Sprint - Nextel 2015 Annual Report Download - page 55

Table of Contents
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 (see FutureContractualObligationsbelow for expected future rent payments). 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, 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, 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.
Network Equipment Sale-Leaseback
In April 2016, certain wholly-owned subsidiaries of Sprint entered into agreements (Network Equipment Sale-Leaseback) to sell and lease-back certain
network equipment to unrelated bankruptcy-remote special purpose entities (collectively, "the Network LeaseCo SPEs"). Sprint sold certain network equipment
with a book value of approximately $3.0 billion to the Network LeaseCo SPEs which was used as collateral to raise approximately $2.2 billion in borrowings from
external investors, including SoftBank.
The Network LeaseCo SPEs are variable interest entities for which Sprint has been identified as the primary beneficiary. As a result, Sprint is required
to consolidate the Network LeaseCo SPEs and intercompany transactions and balances between Network LeaseCo and the wholly-owned Sprint subsidiaries will
be eliminated in consolidation. The network assets involved in the transaction, which consisted primarily of equipment located at cell towers, will remain on
Sprint's consolidated financial statements and will continue to be depreciated. Principal and interest payments on the borrowings from the external investors will be
paid back in staggered, unequal payments through January 2018.
Handset Sale-Leaseback Tranche 2
In April 2016, Sprint entered into a second transaction with MLS (Handset Sale-Leaseback Tranche 2) to sell and lease-back certain iPhone ® devices
leased to customers under the iPhone Forever or iPhone for Life programs. In contrast with the first MLS transaction, this sale-leaseback arrangement will be
accounted for as a financing transaction. Accordingly, the devices will remain in Property, plant, and equipment, net in the consolidated balance sheets and will
continue to be depreciated to their estimated residual values generally over the lease term. The proceeds received will be reflected as cash provided by financing
activities on the consolidated statements of cash flows and payments made to MLS will be reflected as principal repayments and interest expense over the
respective terms. Future changes in the fair value of the financing obligation will be recognized in earnings over the course of the arrangement.
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