Edgar Filing: LEAP WIRELESS INTERNATIONAL INC

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

Form 10-Q/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

Amendment No. 1

(Mark One)

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2013

¨	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 þ No ¨

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 þ No ¨

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):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

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

Explanatory Note

Overview

Leap Wireless International, Inc. (the “Company”), is filing this Amendment No. 1 to Quarterly Report on Form 10-Q/A (this “Amendment”) to restate and amend the Company’s previously issued unaudited condensed consolidated financial statements and related financial information for the three and six months ended June 30, 2013 and 2012 previously included in its Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2013 (the “Original Form 10-Q”), which was filed with the Securities and Exchange Commission on August 5, 2013 (the “Original Filing Date”). This Amendment amends and restates the Company’s unaudited condensed consolidated financial statements and related disclosures in “Part I – Item 1. Financial Statements” for the fiscal quarters ended June 30, 2013 and 2012, as well as related disclosures in “Part I – Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Part I – Item 4. Controls and Procedures,” “Part II – Item 1A. Risk Factors” and “Part II – Item 6. Exhibits.”

Background to the Restatements

On October 20, 2013, the Audit Committee of the Board of Directors of the Company concluded, in consultation with management and after discussion with the Company’s independent registered public accounting firm (PricewaterhouseCoopers LLP), that, due to a classification error in the Company’s presentation of certain capital expenditures in the consolidated statements of cash flows, related supplementary cash flow disclosures and guarantor footnotes, the consolidated financial statements for the years ended December 31, 2012 and 2011 and the unaudited condensed consolidated financial statements for the fiscal quarters ended March 31, 2013 and 2012, June 30, 2013 and 2012, and September 30, 2012 should no longer be relied upon.

As described further in Note 2 to the Company’s unaudited condensed consolidated financial statements included in “Part I – Item 1. Financial Statements” of this Amendment, the classification error related to certain purchases of property and equipment that were unpaid at each of the balance sheet dates (but that were scheduled to be settled in cash soon thereafter), which were incorrectly reflected as cash outflows from investing activities and cash inflows from operating activities.

Effects of Restatements

The following table illustrates the impact of the restatements on the condensed consolidated statements of cash flows for the six months ended June 30, 2013 and 2012 (unaudited, in thousands):


	Six Months Ended June 30, 2013									Six Months Ended June 30, 2012
	As Previously Reported			Adjustment			As Restated			As Previously Reported			Adjustment			As Restated
Operating Activities
Net cash provided by operating activities	$	15,028		$	17,671		$	32,699		$	50,619		$	35,259		$	85,878
Investing Activities
Purchases of property and equipment	$	(48,861	)	$	(17,671	)	$	(66,532	)	$	(265,412	)	$	(30,842	)	$	(296,254	)
Change in prepayments for purchases of property and equipment		(4,986	)		—			(4,986	)		(1,940	)		(4,417	)		(6,357	)
Net cash used in investing activities		(202,503	)		(17,671	)		(220,174	)		(2,552	)		(35,259	)		(37,811	)

Since the Company has not yet filed its Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2013, in this Amendment, the Company has also restated its unaudited condensed consolidated statement of cash flows and related guarantor financial information for the nine months ended September 30, 2012 to correct the classification error described above. These corrections are disclosed in Note 16 to the Company’s unaudited condensed consolidated financial statements included in “Part I – Item 1. Financial Statements” of this Amendment.

The resulting restatements have no impact on the total end-of-period cash and cash equivalents reported on the condensed consolidated statements of cash flows, on the related condensed consolidated balance sheets or condensed consolidated statements of comprehensive income, or on adjusted OIBDA (as defined herein) for any of the affected periods. The classification error was identified by management in connection with the preparation of the Company’s third quarter 2013 financial statements.

The Company has amended and restated in its entirety each Item of the Original Form 10-Q that required a change to reflect this restatement and to include certain additional information, namely: “Part I – Item 1. Financial Statements,” “Part I – Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Part I – Item 4. Controls and Procedures,” “Part II – Item 1A. Risk Factors” and “Part II – Item 6. Exhibits.”

Pursuant to Rule 12b-15 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, this Amendment contains only the items and exhibits to the Original Form 10-Q that are being amended and restated, and unaffected items and exhibits are not included herein. Except as stated above, the financial statements and other disclosures in the Original Form 10-Q are unchanged. In particular, this Amendment has not been updated to reflect any events that have occurred after the Original Form 10-Q was filed or to modify or update disclosures affected by other subsequent events. Accordingly, forward-looking statements included in this Amendment represent management’s views as of the Original Filing Date and should not be assumed to be accurate as of any date thereafter. This Amendment should be read in conjunction with the Original Form 10-Q and the Company’s filings with the Securities and Exchange Commission made subsequent to the Original Filing Date, together with any amendments to those filings.

“Part II – Item 6. Exhibits” of this Amendment has been amended to include currently dated certifications from the Company’s principal executive officer and principal financial officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002.

LEAP WIRELESS INTERNATIONAL, INC.

QUARTERLY REPORT ON FORM 10-Q/A

(Amendment No. 1)

For the Quarter Ended June 30, 2013

TABLE OF CONTENTS


		Page
PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements		1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		34
Item 4.	Controls and Procedures		56

PART II—OTHER INFORMATION
Item 1A.	Risk Factors		58
Item 6.	Exhibits		79

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 10)		1,835			136,222
Goodwill		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 14)
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.

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 8)		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.

LEAP WIRELESS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited and in thousands)


	Six Months Ended June 30,
	2013			2012
	(As Restated, See Note 2)
Operating activities:
Net cash provided by operating activities	$	32,699		$	85,878

Investing activities:
Purchases of property and equipment		(66,532	)		(296,254	)
Change in prepayments for purchases of property and equipment		(4,986	)		(6,357	)
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		(220,174	)		(37,811	)

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	)
Supplementary disclosure of non-cash investing activities:
Acquisition of property and equipment	$	17,135		$	91,139
Net wireless licenses received in exchange transaction	$	6,809		$	—

See accompanying notes to condensed consolidated financial statements.

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 11. Arrangement with Joint Venture.”

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

Note 2. Restatement of Previously Reported Condensed Consolidated Financial Statements

The Company has restated its unaudited condensed consolidated statements of cash flows for the six months ended June 30, 2013 and 2012 due to a classification error related to the presentation of certain capital expenditures and operating cash flows. In addition, the Company is restating its unaudited condensed consolidated statement of cash flows for the nine months ended September 30, 2012 (see Note 16).

The classification error related to certain purchases of property and equipment that were unpaid at each of the balance sheet dates (but that were scheduled to be settled in cash soon thereafter), which were incorrectly reflected as cash outflows from investing activities and cash inflows from operating activities. This classification error resulted in a misstatement of net cash provided by operating activities and net cash used in investing activities, as follows (unaudited, in thousands):


	Six Months Ended June 30, 2013									Six Months Ended June 30, 2012
	As Previously Reported			Adjustment			As Restated			As Previously Reported			Adjustment			As Restated
Operating Activities
Net cash provided by operating activities	$	15,028		$	17,671		$	32,699		$	50,619		$	35,259		$	85,878
Investing Activities
Purchases of property and equipment	$	(48,861	)	$	(17,671	)	$	(66,532	)	$	(265,412	)	$	(30,842	)	$	(296,254	)
Change in prepayments for purchases of property and equipment		(4,986	)		—			(4,986	)		(1,940	)		(4,417	)		(6,357	)
Net cash used in investing activities		(202,503	)		(17,671	)		(220,174	)		(2,552	)		(35,259	)		(37,811	)

The Company has also reflected these corrections as applicable in its unaudited condensed consolidated financial statements and also in the condensed consolidating statements of cash flows presented in “Note 15. Guarantor Financial Information.”

The resulting restatement has no impact on the total end-of-period cash and cash equivalents reported on the condensed consolidated statements of cash flows or on the related condensed consolidated balance sheets or condensed consolidated statements of comprehensive income for any of the affected periods.

Note 3. 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.

LEAP WIRELESS INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 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.

LEAP WIRELESS INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 4. 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 Amendment No. 1 to Annual Report on Form 10-K/A 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.

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

LEAP WIRELESS INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 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.

LEAP WIRELESS INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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.

LEAP WIRELESS INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 5. 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.

LEAP WIRELESS INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 6. 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

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 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.

LEAP WIRELESS INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 7. 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.

LEAP WIRELESS INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 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

LEAP WIRELESS INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

subsidiaries’ creditors, including under the Credit Agreement and the senior notes described below. The notes are effectively junior to all of Leap’s existing 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

LEAP WIRELESS INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 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 8. 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.

LEAP WIRELESS INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

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 9. 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 10. 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 11. 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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 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 4, 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.

LEAP WIRELESS INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Note 12. 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 15.

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

LEAP WIRELESS INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


	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 13. 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 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.

LEAP WIRELESS INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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.

Note 14. 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-

LEAP WIRELESS INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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.

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

LEAP WIRELESS INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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.

Note 15. 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.

In connection with the restatement of the Company’s unaudited condensed consolidated statements of cash flows, the Company has restated its unaudited condensed consolidating statements of cash flows for the six months ended June 30, 2013 and 2012 due to a classification error related to the presentation of certain capital expenditures and operating cash flows (see Note 2). The classification error related to certain purchases of property and equipment that were unpaid at each of the balance sheet dates (but that were scheduled to be settled in cash soon thereafter), which were incorrectly reflected as cash outflows from investing activities and cash inflows from operating activities. This classification error resulted in a misstatement of net cash provided by operating activities and net cash used in investing activities. The classification error has been reflected in the condensed consolidating statements of cash flows for the Issuing Subsidiary and Non-Guarantor Subsidiaries as follows:

LEAP WIRELESS INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Condensed consolidating statement of cash flows for the six months ended June 30, 2013:

•

Issuing Subsidiary – Decreased net cash used in operating activities by $16.2 million with a corresponding increase in net cash used in investing activities for the same amount.

•

Non-Guarantor Subsidiaries – Increased net cash provided by operating activities by $1.5 million with a corresponding increase in net cash used in investing activities for the same amount.

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

•

Issuing Subsidiary – Increased net cash provided by operating activities by $44.7 million with a corresponding increase in net cash used in investing activities for the same amount.

•

Non-Guarantor Subsidiaries – Decreased net cash provided by operating activities by $9.5 million with a corresponding decrease in net cash used in investing activities for the same amount.

In addition, certain revisions have been made to certain intercompany balances in 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 to the condensed consolidating statement of cash flows for the six months ended June 30, 2012:

•

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.

•

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.

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.

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

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

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	)

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:
Cost of service (exclusive of items shown separately below)		—			510,757			—		40,565			(51,093	)		500,229
Cost of equipment		—			384,449			—		58,177			—			442,626
Selling and marketing		—			130,228			—		18,007			—			148,235
General and administrative		5,173			144,748			382		23,324			(8,000	)		165,627
Depreciation and amortization		—			286,377			—		17,052			—			303,429
Impairments and other charges		—			4,353			—		669			—			5,022

Total operating expenses		5,173			1,460,912			382		157,794			(59,093	)		1,565,168
Gain (loss) on sale, exchange or disposal of assets, net		—			283			6,764		(189	)		—			6,858

Operating income (loss)		(5,173	)		(121,628	)		57,378		32,514			—			(36,909	)
Equity in net income (loss) of consolidated subsidiaries		(274,946	)		89,864			—		—			185,082			—
Equity in net income of investees, net		—			538			—		—			—			538
Interest income		12,126			104			—		—			(12,125	)		105
Interest expense		(6,419	)		(137,282	)		—		—			12,125			(131,576	)
Loss on extinguishment of debt		(9	)		(72,979	)		—		—			—			(72,988	)

Income (loss) before income taxes		(274,421	)		(241,383	)		57,378		32,514			185,082			(240,830	)
Income tax expense		—			(25,102	)		—		(28	)		—			(25,130	)

Net income (loss)		(274,421	)		(266,485	)		57,378		32,486			185,082			(265,960	)
Accretion of redeemable non-controlling interests and distributions, net of tax		—			(8,461	)		—		—			—			(8,461	)

Net income (loss) attributable to common stockholders	$	(274,421	)	$	(274,946	)	$	57,378	$	32,486		$	185,082		$	(274,421	)

Other comprehensive income (loss):
Net income (loss)		(274,421	)		(266,485	)		57,378		32,486			185,082			(265,960	)
Net unrealized holding losses on investments and other		(13	)		(13	)		—		—			13			(13	)

Comprehensive income (loss)	$	(274,434	)	$	(266,498	)	$	57,378	$	32,486		$	185,095		$	(265,973	)

LEAP WIRELESS INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Condensed Consolidating Statement of Comprehensive Income for the Three Months Ended June 30, 2012 (unaudited and in thousands):


	Guarantor Parent Company			Issuing Subsidiary			Guarantor Subsidiary		Non-Guarantor Subsidiaries			Consolidating and Eliminating Adjustments			Consolidated
Revenues:
Service revenues	$	—		$	666,327		$	—	$	84,938		$	20		$	751,285
Equipment revenues		—			31,270			—		4,217			—			35,487
Other revenues		—			3,748			28,774		27			(32,549	)		—

Total revenues		—			701,345			28,774		89,182			(32,529	)		786,772

Operating expenses:
Cost of service (exclusive of items shown separately below)		—			264,377			—		20,959			(28,781	)		256,555
Cost of equipment		—			152,736			—		18,937			—			171,673
Selling and marketing		—			68,438			—		8,809			—			77,247
General and administrative		2,813			83,727			191		11,909			(3,748	)		94,892
Depreciation and amortization		—			143,889			—		10,594			—			154,483

Total operating expenses		2,813			713,167			191		71,208			(32,529	)		754,850
Loss on sale, exchange or disposal of assets, net		—			(233	)		—		(100	)		—			(333	)

Operating income (loss)		(2,813	)		(12,055	)		28,583		17,874			—			31,589
Equity in net income (loss) of consolidated subsidiaries		(41,654	)		46,459			—		—			(4,805	)		—
Equity in net loss of investees, net		—			(59	)		—		—			—			(59	)
Interest income		6,062			9,054			—		2			(15,090	)		28
Interest expense		(3,185	)		(78,888	)		—		—			15,090			(66,983	)

Income (loss) before income taxes		(41,590	)		(35,489	)		28,583		17,876			(4,805	)		(35,425	)
Income tax expense		—			(10,562	)		—		—			—			(10,562	)

Net income (loss)		(41,590	)		(46,051	)		28,583		17,876			(4,805	)		(45,987	)
Accretion of redeemable non-controlling interests and distributions, net of tax		—			4,397			—		—			—			4,397

Net income (loss) attributable to common stockholders	$	(41,590	)	$	(41,654	)	$	28,583	$	17,876		$	(4,805	)	$	(41,590	)

Other comprehensive income (loss):
Net income (loss)		(41,590	)		(46,051	)		28,583		17,876			(4,805	)		(45,987	)
Net unrealized holding gains on investments and other		10			10			—		—			(10	)		10

Comprehensive income (loss)	$	(41,580	)	$	(46,041	)	$	28,583	$	17,876		$	(4,815	)	$	(45,977	)

LEAP WIRELESS INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Condensed Consolidating Statement of Comprehensive Income for the Six Months Ended June 30, 2012 (unaudited and in thousands):


	Guarantor Parent Company			Issuing Subsidiary			Guarantor Subsidiary		Non-Guarantor Subsidiaries		Consolidating and Eliminating Adjustments			Consolidated
Revenues:
Service revenues	$	—		$	1,352,037		$	—	$	173,210	$	36		$	1,525,283
Equipment revenues		—			76,520			—		10,588		—			87,108
Other revenues		—			7,713			58,463		27		(66,203	)		—

Total revenues		—			1,436,270			58,463		183,825		(66,167	)		1,612,391

Operating expenses:
Cost of service (exclusive of items shown separately below)		—			531,251			—		45,069		(58,454	)		517,866
Cost of equipment		—			372,084			—		47,436		—			419,520
Selling and marketing		—			153,471			—		19,330		—			172,801
General and administrative		5,550			162,301			381		24,072		(7,713	)		184,591
Depreciation and amortization		—			274,072			—		26,954		—			301,026

Total operating expenses		5,550			1,493,179			381		162,861		(66,167	)		1,595,804
Gain (loss) on sale, exchange or disposal of assets, net		—			(1,624	)		—		823		—			(801	)

Operating income (loss)		(5,550	)		(58,533	)		58,082		21,787		—			15,786
Equity in net income (loss) of consolidated subsidiaries		(140,240	)		79,873			—		—		60,367			—
Equity in net income of investees, net		—			134			—		—		—			134
Interest income		12,125			9,080			—		4		(21,152	)		57
Interest expense		(6,364	)		(148,813	)		—		—		21,152			(134,025	)

Income (loss) before income taxes		(140,029	)		(118,259	)		58,082		21,791		60,367			(118,048	)
Income tax expense		—			(22,273	)		—		—		—			(22,273	)

Net income (loss)		(140,029	)		(140,532	)		58,082		21,791		60,367			(140,321	)
Accretion of redeemable non-controlling interests and distributions, net of tax		—			292			—		—		—			292

Net income (loss) attributable to common stockholders	$	(140,029	)	$	(140,240	)	$	58,082	$	21,791	$	60,367		$	(140,029	)

Other comprehensive income (loss):
Net income (loss)		(140,029	)		(140,532	)		58,082		21,791		60,367			(140,321	)
Net unrealized holding gains on investments and other		12			12			—		—		(12	)		12

Comprehensive income (loss)	$	(140,017	)	$	(140,520	)	$	58,082	$	21,791	$	60,355		$	(140,309	)

LEAP WIRELESS INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Condensed Consolidating Statement of Cash Flows for the Six Months Ended June 30, 2013 (unaudited and in thousands, as restated):


	Guarantor Parent Company			Issuing Subsidiary			Guarantor Subsidiary		Non-Guarantor Subsidiaries			Consolidating and Eliminating Adjustments			Consolidated
Operating activities:
Net cash provided by (used in) operating activities	$	40		$	(26,998	)	$	—	$	59,657		$	—		$	32,699

Investing activities:
Purchases of and change in prepayments for purchases of property and equipment		—			(70,521	)		—		(2,040	)		1,043			(71,518	)
Purchases of wireless licenses and spectrum clearing costs		—			(2,337	)		—		—			—			(2,337	)
Proceeds from sales of wireless licenses and operating assets		—			4,107			—		340			(1,043	)		3,404
Purchases of investments		—			(334,935	)		—		—			—			(334,935	)
Sales and maturities of investments		—			186,103			—		—			—			186,103
Payments received from joint venture		—			33,513			—		—			(33,513	)		—
Investments in and advances to affiliates and consolidated subsidiaries		(620	)		—			—		—			620			—
Change in restricted cash		—			(891	)		—		—			—			(891	)

Net cash used in investing activities		(620	)		(184,961	)		—		(1,700	)		(32,893	)		(220,174	)

Financing activities:
Proceeds from issuance of long-term debt		—			1,414,313			—		—			—			1,414,313
Repayment of long-term debt		—			(1,103,796	)		—		—			—			(1,103,796	)
Payment of debt issuance costs		—			(15,800	)		—		—			—			(15,800	)
Capital contributions, net		—			620			—		—			(620	)		—
Proceeds from issuance of common stock, net		620			—			—		—			—			620
Payments made to joint venture partners		—			—			—		(48,380	)		33,513			(14,867	)
Other		—			(3,506	)		—		—			—			(3,506	)

Net cash provided by (used in) financing activities		620			291,831			—		(48,380	)		32,893			276,964

Net increase in cash and cash equivalents		40			79,872			—		9,577			—			89,489
Cash and cash equivalents at beginning of period		69			449,668			—		65,813			—			515,550

Cash and cash equivalents at end of period	$	109		$	529,540		$	—	$	75,390		$	—		$	605,039

LEAP WIRELESS INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Condensed Consolidating Statement of Cash Flows for the Six Months Ended June 30, 2012 (unaudited and in thousands, as restated):


	Guarantor Parent Company			Issuing Subsidiary			Guarantor Subsidiary		Non-Guarantor Subsidiaries			Consolidating and Eliminating Adjustments			Consolidated
Operating activities:
Net cash provided by (used in) operating activities	$	(30	)	$	41,372		$	—	$	47,267		$	(2,731	)	$	85,878

Investing activities:
Purchases of and change in prepayments for purchases of property and equipment		—			(291,673	)		—		(17,899	)		6,961			(302,611	)
Purchases of wireless licenses and spectrum clearing costs		—			(2,712	)		—		—			—			(2,712	)
Proceeds from sales of wireless licenses and operating assets		—			912			—		7,469			(6,961	)		1,420
Purchases of investments		—			(173,141	)		—		—			—			(173,141	)
Sales and maturities of investments		—			440,734			—		—			—			440,734
Investments in and advances to affiliates and consolidated subsidiaries		(483	)		—			—		—			483			—
Change in restricted cash		—			(1,501	)		—		—			—			(1,501	)

Net cash provided by (used in) investing activities		(483	)		(27,381	)		—		(10,430	)		483			(37,811	)

Financing activities:
Capital contributions, net		—			483			—		—			(483	)		—
Proceeds from the issuance of common stock, net		483			—			—		—			—			483
Payments made to joint venture partners		—			(510	)		—		(7,451	)		2,731			(5,230	)
Other		—			(2,187	)		—		—			—			(2,187	)

Net cash provided by (used in) financing activities		483			(2,214	)		—		(7,451	)		2,248			(6,934	)

Net increase (decrease) in cash and cash equivalents		(30	)		11,777			—		29,386			—			41,133
Cash and cash equivalents at beginning of period		91			270,056			—		75,096			—			345,243

Cash and cash equivalents at end of period	$	61		$	281,833		$	—	$	104,482		$	—		$	386,376

LEAP WIRELESS INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 16. Restated Condensed Consolidated Financial Information for the Nine Months Ended September 30, 2012

As described in Note 2, the following restated condensed consolidated statement of cash flows for the nine months ended September 30, 2012 reflects the correction of the classification error related to certain purchases of property and equipment that were unpaid at the balance sheet date (but that were scheduled to be settled in cash soon thereafter), which were incorrectly reflected as cash outflows from investing activities and cash inflows from operating activities. This classification error resulted in a misstatement of net cash provided by operating activities and net cash used in investing activities, as follows (unaudited, in thousands):


	Nine Months Ended September 30, 2012
	As Previously Reported			Adjustment			As Restated
Operating Activities
Net cash provided by operating activities	$	149,025		$	61,487		$	210,512
Investing Activities
Purchases of property and equipment	$	(371,558	)	$	(57,070	)	$	(428,628	)
Change in prepayments for purchases of property and equipment		(1,940	)		(4,417	)		(6,357	)
Net cash used in investing activities		5,046			(61,487	)		(56,441	)

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited and in thousands)


	Nine Months Ended September 30, 2012
	(As Restated, See Note 2)
Operating activities:
Net cash provided by operating activities	$	210,512

Investing activities:
Purchases of property and equipment		(428,628	)
Change in prepayments for purchases of property and equipment		(6,357	)
Purchases of wireless licenses and spectrum clearing costs		(3,625	)
Proceeds from sales of wireless licenses and operating assets, net		154,021
Purchases of investments		(268,854	)
Sales and maturities of investments		497,762
Change in restricted cash		(760	)

Net cash used in investing activities		(56,441	)

Financing activities:
Repayment of long-term debt		(21,911	)
Payment of debt issuance costs		(296	)
Proceeds from issuance of common stock		483
Payments made to joint venture partners		(27,566	)
Other		(3,662	)

Net cash used in financing activities		(52,952	)

Net increase in cash and cash equivalents		101,119
Cash and cash equivalents at beginning of period		345,243

Cash and cash equivalents at end of period	$	446,362

Supplementary disclosure of cash flow information:
Cash paid for interest	$	(151,519	)
Cash paid for income taxes		(3,943	)
Supplementary disclosure of non-cash investing activities:
Acquisition of property and equipment	$	35,474

LEAP WIRELESS INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

In connection with the restatement of the Company’s unaudited condensed consolidated statement of cash flows for the nine months ended September 30, 2012 as described above, the Company has restated its unaudited condensed consolidating statement of cash flows for the nine months ended September 30, 2012 as follows:

•

Issuing Subsidiary – Increased net cash provided by operating activities by $63.5 million with a corresponding decrease in net cash provided by investing activities for the same amount.

•

Non-Guarantor Subsidiaries – Decreased net cash provided by operating activities by $2.0 million with a corresponding decrease in net cash used in investing activities for the same amount.

As discussed in Note 15, Cricket formerly owned an 85% non-controlling membership interest in Savary Island. 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. Accordingly, the condensed consolidating statement of cash flows for the nine months ended September 30, 2012 has been revised to reflect this reorganization.

Condensed Consolidating Statement of Cash Flows for the Nine Months Ended September 30, 2012 (unaudited and in thousands, as restated):


	Guarantor Parent Company			Issuing Subsidiary			Guarantor Subsidiary		Non-Guarantor Subsidiaries			Consolidating and Eliminating Adjustments			Consolidated
Operating activities:
Net cash provided by (used in) operating activities	$	(47	)	$	145,631		$	—	$	73,665		$	(8,737	)	$	210,512

Investing activities:
Purchases of and change in prepayments for purchases of property and equipment		—			(415,394	)		—		(26,609	)		7,018			(434,985	)
Purchases of wireless licenses and spectrum clearing costs		—			(3,625	)		—		—			—			(3,625	)
Proceeds from sales of wireless licenses and operating assets		—			153,507			—		7,532			(7,018	)		154,021
Purchases of investments		—			(268,854	)		—		—			—			(268,854	)
Sales and maturities of investments		—			497,762			—		—			—			497,762
Payments received from joint venture		—			51,061			—		—			(51,061	)		—
Investments in and advances to affiliates and consolidated subsidiaries		(483	)		—			—		—			483			—
Change in restricted cash		—			(760	)		—		—			—			(760	)

Net cash provided by (used in) investing activities		(483	)		13,697			—		(19,077	)		(50,578	)		(56,441	)

Financing activities:
Repayment of long-term debt		—			(21,911	)		—		—			—			(21,911	)
Payment of debt issuance costs		—			(296	)		—		—			—			(296	)
Capital contributions, net		—			483			—		—			(483	)		—
Proceeds from issuance of common stock, net		483			—			—		—			—			483
Payments made to joint venture partners		—			(1,797	)		—		(85,567	)		59,798			(27,566	)
Other		—			(3,662	)		—		—			—			(3,662	)

Net cash provided by (used in) financing activities		483			(27,183	)		—		(85,567	)		59,315			(52,952	)

Net increase (decrease) in cash and cash equivalents		(47	)		132,145			—		(30,979	)		—			101,119
Cash and cash equivalents at beginning of period		91			270,056			—		75,096			—			345,243

Cash and cash equivalents at end of period	$	44		$	402,201		$	—	$	44,117		$	—		$	446,362

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

As used in this report, unless the context suggests otherwise, the terms “we,” “our,” “ours,” “us,” and the “Company” refer to Leap Wireless International, Inc., or Leap, and its subsidiaries and consolidated joint ventures, including Cricket Communications, Inc., or Cricket. Unless otherwise specified, information relating to population and potential customers, or POPs, is based on 2013 population estimates provided by Claritas Inc., a market research company.

The following information should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included in Part I— Item 1 of this report and the audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Amendment No. 1 to Annual Report on Form 10-K/A for the year ended December 31, 2012 filed with the Securities and Exchange Commission, or the SEC, on October 28, 2013.

Cautionary Statement Regarding Forward-Looking Statements

Except for the historical information contained herein, this report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements reflect management’s current forecast of certain aspects of our future. You can generally identify forward-looking statements by forward-looking words such as “believe,” “think,” “may,” “could,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “seek,” “plan,” “project,” “expect,” “should,” “would” and similar expressions in this report. Such statements are based on currently available operating, financial and competitive information and are subject to various risks, uncertainties and assumptions that could cause actual results to differ materially from those anticipated in or implied by our forward-looking statements. Such risks, uncertainties and assumptions include, among other things:

•

our ability to attract and retain customers in an extremely competitive marketplace;

•

our ability to successfully implement product and service plan offerings and execute effectively on our strategic activities;

•

our ability to compete effectively against wireless carriers with nationwide networks and significantly greater deployment of 4G Long Term Evolution, or LTE, network technology, and the impact of competitors’ initiatives (including new service plans and pricing) and our ability to anticipate and respond to such initiatives;

•

our ability to offer customers cost-effective 4G LTE services and to meet increasing customer demand for high-quality, high-speed data services;

•

uncertainties with respect to the proposed merger with AT&T Inc., or AT&T, including the possibility that the proposed merger may not close or may be delayed, including due to the failure to timely receive required regulatory and stockholder approvals or satisfy other closing conditions;

•

the effect of the announcement of the proposed merger with AT&T on our customers, employees, suppliers, vendors, distributors, dealers, retailers, content and application providers, operating results and business generally;

•

the diversion of management’s time and attention while the proposed merger transaction is pending;

•

the amount of the costs, fees, expenses and charges related to the merger;

•

our ability to make significant changes to our business in light of the proposed merger with AT&T and the covenants contained in the Agreement and Plan of Merger, dated as of July 12, 2013, between Leap, AT&T and the other parties thereto, or the Merger Agreement;

•

changes in economic conditions, including interest rates, consumer credit conditions, consumer debt levels, consumer confidence, unemployment rates, energy and transportation costs and other macro-economic factors that could adversely affect demand for the services we provide;

•

our ability to meet significant purchase commitments under agreements we have entered into;

•

our ability to refinance our indebtedness under, and comply with the covenants in, any credit agreement, indenture or similar instrument governing our existing indebtedness or any future indebtedness;

•

future customer usage of our wireless services, which could exceed our expectations, and our ability to manage or increase network capacity to meet increasing customer demand, in particular demand for data services;

•

our ability to obtain and maintain 3G and 4G roaming and wholesale services from other carriers at cost-effective rates;

•

our ability to acquire or obtain access to additional spectrum in the future at a reasonable cost or on a timely basis;

•

our ability to cost-effectively procure handsets compatible with our network technology and frequency channels;

•

failure of our network or information technology systems to perform according to expectations and risks associated with the ongoing operation and maintenance of those systems, including our customer billing system;

•

our ability to attract, integrate, motivate and retain an experienced workforce, including members of senior management;

•

our ability to maintain effective internal control over financial reporting; and

•

other factors detailed in “Part II—Item 1A. Risk Factors” below.

All forward-looking statements in this report (including any statements with respect to the proposed AT&T merger) should be considered in the context of these risk factors. These forward-looking statements speak only as of the filing date of this report, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this report may not occur and actual results could differ materially from those anticipated or implied in the forward-looking statements. Accordingly, users of this report are cautioned not to place undue reliance on the forward-looking statements.

Overview

Restatement of Previously Reported Condensed Consolidated Financial Information

This “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” has been amended and restated to give effect to the restatement of our unaudited condensed consolidated statements of cash flows for the six months ended June 30, 2013 and 2012 due to a classification error related to the presentation of certain capital expenditures and operating cash flows. Specifically, we have reflected these corrections in the discussions of net cash provided by operating activities, net cash used in investing activities and capital expenditures in the sections below entitled “Liquidity and Capital Resources — Overview,” “Liquidity and Capital Resources — Cash Flows” and “Liquidity and Capital Resources — Capital Expenditures, Significant Acquisitions and Other Transactions — Capital Expenditures.” See Note 2 to the condensed consolidated financial statements in “Part I — Item 1. Financial Statements” of this report for additional information.

Company Overview

We are a wireless communications carrier that offers digital wireless services in the U.S. under the “Cricket^®” brand. Our Cricket service offerings provide customers with unlimited nationwide wireless services for a flat rate without requiring a fixed-term contract or a credit check.

Cricket service is offered by Cricket, a wholly-owned subsidiary of Leap. Cricket service is also offered in South Texas by STX Wireless Operations, LLC, or STX Operations, which Cricket controls through a 75.75% membership interest in STX Wireless, LLC, or STX Wireless, the parent company of STX Operations. For more information regarding this joint venture, see “Liquidity and Capital Resources — STX Wireless Joint Venture” below.

As of June 30, 2013, Cricket service was offered in 48 states and the District of Columbia across an extended area covering approximately 292 million POPs. As of June 30, 2013, we had approximately 4.8 million customers, and we owned wireless licenses covering an aggregate of approximately 136.7 million POPs (adjusted to eliminate duplication from overlapping licenses). The combined network footprint in our operating markets covered approximately 96.2 million POPs as of June 30, 2013. The licenses we own provide an average of 23 MHz of spectrum capacity in our operating markets.

In addition to our Cricket network footprint, we have entered into roaming relationships with other wireless carriers that enable us to offer Cricket customers nationwide voice and data roaming services (including 4G LTE roaming services) over an extended service area. In addition, in 2010 we entered into a wholesale agreement, which we use to offer Cricket services in nationwide retailers outside of our current network footprint. These arrangements have enabled us to offer enhanced Cricket products and services, strengthen our retail presence in our existing markets and expand our distribution nationwide. In addition, we recently amended the wholesale agreement to enable us to purchase 4G LTE services. Since originally introducing products in nationwide retailers in September 2011, we have determined to focus our efforts on those retailers that we believe provide the most attractive opportunities for our business. As a result, we reduced our total presence in the nationwide retail channel from approximately 13,000 locations at June 30, 2012 to approximately 5,000 locations at March 31, 2013.

Our business strategy includes our efforts to improve the experience we provide customers so that they choose to remain a Cricket customer for a longer period. As part of these efforts, we are improving our device activation process, the quality of our device portfolio, and the in-store and call center experience we provide for our customers. We are also focused on continually updating our product and service offerings to better meet the needs of current customers and to attract and retain new ones. Product and service offerings we have introduced in recent years include our Muve Music^® unlimited music download service, the Lifeline service offerings we have introduced in a number of states, and the third-party device financing programs we have introduced in our markets to help customers manage the cost of purchasing a handset. We are also focused on pursuing disciplined investment initiatives and remaining focused on our position as a low-cost provider of wireless telecommunications. We have increased pricing on our devices in an effort to better manage device subsidies and promote the addition of longer-tenured customers. In addition, we have streamlined and reduced our number of dealer locations and Cricket-owned stores to increase sales activity for more productive locations and reduce costs.

We also continue to enhance our network to allow us to provide customers with high-quality service. To date, we have covered approximately 21 million POPs with next-generation LTE network technology. We recently determined to focus our capital spending on enhancing 3G and LTE network coverage and capacity in existing markets rather than deploying LTE in new markets.

The wireless telecommunications industry is very competitive. In general, we compete with national facilities-based wireless providers and their prepaid affiliates or brands, local and regional carriers, non-facilities-based mobile virtual network operators (or MVNOs), voice-over-internet-protocol (or VoIP) service providers, traditional landline service providers, cable companies and mobile satellite service providers. Competition in the wireless industry has increased and intensified in recent quarters, particularly from carriers with robust nationwide networks and significantly greater deployment of 4G LTE technology. The evolving competitive landscape negatively impacted our financial and operating results in recent years and we experienced a 22% reduction in customers between March 31, 2012 and June 30, 2013. We also expect to face new or significantly increased competition from the nationwide expansion of the MetroPCS prepaid brand utilizing the T-Mobile 4G LTE network.

Our ability to remain competitive will depend, in part, on our ability to anticipate and respond to various competitive factors, to provide LTE-based services and meet increasing customer demand for high data throughput speeds, and to keep our costs low. During the third quarter of 2012, we increased pricing on our devices in an effort to better manage our device subsidy and promote the addition of longer-tenured customers, although such changes have also had the effect of decreasing gross customer additions. We also introduced new pricing plans for our service offerings, which included new features such as visual voicemail on certain smartphones, enhanced international calling plans, and supplemental data packages, and we enhanced our Muve Music service, which is now offered for no additional cost in service plans for our Android-based smartphones. In addition, we have introduced third-party device financing programs in our markets to help customers manage the cost of purchasing handsets. The extent to which these initiatives and others we may introduce will positively impact our future financial and operational results will depend upon our ability to anticipate and respond to competitors’ initiatives, our continued efforts to enhance the productivity of our distribution channels, continued customer acceptance of our product and service offerings and our ability to retain and expand our customer base. The evolving competitive landscape may result in more competitive pricing, slower growth, higher costs and increased customer turnover. Any of these results or actions could have a material adverse effect on our business, financial condition and results of operations.

Our customer activity is influenced by seasonal effects related to traditional retail selling periods and other factors that arise in connection with our target customer base. Based on historical results, we generally expect new sales activity to be highest in the first and fourth quarters, although during 2012 we experienced our lowest customer activity during the fourth quarter due, in part, to handset price increases that we introduced in the third quarter. Based on historical results, we also generally expect churn to be highest in the third quarter and lowest in the first quarter. Sales activity and churn, however, can be strongly affected by other factors, including changes in the competitive landscape, service plan pricing, device availability, economic conditions, and high unemployment (particularly in the lower-income segment of our customer base), any of which may either offset or magnify certain seasonal effects. Customer activity can also be strongly affected by promotional and retention efforts that we undertake. For example, from time to time, we lower the price on select smartphones for customers who activate a new line of service and then transfer phone numbers previously used with other carriers. This type of promotion is intended to drive significant, new customer activity for our smartphone handsets and their accompanying higher-priced service plans. We also frequently offer existing customers the opportunity to activate an additional line of voice service on a previously activated Cricket device not currently in service. Customers accepting this offer receive a free first month of service on the additional line of service after paying an activation fee. We also utilize retention programs to encourage existing customers whose service may have been suspended for failure to timely pay to continue service with us for a reduced or free amount. The design, size and duration of our promotional and retention programs vary over time in response to changing market conditions. We believe that our promotional and retention efforts, including those efforts described above, have generally provided and continue to provide important long-term benefits to us, including by helping us attract new customers for our wireless services or by extending the period of time over which customers use our services, thus allowing us to obtain additional revenue from

handsets we have already sold. The success of any of these activities depends upon many factors, including the costs that we incur to attract or retain customers and the length of time these customers continue to use our services. Sales activity that would otherwise have been expected based on seasonal trends can also be negatively impacted by factors we have experienced in the past such as billing system disruptions, promotional and retention efforts not performing as expected, device quality issues, and inventory shortages.

Our principal sources of liquidity are our existing unrestricted cash, cash equivalents and short-term investments and cash generated from operations. See “—Liquidity and Capital Resources” below.

Proposed Merger

On July 12, 2013, AT&T entered into the Merger Agreement with Leap, Mariner Acquisition Sub Inc., a Delaware corporation and wholly-owned subsidiary of AT&T, or 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, or CVR, per share (together, referred to in this report as the Merger Consideration). The CVR will entitle each Leap stockholder to a pro rata share of the net proceeds of the future sale of our 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, or 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.

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 (which we refer to in this report as 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.

Affiliates of MHR Fund Management LLC, or 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.

Critical Accounting Policies and Estimates

Our discussion and analysis of our results of operations and liquidity and capital resources are based on our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. These principles require us to make estimates and judgments that affect our reported amounts of assets and liabilities, our disclosure of contingent assets and liabilities and our reported amounts of revenues and expenses. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition and the valuation of deferred tax assets, long-lived assets and indefinite-lived intangible assets. We base our estimates on historical and anticipated results and trends and on various other assumptions that we believe are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results may differ from our estimates. Since the filing of our Annual Report on Form 10-K for the year ended December 31, 2012 on February 25, 2013, there have been no significant changes to our critical accounting policies and estimates.

Results of Operations

Operating Items

The following tables summarize operating data for our condensed consolidated operations for the three and six months ended June 30, 2013 and 2012 (in thousands, except percentages):


	Three Months Ended June 30,
				% of 2013						% of 2012
				Service						Service			Change
	2013			Revenues			2012			Revenues			Dollars			Percent
Revenues:
Service revenues	$	678,497					$	751,285					$	(72,788	)		(9.7	)%
Equipment revenues		53,046						35,487						17,559			49.5	%

Total revenues		731,543						786,772						(55,229	)		(7.0	)%

Operating expenses:
Cost of service		249,371			36.8	%		256,555			34.1	%		(7,184	)		(2.8	)%
Cost of equipment		183,658			27.1	%		171,673			22.9	%		11,985			7.0	%
Selling and marketing		69,397			10.2	%		77,247			10.3	%		(7,850	)		(10.2	)%
General and administrative		83,402			12.3	%		94,892			12.6	%		(11,490	)		(12.1	)%
Depreciation and amortization		150,856			22.2	%		154,483			20.6	%		(3,627	)		(2.3	)%
Impairments and other charges		4,287			0.6	%		—			—	%		4,287			*

Total operating expenses		740,971			109.2	%		754,850			100.5	%		(13,879	)		(1.8	)%
Gain (loss) on sale, exchange or disposal of assets, net		1,870			0.3	%		(333	)		—	%		2,203			*

Operating income (loss)	$	(7,558	)		(1.1	)%	$	31,589			4.2	%	$	(39,147	)		*

*	Percentage change is not meaningful.


	Six Months Ended June 30,
				% of 2013						% of 2012
				Service						Service			Change
	2013			Revenues			2012			Revenues			Dollars			Percent
Revenues:
Service revenues	$	1,363,119					$	1,525,283					$	(162,164	)		(10.6	)%
Equipment revenues		158,282						87,108						71,174			81.7	%

Total revenues		1,521,401						1,612,391						(90,990	)		(5.6	)%

Operating expenses:
Cost of service		500,229			36.7	%		517,866			34.0	%		(17,637	)		(3.4	)%
Cost of equipment		442,626			32.5	%		419,520			27.5	%		23,106			5.5	%
Selling and marketing		148,235			10.9	%		172,801			11.3	%		(24,566	)		(14.2	)%
General and administrative		165,627			12.2	%		184,591			12.1	%		(18,964	)		(10.3	)%
Depreciation and amortization		303,429			22.3	%		301,026			19.7	%		2,403			0.8	%
Impairments and other charges		5,022			0.4	%		—			—	%		5,022			*

Total operating expenses		1,565,168			114.8	%		1,595,804			104.6	%		(30,636	)		(1.9	)%
Gain (loss) on sale, exchange or disposal of assets, net		6,858			0.5	%		(801	)		(0.1	)%		7,659			*

Operating income (loss)	$	(36,909	)		(2.7	)%	$	15,786			1.0	%	$	(52,695	)		*

*	Percentage change is not meaningful.

The following tables summarize customer activity for the three and six months ended June 30, 2013 and 2012:


							Change
For the Three Months Ended June 30, (1)	2013			2012			Amount			Percent
Gross customer additions		283,066			492,720			(209,654	)		(42.6	)%
Net customer losses		(364,268	)		(289,270	)		(74,998	)		25.9	%
Weighted-average number of customers		5,031,930			5,992,047			(960,117	)		(16.0	)%

							Change
For the Six Months Ended June 30, (1)	2013			2012			Amount			Percent
Gross customer additions		756,947			1,352,267			(595,320	)		(44.0	)%
Net customer losses		(457,305	)		(31,210	)		(426,095	)		*
Weighted-average number of customers		5,122,768			6,008,737			(885,969	)		(14.7	)%
As of June 30,
Total customers		4,839,478			5,902,803			(1,063,325	)		(18.0	)%

*	Percentage change is not meaningful.

(1)	We recognize a gross customer addition for each Cricket Wireless, Cricket Broadband and Cricket PAYGo line of service activated by a customer.

Three and Six Months Ended June 30, 2013 Compared to Three and Six Months Ended June 30, 2012

Gross Customer Additions

Gross customer additions for the three months ended June 30, 2013 were 283,066 compared to 492,720 for the corresponding period of the prior year. The 42.6% decrease in the number of gross customer additions was primarily attributable to intensified competition in our markets (particularly from nationwide carriers who are increasingly targeting the prepaid segment), increasing customer demand for 4G data services and increased handset pricing, as well as continued de-emphasis of our Cricket Broadband service and discontinuation of our daily PAYGo product.

Gross customer additions for the six months ended June 30, 2013 were 756,947 compared to 1,352,267 for the corresponding period of the prior year. The 44.0% decrease in the number of gross customer additions was primarily attributable to intensified competition in our markets (particularly from nationwide carriers who are increasingly targeting the prepaid segment), increasing customer demand for 4G data services and increased handset pricing, as well as continued de-emphasis of our Cricket Broadband service and discontinuation of our daily PAYGo product.

Net Customer Losses

Net customer losses for the three months ended June 30, 2013 were 364,268 compared to 289,270 for the corresponding period of the prior year. The change was primarily due to the decrease in gross customer additions discussed above and fewer reactivating customers.

Net customer losses for the six months ended June 30, 2013 were 457,305 compared to 31,210 for the corresponding period of the prior year. The change was primarily due to the decrease in gross customer additions discussed above, fewer reactivating customers and slightly higher churn levels.

Service Revenues

Service revenues decreased $72.8 million, or 9.7%, for the three months ended June 30, 2013 compared to the corresponding period of the prior year. This decrease resulted from a 16.0% decrease in the weighted-average number of customers, partially offset by a 7.8% increase in average service revenue per customer, or ARPU.

Service revenues decreased $162.2 million, or 10.6%, for the six months ended June 30, 2013 compared to the corresponding period of the prior year. This decrease resulted from a 14.7% decrease in the weighted-average number of customers, partially offset by a 5.2% increase in ARPU.

Equipment Revenues

Equipment revenues increased $17.6 million, or 49.5%, for the three months ended June 30, 2013 compared to the corresponding period of the prior year. This increase resulted primarily from a 99.6% increase in average revenue per device sold due to uptake of our higher-priced devices, partially offset by a 25.1% decrease in the number of devices sold to new and upgrading customers.

Equipment revenues increased $71.2 million, or 81.7%, for the six months ended June 30, 2013 compared to the corresponding period of the prior year. This increase resulted primarily from a 155.9% increase in average revenue per device sold due to uptake of our higher-priced devices, partially offset by a 29.0% decrease in the number of devices sold to new and upgrading customers.

Cost of Service

Cost of service decreased $7.2 million, or 2.8%, for the three months ended June 30, 2013 compared to the corresponding period of the prior year. As a percentage of service revenues, such expenses increased to 36.8% from 34.1% in the prior year period. The increase in cost of service as a percentage of service revenues resulted primarily from a 16.0% decrease in the weighted-average number of customers.

Cost of service decreased $17.6 million, or 3.4%, for the six months ended June 30, 2013 compared to the corresponding period of the prior year. As a percentage of service revenues, such expenses increased to 36.7% from 34.0% in the prior year period. The increase in cost of service as a percentage of service revenues resulted primarily from a 14.7% decrease in the weighted-average number of customers.

Cost of Equipment

Cost of equipment increased $12.0 million, or 7.0%, for the three months ended June 30, 2013 compared to the corresponding period of the prior year. This increase was primarily due to increased uptake of our higher-priced devices, partially offset by a decrease in the number of devices sold to new and upgrading customers discussed above.

Cost of equipment increased $23.1 million, or 5.5%, for the six months ended June 30, 2013 compared to the corresponding period of the prior year. This increase was primarily due to increased uptake of our higher-priced devices, partially offset by a decrease in the number of devices sold to new and upgrading customers as discussed above.

Selling and Marketing Expenses

Selling and marketing expenses decreased $7.9 million, or 10.2%, for the three months ended June 30, 2013 compared to the corresponding period of the prior year. As a percentage of service revenues, such expenses decreased to 10.2% from 10.3% in the prior year period. These decreases were largely attributable to our cost reduction initiatives.

Selling and marketing expenses decreased $24.6 million, or 14.2%, for the six months ended June 30, 2013 compared to the corresponding period of the prior year, largely attributable to our cost reduction initiatives. As a percentage of service revenues, such expenses were generally comparable to the prior year period.

General and Administrative Expenses

General and administrative expenses decreased $11.5 million, or 12.1%, for the three months ended June 30, 2013 compared to the corresponding period of the prior year, primarily due to continued benefits from our cost reduction initiatives. As a percentage of service revenues, such expenses slightly decreased to 12.3% from 12.6% in the prior year period, primarily due to continued benefits from our cost reduction initiatives.

General and administrative expenses decreased $19.0 million, or 10.3%, for the six months ended June 30, 2013 compared to the corresponding period of the prior year, primarily due to continued benefits from our cost reduction initiatives. As a percentage of service revenues, such expenses slightly increased to 12.2% from 12.1% in the prior year period, primarily due to the decrease in service revenues discussed above, partially offset by the continued benefits from our cost reduction initiatives.

Depreciation and Amortization

Depreciation and amortization expense decreased $3.6 million, or 2.3%, for the three months ended June 30, 2013 compared to the corresponding period of the prior year. Depreciation and amortization expense increased $2.4 million, or 0.8%, for the six months ended June 30, 2013 compared to the corresponding period of the prior year. The changes in depreciation and amortization expense were driven primarily by the timing of capital expenditures and assets reaching the end of their depreciable lives.

Impairments and Other Charges

During the three and six months ended June 30, 2013, we incurred $4.3 million and $5.0 million in impairments and other charges, respectively, primarily related to write-offs of capitalized amounts that were no longer recoverable, contract termination and lease exit costs.

Gain (Loss) on Sale, Exchange or Disposal of Assets, Net

During the three months ended June 30, 2013, we recognized a gain of $2.8 million in connection with the sale of various patents. The gain was partially offset by a loss of $1.0 million relating to the disposal of certain property and equipment. During the three months ended June 30, 2012, we recognized a loss of $0.3 million from the disposal of certain property and equipment.

During the six months ended June 30, 2013, we recognized a gain of $6.8 million in connection with the exchange of various spectrum with a subsidiary of T-Mobile USA, Inc., or T-Mobile, and Cellco Partnership dba Verizon Wireless, or Verizon Wireless. For more information regarding this transaction, see the discussion below under “Liquidity and Capital Resources —

Capital Expenditures, Significant Acquisitions and Other Transactions.” Additionally, we recognized a gain of $2.8 million in connection with the sale of various patents. These gains were partially offset by a loss of $2.8 million relating to the disposal of certain property and equipment. During the six months ended June 30, 2012, we recognized a loss of $0.8 million from the disposal of certain property and equipment.

Non-Operating Items

The following tables summarize non-operating data for our condensed consolidated operations for the three and six months ended June 30, 2013 and 2012 (in thousands):


	Three Months Ended June 30,
	2013			2012			Change
Equity in net income (loss) of investees, net	$	1,696		$	(59	)	$	1,755
Interest income		58			28			30
Interest expense		(66,851	)		(66,983	)		132
Loss on extinguishment of debt		(72,988	)		—			(72,988	)
Income tax expense		(10,710	)		(10,562	)		(148	)

	Six Months Ended June 30,
	2013			2012			Change
Equity in net income of investees, net	$	538		$	134		$	404
Interest income		105			57			48
Interest expense		(131,576	)		(134,025	)		2,449
Loss on extinguishment of debt		(72,988	)		—			(72,988	)
Income tax expense		(25,130	)		(22,273	)		(2,857	)

Three and Six Months Ended June 30, 2013 Compared to Three and Six Months Ended June 30, 2012

Equity in Net Income (Loss) of Investees, Net

Equity in net income (loss) of investees, net reflects our share of net income or losses of regional wireless service providers in which we hold investments.

Interest Expense

Interest expense decreased $0.1 million during the three months ended June 30, 2013 compared to the corresponding period of the prior year. The decrease in interest expense primarily resulted from the refinancing in October 2012 of our $300 million in aggregate principal amount of 10% senior notes due 2015 with the $400 million senior secured B term loan facility under the credit agreement we entered into in October 2012, as amended, or the Credit Agreement, and the refinancing in April 2013 of our $1,100 million in aggregate principal amount of 7.75% senior secured notes due 2016, or the Secured Notes, with the $1,425 million senior secured C term loan facility under the Credit Agreement, which term loan facilities bear interest at a lower rate, partially offset by a higher principal amount of long-term debt outstanding following such refinancings.

Interest expense decreased $2.4 million during the six months ended June 30, 2013 compared to the corresponding period of the prior year. The decrease in interest expense primarily resulted from the refinancing in October 2012 of our $300 million aggregate principal amount of 10% senior notes due 2015 with the $400 million senior secured B term loan facility under the Credit Agreement, and the refinancing in April 2013 of the Secured Notes with the $1,425 million senior secured C term loan facility under the Credit Agreement, which term loan facilities bear interest at a lower rate, partially offset by a higher principal amount of long-term debt outstanding following such refinancings.

Loss on Extinguishment of Debt

During the three and six months ended June 30, 2013, we recognized a loss on extinguishment of debt of $73.0 million, $72.8 million of which related to the redemption of the Secured Notes and the satisfaction and discharge of the associated indenture in April 2013 and $0.2 million of which related to the purchase of $1.8 million in aggregate principal amount of 4.50% convertible senior notes due 2014 in April 2013.

Income Tax Expense

During the three months ended June 30, 2013, we recorded income tax expense of $10.7 million compared to $10.6 million for the three months ended June 30, 2012. The $0.1 million increase was primarily due to a $0.3 million increase in our state income tax expense, offset in part by a net reduction in deferred tax liabilities associated with our joint ventures.

During the six months ended June 30, 2013, we recorded income tax expense of $25.1 million compared to $22.3 million for the six months ended June 30, 2012. The increase was primarily due to a nonrecurring $2.6 million tax expense associated with the tax deferral of the gain associated with the exchange of various spectrum with T-Mobile and Verizon Wireless, offset in part by a net reduction in deferred tax liabilities associated with our joint ventures.

Unrestricted Subsidiaries

In July 2011, Leap’s board of directors designated Cricket Music Holdco, LLC (a wholly-owned subsidiary of Cricket, or Cricket Music) and Cricket Music’s wholly-owned subsidiary Muve USA, LLC, or Muve USA, as “Unrestricted Subsidiaries” under the indentures governing our senior notes. Cricket Music, Muve USA and their subsidiaries are also designated as “Unrestricted Subsidiaries” under the Credit Agreement. Cricket Music and Muve USA hold certain hardware, software and intellectual property relating to our Muve Music service. During the three and six months ended June 30, 2012, Cricket Music, Muve USA and their subsidiaries had no operations or revenues. During the three months ended June 30, 2013, Muve USA and its subsidiaries commenced limited operations providing music distribution services to TIM Celular S.A. in Brazil. During both the three and six months ended June 30, 2013, our unrestricted subsidiaries had revenues and income tax expense of $152,000 and $28,000, respectively. Given the lack or limited scope of operations during the relevant periods, the most significant components of the financial position and results of operations of our unrestricted subsidiaries during the three and six months ended June 30, 2012 and 2013 were property and equipment and depreciation expense. As of June 30, 2013 and December 31, 2012, property and equipment of our unrestricted subsidiaries was $2.7 million and $4.9 million, respectively. As of June 30, 2013, our unrestricted subsidiaries also had $0.7 million, $0.4 million and $0.2 million of current assets, current liabilities and long-term liabilities, respectively. For the three and six months ended June 30, 2013, depreciation expense of our unrestricted subsidiaries was $1.1 million and $2.2 million, respectively, resulting, in a net loss of $1.0 million and $2.1 million, respectively. For the three and six months ended June 30, 2012, depreciation expense of our unrestricted subsidiaries was $1.1 million and $2.2 million, respectively, resulting, in a net loss of $1.1 million and $2.3 million, respectively.

Customer Recognition and Disconnect Policies

We recognize a new customer as a gross addition in the month that he or she activates a Cricket service. We recognize a gross customer addition for each Cricket Wireless, Cricket Broadband and Cricket PAYGo line of service activated.

For our Cricket Wireless and Cricket Broadband services, the customer must pay his or her service amount by the payment due date or his or her service will be suspended. These customers, however, may elect to purchase our BridgePay service, which entitles them to an additional seven days of service. When service is suspended, the customer is generally not able to make or receive calls or access the internet. Any call attempted by a suspended customer is routed directly to our customer service center in order to arrange payment. If a new customer does not pay all amounts due on the first bill he or she receives after initial activation within 30 days of the due date, the account is disconnected and deducted from gross customer additions during the month in which the customer’s service was discontinued. If a customer has made payment on the first bill received after initial activation and in a subsequent month does not pay all amounts due within 30 days of the due date, the account is disconnected and counted as churn. For Cricket Wireless customers who have elected to use BridgePay to receive an additional seven days of service, those customers must still pay all amounts otherwise due on their account within 30 days of the original due date or their account will also be disconnected and counted as churn. Pay-in-advance customers who ask to terminate their service are disconnected when their paid service period ends.

Customers for our Cricket PAYGo service generally have 60 days from the date they activated their account, were charged a daily or monthly access fee for service or last “topped-up” their account (whichever is later) to do so again, or they will have their account suspended for a subsequent 60-day period before being disconnected.

Customer turnover, frequently referred to as churn, is an important business metric in the telecommunications industry because it can have significant financial effects. Because we do not require customers to sign fixed-term contracts or pass a credit check, our service is available to a broad customer base and, as a result, some of our customers may be more likely to have their service terminated due to an inability to pay.

Performance Measures

In managing our business and assessing our financial performance, management supplements the information provided by financial statement measures with several customer-focused performance metrics that are widely used in the telecommunications industry. These metrics include ARPU, which measures average service revenue per customer; CPGA, which measures the average cost of acquiring a new customer; cash costs per user per month, or CCU, which measures the non-selling cash cost of operating our business on a per customer basis; churn, which measures turnover in our customer base; and adjusted operating income before depreciation and amortization, or OIBDA, which measures operating performance. ARPU, CPGA, CCU and adjusted OIBDA are non-GAAP financial measures. A non-GAAP financial measure, within the meaning of Item 10 of Regulation S-K promulgated by the SEC, is a numerical measure of a company’s financial performance or cash flows that (a) excludes amounts, or is subject to adjustments that have the effect of excluding amounts, which are included in the most directly comparable measure calculated and presented in accordance with generally accepted accounting principles in the condensed consolidated balance sheets, condensed consolidated statements of comprehensive income or condensed consolidated statements of cash flows; or (b) includes amounts, or is subject to adjustments that have the effect of including amounts, which are excluded from the most directly comparable measure so calculated and presented. See “Reconciliation of Non-GAAP Financial Measures” below for a reconciliation of ARPU, CPGA, CCU and adjusted OIBDA to the most directly comparable GAAP financial measures.

ARPU is service revenues, less pass-through regulatory fees and telecommunications taxes, divided by the weighted-average number of customers, divided by the number of months during the period being measured. Management uses ARPU to identify average revenue per customer, to track changes in average customer revenues over time, to help evaluate how changes in our business, including changes in our service offerings, affect average revenue per customer, and to forecast future service revenue. In addition, ARPU provides management with a useful measure to compare our subscriber revenue to that of other wireless communications providers. Our customers are generally disconnected from service after a specified period following their failure to either pay a monthly bill or replenish, or “top-up,” their account. Because our calculation of weighted-average number of customers includes customers who are not currently paying for service but who have not yet been disconnected from service because they have not paid their last bill or have not replenished their account, ARPU may appear lower during periods in which we have significant disconnect activity. We believe investors use ARPU primarily as a tool to track changes in our average revenue per customer and to compare our per customer service revenues to those of other wireless communications providers. Other companies may calculate this measure differently.

CPGA is selling and marketing costs (excluding applicable share-based compensation expense or benefit included in selling and marketing expense), and equipment subsidy (generally defined as cost of equipment less equipment revenue), less the net loss on equipment transactions and third-party commissions unrelated to customer acquisition, divided by the total number of gross new customer additions during the period being measured. The net loss on equipment transactions unrelated to customer acquisition includes the revenues and costs associated with the sale of wireless devices to existing customers as well as costs associated with device replacements and repairs (other than warranty costs, which are the responsibility of the device manufacturers). Third-party commissions unrelated to customer acquisition are commissions paid to third parties for certain activities related to the continuing service of customers. We deduct customers who do not pay the first bill they receive following initial activation from our gross customer additions in the month in which they are disconnected, which tends to increase CPGA because we incur the costs associated with a new customer without receiving the benefit of a gross customer addition. Management uses CPGA to measure the efficiency of our customer acquisition efforts, to track changes in our average cost of acquiring new subscribers over time, and to help evaluate how changes in our sales and distribution strategies affect the cost-efficiency of our customer acquisition efforts. In addition, CPGA provides management with a useful measure to compare our per customer acquisition costs with those of other wireless communications providers. We believe investors use CPGA primarily as a tool to track changes in our average cost of acquiring new customers and to compare our per customer acquisition costs to those of other wireless communications providers. Other companies may calculate this measure differently.

CCU is cost of service and general and administrative costs (excluding applicable share-based compensation expense or benefit included in cost of service and general and administrative expense) plus net loss on equipment transactions and third-party commissions unrelated to customer acquisition (which includes the gain or loss on the sale of devices to existing customers, costs associated with device replacements and repairs (other than warranty costs which are the responsibility of the device manufacturers) and commissions paid to third parties for certain activities related to the continuing service of

customers), less pass-through regulatory fees and telecommunications taxes, divided by the weighted-average number of customers, divided by the number of months during the period being measured. CCU does not include any depreciation and amortization expense. Management uses CCU as a tool to evaluate the non-selling cash expenses associated with ongoing business operations on a per customer basis, to track changes in these non-selling cash costs over time, and to help evaluate how changes in our business operations affect non-selling cash costs per customer. In addition, CCU provides management with a useful measure to compare our non-selling cash costs per customer with those of other wireless communications providers. We believe investors use CCU primarily as a tool to track changes in our non-selling cash costs over time and to compare our non-selling cash costs to those of other wireless communications providers. Other companies may calculate this measure differently.

Churn, which measures customer turnover, is calculated as the net number of customers that disconnect from our service divided by the weighted-average number of customers divided by the number of months during the period being measured. Customers who do not pay the first bill they receive following initial activation are deducted from our gross customer additions in the month in which they are disconnected; as a result, these customers are not included in churn. Customers of our Cricket Wireless and Cricket Broadband service are generally disconnected from service approximately 30 days after failing to pay a monthly bill, and pay-in-advance customers who ask to terminate their service are disconnected when their paid service period ends. Cricket PAYGo customers generally have 60 days from the date they activated their account, were charged a daily or monthly access fee for service or last “topped-up” their account (whichever is later) to do so again, or they will have their account suspended for a subsequent 60-day period before being disconnected. Management uses churn to measure our retention of customers, to measure changes in customer retention over time, and to help evaluate how changes in our business affect customer retention. In addition, churn provides management with a useful measure to compare our customer turnover activity to that of other wireless communications providers. We believe investors use churn primarily as a tool to track changes in our customer retention over time and to compare our customer retention to that of other wireless communications providers. Other companies may calculate this measure differently.

Adjusted OIBDA is a non-GAAP financial measure defined as operating income (loss) before depreciation and amortization, adjusted to exclude the effects of: (gain)/loss on sale, exchange or disposal of assets, net; impairments and other charges; and share-based compensation expense or benefit. Adjusted OIBDA should not be construed as an alternative to operating income (loss) or net income (loss) as determined in accordance with GAAP, or as an alternative to cash flows from operating activities as determined in accordance with GAAP or as a measure of liquidity.

In a capital-intensive industry such as wireless telecommunications, management believes that adjusted OIBDA, and the associated percentage margin calculations, are meaningful measures of our operating performance. We use adjusted OIBDA as a supplemental performance measure because management believes it facilitates comparisons of our operating performance from period to period and comparisons of our operating performance to that of other companies by backing out potential differences caused by the age and book depreciation of fixed assets (affecting relative depreciation expenses) as well as the items described above for which additional adjustments were made. While depreciation and amortization are considered operating costs under GAAP, these expenses primarily represent the non-cash current period allocation of costs associated with long-lived assets acquired or constructed in prior periods. Because adjusted OIBDA facilitates internal comparisons of our historical operating performance, management also uses this metric for business planning purposes and to measure our performance relative to that of our competitors. In addition, we believe that adjusted OIBDA and similar measures are widely used by investors, financial analysts and credit rating agencies as measures of our financial performance over time and to compare our financial performance with that of other companies in our industry.

Adjusted OIBDA has limitations as an analytical tool, and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations include:

•

it does not reflect capital expenditures;

•

although it does not include depreciation and amortization, the assets being depreciated and amortized will often have to be replaced in the future and adjusted OIBDA does not reflect cash requirements for such replacements;

•

it does not reflect costs associated with share-based awards exchanged for employee services;

•

it does not reflect the interest expense necessary to service interest or principal payments on indebtedness;

•

it does not reflect expenses incurred for the payment of income taxes and other taxes; and

•

other companies, including companies in our industry, may calculate this measure differently than we do, limiting its usefulness as a comparative measure.

Management understands these limitations and considers adjusted OIBDA as a financial performance measure that supplements but does not replace the information provided to management by our GAAP results.

The following table shows metric information for the three and six months ended June 30, 2013 and 2012 (unaudited; adjusted OIBDA in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
ARPU	$	44.89		$	41.64		$	44.30		$	42.12
CPGA	$	387		$	296		$	343		$	253
CCU	$	27.79		$	22.91		$	27.06		$	23.73
Churn		4.3	%		4.4	%		4.0	%		3.8	%
Adjusted OIBDA	$	148,786		$	190,834		$	269,869		$	321,348

Reconciliation of Non-GAAP Financial Measures

We utilize certain financial measures, as described above, that are widely used in the telecommunications industry but that are not calculated based on GAAP. Certain of these financial measures are considered “non-GAAP” financial measures within the meaning of Item 10 of Regulation S-K promulgated by the SEC.

ARPU—The following table reconciles total service revenues used in the calculation of ARPU to service revenues, which we consider to be the most directly comparable GAAP financial measure to ARPU (unaudited; in thousands, except weighted-average number of customers and ARPU):


	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Service revenues	$	678,497		$	751,285		$	1,363,119		$	1,525,283
Less pass-through regulatory fees and telecommunications taxes		(774	)		(2,678	)		(1,629	)		(6,815	)

Total service revenues used in the calculation of ARPU		677,723			748,607			1,361,490			1,518,468
Weighted-average number of customers		5,031,930			5,992,047			5,122,768			6,008,737

ARPU	$	44.89		$	41.64		$	44.30		$	42.12

CPGA—The following table reconciles total costs used in the calculation of CPGA to selling and marketing expense, which we consider to be the most directly comparable GAAP financial measure to CPGA (unaudited; in thousands, except gross customer additions and CPGA):


	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Selling and marketing expense	$	69,397		$	77,247		$	148,235		$	172,801
Less share-based compensation expense included in selling and marketing expense		(211	)		(616	)		(322	)		(639	)
Plus cost of equipment		183,658			171,673			442,626			419,520
Less equipment revenue		(53,046	)		(35,487	)		(158,282	)		(87,108	)
Less net loss on equipment transactions and third-party commissions unrelated to customer acquisition		(90,385	)		(66,932	)		(172,457	)		(163,029	)

Total costs used in the calculation of CPGA	$	109,413		$	145,885		$	259,800		$	341,545
Gross customer additions		283,066			492,720			756,947			1,352,267

CPGA	$	387		$	296		$	343		$	253

CCU—The following table reconciles total costs used in the calculation of CCU to cost of service, which we consider to be the most directly comparable GAAP financial measure to CCU (unaudited; in thousands, except weighted-average number of customers and CCU):


	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Cost of service	$	249,371		$	256,555		$	500,229		$	517,866
Plus general and administrative expense		83,402			94,892			165,627			184,591
Less share-based compensation expense included in cost of service and general and administrative expense		(2,860	)		(3,813	)		(4,863	)		(3,096	)
Plus net loss on equipment transactions and third-party commissions unrelated to customer acquisition		90,385			66,932			172,457			163,029
Less pass-through regulatory fees and telecommunications taxes		(774	)		(2,678	)		(1,629	)		(6,815	)

Total costs used in the calculation of CCU	$	419,524		$	411,888		$	831,821		$	855,575
Weighted-average number of customers		5,031,930			5,992,047			5,122,768			6,008,737

CCU	$	27.79		$	22.91		$	27.06		$	23.73

Adjusted OIBDA—The following table reconciles adjusted OIBDA to operating income (loss), which we consider to be the most directly comparable GAAP financial measure to adjusted OIBDA (unaudited; in thousands):


	Three Months Ended June 30,					Six Months Ended June 30,
	2013			2012		2013			2012
Operating income (loss)	$	(7,558	)	$	31,589	$	(36,909	)	$	15,786
Plus depreciation and amortization		150,856			154,483		303,429			301,026

OIBDA	$	143,298		$	186,072	$	266,520		$	316,812
Plus (gain) loss on sale, exchange or disposal of assets, net		(1,870	)		333		(6,858	)		801
Plus impairments and other charges		4,287			—		5,022			—
Plus share-based compensation expense		3,071			4,429		5,185			3,735

Adjusted OIBDA	$	148,786		$	190,834	$	269,869		$	321,348

Liquidity and Capital Resources

Overview

Our principal sources of liquidity are our existing unrestricted cash, cash equivalents and short-term investments and cash generated from operations. We had a total of $913.1 million in unrestricted cash, cash equivalents and short-term investments as of June 30, 2013. We generated $32.7 million (as restated) of net cash from operating activities during the six months ended June 30, 2013 and expect cash generated from operations to continue to be a significant source of liquidity. We believe that our existing unrestricted cash, cash equivalents and short term investments, together with cash generated from operations, provide us with sufficient liquidity to meet the operating and capital requirements for our current business operations and current investment initiatives.

Our current investment initiatives include the ongoing maintenance, development and enhancement of our network and other business assets, and we continue to enhance our network to allow us to provide customers with high-quality service. To date, we have covered approximately 21 million POPs with next-generation LTE network technology. We recently determined to focus our capital spending on enhancing 3G and LTE network coverage and capacity in existing markets rather than deploying LTE in new markets.

We intend to be disciplined as we consider investment initiatives and to remain focused on our position as a low-cost provider of wireless telecommunications services. Total capital expenditures for 2013 are expected to be between $150 million and $200 million. For additional information regarding our projected capital expenditures for the next several years, see the discussion below under “— Capital Expenditures, Significant Acquisitions and Other Transactions.”

In recent years, we have entered into agreements with significant purchase commitments, including an agreement with Apple to purchase an estimated $800 million of iPhone devices between June 2012 and June 2015 and an agreement with Sprint to purchase a minimum of $205 million of services between 2013 and 2015. Additional information regarding our purchase agreements with Apple and Sprint and other significant contracts and commitments we have entered into is set forth below under “— Capital Expenditures, Significant Acquisitions and Other Transactions.”

We determine our future capital and operating requirements and liquidity based upon our current and projected financial and operating performance, the scope of our investment initiatives and the extent of our contractual commitments. There are a number of risks and uncertainties (including those set forth in “Part II—Item 1A. Risk Factors” of this report) that could cause our financial and operating results and capital or liquidity requirements to differ materially from our projections. If our future financial and operating performance is materially less favorable than our current projections, or if our capital requirements materially increase, we will likely be required to generate additional capital resources. In such an event, we would seek to increase our liquidity through a number of actions, including selling assets, including spectrum not currently utilized in our business operations or other business assets; delaying or reducing operating and capital expenditures; or pursuing other capital or credit markets activities. However, our ability to undertake these transactions or initiatives may be restricted by the terms of the Merger Agreement unless consented to by AT&T.

We had $3,638.2 million in senior indebtedness outstanding as of June 30, 2013, which was comprised of $248 million in aggregate principal amount of 4.50% convertible senior notes due 2014, $1,600 million in aggregate principal amount of 7.75% senior notes due 2020, $398 million in aggregate principal amount of term loan borrowings outstanding under our Credit Agreement that mature in 2019 and $1,425 million in aggregate principal amount of term loan borrowings outstanding under our Credit Agreement that mature in 2020. We 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, our liquidity requirements and other factors.

Although our significant outstanding indebtedness results in risks to our business that could materially affect our financial condition and performance, we believe that these risks are manageable and that we are taking appropriate actions to monitor and address them. For example, in connection with our financial planning process and capital raising activities, we regularly review our business plans and forecasts to monitor our ability to service our debt and to assess our capacity to incur additional debt under our Credit Agreement and the indenture governing Cricket’s senior notes. In addition, because borrowings under our Credit Agreement bear interest at a floating rate, we review changes and trends in interest rates to evaluate possible hedging activities we could implement, to the extent permitted by the Merger Agreement. As a result of the actions described above, and our expected cash generated from operations and other sources of liquidity, we believe we have the ability to effectively manage our levels of indebtedness and address risks to our business and financial condition related to our indebtedness.

Cash Flows (as restated)

Operating Activities

Net cash provided by operating activities decreased $53.2 million, or 61.9%, for the six months ended June 30, 2013 compared to the corresponding period of the prior year. This decrease was primarily attributable to the increase in our operating loss and changes in working capital.

Investing Activities

Net cash used in investing activities was $220.2 million during the six months ended June 30, 2013, which included the effects of the following transactions:

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We purchased $66.5 million of property and equipment for the ongoing maintenance, development and enhancement of our network and other business assets.

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We made investment purchases of $334.9 million, offset by sales or maturities of investments of $186.1 million.

Financing Activities

Net cash provided by financing activities was $277.0 million for the six months ended June 30, 2013, which included the effects of the following transactions:

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We borrowed $1,425 million in aggregate principal amount of senior secured C term loans under our Credit Agreement, which resulted in net proceeds of $1,414 million. The net proceeds were partially offset by the payments to redeem all of our $1,100 million in aggregate principal amount of outstanding Secured Notes and to repurchase $1.8 million of outstanding 4.5% convertible senior notes due 2014.

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We made $14.9 million in distributions and loans to our joint venture partners.

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We repaid $2.0 million of the senior secured B term loans under our Credit Agreement.

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We made $3.5 million of capital lease payments.

Credit Agreement

On October 10, 2012, Cricket entered into 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 the Secured Notes (including accrued interest), as more fully described below. Remaining net proceeds may be used for general corporate purposes.

As of June 30, 2013, we had $1,823 million in outstanding borrowings under the Credit Agreement. Outstanding borrowings under the Credit Agreement bear interest at the London Interbank Offered Rate, or 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%.

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 our 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 Cricket’s borrowing of C term loans under the Credit Agreement, Cricket issued a notice of redemption to redeem all of the Secured Notes 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 Secured Notes to fund the redemption price (including accrued interest) and the indenture governing the Secured Notes was satisfied and discharged in accordance with its terms. As a result of this redemption, we 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 unsecured senior notes described below. The notes are effectively junior to all of Leap’s existing 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 note