the effect of the discount accretion.
The notes bear interest at the rate of 7.75% per year, payable semi-annually in cash in arrears, which interest payments commenced in April 2011. The notes are guaranteed on an unsecured senior basis by Leap and each of its existing and future domestic subsidiaries (other than Cricket, which is the issuer of the notes) that guarantees indebtedness of Leap, Cricket or any subsidiary guarantor. The notes and the guarantees are Leap's, Cricket's and the guarantors' general senior unsecured obligations and rank equally in right of payment with all of Leap's, Cricket's and the guarantors' existing and future unsubordinated unsecured
indebtedness. The notes and the guarantees are effectively junior to Leap's, Cricket's and the guarantors' existing and future secured obligations, including those under the Credit Agreement and the senior secured notes due 2016 described above, to the extent of the value of the assets securing such obligations, as well as to existing and future liabilities of Leap's and Cricket's subsidiaries that are not guarantors (including Savary Island, STX Wireless and Cricket Music and their respective subsidiaries). In addition, the notes and the guarantees are senior in right of payment to any of Leap's, Cricket's and the guarantors' future subordinated indebtedness.
Prior to October 15, 2013, Cricket may redeem up to 35% of the aggregate principal amount of the notes at a redemption price of 107.750% of the principal amount thereof, plus accrued and unpaid interest, if any, thereon to the redemption date, from the net cash proceeds of specified equity offerings. Prior to October 15, 2015, Cricket may redeem the notes, in whole or in part, at a redemption price equal to 100% of the principal amount thereof plus the applicable premium and any accrued and unpaid interest, if any, thereon to the redemption date. The applicable premium is calculated as the greater of (i) 1.0% of the principal amount of such notes and (ii) the excess of (a) the present value at such date of redemption of (1) the redemption price of such notes at October 15, 2015 plus (2) all remaining required interest payments due on such notes through October 15, 2015 (excluding accrued but unpaid interest to the date of redemption), computed using a discount rate equal to the Treasury Rate plus 50 basis points, over (b) the principal amount of such notes. The notes may be redeemed, in whole or in part, at any time on or after October 15, 2015, at a redemption price of 103.875%, 102.583% and 101.292% of the principal amount thereof if redeemed during the twelve months beginning on October 15, 2015, 2016 and 2017, respectively, or at 100% of the principal amount if redeemed during the twelve months beginning on October 15, 2018 or thereafter, plus accrued and unpaid interest, if any, thereon to the redemption date.
If a "change of control" occurs (which includes the acquisition of beneficial ownership of 35% or more of Leap's equity securities (other than a transaction where immediately after such transaction Leap will be a wholly-owned subsidiary of a person of which no person or group is the beneficial owner of 35% or more of such person's voting stock), a sale of all or substantially all of the assets of Leap and its restricted subsidiaries and a change in a majority of the members of Leap's board of directors that is not approved by the board), each holder of the notes may require Cricket to repurchase all of such holder's notes at a purchase price equal to 101% of the principal amount of the notes, plus accrued and unpaid interest, if any, thereon to the repurchase date.
Note 6. Impairments and Other Charges
Impairments and other charges consisted of the following (in thousands):
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2012 | | 2011 | | 2012 | | 2011 |
Severance | | $ | 14,753 |
| | $ | — |
| | $ | 14,753 |
| | $ | — |
|
Wireless license impairments (Note 2) | | — |
| | 377 |
| | — |
| | 377 |
|
Post-acquisition charges (Note 8) | | — |
| | 23,316 |
| | — |
| | 23,947 |
|
Impairments and other charges | | $ | 14,753 |
| | $ | 23,693 |
| | $ | 14,753 |
| | $ | 24,324 |
|
In the third quarter of 2012, the Company developed a plan to reduce administrative and corporate support costs through a reduction in personnel. As a result, the Company recorded a liability of approximately $14.8 million representing severance expense and related costs to implement the plan. The liability is recorded as a component of accounts payable and accrued liabilities within the condensed consolidated balance sheet as of September 30, 2012.
During the three and nine months ended September 30, 2011, the Company recorded an impairment charge of $0.4 million to reduce the carrying value of certain non-operating wireless licenses to their estimated fair values. See "Note 2. Basis of Presentation and Significant Accounting Policies" for additional information. Additionally, during the nine months ended September 30, 2011, the Company incurred $23.9 million of costs to integrate certain operating assets in South Texas. See "Note 8. Significant Acquisitions and Other Transactions."
| |
Note 7. | Basic and Diluted Earnings (Loss) Per Share |
Basic earnings (loss) per share is computed by dividing net income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income attributable to common stockholders by the sum of the weighted-average number of common shares outstanding during the period and the weighted-average number of dilutive common share equivalents outstanding during the period, using the treasury stock
method and the if-converted method, where applicable. Dilutive common share equivalents are comprised of stock options, restricted stock awards, deferred stock units, employee stock purchase rights and convertible senior notes.
The following table sets forth a reconciliation of the Company's computation of weighted-average number of dilutive common share equivalents outstanding to weighted-average number of common shares outstanding for the three and nine months ended September 30, 2012 and 2011 (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
Weighted-average shares - basic | 77,402 |
| | 76,537 |
| | 77,213 |
| | 76,470 |
|
Effect of dilutive securities: | | | | | | | |
Restricted stock awards | 115 |
| | — |
| | — |
| | — |
|
Deferred stock units | 7 |
| | — |
| | — |
| | — |
|
Weighted-average share equivalents - dilutive | 77,524 |
| | 76,537 |
| | 77,213 |
| | 76,470 |
|
| | | | | | | |
Basic earnings (loss) per share | $ | 0.32 |
| | $ | (0.90 | ) | | $ | (1.49 | ) | | $ | (3.01 | ) |
Diluted earnings (loss) per share | $ | 0.32 |
| | $ | (0.90 | ) | | $ | (1.49 | ) | | $ | (3.01 | ) |
During the three and nine months ended September 30, 2012, 8.2 million and 8.6 million common share equivalents, respectively, were excluded from the computation of diluted earnings (loss) per share as their effect was anti-dilutive.
During the three and nine months ended September 30, 2011, 7.5 million and 9.0 million common share equivalents, respectively, were excluded from the computation of diluted earnings (loss) per share as their effect was anti-dilutive.
| |
Note 8. | Significant Acquisitions and Other Transactions |
Other Transactions
On October 1, 2012, the Company and Savary Island assigned to various entities affiliated with T-Mobile USA, Inc. (collectively, "T-Mobile") spectrum in various markets in Alabama, Illinois, Missouri, Minnesota and Wisconsin in exchange for 10 MHz of additional AWS spectrum in Phoenix, Houston and two other Texas markets. The transactions also include intra-market exchanges between the Company and T-Mobile in Philadelphia, Wilmington, Atlantic City and various markets in Texas and New Mexico. The wireless licenses assigned by the Company and Savary Island to T-Mobile were classified as assets held for sale at their carrying value of $186.5 million in the Company's condensed consolidated balance sheet as of September 30, 2012. The Company expects to recognize a non-cash gain on the transaction of approximately $106 million related to the excess of the fair value over carrying value of the spectrum exchanged by the Company in this transaction. In connection with the closing of these transactions, the Company canceled approximately $14.1 million of indebtedness owed by Savary Island to Cricket.
On August 28, 2012, the Company acquired 12 MHz of 700 MHz A block spectrum in Chicago from Verizon Wireless for $204 million and sold Verizon Wireless excess PCS and AWS spectrum in various markets across the U.S. for $188 million. The Company recognized a net gain of $43.6 million in connection with these transactions.
Also on August 28, 2012, Savary Island sold AWS spectrum in various markets to Verizon Wireless for $172 million. Savary Island used substantially all of the proceeds from this sale to prepay a portion of its indebtedness to Cricket under the Savary Island Credit Agreement at the closing of the transaction. Savary Island recognized a net gain of $86.8 million in connection with the transaction.
On June 30, 2011, one of the Company's equity method investees declared a cash dividend and paid the dividend with funds borrowed under a third-party line of credit. The Company's share of the dividend based on its ownership percentage was $18.2 million and was received in full on July 1, 2011. In the condensed consolidated statement of cash flows for the nine months ended September 30, 2011, the Company presented the portion of the dividend equal to its share of accumulated profits (approximately $6.6 million) as cash from operating activities and the remainder (approximately $11.6 million) as cash from investing activities, as it represented a return of the Company's original investment.
On February 11, 2011, the Company entered into an agreement with Global Tower, LLC ("GTP") to sell certain of the Company's telecommunications tower assets in one or more closings. During the second and third quarters of 2011, the Company sold those telecommunications towers and related assets for approximately $25.8 million in cash. The transaction was structured as a sale lease-back financing, in which the Company entered into a 10-year lease agreement with GTP to continue the Company's commercial use of the towers. Accordingly, the Company recorded a capital lease obligation of $25.8 million, which was equal to the proceeds received from GTP.
STX Wireless Joint Venture
Cricket service is offered in South Texas by the Company's joint venture STX Operations, which Cricket controls through a 75.75% controlling membership interest in its parent company STX Wireless. The joint venture was created in October 2010 through the contribution by the Company and various entities doing business as Pocket Communications ("Pocket") of substantially all of their respective wireless spectrum and operating assets in the South Texas region. In exchange for such contributions, Cricket received a 75.75% controlling membership interest in STX Wireless and Pocket received a 24.25% non-controlling membership interest. Additionally, in connection with the transaction, the Company made payments to Pocket of approximately $40.7 million in cash.
The Company accounted for the acquisition of Pocket's business as a business purchase combination in accordance with the authoritative guidance for business combinations, with the Company as the acquirer. The consideration provided to Pocket in exchange for Pocket's business, was allocated to the tangible and intangible assets acquired and liabilities assumed by STX Wireless based on their fair values as of October 1, 2010. The excess of the purchase price over the fair values of the net assets acquired was recorded as goodwill.
Pocket's 24.25% non-controlling membership interest in STX Wireless was recorded in mezzanine equity as a component of redeemable non-controlling interests. The non-controlling interest was initially recognized as part of the purchase accounting in the amount of $51.5 million. The $51.5 million amount comprised the sum of Pocket's proportionate share (24.25%) of the fair value in the business contributed to the joint venture by Pocket plus its proportionate share (24.25%) of the net equity of the business contributed by Cricket.
Cricket controls and manages the joint venture under the terms of the amended and restated limited liability company agreement (the "STX LLC Agreement"). Under the STX LLC Agreement, Pocket has the right to put, and the Company has the right to call, all of Pocket's membership interests in STX Wireless, which rights are generally exercisable on or after April 1, 2014. In addition, in the event of a change of control of Leap, Pocket is obligated to sell to the Company all of its membership interests in STX Wireless. The purchase price for Pocket's membership interests would be equal to 24.25% of the product of Leap's enterprise value-to-revenue multiple for the four most recently completed fiscal quarters multiplied by the total revenues of STX Wireless and its subsidiaries over that same period, subject to adjustment in certain circumstances. In the event optional cash distributions are made to the members of STX Wireless pursuant to the STX LLC Agreement, the purchase price is reduced by the total amount of such distributions made to Pocket plus an amount equal to an 8.0% per annum return on each such distribution from the date it was made. The purchase price is payable in either cash, Leap common stock or a combination thereof, as determined by Cricket in its discretion (provided that, if permitted by Cricket's debt instruments, at least $25 million of the purchase price must be paid in cash). The Company has the right to deduct from or set off against the purchase price certain distributions made to Pocket, as well as any obligations owed to the Company by Pocket. Under the STX LLC Agreement, Cricket is permitted to purchase Pocket's membership interests in STX Wireless over multiple closings in the event that the block of shares of Leap common stock issuable to Pocket at the closing of the purchase would be greater than 9.9% of the total number of shares of Leap common stock then issued and outstanding.
To the extent the redemption price for Pocket's non-controlling membership interest varies from the value of Pocket's net interest in STX Wireless at any period (after the attribution of profits or losses), the value of such interest is accreted to the redemption price for such interest with a corresponding adjustment to additional paid-in capital. For the nine months ended September 30, 2012 and for the year ended December 31, 2011, the Company recorded a net accretion benefit of approximately $2.8 million and $8.9 million, respectively, to bring the carrying value of Pocket's membership interests in STX Wireless to its estimated redemption value.
In accordance with the STX LLC Agreement, STX Wireless made pro-rata tax distributions of $9.1 million and $3.0 million to Cricket and Pocket, respectively, in connection with their estimated tax liabilities resulting from STX Wireless' earnings for the nine months ended September 30, 2012. During the nine months ended September 30, 2011, STX Wireless made similar pro-rata tax distributions of $5.7 million and $1.7 million to Cricket and Pocket, respectively. The Company recorded these tax distributions to Pocket as an adjustment to additional paid-in-capital in the condensed consolidated balance sheets and as a component of
accretion of redeemable non-controlling interests and distributions, net of tax, in the condensed consolidated statements of comprehensive income. The distributions made to Cricket were eliminated in consolidation.
On July 12, 2012, STX Wireless made an optional pro-rata cash distribution of $50.7 million and $16.2 million to Cricket and Pocket, respectively. Under the STX LLC Agreement, this optional distribution to Pocket (plus an annual return, as discussed above), is deducted from the purchase price payable to Pocket in the event of a put, call or mandatory buyout following a change of control of Leap.
At the closing of the formation of the joint venture, STX Wireless entered into a loan and security agreement with Pocket pursuant to which, commencing in April 2012, STX Wireless agreed to make quarterly limited-recourse loans to Pocket out of excess cash in an aggregate principal amount not to exceed $30 million, which loans are secured by Pocket's membership interests in STX Wireless. As of September 30, 2012, Pocket had approximately $6.5 million in aggregate principal amount of outstanding borrowings under the loan and security agreement. Borrowings under the loan and security agreement bear interest at 8.0% per annum, compounded annually, and will mature on the earlier of October 2020 and the date on which Pocket ceases to hold any membership interests in STX Wireless. Cricket has the right to set off all outstanding principal and interest under this loan and security agreement against the payment of the purchase price for Pocket's membership interests in STX Wireless in the event of a put, call or mandatory buyout following a change of control of Leap. Accordingly, outstanding borrowings and accrued interest under the loan and security agreement have been recorded as a deduction from the purchase price payable to Pocket as discussed above in the condensed consolidated balance sheets and as a component of accretion of redeemable non-controlling interests and distributions, net of tax, in the condensed consolidated statements of comprehensive income. The offset of the outstanding borrowings and accrued interest against the purchase price for Pocket's membership interest, coupled with the accretion benefit recorded to adjust the redemption value of Pocket's net interest in STX Wireless, brought the carrying value of Pocket's membership interests in STX Wireless to an estimated redemption value of $64.7 million and $90.7 million as of September 30, 2012 and December 31, 2011, respectively.
In a separate transaction, on January 3, 2011, the Company acquired Pocket's customer assistance call center for $850,000. The Company accounted for this transaction as a business purchase combination in accordance with the authoritative guidance for business combinations. A portion of the purchase price was assigned to property and equipment and the remaining amount was allocated to goodwill.
During 2011, the Company completed the integration of Cricket and Pocket operating assets in the South Texas region to enable the combined network and retail operations of the STX Wireless joint venture to operate more efficiently. During the three and nine months ended September 30, 2011, the Company incurred approximately $23.3 million and $23.9 million, respectively, of such integration costs, which were recorded in impairments and other charges within the Company's condensed consolidated statements of comprehensive income.
Savary Island Venture
As of September 30, 2012, Cricket owned an 85% non-controlling membership interest in Savary Island, which holds wireless spectrum in the upper Midwest portion of the U.S. and which leases a portion of that spectrum to Cricket.
Prior to the formation of the Savary Island venture, Cricket service was offered in greater Chicago and Southern Wisconsin by Denali, an entity in which the Company owned an 82.5% non-controlling membership interest. In December 2010, Cricket purchased the remaining 17.5% controlling membership interest in Denali that it did not previously own. Immediately prior to such purchase, Denali contributed all of its wireless spectrum outside of the Chicago and Southern Wisconsin operating markets and a related spectrum lease to Savary Island, a newly formed venture, in exchange for an 85% non-controlling membership interest. Savary Island acquired this spectrum as a "very small business" designated entity under FCC regulations. Ring Island Wireless, LLC ("Ring Island") contributed $5.1 million of cash to Savary Island in exchange for a 15% controlling membership interest. On March 31, 2011, Denali and its subsidiaries were merged with and into Cricket, with Cricket as the surviving entity.
Under the amended and restated limited liability company agreement of Savary Island (the "Savary Island LLC Agreement"), Ring Island had the right to put its entire controlling membership interest in Savary Island to Cricket during the 30-day period commencing on May 1, 2012. Ring Island exercised this put right on May 14, 2012. Pursuant to the Savary Island LLC Agreement, the purchase price for such sale was an amount equal to Ring Island's equity contributions to Savary Island of $5.1 million less any optional distributions made pursuant to the Savary Island LLC Agreement, plus $150,000 if the sale was consummated prior to May 1, 2017 without incurring any unjust enrichment payments. The Company recorded this obligation to purchase Ring Island's controlling membership interest in Savary Island as a component of redeemable non-controlling interest in the condensed consolidated balance sheets. Savary Island guaranteed Cricket's put obligations under the Savary Island LLC Agreement, which guaranty was secured on a first-lien basis by certain assets of Savary Island. Under the Savary Island LLC Agreement, Savary
Island was also required to make monthly mandatory distributions to Ring Island. Savary Island was also party to a management services agreement with Cricket, pursuant to which Cricket provided management services to Savary Island in exchange for a management fee.
The Company attributed profits and losses to Ring Island's redeemable non-controlling interest each reporting period. To the extent that the redemption price for Ring Island's controlling membership interest exceeded the value of Ring Island's net interest in Savary Island at any period (after the attribution of profits or losses), the value of such interest was accreted to the redemption price for such interest with a corresponding adjustment to additional paid-in capital. However, the Company would not reduce the carrying amount of the redeemable non-controlling interest below the redemption price. Both the attribution of profit or loss and the accretion of the redeemable non-controlling interest were presented as a component of accretion of redeemable non-controlling interests and distributions, net of tax, in the condensed consolidated statements of comprehensive income. As of September 30, 2012 and December 31, 2011, this redeemable non-controlling interest had a carrying value of $5.3 million.
At the closing of the formation of the venture, Savary Island assumed $211.6 million of the outstanding loans then owed by Denali and its subsidiaries to Cricket. In connection with Savary Island's assumption of such loans, Cricket, Savary Island and Savary Island's subsidiaries entered into an amended and restated senior secured credit agreement, dated as of December 27, 2010 (the "Savary Island Credit Agreement") to amend and restate the terms of the Denali senior secured credit agreement applicable to the assumed loans. Under the Savary Island Credit Agreement, Cricket also agreed to loan Savary Island up to an additional $5.0 million to fund its working capital needs. In connection with the closing of the license exchange transaction with T-Mobile on November 30, 2011, Cricket canceled $41.1 million in principal amount of indebtedness owed by Savary Island under the Savary Island Credit Agreement. In connection with the closing of the license sale transaction with Verizon Wireless on August 28, 2012, Savary Island repaid an aggregate of $171.0 million in principal and accrued interest under the Savary Island Credit Agreement. As of September 30, 2012 and December 31, 2011, borrowings outstanding under the Savary Island Credit Agreement (excluding accrued interest) totaled $31.6 million and $170.5 million, respectively. Loans under the Savary Island Credit Agreement (including the assumed loans) accrued interest at the rate of 9.5% per annum and such interest was added to principal annually. All outstanding principal and accrued interest were due May 2021. Outstanding principal and accrued interest were due in quarterly installments commencing May 2018. Savary Island could prepay loans under the Savary Island Credit Agreement at any time without premium or penalty. The obligations of Savary Island and its subsidiaries under the Savary Island Credit Agreement were secured by all of the personal property, fixtures and owned real property of Savary Island and its subsidiaries, subject to certain permitted liens. The Savary Island Credit Agreement and the related security agreements contained customary representations, warranties, covenants and conditions.
Subsequent to the end of the quarter, on October 1, 2012, Savary Island repaid $5.0 million in principal and accrued interest under the Savary Island Credit Agreement and, in connection with the closing of the second license exchange transaction with T-Mobile, Cricket canceled $14.1 million in principal amount of indebtedness thereunder. Also on October 1, 2012, the Company acquired the remaining 15% controlling membership interest in Savary Island from Ring Island for approximately $5.3 million in cash, and Savary Island and its wholly owned subsidiaries became direct and indirect wholly owned subsidiaries, respectively, of Cricket. In addition, the remaining indebtedness under the Savary Island Credit Agreement of approximately $12.5 million was converted into equity in Savary Island, and Cricket and Savary Island terminated the Savary Island Credit Agreement and all related loan and security documents.
| |
Note 9. | Arrangements with Variable Interest Entities and Joint Ventures |
As described in "Note 2. Basis of Presentation and Significant Accounting Policies," the Company consolidates its controlling membership interest in STX Wireless in accordance with the authoritative guidance for consolidations based on the voting interest model. All intercompany accounts and transactions have been eliminated in the condensed consolidated financial statements.
Also as described in Note 2, as of September 30, 2012, the Company consolidated its non-controlling membership interest in Savary Island in accordance with the authoritative guidance for the consolidation of variable interest entities because Savary Island was a variable interest entity and, among other things, the Company had an agreement with Savary Island's other member which established a specified purchase price in the event that Ring Island exercised its right to sell its membership interest to the Company. As further discussed in "Note 8. Significant Acquisitions and Other Transactions," on October 1, 2012, Cricket acquired the remaining 15% controlling membership interest in Savary Island that it did not previously own, and accordingly, Savary Island and its wholly owned subsidiaries became direct and indirect wholly owned subsidiaries of Cricket.
The aggregate carrying amount and classification of the assets and liabilities of Savary Island, excluding intercompany accounts and transactions, as of September 30, 2012 and December 31, 2011 are presented in the table below (in thousands):
|
| | | | | | | |
| September 30, 2012 | | December 31, 2011 |
| | | |
Assets | | | |
Cash and cash equivalents | $ | 10,288 |
| | $ | 7,084 |
|
Wireless licenses | 34,022 |
| | 41,947 |
|
Assets held for sale (1) | 7,924 |
| | 85,190 |
|
Total assets | $ | 52,234 |
| | $ | 134,221 |
|
Liabilities | | | |
Other current liabilities | $ | — |
| | $ | 5 |
|
Total liabilities | $ | — |
| | $ | 5 |
|
| |
(1) | The amount at December 31, 2011 represents the carrying value of wireless licenses sold to Verizon Wireless on August 28, 2012 and the amount at September 30, 2012 represents the carrying value of wireless licenses assigned to T-Mobile on October 1, 2012 under the license sale and exchange transactions discussed in "Note 8. Significant Acquisitions and Other Transactions." |
The following table provides a summary of the changes in value of the Company's redeemable non-controlling interests (in thousands):
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2012 | | 2011 |
| | | |
Beginning balance, January 1 | $ | 95,910 |
| | $ | 104,788 |
|
Accretion of redeemable non-controlling interests, before tax | (2,035 | ) | | (10,499 | ) |
Loans made to joint venture partner | (6,530 | ) | | — |
|
Optional distribution made to joint venture partner | (16,243 | ) | | — |
|
Other | (1,197 | ) | | (779 | ) |
Ending balance, September 30, | $ | 69,905 |
| | $ | 93,510 |
|
| |
Note 10. | Unrestricted Subsidiaries |
In July 2011, the Company's board of directors designated Cricket Music and Cricket Music's wholly-owned subsidiary Muve USA, LLC ("Muve USA") as "Unrestricted Subsidiaries" under the indentures governing Cricket's senior notes. Cricket Music, Muve USA and their subsidiaries are also designated as "Unrestricted Subsidiaries" under the Credit Agreement. Muve USA holds certain hardware, software and intellectual property relating to Cricket's Muve Music service. The financial position and results of operations of Cricket Music and Muve USA are included in the Company's condensed consolidated financial statements included in this report. Together with STX Wireless and Savary Island, Cricket Music and Muve USA and their subsidiaries are presented as "Non-Guarantors" within the Company's condensed consolidating financial statements included in Note 13.
As required by the Credit Agreement and the indentures governing Cricket's senior notes, the Company is presenting the aggregate carrying amount and classification of the components of the financial position as of September 30, 2012 and December 31, 2011 and results of operations of Cricket Music and Muve USA for the three and nine months ended September 30, 2012 and 2011 in the following tables separately (in thousands):
|
| | | | | | | |
| September 30, 2012 | | December 31, 2011 |
Assets | | | |
Cash and cash equivalents | $ | 2 |
| | $ | 1 |
|
Property and equipment, net | 6,062 |
| | 9,435 |
|
Total assets | $ | 6,064 |
| | $ | 9,436 |
|
Liabilities and stockholders' equity | | | |
Other current liabilities | $ | 12 |
| | $ | — |
|
Stockholders' equity | 6,052 |
| | 9,436 |
|
Total liabilities and stockholders' equity | $ | 6,064 |
| | $ | 9,436 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
Revenues | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Operating expenses | | | | | | | |
Depreciation and amortization | 1,124 |
| | 1,100 |
| | 3,372 |
| | 1,100 |
|
Other | 7 |
| | 1 |
| | 12 |
| | 1 |
|
Total operating expenses | 1,131 |
| | 1,101 |
| | 3,384 |
| | 1,101 |
|
Operating loss | (1,131 | ) | | (1,101 | ) | | (3,384 | ) | | (1,101 | ) |
Net loss | $ | (1,131 | ) | | $ | (1,101 | ) | | $ | (3,384 | ) | | $ | (1,101 | ) |
The computation of the Company's annual effective tax rate includes a forecast of the Company's estimated "ordinary" income (loss), which is its annual income (loss) from continuing operations before tax, excluding unusual or infrequently occurring (discrete) items. Significant management judgment is required in projecting the Company's ordinary income (loss). The Company's projected ordinary income tax expense for the full year 2012 consists primarily of the deferred tax effect of the Company's investments in joint ventures that are in a deferred tax liability position and the amortization of wireless licenses for income tax purposes. Because the Company's projected 2012 income tax expense is a relatively fixed amount, a small change in the ordinary income (loss) projection can produce a significant variance in the effective tax rate, therefore making it difficult to determine a reliable estimate of the annual effective tax rate. As a result, and in accordance with the authoritative guidance for accounting for income taxes in interim periods, the Company has computed its provision for income taxes as of and for the three and nine months ended September 30, 2012 and 2011 based upon the actual effective tax rate for those periods.
The Company periodically assesses the likelihood that its deferred tax assets will be recoverable from future taxable income. Deferred tax liabilities associated with wireless licenses and investments in certain joint ventures cannot be considered a source of taxable income to support the realization of deferred tax assets because these deferred tax liabilities will not reverse until some indefinite future period when these assets are either sold or impaired for book purposes. To the extent the Company believes it is more likely than not that its deferred tax assets will not be recovered, it must establish a valuation allowance. As part of this periodic assessment for the three and nine months ended September 30, 2012, the Company weighed the positive and negative factors and, at this time, does not believe there is sufficient positive evidence to support a conclusion that it is more likely than not that all or a portion of its deferred tax assets will be realized, except with respect to the realization of a $1.9 million Texas Margins Tax ("TMT") credit. Accordingly, at September 30, 2012 and December 31, 2011, the Company recorded a valuation allowance offsetting substantially all of its deferred tax assets.
The Company has substantial federal and state net operating losses ("NOLs") for income tax purposes. Subject to certain requirements, the Company may "carry forward" its federal NOLs for up to 20 years to offset future taxable income and reduce its income tax liability. For state income tax purposes, the NOL carryforward period ranges from five to 20 years. As of September 30, 2012, the Company had federal and state NOLs of approximately $2.5 billion which begin to expire in 2022 for federal income tax purposes and of which $37.2 million will expire at the end of 2012 for state income tax purposes. While these NOL carryforwards have a potential to be used to offset future ordinary taxable income and reduce future cash tax liabilities by approximately $953.3 million, the Company's ability to utilize these NOLs will depend upon the availability of future taxable income during the carryforward period and, as such, there is no assurance the Company will be able to realize such tax savings.
The Company's ability to utilize NOLs could be further limited if it were to experience an "ownership change," as defined in Section 382 of the Internal Revenue Code and similar state provisions. In general terms, an ownership change can occur whenever there is a cumulative shift in the ownership of a company by more than 50 percentage points by one or more "5% stockholders" within a three-year period. The occurrence of such a change generally limits the amount of NOL carryforwards a company could utilize in a given year to the aggregate fair market value of the company's common stock immediately prior to the ownership change, multiplied by the long-term tax-exempt interest rate in effect for the month of the ownership change.
The determination of whether an ownership change has occurred for purposes of Section 382 is complex and requires significant judgment. The occurrence of such an ownership change would accelerate cash tax payments the Company would be required to make and likely result in a substantial portion of its NOLs expiring before the Company could fully utilize them.
On August 30, 2011, the Company’s board of directors adopted a Tax Benefit Preservation Plan to help deter acquisitions of Leap common stock that could result in an ownership change under Section 382 and thus help preserve the Company’s ability to use its NOL carryforwards. The Tax Benefit Preservation Plan was approved by the Company's stockholders in May 2012. The Tax Benefit Preservation Plan is designed to deter acquisitions of Leap common stock that would result in a stockholder owning 4.99% or more of Leap common stock (as calculated under Section 382), or any existing holder of 4.99% or more of Leap common stock acquiring additional shares, by substantially diluting the ownership interest of any such stockholder unless the stockholder obtains an exemption from the Company’s board of directors.
The Company's unrecognized income tax benefits and uncertain tax positions, as well as any associated interest and penalties, are recorded through income tax expense; however, such amounts have not been significant in any period.
| |
Note 12. | Commitments and Contingencies |
From time to time, the Company is involved in a variety of lawsuits, claims, investigations and proceedings concerning intellectual property, commercial disputes, business practices and other matters. Due in part to the expansion and development of its business operations, the Company has become subject to increased amounts of litigation, including disputes alleging intellectual property infringement. These matters may seek monetary damages and other relief.
The Company believes that any damage amounts alleged by plaintiffs in matters that may arise are not necessarily meaningful indicators of its potential liability. The Company determines whether it should accrue an estimated loss for a contingency in a particular legal proceeding by assessing whether a loss is deemed probable and whether the amount can be reasonably estimated. The Company reassesses its views on estimated losses on a quarterly basis to reflect the impact of any developments in the matters in which it is involved.
Legal proceedings are inherently unpredictable, and the matters in which the Company is involved often present complex legal and factual issues. The Company vigorously pursues defenses in legal proceedings and engages in discussions where possible to resolve these matters on favorable terms. The Company's policy is to recognize legal costs as incurred. It is possible, however, that the Company's business, financial condition and results of operations in future periods could be materially adversely affected by increased litigation expense, significant settlement costs and/or unfavorable damage awards.
Indemnification Agreements
From time to time, the Company enters into indemnification agreements with certain parties in the ordinary course of business, including agreements with manufacturers, licensors and suppliers who provide it with equipment, software and technology that it uses in its business, as well as with purchasers of assets, lenders, lessors and other vendors. Indemnification agreements are generally entered into in commercial and other transactions in an attempt to allocate potential risk of loss.
Wholesale Agreement
In August 2010, the Company entered into a wholesale agreement with an affiliate of Sprint Nextel which the Company uses to offer Cricket services in nationwide retailers outside of the Company's current network footprint. The initial term of the wholesale agreement runs until December 31, 2015, and automatically renews for successive one-year periods unless either party provides 180-day advance notice to the other. Under the agreement, the Company pays Sprint a specified amount per month for each subscriber activated on its network, subject to periodic market-based adjustments. The Company agreed to provide Sprint with a minimum of $300 million of revenue under the agreement, as amended, over the initial five-year term (against which the Company can credit up to $100 million of revenue under other existing commercial arrangements between the companies), with a minimum of $20 million of revenue to be provided in 2011, a minimum of $75 million of revenue to be provided in 2012, a minimum of $80 million of revenue to be provided in 2013, a minimum of $75 million of revenue to be provided in 2014 and a minimum of
$50 million of revenue to be provided in 2015. Any revenue provided by the Company in a given year above the minimum revenue commitment for that particular year is credited to the next succeeding year. However, to the extent the Company's revenues were to fall beneath the applicable commitment amount for any given year, excess revenues from a subsequent year could not be carried back to offset such shortfall. The Company's obligation to provide the minimum revenue amount for any calendar year is subject to Sprint's compliance with specified covenants in the wholesale agreement. Based upon a review of information provided to the Company by Sprint, the Company informed Sprint that certain of those covenants had not been met and that, as a result, the Company is not subject to the minimum revenue commitment for 2012. Sprint has disputed that assertion.
In addition, in the event Leap is involved in a change-of-control transaction with another facilities-based wireless carrier with annual revenues of at least $500 million in the fiscal year preceding the date of the change of control agreement (other than MetroPCS Communications, Inc. ("MetroPCS")), either the Company (or the Company's successor in interest) or Sprint may terminate the wholesale agreement within 60 days following the closing of such a transaction. In connection with any such termination, the Company (or its successor in interest) would be required to pay to Sprint a specified percentage of the remaining aggregate minimum revenue commitment, with the percentage to be paid depending on the year in which the change of control agreement was entered into, being 30% for any such agreement entered into in 2012, 20% for any such agreement entered into in 2013 and 10% for any such agreement entered into in 2014 or 2015.
In the event that Leap is involved in a change-of-control transaction with MetroPCS during the term of the wholesale agreement, then the agreement would continue in full force and effect, subject to certain revisions, including, without limitation, an increase to the total minimum revenue commitment to $350 million, taking into account any revenue contributed by Cricket prior to the date thereof.
In the event Sprint is involved in a change-of-control transaction, the agreement would bind Sprint's successor-in-interest.
iPhone Purchase Commitment
In May 2012, the Company entered into a three-year minimum purchase commitment with Apple Inc. to purchase iPhones. The commitment began upon the Company's launch of sales of the iPhone in certain markets in June 2012 and is currently estimated to be approximately $900 million, with annual commitments during the three-year period that increase moderately in the second and third years. The actual amount that the Company spends over the term of the commitment will depend on many factors, including customer acceptance and availability of current and future versions of the device and costs for the device.
| |
Note 13. | Guarantor Financial Information |
The $3,000 million of senior notes issued by Cricket (the "Issuing Subsidiary") are comprised of $300 million of unsecured senior notes due 2015, $1,100 million of senior secured notes due 2016 and $1,600 million of unsecured senior notes due 2020. The notes are jointly and severally guaranteed on a full and unconditional basis by Leap (the "Guarantor Parent Company") and Cricket License Company, LLC, a wholly-owned subsidiary of Cricket (the "Guarantor Subsidiary").
The indentures governing these notes limit, among other things, the Guarantor Parent Company's, Cricket's and the Guarantor Subsidiary's ability to: incur additional debt; create liens or other encumbrances; place limitations on distributions from restricted subsidiaries; pay dividends; make investments; prepay subordinated indebtedness or make other restricted payments; issue or sell capital stock of restricted subsidiaries; issue guarantees; sell assets; enter into transactions with affiliates; and make acquisitions or merge or consolidate with another entity.
Condensed consolidating financial information of the Guarantor Parent Company, the Issuing Subsidiary, the Guarantor Subsidiary, Non-Guarantor Subsidiaries (STX Wireless, Savary Island, Cricket Music and their respective subsidiaries) and total consolidated Leap and subsidiaries as of September 30, 2012 and December 31, 2011 and for the three and nine months ended September 30, 2012 and 2011 is presented below. The equity method of accounting is used to account for ownership interests in subsidiaries, where applicable.
Condensed Consolidating Balance Sheet as of September 30, 2012 (unaudited and in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Guarantor Parent Company | | Issuing Subsidiary | | Guarantor Subsidiary | | Non-Guarantor Subsidiaries | | Consolidating and Eliminating Adjustments | | Consolidated |
| | | | | | | | | | | |
Assets | | | | | | | | | | | |
Cash and cash equivalents | $ | 44 |
| | $ | 391,913 |
| | $ | — |
| | $ | 54,405 |
| | $ | — |
| | $ | 446,362 |
|
Short-term investments | — |
| | 176,672 |
| | — |
| | — |
| | — |
| | 176,672 |
|
Inventories | — |
| | 63,037 |
| | — |
| | 4,786 |
| | — |
| | 67,823 |
|
Deferred charges | — |
| | 45,066 |
| | — |
| | 24 |
| | — |
| | 45,090 |
|
Other current assets | 2,320 |
| | 151,224 |
| | 4 |
| | 6,846 |
| | (1,124 | ) | | 159,270 |
|
Total current assets | 2,364 |
| | 827,912 |
| | 4 |
| | 66,061 |
| | (1,124 | ) | | 895,217 |
|
Property and equipment, net | — |
| | 1,797,876 |
| | — |
| | 72,394 |
| | — |
| | 1,870,270 |
|
Investments in and advances to affiliates and consolidated subsidiaries | 815,987 |
| | 2,205,717 |
| | 22,805 |
| | — |
| | (3,044,509 | ) | | — |
|
Wireless licenses | — |
| | — |
| | 1,689,428 |
| | 98,935 |
| | — |
| | 1,788,363 |
|
Assets held for sale | — |
| | — |
| | 178,543 |
| | 7,924 |
| | — |
| | 186,467 |
|
Goodwill | — |
| | 11,222 |
| | — |
| | 20,664 |
| | — |
| | 31,886 |
|
Intangible assets, net | — |
| | 15,417 |
| | — |
| | 12,866 |
| | — |
| | 28,283 |
|
Other assets | 2,777 |
| | 55,361 |
| | — |
| | 9,525 |
| | — |
| | 67,663 |
|
Total assets | $ | 821,128 |
| | $ | 4,913,505 |
| | $ | 1,890,780 |
| | $ | 288,369 |
| | $ | (3,045,633 | ) | | $ | 4,868,149 |
|
Liabilities and Stockholders' Equity | | | | | | | | | | | |
Accounts payable and accrued liabilities | $ | — |
| | $ | 315,943 |
| | $ | — |
| | $ | 5,931 |
| | $ | — |
| | $ | 321,874 |
|
Intercompany payables | 64,115 |
| | 270,424 |
| | — |
| | 55,347 |
| | (389,886 | ) | | — |
|
Other current liabilities | 2,460 |
| | 238,025 |
| | — |
| | 11,409 |
| | (1,124 | ) | | 250,770 |
|
Total current liabilities | 66,575 |
| | 824,392 |
| | — |
| | 72,687 |
| | (391,010 | ) | | 572,644 |
|
Long-term debt, net | 250,000 |
| | 2,954,393 |
| | — |
| | 31,841 |
| | (31,841 | ) | | 3,204,393 |
|
Deferred tax liabilities | — |
| | 340,147 |
| | — |
| | — |
| | — |
| | 340,147 |
|
Other long-term liabilities | — |
| | 156,300 |
| | — |
| | 20,207 |
| | — |
| | 176,507 |
|
Total liabilities | 316,575 |
| | 4,275,232 |
| | — |
| | 124,735 |
| | (422,851 | ) | | 4,293,691 |
|
Redeemable non-controlling interests | — |
| | 69,905 |
| | — |
| | — |
| | — |
| | 69,905 |
|
Stockholders' equity | 504,553 |
| | 568,368 |
| | 1,890,780 |
| | 163,634 |
| | (2,622,782 | ) | | 504,553 |
|
Total liabilities and stockholders' equity | $ | 821,128 |
| | $ | 4,913,505 |
| | $ | 1,890,780 |
| | $ | 288,369 |
| | $ | (3,045,633 | ) | | $ | 4,868,149 |
|
Condensed Consolidating Balance Sheet as of December 31, 2011 (unaudited and in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Guarantor Parent Company | | Issuing Subsidiary | | Guarantor Subsidiary | | Non-Guarantor Subsidiaries | | Consolidating and Eliminating Adjustments | | Consolidated |
| | | | | | | | | | | |
Assets | | | | | | | | | | | |
Cash and cash equivalents | $ | 91 |
| | $ | 262,971 |
| | $ | — |
| | $ | 82,181 |
| | $ | — |
| | $ | 345,243 |
|
Short-term investments | — |
| | 405,801 |
| | — |
| | — |
| | — |
| | 405,801 |
|
Inventories | — |
| | 110,710 |
| | — |
| | 6,247 |
| | — |
| | 116,957 |
|
Deferred charges | — |
| | 57,936 |
| | — |
| | 43 |
| | — |
| | 57,979 |
|
Other current assets | 2,279 |
| | 131,331 |
| | — |
| | 849 |
| | (2 | ) | | 134,457 |
|
Total current assets | 2,370 |
| | 968,749 |
| | — |
| | 89,320 |
| | (2 | ) | | 1,060,437 |
|
Property and equipment, net | — |
| | 1,876,031 |
| | — |
| | 81,343 |
| | — |
| | 1,957,374 |
|
Investments in and advances to affiliates and consolidated subsidiaries | 918,386 |
| | 2,249,019 |
| | 27,863 |
| | — |
| | (3,195,268 | ) | | — |
|
Wireless licenses | — |
| | — |
| | 1,682,111 |
| | 106,859 |
| | — |
| | 1,788,970 |
|
Assets held for sale | — |
| | — |
| | 119,066 |
| | 85,190 |
| | — |
| | 204,256 |
|
Goodwill | — |
| | 11,222 |
| | — |
| | 20,664 |
| | — |
| | 31,886 |
|
Intangible assets, net | — |
| | 17,418 |
| | — |
| | 24,059 |
| | — |
| | 41,477 |
|
Other assets | 3,894 |
| | 59,592 |
| | — |
| | 4,804 |
| | — |
| | 68,290 |
|
Total assets | $ | 924,650 |
| | $ | 5,182,031 |
| | $ | 1,829,040 |
| | $ | 412,239 |
| | $ | (3,195,270 | ) | | $ | 5,152,690 |
|
Liabilities and Stockholders' Equity | | | | | | | | | | | |
Accounts payable and accrued liabilities | $ | 79 |
| | $ | 447,293 |
| | $ | — |
| | $ | 12,906 |
| | $ | — |
| | $ | 460,278 |
|
Current maturities of long-term debt | — |
| | 21,911 |
| | — |
| | — |
| | — |
| | 21,911 |
|
Intercompany payables | 56,009 |
| | 281,546 |
| | — |
| | 32,811 |
| | (370,366 | ) | | — |
|
Other current liabilities | 5,247 |
| | 239,752 |
| | — |
| | 11,360 |
| | (2 | ) | | 256,357 |
|
Total current liabilities | 61,335 |
| | 990,502 |
| | — |
| | 57,077 |
| | (370,368 | ) | | 738,546 |
|
Long-term debt, net | 250,000 |
| | 2,948,749 |
| | — |
| | 190,572 |
| | (190,572 | ) | | 3,198,749 |
|
Deferred tax liabilities | — |
| | 333,804 |
| | — |
| | — |
| | — |
| | 333,804 |
|
Other long-term liabilities | — |
| | 148,362 |
| | — |
| | 24,004 |
| | — |
| | 172,366 |
|
Total liabilities | 311,335 |
| | 4,421,417 |
| | — |
| | 271,653 |
| | (560,940 | ) | | 4,443,465 |
|
Redeemable non-controlling interests | — |
| | 95,910 |
| | — |
| | — |
| | — |
| | 95,910 |
|
Stockholders' equity | 613,315 |
| | 664,704 |
| | 1,829,040 |
| | 140,586 |
| | (2,634,330 | ) | | 613,315 |
|
Total liabilities and stockholders' equity | $ | 924,650 |
| | $ | 5,182,031 |
| | $ | 1,829,040 |
| | $ | 412,239 |
| | $ | (3,195,270 | ) | | $ | 5,152,690 |
|
Condensed Consolidating Statement of Comprehensive Income for the Three Months Ended September 30, 2012 (unaudited and in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Guarantor Parent Company | | Issuing Subsidiary | | Guarantor Subsidiary | | Non-Guarantor Subsidiaries | | Consolidating and Eliminating Adjustments | | Consolidated |
| | | | | | | | | | | |
Revenues: | | | | | | | | | | | |
Service revenues | $ | — |
| | $ | 638,394 |
| | $ | — |
| | $ | 83,607 |
| | $ | 21 |
| | $ | 722,022 |
|
Equipment revenues | — |
| | 44,088 |
| | — |
| | 7,862 |
| | — |
| | 51,950 |
|
Other revenues | — |
| | 3,886 |
| | 27,239 |
| | 1,173 |
| | (32,298 | ) | | — |
|
Total revenues | — |
| | 686,368 |
| | 27,239 |
| | 92,642 |
| | (32,277 | ) | | 773,972 |
|
Operating expenses: | | | | | | | | | | | |
Cost of service (exclusive of items shown separately below) | — |
| | 270,142 |
| | — |
| | 24,650 |
| | (28,391 | ) | | 266,401 |
|
Cost of equipment | — |
| | 180,181 |
| | — |
| | 23,665 |
| | — |
| | 203,846 |
|
Selling and marketing | — |
| | 77,838 |
| | — |
| | 10,273 |
| | — |
| | 88,111 |
|
General and administrative | 2,510 |
| | 75,472 |
| | 191 |
| | 11,710 |
| | (3,886 | ) | | 85,997 |
|
Depreciation and amortization | — |
| | 151,695 |
| | — |
| | 10,126 |
| | — |
| | 161,821 |
|
Impairments and other charges | — |
| | 14,753 |
| | — |
| | — |
| | — |
| | 14,753 |
|
Total operating expenses | 2,510 |
| | 770,081 |
| | 191 |
| | 80,424 |
| | (32,277 | ) | | 820,929 |
|
Gain (loss) on sale or disposal of assets, net | — |
| | (1,931 | ) | | 43,568 |
| | 86,729 |
| | — |
| | 128,366 |
|
Operating income (loss) | (2,510 | ) | | (85,644 | ) | | 70,616 |
| | 98,947 |
| | — |
| | 81,409 |
|
Equity in net income of consolidated subsidiaries | 24,650 |
| | 166,355 |
| | — |
| | — |
| | (191,005 | ) | | — |
|
Equity in net loss of investees, net | — |
| | (203 | ) | | — |
| | — |
| | — |
| | (203 | ) |
Interest income | 6,064 |
| | 3,269 |
| | — |
| | 1 |
| | (9,272 | ) | | 62 |
|
Interest expense | (3,189 | ) | | (70,182 | ) | | — |
| | (3,209 | ) | | 9,272 |
| | (67,308 | ) |
Income before income taxes | 25,015 |
| | 13,595 |
| | 70,616 |
| | 95,739 |
| | (191,005 | ) | | 13,960 |
|
Income tax benefit | — |
| | 12,908 |
| | — |
| | — |
| | — |
| | 12,908 |
|
Net income | 25,015 |
| | 26,503 |
| | 70,616 |
| | 95,739 |
| | (191,005 | ) | | 26,868 |
|
Accretion of redeemable non-controlling interests and distributions, net of tax | — |
| | (1,853 | ) | | — |
| | — |
| | — |
| | (1,853 | ) |
Net income attributable to common stockholders | $ | 25,015 |
| | $ | 24,650 |
| | $ | 70,616 |
| | $ | 95,739 |
| | $ | (191,005 | ) | | $ | 25,015 |
|
Other comprehensive income: | | | | | | | | | | | |
Net income | 25,015 |
| | 26,503 |
| | 70,616 |
| | 95,739 |
| | (191,005 | ) | | 26,868 |
|
Net unrealized holding gains on investments and other | 11 |
| | 11 |
| | — |
| | — |
| | (11 | ) | | |