Cricket Wireless 2010 Annual Report Download - page 89

well as any obligations owed to us by Pocket. Under the STX LLC Agreement, we are 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, we accreted approximately $48.1 million to reflect the change in the redemption
value of such interest. We have recorded this obligation to purchase all of Pocket’s membership interests in STX
Wireless as a component of redeemable non-controlling interests in the consolidated balance sheets. As of
December 31, 2010, this redeemable interest had a carrying 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. We have 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.
We are implementing a plan for STX Wireless 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 through the third quarter of 2011 and we 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. We 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, we purchased
the remaining 17.5% controlling membership interest in Denali that we did not previously own in Denali 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, we are required to make principal payments of $8.5 million per year, with the remaining principal balance and
all accrued interest payable at maturity. Our obligations under the note are secured on a first-lien basis by certain assets of
Savary Island. In connection with the acquisition, we also paid $11 million to the FCC in unjust enrichment payments.
Effective as of the closing of our acquisition of the remaining membership interest in Denali, the management services
agreement, senior secured credit agreement and related agreements among Cricket and Denali and its subsidiaries were
terminated and all remaining outstanding indebtedness (including accrued interest) under the Denali senior secured
credit agreement (other than indebtedness assumed by Savary Island, see below) was cancelled.
Immediately prior to our 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, or Ring Island, contributed $5.1 million of cash to Savary Island in exchange for a 15% controlling
membership interest. In connection with the contribution of assets by Denali, Savary Island assumed $211.6 million
of the outstanding loans owed to us under the Denali senior secured credit agreement, and we entered into an
amended and restated senior secured credit agreement with Savary Island and its subsidiaries to amend and restate
the terms of the Denali senior secured credit agreement applicable to the assume loans (see “Part I — Item 1.
Business” above.) Under the Savary Island LLC Agreement, 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 us,
pursuant to which Cricket provides management services to Savary Island in exchange for a management fee.
83