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| CLWR > SEC Filings for CLWR > Form 10-K on 14-Feb-2013 | All Recent SEC Filings |
14-Feb-2013
Annual Report
The following discussion and analysis should be read in conjunction with our
consolidated financial statements and related notes included elsewhere in this
filing.
Forward-Looking Statements
Statements and information included in this Annual Report on Form 10-K that are
not purely historical are forward-looking statements within the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995. When used in
this report, the words "believe," "expect," "anticipate," "intend," "estimate,"
"evaluate," "opinion," "may," "could," "future," "potential," "probable," "if,"
"will" and similar expressions generally identify forward-looking statements.
Forward-looking statements in this Annual Report on Form 10-K represent our
beliefs, projections and predictions about future events. These statements are
necessarily subjective and involve known and unknown risks, uncertainties and
other important factors that could cause our actual results, performance or
achievements, or industry results, to differ materially from any future results,
performance or achievement described in or implied by such statements. Actual
results may differ materially from the expected results described in our
forward-looking statements, including with respect to the correct measurement
and identification of factors affecting our business or the extent of their
likely impact, the accuracy and completeness of publicly available information
relating to the factors upon which our business strategy is based, or the
success of our business. The factors or uncertainties that could cause actual
results, performance or achievement to differ materially from forward-looking
statements contained in this report are described in Item 1A, Risk Factors, and
elsewhere in this report.
Overview
We are a leading provider of fourth generation, or 4G, wireless broadband services. We build and operate next generation mobile broadband networks that provide high-speed mobile Internet and residential Internet access services in communities throughout the country. As of December 31, 2012, we offered our services in 88 markets in the United States covering an estimated 137.4 million people, including an estimated 135.1 million people covered by our 4G mobile broadband networks in 71 markets. Our 4G mobile broadband network provides a connection anywhere within our coverage area.
In our current 4G mobile broadband markets in the United States, we offer our services through retail channels and through our wholesale partners. Sprint accounts for substantially all of our wholesale sales to date, and offers services in each of our 4G markets. In addition to Sprint and our other existing wholesale partners, we have also recently entered into wholesale agreements with CBeyond, NetZero/United Online, Simplexity, Earthlink, Freedom POP, Leap (dba Cricket Communications), Kajeet and Locus Telecomminications. We ended 2012 with approximately 1.4 million retail and 8.2 million wholesale subscribers. The 4G MVNO Agreement provides for unlimited WiMAX service to Sprint retail customers in exchange for fixed payments in 2012 and 2013, so fluctuations in the wholesale subscriber base will not necessarily correlate to wholesale revenue. We are currently focused on growing our revenue by continuing to build our wholesale business and leveraging our retail business, reducing expenses, and seeking additional strategic opportunities for our current business. As of December 31, 2012, we completed the sale of our international operations in Belgium, Germany and Spain. The results of operations of these international entities prior to their sale are separately disclosed as discontinued operations.
We need to greatly expand our revenue base by increasing sales to our existing
wholesale partners and bringing on other significant wholesale partners. In
addition, to be successful, we believe it is necessary that we deploy LTE
technology which is currently being adopted by most wireless operators globally
as their next generation wireless technology.
We believe that, as the demand for mobile broadband services continues its rapid
growth, Sprint and other service providers will find it difficult, if not
impossible, to satisfy their customers' demands with their existing spectrum
holdings. By deploying LTE, we believe that we will be able to take advantage of
our leading spectrum position to offer substantial additional data capacity to
Sprint and other existing and future mobile broadband service providers for
resale to their customers on a cost effective basis.
Initially, we plan to overlay 2,000 of our existing mobile WiMAX sites with
TDD-LTE, over 20 MHz-wide channels by June 30, 2013, and a total of
approximately 5,000 sites by the end of the year. We refer to this plan as our
current LTE build plan. We are focusing primarily on sites in densely populated
urban areas where we currently experience the highest
concentration of usage of our mobile WiMAX services, although we will also
consider sites in other areas where Sprint and other current and future
wholesale partners express a need for excess data capacity and where we believe
we will be most likely to generate sufficient revenues. We have begun deployment
of our LTE network and have 1,000 sites on air as of December 31, 2012.
Currently, we plan to operate LTE on approximately 8,000 sites by the end of
2014. Our planned deployment of the initial 2,000 sites by June 30, 2013 will
satisfy the initial LTE prepayment milestone under the terms of the 4G MVNO
Agreement.
If our Proposed Merger with Sprint does not close, the success of our current
plans will depend to a large extent on whether we succeed in the following
areas: adding new wholesale partners with substantial requirements for
additional data capacity to supplement their own services and generating or
exceeding the revenue levels we currently expect for that portion of our
business; maintaining our retail base and revenues while continuing to realize
the benefits from cost savings initiatives; deploying LTE technology on our
network; and raising additional capital. Our ability to satisfy the requirements
of our current plans in each of these areas remains uncertain. Given this
uncertainty, we regularly review our current plans and other strategic options,
and we may elect to pursue new or alternative strategies which we believe would
be beneficial to our business and maximize shareholder value.
Merger Agreement
On December 17, 2012, we entered into the Merger Agreement, pursuant to which
Sprint agreed to acquire all of the outstanding shares of Class A Common Stock
and Class B Common Stock, not currently owned by Sprint, SoftBank or their
affiliates. At the closing, the outstanding shares of common stock will be
canceled and converted automatically into the right to receive $2.97 per share
in cash, without interest. Our stockholders will be asked to vote on the
adoption of the Merger Agreement at a special meeting that will be held on a
date to be announced. Consummation of the transactions under the Merger
Agreement are subject to a number of conditions precedent, including, among
others: (i) Clearwire Stockholder Approval, (ii) the receipt of the FCC
approvals required to consummate the Proposed Merger, (iii) the absence of any
order enjoining the consummation of, or prohibiting, the Proposed Merger; (iv)
the non-occurrence of any event having a material adverse effect from the date
of the Merger Agreement to the closing of the Proposed Merger, and (v) the
consummation by Sprint of the SoftBank Transaction, or an alternate transaction
thereto.
The Merger Agreement contains termination rights for the benefit of Sprint and
Clearwire and further provides that Sprint will be required to pay us a
termination fee of $120.0 million under certain specified circumstances of
termination of the Merger Agreement. Any obligation to pay such termination fee
will be satisfied by the cancellation of $120.0 million of Notes, which are
described below. In the event we are entitled to receive the termination fee, in
certain instances, we may also be entitled to receive from Sprint a supplemental
prepayment for LTE services on January 15, 2014 in the amount of $100.0 million,
conditioned upon the completion of site build-out targets pursuant to a
commercial agreement currently in effect between Sprint and Clearwire. Any such
prepayment will be credited against certain of Sprint's obligations under such
agreement.
Note Purchase Agreement
In connection with the Merger Agreement, on December 17, 2012, we and the Issuers also entered into the Note Purchase Agreement in which Sprint agreed to purchase from us at our election up to an aggregate principal amount of $800.0 million of 1.00% Notes due 2018 in ten monthly installments of $80.0 million each. The Notes accrue interest at 1.00% per annum and are exchangeable into shares of Class A Common Stock at an exchange rate of 666.67 shares per $1,000 aggregate principal amount of the Notes, which is equivalent to a price of $1.50 per share, subject to anti-dilution protections. We can draw on the Note Purchase Agreement monthly beginning in January 2013. Additionally, on the last three draw dates (in August, September and October 2013), we can only request that Sprint purchase notes if (i) the Build-Out Agreement is reached by February 28, 2013, (ii) the Build-Out Agreement is in full force and effect and (iii) we have not breached any of our obligations under the Build-Out Agreement. If the Merger Agreement is terminated under circumstances where we would receive, and do not reject, the Sprint Termination Fee, then $120.0 million principal amount of the Notes will be automatically canceled. In addition, if the Merger Agreement is terminated because the SoftBank Transaction is not consummated, we will have the option to exchange the Notes that remain outstanding at the Exchange Rate for 15 business days following the termination of the SoftBank Transaction.
Unlike the terms of the Existing Indenture, the terms of the New Indenture do
not include an option to call or redeem the Notes, and Sprint does not have the
right to put the Notes at specified dates.
The Note Purchase Agreement can be terminated, among other things, by mutual
consent, automatically if the required vote to approve the Proposed Merger is
not obtained at our stockholders meeting, or if the Merger Agreement is
terminated due to a failure of the SoftBank Transaction or a breach of Sprint's
representations, warranties, covenants or agreements thereunder (subject to
certain conditions), provided that if the Note Purchase Agreement is terminated
due to the Merger Agreement being terminated by reason of a failure of the
SoftBank Transaction or because of a breach of any representation, warranty,
covenant or agreement by Sprint, then the Note Purchase Agreement will terminate
upon the earlier of (i) our exercising our option to exchange the Notes upon
such termination and (ii) July 2, 2013; however the Note Purchase Agreement will
not terminate on July 2, 2013 if the Build-Out Agreement was reached by February
28, 2013, the Build-Out Agreement is in full force and effect and we have not
breached any of our obligations under the Build-Out Agreement.
On December 26, 2012, we notified Sprint of our intention to take the first draw
in January 2013 under the Note Purchase Agreement. Following receipt of the DISH
Proposal, the Special Committee elected on December 28, 2012, to revoke our draw
notice prior to receiving any proceeds from the draw to allow us to evaluate the
DISH Proposal. Sprint subsequently asserted that it believes that the draw
notice is irrevocable and has reserved its rights with respect thereto. The
Special Committee also decided to forego the second draw for February 2013 as
the Special Committee continues to evaluate DISH's proposal. Our election to
forego the first two draws under the Note Purchase Agreement has reduced the
aggregate principal amount available to $640.0 million. The Special Committee
has not made any determination with respect to whether we will take any future
draws under the Note Purchase Agreement.
DISH Proposal
After signing the Merger Agreement, we received the DISH Proposal. The DISH Proposal provides for DISH to purchase certain spectrum assets from us, enter into a commercial agreement with us and acquire up to all of our common stock for $3.30 per share (subject to minimum ownership of at least 25% and granting of certain governance rights) and provide us with financing on specified terms. The DISH Proposal is only a preliminary indication of interest and is subject to numerous, material uncertainties and conditions, including the negotiation of multiple contractual arrangements being requested by DISH as well as regulatory approvals. The DISH Proposal provides that it would be withdrawn if we draw any of the funds available under the Note Purchase Agreement. Some of the terms in the DISH Proposal, as currently proposed, may not be permitted under the terms of our current legal and contractual obligations. Additionally, our ability to enter into strategic transactions is significantly limited by our current contractual arrangements, including the Sprint Agreement and our existing Equityholders' Agreement.
The Special Committee is currently evaluating the DISH Proposal and engaging in discussions with each of DISH and Sprint, as appropriate. The Special Committee has not made any determination to change its recommendation regarding the current Sprint transaction. Consistent with our obligations under the Sprint Agreement, we provided Sprint with notice, and the material terms, of the DISH Proposal, and received a response from Sprint that stated, among other things, that Sprint has reviewed the DISH Proposal and believes that it is illusory, inferior to the Sprint transaction and not viable because it cannot be implemented in light of our current legal and contractual obligations. Sprint has stated that the Sprint Agreement would prohibit us from entering into agreements for much of the DISH Proposal.
Liquidity and Capital Resource Requirements
During the year ended December 31, 2012, we incurred $1.74 billion of net losses from continuing operations. We utilized $451.5 million of cash from operating activities of continuing operations and spent $113.0 million of cash on capital expenditures in the improvement and maintenance of our existing networks and for the deployment of our LTE network.
On January 27, 2012, we announced the completion of an offering by our operating subsidiary, Clearwire Communications, of $300.0 million aggregate principal amount of 14.75% first-priority senior secured notes due 2016, which we refer to as the 2016 Senior Secured Notes, at an issue price of 100%. On March 15, 2012, we entered into securities purchase agreements with certain institutional investors, pursuant to which we issued shares of Class A Common Stock for an aggregate price of $83.5 million, which we refer to as the Purchase Price, and in connection with the issuance, Clearwire Communications repurchased
$100.0 million in aggregate principal amount of our 8.25% exchangeable notes due 2040, which we refer to as Exchangeable Notes, for a total price equal to the Purchase Price.
On May 4, 2012, we entered into a sales agreement with Cantor Fitzgerald & Co., which we refer to as CF&Co, pursuant to which we offered and sold shares of our Class A Common Stock having an aggregate offering price of up to $300.0 million from time to time through CF&Co, as sales agent. We received net proceeds of approximately $58.5 million related to this agreement. On July 26, 2012, we announced that we elected to cease further sales under this sales agreement.
We expanded our wholesale agreement with Sprint in 2011 and 2012. Under the 4G MVNO Agreement, Sprint is paying us $925.9 million for unlimited 4G mobile WiMAX services for resale to its retail subscribers in 2012 and 2013. In 2012, we received approximately $600.0 million from Sprint; $450.0 million of which was paid under the 4G MVNO Agreement for services we provided to Sprint in 2012 and $150 million pursuant to a promissory note. The remainder of the amounts owed by Sprint under the 4G MVNO Agreement is payable to us by Sprint for services to be provided in 2013. Of the $925.9 million payable by Sprint under the 4G MVNO Agreement, $175.9 million will be paid as an offset to principal and interest due under the $150.0 million promissory note issued by us to Sprint in 2012. On January 2, 2013, we offset $83.6 million to principal and related accrued interest to reduce the principal amount we owe to Sprint under the promissory note to $75 million. Additionally, in the 4G MVNO Agreement, Sprint agreed to pay us additional usage-based fees for mobile WiMAX services provided to Sprint's retail customers in 2014 and beyond and for LTE services provided to Sprint's wholesale customers in 2013 and beyond.
To date, we have invested heavily in building and maintaining our networks. We have a history of operating losses, and we expect to have significant losses in the future. We do not expect our operations to generate positive cash flows during the next twelve months.
As of December 31, 2012, we had available cash and short-term investments of approximately $868.6 million. Our current LTE build plan is to have approximately 2,000 LTE sites on air by the end of June 2013, which will satisfy the initial LTE prepayment milestone under the terms of the 4G MVNO Agreement with Sprint. Under the 4G MVNO Agreement with Sprint, we are required to expand our LTE network to 5,000 sites by June 30, 2014. Subject to the availability of funding under the Note Purchase Agreement, our current LTE build plan is to expand our LTE network to 5,000 sites by the end of 2013.
Under our current LTE build plan, we currently expect to satisfy our operating,
financing and capital spending needs for the next twelve months using the
available cash and short-term investments on hand together with a portion of the
remaining borrowing capacity available under the Note Purchase Agreement and
with the proceeds of additional vendor financing. As discussed previously, our
election to forego the first two draws under the Note Purchase Agreement has
reduced the aggregate principal amount available to $640.0 million and our
ability to draw a portion of the funds under the Note Purchase Agreement is
subject to certain conditions. Additionally, on the last three Draw Dates (in
August, September and October 2013), we can only request that Sprint purchase
notes if (i) an agreement has been reached between the parties on the Build-Out
Agreement, by February 28, 2013, (ii) the Build-Out Agreement is in full force
and effect and (iii) we have not breached any of our obligations under the
Build-Out Agreement.
By electing to draw on at least three months of borrowing capacity under the
Note Purchase Agreement, we would have sufficient cash and borrowing capacity to
build 2,000 LTE sites by June 30, 2013 and satisfy the initial LTE prepayment
milestone with Sprint, and meet our operating and financing needs for the next
twelve months. If the Merger Agreement were to terminate and funding beyond
three draws under the Note Purchase Agreement would no longer be available to
the Company, without alternative sources of additional capital, we would have to
significantly curtail our LTE network build plan as currently contemplated to
conserve cash and meet our operating and financing obligations during 2013. If
we do not draw on at least three months of borrowing capacity under the Note
Purchase Agreement and do not obtain a similar amount of additional financing
from alternative sources, we forecast that our cash and short-term investments
would be depleted sometime in the fourth quarter 2013.
Further, if the Proposed Merger fails to close for any reason or the closing takes longer than we expect, we will need to raise substantial additional capital and to secure commitments from additional wholesale partners with significant data capacity needs that generate substantial revenues for us in a timely manner to fully implement our business plans and to be able to continue to operate.
The amount of additional capital needed by us if the Proposed Merger fails to close will depend on a number of factors, many of which are outside of our control and subject to a number of uncertainties. Our capital requirements will largely be predicated on the amount of cash we receive from Sprint for our services beyond the minimum commitments specified in our amended wholesale agreement and whether we secure commitments from new wholesale partners with significant data capacity needs. Each will partially depend on whether our construction of an LTE network is successful and completed according to the design architecture and deployment requirements of these parties, the extent to which the parties' customers utilize that network, and the level of Sprint's usage of our mobile WiMAX network beyond 2013. Other factors significantly affecting our capital needs include the amount of cash generated by our retail business, our ability to maintain reduced operating expenses and the accuracy of our other projections of future financial performance.
Any delays in the deployment of our planned LTE network, delays in the rollout of LTE services that rely on our network by Sprint or our other wholesale partners or unexpected increases in the costs we incur in deploying our LTE network would materially increase the additional capital we require for our business. Additionally, if we are unable to secure commitments from additional wholesale partners with significant data capacity needs, our need for additional capital will increase substantially to a level that we may find difficult to obtain.
Whether we would be able to successfully fulfill our additional capital needs in a timely manner is uncertain. If the Merger Agreement terminates, we will likely pursue various alternatives for securing additional capital. These alternatives include, among other things, obtaining additional equity and debt financing from a number of possible sources such as new and existing strategic investors, private or public offerings and vendors. However, we face a number of challenges. Our recent equity financings were dilutive to our shareholders and, with the current trading price of our Class A Common Stock, any additional equity financings could result in significant additional dilution for our stockholders and may not generate the proceeds we need. Further, unless we are able to secure the required shareholder approvals to increase the number of authorized shares under our Certificate of Incorporation, we may not have enough authorized, but unissued shares available to raise sufficient additional capital through an equity financing. With our existing level of indebtedness, including the amount of any financing drawn by us under the Note Purchase Agreement, if any, and our inability to issue additional secured indebtedness under our existing indentures, additional debt financings may not be available on acceptable terms or at all. Even if additional debt financings are available, they could increase our future financial commitments, including aggregate interest payments on our existing and new indebtedness, to levels that we find difficult to support. Other sources of additional capital could include, among other things, a sale of certain of our assets that we believe are not essential for our business, such as excess spectrum. However, our ability to consummate a sale of assets that would generate sufficient proceeds to meet our capital needs on acceptable terms in a timely manner or at all is uncertain.
Additionally, as previously stated, we regularly evaluate our plans and other
strategic options, and, if the Merger Agreement terminates, we may elect to
pursue new or alternative strategies which we believe would be beneficial to our
business. Such changes to our plans could also substantially change our capital
requirements in the near and/or long term.
If the Merger Agreement terminates and we are unable to raise sufficient
additional capital to fulfill our funding needs in a timely manner, or we fail
to generate sufficient additional revenue from our wholesale and retail
businesses to meet our obligations beyond the next twelve months, our business
prospects, financial condition and results of operations will likely be
materially and adversely affected, substantial doubt may arise about our ability
to continue as a going concern and we will be forced to consider all available
alternatives, including financial restructuring, which could include seeking
protection under the provisions of the United States Bankruptcy Code.
Business Segments
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, which we refer to as the CODM, in deciding how to allocate resources and in assessing performance. We define the CODM as our Chief Executive Officer. As our business continues to mature, we assess how we view and operate our business. We market a service that is basically the same service across the United States and as such we operate as a single reportable segment as a provider of wireless broadband services in the United States.
Critical Accounting Policies and Estimates
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 of America, which we refer to as U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates used, including those related to long-lived assets and intangible assets, including spectrum, derivatives, and deferred tax asset valuation allowance.
Our accounting policies require management to make complex and subjective judgments. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, terms of existing contracts, observance of trends in the industry, or information provided by outside sources, as appropriate. Additionally, changes in accounting estimates are reasonably likely to occur from period to period. These factors could have a material impact on our financial statements, the presentation of our financial condition, changes in financial condition or results of operations.
We have identified the following accounting policies and estimates that involve a higher degree of judgment or complexity and that we believe are key to an understanding of our financial statements:
Spectrum Licenses
We have two types of arrangements for spectrum licenses: owned spectrum licenses with indefinite lives and spectrum leases. While owned spectrum licenses are issued for a fixed time, renewals of these licenses have occurred routinely and at nominal cost. Moreover, management has determined that there are currently no legal, regulatory, contractual, competitive, economic or other factors that . . .
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