Sprint - Nextel 2015 Annual Report Download - page 109

Table of Contents
Index to Consolidated Financial Statements
SPRINT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
customer and will remit monthly rental payments to MLS, which are recognized as "Cost of products" on the consolidated statements of operations during the
respective lease-back periods.
In December 2015, Sprint contributed $1.3 billion of certain leased devices and the associated customer leases to wholly-owned consolidated
bankruptcy-remote special purpose entities of Sprint (SPE Lessees). The SPE Lessees then sold the devices and transferred certain specified customer lease end
rights and obligations, such as the right to receive the proceeds from customers who elect to purchase the device at the end of the customer lease term, to MLS in
exchange for proceeds totaling $1.1 billion (Cash Purchase Price) and a DPP of $126 million .
The difference between the fair value and the net book value of the devices sold was recognized as a loss on disposal of property, plant and equipment
in the amount of $65 million and is included in "Other, net" on the consolidated statements of operations. Simultaneously with the sale of the devices, MLS leased
back each device to the SPE Lessees pursuant to the Master Lease Agreement (Device Lease) in exchange for monthly rental payments to be made by the SPE
Lessees to MLS. The monthly rental payments for the devices leased back by us will approximate the amount of cash received from the associated customer leases
during the weighted average 17 month lease-back period (S eeNote13.CommitmentsandContingencies). Rent expense related to MLS totaled $277 million
during the year ended March 31, 2016 and is reflected within cash flows from operations.
The SPE Lessees retain all rights to the underlying customer leases, such as the right to receive the rental payments during the device lease-back period,
other than the aforementioned certain specified customer lease end rights. Each SPE Lessee is a separate legal entity with its own separate creditors who will be
entitled, prior to and upon the liquidation of the SPE Lessee, to be satisfied out of the SPE Lessee’s assets prior to any assets in the SPE Lessee becoming available
to Sprint. Accordingly, the assets of the SPE Lessee are not available to pay creditors of Sprint or any of its affiliates. Settlement for the DPP occurs at the end of
the agreement and can be reduced to the extent that MLS experiences a loss on the device (either not returned or sold at a loss), but only to the extent of the
device's DPP balance. The DPP associated with the Handset Sale-Leaseback Tranche 1 is recorded in "Other assets" in the consolidated balance sheets at its
estimated net realizable value. Changes to the DPP prior to settlement with MLS are recorded as an adjustment to rent expense in "Cost of products" in the
consolidated statements of operations. Brightstar US, Inc. (Brightstar), a subsidiary of SoftBank, provides reverse logistics and remarketing services to MLS with
respect to the devices.
Unless a Device Lease is terminated early, the SPE Lessees are obligated to pay the full monthly rental payments under each Device Lease, regardless
of whether customers make lease payments on the devices leased to them or whether the customer lease is still in effect. Sprint has guaranteed to MLS, the
performance of the agreements and undertakings of the SPE Lessees under the transaction documents.
All devices must be returned to MLS, subject to purchase rights of the customers. Sprint will act as servicer for MLS, to the extent needed, after the end
of the device leaseback period. To secure the obligations of the SPE Lessees under the Device Lease, the SPE Lessees provide a security interest to MLS in, among
other things, the customer leases. In the event that MLS is able to sell the returned devices at a price greater than the expected device residual value, Sprint has the
potential to share some of the excess proceeds.
F-25