10-Q 1 clwr0930201210-q.htm 10-Q CLWR 09.30.2012 10-Q
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended: September 30, 2012
 
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from          to          

______________________________________
Commission file number 001-34196
Clearwire Corporation
(Exact name of registrant as specified in its charter)
DELAWARE
 
56-2408571
(State Of Incorporation)
 
(I.R.S. ID)
1475 120th AVE. NE BELLEVUE, WASHINGTON 98005
(425) 216-7600
______________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that registrant was required to submit and post such files.) Yes þ     No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ
 
Accelerated filer o
Non-accelerated filer o
 
Smaller reporting company o         
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

The number of shares outstanding of the registrant's Class A common stock as of October 23, 2012, was 691,233,800. The number of shares outstanding of the registrant's Class B common stock as of October 23, 2012 was 773,732,672.
 



CLEARWIRE CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
For The Quarter Ended September 30, 2012

Table of Contents

 
 
Page
 
 
 
 
 
 
 
 
 
 



PART I - FINANCIAL INFORMATION

ITEM 1.
Financial Statements

CLEARWIRE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
(Unaudited)
 
September 30,
2012
 
December 31,
2011
ASSETS
 
 
 
Current assets:
 

 
 

Cash and cash equivalents
$
247,748

 
$
891,929

Short-term investments
935,920

 
215,655

Restricted cash
2,178

 
1,000

Accounts receivable, net of allowance of $4,241 and $5,542
58,077

 
83,660

Inventory
13,906

 
23,832

Prepaids and other assets
81,659

 
71,083

Total current assets
1,339,488

 
1,287,159

Property, plant and equipment, net
2,351,561

 
3,014,277

Restricted cash
3,406

 
7,619

Spectrum licenses, net
4,263,367

 
4,298,254

Other intangible assets, net
28,718

 
40,850

Other assets
144,040

 
157,797

Assets of discontinued operations (Note 18)
19,078

 
36,696

Total assets
$
8,149,658

 
$
8,842,652

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 

 
 

Accounts payable and accrued expenses
$
291,505

 
$
157,172

Other current liabilities
206,965

 
122,756

Total current liabilities
498,470

 
279,928

Long-term debt, net
4,244,435

 
4,019,605

Deferred tax liabilities, net
183,374

 
152,182

Other long-term liabilities
916,564

 
719,703

Liabilities of discontinued operations (Note 18)
19,093

 
25,196

Total liabilities
5,861,936

 
5,196,614

Commitments and contingencies (Note 13)


 


Stockholders’ equity:
 

 
 

Class A common stock, par value $0.0001, 2,000,000 shares authorized; 682,759 and 452,215 shares outstanding
68

 
45

Class B common stock, par value $0.0001, 1,400,000 shares authorized; 782,207 and 839,703 shares outstanding
78

 
83

Additional paid-in capital
3,128,081

 
2,714,634

Accumulated other comprehensive income
2,655

 
2,793

Accumulated deficit
(2,159,239
)
 
(1,617,826
)
Total Clearwire Corporation stockholders’ equity
971,643

 
1,099,729

Non-controlling interests
1,316,079

 
2,546,309

Total stockholders’ equity
2,287,722

 
3,646,038

Total liabilities and stockholders’ equity
$
8,149,658

 
$
8,842,652

See accompanying notes to unaudited condensed consolidated financial statements.

2


CLEARWIRE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
Revenues
$
313,882

 
$
332,177

 
$
953,453

 
$
891,596

Operating expenses:
 
 
 

 
 
 
 
Cost of goods and services and network costs (exclusive of items shown separately below)
211,540

 
282,459

 
699,756

 
955,967

Selling, general and administrative expense
139,365

 
176,469

 
419,713

 
569,565

Depreciation and amortization
210,781

 
165,560

 
573,320

 
517,674

Spectrum lease expense
82,513

 
77,696

 
243,411

 
229,137

Loss from abandonment of network and other assets
2,588

 
29,129

 
83,305

 
577,341

Total operating expenses
646,787

 
731,313

 
2,019,505

 
2,849,684

Operating loss
(332,905
)
 
(399,136
)
 
(1,066,052
)
 
(1,958,088
)
Other income (expense):
 
 
 

 
 
 
 
Interest income
555

 
534

 
1,352

 
2,063

Interest expense
(139,040
)
 
(128,596
)
 
(414,382
)
 
(377,133
)
Gain (loss) on derivative instruments
(906
)
 
59,729

 
4,895

 
148,227

Other income (expense), net
137

 
(1,261
)
 
(13,414
)
 
966

Total other expense, net
(139,254
)
 
(69,594
)
 
(421,549
)
 
(225,877
)
Loss from continuing operations before income taxes
(472,159
)
 
(468,730
)
 
(1,487,601
)
 
(2,183,965
)
Income tax benefit (provision)
151,749

 
(10,727
)
 
175,138

 
(28,422
)
Net loss from continuing operations
(320,410
)
 
(479,457
)
 
(1,312,463
)
 
(2,212,387
)
Less: non-controlling interests in net loss from continuing operations of consolidated subsidiaries
279,066

 
395,955

 
945,886

 
1,751,483

Net loss from continuing operations attributable to Clearwire Corporation
(41,344
)
 
(83,502
)
 
(366,577
)
 
(460,904
)
Net loss from discontinued operations attributable to Clearwire Corporation (Note 18), net of tax
(172,437
)
 
(1,289
)
 
(174,836
)
 
(19,580
)
Net loss attributable to Clearwire Corporation
$
(213,781
)
 
$
(84,791
)
 
$
(541,413
)
 
$
(480,484
)
Net loss from continuing operations attributable to Clearwire Corporation per Class A Common Share:
 

 
 

 
 
 
 
Basic
$
(0.07
)
 
$
(0.34
)
 
$
(0.72
)
 
$
(1.87
)
Diluted
$
(0.22
)
 
$
(0.53
)
 
$
(0.97
)
 
$
(2.34
)
Net loss attributable to Clearwire Corporation per Class A Common Share:
 
 
 

 
 
 
 
Basic
$
(0.38
)
 
$
(0.35
)
 
$
(1.06
)
 
$
(1.95
)
Diluted
$
(0.34
)
 
$
(0.54
)
 
$
(1.10
)
 
$
(2.42
)

See accompanying notes to unaudited condensed consolidated financial statements.

3


CLEARWIRE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
Net loss:
 
 
 
 
 
 
 
Net loss from continuing operations
$
(320,410
)
 
$
(479,457
)
 
$
(1,312,463
)
 
$
(2,212,387
)
Less: non-controlling interests in net loss from continuing operations of consolidated subsidiaries
279,066

 
395,955

 
945,886

 
1,751,483

Net loss from continuing operations attributable to Clearwire Corporation
(41,344
)
 
(83,502
)
 
(366,577
)
 
(460,904
)
Net loss from discontinued operations
(172,932
)
 
(5,138
)
 
(179,340
)
 
(78,745
)
Less: non-controlling interests in net loss from discontinued operations of consolidated subsidiaries
495

 
3,849

 
4,504

 
59,165

Net loss from discontinued operations attributable to Clearwire Corporation
(172,437
)
 
(1,289
)
 
(174,836
)
 
(19,580
)
Net loss attributable to Clearwire Corporation
(213,781
)
 
(84,791
)
 
(541,413
)
 
(480,484
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized foreign currency gains (losses) during the period
(641
)
 
(384
)
 
(241
)
 
4,435

Unrealized investment holding gains (losses) during the period
100

 
(5,150
)
 
19

 
(1,362
)
Less: reclassification adjustment of foreign currency gains to net loss from continuing operations

 

 
(3,242
)
 

Other comprehensive income (loss)
(541
)
 
(5,534
)
 
(3,464
)
 
3,073

Less: non-controlling interests in other comprehensive income (loss) of consolidated subsidiaries
592

 
4,163

 
2,799

 
(2,280
)
Other comprehensive income (loss) attributable to Clearwire Corporation
51

 
(1,371
)
 
(665
)
 
793

Comprehensive loss:
 
 
 
 
 
 
 
Comprehensive loss
(493,883
)
 
(490,129
)
 
(1,495,267
)
 
(2,288,059
)
Less: non-controlling interests in comprehensive loss of consolidated subsidiaries
280,153

 
403,967

 
953,189

 
1,808,368

Comprehensive loss attributable to Clearwire Corporation
$
(213,730
)
 
$
(86,162
)
 
$
(542,078
)
 
$
(479,691
)

See accompanying notes to unaudited condensed consolidated financial statements.


4


CLEARWIRE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Nine Months Ended September 30,
 
2012
 
2011
Cash flows from operating activities:
 

 
 

Net loss from continuing operations
$
(1,312,463
)
 
$
(2,212,387
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 

Deferred income taxes
(176,488
)
 
27,374

Non-cash gain on derivative instruments
(4,895
)
 
(148,227
)
Accretion of discount on debt
30,648

 
30,390

Depreciation and amortization
573,320

 
517,674

Amortization of spectrum leases
40,062

 
40,699

Non-cash rent expense
149,918

 
205,098

Loss on property, plant and equipment (Note 5)
169,975

 
837,083

Other non-cash activities
34,219

 
22,847

Changes in assets and liabilities:
 
 
 

Inventory
8,506

 
8,608

Accounts receivable
15,684

 
(68,767
)
Prepaids and other assets
6,605

 
19,371

Prepaid spectrum licenses
(2,283
)
 
(4,371
)
Deferred revenue
157,291

 
71,806

Accounts payable and other liabilities
128,157

 
10,910

Net cash used in operating activities of continuing operations
(181,744
)
 
(641,892
)
Net cash provided by operating activities of discontinued operations
397

 
1,284

Net cash used in operating activities
(181,347
)
 
(640,608
)
Cash flows from investing activities:
 

 
 

Payments to acquire property, plant and equipment
(73,152
)
 
(387,099
)
Purchases of available-for-sale investments
(1,496,966
)
 
(857,035
)
Disposition of available-for-sale investments
777,953

 
847,222

Other investing activities
(807
)
 
22,078

Net cash used in investing activities of continuing operations
(792,972
)
 
(374,834
)
Net cash provided by (used in) investing activities of discontinued operations
59

 
(3,030
)
Net cash used in investing activities
(792,913
)
 
(377,864
)
Cash flows from financing activities:
 

 
 

Principal payments on long-term debt
(19,492
)
 
(23,633
)
Proceeds from issuance of long-term debt
300,000

 

Debt financing fees
(6,205
)
 
(1,158
)
Proceeds from issuance of common stock
58,468

 
3,619

Net cash provided by (used in) financing activities of continuing operations
332,771

 
(21,172
)
Net cash provided by financing activities of discontinued operations

 

Net cash provided by (used in) financing activities
332,771

 
(21,172
)
Effect of foreign currency exchange rates on cash and cash equivalents
(2,236
)
 
(4,145
)
Net decrease in cash and cash equivalents
(643,725
)
 
(1,043,789
)
Cash and cash equivalents:
 
 
 

Beginning of period
893,744

 
1,233,562

End of period
250,019

 
189,773

Less: cash and cash equivalents of discontinued operations at end of period
2,271

 
1,574

Cash and cash equivalents of continuing operations at end of period
$
247,748

 
$
188,199

Supplemental cash flow disclosures:
 

 
 

Cash paid for interest including capitalized interest paid
$
250,473

 
$
237,132

Non-cash investing activities:
 
 
 

Fixed asset purchases in accounts payable and accrued expenses
$
15,734

 
$
25,903

Fixed asset purchases financed by long-term debt
$
558

 
$
11,204

Non-cash financing activities:
 
 
 

Vendor financing obligations
$
(558
)
 
$
(3,166
)
Capital lease obligations
$

 
$
(8,038
)
Class A common stock issued for repayment of long-term debt
$
88,456

 
$

Repayment of long-term debt through issuances of Class A common stock
$
(88,456
)
 
$


See accompanying notes to unaudited condensed consolidated financial statements.


5


CLEARWIRE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)

Nine Months Ended September 30, 2012 and 2011

 
Class A
Common Stock
 
Class B
Common Stock
 
 
 
 
 
 
 
 
 
 
 
Shares
 
Amounts
 
Shares
 
Amounts
 
Additional Paid In Capital
 
Accumulated
Other
Comprehensive Income
 
Accumulated Deficit
 
Non-controlling Interests
 
Total
Stockholders’
Equity
Balances at December 31, 2010
243,544

 
$
24

 
743,481

 
$
74

 
$
2,221,110

 
$
2,495

 
$
(900,493
)
 
$
4,546,788

 
$
5,869,998

Net loss from continuing operations

 

 

 

 

 

 
(460,904
)
 
(1,751,483
)
 
(2,212,387
)
Net loss from discontinued operations

 

 

 

 

 

 
(19,580
)
 
(59,165
)
 
(78,745
)
Other comprehensive income

 

 

 

 

 
793

 

 
2,280

 
3,073

Issuance of common stock, net of issuance costs, and other capital transactions
6,161

 
1

 
(77,413
)
 
(8
)
 
23,877

 

 

 
(20,595
)
 
3,275

Share-based compensation and other transactions

 

 

 

 
5,674

 

 

 
15,482

 
21,156

Balances at September 30, 2011
249,705

 
$
25

 
666,068

 
$
66

 
$
2,250,661

 
$
3,288

 
$
(1,380,977
)
 
$
2,733,307

 
$
3,606,370

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Balances at December 31, 2011
452,215

 
$
45

 
839,703

 
$
83

 
$
2,714,634

 
$
2,793

 
$
(1,617,826
)
 
$
2,546,309

 
$
3,646,038

Net loss from continuing operations

 

 

 

 

 

 
(366,577
)
 
(945,886
)
 
(1,312,463
)
Net loss from discontinued operations

 

 

 

 

 

 
(174,836
)
 
(4,504
)
 
(179,340
)
Other comprehensive loss

 

 

 

 

 
(665
)
 

 
(2,799
)
 
(3,464
)
Issuance of common stock, net of issuance costs, and other capital transactions
230,544

 
23

 
(57,496
)
 
(5
)
 
390,043

 
527

 

 
(273,977
)
 
116,611

Share-based compensation and other transactions

 

 

 

 
23,404

 

 

 
(3,064
)
 
20,340

Balances at September 30, 2012
682,759

 
$
68

 
782,207

 
$
78

 
$
3,128,081

 
$
2,655

 
$
(2,159,239
)
 
$
1,316,079

 
$
2,287,722


See accompanying notes to unaudited condensed consolidated financial statements.

6

CLEARWIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




1.
Description of Business

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements contained in our 2011 Annual Report on Form 10-K. In the opinion of management, all adjustments consisting of normal recurring accruals necessary for a fair presentation have been included. The results for the three and nine months ended September 30, 2012 and 2011 do not necessarily indicate the results that may be expected for the full year.

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. Our current 4G mobile broadband network operates on the Worldwide Interoperability of Microwave Access technology 802.16e standard, which we refer to as mobile WiMAX. As of September 30, 2012, we offered our services in 88 markets in the United States covering an estimated 135 million people, including an estimated 133 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 Nextel Corporation, which we refer to as Sprint, accounts for substantially all of our wholesale revenues 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 arrangements with Earthlink, Simplexity, FreedomPop, Leap Wireless, and Jolt Mobile. 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 capital for our current business and the development of our network.

Over the long term, we will need to expand our revenue base by increasing sales to our existing wholesale partners and by adding additional wholesale partners with substantial offload data capacity needs. To be successful with either, we believe it is necessary that we deploy Long Term Evolution, or LTE, technology, which is currently being adopted by most wireless operators globally as their next generation wireless technology. By deploying LTE, we believe that we will be able to take advantage of our leading spectrum position, which includes approximately 160 MHz of spectrum on average in the 100 largest markets in the United States, to offer offload data capacity to existing and future mobile broadband service providers for resale to their customers on a cost effective basis.
As of September 30, 2012, we believe that we had sufficient cash to fund the near-term liquidity needs of our business for the next twelve months. We do not expect our operations to generate cumulative positive cash flows during the next twelve months. Our cash projections are based on the cash and short term investments we had on hand as of the end of the quarter, the ongoing impact of our cost containment efforts and our current LTE deployment plans, including our plan to deploy approximately 2,000 sites by June 30, 2013. They also rely upon assumptions as to the amount of cash we will receive for our mobile WiMAX services from our retail business and from Sprint under the November 2011 4G MVNO Amendment (See Note 17, Related Party Transactions, for further information). If any of the assumptions underlying our cash projections prove to be inaccurate, we may be required to raise additional capital to fund our current business during the twelve-month period. Also, we will need to raise substantial additional capital to fund our business and meet our financial obligations beyond the end of the period.
If 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 over the long term, our business prospects, financial condition and results of operations will likely be materially and adversely affected, and we will be forced to consider all available alternatives.

2.
Summary of Significant Accounting Policies
The condensed consolidated financial statements have been prepared in accordance with accounting principals generally accepted in the United States of America, which we refer to as U.S. GAAP, and pursuant to the rules and regulations of the Securities and Exchange Commission, which we refer to as the SEC. The same accounting policies are followed for preparing the quarterly and annual financial information unless otherwise disclosed in the notes below.

7

CLEARWIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Revenue Recognition - We primarily earn revenue by providing access to our high-speed wireless networks. In our 4G mobile broadband markets, we offer our services through retail channels and through our wholesale partners. Sprint, our largest wholesale customer, accounts for substantially all of our wholesale revenue to date, and comprises approximately 37% and 36% of total revenues during the three and nine months ended September 30, 2012, respectively.
Revenue consisted of the following (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
Retail revenue
$
197,215

 
$
194,789

 
$
601,181

 
$
560,613

Wholesale revenue
116,498

 
137,162

 
351,879

 
329,579

Other revenue
169

 
226

 
393

 
1,404

Total revenues
$
313,882

 
$
332,177

 
$
953,453

 
$
891,596


In November 2011, we entered into the November 2011 4G MVNO Amendment with Sprint under which, among other things, Sprint will pay us $925.9 million for unlimited 4G mobile WiMAX services for resale to its retail subscribers in 2012 and 2013, approximately two-thirds of which is payable for service provided in 2012, and the remainder for service provided in 2013. Of the $925.9 million, $175.9 million will be paid as an offset to principal and interest due under a $150.0 million promissory note issued by us to Sprint in January 2012. Of the amount due, $900.0 million is being recognized on a straight-line basis over 2012 and 2013 and the remaining $25.9 million is being recorded as an offset to the interest cost associated with the promissory note. See Note 17, Related Party Transactions, for further information on the provisions of this agreement. Wholesale revenue for the three and nine months ended September 30, 2012 is comprised of the current period portion of the revenue recognized on a straight-line basis from the November 2011 4G MVNO Amendment. For 2011, the majority of our wholesale revenues were derived from our agreement with Sprint signed in April 2011. Under that agreement, revenues were earned as Sprint utilized our network, with usage-based pricing that included volume discounts. In addition to revenues earned during that period, wholesale revenues for the nine months ended September 30, 2011 included revenue of approximately $15.4 million of a $28.2 million settlement amount which relates to wholesale services provided in 2010.
Recent Accounting Pronouncements
The following accounting pronouncements were adopted in the nine months ended September 30, 2012:
In May 2011, the Financial Accounting Standards Board, which we refer to as the FASB, issued new accounting guidance amending fair value measurement to achieve common fair value measurement and disclosure requirements in U.S. GAAP, and International Financial Reporting Standards. We adopted the new accounting guidance on January 1, 2012. As the new accounting guidance primarily amended the disclosure requirements related to fair value measurement, the adoption did not have any impact on our financial condition or results of operations.
In June 2011, the FASB issued new accounting guidance on the presentation of other comprehensive income, which was subsequently revised in December 2011. The new guidance eliminates the current option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. Instead, an entity has the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. We adopted the new accounting guidance on January 1, 2012 which resulted in reporting the components of comprehensive loss in the Consolidated Statements of Comprehensive Loss, rather than in the Consolidated Statements of Stockholders' Equity, as previously reported.
The following accounting pronouncements were issued by the FASB during the nine months ended September 30, 2012:
In July 2012, the FASB issued new accounting guidance amending impairment testing for indefinite-lived intangible assets. The objective of these amendments is to reduce the cost and complexity of performing impairment tests for indefinite-lived intangible assets by simplifying how an entity tests those assets for impairment and to improve consistency in impairment testing guidance among long-lived asset categories. The amendments permit an entity first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test. The new accounting guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. We do not anticipate the adoption of the new accounting guidance to have a significant effect on our financial condition or results of operations.

8

CLEARWIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

In October 2012, the FASB issued accounting guidance containing technical corrections and improvements to the Accounting Standards Codification, which we refer to as the Codification. The technical corrections are relatively minor corrections and clarifications. These corrections, which affect various Codification topics and apply to all reporting entities within the scope of those topics, are divided into three main categories: (1) Source literature amendments which carry forward the original intent of certain pre-Codification authoritative literature that was inadvertently altered during the Codification process; (2) Guidance clarification and reference corrections which resulted in changes to wording and references to avoid misapplication or misinterpretation of guidance; and (3) Relocated guidance which moved guidance from one part of the Codification to another to correct instances in which the scope of pre-Codification guidance may have been unintentionally narrowed or broadened during the Codification process. The guidance also made conforming changes for the use of the term "fair value" in certain pre-Codification standards. The FASB did not provide transition guidance for Codification amendments that are not expected to change current practice. However, it did for those amendments that are more substantive and these will be effective for fiscal periods beginning after December 15, 2012. We are still evaluating the impact these technical corrections will have, if any, on our financial condition or results of operations.

3.
Charges Resulting from Cost Savings Initiatives

In connection with our ongoing cost savings initiatives, since the beginning of 2011, a total of approximately 5,800 unutilized tower leases have either been terminated or when early termination was not available under the terms of the lease, we advised our landlords of our intention not to renew. In connection with this lease termination initiative, we incurred lease termination costs and recognized a cease-to-use tower lease liability based on the remaining lease rentals (including contractual rent escalations) for leases subject to termination actions, reduced by estimated minimal sublease rentals. The charge for lease termination activities is net of previously recorded deferred rent liabilities associated with these leases and includes cancellation fees. In addition, where our current contract requires us to continue payments for certain executory costs for the remaining terms of these leases, we have accrued a liability for such costs. See Note 5, Property, Plant and Equipment, for a description of the write down of costs for projects classified as construction in progress related to the above leases.

Charges by type of cost and reconciliation of the associated accrued liability were as follows (in thousands):
 
Lease and Other Contract Termination Costs(1)
 
Employee Termination Costs
 
Other Exit Costs(4)
 
Total
Costs incurred and charged to expense during:
 
 
 
 
 
 

Three months ended September 30, 2011
$
42,102

 
$
1,470

 
$

 
$
43,572

Three months ended September 30, 2012
7,643

 
38

 

 
7,681

Nine months ended September 30, 2011
59,064

 
9,698

 
1,075

 
69,837

Nine months ended September 30, 2012
53,437

 
496

 

 
53,933

Cumulative cost incurred to date(2)
$
210,289

 
$
20,394

 
$
420

 
$
231,103

 
 
 
 
 
 
 
 
Accrued liability as of December 31, 2011
$
164,403

 
$
1,597

 
$

 
$
166,000

Net costs incurred, excluding non-cash credits
53,437

 
496

 

 
53,933

Cash and share payments
(45,005
)
 
(1,968
)
 

 
(46,973
)
Accrued liability as of September 30, 2012(3)
$
172,835

 
$
125

 
$

 
$
172,960

                
(1) 
Lease and other contract termination costs for the three and nine months ended September 30, 2011 includes non-cash credits of $1.2 million and $43.0 million, respectively, representing the reversal of deferred rent balances at the cease-use date, while the costs for the three and nine months ended September 30, 2012 includes $556,000 and $5.3 million, respectively, of accrued executory costs relating to unused tower sites where our current contract requires us to continue payments for the remaining term. Costs for the nine months ended September 30, 2012 also include $25.0 million for the elimination of the remaining estimated sublease rental income from the liability computation.
(2) 
Based on current estimates, total costs for these activities are not expected to be significantly different from those incurred to date.
(3) 
$2.3 million is recorded within Accounts payable and accrued expenses, $50.3 million is recorded as Other current liabilities and $120.4 million is recorded as Other long-term liabilities on the condensed consolidated balance sheets.
(4) 
In the fourth quarter of 2011, an adjustment was recorded to reduce other exit costs by $655,000.


9

CLEARWIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

For the three and nine months ended September 30, 2012, $6.7 million and $49.4 million, respectively were recorded as Cost of goods and services and network costs and $1.0 million and $4.5 million, respectively, were recorded as Selling, general and administrative expenses. For the three and nine months ended September 30, 2011, $35.6 million and $52.1 million, respectively, were recorded as Cost of goods and services and network costs and $8.0 million and $17.8 million, respectively, were recorded as Selling, general and administrative expenses.

4.
Investments
Investments as of September 30, 2012 and December 31, 2011 consisted of the following (in thousands):
 
September 30, 2012
 
December 31, 2011
 
 
 
Gross Unrealized
 
 
 
 
 
Gross Unrealized
 
 
 
Cost
 
Gains
 
Losses
 
Fair Value
 
Cost
 
Gains
 
Losses
 
Fair Value
Short-term
 
 
 
 
 
 
 
 
 
 
 

 
 

 
 

U.S. Government and Agency Issues
$
935,868

 
$
63

 
$
(11
)
 
$
935,920

 
$
215,627

 
$
36

 
$
(8
)
 
$
215,655

We owned Auction Market Preferred securities issued by a monoline insurance company which were perpetual and did not have a final stated maturity. Our Auction Market Preferred securities were fully written down and had no carrying value at December 31, 2011. During the first quarter of 2012, we sold the Auction Market Preferred securities and recorded a gain of $3.3 million to Other income (expense), net on the condensed consolidated statements of operations representing the total proceeds received. We no longer own any collateralized debt obligations or Auction Market Preferred securities.

5.
Property, Plant and Equipment
Property, plant and equipment, which we refer to as PP&E, as of September 30, 2012 and December 31, 2011 consisted of the following (in thousands):
 
Useful
 
September 30, 2012
 
December 31, 2011
 
Lives (Years)
 
 
Network and base station equipment
5 -15
 
$
3,371,977

 
$
3,350,696

Customer premise equipment
2
 
52,691

 
82,545

Furniture, fixtures and equipment
3-5
 
471,497

 
450,254

Leasehold improvements
Lesser of useful life or lease term
 
31,544

 
46,435

Construction in progress
N/A
 
108,684

 
262,761

 
 
 
4,036,393

 
4,192,691

Less: accumulated depreciation and amortization
 
 
(1,684,832
)
 
(1,178,414
)
 
 
 
$
2,351,561

 
$
3,014,277

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
Supplemental information (in thousands):
 

 
 

 
 
 
 
Capitalized interest
$
1,245

 
$
2,190

 
$
4,658

 
$
16,729

Depreciation expense
$
206,174

 
$
159,988

 
$
559,500

 
$
500,956

We have entered into lease arrangements related to our network construction and equipment that meet the criteria for capital leases. At September 30, 2012 and December 31, 2011, we have recorded capital lease assets with an original cost of $81.2 million within Network and base station equipment.
Construction in progress is primarily composed of costs incurred during the process of completing network projects not yet placed in service. The balance at September 30, 2012 included $54.0 million of costs related to completing network projects not yet placed in service, $50.2 million of network and base station equipment not yet assigned to a project and $4.5 million of costs

10

CLEARWIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

related to information technology, which we refer to as IT, and other corporate projects.
Charges associated with Property, plant and equipment

We assess our assets classified as PP&E and evaluate for losses related to (1) shortage, or loss incurred in deploying such equipment, (2) reserve for excessive and obsolete equipment not yet deployed in the network, and (3) abandonment of network and corporate projects no longer expected to be deployed. In addition to charges incurred in the normal course of business, this assessment includes evaluating the impact of changes in our business plans and strategic network plans on those assets.
During the nine months ended September 30, 2012, we solidified our LTE network architecture, including identifying the sites at which we expect to overlay LTE technology in the first phase of our deployment. Any projects that are not required to deploy LTE technology at those sites, or that are no longer viable due to the development of the LTE network architecture, were abandoned and the related costs written down. In addition, any network equipment not required to support our network deployment plans or sparing requirements were written down to estimated salvage value.
During the nine months ended September 30, 2011, in connection with our plan to deploy LTE alongside our existing WiMAX network and the shift in management's strategic network deployment plans to focus on areas with high usage concentration, any projects that no longer fit within the deployment plans were abandoned and the related costs were written down to salvage value. Additionally, in connection with our cost savings initiatives, we continually review our tower leases and evaluate whether such towers fit within management's deployment plans. In connection therewith, certain tower leases have been terminated, and when early termination was not available under the terms of the lease, we advised our landlords of our intention not to renew. The costs for projects included in construction in progress related to leases for which we have initiated such terminations were written down. See Note 3, Charges Resulting from Cost Savings Initiatives, for a discussion of the costs associated with lease terminations.
We incurred the following charges associated with PP&E for the three and nine months ended September 30, 2012 and 2011 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
Abandonment of network projects no longer meeting strategic network plans
$
2,588

 
$
24,413

 
$
82,741

 
$
285,582

Abandonment of network projects associated with terminated leases

 
3,601

 

 
228,343

Abandonment of corporate projects

 
1,115

 
564

 
63,416

Total loss from abandonment of network and other assets
2,588

 
29,129

 
83,305

 
577,341

Charges for disposal and differences between recorded amounts and results of physical counts(1)(2)
10,968

 
30,254

 
28,233

 
47,618

Charges for excessive and obsolete equipment(1)
2,994

 
8,427

 
58,437

 
212,124

Total losses on property, plant and equipment
$
16,550

 
$
67,810

 
$
169,975

 
$
837,083

     
(1)    Included in Cost of goods and services and network costs on the condensed consolidated statements of operations.
(2)  
For the three and nine months ended September 30, 2012, $8.1 million and $13.3 million, respectively, is included in Selling, general and administrative expense on the condensed consolidated statements of operations.

During the third quarter of 2012, based on the LTE equipment vendor selection process and compatibility of existing network equipment, we identified a portion of WiMAX network equipment that we are planning to change or upgrade during our deployment of LTE technology. We concluded that the useful lives of certain WiMAX equipment should be accelerated beginning in the third quarter of 2012. This resulted in the weighted-average remaining useful life of WiMAX network assets to decrease from approximately four years to approximately three years based on the expected date of equipment removal. We will continue to monitor the estimated useful lives of our network assets as our plans evolve.
During the first quarter of 2012, as a result of Sprint's announcement that it plans to decommission its iDEN network, we evaluated the remaining useful lives of our Network and base station equipment co-located at iDEN sites identified by Sprint to be decommissioned. We concluded that, for certain of the Network and base station equipment at these sites, it is not likely that we would continue to operate our equipment at the current location once Sprint decommissions its site. Therefore, we determined

11

CLEARWIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

the useful lives of the Network and base station equipment at these sites should be accelerated beginning in the first quarter of 2012 from a weighted-average remaining useful life of approximately five years to approximately one - two years based on the expected date of decommissioning.

6.
Spectrum Licenses
Owned and leased spectrum licenses as of September 30, 2012 and December 31, 2011 consisted of the following (in thousands):
 
 
September 30, 2012
 
December 31, 2011
 
 
Gross Carrying
Value
 
Accumulated
Amortization
 
Net Carrying
Value
 
Gross Carrying
Value
 
Accumulated
Amortization
 
Net Carrying
Value
Indefinite-lived owned spectrum
 
$
3,101,783

 
$

 
$
3,101,783

 
$
3,098,983

 
$

 
$
3,098,983

Spectrum leases and prepaid spectrum
 
1,364,907

 
(222,623
)
 
1,142,284

 
1,364,907

 
(181,033
)
 
1,183,874

Pending spectrum and transition costs
 
19,300

 

 
19,300

 
15,397

 

 
15,397

Total spectrum licenses
 
$
4,485,990

 
$
(222,623
)
 
$
4,263,367

 
$
4,479,287

 
$
(181,033
)
 
$
4,298,254


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
Supplemental Information (in thousands):
 
 
 

 
 
 
 
Amortization of prepaid and other spectrum licenses
$
13,851

 
$
14,499

 
$
41,739

 
$
42,345


As of September 30, 2012, future amortization of spectrum licenses, spectrum leases and prepaid lease costs (excluding pending spectrum and spectrum transition costs) is expected to be as follows (in thousands):
 
Total
2012
$
13,662

2013
54,563

2014
54,163

2015
53,600

2016
52,862

Thereafter
913,434

Total
$
1,142,284





12

CLEARWIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

7.
Other Intangible Assets
Other intangible assets as of September 30, 2012 and December 31, 2011 consisted of the following (in thousands):
 
 
 
September 30, 2012
 
December 31, 2011
 
Useful lives
 
Gross
Carrying
Value
 
Accumulated
Amortization
 
Net Carrying
Value
 
Gross
Carrying
Value
 
Accumulated
Amortization
 
Net Carrying
Value
Subscriber relationships
7 years
 
$
108,275

 
$
(82,254
)
 
$
26,021

 
$
108,275

 
$
(70,894
)
 
$
37,381

Trade names and trademarks
5 years
 
3,804

 
(2,916
)
 
888

 
3,804

 
(2,346
)
 
1,458

Patents and other
10 years
 
3,270

 
(1,461
)
 
1,809

 
3,228

 
(1,217
)
 
2,011

Total other intangibles
 
 
$
115,349

 
$
(86,631
)
 
$
28,718

 
$
115,307

 
$
(74,457
)
 
$
40,850

As of September 30, 2012, the future amortization of other intangible assets is expected to be as follows (in thousands):
2012
$
4,058

2013
12,301

2014
7,736

2015
3,870

2016
325

Thereafter
428

Total
$
28,718


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
Supplemental Information (in thousands):
 

 
 

 
 
 
 
Amortization expense
$
4,060

 
$
5,024

 
$
12,174

 
$
15,072


We evaluate all of our patent renewals on a case by case basis, based on renewal costs.


13

CLEARWIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

8.
Supplemental Information on Liabilities
Current liabilities
Current liabilities consisted of the following (in thousands):
 
September 30, 2012
 
December 31, 2011
Accounts payable and accrued expenses:
 

 
 

Accounts payable
$
71,416

 
$
65,285

Accrued interest
170,292

 
39,980

Salaries and benefits
21,196

 
29,075

Business and income taxes payable
20,451

 
15,304

Other accrued expenses
8,150

 
7,528

Total accounts payable and accrued expenses
291,505

 
157,172

Other current liabilities:
 

 
 

Derivative instruments
1,778

 
8,240

Deferred revenues(1)
119,970

 
36,691

Current portion of long-term debt
27,079

 
26,474

Cease-to-use lease liability (2)
50,252

 
45,645

Other
7,886

 
5,706

Total other current liabilities
206,965

 
122,756

Total
$
498,470

 
$
279,928

Other long-term liabilities
Other long-term liabilities consisted of the following (in thousands):
 
September 30, 2012
 
December 31, 2011
Deferred rents associated with tower and spectrum leases
$
676,280

 
$
555,838

Cease-to-use liability (2)
120,387

 
117,000

Deferred revenue(1)
75,219

 
1,207

Other
44,678

 
45,658

Total
$
916,564

 
$
719,703

        
(1)    See Note 17, Related Party Transactions, for further detail regarding deferred revenue balances with related parties.
(2)
See Note 3, Charges Resulting from Cost Savings Initiatives, for further information.

9.
Income Taxes

Clearwire Corporation, which we refer to as Clearwire or the Company, holds no significant assets other than its equity interests in Clearwire Communications LLC, which we refer to as Clearwire Communications. Clearwire Communications is treated as a partnership for United States federal income tax purposes and therefore does not pay United States federal income tax. As a result, any current and deferred tax consequences are reflected at the partner level. Other than the balances associated with the non-United States operations, the only temporary difference for Clearwire is the difference between the financial statement carrying value and the tax basis associated with the investment in Clearwire Communications.

Time Warner Cable Inc.'s, which we refer to as Time Warner Cable, exchange of 46.4 million Class B common interests in Clearwire Communications, which we refer to as Class B Common Interests, and a corresponding number of shares of Class B common stock in Clearwire, which we refer to as Class B Common Stock, for an equal number of shares of Clearwire's Class A

14

CLEARWIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

common stock, which we refer to as Class A Common Stock, and which we refer to as the Time Warner Exchange, on September 13, 2012, as well as Comcast Corporation's, which we refer to as Comcast, exchange of 88.5 million Class B Common Interests and a corresponding number of shares of Class B Common Stock for an equal number of shares of Class A Common Stock, which we refer to as the Comcast Exchange, on September 27, 2012, resulted in significant changes to Clearwire's financial statement carrying value and the tax basis it has in Clearwire Communications, as well as, an increase in the amount of temporary differences which will reverse within the net operating loss carryforward period.

Our deferred tax assets primarily represent net operating loss, which we refer to as NOL, carry-forwards associated with Clearwire's operations prior to the formation of the Company on November 28, 2008 and the portion of the partnership losses allocated to Clearwire after the formation of the Company. The Company is subject to a change in control test under Section 382 of the Internal Revenue Code, that if met, would limit the annual utilization of any pre-change in control NOL carryforward as well as the ability to use certain unrealized built in losses as future tax deductions. We believe that the Comcast Exchange, which occurred on September 27, 2012, when combined with other issuances of our Class A Common Stock and certain third party investor transactions involving our Class A Common Stock since December 13, 2011, resulted in a change in control under Section 382 of the Internal Revenue Code. As a result of this change in control and the change in control that occurred on December 13, 2011, we believe that we permanently will be unable to use a significant portion of our NOL carry-forwards that arose before the change in control to offset future taxable income.

We have recognized a deferred tax liability for the difference between the financial statement carrying value and the tax basis of the partnership interest. As it relates to the United States tax jurisdiction, we determined that our temporary taxable difference associated with our investment in the partnership will not completely reverse within the carry-forward period of the NOLs. The portion of such temporary difference that will reverse within the carry-forward period of the NOLs represents relevant future taxable income. Management has reviewed the facts and circumstances, including the history of NOLs, projected future tax losses, and determined that it is appropriate to record a valuation allowance against the portion of our deferred tax assets that are not deemed realizable. As a result of the Time Warner Exchange and the Comcast Exchange, there was an increase in the amount of temporary difference which will reverse within the NOL carry-forward period. Therefore, management determined that it was appropriate to reduce the valuation allowance recorded against our deferred tax assets, along with recording a corresponding deferred tax benefit for our continuing operations. The income tax benefit reflected in our condensed consolidated statements of operations for continuing operations primarily reflects United States deferred taxes net of certain state taxes.

On September 14, 2012, we completed an insolvency filing with respect to our operations in Spain (See Note 18, Discontinued Operations, for further information). As a result, certain intercompany loans related to our international operations will be considered uncollectible for United States federal income tax purposes and, as a result, there is an increase to our deferred tax liability of approximately $172.1 million along with a corresponding deferred tax expense for our discontinued operations.


15

CLEARWIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

10.
Long-term Debt, Net
Long-term debt at September 30, 2012 and December 31, 2011 consisted of the following (in thousands):
 
September 30, 2012
 
Interest
Rates
 
Effective
Rate(1)
 
Maturities
 
Par
Amount
 
Net
Discount
 
Carrying
Value
Notes:
 
 
 
 
 
 
 

 
 

 
 

2015 Senior Secured Notes
12.00%
 
12.92%
 
2015
 
$
2,947,494

 
$
(29,824
)
 
$
2,917,670

2016 Senior Secured Notes
14.75%
 
15.36%
 
2016
 
300,000

 

 
300,000

Second-Priority Secured Notes
12.00%
 
12.42%
 
2017
 
500,000

 

 
500,000

Exchangeable Notes
8.25%
 
16.93%
 
2040
 
629,250

 
(170,392
)
 
458,858

Vendor Financing Notes(3)
LIBOR based(2)
 
6.25%
 
2014/2015
 
33,269

 
(47
)
 
33,222

Capital lease obligations(3)
 
 
 
 
 
 
61,764

 

 
61,764

Total debt, net
 
 
 
 
 
 
$
4,471,777

 
$
(200,263
)
 
4,271,514

Less: Current portion of Vendor Financing Notes and capital lease obligations(4)
 
 
 
 
 
 
 

 
 

 
(27,079
)
Total long-term debt, net
 
 
 
 
 
 
 

 
 

 
$
4,244,435

_______________________________________
(1) 
Represents weighted average effective interest rate based on quarter-end balances.
(2) 
Coupon rate based on 3-month LIBOR plus a spread of 5.50% (secured) and 7.00% (unsecured). Included in the balance are unsecured notes with par amount of $558,000 at September 30, 2012.
(3) 
As of September 30, 2012, par amount of approximately $94.5 million is secured by assets classified as Network and base station equipment.
(4)    Included in Other current liabilities on the consolidated balance sheets.

 
December 31, 2011
 
Interest
Rates
 
Effective
Rate(1)
 
Maturities
 
Par
Amount
 
Net
Discount
 
Carrying
Value
Notes:
 
 
 
 
 
 
 
 
 
 
 
2015 Senior Secured Notes
12.00%
 
12.92%
 
2015
 
$
2,947,494

 
$
(35,272
)
 
$
2,912,222

Second-Priority Secured Notes
12.00%
 
12.42%
 
2017
 
500,000

 

 
500,000

Exchangeable Notes
8.25%
 
16.66%
 
2040
 
729,250

 
(209,259
)
 
519,991

Vendor Financing Notes(3)
LIBOR based(2)
 
6.19%
 
2014/2015
 
48,379

 
(103
)
 
48,276

Capital lease obligations(3)
 
 
 
 
 
 
65,590

 

 
65,590

Total debt, net
 
 
 
 
 
 
$
4,290,713

 
$
(244,634
)
 
4,046,079

Less: Current portion of Vendor Financing Notes and capital lease obligations(4)
 
 
 
 
 
 
 
 
 
 
(26,474
)
Total long-term debt, net
 
 
 
 
 
 
 
 
 
 
$
4,019,605

_______________________________________
(1) 
Represents weighted average effective interest rate based on year-end balances.
(2) 
Coupon rate based on 3-month LIBOR plus a spread of 5.50%.
(3) 
As of December 31, 2011, par amount of approximately $114.0 million is secured by assets classified as Network and base station equipment.
(4) 
Included in Other current liabilities on the consolidated balance sheets.

16

CLEARWIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

2016 Senior Secured Notes  — In January 2012, Clearwire Communications completed an offering of senior secured notes with a par value of $300.0 million, due 2016 and bearing interest at 14.75%, which we refer to as the 2016 Senior Secured Notes. Clearwire Communications received proceeds of $294.8 million, net of debt issuance costs, from the offering. The 2016 Senior Secured Notes provide for bi-annual payments of interest in June and December.

The holders of the 2016 Senior Secured Notes have the right to require us to repurchase all of the notes upon the occurrence of specific kinds of changes of control at a price of 101% of the principal plus any unpaid accrued interest to the repurchase date. Under certain circumstances, Clearwire Communications will be required to use the net proceeds from the sale of assets to make an offer to purchase the 2016 Senior Secured Notes at an offer price equal to 100% of the principal amount plus any unpaid accrued interest.

Our payment obligations under the 2016 Senior Secured Notes are guaranteed by certain domestic subsidiaries on a senior basis and secured by certain assets of such subsidiaries on a first-priority lien basis. The 2016 Senior Secured Notes contain limitations on our activities, which among other things, include incurring additional indebtedness and guarantee indebtedness; making distributions or payment of dividends or certain other restricted payments or investments; making certain payments on indebtedness; entering into agreements that restrict distributions from restricted subsidiaries; selling or otherwise disposing of assets; merger, consolidation or sales of substantially all of our assets; entering transactions with affiliates; creating liens; issuing certain preferred stock or similar equity securities and making investments and acquiring assets.

Exchangeable Notes Transaction  — During the first quarter of 2012, Clearwire and Clearwire Communications entered into securities purchase agreements with certain institutional investors, which we refer to as the Exchange Transaction, pursuant to which Clearwire issued 38.0 million shares of Class A Common Stock for an aggregate price of $83.5 million, which we refer to as the Purchase Price, and Clearwire Communications repurchased $100.0 million in aggregate principal amount of its 8.25% exchangeable notes due 2040, which we refer to as the Exchangeable Notes, for a total price equal to the Purchase Price. Clearwire used the proceeds of the sale of the Class A Common Stock to contribute to Clearwire Communications to allow it to retire $100.0 million in aggregate principal amount of its Exchangeable Notes, plus accrued but unpaid interest, held by the institutional investors. Due to the significant discount resulting from the recognition of the exchange options as a separate derivative liability upon the issuance of the Exchangeable Notes, extinguishment of the Exchangeable Notes in the Exchange Transaction resulted in a loss of $10.1 million recorded in Other income (expense), net on the condensed consolidated statements of operations.
Future Payments — For future payments on our long-term debt see Note 13, Commitments and Contingencies.
Interest Expense — Interest expense included in our condensed consolidated statements of operations for the three and nine months ended September 30, 2012 and 2011, consisted of the following (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
Interest coupon(1)
$
129,804

 
$
121,250

 
$
388,392

 
$
363,472

Accretion of debt discount and amortization of debt premium, net(2)
10,481

 
9,536

 
30,648

 
30,390

Capitalized interest
(1,245
)
 
(2,190
)
 
(4,658
)
 
(16,729
)
 
$
139,040

 
$
128,596

 
$
414,382

 
$
377,133

_______________________________________
(1) 
The nine months ended September 30, 2012 includes $2.5 million of coupon interest relating to Exchangeable Notes, which was settled in the non-cash Exchange Transaction.
(2) 
Includes non-cash amortization of deferred financing fees which are classified as Other assets on the condensed consolidated balance sheets.

11.
Derivative Instruments
The holders’ exchange rights contained in the Exchangeable Notes constitute embedded derivative instruments that are required to be accounted for separately from the debt host instrument at fair value. As a result, upon the issuance of the Exchangeable Notes, we recognized exchange options, which we refer to as Exchange Options, with an estimated fair value of $231.5 million as a derivative liability. As a result of the Exchange Transaction, $100.0 million in par value of the Exchange Notes were retired and the related Exchange Options, with a notional amount of 14.1 million shares, were settled at fair value. The Exchange Options

17

CLEARWIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

are indexed to Class A Common Stock, have a notional amount of 88.9 million and 103.0 million shares at September 30, 2012 and December 31, 2011, respectively, and mature in 2040. See Note 10, Long-term Debt, Net, for further information on the Exchange Transaction.
We do not apply hedge accounting to the Exchange Options. Therefore, gains and losses due to changes in fair value are reported in our condensed consolidated statements of operations. At September 30, 2012 and December 31, 2011, the Exchange Options’ estimated fair value of $1.8 million and $8.2 million, respectively, was reported in Other current liabilities on our condensed consolidated balance sheets. For the three months ended September 30, 2012 and 2011, we recognized (losses)/gains of $(889,000) and $59.7 million, respectively, from the changes in the estimated fair value in Gain (loss) on derivative instruments in our condensed consolidated statements of operations. For the nine months ended September 30, 2012 and 2011, we recognized gains of $4.9 million and $148.3 million, respectively, from the changes in the estimated fair value in Gain (loss) on derivative instruments in our condensed consolidated statements of operations. See Note 12, Fair Value, for information regarding valuation of the Exchange Options.

12.
Fair Value
The following is a description of the valuation methodologies and pricing assumptions we used for financial instruments measured and recorded at fair value on a recurring basis in our financial statements and the classification of such instruments pursuant to the valuation hierarchy.
Cash Equivalents and Investments
Where quoted prices for identical securities are available in an active market, we use quoted market prices to determine the fair value of investment securities and cash equivalents, and they are classified in Level 1 of the valuation hierarchy. Level 1 securities include U.S. Government Treasury Bills, actively traded U.S. Government Treasury Notes and money market mutual funds for which there are quoted prices in active markets or quoted net asset values published by the money market mutual fund and supported in an active market.
Investments are classified in Level 2 of the valuation hierarchy for securities where quoted prices are available for similar investments in active markets or for identical or similar investments in markets that are not active and we use "consensus pricing" from independent external valuation sources. Level 2 securities include U.S. Government Agency Discount Notes and U.S. Government Agency Notes.
Derivatives
The Exchange Options are classified in Level 3 of the valuation hierarchy. To estimate the fair value of the Exchange Options, we use an income approach based on valuation models, including option pricing models and discounted cash flow models. We maximize the use of market-based observable inputs in the models and develop our own assumptions for unobservable inputs based on management estimates of market participants’ assumptions in pricing the instruments.
We use a trinomial option pricing model to estimate the fair value of the Exchange Options. The inputs include the contractual terms of the instrument and market-based parameters such as interest rate forward curves, stock price and dividend yield. A level of subjectivity is applied to estimate our stock price volatility input. The stock price volatility used in computing the fair value of the Exchange Options at September 30, 2012 and December 31, 2011 of 40% is based on our historical stock price volatility giving consideration to our estimates of market participant adjustments for general market conditions as well as company-specific factors such as market trading volume and our expected future performance. Holding all other pricing assumptions constant, an increase or decrease of 10% in our estimated stock volatility at September 30, 2012 could result in a loss of $3.6 million, or a gain of $1.8 million, respectively.

18

CLEARWIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The following table summarizes our financial assets and liabilities by level within the valuation hierarchy at September 30, 2012 (in thousands):
 
Quoted
Prices in
Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Fair Value
Financial assets:
 

 
 

 
 

 
 

Cash and cash equivalents
$
247,748

 
$

 
$

 
$
247,748

Short-term investments
$
475,439

 
$
460,481

 
$

 
$
935,920

Other assets — derivative warrant assets
$

 
$

 
$
195

 
$
195

Financial liabilities:
 
 
 
 
 
 
 

Other current liabilities — derivative liabilities (Exchange Options)
$

 
$

 
$
(1,778
)
 
$
(1,778
)
The following table summarizes our financial assets and liabilities by level within the valuation hierarchy at December 31, 2011 (in thousands):
 
Quoted
Prices in
Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Fair Value
Financial assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
891,929

 
$

 
$

 
$
891,929

Short-term investments
$
215,655

 
$

 
$

 
$
215,655

Other assets — derivative warrant assets
$

 
$

 
$
209

 
$
209

Financial liabilities:
 
 
 
 
 
 
 
Other current liabilities — derivative liabilities (Exchange Options)
$

 
$

 
$
(8,240
)
 
$
(8,240
)
The following table presents the change in Level 3 financial assets and liabilities measured on a recurring basis for the three months ended September 30, 2012 (in thousands):
 
July 1, 2012
 
Acquisitions,
Issuances and
Settlements
 
Net Realized/Unrealized
Gains (Losses)
Included in
Earnings
 
Net Realized/Unrealized
Gains (Losses)
Included in
Accumulated
Other
Comprehensive
Income
 
September 30, 2012
 
Net Unrealized Gains (Losses) Included in 2012 Earnings Relating to Instruments Held at September 30, 2012
Other assets:
 
 
 
 
 
 
 
 
 
 

 
 
Derivatives
$
212

 
$

 
$
(17
)
(1) 
 
$

 
$
195

 
$
(14
)
Other current liabilities:
 
 
 
 
 
 
 
 
 
 

 
 
Derivatives
(889
)
 

 
(889
)
(1) 
 

 
(1,778
)
 
5,333

_____________________________________
(1) 
Included in Gain (loss) on derivative instruments in the condensed consolidated statements of operations.

19

CLEARWIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The following table presents the change in Level 3 financial assets and liabilities measured on a recurring basis for the three months ended September 30, 2011 (in thousands):
 
July 1, 2011
 
Acquisitions,
Issuances and
Settlements
 
Net Unrealized
Gains (Losses)
Included in
Earnings
 
Net Unrealized
Gains (Losses)
Included in
Accumulated
Other
Comprehensive
Income
 
September 30, 2011
 
Net Unrealized Gains (Losses) Included in 2011 Earnings Relating to Instruments Held at September 30, 2011
Long-term investments:
 

 
 

 
 

 
 
 

 
 

 
 

Other debt securities
$
18,521

 
$

 
$

 
 
$
(4,954
)
 
$
13,567

 
$

Other assets:
 
 
 
 
 
 
 
 
 
 

 
 
Derivatives
299

 

 
(12
)
(1) 
 

 
287

 
(95
)
Other current liabilities:
 
 
 
 
 
 
 
 
 
 

 
 
Derivatives
(79,311
)
 

 
59,741

(1) 
 

 
(19,570
)
 
148,322

______________________________________
(1) 
Included in Gain (loss) on derivative instruments in the condensed consolidated statements of operations.
The following table presents the change in Level 3 financial assets and liabilities measured on a recurring basis for the nine months ended September 30, 2012 (in thousands):
 
January 1, 2012
 
Acquisitions,
Issuances and
Settlements
 
Net Realized/Unrealized
Gains (Losses)
Included in
Earnings
 
Net Realized/Unrealized
Gains (Losses)
Included in
Accumulated
Other
Comprehensive
Income
 
September 30, 2012
 
Net Unrealized Gains (Losses) Included in 2012 Earnings Relating to Instruments Held at September 30, 2012
Other assets:
 
 
 
 
 
 
 
 
 
 

 
 
Derivatives
$
209

 
$

 
$
(14
)
(1) 
 
$

 
$
195

 
$
(14
)
Other current liabilities:
 
 
 
 
 
 
 
 
 
 

 
 
Derivatives
(8,240
)
 
1,553

 
4,909

(1) 
 

 
(1,778
)
 
5,333

______________________________________
(1) 
Included in Gain (loss) on derivative instruments in the condensed consolidated statements of operations.
The following table presents the change in Level 3 financial assets and liabilities measured on a recurring basis for the nine months ended September 30, 2011 (in thousands):
 
January 1, 2011
 
Acquisitions,
Issuances and
Settlements
 
Net Unrealized
Gains (Losses)
Included in
Earnings
 
Net Unrealized
Gains (Losses)
Included in
Accumulated
Other
Comprehensive
Income
 
September 30, 2011
 
Net Unrealized Gains (Losses) Included in 2011 Earnings Relating to Instruments Held at September 30, 2011
Long-term investments:
 

 
 

 
 

 
 
 

 
 

 
 

Other debt securities
$
15,251

 
$

 
$

 
 
$
(1,684
)
 
$
13,567

 
$

Other assets:
 
 
 
 
 
 
 
 
 
 

 
 
Derivatives
292

 
90

 
(95
)
(1) 
 

 
287

 
(95
)
Other current liabilities:
 
 
 
 
 
 
 
 
 
 

 
 
Derivatives
(167,892
)
 

 
148,322

(1) 
 

 
(19,570
)
 
148,322

______________________________________
(1) 
Included in Gain (loss) on derivative instruments in the condensed consolidated statements of operations.

20

CLEARWIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The following is the description of the fair value for financial instruments we hold that are not subject to fair value recognition.
Debt Instruments
The senior secured notes maturing in 2015, which we refer to as the 2015 Senior Secured Notes, the 2016 Senior Secured Notes, the second-priority secured notes, which we refer to as the Second-Priority Secured Notes, and the Exchangeable Notes are classified as Level 2 of the valuation hierarchy. To estimate the fair value of the 2015 Senior Secured Notes, the 2016 Senior Secured Notes, the Second-Priority Notes and the Exchangeable Notes, we used the average indicative price from several market makers.
To estimate the fair value of the vendor financing notes, which we refer to as the Vendor Financing Notes, we used an income approach based on the contractual terms of the notes and market-based parameters such as interest rates. As a result, they are classified in Level 3 of the valuation hierarchy. A level of subjectivity is applied to estimate the discount rate used to calculate the present value of the estimated cash flows.
The following table presents the carrying value and the approximate fair value of our outstanding debt instruments at September 30, 2012 and December 31, 2011 (in thousands):
 
September 30, 2012
 
December 31, 2011
 
Carrying
Value
 
Fair Value
 
Carrying
Value
 
Fair Value
Notes:
 

 
 

 
 

 
 

Senior Secured Notes - 2015
$
2,917,670

 
$
2,929,701

 
$
2,912,222

 
$
2,799,820

Senior Secured Notes - 2016
$
300,000

 
$
326,625

 
$

 
$

Second-Priority Secured Notes
$
500,000

 
$
460,000

 
$
500,000

 
$
425,000

Exchangeable Notes(1)
$
458,858

 
$
457,808

 
$
519,991

 
$
446,134

Vendor Financing Notes
$
33,222

 
$
31,501

 
$
48,276

 
$
44,133

_______________________________________
(1) 
Carrying value as of September 30, 2012 and December 31, 2011 is net of $170.4 million and $209.3 million discount, respectively, arising from the separation of the Exchange Options from the debt host instrument. The fair value of the Exchangeable Notes incorporates the value of the exchange feature which we have recognized separately as a derivative on our consolidated balance sheets.


21

CLEARWIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

13.
Commitments and Contingencies
Future minimum cash payments under obligations for our continuing operations listed below (including all optional expected renewal periods on operating leases) as of September 30, 2012, are as follows (in thousands):
 
Total
 
2012
 
2013
 
2014
 
2015
 
2016
 
Thereafter,
including all
renewal periods
Long-term debt obligations
$