10-Q 1 leap-june2013q2x10q.htm 10-Q LEAP-June 2013 Q2-10Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-Q
________________

(Mark One)
R
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the quarterly period ended June 30, 2013
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: 001-34865
Leap Wireless International, Inc.
(Exact name of registrant as specified in its charter)
Delaware
33-0811062
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
5887 Copley Drive, San Diego, CA
92111
(Address of Principal Executive Offices)

(Zip Code)

(858) 882-6000
(Registrant's telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

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 R 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes R  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 o
Accelerated filer R
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 R

The number of shares outstanding of the registrant's common stock on July 22, 2013 was 79,192,131.



LEAP WIRELESS INTERNATIONAL, INC.

QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended June 30, 2013

TABLE OF CONTENTS





PART I

FINANCIAL INFORMATION

Item 1.
Financial Statements

LEAP WIRELESS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)

 
June 30,
2013
 
December 31,
2012
 
(Unaudited)
 
 
Assets
 
 
 
Cash and cash equivalents
$
605,039

 
$
515,550

Short-term investments
308,012

 
159,426

Inventories
102,533

 
121,601

Deferred charges
49,331

 
60,963

Other current assets
167,442

 
139,242

Total current assets
1,232,357

 
996,782

Property and equipment, net
1,499,934

 
1,762,090

Wireless licenses
2,090,821

 
1,947,333

Assets held for sale (Note 9)
1,835

 
136,222

Goodwill (Note 3)
31,886

 
31,886

Intangible assets, net
18,581

 
24,663

Other assets
87,999

 
68,284

Total assets
$
4,963,413

 
$
4,967,260

Liabilities and Stockholders' Equity
 
 
 
Accounts payable and accrued liabilities
$
325,928

 
$
396,110

Current maturities of long-term debt
18,250

 
4,000

Other current liabilities
211,604

 
216,880

Total current liabilities
555,782

 
616,990

Long-term debt, net
3,619,964

 
3,298,463

Deferred tax liabilities
407,794

 
385,111

Other long-term liabilities
157,027

 
169,047

Total liabilities
4,740,567

 
4,469,611

Redeemable non-controlling interests
58,550

 
64,517

Commitments and contingencies (Note 13)

 


Stockholders' equity:
 
 
 
Preferred stock - authorized 10,000,000 shares, $.0001 par value; no shares issued and outstanding

 

Common stock - authorized 160,000,000 shares, $.0001 par value; 79,180,726 and 79,194,750 shares issued and outstanding at June 30, 2013 and December 31, 2012, respectively
8

 
8

Additional paid-in capital
2,179,639

 
2,182,503

Accumulated deficit
(2,014,653
)
 
(1,748,694
)
Accumulated other comprehensive loss
(698
)
 
(685
)
Total stockholders' equity
164,296

 
433,132

Total liabilities and stockholders' equity
$
4,963,413

 
$
4,967,260


See accompanying notes to condensed consolidated financial statements.


1


LEAP WIRELESS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited and in thousands, except per share data)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Revenues:
 
 
 
 
 
 
 
Service revenues
$
678,497

 
$
751,285

 
$
1,363,119

 
$
1,525,283

Equipment revenues
53,046

 
35,487

 
158,282

 
87,108

Total revenues
731,543

 
786,772

 
1,521,401

 
1,612,391

Operating expenses:
 
 
 
 
 
 
 
Cost of service (exclusive of items shown separately below)
249,371

 
256,555

 
500,229

 
517,866

Cost of equipment
183,658

 
171,673

 
442,626

 
419,520

Selling and marketing
69,397

 
77,247

 
148,235

 
172,801

General and administrative
83,402

 
94,892

 
165,627

 
184,591

Depreciation and amortization
150,856

 
154,483

 
303,429

 
301,026

Impairments and other charges (Note 7)
4,287

 

 
5,022

 

Total operating expenses
740,971

 
754,850

 
1,565,168

 
1,595,804

Gain (loss) on sale, exchange or disposal of assets, net
1,870

 
(333
)
 
6,858

 
(801
)
Operating income (loss)
(7,558
)
 
31,589

 
(36,909
)
 
15,786

Equity in net income (loss) of investees, net
1,696

 
(59
)
 
538

 
134

Interest income
58

 
28

 
105

 
57

Interest expense
(66,851
)
 
(66,983
)
 
(131,576
)
 
(134,025
)
Loss on extinguishment of debt
(72,988
)
 

 
(72,988
)
 

 Loss before income taxes
(145,643
)
 
(35,425
)
 
(240,830
)
 
(118,048
)
Income tax expense
(10,710
)
 
(10,562
)
 
(25,130
)
 
(22,273
)
Net loss
(156,353
)
 
(45,987
)
 
(265,960
)
 
(140,321
)
Accretion of redeemable non-controlling interests and distributions, net of tax
(6,756
)
 
4,397

 
(8,461
)
 
292

Net loss attributable to common stockholders
$
(163,109
)
 
$
(41,590
)
 
$
(274,421
)
 
$
(140,029
)
Loss per share attributable to common stockholders:
 
 
 
 
 
 
 
Basic
$
(2.09
)
 
$
(0.54
)
 
$
(3.53
)
 
$
(1.82
)
Diluted
$
(2.09
)
 
$
(0.54
)
 
$
(3.53
)
 
$
(1.82
)
Shares used in per share calculations:
 
 
 
 
 
 
 
Basic
77,915

 
77,206

 
77,815

 
77,116

Diluted
77,915

 
77,206

 
77,815

 
77,116

Other comprehensive loss:
 
 
 
 
 
 
 
Net loss
$
(156,353
)
 
$
(45,987
)
 
$
(265,960
)
 
$
(140,321
)
Net unrealized holding gains (losses) on investments and other
(10
)
 
10

 
(13
)
 
12

Comprehensive loss
$
(156,363
)
 
$
(45,977
)
 
$
(265,973
)
 
$
(140,309
)

See accompanying notes to condensed consolidated financial statements.



2


LEAP WIRELESS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)

 
Six Months Ended June 30,
 
2013
 
2012
Operating activities:
 
 
 
Net cash provided by operating activities
$
15,028

 
$
50,619

Investing activities:
 
 
 
Purchases of property and equipment
(48,861
)
 
(265,412
)
Change in prepayments for purchases of property and equipment
(4,986
)
 
(1,940
)
Purchases of wireless licenses and spectrum clearing costs
(2,337
)
 
(2,712
)
Proceeds from sales of wireless licenses and operating assets, net
3,404

 
1,420

Purchases of investments
(334,935
)
 
(173,141
)
Sales and maturities of investments
186,103

 
440,734

Change in restricted cash
(891
)
 
(1,501
)
Net cash used in investing activities
(202,503
)
 
(2,552
)
Financing activities:
 
 
 
Proceeds from the issuance of long-term debt
1,414,313

 

Repayment of long-term debt
(1,103,796
)
 

Payment of debt issuance costs
(15,800
)
 

Proceeds from issuance of common stock
620

 
483

Payments made to joint venture partners
(14,867
)
 
(5,230
)
Other
(3,506
)
 
(2,187
)
Net cash provided by (used in) financing activities
276,964

 
(6,934
)
Net increase in cash and cash equivalents
89,489

 
41,133

Cash and cash equivalents at beginning of period
515,550

 
345,243

Cash and cash equivalents at end of period
$
605,039

 
$
386,376

Supplementary disclosure of cash flow information:
 
 
 
Cash paid for interest
$
(138,236
)
 
$
(126,747
)
Cash paid for income taxes
$
(4,088
)
 
$
(3,943
)
Net wireless licenses received in exchange transaction
$
(6,809
)
 
$


See accompanying notes to condensed consolidated financial statements.



3

LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



Note 1.
The Company

Leap Wireless International, Inc. ("Leap"), a Delaware corporation, together with its subsidiaries and consolidated joint ventures, is a wireless communications carrier that offers digital wireless services in the United States under the "Cricket®" brand. Cricket service offerings provide customers with unlimited nationwide wireless services for a flat rate without requiring a fixed-term contract or a credit check. The Company's primary service is Cricket Wireless, which offers customers unlimited nationwide voice and data services for a flat monthly rate. Leap conducts operations through its subsidiaries and has no independent operations or sources of income other than through interest income and dividends, if any, from its subsidiaries.

Cricket service is offered by Cricket Communications, Inc. ("Cricket"), a wholly-owned subsidiary of Leap. Cricket service is also offered in South Texas by STX Wireless Operations, LLC ("STX Operations"), which Cricket controls through a 75.75% membership interest in STX Wireless, LLC ("STX Wireless"), the parent company of STX Operations. For more information regarding this joint venture, see "Note 10. Arrangement with Joint Venture."

Leap, Cricket and their subsidiaries and consolidated joint ventures are collectively referred to herein as the "Company."

Note 2.
Proposed Merger

On July 12, 2013, AT&T Inc. ("AT&T") entered into an Agreement and Plan of Merger, dated as of July 12, 2013 (the "Merger Agreement"), with Leap, Mariner Acquisition Sub Inc., a Delaware corporation and wholly-owned subsidiary of AT&T ("Merger Sub"), and Laser, Inc., a Delaware corporation (the stockholders' representative), pursuant to which, upon the terms and subject to the conditions set forth in the Merger Agreement, AT&T will acquire Leap in a transaction in which Leap stockholders would receive $15.00 in cash for each outstanding share of Leap's common stock, plus one non-transferable contingent value right ("CVR") per share (together, the "Merger Consideration"). The CVR will entitle each Leap stockholder to a pro rata share of the net proceeds of the future sale of the Company's 700 MHz A block license in Chicago. The Merger Agreement provides that, on the terms and subject to the conditions thereof, Merger Sub will be merged with and into Leap (the "Merger") with Leap continuing as the surviving corporation in the Merger, and each outstanding share of common stock of Leap (other than excluded shares) will cease to be outstanding and will be converted into the right to receive the Merger Consideration.

Each outstanding stock option, whether vested or unvested, that was granted under one of Leap's stock plans and that has an exercise price equal to or below the $15.00 per share cash merger consideration will be cancelled at the effective time of the Merger and will entitle the holder to receive (1) cash equal to the product of the total number of shares underlying the stock option multiplied by the difference, if any, of the per share cash merger consideration and the exercise price per share underlying each stock option, less any applicable withholding taxes and (2) one CVR for each share underlying the stock option. Holders of an outstanding stock option, whether vested or unvested, with an exercise price greater than the per share cash merger consideration, will have the opportunity to exercise such stock option prior to the effective time of the Merger by providing Leap with a notice of exercise and, for each share underlying the stock option, a cash amount equal to the difference of the exercise price underlying the stock option less the per share cash merger consideration. Each stock option that is so exercised will be settled at the effective time of the Merger and the holder will receive one CVR in respect of each share underlying the stock option and, to the extent the stock option is not exercised prior to the effective time of the Merger, the stock option will be cancelled at the effective time of the Merger for no consideration to the holder. Each outstanding share of restricted stock granted under Leap's stock plans will be cancelled at the effective time of the Merger and the holder will receive the per share cash merger consideration, less any applicable withholding taxes, plus one CVR in respect of such share of restricted stock. Each outstanding stock unit granted under Leap's stock plans (including performance stock units, deferred stock units and deferred cash units but excluding any cash award with a value that is not determined based on the price of Leap common stock), whether vested or unvested, will be cancelled and will entitle the holder to receive an amount in cash equal to the product of the number of shares covered by the unit (assuming target level of performance for any incomplete performance periods) multiplied by the per share cash merger consideration, less any applicable withholding taxes, plus one CVR in respect of such unit.

Leap has made customary representations, warranties and covenants in the Merger Agreement, including, among others, covenants (i) not to solicit proposals relating to alternative transactions or, subject to certain exceptions, enter into discussions concerning or provide information in connection with alternative transactions, and (ii) subject to certain exceptions, not to withhold, withdraw or modify in a manner adverse to AT&T the recommendation of Leap's board of directors that Leap's stockholders adopt the Merger Agreement. Leap may furnish non-public information to a third party who has made an unsolicited proposal that Leap's board of directors determines could be reasonably expected to result in a superior proposal and may engage in discussions with such third party. However, prior to any change in the recommendation of Leap's board of directors, AT&T will have the right to propose revisions to the Merger Agreement and Leap's board of directors must negotiate in good faith and consider such revised


4

LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


terms prior to making a determination to change its recommendation with respect to the Merger. Even if Leap's board of directors changes its recommendation, Leap must continue to submit the Merger Agreement to a vote of its stockholders.

Consummation of the Merger is subject to various customary conditions, including, among others, the adoption of the Merger Agreement by the requisite vote of Leap's stockholders; expiration of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended; approval of the transaction by the Federal Communications Commission (the "FCC"); and approval of the transaction by applicable state public utility commissions. The parties have agreed to use their respective reasonable best efforts to obtain all necessary regulatory approvals for the Merger, provided that AT&T will not be obligated to agree to divestitures or other restrictions that would have any effect on AT&T or to divestitures or other restrictions that would reasonably be expected to have a material adverse effect on Leap and its subsidiaries, taken as a whole. It is a condition to AT&T's obligation to consummate the Merger that the FCC approval has been obtained by final order and that other regulatory approvals have been obtained, in each case without the imposition of an adverse regulatory condition.

The Merger Agreement also provides for certain termination rights, including the right of either party to terminate the Merger Agreement if the Merger is not consummated by July 11, 2014 (the "Termination Date," as it may be extended in certain circumstances to January 11, 2015) and the right of AT&T to terminate the Merger Agreement if Leap's board of directors changes its recommendation with respect to the Merger. A termination fee of $46.3 million is payable by Leap to AT&T upon termination of the Merger Agreement under specified circumstances following the making of a bona fide acquisition proposal (as defined in the Merger Agreement), including as a result of a change in Leap's board of directors' recommendation relating to a superior acquisition proposal. A termination fee of approximately $71.2 million will be payable by Leap to AT&T if the Merger Agreement is terminated by AT&T or Leap because Leap stockholder approval was not obtained following a change in Leap's board of directors' recommendation, or by AT&T following a change in Leap's board of directors' recommendation, where in each case the change of recommendation was in connection with a specified intervening event.

If the Merger Agreement is terminated because the Termination Date has been reached because there is an order of a governmental entity permanently preventing completion of the transaction or as a result of a breach by AT&T and AT&T's breach materially contributed to the failure to receive regulatory approval, and, at the time of such termination, all regulatory approvals have not been received or the transaction has been enjoined, Leap, subject to certain exceptions, will have the option within 30 days of termination of the Merger Agreement to enter into a three-year LTE data roaming agreement with AT&T, which will provide coverage in certain of Leap's markets not covered by Leap's LTE network. If Leap enters into the roaming agreement, AT&T will then have the option within 30 days after entry into the roaming agreement to purchase certain of Leap's spectrum assets. If AT&T does not exercise its right to purchase all of the specified spectrum assets, Leap may, within 60 days after expiration of AT&T's option, require AT&T to purchase all of the specified assets.

Affiliates of MHR Fund Management LLC ("MHR"), which collectively owned approximately 29.9% of the outstanding shares of Leap common stock as of July 22, 2013, have entered into a voting agreement with AT&T and Leap, pursuant to which MHR has agreed to vote such shares in favor of adoption of the Merger Agreement and against any competing acquisition proposals, subject to the limitation set forth in the voting agreement. MHR's obligations under the voting agreement will terminate upon (i) the termination of the Merger Agreement in accordance with its terms and (ii) certain material amendments to the Merger Agreement.

Note 3.
Basis of Presentation and Significant Accounting Policies

Basis of Presentation

The accompanying interim condensed consolidated financial statements have been prepared without audit in accordance with the instructions to Form 10-Q, and therefore do not include all information and footnotes required by accounting principles generally accepted in the United States of America ("GAAP") for a complete set of financial statements. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2012. In the opinion of management, the unaudited financial information for the interim periods presented reflects all adjustments necessary for a fair presentation of the Company's results for the periods presented, with such adjustments consisting only of normal recurring adjustments. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results could differ from management's estimates and operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year.






5

LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


Principles of Consolidation

The condensed consolidated financial statements include the operating results and financial position of Leap and its wholly-owned subsidiaries as well as the operating results and financial position of STX Wireless and its wholly-owned subsidiaries. The Company consolidates STX Wireless in accordance with the authoritative guidance for consolidations based on the voting interest model. All intercompany accounts and transactions have been eliminated in the condensed consolidated financial statements.

Segment and Geographic Data

The Company operates in a single operating segment and a single reporting unit as a wireless communications carrier that offers digital wireless services in the United States. As of and for the three and six months ended June 30, 2013 and 2012, all of the Company's revenues and long-lived assets related to operations in the United States.

Revenues

The Company's business revenues principally arise from the sale of wireless services, devices (handsets and broadband modems) and accessories. Wireless services are provided primarily on a month-to-month basis. The Company's customers are required to pay for their service in advance and the Company does not require customers to sign fixed-term contracts or pass a credit check. Service revenues are recognized only after payment has been received and services have been rendered.

When the Company activates service for a new customer, it often sells that customer a device along with a period of service. In accordance with the authoritative guidance for revenue arrangements with multiple deliverables, the sale of a device along with service constitutes a multiple element arrangement. Under this guidance, once a company has determined the best estimate of selling price of the elements in the sales transaction, the total consideration received from the customer must be allocated among those elements on a relative selling price basis. Applying the guidance to these transactions results in the Company recognizing the total consideration received, less amounts allocated to the wireless service period (generally the customer's monthly service plan), as equipment revenue.

Amounts allocated to equipment revenues and related costs from the sale of devices are recognized when service is activated by new customers. Revenues and related costs from the sale of devices and accessories to existing customers are recognized at the point of sale. The costs of devices and accessories sold are recorded in cost of equipment. In addition to devices that the Company sells directly to its customers at Cricket-owned stores, the Company sells devices to third-party dealers, including nationwide retailers. These dealers then sell the devices to the ultimate Cricket customer, similar to the sale made at a Cricket-owned store. Sales of devices to third-party dealers are recognized as equipment revenues only when service is activated by customers, since the level of price reductions and commissions ultimately available to such dealers is not reliably estimable until the devices are sold by such dealers to customers. Thus, revenues from devices sold to third-party dealers are recorded as deferred equipment revenue and the related costs of the devices are recorded as deferred charges upon shipment of the devices by the Company. The deferred charges are recognized as equipment costs when the related equipment revenue is recognized, which occurs when service is activated by the customer.

Through a third-party provider, the Company's customers may elect to participate in an extended warranty program for devices they purchase. The Company recognizes revenue on replacement devices sold to its customers under the program when the customer purchases the device.

The Company participates in the federal government's Lifeline program and is designated as an eligible telecommunications carrier in certain states in which it provides wireless services. Under this program, the Company offers discounted wireless services to qualified customers and generally receives reimbursement from the federal government for a portion of the subsidized services. The Company recognizes revenue under this program only after amounts eligible for reimbursement have been determined and services have been rendered.

Sales incentives offered to customers and commissions and sales incentives offered to the Company's third-party dealers are recognized as a reduction of revenue when the related service or equipment revenue is recognized. Customers have limited rights to return devices and accessories based on time and/or usage, and customer returns of devices and accessories have historically been insignificant.

Amounts billed by the Company in advance of customers' wireless service periods are not reflected in accounts receivable or deferred revenue since collectability of such amounts is not reasonably assured. Deferred revenue consists primarily of cash


6

LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


received from customers in advance of their service period and deferred equipment revenue related to devices sold to third-party dealers, including nationwide retailers.

Universal Service Fund, E-911 and other telecommunications-related regulatory fees are assessed by various federal and state governmental agencies in connection with the services that the Company provides to its customers. The service plans the Company currently offers are "all-inclusive" of telecommunications and regulatory fees, in that the Company does not separately bill and collect amounts owed and remitted to government agencies from its customers. For the Company's legacy service plans that are not "all-inclusive," the Company separately bills and collects from its customers amounts owed and remitted to government agencies. Regulatory fees and telecommunications taxes separately billed and collected from the Company's customers are recorded in service revenues. Amounts owed to government agencies are recorded in cost of service. During the three and six months ended June 30, 2013, the total amount of regulatory fees and telecommunications taxes separately billed and collected from customers and recorded in service revenues was $0.8 million and $1.6 million, respectively. During the three and six months ended June 30, 2012, the total amount of regulatory fees and telecommunications taxes separately billed and collected from customers and recorded in service revenues was $2.7 million and $6.8 million, respectively. Sales, use and excise taxes for all service plans are reported on a net basis.

Restricted Cash, Cash Equivalents and Short-Term Investments

The Company has set aside certain amounts of cash, cash equivalents and short term investments to satisfy certain contractual obligations. Restricted cash, cash equivalents and short-term investments are included in either other current assets or other assets, depending on the nature of the underlying contractual obligation. As of June 30, 2013, the Company had $1.0 million and $12.0 million of restricted cash, cash equivalents and short-term investments included in other current assets and other assets, respectively. As of December 31, 2012, the Company had $0.7 million and $11.4 million of restricted cash, cash equivalents and short-term investments included in other current assets and other assets, respectively.

Recent Accounting Pronouncements

In July 2012, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update No. 2012-02, "Testing Indefinite-Lived Intangible Assets for Impairment" ("ASU 2012-02"). ASU 2012-02 simplifies the requirements for testing for indefinite-lived intangible assets other than goodwill and permits an entity to first assess qualitative factors to determine whether it is necessary to perform a quantitative fair value test. This new guidance became effective for the Company in the first quarter of 2013. The Company conducts its annual impairment test during the third quarter and does not expect this new guidance to have a material impact on the Company or its condensed consolidated financial statements.

In February 2013, the FASB issued Accounting Standards Update No. 2013-02, "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income" ("ASU 2013-02"). ASU 2013-02 requires companies to present information about significant items reclassified out of accumulated other comprehensive income by component either on the face of the statement where net income is presented or as a separate disclosure in the notes to the financial statements. This new guidance became effective for the Company in the first quarter of 2013 and did not have a material impact on the Company or its condensed consolidated financial statements.



7

LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


Note 4.
Supplementary Balance Sheet Information (in thousands):
 
June 30,
2013
 
December 31,
2012
 
 
 
 
Other current assets:
 
 
 
Accounts receivable, net of allowances for bad debt of $1.0 million and $1.3
million, respectively(1)
$
102,142

 
$
86,467

Prepaid expenses
48,584

 
40,237

Other
16,716

 
12,538

 
$
167,442

 
$
139,242

Property and equipment, net(2):
 
 
 
Network equipment
$
3,356,439

 
$
3,348,122

Computer hardware and software
556,249

 
526,348

Construction-in-progress
36,257

 
54,945

Other
104,204

 
109,400

 
4,053,149

 
4,038,815

Accumulated depreciation
(2,553,215
)
 
(2,276,725
)
 
$
1,499,934

 
$
1,762,090

Intangible assets, net:
 
 
 
Customer relationships
$
50,435

 
$
50,435

Trademarks
37,000

 
37,000

 
87,435

 
87,435

Accumulated amortization of customer relationships
(45,288
)
 
(40,528
)
Accumulated amortization of trademarks
(23,566
)
 
(22,244
)
 
$
18,581

 
$
24,663

Accounts payable and accrued liabilities:
 
 
 
Trade accounts payable
$
146,452

 
$
143,931

Accrued payroll and related benefits
49,070

 
67,539

Other accrued liabilities
130,406

 
184,640

 
$
325,928

 
$
396,110

Other current liabilities:
 
 
 
Deferred service revenue(3)
$
94,284

 
$
100,276

Deferred equipment revenue(4)
30,117

 
36,471

Accrued sales, telecommunications, property and other taxes payable
16,122

 
4,267

Accrued interest
31,743

 
44,653

Other
39,338

 
31,213

 
$
211,604

 
$
216,880

____________
(1)
Accounts receivable, net, consists primarily of (i) amounts billed to third-party dealers for devices and accessories, (ii) amounts due from the federal government in connection with Lifeline and other regulatory programs, and (iii) amounts due from service providers related to interconnect and roaming agreements.
(2)
As of June 30, 2013 and December 31, 2012, $46.4 million and $45.8 million of assets were held by the Company under capital lease arrangements, respectively. Accumulated amortization relating to these assets totaled $25.6 million and $22.9 million as of June 30, 2013 and December 31, 2012, respectively.
(3)
Deferred service revenue consists primarily of cash received from customers in advance of their service period.
(4)
Deferred equipment revenue relates to devices sold to third-party dealers and nationwide retailers which have not yet been purchased and activated by customers.


8

LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


Note 5.
Fair Value of Financial Instruments and Non-Financial Assets

Fair Value of Financial Instruments

The authoritative guidance for fair value measurements defines fair value for accounting purposes, establishes a framework for measuring fair value and provides disclosure requirements regarding fair value measurements. The guidance defines fair value as an exit price, which is the price that would be received upon the sale of an asset or paid upon the transfer of a liability in an orderly transaction between market participants at the measurement date. The degree of judgment utilized in measuring the fair value of assets and liabilities generally correlates to the level of pricing observability. Assets and liabilities with readily available, actively quoted prices or for which fair value can be measured from actively quoted prices in active markets generally have more pricing observability and require less judgment in measuring fair value. Conversely, assets and liabilities that are rarely traded or not quoted have less pricing observability and are generally measured at fair value using valuation models that require more judgment. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency of the asset, liability or market and the nature of the asset or liability.

The Company has categorized its assets and liabilities measured at fair value into a three-level hierarchy in accordance with the authoritative guidance for fair value measurements. Assets and liabilities measured at fair value using quoted prices in active markets for identical assets or liabilities are generally categorized as Level 1; assets and liabilities measured at fair value using observable market-based inputs or unobservable inputs that are corroborated by market data for similar assets or liabilities are generally categorized as Level 2; and assets and liabilities measured at fair value using unobservable inputs that cannot be corroborated by market data are generally categorized as Level 3. Assets and liabilities presented at fair value in the Company's condensed consolidated balance sheets are generally categorized as follows:

Level 1:
Quoted prices in active markets for identical assets or liabilities. The Company did not have any Level 1 assets or liabilities as of June 30, 2013 or December 31, 2012.
Level 2:
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The Company's Level 2 assets as of June 30, 2013 and December 31, 2012 included its cash equivalents, its short-term investments in obligations of the U.S. government and government agencies and its short-term investments in commercial paper.
Level 3:
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Such assets and liabilities may have values determined using pricing models, discounted cash flow methodologies, or similar techniques, and include instruments for which the determination of fair value requires significant management judgment or estimation. The Company did not have any Level 3 assets or liabilities as of June 30, 2013 or December 31, 2012.

The following tables set forth by level within the fair value hierarchy the Company's assets and liabilities that were recorded at fair value as of June 30, 2013 and December 31, 2012 (in thousands). As required by the guidance for fair value measurements, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Thus, assets and liabilities categorized as Level 3 may be measured at fair value using inputs that are observable (Levels 1 and 2) and unobservable (Level 3). Management's assessment of the significance of a particular input to the fair value measurement requires judgment, which may affect the valuation of assets and liabilities and their placement within the fair value hierarchy levels.

 
At Fair Value as of June 30, 2013
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Money market funds
$

 
$
42,044

 
$

 
$
42,044

Commercial paper

 
177,043

 

 
177,043

U.S. government or government agency securities

 
291,189

 

 
291,189

Total
$

 
$
510,276

 
$

 
$
510,276




9

LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


 
At Fair Value as of December 31, 2012
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Money market funds
$

 
$
126,617

 
$

 
$
126,617

Commercial paper

 
82,346

 

 
82,346

U.S. government or government agency securities

 
135,861

 

 
135,861

Total
$

 
$
344,824

 
$

 
$
344,824


Assets in the tables above are reported on the condensed consolidated balance sheets as components of cash and cash equivalents, short-term investments, other current assets and other assets.

Unrealized gains (losses) are presented in accumulated other comprehensive loss within stockholders' equity in the condensed consolidated balance sheets. Realized gains (losses) are presented in other income (expense), net in the condensed consolidated statements of comprehensive income.

Cash Equivalents and Short-Term Investments

As of June 30, 2013 and December 31, 2012, all of the Company's short-term investments were debt securities with contractual maturities of less than one year and were classified as available-for-sale. The fair value of the Company's cash equivalents, short-term investments in obligations of the U.S. government and government agencies and its short-term investments in commercial paper is determined using observable market-based inputs for similar assets, which primarily include yield curves and time-to-maturity factors. Such investments are therefore considered to be Level 2 items.

Available-for-sale securities were comprised as follows as of June 30, 2013 and December 31, 2012 (in thousands):

 
As of June 30, 2013
 
Cost
 
Fair Value
 
 
 
 
Money market funds
$
42,044

 
$
42,044

Commercial paper
177,043

 
177,043

U.S. government or government agency securities
291,189

 
291,189

 
$
510,276

 
$
510,276


 
As of December 31, 2012
 
Cost
 
Fair Value
 
 
 
 
Money market funds
$
126,617

 
$
126,617

Commercial paper
82,345

 
82,346

U.S. government or government agency securities
135,848

 
135,861

 
$
344,810

 
$
344,824


Long-Term Debt

The Company reports its long-term debt obligations at amortized cost; however, the Company is required to disclose the fair value of outstanding debt at each reporting date. The fair value of the Company's outstanding long-term debt is determined primarily by using quoted prices in active markets and was $3,601.3 million and $3,421.5 million as of June 30, 2013 and December 31, 2012, respectively. The Company's debt was considered to be a Level 1 item for disclosure purposes.

Assets Measured at Fair Value on a Nonrecurring Basis

As of June 30, 2013 and December 31, 2012, non-financial assets with a carrying value of $2.0 million and $13.6 million, respectively, accumulated in construction-in-progress had been reduced to a fair value of zero, resulting in an impairment charge


10

LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


of $2.0 million and $13.6 million, respectively. There were no other non-financial assets that were measured and recorded at fair value on a nonrecurring basis.

Note 6.
Long-Term Debt, Net

Long-term debt, net as of June 30, 2013 and December 31, 2012 was comprised of the following (in thousands):

 
June 30,
2013
 
December 31,
2012
 
 
 
 
Convertible senior notes due 2014
$
248,204

 
$
250,000

Senior secured notes due 2016

 
1,100,000

Unamortized discount on $1,100 million senior secured notes due 2016

 
(23,767
)
Term loans under Credit Agreement
1,823,000

 
400,000

Unamortized discount on term loans under Credit Agreement
(14,050
)
 
(3,892
)
Unsecured senior notes due 2020
1,600,000

 
1,600,000

Unamortized discount on $1,600 million unsecured senior notes due 2020
(18,940
)
 
(19,878
)
 
3,638,214

 
3,302,463

Current maturities of long-term debt
(18,250
)
 
(4,000
)
 
$
3,619,964

 
$
3,298,463


Credit Agreement

On October 10, 2012, Cricket entered into a credit agreement (as amended, the "Credit Agreement") with respect to a $400 million senior secured B term loan facility, which was fully drawn in October 2012 and matures in October 2019. B term loan borrowings under the Credit Agreement must be repaid in 27 quarterly installments of $1.0 million each, which commenced on March 31, 2013, followed by a final installment of $373.0 million at maturity.

On March 8, 2013, Cricket amended the Credit Agreement to provide for an incremental $1,425 million senior secured C term loan facility, which was fully drawn on April 15, 2013 and matures in March 2020. C term loan borrowings under the Credit Agreement must be repaid in 26 quarterly installments of $3.6 million each, commencing on September 30, 2013, followed by a final installment of $1,332.4 million at maturity. Approximately $1,185 million of the net proceeds from the C term loan facility were used to fund the redemption of all of Cricket's $1,100 million of 7.75% senior secured notes due 2016 (including accrued interest), as more fully described below. Remaining net proceeds may be used for general corporate purposes.

As of June 30, 2013, the Company had $1,823.0 million in outstanding borrowings under the Credit Agreement. Outstanding borrowings under the Credit Agreement bear interest at the London Interbank Offered Rate ("LIBOR") plus 3.50% (subject to a LIBOR floor of 1.25% per annum) or at the bank base rate plus 2.50% (subject to a base rate floor of 2.25% per annum), as selected by Cricket. At June 30, 2013, the weighted average effective interest rate on outstanding borrowings under the Credit Agreement was 4.8%.

Borrowings under the Credit Agreement are guaranteed by Leap and each of its existing and future wholly owned domestic subsidiaries (other than Cricket, which is the borrower) that guarantees any indebtedness of Leap, Cricket or any subsidiary guarantor or that constitutes a "significant subsidiary" as defined in Regulation S-X under the Securities Act of 1933, as amended (subject to certain exceptions).

Borrowings under the Credit Agreement are effectively senior to all of Leap's, Cricket's and the guarantors' existing and future unsecured indebtedness (including Cricket's $1,600 million aggregate principal amount of senior notes and, in the case of Leap, Leap's $248.2 million aggregate principal amount of convertible senior notes), as well as to all of Leap's, Cricket's and the guarantors' obligations under any permitted junior lien debt that may be incurred in the future, in each case to the extent of the value of the collateral securing the obligations under the Credit Agreement.

Borrowings under the Credit Agreement are secured on a first-priority basis, equally and ratably with any future parity lien debt that Leap, Cricket or the guarantors may incur, by liens on substantially all of the present and future personal property of Leap, Cricket and the guarantors, except for certain excluded assets and subject to permitted liens (including liens on the collateral


11

LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


securing any future permitted priority debt). Under the Credit Agreement, Leap, Cricket and the guarantors are permitted to incur liens securing indebtedness for borrowed money in an aggregate principal amount outstanding (including the aggregate principal amount outstanding under the Credit Agreement) of up to the greater of $1,750 million and 3.5 times Leap's consolidated cash flow (excluding the consolidated cash flow of Cricket Music Holdco, LLC ("Cricket Music") (a wholly-owned subsidiary of Cricket that holds certain hardware, software and intellectual property relating to Cricket's Muve Music® service)) for the prior four fiscal quarters.

Borrowings under the Credit Agreement are effectively junior to all of Leap's, Cricket's and the guarantors' obligations under any permitted priority debt that may be incurred in the future (up to the lesser of 0.30 times Leap's consolidated cash flow (excluding the consolidated cash flow of STX Wireless and Cricket Music) for the prior four fiscal quarters and $300 million in aggregate principal amount outstanding), to the extent of the value of the collateral securing such permitted priority debt, as well as to existing and future liabilities of Leap's and Cricket's subsidiaries that are not guarantors (including STX Wireless and Cricket Music and their respective subsidiaries). In addition, borrowings under the Credit Agreement are senior in right of payment to any of Leap's, Cricket's and the guarantors' future subordinated indebtedness.

Cricket has the right to prepay borrowings under the Credit Agreement, in whole or in part, at any time without premium or penalty, except that prepayments of B term loans in connection with a repricing transaction occurring on or prior to October 10, 2013 are subject to a prepayment premium of 1.00% of the principal amount of the borrowings so prepaid and prepayments of C term loans in connection with a repricing transaction occurring on or prior to March 8, 2014 are subject to a prepayment premium of 1.00% of the principal amount of the borrowings so prepaid.

Under the Credit Agreement, Leap and its restricted subsidiaries are subject to certain limitations, including limitations on their ability to: incur additional debt or sell assets, make certain investments, grant liens and pay dividends and make certain other restricted payments. In addition, Cricket will be required to pay down the facility under certain circumstances if Leap and its restricted subsidiaries issue debt, sell assets or property, receive certain extraordinary receipts or generate excess cash flow (as defined in the Credit Agreement).

The Credit Agreement also provides for an event of default upon the occurrence of a change of control, which is defined to include the acquisition of beneficial ownership of 35% or more of Leap's equity securities (other than a transaction where immediately after such transaction Leap will be a wholly owned subsidiary of a person of which no person or group is the beneficial owner of 35% or more of such person's voting stock), a sale of all or substantially all of the assets of Leap and its restricted subsidiaries and a change in a majority of the members of Leap's board of directors that is not approved by the board. If the indebtedness under the Credit Agreement was accelerated prior to maturity as a result of such change of control, this would give rise to an event of default under the indentures governing the Company's senior notes and convertible notes. The change in control resulting from the Merger would not constitute a "change of control" as defined in the Credit Agreement.

Senior Notes

Discharge of Indenture and Loss on Extinguishment of Debt

On April 15, 2013, in connection with the borrowing of C term loans under the Credit Agreement, Cricket issued a notice of redemption to redeem all of its $1,100 million of 7.75% senior secured notes due 2016 in accordance with the optional redemption provisions governing the notes at a redemption price of 103.875% of the principal amount of outstanding notes, plus accrued and unpaid interest to the redemption date of May 15, 2013. Also on April 15, 2013, Cricket deposited approximately $1,185 million with the trustee for the notes to fund the redemption price (including accrued interest) and the indenture governing the notes was satisfied and discharged in accordance with its terms. As a result of this redemption, the Company recognized a loss on extinguishment of debt of $72.8 million during the three months ended June 30, 2013, which was comprised of $42.6 million in redemption premium, $22.0 million in unamortized debt discount and $8.2 million in unamortized debt issuance costs.

Convertible Senior Notes Due 2014

In June 2008, Leap issued $250 million of 4.50% convertible senior notes due 2014 in a private placement to institutional buyers. The notes bear interest at the rate of 4.50% per year, payable semi-annually in cash in arrears, which interest payments commenced in January 2009. The notes are Leap's general unsecured obligations and rank equally in right of payment with all of Leap's existing and future senior unsecured indebtedness and senior in right of payment to all indebtedness that is contractually subordinated to the notes. The notes are structurally subordinated to the existing and future claims of Leap's subsidiaries' creditors, including under the Credit Agreement and the senior notes described below. The notes are effectively junior to all of Leap's existing


12

LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


and future secured obligations, including those under the Credit Agreement, to the extent of the value of the assets securing such obligations.

Holders may convert their notes into shares of Leap common stock at any time on or prior to the third scheduled trading day prior to the maturity date of the notes, July 15, 2014. If, at the time of conversion, the applicable stock price of Leap common stock is less than or equal to approximately $93.21 per share, the notes will be convertible into 10.7290 shares of Leap common stock per $1,000 principal amount of the notes (referred to as the "base conversion rate"), subject to adjustment upon the occurrence of certain events. If, at the time of conversion, the applicable stock price of Leap common stock exceeds approximately $93.21 per share, the conversion rate will be determined pursuant to a formula based on the base conversion rate and an incremental share factor of 8.3150 shares per $1,000 principal amount of the notes, subject to adjustment. As set forth in the indenture governing the notes, following the consummation of the Merger, holders would receive cash and CVRs upon conversion in lieu of shares of Leap common stock.

Leap may be required to repurchase all outstanding notes in cash at a repurchase price of 100% of the principal amount of the notes, plus accrued and unpaid interest, if any, thereon to the repurchase date if (1) any person acquires beneficial ownership, directly or indirectly, of shares of Leap's capital stock that would entitle the person to exercise 50% or more of the total voting power of all of Leap's capital stock entitled to vote in the election of directors, (2) Leap (i) merges or consolidates with or into any other person, another person merges with or into Leap, or Leap conveys, sells, transfers or leases all or substantially all of its assets to another person or (ii) engages in any recapitalization, reclassification or other transaction in which all or substantially all of Leap common stock is exchanged for or converted into cash, securities or other property, in each case subject to limitations and excluding in the case of (1) and (2) any merger or consolidation where at least 90% of the consideration consists of shares of common stock traded on NYSE, ASE or NASDAQ, (3) a majority of the members of Leap's board of directors ceases to consist of individuals who were directors on the date of original issuance of the notes or whose election or nomination for election was previously approved by the board of directors, (4) Leap is liquidated or dissolved or holders of common stock approve any plan or proposal for its liquidation or dissolution or (5) shares of Leap common stock are not listed for trading on any of the New York Stock Exchange, the NASDAQ Global Market or the NASDAQ Global Select Market (or any of their respective successors). Leap may not redeem the notes at its option. The consummation of the Merger would trigger the right of holders of Leap's 4.50% convertible senior notes due 2014 to require Leap to repurchase holders' notes at a repurchase price of 100% of the principal amount of the notes, plus accrued and unpaid interest, if any, thereon to the repurchase date.

On March 26, 2013, Leap launched a tender offer to purchase, for cash, any and all of its $250 million of 4.50% convertible senior notes due 2014 at a purchase price of $1,005 per $1,000 principal amount of notes tendered plus accrued interest. On April 23, 2013, the Company purchased $1.8 million in aggregate principal amount of 4.50% convertible senior notes due 2014 pursuant to the tender offer, which resulted in a loss on extinguishment of debt of $0.2 million. The Company may from time to time seek to purchase outstanding 4.50% convertible senior notes due 2014 through open-market purchases, privately negotiated transactions or otherwise. Such purchases, if any, will depend on the consent of AT&T, prevailing market conditions, the Company's liquidity requirements and other factors.

Unsecured Senior Notes Due 2020

In November 2010, Cricket issued $1,200 million of 7.75% senior notes due 2020 in a private placement to institutional buyers at an issue price of 98.323% of the principal amount, which were exchanged in January 2011 for identical notes that had been registered with the Securities and Exchange Commission (the "SEC"). The $20.1 million discount to the net proceeds the Company received in connection with the issuance of the notes has been recorded in long-term debt, net in the condensed consolidated financial statements and is being accreted as an increase to interest expense over the term of the notes. In May 2011, Cricket issued an additional $400 million of 7.75% senior notes due 2020 in a private placement to institutional buyers at an issue price of 99.193% of the principal amount, which were exchanged in November 2011 for identical notes that had been registered with the SEC. The $3.2 million discount to the net proceeds the Company received in connection with the issuance of the additional notes was recorded in long-term debt, net in the condensed consolidated financial statements and is being accreted as an increase to interest expense over the term of the notes. At June 30, 2013, the effective interest rates on the initial $1,200 million tranche and the additional $400 million tranche of the notes were 7.86% and 7.80%, respectively, both of which include the effect of the discount accretion.

The notes bear interest at the rate of 7.75% per year, payable semi-annually in cash in arrears, which interest payments commenced in April 2011. The notes are guaranteed on an unsecured senior basis by Leap and each of its existing and future domestic subsidiaries (other than Cricket, which is the issuer of the notes) that guarantees indebtedness of Leap, Cricket or any subsidiary guarantor. The notes and the guarantees are Leap's, Cricket's and the guarantors' general senior unsecured obligations and rank equally in right of payment with all of Leap's, Cricket's and the guarantors' existing and future unsubordinated unsecured indebtedness. The notes and the guarantees are effectively junior to Leap's, Cricket's and the guarantors' existing and future secured


13

LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


obligations, including those under the Credit Agreement, to the extent of the value of the assets securing such obligations, as well as to existing and future liabilities of Leap's and Cricket's subsidiaries that are not guarantors (including STX Wireless and Cricket Music and their respective subsidiaries). In addition, the notes and the guarantees are senior in right of payment to any of Leap's, Cricket's and the guarantors' future subordinated indebtedness.

Prior to October 15, 2013, Cricket may redeem up to 35% of the aggregate principal amount of the notes at a redemption price of 107.750% of the principal amount thereof, plus accrued and unpaid interest, if any, thereon to the redemption date, from the net cash proceeds of specified equity offerings. Prior to October 15, 2015, Cricket may redeem the notes, in whole or in part, at a redemption price equal to 100% of the principal amount thereof plus the applicable premium and any accrued and unpaid interest, if any, thereon to the redemption date. The applicable premium is calculated as the greater of (i) 1.0% of the principal amount of such notes and (ii) the excess of (a) the present value at such date of redemption of (1) the redemption price of such notes at October 15, 2015 plus (2) all remaining required interest payments due on such notes through October 15, 2015 (excluding accrued but unpaid interest to the date of redemption), computed using a discount rate equal to the Treasury Rate plus 50 basis points, over (b) the principal amount of such notes. The notes may be redeemed, in whole or in part, at any time on or after October 15, 2015, at a redemption price of 103.875%, 102.583% and 101.292% of the principal amount thereof if redeemed during the twelve months beginning on October 15, 2015, 2016 and 2017, respectively, or at 100% of the principal amount if redeemed during the twelve months beginning on October 15, 2018 or thereafter, plus accrued and unpaid interest, if any, thereon to the redemption date.

If a "change of control" occurs (which is defined to include the acquisition of beneficial ownership of 35% or more of Leap's equity securities (other than a transaction where immediately after such transaction Leap will be a wholly-owned subsidiary of a person of which no person or group is the beneficial owner of 35% or more of such person's voting stock), a sale of all or substantially all of the assets of Leap and its restricted subsidiaries and a change in a majority of the members of Leap's board of directors that is not approved by the board), each holder of the notes may require Cricket to repurchase all of such holder's notes at a purchase price equal to 101% of the principal amount of the notes, plus accrued and unpaid interest, if any, thereon to the repurchase date. The change in control resulting from the Merger would not constitute a "change of control" as defined in the indenture governing the notes.

Note 7.        Impairments and Other Charges

Impairment and other charges consisted of the following (in thousands):

 
 
Three Months Ended June 30, 2013
 
Six Months Ended June 30, 2013
Property and equipment impairment
 
1,959

 
1,959

Severance
 
(739
)
 
(739
)
Restructuring activities
 
3,067

 
3,802

Impairment and other charges
 
$
4,287

 
$
5,022


During the second quarter of 2013, the Company determined that certain amounts accumulated in construction-in-progress were no longer recoverable, and as such, recorded an impairment charge of approximately $2.0 million, reducing the carrying value of those capitalized amounts to zero. There were no other events or circumstances that occurred during the three months ended June 30, 2013 that indicated the carrying value of long-lived assets may not be recoverable.

In the third and fourth quarters of 2012, the Company developed plans to reduce administrative and corporate support costs through a reduction in personnel and to reduce previously planned network expansion activities and capital expenditures. In the third quarter of 2012, the Company recorded a liability of $14.8 million representing severance expense and related costs. In the fourth quarter of 2012, the Company recognized restructuring charges of $11.0 million, primarily related to lease exit costs associated with cellular sites that were no longer being developed or utilized. During the first and second quarters of 2013, the Company recognized additional restructuring charges of $0.7 million and $3.1 million, respectively, primarily related to contract terminations and lease exit costs.

During 2011, the Company recognized $23.9 million of post-acquisition charges associated with the integration of certain operating assets in South Texas.




14

LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


The following table provides a rollforward of those amounts recorded as liabilities within the consolidated balance sheets:
 
 
December 31, 2012
 
Accruals
 
 Payments
 
June 30, 2013
Post-acquisition charges
 
$
14,726

 
$

 
$
(1,882
)
 
$
12,844

Severance
 
9,877

 
(739
)
 
(7,138
)
 
2,000

Restructuring activities
 
10,393

 
4,612

 
(6,372
)
 
8,633

Total amounts to be settled in cash
 
$
34,996

 
$
3,873

 
$
(15,392
)
 
$
23,477


Note 8.
Basic and Diluted Earnings (Loss) Per Share

Basic earnings (loss) per share is computed by dividing net income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income attributable to common stockholders by the sum of the weighted-average number of common shares outstanding during the period and the weighted-average number of dilutive common share equivalents outstanding during the period, using the treasury stock method and the if-converted method, where applicable. Dilutive common share equivalents are comprised of stock options, restricted stock awards, deferred stock units, employee stock purchase rights and convertible senior notes. Since the Company incurred losses for the three and six months ended June 30, 2013, 8.3 million and 8.2 million common share equivalents were excluded in the computation of diluted loss per share for those periods, respectively. Since the Company incurred losses for the three and six months ended June 30, 2012, 8.9 million common share equivalents were excluded in the computation of diluted loss per share for those periods.
 
Note 9.
Significant Acquisitions and Other Transactions

On June 4, 2013, the Company entered into a license purchase agreement with Cellular South Licenses, LLC ("Cellular South") to sell its 10 MHz PCS wireless license in Biloxi, Mississippi to Cellular South for $6.0 million. The closing of the transaction is subject to customary closing conditions, including the consent of the FCC. The wireless license to be sold to Cellular South has been classified as held for sale at its carrying value of $1.8 million in the condensed consolidated balance sheet as of June 30, 2013.

On March 25, 2013, the Company completed an intra-market license exchange with a subsidiary of T-Mobile USA, Inc. ("T-Mobile") and Cellco Partnership dba Verizon Wireless ("Verizon Wireless") involving various markets in Philadelphia, Wilmington and Atlantic City. The licenses involved in the exchange had a carrying value of $136.2 million and the Company recognized a gain of $6.8 million in connection with the transaction.

Note 10.
Arrangement with Joint Venture

Cricket service is offered in South Texas by STX Operations, which Cricket controls through a 75.75% membership interest in STX Wireless, the parent company of STX Operations. The joint venture was created in October 2010 through the contribution by the Company and various entities doing business as Pocket Communications ("Pocket") of substantially all of their respective wireless spectrum and operating assets in the South Texas region. In exchange for such contributions, Cricket received a 75.75% controlling membership interest in STX Wireless and Pocket received a 24.25% non-controlling membership interest. Additionally, in connection with the transaction, the Company made payments to Pocket of $40.7 million in cash.

Cricket controls and manages the joint venture under the terms of the amended and restated limited liability company agreement (the "STX LLC Agreement"). Under the STX LLC Agreement, Pocket has the right to put, and the Company has the right to call, all of Pocket's membership interests in STX Wireless, which rights are generally exercisable on or after April 1, 2014. In addition, in the event of a change of control of Leap (including as a result of the consummation of the Merger), Pocket is obligated to sell to the Company all of its membership interests in STX Wireless. The purchase price for Pocket's membership interests would be equal to 24.25% of the product of Leap's enterprise value-to-revenue multiple for the four most recently completed fiscal quarters multiplied by the total revenues of STX Wireless and its subsidiaries over that same period, subject to adjustment in certain circumstances. The purchase price will be reduced by the total amount of optional cash distributions that have been made to Pocket pursuant to the STX LLC Agreement plus an amount equal to an 8.0% per annum return on each such distribution from the date it was made. The purchase price is payable in either cash, Leap common stock or a combination thereof, as determined by Cricket in its discretion (provided that, if permitted by Cricket's debt instruments, at least $25 million of the purchase price must be paid in cash). The Company has the right to deduct from or set off against the purchase price any obligations owed to the Company by Pocket. Under the STX LLC Agreement, Cricket is permitted to purchase Pocket's membership interests in STX Wireless over


15

LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


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 varies from the value of Pocket's net interest in STX Wireless at any period (after the attribution of profits or losses), the value of such interest is accreted to the redemption price for such interest with a corresponding adjustment to additional paid-in capital. For the six months ended June 30, 2013 and for the year ended December 31, 2012, the Company recorded a net accretion expense of $5.4 million and a net accretion benefit of $0.7 million, respectively, to bring the carrying value of Pocket's membership interests in STX Wireless to its estimated redemption value.

In accordance with the STX LLC Agreement, STX Wireless made pro-rata tax distributions of $14.6 million and $4.7 million to Cricket and Pocket, respectively, in connection with their estimated tax liabilities resulting from STX Wireless' earnings for the six months ended June 30, 2013. No tax distributions were made during the six months ended June 30, 2012. The Company recorded the tax distributions to Pocket as adjustments to additional paid-in-capital in the condensed consolidated balance sheets and as a component of accretion of redeemable non-controlling interests and distributions, net of tax, in the condensed consolidated statements of comprehensive income. The distributions made to Cricket were eliminated in consolidation.

On July 12, 2012, STX Wireless made an optional pro-rata cash distribution of $50.7 million and $16.2 million to Cricket and Pocket, respectively. On April 26, 2013, STX Wireless made a further optional pro-rata cash distribution of $18.9 million and $6.1 million to Cricket and Pocket, respectively. Under the STX LLC Agreement, optional distributions to Pocket (plus an annual return, as discussed above), reduce the purchase price payable to Pocket in the event of a put, call or mandatory buyout following a change of control of Leap.

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. As of June 30, 2013 and December 31, 2012, Pocket had $12.9 million and $8.3 million in aggregate principal amount of outstanding borrowings under the loan and security agreement, respectively. Borrowings under the loan and security agreement 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. Cricket has 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. Accordingly, outstanding borrowings and accrued interest under the loan and security agreement have been recorded as a deduction from the purchase price payable to Pocket as discussed above in the condensed consolidated balance sheets and as a component of accretion of redeemable non-controlling interests and distributions, net of tax, in the condensed consolidated statements of comprehensive income. The offset of the outstanding borrowings and accrued interest against the purchase price for Pocket's membership interest, coupled with the accretion benefit recorded to adjust the redemption value of Pocket's net interest in STX Wireless, brought the carrying value of Pocket's membership interests in STX Wireless to an estimated redemption value of $58.6 million and $64.5 million as of June 30, 2013 and December 31, 2012, respectively.

As described in Note 3, the Company consolidates its controlling membership interest in STX Wireless in accordance with the authoritative guidance for consolidations based on the voting interest model. All intercompany accounts and transactions have been eliminated in the condensed consolidated financial statements.

The following table provides a summary of the changes in value of the Company's redeemable non-controlling interests (in thousands):

 
Six Months Ended June 30,
 
2013
 
2012
 
 
 
 
Beginning balance, January 1,
$
64,517

 
$
95,910

Accretion of redeemable non-controlling interests, before tax
5,395

 
(1,720
)
Loans made to joint venture partner
(4,140
)
 
(3,750
)
Optional distributions made to joint venture partner
(6,063
)
 

Other
(1,159
)
 
(546
)
Ending balance, June 30,
$
58,550

 
$
89,894



16

LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


Note 11.
Unrestricted Subsidiaries

In July 2011, the Company's board of directors designated Cricket Music and Cricket Music's wholly-owned subsidiary Muve USA, LLC ("Muve USA") as "Unrestricted Subsidiaries" under the indentures governing Cricket's senior notes. Cricket Music, Muve USA and their subsidiaries are also designated as "Unrestricted Subsidiaries" under the Credit Agreement. Muve USA holds certain hardware, software and intellectual property relating to Cricket's Muve Music service. The financial position and results of operations of Cricket Music, Muve USA and their subsidiaries are included in the Company's condensed consolidated financial statements included in this report. Together with STX Wireless, Cricket Music, Muve USA and their subsidiaries are presented as "Non-Guarantors" within the Company's condensed consolidating financial statements included in Note 14.

As required by the Credit Agreement and the indenture governing Cricket's senior notes, the Company is presenting the aggregate carrying amount and classification of the components of the financial position as of June 30, 2013 and December 31, 2012 and results of operations of Cricket Music, Muve USA and their subsidiaries for the three and six months ended June 30, 2013 and 2012 in the following tables separately (in thousands):

 
June 30,
2013
 
December 31,
2012
Assets
 
 
 
Cash and cash equivalents
$
150

 
$
1

Other current assets
597

 

Property and equipment, net
2,688

 
4,937

Total assets
$
3,435

 
$
4,938

Liabilities and stockholders' equity
 
 
 
Accounts payable and accrued liabilities
$
14

 
$

Other current liabilities
373

 
5

Other long-term liabilities
248

 

Stockholders' equity
2,800

 
4,933

Total liabilities and stockholders' equity
$
3,435

 
$
4,938


 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Revenues
$
152

 
$

 
$
152

 
$

Operating expenses
 
 
 
 
 
 
 
Depreciation and amortization
1,125

 
1,124

 
2,249

 
2,248

Other
7

 
1

 
15

 
5

Total operating expenses
1,132

 
1,125

 
2,264

 
2,253

  Operating loss
(980
)
 
(1,125
)
 
(2,112
)
 
(2,253
)
Income tax expense
(28
)
 

 
(28
)
 

Net loss
$
(1,008
)
 
$
(1,125
)
 
$
(2,140
)
 
$
(2,253
)

Note 12.
Income Taxes

The computation of the Company's annual effective tax rate includes a forecast of the Company's estimated "ordinary" income (loss), which is its annual income (loss) from continuing operations before tax, excluding unusual or infrequently occurring (discrete) items. Significant management judgment is required in projecting the Company's ordinary income (loss). The Company's projected ordinary income tax expense for the full year 2013 consists primarily of the deferred tax effect of the Company's investments in joint ventures that are in a deferred tax liability position and the amortization of wireless licenses for income tax purposes. Because the Company's projected 2013 income tax expense is a relatively fixed amount, a small change in the ordinary income (loss) projection can produce a significant variance in the effective tax rate, therefore making it difficult to determine a reliable estimate of the annual effective tax rate. As a result, and in accordance with the authoritative guidance for accounting for


17

LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


income taxes in interim periods, the Company has computed its provision for income taxes as of and for the three and six months ended June 30, 2013 and 2012 based upon the actual effective tax rate for those periods.

The Company periodically assesses the likelihood that its deferred tax assets will be recoverable from future taxable income. To the extent the Company believes it is more likely than not that its deferred tax assets will not be recovered, it must establish a valuation allowance. As part of this periodic assessment for the three and six months ended June 30, 2013, the Company weighed the positive and negative factors and, at this time, does not believe there is sufficient positive evidence to support a conclusion that it is more likely than not that all or a portion of its deferred tax assets will be realized, except with respect to the realization of a $1.9 million Texas Margins Tax ("TMT") credit. Accordingly, at June 30, 2013 and December 31, 2012, the Company recorded a valuation allowance offsetting substantially all of its deferred tax assets. Deferred tax liabilities associated with wireless licenses and investments in certain joint ventures cannot be considered a source of taxable income to support the realization of deferred tax assets because these deferred tax liabilities will not reverse until some indefinite future period when these assets are either sold or impaired for book purposes.

The Company has substantial federal and state net operating losses ("NOLs") for income tax purposes. Subject to certain requirements, the Company may "carry forward" its federal NOLs for up to 20 years to offset future taxable income and reduce its income tax liability. For state income tax purposes, the NOL carryforward period ranges from five to 20 years. As of June 30, 2013, the Company had federal and state NOLs of approximately $2.9 billion and $2.2 billion, respectively, which begin to expire in 2022 for federal income tax purposes and of which $69.8 million will expire at the end of 2013 for state income tax purposes. While these NOL carryforwards have a potential to be used to offset future ordinary taxable income and reduce future cash tax liabilities by approximately $1.1 billion, the Company's ability to utilize these NOLs will depend upon the availability of future taxable income during the carryforward period along with any impact resulting from the Merger and, as such, there is no assurance the Company will be able to realize such tax savings.

The Company's ability to utilize NOLs could be further limited if it were to experience an "ownership change," as defined in Section 382 of the Internal Revenue Code and similar state provisions. In general terms, an ownership change can occur whenever there is a cumulative shift in the ownership of a company by more than 50 percentage points by one or more "5% stockholders" within a three-year period, which would include the ownership change that would result from the Merger. The occurrence of such a change generally limits the amount of NOL carryforwards a company could utilize in a given year to the aggregate fair market value of the company's common stock immediately prior to the ownership change, multiplied by the long-term tax-exempt interest rate in effect for the month of the ownership change.

The determination of whether an ownership change has occurred for purposes of Section 382 is complex and requires significant judgment. The occurrence of such an ownership change would accelerate cash tax payments the Company would be required to make and likely result in a substantial portion of its NOLs expiring before the Company could fully utilize them.

On August 30, 2011, the Company’s board of directors adopted a Tax Benefit Preservation Plan to help deter acquisitions of Leap common stock that could result in an ownership change under Section 382 and thus help preserve the Company’s ability to use its NOL carryforwards. The Tax Benefit Preservation Plan was approved by the Company's stockholders in May 2012. The Tax Benefit Preservation Plan is designed to deter acquisitions of Leap common stock that would result in a stockholder owning 4.99% or more of Leap common stock (as calculated under Section 382), or any existing holder of 4.99% or more of Leap common stock acquiring additional shares, by substantially diluting the ownership interest of any such stockholder unless the stockholder obtains an exemption from the Company’s board of directors. On July 12, 2013, Leap entered into an amendment to the Tax Benefit Preservation Plan to provide that neither the approval, execution or delivery of the Merger Agreement or any amendments thereof or agreements in connection therewith, nor the consummation of transactions or entry into any agreements contemplated thereby, including the Merger, will (i) cause the rights under the Tax Benefit Preservation Plan to become exercisable or entitle a holder of the rights to exercise such rights, (ii) cause AT&T or MHR or any of their affiliates or associates to become an "Acquiring Person" under the terms of the Tax Benefit Preservation Plan, or (iii) give rise to a Distribution Date or a Stock Acquisition Date (as such terms are defined in the Tax Benefit Preservation Plan). Other than as described above, the Tax Benefit Preservation Plan remains in effect and continues to apply to acquisitions of Leap common stock.

The Company's unrecognized income tax benefits and uncertain tax positions, as well as any associated interest and penalties, are recorded through income tax expense; however, such amounts have not been significant in any period.



18

LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


Note 13.
Commitments and Contingencies

From time to time, the Company is involved in a variety of legal proceedings, including lawsuits, claims, investigations and other proceedings concerning intellectual property, commercial disputes, business practices and other matters. Due in part to the expansion and development of its business operations, the Company has become subject to an increased number of these proceedings, including disputes alleging intellectual property infringement. These matters may seek monetary damages and other relief.

The Company believes that any damage amounts alleged by plaintiffs in matters that may arise are not necessarily meaningful indicators of its potential liability. The Company determines whether it should accrue an estimated loss for a contingency in a particular legal proceeding by assessing whether a loss is deemed probable and whether the amount can be reasonably estimated. The Company reassesses its views on estimated losses on a quarterly basis to reflect the impact of any developments in the matters in which it is involved.

Legal proceedings are inherently unpredictable, and the matters in which the Company is involved often present complex legal and factual issues. The Company vigorously pursues defenses in legal proceedings and engages in discussions where possible to resolve these matters on favorable terms. The Company's policy is to recognize legal costs as incurred. It is possible, however, that the Company's business, financial condition and results of operations in future periods could be materially adversely affected by increased litigation expense, significant settlement costs and/or unfavorable damage awards.

Merger-Related Litigation

On July 15, 2013, following the announcement of the Merger, a lawsuit was filed in the Delaware Court of Chancery challenging the proposed Merger. The action is captioned Booth Family Trust v. Leap Wireless International, Inc. et al., C.A. No. 8730-VCN. It is a putative class action filed on behalf of purported stockholders of Leap, and names Leap and its directors as defendants. The complaint alleges that the directors of Leap breached their fiduciary duties to Leap stockholders by engaging in a flawed sales process, by agreeing to sell Leap for inadequate consideration and by agreeing to improper deal protection terms in the Merger Agreement. The complaint seeks, among other relief, declaratory and injunctive relief against the Merger and costs and fees.

On July 19, 2013, July 24, 2013 and July 26, 2013, following the announcement of the Merger, lawsuits were filed in the Superior Court of the State of California, County of San Diego challenging the proposed Merger. The action filed on July 19, 2013 is captioned John Kim v. Leap Wireless International, Inc. et al., Case No. 37-2013-00058491-CU-BT-CTL and the actions filed on July 24, 2013 are captioned Wesley Decker v. Leap Wireless International, Inc. et al, Case No. 37-2013-00059095-CU-SL-CTL and Roxane Andrews v. Leap Wireless International, Inc. et al, Case No. 37-2013-00059141-CU-BT-CTL. The action filed on July 26, 2013 is captioned Joseph Marino v. Leap Wireless International Inc. et al, Case No. 37-2013-00059565-CU-BT-CTL. Each lawsuit is a putative class action filed on behalf of purported stockholders of Leap and names Leap, its directors as well as AT&T and Merger Sub as defendants. The complaints allege that Leap and its directors breached their fiduciary duties to Leap stockholders, and that AT&T and Merger Sub aided and abetted such breaches, by agreeing to improper deal protection terms in the Merger Agreement. The Decker, Andrews and Marino complaints further allege that Leap and its directors breached their fiduciary duties, and that AT&T and Merger Sub aided and abetted such breaches, by engaging in a flawed sales process and by agreeing to sell Leap for inadequate consideration. The Kim complaint seeks, among other relief, declaratory and injunctive relief against the Merger, imposition of a constructive trust and costs and fees. The Decker, Andrews and Marino complaints seek, among other relief, declaratory and injunctive relief against the Merger and costs and fees.

The outcome of these lawsuits is uncertain. An adverse monetary judgment could have a material adverse effect on the operations and liquidity of Leap, a preliminary injunction could delay or jeopardize the completion of the Merger and an adverse judgment granting permanent injunctive relief could indefinitely enjoin completion of the Merger. Leap believes these lawsuits are meritless.

Indemnification Agreements

From time to time, the Company enters into indemnification agreements with certain parties in the ordinary course of business, including agreements with manufacturers, licensors and suppliers who provide it with 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.






19

LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


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. The actual amount the Company spends and the number of devices 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.
The Company purchased approximately one-half of its first-year minimum purchase commitment through June 2013, which purchases were approximately $100 million below its first-year minimum purchase commitment. At its current purchase rate, the Company's iPhone purchases for the second year would be approximately $150 million below its second-year minimum purchase commitment and its purchases for the third year would be approximately $200 million below its third-year minimum purchase commitment. The actual amount of the Company's purchases will depend on the factors described above. However, the Company believes that it will be able to increase its current iPhone sales rate and purchase and sell the total required number of devices over the three-year period of the commitment and for a subsequent one-year inventory sell-through period. Due to the Company's efforts to expand sales volume for the iPhone, the Company has not been required to purchase additional handsets to meet its first-year minimum purchase commitment. In addition to the Company's introduction and expansion of device financing programs, the Company is working with Apple to increase the Company's advertising and promotional programs to increase awareness of the Company's iPhone offering. In addition, if Apple introduces an AWS-compatible version of the iPhone in the future, the Company will be able to sell the device in additional markets covering approximately 40% of its covered POPs. The Company may also seek to amend the requirements under, or extend the term of, the 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, which the Company 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 purchase commitment for that particular year is credited to the next succeeding year. However, to the extent the Company's revenues were to fall beneath the applicable commitment amount for any given year, excess revenues from a subsequent year could not be carried back to offset such shortfall.

In addition, in the event Leap is involved in a change-of-control transaction with another facilities-based wireless carrier with annual revenues of at least $500 million in the fiscal year preceding the date of the change of control agreement (other than MetroPCS Communications, Inc. ("MetroPCS")), either the Company (or the Company's successor in interest) or Sprint may terminate the wholesale agreement within 60 days following the closing of such a transaction. In connection with any such termination, the Company (or its successor in interest) would be required to pay to Sprint a specified percentage of the remaining aggregate minimum purchase commitment, with the percentage to be paid depending on the year in which the change of control agreement was entered into, being 20% for any such agreement entered into in 2013 and 10% for any such agreement entered into in 2014 or 2015. This termination right would be triggered by the Merger, if consummated.

In the event that Leap is involved in a change-of-control transaction with MetroPCS during the term of the wholesale agreement, then the agreement would continue in full force and effect, subject to certain revisions, including, without limitation, an increase to the total minimum purchase commitment to $350 million, taking into account any revenue contributed by Cricket prior to the date thereof. In the event Sprint is involved in a change-of-control transaction, the agreement would bind Sprint's successor-in-interest.


20

LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



Note 14.
Guarantor Financial Information

At June 30, 2013, all of the $1,600 million of senior notes issued by Cricket (the "Issuing Subsidiary") were comprised of 7.75% senior notes due 2020, which are jointly and severally guaranteed on a full and unconditional basis by Leap (the "Guarantor Parent Company") and Cricket License Company, LLC, a 100%-owned subsidiary of Cricket (the "Guarantor Subsidiary").

The indenture governing the senior notes limits, among other things, the Guarantor Parent Company's, Cricket's and the Guarantor Subsidiary's ability to: incur additional debt; create liens or other encumbrances; place limitations on distributions from restricted subsidiaries; pay dividends; make investments; prepay subordinated indebtedness or make other restricted payments; issue or sell capital stock of restricted subsidiaries; issue guarantees; sell assets; enter into transactions with affiliates; and make acquisitions or merge or consolidate with another entity.

Condensed consolidating financial information of the Guarantor Parent Company, the Issuing Subsidiary, the Guarantor Subsidiary, Non-Guarantor Subsidiaries (STX Wireless, Cricket Music and their respective subsidiaries) and total consolidated Leap and subsidiaries as of June 30, 2013 and December 31, 2012 and for the three and six months ended June 30, 2013 and 2012 is presented below. The equity method of accounting is used to account for ownership interests in subsidiaries, where applicable.

Cricket formerly owned an 85% non-controlling membership interest in Savary Island Wireless, LLC (“Savary Island”), which held wireless spectrum in the upper Midwest portion of the U.S. and which leased a portion of that spectrum to Cricket. In October 2012, Cricket acquired the remaining 15% controlling interest for $5.3 million in cash. In December 2012, Savary Island and its subsidiaries were merged with and into Cricket, with Cricket as the surviving entity. As a result of these transactions, the financial position, results of operations and cash flows of these entities have been consolidated into the Issuing Subsidiary. All prior period consolidating financial statements have been revised to reflect this reorganization.

Certain revisions have been made to certain intercompany balances in the condensed consolidating balance sheet as of December 31, 2012, and the condensed consolidating statement of cash flows for the six months ended June 30, 2012 presented below, to more appropriately reflect the substance of the underlying transactions or related settlement terms. These revisions had no impact on the consolidated balance sheet as of December 31, 2012 or the condensed consolidated statement of cash flows for the six months ended June 30, 2012. The revisions had the following impacts:

Condensed consolidating balance sheet as of December 31, 2012:

Guarantor Parent Company - Reclassified $11.2 million from long-term to current assets and $66.5 million from current to long-term liabilities.
Issuing Subsidiary - Reclassified $27.5 million from long-term to current assets, reclassified $242.5 million from current to long-term liabilities, reclassified $35.3 million from current liabilities to long-term assets and reclassified $3.9 million from current liabilities to other current assets.
Guarantor Subsidiary - Reclassified $49.4 million from long-term to current assets.
Guarantor Subsidiary - Reclassified $35.3 million from long-term assets to stockholders' equity to reflect non-cash equity contributions from the Issuing Subsidiary to the Guarantor Subsidiary.
Non-Guarantor Subsidiaries - Reclassified $32.6 million from current to long-term liabilities, reclassified $0.4 million from current liabilities to current assets.

Condensed consolidating statement of cash flows for the six months ended June 30, 2012:

Non-Guarantor Subsidiaries - Increased net cash provided by operating activities by $5.6 million, with a corresponding increase to net cash used in investing activities for the same amount.
Issuing Subsidiary - Decreased net cash provided by operating activities by $5.6 million, with a corresponding decrease to net cash used in investing activities for the same amount.

The Company assessed the materiality of the revisions noted above and concluded that they were not material to any of the Company's previously issued financial statements.


21

LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


Condensed Consolidating Balance Sheet as of June 30, 2013 (unaudited and in thousands):

 
Guarantor
Parent
Company
 
Issuing
Subsidiary
 
Guarantor
Subsidiary
 
Non-Guarantor
Subsidiaries
 
Consolidating
and
Eliminating
Adjustments
 
Consolidated
 
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
109

 
$
529,540

 
$

 
$
75,390

 
$

 
$
605,039

Short-term investments

 
308,012

 

 

 

 
308,012

Inventories

 
98,667

 

 
3,866

 

 
102,533

Deferred charges

 
49,328

 

 
3

 

 
49,331

Advances to affiliates and consolidated subsidiaries
11,181

 
26,162

 
49,052

 

 
(86,395
)
 

Other current assets
805

 
156,146

 
6

 
10,515

 
(30
)
 
167,442

Total current assets
12,095

 
1,167,855

 
49,058

 
89,774

 
(86,425
)
 
1,232,357

Property and equipment, net

 
1,444,641

 

 
55,293

 

 
1,499,934

Investments in and advances to affiliates and consolidated subsidiaries
474,419

 
2,333,808

 

 

 
(2,808,227
)
 

Wireless licenses

 

 
2,025,909

 
64,912

 

 
2,090,821

Assets held for sale

 

 
1,835

 

 

 
1,835

Goodwill

 
11,222

 

 
20,664

 

 
31,886

Intangible assets, net

 
13,434

 

 
5,147

 

 
18,581

Other assets
3,149

 
75,103

 

 
9,747

 

 
87,999

Total assets
$
489,663

 
$
5,046,063

 
$
2,076,802

 
$
245,537

 
$
(2,894,652
)
 
$
4,963,413

Liabilities and Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
 
Accounts payable and accrued liabilities
$
46

 
$
323,398

 
$

 
$
2,484

 
$

 
$
325,928

Current maturities of long-term debt

 
18,250

 

 

 

 
18,250

Intercompany payables

 
60,233

 

 
26,162

 
(86,395
)
 

Other current liabilities
5,213

 
189,512

 

 
16,909

 
(30
)
 
211,604

Total current liabilities
5,259

 
591,393

 

 
45,555

 
(86,425
)
 
555,782

Long-term debt, net
248,204

 
3,371,760

 

 

 

 
3,619,964

Deferred tax liabilities

 
407,794

 

 

 

 
407,794

Long-term intercompany payables
71,904

 
240,704

 

 
40,203

 
(352,811
)
 

Other long-term liabilities

 
142,147

 

 
14,880

 

 
157,027

Total liabilities
325,367

 
4,753,798

 

 
100,638

 
(439,236
)
 
4,740,567

Redeemable non-controlling interests

 
58,550

 

 

 

 
58,550

Stockholders' equity
164,296

 
233,715

 
2,076,802

 
144,899

 
(2,455,416
)
 
164,296

Total liabilities and stockholders' equity
$
489,663

 
$
5,046,063

 
$
2,076,802

 
$
245,537

 
$
(2,894,652
)
 
$
4,963,413




22

LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


Condensed Consolidating Balance Sheet as of December 31, 2012 (unaudited and in thousands):

 
Guarantor
Parent
Company
 
Issuing
Subsidiary
 
Guarantor
Subsidiary
 
Non-Guarantor
Subsidiaries
 
Consolidating
and
Eliminating
Adjustments
 
Consolidated
 
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
69

 
$
449,668

 
$

 
$
65,813

 
$

 
$
515,550

Short-term investments

 
159,426

 

 

 

 
159,426

Inventories

 
118,149

 

 
3,452

 

 
121,601

Deferred charges

 
60,933

 

 
30

 

 
60,963

Advances to affiliates and consolidated subsidiaries
11,182

 
23,592

 
49,407

 

 
(84,181
)
 

Other current assets
707

 
129,346

 

 
13,519

 
(4,330
)
 
139,242

Total current assets
11,958

 
941,114

 
49,407

 
82,814

 
(88,511
)
 
996,782

Property and equipment, net

 
1,694,365

 

 
67,725

 

 
1,762,090

Investments in and advances to affiliates and consolidated subsidiaries
739,072

 
2,327,953

 

 

 
(3,067,025
)
 

Wireless licenses

 

 
1,882,421

 
64,912

 

 
1,947,333

Assets held for sale

 

 
136,222

 

 

 
136,222

Goodwill

 
11,222

 

 
20,664

 

 
31,886

Intangible assets, net

 
14,756

 

 
9,907

 

 
24,663

Other assets
3,938

 
54,852

 

 
9,494

 

 
68,284

Total assets
$
754,968

 
$
5,044,262

 
$
2,068,050

 
$
255,516

 
$
(3,155,536
)
 
$
4,967,260

Liabilities and Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
 
Accounts payable and accrued liabilities
$
40

 
$
389,951

 
$

 
$
6,119

 
$

 
$
396,110

Current maturities of long-term debt

 
4,000

 

 

 

 
4,000

Intercompany payables

 
60,589

 

 
23,592

 
(84,181
)
 

Other current liabilities
5,247

 
202,740

 

 
13,223

 
(4,330
)
 
216,880

Total current liabilities
5,287

 
657,280

 

 
42,934

 
(88,511
)
 
616,990

Long-term debt, net
250,000

 
3,048,463

 

 

 

 
3,298,463

Deferred tax liabilities

 
385,111

 

 

 

 
385,111

Long-term intercompany payables
66,549

 
242,500

 

 
32,562

 
(341,611
)
 

Other long-term liabilities

 
149,819

 

 
19,228

 

 
169,047

Total liabilities
321,836

 
4,483,173

 

 
94,724

 
(430,122
)
 
4,469,611

Redeemable non-controlling interests

 
64,517

 

 

 

 
64,517

Stockholders' equity
433,132

 
496,572

 
2,068,050

 
160,792

 
(2,725,414
)
 
433,132

Total liabilities and stockholders' equity
$
754,968

 
$
5,044,262

 
$
2,068,050

 
$
255,516

 
$
(3,155,536
)
 
$
4,967,260




23

LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


Condensed Consolidating Statement of Comprehensive Income for the Three Months Ended June 30, 2013 (unaudited and in thousands):

 
Guarantor
Parent
Company
 
Issuing
Subsidiary
 
Guarantor
Subsidiary
 
Non-Guarantor
Subsidiaries
 
Consolidating
and
Eliminating
Adjustments
 
Consolidated
 
 
 
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Service revenues
$

 
$
594,040

 
$

 
$
84,391

 
$
66

 
$
678,497

Equipment revenues

 
45,584

 

 
7,462

 

 
53,046

Other revenues

 
3,851

 
25,506

 
89

 
(29,446
)
 

Total revenues

 
643,475

 
25,506

 
91,942

 
(29,380
)
 
731,543

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of service (exclusive of items shown separately below)

 
254,913

 

 
19,987

 
(25,529
)
 
249,371

Cost of equipment

 
160,406

 

 
23,252

 

 
183,658

Selling and marketing

 
61,919

 

 
7,478

 

 
69,397

General and administrative
2,566

 
73,068

 
191

 
11,428

 
(3,851
)
 
83,402

Depreciation and amortization

 
142,403

 

 
8,453

 

 
150,856

Impairments and other charges

 
4,167

 

 
120

 

 
4,287

Total operating expenses
2,566

 
696,876

 
191

 
70,718

 
(29,380
)
 
740,971

Gain (loss) on sale, exchange or disposal of assets, net

 
1,986

 
12

 
(128
)
 

 
1,870

Operating income (loss)
(2,566
)
 
(51,415
)
 
25,327

 
21,096

 

 
(7,558
)
Equity in net income (loss) of consolidated subsidiaries
(163,377
)
 
46,395

 

 

 
116,982

 

Equity in net income of investees, net

 
1,696

 

 

 

 
1,696

Interest income
6,063

 
58

 

 

 
(6,063
)
 
58

Interest expense
(3,220
)
 
(69,694
)
 

 

 
6,063

 
(66,851
)
Loss on extinguishment of debt
(9
)
 
(72,979
)
 

 

 

 
(72,988
)
Income (loss) before income taxes
(163,109
)
 
(145,939
)
 
25,327

 
21,096

 
116,982

 
(145,643
)
Income tax expense

 
(10,682
)
 

 
(28
)
 

 
(10,710
)
Net income (loss)
(163,109
)
 
(156,621
)
 
25,327

 
21,068

 
116,982

 
(156,353
)
Accretion of redeemable non-controlling interests and distributions, net of tax

 
(6,756
)
 

 

 

 
(6,756
)
Net income (loss) attributable to common stockholders
$
(163,109
)
 
$
(163,377
)
 
$
25,327

 
$
21,068

 
$
116,982

 
$
(163,109
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
(163,109
)
 
(156,621
)
 
25,327

 
21,068

 
116,982

 
(156,353
)
Net unrealized holding losses on investments and other
(10
)
 
(10
)
 

 

 
10

 
(10
)
Comprehensive income (loss)
$
(163,119
)
 
$
(156,631
)
 
$
25,327

 
$
21,068

 
$
116,992

 
$
(156,363
)



24

LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


Condensed Consolidating Statement of Comprehensive Income for the Six Months Ended June 30, 2013 (unaudited and in thousands):

 
Guarantor
Parent
Company
 
Issuing
Subsidiary
 
Guarantor
Subsidiary
 
Non-Guarantor
Subsidiaries
 
Consolidating
and
Eliminating
Adjustments
 
Consolidated
 
 
 
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Service revenues
$

 
$
1,196,077

 
$

 
$
166,961

 
$
81

 
$
1,363,119

Equipment revenues

 
134,924

 

 
23,358

 

 
158,282

Other revenues

 
8,000

 
50,996

 
178

 
(59,174
)
 

Total revenues

 
1,339,001

 
50,996

 
190,497

 
(59,093
)
 
1,521,401

Operating expenses: