Cricket Wireless 2010 Annual Report Download - page 119

exchange for a 15% controlling membership interest. Under the amended and restated limited liability company
agreement of Savary Island, Ring Island has the right to put its entire membership interest in Savary Island to
Cricket as early as mid-2012 (based on current FCC rules). Savary Island has guaranteed Cricket’s put obligations
under the Savary Island LLC Agreement, which guaranty is secured on a first-lien basis by certain assets of Savary
Island. At the closing, Savary Island entered into a management services agreement with Cricket, pursuant to which
Cricket provides management services to Savary Island in exchange for a management fee.
Cricket and Denali were parties to a Credit Agreement, dated as of July 13, 2006, as amended (the “Denali
Credit Agreement”), pursuant to which Cricket made loans to Denali to fund a portion of the costs of the acquisition
of the AWS license it acquired in Auction #66 and to fund a portion of the costs of the construction and operation of
the wireless network using such license. As of September 30, 2010, borrowings under the Denali Credit Agreement
totaled $542.9 million (excluding accrued interest). In connection with the contribution of assets by Denali
described above, Savary Island agreed to assume $211.6 million of the outstanding loans owed to Cricket. Effective
as of Cricket’s consummation of the acquisition of the remaining membership interest in Denali, the Denali Credit
Agreement and all related loan and security documents were terminated and all remaining indebtedness including
accrued interest thereunder (other than indebtedness assumed by Savary Island discussed below) was cancelled.
Pursuant to the authoritative accounting guidance for non-controlling interests and variable interest entities,
the Company is deemed to maintain “control” of Savary Island for accounting purposes through its 85% non-
controlling membership interest. At formation, the net equity in Savary Island was comprised of $156.1 million
representing the carrying value of wireless licenses contributed by Denali and $211.6 million of loans owed by
Denali to Cricket that were assumed by Savary Island, plus $5.1 million in cash contributed by Ring Island. The
Company recorded a redeemable non-controlling interest representing Ring Island’s 15% proportionate share of the
net equity in Savary Island, which at the time of formation, resulted in a deficit balance of approximately
$7.6 million, in mezzanine equity as a component of redeemable non-controlling interest. Additionally, at the time
of formation, the Company recorded a pre-tax gain of approximately $12.7 million, which effectively arose from the
requirement to adjust the value of Ring Island’s controlling membership interest from its initial $5.1 million cash
contribution to its proportionate share of Savary Island’s net equity, or the initial value of the redeemable non-
controlling interest, a deficit of $7.6 million. Since the Company is deemed to maintain “control” for accounting
purposes over the Savary Island venture through its 85% non-controlling membership interest, the gain was
recorded to additional paid-in capital.
Under the Savary Island LLC Agreement, Ring Island has the option to put its entire controlling membership
interest in Savary Island to Cricket during the 30-day period commencing on the earlier to occur of May 1, 2012
(based on current FCC rules) and the date of a sale of all or substantially all of the assets, or the liquidation, of
Savary Island, and during any 30-day period commencing after a breach by Cricket of its obligation to pay spectrum
lease fees or fund working capital loans under the Savary Island Credit Agreement (see below) which breach has
continued for 120 days after written notice of breach. The purchase price for such sale is an amount equal to Ring
Island’s equity contributions to Savary Island less any optional distributions made pursuant to the Savary Island
LLC Agreement, plus $150,000 if the sale is consummated prior to May 1, 2017 without incurring any unjust
enrichment payments. If the put option is exercised, the consummation of the sale will be subject to FCC approval.
The Company has recorded this obligation to purchase Ring Island’s controlling membership interest in Savary
Island as a component of redeemable non-controlling interest in the consolidated balance sheets. As of
December 31, 2010, this non-controlling interest had a carrying value of $5.3 million. Under the Savary Island
LLC Agreement, Savary Island is also required to make monthly mandatory distributions to Ring Island.
To the extent the redemption price for Ring Island’s controlling membership interest exceeds the value of
Ring Island’s net interest in Savary Island 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. Accordingly, the Company recorded
a $12.8 million adjustment to accrete the value of such interest to its redemption value. The Company has recorded
the obligation to purchase all of Ring Island’s membership interest in Savary Island as a component of redeemable
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LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)