Cricket Wireless 2012 Annual Report Download - page 138

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LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
equipment, software and technology that it uses in its business, as well as with purchasers of assets, lenders,
lessors and other vendors. Indemnification agreements are generally entered into in commercial and other
transactions in an attempt to allocate potential risk of loss.
iPhone Purchase Commitment
In May 2012, the Company entered into a three-year iPhone purchase commitment with Apple. The
commitment began upon the Company’s launch of sales of the iPhone in June 2012. Based on its current handset
purchase and sales mix and current iPhone device pricing, the Company estimates that the commitment would
require it to purchase approximately $800 million of iPhones, with annual commitments during the three-year
period that increase moderately in the second and third years. The Company projects that the minimum number
of iPhones that it is required to purchase from Apple over the term of the commitment would represent 10% or
less of the total number of handsets it expects to sell to new and upgrading customers over the period of the
commitment and for approximately one year thereafter. However, the actual amount that the Company spends
and the number of devices that it purchases over the term of the commitment will depend on many factors,
including customer acceptance and availability of current and future versions of the device, future costs for the
device, the success of the Company’s marketing and advertising efforts, customer demand for devices offered by
other manufacturers and other factors.
At its current purchase rate, the Company projects that it will purchase approximately one-half of its first-
year minimum purchase commitment through June 2013, although the actual amount of the Company’s
purchases will depend on the factors described above. If Apple were to require the Company to meet the annual
minimum commitment in each of the three years of the contract term, the Company estimates that it would be
required to purchase approximately $100 million of additional iPhones in mid-2013 above its current purchase
rate, approximately $150 million of additional iPhones in mid-2014 above its current purchase rate and
approximately $200 million of additional iPhones in mid-2015 above its current purchase rate. The Company
believes, however, that it will be able to increase its current iPhone sales rate and purchase and sell the required
minimum number of devices over the period of the commitment and for a subsequent inventory sell-through
period not to exceed one year. The Company is pursuing a number of programs to expand sales volume. The
Company also has the flexibility to modify the price at which it offers the iPhone to drive increased volume. In
addition, it is possible that the Company and Apple could agree to revise the requirements under, or extend the
term of, the Company’s purchase commitment, although the Company’s current capital and liquidity projections
do not assume that such a modification will occur.
Wholesale Agreement
In August 2010, the Company entered into a wholesale agreement with an affiliate of Sprint Nextel which it
uses to offer Cricket services in nationwide retailers outside of its current network footprint. The initial term of
the wholesale agreement runs until December 31, 2015, and automatically renews for successive one-year
periods unless either party provides 180-day advance notice to the other. Under the agreement, the Company
pays Sprint a specified amount per month for each subscriber activated on its network, subject to periodic
market-based adjustments. The Company has agreed, among other things, to purchase a minimum of $300
million of wholesale services over the initial five-year term of the agreement, with the following annual
minimum purchase commitments: $20 million in 2011; $75 million in 2012; $80 million in 2013; $75 million in
2014; and $50 million in 2015. The Company entered into an amendment to the wholesale agreement in February
2013 to enable the Company to purchase 4G LTE services. In addition, under the amendment, the Company can
credit up to $162 million of revenue it provides Sprint under other existing commercial arrangements against the
minimum purchase commitment. Any wholesale revenue provided to Sprint in a given year above the minimum
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