Quarterly Report

Table of Contents


 
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: June 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 July 24, 2012 , was 542,094,806 . The number of shares outstanding of the registrant's Class B common stock as of July 24, 2012 was 917,116,026 .
 

Table of Contents


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

Table of Contents

 
 
Page
 
 
 
 
 
 
 
 
 
 

Table of Contents


PART I - FINANCIAL INFORMATION

ITEM 1.
Financial Statements

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

 
 

Cash and cash equivalents
$
238,542

 
$
891,929

Short-term investments
971,603

 
215,655

Restricted cash
2,178

 
1,000

Accounts receivable, net of allowance of $4,638 and $5,542
92,661

 
83,660

Inventory
18,320

 
23,832

Prepaids and other assets
84,399

 
71,083

Total current assets
1,407,703

 
1,287,159

Property, plant and equipment, net
2,546,440

 
3,014,277

Restricted cash
8,528

 
7,619

Spectrum licenses, net
4,270,531

 
4,298,254

Other intangible assets, net
32,765

 
40,850

Other assets
150,080

 
157,797

Assets of discontinued operations (Note 18)
23,772

 
36,696

Total assets
$
8,439,819

 
$
8,842,652

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 

 
 

Accounts payable and accrued expenses
$
156,979

 
$
157,172

Other current liabilities
206,350

 
122,756

Total current liabilities
363,329

 
279,928

Long-term debt, net
4,243,473

 
4,019,605

Deferred tax liabilities, net
143,128

 
152,182

Other long-term liabilities
879,314

 
719,703

Liabilities of discontinued operations (Note 18)
22,768

 
25,196

Total liabilities
5,652,012

 
5,196,614

Commitments and contingencies (Note 13)


 


Stockholders’ equity:
 

 
 

Class A common stock, par value $0.0001, 2,000,000 shares authorized; 542,060 and 452,215 shares outstanding
54

 
45

Class B common stock, par value $0.0001, 1,400,000 shares authorized; 917,116 and 839,703 shares outstanding
91

 
83

Additional paid-in capital
2,891,678

 
2,714,634

Accumulated other comprehensive income
2,077

 
2,793

Accumulated deficit
(1,945,458
)
 
(1,617,826
)
Total Clearwire Corporation stockholders’ equity
948,442

 
1,099,729

Non-controlling interests
1,839,365

 
2,546,309

Total stockholders’ equity
2,787,807

 
3,646,038

Total liabilities and stockholders’ equity
$
8,439,819

 
$
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 June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Revenues
$
316,932

 
$
322,611

 
$
639,571

 
$
559,419

Operating expenses:
 
 
 

 
 
 
 
Cost of goods and services and network costs (exclusive of items shown separately below)
224,426

 
433,363

 
488,216

 
673,508

Selling, general and administrative expense
137,693

 
178,232

 
280,348

 
393,096

Depreciation and amortization
184,566

 
169,640

 
362,539

 
352,114

Spectrum lease expense
81,190

 
76,620

 
160,898

 
151,441

Loss from abandonment of network and other assets
317

 
376,350

 
80,717

 
548,212

Total operating expenses
628,192

 
1,234,205

 
1,372,718

 
2,118,371

Operating loss
(311,260
)
 
(911,594
)
 
(733,147
)
 
(1,558,952
)
Other income (expense):
 
 
 

 
 
 
 
Interest income
533

 
689

 
797

 
1,529

Interest expense
(138,656
)
 
(128,617
)
 
(275,342
)
 
(248,537
)
Gain on derivative instruments
10,663

 
115,279

 
5,801

 
88,498

Other income (expense), net
(283
)
 
1,937

 
(13,551
)
 
2,227

Total other expense, net
(127,743
)
 
(10,712
)
 
(282,295
)
 
(156,283
)
Loss from continuing operations before income taxes
(439,003
)
 
(922,306
)
 
(1,015,442
)
 
(1,715,235
)
Income tax benefit (provision)
7,976

 
(17,464
)
 
23,389

 
(17,695
)
Net loss from continuing operations
(431,027
)
 
(939,770
)
 
(992,053
)
 
(1,732,930
)
Less: non-controlling interests in net loss from continuing operations of consolidated subsidiaries
287,848

 
779,245

 
666,820

 
1,355,528

Net loss from continuing operations attributable to Clearwire Corporation
(143,179
)
 
(160,525
)
 
(325,233
)
 
(377,402
)
Net loss from discontinued operations attributable to Clearwire Corporation (Note 18)
(2,630
)
 
(8,213
)
 
(2,399
)
 
(18,291
)
Net loss attributable to Clearwire Corporation
$
(145,809
)
 
$
(168,738
)
 
$
(327,632
)
 
$
(395,693
)
Net loss from continuing operations attributable to Clearwire Corporation per Class A Common Share:
 

 
 

 
 
 
 
Basic
$
(0.28
)
 
$
(0.65
)
 
$
(0.67
)
 
$
(1.53
)
Diluted
$
(0.32
)
 
$
(0.98
)
 
$
(0.75
)
 
$
(1.79
)
Net loss attributable to Clearwire Corporation per Class A Common Share:
 
 
 

 
 
 
 
Basic
$
(0.29
)
 
$
(0.68
)
 
$
(0.68
)
 
$
(1.61
)
Diluted
$
(0.33
)
 
$
(1.01
)
 
$
(0.76
)
 
$
(1.87
)

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 June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Net loss:
 
 
 
 
 
 
 
Net loss from continuing operations
$
(431,027
)
 
$
(939,770
)
 
$
(992,053
)
 
$
(1,732,930
)
Less: non-controlling interests in net loss from continuing operations of consolidated subsidiaries
287,848

 
779,245

 
666,820

 
1,355,528

Net loss from continuing operations attributable to Clearwire Corporation
(143,179
)
 
(160,525
)
 
(325,233
)
 
(377,402
)
Net loss from discontinued operations
(7,451
)
 
(32,919
)
 
(6,408
)
 
(73,607
)
Less: non-controlling interests in net loss from discontinued operations of consolidated subsidiaries
4,821

 
24,706

 
4,009

 
55,316

Net loss from discontinued operations attributable to Clearwire Corporation
(2,630
)
 
(8,213
)
 
(2,399
)
 
(18,291
)
Net loss attributable to Clearwire Corporation
(145,809
)
 
(168,738
)
 
(327,632
)
 
(395,693
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized foreign currency gains during the period
1,177

 
801

 
400

 
4,819

Unrealized investment holding gains (losses) during the period
117

 
(667
)
 
(81
)
 
3,788

Less: reclassification adjustment of foreign currency gains to net loss from continuing operations
(1,478
)
 
—

 
(3,242
)
 
—

Other comprehensive income (loss)
(184
)
 
134

 
(2,923
)
 
8,607

Less: non-controlling interests in other comprehensive income (loss) of consolidated subsidiaries
290

 
(67
)
 
2,207

 
(6,443
)
Other comprehensive income (loss) attributable to Clearwire Corporation
106

 
67

 
(716
)
 
2,164

Comprehensive loss:
 
 
 
 
 
 
 
Comprehensive loss
(438,662
)
 
(972,555
)
 
(1,001,384
)
 
(1,797,930
)
Less: non-controlling interests in comprehensive loss of consolidated subsidiaries
292,959

 
803,884

 
673,036

 
1,404,401

Comprehensive loss attributable to Clearwire Corporation
$
(145,703
)
 
$
(168,671
)
 
$
(328,348
)
 
$
(393,529
)

See accompanying notes to unaudited condensed consolidated financial statements.


4


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

 
 

Net loss from continuing operations
$
(992,053
)
 
$
(1,732,930
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 

Deferred income taxes
(24,289
)
 
17,047

Non-cash gain on derivative instruments
(5,801
)
 
(88,498
)
Accretion of discount on debt
20,167

 
20,854

Depreciation and amortization
362,539

 
352,114

Amortization of spectrum leases
26,760

 
26,748

Non-cash rent expense
104,647

 
109,619

Loss on property, plant and equipment (Note 5)
153,425

 
769,273

Other non-cash activities
26,298

 
12,204

Changes in assets and liabilities:
 
 
 

Inventory
4,463

 
7,212

Accounts receivable
(19,050
)
 
(16,033
)
Prepaids and other assets
645

 
(3,708
)
Prepaid spectrum licenses
(2,283
)
 
(3,942
)
Deferred revenue
155,406

 
61,352

Accounts payable and other liabilities
4,628

 
(83,994
)
Net cash used in operating activities of continuing operations
(184,498
)
 
(552,682
)
Net cash provided by (used in) operating activities of discontinued operations
4,237

 
(16,268
)
Net cash used in operating activities
(180,261
)
 
(568,950
)
Cash flows from investing activities:
 

 
 

Payments to acquire property, plant and equipment
(47,540
)
 
(335,212
)
Purchases of available-for-sale investments
(1,247,147
)
 
(857,035
)
Disposition of available-for-sale investments
492,953

 
607,222

Other investing activities
(4,918
)
 
20,868

Net cash used in investing activities of continuing operations
(806,652
)
 
(564,157
)
Net cash provided by (used in) investing activities of discontinued operations
59

 
(2,533
)
Net cash used in investing activities
(806,593
)
 
(566,690
)
Cash flows from financing activities:
 

 
 

Principal payments on long-term debt
(12,867
)
 
(17,439
)
Proceeds from issuance of long-term debt
300,000

 
—

Debt financing fees
(6,205
)
 
(1,148
)
Proceeds from issuance of common stock
58,468

 
3,619

Net cash provided by (used in) financing activities of continuing operations
339,396

 
(14,968
)
Net cash provided by financing activities of discontinued operations
—

 
—

Net cash provided by (used in) financing activities
339,396

 
(14,968
)
Effect of foreign currency exchange rates on cash and cash equivalents
(1,633
)
 
(2,533
)
Net decrease in cash and cash equivalents
(649,091
)
 
(1,153,141
)
Cash and cash equivalents:
 
 
 

Beginning of period
893,744

 
1,233,562

End of period
244,653

 
80,421

Less: cash and cash equivalents of discontinued operations at end of period
6,111

 
1,656

Cash and cash equivalents of continuing operations at end of period
$
238,542

 
$
78,765

Supplemental cash flow disclosures:
 

 
 

Cash paid for interest including capitalized interest paid
$
249,892

 
$
236,292

Non-cash investing activities:
 
 
 

Fixed asset purchases in accounts payable and accrued expenses
$
13,465

 
$
38,365

Fixed asset purchases financed by long-term debt
$
117

 
$
9,792

Non-cash financing activities:
 
 
 

Vendor financing obligations
$
(117
)
 
$
(1,897
)
Capital lease obligations
$
—

 
$
(7,895
)
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)

Six Months Ended June 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
—

 
—

 
—

 
—

 
—

 
—

 
(377,402
)
 
(1,355,528
)
 
(1,732,930
)
Net loss from discontinued operations
—

 
—

 
—

 
—

 
—

 
—

 
(18,291
)
 
(55,316
)
 
(73,607
)
Other comprehensive income
—

 
—

 
—

 
—

 
—

 
2,164

 
—

 
6,443

 
8,607

Surrender of Class B common stock
—

 
—

 
(77,413
)
 
(8
)
 
—

 
—

 
—

 
 
 
(8
)
Issuance of common stock, net of issuance costs, and other capital transactions
4,770

 
1

 
—

 
—

 
19,843

 
—

 
—

 
(16,562
)
 
3,282

Share-based compensation and other transactions
—

 
—

 
—

 
—

 
3,095

 
—

 
—

 
8,169

 
11,264

Balances at June 30, 2011
248,314

 
$
25

 
666,068

 
$
66

 
$
2,244,048

 
$
4,659

 
$
(1,296,186
)
 
$
3,133,994

 
$
4,086,606

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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
—

 
—

 
—

 
—

 
—

 
—

 
(325,233
)
 
(666,820
)
 
(992,053
)
Net loss from discontinued operations
—

 
—

 
—

 
—

 
—

 
—

 
(2,399
)
 
(4,009
)
 
(6,408
)
Other comprehensive loss
—

 
—

 
—

 
—

 
—

 
(716
)
 
—

 
(2,207
)
 
(2,923
)
Issuance of common stock, net of issuance costs, and other capital transactions
89,845

 
9

 
77,413

 
8

 
168,204

 
—

 
—

 
(37,481
)
 
130,740

Share-based compensation and other transactions
—

 
—

 
—

 
—

 
8,840

 
—

 
—

 
3,573

 
12,413

Balances at June 30, 2012
542,060

 
$
54

 
917,116

 
$
91

 
$
2,891,678

 
$
2,077

 
$
(1,945,458
)
 
$
1,839,365

 
$
2,787,807


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 six months ended June 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 June 30, 2012 , we offered our services in 88 markets in the United States covering an estimated 136 million people, including an estimated 134 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 primarily 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 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 in the United States 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 June 30, 2012 , we believe that we had sufficient cash to fund the near-term liquidity needs of our business for at least the next 12 months 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, the cash we expect to receive for our mobile WiMAX services from our retail business and from Sprint under the agreement signed with them in November 2011, which we refer to as the November 2011 4G MVNO Amendment (See Note 17, Related Party Transactions, for further information) and other wholesale partners, and the cash we expect to spend under our current LTE deployment plans. We do not expect our operations to generate cumulative positive cash flows during the next twelve months. If our business fails to perform as we expect or if we incur unforeseen expenses, we may be required to raise additional capital in the near term to fund our current business. Also, we will need to raise substantial additional capital to fund our business and meet our financial obligations beyond the next 12 months .
If we are unable to raise sufficient additional capital to meet our funding needs on acceptable terms 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.
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

7
CLEARWIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

customer, accounts for primarily all of our wholesale revenue to date, and comprises approximately 36% of total revenues during the three and six months ended June 30, 2012 .
Revenue consisted of the following (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Retail revenue
$
199,156

 
$
190,583

 
$
403,966

 
$
365,824

Wholesale revenue
117,560

 
131,522

 
235,381

 
192,417

Other revenue
216

 
506

 
224

 
1,178

Total revenues
$
316,932

 
$
322,611

 
$
639,571

 
$
559,419


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 six months ended June 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 second quarter of 2011 included revenue of approximately $16.1 million attributable to services provided in the first quarter of 2011, and approximately $12.8 million of a $28.2 million settlement amount which relates to wholesale services provided in 2010.
The following accounting policies were adopted in the six months ended June 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.

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 sublease rentals that could be reasonably obtained. In addition to charges related to payment of lease termination costs, during the second quarter of 2012, based on sublease activity to date, we eliminated the remaining estimated sublease rental income from the liability computation and fully incorporated contractual rent escalations resulting in an increase to the liability of approximately $25.0 million . 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

8
CLEARWIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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 June 30, 2011
$
14,901

 
$
3,763

 
$
1,075

 
$
19,739

Three months ended June 30, 2012
34,331

 
256

 
—

 
34,587

Six months ended June 30, 2011
16,962

 
8,257

 
1,075

 
26,294

Six months ended June 30, 2012
45,794

 
458

 
—

 
46,252

Cumulative cost incurred to date (2)
$
202,646

 
$
20,356

 
$
420

 
$
223,422

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

 
$
1,597

 
$
—

 
$
166,000

Net costs incurred, excluding non-cash credits
45,794

 
458

 
—

 
46,252

Cash and share payments
(30,520
)
 
(1,664
)
 
—

 
(32,184
)
Accrued liability as of June 30, 2012 (3)
$
179,677

 
$
391

 
$
—

 
$
180,068

                 
(1)  
Lease and other contract termination costs for the three and six months ended June 30, 2011 includes non-cash credits of $2.4 million and $41.8 million , respectively, representing the reversal of deferred rent balances at the cease-use date, while the costs for the three and six months ended June 30, 2012 includes $4.4 million and $4.7 million , respectively, of accrued executory costs relating to unused tower sites where our current contract requires us to continue payments for the remaining term.
(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, $50.1 million is recorded as Other current liabilities and $127.6 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 .

For the three and six months ended June 30, 2012, $31.9 million and $42.8 million , respectively were recorded as Cost of goods and services and network costs and $2.6 million and $3.5 million , respectively, were recorded as Selling, general and administrative expenses. For the three and six months ended June 30, 2011, $14.4 million and $16.5 million , respectively, were recorded as Cost of goods and services and network costs and $5.3 million and $9.8 million , respectively, were recorded as Selling, general and administrative expenses.

4.
Investments
Investments as of June 30, 2012 and December 31, 2011 consisted of the following (in thousands):
 
June 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
$
971,656

 
$
19

 
$
(72
)
 
$
971,603

 
$
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.


9
CLEARWIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

5.
Property, Plant and Equipment
Property, plant and equipment, which we refer to as PP&E, as of June 30, 2012 and December 31, 2011 consisted of the following (in thousands):
 
Useful
 
June 30, 2012
 
December 31, 2011
 
Lives (Years)
 
 
Network and base station equipment
5 -15
 
$
3,370,054

 
$
3,350,696

Customer premise equipment
2
 
62,412

 
82,545

Furniture, fixtures and equipment
3-5
 
480,918

 
450,254

Leasehold improvements
Lesser of useful life or lease term
 
40,661

 
46,435

Construction in progress
N/A
 
98,839

 
262,761

 
 
 
4,052,884

 
4,192,691

Less: accumulated depreciation and amortization
 
 
(1,506,444
)
 
(1,178,414
)
 
 
 
$
2,546,440

 
$
3,014,277

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Supplemental information (in thousands):
 

 
 

 
 
 
 
Capitalized interest
$
1,239

 
$
2,305

 
$
3,413

 
$
14,539

Depreciation expense
$
179,959

 
$
164,067

 
$
353,326

 
$
340,968

We have entered into lease arrangements related to our network construction and equipment that meet the criteria for capital leases. At June 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 June 30, 2012 included $20.7 million of costs related to completing network projects not yet placed in service, $62.0 million of network and base station equipment not yet assigned to a project and $16.1 million of costs 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 six months ended June 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 also written down to estimated salvage value.
During the six months ended June 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.

10
CLEARWIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


We incurred the following charges associated with PP&E for the three and six months ended June 30, 2012 and 2011 (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Abandonment of network projects no longer meeting strategic network plans
$
182

 
$
235,064

 
$
80,153

 
$
261,169

Abandonment of network projects associated with terminated leases
—

 
79,293

 
—

 
224,742

Abandonment of corporate projects
135

 
61,993

 
564

 
62,301

Total loss from abandonment of network and other assets
317

 
376,350

 
80,717

 
548,212

Charges for disposal and differences between recorded amounts and results of physical counts (1)(2)
8,560

 
16,830

 
17,265

 
17,364

Charges for excessive and obsolete equipment (1)
5,492

 
197,768

 
55,443

 
203,697

Total losses on property, plant and equipment
$
14,369

 
$
590,948

 
$
153,425

 
$
769,273

      
(1)     Included in Cost of goods and services and network costs on the condensed consolidated statements of operations.
(2)  
For the three and six months ended June 30, 2012 , $3.0 million and $5.2 million , respectively, is included in Selling, general and administrative expense on the condensed consolidated statements of operations.
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 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 5 years to approximately 1 - 2 years based on the expected date of decommissioning. We will continue to monitor the estimated useful lives of our network assets as our plans continue to evolve. Any further adjustments to those lives would likely result in increased depreciation expense in future periods.

6.
Spectrum Licenses
Owned and leased spectrum licenses as of June 30, 2012 and December 31, 2011 consisted of the following (in thousands):
 
 
June 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

 
(208,892
)
 
1,156,015

 
1,364,907

 
(181,033
)
 
1,183,874

Pending spectrum and transition costs
 
12,733

 
—

 
12,733

 
15,397

 
—

 
15,397

Total spectrum licenses
 
$
4,479,423

 
$
(208,892
)
 
$
4,270,531

 
$
4,479,287

 
$
(181,033
)
 
$
4,298,254


 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Supplemental Information (in thousands):
 
 
 

 
 
 
 
Amortization of prepaid and other spectrum licenses
$
13,093

 
$
13,664

 
$
27,888

 
$
27,846



11
CLEARWIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

As of June 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
$
28,130

2013
54,669

2014
54,221

2015
53,630

2016
52,793

Thereafter
912,572

Total
$
1,156,015


We expect that all renewal periods in our spectrum leases will be renewed by us, and the costs to renew to be immaterial.

7.
Other Intangible Assets
Other intangible assets as of June 30, 2012 and December 31, 2011 consisted of the following (in thousands):
 
 
 
June 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

 
$
(78,467
)
 
$
29,808

 
$
108,275

 
$
(70,894
)
 
$
37,381

Trade names and trademarks
5 years
 
3,804

 
(2,725
)
 
1,079

 
3,804

 
(2,346
)
 
1,458

Patents and other
10 years
 
3,257

 
(1,379
)
 
1,878

 
3,228

 
(1,217
)
 
2,011

Total other intangibles
 
 
$
115,336

 
$
(82,571
)
 
$
32,765

 
$
115,307

 
$
(74,457
)
 
$
40,850


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

2012
$
8,116

2013
12,302

2014
7,737

2015
3,871

2016
326

Thereafter
413

Total
$
32,765


 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Supplemental Information (in thousands):
 

 
 

 
 
 
 
Amortization expense
$
4,056

 
$
5,024

 
$
8,114

 
$
10,048


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


12
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):
 
June 30, 2012
 
December 31, 2011
Accounts payable and accrued expenses:
 

 
 

Accounts payable
$
63,312

 
$
65,285

Accrued interest
42,879

 
39,980

Salaries and benefits
16,028

 
29,075

Business and income taxes payable
19,483

 
15,304

Other accrued expenses
15,277

 
7,528

Total accounts payable and accrued expenses
156,979

 
157,172

Other current liabilities:
 

 
 

Derivative instruments
889

 
8,240

Deferred revenues (1)
117,756

 
36,691

Current portion of long-term debt
27,141

 
26,474

Cease-to-use lease liability (2)
50,141

 
45,645

Other
10,423

 
5,706

Total other current liabilities
206,350

 
122,756

Total
$
363,329

 
$
279,928

Other long-term liabilities
Other long-term liabilities consisted of the following (in thousands):
 
June 30, 2012
 
December 31, 2011
Deferred rents associated with tower and spectrum leases
$
632,152

 
$
555,838

Cease-to-use liability (2)
127,599

 
117,000

Deferred revenue (1)
75,549

 
1,207

Other
44,014

 
45,658

Total
$
879,314

 
$
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, including for Clearwire, arise at the partner level. Other than the balances associated with the non-United States operations, the only temporary difference for Clearwire is the basis difference associated with our investment in the partnership. We have recognized a deferred tax liability for this basis difference. Our deferred tax assets primarily represent net operating loss 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. A portion of our deferred tax assets will be realized through schedulable reversing deferred tax liabilities, however all of the net operating losses incurred on or before December 13, 2011 are limited under Section 382 and a portion cannot be realized within

13
CLEARWIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

the carry-forward period. Net operating losses incurred after December 13, 2011 are not subject to limitation under Section 382. As it relates to the United States tax jurisdiction, we determined that our temporary taxable difference associated with our investment in Clearwire Communications will not completely reverse within the carry-forward period of the net operating losses. The portion of such temporary difference that will reverse within the carry-forward period of the net operating losses represents relevant future taxable income. Management has reviewed the facts and circumstances, including the history of net operating losses and 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.

The income tax benefit reflected in our condensed consolidated statements of operations primarily reflects United States deferred taxes net of certain state taxes.

10.
Long-term Debt, Net
Long-term debt at June 30, 2012 and December 31, 2011 consisted of the following (in thousands):
 
June 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

 
$
(31,706
)
 
$
2,915,788

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

 
(175,587
)
 
453,663

Vendor Financing Notes (3)
LIBOR based (2)
 
6.24%
 
2014/2015
 
38,126

 
(54
)
 
38,072

Capital lease obligations (3)
 
 
 
 
 
 
63,091

 
—

 
63,091

Total debt, net
 
 
 
 
 
 
$
4,477,961

 
$
(207,347
)
 
4,270,614

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

 
 

 
(27,141
)
Total long-term debt, net
 
 
 
 
 
 
 

 
 

 
$
4,243,473

_______________________________________
(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 $117,000 at June 30, 2012.
(3)      As of June 30, 2012 , par amount of approximately $101.1 million is secured by assets classified as Network and base station equipment.
(4)      Included in Other current liabilities on the consolidated balance sheets.


14
CLEARWIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 
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.
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 Communication 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 Clearwire's Class A common stock, which we refer to as 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.

15
CLEARWIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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 six months ended June 30, 2012 and 2011 , consisted of the following (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Interest coupon (1)
$
129,916

 
$
120,681

 
$
258,588

 
$
242,222

Accretion of debt discount and amortization of debt premium, net (2)
9,979

 
10,241

 
20,167

 
20,854

Capitalized interest
(1,239
)
 
(2,305
)
 
(3,413
)
 
(14,539
)
 
$
138,656

 
$
128,617

 
$
275,342

 
$
248,537

_______________________________________
(1)  
During the six months ended June 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 are indexed to Class A Common Stock, have a notional amount of 88.9 million and 103.0 million shares at June 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 June 30, 2012 and December 31, 2011 , the Exchange Options’ estimated fair value of $889,000 and $8.2 million , respectively, was reported in Other current liabilities on our condensed consolidated balance sheets. For the three months ended June 30, 2012 and 2011 , we recognized gains of $10.7 million and $115.4 million , respectively, from the changes in the estimated fair value in Gain on derivative instruments in our condensed consolidated statements of operations. For the six months ended June 30, 2012 and 2011 , we recognized gains of $5.8 million and $88.6 million , respectively, from the changes in the estimated fair value in Gain 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.

16
CLEARWIRE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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 June 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 June 30, 2012 could result in a loss of $2.7 million , or a gain of $889,000 , respectively.
The following table summarizes our financial assets and liabilities by level within the valuation hierarchy at June 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
$
238,542

 
$
—

 
$
—

 
$
238,542

Short-term investments
$
575,960

 
$
395,643

 
$
—

 
$
971,603

Other assets — derivative warrant assets
$
—

 
$
—

 
$
212

 
$
212

Financial liabilities:
 
 
 
 
 
 
 

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

 
$
—

 
$
(889
)
 
$
(889
)
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
)

17
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 June 30, 2012 (in thousands):
 
April 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
 
June 30, 2012
 
Net Unrealized Gains (Losses) Included in 2012 Earnings Relating to Instruments Held at June 30, 2012
Other assets:
 
 
 
 
 
 
 
 
 
 

 
 
Derivatives
$
214

 
$
—

 
$
(2
)
(1)  
 
$
—

 
$
212

 
$
3

Other current liabilities:
 
 
 
 
 
 
 
 
 
 

 
 
Derivatives
(11,554
)
 
—

 
10,665

(1)  
 
—

 
(889
)
 
6,222

_____________________________________
(1)  
Included in Gain 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 three months ended June 30, 2011 (in thousands):
 
April 1, 2011
 
Acquisitions,
Issuances and
Settlements
 
Net Unrealized
Gains (Losses)
Included in
Earnings
 
Net Unrealized
Gains (Losses)
Included in
Accumulated
Other
Comprehensive
Income
 
June 30, 2011
 
Net Unrealized Gains (Losses) Included in 2011 Earnings Relating to Instruments Held at June 30, 2011
Long-term investments:
 

 
 

 
 

 
 
 

 
 

 
 

Other debt securities
$
19,697

 
$
—

 
$
—

 
 
$
(1,176
)
 
$
18,521

 
$
—

Other assets:
 
 
 
 
 
 
 
 
 
 

 
 
Derivatives
292

 
90

 
(83
)
(1)  
 
—

 
299

 
(83
)
Other current liabilities:
 
 
 
 
 
 
 
 
 
 

 
 
Derivatives
(194,673
)
 
—

 
115,362

(1)  
 
—

 
(79,311
)
 
88,581

______________________________________
(1)  
Included in Gain 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 six months ended June 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
 
June 30, 2012
 
Net Unrealized Gains (Losses) Included in 2012 Earnings Relating to Instruments Held at June 30, 2012
Other assets:
 
 
 
 
 
 
 
 
 
 

 
 
Derivatives
$
209

 
$
—

 
$
3

(1)  
 
$
—

 
$
212

 
$
3

Other current liabilities:
 
 
 
 
 
 
 
 
 
 

 
 
Derivatives
(8,240
)
 
1,553

 
5,798

(1)