Cricket Wireless 2010 Annual Report Download - page 118

obligated to sell to the Company all of its membership interests in STX Wireless. The purchase price for Pocket’s
membership interests would be equal to 24.25% of the product of Leap’s enterprise value-to-revenue multiple for
the four most recently completed fiscal quarters multiplied by the total revenues of STX Wireless and its
subsidiaries over that same period. The purchase price is payable in either cash, Leap common stock or a
combination thereof, as determined by Cricket in its discretion (provided that, if permitted by Cricket’s debt
instruments, at least $25 million of the purchase price must be paid in cash). The Company has the right to deduct
from or set off against the purchase price certain distributions made to Pocket, as well as any obligations owed to the
Company by Pocket. Under the STX LLC Agreement, Cricket is permitted to purchase Pocket’s membership
interests in STX Wireless over multiple closings in the event that the block of shares of Leap common stock issuable
to Pocket at the closing of the purchase would be greater than 9.9% of the total number of shares of Leap common
stock then issued and outstanding. To the extent the redemption price for Pocket’s non-controlling membership
interest exceeds the value of Pocket’s net interest in STX Wireless at any period, the value of such interest is
accreted to the redemption price for such interest with a corresponding adjustment to additional paid-in capital. As
of December 31, 2010, the Company had recorded accretion charges of $48.1 million to bring the carrying value of
Pocket’s membership interests in STX to its currently estimated redemption value of $99.5 million.
At the closing of the formation of the joint venture, STX Wireless entered into a loan and security agreement
with Pocket pursuant to which, commencing in April 2012, STX Wireless agreed to make quarterly limited-
recourse loans to Pocket out of excess cash in an aggregate principal amount not to exceed $30 million, which loans
are secured by Pocket’s membership interests in STX Wireless. Such loans will bear interest at 8.0% per annum,
compounded annually, and will mature on the earlier of October 2020 and the date on which Pocket ceases to hold
any membership interests in STX Wireless. Cricket has the right to set off all outstanding principal and interest
under this loan and security agreement against the payment of the purchase price for Pocket’s membership interests
in STX Wireless in the event of a put, call or mandatory buyout following a change of control of Leap.
The Company is implementing a plan to integrate the Cricket and Pocket operating assets in the South Texas
region so that the combined network and retail operations of the new joint venture will operate more efficiently.
These changes and integrations are expected to occur throughout 2011 and the Company may incur significant
restructuring charges to integrate STX Wireless’ network and retail operations during this time period.
Denali and Savary Island Transactions
Cricket service is offered in the upper Midwest by Denali Operations. Denali Operations and its parent
company, Denali, are wholly-owned subsidiaries of Cricket. The Company originally acquired an 82.5%
non-controlling membership interest in Denali in 2006. Denali was formed as a “very small business”
designated entity under FCC regulations and purchased a wireless license in Auction #66 covering the upper
Midwest portion of the U.S. On December 27, 2010, Cricket purchased the remaining 17.5% controlling
membership interest in Denali that it did not previously own, for $53.5 million in cash and a five-year
$45.5 million promissory note. Interest on the outstanding principal balance of the note varies from
year-to-year at rates ranging from approximately 5.0% to 8.3% and compounds annually. Under the note,
Cricket is required to make principal payments of $8.5 million per year, with the remaining principal balance
and all accrued interest payable at maturity. Cricket’s obligations under the note are secured on a first-lien basis by
certain assets of Savary Island. In connection with the acquisition, Cricket also paid $11 million to the FCC in unjust
enrichment payments. As a result of the acquisition, Denali and its subsidiaries became wholly-owned subsidiaries
of Cricket.
Immediately prior to the Company’s purchase of the remaining membership interest in Denali, Denali
contributed all of its wireless spectrum outside of its Chicago and Southern Wisconsin operating markets and a
related spectrum lease to Savary Island, a newly formed venture, in exchange for an 85% non-controlling
membership interest. Savary Island acquired this spectrum as a “very small business” designated entity under
FCC regulations. Ring Island Wireless, LLC (“Ring Island”) contributed $5.1 million of cash to Savary Island in
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LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)