Approximate date of commencement of proposed sale to the
public: As soon as practicable after the
effective date of this Registration Statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933 check the
following box: o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
CALCULATION
OF REGISTRATION FEE
Proposed Maximum
Title of Each Class of Securities
Aggregate
Amount of
to be Registered
Offering
Price(1)(2)
Registration
Fee(3)
Class A common stock, par
value $0.0001
$400,000,000
$42,800
(1)
Estimated solely for the purpose of
calculating the registration fee pursuant to Rule 457(o)
under the Securities Act.
(2)
Includes shares of Class A
common stock subject to the over-allotment of the underwriters.
(3)
Pursuant to Rule 457(p) under
the Securities Exchange Act of 1933, the registration fee is
offset in its entirety by registration fees previously paid by
Clearwire with respect to unsold shares of common stock
registered under the Registration Statement on
Form S-1
(Registration
No. 333-133993)
of Clearwire Corporation filed with the Securities and Exchange
Commission on May 11, 2006 and subsequently withdrawn.
Therefore, no Registration Fee is required with respect to the
shares to be registered hereunder.
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until this Registration
Statement shall become effective on such date as the Commission
acting pursuant to said Section 8(a), may determine.
The
information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these
securities and we are not soliciting an offer to buy these
securities in any state where the offer or sale is not
permitted.
This is Clearwire Corporation’s initial public offering. We
are
offering shares
of our Class A common stock. We expect the public offering
price to be between $ and
$ per share.
We have two classes of authorized common stock, Class A
common stock and Class B common stock. The rights of the
holders of Class A common stock and Class B common
stock are identical, except with respect to voting and
conversion. Each share of Class A common stock is entitled
to one vote. Each share of Class B common stock is entitled
to ten votes and is convertible at any time into one share of
Class A common stock. As of November 30, 2006, our
founder, Chairman and Co-Chief Executive Officer, Craig McCaw,
along with his affiliates, owns Class A common stock and
Class B common stock representing approximately 52% of our
combined voting power. Intel Pacific, Inc., or Intel Pacific, a
wholly owned subsidiary of Intel Corporation, along with its
affiliates, own Class A common stock and Class B
common stock representing approximately 32% of our combined
voting power as of November 30, 2006. By virtue of a voting
agreement, Mr. McCaw and Intel Pacific, along with their
respective affiliates, beneficially own Class A common
stock and Class B common stock representing approximately
83% of our combined voting power and currently have, and
immediately following this offering will continue to have, the
ability to designate a majority of our board of directors.
Currently, no public market exists for our common stock. We have
applied to have our shares of Class A common stock approved
for quotation on the Nasdaq Global Market under the symbol
“CLWR.”
Investing in our Class A common stock involves risks
that are described in the “Risk Factors” section
beginning on page 9 of this prospectus.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
Per Share
Total
Public offering price
$
$
Underwriting discounts and
commissions
$
$
Proceeds, before expenses, to
Clearwire Corporation
$
$
The underwriters may also purchase up to an
additional shares
of our Class A common stock from us at the public offering
price, less the underwriting discount, within 30 days from
the date of this prospectus to cover over-allotments, if any.
The shares will be ready for delivery on or
about ,
2007.
You should rely only on the information contained in this
prospectus. We have not, and the underwriters have not,
authorized any other person to provide you with different
information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not,
and the underwriters are not, making an offer to sell these
securities in any jurisdiction where offer or sale is not
permitted. You should assume that the information appearing in
this prospectus is accurate only as of the date on the front
cover of this prospectus. Our business, financial condition,
results of operations and prospects may have changed since that
date.
No action is being taken in any jurisdiction outside the United
States to permit a public offering of the Class A common
stock or possession or distribution of this prospectus in that
jurisdiction. Persons who come into possession of this
prospectus in jurisdictions outside the United States are
required to inform themselves about and to observe any
restrictions as to this offering and the distribution of this
prospectus applicable to those jurisdictions.
This offering is only being made to persons in the United
Kingdom whose ordinary activities involve them in acquiring,
holding, managing or disposing of investments (as principal or
agent) for the purposes of their businesses or otherwise in
circumstances which have not resulted and will not result in an
offer to the public in the United Kingdom within the meaning of
the Public Offers of Securities Regulations 1995 or the UK
Financial Services and Markets Act 2000, or FSMA, and each
underwriter has only communicated or caused to be communicated
and will only communicate or cause to be communicated any
invitation or inducement to engage in investment activity
(within the meaning of section 21 of FSMA) received by it
in connection with the issue or sale of the shares of
Class A common stock in circumstances in which
section 21(1) of FSMA does not apply to us. Each of the
underwriters agrees and acknowledges that it has complied and
will comply with all applicable provisions of FSMA with respect
to anything done by it in relation to the shares of Class A
common stock in, from or otherwise involving the United Kingdom.
The following summary highlights information contained
elsewhere in this prospectus. It may not contain all the
information that may be important to you. You should read this
entire prospectus carefully, including the sections entitled
“Risk Factors” and “Management’s Discussion
and Analysis of Financial Condition and Results of
Operations,” and our historical consolidated financial
statements and related notes included elsewhere in this
prospectus. In this prospectus, unless the context requires
otherwise, references to “Clearwire, “the
Company,”“we,”“our,” or
“us” refer to Clearwire Corporation and its
consolidated subsidiaries.
Our
Company
We build and operate next generation wireless broadband networks
that enable fast, simple, portable, reliable and affordable
Internet communications. Our wireless broadband networks cover
entire communities and deliver a high-speed Internet connection
that not only creates a new communications path into the home or
office, but also provides a broadband connection anytime and
anywhere within our coverage area. We intend to evolve our
network and the services we provide to facilitate a greater
range of mobile communications services than we currently offer.
Our current service is both competitive with and complementary
to existing wireline and wireless networks. Our subscribers may
access the same rich content, applications and services as
subscribers of wireline broadband services, while also
experiencing much of the freedom and flexibility that large
scale wireless networks enable. We believe our network combines
some of the best features of cellular, cable modem, digital
subscriber line, or DSL, and wireless fidelity, or WiFi,
networks into a single service offering that legacy networks do
not currently match. As our capabilities evolve, we also expect
to develop and offer additional innovative and differentiated
products and services. Our recently introduced voice over
Internet protocol, or VoIP, telephony service is one example of
a service that complements our current wireless broadband
offering. Our current wireless broadband Internet access service
is:
•
Fast. We offer connectivity speeds that
typically exceed cellular networks and are competitive with
wireline broadband offerings.
•
Simple. Our services are easy to acquire and
use, with no software or professional installation typically
required.
•
Portable. Unlike wired networks, our customers
can access our network from anywhere within our coverage area.
•
Reliable. We use licensed radio frequencies,
or spectrum, which enables us to minimize interference common on
certain wireless networks that use unlicensed or shared radio
frequencies.
•
Affordable. We offer a value proposition that
is competitive while recognizing the unique benefits of our
service offerings.
We were founded by telecommunications pioneer Craig O. McCaw,
our Chairman and Co-Chief Executive Officer, in October 2003,
and we launched our first market in August 2004. By
November 30, 2006, we offered our services to more than
9.5 million people in the United States and Europe. Our
network in the United States is deployed in 34 markets across
more than 350 municipalities and covers an estimated
8.5 million people. Our markets range from major
metropolitan areas to small, rural communities, and all sizes in
between. As of November 30, 2006, we also offered our
wireless broadband services internationally in Brussels, Belgium
and Dublin, Ireland, where our network covers approximately
1.0 million people.
Subscribers have rapidly adopted our services as we have grown
from approximately 1,000 wireless broadband Internet subscribers
as of September 30, 2004 to over 188,000 as of
November 30, 2006. We estimate that the average monthly
increase in our subscriber penetration rate, calculated by
dividing the number of new subscribers by the number of
households covered by our network, ranged between 0.5% to 0.7%
for each of the eleven months ended November 30, 2006. We
believe that substantially all of the households we cover have
access to cable modem
and/or DSL
Internet services, leading us to conclude that
our rapid subscriber growth rates reflect the mass market appeal
and robust customer demand for our differentiated services, even
in the presence of highly competitive wireline broadband
alternatives.
Our advanced wireless broadband network currently relies on
network infrastructure equipment that is based on proprietary
non-line-of-sight,
or NLOS, Orthogonal Frequency Division Multiplexing, or
OFDM, technologies. We have committed to deploy networks based
on the IEEE mobile Worldwide Interoperability of Microwave
Access 802.16e-2005, or mobile WiMAX, standard once mobile WiMAX
equipment is commercially available and meets our requirements.
As with our current network infrastructure equipment, we expect
mobile WiMAX to support fixed, portable and mobile service
offerings using a single network architecture. In addition, as
mobile WiMAX is a standards-based technology, we expect
manufacturers to eventually offer a number of handheld
communications and consumer electronic devices that will be
enabled to communicate using our mobile WiMAX network, including
notebook computers, ultramobile personal computers, or PCs,
personal data assistants, or PDAs, gaming consoles, MP3 players,
and other handheld devices.
In addition, we and Intel Corporation, or Intel, have agreed to
jointly develop, promote and market a mobile WiMAX service
offering as a co-branded service available only over
Clearwire’s mobile WiMAX network in the United States. This
service will target users of notebook computers, ultramobile
PCs, and other mobile computing devices containing Intel
microprocessors.
Industry
We believe the U.S. broadband market offers significant
long-term growth potential. According to IDC’s
U.S. Broadband Services
2006-2010
Forecast (September 2006), the U.S. residential broadband
market is expected to grow at a 14.3% compound annual growth
rate between 2006 and 2010. According to that same report and
IDC’s June 2006 Internet Commerce Market Model, Version
10.2, broadband penetration is expected to exceed 74% of
U.S. households by 2010, up from 36% in 2005, as
dial-up
subscribers migrate to broadband connectivity and people with no
Internet access become broadband subscribers. Based on those
same reports, the worldwide broadband market is expected to
experience similar growth trends. In its November 2006 Worldwide
WiMAX Forecast, Gartner Dataquest estimates that the size of the
North American WiMAX market will increase from approximately
30,000 connection installed bases in 2006 to 21.2 million
in 2011, and the worldwide market will increase from 180,000
connection installed bases in 2006 to 84.8 million in 2011.
In addition to growing broadband demand, the rapid growth of
mobile email products, as well as sales of notebook computers
and ultramobile PCs, leads us to believe that subscribers will
increasingly favor Internet access that provides for the
portability offered by our existing network and, once
commercially deployable, the mobility offered by WiMAX.
As wireless broadband becomes more widely available, we believe
demand for mobile applications will dramatically increase,
including demand for email, web browsing, VoIP telephony,
streaming audio and video, video conferencing, gaming,
e-commerce,
music and video downloading and file transfers. For instance,
the
U.S. VoIP-based
broadband telephony market is expected to grow from
4.3 million households in 2005 to 22.5 million
households by 2010, according to Jupiter Research’s
Broadband / Voice Over IP (September 2006) report,
representing approximately a 39% compound annual growth rate.
The worldwide VoIP telephony market is expected to experience
similar growth trends, according to iSuppli’s August 2006
Wired Communications Topical Report.
Competitive
Strengths
Our business is characterized by the following competitive
strengths:
•
Differentiated Services. We offer our
subscribers competitively priced services that combine speed,
simplicity, portability and reliability. We believe that no
operator of DSL, cable or cellular networks currently delivers
all of these characteristics in a single service offering.
•
Attractive Spectrum Position. We use
licensed spectrum, which allows us to minimize the interference
common to many networks that use unlicensed spectrum, including
WiFi networks. The supply of licensed spectrum is limited,
creating significant barriers to entry for competing
wireless services. We believe that we have the second largest
spectrum position in the 2.5 GHz
(2495-2690 MHz)
band in the United States with a spectrum portfolio that
includes approximately 11.5 billion MHz-POPs, an industry
metric that represents the amount of spectrum in a given area,
measured in Megahertz, multiplied by the estimated population of
that area. As of November 30, 2006, our spectrum rights in
the United States covered an estimated 205 million people.
In Europe as of November 30, 2006, we held approximately
5.1 billion MHz-POPs of spectrum, predominantly in the
3.5 GHz band, covering approximately 117 million
people, not including licenses that we were recently awarded in
Germany covering approximately 82.5 million people. We plan
to continue acquiring spectrum in markets that we believe are
attractive for our service offerings.
•
Efficient Economic Model. We believe
our economic model for deploying our services is based on
replicable and scalable individual market builds, allowing us to
repeat our build-out processes as we expand. Once our network is
deployed, we are typically able to leverage our fixed costs over
an increasing number of subscribers. We believe our model
requires lower fixed capital and operating expenditures relative
to other wireless and wireline broadband service providers. As
of September 30, 2006, 25 of our 26 markets in the
United States that had been in operation for more than nine
months had positive cash flow from operations before marketing
expenses.
•
World-Class Management
Team. Regarded as a pioneer and leader in the
wireless communications industry, Mr. McCaw has been an
active entrepreneur, operator and investor in the industry for
more than 35 years. In addition to Mr. McCaw, our
senior management team consists of a core group of five senior
executives, who together average almost 25 years of
experience in or serving the communications and Internet
industries with companies such as McCaw Cellular, AT&T
Wireless, Nextel Communications, Nextel Partners and others.
•
Strong Strategic Relationships. We have
key strategic relationships with three industry leaders, Intel,
Motorola and Bell Canada, which, directly or through their
affiliates, have invested a total of approximately
$1.1 billion in our equity securities. We believe our
strategic relationships with Intel, Motorola and Bell Canada
place us in an advantageous position with respect to access to
equipment, deployment of mobile WiMAX and development of other
value added services, such as VoIP telephony.
Business
Strategy
We intend to continue to grow our business by pursuing the
following strategies:
•
Deploy our service broadly and increase our subscriber
base rapidly. We intend to deploy our network
throughout the United States and internationally in markets that
we find attractive. We believe that this broad deployment will
enable us to rapidly increase our subscriber base. If mobile
WiMAX network equipment and devices become commercially
available and meet certain requirements, we expect to deploy
mobile WiMAX networks in our new markets and, over time, migrate
our existing markets to the same technology.
•
Build our spectrum position. We intend
to continue acquiring spectrum domestically and internationally,
thereby increasing the number of markets in which we are able to
offer our services.
•
Enhance portability and mobile service
offerings. We will continue to focus on
enhancing the portability of subscriber equipment and to work
with vendors to introduce devices that will allow us to offer
fully mobile services, whether based on our existing Expedience
network or on our planned mobile WiMAX network. We intend to
introduce a PC Card for our Expedience network in the second
half of 2007 that will enable mobile access to our services. We
further believe that commercial deployment of mobile WiMAX will
lead to the development and sale of mobile products that are
compatible with our planned mobile WiMAX network.
Offer premium value added services. We
intend to generate incremental revenues, leverage our cost
structure and improve subscriber retention by offering a variety
of premium services. We currently offer VoIP telephony services
in 13 markets, and plan to offer other premium services and
applications, such as WiFi hotspots, public safety services,
security services, and subscription-based technical support. We
believe that our planned mobile WiMAX deployment will enable us
to offer additional premium services that take advantage of the
capabilities of this technology.
Risk
Factors
Our business is subject to numerous risks, as more fully
described in the section entitled “Risk Factors”
following this prospectus summary. You should carefully review
these risks before investing in our Class A common stock.
Some of the risks you should consider relating to our business
and this offering include:
•
We are an early stage company with a history of operating losses
and we expect to continue to realize significant net losses for
the foreseeable future. As of September 30, 2006, our
accumulated deficit was approximately $366.2 million.
•
Our business plan will require us to raise substantial
additional financing both in the near term and over the next
five years or more. As with other businesses that require a
substantial investment in physical infrastructure prior to
generating revenue, we intend to invest significantly in our
business before we expect to generate cash flow from operations
adequate to cover our anticipated expenses. If we do not obtain
additional debt or equity financing, our business prospects,
financial condition and results of operations will be adversely
affected.
•
We are committed to using commercially reasonable efforts to
deploy wireless broadband networks based solely on mobile WiMAX
technology once that technology meets certain specified
performance criteria, even if there are alternative technologies
available in the future that are technologically superior or
more cost effective.
•
Our business plan contemplates migration of our current network
to a mobile WiMAX network. Mobile WiMAX technology is not yet
commercially available, and may never be developed to our
satisfaction or at all. If mobile WiMAX is not successfully
developed and integrated into our network, our business
prospects and results of operations may be adversely affected.
•
We currently depend on our commercial partners to develop and
deliver the equipment for our existing and planned networks. If
our commercial partners fail to provide equipment that meets our
requirements on a timely basis, our business prospects and
results of operations may be adversely affected.
•
Many of our competitors are better established and have
significantly greater resources, and may subsidize their
competitive offerings with other products and services, which
may make it difficult for us to attract and retain subscribers.
•
Since August 2005 we have borrowed approximately
$755.7 million. Our substantial indebtedness and
restrictive debt covenants could limit our financing options and
liquidity position and may limit our ability to grow our
business.
•
Mr. McCaw and Intel Pacific collectively control a majority
of our combined voting power, and may have, or may develop in
the future, interests that may diverge from yours.
•
Future sales of large blocks of our common stock, which are
subject to demand registration rights that are triggered by this
offering, may adversely impact our stock price.
General
Information About This Prospectus
Clearwire®,
ClearBusiness®,
ClearPremium®,
ClearClassic®
and
ClearValue®
are registered trademarks of Clearwire.
NextNet®
and
Expedience®
are registered trademarks of NextNet Wireless, Inc., a
wholly-owned subsidiary of Motorola, Inc. All other trademarks,
service marks and trade names referred to in this prospectus are
the property of their respective owners.
Mr. McCaw, through his affiliates, currently owns
Class A common stock and Class B common stock
representing approximately 52% of our combined voting power.
Intel Pacific and its affiliates currently own Class A
common stock and Class B common stock representing
approximately 32% of our combined voting power. By virtue of a
voting agreement, Mr. McCaw and Intel Pacific, along with
their respective affiliates, together beneficially
own shares of capital stock representing approximately 83%
of our voting power. We and affiliates of Mr. McCaw and
Intel Pacific are parties to a voting agreement that requires
each of these shareholders to vote its shares in favor of four
directors designated by Eagle River Holdings, LLC, or ERH, an
entity controlled by Mr. McCaw, and, depending on
Intel’s ownership of our outstanding capital stock, up to
two directors designated by Intel Pacific. Intel Pacific’s
obligation to vote its shares in favor of the four ERH designees
is not subject to any minimum ERH share ownership requirement,
which means that ERH will retain these rights even if it no
longer holds any shares of our capital stock. This voting
agreement will remain in effect after this offering. As a result
of the combined voting power of Mr. McCaw and Intel and their
voting agreement, we will qualify for, and intend to rely on,
exemptions from certain Nasdaq Global Market corporate
governance standards.
We are a Delaware corporation. Our principal executive offices
are located at 5808 Lake Washington Boulevard NE,
Suite 300, Kirkland, Washington98033, and our telephone
number is
(425) 216-7600.
Our website address is http://www.clearwire.com. Information on
or accessed through our website is not incorporated into this
prospectus and is not a part of this prospectus.
shares
of Class A common stock. We also have granted the
underwriters an option to purchase up to an
additional shares
of Class A common stock to cover over-allotments in
connection with this offering.
Common stock outstanding after the offering
Following the consummation of this offering, and assuming the
underwriters’ over-allotment option is exercised in full,
we will have outstanding:
• shares
of Class A common stock; and
• 85,790,057 shares of
Class B common stock.
The rights of the holders of Class A common stock and
Class B common stock are identical, except with respect to
voting and conversion. Shares of Class A common stock are
entitled to one vote per share and shares of Class B common
stock are entitled to ten votes per share. Shares of
Class B common stock convert to shares of Class A
common stock on a one to one basis at any time at the option of
the holder and automatically under certain circumstances
involving the transfer of such shares. As used in this
prospectus, the term “common stock” means our
Class A common stock and the term “capital stock”
means our Class A and Class B common stock, unless
otherwise specified.
Use of proceeds
We will receive net proceeds from this offering of approximately
$ million, or approximately
$ million if the underwriters
exercise their over-allotment option in full, assuming an
initial public offering price of
$ per share and after
deducting the estimated underwriting discount. We will use the
proceeds of this offering for market and network expansion,
spectrum acquisitions and general corporate purposes.
Proposed Nasdaq Global Market symbol
“CLWR”
The number of shares outstanding following this offering is
based on 322,939,029 shares of Class A common stock
and 85,790,057 shares of Class B common stock
outstanding as of September 30, 2006, and excludes:
•
33,938,074 shares of Class A common stock issuable
upon exercise of outstanding options, with a weighted average
exercise price of $3.07 per share;
•
16,061,926 shares of Class A common stock available
for future issuance under our 2003 Stock Option Plan;
•
56,407,953 shares of Class A common stock issuable
upon exercise of outstanding warrants, with a weighted average
exercise price of $4.67 per share;
•
85,790,057 shares of Class A common stock issuable
upon conversion of our Class B common stock;
•
2,033,000 shares of Class A common stock issuable upon
the closing of pending spectrum acquisitions; and
•
1,130,000 shares of Class A common stock issuable upon
exercise of warrants to be issued upon the closing of pending
spectrum acquisitions, with a weighted average exercise price of
$7.50 per share.
The information set forth below should be read in conjunction
with the information under “Capitalization,”“Selected Historical Consolidated Financial Data,”“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and the consolidated
financial statements and related notes included elsewhere in
this prospectus. The balance sheet data is a summary of our
consolidated balance sheet as of September 30, 2006, on an
actual basis and on an as adjusted basis to give effect to the
application of the net proceeds from this offering at an assumed
initial public offering price of $
per share, after deducting estimated underwriting discounts,
commissions and offering expenses, but assuming no exercise of
the underwriters’ over-allotment option. The statement of
operations data for the period from October 27, 2003
(inception) through December 31, 2003 and for the years
ended December 31, 2004 and 2005 was derived from our
audited consolidated financial statements included elsewhere in
this prospectus. The statement of operations data for the
nine-month periods ended September 30, 2005 and 2006 and
the balance sheet data as of September 30, 2006 have been
derived from our unaudited consolidated financial statements
that are included elsewhere in this prospectus and have been
prepared on the same basis as our audited financial statements.
In the opinion of management, the unaudited consolidated
financial statements reflect all adjustments, consisting only of
normal and recurring adjustments, necessary to state fairly our
results of operations for and as of the periods presented.
Historical results are not necessarily indicative of results to
be expected for future periods and interim results are not
necessarily indicative of results for the entire year.
Represents our estimate of the number of natural persons
resident in the geographic areas in which our wireless broadband
service is commercially available. Our calculation of covered
population is based on our estimate of covered households
multiplied by 2.5 persons per household.
(2)
Represents our estimate of the number of natural persons
resident in the geographic areas in which our wireless broadband
service is commercially available for our consolidated
subsidiaries only, and excludes data regarding our equity
investees. Our calculation of covered population is based on
estimates from Economist Intelligence Unit database covered
households multiplied by 2.3 and 3.0 persons per household,
respectively for Brussels, Belgium and Dublin, Ireland.
(3)
Represents our estimate of the number of single residence homes,
apartments and condominium units in the geographic areas in
which our wireless broadband service is commercially available.
Our estimate is based on information extrapolated from 2000
U.S. census data and other market information.
(4)
Represents the number of individuals and business or
governmental entities receiving wireless broadband connectivity
through our network.
(5)
Certain coverage and subscriber data as of November 30,2006 is disclosed elsewhere in this prospectus.
Investing in shares of our common stock involves a high
degree of risk. Before investing in our common stock you should
consider carefully the following risks, together with the
financial and other information contained in this prospectus. If
any of the following risks actually occurs, our business,
prospects, financial condition and results of operations could
be adversely affected. In that case, the trading price of our
common stock would likely decline and you may lose all or a part
of your investment.
We are
an early stage company, we have a history of operating losses
and we expect to continue to realize significant net losses for
the foreseeable future.
We have only recently begun to implement our business strategy
and we amended that strategy significantly in connection with
our sale of NextNet in August 2006. We have recorded a net loss
in each reporting period since our inception. Our net loss in
the year ended December 31, 2004 and 2005, and in the nine
months ended September 30, 2006, was approximately
$33.0 million, $140.0 million and $191.9 million,
respectively. Our accumulated deficit at September 30, 2006
was approximately $366.2 million. As Clearwire is at an
early stage of development, we cannot anticipate with certainty
what our earnings, if any, will be in any future period.
However, we expect to incur significant net losses as we develop
and deploy our network in new and existing markets, expand our
services and pursue our business strategy. We intend to invest
significantly in our business before we expect cash flow from
operations will be adequate to cover our anticipated expenses.
In addition, at this stage of our development we are subject to
the following risks:
•
our results of operations may fluctuate significantly, which may
adversely affect the value of an investment in our common stock;
•
we may be unable to develop and deploy our network, expand our
services, meet the objectives we have established for our
business strategy or grow our business profitably, if at all;
•
it may be difficult to predict accurately our key operating and
performance metrics because of our limited operating
history; and
•
our network and related technologies may fail or the quality and
number of services we are able to provide may decline if our
network operates at maximum capacity for an extended period of
time.
If we are unable to execute our business strategy and grow our
business, either as a result of the risks identified in this
section or for any other reason, our business, prospects,
financial condition and results of operations will be materially
and adversely affected.
If we
do not obtain additional financing, our business prospects,
financial condition and results of operations will be adversely
affected.
We are not seeking to satisfy all of our anticipated capital
needs through this offering. The proceeds of this offering are
expected to provide only a portion of the capital we believe
necessary to implement our business strategy. Accordingly, we
will need to obtain significant additional financing, both in
the near and long term, to make planned capital expenditures,
cover operating expenses and service our existing debt. We may
not be able to secure adequate additional financing when needed
on acceptable terms or at all. To execute our business strategy,
we may issue additional equity securities in public or private
offerings, potentially at a price lower than our initial public
offering price or the market price of our common stock at the
time of such issuance. We will likely seek significant
additional debt financing, and, as a result, will likely be
forced to incur significant interest expense. Our existing level
of debt may make it more difficult for us to obtain this debt
financing, may reduce the amount of money available to finance
our operations and other business activities, may expose us to
the risk of increasing interest rates, may make us more
vulnerable to general economic downturns and adverse industry
conditions, and may reduce our flexibility in planning for, or
responding to, changing business and economic conditions. We
also may decide to sell additional debt or
equity securities in our domestic or international subsidiaries,
which may dilute our ownership interest in or reduce or
eliminate our income, if any, from those entities. If we cannot
secure sufficient additional funding we may forego strategic
opportunities or delay, scale back and eliminate network
deployments, operations, spectrum acquisitions and investments.
Certain holders of our warrants are entitled to pre-emptive
rights in unregistered equity offerings completed within one
year after the date of this offering, which may delay or
otherwise adversely affect our ability to raise additional funds.
We
have committed to deploy a wireless broadband network using
mobile WiMAX technologies under certain circumstances, even if
there are alternative technologies available in the future that
would be technologically superior or more cost
effective.
Under the terms of our strategic collaboration agreement with
Intel, we have committed to use commercially reasonable efforts
to deploy a mobile WiMAX based network once mobile WiMAX
equipment is commercially available and satisfies certain
technical performance criteria. Other competing technologies may
be developed that have advantages over mobile WiMAX, and
operators of other networks based on these competing
technologies may be able to deploy their networks at a lower
cost than that incurred in deploying a mobile WiMAX network,
which may allow those operators to compete more effectively.
Additionally, if other network operators do not adopt and deploy
mobile WiMAX, equipment manufacturers may be unwilling to invest
the time and money necessary to develop infrastructure equipment
and end user devices that meet our business needs. Furthermore,
we are depending on the widescale deployment of mobile WiMAX
networks to drive an adequate volume of demand which we expect
will support reasonably priced equipment. As a result, our
commitment to deploy mobile WiMAX technology on our network may
lead to problems acquiring new subscribers and dissatisfaction
among our existing subscribers, either of which would harm our
prospects, financial condition and results of operations.
Additionally, mobile WiMAX may not perform as we expect, or as
well as our existing Expedience technology, and therefore we may
not be able to deliver the quality or types of service we
expect. We also may discover unanticipated costs associated with
deploying and maintaining our network or delivering services we
must offer in order to remain competitive. Either or both of
these risks could reduce our subscriber growth, increase our
costs of providing services or increase our churn. Churn is an
industry term we use to measure the rate at which subscribers
terminate service. We calculate this metric by dividing the
number of subscribers who terminate their service in a given
month by the average number of subscribers during that month, in
each case excluding those who subscribe for and terminate our
service within 30 days.
If
third parties fail to develop and deliver the equipment that we
need for both our existing and future networks, we may be unable
to execute our business strategy or operate our
business.
We currently depend on third parties to develop and deliver
complex systems, software and hardware products and components
for our network in a timely manner, at a high level of quality.
Motorola is our sole supplier of equipment and software for the
Expedience system currently deployed on our network, which was
developed by NextNet. The Expedience system consists of network
components used by us and subscriber equipment used by our
subscribers. To successfully execute our business strategy,
Motorola must not only continue to produce the Expedience
system, including the software and hardware components, and
deliver it when needed by us, but must also continue to further
upgrade and evolve the technology for our business to remain
competitive until we deploy mobile WiMAX technologies. Any
failure by Motorola to meet these needs may impair our ability
to execute our business strategy and our ability to operate our
business.
For our planned mobile WiMAX deployment, we are relying on third
parties, including Motorola and Intel, to develop the network
components and subscriber equipment necessary to build and
operate our mobile WiMAX networks. As mobile WiMAX is a new and
highly sophisticated technology, we cannot be certain that these
third parties will be successful in their development efforts.
Even if these parties are successful, the development process
for mobile WiMAX network components and subscriber equipment may
be lengthy and subject to significant delays. If these third
parties are unable to develop mobile WiMAX network components
and subscriber equipment on a timely basis that perform
according to our expectations, we may be unable to deploy mobile
WiMAX on our networks when we expect, or at all. If we are
unable to deploy mobile WiMAX in a timely manner, we may be
unable to execute our business strategy and our prospects and
results of operations would be harmed.
Many
of our competitors are better established and have significantly
greater resources than we have, which may make it difficult to
attract and retain subscribers.
The market for broadband and related services is highly
competitive, and we compete with several other companies within
each of our markets. Many of our competitors are well
established with larger and better developed networks and
support systems, longer-standing relationships with customers
and suppliers, greater name recognition and greater financial,
technical and marketing resources than we have. Our competitors
may subsidize competing services with revenue from other sources
and, thus, may offer their products and services at prices lower
than ours. Our competitors may also reduce the prices of their
services significantly or may offer broadband connectivity
packaged with other products or services. We may not be able to
reduce our prices or otherwise combine our services with other
products or services, which may make it more difficult to
attract and retain subscribers.
Many of our competitors are better established or have greater
financial resources than we have. Our competitors include:
•
cable operators offering high-speed Internet connectivity
services and voice communications;
•
incumbent and competitive local exchange carriers providing DSL
services over their existing wide, metropolitan and local area
networks;
•
3G cellular, PCS and other wireless providers offering wireless
broadband services and capabilities, including developments in
existing cellular and PCS technology that may increase network
speeds or have other advantages over our services;
•
Internet service providers offering
dial-up
Internet connectivity;
•
municipalities and other entities operating WiFi networks, some
of which are free or subsidized;
•
providers of VoIP and other telephony services;
•
wireless Internet service providers using licensed or unlicensed
spectrum;
•
satellite and fixed wireless service providers offering or
developing broadband Internet connectivity and VoIP telephony;
•
electric utilities and other providers offering or planning to
offer broadband Internet connectivity over power lines; and
•
resellers providing wireless Internet or other wireless services
using infrastructure developed and operated by others.
We expect other existing and prospective competitors to adopt
technologies or business plans similar to ours, or seek other
means to develop services competitive with ours, particularly if
our services prove to be attractive in our target markets. For
example, Sprint Nextel, or Sprint, has announced its intention
to deploy a mobile WiMAX network covering 100 million
people in the United States by the end of 2008. Sprint has
substantially greater resources than we do, giving them certain
advantages over us. Sprint may deploy their network in some of
the same markets in which we have deployed or plan to deploy our
network. Sprint or other operators may deploy their network
faster or more broadly than we, thereby obtaining a time to
market advantage over us. There can be no assurances that there
will be sufficient customer demand for services offered over
mobile WiMAX networks in the same markets to allow multiple
operators, if any, to succeed.
Our
substantial indebtedness and restrictive debt covenants could
limit our financing options and liquidity position and may limit
our ability to grow our business.
In August 2005, we issued senior secured notes, due 2010, in an
aggregate principal amount of $260.3 million, and warrants
to purchase up to 20,827,653 shares of our common stock. In
February 2006, we issued additional senior secured notes, due
2010, in an aggregate principal amount of $360.4 million,
and warrants to purchase up to 28,828,000 shares of our
common stock. In August 2006 we borrowed an additional
$125.0 million under a commercial loan. We also borrowed
$10.0 million from BCE Nexxia, an affiliate of Bell Canada,
in June 2006 in connection with the build-out and deployment of
our VoIP infrastructure. So long as these debt obligations are
outstanding, we are required to make aggregate interest payments
and principal payments of $317.5 million and
$755.7 million, respectively, during the five years ending
December 31, 2011, including interest and principal
payments of $84.1 million and $1.3 million,
respectively, during the year ending December 31, 2007.
Our indebtedness could have important consequences to the
holders of our common stock, such as:
•
we may not be able to obtain additional financing to fund
working capital, operating losses, capital expenditures or
acquisitions on terms acceptable to us or at all;
•
we may be unable to refinance our indebtedness on terms
acceptable to us, or at all;
•
our substantial indebtedness may make us more vulnerable to
economic downturns and limit our ability to withstand
competitive pressures; and
•
cash flows from operations and investing activities have been
negative since inception and will continue to be so for some
time, and our remaining cash, if any, may be insufficient to
operate our business.
Additionally, covenants in the indenture governing our senior
secured notes and in the security agreement governing our
commercial loan impose operating and financial restrictions on
us. These restrictions prohibit or limit our ability, and the
ability of our subsidiaries, to, among other things:
•
pay dividends to our stockholders;
•
incur, or cause certain of our subsidiaries to incur, additional
indebtedness;
•
permit liens on or conduct sales of any assets pledged as
collateral;
•
sell all or substantially all of our assets or consolidate or
merge with or into other companies;
•
repay existing indebtedness; and
•
engage in transactions with affiliates.
A breach of any of these covenants could result in a default
under our senior secured notes and our commercial loans. If a
default causes our debt repayment obligations to be accelerated,
our assets may be insufficient to repay the amount due in full.
If we are unable to repay or refinance those amounts, the
trustee for, or holders of, our senior secured notes, and the
collateral agent for our commercial loan, could proceed against
the assets pledged to secure these obligations, which include a
substantial portion of our spectrum assets and substantially all
of our other assets.
These restrictions may limit our ability to obtain additional
financing, withstand downturns in our business and take
advantage of business opportunities. Moreover, we may seek
additional debt financing on terms that include more restrictive
covenants, may require repayment on an accelerated schedule or
may impose other obligations that limit our ability to grow our
business, acquire needed assets, or take other actions we might
otherwise consider appropriate or desirable.
Our
independent public accountants have identified a material
weakness and other significant deficiencies in our internal
control over financial reporting. If we fail to establish and
maintain an effective system of internal control, we may not be
able to report our financial results accurately or to prevent
fraud. Any inability to report and file our financial results in
an accurate and timely manner could harm our business and
adversely impact the trading price of our common
stock.
Prior to this offering, we have been a private company and have
not filed reports with the SEC. We will become subject to the
public reporting requirements of the Securities Exchange Act
upon the completion of this offering. As a public reporting
company we will be required, among other things, to maintain a
system of effective control over financial reporting. We produce
our consolidated financial statements in accordance with the
requirements of generally accepted accounting principles in the
United States, or U.S. GAAP, but our internal control may
not currently meet all of the standards applicable to companies
with publicly traded securities.
Effective internal controls are necessary to provide reliable
financial reports and prevent fraud. If we cannot provide
reliable financial reports or prevent fraud, we may not be able
to manage our business as effectively as we would if an
effective control environment existed, and our business, brand
and reputation with investors may be harmed. As a result, our
current internal control deficiencies may adversely affect our
financial condition, results of operation and access to capital.
We have in the past discovered, and may in the future discover,
areas of our internal control that need improvement.
In connection with their audits for the years ended
December 31, 2004 and 2005, our independent public
accountants identified a material weakness in our internal
control. A material weakness is a significant deficiency that,
by itself or in combination with other control deficiencies,
results in more than a remote likelihood that a material
misstatement in our annual or interim financial statements will
not be prevented or detected. The identified weakness concerns a
lack of sufficient review of nonroutine and complex
transactions. Our independent public accountants have also
identified other significant deficiencies in our internal
control. If we do not address and remediate our material
weakness and other significant deficiencies, the reliability of
our periodic reports on
Form 10-Q
and annual report on
Form 10-K
may be compromised. In addition, reporting a material weakness
may negatively impact investors’ perception of us. We have
allocated, and will continue to allocate, significant additional
resources to remediating any deficiencies in our internal
control. We are in the process of addressing and remedying the
identified material weakness in internal control over financial
reporting, as well as all other identified significant
deficiencies. However, elements of our remediation plan can only
be accomplished over time, and our initiatives ultimately may
not result in an effective internal control environment.
Acquisitions,
investments and other strategic transactions could result in
operating difficulties, dilution and distractions from our core
business.
We have entered, and may in the future enter, into strategic
transactions, including strategic supply and service agreements
and acquisitions of other assets and businesses. Any such
transactions can be risky, may require a disproportionate amount
of our management and financial resources and may create
unforeseen operating difficulties or expenditures, including:
•
difficulties in integrating acquired technologies and operations
into our business while maintaining uniform standards, controls,
policies and procedures;
•
obligations imposed on us by counterparties in such transactions
that limit our ability to obtain additional financing, our
ability to compete in geographic areas or specific lines of
business, or other aspects of our operational flexibility;
•
increasing cost and complexity of assuring the implementation
and maintenance of adequate internal control and disclosure
controls and procedures, and of obtaining the reports and
attestations required under the Securities Exchange Act;
•
difficulties in consolidating and preparing our financial
statements due to poor accounting records, weak financial
controls and, in some cases, procedures at acquired entities not
based on U.S. GAAP particularly those entities in which we lack
control; and
inability to predict or anticipate market developments and
capital commitments relating to the acquired company, business
or technology.
In the past, some of our business acquisitions have given rise
to significant deficiencies in financial reporting controls in
certain areas such as cash, inventory, fixed assets, prepaid
site rentals, value-added tax receivables and depreciation
expense, as well as inconsistent preparation of monthly routine
elimination entries that resulted in intercompany transactions
not properly eliminated in consolidation at year end. In
addition, acquisitions of, and investments in, businesses
organized outside the United States often can involve additional
risks, including:
•
difficulties, as a result of distance, language, legal or
culture differences, in developing, staffing and managing
foreign operations;
•
lack of control over our equity investees and other business
relationships;
•
currency exchange rate fluctuations;
•
longer payment cycles;
•
credit risk and higher levels of payment fraud;
•
foreign exchange controls that might limit our control over, or
prevent us from repatriating, cash generated outside the United
States;
•
potentially adverse tax consequences;
•
expropriation or nationalization of assets;
•
differences in regulatory requirements that may make it
difficult to offer all of our services;
•
unexpected changes in regulatory requirements;
•
increased management time and resources to manage overseas
operations;
•
trade barriers and import and export restrictions; and
•
political or social unrest and economic instability.
The anticipated benefit of any of our strategic transactions may
never materialize. Future investments, acquisitions or
dispositions, or similar arrangements could result in dilutive
issuances of our equity securities, the incurrence of debt,
contingent liabilities or amortization expenses, or write-offs
of goodwill, any of which could harm our financial condition.
Any such transactions may require us to obtain additional equity
or debt financing, which may not be available on favorable
terms, or at all. We have experienced certain of these risks in
connection with our acquisitions and investments in the past,
and the occurence of any of these risks in the future may have a
material effect on our business.
We may
experience difficulties in constructing, upgrading and
maintaining our network, which could adversely affect customer
satisfaction, increase subscriber churn and reduce our
revenues.
Our success depends on developing and providing services that
give subscribers a high quality experience. We expect to expend
significant resources in constructing, maintaining and improving
our network. Additionally, as the number of subscribers using
our network increases, as the usage habits of our subscribers
change and as we increase our service offerings, we may need to
upgrade our network to maintain or improve the quality of our
services. If we do not successfully implement upgrades to our
network, the quality of our services may decline and the rate of
our subscriber churn may increase.
We may experience quality deficiencies, cost overruns and delays
with our construction, maintenance and upgrade projects
including the portions of those projects not within our control.
The construction of our network requires permits and approvals
from numerous governmental bodies, including municipalities and
zoning boards. Such entities often limit the expansion of
transmission towers and other construction necessary for our
network. Failure to receive approvals in a timely fashion can
delay system rollouts and raise the cost
of completing construction projects. In addition, we typically
are required to obtain rights from land, building and tower
owners to install the antennas and other equipment that provide
our service to our subscribers. We may not be able to obtain, on
terms acceptable to us or at all, the rights necessary to
construct our network and expand our services.
We also may face challenges in managing and operating our
network. These challenges include ensuring the availability of
subscriber equipment that is compatible with our network and
managing sales, advertising, customer support, billing and
collection functions of our business while providing reliable
network service that meets our subscribers’ expectations.
For example, our billing system was designed by, and is
currently serviced by, a vendor for whom we believe we are the
largest customer and, if this vendor were to experience
operational or financial distress, we may be required to replace
our billing provider or implement a new billing system which
could disrupt our operations and cause us to incur expenses we
do not currently anticipate. Our failure in any of these areas
could adversely affect customer satisfaction, increase
subscriber churn, increase our costs, decrease our revenues and
otherwise have a material adverse effect on our business,
prospects, financial condition and results of operations.
If we
do not obtain and maintain rights to use licensed spectrum in
one or more markets, we may be unable to operate in these
markets, which could adversely affect our ability to execute our
business strategy.
To offer our services using licensed spectrum both in the United
States and internationally, we depend on our ability to acquire
and maintain sufficient rights to use spectrum through ownership
or long-term leases in each of the markets in which we operate
or intend to operate. Obtaining the necessary amount of licensed
spectrum can be a long and difficult process that can be costly
and require a disproportionate amount of our resources. We may
not be able to acquire, lease or maintain the spectrum necessary
to execute our business strategy. In addition, we may spend
significant resources to acquire spectrum, even if the amount of
spectrum actually acquired in certain markets is not adequate to
deploy our network on a commercial basis in all such markets.
Using licensed spectrum, whether owned or leased, poses
additional risks to us, including:
•
inability to satisfy build-out or service deployment
requirements upon which our spectrum licenses or leases are, or
may be, conditioned;
•
adverse changes to regulations governing our spectrum rights;
•
inability to use the spectrum we have acquired or leased due to
interference from licensed or unlicensed operators in our band
or in adjacent bands;
•
refusal by the FCC or one or more foreign licensing authorities
to recognize our acquisition or lease of spectrum licenses from
others or our investments in other license holders;
•
inability to offer new services or to expand existing services
to take advantage of new capabilities of our network resulting
from advancements in technology due to regulations governing our
spectrum rights;
•
inability to control leased spectrum due to contractual disputes
with, or the bankruptcy or other reorganization of, the license
holders;
•
failure of the FCC or other regulators to renew our spectrum
licenses as they expire and our failure to obtain extensions or
renewals of spectrum leases before they expire;
•
potentially significant increases in spectrum prices, because of
increased competition for the limited supply of licensed
spectrum both in the United States and internationally; and
•
invalidation of our authorization to use all or a significant
portion of our spectrum, resulting in, among other things,
impairment charges related to assets recorded for such spectrum.
We expect the FCC to make additional spectrum available from
time to time, including 60 MHz of spectrum in the
700 MHz band. Congress has directed that the FCC conduct an
auction for the 700 MHz band spectrum no later than
January 28, 2008. Additionally, other companies hold
spectrum rights that could be made available for lease or sale.
The availability of additional spectrum in the marketplace could
change the market value of spectrum rights generally and, as a
result, may adversely affect the value of our spectrum assets.
Interruption
or failure of our information technology and communications
systems could impair our ability to provide our services, which
could damage our reputation and harm our operating
results.
We have experienced service interruptions in some markets in the
past and may experience service interruptions or system failures
in the future. Any service interruption adversely affects our
ability to operate our business and could result in an immediate
loss of revenues. If we experience frequent or persistent system
or network failures, our reputation and brand could be
permanently harmed. We may make significant capital expenditures
to increase the reliability of our systems, but these capital
expenditures may not achieve the results we expect.
Our services depend on the continuing operation of our
information technology and communications systems. Any damage to
or failure of these systems could result in interruptions in our
service. Interruptions in our service could reduce our revenues
and profits, and our brand could be damaged if people believe
our network is unreliable. Our systems are vulnerable to damage
or interruption from earthquakes, terrorist attacks, floods,
fires, power loss, telecommunications failures, computer
viruses, computer denial of service attacks or other attempts to
harm our systems, and similar events. Some of our systems are
not fully redundant, and our disaster recovery planning may not
be adequate. The occurrence of a natural disaster or
unanticipated problems at our network centers could result in
lengthy interruptions in our service and adversely affect our
operating results.
A
number of our significant business arrangements are between us
and parties that have an investment in or a fiduciary duty to
our company, and the terms of those arrangements may not be
beneficial to us.
We are party to a number of services, development, supply and
licensing agreements with parties that have an ownership or
fiduciary relationship with us, including agreements between us
and Intel, Motorola, and Bell Canada, as well as agreements with
ERH and Eagle River, Inc., or ERI, each of which are controlled
by Mr. McCaw. These relationships may create actual or
potential conflicts of interest, and may cause the parties to
these arrangements to make decisions or take actions that do not
reflect your best interests. The terms of these agreements are
discussed in greater detail in the section entitled
“Certain Relationships and Related Transactions.”
We are party to an advisory services agreement with ERI pursuant
to which we pay ERI $800,000 per year and reimburse certain out
of pocket expenses in exchange for certain strategic advisory
services. We are unable to obtain meaningful comparisons of
services or pricing because of the unique nature of the services
Mr. McCaw and ERI provide, and thus can offer no assurances
that equal or better terms would not be available from another
party. In addition, Mr. McCaw and his affiliates face only
limited restrictions on their ability to compete with us.
Because these limitations are not universal, there may arise
conflicts of interest that restrict or inhibit our ability to
operate our business, make acquisitions and obtain financing.
Furthermore, in addition to Mr. McCaw, certain members of
our management team are also employed by, or have interests in,
ERH or its affiliates or one of Mr. McCaw’s other
investments, including Mr. Wolff, our Co-Chief Executive
Officer and Co-President, who serves as President of ERH.
Our commercial agreements with Motorola, Intel and Bell Canada
were entered into concurrently with purchases of our shares of
capital stock by each of these entities or their affiliates.
None of these agreements restricts these parties from entering
into similar arrangements with other parties. Neither
Mr. McCaw, ERH, Intel, Motorola or any of our other debt or
equity security holders, nor any of their respective affiliates,
are obligated to purchase equity from, or contribute or lend
funds to, us or any of our subsidiaries or equity investees.
The
industries in which we operate are continually evolving, which
makes it difficult to evaluate our future prospects and
increases the risk of your investment. Our products and services
may become obsolete, and we may not be able to develop
competitive products or services on a timely basis or at
all.
The broadband services industry is characterized by rapid
technological change, competitive pricing, frequent new service
introductions, evolving industry standards and changing
regulatory requirements. For example, we plan to introduce a PC
Card compatible with our current Expedience technology in the
second half of 2007. Additionally, our planned deployment of
mobile WiMAX depends on the development of network equipment and
subscriber devices based on the mobile WiMAX standard. Each of
these development efforts faces a number of continuing
technological and operational challenges. We believe that our
success depends on our ability to anticipate and adapt to these
and other challenges and to offer competitive services on a
timely basis. We face a number of difficulties and uncertainties
associated with our reliance on future technological
development, such as:
•
existing service providers may use more traditional and
commercially proven means to deliver similar or alternative
services;
•
new service providers may use more efficient, less expensive
technologies, including products not yet invented or developed;
•
consumers may not subscribe to our services;
•
we may not be able to realize economies of scale;
•
we may be unable to respond successfully to advances in
competing technologies in a timely and cost-effective manner;
•
we may lack the financial and operational resources necessary to
enable migration toward mobile WiMAX technology and the
development and deployment of network components and software
that do not currently exist and that may require substantial
upgrades to or replacements of existing infrastructure; and
•
existing, proposed or undeveloped technologies may render our
existing or planned services less profitable or obsolete.
As our services and those offered by our competitors develop,
businesses and consumers may not accept our services as a
attractive alternative to other means of receiving wireless
broadband services.
We
rely on highly skilled executives and other personnel. If we
cannot retain and motivate key personnel, we may be unable to
implement our business strategy.
Our future success depends largely on the expertise and
reputation of Mr. McCaw and the other members of our senior
management team, including Benjamin G. Wolff, our Co-President
and Co-Chief Executive Officer, Perry S. Satterlee, our
Co-President and Chief Executive Officer of our operations in
the United States, Nicolas Kauser, our Chief Technology Officer,
R. Gerard Salemme, our Executive Vice President for Strategy,
Policy and External Affairs, and John A. Butler, our Chief
Financial Officer. In addition, we intend to hire additional
highly skilled individuals to staff our operations in the United
States and internationally. Loss of any of our key personnel or
the inability to recruit and retain qualified individuals could
adversely affect our ability to implement our business strategy
and operate our business.
In addition, to successfully introduce our services in new
markets and grow our business in existing markets, we rely on
the skills of our general managers in these markets. If we
cannot hire, train and retain motivated and well-qualified
individuals to serve as general managers in our markets, we may
face difficulties in attracting, recruiting and retaining
various sales and support personnel in those markets, which may
lead to difficulties in growing our subscriber base.
Certain
aspects of our VoIP telephony services differ from traditional
telephone service, which may limit the attractiveness of our
services.
We intend to continue to offer VoIP telephony as a value added
service with our wireless broadband Internet service. Our VoIP
telephony services differ from traditional phone service in
several respects, including:
•
our subscribers may experience lower call quality than they
experience with traditional wireline telephone companies,
including static, echoes and transmission delays;
•
our subscribers may experience higher dropped-call rates than
they experience with traditional wireline telephone companies;
•
a power loss or Internet access interruption may cause our
service to be interrupted; and
•
at this time we do not offer local number portability to our
subscribers.
If our subscribers do not accept the differences between our
VoIP telephony services and traditional telephone service, they
may not adopt or keep our VoIP telephony services or our other
services, or may choose to retain or return to service provided
by traditional telephone companies.
Additionally, although we are compliant with the Federal
Communication Commission’s, or FCC’s,
November 28, 2005 mandate that all VoIP providers transmit
all 911 calls to the appropriate public safety answering point,
or PSAP, our VoIP emergency calling service is significantly
more limited than the emergency calling services offered by
traditional telephone companies. Our VoIP emergency calling
service can transmit to a dispatcher at a PSAP only the location
information that the subscriber has registered with us, which
may at times be different from the actual location at the time
of the call due to the portability of our services. As a result,
if our subscribers fail to properly register or update their
registered locations, our emergency calling systems may not
assure that the appropriate PSAP is reached and may cause
significant delays, or even failures, in callers’ receipt
of emergency assistance. Our failure to develop or operate an
adequate emergency calling service could subject us to
substantial liabilities and may result in delays in subscriber
adoption of our VoIP services or our other services, abandonment
of our services by subscribers, and litigation costs, damage
awards and negative publicity, any of which could harm our
business, prospects, financial condition or results of
operations. Furthermore, potential changes by the FCC to current
intercarrier compensation mechanisms could result in significant
changes to our costs of providing VoIP telephony, thereby
eliminating pricing benefits between VoIP telephony services and
traditional telephone services and our potential profitability.
Our
activities outside the United States operate in a competitive
environment different than the environment within the United
States. Any difficulties in managing these businesses could
occupy a disproportionate amount of our management’s
attention and disrupt our operations.
We operate or hold spectrum outside of the United States through
our subsidiaries in Belgium, Ireland, Poland, Romania and Spain
and through equity investees in Denmark and Mexico. We intend to
continue to pursue opportunities in certain international
markets through acquisitions and strategic alliances. Our
activities outside the United States operate in different
environments than we face in the United States, particularly
with respect to competition. In addition, we have only recently
begun to assemble a management team dedicated to addressing our
international business operations. Due to these differences, our
activities outside the United States may require a
disproportionate amount of our management and financial
resources, which could disrupt our operations and adversely
affect our business.
In a number of international markets, we face substantial
competition from local service providers that offer or may offer
their own wireless broadband or VoIP telephony services and from
other companies that provide Internet connectivity services. We
may face heightened challenges in gaining market share,
particularly in certain European countries, where a large
portion of the population already has broadband Internet
connectivity and incumbent companies already have a dominant
market share in their service areas. Furthermore, foreign
providers of competing services may have a substantial advantage
over us in attracting
subscribers due to a more established brand, greater knowledge
of local subscribers’ preferences and access to significant
financial or strategic resources.
In addition, in some international markets, foreign governmental
authorities may own or control the incumbent telecommunications
companies operating under their jurisdiction. Established
relationships between government-owned or government-controlled
telecommunications companies and their traditional local
telecommunications providers often limit access of third parties
to these markets. The successful expansion of our international
operations in some markets may depend on our ability to locate,
form and maintain strong relationships with established local
communication services and equipment providers. Failure to
establish these relationships or to market or sell our products
and services successfully could limit our ability to attract
subscribers to our services.
We may
be unable to protect our intellectual property, which could
reduce the value of our services and our brand.
Our ability to compete effectively depends on our ability to
protect our proprietary network and system designs. We may not
be able to safeguard and maintain our proprietary rights. We
rely on patents, trademarks and policies and procedures related
to confidentiality to protect our intellectual property. Some of
our intellectual property, however, is not covered by any of
these protections.
Our pending patent applications may not be granted or, in the
case of patents issued or to be issued, the claims allowed may
not be sufficiently broad to protect our intellectual property.
Even if all of our patent applications were issued and were
sufficiently broad, our patents may be challenged or
invalidated. In addition, the United States Patent and Trademark
Office may not grant federal registrations based on our pending
trademark applications. Even if federal registrations are
granted, these trademark rights may be challenged. Moreover,
patent and trademark applications filed in foreign countries may
be subject to laws, rules and procedures that are substantially
different from those of the United States, and any foreign
patents may be difficult and expensive to obtain and enforce. We
could, therefore, incur substantial costs in prosecuting patent
and trademark infringement suits or otherwise protecting our
intellectual property rights.
We
could be subject to claims that we have infringed on the
proprietary rights of others, which claims would likely be
costly to defend, could require us to pay damages and could
limit our ability to use necessary technologies in the
future.
Competitors or other persons may independently develop or patent
technologies or processes that are substantially equivalent or
superior to ours or that are necessary to permit us to deploy
and operate our network, whether based on Expedience or mobile
WiMAX technology. These persons may claim that our services and
products infringe on these patents or other proprietary rights.
For instance, certain third parties claim that they hold patents
relating to certain aspects of mobile WiMAX technology. These
third parties may seek to enforce these patent rights against
the operators of mobile WiMAX networks, such as us. Defending
against infringement claims, even meritless ones, would be time
consuming, distracting and costly. If we are found to be
infringing the proprietary rights of a third party, we could be
enjoined from using such third party’s rights, may be
required to pay substantial royalties and damages, and may no
longer be able to use the intellectual property subject to such
rights on acceptable terms or at all. Failure to obtain licenses
to intellectual property held by thid parties on reasonable
terms, or at all, could delay or prevent the development or
deployment of our services and could cause us to expend
significant resources to develop or acquire non-infringing
intellectual property.
If our
data security measures are breached, subscribers may perceive
our network and services as not secure.
Our network security and the authentication of our subscriber
credentials are designed to protect unauthorized access to data
on our network. Because techniques used to obtain unauthorized
access to or to sabotage networks change frequently and may not
be recognized until launched against a target, we may be unable
to anticipate or implement adequate preventive measures against
unauthorized access or sabotage.
Consequently, unauthorized parties may overcome our network
security and obtain access to data on our network, including on
a device connected to our network. In addition, because we
operate and control our network and our subscribers’
Internet connectivity, unauthorized access or sabotage of our
network could result in damage to our network and to the
computers or other devices used by our subscribers. An actual or
perceived breach of network security, regardless of our
responsibility, could harm public perception of the
effectiveness of our security measures, adversely affect our
ability to attract and retain subscribers, expose us to
significant liability and adversely affect our business
prospects.
Our
business depends on a strong brand, and if we do not maintain
and enhance our brand, our ability to attract and retain
subscribers may be impaired and our business and operating
results harmed.
We believe that our brand is a critical part of our business.
Maintaining and enhancing our brand may require us to make
substantial investments with no assurance that these investments
will be successful. If we fail to promote and maintain the
“Clearwire” brand, or if we incur significant expenses
in this effort, our business, prospects, operating results and
financial condition may be harmed. We anticipate that
maintaining and enhancing our brand will become increasingly
important, difficult and expensive.
We are
subject to extensive regulation that could limit or restrict our
activities and adversely affect our ability to achieve our
business objectives. If we fail to comply with these
regulations, we may be subject to penalties, including fines and
suspensions, which may adversely affect our financial condition
and results of operations.
Our acquisition, lease, maintenance and use of spectrum licenses
are extensively regulated by federal, state, local and foreign
governmental entities. These regulations are subject to change
over time. In addition, a number of other federal, state, local
and foreign privacy, security and consumer laws also apply to
our business, including our interconnected VoIP telephony
service. These regulations and their application are subject to
continual change as new legislation, regulations or amendments
to existing regulations are adopted from time to time by
governmental or regulatory authorities, including as a result of
judicial interpretations of such laws and regulations. For
example, it is also possible that the FCC could subject our
capital stock to foreign ownership limitations. If our capital
stock were to become subject to such limitations, owners of our
capital stock may become subject to obligatory redemption
provisions, such as those in our certificate of incorporation.
Such restrictions may also decrease the value of our stock by
reducing the pool of potential investors in our company and
making the acquisition of control of us by potential foreign
investors more difficult. Current regulations directly affect
the breadth of services we are able to offer and may impact the
rates, terms and conditions of our services. Regulation of
companies that offer competing services, such as cable and DSL
providers and incumbent telecommunications carriers, also
affects our business indirectly.
In order to provide “interconnected” VoIP service we
need to obtain, on behalf of our customers, North American
Numbering Plan telephone numbers, the availability of which may
be limited in certain geographic areas of the United States and
subject to other regulatory restrictions. As an
“interconnected” VoIP and facilities-based wireless
broadband provider, we are required under FCC rules, by May
2007, to comply with the Communications Assistance for Law
Enforcement Act, or CALEA, which requires service providers to
build certain capabilities into their networks and to
accommodate wiretap requests from law enforcement agencies.
In addition, the FCC or other regulatory authorities may in the
future restrict our ability to manage subscribers’ use of
our network, thereby limiting our ability to prevent or manage
subscribers’ excessive bandwidth demands. To maintain the
quality of our network and user experience, we limit the
bandwidth used by our subscribers’ applications, in part by
restricting the types of applications that may be used over our
network. Some providers and users of these applications have
objected to this practice. If the FCC or other regulatory
authorities were to adopt regulations that constrain our ability
to employ bandwidth management practices, excessive use of
bandwidth-intensive applications would likely reduce the quality
of our services for all subscribers. A decline in the quality of
our services could harm our business.
In certain of our international markets, we may require a
license for the use of regulated radio frequencies from
national, provincial or local regulatory authorities before
providing our services. Where required, regulatory authorities
may have significant discretion in granting the licenses and in
determining the conditions for use of the frequencies covered by
the licenses, and are often under no obligation to renew the
licenses when they expire. Additionally, even where we currently
hold a license or successfully obtain a license in the future,
we may be required to seek modifications to the license or the
regulations applicable to the license to implement our business
strategy. For example, in certain international markets, the
licenses we hold, and the applicable rules and regulations,
currently do not specifically permit us to provide mobile
services. Thus, prior to offering mobile services to our
subscribers in those markets, absent action by the regulatory
authorities to modify the licenses and applicable rules, we may
need to obtain the approval of the proper regulatory authorities.
The breach of a license or applicable law, even if inadvertent,
can result in the revocation, suspension, cancellation or
reduction in the term of a license or the imposition of fines.
In addition, regulatory authorities may grant new licenses to
third parties, resulting in greater competition in territories
where we already have rights to licensed spectrum. In order to
promote competition, licenses may also require that third
parties be granted access to our bandwidth, frequency capacity,
facilities or services. We may not be able to obtain or retain
any required license, and we may not be able to renew our
licenses on favorable terms, or at all.
Our wireless broadband and VoIP telephony services may become
subject to greater state or federal regulation in the future.
The scope of the additional regulations that may apply to VoIP
telephony services providers and the impact of such regulations
on providers’ competitive position are presently unknown.
Risks
Relating to the Shares and this Offering
We are
a “controlled company” within the meaning of the
Nasdaq Marketplace Rules and, as a result, will qualify for, and
intend to rely on, exemptions from certain corporate governance
requirements.
As of November 30, 2006, Mr. McCaw and Intel Pacific
and their respective affiliates together beneficially own
approximately 83% of the voting power of our outstanding capital
stock. Affiliates of Mr. McCaw and Intel Pacific, a wholly
owned subsidiary of Intel Corporation, are parties to a voting
agreement that effectively permits, and immediately following
the consummation of this offering will continue to permit,
Mr. McCaw, through ERH, to designate four of our directors
and Intel Pacific to designate two of our directors as long as
Intel Pacific and its affiliates hold at least 15% of our
outstanding capital stock and one of our directors as long as
Intel Pacific and its affiliates hold at least 7.5% of our
outstanding capital stock. Because of the voting agreement and
their aggregate voting power, Mr. McCaw and Intel Pacific
share the ability to elect a majority of our directors and will
continue to do so immediately after this offering.
As a result of the combined voting power of Mr. McCaw and
Intel Pacific and their voting agreement, we will qualify for,
and intend to rely on, exemptions from certain Nasdaq corporate
governance standards. Under the Nasdaq Marketplace Rules, a
company of which more than 50% of the voting power is held by a
single person or a group of people is a “controlled
company” and may elect not to comply with certain Nasdaq
Global Market corporate governance requirements, including
(1) the requirement that a majority of the board of
directors consist of independent directors, (2) the
requirement that the compensation of officers be determined, or
recommended to the board of directors for determination, by a
majority of the independent directors or a compensation
committee comprised solely of independent directors and
(3) the requirement that director nominees be selected, or
recommended for the board of directors’ selection, by a
majority of the independent directors or a nominating committee
comprised solely of independent directors with a written charter
or board resolution addressing the nomination process. Unless we
no longer rely on these exemptions, you will not have the same
protections afforded to stockholders of companies that are
subject to all of the Nasdaq Global Market corporate governance
requirements.
Craig
McCaw and Intel Pacific are our largest stockholders, and as a
result they can exert control over us and may have actual or
potential interests that may diverge from yours.
As of November 30, 2006, Mr. McCaw and his affiliates
own Class A common stock and Class B common stock
representing approximately 52% of our combined voting power.
Intel Pacific and its affiliates own Class A common stock
and Class B common stock representing approximately 32% of
our combined voting power as of that date. By virtue of a voting
agreement, Mr. McCaw, and Intel Pacific, along with their
respective affiliates, collectively own Class A common
stock and Class B common stock representing approximately
83% of our combined voting power. As a result, following this
offering and assuming no exercise of the underwriters’
over-allotment option, the shares beneficially owned by
Mr. McCaw and Intel Pacific, and their respective
affiliates, will represent
approximately % of the number of
votes in any matter on which our stockholders are entitled to
vote, with ERH directly holding shares of capital stock
representing % of our voting power
and Intel Pacific directly holding shares of capital stock
representing % of our voting power.
Mr. McCaw and Intel Pacific may have interests that diverge
from those of other holders of our capital stock. As a result,
ERH and Intel Pacific may vote their shares of capital stock to
cause us to take actions that may conflict with your best
interests as a stockholder, which could adversely affect our
results of operations and the trading price of our common stock.
Through his control of ERH, Mr. McCaw can currently control
our management, affairs and all matters requiring stockholder
approval, including the approval of significant corporate
transactions, a sale of our company, decisions about our capital
structure and, subject to our agreements with Bell Canada and
Intel Pacific, the composition of our board of directors. Under
the voting agreement between Intel Pacific and ERH, each party
has agreed to vote its shares in favor of four directors
designated by ERH and for two directors designated by Intel
Pacific, for so long as Intel Pacific holds at least 15% of our
outstanding capital stock, and for one director designated by
Intel Pacific, for so long as Intel Pacific holds at least 7.5%
of our outstanding capital stock. ERH’s right to cause
Intel to vote its shares in favor of four individuals designated
by ERH is not subject to any minimum share ownership
requirement. Under the voting agreement, ERH will retain these
rights even if ERH no longer holds any shares of our capital
stock. ERH’s voting agreements with Intel and Bell Canada
will remain in effect after this offering. In addition, if all
of ERH’s shares of our Class B common stock were to
convert into Class A common stock following this offering
and Intel Pacific did not convert any of their shares of our
Class B common stock to Class A common stock, Intel
Pacific would beneficially own shares of common stock
representing % of our voting power.
As a result, Intel Pacific would be able to exercise effective
control over our company, subject to Intel Pacific’s voting
agreement with ERH.
Prior
to this offering, our common stock has not been traded in a
public market. We cannot predict the extent to which a trading
market will develop or how liquid that market might become. The
initial public offering price may not be indicative of prices
that will prevail in the trading market.
The trading price of our common stock following this offering
may be highly volatile and could be subject to fluctuations in
price in response to various factors, some of which are beyond
our control. These factors include:
•
quarterly variations in our results of operations or those of
our competitors;
•
announcements by us or our competitors of acquisitions, new
products, significant contracts, commercial relationships or
capital commitments;
•
disruption to our operations or those of other companies
critical to our network operations;
•
the emergence of new competitors or new technologies;
•
our ability to develop and market new and enhanced products on a
timely basis;
•
seasonal or other variations in our subscriber base;
•
commencement of, or our involvement in, litigation;
dilutive issuances of our stock or the stock of our
subsidiaries, or the incurrence of additional debt;
•
changes in our board or management;
•
adoption of new or different accounting standards;
•
changes in governmental regulations or the status of our
regulatory approvals;
•
changes in earnings estimates or recommendations by securities
analysts;
•
announcements regarding mobile WiMAX and other technical
standards; and
•
general economic conditions and slow or negative growth of
related markets.
In addition, the stock market in general, and the market for
shares of technology companies in particular, has experienced
price and volume fluctuations that have often been unrelated or
disproportionate to the operating performance of those
companies. We expect the price of our common stock will be
subject to such fluctuations, which may be exacerbated shortly
following this offering. In addition, in the past, following
periods of volatility in the trading price of a company’s
securities, securities class action litigation or shareholder
derivative suits have often been instituted against those
companies. Such litigation, if instituted against us, could
result in substantial costs and divert our management’s
attention and resources.
Shares
eligible for sale in the future may cause the trading price for
our common stock to decline.
Sales of a substantial number of shares of our common stock
following this offering, or the perception that these sales
could occur, may depress the trading price of our common stock.
These sales could also impair our ability to raise additional
capital through a sale of our equity securities. Our certificate
of incorporation authorizes us to issue up to
700,000,000 shares of Class A common stock and
100,000,000 shares of Class B common stock. As of
November 30, 2006, 327,946,174 shares of common stock
were outstanding and 33,951,450 shares were issuable upon
the exercise of outstanding stock options,
85,790,057 shares were issuable upon the conversion of
outstanding shares of our Class B common stock and
56,407,953 shares were issuable upon the exercise of
outstanding warrants.
The number of shares of common stock eligible for sale in the
public market is limited by restrictions under federal
securities law and under agreements that our executive officers,
directors and each holder of 5% or more of our common stock have
entered into with the underwriters of this offering. Those
agreements restrict these persons from selling, pledging or
otherwise disposing of their shares for a period of
180 days after the date of this prospectus without the
prior written consent of Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Morgan Stanley &
Co. Incorporated and J.P. Morgan Securities Inc., the
representatives of the underwriters. However, the
representatives of the underwriters may, in their sole
discretion, release all or any portion of the common stock from
the restrictions of the
lock-up
agreements.
Beginning immediately after the date of this offering, holders
of shares
of our common stock,
including shares
issuable on exercise of outstanding warrants, will be able to
require us to file a registration statement with respect to
their shares no later than 120 days from the date of this
offering. These holders will be entitled to have their shares
included for sale in subsequent registered offerings of our
common stock. See the section entitled “Certain
Relationships and Related
Transactions — Registration Rights
Agreements.”
We have in the past issued, and intend to continue to issue, our
capital stock and the capital stock of our subsidiaries to raise
capital and to acquire spectrum or operating companies.
Issuances of our stock or the stock of a subsidiary will dilute
the interest of our stockholders, and may reduce the trading
price of our common stock.
We may
apply the proceeds of this offering to uses that ultimately do
not improve our operating results or increase the value of your
investment.
We intend to use the net proceeds from this offering for market
and network expansion, spectrum acquisitions and general
corporate purposes. However, we do not have more specific plans
for the net proceeds from this offering and our management will
have broad discretion in how we use these proceeds. These
proceeds could be applied in ways that do not improve our
operating results or otherwise increase the value of your
investment.
Purchasers
in this offering will experience immediate and substantial
dilution in the book value of their investment.
We expect the initial public offering price of our common stock
in this offering will be substantially higher than the net
tangible book value per share of our common stock immediately
after this offering. Therefore, if you purchase our common stock
in this offering, you will incur an immediate dilution of
$ in net tangible book value per
share from the price you paid, based on an assumed initial
offering price of $ per
share. The exercise of outstanding options and warrants will
result in further dilution. For a further description of the
dilution you will experience immediately after this offering,
see the section entitled “Dilution.”
This prospectus contains “forward-looking statements”
that represent our beliefs, projections and predictions about
future events. These statements are necessarily subjective and
involve known and unknown risks, uncertainties and other
important factors that could cause our actual results,
performance or achievements, or industry results, to differ
materially from any future results, performance or achievement
described in or implied by such statements. Actual results may
differ materially from the expected results described in our
forward-looking statements, including with respect to the
correct measurement and identification of factors affecting our
business or the extent of their likely impact, the accuracy and
completeness of publicly available information relating to the
factors upon which our business strategy is based or the success
of our business.
Some of the risks investors should consider in connection with
this offering are:
•
We are an early stage company with a history of operating losses
and we expect to continue to realize significant net losses for
the foreseeable future. As of September 30, 2006, our
accumulated deficit was approximately $366.2 million.
•
Our business plan will require us to raise substantial
additional financing both in the near term and over the next
five years or more. As with other businesses that require a
substantial investment in physical infrastructure prior to
generating revenue, we intend to invest significantly in our
business before we expect to generate cash flow from operations
adequate to cover our anticipated expenses. If we do not obtain
additional debt or equity financing, our business, prospects,
financial condition and results of operations will be adversely
affected.
•
We are committed to using commercially reasonable efforts to
deploy wireless broadband networks based solely on mobile WiMAX
technology once that technology meets certain specified
performance criteria, even if there are alternative technologies
available in the future that are technologically superior or
more cost effective.
•
Our business plan contemplates migration of our current network
to a mobile WiMAX network. Mobile WiMAX technology is not yet
commercially available, and may never be developed to our
satisfaction or at all. If mobile WiMAX is not successfully
developed and integrated into our network, our business
prospects and results of operations may be adversely affected.
•
We currently depend on our commercial partners to develop and
deliver the equipment for our existing and planned networks. If
our partners fail to provide equipment that meets our
requirements on a timely basis, our business prospects and
results of operations may be adversely affected.
•
Many of our competitors are better established and have
significantly greater resources, and may subsidize their
competitive offerings with other products and services, which
may make it difficult for us to attract and retain subscribers.
•
Since August 2005 we have borrowed approximately
$755.7 million. Our substantial indebtedness and
restrictive debt covenants could limit our financing options and
liquidity position and may limit our ability to grow our
business.
•
Mr. McCaw and Intel Pacific collectively control a majority
of our combined voting power, and may have, or may develop in
the future, interests that may diverge from yours.
•
Future sales of large blocks of our common stock, which are
subject to demand registration rights that are triggered by this
offering, may adversely impact our stock price.
You should review carefully the section entitled “Risk
Factors” beginning on page 9 of this prospectus for a
discussion of these and other risks that relate to our business
and investing in shares of our common stock.
We will receive net proceeds of approximately
$ million from the sale of
shares of Class A common stock in this offering, assuming
an initial public offering price of
$ per share and after
deducting estimated underwriting discounts and commissions and
estimated expenses of the offering payable by us. If the
underwriters exercise their over-allotment option in full, we
will receive additional net proceeds of approximately
$ million after deducting
estimated underwriting discounts and commissions.
The principal purposes of this offering are to obtain additional
capital, create a public market for our Class A common
stock and facilitate future access to public equity markets. We
expect to use the proceeds from this offering for market and
network expansion, spectrum acquisitions and general corporate
purposes.
Pending application of our net proceeds from this offering, we
intend to invest the net proceeds in investment-grade,
interest-bearing instruments.
We have not declared or paid any dividends on our capital stock
since our inception. We currently expect to retain future
earnings, if any, for use in the operation and expansion of our
business. We do not anticipate paying any cash dividends in the
foreseeable future. In addition, covenants in the indenture
governing our senior secured notes and the loan documents
governing our commercial loan impose significant restrictions on
our ability to pay dividends to our stockholders.
The following table sets forth our cash, cash equivalents and
short-term investments and capitalization as of
September 30, 2006 on an actual basis and on an as adjusted
basis to give effect to the issuance of sale by us of shares of
our Class A common stock in this offering at an assumed
initial public offering price of
$ per share and after
deducting estimated underwriting discounts, commissions and
offering expenses payable by us.
The information below should be read in conjunction with the
sections entitled “Selected Historical Consolidated
Financial Data” and “Description of
Indebtedness,” and our consolidated financial statements
and related notes included elsewhere in this prospectus.
Preferred stock: par value
$0.0001 per share, 5,000,000 shares authorized, no
shares issued and outstanding, actual and as adjusted
—
—
Class A common stock: par
value $0.0001 per share, and additional paid-in capital,
700,000,000 shares authorized, 322,939,029 shares
issued and outstanding,
actual; shares
issued and outstanding, as adjusted
1,440,442
Class B common stock: par
value $0.0001 per share, and additional paid-in capital,
100,000,000 shares authorized, 85,790,057 shares
issued and outstanding, actual and as adjusted
234,376
Common stock and warrants payable
91
91
Deferred compensation
(166
)
(166
)
Accumulated other comprehensive
income
3,785
3,785
Accumulated deficit
(366,214
)
(366,214
)
Total stockholders’ equity
$
1,312,314
$
Total capitalization
$
1,951,557
$
The number of shares outstanding following this offering is
based on 322,939,029 shares of Class A common stock
and 85,790,057 shares of Class B common stock
outstanding as of September 30, 2006, and excludes:
•
33,938,074 shares of Class A common stock issuable
upon exercise of outstanding options, with a weighted average
exercise price of $3.07 per share;
•
16,061,926 shares of Class A common stock available
for future issuance under our 2003 Stock Option Plan;
•
56,407,953 shares of Class A common stock issuable
upon exercise of outstanding warrants, with a weighted average
exercise price of $4.67 per share;
•
85,790,057 shares of Class A common stock issuable
upon conversion of our Class B common stock;
•
2,033,000 shares of Class A common stock issuable upon
the closing of pending spectrum acquisitions; and
•
1,130,000 shares of Class A common stock issuable upon
exercise of warrants to be issued upon the closing of pending
spectrum acquisitions, with a weighted average exercise price of
$7.50 per share.
Our net tangible book value as of September 30, 2006 was
approximately $1.3 billion, or $3.13 per share. Net
tangible book value per share represents total tangible assets
less total liabilities, divided by the number of outstanding
shares of capital stock. After giving effect to the issuance and
sale
of shares
of common stock in this offering at an initial public offering
price of $ per share and
after deducting estimated underwriting discounts, commissions
and offering expenses, our pro forma net tangible book value as
of September 30, 2006 would have been approximately
$ million, or approximately
$ per share. This represents
an immediate increase in net tangible book value of
$ per share to existing
stockholders and an immediate dilution in net tangible book
value of $ per share to
investors in this offering. The following table illustrates this
dilution on a per share basis:
Pro forma net tangible book value
per share after this offering
Dilution in pro forma net tangible
book value per share to new investors
$
The following table sets forth, on a pro forma basis as of
September 30, 2006:
•
the average price per share of capital stock paid by our
existing stockholders (cash and stock) and the average price per
share of common stock to be paid by investors in this offering;
•
the total number of shares of our capital stock owned by our
existing stockholders and the total number of shares of our
common stock to be purchased in this offering; and
•
the total consideration (cash and stock) paid by our existing
stockholders for shares of our capital stock and to be paid by
investors purchasing shares of common stock in this offering.
Average Price Per
Total Consideration
Shares of Capital Stock
Share of
Amount
Percent
Number
Percent
Capital Stock
(In thousands)
(In thousands)
Existing stockholders
$
%
%
$
New investors
$
%
%
$
Total
$
100.00
%
100.00
%
The number of shares outstanding following this offering is
based on 322,939,029 shares of Class A common stock
and 85,790,057 shares of Class B common stock
outstanding as of September 30, 2006, and excludes:
•
33,938,074 shares of Class A common stock issuable
upon exercise of outstanding options, with a weighted average
exercise price of $3.07 per share;
•
16,061,926 shares of Class A common stock available
for future issuance under our 2003 Stock Option Plan;
•
56,407,953 shares of Class A common stock issuable
upon exercise of outstanding warrants, with a weighted average
exercise price of $4.67 per share;
•
85,790,057 shares of Class A common stock issuable
upon conversion of our Class B common stock;
•
2,033,000 shares of Class A common stock issuable upon
the closing of pending spectrum acquisitions; and
1,130,000 shares of Class A common stock issuable upon
exercise of warrants to be issued upon the closing of pending
spectrum acquisitions, with a weighted average exercise price of
$7.50 per share.
If the underwriters’ over-allotment option is exercised in
full, the number of shares of capital stock held by existing
stockholders will be reduced to % of the total number
of shares of capital stock to be outstanding after this
offering, and the number of shares of common stock in this
offering will be increased
to shares
or % of the total number of shares of capital stock
outstanding after this offering. We have also agreed to issue
warrants pursuant to agreements with parties who have agreed to
assist us in acquiring spectrum. The number of warrants issuable
under these agreements will not be determined until such
acquisitions, if any, close. See “Certain Relationships and
Related Transactions.” In addition, following this offering
we may also be required to issue additional shares of our common
stock upon an adjustment of the purchase price related to the
acquisition of our subsidiary in Spain.
The following table sets forth selected consolidated financial
data for our company. The selected financial information set
forth below under the captions “Statement of Operations
Data” and “Balance Sheet Data” for the period
from October 27, 2003 (inception) to December 31, 2003
and for the years ended and as of December 31, 2004 and
2005 have been derived from our audited consolidated financial
statements included elsewhere in this prospectus. The selected
financial data set forth below under the caption “Balance
Sheet Data” as of December 31, 2003 has been derived
from our audited consolidated financial statements not included
in this prospectus. The statement of operations data for the
nine months ended September 30, 2005 and 2006 and the
balance sheet data as of September 30, 2006 have been
derived from our unaudited consolidated financial statements
that are included elsewhere in this prospectus and have been
prepared on the same basis as our audited financial statements.
In the opinion of management, the unaudited consolidated
financial statements reflect all adjustments, consisting only of
normal and recurring adjustments, necessary to state fairly our
results of operations as of and for the periods presented.
Historical results are not necessarily indicative of results to
be expected for future periods and interim results are not
necessarily indicative of results for the entire year.
The selected historical consolidated financial data should be
read in conjunction with “Use of Proceeds,”“Capitalization,”“Management’s Discussion
and Analysis of Financial Condition and Results of
Operations” and our consolidated financial statements and
related notes included elsewhere in this prospectus.
Represents our estimate of the
number of natural persons resident in the geographic areas in
which our wireless broadband service is commercially available.
Our calculation of covered population is based on our estimate
of covered households multiplied by 2.5 persons per household.
(2)
Represents our estimate of the
number of natural persons resident in the geographic areas in
which our wireless broadband service is commercially available
for our consolidated subsidiaries only, and excludes data
regarding our equity investees. Our calculation of covered
population is based on estimates from the Economist Intelligence
Unit database covered households multiplied by 2.3 and
3.0 persons per household, respectively for Brussels,
Belgium and Dublin, Ireland.
(3)
Represents our estimate of the
number of single residence homes, apartments and condominium
units in the geographic areas in which our wireless broadband
service is commercially available. Our estimate is based on
information extrapolated from 2000 U.S. census data and
other market information.
(4)
Represents the number of
individuals and business or governmental entities receiving
wireless broadband connectivity through our network.
(5)
Certain coverage and subscriber
data as of November 30, 2006 is disclosed elsewhere in this
prospectus.
The following discussion and analysis should be read in
conjunction with our consolidated financial statements and
related notes included elsewhere in this prospectus. The
following discussion and analysis contains forward-looking
statements that reflect our plans, estimates and beliefs. Our
actual results could differ materially from those discussed in
the forward-looking statements. Factors that could cause or
contribute to these differences include those discussed below
and elsewhere in this prospectus, particularly in the section
entitled “Risk Factors.”
Overview
and Recent Developments
We build and operate wireless broadband networks that enable
fast, simple, portable, reliable and affordable communications.
Our networks cover entire communities, delivering a wireless
high-speed Internet connection and enabling other services and
features that create a new communications path into the home or
office. We provide a portable broadband connection that delivers
Internet access and enable premium services, such as VoIP
telephony, anytime and anywhere within our coverage area. Our
service is at once competitive with and complementary to
existing wireline and wireless networks.
We launched our first market in August 2004 and are growing
rapidly in terms of the number of markets served, number of
people covered by our network, and number of total subscribers.
As of September 30, 2006 we offered service for sale to the
5.6 million people who lived in one of the 250
municipalities in our 32 U.S. markets. As of that date we
had approximately 144,000 U.S. subscribers. Since that
date, we have launched our Raleigh-Durham, North Carolina and
Seattle-Tacoma, Washington markets, which increased the total
number of persons covered by our network by 2.9 million, or
51.8%, to 8.5 million. During that same two-month period,
we increased our total broadband subscribers by 24,000, or 16.7%.
We believe that our U.S. subscriber growth rates reflect
rapid customer acceptance of our services. We estimate that the
average monthly increase in our subscriber penetration rate,
which we calculate by dividing the number of new subscribers by
the number of households covered by our network, ranged between
0.5% and 0.7% for each of the nine months ended
September 30, 2006.
We are investing heavily in building networks and growing our
subscriber base. Our efforts include offering premium services
and applications in order to make our service more attractive.
This expansion will require significant capital expenditures as
well as sales and marketing expenses, and will likely be
accompanied by significant operating losses over the next five
years or more as we expand the area covered by our network and
invest to build our brand and develop subscriber loyalty. We
expect to launch additional markets in 2007 that, if introduced
on the schedule we anticipate, based on our historical
experience, which may not be indicative of future performance,
would expand our covered population by approximately 75% to more
than 15 million people.
As a result of our current buildout and marketing plans, we
expect to require significant additional capital, which we
intend to raise through subsequent equity offerings, by
increasing our debt, or a combination of the two. As of
September 30, 2006, our total assets were $2.1 billion
and our stockholders’ equity was $1.3 billion, which
compares to total assets of $627.9 million and
stockholders’ equity of $318.7 million at
December 31, 2005. Our unrestricted and short-term
investments at September 30, 2006 totaled
$1,251.2 million. We cannot offer assurances that the
necessary capital will be available on attractive terms or at
all, and we plan to manage our uses of capital by adjusting the
rate at which we build our network, acquire spectrum and deploy
our services.
As we have concentrated our financial and management resources
on expanding our services, we have incurred net losses of
$33.0 million and $140.0 million for the fiscal years
ended December 31, 2004 and 2005, and $191.9 million
for the nine months ended September 30, 2006. Moreover, a
significant portion of our historical revenues were generated
from equipment sales through our former NextNet subsidiary,
which we sold to Motorola on August 29, 2006. Following
this sale we anticipate that most of our future revenues will be
generated by delivering wireless broadband services. We believe
the sale of NextNet affects our prospective
results of operations, both by reducing selling, general and
administrative expense, research and development expense, and
depreciation and amortization expense associated with
NextNet’s operations, and by increasing our expenses and
capital expenditures for equipment acquisition. We have not
classified NextNet as a discontinued operation in our statement
of operations because of our ongoing involvement with that
company under our exclusive supply and infrastructure
development agreements. However, our net loss for the nine month
period ended September 30, 2006 include $7.9 million
in direct selling, general and administrative expense,
$7.2 million in direct research and development expense,
and $1.4 million in direct depreciation and amortization
that we expect to be non-recurring following the NextNet sale.
In addition, we have been acquiring spectrum internationally so
that we can deploy our networks in Europe and elsewhere. As of
September 30, 2006 we offered service in Brussels, Belgium
and Dublin, Ireland, which together included an additional
17,900 subscribers and 1.0 million people covered by our
network. We also held minority interests in companies that were
deploying similar services in Denmark and Mexico which together
cover an estimated 10.2 million people. We hold spectrum
covering another 45.1 million people in Spain,
38.1 million people in Poland, and 21.6 million people
in Romania. Finally, we were notified on December 15, 2006 that
we had won a spectrum auction in Germany at a cost of
approximately $25 million that, when completed, will give
us the capability to launch our service across the entire
country covering a total of 82.5 million people.
In the eleven months ended November 30, 2006 we achieved
significant financial and operational milestones:
•
launching our services in nine new U.S. markets covering an
additional 4.7 million people;
•
increasing our U.S. spectrum holdings from 6.7 billion
to 11.5 billion MHz-POPs, an increase of 72%, and our
international holdings from 4.0 billion to 5.1 billion
MHz-POPs, a 28% increase;
•
selling our NextNet subsidiary to Motorola and executing
infrastructure and subscriber supply agreements with Motorola;
•
entering into a mobile WiMAX collaboration agreement with Intel;
•
raising approximately $1.5 billion in debt and equity
financings;
•
expanding our distribution channels as we entered into
distribution agreements with AOL and Circuit City; and
•
introducing our VoIP telephony services in 13 U.S. markets.
Total revenues. Total revenues increased
$61.7 million to $76.4 million for the nine months
ended September 30, 2006 from $14.7 million for the
nine months ended September 30, 2005. This result includes
a $39.4 million increase in service revenue as we increased
our subscriber base, as well as a $22.3 million increase in
equipment revenue derived from NextNet operations.
Service revenue. Service revenue is primarily
generated from subscription and modem lease fees for our
wireless broadband service. Activation fees and fees for other
services such as email, VoIP, and web hosting services are also
included in service revenue. As of September 30, 2006, we
operated in 32 U.S. markets and two international markets
covering a geographic area containing approximately
6.6 million people. Total subscribers in all markets grew
from approximately 33,700 as of September 30, 2005 to
approximately 162,300 as of September 30, 2006, generating
service revenue of approximately $43.9 million for the nine
months ended September 30, 2006 as compared to
$4.5 million for the nine months ended September 30,2005. This increase reflects net increases of 67,900 subscribers
in markets launched prior to January 1, 2006, and 14,200
subscribers in the seven markets launched during the first nine
months of 2006. Of these seven new markets, five were launched
in the third quarter.
For the nine months ended September 30, 2006, we
experienced an average monthly churn, which refers to the
percentage of our existing customers who terminate service in a
given month, of approximately 1.9%, with approximately 1.4% of
this amount resulting from subscriber relocations or
non-payment, based upon exit interviews. Given our limited
operating history, and that our current subscriber contracts are
generally for a term of one to two years, our current rate of
churn may not be representative of the churn we may experience
in the future.
Equipment and other revenue. Our equipment and
other revenue includes sales of NextNet equipment through the
date of sale in August 2006. Equipment and other revenue
increased approximately $22.3 million, to
$32.6 million for the eight-month period ending on the date
of sale from $10.3 million for the nine months ended
September 30, 2005. This increase is due to an increase in
the volume of sales of customer premise equipment, or CPE, and
other units to Inukshuk, Inc., a joint venture between Rogers
Cable Enterprises and Bell Canada, through an arrangement with
Flux Fixed Wireless, LLC, an entity controlled by
Mr. McCaw. Total related party sales increased
$14.9 million to $15.6 million for the nine months
ended September 30, 2006 from $661,000 for the nine months
ended September 30, 2005. The remainder of the increase is
a result of an increase in overall sales volume across our
customer base.
Total cost of goods and services. Total cost
of goods and services increased $41.1 million to
$53.7 million for the nine months ended September 30,2006, from $12.5 million for the nine months ended
September 30, 2005.
Cost of service. As a result of the expansion
in 2006 of our wireless broadband network and related subscriber
growth, cost of service increased to $21.3 million for the
nine months ended September 30, 2006 as compared to
$2.0 million for the nine months ended September 30,2005. The increase is due to an increase in costs for towers
leased, the number of subscribers using our service, and
additional markets served. As we continue to expand our network,
we anticipate that the cost of service will increase in
connection with our subscriber growth.
Cost of equipment. Our cost of equipment
consists primarily of costs incurred for equipment manufactured
by NextNet through August 29, 2006. Following the increase
in the number of CPE units sold in 2006, cost of equipment
increased $21.9 million to $32.4 million for the eight
months ended August 29, 2006 as compared to
$10.5 million for the nine months ended September 30,2005. As a percentage of equipment and other revenue, cost of
equipment decreased to 99.4% for the eight months ended
August 29, 2006 from 102.8% for the nine months ended
September 30, 2005, as a result of improvements in our CPE
design and production efficiencies. As a result of our sale of
NextNet, we do not expect to incur material cost of equipment.
Selling, general and administrative
expense. Selling, general and administrative
expense increased $73.3 million, or 105.8%, to
$142.5 million for the nine months ended September 30,2006 from $69.3 million
for the nine months ended September 30, 2005. The overall
increase is due to employee compensation and related costs,
additional marketing and advertising costs related to the
expansion of our business, increases in professional fees, and
higher facilities costs. Employee and related compensation
expense increased $45.4 million due to headcount increases
to support the overall growth of our business. Our total
employee headcount increased from 599 at September 30, 2005
to 1,075 at September 30, 2006. Marketing and advertising
expense increased $14.3 million as we expanded our number
of markets in the United States from 17 to 32 and increased our
subscriber base from 33,700 at September 30, 2005 to
162,300 at September 30, 2006. Facilities expenses
increased $4.1 million in connection with the headcount
increase and market expansion. Professional fees, which include
legal, accounting and other costs related to acquisitions and
regulatory compliance, increased $4.0 million to
$15.3 million for the nine months ended September 30,2006 from $11.3 million for the same period in 2005 due
primarily to costs associated with our prior withdrawn
registration statement, spectrum transactions and other
transactions. Call center expenses increased $2.5 million
due to the further expansion of our support services as we
expanded our markets.
We expect our selling, general, and administrative expenses to
continue to increase in future periods. We expect that these
increases will primarily be related to marketing expenses
necessary to support our growth and our efforts to build brand
awareness through national advertising and promotional
activities, as well as costs related to expenses for
professional fees associated with Securities Exchange Act
reporting and compliance, personnel and facility-related costs,
network expansion, and costs related to our future call center,
which we expect to open in 2007.
Research and development expense. Research and
development expense increased $1.5 million, or 21.3%, to
$8.5 million for the nine months ended September 30,2006 from $7.0 million for the nine months ended
September 30, 2005. The increase was primarily due to
additional research and development expenditures to support the
expansion of our wireless broadband network and the development
by NextNet of new technologies and products, including PC Cards
and chipsets to be installed directly in consumer devices. We
expect our research and development expenses to decrease as a
result of the sale of NextNet.
Depreciation and amortization
expense. Depreciation and amortization expense
increased $19.4 million to $26.4 million for the nine
months ended September 30, 2006 from $7.0 million for
the nine months ended September 30, 2005, primarily due to
increased network build-out and deployed CPE costs related to
our expansion into new markets and associated subscriber growth.
Capital expenditures for depreciable property, plant and
equipment increased $27.9 million to $129.0 million
for the nine months ended September 30, 2006 from
$101.1 million for the nine months ended September 30,2005. The majority of these expenditures relate to the
construction of our network and purchases of base station
equipment.
Changes in technology customarily used in our business, such as
a transition to mobile WiMAX, may result in an impairment in the
value or a change in the estimated useful life of our Expedience
network equipment already placed in service. If such a change
occurs, we may be required to record an impairment charge to
reduce the carrying amount of equipment in service to its fair
value, and to accelerate the useful life of the respective
equipment, resulting in an increase in periodic depreciation
expense over the remaining useful life of the equipment, or, in
appropriate instances, to write off the entire unamortized value.
Spectrum lease expense. Spectrum lease expense
increased $9.6 million to $14.6 million for the nine
months ended September 30, 2006 from $5.1 million for
the nine months ended September 30, 2005. As certain of our
leases include escalation clauses, we are required to record
expense on a straight-line basis over the term of these leases,
including renewal periods where appropriate. Total spectrum
lease expense increased as a direct result of an increase in the
number of spectrum licenses leased as part of the deployment of
our wireless broadband network. We expect spectrum lease expense
to continue to increase as we acquire additional spectrum and
the costs of acquiring such spectrum become higher.
Gain on sale of NextNet. The sale of NextNet
resulted in a gain of $19.8 million, comprised of aggregate
proceeds from the sale of $47.1 million less the book value
of net assets sold of $26.1 million and transaction related
costs of $1.2 million.
Operating loss. As a result of the above,
operating loss increased from $86.1 million for the nine
months ended September 30, 2005 to $149.5 million for
the nine months ended September 30, 2006.
Interest (expense) income — net. We
incurred $42.9 million of net interest expense for the nine
months ended September 30, 2006 from $4.2 million of
net interest expense in the nine months ended September 30,2005. The majority of this increase in interest expense is due
to the issuance in August 2005 of senior secured notes, due
2010, in an aggregate principal amount of $260.3 million,
and the issuance in February 2006 of additional senior secured
notes, due 2010, in an aggregate principal amount of
$360.4 million, as well as additional loans totaling
$135.0 million. We recorded interest expense totaling
$47.9 million, including $47.0 million related to our
senior secured notes, in the nine months ended
September 30, 2006. We also recorded amortization of
original issuance discount of $10.6 million related to our
senior secured notes. These amounts were partially offset by
interest income earned on our short-term investments of
$6.9 million and capitalized interest of $11.2 million
in the nine months ended September 30, 2006 as compared to
$4.4 million of interest expense and $1.5 million of
interest income in the nine months ended September 30,2005. The increase in interest income is primarily due to an
increase in our total short-term investments.
Other income (expense) — net. We
recognized $7.7 million of other income in the nine months
ended September 30, 2006 as compared to $3.3 million
of other income in the nine months ended September 30, 2005.
Income tax provision. We incurred
$1.9 million of income tax expense in the nine months ended
September 30, 2006 as compared to $934,000 in the nine
months ended September 30, 2005. The expense represents the
recognition of a deferred tax liability related to the
accounting for FCC licenses we own. Owned FCC licenses are
amortized over 15 years for U.S. tax purposes but, since
these licenses have an indefinite life, they are not amortized
for financial statement reporting purposes. The ongoing
difference between the financial statements and tax amortization
treatment resulted in our recording a deferred income tax
expense of $1.9 million for the nine months ended
September 30, 2006.
Losses from equity investees —
net. Losses from equity investees — net
increased $3.0 million to $5.8 million for the nine
months ended September 30, 2006 from $2.7 million for
the nine months ended September 30, 2005. The increase is
due to continued losses from our equity investee MVS Net S.A. de
C.V. in Mexico, as well as losses from our equity investee
Danske Telecom A/S in Denmark that we invested in during June
2005.
Net loss. As a result of the above, our net
loss increased to $191.9 million for the nine months ended
September 30, 2006 as compared to $89.6 million for
the nine months ended September 30, 2005.
Total revenues. Total revenues increased
$18.2 million to $33.5 million in 2005 from
$15.3 million in 2004, due to a $10.0 million increase
in equipment revenue and an $8.2 million increase in
service revenue as we began commercial deployment of our network.
Service revenue. In August 2004 we launched
our first market for wireless broadband services. We had three
markets covering approximately 480,000 people in commercial
operation by December 31, 2004. As of December 31,2005 we operated in a total of 25 markets covering approximately
3.8 million people. Of the 22 new markets launched in 2005,
15 were launched in the second half of the year. Total
subscribers in all markets grew from approximately 3,500 as of
December 31, 2004 to approximately 56,200 as of
December 31, 2005, generating service revenues of
approximately $8.5 million in 2005 as compared to $200,000
in 2004.
Equipment and other revenue. Equipment and
other revenue increased approximately $10.0 million, or
66.7%, to $25.0 million in 2005 from $15.0 million in
2004. This increase was due to an increase in the volume of base
station, CPE and other units sold from approximately 13,500 to
approximately 19,500. Sales of equipment to related parties
increased $2.8 million to $9.7 million in 2005 from
$6.9 million in 2004. The majority of this increase was
attributable to sales of base station equipment in the fourth
quarter to Inukshuk, Inc., a joint venture of Bell Canada and
Rogers Communications, through an arrangement with Flux Fixed
Wireless, LLC, an entity controlled by Mr. McCaw.
equipment to Inukshuk increased $4.1 million, or 73.2%, to
$9.7 million in 2005 from $5.6 million in 2004. This
increase more than offset the loss of $1.3 million in
related party sales to ERH in 2004.
Total cost of goods and services. Total cost
of goods and services increased $10.8 million, or 84.4%, to
$23.6 million in 2005 from $12.8 million in 2004.
Cost of service. The deployment of our
wireless broadband network to support the expansion of our
services resulted in cost of service increasing by
$4.0 million to $4.2 million in 2005 compared to
$200,000 in 2004. Tower costs represented the majority of the
increase, growing to $3.7 million in 2005 from
approximately $15,000 in 2004.
Cost of equipment. Following the increase in
the number of base station units and CPE sold in 2005, cost of
equipment increased $6.6 million, or 52.0%, to
$19.3 million in 2005 from $12.7 million in 2004. As a
percentage of equipment and other revenue, cost of equipment
decreased to 77.3% of equipment and other revenue in 2005 from
84.4% in 2004 as a result of an improvement in our product
design, and production efficiencies and the impact of the fourth
quarter base station equipment sales to Inukshuk. We recognize
significantly higher margins on sales of base station equipment
as compared to sales of CPE.
Selling, general and administrative
expense. Selling, general and administrative
expense increased $82.0 million to $106.2 million in
2005 from $24.2 million in 2004. The increase was primarily
due to a significant increase in employee compensation and
benefit costs, marketing and advertising costs, professional
fees, and facilities costs to support the expansion of our
business. Employee compensation, benefits and other related
expenses included in selling, general, and administrative
expense increased $39.2 million to $52.5 million in
2005 from $13.3 million in 2004, as we increased total
headcount to support the overall growth of our business.
Marketing and advertising costs increased $15.9 million to
$17.7 million in 2005 from $1.8 million in 2004, as we
launched or expanded our marketing and sales efforts in 22
markets. Professional fees are included in selling, general, and
administrative expense, including legal, accounting and other
costs related to regulatory compliance, increased
$11.2 million to $15.0 million in 2005 from
$3.8 million in 2004. Facilities costs included in selling,
general, and administrative expense increased $3.2 million
to $4.0 million in 2005 from $800,000 in 2004, as we
expanded our administrative office space in Kirkland, Washington
and opened various locations in our new markets.
Research and development expense. Research and
development expense increased $3.8 million, or 66.0%, to
$9.6 million in 2005 from $5.8 million in 2004. The
increase was primarily due to the additional research and
development expenditure to support the expansion of our wireless
broadband network and the development of new technologies,
including PC cards and chipsets installed directly in consumer
devices. Additionally, we acquired NextNet in March 2004, which
resulted in a full year of research and development expense in
2005 as compared to only ten months of such expense in 2004.
Depreciation and amortization
expense. Depreciation and amortization expense
increased $9.3 million to $11.9 million in 2005 from
$2.6 million in 2004, primarily due to increased network
build-out and deployed CPE following our expansion into new
markets and related subscriber growth. Capital expenditure for
purchases of depreciable property, plant and equipment increased
$119.9 million to $132.7 million in 2005 from
$12.8 million in 2004.
Spectrum lease expense. Spectrum lease expense
increased $6.4 million to $9.4 million in 2005 from
$3.0 million in 2004. Total spectrum lease expense
increased as a direct result of the increasing number of
spectrum licenses we leased as part of the deployment of our
wireless broadband network. We entered into or assumed lease
arrangements for approximately 200 spectrum licenses in 2005,
increasing the total number held to approximately 285 as of
December 31, 2005 as compared to approximately 85 as of
December 31, 2004.
Operating loss. As a result of the above,
operating loss increased from $33.1 million in 2004 to
$127.2 million in 2005.
Interest (expense) income — net. We
incurred $11.5 million of net interest expense in 2005 as
compared to $1.2 million of interest income in 2004. The
majority of this difference is due to the issuance in
August 2005 of senior secured notes due 2010, in an aggregate
principal amount of $260.3 million. We recorded interest
expense totaling $11.6 million and amortization of original
issue discount of $4.4 million in 2005 related to these
senior secured notes. These amounts were partially offset by
interest income earned on our short-term investments of
$3.1 million and capitalized interest of $2.3 million
in 2005 as compared to $1.2 million of interest income in
2004. The increase in interest income is primarily due to an
increase in our total short-term investments and the fact that
we earned income on short-term investments acquired mid-year in
2004 for a full year in 2005.
Other income (expense) — net. We
recognized $3.8 million of other income in 2005 as compared
to $300,000 of other expense in 2004. The increase in other
income (expense) — net is primarily due to an increase
in our total short-term investments and the fact that we held
certain short-term investments for a full year in 2005 as
compared to six months in 2004.
Income tax provision. We recorded a
$1.5 million income tax provision in 2005 as compared to $0
in 2004. The expense represents the recognition of a deferred
tax liability related to the accounting for FCC licenses we own.
Owned FCC licenses are amortized over 15 years for
U.S. tax purposes but, since these licenses have an
indefinite life, they are not amortized for financial statement
reporting purposes. The ongoing difference between the financial
statements and tax amortization treatment resulted in our
recording a deferred income tax expense of $1.5 million in
2005.
Losses from equity investees —
net. Losses from equity investees — net
increased $2.9 million to $3.9 million from
$988,000 million in 2004. The increase in losses from
equity investees was due to the inclusion of a full year of
losses from MVS Net S.A. de C.V. in Mexico, as compared to six
months of losses in 2004, and the addition in June 2005 of a new
equity investee, Danske Telecom A/S in Denmark.
Net loss. As a result of the above, our net
loss increased to $140.0 million in 2005 as compared to
$33.0 million in 2004.
For the period from our inception on October 27, 2003 to
December 31, 2003, we incurred approximately
$1.4 million of selling, general and administrative and
other expenses, primarily related to the establishment of our
company and the purchase of 34 spectrum leases.
Liquidity
and Capital Resources
Since inception, our activities have consisted principally of
developing, deploying and operating our network and acquiring
spectrum and other assets for the delivery of wireless broadband
services. Until the sale of NextNet in August 2006, we also
developed and sold network equipment and CPE. We have relied on
the proceeds from equity and debt financing, rather than cash
generated from operations, as our primary source of capital to
fund this development. Specifically, we raised
$214.6 million in capital through the issuance of
90,000,000 shares of Class A common stock and
34,613,020 shares of Class B common stock in 2004. We
raised $139.6 million in capital through the issuance of
34,907,062 shares of Class A common stock in 2005, and
$1.0 billion through sales of 142,425,485 shares of
Class A common stock and 29,717,197 shares of
Class B common stock to Intel Pacific, Motorola and others
in the first nine months of 2006. We have also raised capital
through debt financing, including issuance of debt securities
and warrants, totaling $260.3 million in 2005 and
$495.4 million for the first nine months of 2006. Please
see “Description of Indebtedness” for a more detailed
description of our indebtedness.
Following the sale of NextNet, our primary liquidity
requirements will arise from the need to expand our wireless
broadband network, purchase spectrum, provide CPE to our new
subscribers, and fund our operating losses. We believe the net
proceeds from this offering, together with our cash and cash
equivalents and short-term investments, will be sufficient to
fund our anticipated operations for at least the next twelve
months, although we may seek to raise additional capital during
this period depending on market conditions. We expect to
continue making significant investments to acquire spectrum and
to construct and expand our network, and we believe we will
require significant cash expenditures related to capital
construction costs,
spectrum acquisition and operating losses. However, we believe
our business plan permits a high degree of flexibility with
respect to the rate at which we make these expenditures, as we
can adjust our deployment schedule depending on the availability
of additional capital. Based on our expected deployment
schedule, we expect our capital expenditures (not including
amounts expended on spectrum acquisitions) for the fourth
quarter of 2006 to be approximately $30.0 million, and we
expect to make additional capital expenditures (not including
amounts expended on spectrum acquisitions) of approximately
$500.0 million in 2007, subject to the availability of
additional capital on acceptable terms. We intend to acquire
spectrum as opportunities to make such acquisitions arise.
Although we cannot predict the availability or cost of spectrum
in the future, as of November 30, 2006, we had committed to
expenditures of $40.0 million to acquire spectrum rights,
assuming these transactions close.
Effects of foreign exchange rate
or cash and cash equivalents
(664
)
2,286
Net increase in cash and cash
equivalents, including the effect of foreign exchange rate
changes
4,816
855,076
Cash and cash equivalents at
beginning of period
12,598
29,188
Cash and cash equivalents at end
of period
$
17,414
$
884,264
Operating
Activities
Net cash used in operating activities increased
$94.9 million to $138.5 million for the nine months
ended September 30, 2006, from $43.7 million for the
nine months ended September 30, 2005. Cash received from
customers was $84.4 million for the nine months ended
September 30, 2006 compared to $16.2 million for the
nine months ended September 30, 2005. This increase was due
to an increase in the number of our subscribers as we launched
our service in seven new markets for the nine months ended
September 30, 2006. This increase was more than offset by
increases in all operating expenses, most significantly general
and administrative and sales and marketing expenses, including
employee compensation, professional fees and facilities and
advertising expense, due to the expansion of our wireless
broadband network and a significant increase in the number of
markets served.
Investing
Activities
Net cash used in investing activities increased
$171.6 million to $511.4 million for the nine months
ended September 30, 2006 from $339.8 million for the
nine months ended September 30, 2005. We launched seven new
markets in the nine months ended September 30, 2006, and,
as a result, invested $203.9 million in deploying our
wireless broadband network and acquiring additional spectrum
licenses for the nine months ended September 30, 2006, as
compared to $109.5 million for the nine months ended
September 30, 2005, an increase of $94.4 million.
Purchases of short-term investments, net of sales or maturities,
increased $126.7 million to $270.5 million for the
nine months ended September 30, 2006 from
$143.8 million for the nine months ended September 30,2005. These expenditures were partially offset by the net
proceeds on the sale of NextNet totaling $47.1 million.
Net cash provided by financing activities increased
$1.1 billion to $1.5 billion for the nine months ended
September 30, 2006 from $388.9 million for the nine
months ended September 30, 2005. During the nine months
ended September 30, 2006 we received $1.0 billion of
net proceeds from the issuance of common stock,
$360.4 million from the issuance of our senior secured
notes, due 2010, and $135.0 million in connection with our
commercial loan and other indebtedness.
The following table presents a summary of our cash flows and
beginning and ending cash balances for the period from
October 27, 2003 (inception) to December 31, 2003 and
for the years ended December 31, 2004 and 2005:
Effect of foreign exchange rates
on cash and cash equivalents
—
178
(636
)
Net increase in cash and cash
equivalents, including the effect of foreign exchange rates
2,721
9,877
16,590
Cash and cash equivalents at
beginning of period
—
2,721
12,598
Cash and cash equivalents at end
of period
$
2,721
$
12,598
$
29,188
Operating
Activities
Net cash used in operating activities increased
$43.8 million, or 83.1%, to $96.7 million in 2005,
from $52.8 million in 2004. Cash received from customers
was $31.6 million in 2005 compared to $11.6 million in
2004. This increase was due to an increase in the number of our
subscribers as we launched our service in 22 domestic and two
international markets in 2005. This increase was more than
offset by increases in all operating expenses, most
significantly selling, general, and administrative expenses, due
to the expansion of our wireless broadband network and a
significant increase in the number of markets served.
Investing
Activities
Net cash used in investing activities increased
$130.9 million to $275.3 million in 2005 from
$144.4 million in 2004. We launched 22 domestic and two
international markets in 2005, and, as a result, invested
$184.8 million in deploying our wireless broadband network
and acquiring additional spectrum licenses in 2005, as compared
to $39.2 million in 2004, an increase of
$145.6 million. These expenditures were partially offset by
a reduction in our net investment in short-term investments.
Purchases of short-term investments, net of sales or maturities,
decreased $61.1 million to $17.7 million in 2005 from
$78.8 million in 2004.
Financing
Activities
Net cash provided by financing activities increased
$182.2 million to $389.2 million in 2005 from
$207.0 million in 2004. This increase was primarily due to
the issuance in 2005 of our senior secured notes, due 2010, in
an aggregate principal amount of $260.3 million.
We received $75.0 million less in proceeds from sales of
capital stock in 2005 as compared to 2004. Proceeds from the
issuance of capital stock in 2005 and 2004 were
$139.6 million and $214.6 million, respectively.
Financings
and Capital Requirements
We have financed our operations through the sale of debt and
equity securities and the issuance of bank debt. Significant
transactions for the nine months ended September 30, 2006
and for the year ended December 31, 2005 include the
following:
•
in August 2006, we issued 100,000,000 shares of our capital
stock to Intel Pacific for a purchase price of
$600.0 million;
•
in August 2006, we issued 50,000,000 shares of our common
stock to Motorola for a purchase price of $300.0 million;
•
in August 2006, we issued 25,809,348 shares of our common
stock to existing investors for a purchase price of
$155.0 million;
•
in August 2006, we borrowed $125.0 million under a term loan;
•
in June 2006, we borrowed $10.0 million under our July 2005
loan agreement with BCE Nexxia;
•
in February 2006, we sold approximately $360.4 million in
senior secured notes. In connection with the sale of these
notes, we issued warrants to the purchasers entitling them to
purchase up to 28,828,000 shares of our common stock;
•
in August 2005, we sold approximately $260.3 million in
senior secured notes. In connection with the sale of these
notes, we issued warrants to the purchasers entitling them to
purchase up to 20,827,653 shares of our common
stock; and
•
in March 2005, we issued 25,000,000 shares of our common
stock to Bell Canada for a purchase price of $100.0 million.
Debt
Obligations and Restricted Cash and Investments
In August 2005, we completed the sale of senior secured notes
due 2010 in an aggregate principal amount of
$260.3 million. In connection with our sale of senior
secured notes, we also issued warrants to purchase up to
20,827,653 shares of our common stock. In addition, we
granted the purchasers of the senior secured notes a one-time
option to acquire up to an equivalent amount of additional notes
and warrants for a period of 180 days following the
issuance of the senior secured notes. This option was exercised
in February 2006, at which time we completed the sale to new and
existing holders of additional senior secured notes due 2010 in
an aggregate principal amount of $360.4 million, and
warrants to purchase up to 28,828,000 shares of our common
stock. As of September 30, 2006, we recorded the aggregate
principal amount of the senior secured notes outstanding net of
a discount of $115.2 million due to the unamortized portion
of the proceeds allocated to the warrants, based on their
estimated fair value. Additionally, under the terms of the
senior secured notes, we were required to purchase and pledge
non-callable government securities as interest payment
collateral for the senior secured notes. These restricted
investments, totaling $88.7 million at September 30,2006, are included in current and long-term restricted
investments in our consolidated balance sheets. We also entered
into a senior credit facility with net proceeds of
$125.0 million, and drew $10.0 million against our
July 2005 line of credit with BCE Nexxia. As of
September 30, 2006, we had restricted cash of
$9.7 million. The majority of this restricted cash related
to our letters of credit.
Contractual
Obligations
The contractual obligations presented in the table below
represent our estimates of future payments under fixed
contractual obligations and commitments as of December 31,2005. The amounts in the table may
differ from those reported on our consolidated balance sheet as
of December 31, 2005. Changes in our business needs or
interest rates, as well as actions by third parties and other
factors, may cause these estimates to change. Because these
estimates are complex and necessarily subjective, our actual
payments in future periods are likely to vary from those
presented in the table. The following table summarizes certain
of our contractual obligations, including principal and interest
payments under our debt obligations and payments under our
spectrum lease obligations, as of December 31, 2005:
Less than
1-3
Over 5
Contractual Obligations
Total
1 Year
Years
3-5 Years
Years
(In millions)
Long-term debt
obligations(1)
$
260.3
$
—
$
—
$
260.3
$
—
Interest
payments(2)(3)
132.1
28.6
57.3
46.2
—
Operating lease obligations
70.6
15.0
29.7
25.4
0.5
Spectrum lease obligations
294.5
10.7
21.7
21.7
240.4
Total(4)
$
757.5
$
54.3
$
108.7
$
353.6
$
240.9
(1)
Excludes $495.4 million in long-term debt obligations
incurred during the nine months ended September 30, 2006.
Please see “Description of Indebtedness.”
(2)
As of September 30, 2006, our interest payment obligations
increased by $55.5 million for less than 1 year,
$107.8 million for 1 to 3 years, $22.1 million
for 3 to 5 years and $0 for over 5 years, increasing
total interest payments by $185.4 million. This increase
was due to the issuance of debt during the nine months ended
September 30, 2006, in an aggregate principal amount of
$495.4 million.
(3)
Our interest payment obligations are calculated for all years
using an interest rate of 11%.
(4)
Excludes our commitment to purchase no less than
$150.0 million of equipment products from Motorola through
August 29, 2008 under the terms of the Supply Agreement
that was entered into on August 29, 2006. Please see
“Certain Relationships and Related Transactions” for
more detailed description of our Supply Agreement with Motorola.
Future
Liquidity and Capital Resource Requirements
Based upon our current plans, we believe that our cash, cash
equivalents and marketable securities will be sufficient to
cover our estimated liquidity needs for at least the next twelve
months. Our business is in its early stages. We regularly
evaluate our plans and strategy, and these evaluations often
result in changes, some of which may be material and
significantly modify our cash requirements. For example, we
significantly changed our business strategy in August 2006
following our sale of NextNet. These changes in our plans or
strategy may include the introduction of new features or
services, significant or enhanced distribution arrangements,
investments in infrastructure, acquisition of another company,
or any combination of the foregoing.
Critical
Accounting Policies
Our discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States.
The preparation of these consolidated financial statements
requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses,
and related disclosure of contingent assets and liabilities.
In consultation with our board of directors, we have identified
the following accounting policies that we believe are key to an
understanding of our financial statements: revenue recognition;
impairments of long-lived assets; impairments of goodwill and
intangible assets with indefinite useful lives; stock-based
compensation; valuation of common stock; accounting for spectrum
licenses and leases; and the deferred tax asset valuation
allowance.
These accounting policies require management to make complex and
subjective judgments. By their nature, these judgments are
subject to an inherent degree of uncertainty. These judgments
are based on our historical experience, terms of existing
contracts, our observance of trends in the industry, information
provided by our customers and information available from other
outside sources, as appropriate. Different, reasonable estimates
could have been used in the current period. Additionally,
changes in accounting estimates are reasonably likely to occur
from period to period. Both of these factors could have a
material impact on the presentation of our financial condition,
changes in financial condition or results of operations.
Revenue
Recognition
We recognize revenue in accordance with Staff Accounting
Bulletin, or SAB, No. 104, Revenue Recognition,
when all of the following conditions exist: (i) persuasive
evidence of an arrangement exists in the form of an accepted
purchase order; (ii) delivery has occurred, based on
shipping terms, or services have been rendered; (iii) the
price to the buyer is fixed or determinable, as documented on
the accepted purchase order; and (iv) collectibility is
reasonably assured.
Service revenue — We primarily earn service
revenue by providing access to our wireless broadband network.
Also included in service revenue are revenue from optional
services, including personal and business email and static
Internet Protocol. Activation fees are charged to customers upon
subscription.
We apply Emerging Issues Task Force, or EITF, Issue
No. 00-21,
Accounting for Revenue Arrangements with Multiple
Deliverables, to account for revenue arrangements with
multiple deliverables. These arrangements are allocated among
the separate units of accounting based on the relative fair
values if the deliverables in the arrangement meet certain
criteria.
Service revenue from customers for the wireless broadband and
optional services are billed in advance and recognized ratably
over the service period. Activation fees charged to the customer
are deferred and recognized as service revenue on a
straight-line basis over the expected life of the customer
relationship, which we have estimated to be 3.5 years. This
expected life was determined based on our assessment of
historical industry averages. Given our limited history we
believe that these averages represent the best indicator of our
future duration of customer life. As we develop more history of
contract renewals, our estimate of the expected life of our
customer relationship may change. Any change will be reflected
prospectively beginning in the period that the change in
estimate occurs.
Equipment and other revenue — We primarily earn
equipment revenue from sales of base stations, CPE, related
infrastructure, system services and software maintenance
contracts. Revenue associated with the shipment of CPE and other
equipment to our customers is recognized when title and risk of
loss have transferred to the customer. Generally, the risks of
ownership and title pass when product is delivered to our
customer. There are no rights of return provided in any of our
equipment sales contracts. In the interest of customer
relations, in the past we have allowed returns or exchanges of
certain products. If and when products are returned, we normally
exchange them. We have not established a sales return allowance
as returns have been insignificant to date and no significant
returns are anticipated.
Sales discounts, primarily discounts on list prices of equipment
sold, are generally classified as a reduction of revenues in
accordance with EITF Issue
No. 01-09,
Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendor’s Products), and
are recognized when revenue is recognized. Shipping and handling
costs billed to customers are recorded to equipment and other
revenue. Freight costs associated with shipping goods to
customers are recorded to cost of equipment.
In arrangements that include multiple elements, such as the sale
of a base station with a software maintenance contract, we apply
the accounting guidance in accordance with Statement of
Position, or
SOP, No. 97-2,
Software Revenue Recognition. Revenue is allocated to each
element of the transaction based upon its fair value as
determined by vendor specific objective evidence. Vendor
specific objective evidence of fair value for all elements of an
arrangement is based upon the normal pricing and discounting
practices for those products and services when sold separately.
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 we 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. If the fair value of a delivered element has not been
established, we use the residual method to record revenue if the
fair value of all undelivered elements is determinable. Under
the residual method, the fair value of the undelivered elements
is deferred and the remaining portion of the arrangement fee is
allocated to the delivered elements and is recognized as revenue.
Software maintenance services include technical support and the
right to receive unspecified upgrades and enhancements on a
when-and-if
available basis. Fees for software maintenance services are
typically billed annually in advance of performance of the
services with provisions for subsequent annual renewals. We
defer the related revenues and recognize them ratably over the
respective maintenance terms, which typically are one to two
years.
Impairments
of Long-lived Assets
We review our long-lived assets to be held and used, including
property, plant and equipment and intangible assets with
definite useful lives, for recoverability whenever an event or
change in circumstances indicates that the carrying amount of
such long-lived asset or group of long-lived assets may not be
recoverable. Such circumstances include, but are not limited to
the following:
•
a significant decrease in the market price of the asset;
•
a significant change in the extent or manner in which the asset
is being used;
•
a significant change in the business climate that could affect
the value of the asset;
•
a current period loss combined with projections of continuing
losses associated with use of the asset;
•
a significant change in our business and technology strategy;
•
a significant change in our management’s views of growth
rates for our business; and
•
a significant change in the anticipated future economic and
regulatory conditions and expected technological availability.
We frequently evaluate whether such events and circumstances
have occurred. When such events or circumstances exist, we would
determine the recoverability of the asset’s carrying value
by estimating the undiscounted future net cash flows (cash
inflows less associated cash outflows) that are directly
associated with and that are expected to arise as a direct
result of the use of the asset. For purposes of recognition and
measurement, we group our long-lived assets at the lowest level
for which there are identifiable cash flows that are largely
independent of the cash flows of other assets and liabilities.
If the total of the expected undiscounted future net cash flows
is less than the carrying amount of the asset, a loss, if any,
is recognized for the difference between the fair value of the
asset and its carrying value.
Impairments
of Goodwill and Intangible Assets with Indefinite Useful
Lives
We assess the impairment of goodwill and intangible assets with
indefinite useful lives at least annually, or whenever an event
or change in circumstances indicates that the carrying value of
such asset or group of assets may not be recoverable. Factors we
consider important, any of which could trigger an impairment
review, include:
•
significant underperformance relative to expected historical or
projected future operating results;
•
significant changes in our use of the acquired assets or the
strategy for our overall business; and
Our owned spectrum licenses relate to our wireless broadband
services business and are an integral part of our network
coverage area, which is marketed under a single branding
strategy and represent the highest and best use of the assets.
Hence, they are evaluated as a single unit of accounting for
impairment testing purposes.
We complete a two step process to determine the amount of the
impairment. The first step involves comparison of the fair value
of the reporting unit to its carrying value to determine if any
impairment exists. If the fair value of the reporting unit is
less than the carrying value, goodwill is considered to be
impaired and the second step is performed. The second step
involves comparison of the implied fair value of goodwill to its
carrying value. The implied fair value of goodwill is determined
by allocating fair value to the various assets and liabilities
within the reporting unit in the same manner goodwill is
recognized in a business combination. In calculating an
impairment charge, the fair value of the impaired reporting
units are estimated using a discounted cash flow valuation
methodology or by reference to recent comparable transactions.
In making our assessment, we rely on a number of factors,
including operating results, business plans, economic
projections, and anticipated future cash flows. There are
inherent uncertainties related to these factors and judgment in
applying these factors to our goodwill impairment test. We
performed our annual impairment tests of goodwill as of
October 1, 2005, and concluded that there was no impairment
of our goodwill.
Our intangible assets with indefinite useful lives consist
mainly of our spectrum licenses originally issued by the FCC,
trade names and trademarks. The impairment test for intangible
assets with indefinite useful lives consists of a comparison of
the fair value of an intangible asset with its carrying amount.
If the carrying amount of an intangible asset exceeds its fair
value, an impairment loss will be recognized in an amount equal
to that excess. The fair value is determined by estimating the
discounted future cash flows that are directly associated with
and that are expected to arise as a direct result of the use and
eventual disposition of the asset. We performed our annual
impairment test of indefinite lived intangible assets as of
October 1, 2005, and concluded that there was no impairment
of these intangible assets.
Stock-Based
Compensation
Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, or
SFAS No. 123, establishes the use of the fair value
based method of accounting for arrangements under which
compensation cost is determined using the fair value stock-based
compensation determined as of the date of grant and is
recognized over the periods in which the related services are
rendered. The statement also permits companies to elect to
continue using the intrinsic value accounting method specified
in Accounting Principles Bulletin Opinion No. 25,
Accounting for Stock Issued to Employees, to account for
stock-based compensation issued to employees. Through
December 31, 2005, we elected to use the intrinsic value
based method for stock options issued to employees and have
disclosed the pro forma effect of using the fair value based
method to account for our stock-based compensation pursuant to
SFAS No. 148, Accounting for Stock-Based
Compensation — Transition and Disclosure, or
SFAS No. 148.
On January 1, 2006, we adopted SFAS No. 123(R),
Share-Based Payment, or 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. SFAS No. 123(R) was applied
prospectively to new stock options and to options modified,
repurchased, or cancelled on or after January 1, 2006. We
recognize these compensation costs, net of a forfeiture rate,
for those shares expected to vest on a graded vesting schedule
over the requisite service period of the award, which is
generally the option vesting term of four years. We continue to
account for the outstanding awards at January 1, 2006 under
APB 25 as we were considered a non-public entity at the
date of adoption that used the minimum value method for pro
forma disclosure under SFAS No. 148.
We use the Black-Scholes valuation model, or BSM, to estimate
fair value of stock options which requires complex and various
judgmental assumptions including estimated stock price
volatility, employee exercise patterns (expected life of the
option) and future forfeitures. The computation of expected
volatility is based on an average historical volatility from
common shares of a group of our peers for an appropriate period
of time. The expected life of options granted is based on the
simplified calculation of expected life, described
in Staff Accounting Bulletin No. 107, or SAB No. 107,
Share-Based Payment, due to lack of option exercise. In
addition, an estimate of 3% annual forfeiture rate was used for
the nine months ended September 30, 2006 based on our
historical experience since inception. If any of the assumptions
used in the BSM change significantly, stock-based compensation
expense may differ materially in the future from that recorded
in the current period. See Note 12, “Stock-Based
Payments” of our consolidated financial statements for
additional information.
We account for grants under the Stock Appreciation Rights, or
SAR, Plan, under SFAS No. 123(R). SARs are recorded as
liability awards, as cash settlement is anticipated, and this
liability is remeasured at fair value each reporting period
until the awards are settled. The fair value is determined in
the same manner as a stock option granted under the Stock Option
Plan using the same assumptions and option-pricing model to
estimate the fair value. Compensation expense for each period
until settlement is based on the change (or a portion of the
change, depending on the percentage of the requisite service
that has been rendered at the reporting date) in the fair value
for each reporting period. See Note 12 “Stock-Based
Payments” of our consolidated financial statements for
additional information.
Valuation
of Common Stock
Significant
Factors, Assumptions, and Methodologies Used in Determining the
Fair Value of our Capital Stock.
Members of our management possessing the requisite valuation
experience estimated the fair value of our capital stock. We did
not obtain contemporaneous valuations prepared by an unrelated
valuation specialist at the time of each stock option issuance
because we believe our management possessed the requisite
valuation expertise to prepare a reasonable estimate of the fair
value of the interests at the time of each issuance since
inception.
The determination of the fair value of our common stock requires
us to make judgments that are complex and inherently subjective.
We used the market approach to estimate the value of our
enterprise at each date options were granted and at each
reporting date. Under the market approach, a transaction-based
method is used to estimate the value of our enterprise based on
transactions involving capital stock with unrelated investors
and other third parties. This approach assumes that such
transactions constitute the best evidence as to the fair value
of our common stock.
Of this amount, 3,820,781 shares were sold to a related
party.
(2)
Of this amount, 13,967,119 shares were sold to a related
party.
Additionally, we use the best information available to
corroborate our determination, including events affecting the
fair value of our common stock during the year, such as:
•
the implementation of our business strategy, including the
achievement of significant qualitative and quantitative
milestones relating to, among others, the number of markets
launched, subscriber growth, revenue growth, spectrum licenses
acquired or leased, employee growth and the execution of
strategic transactions;
•
the exercise price of warrants for the purchase of our common
stock issued to both related and third parties;
•
the terms of cash sale transactions for the purchase of our
common stock by related parties; and
•
the terms of non-cash transactions in which related parties
received our common stock as consideration.
In evaluating each of these events, we have assumed that such
transactions provide additional corroborating evidence as to the
fair value of our capital stock. For those transactions
involving related parties, the facts and circumstances present
are reviewed to evaluate whether the terms of these agreements
differ materially from those that would have existed in an
arms-length transaction with an unrelated party. This evaluation
is performed by comparing those related party transactions to
similar transactions with unrelated parties.
We further corroborated the estimate of fair value by
calculating the enterprise value using the income approach at
various points throughout the year. The income approach applies
an appropriate discount rate to an estimate of the future cash
flows based on our forecasts of revenues, costs and capital
expenditures. Given that we are an early stage company,
forecasting these cash inflows and outflows requires that we
make judgments that are substantially more complex and
inherently subjective than those that would be required in a
mature business. As such, we determined that the market approach
was a more accurate method of estimating fair value and have
relied on the income approach for corroboration only.
In anticipation of this offering, we considered whether the
stock options granted during 2005 had compensatory elements at
the grant date that should be reflected in our financial
statements. In conducting the retrospective analysis, we
considered the valuation methodologies that investment banking
firms discussed with us in preparation for this offering in the
context of the guidance provided in the AICPA Audit and
Accounting Practice Aid Series, Valuation of Privately Held
Company Equity Securities Issued as Compensation. We further
considered the likelihood of proceeding with this offering and
the changes in the business and capital structure during the
course of 2005 and during the period thereafter leading up to
the filing of a registration statement with the SEC. Based on
such considerations, we determined that the contemporaneous
valuation estimates completed by management at the time of each
equity offering accurately reflected the fair value of our
common stock at each grant date.
We expect there to be a difference between the estimated fair
value of the common stock used to account for options issued
during the fiscal year ended December 31, 2005 under the
Clearwire Corporation
2003 Stock Option Plan and the fair value of our common stock
based on an assumed initial public offering price of
$ per share. The reasons for
this difference in the estimated of fair value of our common
stock during the fiscal year ended December 31, 2005 and
the fair value based on an assumed initial public offering price
of $ per share are attributed
to .
Accounting
for Spectrum Licenses and Leases
We have two types of arrangements for spectrum licenses in the
United States: direct licenses from the FCC which we own and
leases or subleases from third parties that own or lease one or
more FCC licenses.
The owned FCC licenses, as well as our licenses for spectrum in
international markets, are accounted for as intangible assets
with indefinite lives in accordance with the provisions of
SFAS No. 142. In accordance with
SFAS No. 142, intangible assets with indefinite useful
lives are not amortized but must be assessed for impairment
annually or more frequently if an event indicates that the asset
might be impaired. We performed our annual impairment test of
indefinite lived intangible assets as of October 1, 2005
and concluded that there was no impairment of these intangible
assets. For leases involving significant up-front payments, we
account for such payments as prepaid spectrum license fees.
We account for the spectrum lease arrangements as executory
contracts which are similar to operating leases. For leases
containing scheduled rent escalation clauses we record minimum
rental payments on a straight-line basis over the terms of the
leases, including the renewal periods as appropriate.
Deferred
Tax Asset Valuation Allowance
A valuation allowance is provided for deferred tax assets if it
is more likely than not that these items will either expire
before we are able to realize their benefit, or that future
deductibility is uncertain. In accordance with
SFAS No. 109, we record net deferred tax assets to the
extent we believe these assets will more likely than not be
realized. In making such determination, we consider all
available positive and negative evidence, including our limited
operating history, scheduled reversals of deferred tax
liabilities, projected future taxable income/loss, tax planning
strategies and recent financial performance. We currently record
a full valuation allowance for net deferred tax assets, which
was approximately $67.1 million and $18.7 million as
of December 31, 2005 and 2004, respectively.
Recent
Accounting Pronouncements
FIN No. 48 — In June 2006, the
FASB issued Interpretation, FIN, No. 48, Accounting for
Uncertainty in Income Taxes. FIN No. 48 prescribes
a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return.
FIN No. 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods, disclosure, and transition. FIN No. 48 is
effective for our first fiscal year beginning after
December 15, 2006. We are currently evaluating the
provisions of FIN No. 48 to determine what effect its
adoption on January 1, 2007 will have on our financial
position, cash flows, and results of operations.
SAB No. 108 — In September 2006, the
SEC staff issued SAB No. 108, Considering the
Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements.
SAB No. 108 provides interpretive guidance on how the
effects of prior-year uncorrected misstatements should be
considered when quantifying misstatements in the current year
financial statements. SAB No. 108 requires registrants
to quantify misstatements using both an income statement
(“rollover”) and balance sheet (“iron
curtain”) approach and evaluate whether either approach
results in a misstatement that, when all relevant quantitative
and qualitative factors are considered, is material. If prior
year errors that had been previously considered immaterial now
are considered material based on either approach, no restatement
is required so long as management properly applied its previous
approach and all relevant facts and circumstances were
considered. If prior years are not restated, the cumulative
effect adjustment is recorded in opening accumulated deficit as
of the beginning of the fiscal year of implementation.
SAB No. 108 is effective for fiscal years ending on or
after November 15, 2006, with earlier implementation
encouraged. We do not believe that our implementation of
SAB No. 108 will have an effect on our financial
position, cash flows, or results of operations.
SFAS No. 157 — In September 2006, the
FASB issued SFAS No. 157, Fair Value Measurements.
SFAS No. 157 defines fair value, establishes a
framework for measuring fair value and expands disclosure of
fair value measurements. SFAS No. 157 applies under
other accounting pronouncements that require or permit fair
value measurements and accordingly, does not require any new
fair value measurements. SFAS No. 157 is effective for
financial statements issued for fiscal years beginning after
November 15, 2007. We are currently evaluating the impact
of this pronouncement on our financial statements.
FSP No. SFAS 123(R) — 3- In November
2005, the FASB issued FSP No. SFAS 123(R)-3,
Transition Election Related to Accounting for the Tax Effects
of Share-Based Payment Awards. This FSP provides an
alternative transition method for calculating the tax effects of
adopting SFAS No. 123(R), which includes simplified
methods to establish the beginning balance of the additional
paid-in capital pool (APIC pool) related to the tax effects of
employee stock-based compensation, and to determine the
subsequent impact on the APIC pool and the statement of cash
flows of the tax effects of employee stock-based compensation
awards that are outstanding upon adoption of
SFAS No. 123(R). We have until January 1, 2007,
to make a one-time election and are currently in the process of
evaluating the alternative methods.
Quantitative
and Qualitative Disclosures about Market Risk
The risk inherent in our market risk sensitive instruments and
positions is the potential loss from adverse changes in interest
rates and foreign currency exchange rates. None of our market
risk sensitive instruments are held for trading purposes.
Interest
Rate Risk
Our primary interest rate risk is associated with our long-term
debt. We have a total outstanding balance of long-term debt of
$639.2 million as of September 30, 2006. The weighted
average annual interest rate on this long-term debt is 11.1%. A
one percent increase in the interest rate on our long-term debt
outstanding as of September 30, 2006, would increase our
annual interest expense by approximately $6.4 million per
year.
We have short-term investments that are subject to interest rate
risk that may impact the return on those investments. We do not
expect our operating results, financial condition or cash flows
to be materially affected by changes in market interest rates.
Foreign
Currency Exchange Rates
We are exposed to foreign currency exchange rate risk as it
relates to our international operations. We currently do not
hedge our currency exchange rate risk and, as such, we are
exposed to fluctuations in the value of the U.S. dollar
against other currencies. Our international subsidiaries and
equity investees generally use the currency of the jurisdiction
in which they reside, or local currency, as their functional
currency. Assets and liabilities are translated at exchange
rates in effect as of the balance sheet date. 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 during the reporting period. 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) as a component of
net loss.
Control
and Procedures
Internal
Control Over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over our financial reporting, as such
term is defined under
Rule 13a-15(f)
promulgated under the Exchange Act. Internal control over
financial reporting refers to the process designed by, or under
the supervision of, our Co-Chief Executive Officers and our
Chief Financial Officer, and effected by our board of directors,
management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles, and
includes those policies and procedures that:
•
pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions
of our assets;
•
provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and
that receipts and expenditures are being made only in accordance
with authorization of our management and directors; and
•
provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on the financial
statements.
Due to inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. In addition,
projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In connection with their audit of our consolidated financial
statements for the year ended December 31, 2005, our
auditors identified one material weakness, as well as, several
significant deficiencies, with respect to our internal control
over financial reporting. A significant deficiency involves
matters in the design or operation of the Company’s
internal control that could adversely affect our ability to
record, process, summarize and report financial data consistent
with the assertions of management in the consolidated financial
statements. A material weakness is a control deficiency, or
combination of control deficiencies, that results in more than a
remote likelihood that a material misstatement of the annual or
interim financial statements will not be prevented or detected.
In particular, management determined the material weakness
related to our lack of sufficient review of our accounting for
nonroutine and complex transactions, particularly with respect
to accounting for equity-method investments, issuance of debt
with detachable warrants and proper cutoff of accounts payable
and accrued expenses. These errors resulted in material
adjustments and reclassifications to our consolidated financial
statements as a result of, and in the course of, the audit of
our financial statements.
In addition, management determined there are significant
deficiencies relating to: deficiencies in financial reporting
controls in our international operations over areas such as
cash, inventory, fixed assets, prepaid site rentals, value-added
tax receivables and depreciation expense; inconsistent
preparation of monthly routine elimination entries that resulted
in intercompany transactions not properly eliminated in
consolidation at year end; deficiencies in our process to assess
the risk of material misstatement of the financial statements
due to fraud; the lack of a comprehensive tracking and listing
of related party transactions to ensure all such transactions
are reported to accounting personnel; the absence, in some
instances, of a formal policy for our information technology
department regarding authorization and coordination of access to
our systems, applications and underlying data; the lack of a
consistent company-wide systems development and project
framework, including standardized project requirements and
templates; inconsistent implementation of formal security
policies across all operating systems and applications; the lack
of a comprehensive accounting policies and procedures manual;
utilization of financial software applications configured
according to the manufacturer’s design, rather than
adjusted to fit certain requirements; the lack of a formal
process to review user access to our financial software
applications on a regular basis; and deficiencies in our backup
strategy relating to our network and data.
Management’s
Remediation Initiatives
We are in the process of addressing and remedying the material
weakness in internal control over financial reporting described
above, as well as the other significant deficiencies. Elements
of our remediation plan can only be accomplished over time and
we can offer no assurances that those initiatives will
ultimately have the intended effects. We have aggregated the
above described material weakness and significant
deficiencies into three categories: processes surrounding the
procure to payment cycle; financial reporting and complex
accounting; and information technology.
In order to address the weakness surrounding the procure to
payment cycle, we have engaged a consulting firm specializing in
supply chain management. This consultant, together with key
internal process owners, has identified areas for improvement
and is currently developing project plans to address these
areas. Additionally, we have centralized the receipt and
processing of vendor invoices and have established month-end
reviews of open purchase orders for commitments against received
goods and services for accrual.
With respect to financial reporting and complex accounting, we
have increased the overall number of staff within the
Controller’s organization as well as the technical breadth
of the team. Within the expanded organization, we have hired a
Controller, a Director of Accounting for Spectrum and
Acquisitions, who monitors and accounts for complex transactions
and spectrum leases and acquisitions, a Director of Financial
Reporting, who oversees internal and external reporting, as well
as the consolidation process, and a Director of Sarbanes-Oxley
Compliance and Internal Audit. In order to improve the quality
of our month-end close process, we have created and implemented
policies and procedures for financial close and related
sub-processes.
We have reconfigured our financial software application to fit
our business requirements. We have engaged a nationally
recognized outside accounting firm to provide technical
consultation with respect to complex transactions and we have
created a Disclosure Committee to review quarterly financial
statements, significant transactions and disclosure controls and
procedures. The impact of the increases in staffing and process
changes will require time and management attention to ensure
that improvements take effect. We will continue to assess and
evaluate our financial reporting and accounting processes to
identify further enhancements and improvements.
Additionally, we are currently in the process of performing an
annual fraud risk assessment where we expect to identify the
risks that are unique to our business, identify gaps or
weaknesses in controls to mitigate those risks, and ultimately
develop practical plans for targeting resources and controls to
reduce the underlying risks.
To address the absence, in some instances, of a formal policy
for our information technology department regarding the
authorization and coordination of access to our systems and
underlying data, we have implemented the requirement of
authorization by the hiring manager to grant initial access to
network systems, applications and underlying data. Special
circumstances and higher risk areas require Vice President
approval. In addition, we are implementing a role-based approach
to determine system and application access for all field
positions. We perform quarterly user access reviews for our
financial software and have performed user access reviews for
our billing system. On a periodic basis, we intend to perform a
segregation of duties analysis between these two systems. We
expect to monitor the adherence to these policies and to
evaluate whether these changes have the desired effects on our
control environment.
With respect to formalization of a company-wide systems
development and project framework, we have established and
implemented a company-wide System Development Life Cycle
framework for our key financial systems. We have implemented a
formal change management process for our financial software and
supporting database and information technology infrastructure,
including requirements for testing, centralization and tracking
of defects as well as major development efforts and approval for
release. A formal company-wide information security policy was
implemented during the third quarter of 2006. To address
deficiencies in our network and data backup strategy, we have
implemented off-site backup as part of the migration of
financial software servers to a secure third-party location.
Based upon the changes in processes, people and systems as
described above, we believe that we are making substantial
progress in addressing the material weaknesses discussed above,
as well as the other significant deficiencies in our internal
control over financial reporting. Our remediation plan can only
be accomplished over time, and we can offer no assurances that
our initiatives will ultimately be successful.
We build and operate next generation wireless broadband networks
that enable fast, simple, portable, reliable and affordable
Internet communications. Our wireless broadband networks cover
entire communities and deliver a wireless broadband connection
that not only creates a new communications path into the home or
office, but also provides a broadband connection anytime and
anywhere within our coverage area. We intend to evolve our
network and the services we provide to facilitate a greater
range of mobile communications services than we currently offer.
Our current service is both competitive with and complementary
to existing services provided over wireline and wireless
networks. Our subscribers access the same rich content,
applications and services as subscribers of wireline broadband
services, while also experiencing much of the freedom and
flexibility that large scale wireless networks enable. We
believe our network combines some of the best features of
cellular, cable, DSL and WiFi networks into a single service
offering that other networks cannot match. As our capabilities
evolve, we also expect to develop and offer additional
innovative and differentiated products and services. Our
recently introduced VoIP telephony service is one example of a
premium service that complements our current wireless broadband
offering.
We launched our first market in August 2004. As of
November 30, 2006, we offered our wireless broadband
service to approximately 9.5 million people in the United
States and Europe. Our network in the United States is deployed
in 34 markets across more than 350 municipalities and
covers an estimated 8.5 million people. As of
November 30, 2006, we also offered our wireless broadband
services internationally in Brussels, Belgium and Dublin,
Ireland, where our network covers approximately 1.0 million
people. Our equity investees in Denmark and Mexico offer
comparable services. Our markets range from major metropolitan
areas to small rural communities and markets of all sizes in
between.
Subscribers have rapidly adopted our services as we have grown
from 1,000 wireless broadband subscribers as of
September 30, 2004 to more than 188,000 subscribers as of
November 30, 2006. We estimate that the average monthly
increase in our subscriber penetration rate, calculated by
dividing the number of new subscribers by the number of
households covered by our network, ranged between 0.5% to 0.7%
for each of the eleven months ended November 30, 2006. We
believe our subscriber growth rates reflect the mass market
appeal and robust customer demand for our services, even in the
presence of highly competitive wireline broadband alternatives.
Our network currently operates on Expedience technology, which
we purchase from a subsidiary of Motorola. Unlike many existing
wireline and wireless networks, our Expedience network was
designed specifically to support portable, and eventually
mobile, wireless broadband services. We recently committed to
adopt a new network technology based on the mobile WiMAX
standard. Once equipment incorporating this technology becomes
commercially available and meets certain requirements, we expect
to deploy networks based on mobile WiMAX in all of our
subsequent markets and, over time, to migrate our existing
markets to mobile WiMAX. As with our current Expedience
technology, we expect mobile WiMAX to support fixed, portable
and mobile service offerings using a single network
architecture. In addition, we expect manufacturers to develop
and eventually sell various handheld communications and consumer
electronic devices that will be enabled to communicate using our
planned mobile WiMAX network, including notebook computers,
ultramobile PCs, PDAs, game consoles, MP3 players, and other
handheld devices.
Background
Our company was founded by Craig O. McCaw, our Chairman and
Co-Chief Executive Officer, on October 27, 2003, as Flux
U.S. Corporation. On November 13, 2003, an entity
controlled by Mr. McCaw contributed all of the equity
interests of Fixed Wireless Holdings, LLC, or FWH, in exchange
for shares of our Class B common stock. FWH had been formed
on March 13, 2003, and, from its formation until
November 13, 2003, was engaged in acquiring and holding
spectrum licenses and leases. We acquired the
“Clearwire”
trademark from a third party on November 13, 2003 and
changed our name from Flux U.S. Corporation to Clearwire
Corporation in February 2004.
On March 16, 2004, we acquired all of the outstanding
capital stock of NextNet Wireless, Inc., or NextNet, in a merger
between NextNet and one of our wholly-owned subsidiaries,
NextNet was founded in January 1998 to develop and sell
equipment that enables the deployment of broadband wireless
networks. At the time of acquisition, ERH held approximately 25%
of the voting stock of NextNet. We sold all of the outstanding
capital stock of NextNet to Motorola on August 29, 2006.
We conduct our operations through our domestic and international
subsidiaries. For information regarding the geographic
distribution of our total revenues and total long-lived assets,
see Note 15 “Geographic Information” of our
consolidated financial statements. Our operations in the United
States are primarily conducted through our subsidiary, Clearwire
US LLC, and our spectrum leases and licenses in the United
States are primarily held by separate holding companies.
Internationally, our operations are conducted through Clearwire
International, LLC, our wholly-owned subsidiary, which
indirectly holds investments in Europe and Mexico. The chart
below summarizes the structure of our company and our
subsidiaries.
Industry
We believe the U.S. broadband market offers significant
long-term growth potential. According to IDC’s
2006-2010
U.S. Broadband Services Forecast (September 2006), the
U.S. residential broadband market is expected to grow at a
14.3% compound annual growth rate between 2006 and 2010.
According to that same report and IDC’s June 2006 Internet
Commerce Market Model, Version 10.2, broadband penetration is
expected to exceed 68% of U.S. residential households by
2010, up from 36% in 2005, as
dial-up
subscribers migrate to broadband connectivity and people with no
Internet access become broadband subscribers. However, an
estimated 34.1 million households, or 31% of all
U.S. households, accessed the Internet via a
dial-up or
other narrowband connection, while an estimated
36.6 million households, or 33% of all
U.S. households, had no Internet connectivity at all. Of
the 40.5 million households with broadband connectivity in
2005, approximately 55% used a cable modem, 42% used DSL and 3%
used other services such as wireless
broadband or fiber networks. The worldwide broadband market is
expected to experience similar growth trends, with IDC
forecasting in its June 2006 Internet Commerce Model, Version
10.2 a 14% compound annual growth rate from 180.4 million
households with broadband Internet connectivity at the end of
2005 to 346.8 million by the end of 2010. In addition to
growing broadband demand, the rapid growth of mobile email
products, as well as sales of notebook computers and ultramobile
PCs, leads us to believe that subscribers will increasingly
favor Internet access that provides the portability offered by
our existing network and, once commercially deployable, the
mobility offered by WiMAX.
As wireless broadband becomes widely available, we believe
demand for a broad range of mobile applications will
dramatically increase, including demand for email, web browsing,
VoIP telephony, streaming audio and video, video conferencing,
gaming,
e-commerce,
music and video downloading and file transfers. For instance, in
its September 2006 Broadband / Voice Over IP report,
JupiterResearch estimates that in 2005 approximately
4.3 million U.S. households used a
VoIP-based
broadband telephony service, while 105.8 million used a
traditional switched access telephony service, according to the
FCC, Statistics of Communications Common Carriers Report. The
U.S. VoIP-based
broadband telephony market is expected to grow to
22.5 million households by 2010, according to
JupiterResearch, representing a 39% compound annual growth rate.
The worldwide VoIP telephony market is expected to experience a
similar growth trend, with iSuppli forecasting in its August
2006 Wired Communications Topical Report, growth in residential
VoIP subscribers from 15.8 million subscribers in 2005 to
151.2 million subscribers in 2010, representing a 57%
compound annual growth rate.
In addition to growing broadband demand, the rapid growth of
mobile email products, as well as sales of notebook computers
and ultramobile PCs, leads us to believe that subscribers will
increasingly favor Internet access that provides for portability
or mobility. In its August 2006 Worldwide Portable PC
2006-2010
Forecast by Screen Size and July 2006 Worldwide Converged Mobile
2006-2010 Forecast Update, IDC stated that it expects
U.S. laptop sales to increase by approximately 19%
annually, from 21.6 million in 2005 to 51.3 million in
2010, and U.S. shipment of converged mobile devices,
generally consisting of handheld devices with mobile data access
and telephony capabilities, are expected to increase by
approximately 46% annually, from 5.2 million in 2005 to
34 million in 2010. Based on these same reports, worldwide
shipments of converged mobile devices are expected to increase
by approximately 34.1% annually from 56.5 million in 2005
to 244.7 million in 2010. As purchases of laptops and other
portable data devices continue to accelerate, we believe
consumers increasingly will look for more efficient and
effective ways to access the Internet on these devices.
According to IDC’s October 2006 Worldwide Telecom
Blackbook, Version 3, U.S. spending on wireless data
services is expected to increase from $9.5 billion in 2005
to $42.7 billion in 2010, representing a 35% compound
annual growth rate.
Competitive
Strengths
Our business is characterized by the following competitive
strengths:
•
Differentiated Services. Our advanced
wireless broadband network allows us to offer our subscribers
competitively priced services that combine speed, simplicity,
portability and reliability. We believe that no operator of DSL,
cable or cellular networks currently delivers all of these
characteristics in a single service offering.
•
Attractive Spectrum Position. We use
licensed spectrum, which allows us to minimize the interference
common to many networks that use unlicensed spectrum such as
WiFi network operators. As the supply of licensed spectrum is
limited, significant barriers to entry exist for competing
wireless services. We believe that we have the second largest
spectrum position in the 2.5 GHz
(2495-2690 MHz)
band in the United States with approximately 11.5 billion
MHz-POPs in our spectrum portfolio. As of November 30,2006, our spectrum rights covered an estimated 205 million
people in the United States, with a varying amount of spectrum
in each of our markets. In Europe, we hold approximately
5.1 billion MHz-POPs of spectrum predominantly in the
3.5 GHz band, which as of November 30, 2006, covered
approximately 117 million people, with a varying amount of
spectrum in each of our markets. Because we
engineer our networks to optimize the number of users that the
network can support while providing sufficient capacity and
bandwidth, we do not currently launch our services in a market
using our current technology unless we control a minimum of six
channels containing at least 5 MHz of spectrum each.
However, we expect the spectral efficiency of mobile WiMAX
technologies to continue to evolve. As a result, if WiMAX
becomes commercially available, we may decide to deploy our
services in some markets where we hold less spectrum than we
currently consider sufficient. Alternatively, we could find that
new technologies and subscriber usage patterns require us to
have more spectrum available in our markets.
•
Efficient Economic Model. We believe
our economic model for deploying our services is based on
replicable and scalable individual market builds, allowing us to
repeat our build-out processes as we expand. Once our network is
deployed, we are typically able to leverage our fixed costs over
an increasing number of subscribers. We believe our model
requires lower fixed capital and operating expenditures relative
to other wireless and wireline broadband service providers. As
our capabilities evolve, we also expect to generate incremental
revenue from our subscriber base by developing and offering
premium products and services, such as our recently introduced
VoIP telephony services. As of September 30, 2006, 25 of
our 26 markets in the United States that had been in operation
for more than nine months had positive cash flows from
operations before marketing expenses.
•
World-Class Management
Team. Regarded as a pioneer and leader in the
wireless communications industry, Mr. McCaw, our founder,
Chairman and Co-Chief Executive Officer, has been an active
entrepreneur, operator and investor in the industry for more
than 35 years. In addition to Mr. McCaw, our senior
management team consists of a core group of five senior
executives, who together average almost 25 years of
experience in or serving the communications and Internet
industries with companies such as McCaw Cellular, AT&T
Wireless, Nextel Communications, Nextel Partners and others.
•
Strong Strategic Relationships. We have
key strategic relationships with three critical industry
leaders, Intel, Motorola and Bell Canada, which, directly or
indirectly through their affiliates, collectively have invested
more than $1.1 billion in our equity securities. We believe
our strategic relationships with Intel, Motorola and Bell Canada
place us in an advantageous position with respect to access to
equipment and deployment of premium services such as VoIP
telephony. Our strategic relationship with Motorola permits us
to acquire network infrastructure and subscriber equipment for
our current deployment of Expedience systems and our planned
future deployment of a mobile WiMAX network. Furthermore, we
believe our collaboration with Intel to develop, deploy and
market a co-branded service offering for certain notebook
computers, ultramobile PCs and other portable devices will
enhance our efforts to offer differentiated services while at
the same time leveraging one of the world’s most recognized
brands. In addition, Intel has committed to work with original
equipment manufacturers and original design manufacturers to
help ensure that equipment vendors offer WiMAX enabled notebook
computers, ultramobile PCs, and other mobile computing devices
containing Intel microprocessors that are compatible with our
planned mobile WiMAX network, an arrangement we believe will
increase demand for our planned mobile WiMAX services. Bell
Canada also has played an important role in the development of
our VoIP telephony service offering.
Business
Strategy
We intend to continue to grow our business by pursuing the
following strategies:
•
Deploy our service broadly and increase our subscriber
base rapidly. We intend to deploy our network
throughout the United States and internationally in markets that
we consider to be attractive. If mobile WiMAX network
infrastructure equipment and subscriber devices become
commercially available and meet certain requirements, we expect
to deploy mobile WiMAX networks in our new markets and, over
time, to migrate our existing markets to the same
technology. Our network, whether based on Expedience technology
or the mobile WiMAX standard, should enable us to offer our
services to a range of subscribers, from individuals, households
and small businesses to market segments that depend on mobile
communications, such as public safety personnel, field
salespeople, traveling professionals, contractors, real estate
agents and others. To reach potential subscribers, we plan to
offer our services through multiple sales channels, including
direct and indirect sales representatives, company-owned retail
stores, national retail chains such as Best Buy and Circuit
City, and wholesale arrangements with third parties, such as AOL.
•
Build our spectrum position. We expect
to continue acquiring spectrum in our existing bands
domestically and internationally, thereby increasing the number
of markets in which we are able to offer our services. We may
also explore the acquisition of licensed spectrum in frequency
bands other than those we use today if we believe that using
such bands to launch our service is technologically and
economically advantageous.
•
Enhance portability and mobile service
offerings. We will continue to focus on
enhancing the portability of subscriber equipment and to work
with vendors to introduce devices that will permit full mobility
of our services over our network, whether based on our existing
Expedience network or on our planned mobile WiMAX network. We
intend to work with Motorola to decrease costs and to introduce
greater mobility by introducing a PC Card for our Expedience
network in the second half of 2007. We further believe that the
commercial deployment of mobile WiMAX will lead to the
development and sale of a greater number of mobile products that
will be compatible with our planned mobile WiMAX network. As
those products are introduced, we plan to create mobile service
offerings that will be aimed at attracting the purchasers of
those products to our network.
•
Offer premium differentiated
services. We intend to generate incremental
revenues, leverage our cost structure and improve subscriber
retention by offering a variety of premium services. We
currently offer VoIP telephony services in 13 of our United
States markets, and plan to offer other premium services and
applications, such as WiFi hotspots, public safety services,
security services and subscription-based technical support. We
believe that our planned mobile WiMAX deployment will enable us
to offer additional premium services over our network as
manufacturers develop and sell devices that take advantage of
the capabilities of mobile WiMAX.
Services
We offer our services in both domestic and international
markets. Our services consist primarily of providing wireless
broadband connectivity, but in some of our domestic markets, we
also offer VoIP telephony services. Our service revenue
accounted for approximately 2%, 25% and 57% of total revenues
for the years ended December 31, 2004 and 2005 and the nine
months ended September 30, 2006, respectively. Prior to the
launch of our first market in August 2004, equipment and other
revenue accounted for all of our total revenues. Domestic sales
accounted for approximately 79%, 83% and 74% of our service
revenue for the years ended December 31, 2004 and 2005 and
the nine months ended September 30, 2006, respectively,
while our international sales accounted for approximately 21%,
17% and 26% of service revenue over the same periods,
respectively. We began introducing VoIP telephony services in
our United States markets in April 2006. To date, VoIP revenue
has not contributed materially to our service revenue. The
remainder of our total revenues for these periods were generated
from sales of equipment by our former subsidiary NextNet, which
we sold to Motorola in August 2006.
Domestic
Wireless Broadband Services
We offer subscribers a fast, simple, portable, reliable and
affordable way to connect to the Internet. In our domestic
markets, we offer subscribers a choice of service plans designed
to accommodate users that
require greater access speeds or more email addresses and web
hosting accounts. Our primary service plans for our current
wireless broadband services in the United States include:
Download Speed to
Upload Speed from
Base Rate
Service
End-User
End-User
($/month)*
Additional Features
ClearValue
Up to 768 Kbps
Up to 256 Kbps
$
24.99 - $29.99
3 email addresses
ClearPremium
Up to 1.5 Mbps
Up to 256 Kbps
$
34.99 - $37.99
5 email addresses, 10 MB web
hosting account
ClearBusiness
Up to 1.5 Mbps
Up to 256 Kbps
$
49.99
8 email addresses, 25 MB web
account,
1 static IP address
*
Excludes monthly modem lease fee of $4.99, where applicable, and
excludes introductory and promotional rates and rate packages.
We believe that our subscribers are attracted to our current
wireless broadband services primarily because our network
combines some of the best features of cable modem, DSL and
cellular networks into a single service offering at an
attractive price. While we serve a large variety of subscribers,
we believe that the majority of our subscriber base can be
divided into the following broad categories:
•
subscribers who require a portable high-speed Internet
connection, such as
on-the-go
professionals, field salespeople, contractors, police and fire
personnel and others;
•
subscribers who value the flexibility of a portable wireless
broadband service;
•
subscribers who desire a simple way to obtain and use high-speed
Internet access at a reasonable price; and
•
subscribers who are dissatisfied with other service offerings,
often because of perceived or actual poor quality of service,
slow speeds, price, the requirement to participate in undesired
bundled offers, difficulty of installation or unsatisfactory
customer service;
Based on a subscriber survey we conducted in August 2006,
approximately 58% of our new domestic subscribers in that month
reported they were subscribers of either DSL or cable modem
service at the time that they subscribed for our services, while
approximately 32% of our new domestic subscribers in that month
were Internet users migrating from dial up to broadband. The
remaining 10% indicated they were first time Internet
subscribers. As of November 30, 2006, approximately 60% of
our U.S. subscribers had selected our ClearPremium offering.
New subscribers to our ClearValue, ClearPremium and
ClearBusiness service plans generally sign a service contract
with a one or two year term. As of November 30, 2006,
approximately 65% of our U.S. subscribers had entered into
a two year contract. We typically charge an activation fee of
$25 to $50, depending on the market and contract length. We
typically waive activation fees for subscribers that sign a two
year contract.
We recently began to offer alternative payment plans to address
the specific needs of some of our subscribers. For example, we
recently introduced a month-to-month no contract option for our
ClearPremium service, which is well-suited for subscribers who
either do not meet our credit requirements or who anticipate
needing our service for a limited period of time, such as
military personnel or students. These subscribers are not
required to sign a contract, but they are charged a higher
monthly fee than the price paid by subscribers who enter into a
contract. Additionally, in lieu of signing a contract, our
subscribers have the option of prepaying an amount equal to the
fees for 12 months of our services, if they want to receive
reduced contract pricing without signing a contract.
Our subscribers generally make their payments through an
automatic charge to a credit or debit card. We believe automatic
billing reduces our transaction costs, permits us to bill in
advance, which limits our bad debt and accounts receivable
expenses, and improves subscriber retention and renewal rates.
We generally have
not accepted other forms of payment such as cash or checks;
however, in some markets, we have recently begun to accept cash
payments for our services.
To use our current services, our subscribers must obtain one of
our modems. Our subscribers generally lease a modem from us at a
rate of $4.99 per month. We also offer modems for sale to those
subscribers who prefer to own rather than lease our modem. We
require subscribers under our no contract payment plan to
purchase a modem.
International
Wireless Broadband Services
We expect to continue to leverage the product development
initiatives of our domestic operations in establishing our
service offerings in our international markets. We currently
offer wireless broadband services similar to our domestic
service through our subsidiaries in Brussels, Belgium and
Dublin, Ireland. Our equity investees offer a comparable
wireless broadband service in their markets in Denmark and
Mexico.
In our international markets, we currently offer subscribers a
choice of service plans designed to accommodate users that
require faster access speeds or a greater number of email
addresses and web hosting accounts. The specific service plans
and pricing offered in a particular market depend on a variety
of factors, including, among others, service offerings by
competitors in that market. The service plans offered in
Brussels and Dublin are summarized below:
Download Speed to
Upload Speed from
Base Rate
Market
Service Plan
End-User
End-User
(€/month)
Brussels, Belgium
Freedom Light
Up to 1.0 Mbps
Up to 128 Kbps
28.99
Freedom Premium
Up to 3.0 Mbps
Up to 256 Kbps
38.99
Dublin, Ireland
Clear X2
Up to 512 Kbps
Up to 128 Kbps
24.95
Clear Freedom
Up to 1.0 Mbps
Up to 256 Kbps
39.95
Clear Performer
Up to 2.0 Mbps
Up to 256 Kbps
49.95
Clear Business
Up to 2.5 Mbps
Up to 256 Kbps
79.95
As in our domestic markets, we continue to evaluate the service
plans offered in each of our international markets. As we deploy
our services in new markets internationally, the service plans
in those markets may vary from our current offerings based on
factors such as the local competitive environment and the
demands of the subscribers we intend to target in that market.
Voice-over-Internet-Protocol
Telephony
As a part of our plan to offer value-added services to increase
subscriber demand and generate incremental revenue from our
wireless broadband subscribers, in April 2006, we began offering
VoIP telephony services in some of our domestic markets, which
we call Clearwire Internet Phone Service. As of
November 30, 2006, we had launched our VoIP telephony
services in the following 13 markets:
Bellingham WA
Merced, CA
Stockton, CA
Bend, OR
Modesto, CA
Tri-Cities,
WA
Boise, ID
Redding, CA
Visalia, CA
Eugene, OR
Reno, NV
Medford, OR
Roseburg, OR
We plan to introduce our VoIP telephony service in each of our
domestic markets. We continue to explore options for deploying
VoIP telephony services in our international markets, but we do
not have specific plans to deploy VoIP telephony services in
those markets in the near term.
In our domestic VoIP markets, we are currently offering a single
VoIP telephony service plan that provides subscribers with
unlimited local and long distance calling, including calls
within the United States, Canada and Puerto Rico, for a fixed
monthly fee of $34.99 per month with a monthly $5.00
promotional discount during the first 12 months. Our VoIP
telephony service permits calls outside these countries on a
charge-per-call
basis. Our VoIP telephony service package includes enhanced
calling features such as voice mail, call waiting, 3-way calling
and caller ID. In addition, our subscribers can set a range of
telephony options online, such as call forwarding and call
blocking. We also provide optional email notification of
voicemail messages through which a subscriber may choose to
receive a voicemail message attached as a file to an email
message.
Our VoIP telephony service is facilities-based, which means that
the service is provided across our network and switches through
equipment we control. This allows us to prioritize our voice
traffic over other data traffic and, we believe, provide higher
average call quality than is available on non facilities-based
VoIP systems.
By mid-2007, we expect to introduce additional enhancements to
our VoIP telephony services, which we believe will make our
service offering more attractive to potential subscribers. These
enhancements are expected to include local number portability
and automatic location determination capability for E911. Once
these enhancements are introduced, we intend to increase our
focus on marketing these services to our current and future
subscribers.
Future
Mobile WiMAX Services
If and when we migrate our network to mobile WiMAX, we expect to
be able to offer subscribers services over the mobile WiMAX
network similar to the fixed and portable wireless high-speed
Internet access and VoIP telephony services we currently offer
our existing subscribers, but with a greater emphasis on
mobility. Once mobile WiMax becomes commercially available, we
believe that manufacturers will have an interest in equipping a
broad array of handheld communications and consumer electronic
devices with mobile WiMAX chipsets, including notebook
computers, ultramobile PCs, PDAs, games consoles, MP3
players, and other productivity and entertainment
devices. As these products are introduced, we intend to explore
offering new premium services designed to take advantage of the
capabilities of these devices.
Beyond our existing and expected future fixed, portable and
mobile service offerings, we and Intel have entered into a
strategic collaboration agreement to develop, deploy and market
a co-branded mobile WiMAX service in the United States that will
target users of certain notebook computers, ultramobile PCs and
other mobile computing devices containing Intel microprocessors.
Both of the parties have committed to make certain contributions
to the development, promotion and marketing of this service,
which will be available only over our planned mobile WiMAX
network.
Markets
Served and Deployment
Domestic
Markets
We use the term “market” to refer to one or more
municipalities in a geographically distinct location in which we
provide our services. Our markets range from major metropolitan
areas to small, rural communities, and markets of all sizes in
between.
We determine which markets to enter by assessing a number of
criteria in four broad categories. First, we evaluate our
ability to deploy our service in a given market, taking into
consideration our spectrum position, the availability of towers
and zoning constraints. Next, we assess the market by evaluating
the number of competitors, existing price points, demographic
characteristics and distribution channels. Then, we perform an
analysis to evaluate the economic potential of the market,
focusing on our forecasts of revenue growth opportunities,
capital requirements and projected cash flow. Finally, we look
at market clustering opportunities and other cost efficiencies
that might be realized.
Based on this approach, as of November 30, 2006, we offered
our services in 34 domestic markets across more than 350
municipalities covering an estimated 8.5 million people.
Our markets, and the months
they have been in commercial operation and the estimated
population in our network coverage area are set forth below.
Months in
Estimated Network
Commercial
Covered
Domestic Markets
Operation
Population*
(In thousands)
Jacksonville, FL
26
699.6
Abilene, TX
23
107.9
St. Cloud, MN
23
148.4
Daytona Beach, FL
21
169.0
Medford, OR
17
78.7
Stockton, CA
16
391.0
Modesto, CA
16
303.1
Midland/Odessa, TX
16
171.3
Eugene, OR
16
169.2
Visalia, CA
16
135.3
Merced, CA
15
96.0
Duluth, MN
15
101.2
Eau Claire, WI
15
58.9
Roseburg, OR
15
21.7
Tri-Cities,
WA
14
85.6
Killeen/Temple, TX
14
172.2
Bellingham, WA
13
115.5
Lewiston, ID
13
73.0
Waco, TX
13
132.9
Anchorage, AK
12
196.8
Boise, ID
12
302.8
Redding, CA
11
96.1
Maui, HI
11
82.8
Wichita Falls, TX
11
101.2
Bend, OR
11
53.8
Greensboro/Winston-Salem, NC
9
524.1
Reno/Carson City, NV
8
317.6
Amarillo, TX
4
213.3
Klamath Falls, OR
3
32.1
Aberdeen, WA
3
25.9
Oahu, HI
2
527.4
Grants Pass, OR
2
50.0
Seattle/Tacoma, WA
1
2,138.9
Raleigh/Durham, NC
1
657.5
Total
8,550.8
*
Estimated based on 2.5 persons per covered household.
As of November 30, 2006, we had approximately 168,000
subscribers in the United States. We expect to launch additional
markets in 2007 that, if launched, would expand our coverage
area by 75% to more than 15 million people.
Outside the United States, we use categories of criteria similar
to those we apply inside the United States to determine the
markets in which to deploy. With respect to our equity
investees, we work in conjunction with our partners in making
these determinations. As of November 30, 2006, we, through
our consolidated subsidiaries and equity investees, offered our
services in the following countries:
Approximate percentage owned in European countries assumes 100%
ownership of Clearwire Europe B.V., or Clearwire Europe, a
direct subsidiary of Clearwire Corporation through which we
conduct our European operations. We may be obligated to issue up
to ten percent of the current share capital of Clearwire Europe
B.V. to a group of consultants under the terms of an existing
services agreement with them. The interest held by these
consultants may be diluted if we or any third parties make
additional equity contributions to Clearwire Europe unless the
consultants exercise preemptive rights to make their pro-rata
share of such contributions.
(2)
Services offered under the Clearwire brand and trademark.
(3)
Services similar to ours offered under the MVS Net and E-go
brand.
As of November 30, 2006, we had approximately 20,400
subscribers in Belgium and Ireland.
Sales and
Marketing
Our marketing efforts include reliance on a full range of
integrated marketing campaigns and sales activities, including
advertising, direct marketing, public relations and events to
support our direct sales teams, company-owned retail stores,
mall and mobile kiosks, authorized representatives and resellers.
We believe we have a strong local presence in each of our
markets, which enhances our ability to design marketing
campaigns tailored to the preferences of the local community. We
advertise across a broad range of media, including print,
billboards, online and radio broadcast media. We also conduct
community awareness campaigns that focus on grass-roots
marketing efforts, and host local community events where
potential subscribers can experience our service. Our direct
marketing efforts have included direct mailings and delivering
door hangers to potential subscribers in our network coverage
area.
We use multiple distribution channels to reach potential
subscribers, including:
Direct. We have hired salespeople to sell our
services directly to subscribers. Our salespeople also set up
mobile kiosks at local community and sporting events and near
retail establishments or educational institutions to demonstrate
our services. Each of these salespeople carries a supply of
modems, so that a new subscriber can activate his or her account
and receive equipment while at the mobile kiosk. As of
November 30, 2006, we employed approximately 430
salespeople in the United States. We generally compensate these
employees on a salary plus commission basis. We anticipate that
our direct sales teams will expand their focus in the future to
include acquiring small and medium sized business accounts as
subscribers.
Indirect. Our indirect sales channels include
a variety of authorized representatives, such as traditional
cellular retailers, satellite television dealers and computer
sales and repair stores. These authorized representatives
typically operate retail stores but, subject to our approval,
can also extend their sales efforts online. Authorized
representatives assist in developing awareness of and demand for
our service by promoting our services and brand as part of their
own advertising and direct marketing campaigns. As of
November 30, 2006, we had more than 900 authorized
representatives in the United States.
We also offer our services through national retail chains, and
we believe that the percentage of our total sales from this
indirect sales channel will continue to increase. We have
distribution agreements with Best Buy Co., Inc. and Circuit City
Stores, Inc., two of the leading specialty electronics retailers
in the United States. As of November 30, 2006, our services
were offered in 50 Best Buy and 39 Circuit City stores. Best Buy
and Circuit City provide premium positioning for our products as
well as endcaps or displays, signage, newspaper inserts, video
displays and dedicated sales personnel.
Clearwire owned and operated retail. We market
our products and services through a number of Clearwire-operated
retail outlets, including retail stores and kiosks located in
malls and shopping centers. We generally compensate these
employees on an hourly basis plus commissions.
Internet and telephone sales. We direct
prospective subscribers to our website or our telesales centers
in our advertising. Our website is a fully functional sales
channel where subscribers can check pricing and service
availability, research service plans and activate accounts using
a credit card. Prospective subscribers can also call into one of
our telesales centers to activate service.
Wholesale distribution. We sell our wireless
broadband Internet services at wholesale rates to distribution
partners that re-market our services under their own brand name,
under our brand name or on a co-branded basis. For example,
under our agreement with AOL, AOL has the right to bundle and
sell our wireless broadband services using a co-branded strategy
as part of a bundle with their content services in selected
markets. AOL launched its bundled service offering in May 2006.
Our agreement with AOL provides that we will provide Internet
connectivity on our wireless broadband network over which AOL
will provide its services to its subscribers.
We expect our indirect sales channel to continue growing in
significance as a result of our agreements with Best Buy,
Circuit City and others. In addition, we have implemented
marketing programs such as direct mailings and have established
a call center to strengthen our brand and increase the
percentage of sales sourced from our Internet and telephone
sales channels.
Customer
Service and Technical Support
We typically initiate each customer subscription through a
credit or debit card approval process. We also check the
subscriber’s credit and, depending on the result, may
require a deposit for the wireless modem. Once we have an
approved form of payment, we activate service and make an
initial charge on the card to cover the activation fee and the
first month of service. Finally, we establish monthly recurring,
automatic card charges for the duration of the subscriber’s
relationship with us. All of our subscriber invoices are
electronic, and we have invested in a comprehensive billing
system interface program.
We believe reliable customer service and technical support are
critical to attracting and retaining subscribers. Within ten
days of a subscriber’s enrollment, we typically make a
“welcome” call to each subscriber to inquire about
their experience with our service and conduct a brief survey. We
believe this survey conveys a positive image to the subscriber
and gives us an initial indication of the subscriber’s
experience with our service.
We provide the following support for all subscribers:
•
toll-free, live telephone and email-based assistance available
seven days a week, 24 hours a day;
•
resources on our website that cover frequently asked questions
and provide signal and networking tips;
online account access and, for VoIP subscribers, web-based
resources that allow them to control their telephony features
and settings; and
•
a network of service technicians available to provide
on-site
customer assistance and technical support.
In October 2006, we opened a call center in Las Vegas, Nevada
staffed with approximately 90 customer service representatives.
We believe that having our own internal customer service and
technical support personnel enables us to deliver a consistent,
high quality customer service, thereby improving subscriber
retention.
Currently, some of our customer care operations are outsourced
to a third-party vendor. However, we expect to replace some of
these outsourced customer care operations with our own internal
customer care services, partially through the planned opening of
an additional call center in 2007.
Our
Network
Overview
Our network, in both our domestic and international markets,
currently relies on the Expedience wireless broadband access
system that supports delivery of any
IP-compatible
broadband applications, including high-speed Internet access and
VoIP telephony services. This system, which is manufactured by
NextNet, a wholly-owned subsidiary of Motorola, is comprised of
base station transceivers, a network management system, and
modems used by our subscribers. Expedience operates over our
spectrum in the 2.5 GHz band in the United States and in
the 3.5 GHz band in Europe. We believe that the Expedience
system has certain key advantages over competing technologies
that are currently available, such as:
•
simple self-installation by subscribers and provisioning of
modems, with no software installation required on the
subscriber’s computer;
•
easy network and tower installation and deployment requirements;
•
flexible and scalable architecture that can service large
metropolitan or small rural areas;
•
ability to provide overlapping coverage from multiple sites for
reliable and robust connectivity; and
•
enhanced reliability and reduced latency provided by linking our
towers via a microwave mesh network that carries the majority of
our backhaul traffic over licensed and unlicensed frequencies.
Once network infrastructure incorporating mobile WiMAX
technology becomes commercially available and meets our
performance requirements, we expect to deploy mobile WiMAX
technology in all of our subsequent markets and, over time,
migrate our existing markets to mobile WiMAX. Upon adopting the
mobile WiMAX standard, we believe our network will continue to
support fixed, portable and mobile service offerings using a
network architecture that shares the key advantages of our
current Expedience system.
Technology
Expedience
Technology
The Expedience system is a wireless
IP-based,
Ethernet platform built around an OFDM and Time
Division Duplex, or TDD, physical layer, which allows us to
address two challenges that face wireless carriers, namely NLOS
performance and frequency utilization.
OFDM is a physical layer protocol for NLOS broadband networks
that uses a large number of individual carriers and a process of
mapping a user’s data to those carriers to leverage the
presence of multi-path to transmit and receive data robustly in
the NLOS service environment. OFDM is preferable to single
carrier technologies for addressing multi-path and
frequency-selective fading in a broadband channel.
TDD allows upstream and downstream links to the network to exist
on the same radio frequency channel, meaning that there is no
need to use multiple channels or to have guard-bands between
downstream and upstream channels. Thus, TDD enables wireless
broadband access systems to be deployed on any channel in the
radio frequency band, making it flexible for a carrier managing
non-contiguous spectrum, such as our company. TDD also allows a
service provider to maximize spectrum utilization by allocating
up and down link resources appropriate to the traffic pattern
over a given market.
Expedience
Network Components
The Expedience CPE that currently operates on our network is a
NLOS wireless modem that connects to any
IP-based
device, such as a computer, using a standard Ethernet
connection. It is simple to install and requires no service
provider configuration or support and no software download or
installation. A subscriber need only connect the CPE to an
external power source and to the subscriber’s computer. For
those subscribers who live on the perimeter of our coverage area
or who otherwise might have difficulty receiving our service, we
also offer an optional outdoor subscriber unit that can be
installed on the exterior of the subscriber’s home or
office to obtain signals over an extended range. In addition to
the Expedience CPE and outdoor subscriber units, we expect to
offer a PC Card that will be compatible with our network to our
subscribers in the second half of 2007.
The Expedience base station allows for 360 degree coverage by
employing multiple transceivers and antennas on a single tower
to maximize subscriber density and spectral efficiency. This
setup is scalable, expandable and flexible, allowing us to
control costs to promote efficient expansion as our subscriber
base grows. Our base stations generally are located on existing
communications towers, but can also be placed on rooftops of
buildings and other elevated locations. We generally lease our
tower locations from third parties.
We also use a network management system that incorporates a
complete set of management tools to enable the configuration,
management, monitoring and reporting of all network status
elements. This system provides secure, centralized and remote
configuration of base stations, CPE, switches and other network
elements. The system reports to and alerts system administrators
to alarms and faults, and monitors system performance down to
the individual CPE. It supports customizable report generation
to track network performance, utilization and capacity.
Mobile
WiMAX
Mobile WiMAX is an all IP-based technology and, like Expedience,
is optimized for high-throughput, real-time data applications.
Mobile WiMAX is based on the IEEE
802.16e-2005
standard and will operate in our 2.5 GHz and 3.5 GHz
spectrum bands.
Similar to our current Expedience network, we expect our planned
mobile WiMAX network to be a wireless
IP-based,
Ethernet platform designed around an OFDM and TDD physical
layer, to address NLOS performance and frequency utilization
issues. We expect that mobile WiMAX will meet all of our
anticipated requirements for mobile Internet usage, as we
believe it will support multiple handoff mechanisms,
power-saving mechanisms for mobile devices, advanced quality of
service and low latency for improved support of real-time
applications, and advanced authorization, authentication and
accounting functionality.
A mobile WiMAX network is expected to consist of the same
elements as Expedience, including base station transceivers, a
network management system and subscriber devices. For
subscribers, we expect that mobile WiMAX enabled chipsets will
initially be included in NLOS modems similar to the Expedience
CPE and in PC Cards. Eventually, we expect manufacturers to sell
a number of handheld communications and consumer electronic
devices that will be enabled to communicate using our mobile
WiMAX network, such as notebook computers, ultramobile PCs,
PDAs, gaming consoles and MP3 players and other handheld devices.
Our network operates over licensed spectrum in our U.S. and
European markets. Although several broadband technologies can
operate in unlicensed or public access spectrum, we believe
using licensed spectrum enables us to provide a consistently
higher quality of service to our subscribers.
Domestic
In the United States, licensed spectrum is governed by FCC rules
that restrict interference from other licensees and spectrum
users, providing some protection against interruption and
degradation of service. Under FCC rules, unlicensed spectrum
users do not have exclusive use of any frequencies, may not
cause interference with the operations of any licensed operators
and may suffer interference from others using licensed
frequencies in overlapping geographic areas, making quality and
availability of their services unpredictable.
We are designing our network in the United States to operate
primarily on spectrum located within the 2495 to 2690 MHz
band, or 2.5 GHz band, which is designated for Broadband
Radio Service, or BRS, and Educational Broadband Service, or
EBS. Most BRS and EBS licenses are allocated in a scheme that
provides for overlapping circular territories with a
35-mile
radius. Under current FCC rules, the BRS and EBS band in each
territory is generally divided into 33 channels for a total of
198 MHz of spectrum, with an additional three channels
consisting of 9 MHz of guard band spectrum.
Under FCC rules, we can access BRS spectrum either through
outright ownership of a BRS license issued by the FCC or through
a leasing arrangement with a BRS license holder. The FCC rules
limit eligibility to hold EBS licenses to accredited educational
institutions and certain governmental, religious and nonprofit
entities, but permit those license holders to lease up to 95% of
their capacity for non-educational purposes. Therefore, although
we cannot hold an EBS license, we can access EBS spectrum
through a long-term leasing arrangement with a license holder.
EBS leases entered into prior to January 10, 2005, may
remain in effect for up to 15 years and may be renewed and
assigned in accordance with the terms of those leases. The
initial term of EBS leases entered into after January 10,2005, is required by FCC rules to be coterminous with the term
of the license. In addition, these leases typically give the
leaseholder the right to participate in and monitor compliance
by the license holder with FCC rules and regulations. Our EBS
spectrum leases typically have an initial term equal to the
remaining term of the EBS license, with an option to renew the
lease for up to three renewal terms of ten years or less with
respect to a final renewal term, for a total lease term of up to
30 years. In addition, we generally have a right of first
refusal for a period of time after our leases expire to match
another party’s offer to lease the same spectrum. Our
leases are generally transferable.
Since our formation, we have focused on acquiring BRS licenses
and leases, as well as EBS leases, in markets throughout the
United States. As of November 30, 2006, we believe that we
are the second largest holder of licensed spectrum in the
2.5 GHz band in the United States. As of November 30,2006, we owned or leased, or had entered into agreements to
acquire or lease, approximately 11.5 billion MHz-POPs of
spectrum. Of our total 11.5 billion MHz-POPs of spectrum in
the United States, we estimate that we own approximately 25%
with the remainder leased from third-parties, generally under
30-year lease terms. When the FCC’s new rules for the
2.5 GHz band in the United States are fully implemented,
the usable MHz per channel within this band will decrease from
6 MHz to 5.5 MHz. As our network is designed to
operate using 5 MHz channels, this regulatory change will
not adversely affect our ability to deliver our services but
will cause a proportionate reduction of our calculated MHz-POPs.
See “Business — Regulatory Matters —
Spectrum Regulation.”
As of November 30, 2006, if we conclude all of our pending
spectrum acquisition agreements, our spectrum rights would cover
an estimated 205 million people in the United States. Our
pending spectrum acquisition contracts are subject to various
closing conditions, some of which are outside of our control
and, as a result, we may not acquire all of the spectrum that is
subject to these agreements. Nearly all of such closing
conditions relate either to licensee or FCC consents, which we
expect are likely to be granted. A limited number of our pending
agreements are subject to closing conditions involving the
resolution of bankruptcy or similar proceedings. We currently
have minimum purchase commitments of approximately
$40.0 million to acquire new spectrum in the first half of
2007.
We engineer our networks to optimize both the service that we
offer and the number of subscribers to whom we can offer
service. Consequently, we currently will not launch our services
in a market using our current technology unless we control a
minimum of six channels of spectrum that contain at least
5 MHz of spectrum each. As a result, including pending
spectrum deals we believe that currently we can commercially
launch our services over spectrum covering an estimated
115.0 million people in the United States. However, we
expect the spectral efficiency of technologies we deploy to
continue to evolve, and as a result, we may decide to deploy our
services in some markets with less spectrum. Alternatively, we
could find that new technologies and subscriber usage patterns
require us to have more spectrum available in our markets.
We are actively pursuing opportunities to acquire additional
licensed spectrum in new markets and to add depth of spectrum
where we require additional channels to deploy our services. We
generally purchase and lease licensed spectrum for cash and, in
some instances and subject to applicable securities laws, common
stock or warrants. We have found that, in some instances, we
have an advantage over other bidders because we have a
demonstrated track record of using the spectrum to deploy
wireless broadband services as opposed to simply warehousing
spectrum rights. We also may pay commissions or issue shares,
stock options or warrants to brokers who locate and secure
spectrum for us. We have recently observed a significant
increase in the cost of acquiring spectrum in the United States,
and we expect this trend to continue as the supply of licensed
spectrum diminishes.
We have entered into certain agreements for the purchase or
lease of spectrum where, under certain circumstances, such as if
we are not using or planning to use such spectrum pursuant to
our business plan, the lessor or seller may have the right to
repurchase or to terminate the lease in the future for a
calculated payment. We may enter into additional agreements with
similar rights in the future.
International
We currently hold spectrum rights in Belgium, Ireland, Poland,
Romania and Spain. Our equity investees also control spectrum in
Denmark and Mexico. In each of Belgium, Poland, Romania and
Spain, our licenses cover the entire country. Our licenses in
Ireland cover a significant portion of the country’s
population. Unlike the United States where our spectrum is in a
single band, our international In addition to our current
holdings, we recently won an auction to acquire approximately
3.5 billion MHz-POPs of spectrum in the 3.5 GHz band
in Germany covering approximately 82.5 million people. We
intend to continue to expand our international spectrum
holdings. spectrum falls within different frequency ranges, but
we believe that each of the frequencies are or will be suitable
for our service. A summary of the spectrum rights held by our
subsidiaries and our equity investees is below, including the
frequency band in which the spectrum is held, an estimate of the
population covered by our spectrum in each country and the total
MHz-POPs of our spectrum.
Estimates based on country population data derived from the
Economist Intelligence Unit database, except for Denmark,
Ireland and Mexico, which are based on census or other market
information gathered by us or our affiliates regarding the
number of residents within the licensed coverage area.
Represents the amount of our spectrum in a given area, measured
in MHz, multiplied by the estimated population of that area.
(3)
Includes spectrum expected to be acquired following our
successful bid for spectrum licenses in Germany.
As in the United States, we engineer our international networks
to optimize the number of users that the network can support
while providing sufficient capacity and bandwidth. Thus, we
typically choose not to launch our services in a market using
our current technology unless we control a minimum of
30 MHz of spectrum.
We currently have a dedicated team of professionals actively
pursuing new spectrum opportunities and we are negotiating to
acquire additional spectrum in countries throughout Europe as
well as in select countries in Latin America. We intend to
continue to expand our international spectrum holdings.
Research
and Development
Following the sale of our NextNet subsidiary to Motorola, our
research and development efforts have focused on the design of
our network, enhancements to the capabilities of our network and
the evolution of our service offerings. A significant portion of
our development efforts involves working with the suppliers of
our network infrastructure and subscriber equipment. We are
currently working with Motorola to introduce Expedience
technology onto a PC card, which we expect to occur in the
second half of 2007. At the same time, we are working with both
Intel and Motorola to develop network components and subscriber
equipment for our planned mobile WiMAX network, including an
ongoing mobile WiMAX trial in Portland, Oregon. We expect to
continue to these efforts in the future.
We spent approximately $5.8 million, $9.6 million and
$8.5 million on research and development activities during
the years ended December 31, 2004 and 2005 and the nine
months ended September 30, 2006, respectively. NextNet,
which we sold in August 2006, incurred direct research and
development expense of $7.2 million for the nine months
ended September 30, 2006.
Suppliers
Motorola, which acquired our former NextNet subsidiary in August
2006, is currently the only supplier of certain network
components and subscriber equipment for the Expedience system
currently deployed on our network. Thus, we are dependent on
Motorola to produce the equipment and software we need for our
current network in a timely manner. Moreover, we are parties to
a number of commercial agreements with Motorola that limit our
ability to use other equipment suppliers under certain
circumstances, not only for our current Expedience network, but
also for our planned mobile WiMAX network. See “Certain
Relationships and Related Transactions” for a discussion of
these agreements.
Competition
The market for broadband services is highly competitive and
includes companies that offer a variety of services using a
number of different technological platforms, such as cable
modems, DSL, third-generation cellular, satellite, wireless
internet service and other emerging technologies. We compete
with these companies on the basis of the speed, ease of use,
portability, reliability, and price of our respective services.
Our principal competitors include cable and DSL operators,
wireless telephone providers, WiFi and, prospectively, WiMAX
providers, satellite providers and others.
Cable
Modem and DSL Services
We compete with companies that provide Internet connectivity
through cable modems or DSL. Principal competitors include cable
companies, such as Time Warner and Comcast, as well as incumbent
telephone companies, such as AT&T, Qwest and Verizon. Both
cable and telephone companies deploy their services over wired
networks initially designed for voice and one-way data
transmission that have subsequently been upgraded to provide for
additional services, such as Internet connectivity.
Cellular and PCS carriers are seeking to expand their capacity
to provide data and voice services that are superior to ours.
These providers have substantially broader geographic coverage
than we have and, for the foreseeable future, than we expect
have. If one or more of these providers can deploy technologies
that compete effectively with our services, the mobility and
coverage offered by these carriers will provide even greater
competition than we currently face.
Wireless
Broadband Service Providers
We also face competition from other wireless broadband service
providers that use licensed spectrum. Moreover, if our
technology is successful and garners widespread support, we
expect these and other competitors to adopt or modify our
technology or develop a technology similar to ours. We believe
that, as network infrastructure based on mobile WiMAX technology
becomes commercially available and manufacturers develop and
sell handheld communications and consumer electronic devices
that are enabled to communicate using mobile WiMAX networks,
other network operators will introduce mobile WiMAX services
comparable to ours in both our domestic and international
markets. For instance, Sprint Nextel, which we believe is the
largest holder of spectrum in the 2.5 GHz band in the
United States, recently announced that it intends to deploy a
mobile WiMAX network covering 100 million people in the
United States by the end of 2008.
Satellite
Satellite providers like Wild Blue and Hughes Network Services
offer broadband data services that address a niche market,
mainly less densely populated areas that are unserved or
underserved by competing service providers. Although satellite
offers service to a large geographic area, latency caused by the
time it takes for the signal to travel to and from the satellite
may challenge the ability to provide some services, such as
VoIP, and reduces the size of the addressable market.
WISPs
and WiFi
We also compete with other wireless Internet service providers
that use unlicensed spectrum. In addition to these commercial
operators, many local governments, universities and other
governmental or quasi-governmental entities are providing or
subsidizing WiFi networks over unlicensed spectrum, in some
cases at no cost to the user. Unlicensed spectrum may be subject
to interference from other users of the spectrum, which can
result in disruptions and interruptions of service. We rely
exclusively on licensed spectrum for our network and do not
expect significant competition from providers using unlicensed
spectrum to deliver services to their customers.
International
In our international markets, we generally face competition from
incumbent telecommunications companies that provide their own
wireless broadband or VoIP telephony services, as well as from
other companies that provide Internet connectivity services.
Although in certain European countries, incumbent
telecommunications companies may have a dominant market share
based on their past status as the single operator of
telecommunications services in a particular country, these
incumbent telecommunications companies rely on systems initially
designed for voice transmission which have been upgraded to
provide wireless broadband services.
Other
We believe other emerging technologies may also enter the
broadband services market. For example, certain Internet service
providers are working with electric distribution utilities to
install broadband over power line, or BPL, technology on
electric distribution lines to provide broadband services. These
Internet service and BPL providers are potential competitors.
BPL technology may turn electrical lines into large unshielded
transmitting antennas that would allow transmission of data over
these lines, but could potentially create interference with some
wireless networks.
Regulatory
Matters
Overview
The regulatory environment relating to our business and
operations is evolving. A number of legislative and regulatory
proposals under consideration by federal, state and local
governmental entities may lead to the repeal, modification or
introduction of laws or regulations that could affect our
business. Significant areas of existing and potential regulation
for our business include broadband Internet access,
telecommunications and spectrum regulation and Internet taxation.
Broadband
Internet Access Regulation
In June 2005, the U.S. Supreme Court overturned the Ninth
Circuit Court of Appeals, upholding the FCC’s findings in
favor of cable modem operators in the National
Cable & Telecommunications Association v. Brand X
Internet Services case. The Court held that cable modem
operators are not required to provide rival Internet service
providers, such as Brand X, with access to their cable broadband
lines. The central issue in the Brand X case was how cable
broadband services, specifically cable modem services, should be
classified under the Communications Act of 1934, as amended, or
the Communications Act. In 2002, the FCC ruled that cable
broadband was an “information service” not a
“telecommunications service,” and therefore not
subject to the same regulations imposed on telecommunications
service providers under the Communications Act and FCC rules. In
the Brand X decision, the Supreme Court upheld the FCC’s
decision that cable modem service is an information service, and
as such, cable operators are not required to share their cable
modem lines with competitors.
In August 2005, the FCC found that wireline broadband Internet
access services, including DSL Internet access, provided by
facilities-based telephone companies is an “information
service” rather than a “telecommunications
service” under the Communications Act. In addition, the FCC
determined that the broadband transmission component of wireline
broadband Internet access service is no longer required to be
offered to competitors as a telecommunications service subject
to Title II of the Communications Act, as previously
required under the FCC’s rules. This ruling is currently
being appealed. As a result, telephone companies no longer are
required to share their broadband Internet access facilities
with competing Internet service providers. The result of the
Brand X decision and the FCC’s classification of wireline
broadband Internet access service is that both DSL and cable
modem providers are entitled to retain exclusive use of their
broadband Internet access lines without having to open them up
to competing Internet service providers. This regulatory
framework may encourage independent Internet service providers
to explore other options for broadband Internet access,
including wireless services.
On September 23, 2005 the FCC released a Policy Statement
outlining its general views toward ensuring that broadband
networks are widely deployed, open, affordable and accessible to
all consumers. It adopted four principles to encourage broadband
deployment and preserve and promote the open and interconnected
nature of the public Internet, and suggested that it would
incorporate them into its ongoing policy-making activities.
On November 7, 2006, the FCC issued an order classifying
BPL Internet access service as an “information
service.” Like cable modem and DSL service, the broadband
transmission component of BPL Internet access service is not
required to be offered as a telecommunications service.
Telecommunications
Regulation
The FCC has classified Internet access services generally as
interstate “information services” rather than as
“telecommunications services” regulated under
Title II of the Communications Act. Accordingly, most
regulations that apply to telephone companies and other common
carriers currently do not apply to our wireless broadband
Internet access service. For example, we are not currently
required to contribute a
percentage of gross revenues from our Internet access services
to universal service funds, or USF, used to support local
telephone service and advanced telecommunications services for
schools, libraries and rural health care facilities.
Internet access providers also are not required to file tariffs
with the FCC, setting forth the rates, terms, and conditions of
their service offerings. The FCC, however, is currently
considering whether to impose various consumer protection
obligations, similar to Title II obligations, on broadband
Internet access providers, including DSL, cable modem and
wireless broadband Internet access providers. These requirements
may include obligations related to
truth-in-billing,
slamming, discontinuing service, customer proprietary network
information and federal USF mechanisms. Internet access
providers are currently subject to generally applicable state
consumer protection laws enforced by state Attorneys General and
general Federal Trade Commission, or FTC, consumer protection
rules.
The FCC has not yet classified interconnected VoIP services as
information services or telecommunications services under the
Communications Act. In November 2004, the Commission determined
that regardless of their regulatory classification, certain
interconnected VoIP services qualify as interstate services with
respect to economic regulation. The FCC preempted state
regulations that address such issues as entry certification,
tariffing, and E911 requirements, as applied to certain
interconnected VoIP services. This ruling is being appealed. The
regulatory classification of other types of interconnected VoIP
services remains uncertain at this time.
In June 2006, the FCC determined that all
“interconnected” VoIP services are required to
contribute a percentage of interstate gross revenues to USF
beginning October 1, 2006. This ruling has been appealed
but remains in effect pending appeal. Our VoIP service qualifies
as “interconnected VoIP” for purposes of USF
regulation and therefore is subject to this fee which may be
passed on to our subscribers. We have incorporated this fee
requirement into our VoIP billing system and have begun
remitting federal USF payments.
The FCC is conducting a comprehensive proceeding to address all
types of
IP-enabled
services, including interconnected VoIP service, and to consider
what regulations, if any, should be applied to such services, as
use of broadband services becomes more widespread. In June 2005,
the FCC adopted the first set of regulations in this
comprehensive
IP-enabled
proceeding, imposing E911-related requirements on interconnected
VoIP service providers as a condition of offering such service
to consumers. The FCC defined “interconnected VoIP
service” as voice service that: (i) enables real-time,
two-way voice communications; (ii) requires a broadband
connection from the user’s location; (iii) requires
IP-compatible
CPE; and (iv) permits users generally to receive calls that
originate on and terminate to the public switched telephone
network, or PSTN. Effective November 28, 2005, all
interconnected VoIP providers are required to transmit, via the
wireline E911 network, all 911 calls, as well as a call-back
number and the caller’s registered location for each call,
to the appropriate PSAP, provided that the PSAP is capable of
receiving and processing that information. In addition, all
interconnected VoIP providers must have a process to obtain a
subscriber’s registered location prior to activating
service, and a process to allow their subscribers to update
their registered location immediately if the subscriber moves
the service to a different location. Interconnected VoIP
providers are also required to prominently and in plain English
advise subscribers of the manner in which dialing 911 using VoIP
service is different from dialing 911 service using traditional
telephone service, and to provide warning labels with VoIP CPE.
The FCC is considering additional regulations, including:
(i) whether to require interconnected VoIP providers to
develop future capabilities to automatically identify a
subscriber’s physical location without assistance from the
subscriber and (ii) what intercarrier compensation regime
should apply to interconnected VoIP traffic over the PSTN.
Accordingly, our costs to provide VoIP service may increase,
which will impact our pricing decisions vis-à-vis our
competitors and our profit margins, if any.
On August 5, 2005, the FCC adopted an Order finding that
both facilities-based broadband Internet access providers and
interconnected VoIP providers are subject to CALEA, which
requires service providers covered by that statute to build
certain law enforcement surveillance assistance capabilities
into their communications networks and to maintain CALEA-related
system security policies and procedures. The FCC required
facilities-based broadband Internet access providers and
interconnected VoIP providers to comply with
CALEA’s assistance-capability requirements by May 14,2007. On June 9, 2006, the Court of Appeals for the
District of Columbia issued a ruling upholding the FCC Order.
On May 3, 2006, the FCC adopted an additional Order
addressing the CALEA compliance obligations of these providers.
In that order the FCC: (i) affirmed the May 14, 2007
assistance-capability compliance deadline; (ii) indicated
compliance standards are to be developed by the industry within
the telecommunications standards-setting bodies working together
with law enforcement; (iii) permitted the use of certain
third parties to satisfy CALEA compliance obligations;
(iv) restricted the availability of compliance extensions;
(v) concluded that facilities-based broadband Internet
access providers and interconnected VoIP providers are
responsible for any CALEA development and implementation costs;
(vi) declared that the FCC may pursue enforcement action,
in addition to remedies available through the courts, against
any non-compliant provider; and (vii) adopted interim
progress report filing requirements.
Broadband Internet-related and
IP-services
regulatory policies are continuing to develop, and it is
possible that our broadband Internet access and VoIP services
could be subject to additional regulations in the future. The
extent of the regulations that will ultimately be applicable to
these services and the impact of such regulations on the ability
of providers to compete are currently unknown.
Spectrum
Regulation
The FCC routinely reviews its spectrum policies and may change
its position on spectrum allocations from time to time. On
July 29, 2004, the FCC issued rules revising the band plan
for BRS and EBS and establishing more flexible technical and
service rules to facilitate wireless broadband operations in the
2.495 to 2.690 GHz band. The FCC adopted new rules that
(i) expand the permitted uses of EBS and BRS spectrum so as
to facilitate the provision of high-speed data and voice
services accessible to mobile and fixed users on channels that
previously were used primarily for one-way video delivery to
fixed locations; and (ii) change some of the frequencies on
which BRS and EBS operations are authorized to enable more
efficient operations. These new rules streamlined licensing and
regulatory burdens associated with the prior service rules and
created a “PCS-like” framework for geographic
licensing and interference protection. Under the new rules,
existing holders of BRS and EBS licenses and leases generally
have exclusive rights over use of their assigned frequencies to
provide commercial wireless broadband services to residences,
businesses, educational and governmental entities within their
geographic markets. These rules also require BRS licensees,
including us, to bear their own expenses in transitioning to the
new band plan and, if they are seeking to initiate a transition,
to pay the costs of transitioning EBS licensees to the new band
plan. The transition rules also provide a mechanism for
reimbursement of transaction costs by other operators in the
market. Additionally, the Commission expanded the scope of its
spectrum leasing rules and policies to allow BRS and EBS
licensees to enter into flexible, long-term spectrum leases.
On April 21, 2006, the FCC issued an Order adopting
comprehensive rules for relocating incumbent BRS operations in
the 2150 to 2162 MHz band. These rules will further
facilitate the transition to the new 2.5 GHz band plan.
This Order is currently subject to Petitions for Reconsideration
and judicial appeal.
Additionally, on April 27, 2006, the FCC released an Order
revising and clarifying its BRS/EBS rules. Petitions for
Reconsideration of this Order are pending. Significantly, the
FCC generally reaffirmed the flexible technical and operational
rules upon which our systems are designed and operating. The FCC
clarified the process of transitioning from the old spectrum
plan to the new spectrum plan, but reduced the transition area
from large “major economic areas,” to smaller, more
manageable “basic trading areas.” Proponents seeking
to initiate a transition to the new band plan will be given a
30-month
timeframe within which to notify the FCC of their intent to
initiate a transition, followed by a
3-month
planning period and an
18-month
period transition completion period. In markets where no
proponent initiates a transition, licensees will be permitted to
self-transition to the new band plan. The FCC adopted a
procedure whereby the proponent will be reimbursed for the value
it adds to a market through reimbursement by other commercial
operators in a market, on a pro-rata basis, after the transition
is completed and the FCC has been notified.
The FCC also clarified the procedure by which BRS and EBS
licensees must demonstrate substantial service, and required
them to demonstrate substantial service by May 1, 2011.
Substantial service showings
demonstrate to the FCC that a licensee is not warehousing
spectrum, but rather is using the spectrum to provide actual
service to subscribers. If a BRS or EBS licensee fails to
demonstrate substantial service by May 1, 2011, its license
may be canceled and made available for re-licensing.
The FCC reaffirmed its decision to permit mobile satellite
service providers to operate in the 2496 to 2500 MHz band
on a shared, co-primary basis with BRS licensees. It also
concluded that spectrum sharing in the 2496 to 2500 MHz
band between BRS licensees and a limited number of incumbent
licensees, such as broadcast auxiliary service, fixed microwave,
and public safety licensees, is feasible. It therefore declined
to require the relocation of those incumbent licensees in the
2496 to 2500 MHz band. Additionally, the FCC reaffirmed its
conclusion that BRS licensees can share the 2496 to
2500 MHz band with industrial, scientific, and medical, or
ISM, devices because ISM devices typically operate in a
controlled environment and use frequencies closer to
2450 MHz. The FCC also reaffirmed its decision to permit
low-power, unlicensed devices to operate in the 2655 to
2690 MHz band, but emphasized that unlicensed devices in
the band may not cause harmful interference to licensed BRS
operations. Previously, low-power, unlicensed devices were
permitted to operate in the 2500 to 2655 MHz band, but not
in the 2655 to 2690 MHz band.
Finally, the FCC reaffirmed the application of its spectrum
leasing rules and policies to BRS and EBS, and ruled that new
EBS spectrum leases may provide for a maximum term (including
initial and renewal terms) of 30 years. The FCC further
required that new EBS spectrum leases with terms of
15 years or longer must allow the EBS licensee to review
its educational use requirements every five years, beginning at
the fifteenth year of the lease.
Although we believe that the FCC’s BRS/EBS rules will
enable us to pursue our long-term business strategy, these rules
may be interpreted in a manner materially and adversely to our
business. In addition, these rules may be amended in a manner
that materially and adversely affects our business.
Recently, the Federal Aviation Administration, or FAA, proposed
regulations governing potential interference to navigable
airspace from certain FCC-licensed radio transmitting devices,
including 2.5 GHz transmitters. These regulations would
require FAA notice and approval for new or modified transmitting
facilities. If adopted, these regulations could substantially
increase the administrative burden and costs involved in
deploying our service.
In certain international markets, our subsidiaries are subject
to rules that provide that, if the subsidiary’s wireless
service is discontinued or impaired for a specified period of
time, the spectrum rights may be revoked.
Internet
Taxation
The Internet Tax Non-Discrimination Act, which was passed by
Congress in November 2004 and signed into law in December 2004,
renewed and extended until November 2007 a moratorium on taxes
on Internet access and multiple, discriminatory taxes on
electronic commerce under the Internet Tax Freedom Act. This
moratorium had previously expired in November 2003, and its
extension preserved the “grandfathering” of states
that taxed Internet access prior to October 1998 to allow them
to continue to do so. Certain states have enacted various taxes
on Internet access or electronic commerce, and selected
states’ taxes are being contested. State tax laws may not
be successfully contested, and future state and federal laws
imposing taxes or other regulations on Internet access and
electronic commerce may arise, any of which could increase the
cost of our services and could materially adversely affect our
business.
Intellectual
Property
We review our technological developments with our technology
staff and business units to identify and capture innovative and
novel features of our core technology that provide us with
commercial advantages and file patent applications as necessary
to protect these features both in the United States and
elsewhere. We hold 27 granted U.S. patents, and we also
have 8 pending U.S. patent applications. For our wireless
broadband network, the patents and applications cover features
and functionality, including the ability to manage device power
output to ensure frequency stabilization, as well as the ability
to manage network output and
infrastructure in a dynamic output environment to produce, among
other things, reliable network uptime. We hold 16 granted
patents and have 20 pending patent applications in various
foreign jurisdictions. Assuming that all maintenance fees and
annuities continue to be paid, the patents expire on various
dates from 2017 until 2023. “Clearwire” and the
associated Clearwire corporate logo, “ClearBusiness,”“ClearPremium,”“ClearClassic” and
“ClearValue” are our registered trademarks in the
United States, and we maintain or have pending trademarks in
approximately 10 foreign jurisdictions.
Employees
As of November 30, 2006 we had approximately 900 employees
in the United States and approximately 295 employees in our
international operations. This total does not include employees
of our equity investees. We believe our employee relations are
good.
Properties
and Facilities
Our executive offices are currently located in Kirkland,
Washington, where we lease approximately 34,146 square feet
of space. We plan to move our executive offices to a new
Kirkland, Washington location in early 2007, where we lease
68,509 square feet of space. The new lease will continue
until 2013. We intend to sublease our current headquarters space
to a third party, if possible, until our lease term expires on
December 27, 2010. We do not own any real property.
We believe that substantially all of our property and equipment
is in good condition, subject to normal wear and tear. We expect
to open a new call center in 2007. Other than our expected call
center, we believe that our current facilities have sufficient
capacity to meet the projected needs of our business for the
next twelve months.
The following table lists our significant properties and the
inside square footage of those properties:
Size
City, State
(square feet)
Kirkland, WA (headquarters and
administrative)
68,509
Kirkland, WA (administrative)
34,146
Las Vegas, NV (call center)
13,565
Henderson, NV (administrative and
warehouse space)
12,000
Vienna, Austria (shared service
center)
4,500
We lease additional office space in Washington, D.C. and several
of our current and planned markets. We also lease approximately
88 retail stores and mall kiosks. Our retail stores, excluding
mall kiosks, range in size from approximately 700 square
feet to 8,000 square feet, with leases having terms
typically from three months to seven years.
Internationally we have offices in Bucharest, Romania, Brussels,
Belgium, Dublin, Ireland, Madrid, Spain and Warsaw, Poland.
Legal
Proceedings
We are subject to various claims and legal actions arising in
the ordinary course of business from time to time. We believe
that the ultimate resolution of these matters, whether
individually or in the aggregate, will not have a material
adverse effect on our business, prospects, financial condition
and results of operations. For example, we are currently party
to a settlement agreement with Sprint Nextel and certain other
parties resolving various disputes involving spectrum leases.
For this settlement agreement to take effect, certain closing
conditions must be met, not all of which are within our or
Sprint’s control. If this settlement agreement does not
take effect and such disputes are decided adversely against us,
we do not believe these disputes would have an adverse effect on
our business.
The following table sets forth certain information regarding the
members of our board of directors, executive officers and key
employees, as of the date of this prospectus.
Name
Age
Position
Craig O. McCaw(1)
57
Chairman and Co-Chief Executive
Officer
Benjamin G. Wolff
38
Co-President and Co-Chief
Executive Officer
Perry S. Satterlee
46
Co-President, and President and
Chief Executive Officer of Clearwire US LLC
John A. Butler
44
Executive Vice-President and Chief
Financial Officer
Nicolas Kauser
66
Director; Chief Technology Officer
R. Gerard Salemme
52
Director; Executive Vice
President — Strategy, Policy and External Affairs
David Perlmutter(2)
53
Director
Arvind Sodhani(2)
52
Director
Peter L. S. Currie(3)
50
Director
Richard P. Emerson(3)
44
Director
Michael J. Sabia(4)
53
Director
Stuart M. Sloan(1)
63
Director
Christine M. Bertany
40
Vice President, People Development
Hope F. Cochran
35
Vice President, Finance and
Treasurer
Broady R. Hodder
35
Vice President, General Counsel
and Secretary
Leila L. Kirske
43
Vice President, Controller
(1)
Members of our compensation committee.
(2)
Designated by Intel Pacific pursuant to the voting agreement
between ERH and Intel Pacific.
(3)
Members of our audit committee.
(4)
Designated by Bell Canada pursuant to our agreement with Bell
Canada.
Craig O. McCaw. Mr. McCaw has served as
our Chairman and Chief Executive Officer since he founded our
company in October 2003 and as our Co-Chief Executive Officer
since May 2006. Since May 2000, Mr. McCaw has served as a
director and Chairman of ICO Global Communications (Holdings)
Limited, or ICO, and has served as a director of ICO North
America, Inc. since December 2004. Mr. McCaw is also
Chairman, Chief Executive Officer and a member of Eagle River
Investments, LLC, ERH, and Eagle River Inc. and its affiliates,
which are private investment companies that focus on strategic
investments in the communications industry. Mr. McCaw also
currently serves as a director of RadioFrame Networks, Inc. and
of Tello Corp. Mr. McCaw is a former director of Nextel
Communications, Inc. and XO Communications, Inc., or XO,
formerly known as NEXTLINK Communications, Inc.
Benjamin G. Wolff. Mr. Wolff has served
as our Co-President and Chief Strategy Officer since October
2005, and as our Co-Chief Executive Officer since May 2006.
Previously, Mr. Wolff served as our Executive Vice
President from April 2004 to October 2005. In addition to his
positions with our company, Mr. Wolff is a principal of
ERH, the President of ERH and ERI, and a director of ICO and ICO
North America. From August 1994 until April 2004, Mr. Wolff
was a lawyer with Davis Wright Tremaine LLP, where he became a
partner in January 1998. Mr. Wolff’s practice focused
on mergers and acquisitions, corporate finance and strategic
alliance transactions. While with Davis Wright Tremaine LLP, he
co-chaired the firm’s Business Transactions Department,
served on the firm’s Executive Committee, and had primary
responsibility for representing clients such as
360 networks, Allied Signal, Eagle River, ICO, Intel,
NEXTLINK and Starbucks Coffee Company in various corporate and
transactional matters.
Perry S. Satterlee. Mr. Satterlee has
served as our Co-President since October 2005 and as President
and Chief Executive Officer of Clearwire US LLC, since May 2006.
Previously, Mr. Satterlee was Chief Operating Officer from
July 2002 to July 2004, and Vice President-Sales and Marketing,
from August 1998 to July 2004, of Nextel Partners Inc. Prior to
joining Nextel Partners, Mr. Satterlee was the
President-Pacific Northwest Area of Nextel. Prior to joining
Nextel, Mr. Satterlee served from 1992 to 1996 as Vice
President and General Manager of Central California District of
AT&T Wireless Services, formerly McCaw Cellular. From 1990
to 1992, he was General Manager of McCaw Cellular’s
Ventura/Santa Barbara market. From 1988 to 1990,
Mr. Satterlee was Director of Planning for McCaw Cellular,
where he led the company’s planning and budgeting processes.
John A. Butler. Mr. Butler has served as
our Chief Financial Officer since March 2005. Previously,
Mr. Butler served as Executive Vice President and Chief
Financial Officer of Valor Communications Group, Inc. from 2000
to 2005. From 1998 to 2000, Mr. Butler served as Executive
Vice President and Chief Financial Officer of Commonwealth
Telephone Enterprises, Inc. Prior to 1998, he was a director at
First Union Capital Markets (Wachovia) in the Media and
Communications Group. Mr. Butler has been employed by a
number of financial institutions, and began his career at Arthur
Andersen & Co.
Nicolas Kauser. Mr. Kauser has served as
a director since February 2004 and as our Chief Technology
Officer since January 2005 and currently is a principal of ERH.
Previously, Mr. Kauser was a director of XO.
Mr. Kauser is also a director of Triquint Semiconductor, a
position he has held since December 1999 and has been a director
of RadioFrame Networks since 2002. Until September 1998,
Mr. Kauser was an Executive Vice President and Chief
Technology Officer for AT&T Wireless, formerly McCaw
Cellular, where he was responsible for all aspects of
engineering and technology projects, network operations,
long-range planning and evolution of the network, and supporting
network technologies. Mr. Kauser was also responsible for
AT&T Wireless’ fixed wireless initiative, Project
Angel. Before joining McCaw Cellular in 1990, Mr. Kauser
was Vice President of Engineering and subsequently Senior Vice
President Operations at Cantel, the Canadian nationwide cellular
provider based in Toronto, Canada.
R. Gerard Salemme. Mr. Salemme has
served as a director since November 2003 and Executive Vice
President — Strategy, Policy, and External Affairs of
our company since April 2004 and currently is a principal of
ERH, a Vice President of ERI, and a director of and consultant
to ICO and ICO North America. Previously, Mr. Salemme
served as our Vice President and Secretary from November 2003 to
April 2004. Prior to joining our company, Mr. Salemme was
Senior Vice President, External Affairs of XO from May 1997 to
June 2003. Before joining XO, Mr. Salemme served as
AT&T Corp.’s Vice President of Government Affairs,
directing AT&T’s federal regulatory public policy
organization, including participation in the FCC’s
narrowband and broadband PCS auctions. Prior to AT&T,
Mr. Salemme served as Senior Vice President, External
Affairs for McCaw Cellular. Previously, Mr. Salemme was the
Senior Telecommunications Policy Analyst for the U.S. House
of Representatives Subcommittee on Telecommunications and
Finance. Prior to joining the subcommittee, he was a Regional
Manager at GTE Corporation/Sprint Corporation and supervised the
company’s government relations in the New York/New England
region. Mr. Salemme has also served as Chief of Staff to
Congressman Ed Markey of Massachusetts and was a lecturer of
economics at the University of Massachusetts at Salem.
David Perlmutter. Mr. Perlmutter has
served as a director of our company since August 2006, having
been designated by Intel Pacific in connection with the voting
agreement between ERH and Intel Pacific, and is currently Senior
Vice President of Intel Corporation. Mr. Perlmutter has
served as the General Manager of Intel Corporation’s
Mobility Group (previously Mobile Products Group) since January
2004, where he manages the design, development and marketing of
Intel’s solutions for the mobile computing segment. From
January 1996 to January 2006, he was a Vice-President of Intel
Corporation. Mr. Perlmutter holds a B.Sc. in Electrical
Engineering from Technion, Israel Institute of Technology.
Arvind Sodhani. Mr. Sodhani has served as
a director of our company since August 2006, having been
designated by Intel Pacific in connection with the voting
agreement between ERH and Intel Pacific and is currently
President of Intel Capital Corporation and Senior Vice President
of Intel Corporation. Mr. Sodhani has served as President
of Intel Capital since March 2005 and in that role oversees
Intel’s internal new
business incubation, external investments, and mergers and
acquisitions in support of Intel’s strategic objectives.
Mr. Sodhani joined Intel in 1981 as assistant treasurer of
Intel Europe, was promoted to assistant treasurer in August 1984
and was named Treasurer of Intel Corporation in July 1998. Mr.
Sodhani was elected Vice President by the Intel Board of
Directors in 1990 and promoted to Senior Vice President in
February 2005. Mr. Sodhani holds a BS and MS in economics
from the University of London and an MBA from the University of
Michigan. Mr. Sodhani has also been a member of The NASDAQ
Stockmarket, Inc. board of directors since 1997.
Peter L. S. Currie. Mr. Currie has served
as a director of our company since 2005 and is currently
president of Currie Capital LLC. From 2002 to 2005 he was a
managing member of General Atlantic LLC, a worldwide private
equity investment company, where he continues to serve as
special advisor. Before joining General Atlantic,
Mr. Currie was a partner and co-founder of The Barksdale
Group, an early-stage venture capital firm. Mr. Currie also
served as executive vice president and chief administrative
officer of Netscape Communications from 1995 to 1999, and held
various positions, including executive vice president and chief
financial officer, of McCaw Cellular Communications, Inc. from
1989 to 1995. Prior to joining McCaw Cellular he was a Principal
at Morgan Stanley & Co. Incorporated, where he joined
in 1982. He is also a director of CNET Networks, Inc., Safeco
Corporation, Sun Microsystems and he is a charter trustee of
Phillips Academy.
Richard P. Emerson. Mr. Emerson has
served as a director of our company since 2004 and is currently
a Senior Managing Director of Evercore Partners, L.P. From 2000
to 2003, Mr. Emerson was Senior Vice President of Corporate
Development and Strategy at Microsoft Corporation. Prior to
joining Microsoft Corporation, Mr. Emerson was a Managing
Director at Lazard Frères & Co. LLC.
Mr. Emerson was also previously affiliated with The
Blackstone Group and Morgan Stanley & Co. Incorporated.
Michael J. Sabia. Mr. Sabia has served as
a director of our company since March 2005 having been
designated pursuant to our agreement with Bell Canada.
Mr. Sabia is currently the President and Chief Executive
Officer of BCE Inc, and Chief Executive Officer of Bell Canada.
Mr. Sabia has held senior executive positions with BCE Inc.
and Bell Canada since July 2000. Mr. Sabia also serves as a
director of BCE, Bell Canada; Bell Aliant Regional
Communications Inc.; The Thomson Corporation; and Telesat
Canada. Mr. Sabia was an officer of Teleglobe Communications,
which filed for bankruptcy in May 2002.
Stuart M. Sloan. Mr. Sloan has served as
a director of our company since 2004 and since 1984 has been
principal of Sloan Capital Companies. Mr. Sloan was
also the Chairman of the Board from 1986 to 1998 and the Chief
Executive Officer from 1991 to 1996 of Quality Food Centers,
Inc., a supermarket chain. Mr. Sloan is also a director for
Anixter International, Inc., J. Crew and Rite Aid Corp.
Christine M. Bertany. Ms. Bertany has
served as our Vice President, People Development since September
2004. Previously, Ms. Bertany was Principal of HR
Strategies International, a human resources consulting firm she
established and operated from 2000 to 2004. Prior to building
her consulting business, Ms. Bertany was the Director of
Human Resources for drugstore.com from its public offering in
1999 to 2000. Ms. Bertany spent nearly five years at McCaw
Cellular and AT&T Wireless from 1995 to 1999 in a variety of
leadership roles in their People Development organization.
Hope F. Cochran. Mrs. Cochran has served
as the Vice President, Finance for Clearwire since November 2005
and Treasurer since June 2006. Previously, from May 2003 to
August 2005, Mrs. Cochran served as the Chief Financial
Officer of Evant Incorporated, a planning and logistics software
developer. From May 2001 to May 2003, Mrs. Cochran served
as the Controller of the Americas — Sales Operations
for PeopleSoft, Inc. Prior to 2001, Mrs. Cochran was a
founder and served as the Chief Financial Officer of
SkillsVillage, a contractor supply chain management software
provider, until its sale to PeopleSoft, Inc. In both chief
financial officer positions, Mrs. Cochran managed corporate
finance, accounting, human resources, legal and facilities.
Mrs. Cochran began her career as an auditor at
Deloitte & Touche LLP.
Broady R. Hodder. Mr. Hodder was named
our Vice President and General Counsel in May 2006 and was
appointed Secretary in June 2006. Previously, Mr. Hodder
served as our Corporate Counsel and Assistant Secretary from
November 2004 to November 2005 and Vice President Legal, Finance
and Corporate
Development from November 2005 to May 2006. Prior to joining our
company, from April 2001 to November 2004, Mr. Hodder was a
lawyer with Davis Wright Tremaine LLP, where he became a partner
in January 2004. Before joining Davis Wright Tremaine LLP,
Mr. Hodder was a lawyer with Gray Cary Ware &
Freidenrich LLP and Lionel Sawyer and Collins Ltd.
Leila L. Kirske. Ms. Kirske was named our
Vice President, Controller in September 2006. From September
2003 to September 2006, Ms. Kirske worked for Washington
Mutual, Inc., first serving as Division Controller,
Corporate Services Organization and then as
Division Finance Officer, Planning & Performance
Measurement, Corporate Services Organization. From June 2002 to
September 2003, Ms. Kirske served as Chief Financial
Officer and Vice President Finance and Administration at Med
Data Inc., a billing, coding, and data management company. From
October 1997 to September 2001, Ms. Kirske served as Vice
President Finance and Administration, and, from September 2001
to May 2002, as Chief Financial Officer, of Bsquare Corporation,
a software systems integrator for mobile devices. Prior to 1997,
Ms. Kirske was the Director of Accounting for Mosaix, Inc.,
a telephony equipment and customer management solution provider
and Spacelabs Medical, Inc., a manufacturer and distributor of
critical care medical equipment. Ms. Kirske began her
career and attained the level of general practice manager at
PricewaterhouseCoopers.
Audit
Committee
We have established an audit committee, the primary
responsibilities of which are to oversee the accounting and
financial reporting processes of our company as well as our
affiliated and subsidiary companies, and to oversee the internal
and external audit processes. The audit committee also assists
the board of directors in fulfilling its oversight
responsibilities by reviewing the financial information which is
provided to stockholders and others, and the system of internal
controls which management and the board of directors have
established. The audit committee oversees the independent
auditors, including their independence and objectivity. However,
the committee members are not acting as professional accountants
or auditors, and their functions are not intended to duplicate
or substitute for the activities of management and the
independent auditors. The audit committee is empowered to retain
independent legal counsel and other advisors as it deems
necessary or appropriate to assist the audit committee in
fulfilling its responsibilities, and to approve the fees and
other retention terms of the advisors.
The audit committee is comprised of two members, both of whom
were elected by the board of directors. Peter Currie and Richard
Emerson currently serve as our audit committee members. We
intend to appoint an additional person to our audit committee
before completing this offering. Our board of directors has
determined that each of the members of our audit committee is
“independent,” as defined under and required by the
federal securities laws and the rules of the Nasdaq Global
Market. Our board of directors has determined that
Mr. Currie qualifies as an “audit committee financial
expert” under the federal securities laws and that each
member of the audit committee has the “financial
sophistication” required under the rules of the Nasdaq
Global Market.
Compensation
Committee
We have established a compensation committee, the primary
responsibilities of which are to periodically review and approve
the compensation and other benefits for our employees, officers
and independent directors, including reviewing and approving
corporate goals and objectives relevant to the compensation of
our executive officers in light of those goals and objectives,
and setting compensation for these officers based on those
evaluations. Our compensation committee also administers and has
discretionary authority over the issuance of stock awards under
our stock compensation plans,
The compensation committee has in the past, and may in the
future, delegate authority to review and approve the
compensation of our employees to certain of our executive
officers, including with respect to stock option or SAR grants
made to under our Stock Option Plan or Stock Appreciation Rights
Plan. Even where the compensation committee has not delegated
authority, our executive officers typically make recommendations
to the compensation committee regarding compensation to be paid
to our employees and the size of stock option or SAR grants.
The compensation committee is comprised of two members,
Messrs. McCaw and Sloan. The board has determined that
Mr. Sloan meets the independence requirements of the Nasdaq
Marketplace Rules.
Code of
Conduct and Ethics
Our board of directors has adopted a code of conduct and ethics
that establishes the standards of ethical conduct applicable to
all directors, officers and employees of our company. The code
addresses, among other things, conflicts of interest, compliance
with disclosure controls and procedures and internal control
over financial reporting, corporate opportunities and
confidentiality requirements. The audit committee is responsible
for applying and interpreting our code of conduct and ethics in
situations where questions are presented to it.
Compensation
Committee Interlocks and Insider Participation
Our compensation committee is currently comprised of
Messrs. McCaw and Sloan. Mr. McCaw also serves as our
Chairman and Co-Chief Executive Officer. For a description of
the transactions between us and members of the compensation
committee, and entities affiliated with such members, see the
transactions described under the section entitled “Certain
Relationships and Related Transactions.”
The primary goals of the compensation committee of our board of
directors with respect to executive compensation are to attract
and retain the most talented and dedicated executives possible,
to tie annual and long-term cash and stock incentives to
achievement of specified performance objectives, and to align
executives’ incentives with stockholder value creation. To
achieve these goals, the compensation committee intends to
implement and maintain compensation plans that tie a substantial
portion of executives’ overall compensation to key
strategic goals such as the development of our network, the
establishment and maintenance of key strategic relationships,
and the growth of our subscriber base as well as our financial
and operational performance, as measured by metrics such as
revenue, subscriber growth, churn and markets launched. The
compensation committee evaluates individual executive
performance with a goal of setting compensation at levels the
committee believes are comparable with executives in other
companies of similar size and stage of development operating in
the communications industry while taking into account our
relative performance and our own strategic goals.
We have not retained a compensation consultant to review our
policies and procedures with respect to executive compensation.
We conduct an annual benchmark review of the aggregate level of
our executive compensation, as well as the mix of elements used
to compensate our executive officers. This review is based on a
survey of executive compensation paid by 24 communications
companies conducted by an independent third party, Thobe Group
Inc., in which we participate. We benchmark our executive
compensation against the median updated compensation paid by the
eight companies generating less than $750 million in annual
revenue.
We do not directly compensate Mr. McCaw for his services as
a director, a member of the compensation committee and our
Chairman and Co-Chief Executive Officer. Mr. McCaw is
indirectly compensated for his services pursuant to an advisory
services agreement between Clearwire and Eagle River, Inc., or
ERI, a corporation of which Mr. McCaw is the sole
stockholder. For the nine months ended September 30, 2006,
we paid ERI $600,000 for advisory services plus an additional
$679,000 in out of pocket expense reimbursements. We do not
expect any significant adjustment to the compensation or expense
reimbursements to ERI in 2007. In addition, although
Messrs. Wolff, Salemme and Kauser receive a salary from us,
they are also compensated by ERI. We believe that the
compensation paid by ERI to these executives relates to such
executives’ services to ERI and not to those
executive’s services to us or to the advisory services ERI
provides us. Consequently, our compensation committee does not
take into account the compensation ERI pays to these executives
when determining our executive compensation policies, programs
or awards for these individuals.
Elements
of Compensation
Executive compensation consists of following elements:
Base Salary. Base salaries for our
executives are established based on the scope of their
responsibilities, taking into account competitive market
compensation paid by other companies for similar positions.
Generally, we believe that executive base salaries should be
targeted near the median of the range of salaries for executives
in similar positions with similar responsibilities at comparable
companies, in line with our compensation philosophy. Base
salaries are reviewed annually, and adjusted from time to time
to realign salaries with market levels after taking into account
individual responsibilities, performance and experience. For
2007, this review will occur in the first quarter.
Discretionary Annual Bonus. The
compensation committee has the authority to award discretionary
annual bonuses to our executive officers. The annual incentive
bonuses are intended to compensate officers for achieving
financial and operational goals and for achieving individual
annual performance objectives. These objectives vary depending
on the individual executive, but relate generally to strategic
factors such as network deployment, new service implementation
and subscriber acquisition, and to financial factors such as
raising capital, improving our results of operations and
increasing the price per share of our capital stock.
Our discretionary annual bonus is paid in cash in an amount
reviewed and approved by the compensation committee and
ordinarily is paid in a single installment in the first quarter
following the completion of a given fiscal year. Pursuant to
either an employment agreement or offer letter, each officer,
other than Mr. McCaw, is eligible for a discretionary
annual bonus up to an amount equal to a specified percentage of
such executive’s salary. However, the compensation
committee may increase the discretionary annual bonus paid to
our executive officers, and the discretionary bonus paid to each
officer in 2006 for performance in 2005 exceeded this specified
amount. The compensation committee has targeted discretionary
bonus amounts to be paid for 2007 for performance in 2006 at 50%
of base salary for each of our executive officers. The actual
amount of discretionary bonus will be determined following a
review of each executive’s individual performance and
contribution to our strategic goals conducted during the first
quarter in 2007. The compensation committee has not fixed a
maximum payout for any officers’ annual discretionary bonus.
Long-Term Incentive Program. We believe
that long-term performance is achieved through an ownership
culture that encourages such performance by our executive
officers through the use of stock and stock-based awards. Our
stock compensation plans have been established to provide
certain of our employees, including our executive officers, with
incentives to help align those employees’ interests with
the interests of stockholders. The compensation committee
believes that the use of stock and stock-based awards offers the
best approach to achieving our compensation goals. We have not
adopted stock ownership guidelines, and, other than
Mr. McCaw, our stock compensation plans have provided the
principal method for our executive officers to acquire equity or
equity-linked interests in our company. We believe that the
annual aggregate value of these awards should be set near
competitive median levels for comparable companies. However, due
to the early stage of our business, we expect to provide a
greater portion of total compensation to our executives through
our stock compensation plans than through cash-based
compensation.
Options. Our 2003 Stock Option Plan
authorizes us to grant options to purchase shares of common
stock to our employees, directors and consultants. Our
compensation committee is the administrator of the stock option
plan. Stock option grants are made at the commencement of
employment and, occasionally, following a significant change in
job responsibilities or to meet other special retention or
performance objectives. The compensation committee reviews and
approves stock option awards to executive officers based upon a
review of competitive compensation data, its assessment of
individual performance, a review of each executive’s
existing long-term incentives, and retention considerations.
Periodic stock option grants are made at the discretion of the
compensation committee to eligible employee and, in appropriate
circumstances, the compensation committee considers the
recommendations of members of management, such as
Mr. Wolff, our Co-Chief Executive Officer,
Mr. Satterlee, our Co-President, and Christine Bertany, our
Vice President, People Development. In 2006, certain named
executive officers were awarded stock options in the amounts
indicated in the section entitled “Grants of Plan Based
Awards”. These grants included grants made on
August 30, 2006, in recognition of exceptional
contributions to our company relating to the negotiation and
subsequent closing in August of our transactions with Motorola
and Intel, and on September 15, 2006, in connection with a
merit-based grant to a large number of employees intended to
encourage an ownership culture among our employees. Stock
options granted by us have an exercise price equal to the fair
market value of our common stock on the day of grant, typically
vest 25% per annum based upon continued employment over a
four-year period, and generally expire ten years after the date
of grant. Incentive stock options also include certain other
terms necessary to assure compliance with the Internal Revenue
Code of 1986, as amended.
Stock Appreciation Rights. Our Stock
Appreciation Rights Plan authorizes us to grant stock
appreciation rights, or SARs. A SAR represents a right to
receive the appreciation in value, if any, of our common stock
over the base value of the SAR. The base value of each SAR
equals the value of our common stock on the date the SAR is
granted. Upon surrender of each SAR, unless we elect to deliver
common stock, we will pay an amount in cash equal to the value
of our common stock on the date of delivery over the base price
of the SAR. SARs typically vest based upon continued employment
on a pro-rata basis over a four-year period, and generally
expire ten years after the date of grant. Our compensation
committee is the administrator of our stock appreciation rights
plan. To date, no SARs have been awarded to any of our executive
officers. We have the right to convert outstanding SARs into
stock options, and, following this offering, we may elect to do
so.
Restricted Stock Grants. Our
compensation committee has and may in the future elect to make
grants of restricted stock to our executive officers. In April
2006, we granted Mr. Wolff restricted stock pursuant to a
Stock Grant Agreement dated April 17, 2006. Fifty percent
of the shares will vest on March 1, 2007 and the remainder
will vest on March 1, 2008, so long as Mr. Wolff
remains in continuous employment with us through those dates.
Other Compensation. Our executive
officers who were parties to employment agreements prior to this
offering will continue, following this offering, to be parties
to such employment agreements in their current form until such
time as the compensation committee determines in its discretion
that revisions to such employment agreements are advisable. In
addition, consistent with our compensation philosophy, we intend
to continue to maintain our current benefits and perquisites for
our executive officers; however, the compensation committee in
its discretion may revise, amend or add to the officer’s
executive benefits and perquisites if it deems it advisable. We
believe these benefits and perquisites are currently lower than
median competitive levels for comparable companies. We currently
have plans to change either the employment agreements (except as
required by law or as required to clarify the benefits to which
our executive officers are entitled as set forth herein) or
levels of benefits and perquisites provided thereunder.
Summary
Compensation Table
The following table sets forth information regarding
compensation earned by our Co-Chief Executive Officers,
Co-Presidents, Chief Financial Officer and two other most highly
compensated executive officers during 2005 and as estimated (on
an annualized basis) for 2006:
Stock
Option
All Other
Salary
Bonus(2)
Awards(3)
Awards(4)
Compensation
Total
Name and Principal Position
Year(1)
($)
($)
($)
($)
($)
($)
Craig O. McCaw
2006
—
—
—
—
—
(5)
—
Chairman and Co-
2005
—
—
—
—
—
—
Chief Executive Officer
Benjamin G. Wolff
2006
364,000
—
1,250,000
(6)
6,848,800
(7)
716,955
(8)
9,179,755
Co-President and
2005
350,000
350,000
—
—
—
700,000
Co-Chief Executive Officer
John A. Butler
2006
310,000
—
—
1,563,350
(9)
—
1,873,350
Chief Financial Officer
2005
227,717
300,000
—
846,000
(10)
11,725
(11)
1,385,442
Perry S. Satterlee
2006
374,850
—
2,271,800
(12)
—
2,646,650
Co-President
2005
357,000
350,000
—
707,000
R. Gerard Salemme
2006
323,420
—
—
3,026,400
(13)
—
3,349,820
Executive Vice
President —
2005
309,000
155,000
—
—
—
464,000
Strategy, Policy and
External Affairs
Nicolas Kauser
2006
364,000
—
—
2,031,400
(14)
—
2,395,400
Chief Technology Officer
2005
350,000
175,000
—
—
—
525,000
(1)
Compensation is estimated for 2006
based upon actual compensation through November 30, 2006
and projected compensation through December 31, 2006.
(2)
The compensation committee has not
yet determined the amount of the bonus to be awarded for the
named executive officers for fiscal year 2006.
(3)
The value of stock awards granted
to our executive officers equals the number of shares granted
multiplied by the estimated fair value of a share of our capital
stock on the date of grant. For information regarding
significant factors, assumptions and methodologies used in
determining the fair value of our capital stock, see the section
entitled “Critical Accounting Policies —
Valuation of Common Stock.”
(4)
The value of option awards granted
to our executive officers has been estimated pursuant to SFAS
No. 123(R) for 2006 and SFAS No. 123 for 2005. Our
executive officers will not realize the estimated value of these
awards in cash until these awards are vested and exercised or
sold. Our adoption of SFAS No. 123(R) on January 1,2006 resulted in a significant increase in the estimated value
of our options. For instance, the weighted average fair value of
our options granted during the nine months ended
September 30, 2006, calculated pursuant to SFAS
No. 123(R), was $3.84. If this amount had been calculated
pursuant to SFAS No. 123, it would have been $1.42. For
information regarding our valuation of option awards, see
“Critical Accounting Policies — Stock-Based
Expense.”
Does not include payment to ERI for
management fees and reimbursement of certain expenses pursuant
to the Advisory Services Agreement between Clearwire and ERI,
dated November 13, 2003. Mr. McCaw owns 100% of the
outstanding capital stock of ERI. We paid ERI management fees of
$800,000 and $600,000, respectively, in each of 2005 and for the
nine months ended September 30, 2006, and reimbursed
expenses of $296,000 and $679,000, respectively in 2005 and for
the nine months ended September 30, 2006, respectively.
(6)
Relates to a grant of 250,000
restricted shares to Mr. Wolff on April 17, 2006.
(7)
Represents the aggregate fair
market value of options to purchase 400,000 share of
Class A common stock granted January 26, 2006, with an
exercise price of $5.00 per share, options to purchase
1,000,000 shares of Class A common stock granted
August 30, 2006, with an exercise price of $6.00 per
share and options to purchase 360,000 shares of
Class A common stock granted September 15, 2006, with
an exercise price of $6.00 per share.
(8)
We paid Mr. Wolff $716,955 as a tax
gross-up relating to the grant to Mr. Wolff of shares of
restricted stock on April 17, 2006.
(9)
Represents the aggregate fair
market value of options to purchase 150,000 shares of
Class A common stock granted January 26, 2006, with an
exercise price of $5.00 per share, options to purchase
100,000 shares of Class A common stock granted
August 30, 2006, with an exercise price of $6.00 per
share and options to purchase 157,500 shares of
Class A common stock granted September 15, 2006, with
an exercise price of $6.00 per share.
(10)
Represents the aggregate fair
market value of options to purchase 900,000 shares of
Class A common stock granted March 31, 2005, with an
exercise price of $4.00 per share.
(11)
Reflects relocation expenses in the
amount of $11,725 paid to Mr. Butler.
(12)
Represents the aggregate fair
market value of options to purchase 400,000 shares of
Class A common stock granted January 26, 2006, with an
exercise price of $5.00 per share and options to purchase
210,000 shares of our Class A common stock granted
September 15, 2006 with an exercise price of $6.00 per
share.
(13)
Represents the aggregate fair
market value of options to purchase 200,000 shares of
Class A common stock granted January 26, 2006, with an
exercise price of $5.00 per share, options to purchase
250,000 shares of Class A common stock granted
August 30, 2006 with an exercise price of $6.00 per
share and options to purchase 330,000 shares of
Class A common stock granted September 15, 2006, with
an exercise price of $6.00 per share.
(14)
Represents the aggregate fair
market value of options to purchase 200,000 shares of
Class A common stock granted January 26, 2006, with an
exercise price of $5.00 per share and options to purchase
330,000 shares of Class A common stock granted
September 15, 2006, with an exercise price of
$6.00 per share.
Advisory
Services Agreement
We are parties to an Advisory Services Agreement dated
November 13, 2003 with ERI, a corporation of which
Mr. McCaw is the sole shareholder, pursuant to which we pay
ERI an annual fee for services rendered amounting to $800,000
and reimburse ERI for certain out of pocket expenses. We do not
compensate Mr. McCaw for his services other than directly
in the form of stock based compensation described below and
indirectly in cash through payments to ERI under the advisory
services agreement. We expect to continue this arrangement
following this offering. See “Certain Relationships and
Related Transactions — Advisory Services
Agreement” for additional information about this agreement
and the related payments.
Employment
Agreement
Perry S.
Satterlee
We have entered into an employment agreement with Perry S.
Satterlee, our Co-President, and the President and Chief
Executive Officer of Clearwire US LLC, for renewable one year
terms, most recently effective June 28, 2006. Under his
employment agreement, Mr. Satterlee is entitled to receive
an annual base salary of $350,000, subject to review by our
compensation committee. Mr. Satterlee also is entitled to
an annual cash bonus based on his performance of up to 50% of
his salary. In addition, we granted Mr. Satterlee
1,000,000 shares of restricted stock and options covering
1,000,000 shares upon the execution of his employment
agreement. If we terminate Mr. Satterlee’s employment
without cause, we will pay Mr. Satterlee a lump sum payment
in the amount of his annual base salary plus an amount equal to
the most recent annual bonus payment he received. Our failure to
renew the agreement for any subsequent one-year terms shall be
deemed to be a termination without cause. The agreement also
prohibits Mr. Satterlee from competing with us for a period
of one year after termination of his employment relationship
with our company, unless we terminate him without cause.
We do not have formal employment agreements with any of our
other senior executive officers; however, certain
executives’ compensation and other arrangements are set
forth in offer letters provided to each of them. These offer
letters are described below. Since the date of these offer
letters, the compensation paid to each of these executives has
been increased and additional options have been awarded to these
executives.
John A. Butler. Effective March 8, 2005,
we entered into a letter agreement with John A. Butler providing
for his employment as Chief Financial Officer beginning on
March 14, 2005. Under his letter agreement, Mr. Butler
is entitled to receive an annual base salary of $300,000,
subject to review by our compensation committee. Mr. Butler
also is eligible to receive an annual discretionary
performance-related bonus of up to 50% of his annual base
salary. In addition, we granted Mr. Butler options to
purchase 900,000 shares of our Company’s Class A
common stock at an exercise price of $4.00 per share.
Mr. Butler has entered into an agreement not to compete
with us for a period of one year after termination of his
employment relationship with us. In addition, we have a verbal
agreement with Mr. Butler to provide him with a severance
benefit equal to his annual salary.
Nicolas Kauser. Effective May 17, 2004,
we entered into a letter agreement with Nicolas Kauser providing
for his employment on a part time basis amounting to two-thirds
of his professional time as President, International Operations
of Clearwire Corp., President of Clearwire Europe, s.a.r.l., and
President of Clearwire International, LLC beginning May 3,2004. Under his letter agreement, Mr. Kauser is entitled to
receive an annual base salary of $250,000, subject to review by
our compensation committee. Mr. Kauser also is eligible to
receive an annual discretionary performance-related bonus of up
to 25% of his annual base salary. As a condition of employment,
Mr. Kauser has entered into an agreement not to compete
with us for a period of one year after termination of his
employment relationship with us.
R. Gerard Salemme. Effective
April 30, 2004, we entered into a letter agreement with R.
Gerard Salemme providing for his employment as Executive Vice
President, External Affairs, beginning April 1, 2004. Under
his letter agreement, Mr. Salemme is entitled to receive an
annual base salary of $300,000, subject to review by our
compensation committee. Mr. Salemme also is eligible to
receive an annual discretionary performance-related bonus of up
to 26% of his annual base salary. As a condition of employment,
Mr. Salemme has entered into an agreement not to compete
with us for a period of one year after termination of his
employment relationship with us.
Benjamin G. Wolff. Effective April 1,2004, we entered into a letter agreement with Benjamin G. Wolff
providing for his employment as Executive Vice-President,
Corporate Affairs, beginning on April 1, 2004. Under his
letter agreement, Mr. Wolff is entitled to receive an
annual base salary of $250,000, subject to review by our
compensation committee. Mr. Wolff also is eligible to
receive an annual discretionary performance-related bonus of up
to 25% of his base salary. In addition, we granted
Mr. Wolff options to purchase 1,000,000 shares of our
company’s Class A common stock, which options will
vest over a four year period, unless earlier vested upon a
change of control of our company. Mr. Wolff is also
entitled to take a three month paid sabbatical upon request. As
a condition of employment, Mr. Wolff has entered into an
agreement not to compete with us for a period of one year after
termination of his employment relationship with us.
The compensation committee, which will be comprised solely of
“outside directors” as defined for purposes of
Section 162(m) of the Internal Revenue Code, may elect to
adopt plans or programs providing for additional benefits if the
compensation committee determines that doing so is in our best
interests.
Our employment letters with Messrs. Salemme and Wolff
provide for a lump sum cash payment if we terminate their
employment without cause. For a complete description and
quantification of benefits payable to our named officers on and
following termination of employment under plans and programs
currently in effect, see “— Potential Payments
Upon Termination Or Change In Control”.
The compensation committee approved awards under our 2003 Stock
Option Plan to certain of our named executives in 2005 and 2006
and awarded restricted stock to Mr. Wolff in 2006. Our
compensation committee has not established guidelines for the
grant of plan-based awards for the remainder of 2006 or 2007.
Set forth below is information regarding awards granted during
2005 and 2006:
All Other Stock
All Other Option
Awards: Number of
Awards: Number of
Exercise or Base
Shares of Stock
Securities Underlying
Price of Option
Name
Grant Date
or Units (#)
Options (#)
Awards ($/sh)
Craig O. McCaw
—
—
—
—
Benjamin G. Wolff
1/26/06
250,000
(1)
400,000
$
5.00
8/30/06
—
1,000,000
6.00
9/15/06
—
360,000
6.00
John A. Butler
3/31/05
—
900,000
4.00
1/26/06
—
150,000
5.00
8/30/06
—
100,000
6.00
9/15/06
—
157,500
6.00
Perry S. Satterlee
1/26/06
—
400,000
5.00
9/15/06
—
210,000
6.00
R. Gerard Salemme
1/26/06
—
200,000
5.00
8/30/06
—
250,000
6.00
9/15/06
—
330,000
6.00
Nicolas Kauser
1/26/06
—
200,000
5.00
9/15/06
—
330,000
6.00
(1)
Represents restricted stock per
Stock Grant Agreement dated April 17, 2006. 50% of the
shares will vest on March 1, 2007 and the balance will vest
on March 1, 2008, so long as Mr. Wolff remains in
continuous employment with the Company through those dates.
2003
Stock Option Plan
Our 2003 Stock Option Plan is administered by our compensation
committee. The objectives of the plan include attracting,
motivating and retaining key personnel and promoting our success
by linking the interests of our employees, directors and
consultants with our success.
Options
Available for Issuance
There are 50,000,000 shares of common stock authorized for
options grants under the plan. As of September 30, 2006,
16,061,926 shares of common stock were available for grant
under the plan. The options to be delivered under the plan will
be made available, at the discretion of the compensation
committee, from authorized but unissued shares or outstanding
options that expire or are cancelled. If shares covered by an
option cease to be issuable for any reason, such number of
shares will no longer count against the shares authorized under
the plan and may again be granted under the plan.
Term
of Options
The term of each option is ten years from the date of the grant
of the option, unless a shorter period is established for
incentive stock options or the administrator of the 2003 stock
option plan establishes a shorter period.
Options granted under our 2003 Stock Option Plan, unless waived
or modified in a particular option agreement or by action of the
compensation committee, vest according to the following schedule:
Portion of
From The Grant Date
Grant Vested
Less than 1 year
0
%
1 year
25
%
2 years
50
%
3 years
75
%
After 4 Years
100
%
Options granted under the 2003 Stock Option Plan require that
the recipient of a grant be continuously employed or otherwise
provide services to us or our subsidiaries. Failure to be
continuously employed or in another service relationship,
generally results in the forfeiture of options not vested at the
time the employment or other service relationship ends.
Termination of a recipient’s employment or other service
relationship for cause generally results in the forfeiture of
all of the recipient’s options.
Adjustments
in Our Capital Structure
The number and kind of shares available for grants under our
2003 Stock Option Plan and any outstanding options under the
plan, as well as the exercise price of outstanding options, will
be subject to adjustment by the compensation committee in the
event of any merger, consolidation, reorganization, stock split,
stock dividend or other event causing a capital adjustment
affecting the number of outstanding shares of common stock. In
the event of a capital adjustment, the compensation committee
may change the number and kind of shares granted under the plan.
In the event of an adjustment to our capital structure, the
compensation committee may change the number and kind of shares
granted under the plan. In the event of a business combination
or in the event of a sale of all or substantially all of our
assets, the compensation committee may cash out some or all of
the unexercised, vested options under the plan, or allow some or
all of the options to remain outstanding, subject to certain
conditions. Unless otherwise provided in individual option
agreements, the vesting of outstanding options will not
accelerate in connection with a business combination or in the
event of a sale of all or substantially all of our assets.
Administration
The compensation committee has full discretionary authority to
determine all matters relating to options granted under the plan.
The compensation committee has the authority to determine the
persons eligible to receive options, the number of shares
subject to each option, the exercise price of each option, any
vesting schedule, any acceleration of the vesting schedule and
any extension of the exercise period.
Amendment
and Termination
Our board of directors has authority to suspend, amend or
terminate the plan, except as would adversely affect
participants’ rights to outstanding awards without their
consent. As the plan administrator, our compensation committee
has the authority to interpret the plan and options granted
under the plan and to make all other determinations necessary or
advisable for plan administration.
We also grant options to individuals or entities pursuant to
written agreements not subject to the terms of this plan. Please
see the section entitled “Description of Capital
Stock” for further discussion of our stock options.
Our Stock Appreciation Rights Plan is administered by the
compensation committee and provides for the granting of awards
of SARs. The objectives of this plan include attracting,
motivating and retaining the best personnel and promoting our
success by linking the interests of our employees, directors and
consultants with our company’s success. We typically do not
make awards under this plan to our executive officers. We
adopted this plan in January 2006 and, as of September 30,2006, we had 471,875 SARs outstanding. We account for grants
under the SAR Plan under SFAS No. 123(R). SARs are
recorded as liability awards as cash settlement is anticipated
and are remeasured at fair value as the end of each reporting
period until the awards are settled. The fair value is
determined in the same manner as a stock option granted under
our 2003 Stock Option Plan, using the same assumptions and
option pricing model to estimate the fair value. Compensation
expense for each period until settlement is based on the change
(or a portion of the change, depending on the percentage of the
requisite service that has been rendered at the reporting date)
in the fair value for each reporting period.
SARs
Available for Issuance
The SARs under this plan are based on our Class A common
stock. There are 500,000 SARs authorized for issuance under the
plan. Awards under the plan will be made available, at the
discretion of the compensation committee, from authorized but
unissued SARs or outstanding SARs that expire or cancelled. SARs
may, at the discretion of the compensation committee, be settled
either in cash or by issuance of shares of common stock and, in
the case of settlement in stock, at a value based on the common
stock price at the Settlement date.
Adjustments
Changes in Our Capital Structure
The number and kind of shares available for SARs under our Stock
Appreciation Rights Plan and any outstanding SARs under the
plan, as well as the exercise price of outstanding options, will
be subject to adjustment by the compensation committee in the
event of any merger, consolidation, reorganization, stock split,
stock dividend or other event causing a capital adjustment
affecting the number of outstanding shares of common stock. In
the event of a capital adjustment, the compensation committee
may change the number and kind of shares granted under the plan.
In the event of a business combination or in the event of a sale
of all or substantially all of our property, any outstanding
SARs will expire as long as all holders of SARs under the plan
receive advance notice and an opportunity to surrender the
outstanding SARs.
The compensation committee, in its sole discretion, may
determine to redeem some or all of the outstanding, vested
awards for an amount equal to the surrender value under the plan.
Administration
The compensation committee has full discretionary authority to
determine all matters relating to awards granted under the plan.
The compensation committee has the authority to determine the
persons eligible to receive options, and approves the number of
shares subject to each option, the exercise price of each
option, any vesting schedule, any acceleration of the vesting
schedule and any extension of the exercise period.
Amendment
and Termination
Our board of directors has authority to suspend, amend or
terminate the plan. Our board of directors may, but does not
expect to, terminate this plan in connection with our initial
public offering.
If our board of directors terminates this plan following this
offering unvested SARs will expire and vested SARs automatically
will be surrendered.
Outstanding
Equity Awards At Fiscal Year-End; Option Exercises and Stock
Vested
The following table summarizes the outstanding equity award
holdings held by our Co-Chief Executive Officers, Co-Presidents,
Chief Financial Officer and our two other most highly
compensated executive officers.
Stock Awards
Option Awards
Market
Number of
Number of
Value of
Securities
Securities
Number of
Shares or
Underlying
Underlying
Shares or Units
Units of
Unexercised
Unexercised
Option
of Stock That
Stock That
Options
Options
Exercise
Option
Have Not
Have Not
Exercisable
Unexercisable
Price
Expiration
Vested
Vested
Name
(#)
(#)
($)
Date
(#)
($)(2)
Craig O. McCaw
1,250,000
3,750,000
$
2.00
12/15/14
—
—
Benjamin G. Wolff
500,000
500,000
$
0.75
4/1/14
250,000
(1)
250,000
750,000
$
2.00
12/15/14
—
—
0
400,000
$
5.00
1/26/16
—
—
0
1,000,000
$
6.00
8/30/16
—
—
0
360,000
$
6.00
9/14/16
—
—
John A. Butler
225,000
675,000
$
4.00
3/31/15
—
—
0
150,000
$
5.00
1/26/16
—
—
0
100,000
$
6.00
8/30/16
—
—
0
157,500
$
6.00
9/15/16
—
—
Perry S. Satterlee
500,000
500,000
$
2.00
6/28/14
—
—
0
400,000
$
5.00
1/26/06
—
—
0
210,000
$
6.00
9/15/06
—
—
R. Gerard Salemme
937,500
312,500
$
0.75
11/26/13
—
—
187,500
562,500
$
2.00
12/15/14
—
—
0
200,000
$
5.00
1/26/16
—
—
0
250,000
$
6.00
8/30/16
—
—
0
330,000
$
6.00
9/14/06
—
—
Nicolas Kauser
750,000
250,000
$
0.75
11/26/13
—
—
250,000
750,000
$
2.00
12/15/14
—
—
0
200,000
$
5.00
1/26/16
—
—
0
330,000
$
6.00
9/15/16
—
—
(1)
Represents restricted stock per
Stock Grant Agreement dated April 17, 2006.
(2)
Assumes a price per share of our
common stock of $ per share, which
represents the midpoint of the range set forth on the cover of
this prospectus.
Option
Exercises and Stock Vested
There have been no exercise of stock options, SARs or similar
instruments, or vesting of stock, restricted stock, restricted
stock units or similar instruments, by our Co-Chief Executive
Officers during the last fiscal year.
Pension
Benefits
None of our named executives participate in or have account
balances in qualified or non-qualified defined benefit plans
sponsored by us.
Nonqualified
Deferred Compensation
None of our named executives participate in or have account
balances in non-qualified defined contribution plans or other
deferred compensation plans maintained by us. The compensation
committee, which will be comprised solely of “outside
directors” as defined for purposes of Section 162(m)
of the Internal Revenue Code, may elect to provide our officers
and other employees with non-qualified defined contribution
or deferred compensation benefits if the compensation committee
determines that doing so is in our best interests.
Director
Compensation
We currently have three independent directors that qualify for
compensation. Independent directors receive an initial stock
option grant and follow-on annual stock option grants. In
addition, independent directors receive annual cash
compensation, plus additional cash compensation, usually $1,000
per meeting, for meetings attended in person, and reimbursement
of actual out-of-pocket expenses. Compensation is paid out
approximately two to three times a year, depending on the amount
of meetings being held. Directors can choose to be compensated
in stock in lieu of cash. If they choose stock, it is issued at
the current fair market value at the time of issuance.
The following table sets forth a summary of the compensation we
paid to our non-employee directors in 2005 and a summary of what
we have paid directors for 2006 as of November 30, 2006,
Fees
Earned or
Stock
Option
Paid in Cash
Awards
Awards
Total
Name
Year
($)
($)
($)
($)
David Perlmutter
2006
2005
—
—
—
—
Arvind Sodhani
2006
—
—
—
—
2005
Richard P. Emerson
2006
—
2,502
(1)
—
2,502
2005
2,500
14,000
(2)
17,550
(3)
34,050
Michael J. Sabia
2006
2005
Stuart M. Sloan
2006
—
2,502
(4)
—
2,502
2005
—
18,700
(5)
17,550
(6)
36,250
Peter L. S. Currie
2006
—
2,502
(7)
199,000
(8)
201,502
2005
—
2,500
(9)
33,175
(10)
35,675
(1)
Mr. Emerson was entitled to cash
compensation in the amount of $2,500 for his attendance at board
meetings. Mr. Emerson elected to receive 417 shares of
Class A common stock at a per share price of $6.00 per
share in lieu of such cash compensation.
(2)
Mr. Emerson was entitled to
cash compensation in the amount of $14,000 for his attendance at
board meetings. Mr. Emerson elected to receive 2,800 shares
of Class A common stock at a price of $5.00 per share in
lieu of such cash compensation.
(3)
Represents an initial grant of
options to purchase shares of Class A common stock upon
joining the board of directors.
(4)
Mr. Sloan was entitled to cash
compensation of $2,500 for his attendance at board and committee
meetings. Mr. Sloan elected to receive 417 shares of
Class A common stock at a price of $6.00 per share in lieu
of such cash compensation.
(5)
Mr. Sloan was entitled to
total cash compensation of $16,000 for his attendance at board
and committee meetings. Mr. Sloan elected to receive
625 shares of Class A common stock at a price of
$4.00 per share and 2,700 shares of Class A
common stock at a price of $6.00 per share in lieu of such
cash compensation.
(6)
Mr. Sloan received options to
purchase 15,000 shares of our Class A common stock at an
exercise price of $5.00 per share as director compensation
in 2005.
(7)
Mr. Currie was entitled to
cash compensation in the amount of $2,500 for attendance at
board meetings. Mr. Currie elected to receive
417 shares of Class A common stock at a per share
price of $6.00 per share in lieu of such cash compensation.
(8)
Mr. Currie received options to
purchase 50,000 shares of our Class A common stock at an
exercise price of $6.00 per share as director compensation
in 2006.
(9)
Mr. Currie was entitled to cash
compensation in the amount of $2,500 for attendance at board
meetings. Mr. Currie elected to receive 500 shares of
Class A common stock at a per share price of $5.00 per
share in lieu of such cash compensation.
(10)
Mr. Currie received options to
purchase 27,500 shares of our Class A common stock for
director compensation in 2005.
Potential
Payments Upon Termination or Change in Control
Pursuant to his letter agreement dated April 27, 2004, if
Mr. Salemme is terminated without cause (whether through
constructive termination or otherwise), we must make a lump-sum
severance payment to him in an amount equal to six
(6) months of his salary. Pursuant to a letter agreement
dated April 1, 2004, if Mr. Wolff is terminated
without cause (whether through constructive termination or
otherwise), we must make a lump-sum severance payment to him in
an amount equal to his annual salary. We have a verbal agreement
with Mr. Butler to make a lump-sum severance payment to him
equal to his annual salary if his employment is terminated.
Pursuant to Mr. Satterlee’s employment agreement, if
we terminate Mr. Satterlee’s employment without cause,
we will pay Mr. Satterlee a lump sum payment in the amount
of his annual base salary plus an amount equal to the most
recent annual bonus payment he received. Assuming the employment
of our executive officers were to be terminated without cause
(whether through constructive termination or otherwise) on
December 31, 2006, the following individuals would be
entitled to payments in the amounts set forth opposite their
name in the below table.
Cash Severance
Benjamin G. Wolff
$
364,000
John A. Butler
310,000
Perry S. Satterlee
724,850
R. Gerard Salemme
161,710
We are not obligated to make any cash payment to these
executives if their employment is terminated by us for cause or
by the executive without cause, or to any other executive
officer on the termination of employment for any reason. In
addition, we do not provide any medical continuation or death or
disability benefits for any of our executive officers that are
not also available to our employees.
In addition, Messrs. McCaw, Wolff, Butler, Satterlee,
Salemme and Kauser hold options that would vest upon any change
in control. We are not obligated to make any other payment on a
change of control. Assuming a change in control were to take
place on December 31, 2006, the following individuals would
be entitled to change in control payments in the amounts set
forth opposite their name:
Value of Accelerated Equity
and Performance Awards(1)
Craig O. McCaw
$
Benjamin G. Wolff
Perry S. Satterlee
John A. Butler
R. Gerard Salemme
Nicolas Kauser
(1)
Assumes a price per share of our
common stock of $ per share,
which represents the midpoint of the range set forth on the
cover of this prospectus.
Employee
Benefit Plans
Our employees, including our executive officers, are entitled to
various employee benefits. These benefits include the following:
medical and dental care plans; flexible spending accounts for
healthcare; life, accidental death and dismemberment and
disability insurance; employee assistance programs (confidential
counseling); benefit advocacy counseling; a 401(k) plan; and
paid time off.
401(k)
Plan
Until July 1, 2004, we offered a 401(k) Plan to eligible
employees as part of a 401(k) Plan administered by ERH. Under
the plan, employees were eligible for matching contributions
after six months of
service for 100% of the employees’ contributions, up to 5%
of total employee compensation. There were no matching
contributions by us in 2004. The employees on this plan
transferred into our 401(k) plan in 2005.
After July 1, 2004, our eligible employees have been
offered the right to participate in a 401(k) Plan we assumed
after our acquisition of NextNet. To date, we have not made any
matching contributions under our plan. Effective January 1,2007, we will match 50% of employees’ contributions, up to
3% of total employee compensation. These contributions will vest
over a three year period commencing on the employees’ hire
dates.
We also acquired CTI’s 401(k) Plan in November 2003. We
intend to terminate this plan in early 2007. Upon termination of
the plan, the funds for prior CTI employees will be transferred
to our 401(k) plan or disbursed to the participants.
Indemnification
of Officers and Directors
Our certificate of incorporation and bylaws allow us to
indemnify our officers and directors to the fullest extent
permitted by the Delaware General Corporation Law. It also
contains provisions that provide for the indemnification of
directors of the company for third party actions and actions by
or in the right of the company that mirror Section 145 of
the Delaware General Corporation Law.
In addition, the Company’s certificate of incorporation
states that it shall have power to purchase and maintain
insurance on behalf of any person who is or was a director,
officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director,
officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, including service with
respect to an employee benefit plan, against any liability
asserted against such person or incurred by such person in any
such capacity, or arising out of such person’s status as
such, and related expenses, whether or not the corporation would
have the power to indemnify such person against such liability
under the Delaware General Corporate Law. We also have and
intend to maintain director and officer liability insurance, if
available on reasonable terms.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or
persons controlling us under the foregoing provisions, we have
been informed that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
The following table shows information regarding the beneficial
ownership of shares of our Class A common stock and
Class B common stock as of November 30, 2006 and shows
the number of and percentage owned by:
•
each person who is known by us to own beneficially more than 5%
of our Class A common stock and Class B common stock;
•
each member of our board of directors;
•
each of our named executive officers; and
•
all members of our board of directors and our executive officers
as a group.
Except as indicated in the footnotes to this table (i) each
person has sole voting and investment power with respect to all
shares attributable to such person and (ii) each
person’s address is c/o Clearwire Corporation, 5808
Lake Washington Boulevard NE, Suite 300, Kirkland,
Washington98033 unless otherwise indicated.
Shares Beneficially Owned
Shares Beneficially Owned
Prior to this Offering
After this Offering
Class A(1)
%
Class B
%
% Voting
Class A
%
Class B
%
% Voting
5%
Stockholders:
Eagle River Holdings,
LLC(2)
107,768,876
28.3
56,072,860
65.4
51.6
107,768,876
56,072,860
65.4
Intel
Corporation(3)
110,000,000
30.8
29,717,197
34.6
31.8
110,000,000
29,717,197
34.6
Motorola,
Inc.(4)
50,000,000
15.2
—
*
4.2
50,000,000
—
*
Bell
Canada(5)
38,967,119
11.9
—
*
3.3
38,967,119
—
*
OB Wireless
LLC(6)
21,000,000
6.4
—
*
1.8
21,000,000
—
*
Named Executive Officers and
Directors:
Craig O.
McCaw(7)
111,728,876
28.8
56,072,860
65.4
51.7
111,728,876
56,072,860
65.4
R. Gerard
Salemme(8)
1,362,500
*
—
*
*
1,362,500
—
*
Nicolas
Kauser(9)
1,300,000
*
—
*
*
1,300,000
—
*
Stuart M.
Sloan(10)
823,617
*
—
*
*
823,617
—
*
Peter L. S.
Currie(11)
807,792
*
—
*
*
807,792
—
*
David
Perlmutter(12)
—
*
—
*
*
—
—
*
Arvind
Sodhani(13)
10,000,000
3.1
—
*
—
10,000,000
—
*
Richard
Emerson(14)
277,592
*
—
*
*
277,592
—
*
Michael J.
Sabia(15)
38,967,119
11.9
—
*
3.3
38,967,119
—
*
Benjamin G.
Wolff(16)
109,118,876
28.5
56,072,860
65.4
51.7
109,118,876
56,072,860
65.4
Perry S.
Satterlee(17)
1,600,000
*
—
*
*
1,600,000
—
*
John A.
Butler(18)
262,500
*
—
*
*
262,500
—
*
All directors and executive
officers as a group (12 persons)
158,479,996
38.3
85,790,057
100.0
87.1
158,479,996
85,790,057
100.0
*
Less than one percent.
(1)
Shares of Class A common stock
beneficially owned and the respective percentages of beneficial
ownership of Class A common stock assumes the exercise or
conversion of all shares of Class B common stock
beneficially owned by such person or entity and all options,
warrants and other securities convertible into common stock
beneficially owned by such person or entity currently
exercisable or exercisable within 60 days of
November 30, 2006. Shares issuable pursuant to the
conversion of Class B common stock or the exercise of stock
options and warrants exercisable within 60 days are deemed
outstanding and held by the holder of such shares of
Class B common stock, options or warrants for computing the
percentage of outstanding common stock beneficially owned by
such person, but are not deemed outstanding for computing the
percentage of outstanding common stock beneficially owned by any
other person. The respective percentages of beneficial ownership
of Class A common stock is based on 327,946,174 shares
of common stock outstanding as of November 30, 2006.
Includes 51,696,016 shares of
common stock, 1,125,000 shares of common stock issuable on
exercise of warrants and 56,072,860 shares of Class B
common stock. Eagle River Holdings, LLC may be deemed to
beneficially own 70,282,803 shares of common stock and
29,717,197 shares of Class B common stock beneficially
owned by Intel Pacific, Inc., 10,000,000 shares of common
stock beneficially owned by Intel Capital Corporation and
280,000 shares of common stock issuable upon exercise of
warrants beneficially owned by Middlefield Ventures, Inc., a
wholly-owned, subsidiary of Intel Corporation, pursuant to a
voting agreement pursuant to a voting agreement among ERH, Intel
Pacific, Inc. and Intel Capital Corporation regarding the
election of directors. Does not include 1,840,000 shares of
common stock issuable upon exercise of warrants issued to Eagle
River Holdings, LLC, which will become exercisable upon the
completion of this offering. Eagle River Holdings, LLC is
controlled by Mr. McCaw. The manager of Eagle River
Holdings, LLC is Eagle River, Inc., an entity controlled by and
wholly-owned by Mr. McCaw. The address of such stockholder
is 2300 Carillon Point, Kirkland, Washington98033.
(3)
Includes 10,000,000 shares of
common stock issued to Intel Capital Corporation and
70,282,803 shares of common stock and
29,717,197 shares of Class B common stock issued to
Intel Pacific, Inc., a subsidiary of Intel Corporation. Intel
Corporation and Intel Pacific, Inc. may be deemed to
beneficially own 51,696,016 shares of common stock and
56,072,860 shares of Class B common stock beneficially
owned Eagle River Holdings, LLC, and 1,125,000 shares of
common stock issuable upon exercise of warrants beneficially
owned Eagle River Holdings, LLC pursuant to a voting agreement
among ERH, Intel Pacific, Inc. and Intel Capital Corporation
regarding the election of directors. Does not include
280,000 shares of common stock issuable upon exercise of
warrants issued to Middlefield Ventures, Inc., a wholly-owned
subsidiary of Intel Corporation, which will become exercisable
upon the completion of this offering. Intel Capital Corporation,
Intel Pacific, Inc. and Eagle River Holdings, LLC are parties to
a voting agreement under which such stockholders and their
affiliates share the ability to elect a majority of our
directors. The stockholder disclaims beneficial ownership of the
shares of capital stock held by ERH. The address of such
stockholder is 2200 Mission College Blvd., RN6-46, Santa Clara,
CA95052.
The address of such stockholder is
100 de la Gauchetiere West, Suite 3700, Montreal, Quebec,
Canada.
(6)
The stockholder is controlled by
John E. McCaw, Jr., who is a brother of Craig O. McCaw. The
address of such stockholder is 1301 First Avenue,
Suite 200, Seattle, Washington98065.
(7)
Includes options to purchase
2,500,000 shares of common stock, 335,000 shares of
common stock held by CWCI LLC, an entity wholly-owned by
Mr. McCaw, and 51,696,016 shares of common stock and
56,072,860 shares of Class B common stock issued to
Eagle River Holdings, LLC, and 1,125,000 shares of common
stock issuable upon exercise of warrants issued to Eagle River
Holdings, LLC. Mr. McCaw owns all of the voting membership
interests in Eagle River Holdings, LLC and also controls and
wholly-owns Eagle River, Inc., the manager of Eagle River
Holdings, LLC. Mr. McCaw may be deemed to beneficially own
70,282,803 shares of common stock and
29,717,197 shares of Class B common stock issued to
Intel Pacific, Inc., a subsidiary of Intel Capital Corporation,
and 10,000,000 shares of common stock issued to Intel
Capital Corporation, pursuant to a voting agreement among ERH,
Intel Pacific, Inc. and Intel Capital Corporation regarding the
election of directors. Does not include 1,840,000 shares of
common stock issuable upon exercise of warrants issued to Eagle
River Holdings, LLC or 280,000 shares of common stock
issuable upon exercise of warrants issued to Middlefield
Ventures, an affiliate of Intel which will become exercisable
upon the completion of this offering.
(8)
Includes options to purchase
1,362,500 shares of common stock.
(9)
Includes options to purchase
1,300,000 shares of common stock.
(10)
Includes options to purchase
18,125 shares of common stock. Includes 800,000 shares
of common stock issued in the name of SMS Trust. Mr. Sloan
is the Trustee of SMS Trust.
(11)
Includes options to purchase
6,875 shares of common stock.
(12)
The address of such stockholder is
2200 Mission College Blvd., Santa Clara, CA95052.
(13)
Includes 10,000,000 shares of
common stock issued to Intel Capital Corporation.
Mr. Sodhani is the President of Intel Capital Corporation.
Mr. Sodhani disclaims beneficial ownership of the shares of
common stock held by Intel Capital Corporation, except to the
extent of his pecuniary interest therein. The address of such
stockholder is 2200 Mission College Blvd., RN6-46, SantaClara, CA95052.
(14)
Includes options to purchase
20,625 shares of common stock.
(15)
Includes 38,967,119 shares of
common stock held by Bell Canada. Mr. Sabia is the Chief
Executive Officer of Bell Canada. The address of such
stockholder is c/o Bell Canada, 1000 de la Gauchtiere
Street West, Suite 3700, Montreal, Quebec, Canada.
(16)
Includes options to purchase
1,100,000 shares of common stock and 250,000 shares of
common stock granted in the form of restricted stock on
April 17, 2006 held directly, and 51,696,016 shares of
common stock and 1,125,000 shares of common stock issuable
upon exercise of warrants, and 56,072,860 shares of
Class B common stock, held by Eagle River Holdings, LLC.
Mr. Wolff is the President of Eagle River Holdings, LLC and
Eagle River, Inc., the manager of Eagle River Holdings, LLC.
Does not include 1,840,000 shares of common stock issuable
upon exercise of warrants issued to Eagle River Holdings, LLC or
280,000 shares of common stock issuable upon exercise of
warrants issued to Middlefield Ventures, Inc., a wholly-owned
subsidiary of Intel, which will become exercisable upon the
completion of this offering. Mr. Wolff may be deemed to
beneficially own 70,282,803 shares of common stock and
29,717,197 shares of Class B common stock issued to
Intel Pacific, Inc., a subsidiary of Intel Capital Corporation,
and 10,000,000 shares of
common stock issued to Intel Capital Corporation pursuant to a
voting agreement among ERH, Intel Pacific, Inc. and Intel
Capital Corporation regarding the election of directors.
(17)
Includes options to purchase
600,000 shares of common stock. Includes
150,000 shares of common stock issued in the name of
PSS-MSS Limited Partnership. Mr. Satterlee is the General
Partner of PSS-MSS Limited Partnership.
(18)
Includes options to purchase
262,500 shares of common stock.
Procedures
for Approval of Related Person Transactions
We submit all transactions involving a commitment of
$5 million or more that we contemplate entering into,
including related person transactions, to the board of directors
for approval. Each of the related party transactions listed
below that were submitted to our board were approved by a
disinterested majority of our board of directors after full
disclosure of the interest of the related party in the
transaction.
Stockholders
Agreement
We and certain of our stockholders, including, without
limitation, ERH, Bell Canada, Hispanic Information and
Telecommunications Network, Inc., or HITN, ITFS Spectrum
Advisors, LLC, or ITFS Advisors, Clearwire Holdings, Inc., or
CHI, Intel Pacific and Motorola are a party to our stockholders
agreement. The stockholders agreement restricts transfer of our
capital stock and conveys other rights, obligations and
limitations upon us and the stockholders who are party to that
agreement. The stockholders agreement will terminate upon the
consummation of this offering.
We entered into a registration rights agreement with ERH, HITN
and CHI on November 13, 2003. We granted registration
rights to certain other stockholders in a separate registration
rights agreement dated March 16, 2004. Each of these
agreements grants “piggyback” registration rights with
respect to our Class A common stock, including our
Class A common stock issuable upon conversion of our
Class B common stock, as applicable, subject to standard
cutback provisions imposed by underwriters, and rights to
require us to effect
Form S-3
registrations. These rights are exercisable immediately after
the consummation of this offering, subject to the expiration of
the lock-up
arrangements described elsewhere in this prospectus.
Additionally, we granted registration rights to the holders of
the warrants issued in conjunction with our senior secured notes
due 2010 under a registration rights agreement dated
August 5, 2005. Under this registration rights agreement,
not later than 120 days after the effectiveness of the
registration statement of which this prospectus constitutes a
part, we must file a resale registration statement on
Form S-1
registering the resale of shares of Class A common stock
issuable upon the exercise of the warrants. We must cause the
Form S-1
resale registration statement to be declared effective within
180 days following the effectiveness of the registration
statement of which this prospectus forms a part, and thereafter
we must maintain that registration statement in effect (subject
to certain suspension periods) for at least two years. If we
fail to meet our obligations to file, make effective and
maintain that registration statement we will be required to pay
to each affected warrant holder an amount in cash equal to 2% of
the purchase price of such holder’s warrants. In the event
that we fail to make such payments in a timely manner the
payments will bear interest at a rate of 1% per month until
paid in full. This registration rights agreement also provides
for incidental registration rights in connection with follow-on
offerings, other than issuances pursuant to a business
combination transaction or employee benefit plan.
Each registration rights agreement allows us to continue to
grant registration rights to other investors, some of which may
be superior to the rights already granted. Each of our existing
registration rights agreements provides that we are responsible
for paying the costs and expenses of registration other than
underwriter discounts, commissions and transfer taxes. Parties
to each of these agreements may transfer their registration
rights under certain circumstances, including to family members
and other affiliates, in connection with a bona fide pledge for
a secured loan, and in private transfers to accredited investors.
Each of these registration rights agreements provides that, in
connection with an underwritten public offering, and subject to
certain limitations, the underwriters may reduce the number of
shares that may be included by registration rights holders.
We, Intel Pacific and Motorola are party to an investor rights
agreement dated August 29, 2006, that provides Motorola and
Intel Pacific additional rights to those granted to the
stockholders under the registration rights agreements and
stockholder agreement. Among the rights granted to Intel Pacific
and Motorola are:
•
demand registration rights, pursuant to which, six months
after the effectiveness of the registration statement of which
this prospectus constitutes a part, each of Intel Pacific and
Motorola have the right to effect one demand registration of our
Class A common stock, including our Class A common
stock issuable upon conversion of our Class B common stock,
held by them at the time of such demand;
•
“piggyback” registration rights with respect to our
Class A common stock, including our Class A common
stock issuable upon conversion of our Class B common stock,
as applicable, subject to standard cutback provisions imposed by
underwriters; and
•
the right to demand that we effect a registration with respect
to all or a part of their securities upon us becoming eligible
to file on
Form S-3.
Unlike in our registration rights agreement, there is no
90 day waiting period for such demand.
Voting
Agreement
We, ERH, Intel Pacific and Intel Capital Corporation are party
to a voting agreement dated August 29, 2006. Under the
voting agreement the parties have agreed that ERH, Intel Pacific
and any person or entity to whom ERH or Intel Pacific transfers
their respective shares of capital stock, and any person or
entity to whom we issue and sell shares of Class B common
stock, or securities convertible into or exchangeable for
Class B common stock, must vote its shares in any election
of our directors as may be necessary to elect as director or
directors two individuals designated by Intel Pacific so long as
Intel Pacific and Intel Capital Corporation, and their
respective affiliates, hold at least 15% of our outstanding
stock, one individual designated by Intel Pacific so long as
Intel Pacific and Intel Capital Corporation, and their
respective affiliates, hold at least 7.5% but less than 15% of
our outstanding capital stock, and four individuals designated
by ERH. ERH’s right to cause Intel to vote its shares in
favor of four individuals designated by ERH is not subject
to any minimum share ownership requirement, which means that ERH
will retain these rights even if it no longer owns any shares of
our capital stock.
Relationships
Among Certain Stockholders, Directors and Officers
As of November 30, 2006, ERH held approximately 26% of our
outstanding capital stock, including 65% of our outstanding
Class B common stock and approximately 16% of our
outstanding Class A common stock. As of November 30,2006, ERH held $23.0 million in principal amount of senior
secured notes and warrants to purchase 1,840,000 shares of
Class A common stock which were purchased under the senior
note and warrant offering. Please refer to the section entitled
Description of Indebtedness for more information. ERH held 3.7%
of our senior secured notes as of September 30, 2006 and
18.4% as of December 31, 2005. ERH earned accrued interest
relating to our senior secured notes in the amount of
$3.2 million for the nine months ended September 30,2006 and $3.1 million for the year ended December 31,2005. ERH received $2.5 million for deemed interest in
February 2006. Eagle River, Inc., or ERI, is the manager of ERH.
Each entity is controlled by Mr. McCaw. Because of the
disproportionate voting power of our Class B common stock
following this offering, ERH directly, and Mr. McCaw
indirectly, will hold capital stock that represents %
of our combined voting power assuming an initial public offering
price of $ per share and no
exercise of the underwriters’ over-allotment option.
Mr. McCaw and his affiliates have significant investments
in ICO and AboveNet, Inc., each of which may compete with us
currently or in the future.
In addition to serving as officers and directors for us and our
affiliates, each of Messrs. Salemme, Wolff and Kauser
provides services to ERI, ERH and their affiliates, for which
they are compensated by ERI. ERI, ERH and their affiliates do
not compensate Messrs. Salemme, Wolff or Kauser for their
efforts on our behalf. ERI, ERH and their affiliates do
compensate Messrs. Salemme, Wolff and Kauser for their
efforts on
behalf of ERI, ERH and their affiliates as they relate to
investment and business activities unrelated to us. In recent
years, this compensation has been substantial, and consists of a
variable combination of salary, bonuses and distribution of
profits. A material portion of this compensation is directly
related to the success of the ERI and its affiliates other than
us. Such compensation is in addition to the compensation paid to
such individuals by us, except for Mr. McCaw whom we do not
directly compensate other than certain grants of stock options.
Mr. Wolff, our Co-Chief Executive Officer and Co-President,
was a partner at Davis Wright Tremaine LLP until April 2004.
Mr. Wolff’s spouse is currently a partner with Davis
Wright Tremaine LLP. Davis Wright Tremaine LLP has rendered
substantial legal services to us since our formation, and
continues to provide legal services to us, including in
connection with this offering.
Middlefield Ventures, Inc., a wholly-owned subsidiary of Intel
Corporation, held 0.5% of our senior secured notes and warrants
to purchase 280,000 shares of our Class A common stock
as of September 30, 2006.
Investment
Agreements with Intel Pacific
Common
Stock Purchase Agreement
We are party to a common stock purchase agreement with Intel
Pacific dated June 28, 2006. Pursuant to the common stock
purchase agreement, on August 29, 2006, Intel Pacific
purchased 70,282,803 shares of our Class A common
stock and 29,717,197 shares of our Class B common
stock, at a price of $6.00 per share for an aggregate
purchase price of $600.0 million. We also committed to use
not less than $200.0 million of these proceeds for capital
and operational expenditures associated with the deployment and
operation of a mobile WiMAX network in the United States, which
may include expenditures for spectrum acquisitions and leases,
site acquisition, network construction and mobile WiMAX network
infrastructure and subscriber equipment. The agreement also
contains certain anti-dilution provisions which will terminate
upon the closing of this offering. As of November 30, 2006,
Intel Pacific held of record approximately 21% of our
outstanding Class A common stock and approximately 35%
of our outstanding Class B common stock.
Side
Agreement with Intel Pacific
We are party to an agreement with Intel Pacific dated
August 29, 2006, that provides Intel Pacific and its
affiliates with additional rights to those granted under our
stockholders agreement and registration rights agreement. Among
the rights granted to Intel Pacific and its affiliates are:
•
so long as Intel Pacific and its affiliates beneficially own at
least 5% of our issued and outstanding capital stock, and if
Intel Pacific no longer has a right to designate and nominate a
director pursuant to the voting agreement described above, a
representative of Intel shall have the right to attend and
observe all meetings of our board of directors subject to
certain limitations; and
•
entitled to preemptive rights in addition to those rights
granted to the stockholders pursuant to our stockholders
agreement. In connection with each issuance of new shares and
upon the expiration of the period to exercise any preemptive
rights with respect to any such issuance, we must make an
offering to Intel Pacific and its affiliates of any new shares
not purchased by (i) the eligible stockholders pursuant to
our stockholders agreement, (ii) Bell Canada or ERH
pursuant to the agreement dated as of March 16, 2005, among
the Company, Eagle River, and Bell Canada or (iii) Motorola
pursuant to the side agreement with Motorola dated
August 29, 2006. These preemptive rights will terminate
upon the closing of this offering.
Mobile
WiMAX Network Collaboration Agreement
We entered into a mobile WiMAX network collaboration agreement
with Intel on June 28, 2006. Pursuant to the collaboration
agreement, we and Intel established a strategic collaboration
through which we agreed to use commercially reasonable efforts
to develop and deploy a mobile WiMAX networks in the United
States, and Intel agreed to develop and market certain
integrated circuits, modules and other platforms for use
in certain computer notebooks, ultramobile PCs and other mobile
computing devices that would enable these devices to connect to
our mobile WiMAX networks.
Under the collaboration agreement, we and Intel will also work
together to develop, deploy and market a co-branded mobile WiMAX
service offering in the United States, to be available only on
our network, which will target users of certain WiMAX enabled
notebook computers, ultramobile PCs, and other mobile computing
devices containing Intel microprocessors. Both of the parties
are obligated to contribute to the development, promotion and
marketing of this service, with Intel committing to spend a
specific amount on the marketing of the service
and/or
mobile WiMAX enabled devices as we achieve certain network
deployment milestones.
As part of the collaboration, Intel also committed to help
ensure the commercial availability of subscriber devices,
including Intel mobile computing devices and residential gateway
modems, compatible with our planned mobile WiMAX networks from
multiple vendors within certain specified time frames. We agreed
to pay the distribution channel, including OEMs and retailers,
certain marketing incentives to promote activation of our mobile
WiMAX service.
We have agreed to share with Intel the revenues received from
subscribers using Intel mobile computing devices on our domestic
mobile WiMAX network. Intel also will receive a one time fixed
payment for each new Intel mobile computing device activated on
our domestic mobile WiMAX network once we have successfully
achieved substantial coverage of our mobile WiMAX network across
the United States. The one time activation payments will
terminate upon the expiration of a defined time period and upon
certain other conditions. In addition, provided that mobile
WiMAX technology meets certain performance criteria, our ability
to launch non-WiMAX broadband or data services in the United
States and internationally is restricted until we have met
certain requirements.
The mobile WiMAX network collaboration agreement will remain in
effect until June 28, 2013 unless otherwise terminated by
the parties pursuant to the agreement. In the event that net
subscriber activations of Intel mobile computing devices do not
meet certain levels by 2011, Intel will have the right to
terminate the agreement upon three months advance written notice.
Investment
Agreements with Motorola
Stock
Purchase and Subscription Agreement with Motorola
We and Motorola are party to a stock purchase agreement dated
June 30, 2006, pursuant to which Motorola purchased all of
the outstanding shares of NextNet from us for a total purchase
price of $50 million on August 29, 2006. Under the
stock purchase agreement we have agreed to help transition the
business and ownership of NextNet after the closing date in a
manner that minimizes any disruption to the operation of the
business of NextNet following the closing which occurred on
August 29, 2006.
Simultaneous with our entry into the stock purchase agreement we
entered into a subscription agreement with Motorola, pursuant to
which Motorola purchased 50,000,000 shares of our
Class A common stock at a per share price of $6.00 per
share for an aggregate purchase price of $300 million. As
of November 30, 2006, Motorola owned approximately 15% of
our outstanding Class A common stock.
Side
Agreement
We are party to an agreement with Motorola dated August 29,2006 that provides Motorola with additional rights to those
granted under the stockholders agreement and investor rights
agreement. Among the rights granted to Motorola are:
•
if at any time after the date of the subscription agreement
between us and Motorola described below and prior to the closing
of this offering or May 29, 2007, whichever is earlier, we
sell or issue or agree to sell or issue common stock (or
securities convertible into or exchangeable for common stock) to
any person for consideration less than $6.00 per share, we
must issue to
Motorola for no consideration a number of shares of our
Class A common stock necessary to prevent any dilution of
Motorola’s interest in us;
•
a right of first refusal with respect to sales of our securities
by any entity owned by Mr. McCaw to competitors of Motorola;
•
an additional preemptive rights in addition to those rights
granted to the stockholders pursuant to the stockholders
agreement. In connection with each issuance of new shares and
upon the expiration of the period to exercise any preemptive
rights with respect to any such issuance we must make an
offering to Motorola and its affiliates of any new shares not
purchased by (i) the eligible stockholders pursuant to our
stockholders agreement, (ii) Bell Canada or ERH pursuant to
the agreement dated as of March 16, 2005, among the
Company, Eagle River, and Bell Canada, or (iii) Intel
pursuant to the side agreement with Intel dated August 29,2006. These preemptive rights will terminate upon the closing of
this offering;
•
“Most Favored Nations” status, pursuant to which, in
connection with an investment in us by any entity (i) made
substantially concurrent with the purchase by Motorola or
(ii) as of the date of such investment, of a size
substantially similar to or less than the purchase by Motorola,
rights or privileges more favorable, or obligations less
burdensome, than those received by, or imposed upon, Motorola in
the amended and restated stockholders agreement, registration
rights agreement or the agreement between us and Motorola
described above, Motorola has the option to either retain the
set of rights, privileges and obligations it receives pursuant
to those agreements, or to forego such rights, privileges and
obligations in exchange for the rights, privileges and
obligations provided to such other entity in connection with
such entity’s investment; and
•
a right to have an observer attend our board meetings.
These provisions will terminate upon the closing of this
offering.
Commercial
Agreements with Motorola
Wireless
Broadband System Infrastructure Agreement
We entered into a wireless broadband system infrastructure
agreement with Motorola dated August 29, 2006. Under the
infrastructure agreement Motorola has agreed to supply us with
various infrastructure products and products for our current
Expedience system and future mobile WiMAX networks. The prices
we will pay for these products are capped in the agreement, and
Motorola has agreed to use commercially reasonable efforts to
reduce these prices during the term. The agreement requires us
to purchase certain types of network infrastructure products
exclusively from Motorola for a period of five years, and then
51% of such equipment for the remainder of the term of the
agreement, subject to certain exceptions. Prior to
August 29, 2008, we must purchase at least a total of
$150.0 million in infrastructure products under this
agreement and subscriber products under the wireless broadband
CPE supply agreement described below from Motorola. If we decide
to resell mobile WiMax handsets, we will be required to purchase
from Motorola at least 25% of any WiMAX subscriber handsets that
we resell to our customers, so long as the capabilities and
costs of such handsets are equal to comparable products offered
by competitors. This agreement will expire on August 29,2014, but is subject to automatic renewal for subsequent one
year terms unless terminated by either of the parties. As of
September 30, 2006, we had not made any payments to
Motorola under the infrastructure agreement.
The wireless broadband system infrastructure agreement will
terminate eight years after the effective date. However,
unless 120 days written notice is given by one of the
parties that it wishes to terminate the agreement after
8 years, the agreement will renew for successive one year
terms thereafter.
Wireless
Broadband CPE Supply Agreement
We and Motorola are also party to a wireless broadband CPE
supply agreement dated August 29, 2006. Under the supply
agreement, we have agreed to purchase certain wireless broadband
subscriber products,
support, accessories and related equipment from Motorola. The
prices we will pay for these products are capped in the
agreement, and Motorola has agreed to use commercially
reasonable efforts to reduce these prices during the term. The
agreement requires us to purchase all modems and PC Cards we
provide to our subscribers from Motorola for a period of five
years, and 51% for the remainder of the term of the agreement,
subject to certain exceptions. This agreement will expire on
August 29, 2014, but is subject to automatic renewal for
subsequent one year terms unless terminated by either of
the parties. As of September 30, 2006, we had not made any
payments to Motorola under the supply agreement.
Wireless
Broadband System Services Agreement with Motorola
We entered into a wireless broadband system services agreement
with Motorola on August 29, 2006. Under the services
agreement, we may purchase certain services from Motorola. These
services include, but are not limited to, planning and design of
our network, including capacity and coverage considerations,
site selection, installation and commissioning of Motorola
network elements, integration of our network elements into the
Motorola network, acceptance testing of the Clearwire network,
program management and project administration, billing
integration and security monitoring and management. As of
September 30, 2006, we have not made any payments to
Motorola under the services agreement.
The wireless broadband system services agreement will terminate
eight years after the effective date. However, unless
120 days written notice is given by one of the parties that
it wishes to terminate the agreement after 8 years, the
agreement will renew for successive one year terms thereafter.
Advisory
Services Agreement
We are party to an advisory services agreement dated
November 13, 2003, with ERI, which is wholly-owned by
Mr. McCaw. This agreement had an initial term of three
years and renews automatically for successive one year terms
unless terminated by either party upon prior notice. ERI
provides us with advisory and consulting services, including
without limitation, advice regarding the development, ownership
and operation of communications services, long-range planning
and strategy for our development and growth and dealings with
federal, state and local regulatory authorities. In exchange for
these services, we pay ERI an annual advisory fee of $800,000
and reimburse ERI for any
out-of-pocket
expenses incurred by ERI on our behalf. Expenses under the
advisory services agreement incurred during fiscal years ended
December 31, 2003, 2004, 2005 and for the nine months ended
September 30, 2006 amounted to $341,000, $125,000, $296,000
and $679,000, respectively. For the nine months ended
September 30, 2006, the expenses reimbursed to ERI
primarily related to $578,000 for airplane and related fees as
well as other reimbursements for lodging and consulting costs.
The annual advisory fee also covers certain overhead expenses
incurred by ERI on our behalf, including expenses related to
support services, technical services personnel, administrative
support and office space for Messrs. McCaw, Wolff and
Kauser and their administrative assistants. In 2003, 2004, 2005
and for the nine months ended September 30, 2006 we paid
ERI fees of $107,000, $800,000, $800,000 and $600,000,
respectively, pursuant to the advisory services agreement.
Except for compensation indirectly resulting from fees received
by ERI under the advisory services agreement and except for
certain stock option grants, we do not directly compensate
Mr. McCaw. Additionally, in connection with this agreement,
we issued ERH warrants to purchase 1,125,000 shares of our
common stock at an exercise price of $1.00 per share. The
warrants are held by ERH and expire on November 13, 2013.
As the sole owner of ERI, Mr. McCaw has an interest in all
amounts paid by us to ERI.
Agreement
with Bell Canada
We, ERH and Bell Canada are parties to an agreement dated
March 16, 2005 that provides Bell Canada with additional
rights to those granted under the stockholders agreement and
registration rights agreement. Among the rights granted to Bell
Canada are:
•
the then current Chief Executive Officer of BCE Inc., the parent
company of Bell Canada, is to be nominated for election to our
board of directors until the earliest to occur of the date that
(i) Bell Canada and its affiliates cease to own in the
aggregate at least 5% of our total
outstanding voting shares, (ii) Bell Canada and its
affiliates cease to own in the aggregate at least
12,500,000 shares of our common stock, or (iii) any of
our competitors acquires control of Bell Canada or BCE Inc. The
Chief Executive Officer of Bell Canada, Mr. Sabia,
currently is a member of our board of directors in accordance
with this provision;
•
subject to certain exceptions and adjustments, Bell Canada is
entitled to receive additional shares of common stock for no
consideration if we sell new shares at a price less than
$4.00 per share. These rights terminated on August 29,2006;
•
until such time as Bell Canada and its affiliates hold less than
12,500,000 shares of common stock, we cannot sell any
securities to certain Canadian competitors of Bell Canada other
than in a public offering; and
•
if we terminate or commit certain breaches or defaults under our
master supply agreement with Bell Canada or BCE Nexxia
Corporation, or if certain providers of VoIP services acquire a
majority of the outstanding voting power of us or ERH, then we,
ERH, Mr. McCaw, FFW and certain affiliates cannot enforce
certain transfer restrictions and other rights under the
stockholders agreement against Bell Canada and its affiliates.
These rights will terminate upon the closing of this offering.
Master
Supply Agreement with Bell Canada and BCE Nexxia
Corporation
We and Clearwire LLC, our wholly-owned subsidiary now known as
Clearwire US LLC, are parties to a master supply agreement dated
March 16, 2005 with Bell Canada and BCE Nexxia Corporation,
or BCE Nexxia, an affiliate of Bell Canada. Under the master
supply agreement, Bell Canada and BCE Nexxia will provide or
arrange for the provision of hardware, software, procurement
services, management services and other components necessary for
us to provide VoIP telephony services to our subscribers in the
United States and will provide
day-to-day
management and operation of certain of the components and
services necessary for us to provide these services. We have
agreed to use Bell Canada and BCE Nexxia exclusively to provide
such service unless such agreement violates the rights of third
parties under our existing agreements. We also agreed to
designate Bell Canada and BCE Nexxia as our and our
affiliates’ preferred providers of VoIP telephony services
and applications in markets beyond the United States, to the
extent permitted under our existing agreements. In addition to
these services, the master supply agreement grants Bell Canada
and BCE Nexxia the right to supply certain required services and
products in support of future service offerings by us and our
affiliates. The master supply agreement can be terminated
without cause on twelve months’ notice by either party
given at any time on or after October 1, 2007.
Under the master supply agreement, we have agreed to pay BCE
Nexxia or Bell Canada a flat fee for each new subscriber of our
VoIP telephony services. We will pay this fee either by issuing
additional shares of our common stock or, in certain
circumstances, by paying cash. Under the master supply
agreement, if we have closed a round of equity financing
involving our common stock in the 90 day period prior to
the end of the calendar quarter for which payment is due, we are
required to pay this fee by issuing additional shares of our
common stock at a price equal to the price we received in the
last round of equity financing involving our common stock or
securities convertible into our common stock. If we have not
closed a round of equity financing involving our common stock,
or securities convertible into our common stock, in the
90-day
period prior to the end of the calendar quarter for which
payment is due, we have the option of paying this fee either in
cash or by issuing additional shares of our common stock at a
price equal to the offering price of the last round of equity
financing involving our common stock or securities convertible
into our common stock. The number of shares of common stock
issued will be determined based on the price per share of common
stock in our most recent round of equity financing at the time
of issuance.
Credit
Agreement with BCE Nexxia
On June 7, 2006, we borrowed $10.0 million from Bell Canada
under a credit agreement dated as of July 19, 2005. The
loan is evidenced by a promissory note dated May 31, 2006.
The loan is for the purpose of funding capital expenditures and
start-up
costs associated with the deployment of VoIP. The interest rate
is
7% per annum. Repayment of principal and accrued interest
is due July 19, 2008. The loan is secured by certain
telecommunications equipment and other tangible personal
property located at Bell Canada locations in Canada, and
associated software licenses and permits. No other Clearwire
entities are co-borrowers, guarantors or pledgors with respect
to this loan.
Agreements
with HITN and its Affiliates
Master
Spectrum Acquisition Agreement
We entered into a master spectrum acquisition agreement on
November 13, 2003 with HITN, a non-profit FCC licensee of
EBS spectrum. HITN is affiliated with José Luis Rodriguez,
who, prior to August 12, 2006 served on our board of
directors. The master spectrum acquisition agreement provides
the terms upon which HITN leases to one of our subsidiaries,
Fixed Wireless Holdings, its excess capacity on certain of its
EBS frequencies in certain markets. Under this agreement, we
paid $8.5 million in cash and issued 3,698,250 shares
of our common stock at an estimated per share value of $1.00 for
a total value of $3.7 million to HITN in 2003. In
connection with an amendment of the agreement on March 29,2004, we paid HITN an additional $3.0 million in cash and
issued to HITN an additional 1,299,220 shares of our common
stock at an estimated value per share of $1.00 for a total
estimated value of $1.3 million.
Upon reaching certain financial milestones for two consecutive
fiscal quarters, we will be required to issue HITN additional
shares of our common stock. The number of additional shares
issuable to HITN is determined by dividing (i) the lesser
of (a) $0.03 multiplied by the number of channels leased
from HITN multiplied by the estimated population covered by
spectrum leased to us under the agreement or (b) 1% of our
net operating margin for such quarters, by (ii) our then
current share price. In addition, we make ongoing monthly lease
payments for each of these leases, which lease payments totaled
approximately $34,000, $544,000, $640,000 and $180,000 in the
years ended December 31, 2003, 2004, 2005 and for the nine
months ended September 30, 2006, respectively.
Simultaneously, we entered into a warrant agreement pursuant to
which we agreed to issue to ITFS Advisors, an affiliate of
Mr. Rodriguez, warrants to purchase a total of
1,908,151 shares of our common stock at an exercise price
of $0.001 per share, based upon ITFS Advisors assisting us
in procuring agreements to lease or acquire additional spectrum.
The warrants issued to ITFS Advisors are exercisable at any
time, up to the earlier of the 10th anniversary of the
issuance date or a liquidity event (which includes an initial
public offering of the common stock of registrant).
José Luis Rodriguez ceased to be a member of our board of
directors as of August 12, 2006. As of the date of this
registration statement, none of Mr. Rodriguez, HITN, HITN
Spectrum or ITFS Consultants, LLC is a “related party”
for purposes of Item 404(a) of
Regulation S-K.
Spectrum
Access and Loan Facility Agreement with HITN and HITN
Spectrum
Under a spectrum access and loan facility agreement dated
May 24, 2005, we have the option to provide financing to
HITN Spectrum LLC, or HITN Spectrum, which is wholly-owned by
HITN, or its subsidiaries to facilitate the acquisition by HITN
Spectrum, or a wholly-owned subsidiary of HITN Spectrum, of EBS
licenses.
All obligations under the promissory notes are secured by a
security agreement granting us a first and exclusive lien on
HITN Spectrum’s or its wholly-owned subsidiary’s
assets. The obligations are further secured by a pledge
agreement granting us a first priority, exclusive pledge by HITN
of 100% of the securities of HITN Spectrum and all of its
wholly-owned subsidiaries. In addition, all obligations are
guaranteed by HITN. We may terminate this agreement at any time
upon written notice to HITN and HITN Spectrum.
Spectrum
Acquisition Consulting Agreement with ITFS Spectrum Consultants,
LLC
We entered into a spectrum acquisition consulting agreement with
ITFS Spectrum Consultants, LLC, or ISC, an affiliate of
Mr. Rodriguez, on February 1, 2005, which was amended
in April 2006. Pursuant to this agreement, ISC will provide
services to assist us in securing definitive agreements for the
acquisition of spectrum capacity of EBS or BRS channels through
spectrum license purchase, lease or sublease, or option to
purchase.
Under this agreement, during the year ended December 31,2005, we paid to ISC approximately $147,000 and issued to ISC
warrants to purchase a total of 191,891 shares of our
common stock with an exercise price of $0.05 per share. As
of September 30, 2006 warrants to purchase
12,675 shares of Class A common stock valued at
$103,000 were payable to ISC.
Indemnification
Agreements
We and Flux Fixed Wireless, LLC, an affiliate in which ERH
directly and Mr. McCaw indirectly holds an equity interest,
entered into an indemnification agreement dated
November 13, 2003, pursuant to which we are required to
indemnify, defend and hold harmless Flux Fixed Wireless and any
of its directors, officers, partners, employees, agents and
spouses and each of its and their affiliates to the fullest
extent permitted by law for any claims made against an
indemnitee by reason of the fact that the indemnitee is or was
or may be deemed to be a stockholder, director, officer,
employee, controlling person, agent or fiduciary of our company,
or any of our subsidiaries. We are obligated to pay the expenses
of any indemnitee in connection with any claims that are subject
to the agreement.
We also have entered into indemnification agreements that
require us to indemnify each of Mr. Emerson,
Mr. Sloan, Mr. Wolff, Mr. Salemme,
Mr. Kauser, Mr. Arvind Sodhani, Mr. David
Perlmutter, Mr. Michael Sabia and Mr. Peter Currie, to
the fullest extent permitted by law for any claims made against
each of these persons because he or she is, was or may be deemed
to be a stockholder, director, officer, employee, controlling
person, agent or fiduciary of Clearwire or any of our
subsidiaries. We are obligated to pay the expenses of these
persons in connection with any claims that are subject to the
agreement.
We have agreed to indemnify Mr. Butler and our other
officers and directors pursuant to the terms of our certificate
of incorporation, which provides for indemnification of our
directors and executive officers who have not otherwise entered
into an indemnification agreement with us as described above.
See the section entitled “Description of Capital
Stock — Limitations on Liability and Indemnification
of Officers and Directors.”
Acquisition
of NextNet
COM Holdings, LLC, or COM, which is currently known as ERH,
previously held a majority of the outstanding shares of NextNet.
In connection with the merger between NextNet and a wholly-owned
subsidiary of Clearwire on February 23, 2004, ERH consented
to the merger. As a result of the payment of consideration to
NextNet’s stockholders following the effectiveness of the
merger, ERH received 6,967,399 shares of our Class A
common stock valued at approximately $6.7 million. We
subsequently sold 100% of our interest in NextNet to Motorola
for $50.0 million pursuant to the purchase agreement with
Motorola as described elsewhere in this prospectus.
Commercial
Agreements between Affiliates of ERH and NextNet
Affiliates of ERH, and affiliates of our former subsidiary,
NextNet, were parties to a master purchase agreement, support
services agreement and escrow agreement dated July 9, 2003,
as amended on April 14, 2006. Under these agreements,
NextNet had agreed to sell its standard products and provide
user support to these affiliates, for which it received
$6.9 million, $9.7 million and $15.6 million for
the years ended December 31, 2004 and 2005 and the nine
months ended September 30, 2006. We sold NextNet to
Motorola on August 29, 2006 and have no further obligations
under these agreements.
We summarize below the principal terms of the agreements that
govern the senior secured notes due 2010. This summary is not a
complete description of all of the terms of the senior secured
notes.
In August 2005, we issued an initial amount of
$260.3 million aggregate principal amount of senior secured
notes due 2010. We issued our senior secured notes in
transactions exempt from or not subject to registration under
the Securities Act. We also issued warrants to the purchasers of
our senior secured notes entitling them to purchase up to
20,827,653 shares of our common stock, which we refer to as
the warrants. In February 2006, we sold additional senior
secured notes in an aggregate principal amount of
$360.4 million and warrants to purchase an additional
28,828,000 shares of our common stock.
Terms
of Our Senior Secured Notes
Our senior secured notes bear interest at 11% per annum.
Interest on our senior secured notes is payable semi-annually on
February 15 and August 15. If we do not complete this
offering by August 15, 2007, the rate on the senior secured
notes will increase by 1% per annum.
Under the terms of the agreement we are required to purchased
and pledged non-callable government securities as interest
payment collateral for our senior secured notes. As of
September 30, 2006, we continued to hold approximately
$88.7 million of these securities. Such amount is
sufficient upon receipt of scheduled principal and interest
payments thereon, to provide for the payment in full of
scheduled interest payments due on our senior secured notes
through November 15, 2007.
At our option, we may redeem our senior secured notes, in whole
or in part, at any time. At the option of each note holder, we
are obligated to offer to redeem our senior secured notes upon
the occurrence of certain specified events which result in a
change in control of our company as set forth in the indenture
governing the notes. In either case, the redemption price is
equal to 102.5% of the principal amount of our senior secured
notes redeemed plus any accrued and unpaid interest payable
thereon. In addition, upon such redemption, the holders of our
senior secured notes being redeemed are entitled to receive a
pro rata portion of any remaining interest payment collateral.
Within one year of receiving the net proceeds from an asset
sale, as defined in the indenture, certain of our subsidiaries
may apply such proceeds at their option to redeem notes on a pro
rata basis, to purchase replacement assets, or have us offer to
purchase the maximum principal amount of our senior secured
notes and other pari passu indebtedness that may be purchased
with the net proceeds of the asset sale. We refer to such an
offer as an asset sale offer. The asset sale offer price is
payable in cash and will equal 100% of the principal amount of
our senior secured notes and 100% of the pari passu indebtedness
plus the respective accrued and unpaid interest from the date of
purchase. Any net proceeds that remain outstanding a year after
the completion of an asset sale shall be used to make an asset
sale offer.
As long as our senior secured notes are outstanding, we must
comply with certain restrictive covenants in the indenture that,
among other things, prohibit or limit our ability
and/or the
ability of certain of our subsidiaries to:
•
pay dividends on, redeem or repurchase our capital stock;
•
incur additional indebtedness;
•
permit liens on any assets pledged as collateral;
•
sell all or substantially all of our assets or consolidate or
merge with or into other companies;
determine sufficient levels of compliance with FCC regulations
for our spectrum licenses;
•
engage in transactions with affiliates; and
•
engage in sale-leaseback transactions.
Security
for Our Senior Secured Notes
Together with their respective existing and future domestic
restricted subsidiaries, at the time we sold our senior secured
notes, our subsidiaries, Clearwire US LLC and Fixed Wireless
Holdings, LLC and their subsidiaries, jointly and severally
guarantee on a senior secured basis our obligations under our
senior secured notes. NextNet originally guaranteed the senior
secured notes, but was released from the guarantee when we sold
it to Motorola on August 29, 2006. Liens on all of the
assets of the guarantors, which currently constitute a
significant majority of our domestic spectrum and operating
assets, secure our senior secured notes. In addition, the
interest payment collateral that we purchased and pledged
secures our obligation to make the interest payments under our
senior secured notes through November 15, 2007.
The indenture governing our senior secured notes grants the
holders of our senior secured notes various remedies with
respect to our senior secured notes and the collateral pledged
to secure our senior secured notes in the event of a default by
us with respect to payment of our obligations under our senior
secured notes or compliance by us or our subsidiaries with the
covenants under the indenture. Among these remedies, the holders
of our senior secured notes will be entitled to accelerate our
obligations under the senior secured notes and to foreclose on
all of the assets pledged as collateral.
Terms
of the Warrants
As of September 30, 2006, the number of shares of
Class A common stock underlying the warrants was
49,655,653 shares in the aggregate, and will remain fixed
upon determination of the exercise price following the offering,
as described below. Holders may exercise their warrants at any
time following this offering, subject to the expiry of the
applicable
lock-up
period. The warrants expire on the later of August 5, 2010,
which is the fifth anniversary of their issuance, or the second
anniversary of the expiration of the
lock-up
period following this offering.
The exercise price of the warrant is the lesser of
$5.00 per share or the volume weighted average price of the
Class A common stock for the first twenty trading days
following expiration of the
lock-up
period applicable to the holder of such warrant, if any,
following this offering.
We granted the holders of the warrants registration rights
covering the shares subject to issuance under the warrants.
These registration rights are described in the section
“Certain Relationships and Related Transactions —
Registration Rights Agreements.”
Senior
Credit Facility
We summarize below the principal terms of our senior credit
facility. This summary is not a complete description of all of
the terms of the senior credit facility.
On August 21, 2006, we entered into a loan agreement with
Morgan Stanley Senior Funding, Inc., Merrill Lynch, Pierce,
Fenner & Smith Incorporated, and JPMorgan Chase Bank,
N.A. for a joint senior credit facility, or the senior credit
facility, in the amount of $125.0 million.
Terms
of the Senior Credit Facility
Loans made pursuant to the senior credit facility may be
Eurodollar Loans or ABR Loans. Loans made under the senior
credit facility will mature in eleven consecutive quarterly
installments with the first installment due on December 31,2006 and the last installment, which is a balloon payment for
most of the amount originally borrowed, due on August 18,2009. We may prepay the loans, in whole or in party, at any
time, although if we prepay any amount within the first two
years of the loan, we will be subject to a prepayment penalty.
If we, or certain of our subsidiaries, receive net proceeds in
excess of $25 million from
any asset sale, such proceeds must either be applied to the
prepayment of any loans outstanding under the senior credit
facility, or must be used for the purchase of new assets for our
business. Each borrowing under the senior credit facility will
be pro rata among the various lenders.
Each Eurodollar loan will bear interest for each day at
Eurodollar base rate plus an applicable margin percentage. The
Eurodollar base rate will be equal to the quotient of the rate
per annum determined for deposits in dollars appearing on
Page 3570 of the Telerate screed as of 11:00 a.m.,
London time, two business days prior to the beginning of the
interest period, divided by, 1.00 minus the aggregate of the
maximum rates of reserve requirements in effect on such day.
Each ABR loan will bear interest at a rate per annum equal to
the ABR plus an applicable margin percentage.
Guarantors
Pursuant to the terms of the senior credit facility, Clearwire
Spectrum Holdings, LLC, Clearwire Telecommunications Services,
LLC, Clearwire US LLC and Winbeam, Incorporated, entered into a
Guarantee and Collateral Agreement with Morgan Stanley Senior
Funding, Inc., as administrative agent, pursuant to which we
those entities, jointly and severally, guaranteed the
performance of our obligations under the senior credit facility.
In addition, the parties to the guarantee and collateral
agreement, other than Clearwire US LLC, granted a security
interest in all of their accounts, chattel paper, deposit
accounts, documents, equipment, general intangibles,
instruments, intellectual property, inventor, investment
property,
letter-of-credit
rights, goods and all books and records pertaining to the same,
and all FCC license rights.
Restrictive
Covenants and Other Matters
The loan agreement includes customary covenants, which, subject
to certain exceptions, restrict or limit our ability and the
ability of our subsidiaries to, among other things:
•
incur additional indebtedness;
•
incur liens, except for certain permitted liens;
•
sell, lease exchange or otherwise transfer any capital stock in
Clearwire Spectrum Holdings, LLC or any other subsidiary that
holds FCC license rights that are “designated
spectrum” under the loan agreement, except for certain
permitted sales;
•
declare or pay any dividend or make any other payment or
distribution on our capital stock or the capital stock of
certain of our subsidiaries;
•
redeem our capital stock or the capital stock of certain of our
subsidiaries;
•
make any advance, loan, extension of credit or capital
contribution to, or purchase any capital stock or debt
securities from, any entity;
•
engage in mergers or consolidations;
•
make any payment to, or sell, lease or transfer any properties
or assets to, or purchase property from, or enter into, amend or
renew any transaction or agreement with, any of our
affiliates; or
•
enter into sale-leaseback transactions.
The loan agreement contains customary events of default,
including failure to pay principal and interest when due, breach
of any representation or warranty or covenants in the loan
agreement, bankruptcy, or failure for any security agreement or
guarantee to be in full force and effect.
As of September 30, 2006, the outstanding balance under the
senior credit facility was $125.0 million.
The following summary of certain provisions of our capital
stock does not purport to be complete and is subject to our
Third Amended and Restated Certificate of Incorporation, our
Bylaws, as amended, and the provisions of applicable law. Copies
of our Third Amended and Restated Certificate of Incorporation
and our Bylaws, as amended, are filed as exhibits to the
registration statement, of which this prospectus is a part.
Authorized
Capitalization
Our authorized capital stock consists of:
•
700,000,000 shares of Class A common stock, par value
$0.0001 per share;
•
100,000,000 shares of Class B common stock, par value
$0.0001 per share; and
•
5,000,000 shares of preferred stock, par value
$0.0001 per share.
After this offering there will
be shares of our Class A
common stock, 85,790,057 shares of our Class B common
stock and no shares of our preferred stock outstanding. All
shares of common stock to be outstanding upon completion of this
offering will be validly issued, fully paid and nonassessable.
Capital
Stock
Immediately following the closing of this offering,
Mr. McCaw will beneficially own shares of our capital stock
representing % of the combined
voting power of our outstanding capital stock. Further, ERH,
which is controlled by Mr. McCaw, and Intel Pacific have
entered into a voting agreement in which they agreed to vote in
any election of our board of directors for four directors
designated by Mr. McCaw and two directors designated by
Intel Pacific as long as Intel Pacific holds at least 15% of our
outstanding capital stock and one director as long as Intel
Pacific holds at least 7.5% of our outstanding capital stock.
ERH’s right to cause Intel to vote its shares in favor of
four individuals designated by ERH is not subject to any minimum
share ownership requirement, which means that ERH will retain
these rights even if it no longer holds any shares of our
capital stock. The voting agreement will remain in effect after
this offering. Mr. McCaw beneficially owns
85,790,057 shares of our Class B common stock,
including 56,072,860 shares of our Class B common
stock owned directly by ERH, and 29,717,197 shares of our
Class B common stock owned by Intel Pacific. Intel Pacific
beneficially owns 85,790,057 shares of our Class B
common stock, including 29,717,197 shares owned directly
and 56,072,860 shares owned by ERH. As a result,
Mr. McCaw, Intel Pacific, and their affiliates will be able
to exercise significant control over the composition of our
board of directors as well as significant influence over the
outcome of many matters submitted to a vote of our stockholders,
including amendments to our certificate of incorporation and
mergers or other business combinations. If either Mr. McCaw
or Intel Pacific sells a material portion of his or its shares
of our capital stock, the other party will have significant
influence over the outcome of matters submitted to a vote of our
stockholders. As of November 30, 2006, there were 157
stockholders of record of our Class A common stock and two
stockholders of record of our Class B common stock. The
rights of the Class A common stock and Class B common
stock are identical, except with respect to voting and
conversion.
Voting rights. Each holder of our Class A
common stock is entitled to one vote per share on each matter
submitted to a vote of stockholders. Each holder of our
Class B common stock is entitled to ten votes per share on
each matter submitted to a vote of stockholders. Holders of our
Class A and Class B common stock vote together as a
single class on each matter submitted to a vote of the
stockholders. Our bylaws provide that the presence of holders of
shares representing a majority of the combined voting power of
our outstanding capital stock entitled to vote at a
stockholders’ meeting shall constitute a quorum. When a
quorum is present, the affirmative vote of a majority of the
votes cast is required to take action, unless otherwise
specified by law or our certificate of incorporation, and except
for the election of directors, which is determined by a
plurality vote. There are no cumulative voting rights.
Dividends. Each holder of shares of our
capital stock will be entitled to receive such dividends and
other distributions in cash, stock or property as may be
declared by our board of directors from time to time
out of our assets or funds legally available for dividends or
other distributions. We do not, however, intend to pay dividends
on our capital stock in the foreseeable future. See the section
entitled “Dividend Policy.” These rights are subject
to the preferential rights of any other class or series of our
preferred stock.
Other rights. Each holder of Class A
common stock is subject to, and may be adversely affected by,
the rights of the holders of shares of Class B common stock
or any series of preferred stock that we may designate and issue
in the future. We have granted to the holders of warrants issued
in connection with our issuance and sale of senior secured
notes, due 2010, pre-emptive rights to maintain their percentage
ownership existing prior to each sale of our equity or other
securities or instruments that are convertible into or
exchangeable or exercisable for shares of our capital stock that
we issue in connection with an offering not registered under the
Securities Act after August 5, 2005, subject to certain
limitations. These pre-emptive rights expire one year after the
completion of this offering. This offering is not subject to
such pre-emptive rights. In addition, we have granted to
Motorola, Intel Pacific and certain other stockholders
anti-dilution rights which require us, in the event we issue
certain shares of our capital stock for no consideration or at a
price less than $6.00 per share prior to the earlier of
May 29, 2007 or the closing of this offering, to
concurrently issue for no further consideration, additional of
shares of our Class A common stock. The number of shares to
be issued to each is determined based on the price at which the
shares are sold in the dilutive offering and the amount invested.
Conversion rights of Class B common
stock. Subject to obtaining any necessary
approvals of the FCC, our Class B common stock is
convertible as follows:
•
holders of shares of our Class B common stock may elect at
any time to convert such shares into an equal number of shares
of Class A common stock;
•
in the event any holder of shares of Class B common stock,
together with certain of such holder’s affiliates, hold in
the aggregate less than 5% of the total issued and outstanding
shares of Class B common stock, the holder’s
Class B common stock will automatically convert into an
equal number of shares of Class A common stock; and
•
upon any transfer of shares of Class B common stock to
anyone other than ERH or Intel, or certain affiliates of ERH or
Intel, or if such person ceases to be our affiliate or is not
otherwise under the control of our current holders of
Class B common stock the transferred Class B common
stock will automatically convert into an equal number of shares
of Class A common stock.
Rights upon liquidation. If our company is
involved in a consolidation, merger, recapitalization,
reorganization, or similar event, each holder of Class A
common stock will receive the same amount of consideration per
share, and each holder of Class B common stock will receive
the same amount of consideration per share as the Class A
common stockholders, as if the Class B common stock had
been converted into Class A common stock. If the
consideration payable to holders of our capital stock in the
transaction will consist of securities, such holders will
receive the same consideration per share, except that the
holders of Class B common stock may receive securities in
the transaction entitling them to similar conversion rights and
to ten votes per share.
Ownership and transfer restrictions. We may
restrict the ownership of shares of our capital stock by any
party if such ownership may be inconsistent with or in violation
of any provisions of the laws of the FCC, if it would limit or
impair our business activities or proposed business activities,
or if it could subject us to any regulation under the laws of
the FCC to which we would not otherwise be subject. Further, we
may at any time redeem, by payment of cash, any or all shares
beneficially owned by any alien, its representatives, a foreign
government or representative thereof, or any corporation
organized under the laws of a foreign country, at the applicable
market price (as defined in our certificate of incorporation) of
the security on the third business day before the notice of
redemption is delivered, or, if the party purchased the shares
to be redeemed within one year before the redemption date, at a
price not to exceed the purchase price paid for such shares.
We do not have any shares of preferred stock outstanding. Our
board of directors has the authority to issue shares of
preferred stock from time to time on terms it may determine, to
divide shares of preferred stock into one or more series and to
fix the designations, preferences, privileges, and restrictions
of preferred stock, including dividend rights, conversion
rights, voting rights, terms of redemption, liquidation
preference, sinking fund terms, and the number of shares
constituting any series or the designation of any series to the
fullest extent permitted by the General Corporation Law of the
State of Delaware, or DGCL. The issuance of our preferred stock
could have the effect of decreasing the trading price of our
common stock, restricting dividends on our capital stock,
diluting the voting power of our common stock, impairing the
liquidation rights of our capital stock, or delaying or
preventing a change in control of our company.
Delaware
Anti-Takeover Law and Certain Charter and Bylaw
Provisions
Certain provisions of Delaware law and our certificate of
incorporation and bylaws could make it more difficult to acquire
us by means of a tender offer, a proxy contest or otherwise, or
to remove incumbent officers and directors. These provisions,
summarized below, may discourage certain types of takeover
practices and takeover bids, and encourage persons seeking to
acquire control of our company to first negotiate with us. We
believe that the potential ability to negotiate with the
proponent of an unfriendly or unsolicited proposal to acquire or
restructure us outweigh the disadvantages of discouraging such
proposals because, among other things, negotiation of such
proposals could result in an improvement of their terms.
Delaware
Anti-Takeover Statute
We are subject to Section 203 of the DGCL, an anti-takeover
statute. In general, Section 203 prohibits a publicly held
Delaware corporation from engaging in a “business
combination” with an “interested stockholder” for
a period of three years following the date the person became an
interested stockholder, unless (with certain exceptions):
•
prior to such date, our board of directors approved either the
business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
•
upon consummation of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the number of shares
outstanding those shares owned by persons who are directors and
also officers and by employee stock plans in which employee
participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a
tender or exchange offer;
•
on or before such date, the business combination is approved by
the board of directors and authorized at an annual or special
meeting of stockholders and not by written consent, by the
affirmative vote of at least two-thirds of the outstanding
voting stock that is not owned by the interested stockholder.
Generally, a “business combination” includes:
•
a merger or consolidation involving us and the interested
stockholder;
•
a sale of 10% or more of the assets of the corporation;
•
a stock sale, subject to certain exceptions, resulting in the
transfer of the corporation’s stock to the interested
stockholder;
•
any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock or any class or
series of the corporation beneficially owned by the interested
stockholders; or
•
other transactions resulting in a financial benefit to the
interested stockholder.
Generally, an “interested stockholder” is a person
who, together with affiliates and associates, owns (or within
three years prior to the determination of interested stockholder
status, did own) 15% or more of a corporation’s voting
stock. Notwithstanding the definition of “interested
stockholder” in Section 203, our certificate of
incorporation provides that ERH and Intel Corporation shall not
be deemed to be interested stockholders for this purpose. The
fact we are subject to Section 203 would be expected to
have an anti-takeover effect with respect to transactions not
approved in advance by the board of directors, including
discouraging attempts that might result in a premium over the
market price for the shares of common stock held by stockholders.
Election
and Removal of Directors
Our bylaws require a minimum of five directors and a maximum of
eleven directors, with the number of directors at any time to be
fixed by board resolution. We currently have nine directors.
Directors are elected by a plurality of the votes present at
each annual meeting of our stockholders. Under our stockholders
agreement each of HITN, CHI and Bell Canada have the right to
nominate a member or members of our board of directors under
certain circumstances although neither HITN or CHI currently
meet the requirements. Our stockholder’s agreement will
expire upon this offering; however, Bell Canada will retain its
right to nominate a member of our board pursuant to a side
agreement between us, ERH, and Bell Canada until such time as
Bell Canada and its affiliates cease to own at least 5% of our
total outstanding voting shares, or Bell Canada ceases to own at
least 12,500,000 shares of our common stock, or any of our
competitors acquire control of Bell Canada or its parent, BCE,
Inc. ERH, which is controlled by Mr. McCaw, and Intel
Pacific have entered into a voting agreement in which they
agreed to vote in any election of our board of directors for
four directors designated by Mr. McCaw and two directors
designated by Intel Pacific as long as Intel Pacific holds at
least 15% of our outstanding capital stock and one director as
long as Intel Pacific holds at least 7.5% of our outstanding
capital stock. Mr. McCaw beneficially owns
85,790,057 shares of our Class B common stock,
including 56,072,860 shares of our Class B common
stock owned directly by ERH, and 29,717,197 shares of our
Class B common stock owned by Intel Pacific. Intel Pacific
beneficially owns 85,790,057 shares of our Class B
common stock, including 29,717,197 shares owned directly
and 56,072,8760 shares owned by ERH. As a result,
Mr. McCaw, Intel Pacific, and their affiliates will be able
to exercise significant control over the composition of our
board of directors and the outcome of many matters submitted to
a vote of our board of directors. See “Certain
Relationships and Related Transactions” for a description
of our side letter agreement with Bell Canada.
Our bylaws provide that the chairman of the board, the chief
executive officer (if a director), the president (if a
director), or a majority of the directors, may call special
meetings of the board of directors.
Special
Meetings of Stockholders
Our bylaws provide that special meetings of our stockholders may
be called by our board of directors or, subject to specified
notice requirements, by holders of not less than a majority of
our outstanding capital stock.
Requirements
for Advance Notification of Stockholder Proposals
Our bylaws establish advance notice procedures with respect to
stockholder proposals.
Limitations
on Liability and Indemnification of Officers and
Directors
Our certificate of incorporation provides that none of our
directors shall be liable to us or our stockholders for monetary
damages for any breach of fiduciary duty as a director, except
to the extent otherwise required by the DGCL. The effect of this
provision is to eliminate our rights, and our stockholders’
rights, to recover monetary damages against a director for
breach of a fiduciary duty of care as a director. This provision
does not limit or eliminate our right, or the right of any
stockholder, to seek non-monetary relief, such as an injunction
or rescission in the event of a breach of a director’s duty
of care. In addition, our certificate of incorporation provides
that if the DGCL is amended to authorize the further elimination
or limitation of the liability of a director, then the liability
of the directors shall be eliminated or limited to the fullest
extent permitted by the DGCL, as so amended. These provisions
will not alter the liability of directors under federal or state
securities laws. Our certificate of incorporation also includes
provisions for the indemnification of our directors and officers
to the fullest extent permitted by Section 145 of the DGCL.
Further, we have entered into indemnification agreements with
certain of our directors and officers which require us, among
other things, to indemnify them against certain liabilities
which may arise by reason of the directors’ status or
service as a director, other than liabilities arising from bad
faith or willful misconduct of a culpable nature. We also intend
to maintain director and officer liability insurance, if
available on reasonable terms.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or
persons controlling the registrant pursuant to the foregoing
provisions, the registrant has been informed that in the opinion
of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is
therefore unenforceable.
Corporate
Opportunities and Transactions with Intel, ERH, and their
Affiliates
In recognition that directors, officers, stockholders, members,
managers or employees of Intel, ERH and their affiliates may
serve as our directors or officers, and that Mr. McCaw, ERH
and their affiliates, or the ERH Entities and Intel Corporation
may engage in similar activities or lines of business that we
do, our certificate of incorporation provides for the allocation
of certain corporate opportunities between us, Intel and the ERH
Entities. Specifically, neither Intel nor any of the ERH
Entities or any director, officer, stockholder, member, manager
or employee of Intel or the ERH Entities has any duty to refrain
from engaging directly or indirectly in the same or similar
business activities or lines of business that we do or from
employing any of our officers or employees. However, the side
agreement with Intel does restrict Mr. McCaw’s ability
to compete with us. In the event that Intel Corporation or an
ERH Entity, for so long as Intel Corporation or such ERH Entity
serves as one of our directors or officers of our company,
acquires knowledge of a potential transaction or matter which
may be a corporate opportunity for them and us, we will not have
any expectancy in such corporate opportunity, and Intel
Corporation or such ERH Entity will not have any duty to
communicate or offer such corporate opportunity to us and may
pursue or acquire such corporate opportunity for themselves or
direct such opportunity to another person. In addition, if any
of our directors or officers serve as a director, officer,
member, manager or employee of Intel or any ERH Entity and
acquires knowledge of a potential transaction or matter which
may be a corporate opportunity for us or Intel or an ERH Entity,
we will not have any expectancy in such corporate opportunity
unless such corporate opportunity is expressly offered to such
person in his or her capacity as our director or officer. Our
certificate of incorporation provides that any amendment of
these provisions requires the affirmative vote of at least 75%
of the voting power of all shares of our outstanding common
stock.
In recognition that we may engage in material business
transactions with Intel or the ERH Entities, or with our
directors or one or more entities in which our directors have a
financial interest, our certificate of incorporation provides
that Intel, the ERH Entities, and any of our directors or
officers who also serve as a director, officer, stockholder,
member, manager or employee of another entity or have a
financial interest in another entity will have fully satisfied
and fulfilled his, her or its fiduciary duty to us and our
stockholders with respect to such transaction, if:
•
the transaction was fair to us as of the time it was authorized,
approved or ratified by our board, a board committee, or our
stockholders; or
•
the material facts of the transaction were disclosed and the
transaction was approved in good faith by either (i) our
directors, or a committee of directors, who are disinterested in
the
transaction, or (ii) the holders of a majority of the then
outstanding voting stock, excluding the stockholders having an
interest in the transaction, voting as a single class; or
•
the transaction is effected pursuant to, and consistent with,
guidelines established in good faith, after disclosure of all
material facts, by either (i) our directors, or a committee
of directors, who are disinterested in the transaction, or
(ii) the holders of a majority of the then outstanding
voting stock, excluding the stockholders having an interest in
the transaction, voting as a single class.
Authorized
but Unissued Shares
Our authorized but unissued shares of common stock and preferred
stock will be available for future issuance without your
approval. We may use additional shares for a variety of
corporate purposes, including future public offerings to raise
additional capital, corporate acquisitions and employee benefit
plans. The existence of authorized but unissued shares of common
stock and preferred stock could render more difficult or
discourage an attempt to obtain control of us by means of a
proxy contest, tender offer, merger or otherwise.
Supermajority
Provisions
The DGCL provides generally that the affirmative vote of a
majority in voting power of the outstanding shares entitled to
vote is required to amend our certificate of incorporation,
unless the certificate of incorporation or bylaws require a
greater percentage. Our organizational documents provide that
the following provisions in the certificate of incorporation or
bylaws may be amended only by a vote of two-thirds or more in
voting power of all the outstanding shares of our capital stock
entitled to vote:
•
the limitation on the liability of our directors to us and our
stockholders and the obligation to indemnify and advance
reasonable expenses to the directors and officers to the fullest
extent authorized by the DGCL;
•
the provisions relating to amendment of our certificate of
incorporation by the affirmative vote of the holders of a
majority of our capital stock;
•
the provisions relating to corporate opportunities and
transactions with Mr. McCaw, Intel Corporation, the ERH
Entities, our directors and officers, and other
affiliates; and
•
the supermajority voting requirements listed above.
In addition, our certificate of incorporation grants our board
of directors the authority to amend and repeal our bylaws
without a stockholder vote in any manner not inconsistent with
the laws of the State of Delaware or our certificate of
incorporation.
Trading
and Listing
We have applied for listing of our Class A common stock on
the Nasdaq Global Market under the trading symbol
“CLWR.”
Transfer
Agent and Registrar
The transfer agent and registrar for our common stock is
.
Prior to this offering, there has been no public market for
shares of our common stock. Future sales of substantial amounts
of our common stock in the public market could adversely affect
prevailing market prices and could impair our ability to raise
capital through equity securities.
Upon completion of this offering, shares of our common stock
will be outstanding, based on 327,946,174 shares of
Class A common stock and 85,790,057 shares of
Class B common stock outstanding as of November 30,2006, assuming no exercise of the underwriters’
over-allotment option and no exercise of outstanding options or
warrants. Of our outstanding shares, the shares of common stock
sold in this offering will be freely tradable without
restriction or further registration under the Securities Act,
except that shares owned by our “affiliates,” as that
term is defined in Securities Act Rule 144 generally may be
sold only in compliance with the Rule 144 limitations
described below. Additional shares will be available for sale in
the public market as follows:
•
on the date of this prospectus, shares will be available for
immediate sale;
•
between the date of this prospectus and 90 days after the
date of this prospectus, shares will be available for sale
pursuant to Rule 144(k);
•
90 days after the date of this prospectus, shares will be
available for sale pursuant to Rules 144 or 701;
•
between 90 days and 180 days after the date of this
prospectus, shares will be available for sale pursuant to
Rules 144, 144(k) or 701;
•
180 days after the date of this prospectus, shares will be
available for sale upon to the expiration of
lock-up
agreements or pursuant to Rules 144, 144(k) or 701; and
•
at various times thereafter, shares will become available for
sale upon expiration of applicable holding periods.
Upon completion of this offering, our existing stockholders will
own shares of common stock representing an
aggregate % ownership interest in us after the
offering
(or shares
of common stock representing a % aggregate ownership
interest in us, assuming the underwriters exercise their
over-allotment option in full).
We may issue shares of common stock from time to time as
consideration for future acquisitions, investments or other
corporate purposes. In the event that any such acquisition,
investment or other transaction is significant, the number of
shares of common stock that we may issue may in turn be
significant. In addition, we also may grant registration rights
covering shares of common stock issued in connection with any
such acquisitions and investments.
Lock-Up
Arrangements
We, certain of our existing security holders, our executive
officers, our directors and affiliates, ERH, Intel and Motorola
have agreed, with specified exceptions, not to sell or transfer
any of our common stock for 180 days after the date of this
prospectus without first obtaining the written consent of the
representatives of the underwriters on behalf of the
underwriters. Specifically, we and these other individuals have
agreed not to directly or indirectly:
•
offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase, or otherwise
transfer or dispose of, directly or indirectly, any shares of
our common stock, or any securities convertible into or
exercisable or exchangeable for any shares of our common stock
or any right to acquire shares of our common stock; or
•
enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences
of ownership of the common stock, whether any such transaction
described above is to be settled by delivery of common stock or
such other securities, in cash or otherwise.
As
of ,
2006, shares
of our capital stock are subject to
lock-up
agreements.
As of November 30, 2006, options to purchase
33,951,450 shares of our common stock were outstanding.
Upon completion of this offering, we intend to file a
Form S-8
registration statement under the Securities Act to register the
issuance of all 33,951,450 shares of common stock subject
to outstanding options and up to an additional
15,908,071 shares of common stock issuable under our stock
option plan. Accordingly, shares of common stock issued under
this plan will be eligible for sale in the public markets,
subject to applicable securities laws, vesting restrictions and
the lock-up
agreements described above. See the section entitled
“Management — 2003 Stock Option Plan.”
Beginning 180 days after the date of this offering, holders
of shares of our common stock will be entitled to have their
shares included for sale in subsequent registered offerings of
our common stock. Certain of these stockholders also will be
entitled to cause us to register resales of their shares
beginning, with respect to some holders, on the first
anniversary of this offering, and with respect to other holders,
three months thereafter. In addition, certain holders of our
common stock have the right, at any time six months after the
effective date of this prospectus, to require us to file a
registration statement for the registration of shares of common
stock held by them. Further, immediately following this
offering, holders of warrants exercisable into shares of our
common stock will be able to require us to file a registration
statement with respect to the shares issuable upon exercise of
their warrants. However, holders of warrants entitled to require
such registration have entered into an agreement with us not to
sell, pledge or otherwise dispose of shares received upon
exercise of their warrants for a period of 180 days after
the date of this prospectus, although these holders may require
us to file a registration statement relating to shares issuable
upon exercise of their warrants on or no later than
120 days after the effective date of this prospectus. See
the section entitled “Certain Relationships and Related
Transactions — Registration Rights Agreements.”
Rule 144
In general, under Rule 144 as currently in effect,
beginning 90 days after the date of this prospectus, any
person, including an affiliate of Clearwire, who has
beneficially owned shares of our common stock for a period of at
least one year is entitled to sell, within any three-month
period, a number of shares that does not exceed the greater of:
•
1% of the then-outstanding shares of common stock; and
•
the average weekly trading volume in the common stock on the
Nasdaq Market, assuming our common stock is quoted on that
exchange, during the four calendar weeks preceding the date on
which the notice of the sale is filed with the Securities and
Exchange Commission.
Sales under Rule 144 are also subject to provisions
relating to notice, manner of sale, volume limitations and the
availability of current public information about us.
Under Rule 144(k), a person who is not deemed to have been
one of our affiliates at any time during the three months
preceding a sale, and who has beneficially owned the shares for
at least two years, including the holding period of any prior
owner other than an “affiliate,” is entitled to sell
the shares without complying with the manner of sale, public
information, volume limitation or notice provisions of
Rule 144.
Rule 701
In general, under Rule 701 of the Securities Act as
currently in effect, each of our employees, consultants or
advisors who purchases shares from us in connection with a
compensatory stock plan or other written agreement is eligible
to resell those shares 90 days after the effective date of
this offering in reliance on Rule 144, but without
compliance with some of the restrictions, including the holding
period, contained in Rule 144.
The following is a general discussion of the material
U.S. federal income and estate tax consequences of the
purchase, ownership and disposition of our Class A common
stock by a
non-U.S. holder.
In general, a
non-U.S. holder
is a beneficial owner of Class A common stock that is:
•
an individual who is not a citizen or resident of the U.S.;
•
a corporation or other entity treated as a corporation for
U.S. tax purposes that is not organized or created under
U.S. law;
•
an estate that is not taxable in the U.S. on its worldwide
income; or
•
a trust that is either not subject to primary supervision over
its administration by a U.S. court or not subject to the
control of a U.S. person with respect to substantial trust
decisions.
If you are a partner in a partnership, or an entity treated as a
partnership for U.S. federal income tax purposes, that
holds Class A common stock, your tax treatment generally
will depend upon your U.S. tax status and upon the
activities of the partnership. If you are a partner of a
partnership (or entity treated as a partnership) holding
Class A common stock, we suggest that you consult your tax
advisor.
If you are an individual, who is not a citizen or resident of
the United States, you may be deemed to be a resident alien,
rather than a nonresident alien, in any calendar year by virtue
of being present in the United States for at least 31 days
in that calendar year and for an aggregate of at least
183 days during a three-year period ending in that calendar
year (counting for such purposes all of the days present in that
year, one-third of the days present in the immediately preceding
year, and one-sixth of the days present in the second preceding
year). Resident aliens are generally subject to
U.S. federal income tax as if they were U.S. citizens.
This discussion is based on the Internal Revenue Code of 1986,
as amended, or the Code, the final and temporary
U.S. Treasury Regulations promulgated thereunder and
published administrative and judicial interpretations thereof,
all as of the date of this prospectus and all of which are
subject to change, possibly with retroactive effect.
This discussion does not address all aspects of
U.S. federal taxation, and in particular is limited as
follows:
•
the discussion assumes that you hold your Class A common
stock as a capital asset and that you do not have a special tax
status, such as a financial institution, an insurance company, a
tax-exempt organization or a broker-dealer or trader in
securities;
•
the discussion does not consider tax consequences that depend
upon your particular tax situation;
•
the discussion does not consider special tax provisions that may
be applicable to you if you have relinquished
U.S. citizenship or residence;
•
the discussion does not cover state, local or
non-U.S. tax
consequences;
•
the discussion does not consider the tax consequences for
stockholders, partners, owners or beneficiaries of a
non-U.S. holder; and
•
we have not requested a ruling from the Internal Revenue
Service, or IRS, on the tax consequences of owning the
Class A common stock. As a result, the IRS could disagree
with portions of this discussion.
Each prospective purchaser of Class A common stock is
advised to consult a tax advisor with respect to current and
possible future U.S federal income and estate tax consequences
of purchasing, owning and disposing of our Class A common
stock as well as any tax consequences that may arise under the
laws of any state, municipality or other taxing jurisdiction
within or outside the United States.
Distributions paid on the shares of Class A common stock
generally will constitute dividends for U.S. federal income
tax purposes to the extent paid out of our current or
accumulated earnings and profits, as determined under
U.S. federal income tax principles. To the extent that the
amount of any distribution exceeds our current and accumulated
earnings and profits for a taxable year, the distribution first
will be treated as a tax-free return of your basis in the shares
of Class A common stock, reducing that adjusted basis, and
the balance of the distribution in excess of your adjusted basis
will be taxed as capital gain recognized on a sale or exchange
of the Class A common stock (as discussed below).
Subject to the discussion below, a U.S. withholding tax of
30% generally will be imposed on any distribution we make to
you, to the extent it constitutes a dividend under the rules
described in the preceding paragraph, unless a reduced
withholding tax rate is specified by an applicable income tax
treaty. To obtain the benefit of a reduced withholding tax rate
under a treaty, you generally must provide us or our paying
agent, as the case may be, with a properly completed IRS
Form W-8BEN
(or other applicable form) certifying that you qualify for a
reduced withholding tax rate. If you hold Class A common
stock through a foreign partnership or a foreign intermediary,
the partnership or intermediary may also need to satisfy
certification requirements.
The withholding tax described in the preceding paragraph does
not apply if you are engaged in a trade or business in the
United States and if dividends on the Class A common stock
are effectively connected with the conduct of such trade or
business and, if an applicable U.S. income tax treaty
requires, are attributable to a permanent establishment which
you maintain in the United States. You will be required, under
applicable Treasury Regulations, to provide us or our paying
agent, as the case may be, with a properly completed IRS
Form W-8ECI
(or other applicable form) in order to claim an exemption from
U.S. withholding tax under the rule discussed above.
Although exempt from U.S. withholding tax, (provided the
certification requirements discussed above are met), you
generally will be subject to U.S. federal income tax on
such dividends in the same manner as if you were a
U.S. resident. Non-corporate U.S. residents currently
are subject to a maximum U.S. federal income tax rate of
15% on dividends, provided certain holding requirement are met.
If you are a foreign corporation, you may be subject to an
additional “branch profits tax” imposed at a rate of
30% (or a lower treaty rate) on your effectively connected
earnings and profits, as adjusted for certain items.
If withholding results in an overpayment of tax, you may obtain
a refund of the excess by timely filing with the IRS an
appropriate claim for refund along with the required information.
Gain On
Disposition Of Class A common stock
You generally will not be subject to U.S. federal income
tax on gain realized on a sale or other disposition of
Class A common stock unless:
•
the gain is effectively connected with a trade or business you
conduct in the United States and, if a tax treaty is applicable,
the gain is attributable to a permanent establishment you
maintain in the United States, in which case the gain will be
subject to U.S. federal income tax as if you were a
U.S. resident. If you are a foreign corporation, you may be
subject to an additional branch profits tax equal to 30% of your
effectively connected earnings and profits for the taxable year,
as adjusted for certain items, unless you qualify for a lower
rate under an applicable income tax treaty and you properly
document such qualification;
•
we are or have been a “U.S. real property holding
corporation”, USRPHC, at any time during the shorter of the
five-year period preceding the disposition or the period during
which you hold the Class A common stock. We believe that we
are not currently and do not expect to become in the future a
USRPHC for U.S. federal income tax purposes; or
•
if you (i) are an individual, (ii) hold the
Class A common stock as a capital asset, (iii) are
present in the United States for 183 or more days during the
taxable year of the sale and (iv) certain conditions are
met, then you will be subject to a flat 30% tax on the gain
derived
from the sale, which may be offset by U.S. source capital
losses, even though you are not considered a resident of the
United States.
If you are not a corporation and you are subject to
U.S. federal income tax on gain you recognize on the sale
or exchange of Class A common stock under either of the
first two of these exceptions, a reduced U.S. federal
income tax rate of 15% may apply to such gain, provided that you
have held the Class A common stock for more than one year.
Information
Reporting Requirements And Backup Withholding
We must report annually to the IRS the amount of dividends paid
to each
non-U.S. holder,
the name and address of the holder, and the amount of any tax
withheld from the payment, regardless of whether withholding was
required. Copies of the information returns reporting the
dividends and withholding may also be made available to the tax
authorities in the country in which the
non-U.S. holder
is a resident under the provisions of an applicable income tax
treaty or agreement.
Under some circumstances, if you fail to certify your status as
a
non-U.S. holder
on a properly completed IRS
Form W-8BEN,
under penalty of perjury, or payor has actual knowledge or
reason to know that you are not a U.S. person as defined in
the Code, additional information reporting and backup
withholding is required on distributions paid to you with
respect to Class A common stock. Backup withholding
currently applies at a rate of 28%.
In addition, you may have to comply with specific certification
procedures to establish your
non-U.S. status
in order to avoid information reporting and backup withholding
on proceeds from a disposition of Class A common stock.
Backup withholding is not an additional tax. Rather, the
U.S. federal income tax liability of persons subject to
backup withholding will be reduced by the amount of tax
withheld. When withholding results in an overpayment of taxes, a
refund may be obtained if the required information is timely
furnished to the IRS.
Federal
Estate Tax
An individual
non-U.S. holder
who owns Class A common stock at the time of his or her
death, or who had made certain lifetime transfers of an interest
in Class A common stock while retaining certain powers,
rights or interests in the stock, will be required to include
the value of that Class A common stock in his or her gross
estate for U.S. federal estate tax purposes, unless an
applicable estate tax treaty provides otherwise.
The foregoing discussion is only a summary of material
U.S. federal income and estate tax consequences of the
ownership, sale or other disposition of Class A common
stock by
non-U.S. holders.
You are urged to consult your own tax advisor with respect to
the particular tax consequences to you of ownership and
disposition of Class A common stock, including the effect
of any U.S., state, local,
non-U.S. or
other tax laws, and any applicable income or estate tax
treaty.
Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Morgan Stanley & Co. Incorporated and J.P. Morgan
Securities Inc. are acting as representatives of the
underwriters named below. Subject to the terms and conditions
described in a purchase agreement between us and the
underwriters, we have agreed to sell to the underwriters, and
the underwriters severally have agreed to purchase from us, the
number of shares listed opposite their names below.
Number
Underwriter
of Shares
Merrill Lynch, Pierce, Fenner
& Smith
Incorporated
Morgan Stanley & Co.
Incorporated
J.P. Morgan Securities
Inc.
Wachovia Capital Markets, LLC
Bear, Stearns & Co.
Inc.
Citigroup Global Markets Inc.
Jefferies & Company,
Inc.
Raymond James &
Associates, Inc.
ThinkEquity Partners LLC
Stifel, Nicolaus & Company,
Incorporated
Total
The underwriters have agreed to purchase all of the shares sold
under the purchase agreement if any of these shares are
purchased. If an underwriter defaults, the purchase agreement
provides that the purchase commitments of the nondefaulting
underwriters may be increased or the purchase agreement may be
terminated.
We have agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act, or
to contribute to payments the underwriters may be required to
make in respect of those liabilities.
The underwriters are offering the shares, subject to prior sale,
when, as and if issued to and accepted by them, subject to
approval of legal matters by their counsel, including the
validity of the shares, and other conditions contained in the
purchase agreement, such as the receipt by the underwriters of
officer’s certificates and legal opinions. The underwriters
reserve the right to withdraw, cancel or modify offers to the
public and to reject orders in whole or in part.
Commissions
and Discounts
The representatives have advised us that the underwriters
propose initially to offer the shares to the public at the
initial public offering price on the cover page of this
prospectus and to dealers at that price less a concession not in
excess of $ per share. The
underwriters may allow, and the dealers may reallow, a discount
not in excess of $ per share
to other dealers. After the initial public offering, the public
offering price, concession and discount may be changed.
The following table shows the public offering price,
underwriting discount and proceeds before expenses to us. The
information assumes either no exercise or full exercise by the
underwriters of their over-allotment option.
Per Share
Without Option
With Option
Public offering price
$
$
$
Underwriting discount
$
$
$
Proceeds, before expenses, to
Clearwire Corporation
The expenses of the offering, not including the underwriting
discount, are estimated at $ and
are payable by us.
Over-allotment
Option
We have granted an option to the underwriters to purchase up to
additional shares at the public offering price less the
underwriting discount. The underwriters may exercise this option
for 30 days from the date of this prospectus solely to
cover any over-allotments. If the underwriters exercise this
option, each will be obligated, subject to conditions contained
in the purchase agreement, to purchase a number of additional
shares proportionate to that underwriter’s initial amount
reflected in the above table.
No Sales
of Similar Securities
We and our executive officers and directors and all existing
stockholders have agreed, with exceptions, not to sell or
transfer any common stock for 180 days after the date of
this prospectus without first obtaining the written consent of
the representatives. Specifically, we and these other
individuals have agreed not to directly or indirectly:
•
offer, pledge, sell or contract to sell any common stock;
•
sell any option or contract to purchase any common stock;
•
purchase any option or contract to sell any common stock;
•
grant any option, right or warrant for the sale of any common
stock;
•
lend or otherwise dispose of or transfer any common stock;
•
request or demand that we file a registration statement related
to the common stock; or
•
enter into any swap or other agreement that transfers, in whole
or in part, the economic consequence of ownership of any common
stock whether any such swap or transaction is to be settled by
delivery of shares or other securities, in cash or otherwise.
This lockup provision applies to common stock and to securities
convertible into or exchangeable or exercisable for or repayable
with common stock. It also applies to common stock owned now or
acquired later by the person executing the agreement or for
which the person executing the agreement later acquires the
power of disposition.
Quotation
on the Nasdaq Global Market
We expect the shares to be approved for quotation on the Nasdaq
Global Market, subject to notice of issuance, under the symbol
“CLWR.”
Before this offering, there has been no public market for our
common stock. The initial public offering price will be
determined through negotiations between us and the
representatives and lead managers. In addition to prevailing
market conditions, the factors to be considered in determining
the initial public offering price are:
•
the valuation multiples of publicly traded companies that the
representatives and the lead managers believe to be comparable
to us;
•
our financial information;
•
the history of, and the prospects for, our company and the
industry in which we compete;
•
an assessment of our management, its past and present
operations, and the prospects for, and timing of, our future
revenues;
the above factors in relation to market values and various
valuation measures of other companies engaged in activities
similar to ours.
An active trading market for the shares may not develop. It is
also possible that after the offering the shares will not trade
in the public market at or above the initial public offering
price.
The underwriters do not expect to sell more than 5% of the
shares in the aggregate to accounts over which they exercise
discretionary authority.
Price
Stabilization, Short Positions and Penalty Bids
Until the distribution of the shares is completed, SEC rules may
limit underwriters and selling group members from bidding for
and purchasing our common stock. However, the representatives
may engage in transactions that stabilize the price of the
common stock, such as bids or purchases to peg, fix or maintain
that price.
If the underwriters create a short position in the common stock
in connection with the offering, i.e., if they sell more shares
than are listed on the cover of this prospectus, the
representatives may reduce that short position by purchasing
shares in the open market. The representatives may also elect to
reduce any short position by exercising all or part of the
over-allotment option described above. Purchases of the common
stock to stabilize its price or to reduce a short position may
cause the price of the common stock to be higher than it might
be in the absence of such purchases.
The representatives may also impose a penalty bid on
underwriters and selling group members. This means that if the
representatives purchase shares in the open market to reduce the
underwriter’s short position or to stabilize the price of
such shares, they may reclaim the amount of the selling
concession from the underwriters and selling group members who
sold those shares. The imposition of a penalty bid may also
affect the price of the shares in that it discourages resales of
those shares.
Neither we nor any of the underwriters makes any representation
or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of
the common stock. In addition, neither we nor any of the
underwriters makes any representation that the representatives
or the lead managers will engage in these transactions or that
these transactions, once commenced, will not be discontinued
without notice.
Reserved
Shares
At our request, the underwriters have reserved for sale, at the
initial public offering price, up
to
Class A common shares, offered by this prospectus for sale
to some of our directors, officers and employees. If these
persons purchase reserved Class A common shares, this will
reduce the number of Class A common shares available for
sale to the general public. Any reserved common shares that are
not orally confirmed for purchase within one day of the pricing
of this offering will be offered by the underwriters to the
general public on the same terms as the other Class A
common shares offered by this prospectus.
Electronic
Distribution
Merrill Lynch will be facilitating Internet distribution for
this offering to certain of its Internet subscription customers.
Merrill Lynch intends to allocate a limited number of shares for
sale to its online brokerage customers. An electronic prospectus
is available on the Internet Web site maintained by Merrill
Lynch. Other than the prospectus in electronic format, the
information on the Merrill Lynch Web site is not part of this
prospectus.
Other
Relationships
Each of the representatives of the underwriters acted as a
placement agent of our senior secured notes and warrants and, in
the future, the underwriters may, from time to time, engage in,
investment banking and other commercial dealings in the ordinary
course of business with us.
In connection with our note and warrant financing in August 2005
and February 2006, affiliates of Merrill Lynch, Pierce,
Fenner & Smith Incorporated currently own approximately
$94,244,600 in aggregate principal amount of our senior secured
notes due 2010 and warrants to purchase 5,520,000 shares of
our Class A common stock and hold 4,614,379 shares of
our Class A common stock, some of which were acquired in
connection with our August 2006 preemptive rights offerings in
connection with the investments in us by Intel Pacific and
Motorola discussed elsewhere in this prospectus. These
affiliates of Merrill Lynch may,from time to time, effect
transactions in these securities for its own account in the
ordinary course of business.
In addition, Morgan Stanley Senior Funding, Inc., an affiliate
of Morgan Stanley & Co. Incorporated, is the
administrative agent and a lender under our Senior Credit
Facility. Merrill Lynch, Pierce, Fenner & Smith
Incorporated is the syndication agent and Merrill Lynch Capital
Corporation, an affiliate of Merrill Lynch, Pierce,
Fenner & Smith Incorporated, is a lender under our
Senior Credit Facility. JPMorgan Chase Bank, N.A. is the
documentation agent and a lender under our Senior Credit
Facility. In addition, Morgan Stanley & Co. Incorporated and
an affiliate Merrill Lynch, Pierce, Fenner & Smith
Incorporated acted as financial advisors to us in the
investments in us by Intel and Motorola discussed elsewhere in
this prospectus. An affiliate of Merrill Lynch, Pierce, Fenner
& Smith Incorporated also
received shares
of our common stock pursuant to our preemptive rights offering
in August 2006, in connection with these same investments. They
have received customary fees and commissions for these
transactions.
Each underwriter has represented, warranted and agreed that:
•
it has not made and will not make an offer of the shares to the
public in the United Kingdom prior to the publication of
prospectus in relation to the shares of our common stock and the
offer that has been approved by the Financial Services Authority
(“FSA”) or, where appropriate, approved in another
Member State and notified to the FSA, all in accordance with the
Prospectus Directive, except that it may make an offer of the
shares to persons who fall within the definition of
“qualified investor” as that term is defined in
Section 86(1) of the Financial Services and Markets Act
2000 (“FSMA”) or otherwise in circumstances which do
not result in an offer of transferable securities to the public
in the United Kingdom within the meaning of the FSMA;
•
it has only communicated or caused to be communicated and will
only communicate or cause to be communicated any invitation or
inducement to engage in investment activity (within the meaning
of Section 21 of the FSMA) received by it in connection
with the issue or sale of any shares in circumstances in which
Section 21(1) of FSMA does not apply to us; and
•
it has complied and will comply with all applicable provisions
of FSMA with respect to anything done by it in relation to the
shares in, from, or otherwise involving the United Kingdom.
The validity of the issuance of the shares of common stock
offered hereby and certain other legal matters relating to this
offering will be passed upon for us by Davis Wright Tremaine,
LLP, Seattle, Washington. Certain legal matters relating to this
offering will be passed upon for us by Kirkland & Ellis
LLP, New York, New York. Certain legal matters relating to this
offering will be passed on for the underwriters by Simpson
Thacher & Bartlett LLP, Palo Alto, California.
Benjamin G. Wolff, our Co-President and Co-Chief Executive
Officer, was a lawyer at Davis Wright Tremaine LLP from August
1994 until April 2004. Mr. Wolff’s spouse is a partner
with Davis Wright Tremaine LLP. Davis Wright Tremaine LLP has
rendered substantial legal services to us since our formation.
Davis Wright Tremaine LLP continues to provide legal services to
us, including services in connection with this offering.
The financial statements as of December 31, 2005, and 2004
and for the years ended December 31, 2005 and 2004 and the
period from October 27, 2003 (inception) through
December 31, 2003 included in this prospectus have been
audited by Deloitte & Touche LLP, an independent
registered public accounting firm, as stated in their report
appearing herein and elsewhere in the registration statement,
and are included in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.
We have filed with the Securities and Exchange Commission a
registration statement on
Form S-1
under the Securities Act to register our Class A common
stock being offered in this prospectus. This prospectus, which
forms part of the registration statement, does not contain all
the information included in the registration statement and the
exhibits and schedules thereto. You will find additional
information about us and our common stock in our Securities and
Exchange Commission filings and the registration statement with
respect to the statement contained in this prospectus regarding
the contents of any agreement or any other document, in each
instance, the statement is qualified in all respects by the text
of the agreement or document, a copy of which has been filed as
an exhibit to the registration statement. Our Securities and
Exchange Commission filings and the registration statement and
the exhibits and schedules thereto may be inspected and copied
at the Securities and Exchange Commission’s Public
Reference Room, 100 F Street, N.E., Washington, D.C. 20549.
You may obtain information on the operation of the Public
Reference Room by calling the Securities and Exchange Commission
at
1-800-SEC-0330.
The Securities and Exchange Commission also maintains an
Internet site (http://www.sec.gov) that contains reports, proxy
and information statements, and other information regarding
issuers who file electronically with the Securities and Exchange
Commission.
Upon completion of this offering, we will be subject to the
information reporting requirement of the Securities Exchange Act
of 1934 and we intend to file reports, proxy statements and
other information with the Securities and Exchange Commission.
We have audited the accompanying consolidated balance sheets of
Clearwire Corporation and subsidiaries (the “Company”)
as of December 31, 2005 and 2004, and the related
consolidated statements of operations, shareholders’
equity, and cash flows for the years ended December 31,2005 and 2004, and for the period from October 27, 2003
(inception) to December 31, 2003. 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 consolidated financial
position of Clearwire Corporation and subsidiaries as of
December 31, 2005 and 2004, and the results of their
operations and their cash flows for the years ended
December 31, 2005 and 2004, and for the period from
October 27, 2003 (inception) to December 31, 2003 in
conformity with accounting principles generally accepted in the
United States of America.
Accounts receivable — net
(includes amounts due from related parties of $0, $3,882 and $3)
1,635
9,149
5,211
Notes receivable
4,105
—
10,000
Inventory
1,308
10,245
16,250
Prepaid spectrum license fees
29,636
19,860
8,897
Prepaids and other assets
18,563
9,744
1,177
Total current assets
1,379,272
203,637
134,814
Property, plant and
equipment — net
248,653
145,584
13,126
Restricted cash —
long-term
9,515
8,343
3,469
Restricted investments —
long-term
16,094
27,026
—
Prepaid spectrum license
fees — long-term
182,207
81,868
47,439
Spectrum licenses and other
intangible assets — net
166,629
115,255
42,248
Goodwill
32,644
16,623
9,209
Investments in affiliates
13,081
18,923
9,132
Other assets
24,497
10,659
3,868
TOTAL ASSETS
$
2,072,592
$
627,918
$
263,305
LIABILITIES AND
SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable (includes related
party balances of $3,630, $0 and $0)
$
25,328
$
29,245
$
11,939
Accrued expenses and other
liabilities:
Interest
9,188
11,590
—
Salaries and benefits
8,100
8,052
4,237
Other
31,807
26,296
425
Deferred rent
6,447
335
596
Deferred revenue (includes related
party balances of $0, $1,328 and $455)
4,106
3,002
1,354
Due to affiliate
361
348
181
Current portion of long-term debt
1,250
—
—
Total current liabilities
86,587
78,868
18,732
Long-term debt (net of discount of
$115,203, $50,385 and $0)
639,243
209,961
—
Other long-term liabilities
31,858
19,115
1,308
Total liabilities
757,688
307,944
20,040
MINORITY INTEREST
2,590
1,282
1,895
COMMITMENTS AND CONTINGENCIES
—
—
—
SHAREHOLDERS’ EQUITY:
Preferred stock, par value $0.0001,
5,000,000 shares authorized; 0 shares issued and
outstanding
—
—
—
Common stock, par value $0.0001,
and additional paid-in capital, 800,000,000 shares
authorized; Class A, 322,939,029, 168,556,831 and
129,160,469 shares issued and outstanding
1,440,442
436,455
218,411
Class B, 85,790,057,
56,072,860 and 56,072,860 shares issued and outstanding
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, which operates as one business segment,
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. 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 our 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,
Strategic Transactions, for additional information.
As of September 30, 2006, Clearwire is majority-controlled
by Craig O. McCaw, the Chairman and Co-Chief Executive Officer,
through shares of Class A and Class B common stock
held by Eagle River Holdings, LLC (“ERH”), an entity
controlled by Mr. McCaw.
2.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation — The consolidated
financial statements include all of the assets, liabilities and
results of operations of Clearwire’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.
Basis of Presentation — In the opinion of
management, the unaudited consolidated financial statements as
of and for the nine months ended September 30, 2006 and
2005 and as of and for the years ended December 31, 2005
and 2004, and for the period from October 27, 2003
(inception to December 31, 2003) reflect all adjustments,
consisting only of normal recurring adjustments, necessary for
their fair presentation in conformity with accounting principles
generally accepted in the United States of America
(“GAAP”). GAAP requires management to make estimates
and assumptions that affect the amounts reported in the
financial statements and accompanying notes, including estimates
of probable losses and expenses. Actual results could differ
from those estimates. Operating results for the nine months
ended September 30, 2006 are not necessarily indicative of
the results that may be expected for the year ending
December 31, 2006.
Use of Estimates — The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States of America 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, the valuation of
the Company’s common stock, 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 to be minimal.
Restricted Cash — Restricted cash is classified
as a current or noncurrent asset based on its designated
purpose. For 2004 restricted cash of $5.3 million
previously reported as a financing activity has been classified
as an investing activity to conform with current year
presentation.
Short-Term Investments — Marketable debt and
equity securities that are available for current operations are
classified as short-term
available-for-sale
investments, and are stated at fair value. Unrealized gains and
losses are recorded net of tax as a separate component of
accumulated other comprehensive income (loss). Unrealized losses
are charged against net earnings 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 contractual maturities on
all of the marketable debt securities in 2005 are in excess of
10 years.
The unrealized losses as of September 30, 2006 and
December 31, 2005 and 2004 were due to normal market
fluctuations and, since the company has the ability and intent
to hold to maturity therefore, the unrealized losses are not
deemed to be an
other-than-temporary
impairment. For the nine months ended September 30, 2006
and the years ended December 31, 2005 and 2004, the Company
realized a net loss of $21,000 (unaudited), a net gain of
$97,000 and a net loss of $2,000, respectively, on sales of its
short-term investments.
Restricted Investments — Restricted investments
consist of U.S. government securities. At
September 30, 2006 and December 31, 2005 restricted
investments represented securities held as collateral for the
interest payments through November 15, 2007 related to
long-term debt. These securities are classified as
held-to-maturity
and are stated at amortized cost.
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 9, Long-Term Debt, for the fair value of long-term
debt.
Accounts Receivable — Accounts receivables are
stated at amounts due from customers net of an allowance for
doubtful accounts. The Company specifically reserves for
customers with known disputes or collectibilty 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. The allowance for
doubtful accounts represents the Company’s best estimate of
the
amount of probable credit losses. The allowance for doubtful
accounts was $200,000 (unaudited), $346,000 and $89,000 as of
September 30, 2006, December 31, 2005 and 2004,
respectively.
Inventory — Inventory 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. The Company
recorded an inventory write-down of $52,000, $332,000 and $0 in
2005, 2004 and 2003, respectively, and an inventory write-down
of $1.2 million (unaudited) and $331,000 (unaudited) for
the nine months ended September 30, 2006 and 2005.
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.
The estimated useful lives of property, plant and equipment are
as follows:
Network and base station equipment
3-7 years
Customer premise equipment
2 years
Furniture, fixtures and equipment
3-5 years
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 their useful lives, generally three years.
Costs recognized in the preliminary project phase and the
post-implementation phase are expensed as incurred. The Company
has not sold, leased or licensed software developed for internal
use to customers and has no intention of doing so in the future.
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 and Banda
Ancha S.A. (“BASA”) in December 2005. As further
described in Note 7, Spectrum Licenses and Other Intangible
Assets, the Company accounts for its spectrum licenses and other
intangible assets in accordance with the provisions of Statement
of Financial Accounting Standards (“SFAS”)
No. 142, Goodwill and Other Intangible Assets. 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 as
of October 1, 2005 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 acquisition of NextNet in March
2004 and BASA in December 2005 and February 2006. In accordance
with SFAS No. 142, the Company performed its annual
impairment tests of goodwill as of October 1, 2005 and
concluded that there was no impairment of its goodwill. Goodwill
of $9.4 million related to NextNet was eliminated upon its
sale in August 2006. See Note 3, Strategic Transactions for
additional information.
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. There was no impairment charge recorded
for the nine months ended September 30, 2006 (unaudited),
or the years ended December 31, 2005 or 2003. The Company
recorded an impairment charge of $295,000 in 2004.
Deferred Financing Costs — Deferred financing
costs consist primarily of legal, accounting, printing and
investment banking fees 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 9, Long-Term Debt, the Company incurred
$10.8 million of deferred financing costs in 2005 and $21.8
million (unaudited) in 2006. For the nine months ended
September 30, 2006 and the year ended December 31,2005, $2.4 million (unaudited) and $898,000, respectively
of total deferred financing costs were amortized using the
effective interest method and included in interest (expense)
income, net.
Interest Capitalization — Interest is
capitalized on property, plant and equipment and improvements
under construction based on rates applicable to borrowings
outstanding during the period and the weighted average balance
of qualified assets under construction during the period.
Interest capitalization ceases when the construction is
substantially complete and available for use. Capitalized
interest is reported as a cost of the property, plant and
equipment.
Comprehensive Loss — Comprehensive loss
consists of two components, net income and other comprehensive
income. Other comprehensive loss refers to revenue, expenses,
gains and losses that under generally accepted accounting
principles are recorded as an element of shareholders’
equity but are excluded from net income. The Company’s
other comprehensive loss is comprised of foreign currency
translation adjustments from our 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.
Revenue Recognition — The Company primarily
earns service revenues by providing access to its high-speed
wireless network. Also included in service revenues are
equipment rentals and optional services, including personal and
business email and static Internet Protocol. Service revenues
from customers are billed in advance and recognized ratably over
the service period.
Through August 2006, the Company primarily earned equipment
revenues 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, Strategic Transactions. Revenues associated with
the shipment of CPE and other equipment to the customers were
recognized when title and risk of loss transferred to the
customer.
The Company recognizes revenues in accordance with Staff
Accounting Bulletin (“SAB”) 104, Revenue
Recognition, and 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.
Shipping and handling costs billed to customers are recorded to
equipment and other revenues. Freight costs associated with
shipping goods to customers are recorded to cost of equipment.
In arrangements that include multiple elements, such as the sale
of a base station with a software maintenance contract, the
Company applies the accounting guidance in accordance with
Statement of Position (“SOP”)
No. 97-2,
Software Revenue Recognition. Revenue is 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 is based upon the normal pricing and discounting
practices for those products and services when sold separately.
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.
Software maintenance services include technical support and the
right to receive unspecified upgrades and enhancements on a
when-and-if
available basis. Fees for software maintenance services are
typically billed annually in advance of performance of the
services with provisions for subsequent annual renewals. The
related revenues are deferred and recognized ratably over the
respective maintenance terms, which typically are one to two
years.
Product Warranty — While a wholly-owned
subsidiary, NextNet 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 is made for estimated product
repair at the time of the sale based upon the Company’s
historical trends. The Company maintains the obligation under
these warranties for equipment sold by NextNet while it was a
wholly-owned subsidiary. Information about warranty cost and
warranty liability is as follows (in thousands):
Advertising Costs — Advertising costs are
expensed as incurred. Advertising expense was $19.3 million
(unaudited) and $8.8 million (unaudited) for the nine
months ended September 30, 2006 and 2005, respectively.
Advertising expense was $13.8 million and $675,000 for the
years ended December 31, 2005 and 2004, respectively. There
were no advertising costs incurred during 2003.
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. 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: Stock-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.
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 stock-based compensation expense in accordance
with Accounting Principles Board (“APB”) Opinion
No. 25, Accounting for Stock Issued to Employees (“APB
No. 25”), and related Interpretations, as permitted by
SFAS No. 123.
Total compensation expense recorded during the nine months ended
September 30, 2006 was $8.4 million (unaudited), of
which $7.1 million (unaudited) related to option grants
recorded under SFAS No. 123(R) and $1.3 million
(unaudited) was recorded 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 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. 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 recorded 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 recorded
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 — Our international operations
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 during the
year. 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) as a component of net loss.
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.
Reclassification — Certain reclassifications
have been made to the prior year’s financial statements to
conform to classifications used in the current year. For 2004,
the common stock and warrants payable balance of
$3.4 million previously included in current liabilities was
classified as a component of Shareholders’ equity to
conform with the current year presentation.
FIN No. 48 — In June 2006, the
FASB issued Interpretation (“FIN”) No. 48,
Accounting for Uncertainty in Income Taxes
(“FIN No. 48”). FIN No. 48
prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return.
FIN No. 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods, disclosure, and transition. FIN No. 48 is
effective for the Company’s first fiscal year beginning
after December 15, 2006. The Company is currently
evaluating the provisions of FIN No. 48 to determine
what effect its adoption on January 1, 2007 will have on
its financial position, cash flows, and results of operations.
SAB No. 108 — In September 2006, the
SEC staff issued SAB No. 108, Considering the
Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements
(“SAB No. 108”). SAB No. 108
provides interpretive guidance on how the effects of prior-year
uncorrected misstatements should be considered when quantifying
misstatements in the current year financial statements.
SAB No. 108 requires registrants to quantify
misstatements using both an income statement
(“rollover”) and balance sheet (“iron
curtain”) approach and evaluate whether either approach
results in a misstatement that, when all relevant quantitative
and qualitative factors are considered, is material. If prior
year errors that had been previously considered immaterial now
are considered material based on either approach, no restatement
is required so long as management properly applied its previous
approach and all relevant facts and circumstances were
considered. If prior years are not restated, the cumulative
effect adjustment is recorded in opening accumulated deficit as
of the beginning of the fiscal year of implementation.
SAB No. 108 is effective for fiscal years ending on or
after November 15, 2006, with earlier implementation
encouraged. The Company does not believe that its implementation
of SAB No. 108 will have an effect on its financial
position, cash flows, or results of operations.
SFAS No. 157 — In September 2006, the
FASB issued SFAS No. 157, Fair Value Measurements
(“SFAS No. 157”). SFAS No. 157
defines fair value, establishes a framework for measuring fair
value and expands disclosure of fair value measurements.
SFAS No. 157 applies under other accounting
pronouncements that require or permit fair value measurements
and accordingly, does not require any new fair value
measurements. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after
November 15, 2007. The Company is currently evaluating the
impact of this pronouncement on its financial statements.
FSP No. SFAS 123(R)-3 — In November
2005, the FASB issued FSP No. SFAS 123(R)-3,
Transition Election Related to Accounting for the Tax Effects
of Share-Based Payment Awards. This FSP provides an
alternative transition method for calculating the tax effects of
adopting SFAS No. 123(R), which includes simplified
methods to establish the beginning balance of the additional
paid-in capital pool (APIC pool) related to the tax effects of
employee stock-based compensation, and to determine the
subsequent impact on the APIC pool and the statement of cash
flows of the tax effects of employee stock-based compensation
awards that are outstanding upon adoption of
SFAS No. 123(R). The Company has until January 1,2007, to make a one-time election and is currently in the
process of evaluating the alternative methods.
3.
STRATEGIC
TRANSACTIONS
Acquisitions
During the nine months ended September 30, 2006
(unaudited), the Company purchased various companies through
both asset and share purchase agreements. The total aggregate
purchase price was approximately $70.0 million (unaudited),
comprised of $45.0 million (unaudited) cash and common
stock valued at $25.0 million (unaudited). The purchased
assets primarily relate to the acquisition of spectrum licenses,
other minor assets and liabilities and include the assumption of
spectrum and tower lease agreements.
These acquisitions are accounted for using the purchase method
of accounting. The total aggregate consideration and purchase
price allocation for all of the Company’s acquisitions, for
the nine months ended September 30, 2006 and for the year
ended December 31, 2005 are as follows (in thousands):
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.
Nine Months Ended
Year Ended
September 30,
December 31,
Purchase Consideration
2006
2005
(Unaudited)
Cash paid
$
44,764
$
31,011
Common stock and warrants issued
and payable
24,813
944
Transaction-related costs
425
1,303
$
70,002
$
33,258
Purchase Price
Allocation
Current assets
$
2,120
$
7,705
Intangible assets
46,692
38,381
Goodwill
23,750
7,274
Current liabilities
(1,726
)
(13,672
)
Other long-term liabilities
(834
)
(6,430
)
Net assets acquired
$
70,002
$
33,258
NextNet — In March 2004, a wholly-owned
subsidiary of Clearwire merged with and into NextNet with
NextNet being the surviving company in the merger. As a result
of the merger transaction, NextNet became a wholly-owned
subsidiary of Clearwire and provides the development and
manufacturing of equipment that enables the deployment of
Clearwire’s broadband wireless network. Total consideration
issued to former holders of NextNet securities consisted of
13,869,378 shares of Clearwire’s Class A common
stock; warrants to purchase 3,070,339 shares of
Clearwire’s Class A common stock at $4.00 per
share, of which 443,489 were unissued as of December 31,2005; and $339,000 in cash. The Class A common stock was
valued at $1.00 per share by an independent third party
appraiser. The warrants were valued at $966,000 using the
Black-Scholes option pricing model and recorded in additional
paid-in capital. In addition, Clearwire also provided
pre-acquisition financing to NextNet in the amount of
$2.1 million, which is included in the total purchase
consideration.
Prior to the NextNet merger, ERH held shares of NextNet’s
Series E preferred stock that were converted into
6,967,399 shares of Clearwire’s Class A common
stock in the merger transaction in accordance with the same
terms of the merger agreement for former holders of
NextNet’s Series E preferred stock.
The acquisition was accounted for using the purchase method of
accounting. The consideration and purchase price allocation were
as follows, based on estimated fair values of assets acquired
and liabilities assumed on the acquisition date (in thousands):
The results of operations of NextNet were included in the
results of Clearwire from the date of acquisition until the date
of sale, see below paragraph for more information on the
dispositions of NextNet on August 29, 2006.
Dispositions
NextNet (Unaudited) — 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 million
(unaudited) in cash. The sale of NextNet resulted in a gain of
$19.8 million (unaudited), comprised of aggregate proceeds
from the sale of $47.1 million (unaudited) less the book
value of net assets sold of $26.1 million (unaudited) and
transaction related costs of $1.2 million (unaudited),
which consists of legal fees and employee related costs. The
transaction closed on August 29, 2006. The carrying value
of the assets and liabilities sold are as follows (in thousands):
Inventory
$
8,895
Property, plant and equipment
4,620
Other current and long-term assets
8,387
Intangible assets
5,211
Goodwill
9,352
Total assets
36,465
Current liabilities
9,888
Other long-term liabilities
490
Total liabilities
10,378
Net assets disposed
$
26,087
In connection with the sale of NextNet, Clearwire and Motorola
also entered into agreements for the purchase of certain
infrastructure and supply inventory from NextNet. 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
(unaudited) 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%
(unaudited) of its 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% (unaudited) for the remainder of the term.
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 03-13 Applying the Conditions in
Paragraph 42 of SFAS No. 144 in Determining whether to
report Discontinued Operations.
Other
Agreements
Subscription Agreement — Clearwire and Motorola
signed a Subscription Agreement on June 30, 2006, under
which Motorola agreed to purchase 50,000,000 shares
(unaudited) of Clearwire’s Class A common stock at
$6.00 per share (unaudited) for a purchase price of
$300.0 million (unaudited). The agreement with Motorola
includes certain limited anti-dilution features. The transaction
closed on August 29, 2006.
Common Stock Purchase Agreement — Clearwire and
Intel Pacific Inc. (“IPI”), a Delaware corporation and
wholly owned subsidiary of Intel Corporation
(“Intel”), signed a Common Stock Purchase Agreement on
June 28, 2006, under which IPI agreed to purchase a total
of 100,000,000 shares of Clearwire’s Class A and
Class B common stock, 70,282,803 (unaudited) and
29,717,197 shares (unaudited), respectively, at
$6.00 per share (unaudited) for a total purchase price of
$600.0 (unaudited) million. The agreement includes certain
limited anti-dilution features which will 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
25,809,348 shares of Clearwire’s Class A Common
Stock at $6.00 per share for an aggregate purchase price of
$154.9 million (unaudited). 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 25,000,000 shares of Clearwire’s
Class A common stock for $100.0 million. See
Note 11, Stockholders’ Equity, for further details of
the purchase of common stock. At the time of Bell’s
investment in Clearwire, Bell, Clearwire and 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.
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.
Investment by Intel Capital Corporation in Class A
common stock — In October 2004, Intel Capital
Corporation (“Intel Capital”) completed the purchase
of 10,000,000 shares of Clearwire’s Class A
common stock for $2.00 per share. The investment was made
by Intel in connection with a joint development and
collaboration agreement dated October 13, 2004 pursuant to
which the Company and Intel established a strategic relationship
to develop the market segment for IEEE 802.16e-2005 Standard
Broadband Wireless Access Systems/WiMax. The parties agreed to
collaborate on the development, testing and deployment of the
technology to be utilized in these systems, which agreement was
terminated in connection with Clearwire and Intel entering into
that Mobile WiMAX Network Collaboration Agreement.
Transactions with HITN and its Affiliates — In
November 2003, the Company entered into a Master Spectrum
Agreement (“MSA”) with a third-party EBS license
holder, the Hispanic Information and Telecommunications Network,
Inc. (“HITN”). The founder and president of HITN is a
member of Clearwire’s Board of Directors. The MSA provides
for terms under which HITN leases excess capacity on certain of
its EBS spectrum licenses to Clearwire. The licenses covered
under the MSA include all of the spectrum rights acquired in the
Clearwire Spectrum Corporation acquisition, plus access to an
additional twelve markets in the United States. For each market
leased by HITN to the Company under the MSA, the Company and
HITN enter into a separate lease agreement which contains
additional lease terms. The initial lease term is 15 years
with one renewal for additional 15 years. The MSA also
provides for additional shares of Class A common stock to
be issued to HITN upon Clearwire reaching certain financial
milestones.
In March 2004, the MSA between Clearwire and HITN was amended to
provide, among other things, additional leased EBS spectrum
capacity in an additional major metropolitan market.
Additionally, Clearwire and HITN entered into a spectrum option
agreement (the “Option Agreement”) whereby Clearwire
has an option to enter into leases of spectrum for which HITN
has pending EBS license applications upon grant of those
licenses by the FCC. The lease terms and conditions would be
similar to those under the MSA.
Total consideration for the above agreement and for the lease of
spectrum pursuant to the Option Agreement was $22.1 million
in cash and 8,489,152 shares of Class A common stock
valued at $12.3 million.
Subsequent to the MSA, the Company entered into two other
related agreements with ITFS Spectrum Advisors, LLC
(“ISA”) and ITFS Spectrum Consultants LLS
(“ISC”). The founder and president of HITN, also on
Clearwire’s Board of Directors, is an owner of ISA and ISC,
which are also affiliates of HITN. The agreements provided for
payment to be provided to ISA and ISC in the form of warrants to
purchase additional shares of Class A common stock in
exchange for ISA and ISC providing opportunities for Clearwire
to purchase or lease additional spectrum. Each of the agreements
specifies a maximum consideration available under the agreement
and, in 2005, the maximum consideration under the agreement with
ISA has been reached.
For the years ended December 31, 2005 and 2004, ISA earned
warrants to purchase 365,380 shares and
1,542,711 shares of Class A stock valued at $1,219,000
and $2,990,000, respectively. There were no warrants payable to
ISA as of December 31, 2005. As of December 31, 2004,
warrants to purchase 1,233,207 shares of Class A
common stock valued at $2.5 million were payable to ISA.
For the year ended December 31, 2005, ISC earned
approximately $823,000, of which $147,000 was paid in cash and
warrants to purchase 191,891 shares of Class A common
stock valued at $676,000. There were no warrants payable to ISC
at December 31, 2005.
Spain — In December 2005, Clearwire entered
into agreements to purchase a 100% equity ownership stake in
BASA, an entity in Spain that owns fixed wireless spectrum
licenses covering the entire country. The purchase occurred in
two transactions: (1) a direct cash investment in December
2005 by Clearwire in BASA of approximately $6.2 million to
in exchange for an initial 51% stake; and (2) in February
2006 a purchase from BASA Holding Iberia S.L.U.
(“BHI”) for all of its shares in BASA, which
represents all of the remaining BASA shares not acquired by
Clearwire in the first transaction, in exchange for
4,750,000 shares of Clearwire’s Class A common
stock valued at $5.00 per share. The purchase was recorded
in 2006 as a step acquisition of the 100% controlling interest
in BASA’s business in accordance with SFAS No. 141,
Business Combinations. The Company recorded
$32.6 million (unaudited) of goodwill as of
September 30, 2006 on the acquisition of BASA.
Ireland — CIL is a company that owns fixed
wireless spectrum licenses in Ireland. During 2005, Clearwire
made an additional cash investment in CIL of $9.6 million,
increasing the ownership stake to 97.61%. The results of
operations of CIL have been included in the Company’s
results from the date of acquisition (September 2004), and the
minority interest ownership reflected accordingly. Since March
2005, the minority interest’s share of losses has exceeded
their ownership interest, as such the Company has been
recognizing 100% of CIL’s losses in operations.
Belgium — Mac Telecom, SA is a company that
owns fixed wireless spectrum licenses in Belgium. In 2005, the
Company provided a loan of $7.6 million for continuing
operations. At December 31, 2005the Company had not yet
opted to exercise the option to acquire additional regular
shares. The results of operations of Mac Telecom have been
included in the Company’s results from the date of
acquisition (December 2004), and the minority interest ownership
reflected accordingly. Subsequent to September 30, 2006,
Clearwire Europe acquired the remaining shareholding interest in
Mac Telecom, SA. The transaction closed on October 16, 2006.
Investments
in Equity Investees
Denmark — Danske is a public limited company in
Denmark. Danske 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 May 2005 for approximately
$11.3 million. Revenues and related cost of goods and
services sold to Danske by NextNet through August 29, 2006
have been eliminated, and Clearwire’s investment in Danske
has been reduced for its proportionate share of losses.
Mexico — MVS Net is a Mexican
telecommunications company with which Clearwire entered into an
agreement and has invested a total of $22.9 million in
exchange for a 26.7% interest in MVS Net. Clearwire also has an
option to invest an additional $5.0 million at the same
valuation as its initial investment
until the third anniversary of the initial investment. The
Company accounts for its investment in MVS Net under the equity
method. Revenues and related costs of goods and services sold to
MVS Net by NextNet through August 29, 2006 have been
eliminated, and Clearwire’s investment in MVS Net has been
reduced by approximately $4.6 million representing its
proportionate share of losses.
Depreciation expense for the nine months ended
September 30, 2006 and 2005 was $24.6 million
(unaudited) and $6.3 million (unaudited), respectively.
Depreciation expense for the years ended December 31, 2005
and 2004, and the period from October 27, 2003 (inception)
through December 31, 2003 was $10.9 million,
$1.6 million and $27,000, respectively.
Amortization expense for the nine months ended
September 30, 2006 and 2005 was $1.8 million
(unaudited) and $667,000 (unaudited), respectively. Amortization
expense for the years ended December 31, 2005 and 2004, and
the period from October 27, 2003 (inception) through
December 31, 2003 was $964,000, $936,000 and $0,
respectively.
The changes in the carrying value of goodwill for the nine
months ended September 30, 2006 is as follows (in
thousands) (unaudited):
Based on the identified intangible assets recorded as of
December 31, 2005, prior to the NextNet disposal, future
amortization of intangible assets is expected to be as follows
(in thousands):
2006
$
1,347
2007
1,347
2008
1,347
2009
1,347
2010
1,347
Thereafter
9,605
Total
$
16,340
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
Spectrum Licenses — Spectrum licenses authorize
wireless carriers to use radio frequency spectrum, which are
issued on both a site-specific and a wide-area basis, enabling
wireless carriers to provide service to certain geographical
areas in the United States. These licenses are generally
acquired by us either directly
from the governmental authority in the applicable country, which
in the United States is the FCC, or through a business
combination or an asset purchase, and are considered
indefinite-lived intangible assets, except for the licenses
acquired in Poland and Spain, which are subject to construction
and/or
operational and technical requirements. The FCC has routinely
granted license renewals if the licensees provide substantial
services in their licensed area and have complied with
applicable rules and policies and the Communications Act of
1934, as amended. The Company believes that it has met and will
continue to meet all requirements necessary to retain and secure
renewal of its spectrum licenses. Our spectrum licenses are
carried at cost or, if acquired in a business combination, at an
allocated amount based on the fair value.
The Company also leases spectrum licenses from third parties who
hold the licenses. These leased spectrum licenses are accounted
for as executory contracts, which are treated like operating
leases, and are not included in the schedule of intangible
assets above. 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 appropriate.
During the nine months ended September 30, 2006 and 2005,
the Company issued total consideration of approximately
$151.6 million (unaudited) and $57.2 million
(unaudited), respectively, to acquire spectrum licenses. Of the
total consideration paid during 2006, $50.7 million
(unaudited) (comprised of $50.4 million (unaudited) in cash
and $300,000 (unaudited) in the value of warrants and common
stock) related to the purchased spectrum licenses and
$100.9 million (unaudited) (comprised of $71.1 million
(unaudited) in cash and $29.8 million (unaudited) in the
value of warrants and common stock) related to the purchase of
leased spectrum licenses. As of September 30, 2006, $63,000
(unaudited) was payable either in warrants or Class A
common stock related to these items.
During the years ended December 31, 2005 and 2004, the
Company incurred approximately $126.3 million and
$66.7 million, respectively, to acquire spectrum licenses.
Of the total paid during 2005, $72.9 million (comprised of
$64.1 million in cash and $8.8 million in the value of
warrants and common stock) related to the purchased spectrum
licenses and $53.4 million (comprised of $38.8 million
in cash and $14.6 million in the value of warrants and
common stock) related to the purchase of leased spectrum
licenses. As of December 31, 2005, $1.4 million was
payable either in warrants or Class A common stock related
to these items.
These licenses relate to spectrum that the Company is expected
to use in connection with the deployment of its wireless
broadband network. In accordance with SFAS No. 142,
the Company performed its annual impairment test of
indefinite-lived spectrum licenses as of October 1, 2005,
and concluded that there was no impairment as the fair values of
these intangible assets were greater than their carrying values.
Total spectrum licenses and
prepaid spectrum license fees
$
375,627
$
210,248
$
92,020
For the nine months ended September 30, 2006 and 2005, the
Company recorded amortization on the prepaid spectrum license
fees of $4.3 million (unaudited) and $3.4 million
(unaudited). For the nine months ended September 30, 2006
and 2005, the Company recorded amortization on the spectrum
licenses of $1.1 million (unaudited) and
$0 (unaudited), respectively.
For the years ended December 31, 2005 and 2004, and the
period from October 27, 2003 (inception) through
December 31, 2003, the Company recorded amortization on the
prepaid spectrum license fees of $2.9 million (unaudited),
$1.3 million (unaudited) and $71,000, respectively. For the
year ended December 31, 2005, the Company recorded
amortization on the spectrum licenses of $44,000. For the year
ended
Components of deferred tax assets and liabilities as of
December 31, 2005 and 2004, were as follows (in thousands):
2005
2004
Current deferred tax assets
$
2,323
$
441
Noncurrent deferred tax assets:
Net operating loss carryforward
77,692
23,117
Property, equipment and other
long-term assets
407
1,061
Other
3,055
296
Total deferred tax assets
83,477
24,915
Valuation allowance
(67,090
)
(18,703
)
Net deferred tax assets:
16,387
6,212
Noncurrent deferred tax
liabilities:
Spectrum licenses
13,423
3,640
Bond issuance cost —
warrant valuation
5,355
—
Other intangibles
2,759
3,061
Total deferred tax liabilities
21,537
6,701
Net deferred tax liabilities
$
5,150
$
489
As of December 31, 2005, the Company had federal tax net
operating loss carryforwards in the United States of
approximately $159.8 million. Approximately
$33.8 million of the net operating loss carryforward was
acquired through acquisitions and will be subject to certain
annual limitations imposed under Section 382 of the
Internal Revenue Code of 1986. The net operating loss
carryforwards will begin to expire in 2021. The Company had
approximately $58.0 million of tax net operating loss
carryforwards in the foreign jurisdictions as of
December 31, 2005. The expiration dates for net operating
losses in foreign jurisdictions vary by country.
The Company have recorded a valuation allowance against a
significant portion of the deferred tax assets. Management has
reviewed the facts and circumstances, including the limited
history and the projected future tax losses, and determined that
it is appropriate to reduce a portion of the gross deferred tax
asset. The remaining deferred tax asset will be reduced by
schedulable deferred tax liabilities. The net deferred tax
liabilities are related to certain intangible assets, including
certain spectrum assets, which are not amortized for book
purposes. The net change in the valuation allowance for the
years ended December 31, 2005 and 2004, was an increase of
$48.4 million and $15.1 million, respectively. Net
noncurrent deferred tax liabilities of $5.2 million are
included in other long-term liabilities at December 31,2005.
The Company incured significant deferred tax liabilities related
to the domestic spectrum licenses. Since there is no
amortization on certain acquired spectrum licenses for book
purposes and the Company cannot estimate the amount, if any, of
deferred tax liabilities related to those acquired spectrum
licenses which will reverse in future periods, the valuation
allowance was increased accordingly. The Company continues to
amortize acquired spectrum license for federal income tax
purposes. The ongoing difference between book and tax
amortization resulted in an additional deferred income tax
provision of approximately $1.5 million for the year ended
December 31, 2005.
11% Senior Secured Notes due
in 2010, principal at maturity: $260.3 million
$
213,472
$
209,961
11% Additional Senior Secured
Notes due in 2010, principal at maturity: $360.4 million
292,021
—
Secured $125 million loan
from Morgan Stanley Senior Funding, Inc. due in 2009, 1% of
principal due annually; residual at maturity
125,000
—
Secured $10 million loan from
BCE Nexxia Corporation due in 2008, principal at maturity:
$10 million
10,000
—
640,493
209,961
Less: current portion
(1,250
)
—
Total long-term debt
$
639,243
$
209,961
Credit Agreement (unaudited) — In August 2006,
Clearwire signed a loan agreement with Morgan Stanley Senior
Funding, Inc., Merrill Lynch Capital Corporation, and JP Morgan
Chase Bank, N.A. for a term loan in the amount of
$125.0 million. The loan is secured by certain assets of
Clearwire entities, as specified in the loan agreement. The loan
matures in August 2009. The proceeds of the loan are available
for general corporate purposes.
The amount outstanding under the loan agreement bears interest
at a rate based, at the Company’s option, on either the
Eurodollar rate or the greater of a) the Prime Rate or
b) the Federal Funds Effective Rate plus one-half of one
percent. In each case, the interest rate is subject to an
applicable margin. If the Company chooses a Eurodollar loan, the
applicable margin is 6.75% per annum, otherwise the
applicable margin is 5.75% per annum. If the loan is a
Eurodollar loan, the Company may choose the length of the
interest period, which may not exceed six months without the
lenders’ consent, otherwise the interest period is each
fiscal quarter. Accrued interest is generally payable at the end
of each interest period, but for any period longer than three
months, interest is payable at the end of each three month
period. Principal payments in the amount of approximately
$313,000 are to be made each quarter starting December 31,2006. There were borrowings of
$125.0 million outstanding under the Facility as of
September 30, 2006, with a weighted average interest rate
of 12.1%.
BCE Nexxia Corporation Financing (unaudited) —
As required under the Master Supply Agreement with Bell Canada
and BCE Nexxia Corporation (“BCE”) and in order to
assist funding capital expenses and
start-up
costs associated with the deployment of Company services, BCE
agreed to make available to Clearwire financing in the amount of
$10.0 million. BCE funded the entire amount on June 7,2006. The loan is secured by a security interest in the
telecommunications equipment and property related to VoIP and
bears interest at 7% per annum and is due and payable in
full on July 19, 2008. At September 30, 2006, the
Company had $222,000 accrued interest related to the BCE loan.
11% Senior Secured Notes due 2010 — In
August 2005 the Company completed the sale of
$260.3 million in principal amount of senior secured notes
(the “Notes”) due 2010. In connection with the sale of
the Notes, the Company also issued warrants (the
“Warrants”) to the purchasers of the Notes entitling
them to purchase up to 20,827,653 shares of the
Company’s Class A common stock. In addition, the
Company granted the purchasers of the Notes a one-time option to
acquire up to an equivalent amount of additional Notes and
Warrants for a period of 180 days following the issuance of
the Notes which was exercised in February 2006 as the 11%
Additional Senior Secured Notes due 2010. As of
September 30, 2006 (unaudited) and December 31, 2005,
$260.3 million in aggregate principal amount was
outstanding under these Notes. As of September 30, 2006,
the aggregate principal amount of the Notes was reduced by
$46.9 million (unaudited), the unamortized portion of the
proceeds allocated to the Warrants issued in connection with the
Notes based on the relative fair value of the Notes and the
Warrants. As of September 30, 2006 and December 31,2005 the fair value of the Notes was approximately
$278.3 million (unaudited) and $225.3 million,
respectively.
11% Additional Senior Secured Notes due 2010 —
In February 2006, the Company completed the sale of
$360.4 million senior secured notes (the “Additional
Notes”) to new and existing holders, which are due 2010. In
connection with the sale of the Additional Notes, the Company
also issued 28,828,000 Warrants to the purchasers of the
Additional Notes entitling them to purchase shares of the
Company’s Class A common stock. The terms of the
Additional Notes and Warrants are substantially identical to the
original Notes and Warrants. As of September 30, 2006,
$360.4 million (unaudited) in aggregate principal amount
was outstanding under the Additional Notes. As of
September 30, 2006, the aggregate principal amount of the
Additional Notes was reduced by $68.3 million (unaudited),
the portion of the proceeds allocated to the Warrants issued in
connection with the Additional Notes based on the relative fair
value of the Additional Notes and the Warrants. As of
September 30, 2006 the fair value of the Additional Notes
was approximately $385.1 million (unaudited).
Interest on each of the Notes and Additional Notes is payable
semi-annually on February 15 and August 15 at an annual rate of
11%. If the Company does not complete an initial public offering
from which it receives gross proceeds equal to or in excess of
$300.0 million or otherwise have its common stock listed on
the New York Stock Exchange or NASDAQ Global Market with a
market capitalization in excess of $1.0 billion and a
public float of at least $300.0 million (a “Qualified
IPO”) before August 15, 2007, the interest rate
increases to 12% per annum. For each subsequent year during
the remaining term of the Notes in which no Qualified IPO
occurs, the interest rate will increase by an additional
1% per annum up to a maximum interest rate of 14%.
Certain of the Company’s subsidiaries jointly and severally
guarantee on a senior secured basis its obligations under the
Notes and Additional Notes. Liens on all of the assets of these
entities and their respective domestic subsidiaries secure each
of the Notes and Additional Notes. In addition, the Company had
purchased non-callable government securities as interest payment
collateral for the Notes and Additional Notes. This amount is
included in current and long-term restricted investments in the
Company’s consolidated balance sheets. Such amount will be
sufficient upon receipt of scheduled principal and interest
payments thereon, to provide for the payment in full of the
first four scheduled interest payments due on the Notes and
Additional Notes. If the Company issues additional Notes
pursuant to the Indenture (the “Indenture”) governing
the Notes it will purchase and pledge additional non-callable
government securities to provide for the payment in full of the
first three scheduled interest payments due on such additional
Notes.
The Company may choose to redeem the Notes in whole or in part
at any time at a price equal to 102.5% of the principal amount
of the Notes redeemed. The Company must, however, offer to
redeem the Notes upon the occurrence of certain specified events
which result in a change in control of us as set forth in the
Indenture. The redemption price is equal to 102.5% of the
principal amount of the Notes redeemed plus any accrued and
unpaid interest payable thereon. In addition, upon redemption,
the holders of the Notes being redeemed are entitled to receive
a pro rata portion of any remaining interest payment collateral.
After an asset sale, as defined in the Indenture, the Company,
under certain conditions, must choose either to apply those
proceeds to redeem Notes at 100.0% or to repurchase replacement
assets or purchase the maximum principal amount of the Notes.
As long as the Notes are outstanding, the Company must comply
with certain restrictive covenants in the Indenture that, among
other things, limit its ability
and/or the
ability of its restricted subsidiaries to pay dividends on,
redeem or repurchase its capital stock, incur additional
indebtedness, create liens, sell assets and consolidate or merge
with or into other companies.
Terms of the Warrants — Holders of Company
Warrants issued in connection with the Notes may exercise their
Warrants at any time after the earliest of a Qualified IPO, any
other registration of its common stock or upon the completion of
a change of control as defined in the Indenture. The Warrants
expire on the later of August 5, 2010, or the second
anniversary of the expiration of any
lock-up
period following a Qualified IPO.
The exercise price of the warrants is the lesser of
$5.00 per share or, if applicable, the volume weighted
average price of the Class A common stock for the first
twenty trading days following expiration of any
lock-up
period following a Qualified IPO. The exercise price of the
Warrants is also subject to adjustment upon any issuance by us
of Class A common stock at a price below the then existing
exercise price or upon any stock split, stock dividend,
recapitalization or reorganization.
The Company granted the holders of the Warrants registration
rights covering the shares subject to issuance under the
Warrants and also granted pre-emptive rights to purchase shares
of its capital stock, or securities or instruments convertible
into or exchangeable or exercisable for shares of its capital
stock that it issues after August 5, 2005, subject to
certain limitations. These pre-emptive rights expire one year
after the completion of a Qualified IPO of the Company’s
capital stock satisfying certain thresholds.
Interest (Expense) Income, net — Interest
(expense) income, net, included in the Company’s
consolidated statement of operations, consists of the following
for the nine months ended September 30, 2006 and
September 30, 2005 and for the years ended
December 31, 2005 and 2004 (in thousands):
The Company’s commitments for non-cancelable operating
leases consist mainly of spectrum licenses, office space,
equipment and certain of its network equipment situated on
leased sites, including land, towers and rooftop locations.
Certain of the leases provide for minimum lease payments,
additional charges and escalation clauses and generally have
initial terms of five years with multiple renewal options for
additional five-year terms totaling 20 to 25 years.
Future payments under spectrum license and operating lease
obligations (including all optional renewal periods) as of
December 31, 2005, are as follows (in thousands):
Years Ending December 31,
Spectrum
Operating Lease
Total
2006
$
10,718
$
14,992
$
25,710
2007
10,844
14,893
25,737
2008
10,843
14,839
25,682
2009
10,782
14,828
25,610
2010
10,898
10,533
21,431
Thereafter, including all renewal
periods
240,352
511
240,863
$
294,437
$
70,596
$
365,033
Rent expense for the nine months ended September 30, 2006
and 2005 was $6.1 million and $2.5 million,
respectively (unaudited). Rent expense for the years ended
December 31, 2005 and 2004, and the period from
October 27, 2003 (inception) through December 31, 2003
was $4.0 million, $1.4 million and $39,000,
respectively.
Contingencies — In the normal course of
business, Clearwire has various legal claims and other
contingent matters outstanding. Management believes that any
ultimate liability arising from these actions will not have a
material adverse impact on Clearwire’s financial condition
or results of operations.
Indemnity Agreements — Flux Fixed Wireless, LLC
(“FFW”), a wholly owned subsidiary of Mr. McCaw
and ERH, and Clearwire entered into an Indemnification
Agreement, dated November 13, 2003, pursuant to which
Clearwire agreed to indemnify, defend and hold harmless FFW and
any of its directors, officers, partners, employees, agents and
spouses and each of its and their affiliates (each, an
“Indemnitee”) to the fullest extent permitted by law
for any claims made against an Indemnitee by reason of the fact
that Indemnitee is, was or may be deemed a stockholder,
director, officer, employee, controlling person, agent or
fiduciary of Clearwire or any subsidiary of Clearwire. Clearwire
is obligated to pay the expenses of any Indemnitee in connection
with any claims which are subject to the agreement.
Clearwire is currently a party to, or contemplating entering
into, similar indemnification agreements with certain other of
its officers and each of the other members of its Board of
Directors.
11.
SHAREHOLDER’S
EQUITY
Preemptive Rights Exercises — In August 2006,
Clearwire entered into subscription agreements with the holders
of its outstanding stock for the sale of an aggregate of
25,809,348 shares of Clearwire’s Class A common
stock at $6.00 per share for an aggregate purchase price of
$154.9 million. The agreements include certain limited
anti-dilution features. The transactions closed on
August 29, 2006, except for one agreement covering the sale
of 3,666,666 shares which closed in October 2006.
In March 2005, Bell completed its purchase from Clearwire of
25,000,000 shares of its Class A common stock at a
price of $4.00 per share, pursuant to a Subscription
Agreement, Amended and Restated Stockholders Agreement
(“Stockholders Agreement”) and Registration Rights
Agreement between Bell and Clearwire dated March 16, 2005.
At the time of Bell’s investment in Clearwire, Bell,
Clearwire and ERH also entered into a separate agreement, dated
March 16, 2005 (“Separate Agreement”), and Bell
and one of its affiliates entered into a master supply agreement
with Clearwire. The Separate Agreement provides Bell with
certain rights that are in addition to Bell’s rights under
the Stockholders Agreement and Registration Rights Agreement.
Among the rights granted to Bell under the Separate Agreement
are the nomination of BCE’s Chief Executive Officer to
Clearwire’s Board of Directors, anti-dilution protection,
certain purchase rights, certain restrictions on the sale of
Clearwire securities to Bell competitors and other limitations.
During the period from March through June 2005, in connection
with the Bell investment, the Company completed private
placements of 9,873,512 shares of Class A common stock
at a price of $4.00 per
share in which it received proceeds of $39.5 million. The
private placement included existing Clearwire stockholders as
well as new investors.
In October 2004, Intel completed the purchase of
10,000,000 shares of Clearwire’s Class A common
stock for $2.00 per share. The investment was made by Intel
in connection with a joint development agreement and
collaboration agreement dated October 13, 2004. See
Note 3, Strategic Transactions, for further information.
In August 2004, the Company completed a private placement of
80,000,000 shares of Class A common stock at a price
of $2.00 per share. Mr. McCaw, through FFW and ERH,
exercised pre-emptive rights and purchased additional shares in
the private placement, acquiring 45,313,617 shares of the
total 80,000,000 shares of Class A common stock sold.
700,000,000 shares of Class A common stock, par value
$0.0001 per share;
•
100,000,000 shares of Class B common stock, par value
$0.0001 per share; and
•
5,000,000 shares of preferred stock, par value
$0.0001 per share.
In August 2006, the Company filed an amendment to increase the
number of authorized shares of Class A common stock to
700,000,000 and, accordingly, the total authorized shares
increased to 805,000,000.
The following is a summary description of the Company’s
common stock:
Class A common stock — The holders of
Class A common stock are entitled to one vote per share, on
each matter submitted to a vote by the stockholders.
Class B common stock — The holders of
Class B common stock are entitled to ten votes per share,
on each matter submitted to a vote by the stockholders.
Class B common stock is convertible at any time at the
option of its holders into shares of Class A common stock.
Each share of Class B common stock is convertible into one
share of Class A common stock.
Preferred Stock — May be divided into one or
more series. Each series will have the preferences, limitations
and relative rights as determined by the Board of Directors. No
series of preferred stock have been designated by the Board of
Directors.
Ranking — With respect to rights on
liquidation, dissolution or similar events, each holder of
Class A and Class B common stock will receive the same
amount of consideration per share, except that Class B
common stock holders may receive securities in the transactions
with terms that entitle them to ten votes per share.
Common stock and warrants payable — The Company
engaged several parties to obtain spectrum on its behalf in
exchange for rights to receive its common stock and warrants. As
the rights are earned over the period of an acquisition of
spectrum, these obligations can be outstanding for a period of
time until FCC approval or other milestones are met. The Company
records common stock and warrants payable to recognize the
timing difference when consideration has been received, but it
has not yet issued securities.
12.
STOCK-BASED
PAYMENTS
The Company has the following share-based arrangements,
“The Clearwire Corporation 2003 Stock Option Plan”
(the “Stock Option Plan”) and “The Clearwire
Corporation Stock Appreciation Rights Plan” (the “SAR
Plan”). These arrangements provide for performance
incentives for certain officers, employees and individuals or
companies who provide us services. The compensation cost that
has been charged against income for these plans for the nine
months ended September 30, 2006 and 2005, the years ended
December 31,
Included in the nine months ended September 30, 2006 is
$67,000, net of forfeitures, of expense related to SAR’s.
See below for further discussion.
The Company capitalizes stock-based compensation to internally
developed software costs in accordance with the provisions of
Statement of Position
98-1,
“Accounting for Costs of Computer Software Developed or
Obtained for Internal Use”
(“SOP 98-1”).
Capitalized costs are amortized on a straight-line basis over
the estimated useful life of the software once it is available
for use. Capitalized stock-based compensation cost is $117,000
(unaudited) for the nine months ended September 30, 2006.
There were no material costs capitalized for the nine months
ended September 30, 2005, the years ended December 31,2005, 2004 and for the period from October 27, 2003
(inception) through December 31, 2003.
Stock Option Plan — The Stock Option Plan
provides for the granting of up to 50,000,000 qualified and
nonqualified stock options. The options generally vest ratably
based on four years of continuous service and expire no later
than ten years after the date of grant.
Prior to January 1, 2006, the Company accounted for the
Stock Option Plan under the recognition and measurement
provisions of Accounting Principles Bulletin Opinion
No. 25, Accounting for Stock Issued to Employees,
(“APB 25”). Stock options granted at prices below
fair market value at the date of grant are considered
compensatory, and compensation expense is deferred and
recognized over the option vesting period using the graded
vesting method. Compensation expense is based on the excess of
the fair market value of the underlying common stock at the date
of grant over the exercise price of the option.
The Company also granted stock options to employees of entities
under common control who performed services to purchase shares
of the Company’s Class A common stock. In accordance
with EITF Issue
No. 00-23
and SFAS No. 123(R), Share-Based Payment,
(“SFAS No. 123(R)”), the fair value of such
options was recorded as a dividend and a charge against
additional paid-in capital on the line item, deferred
stock-based compensation. A total $2.4 million (unaudited),
$34,000, $1.3 million and $2.1 million was recorded
for the nine months ended September 30, 2006, the years
ended December 31, 2005 and 2004, and the period from
October 27, 2003 (inception) through December 31,2003, respectively.
On January 1, 2006, the Company applied
SFAS No. 123(R) prospectively to new awards and to
awards modified, repurchased, or cancelled on or after
January 1, 2006. Stock-based compensation expense for all
share-based payment awards granted on or after January 1,2006 is based on the grant-date fair value estimated. These
compensation costs are recognized net of a forfeiture rate and
only on those shares expected to vest on a graded vesting
schedule over the requisite service period of the award, which
is generally the option vesting term of four years. An estimate
of 3% is used for the annual forfeiture rate (unaudited) for the
nine months ended September 30, 2006 based on its
historical experience since the Company’s inception.
The Company continues to account for the outstanding awards at
January 1, 2006 under APB 25 because it was considered
a non-public entity at the date of adoption that used the
minimum value method for pro forma disclosure under
SFAS No. 148, Accounting for Stock-Based
Compensation — Transition and Disclosure.
Information regarding stock options outstanding and exercisable
as of December 31, 2005 is as follows:
Options Outstanding
Weighted
Average
Options Exercisable
Contractual
Weighted
Weighted
Life
Average
Average
Number of
Remaining
Exercise
Number of
Exercise
Exercise Price
Options
(In Years)
Price
Options
Price
$0.75
5,262,500
8.0
$
0.75
2,381,250
$
0.75
1.00
2,938,128
8.0
1.00
2,361,267
1.00
2.00
13,074,800
8.9
2.00
3,215,325
2.00
4.00
1,555,000
9.3
4.00
—
4.00
5.00
1,028,500
9.9
5.00
—
5.00
Total
23,858,928
8.7
$
1.86
7,957,842
$
1.33
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model using the
assumptions noted in the table below for the nine months ended
September 30, 2006 and 2005, the years ended
December 31, 2005 and 2004 and the period from
October 27, 2003 (inception) through December 31,2003. The volatility used is based on an average historical
volatility from common shares of a group of the Company’s
peers for an appropriate period of time. There is a 0% expected
dividend yield as there are currently no future plans to pay any
dividends. The expected life of options granted is based on the
simplified calculation of expected life, described in the
Securities and Exchange Commission’s Staff Accounting
Bulletin No. 107 (“SAB 107”) due to
lack of option exercise. The risk-free interest rate is based on
the zero-coupon U.S. Treasury bond, with a term equal to
the expected life of the options.
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model using the
following assumptions:
Weighted average fair value per
option at grant date
$3.84
$0.73
Non-Employee
2005
2004
2003
Expected volatility
80.31%
88.54%
93.91%
Expected dividend yield
—
—
—
Expected life (in years)
10
10
10
Risk-free interest rate
4.20% - 4.23%
4.13% - 4.72%
4.30%
Weighted average fair value per
option at grant date
$1.71
$1.71
$0.91
The total fair value of options vested during the nine months
ended September 30, 2006, the years ended December 31,2005, 2004 and the period from October 27, 2003 (inception)
through December 31, 2003 was $2.6 million
(unaudited), $3.3 million, $1.1 million and $362,000,
respectively. As of September 30, 2006, total unrecognized
stock-based compensation costs related to non-vested stock
options was $8.4 million and is expected to be recognized
over a weighted average period of 3.7 years.
In connection with the sale of NextNet in August 2006, the
Company modified the terms of the options and SARs previously
granted to the employees of NextNet, in an effort to encourage
NextNet
employee retention. The vesting of 228,523 options and 375 SARs
was accelerated and the exercise term of 2,167,523 options and
375 SARs was extended, resulting in $753,000 (unaudited) expense
under SFAS No. 123(R) during the nine months ended
September 30, 2006. The fair value of the modified awards
and the fair value of the original awards immediately before the
modification were measured by the Black-Scholes option pricing
model based on the share price and other pertinent factors at
the modification date.
On August 11, 2006, the Company extended the exercise term
of 15,000 then unexpired and 173,346 then expired options owned
by terminated employees to October 26, 2006. The exercise
term extension of the unexpired options was accounted for as a
modification under SFAS No. 123(R), and the fair value
of the modified awards and the fair value of the original awards
immediately before the modification were measured by the
Black-Scholes option pricing model based on the share price and
other pertinent factors on July 26, 2006. The exercise term
extension of the expired options was accounted for as a new
grant of equity award under EITF Issue
No. 00-19,
“Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Company’s Own
Stock”. The fair value of the awards was measured by the
Black-Scholes option pricing model based on the share price and
other pertinent factors on July 26, 2006. As a result of
above, $807,000 (unaudited) of additional compensation expense
was incurred during the nine months ended September 30,2006.
Stock Option Plan — Restricted Stock —
In April 2006 and June 2004, the Company issued 250,000
(unaudited) and 1,000,000 shares of restricted stock to a
senior officer which vests in equal annual installments over a
two-year period. The Company also agreed to reimburse the
officer for the personal income tax liability associated with
the restricted stock. Compensation expense related to these
restricted stock grants of $797,000 (unaudited) and $875,000
(unaudited) was recorded for the nine months ended
September 30, 2006 and 2005, respectively, and
$1.4 million and $1.0 million for the years ended
December 31, 2005 and 2004, respectively. A summary of the
status of the restricted stock as of September 30, 2006 and
changes during the nine months ended September 30, 2006 is
presented below:
As of September 30, 2006, there was
$703,000 (unaudited) of total unrecognized compensation
cost related to the unvested restricted stock, which is expected
to be recognized over a weighted-average period of
1.4 years. The total fair value of shares vested during the
nine months ended September 30, 2006 and 2005 was
$1.0 million (unaudited) and $1.0 million (unaudited),
respectively and the years ended December 31, 2005 and 2004
was $0 million and 0.8 million, respectively.
SAR Plan (unaudited) — The SAR Plan was adopted
in January 2006 and provides for the granting of up to 500,000
stock appreciation rights. The stock appreciation rights
generally vest ratably over four years of continuous service and
expire no later than ten years after the date of grant. The SAR
Plan allows holders of these rights to share in the appreciation
of the fair value of the Company’s Class A common
stock. Settlement of these rights will be in cash, but these
rights may be replaced at the Company’s discretion with an
equivalent number of nonqualified options.
The Company accounts for grants under the SAR Plan under
SFAS No. 123(R). SARs are recorded as liability awards
as, cash settlement is anticipated, and are remeasured at fair
value each reporting period until the awards are settled. The
fair value is determined in the same manner as a stock option
granted under the Stock Option Plan using the same assumptions
and option-pricing model to estimate the fair value.
Compensation expense for each period until settlement is based
on the change (or a portion of the change, depending on the
percentage of the requisite service that has been rendered at
the reporting date) in the fair value for each reporting period.
For the nine months ended September 30, 2006, 471,875
(unaudited) net
SARs were granted between $5.00 (unaudited) and $6.00
(unaudited). There were no exercisable SARs as of
September 30, 2006. The Company recorded $67,000
(unaudited), net of forfeitures, of stock-based compensation
expense for SARs grants for the nine months ended
September 30, 2006. Of the total stock-based compensation
expense recorded, $15,000 (unaudited) was included in cost of
services and $52,000 (unaudited) was included in selling general
and administrative. The stock-based compensation liability at
September 30, 2006 for the requisite service that has been
rendered was $66,000 (unaudited) and was included in other
long-term liabilities.
Warrants — Warrants to purchase the
Company’s Class A common stock were issued in
connection with business combinations and the acquisition of
spectrum or assets. Warrants are recorded in Class A common
stock, warrants and additional paid-in capital at fair value at
grant date.
The fair value of warrants granted is estimated on the date of
grant using the Black-Scholes option pricing model using the
following assumptions for the nine months ended
September 30, 2006 (unaudited):
Expected volatility
73.76% - 88.54%
Expected dividend yield
—
Expected life (in years)
5-10
Risk-free interest rate
3.05% to 5.16%
Weighted average fair value per
share at grant date
$3.28
The fair value of warrants granted is estimated on the date of
grant using the Black-Scholes option pricing model using the
following average assumptions for the years ended
December 31, 2005, 2004 and for the period from
October 27, 2003 (inception) through December 31, 2003:
2005
2004
2003
Expected volatility
78.62% to 80.31%
88.54%
93.91%
Expected dividend yield
—
—
—
Expected life (in years)
6
10
10
Risk-free interest rate
3.89% to 4.61%
3.05% to 4.50%
4.29%
Weighted average fair value per
share at grant date
$4.09
$0.63
$0.89
13.
NET LOSS
PER SHARE
Basic and diluted loss per share have been calculated in
accordance with SFAS No. 128 for the nine months ended
September 30, 2006 and 2005, for the years ended
December 31, 2005 and 2004, and for the period
October 27, 2003 (inception) through December 31,2003. As the Company had a net loss in each of the periods
presented, basic and diluted net loss per common share are the
same.
The computations of diluted loss per share for the nine months
ended September 30, 2006 and 2005, for the years ended
December 31, 2005 and 2004, and for the period from
October 27, 2003 (inception) through December 31,2003, did not include the effects of the following options,
restricted stocks and warrants as the inclusion of these
securities would have been antidilutive.
Comprehensive loss consists of two components, net income and
other comprehensive income. Other comprehensive loss refers to
revenue, expenses, gains and losses that under generally
accepted accounting principles are recorded as an element of
shareholders’ equity but are excluded from net income. The
Company’s other comprehensive loss is comprised of foreign
currency translation adjustments from our subsidiaries not using
the U.S. dollar as their functional currency and unrealized
gains and losses on marketable securities categorized as
available-for-sale.
Total comprehensive loss for the nine months ended
September 30, 2006 was $187.6 million (unaudited)
compared to a comprehensive loss of $90.4 million
(unaudited) for the nine months ended September 30, 2005.
Total comprehensive loss was $140.7 million and
$32.8 million for the years ended
December 31, 2005 and 2004, respectively. The primary
difference between net loss as reported and comprehensive loss
are foreign currency translation adjustments.
The components of accumulated other comprehensive loss were as
follows (in thousands):
Accumulated net unrealized loss on
available-for sale investments
$
(24.3
)
$
87.3
Accumulated foreign currency
translation
(458.0
)
178.0
Total accumulated other
comprehensive income
$
(482.3
)
$
265.3
15.
GEOGRAPHIC
INFORMATION
The Company operates as one reporting segment as of
September 30, 2006. Due to the sale of NextNet on
August 29, 2006, the Company modified its segment reporting
under the requirements of SFAS No. 131, Disclosures
about Segments of an Enterprise and Related
Information. The segment disclosures as of
December 31, 2005 and 2004 have been recast to conform to
the Company’s organizational structure going forward.
The Company’s geographic results are as follows (in
thousands):
401(k) Plan — In connection with
Clearwire’s merger with NextNet in March 2004, the Company
acquired NextNet’s 401(k) Plan and amended the Plan to
become the Clearwire Corporation 401(k) Plan effective
July 1, 2004. This defined contribution plan covers all
employees. Participants may contribute up to 60% of their
compensation in any plan year, subject to an annual limitation.
Employer contributions may be made at the discretion of the
Company’s Board of Directors. To date, there have been no
Company contributions made to the Plan.
In connection with Clearwire’s merger with NextNet in March
2004, we acquired NextNet’s 401(k) plan, and amended the
plan to become the Clearwire Corporation 401(k) Plan (the
“Plan”) effectively July 1, 2004. This defined
contribution plan covers all employees meeting certain
eligibility criteria. Participants may contribute up to 60% of
their compensation in any plan year, limited by an annual
maximum amount as determined by the Internal Revenue Service.
Employer contributions may be made at the discretion of our
Board of Directors. To date, there have been no company
contributions made to the Plan. The Plan continued after the
August 29, 2006 sale of NextNet to Motorola and the NextNet
employees were given the option of leaving their past
contributions with the existing plan or rollover their
contributions to another qualified contribution plan. Effective
January 1, 2007, we will match 50% of employees
contributions, up to 3% of total employee compensation. The
contributions will vest over a three year period commencing on
the employees hired dates.
Until July 1, 2004, the Company offered a 401(k) Plan to
eligible employees as part of a 401(k) Plan administered by ERH.
Under the Plan, employees were eligible for matching
contributions after six months of service for 100% of the
employees’ contributions, up to 5% of total employee
compensation. There were no
matching contributions by us in 2004. The employees on this Plan
transferred into the Clearwire Corporation 401(k) Plan in 2005.
The Company also acquired CTI’s 401(k) Plan in November
2003. The Company intends to terminate this plan in 2006. Upon
termination of the Plan, the funds for prior CTI employees will
be transferred to the current Clearwire Corporation 401(k) Plan
or disbursed to the participants.
17.
RELATED
PARTY TRANSACTIONS
Clearwire has a number of strategic and commercial relationships
with third-parties that have had a significant impact on
Clearwire’s business, operations and financial results and
have the potential to have a similar impact in the future. Of
these, the material relationships have been with ERH, HITN, ISA,
ISC and Bell Canada, all of which are or have been related
parties.
Relationships among Certain Stockholders, Directors, and
Officers of Clearwire — At December 31, 2005,
ERH is the holder of all of Clearwire’s outstanding
Class B common stock and approximately 30% of
Clearwire’s outstanding Class A common stock. Due to
the transactions described elsewhere in this document, ERH held
approximately 65% of the Company’s outstanding Class B
common stock and approximately 16% of its outstanding
Class A common stock as of September 30, 2006
(unaudited). Eagle River Inc. (“ERI”) is the manager
of ERH. Each entity is controlled by Mr. McCaw.
Mr. McCaw and his affiliates have significant investments
in other telecommunications businesses, some of which may
compete with Clearwire currently or in the future. Subject only
to the noncompete provisions of the stockholder’s
agreement, Mr. McCaw and his affiliates will likely
continue to make additional investments in telecommunications
businesses.
ERH also holds 18.4% of the Company’s long-term outstanding
notes as of December 31, 2005 and 3.7% as of
September 30, 2006 (unaudited). As of December 31,2005, the notes held by ERH consisted of $48.0 million face
value, or $38.7 million of net discounts for warrants. As
of September 30, 2006 (unaudited), the notes held by ERH
consisted of $23.0 million face value, or
$19.0 million net of discounts for warrants. As of
December 31, 2005 and September 20, 2006 (unaudited),
ERH holds warrants entitling it to purchase 3,840,000 and
1,840,000 shares of the Company’s Class A common
stock. During the nine months ended September 30, 2006
(unaudited), ERH sold $25.0 million of the notes and
warrants it held from the August 2005 note issuance to an
unrelated party.
ERH earned accrued interest relating to the notes in the amount
of $3.1 million for the year-end December 31, 2005 and
$3.2 million for the nine-month period ended
September 30, 2006 (unaudited). ERH received a
$2.5 million (unaudited) and a $1.3 million
(unaudited) payment for accrued interest in February 2006 and
August 2006, respectively. There were no interest payments on
the debt during 2005.
In addition to acting as officers and directors of Clearwire,
certain individuals provide services to Eagle River, ERI, ERH
and their affiliates for which they are compensated. Any
compensation provided is in addition to the compensation paid to
such individuals by Clearwire, except for Mr. McCaw and
certain other individuals who do not directly receive additional
compensation from Clearwire (see Advisory Services Agreement
below).
Advisory Services Agreement — Clearwire and ERI
have entered into an Advisory Services Agreement, dated
November 13, 2003 (the “Advisory Services
Agreement”). Clearwire engaged ERI to provide advisory and
consulting services, including without limitation, advice as to
the development, ownership and operation of communications
services, advice concerning long-range planning and strategy for
the development and growth of Clearwire, advice and support in
connection with its dealings with federal, state and local
regulatory authorities, advice regarding employment, retention
and compensation of employees and assistance in short-term and
long-term financial planning.
In exchange for the services, Clearwire agreed to pay ERI and
annual advisory fee of $800,000 plus any
out-of-pocket
expenses incurred by ERI. The annual advisory fee covers certain
overhead expenses incurred by ERI on behalf of Clearwire,
including expenses related to providing administrative support
and office space to Messrs. McCaw, Wolf and Kauser and
compensation for services provided to Clearwire by certain
personnel of ERI. Except for compensation indirectly resulting
from fees received by ERI under the
Advisory Services Agreement, Mr. McCaw does not receive any
compensation directly from Clearwire. During the fiscal years
ended December 31, 2003, 2004, 2005 and for the nine months
ended September 30, 2006, the Company paid ERI fees of
$107,000, $800,000, $800,000 and $600,000 (unaudited),
respectively and expense reimbursements of $341,000, $125,000,
$296,000 and $679,000 (unaudited), respectively under this
agreement.
Pursuant to the Advisory Services Agreement, in 2003 Clearwire
also issued to ERH warrants to purchase 1,125,000 shares of
Class A common stock at an exercise price of $1.00 per
share, which may be exercised any time within 10 years of
the issuance of the warrants. As of September 30, 2006, the
remaining life of the warrant was 7.1 years (unaudited).
Subscription Agreement — Clearwire and FFW
entered into a subscription agreement in November 2003. Pursuant
to this agreement in 2004, FFW received 34,613,020 shares
of Class B common stock in exchange for $27.0 million
in cash and additional spectrum licenses valued at
$7.6 million. Clearwire accounted for the transaction as a
transaction between entities under common control.
Commercial Agreements with NextNet — ERH and
NextNet entered into a master purchase agreement, support
services agreement and escrow agreement (the “Commercial
Agreements”) in July 2003. Under the Commercial Agreements,
NextNet agreed to sell its standard products and to provide
support services in connection with the products sold to ERH and
its affiliates, with some products being sold at a substantial
discount to NextNet’s standard prices. NextNet also agreed
to develop enhanced products based on specification submitted by
ERH. The Commercial Agreements also grants ERH certain exclusive
rights to distribute NextNet equipment in various countries
around the world. As of December 31, 2005, ERH had not
requested any development of enhanced products, nor had it
elected to distribute NextNet equipment to any country other
than Canada. For the years ended December 31, 2005 and
2004, NextNet sold $9.7 million and $6.9 million of
equipment, with a cost of $1.9 million and
$3.1 million, respectively, to ERH under this agreement.
This agreement was terminated upon the sale of NextNet to
Motorola in August 2006.
NextNet and MVS Net Joint Development Agreement —
Under a joint development agreement (“JDA”), dated
April 2002, between MVS Net and NextNet, NextNet agreed to
provide MVS Net with certain equipment, software and systems
engineering services for use in deploying a broadband wireless
service in Mexico. The agreement contemplates two phases, a
rollout of service in Mexico City, Guadalajara or Monterrey,
Mexico and required $5.5 million in purchases under the JDA
by MVS Net. The term of the JDA is ten years and includes a
three-year exclusivity provision for MVS Net to be the only
authorized purchaser of NextNet equipment in Mexico, subject to
satisfying certain purchase commitments. The exclusivity period
will extend if the service rollout is completed with a
three-year period and MVS Net continues to purchase NextNet
products and services. The Company accounts for its investment
in MVS Net under the equity method. Revenue and related costs of
goods and services sold to MVS Net under the JDA from
March 16, 2004 through December 31, 2005 have been
eliminated, and Clearwire’s investment in MVS Net has been
reduced for its proportionate share of losses. This agreement
has been transferred to Motorola as a part of the NextNet sale
in August 2006.
Nextel Undertaking — Clearwire and
Mr. McCaw entered into an agreement and undertaking in
November 2003, pursuant to which Clearwire agreed to comply with
the terms of a separate agreement between Nextel and
Mr. McCaw. The agreement provides Nextel the following
rights until October 3, 2006: (1) Nextel had the right
to swap certain channels of owned or leased BRS or EBS with
entities controlled by Mr. McCaw, including Clearwire; and
(2) Nextel had a right of first refusal on a sale by
Clearwire of certain owned or leased BRS and EBS spectrum to a
third-party. The right of first refusal generally does not apply
to spectrum acquired after August 13, 2004. This agreement
is binding on the Company so long as the Company is a
“controlled affiliate” of Mr. McCaw as defined
therein. Under the terms of the agreement, Nextel notified
Clearwire of its request to swap certain channels. This swap is
pending. There were no payments made to Nextel under this
agreement in 2005 or 2004 or during the nine months ended
September 30, 2006 and 2005 (unaudited).
Intel Collaboration Agreement — On
June 28, 2006, Clearwire entered into a collaboration
agreement with Intel, to develop, deploy and market a co-branded
mobile WiMAX service offering in the United States,
that will target users of certain WiMAX enabled notebook
computers, ultramobile PCs, and other mobile computing devices
containing Intel microprocessors. Both parties have committed to
make certain contributions to the development, promotion and
marketing of this service, which will be available only over our
mobile WiMAX network.
The Company and Intel have agreed to share the revenues received
from subscribers using Intel mobile computing devices on the
Company’s domestic mobile WiMAX network. Intel will also
receive a one time fixed payment for each new Intel mobile
computing device activated on our domestic mobile WiMAX network
once the Company has successfully achieved substantial mobile
WiMAX network coverage across the United States. For the period
ended September 30, 2006, Clearwire has not paid any
amounts under this agreement.
Motorola Agreements — Simultaneously with the
sale of NextNet, certain commercial agreements between Clearwire
and Motorola were entered into for the purchase of certain
infrastructure and supply inventory from infrastructure and
NextNet. Under these agreements, Clearwire will be committed to
purchase no less than $150.0 million of equipment products
from Motorola in the first two years after the effective date,
subject to Motorola continuing to satisfy certain performance
requirements and other conditions. The Company is also committed
to purchase all Expedience modems and Expedience PC cards we
provide to the Company’s subscribers for a period of five
years and 51% for the remainder of the term of the agreement if
certain conditions are met. Refer to Note 3 for further
details.
Through and
including ,
2007 (the 25th day after this prospectus), all dealers
effecting transactions in these securities, whether or not
participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers’ obligation
to deliver a prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
The following table shows the costs and expenses, other than
underwriting discounts and commissions, payable in connection
with the sale and distribution of the securities being
registered. All amounts except the SEC registration fee and the
NASD fee are estimated. The missing amounts will be filed by
amendment.
Amount
(In thousands)
SEC Registration Fee
$
43
Nasdaq Global Market Listing Fee
*
NASD Fee
41
Accounting Fees and Expenses
*
Legal Fees and Expenses
*
Printing Fees and Expenses
*
Blue Sky Fees and Expenses
*
Miscellaneous
*
Total
$
*
To be completed by amendment.
Item 14.
Indemnification
of Directors and Officers
Section 102 of the General Corporation Law of the State of
Delaware allows a corporation to eliminate the personal
liability of directors of a corporation or its stockholders for
monetary damages for a breach of a fiduciary duty as a director,
except where the director breached his duty of loyalty, failed
to act in good faith, engaged in intentional misconduct or
knowingly violated a law, authorized the payment of a dividend
or approved a stock repurchase or redemption in violation of
Delaware corporate law or obtained an improper personal benefit.
Section 145 of the Delaware General Corporation Law
empowers a Delaware corporation to indemnify any person who was
or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other
than an action by or in the right of such corporation) by reason
of the fact that such person is or was a director, officer,
employee or agent of such corporation, or is or was serving at
the request of such corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture,
trust or other enterprise. The indemnity may include expenses
(including attorneys’ fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by such
person in connection with such action, suit or proceeding,
provided that such person acted in good faith and in a manner
such person reasonably believed to be in or not opposed to the
best interests of the corporation and, with respect to any
criminal action or proceeding, had no reasonable cause to
believe such person’s conduct was unlawful. A Delaware
corporation may indemnify directors, officers, employees and
other agents of such corporation in an action by or in the right
of a corporation under the same conditions against expenses
(including attorneys’ fees) actually and reasonably
incurred by the person in connection with the defense and
settlement of such action or suit, except that no
indemnification is permitted without judicial approval if the
person to be indemnified has been adjudged to be liable to the
corporation. Where a present or former director or officer of
the corporation is successful on the merits or otherwise in the
defense of any action, suit or proceeding referred to above or
in defense of any claim, issue or matter therein, the
corporation must indemnify such person against the expenses
(including attorneys’ fees) which he or she actually and
reasonably incurred in connection therewith.
Section 174 of the General Corporation Law of the State of
Delaware provides, among other things, that a director who
willfully or negligently approves of an unlawful payment of
dividends or an unlawful stock purchase or redemption, may be
held liable for such actions. A director who was either absent
when the unlawful actions were approved or dissented at the
time, may avoid liability by causing his or her dissent to such
actions to be entered into the books containing the minutes of
the meetings of the board of directors at the time such action
occurred or immediately after such absent director receives
notice of the unlawful acts.
Our certificate of incorporation contains a provision that
eliminates the personal liability of directors to the company or
its stockholders for monetary damages for a breach of fiduciary
duty as a director, to the fullest extent permitted by Delaware
General Corporation Law. It also contains provisions that
provide for the indemnification of directors of the company for
third party actions and actions by or in the right of the
company that mirror Section 145 of the Delaware General
Corporation Law.
In addition, the Company’s certificate of incorporation
states that it shall have power to purchase and maintain
insurance on behalf of any person who is or was a director,
officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director,
officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, including service with
respect to an employee benefit plan, against any liability
asserted against such person or incurred by such person in any
such capacity, or arising out of such person’s status as
such, and related expenses, whether or not the corporation would
have the power to indemnify such person against such liability
under Delaware General Corporate Law. We also have and intend to
maintain director and officer liability insurance, if available
on reasonable terms.
Service as a director, officer, employee or agent or another
corporation, partnership, limited liability company, joint
venture or other enterprise, at least 50% of whose equity
interests are owned by us, are conclusively presumed to be
serving in such capacity upon the Company’s request.
Persons who become or remain directors after the date of
adoption of the indemnity provisions are presumed to rely on
them in entering into or remaining in such service.
Item 15.
Recent
Sales of Unregistered Securities.
The following sets for the information regarding unregistered
securities sold by the registrant since October 27, 2003
(inception).
Offerings
(1)
From June 2004 through August 2004, the registrant issued and
sold 80,000,000 shares of common stock at an offering price
of $2.00 per share for a total of $160,000,000.
46,007,750 shares were sold to existing stockholders (of
which 39,598,751 shares were sold to Flux Fixed Wireless,
LLC, and 5,714,886 were sold to Eagle River Holdings, LLC,
affiliates of the registrant), for which the registrant received
cash consideration of $92,015,500 and the remaining
33,992,250 shares were sold to accredited investors for
cash consideration of $67,984,500. The issuance and sale of such
shares was effected without registration under the Securities
Act in reliance on the exemption from registration provided
under Rule 506 of Regulation D promulgated under the
Securities Act and under Section 4(2) of the Securities Act.
(2)
In March 2005 the registrant issued and sold
29,873,512 shares of common stock to accredited investors
at offering price of $4.00 per share for cash consideration of
$119,494,048. The issuance and sale of such shares was effected
without registration under the Securities Act in reliance on the
exemption from registration provided under Rule 506 of
Regulation D promulgated under the Securities Act and under
Section 4(2) of the Securities Act.
(3)
In June 2005 the registrant issued and sold
5,000,000 shares of common stock to accredited investors at
an offering price of $4.00 per share for cash consideration of
$20,000,000. The issuance and sale of such shares was effected
without registration under the Securities Act in
reliance on the exemption from registration provided under
Rule 506 of Regulation D promulgated under the
Securities Act and under Section 4(2) of the Securities Act.
(4)
From August 2005 through February 2006 the registrant issued and
sold to accredited investors Senior Notes in the amount of
$620,695,659 and 49,655,653 warrants to purchase common stock at
an exercise price of $5.00 per share. The issuance and sale
of such notes was effected without registration under the
Securities Act in reliance on the exemption from registration
provided under Rule 506 of Regulation D promulgated
under the Securities Act and under Section 4(2) of the
Securities Act.
(5)
In August 2006 the registrant issued and sold
142,425,485 shares of common stock to accredited investors
at an offering price of $6.00 per share for cash
consideration of $854,552,910. The issuance and sale of such
shares was effected without registration under the Securities
Act in reliance on the exemption from registration provided
under Rule 506 of Regulation D promulgated under the
Securities Act, Regulation S promulgated under the
Securities Act and under Section 4(2) of the Securities Act.
(6)
In August 2006 the registrant issued and sold
29,717,197 shares of Class B common stock to an
accredited investor at an offering price of $6.00 for cash
consideration of $178,303,182. The issuance and sale of such
shares was effected without registration under the Securities
Act in reliance on the exemption from registration provided
under Rule 506 of Regulation D promulgated under the
Securities Act, and under Section 4(2) of the Securities
Act.
(7)
In October 2006 the registrant issues and sold
3,666,666 shares of common stock to accredited investors at
an offering price of $6.00 for cash consideration of
$21,999,996. The issuance and sale of such shares was effected
without registration under the Securities Act in reliance on the
exemption from registration provided under Regulation S
promulgated under the Securities Act.
Spectrum
Acquisitions
(1)
From November 2003 through May 2004 the registrant issued and
sold 10,631,714 shares of common stock to HITN, an
affiliate of the registrant and an accredited investor at a per
share price of $1.00 per share for a total of $10,631,714 in
connection with the acquisition of spectrum. The issuance and
sale of such shares was effected without registration under the
Securities Act in reliance on the exemption from registration
provided under Rule 506 of Regulation D promulgated under
the Securities Act and under Section 4(2) of the Securities
Act.
(2)
In October 2004 the registrant issued and sold
2,013,426 shares of common stock to an accredited investor
at a per share price of $2.00 per share for a total of
$4,026,852 in connection with the acquisition of spectrum. The
issuance and sale of such shares was effected without
registration under the Securities Act in reliance on the
exemption from registration provided under Rule 506 of
Regulation D promulgated under the Securities Act and under
Section 4(2) of the Securities Act.
(3)
In October 2004 the registrant issued and sold
32,655 shares of common stock to an accredited investor at
a per share price of $2.00 per share for a total of $65,310 in
connection with the acquisition of spectrum. The issuance and
sale of such shares was effected without registration under the
Securities Act in reliance on the exemption from registration
provided under Rule 506 of Regulation D promulgated
under the Securities Act and under Section 4(2) of the
Securities Act.
(4)
In October 2004 the registrant issued and sold
276,595 shares of common stock to an accredited investor at
a per share price of $2.00 per share for a total of
$553,190 in connection with the acquisition of spectrum. The
issuance and sale of such shares was effected without
registration under the Securities Act in reliance on the
exemption from registration provided under Rule 506 of
Regulation D promulgated under the Securities Act and under
Section 4(2) of the Securities Act.
In October 2004 the registrant issued and sold
376,875 shares of common stock to an accredited investor at
a per share price of $2.00 per share for a total of
$753,750 in connection with the acquisition of spectrum. The
issuance and sale of such shares was effected without
registration under the Securities Act in reliance on the
exemption from registration provided under Rule 506 of
Regulation D promulgated under the Securities Act and under
Section 4(2) of the Securities Act.
(6)
In November 2004 the registrant issued and sold
346,685 shares of common stock to an accredited investor at
a per share price of $2.00 per share for a total of
$693,370 in connection with the acquisition of spectrum. The
issuance and sale of such shares was effected without
registration under the Securities Act in reliance on the
exemption from registration provided under Rule 506 of
Regulation D promulgated under the Securities Act and under
Section 4(2) of the Securities Act.
(7)
In November 2004 the registrant issued and sold
1,456,077 shares of common stock to an accredited investor
at a per share price of $2.00 per share for a total of
$2,912,154 in connection with the acquisition of spectrum. The
issuance and sale of such shares was effected without
registration under the Securities Act in reliance on the
exemption from registration provided under Rule 506 of
Regulation D promulgated under the Securities Act and under
Section 4(2) of the Securities Act.
(8)
In November 2004 the registrant issued and sold
208,011 shares of common stock to an accredited investor at
a per share price of $2.00 per share for a total of
$416,022 in connection with the acquisition of spectrum. The
issuance and sale of such shares was effected without
registration under the Securities Act in reliance on the
exemption from registration provided under Rule 506 of
Regulation D promulgated under the Securities Act and under
Section 4(2) of the Securities Act.
(9)
In November 2004 the registrant issued and sold
1,456,077 shares of common stock to an accredited investor
at a per share price of $2.00 per share for a total of
$2,912,154 in connection with the acquisition of spectrum. The
issuance and sale of such shares was effected without
registration under the Securities Act in reliance on the
exemption from registration provided under Rule 506 of
Regulation D promulgated under the Securities Act and under
Section 4(2) of the Securities Act.
(10)
From February 2005 through October 2005 the registrant issued
and sold 104,111 shares of common stock to an accredited
investor at a per share price of $2.00 per share for a
total of $208,222 in connection with the acquisition of
spectrum. The issuance and sale of such shares was effected
without registration under the Securities Act in reliance on the
exemption from registration provided under Rule 506 of
Regulation D promulgated under the Securities Act and under
Section 4(2) of the Securities Act.
(11)
In February 2005 the registrant issued and sold
213,821 shares of common stock to an accredited investor at
a per share price of $2.00 per share for a total of
$427,642 in connection with the acquisition of spectrum. The
issuance and sale of such shares was effected without
registration under the Securities Act in reliance on the
exemption from registration provided under Rule 506 of
Regulation D promulgated under the Securities Act and under
Section 4(2) of the Securities Act.
(12)
In May 2005 the registrant issued and sold 300,000 shares
of common stock to an accredited investor at a per share price
of $2.00 per share for a total of $600,000 in connection with
the acquisition of spectrum. The issuance and sale of such
shares was effected without registration under the Securities
Act in reliance on the exemption from registration provided
under Rule 506 of Regulation D promulgated under the
Securities Act and under Section 4(2) of the Securities Act.
From May 2005 through July 2005 the registrant issued and sold
287,774 shares of common stock to an accredited investor at
a per share price of $2.00 per share for a total of
$575,548 in connection with the acquisition of spectrum. The
issuance and sale of such shares was effected without
registration under the Securities Act in reliance on the
exemption from registration provided under Rule 506 of
Regulation D promulgated under the Securities Act and under
Sections 4(2) and 4(6) of the Securities Act.
(14)
In October 2005 the registrant issued and sold
66,238 shares of common stock to an accredited investor at
a per share price of $2.00 per share for a total of $132,476 in
connection with the acquisition of spectrum. The issuance and
sale of such shares was effected without registration under the
Securities Act in reliance on the exemption from registration
provided under Rule 506 of Regulation D promulgated
under the Securities Act and under Sections 4(2) and 4(6)
of the Securities Act.
(15)
In October 2005 the registrant issued and sold
66,237 shares of common stock to an accredited investor at
a per share price of $2.00 per share for a total of $132,474 in
connection with the acquisition of spectrum. The issuance and
sale of such shares was effected without registration under the
Securities Act in reliance on the exemption from registration
provided under Rule 506 of Regulation D promulgated
under the Securities Act and under Sections 4(2) and 4(6)
of the Securities Act.
(16)
In October 2005 the registrant issued and sold
42,525 shares of common stock to an accredited investor at
a per share price of $2.00 per share for a total of $85,050 in
connection with the acquisition of spectrum. The issuance and
sale of such shares was effected without registration under the
Securities Act in reliance on the exemption from registration
provided under Rule 506 of Regulation D promulgated
under the Securities Act and under Sections 4(2) and 4(6)
of the Securities Act.
(17)
In October 2005 the registrant issued and sold
175,000 shares of common stock to an accredited investor at
a per share price of $2.00 per share for a total of
$350,000 in connection with the acquisition of spectrum. The
issuance and sale of such shares was effected without
registration under the Securities Act in reliance on the
exemption from registration provided under Rule 506 of
Regulation D promulgated under the Securities Act and under
Sections 4(2) and 4(6) of the Securities Act.
(18)
In November 2005 the registrant issued and sold
1,250,000 shares of common stock to an accredited investor
at a per share price of $2.00 per share for a total of
$2,500,000 in connection with the acquisition of spectrum. The
issuance and sale of such shares was effected without
registration under the Securities Act in reliance on the
exemption from registration provided under Rule 506 of
Regulation D promulgated under the Securities Act and under
Section 4(2) of the Securities Act.
(19)
In November 2005 the registrant issued and sold
500,000 shares of common stock to an accredited investor at
a per share price of $2.00 per share for a total of
$1,000,000 in connection with the acquisition of spectrum. The
issuance and sale of such shares was effected without
registration under the Securities Act in reliance on the
exemption from registration provided under Rule 506 of
Regulation D promulgated under the Securities Act and under
Sections 4(2) and 4(6) of the Securities Act.
(20)
In November 2005 the registrant issued and sold
500,000 shares of common stock to an accredited investor at
a per share price of $2.00 per share for a total of
$1,000,000 in connection with the acquisition of spectrum. The
issuance and sale of such shares was effected without
registration under the Securities Act in reliance on the
exemption from registration provided under Rule 506 of
Regulation D promulgated under the Securities Act and under
Sections 4(2) and 4(6) of the Securities Act.
In December 2005 the registrant issued and sold
51,666 shares of common stock to an accredited investor at
a per share price of $5.00 per share for a total of
$258,330 in connection with the acquisition of spectrum. The
issuance and sale of such shares was effected without
registration under the Securities Act in reliance on the
exemption from registration provided under Rule 506 of
Regulation D promulgated under the Securities Act and under
Sections 4(2) and 4(6) of the Securities Act.
(22)
In June 2005 the registrant issued and sold 354,614 shares
of common stock to HITN, an affiliate of the registrant and an
accredited investor at a per share price of $2.00 per share
for a total of $709,228 in connection with the acquisition of
spectrum. The issuance and sale of such shares was effected
without registration under the Securities Act in reliance on the
exemption from registration provided under Rule 506 of
Regulation D promulgated under the Securities Act and under
Sections 4(2) and 4(6) of the Securities Act.
(23)
From September 2005 through November 2005 the registrant issued
and sold 102,824 shares of common stock to HITN, an
affiliate of the registrant and an accredited investor at a per
share price of $5.00 per share for a total of $514,120 in
connection with the acquisition of spectrum. The issuance and
sale of such shares was effected without registration under the
Securities Act in reliance on the exemption from registration
provided under Rule 506 of Regulation D promulgated
under the Securities Act and under Section 4(2) of the
Securities Act.
(24)
In January 2006 the registrant issued and sold 400,000 warrants
to purchase common stock with an exercise price of
$5.00 per share in connection with the acquisition of
spectrum. The issuance and sale of such warrants was effected
without registration Rule 506 of Regulation D
promulgated under the Securities Act and under Section 4(2)
of the Securities Act.
(25)
In May 2006 the registrant issued and sold 60,000 shares of
common stock to an accredited investor at per share price of
$5.00 per share for a total of $300,000 in connection with the
acquisition of spectrum. The issuance and sale of such shares
was effected without registration under the Securities Act in
reliance on the exemption from registration provided under
Rule 506 of Regulation D promulgated under the
Securities Act and under Sections 4(2) and 4(6) of the
Securities Act.
(26)
In August 2006 registrant issued and sold 6,666,667 shares
of common stock to accredited investors at a per share price of
$6.00 per share for a total of $40,000,002 in connection with
the acquisition of spectrum. The issuance and sale of such
shares was effected without registration under the Securities
Act in reliance on the exemption from registration provided
under Rule 506 of Regulation D promulgated under the
Securities Act and under Sections 4(2) of the Securities
Act.
(27)
In October 2006 the registrant issued and sold 1,200,000
shares of common stock to accredited investors at a per share
price of $6.00 per share for total of $7.2 million in
connection with the acquisition of spectrum pursuant to a stock
purchase agreement signed on August 2, 2006. The issuance
and sale of such shares was effected without registration under
the Securities Act in reliance on the exemption from
registration provided under Regulation S promulgated.
Stock
Acquisitions
(1)
In November 2003 the registrant issued and sold
7,709,375 shares of common stock to an accredited investor
at a per share price of $1.00 per share in connection with
the acquisition of Clearwire Technologies, Inc. and its
subsidiaries. The issuance and sale of such shares was effected
without registration under the Securities Act in reliance on the
exemption from registration provided under Sections 4(2)
and 4(6) of the Securities Act
(2)
From November 2003 through December 2004 the registrant issued
and sold 56,072,860 shares of Class B common stock to
an accredited investor at a per share price of $1.00 per
share for a total of $56,072,860 in connection with the
acquisition of Fixed Wireless Holdings, LLC. The
issuance and sale of such shares was effected without
registration under the Securities Act in reliance on the
exemption from registration provided under Rule 506 of
Regulation D promulgated under the Securities Act and under
Sections 4(2) and 4(6) of the Securities Act.
(3)
From March 2004 through May 2004 the registrant issued and sold
13,869,378 shares of common stock and 3,070,339 warrants to
purchase common stock with an exercise price of $4.00 per
share to accredited investors in connection with the merger
transaction with NextNet Wireless, Inc. 52,335 warrants are
subject to reversion to the registrant pursuant to the
transaction documents. The issuance and sale of such shares was
effected without registration under the Securities Act in
reliance on the exemption from registration provided under
Rule 506 of Regulation D promulgated under the
Securities Act and under Section 4(2) of the Securities Act.
(4)
In May 2005 the registrant issued and sold 258,091 shares
of common stock to accredited investors at a per share price of
$2.00 per share for a total of $516,182 in connection with the
acquisition of Unison Wireless, Inc. The issuance and sale of
such shares was effected without registration under the
Securities Act in reliance on the exemption from registration
provided under Rule 506 of Regulation D promulgated under
the Securities Act and under Section 4(2) of the Securities
Act.
(5)
In January 2006 the registrant issued and sold to an accredited
investor 142,630 shares of common stock to accredited
investors at a per share price of $5.00 per share.
14,805 shares were issued to a spectrum consultant or
broker for a total of $74,025, and the remaining 127,825 were
issued to stockholders for a total of $639,125 in connection
with the acquisition of WinBeam, Incorporated. The issuance and
sale of such shares was effected without registration under the
Securities Act in reliance on the exemption from registration
provided under Rule 506 of Regulation D promulgated
under the Securities Act and under Sections 4(2) and 4(6)
of the Securities Act.
(6)
In February 2006 the registrant issued and sold
4,750,000 shares of common stock to an accredited investor
at a per share price of $5.00 for a total of $23,750,000 in
connection with the acquisition of Banda Ancha S.A. The issuance
and sale of such shares was effected without registration under
the Securities Act in reliance on the exemption from
registration provided under Regulation S promulgated under the
Securities Act.
(7)
In April 2006 the registrant issued and sold 70,000 shares
of common stock at a per share price of $5.00 for a total of
$350,000 in connection with the acquisition of Wi-Com
Consulting, Inc. The issuance and sale of such shares was
effected without registration under the Securities Act in
reliance on the exemption from registration provided under
Rule 506 of Regulation D promulgated under the
Securities Act and under Section 4(2) of the Securities Act.
Consultant,
Advisory, and Joint Development Agreements
(1)
In November 2003 the registrant issued and sold warrants to
purchase $1,125,000 shares of common stock to COM Holdings,
LLC, an affiliate of the registrant and an accredited investor
at an exercise price of $1.00 per share in connection with
certain advisory services. The issuance and sale of such
warrants was effected without registration under the Securities
Act in reliance on the exemption from registration provided
under Rule 506 of Regulation D promulgated under the
Securities Act and under Sections 4(2) and 4(6) of the
Securities Act.
(2)
In October 2004 the registrant issued and sold
10,000,000 shares of common stock to an accredited investor
at a per share price of $2.00 per share for a total of
$20,000,000 in connection with and investment and joint
development agreement. The issuance and sale of such shares was
effected without registration under the Securities Act in
reliance on the exemption from registration provided under
Rule 506 of Regulation D promulgated under the
Securities Act and under Sections 4(2) and 4(6) of the
Securities Act.
From February 2005 through August 2006 the registrant issued and
sold 248,810 warrants to purchase common stock to ITFS Spectrum
Consultants LLC, an affiliate of Mr. Rodriguez and an
accredited investor at an exercise price of $.05 per share
in connection with a consultant agreement. The issuance and sale
of such warrants was effected without registration under the
Securities Act in reliance on the exemption from registration
provided under Rule 506 of Regulation D promulgated under
the Securities Act and under Sections 4(2) and 4(6) of the
Securities Act.
(4)
From April 2004 through December 2005 the registrant issued and
sold 1,908,151 warrants to purchase common stock to ITFS
Spectrum Advisors LLC, an affiliate of Mr. Rodriguez and an
accredited investor at an exercise price of $.001 per share
in connection an advisory agreement. The issuance and sale of
such warrants was effected without registration under the
Securities Act in reliance on the exemption from registration
provided under Rule 506 of Regulation D promulgated under
the Securities Act and under Sections 4(2) and 4(6) of the
Securities Act.
(5)
In February 2006 the registrant issued and sold
12,650 shares of common stock to an accredited investor at
a per share price of $2.00 per share in connection with a
consultant agreement. The issuance and sale of such shares was
effected without registration under the Securities Act in
reliance on the exemption from registration provided under
Rule 506 of Regulation D promulgated under the
Securities Act and under Sections 4(2) and 4(6) of the
Securities Act.
(6)
In August 2006 the registrant issued and sold 2,514 shares
of common stock to an accredited investor at a per share price
of $2.00 per share in connection with a consultant agreement.
The issuance and sale of such shares was effected without
registration under the Securities Act in reliance on the
exemption from registration provided under Rule 506 of
Regulation D promulgated under the Securities Act and under
Sections 4(2) and 4(6) of the Securities Act.
Director,
Officer and Employee Compensation
(1)
In August 2004 the registrant issued 1,000,000 share of
restricted stock to an executive officer of the registrant at a
per share price of $2.00 per share for a total of
$2,000,000 pursuant to a restricted stock grant agreement. The
issuance and sale of such shares was effected without
registration under the Securities Act in reliance on the
exemption from registration provided under Rule 506 of
Regulation D promulgated under the Securities Act and under
Section 4(2) of the Securities Act.
(2)
In January 2005 the registrant issued 17,125 shares of
common stock to directors of the registrant at a per share price
of $2.00 per share in connection with director compensation. The
issuance and sale of such shares was effected without
registration under the Securities Act in reliance on the
exemption from registration provided under Rule 506 of
Regulation D promulgated under the Securities Act and under
Section 4(2) of the Securities Act.
(3)
In July 2005 the registrant issued 1,625 shares of common
stock to directors of the registrant at a per share price of
$4.00 per share in connection with director compensation.
The issuance and sale of such shares was effected without
registration under the Securities Act in reliance on the
exemption from registration provided under Section 4(2) of
the Securities Act.
(4)
In December 2005 the registrant issued 14,800 shares of
common stock to directors at a per share price of $5.00 per
share in connection with director compensation. The issuance and
sale of such shares was effected without registration under the
Securities Act in reliance on the exemption from registration
provided under Rule 506 of Regulation D promulgated
under the Securities Act and under Section 4(2) of the
Securities Act.
(5)
In April 2006, the registrant issued 250,000 shares of
common stock at a value of $5.00 per share. The issuance
and sale of such restricted shares was effected without
registration under the Securities Act in reliance on the
exemption from registration provided under Sections 4(2)
and 4(6) of the Securities Act.
In July 2006, the registrant issued 2,252 shares of common
stock to directors as a directors’ fee in lieu of
compensation. The issuance and sale of such restricted shares
was effected without registration under the Securities Act in
reliance on the exemption from registration provided under
Section 4(2) of the Securities Act.
(7)
From December 2003 to November 2006, the registrant has issued
directors, officers and employees options to purchase
36,263,724 shares of common stock with per share exercise
prices ranging from $0.75 to $6.00, 140,479 of which have been
exercised. The issuance and sale of such shares was effected
without registration under the Securities Act in reliance on the
exemption from registration provided under Rule 701 of the
Securities Act.
(8)
Since January 2006, the registrant has issued to employees
508,650 stock appreciation rights to employees with a base value
of $5.00 per stock appreciation right, none of which have
been exercised. The issuance and sale of such stock appreciation
rights was effected without registration under the Securities
Act in reliance on the exemption from registration provided
under Rule 701 of the Securities Act.
Form of stock certificate for
Class A common stock.†
4
.2
Amended and Restated Stockholders
Agreement dated March 16, 2004 among Clearwire Corporation
and the parties thereto.
4
.3
Registration Rights Agreement
dated November 13, 2003 among Flux U.S. Corporation,
Clearwire Holdings, Inc. and Hispanic Information and
Telecommunications Network, Inc.
Securities Purchase Agreement
dated August 5, 2005 among Clearwire Corporation and the
buyers of the Senior Secured Notes, as amended February 16,2006.
4
.8
Indenture dated August 5,2005 among Clearwire Corporation, Clearwire LLC, Fixed Wireless
Holdings, LLC, NextNet Wireless, Inc. and The Bank of New York,
as Trustee, as supplemented February 16, 2006.
4
.9
Form of Senior Secured Note, due
2010.
4
.10
Form of Warrant.
5
.1
Opinion of Davis Wright Tremaine
LLP.†
9
.1
Voting Agreement dated
August 29, 2006 between Clearwire Corporation, Intel
Pacific, Inc., Intel Capital Corporation and Eagle River
Holdings, LLC.†
10
.1
Advisory Services Agreement dated
November 13, 2003 between Flux U.S. Corporation and
COM Holdings, LLC.
10
.2
Indemnification Agreement dated
November 13, 2003 among Flux Fixed Wireless, LLC and Flux
U.S. Corporation.
10
.3
Form of Indemnification Agreement.
10
.4
Letter Agreement dated
April 1, 2004 between Clearwire Corporation and Ben Wolff.
Letter Agreement dated
April 26, 2004 between Clearwire Corporation and Nicolas
Kauser.
10
.6
Letter Agreement dated
April 27, 2004 between Clearwire Corporation and R. Gerard
Salemme.
10
.7
Employment Agreement dated
June 28, 2004 between Clearwire Corporation and Perry
Satterlee.
10
.8
Letter Agreement dated
March 2, 2005 between Clearwire Corporation and John Butler.
10
.9
Clearwire Corporation 2003 Stock
Option Plan, as amended.
10
.10
Agreement dated March 5, 2003
among Nextel Communications, Inc., Digital Radio, LLC and
Craig O. McCaw.†
10
.11
Amendment to Agreement dated
March 5, 2003, dated October 3, 2003, among Nextel
Communications, Inc., Digital Radio, L.L.C. and Craig O.
McCaw.†
10
.12
Agreement and Undertaking dated
November 13, 2003 between Flux U.S. Corporation and
Craig O. McCaw.†
10
.13
Master Spectrum Acquisition
Agreement dated November 13, 2003 between Flux
U.S. Corporation and Hispanic Information and
Telecommunications Network, Inc.
10
.14
First Addendum and Amendment to
the Master Spectrum Acquisition Agreement dated March 29,2004 between Clearwire Corporation and Hispanic Information and
Telecommunications Network, Inc.
10
.15
ITFS Capacity Use and Royalty
Agreement dated November 13, 2003 between Hispanic
Information and Telecommunications Network, Inc. and Fixed
Wireless Holdings, LLC.
10
.16
Spectrum Access and
Loan Facility Agreement dated May 24, 2005 among
Clearwire Corporation, Hispanic Information and
Telecommunications Network, Inc. and HITN Spectrum, LLC.
10
.17
Warrant Agreement dated
November 13, 2003 by and between Flux U.S. Corporation
and ITFS Spectrum Advisors LLC.
10
.18
Letter Agreement dated
March 29, 2004 from Clearwire Corporation to ITFS Spectrum
Advisors LLC.
10
.19
Spectrum Acquisition Consulting
Agreement dated February 1, 2005 by and between Clearwire
Corporation and ITFS Spectrum Consultants LLC.
10
.20
Letter Agreement dated
February 1, 2005 from Clearwire Corporation to ITFS
Spectrum Consultants LLC.‡
10
.21
Amendment and Consent dated
February 1, 2005 between Clearwire Corporation to ITFS
Spectrum Advisors LLC and ITFS Spectrum Consultants LLC.
10
.22
Second Amendment and Consent dated
April 26, 2006, by and among Clearwire Corporation and ITFS
Spectrum Consultants LLC.
10
.23
Spectrum Option Agreement dated
March 29, 2004 between Clearwire Corporation and Hispanic
Information and Telecommunications Network, Inc.‡
10
.24
EBS Capacity Use and Royalty
Agreement dated September 15, 2005 between Hispanic
Information and Telecommunications Network, Inc. and Clearwire
Spectrum Holdings LLC.‡
Market Operation, Spectrum Lease
and Sublicense Agreement dated October 22, 2004 by and
among the Sprint subsidiaries listed on
Schedule R-1
and Fixed Wireless Holdings, LLC.† ‡
10
.27
Stock Purchase Agreement dated
September 30, 2004 among Craig Wireless Honolulu Inc.,
Craig Wireless Nevada Inc., Craig Wireless Systems Inc. and
Fixed Wireless Holdings, LLC, as amended on November 30,2004.
10
.28
Stock Purchase Agreement dated
October 22, 2004 between Clearwire Corporation and Kenneth
A. Jonsson, as amended on January 11, 2005.
10
.29
Subscription Agreement dated
March 8, 2005 between Clearwire Corporation and Bell
Canada.†‡
10
.30
Master Supply Agreement dated
March 16, 2005 among Clearwire Corporation, Clearwire LLC,
Bell Canada and BCE Nexxia Corporation.‡ †
Side Agreement dated
March 16, 2005 between Clearwire Corporation, Eagle River
Holdings, LLC and Bell Canada.‡ †
10
.32
Credit Agreement dated
July 19, 2005 between Clearwire Corporation and Bell
Canada, as amended February 2006.
10
.33
Security Agreement dated
July 19, 2005 between Clearwire Corporation and Bell Canada.
10
.34
Movable Hypothec Agreement dated
July 19, 2005 between Clearwire Corporation and Bell Canada.
10
.35
Purchase Agreement dated
June 6, 2005 among Wireless One of North Carolina, LLC,
WaveTel NC License Corporation, WaveTel, L.L.C., WaveTel TN LLC
and Fixed Wireless Holdings, LLC.‡
10
.36
Equipment Lease Agreement dated
June 30, 2005 between Clearwire Corporation and 6311458
Canada Ltd.
10
.37
Purchase Agreement dated
September 9, 2005 between Baypoint St. Louis, LLC,
Clearwire Corporation and Clearwire Spectrum Holdings LLC.‡
10
.38
Purchase Agreement dated
September 9, 2005 among St. Lou E, LLC, Clearwire
Corporation and Clearwire Spectrum Holdings LLC.‡
10
.39
Vendor Agreement dated
September 27, 2005 between Best Buy Purchasing LLC and
Clearwire LLC.†
10
.40
Subscription Service Addendum to
Vendor Agreement dated September 27, 2005 between Best Buy
Stores, L.P. and Clearwire LLC.†
10
.41
Co-Marketing Agreement dated
September 14, 2006 between Circuit City Stores, Inc. and
Clearwire US LLC.†
10
.42
Purchase and Sale Agreement dated
October 24, 2005 between Nextel Spectrum Acquisition Corp.
and Clearwire Spectrum Holdings LLC, as amended on
December 12, 2005.‡†
10
.43
Stock Purchase Agreement dated
November 7, 2005 between the shareholders of WinBeam,
Incorporated and Clearwire Spectrum Holdings LLC.
10
.44
Purchase Agreement dated
November 8, 2005 between Comspec Corporation and Clearwire
Spectrum Holdings LLC.‡
10
.45
Bundled Wireless Broadband
Services Agreement dated November 23, 2005 between
Clearwire LLC and America Online, Inc.†
10
.46
Subscription Agreement dated
June 30, 2006 between Motorola, Inc. and the Clearwire
Corporation.†
10
.47
Side Agreement dated June 30,2006 between Motorola, Inc. and the Clearwire Corporation.†
10
.48
Amended and Restated Limited
Liability Company Agreement dated July 12, 2006, between
Clearwire US LLC and Shichinin LLC.†
10
.49
Loan Agreement dated
August 21, 2006 among Clearwire Corporation, the several
lenders from time to time parties thereto, JPMorgan Chase Bank,
Merrill, Lynch, Pierce, Fenner & Smith Inc. and Morgan
Stanley Senior Funding, Inc.
10
.50
Guarantee and Collateral Agreement
dated August 21, 2006 made by Clearwire Corporation and
certain of its subsidiaries in favor of Morgan Stanley Senior
Funding, Inc.
10
.51
Common Stock Purchase Agreement
dated June 28, 2006 between Clearwire Corporation and Intel
Pacific, Inc.†
10
.52
Mobile Wimax Network Collaboration
Agreement dated June 28, 2006 between Clearwire Corporation
and Intel Corporation.‡†
10
.53
Stock Purchase Agreement dated
June 30, 2006 between Motorola, Inc., Clearwire Corporation
and NextNet Wireless, Inc.†
10
.54
Master Service Agreement dated
August 2, 2004, between Level 3 Communications, LLC
and Clearwire Corporation, as amended pursuant to the First
Amendment to Master Service Agreement dated August 29,2006.†
Wireless Broadband System Services
Agreement dated August 29, 2006 between Motorola and
Clearwire US LLC.‡†
10
.56
Wireless Broadband System
Infrastructure Agreement dated August 29, 2006 between
Motorola and Clearwire US LLC.‡†
10
.57
Wireless Broadband CPE Supply
Agreement dated August 29, 2006 between Motorola and
Clearwire US LLC.‡†
10
.58
Side Letter Agreement dated
June 28, 2006 between Intel Pacific, Inc., Eagle River
Holdings, LLC and Clearwire Corporation.†
10
.59
Master Royalty and Use Agreement
dated July 31, 2006 between Clearwire Spectrum
Holdings II LLC, Chicago Instructional Technology
Foundation, Inc., Denver Area Educational Telecommunications
Consortium, Inc., Instructional Telecommunications Foundation,
Inc., North American Catholic Educational Programming
Foundation, Inc., Portland Regional Educational
Telecommunications Corporation, Twin Cities Schools
Telecommunications Group, Inc., and other licensees who may
become parties to the agreement.†
10
.60
Master Royalty and Use Agreement
dated July 31, 2006 between Clearwire Spectrum
Holdings II LLC, North American Catholic Educational
Programming Foundation, Inc. and Clearwire Corporation.†
10
.61
Membership Interest Purchase
Agreement dated August 9, 2006 among Clearwire Spectrum Holdings
II LLC and the parties thereto.†
10
.62
Purchase Agreement dated
August 8, 2006 between SpeedNet LLC, Clearwire Spectrum
Holdings II LLC and Clearwire Corporation.†
10
.63
EBS Long-Term De Facto Transfer
Individual Use Agreement dated September 18, 2006 between
Portland Regional Educational Telecommunications Corp. and
Clearwire Spectrum Holdings II LLC.†
10
.64
Office Lease Agreement dated
October 12, 2006, between Carillon Properties (Landlord)
and Clearwire Corporation (Tenant).
10
.65
Securities Purchase Agreement
dated December 7, 2005 among BASA Holding Iberia S.L.U.,
Clearwire Corporation and Clearwire Europe S.A.R.L.
10
.66
Investment Agreement, dated
December 7, 2005, by and between Banda Ancha S.A., BASA
Holding Iberia S.L.U. and Clearwire Europe S.A.R.L.
10
.67
Indemnification Agreement dated
December 7, 2005 among BASA Holding Iberia S.L.U.,
Clearwire Corporation and Clearwire Europe S.A.R.L.
10
.68
MAC Telecom Stock Purchase
Agreement dated August 2, 2006 between Clearwire Europe
S.A.R.L., and the individuals and entities listed on the Exhibit
thereto.
10
.69
MTH Stock Purchase Agreement dated
August 2, 2006 between Clearwire Europe S.A.R.L., Axel
Beghin, Charles du Bunsen, Nicholas du Chastel and Matthew
Ridgwell.
Flux U.S. Corporation changed its name to Clearwire
Corporation effective February 24, 2004, and as a result
all references to Flux U.S. Corporation in this index are
now to Clearwire Corporation.
1. The undersigned Registrants hereby undertakes to provide
to the underwriters at the closing specified in the underwriting
agreement certificates in such denominations and registered in
such names as required by the underwriter to permit prompt
delivery to each purchaser.
2. Insofar as indemnification for liabilities arising under
the Securities Act may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that
in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid
by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final
adjudication of such issue.
3. The undersigned registrant hereby undertakes that:
(1) For the purposes of determining any liability under the
Securities Act, the information omitted from the form of
prospectus filed as a part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as
of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and this
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Pursuant to the requirements of the Securities Act of 1933, as
amended, the registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in Kirkland, Washington, on this
18th day of December, 2006.
Clearwire Corporation
By:
/s/ Craig O.
McCaw
Name: Craig O. McCaw
Title:
Chairman of the Board of Directors and Co-Chief Executive Officer
By:
/s/ Benjamin
G. Wolff
Name: Benjamin G. Wolff
Title:
Co-Chief Executive Officer and
Co-President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons
in the capacities indicated on December 18, 2006.
Signature
Title
/s/ Craig
O. McCaw
Craig
O. McCaw
Chairman of the Board and Co-Chief
Executive Officer
(Principal Executive Officer)
/s/ John
A. Butler
John
A. Butler
Chief Financial Officer
(Principal Financial and Accounting Officer)
Form of stock certificate for
Class A common stock.†
4
.2
Amended and Restated Stockholders
Agreement dated March 16, 2004 among Clearwire Corporation
and the parties thereto.
4
.3
Registration Rights Agreement
dated November 13, 2003 among Flux U.S. Corporation,
Clearwire Holdings, Inc. and Hispanic Information and
Telecommunications Network, Inc.
Securities Purchase Agreement
dated August 5, 2005 among Clearwire Corporation and the
buyers of the Senior Secured Notes, as amended February 16,2006.
4
.8
Indenture dated August 5,2005 among Clearwire Corporation, Clearwire LLC, Fixed Wireless
Holdings, LLC, NextNet Wireless, Inc. and The Bank of New York,
as Trustee, as supplemented February 16, 2006.
4
.9
Form of Senior Secured Note, due
2010.
4
.10
Form of Warrant.
5
.1
Opinion of Davis Wright Tremaine
LLP.†
9
.1
Voting Agreement dated
August 29, 2006 between Clearwire Corporation, Intel
Pacific, Inc., Intel Capital Corporation and Eagle River
Holdings, LLC.†
10
.1
Advisory Services Agreement dated
November 13, 2003 between Flux U.S. Corporation and
COM Holdings, LLC.
10
.2
Indemnification Agreement dated
November 13, 2003 among Flux Fixed Wireless, LLC and Flux
U.S. Corporation.
10
.3
Form of Indemnification Agreement.
10
.4
Letter Agreement dated
April 1, 2004 between Clearwire Corporation and Ben Wolff.
10
.5
Letter Agreement dated
April 26, 2004 between Clearwire Corporation and Nicolas
Kauser.
10
.6
Letter Agreement dated
April 27, 2004 between Clearwire Corporation and R. Gerard
Salemme.
10
.7
Employment Agreement dated
June 28, 2004 between Clearwire Corporation and Perry
Satterlee.
10
.8
Letter Agreement dated
March 2, 2005 between Clearwire Corporation and John Butler.
10
.9
Clearwire Corporation 2003 Stock
Option Plan, as amended.
10
.10
Agreement dated March 5, 2003
among Nextel Communications, Inc., Digital Radio, LLC and
Craig O. McCaw.†
10
.11
Amendment to Agreement dated
March 5, 2003, dated October 3, 2003, among Nextel
Communications, Inc., Digital Radio, L.L.C. and Craig O.
McCaw.†
10
.12
Agreement and Undertaking dated
November 13, 2003 between Flux U.S. Corporation and
Craig O. McCaw.†
10
.13
Master Spectrum Acquisition
Agreement dated November 13, 2003 between Flux
U.S. Corporation and Hispanic Information and
Telecommunications Network, Inc.
First Addendum and Amendment to
the Master Spectrum Acquisition Agreement dated March 29,2004 between Clearwire Corporation and Hispanic Information and
Telecommunications Network, Inc.
10
.15
ITFS Capacity Use and Royalty
Agreement dated November 13, 2003 between Hispanic
Information and Telecommunications Network, Inc. and Fixed
Wireless Holdings, LLC.
10
.16
Spectrum Access and
Loan Facility Agreement dated May 24, 2005 among
Clearwire Corporation, Hispanic Information and
Telecommunications Network, Inc. and HITN Spectrum, LLC.
10
.17
Warrant Agreement dated
November 13, 2003 by and between Flux U.S. Corporation
and ITFS Spectrum Advisors LLC.
10
.18
Letter Agreement dated
March 29, 2004 from Clearwire Corporation to ITFS Spectrum
Advisors LLC.
10
.19
Spectrum Acquisition Consulting
Agreement dated February 1, 2005 by and between Clearwire
Corporation and ITFS Spectrum Consultants LLC.
10
.20
Letter Agreement dated
February 1, 2005 from Clearwire Corporation to ITFS
Spectrum Consultants LLC.‡
10
.21
Amendment and Consent dated
February 1, 2005 between Clearwire Corporation to ITFS
Spectrum Advisors LLC and ITFS Spectrum Consultants LLC.
10
.22
Second Amendment and Consent dated
April 26, 2006, by and among Clearwire Corporation and ITFS
Spectrum Consultants LLC.
10
.23
Spectrum Option Agreement dated
March 29, 2004 between Clearwire Corporation and Hispanic
Information and Telecommunications Network, Inc.‡
10
.24
EBS Capacity Use and Royalty
Agreement dated September 15, 2005 between Hispanic
Information and Telecommunications Network, Inc. and Clearwire
Spectrum Holdings LLC.‡
Market Operation, Spectrum Lease
and Sublicense Agreement dated October 22, 2004 by and
among the Sprint subsidiaries listed on
Schedule R-1
and Fixed Wireless Holdings, LLC.† ‡
10
.27
Stock Purchase Agreement dated
September 30, 2004 among Craig Wireless Honolulu Inc.,
Craig Wireless Nevada Inc., Craig Wireless Systems Inc. and
Fixed Wireless Holdings, LLC, as amended on November 30,2004.
10
.28
Stock Purchase Agreement dated
October 22, 2004 between Clearwire Corporation and Kenneth
A. Jonsson, as amended on January 11, 2005.
10
.29
Subscription Agreement dated
March 8, 2005 between Clearwire Corporation and Bell
Canada.†‡
10
.30
Master Supply Agreement dated
March 16, 2005 among Clearwire Corporation, Clearwire LLC,
Bell Canada and BCE Nexxia Corporation.‡ †
10
.31
Side Agreement dated
March 16, 2005 between Clearwire Corporation, Eagle River
Holdings, LLC and Bell Canada.‡ †
10
.32
Credit Agreement dated
July 19, 2005 between Clearwire Corporation and Bell
Canada, as amended February 2006.
10
.33
Security Agreement dated
July 19, 2005 between Clearwire Corporation and Bell Canada.
10
.34
Movable Hypothec Agreement dated
July 19, 2005 between Clearwire Corporation and Bell Canada.
10
.35
Purchase Agreement dated
June 6, 2005 among Wireless One of North Carolina, LLC,
WaveTel NC License Corporation, WaveTel, L.L.C., WaveTel TN LLC
and Fixed Wireless Holdings, LLC.‡
10
.36
Equipment Lease Agreement dated
June 30, 2005 between Clearwire Corporation and 6311458
Canada Ltd.
10
.37
Purchase Agreement dated
September 9, 2005 between Baypoint St. Louis, LLC,
Clearwire Corporation and Clearwire Spectrum Holdings LLC.‡
10
.38
Purchase Agreement dated
September 9, 2005 among St. Lou E, LLC, Clearwire
Corporation and Clearwire Spectrum Holdings LLC.‡
10
.39
Vendor Agreement dated
September 27, 2005 between Best Buy Purchasing LLC and
Clearwire LLC.†
Subscription Service Addendum to
Vendor Agreement dated September 27, 2005 between Best Buy
Stores, L.P. and Clearwire LLC.†
10
.41
Co-Marketing Agreement dated
September 14, 2006 between Circuit City Stores, Inc. and
Clearwire US LLC.†
10
.42
Purchase and Sale Agreement dated
October 24, 2005 between Nextel Spectrum Acquisition Corp.
and Clearwire Spectrum Holdings LLC, as amended on
December 12, 2005.‡†
10
.43
Stock Purchase Agreement dated
November 7, 2005 between the shareholders of WinBeam,
Incorporated and Clearwire Spectrum Holdings LLC.
10
.44
Purchase Agreement dated
November 8, 2005 between Comspec Corporation and Clearwire
Spectrum Holdings LLC.‡
10
.45
Bundled Wireless Broadband
Services Agreement dated November 23, 2005 between
Clearwire LLC and America Online, Inc.†
10
.46
Subscription Agreement dated
June 30, 2006 between Motorola, Inc. and the Clearwire
Corporation.†
10
.47
Side Agreement dated June 30,2006 between Motorola, Inc. and the Clearwire Corporation.†
10
.48
Amended and Restated Limited
Liability Company Agreement dated July 12, 2006, between
Clearwire US LLC and Shichinin LLC.†
10
.49
Loan Agreement dated
August 21, 2006 among Clearwire Corporation, the several
lenders from time to time parties thereto, JPMorgan Chase Bank,
Merrill, Lynch, Pierce, Fenner & Smith Inc. and Morgan
Stanley Senior Funding, Inc.
10
.50
Guarantee and Collateral Agreement
dated August 21, 2006 made by Clearwire Corporation and
certain of its subsidiaries in favor of Morgan Stanley Senior
Funding, Inc.
10
.51
Common Stock Purchase Agreement
dated June 28, 2006 between Clearwire Corporation and Intel
Pacific, Inc.†
10
.52
Mobile Wimax Network Collaboration
Agreement dated June 28, 2006 between Clearwire Corporation
and Intel Corporation.‡†
10
.53
Stock Purchase Agreement dated
June 30, 2006 between Motorola, Inc., Clearwire Corporation
and NextNet Wireless, Inc.†
10
.54
Master Service Agreement dated
August 2, 2004, between Level 3 Communications, LLC
and Clearwire Corporation, as amended pursuant to the First
Amendment to Master Service Agreement dated August 29,2006.†
10
.55
Wireless Broadband System Services
Agreement dated August 29, 2006 between Motorola and
Clearwire US LLC.‡†
10
.56
Wireless Broadband System
Infrastructure Agreement dated August 29, 2006 between
Motorola and Clearwire US LLC.‡†
10
.57
Wireless Broadband CPE Supply
Agreement dated August 29, 2006 between Motorola and
Clearwire US LLC.‡†
10
.58
Side Letter Agreement dated
June 28, 2006 between Intel Pacific, Inc., Eagle River
Holdings, LLC and Clearwire Corporation.†
10
.59
Master Royalty and Use Agreement
dated July 31, 2006 between Clearwire Spectrum
Holdings II LLC, Chicago Instructional Technology
Foundation, Inc., Denver Area Educational Telecommunications
Consortium, Inc., Instructional Telecommunications Foundation,
Inc., North American Catholic Educational Programming
Foundation, Inc., Portland Regional Educational
Telecommunications Corporation, Twin Cities Schools
Telecommunications Group, Inc., and other licensees who may
become parties to the agreement.†
10
.60
Master Royalty and Use Agreement
dated July 31, 2006 between Clearwire Spectrum
Holdings II LLC, North American Catholic Educational
Programming Foundation, Inc. and Clearwire Corporation.†
10
.61
Membership Interest Purchase
Agreement dated August 9, 2006, among Clearwire Spectrum
Holdings II LLC and the parties thereto.†
Purchase Agreement dated
August 8, 2006 between SpeedNet LLC, Clearwire Spectrum
Holdings II LLC and Clearwire Corporation.†
10
.63
EBS Long-Term De Facto Transfer
Individual Use Agreement dated September 18, 2006 between
Portland Regional Educational Telecommunications Corp. and
Clearwire Spectrum Holdings II LLC.†
10
.64
Office Lease Agreement dated
October 12, 2006, between Carillon Properties (Landlord)
and Clearwire Corporation (Tenant).
10
.65
Securities Purchase Agreement
dated December 7, 2005 among BASA Holding Iberia S.L.U.,
Clearwire Corporation and Clearwire Europe S.A.R.L.
10
.66
Investment Agreement, dated
December 7, 2005, by and between Banda Ancha S.A., BASA
Holding Iberia S.L.U. and Clearwire Europe S.A.R.L.
10
.67
Indemnification Agreement dated
December 7, 2005 among BASA Holding Iberia S.L.U.,
Clearwire Corporation and Clearwire Europe S.A.R.L.
10
.68
MAC Telecom Stock Purchase
Agreement dated August 2, 2006 between Clearwire Europe
S.A.R.L., and the individuals and entities listed on the Exhibit
thereto.
10
.69
MTH Stock Purchase Agreement dated
August 2, 2006 between Clearwire Europe S.A.R.L., Axel
Beghin, Charles du Bunsen, Nicholas du Chastel and Matthew
Ridgwell.
Flux U.S. Corporation changed its name to Clearwire
Corporation effective February 24, 2004, and as a result
all references to Flux U.S. Corporation in this index are
now to Clearwire Corporation.
†
To be filed by amendment.
‡
Confidential treatment requested.
Dates Referenced Herein and Documents Incorporated by Reference