Exhibit 99.1

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

To the Board of Directors and Stockholders of Clearwire Corporation

Kirkland, Washington

 

We have audited the accompanying consolidated balance sheets of Clearwire Corporation and subsidiaries (the “Company”) as of December 31, 2007 and 2006, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Clearwire Corporation and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.

 

As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for stock-based compensation upon adoption of Statement of Financial Accounting Standards Board Statement No. 123(R), Share-Based Payment.

 

 

Seattle, Washington

March 11, 2008 (March 25, 2009 as to Note 19)

 

 

See notes to consolidated financial statements

 

 

See notes to consolidated financial statements

 

 

See notes to consolidated financial statements.

 

 

See notes to consolidated financial statements.

 

 

The Business

 

The consolidated financial statements include the accounts of Clearwire Corporation, a Delaware corporation, and its wholly-owned and majority-owned or controlled subsidiaries (collectively, the “Company” or “Clearwire”). Clearwire was formed on October 27, 2003 and is an international provider of wireless broadband services. Clearwire delivers high-speed wireless broadband services to individuals, small businesses, public safety organizations, and others in a growing number of markets through its advanced network. As of December 31, 2007, the Company offered its services in 46 markets throughout the United States and four markets internationally. Prior to August 29, 2006, Clearwire, through its wholly-owned subsidiary, NextNet Wireless, Inc. (“NextNet”), developed, manufactured, and sold equipment that enabled the deployment of broadband wireless networks. NextNet is currently the sole supplier of base station and customer premise equipment that Clearwire uses to provide its services. On August 29, 2006, Clearwire sold NextNet to Motorola, Inc. (“Motorola”). As part of the agreement with Motorola, the Company agreed to use Motorola as an exclusive supplier of certain infrastructure and subscriber equipment for a specified period of time, subject to Motorola continuing to satisfy certain requirements and other conditions. See Note 3, Significant Transactions, for additional information

 

On January 19, 2007, the Company’s Board of Directors approved a reverse stock split, which was approved by the Company’s stockholders on February 16, 2007. The reverse stock split became effective March 1, 2007. Upon the effectiveness of the reverse stock split, each three shares of Class A common stock were combined into one share of Class A common stock and each three shares of Class B common stock were combined into one share of Class B common stock. All share and per share amounts in the consolidated financial statements have been retroactively adjusted for all periods presented to give effect to the reverse stock split.

 

Business Segments

 

The Company complies with the requirements of Statement of Financial Accounting Standards (“SFAS”) No. 131, Disclosures about Segments of an Enterprise and Related Information (“SFAS No. 131”), which establishes annual and interim reporting standards for an enterprise’s operating segments and related disclosures about its products, services, geographic areas and major customers. Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision makers in deciding how to allocate resources and in assessing performance. Operating segments can be aggregated for segment reporting purposes so long as certain aggregation criteria are met. The Company defines the chief operating decision makers as our Chief Executive Officer, Chief Operating Officer and the Chief Financial Officer. As its business continues to mature, the Company assesses how it views and operates the business. As a result, in the fourth quarter of 2007 the Company changed how its chief operating decision makers assess the business and the Company is now organized into two reportable business segments: the United States and the International business. See Note 16, Business Segments, for additional discussion.

 

 

Basis of Presentation

 

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).

 

Principles of Consolidation — The consolidated financial statements include all of the assets, liabilities and results of operations of the Company’s wholly-owned and majority-owned or controlled subsidiaries. Investments in entities that the Company does not control, but for which it has the ability to exercise significant influence over operating and financial policies, are accounted for under the equity method. All intercompany transactions are eliminated in consolidation.

 

CLEARWIRE CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Due to the inherent uncertainty involved in making those estimates, actual results could materially differ.

 

Significant estimates inherent in the preparation of the accompanying financial statements include the application of purchase accounting including the valuation of acquired assets and liabilities, valuation of investments, the valuation of the Company’s common stock, the amortization period of prepaid spectrum license fees, allowance for doubtful accounts, depreciation and equity granted to third parties and employees.

 

Cash and Cash Equivalents — Cash and cash equivalents consist of time deposits and highly liquid short-term investments with original maturities of three months or less. Cash and cash equivalents exclude cash that is contractually restricted for operational purposes. The Company maintains cash and cash equivalent balances with financial institutions that exceed federally insured limits. The Company has not experienced any losses related to these balances, and management believes its credit risk related to these balances to be minimal.

 

Restricted Cash — Restricted cash is classified as a current or noncurrent asset based on its designated purpose. As of December 31, 2007, the Company had restricted cash of $12.7 million. The majority of this restricted cash related primarily to the Company’s outstanding letters of credit.

 

Investments — SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, and Staff Accounting Bulletin (“SAB”) No. 59, Accounting for Non-current Marketable Equity Securities, provide guidance on determining when an investment is other-than-temporarily impaired. The Company classifies marketable debt and equity securities that are available for current operations as short-term available-for-sale investments, and these securities are stated at fair value. Unrealized gains and losses are recorded as a separate component of accumulated other comprehensive income (loss). Losses are recognized when a decline in fair value is determined to be other-than-temporary. Realized gains and losses are determined on the basis of the specific identification method. The Company reviews its short-term and long-term investments on an ongoing basis for indicators of other-than-temporary impairment, and this determination requires significant judgment.

 

The Company has an investment portfolio comprised of marketable debt and equity securities including commercial paper, corporate bonds, municipal bonds, auction rate securities and other securities. The value of these securities is subject to market volatility during the period the investments are held and until their sale or maturity. The Company recognizes realized losses when declines in the fair value of our investments below their cost basis are judged to be other-than-temporary. In determining whether a decline in fair value is other-than-temporary, the Company considers various factors including market price (when available), investment ratings, the financial condition and near-term prospects of the issuer, the length of time and the extent to which the fair value has been less than the cost basis, and the Company’s intent and ability to hold the investment until maturity or for a period of time sufficient to allow for any anticipated recovery in market value. The Company makes significant judgments in considering these factors. If it is judged that a decline in fair value is other-than-temporary, the investment is valued at the current estimated fair value and a realized loss equal to the decline is reflected in the consolidated statement of operations.

 

In determining fair value, the Company uses quoted prices in active markets where such prices are available, or models to estimate the fair value using various methods including the market, income and cost approaches. For investments where models are used to estimate fair value in the absence of quoted market prices, the Company often utilizes certain assumptions that market participants would use in pricing the investment, including assumptions about risk and or the risks inherent in the inputs to the valuation technique. These inputs are readily observable, market corroborated, or unobservable Company inputs.

 

CLEARWIRE CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The Company estimates the fair value of securities without quoted market prices using internally generated pricing models that require various inputs and assumptions. The Company believes that its pricing models, inputs and assumptions are what market participants would use in pricing the securities. The Company maximizes the use of observable inputs to the pricing models where quoted market prices from securities and derivatives exchanges are available and reliable. The Company typically receives external valuation information for U.S. Treasuries, other U.S. Government and Agency securities, as well as certain corporate debt securities, money market funds and certificates of deposit. The Company also uses certain unobservable inputs that cannot be validated by reference to a readily observable market or exchange data and relies, to a certain extent, on management’s own assumptions about the assumptions that market participant would use in pricing the security. The Company’s internally generated pricing models may include its own data and require the Company to use its judgment in interpreting relevant market data, matters of uncertainty and matters that are inherently subjective in nature. The Company uses many factors that are necessary to estimate market values, including, interest rates, market risks, market spreads, and timing of cash flows, market liquidity, and review of underlying collateral and principal, interest and dividend payments. The use of different judgments and assumptions could result in different presentations of pricing and security prices could change significantly based on market conditions.

 

Restricted Investments — Restricted investments consist of U.S. government securities. At December 31, 2006 restricted investments represented securities held as collateral for the interest payments through November 15, 2007 related to the Company’s long-term debt. These securities are classified as held-to-maturity and are stated at amortized cost. Gross unrealized losses on these investments were $244,000 at December 31, 2006. There were no gross unrealized gains as of December 31, 2006. As a result of repayment of long-term debt, there is no remaining collateral requirement and no balance in restricted investments at December 31, 2007.

 

Fair Value of Financial Instruments — The Company has determined the estimated fair value of financial instruments using available market information and management judgment. Accordingly, these estimates are not necessarily indicative of the amounts that could be realized in a current market exchange. The carrying amounts of cash and cash equivalents, accounts and notes receivable, accounts payable, accrued expenses and due to affiliates are reasonable estimates of their fair values based on the liquidity of these financial instruments and their short-term nature. The Company does not hold or issue any financial instruments for trading purposes. See Note 10, Long-Term Debt, for the fair value of long-term debt.

 

Accounts Receivable — Accounts receivable are stated at amounts due from customers net of an allowance for doubtful accounts. The Company specifically provides allowances for customers with known disputes or collectibility issues. The remaining reserve recorded in the allowance for doubtful accounts is the Company’s best estimate of the amount of probable losses in the remaining accounts receivable based upon an evaluation of the age of receivables and historical experience. The allowance for doubtful accounts was approximately $787,000 and $753,000 as of December 31, 2007 and 2006, respectively.

 

Inventory — Inventory primarily consists of finished goods and is stated at the lower of cost or net realizable value. Cost is determined under the first-in, first-out inventory method. The Company records inventory write-downs for obsolete and slow-moving items based on inventory turnover trends and historical experience.

 

Property, Plant and Equipment — Property, plant and equipment and improvements that extend the useful life of an asset are stated at cost, net of accumulated depreciation. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets. The Company capitalizes costs of additions and improvements, including direct costs of constructing property, plant and equipment and interest costs related to construction. The estimated useful life of property, plant and equipment are determined based on historical usage of that or similar equipment, with consideration given to technological changes and industry trends that could impact the network architecture and asset utilization. Leasehold improvements are recorded at cost and amortized over the lesser of their estimated useful lives or the related lease term. Maintenance and repairs are expensed as incurred.

 

CLEARWIRE CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Internally Developed Software — Clearwire capitalizes costs related to computer software developed or obtained for internal use in accordance with Statement of Position (“SOP”) No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. Software obtained for internal use has generally been enterprise-level business and finance software customized to meet specific operational needs. Costs incurred in the application development phase are capitalized and amortized over the useful life of the software, which is generally three years. Costs recognized in the preliminary project phase and the post-implementation phase are expensed as incurred.

 

Intangible Assets — Intangible assets consist primarily of Federal Communications Commission (“FCC”) spectrum licenses and other intangible assets related to Clearwire’s acquisition of NextNet in March 2004, which was subsequently disposed in August 2006, and Banda Ancha S.A. (“BASA”) in December 2005 and February 2006. As further described in Note 7, Spectrum Licenses, Goodwill and Other Intangible Assets, the Company accounts for its spectrum licenses and other intangible assets in accordance with the provisions of SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142). In accordance with SFAS No. 142, intangible assets with indefinite useful lives are not amortized but must be assessed for impairment annually or more frequently if an event indicates that the asset might be impaired. The Company performed its annual impairment test of indefinite lived intangible assets on October 1, 2007 and concluded that there was no impairment of these intangible assets.

 

Goodwill — Goodwill represents the excess of the purchase price over the estimated fair value of net assets acquired from Clearwire’s acquisitions. In accordance with SFAS No. 142, the Company completes a two-step process to determine the amount of goodwill impairment. The first step involves comparison of the fair value of the reporting unit to its carrying value to determine if any impairment exists. If the fair value of the reporting unit is less than the carrying value, goodwill is considered to be impaired and the second step is performed. The second step involves comparison of the implied fair value of goodwill to its carrying value. The implied fair value of goodwill is determined by allocating fair value to the various assets and liabilities within the reporting unit in the same manner goodwill is recognized in a business combination. In calculating an impairment charge, the fair value of the impaired reporting units are estimated using a discounted cash flow valuation methodology or by reference to recent comparable transactions. In making this assessment, the Company relies on a number of factors, including operating results, business plans, economic projections, and anticipated future cash flows. There are inherent uncertainties related to these factors and judgment in applying these factors to the goodwill impairment test. The Company performed its annual impairment tests of goodwill as of October 1, 2007, and concluded that there was no impairment of goodwill.

 

Long-Lived Assets — Long-lived assets to be held and used, including property, plant and equipment and intangible assets with definite useful lives, are assessed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the total of the expected undiscounted future cash flows is less than the carrying amount of the asset, a loss, if any, is recognized for the difference between the fair value and carrying value of the assets. Impairment analyses, when performed, are based on the Company’s business and technology strategy, management’s views of growth rates for its business, anticipated future economic and regulatory conditions and expected technological availability. For purposes of recognition and measurement, the Company groups its long-lived assets at the lowest level for which there are identifiable cash flows which are largely independent of other assets and liabilities.

 

Deferred Financing Costs — Deferred financing costs consists primarily of investment banking fees, legal, accounting and printing costs associated with the issuance of the Company’s long-term debt. Deferred financing fees are amortized over the life of the corresponding debt facility. In relation to the issuances of the long-term debt discussed in Note 10, Long-Term Debt, the Company incurred $30.2 million of deferred financing costs in 2007 for its $1.25 billion senior term loan facility entered into during 2007 and an additional $39.3 million related to the repayment of its $125.0 million term loan and the retirement of its $620.7 million senior secured notes due 2010, compared to $21.8 million in 2006. For the years ended December 31, 2007 and 2006, $6.7 million and $3.9 million,

 

CLEARWIRE CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

respectively of total deferred financing costs were amortized using the effective interest method and included in interest expense, net.

 

Interest Capitalization — The Company follows the provisions of SFAS No. 34, Capitalization of Interest Cost (“SFAS No. 34”), with respect to its FCC licenses and the related construction of its network infrastructure assets. Capitalization commences with pre-construction period administrative and technical activities, which includes obtaining leases, zoning approvals and building permits, and ceases when the construction is substantially complete and available for use (generally when a market is launched). Interest is capitalized on property, plant and equipment, improvements under construction, and FCC spectrum licenses accounted for as intangible assets with indefinite useful lives. Interest capitalization is based on rates applicable to borrowings outstanding during the period and the weighted average balance of qualified assets under construction during the period. Capitalized interest is reported as a cost of the network assets and amortized over the useful life of those assets.

 

Comprehensive Loss — Comprehensive loss consists of two components, net loss and other comprehensive income (loss). Other comprehensive income (loss) refers to revenue, expenses, gains and losses that under generally accepted accounting principles are recorded as an element of stockholders’ equity but are excluded from net loss. The Company’s other comprehensive income (loss) is comprised of foreign currency translation adjustments from its subsidiaries not using the U.S. dollar as their functional currency and unrealized gains and losses on marketable securities categorized as available-for-sale.

 

Income Taxes — The Company accounts for income taxes in accordance with the provisions of SFAS No. 109, Accounting for Income Taxes, which requires that deferred income taxes be determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities using the tax rates expected to be in effect when the temporary differences reverse. Valuation allowances, if any, are recorded to reduce deferred tax assets to the amount considered more likely than not to be realized. We also apply FASB Interpretation Number 48 (“FIN 48”) which prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements.

 

Revenue Recognition — The Company primarily earns service revenue by providing access to its high-speed wireless network. Also included in service revenue are equipment rentals and optional services, including personal and business email and static Internet Protocol. Service revenue from customers are billed in advance and recognized ratably over the service period. Revenues associated with the shipment of customer premise equipment (“CPE”) and other equipment to customers are recognized when title and risk of loss transferred to the customer. Shipping and handling costs billed to customers are recorded to service revenue.

 

The Company recognizes revenues in accordance with SAB 104, Revenue Recognition, and Emerging Issues Task Force (“EITF”) Issue No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables. EITF Issue No. 00-21 addresses how to account for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets. Revenue arrangements with multiple deliverables are required to be divided into separate units of accounting based on the deliverables relative fair value if the deliverables in the arrangement meet certain criteria. Activation fees charged to the customer are deferred and recognized as service revenues on a straight-line basis over the average expected life of the customer relationship of 3.5 years.

 

Revenue is deferred for any undelivered elements and revenue is recognized when the product is delivered or over the period in which the service is performed. If the Company cannot objectively determine the fair value of any undelivered element included in the bundled product and software maintenance arrangements, revenue is deferred until all elements are delivered and services have been performed, or until fair value can objectively be determined for any remaining undelivered elements.

 

Through August 2006, the Company earned equipment revenue primarily from sales of CPE and related infrastructure, system services and software maintenance contracts by the Company’s formerly wholly-owned subsidiary, NextNet (See Note 3, Significant Transactions). In arrangements that included multiple elements,

 

CLEARWIRE CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

including software, such as the sale of a NextNet base station with a software maintenance contract, the Company applied the accounting guidance in accordance with SOP No. 97-2, Software Revenue Recognition. Revenue was allocated to each element of the transaction based upon its fair value as determined by vendor specific objective evidence (“VSOE”). VSOE of fair value for all elements of an arrangement was based upon the normal pricing and discounting practices for those products and services when sold separately.

 

Software maintenance services included technical support and the right to receive unspecified upgrades and enhancements on a when-and-if available basis. Fees for software maintenance services were typically billed annually in advance of performance of the services with provisions for subsequent annual renewals. The related revenues were deferred and recognized ratably over the respective maintenance terms, which typically were one to two years.

 

Product Warranty — NextNet, a wholly-owned subsidiary until sold in August 2006, sold base station equipment and CPE to third parties. NextNet generally warranted new technology equipment sold to the purchaser to be free from defects in material and workmanship for two years for system infrastructure and one year for CPE. A warranty provision was made for estimated product repair at the time of the sale based upon the Company’s historical trends. In connection with the sale of NextNet to Motorola, the Company retained responsibility for a portion of the warranty costs on equipment sold during the period that NextNet was a wholly-owned subsidiary of the Company, and therefore, maintained a liability related to this obligation through August 2007. Information about warranty cost and warranty liability is as follows (in thousands):

 

 

Advertising Costs — Advertising costs are expensed as incurred. Advertising expense was $49.2 million, $38.4 million and $13.8 million for the years ended December 31, 2007, 2006 and 2005, respectively.

 

Research and Development — Research and development costs are expensed as incurred.

 

Net Loss per Share — The Company calculates net loss per share in accordance with SFAS No. 128, Earnings Per Share (“SFAS No. 128”).  Under the provisions of SFAS No. 128, basic net loss per common share is computed by dividing income or loss available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net loss per common share is computed by dividing income or loss available to common stockholders by the weighted-average number of common and dilutive common stock equivalents outstanding during the period. Common stock equivalents typically consist of the common stock issuable upon the exercise of outstanding stock options, warrants and restricted stock using the treasury stock method. The effects of potentially dilutive common stock equivalents are excluded from the calculation of diluted loss per share if their effect is antidilutive.

 

Accounting Change:  Share-Based Compensation — On January 1, 2006, the Company adopted SFAS No. 123(R), Share-Based Payment (“SFAS No. 123(R)”), which requires the measurement and recognition of compensation expense for all share-based awards made to employees and directors based on estimated fair values.

 

CLEARWIRE CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

As the Company was considered a nonpublic entity at the date of adoption and used the minimum value method for pro forma disclosures under SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”), the Company is required to apply the prospective transition method and has estimated the fair value of options granted on or after January 1, 2006 using the Black-Scholes option pricing model. The Company has applied the provisions of SFAS No. 123(R) to employee stock options granted, modified, repurchased, cancelled or settled on or after January 1, 2006. The estimate of compensation expense requires complex and subjective assumptions, including the Company’s stock price volatility, employee exercise patterns (expected life of the options), future forfeitures, and related tax effects.

 

Prior to the adoption of SFAS No. 123(R), the Company accounted for share-based compensation expense in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”), and related Interpretations, as permitted by SFAS No. 123.

 

Total share-based compensation expense recorded during the year ended December 31, 2007 was $42.8 million compared to $14.2 million during December 31, 2006. Of these amounts, $42.7 million and $12.5 million for the years ended December 31, 2007 and 2006, respectively, related to option grants recorded under SFAS No. 123(R) and $113,000 and $1.7 million under APB No. 25 for grants before January 1, 2006 for which the requisite service was not fully satisfied as of January 1, 2006.

 

Operating Leases — The Company has operating leases for certain facilities, equipment and spectrum licenses for use in its operations. Certain of the Company’s spectrum licenses are leased from third-party holders of Educational Broadband Service (“EBS”) spectrum licenses granted by the Federal Communications Commission (“FCC”). EBS licenses authorize the provision of certain communications services on the EBS channels in certain markets throughout the United States. The Company accounts for these spectrum leases as executory contracts which are similar to operating leases. Leases that are pending FCC approval are not amortized until final approval is received and are included in prepaid spectrum license fees in the accompanying consolidated balance sheets. The Company accounts for its leases in accordance with SFAS No. 13, Accounting for Leases, and Financial Accounting Standards Board (“FASB”) Technical Bulletin 85-3, Accounting for Operating Leases with Scheduled Rent Increases (as amended). For leases containing scheduled rent escalation clauses the Company records minimum rental payments on a straight-line basis over the terms of the leases, including the renewal periods as appropriate. For leases containing tenant improvement allowances and rent incentives, the Company records deferred rent, which is a liability, and that deferred rent is amortized over the term of the lease, including the renewal periods as appropriate, as a reduction to rent expense.

 

Foreign Currency — The Company’s international subsidiaries generally use their local currency as their functional currency. Assets and liabilities are translated at exchange rates in effect at the balance sheet date. Resulting translation adjustments are recorded as a separate component of accumulated other comprehensive (loss) income. Income and expense accounts are translated at the average monthly exchange rates. The effects of changes in exchange rates between the designated functional currency and the currency in which a transaction is denominated are recorded as foreign currency transaction gains (losses) and recorded in the consolidated statement of operations.

 

Concentration of Risk — The Company believes that the geographic diversity of its customer base and retail nature of its product minimizes the risk of incurring material losses due to concentrations of credit risk.

 

NextNet, the Company’s previously wholly-owned subsidiary, purchased by Motorola on August 29, 2006, is currently the sole supplier of the base stations and CPE the Company uses to provide services to its customers. If NextNet is unable to continue to develop or provide the equipment on a timely cost-effective basis, the Company may not be able to adequately service existing customers or add new customers and offer competitive pricing.

 

CLEARWIRE CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Recent Accounting Pronouncements

 

SFAS No. 141(R) — In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS No. 141(R)”). In SFAS No. 141(R), the FASB retained the fundamental requirements of SFAS No. 141 to account for all business combinations using the acquisition method (formerly the purchase method) and for an acquiring entity to be identified in all business combinations. However, the new standard requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; requires transaction costs to be expensed as incurred; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. SFAS No. 141(R) is effective for annual periods beginning on or after December 15, 2008. Accordingly, any business combinations will be recorded and disclosed following existing GAAP until January 1, 2009. The Company expects that SFAS No. 141(R) will have an impact on its consolidated financial statements when effective, but the nature and magnitude of the specific effects will depend upon the nature, terms and size of the acquisitions consummated after the effective date.

 

SFAS No. 160 — In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements (“SFAS No. 160”). SFAS No. 160 amends Accounting Research Bulletin No. 51, Consolidated Financial Statements, and requires all entities to report noncontrolling (minority) interests in subsidiaries within equity in the consolidated financial statements, but separate from the parent shareholders’ equity. SFAS No. 160 also requires any acquisitions or dispositions of noncontrolling interests that do not result in a change of control to be accounted for as equity transactions. Further, SFAS No. 160 requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. SFAS No. 160 is effective for annual periods beginning on or after December 15, 2008. The Company is currently evaluating whether the adoption of SFAS No. 160 will have a material impact on its consolidated financial statements.

 

SFAS No. 159 — In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”). SFAS No. 159 permits entities to choose, at specified election dates, to measure eligible items at fair value (“fair value option”) and to report in earnings unrealized gains and losses on those items for which the fair value option has been elected. SFAS No. 159 also requires entities to display the fair value of those assets and liabilities on the face of the balance sheet. SFAS No. 159 establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. The Company does not believe the adoption of this pronouncement will have a material impact on its consolidated financial statements.

 

SFAS No. 157 — In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements and accordingly, does not require any new fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. In February 2008, the effective date of SFAS No. 157 was delayed for one year by Final FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157, for certain non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company is currently evaluating the impact of this pronouncement on its financial statements.

 

CLEARWIRE CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

Acquisitions

 

During the year ended December 31, 2007, the Company acquired 100% of the interests of RiverCity Software Solutions, LLC and RiverCity IntraISP, LLC from RiverCity Internet Group, for an aggregate purchase price of $7.6 million, net of cash acquired of $361,000, comprised of $7.4 million in cash, of which $500,000 is remaining to be paid, and $178,000 of transaction related costs. RiverCity Software Solutions, LLC and RiverCity IntraISP, LLC specialize in providing billing, online support services and customer relationship management software solutions to the communications and services industry.

 

For the year ended December 31, 2006, the Company purchased various companies through both asset and share purchase agreements. The total aggregate purchase price was approximately $81.6 million comprised of $49.1 million in cash, common stock valued at $32.0 million and $520,000 of transaction related costs. The assets purchased were primarily spectrum licenses and other minor assets and liabilities and included the assumption of spectrum and tower lease agreements.

 

Purchase transactions are subject to purchase price allocation adjustments due to contingency resolution and final determination of fair values for up to one year after close. Although the total amount ultimately settled and paid could change, the Company does not believe that any change would be material to its consolidated financial statements or results of operations. The Company accounts for its acquisitions using the purchase method in accordance with SFAS No. 141, Business Combinations. Pro-forma information is not included for acquisitions completed in 2007 and 2006 as they were not material to the consolidated financial statements of the Company.

 

The total aggregate consideration and purchase price allocation for all of the Company’s acquisitions, for the years ended December 31, 2007 and 2006, are as follows (in thousands):

 

 

Dispositions

 

NextNet — On June 30, 2006 Clearwire and Motorola executed a Stock Purchase Agreement in which Motorola agreed to purchase 100% of the outstanding NextNet stock for a purchase price of $50.0 million in cash. The sale of NextNet resulted in a gain of $19.8 million, comprised of aggregate proceeds from the sale of

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

$47.1 million less the book value of net assets sold of $26.1 million and transaction related costs of $1.2 million, which consists of legal fees and employee related termination costs. The transaction closed on August 29, 2006.

 

The carrying value of the assets and liabilities sold during 2006 are as follows (in thousands):

 

 

In connection with the sale of NextNet, Clearwire and Motorola also entered into agreements for the purchase of certain infrastructure and supply inventory from NextNet (“Supply Agreement”). These agreements cover a number of topics, including, but not limited to, certain technology development projects and future Clearwire purchase commitments and a maximum Motorola pricing schedule for network equipment from NextNet. The aggregate price paid by Clearwire in any calendar year will be no less favorable than the aggregate price paid by other customers contemporaneously buying similar or lesser aggregate purchases. Clearwire is committed to purchase no less than $150.0 million of equipment products from Motorola in the first two years after the effective date of the Supply Agreement. Clearwire is also committed to purchase no less than 25.0% of its Worldwide Interoperability for Microwave Access (“WiMAX”) subscriber handsets from Motorola as long as the capabilities and costs of the handsets (and the availability of such handsets) are equal for a given product in similar quantities or service offered by Motorola and another supplier or suppliers. These commitments are effective for an initial term of eight years and will be automatically renewed for consecutive one year terms unless either party notifies the other party in writing of its intent to terminate the agreements at least one hundred and twenty days prior to the expiration of the initial term or any renewal thereof. Clearwire has also committed to use Motorola as its 100.0% exclusive supplier for specified Wireless Broad Band Infrastructure products until the fifth anniversary date of the agreement. After the fifth anniversary date the commitment is reduced to 51.0% until the term ends on August 29, 2014. For the period from the effective date of the agreement of August 29, 2006, through December 31, 2007, total purchases from Motorola under these agreements were $98.4 million. The remaining commitment was $51.6 million at December 31, 2007.

 

Due to Clearwire’s continuing involvement in NextNet through the various agreements described above, the sale of NextNet was not classified as discontinued operations in the financial statements as it did not meet the discontinued operations criteria specified in SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets and EITF Issue No. 03-13, Applying the Conditions in Paragraph 42 of SFAS No. 144 in Determining whether to report Discontinued Operations.

 

Financing

 

In an effort to simply its capital structure, access incremental borrowing availability, and extend debt maturities, on July 3, 2007, the Company entered into a senior term loan facility providing for loans of up to $1.0 billion. The Company borrowed $379.3 million under the senior term loan facility on the date of closing and repaid obligations under its existing $125.0 million term loan and fees and costs attributable to the senior term loan facility. The remainder is being used for capital expenditures, working capital and general corporate purposes. On

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

August 15, 2007, the Company borrowed the remaining amount of approximately $620.7 million under the senior term loan facility, and fully retired the senior secured notes, originally due 2010, for a price of 102.5% of the aggregate principal amount outstanding of approximately $620.7 million plus accrued and unpaid interest to the date of redemption and the remaining portion of the interest escrow. The $1.0 billion senior secured term loan facility provides for quarterly amortization payments aggregating an annual amount equal to 1.00% of the original principal amount of the term loans prior to the maturity date, with the remaining balance due on July 3, 2012. In general, borrowings under the senior term loan facility bear interest based, at the Company’s option, at either the Eurodollar rate or an alternate base rate, in each case plus a margin. The rate of interest for borrowings under the new senior term loan facility is the Eurodollar rate plus 6.00% or the alternate base rate plus 5.00%, with interest payable quarterly with respect to alternate base rate loans, and with respect to Eurodollar loans, interest is payable in arrears at the end of each applicable period, but at least every three months. The weighted average rate under this facility was 11.06% at December 31, 2007. See Note 10, Long-Term Debt, for additional discussion.

 

On November 2, 2007, the Company entered into an Incremental Facility Amendment (the “Amendment”) with Morgan Stanley Senior Funding, Inc, as administrative agent, term lender and co-lead arranger, Wachovia Bank N.A. as term lender, and Wachovia Capital Markets, LLC, as co-lead arranger, which amended the Credit Agreement dated July 3, 2007 (the “Credit Agreement”) to provide an additional $250.0 million in term loans. This additional funding, which closed on the same date, increases the size of the Company’s senior secured term loan facility to $1.25 billion. The Company will use the additional proceeds to further support its expansion plans and for general corporate purposes. The material terms of the incremental term loans are the same as the terms of the loans under the original senior secured term loan facility.

 

In connection with the repayment of the $125.0 million term loan and the retirement of the $620.7 million senior secured notes due 2010, the Company recorded a $159.2 million loss on extinguishment of debt, which was primarily due to the write-off of the unamortized portion of the proceeds allocated to the warrants originally issued in connection with the senior secured notes and the related deferred financing costs. In connection with the $1.0 billion senior term loan facility, the Company recorded deferred financing cost of $27.7 million which is being amortized over the five year term of the loan. In connection with the Amendment, the Company recorded additional deferred financing costs of $2.5 million which are being amortized over the remaining term of the loan.

 

The senior term loan facility contains financial, affirmative and negative covenants that the Company believes are usual and customary for a senior secured credit agreement. The negative covenants in the new senior secured term loan facility include, among other things, limitations (each of which shall be subject to standard and customary and other exceptions for financings of this type) on its ability to: declare dividends and make other distributions, redeem or repurchase its capital stock, prepay, redeem or repurchase certain subordinated indebtedness, make loans or investments (including acquisitions), incur additional indebtedness, grant liens, enter into sale-leaseback transactions, modify the terms of subordinated debt or certain other material agreements, change its fiscal year, restrict dividends from our subsidiaries or restrict liens, enter into new lines of business, recapitalize, merge, consolidate or enter into certain acquisitions, sell our assets, and enter into transactions with its affiliates.

 

Other Agreements

 

BellSouth — On May 29, 2007, the Company closed an agreement with BellSouth Corporation to acquire for an aggregate price of $300.0 million all interests in SFT Spectrum, LLC and BWC Spectrum, LLC, which collectively held all of AT&T Inc.’s leases and licenses for 2.5 GHz spectrum. These entities were wholly-owned subsidiaries of BellSouth Corporation, which is wholly-owned by AT&T, Inc. as a result of a merger that closed in December 2006. Based on the terms of the agreement, the acquisition was treated as a purchase of assets under EITF Issue No. 98-3, Determining Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or of a Business. The Company finalized the allocation estimates during the third quarter and recorded $196.8 million as purchased spectrum rights and $103.2 million as leased spectrum based on the fair values of the owned and leased spectrum.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Subscription Agreement — Clearwire and Motorola signed a Subscription Agreement on June 30, 2006, under which Motorola agreed to purchase 16,666,666 shares of Clearwire’s Class A common stock at $18.00 per share for a purchase price of $300.0 million. The agreement with Motorola includes certain limited anti-dilution features. The transaction closed on August 29, 2006.

 

Common Stock Purchase Agreement — Clearwire and Intel Capital Corporation (“Intel Capital”), a Delaware corporation and wholly owned subsidiary of Intel Corporation (“Intel”), signed a Common Stock Purchase Agreement on June 28, 2006, under which Intel Capital agreed to purchase a total of 33,333,333 shares of Clearwire’s Class A and Class B common stock, 23,427,601 shares and 9,905,732 shares, respectively, at $18.00 per share for a total purchase price of $600.0 million. The agreement includes certain limited anti-dilution features which would terminate upon the closing of the Company’s initial public offering. The transaction closed on August 29, 2006.

 

Concurrently with the Common Stock Purchase Agreement, Clearwire and Intel entered into a mobile WiMAX network Collaboration Agreement (“Collaboration Agreement”). Under the Collaboration Agreement, Clearwire agreed to use commercially reasonable efforts to develop and deploy a mobile WiMAX network in the United States, and Intel agreed to use commercially reasonable efforts to cause certain WiMAX capable end user devices to be compatible for use on Clearwire’s network.

 

Preemptive Rights Exercises — In August 2006, in connection with the exercise of preemptive rights triggered by the sale of common stock to Intel and Motorola described above, Clearwire entered into subscription agreements with the holders of its outstanding stock of the sale of an aggregate of 8,603,116 shares of Clearwire’s Class A Common Stock at $18.00 per share for an aggregate purchase price of $154.9 million. The agreements include certain limited anti-dilution features. The transactions closed in August and October of 2006.

 

Agreements with Bell Canada — In March 2005, Bell Canada (“Bell”), a Canadian telecommunications company which is a subsidiary of BCE Inc. (“BCE”), purchased 8,333,333 shares of Clearwire’s Class A common stock for $100.0 million. At the time of Bell’s investment in Clearwire, Bell, Clearwire and Eagle River Holdings, LLC (“ERH”) also entered into a separate agreement and Bell and BCE Nexxia Corporation (“BCE Nexxia”), an affiliate of Bell, entered into a Master Supply Agreement (“Master Supply Agreement”) dated March 16, 2005 with Clearwire.

 

Under the Master Supply Agreement, Bell and BCE Nexxia provide or arrange for the provision of hardware, software, procurement services, management services and other components necessary for Clearwire to provide Voice over Internet Protocol (“VoIP”) services to their subscribers in the United States and provide day-to-day management and operation of the components and services necessary for Clearwire to provide these VoIP services. Clearwire has agreed to use Bell Canada and BCE Nexxia exclusively to provide such service unless such agreement violates the rights of third parties under its existing agreements. Bell and BCE Nexxia are Clearwire’s and its affiliates’ preferred providers of these services and applications in markets beyond the United States, to the extent permitted under its existing agreements. In addition to these services, the Master Supply Agreement grants Bell and BCE Nexxia certain rights with respect to future service offerings by Clearwire and its affiliates. Under the Master Supply Agreement, BCE Nexxia and Bell will be compensated by Clearwire either in shares of Clearwire’s Class A common stock or cash. Total fees paid for new subscribers under the Master Supply Agreement were $112,000, $0 and $0 for the years ended December 31, 2007, 2006 and 2005, respectively. Amounts paid for supplies, equipment and other services purchased through Bell Canada or BCE were $6.0 million, $7.5 million and $15.4 million for the years ended December 31, 2007, 2006 and 2005, respectively. The Master Supply Agreement can be terminated for convenience on twelve months notice by either party at any time beginning on or after October 1, 2007. On October 29, 2007, the Company delivered a notice of termination of the Master Supply Agreement to BCE Nexxia and the agreement should terminate on October 29, 2008, unless it is extended by the parties.

 

CLEARWIRE CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

During 2004, the Company entered into two agreements with ITFS Spectrum Advisors, LLC (“ISA”) and ITFS Spectrum Consultants LLS (“ISC”). The agreements provided for payment to ISA and ISC in the form of warrants to purchase additional shares of Class A common stock in exchange for ISA and ISC providing opportunities for Clearwire to purchase or lease additional spectrum. Each of the agreements specifies a maximum consideration available under the agreement and, in 2005, the maximum consideration under the agreement with ISA was reached.

 

For the years ended December 31, 2007 and 2006, ISC earned approximately $181,000 and $400,000, respectively. During 2007 and 2006, $181,000 and $65,000 was paid in cash, respectively, and warrants to purchase 7,138 and 18,973 shares of Class A common stock, valued at $116,000 and $196,000, were issued, respectively. The maximum consideration under the agreement with ISC was reached in 2007. As of December 31, 2007, there was no payable remaining related to these agreements.

 

 

The Company’s ownership interests in equity investees, accounted for under the equity method, are as follows:

 

 

Denmark — Danske, a public limited company in Denmark is a telecommunications services provider holding spectrum licenses covering most of the major markets in Denmark. Danske offers wireless broadband Internet services to consumers and businesses in multiple markets in Denmark over a network deploying NextNet equipment. Clearwire acquired an equity interest in Danske in 2005 and has invested a total of $12.2 million through December 31, 2007. Revenues and related cost of goods and services sold to Danske by NextNet through August 29, 2006 have been eliminated. Clearwire’s investment in Danske has been reduced by $6.1 million for its proportionate share of losses since inception, of which approximately $2.6 million, $3.3 million and $288,000 was incurred during the years ended December 31, 2007, 2006 and 2005, respectively. Total assets and total liabilities of Danske at December 31, 2007 were $27.5 million and $20.4 million. Total assets and total liabilities of Danske at December 31, 2006 were $36.8 million and $19.0 million.

 

Mexico — MVS Net, S.A. de C.V. (“MVS Net”) is a Mexican telecommunications company in which Clearwire acquired an equity interest in 2004 and has invested a total of $30.3 million through December 31, 2007. Revenues and related costs of goods and services sold to MVS Net by NextNet through August 29, 2006 have been eliminated. Clearwire’s investment in MVS Net has been reduced by $8.7 million for its proportionate share of losses since inception, of which approximately $2.2 million, $1.9 million, and $3.7 million was incurred during the years ended December 31, 2007, 2006 and 2005, respectively. Total assets and total liabilities of MVS Net at December 31, 2007 were $25.2 million and $16.7 million. Total assets and total liabilities of MVS Net at December 31, 2006 were $28.1 million and $16.7 million.

 

CLEARWIRE CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

Investments as of December 31, 2007 and 2006 consist of the following (in thousands):

 

 

Marketable debt and equity securities that are available for current operations are classified as short-term available-for-sale investments, and are stated at fair value. Auction rate securities without readily determinable market values are classified as long-term available-for-sale investments and are stated at fair value. Unrealized gains and losses are recorded as a separate component of accumulated other comprehensive income (loss). Realized losses are recognized when a decline in fair value is determined to be other-than-temporary. Realized gains and losses are determined on the basis of the specific identification method. Gross realized losses were $5.8 million for 2007, and there were no significant realized losses in 2006 or 2005. There were no significant gains in 2007, 2006, or 2005.

 

The cost and fair value of investments at December 31, 2007, by contractual years-to-maturity, are presented below (in thousands):

 

 

The following table summarizes investments that have unrealized losses as of December 31, 2007 (in thousands):

 

 

CLEARWIRE CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

At December 31, 2007, the Company held available for sale short-term and long-term investments with a total fair value of $155.6 million and a cost of $162.9 million. During the year ended December 31, 2007, the Company incurred other-than-temporary impairment losses and realized losses of $35.0 million related to a decline in the estimated fair values of a number of short-term and long-term investment securities. Included in the Company’s investments were auction rate securities with a fair value of $88.6 million and a cost of $95.9 million. Auction rate securities are variable rate debt instruments whose interest rates are reset approximately every 30 or 90 days through an auction process. The auction rate securities are classified as available for sale and are recorded at fair value.

 

Beginning in August 2007, the auctions failed to attract buyers and sell orders could not be filled. Due to current market conditions, the Company is unable to estimate when the auctions will resume. When an auction fails, the security resets to a maximum rate as determined in the security documents. These rates vary from LIBOR + 84 basis points to LIBOR + 100 basis points. While the Company continues to earn interest on these investments at the maximum contractual rate, until the auctions resume, the investments are not liquid and it may not have access to these funds until a future auction on these investments is successful. At December 31, 2007, the estimated fair value of these auction rate securities no longer approximates cost and the Company recorded other-than-temporary impairment losses and realized losses on its auction rate securities of $32.3 million for the year ended December 31, 2007. For certain other auction rate securities, the Company recorded an unrealized loss of $7.3 million in other comprehensive income reflecting the decline in the estimated fair value of these securities. The Company considers these declines in fair value to be temporary given its consideration of the collateral underlying these securities and its conclusion that the declines are related to changes in interest rates rather than any credit concerns related to the underlying assets. Additionally, the Company has the intent and ability to hold the investments until maturity or for a period of time sufficient to allow for any anticipated recovery in market value.

 

In addition to the above mentioned securities, the Company holds one commercial paper security issued by a structured investment vehicle that was placed in receivership in September 2007 for which an insolvency event was declared by the receiver in October 2007. The Issuer invests in residential and commercial mortgages and other structured credits including sub-prime mortgages. At December 31, 2007, the estimated fair value of this security was $7.5 million based on the Company’s internally generated pricing models. During 2007 the Company recognized losses of $2.5 million related to this commercial paper security. A restructuring plan for this security is expected by mid 2008.

 

The Company estimated the fair value of these securities using internally generated pricing models that require various inputs and assumptions and the Company also uses various methods including market, income and cost approaches. Based on these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the investment, including assumptions about risk and or the risks inherent in the inputs to the valuation technique. These inputs are readily observable, market corroborated, or unobservable. The Company maximizes the use of observable inputs to the pricing models where quoted market prices from securities and derivatives exchanges are available and reliable. The Company typically receives external valuation information for U.S. Treasuries, other U.S. Government and Agency securities, as well as certain corporate debt securities, money market funds and certificates of deposit. The Company also uses certain unobservable inputs that cannot be validated by reference to a readily observable market or exchange data and relies, to a certain extent, on management’s own assumptions about the assumptions that market participant would use in pricing the security. In these instances, fair value is determined by analysis of historical and forecasted cash flows, default probabilities and recovery rates, time value of money and discount rates considered appropriate given the level of risk in the security and associated investor yield requirements. Extrapolation or other methods are applied to observable market or other data to estimate assumptions that are not observable. The internally derived values are compared to values received from brokers for reasonableness. The Company’s internally generated pricing models may include its own data and require us to use judgment in interpreting relevant market data, matters of uncertainty and matters that are inherently subjective in nature. The use of different judgments and assumptions could result in different presentations of pricing and security prices could change significantly based on market conditions.

 

CLEARWIRE CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The Company’s investments in auction rate securities represent interests in collateralized debt obligations supported by preferred equity securities of small to medium sized insurance companies and financial institutions and asset backed capital commitment securities supported by high grade, short term commercial paper and a put option from a monoline insurance company. These auction rate securities were rated AAA/Aaa or AA/Aa by Standard & Poors and Moody’s rating services at the time of purchase and their ratings have not changed as of December 31, 2007. With regards to the asset backed capital commitment securities, both rating agencies have placed the issuer’s ratings under review for possible downgrade.

 

As issuers and counterparties to the Company’s investments announce financial results in the coming quarters, it is possible that the Company may record additional losses and realize losses that are currently unrealized. The Company will continue to monitor its investments for substantive changes in relevant market conditions, substantive changes in the financial condition and performance of the investments’ issuers and other substantive changes in these investments.

 

The stated maturity of these securities is longer than 10 years; however, because we considered them to be highly liquid and available for operations, our convention was to use the next auction date, which occurs every 30 to 90 days, as the effective maturity date and these securities were recorded as short-term investments. Current market conditions do not allow the Company to estimate when the auctions for its auction rate securities will resume. As a result, during 2007 the Company reclassified its auction rate securities from short-term investments to long-term investments.

 

 

Property, plant and equipment as of December 31, 2007 and 2006 consisted of the following (in thousands):

 

 

The Company follows the provisions of SFAS No. 34 with respect to its owned FCC licenses and the related construction of its network infrastructure assets. Capitalization commences with pre-construction period administrative and technical activities, which includes obtaining leases, zoning approvals and building permits, and ceases when the construction is substantially complete and available for use generally when a market is launched.

 

Interest capitalized for the years ended December 31, 2007 and 2006 was $29.0 million and $16.6 million, respectively. Depreciation expense for the years ended December 31, 2007, 2006 and 2005 was $80.3 million, $38.5 million and $10.9 million, respectively.

 

CLEARWIRE CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

Spectrum licenses, goodwill, and other intangible assets as of December 31, 2007 and 2006 consisted of the following (in thousands):

 

 

The changes in the carrying value of goodwill for the years ended December 31, 2007 and 2006 is as follows (in thousands):

 

 

Based on the identified intangible assets recorded as of December 31, 2007, future amortization of intangible assets, not including spectrum leases pending FCC approval, is expected to be as follows (in thousands):

 

 

CLEARWIRE CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Actual amortization expense to be reported in future periods could differ from these estimates as a result of new intangible asset acquisitions, impairments, changes in useful lives and other relevant factors.

 

For the years ended December 31, 2007, 2006 and 2005, the Company recorded amortization of $4.4 million, $2.5 million and $964,000, respectively, on spectrum licenses and other intangibles.

 

Purchased Spectrum Rights and other intangibles — Spectrum licenses, which are issued on both a site-specific and a wide-area basis, authorize wireless carriers to use radio frequency spectrum to provide service to certain geographical areas in the United States and internationally. These licenses are generally acquired by the Company either directly from the governmental authority in the applicable country, which in the United States is the Federal Communications Commission (“FCC”), or through a business combination or an asset purchase, and are considered indefinite-lived intangible assets, except for the licenses acquired in Poland, Spain, Germany and Romania which are considered definite-lived intangible assets due to limited license renewal history within these countries.

 

During the year ended December 31, 2007, the Company paid consideration of $226.7 million relating to purchased spectrum rights, which was comprised of $222.5 million in cash and $4.2 million in the form of warrants and common stock. Of this cash paid during December 31, 2007, $196.8 million related to the purchased spectrum rights acquired from BellSouth Corporation (see Note 3, Significant Transactions, for additional information regarding BellSouth). Also, during the year ended December 31, 2007, the Company acquired intangibles related to acquisitions of $8.3 million, of which $4.6 million was allocated to customer relationships and $3.7 million was allocated to existing technology, and paid an additional $373,000 in cash relating to other intangible assets, primarily customer relationships.

 

During the year ended December 31, 2006 the Company paid consideration of $88.5 million, comprised of $88.2 million in cash and $300,000 in the form of warrants and common stock, to purchase spectrum rights.

 

Prepaid Spectrum License Fees - The Company also leases spectrum from third parties who hold the spectrum licenses. These leases are accounted for as executory contracts, which are treated like operating leases. Consideration paid to third-party holders of these leased licenses at the inception of a lease agreement is accounted for as prepaid spectrum license fees and is expensed over the term of the lease agreement, including renewal terms, as applicable. Future commitments under these leases are disclosed in Note 11.

 

During the year ended December 31, 2007, consideration paid relating to prepaid spectrum license fees was $256.5 million, which was comprised of $239.4 million in cash and $17.1 million in the form of warrants and common stock. Cash paid related to the purchase of leased spectrum from BellSouth was $103.2 million. In addition, during 2007, the Company received $6.0 million in cash relating to the sale of spectrum licenses.

 

During the year ended December 31, 2006, cash consideration paid relating to prepaid spectrum license fees was $148.7 million, comprised of $85.0 million in cash and $63.7 million in the value of warrants and common stock.

 

For the years ended December 31, 2007, 2006, and 2005, the Company recorded amortization of $37.9 million, $6.3 million and $2.9 million, respectively, of leased spectrum.

 

CLEARWIRE CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

Accounts payable and accrued expenses as of December 31, 2007 and 2006 consisted of the following (in thousands):

 

 

 

Components of deferred tax assets and liabilities as of December 31, 2007 and 2006 were as follows (in thousands):