Cricket Wireless 2012 Annual Report Download

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TRANSFORMATION
IN ACTION
LEAP 2012 ANNUAL REPORT

Table of contents

  • Page 1
    LEAP 2012 ANNUAL REPORT TRANSFORMATION IN ACTION

  • Page 2
    ... We are focused on delivering a better customer experience that retains Cricket's current customers and attracts post-paid customers. At the same time, we are targeting making smart investments in our business to drive profitable growth. In a competitive market, we are making changes and driving to...

  • Page 3
    ...devices which, together with our high-value service plans, are expected to keep customers with us longer." Doug Hutcheson Chief Executive Officer and Director Leap Wireless International, Inc. For pre-paid wireless carriers across the board, 2012 was a difficult year. Growth slowed as the wireless...

  • Page 4
    ...party device leasing program in the fourth quarter of 2012 - a critical program we expect to enhance in the coming year. We also improved the sales and activation process in our stores, at our dealers, online and through telesales. To drive the most meaningful results, we refined our national retail...

  • Page 5
    ... best total value in wireless and to expanding our base through programs like Cricket Lifeline Credit. At year end we had more than 440,000 customers receiving a Lifeline credit, a government assistance program that offers monthly credits to qualifying low-income customers. Lifeline offers savings...

  • Page 6
    ... same time staying focused on improving the customer experience to drive profitable growth. I look forward to updating you on our progress in the year ahead. Sincerely, S. Douglas Hutcheson Chief Executive Officer and Director Leap Wireless International, Inc. 4 Leap Wireless International, Inc...

  • Page 7
    ... to use their new device before they ever leave the store. We backed it up with a better customer care experience, including a continued focus on "first call resolution" designed to address customer concerns the very first time they contact us. As a result, we lowered our customer care costs while...

  • Page 8
    ... national carriers head on, with a strong message: Cricket offers the "total package" at half the price of AT&T and Verizon. OPERATIONS In a fast-changing wireless marketplace, we are adapting the way we operate to optimize our performance. We need to attract more customers profitably in this new...

  • Page 9
    ... meaningful results. We have refined our retail distribution network, focusing on only the best locations for company-owned stores and refocusing our dealer compensation program to keep customers with us longer. We also significantly reduced our national retail spending and narrowed our focus from...

  • Page 10
    ... entering into arrangements with other carriers. Value-seeking customers can save over $1,000 on their Apple iPhone 5® or Samsung Galaxy S® III smartphone over two years with Cricket, which gives us a real opportunity if we can get the total offering right. 8 Leap Wireless International, Inc.

  • Page 11
    ... 2012, the aggregate market value of the registrant's voting and nonvoting common stock held by non-affiliates of the registrant was approximately $350,398,812 based on the closing price of Leap common stock on the NASDAQ Global Select Market on June 29, 2012 of $6.43 per share. The number of shares...

  • Page 12

  • Page 13
    LEAP WIRELESS INTERNATIONAL, INC. ANNUAL REPORT ON FORM 10-K For the Year Ended December 31, 2012 TABLE OF CONTENTS Page PART I Business ...Risk Factors ...Unresolved Staff Comments ...Properties ...Legal Proceedings ...Mine Safety Disclosures ...PART II Item 5. Market for Registrant's Common ...

  • Page 14
    [THIS PAGE INTENTIONALLY LEFT BLANK]

  • Page 15
    ... maintain 3G and 4G roaming and wholesale services from other carriers at costeffective rates; • our ability to acquire or obtain access to additional spectrum in the future at a reasonable cost or on a timely basis; • failure of our network or information technology systems to perform according...

  • Page 16
    ... of 23 MHz of coverage 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 over an extended service area. We have also...

  • Page 17
    ... low-cost provider of wireless telecommunications. During the third quarter of 2012, we increased pricing on our devices in an effort to better manage device subsidies and promote the addition of longer-tenured customers. We also plan to streamline and reduce our number of direct and indirect dealer...

  • Page 18
    ... our markets to help customers manage the cost of purchasing a device, and we plan to expand the availability and type of device financing programs we offer in 2013. Customer Care and Billing We outsource our call center operations to multiple call center vendors to manage the cost of providing care...

  • Page 19
    ... target customer demographic and provide the most efficient market coverage while minimizing cost. As part of this strategy, we plan to streamline and reduce our number of direct and indirect dealer locations in 2013 to attempt to increase the productivity of more attractive locations. In addition...

  • Page 20
    ... cell sites, managing call handoffs and access to and from the public switched telephone network, or PSTN, and other value-added services. These locations also house platforms that enable services including text messaging, picture messaging, voice mail and data services. In operating our network, we...

  • Page 21
    ... AT&T, Verizon Wireless, Sprint and T-Mobile) to offer competitively-priced unlimited prepaid and postpaid service offerings. In addition, a number of carriers have begun to offer bundled service offerings comprised of unlimited voice service and fixed amounts of data that customers can share across...

  • Page 22
    ... of 2012, we increased pricing on our devices in an effort to better manage device subsidies 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...

  • Page 23
    ... demand for wireless mobile services, the FCC has allocated additional spectrum that can be used for two-way mobile wireless voice, data and broadband services, including AWS spectrum. The FCC has licensed six frequency blocks consisting of one 20 MHz license in each of 734 cellular market areas, or...

  • Page 24
    ...their ongoing eligibility (for example, changes in agreements that the FCC has previously reviewed), annual reporting requirements and a commitment by the FCC to audit each designated entity at least once during the license term. In addition, third parties and the federal government have in the past...

  • Page 25
    ... our business, financial condition or results of operations. FCC rules also require that local exchange carriers and most commercial mobile radio service providers, including providers like Cricket, allow customers to change service providers without changing telephone numbers. For wireless service...

  • Page 26
    ... rules requiring commercial mobile radio service providers to provide automatic roaming for voice and SMS text messaging services on just, reasonable and non-discriminatory terms. The FCC has also adopted rules generally requiring carriers to offer data roaming services on commercially reasonable...

  • Page 27
    ... service support mechanisms intended to support both voice and broadband services in high-cost areas, which would be funded through a new Connect America Fund, or CAF. Over time, these CAF mechanisms will replace legacy high-cost support mechanisms that currently provide funding to wireless carriers...

  • Page 28
    ... the sole purpose of lawfully connecting the handset to another network. This exemption permitted locked handsets purchased from one wireless carrier to be unlocked and then activated on another carrier's network. On October 28, 2012, the Copyright Office issued a new exemption under the DMCA, which...

  • Page 29
    ...-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...

  • Page 30
    ... and manager of communication towers and other communications sites. From 2002 to 2006, he served as chief financial officer, and later as president and a director, of Frontier Communications, a provider of communication services. From 1987 to 2002, Mr. Elliott held a number of financial, legal...

  • Page 31
    ... president and chief technical officer since February 2012. From August 2010 to February 2012, Mr. Strickland provided strategic information technology consulting services through his own firm. Prior to that, Mr. Strickland served as senior vice president and chief information officer of T-Mobile...

  • Page 32
    ...our markets is subject to a number of risks, including, among other things, increased competition, our inability to manage or increase our network capacity or service offerings to meet increasing customer demand, promotional or retention activities that do not perform as expected, device quality and...

  • Page 33
    ... AT&T, Verizon Wireless, Sprint and T-Mobile) to offer competitively-priced unlimited prepaid and postpaid service offerings. In addition, a number of carriers have begun to offer bundled service offerings comprised of unlimited voice service and fixed amounts of data that customers can share across...

  • Page 34
    ... of 2012, we increased pricing on our devices in an effort to better manage device subsidies 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...

  • Page 35
    ... and future versions of the device, future costs for the device, the success of our marketing and advertising efforts, customer demand for devices offered by other manufacturers and other factors. At our current purchase rate, we project that we will purchase approximately one-half of our first-year...

  • Page 36
    ... that customers will accept our products and service offerings at the levels we expect, that prices will not decline to levels below what we have negotiated to pay or that we will be able to satisfy any purchase commitments. We are significantly reducing the number of locations in which we offer our...

  • Page 37
    ... into in the Future May Limit Our Ability to Operate Our Business. Our Credit Agreement and the indentures governing Cricket's secured and unsecured senior notes contain covenants that restrict the ability of Leap, Cricket and their restricted subsidiaries to make distributions or other payments...

  • Page 38
    ... Our Operating Expenses. Because we offer unlimited voice, data, mobile broadband and music download services for a flat monthly rate, our customers' average usage of these services per month is significant. We provide these services through our own Cricket network footprint and through roaming and...

  • Page 39
    ... our business, financial condition and results of operations. The Wireless Industry Is Experiencing Rapid Technological Change; Offering LTE Services Will Require Us to Make Significant Capital Investments and/or Enter Into Partnerships or Joint Ventures with Others. The wireless communications...

  • Page 40
    ... or use. However, we currently rely on one key vendor for billing services, a single vendor to support the platform for our Muve Music service, a single vendor for the operation of our network operations center, a limited number of vendors for voice and data communications transport services and...

  • Page 41
    ... Churn, Reduced Revenue and Increased Costs, and Could Harm Our Reputation. Our network and information technology (IT) infrastructure and the infrastructure of our vendors (including systems supporting service activation, billing, point of sale, inventory management, customer care and financial 27

  • Page 42
    ... years, we have upgraded a number of our significant, internal business systems, including implementing a new customer billing system, a new inventory management system and a new point-of-sale system. The implementation of significant new systems often involves delays and disruptions in connection...

  • Page 43
    ...business, financial condition and results of operations. In addition, we rely on third-party intellectual property and digital content to provide certain of our wireless services to customers, including Muve Music, an unlimited music download service we offer that is designed specifically for mobile...

  • Page 44
    ... would adversely affect our business, impose new costs or require changes in current or planned operations. In addition, state regulatory agencies are increasingly focused on the quality of service and support that wireless carriers provide to their customers and several agencies have proposed or...

  • Page 45
    ...and activate new customers, which could have a material adverse impact on our business, financial condition or results of operations. We participate in the federal government's Lifeline program, which provides support from the USF to subsidize discounted telecommunications services for qualified low...

  • Page 46
    ... they may affect our business, financial condition or results of operations. In addition, certain states in which we provide service are considering legislation that would require companies selling prepaid wireless services to verify a customer's identity using government identification. Although we...

  • Page 47
    ... in connection with the services we provide. These fees include federal USF fees and common carrier regulatory fees. In addition, many state and local governments impose various surcharges, taxes and fees on our activities, including with respect to sales of our products and services and...

  • Page 48
    ... our network, or result in significant costs to us for past and future termination charges. Any of these changes could have a material adverse effect on our business, financial condition and operating results. We resell third party long distance services in connection with our offering of unlimited...

  • Page 49
    ... on our business, financial condition and future cash flows. On August 30, 2011, our 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 our ability to use our NOL...

  • Page 50
    ... us or by our competitors; • entry of new competitors into our markets, changes in product and service offerings by us or our competitors, changes in the prices charged for product and service offerings by us or our competitors, or changes or upgrades in the network technologies used by us or our...

  • Page 51
    ... market price of Leap common stock. If any of Leap's stockholders cause a large number of securities to be sold in the public market, these sales could reduce the trading price of Leap common stock. These sales could also impede our ability to raise future capital. We Could Elect to Raise Additional...

  • Page 52
    ... issue shares under these stock plans, they can be freely sold in the public market after the recipient satisfies any vesting period applicable to the shares. If any of Leap's stockholders causes a large number of securities to be sold in the public market, these sales could reduce the trading price...

  • Page 53
    ... 230 retail locations in our markets, including stores ranging in size from approximately 800 square feet to 11,000 square feet. As of December 31, 2012, we leased office space totaling approximately 200,000 square feet for our corporate headquarters in San Diego. We use these offices for...

  • Page 54
    ...Cricket markets, we may lease additional or substitute office facilities, retail stores, cell sites, switch sites and warehouse facilities. Item 3. Legal Proceedings From time to time... are involved often present complex legal and factual issues. We vigorously pursue defenses in legal proceedings and...

  • Page 55
    ... Year - 2012 First Quarter ...Second Quarter ...Third Quarter ...Fourth Quarter ... 15.65 17.20 16.79 9.45 11.14 8.78 6.96 7.59 11.64 14.72 6.27 5.83 8.56 4.78 4.42 5.18 On February 1, 2013, the last reported sale price of Leap common stock on the NASDAQ Global Select Market was $6.02 per share...

  • Page 56
    ... 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Item 8. Financial Statements and Supplementary Data" included elsewhere in this report. 2012 2011 Year Ended December 31, 2010 2009 2008 Statement of Operations Data: Revenues ...Operating income (loss...

  • Page 57
    ... 23 MHz of coverage 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 over an extended service area. We recently entered...

  • Page 58
    ...-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...

  • Page 59
    ... sale of wireless services, devices (handsets and broadband modems) and accessories. Wireless services are provided primarily on a month-to-month basis. Our customers are required to pay for their service in advance and we do not require customers to sign fixed-term contracts or pass a credit check...

  • Page 60
    ... 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 we provide to our customers. The service plans...

  • Page 61
    ... in cost of service. During the years ended December 31, 2012, 2011 and 2010 the total amount of regulatory fees and telecommunications taxes separately billed and collected from customers and recorded in service revenues was $9.4 million, $32.6 million and $108.4 million, respectively. Sales, use...

  • Page 62
    ... occurred during the year ended December 31, 2011 that indicated the carrying value of any long-lived assets may not be recoverable. In August 2010, we entered into a wholesale agreement, which we use to offer Cricket services in nationwide retailers outside of our current network footprint. This...

  • Page 63
    ... In connection with our 2012 annual impairment test, the aggregate fair value and carrying value of our operating wireless licenses (excluding assets held for sale) were $2,415.0 million and $1,745.7 million, respectively, as of September 30, 2012. No impairment charges were recorded during the year...

  • Page 64
    ... average number of shares of Leap common stock outstanding during such month and the average closing price of Leap common stock during such month. We considered the month of August to be an appropriate period over which to measure average market capitalization in 2012 because trading prices during...

  • Page 65
    The closing price of Leap common stock was $6.65 on December 31, 2012 and Leap's market capitalization was above our book value as of such date. Since that time, the closing price of Leap common stock has ranged from a high of $7.05 per share to a low of $5.51 per share. If the price of Leap common ...

  • Page 66
    ... 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...

  • Page 67
    ...counted as churn. Pay-inadvance 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...

  • Page 68
    ...year. The 7.1% decrease in the number of gross customer additions was primarily driven by changes we made to our product and service offerings in the second half of 2010, which eliminated the first free month of service we previously provided new customers and generally equalized the prices that new...

  • Page 69
    ... in the number of new Cricket Broadband customers due to increased device pricing, reduced marketing emphasis and increased network management initiatives. The year-over-year decrease was partially offset by an increase in the number of new voice customers as a result of customer acceptance of...

  • Page 70
    ... weighted-average total number of customers and increases in federal and state tax rates, our increased penetration in existing markets with higher tax rates and increased roaming costs in connection with the introduction of our unlimited nationwide service plans. Cost of Equipment Cost of equipment...

  • Page 71
    ... 31, 2011, we incurred approximately $26.4 million of integration charges relating primarily to certain leased cell site and retail store locations contributed to our joint venture STX Wireless in the South Texas region that it no longer uses. During the year ended December 31, 2010, we recorded...

  • Page 72
    ...) of investees, net reflects our share of net income or losses of regional wireless service providers in which we hold investments. Interest Income Interest income decreased $0.1 million and $0.8 million during the years ended December 31, 2012 and 2011, respectively, compared to the corresponding...

  • Page 73
    ... entered into with T-Mobile. In addition, during the year ended December 31, 2010, we recorded a $15.5 million income tax benefit in connection with the impairment of our goodwill. Unrestricted Subsidiaries In July 2011, Leap's board of directors designated Cricket Music Holdco, LLC (a wholly...

  • Page 74
    ... financial information reflects all normal recurring adjustments that are, in the opinion of management, necessary for a fair statement of our results of operations for the interim periods presented (in thousands, except per share data): March 31, 2012 Three Months Ended June 30, September 30, 2012...

  • Page 75
    ... Three Months Ended June 30, September 30, 2012 2012 March 31, 2012 December 31, 2012 Revenues: Service revenues ...Equipment revenues ...Total revenues ...Operating expenses: Cost of service (exclusive of items shown separately below) ...Cost of equipment ...Selling and marketing ...General and...

  • Page 76
    ... 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...

  • Page 77
    ... failing to pay a monthly bill, and pay-inadvance 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...

  • Page 78
    ... 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 (in thousands, except weighted-average number of customers and ARPU): March 31, 2012 Three Months Ended Year Ended June...

  • Page 79
    ... 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 (in thousands, except gross customer additions and CPGA): March 31, 2012 Three Months Ended Year Ended June 30...

  • Page 80
    .... In addition, we may enter into partnerships or joint ventures with others to supplement our facilities-based LTE network coverage. 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...

  • Page 81
    ..., 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 indentures governing Cricket...

  • Page 82
    ...for approximately $40.7 million, which were contributed to our South Texas joint venture, STX Wireless. Financing Activities Net cash provided by financing activities was $29.3 million for the year ended December 31, 2012, which included the effects of the following transactions: • We entered into...

  • Page 83
    ... October 10, 2012, Cricket entered into the Credit Agreement with respect to a $400 million senior secured term loan facility, which was fully drawn at closing and matures in October 2019. Outstanding borrowings under the Credit Agreement bear interest at the London Interbank Offered Rate, or LIBOR...

  • Page 84
    ... 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...

  • Page 85
    ... 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. Senior Secured Notes Due 2016 In June 2009, Cricket issued...

  • Page 86
    ... 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. The notes may be redeemed, in whole or in part, at any time at a redemption price...

  • Page 87
    ... in connection with the issuance of the notes has been recorded in long-term debt, net in the 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% unsecured senior notes...

  • Page 88
    ... Financial Statements and Supplementary Data" of this report, we apply the authoritative guidance for fair value measurements to our assets and liabilities. 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...

  • Page 89
    ... LTE roaming and wholesale arrangements and we may enter into partnerships or joint ventures with other carriers. We intend to be disciplined as we pursue delivery of additional LTE services to our customers and to remain focused on our position as a low-cost provider of wireless telecommunications...

  • Page 90
    ... exceed one year. We are pursuing a number of programs to expand sales volume, including exploring expanded device leasing and financing programs and working with Apple to increase our advertising and promotional programs to increase awareness of our iPhone offering. In addition, if Apple introduces...

  • Page 91
    ...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...

  • Page 92
    ... Texas region to enable the combined network and retail operations of the STX Wireless joint venture to operate more efficiently. During the year ended December 31, 2011, we incurred approximately $26.4 million, of such integration costs, which were recorded in impairments and other charges within...

  • Page 93
    ... as of December 31, 2012 for the next five years and thereafter (in thousands). Future events, including potential refinancing of our long-term debt, could cause actual payments to differ significantly from these amounts. 2013 2014-2015 2016-2017 Thereafter Total Long-term debt(1) ...Capital...

  • Page 94
    ... 31, 2011, all of our senior indebtedness bore interest at fixed rates, and accordingly our senior indebtedness did not expose us to market risk for changes in interest rates as of such date. The change during the year ended December 31, 2012 resulted from Cricket's entry into the Credit Agreement...

  • Page 95
    ...Statements and Supplementary Data Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Leap Wireless International, Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of comprehensive income, of...

  • Page 96
    LEAP WIRELESS INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts) December 31, 2012 December 31, 2011 Assets Cash and cash equivalents ...Short-term investments ...Inventories ...Deferred charges ...Other current assets ...Total current assets ...Property and ...

  • Page 97
    LEAP WIRELESS INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands, except per share data) 2012 Year Ended December 31, 2011 2010 Revenues: Service revenues ...Equipment revenues ...Total revenues ...Operating expenses: Cost of service (exclusive of items shown ...

  • Page 98
    LEAP WIRELESS INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year Ended December 31, 2012 2011 2010 Operating activities: Net loss ...$(187,277) $(317,677) $ (785,055) Adjustments to reconcile net loss to net cash provided by operating activities: Share-based compensation ...

  • Page 99
    LEAP WIRELESS INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands, except share amounts) Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Common Stock Shares Amount Accumulated Deficit Total Balance at December 31, 2009 ...77,524,040 ...

  • Page 100
    ...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...

  • Page 101
    ..., 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...

  • Page 102
    ... 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 years ended December 31, 2012, 2011 and 2010 the total...

  • Page 103
    ... new customers, store operating costs (such as retail associates' salaries and rent), and salary and overhead charges associated with selling and marketing functions. General and Administrative. General and administrative expenses primarily include call center and other customer care program costs...

  • Page 104
    ... of cost or market using the average cost method. Devices sold to third party dealers and nationwide retailers are recorded as deferred charges upon shipment of the devices by the Company. The deferred charges are recognized as cost of equipment when service is activated by the customer. Property...

  • Page 105
    ... during the year ended December 31, 2011 that indicated the carrying value of any long-lived assets may not be recoverable. In August 2010, the Company entered into a wholesale agreement, which it uses to offer Cricket services in nationwide retailers outside of its current network footprint. This...

  • Page 106
    ..." for further discussion regarding the Company's impairment evaluation of wireless licenses. Goodwill The Company records the excess of the purchase price over the fair value of net assets acquired in a business combination as goodwill. As of December 31, 2012 and 2011, goodwill of $31.9 million...

  • Page 107
    ... its voice and data communications transport services and a limited number of vendors for payment processing services. Loss or disruption of these services could materially adversely affect the Company's business. The networks the Company operates do not, by themselves, provide national coverage and...

  • Page 108
    LEAP WIRELESS INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) were unable to obtain or maintain cost-effective roaming or wholesale services for its customers in geographically desirable service areas, the Company's competitive position, business, financial condition and...

  • Page 109
    LEAP WIRELESS INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Advertising Costs Advertising costs are expensed as incurred. Advertising costs totaled $131.2 million, $115.8 million and $137.6 million for the years ended December 31, 2012, 2011 and 2010, respectively. ...

  • Page 110
    ..., financial condition and future cash flows. 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...

  • Page 111
    ... at fair value in the Company's 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 December 31, 2012 or December 31, 2011. Level 2: Observable...

  • Page 112
    ... 2 Level 3 Total Assets: Money market funds ...Commercial paper ...U.S. government or government agency securities ...Total ... $- - - $- $224,383 165,202 293,610 $683,195 $- - - $- $224,383 165,202 293,610 $683,195 Assets in the tables above are reported on the consolidated balance sheets as...

  • Page 113
    LEAP WIRELESS INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Available-for-sale securities were comprised as follows as of December 31, 2012 and December 31, 2011 (in thousands): As of December 31, 2012 Cost Fair Value Money market funds ...Commercial paper ...U.S. ...

  • Page 114
    ... billed to third-party dealers for devices and accessories, (ii) amounts due from the Company's third-party logistics provider for devices sold from the Company to the supplier, (iii) amounts due from the federal government in connection with the Lifeline program, and (iv) amounts due from service...

  • Page 115
    ...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. Supplementary Cash Flow Information (in thousands): December 31, 2012 2011...

  • Page 116
    ... the purchase price over the fair values of the assets acquired (net of liabilities assumed, including the related deferred tax effects) by STX Wireless from Pocket in connection with the formation of the joint venture. On January 3, 2011, the Company acquired a customer assistance call center from...

  • Page 117
    ... average number of shares of Leap common stock outstanding during such month and the average closing price of Leap common stock during such month. The Company considered the month of August to be an appropriate period over which to measure average market capitalization in 2012 because trading prices...

  • Page 118
    ... closing price of Leap common stock was $6.65 on December 31, 2012 and Leap's market capitalization was above the Company's book value as of such date. Since that time, the closing price of Leap common stock has ranged from a high of $7.05 per share to a low of $5.51 per share. If the price of Leap...

  • Page 119
    ... Company's commercial use of the towers. Accordingly, the Company recorded a capital lease obligation of $25.8 million, which was equal to the proceeds received from GTP. STX Wireless Joint Venture Cricket service is offered in South Texas by the Company's joint venture STX Operations, which Cricket...

  • Page 120
    ...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...

  • Page 121
    ... Texas region to enable the combined network and retail operations of the STX Wireless joint venture to operate more efficiently. During the year ended December 31, 2011, the Company incurred approximately $26.4 million of such integration costs, which were recorded in impairments and other charges...

  • Page 122
    ...wireless licenses sold by Savary Island to Verizon Wireless on August 28, 2012 under the license sale transaction discussed in Note 6. The following table provides a summary of the changes in value of the Company's redeemable noncontrolling interests (in thousands): Year Ended December 31, 2012 2011...

  • Page 123
    ... the indentures governing Cricket's senior notes, the Company is presenting the aggregate carrying amount and classification of the components of the financial position as of December 31, 2012 and December 31, 2011 and results of operations of Cricket Music and Muve USA for the years ended December...

  • Page 124
    LEAP WIRELESS INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Credit Agreement On October 10, 2012, Cricket entered into a credit agreement (the "Credit Agreement") with respect to a $400 million senior secured term loan facility, which was fully drawn at closing and ...

  • Page 125
    ... by Savary Island to Verizon Wireless that was secured by the noteholder's lien, Cricket repaid the balance of the nonnegotiable promissory note in full and the non-negotiable promissory note was terminated and discharged. Convertible Senior Notes Due 2014 In June 2008, Leap issued $250 million of...

  • Page 126
    ... 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. Senior Secured Notes Due 2016 In June 2009, Cricket issued...

  • Page 127
    ...net proceeds the Company received in connection with the issuance of the notes has been recorded in long-term debt, net in the 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...

  • Page 128
    LEAP WIRELESS INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 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 ...

  • Page 129
    ... quarter, reducing the carrying value of these capitalized amounts to zero. Additionally, in connection with the reduction in network expansion activities, the Company recognized restructuring charges of approximately $11.0 million primarily related to lease exit costs associated with cellular sites...

  • Page 130
    ... provides a rollforward of the impairments and other charges recorded as a component of accounts payable and accrued liabilities within the consolidated balance sheets: December 31, 2011 Accruals Payments December 31, 2012 Post acquisition charges ...Severance ...Restructuring activities ...Total...

  • Page 131
    ... liability on its balance sheet. During the year ended December 31, 2012, the Company recorded a $90.2 million increase to its valuation allowance, which primarily consisted of $84.3 million and $5.9 million related to changes in the federal and state net operating loss carryforwards, respectively...

  • Page 132
    ... them. In 2011, trading in Leap common stock increased the risk of an ownership change under Section 382 of the Internal Revenue Code. Accordingly, 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...

  • Page 133
    ... also generally provide for accelerated vesting if there is a termination of service following a change in control (as defined in the 2004 Plan and the 2009 Plan). The stock options are exercisable for up to ten years from the grant date. Compensation expense is amortized on a straight-line basis...

  • Page 134
    LEAP WIRELESS INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) A summary of the Company's stock option award activity as of and for the years ended December 31, 2012 and 2011 is as follows (in thousands, except per share data): WeightedAverage Exercise Price Per Share ...

  • Page 135
    ...approximately 50% of the fair value of the surrendered options using the BlackScholes stock option pricing model. The Exchange Offer did not result in any additional share-based compensation expense. Executive officers and members of the Company's board of directors were not permitted to participate...

  • Page 136
    LEAP WIRELESS INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The following table summarizes information about restricted stock awards that vested during the years ended December 31, 2012, 2011, and 2010 (in thousands): Year Ended December 31, 2012 2011 2010 Fair value ...

  • Page 137
    ... of the Company's share-based awards for the years ended December 31, 2012, 2011, and 2010 was allocated in the consolidated statements of comprehensive income as follows (in thousands, except per share data): Year Ended December 31, 2012 2011 2010 Cost of service ...Selling and marketing expense...

  • Page 138
    ...renews for successive one-year periods unless either party provides 180-day advance notice to the other. Under the agreement, the Company pays Sprint a specified amount per month for each subscriber activated on its network, subject to periodic market-based adjustments. The Company has agreed, among...

  • Page 139
    ... 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...

  • Page 140
    ...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 December 31, 2012 and December 31, 2011...

  • Page 141
    LEAP WIRELESS INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Condensed Consolidating Balance Sheet as of December 31, 2012 (in thousands): Guarantor Parent Company Consolidating and Non-Guarantor Eliminating Subsidiaries Adjustments Consolidated Issuing Subsidiary ...

  • Page 142
    LEAP WIRELESS INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Condensed Consolidating Balance Sheet as of December 31, 2011 (in thousands): Guarantor Parent Company Consolidating and Non-Guarantor Eliminating Subsidiaries Adjustments Consolidated Issuing Subsidiary ...

  • Page 143
    LEAP WIRELESS INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Condensed Consolidating Statement of Comprehensive Income for the Year Ended December 31, 2012 (in thousands): Guarantor Parent Company Consolidating and Issuing Guarantor Non-Guarantor Eliminating Subsidiary ...

  • Page 144
    LEAP WIRELESS INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Condensed Consolidating Statement of Comprehensive Income for the Year Ended December 31, 2011 (in thousands): Guarantor Parent Company Consolidating and Issuing Guarantor Non-Guarantor Eliminating Subsidiary ...

  • Page 145
    ... of service (exclusive of items shown separately below) ...Cost of equipment ...Selling and marketing ...General and administrative ...Depreciation and amortization ...Impairments and other charges ...Total operating expenses ...Loss on sale, exchange or disposal of assets, net ...Operating income...

  • Page 146
    ... Operating activities: Net cash provided by (used in) operating activities ...$ (22) $ 104,799 Investing activities: Purchases of and change in prepayments for purchases of property and equipment ...Purchases of wireless licenses and spectrum clearing costs ...Proceeds from sales of wireless...

  • Page 147
    ... Operating activities: Net cash provided by operating activities ...$ Investing activities: Acquisition of a business ...Purchases of and change in prepayments for purchases of property and equipment ...Purchases of wireless licenses and spectrum clearing costs ...Proceeds from sales of wireless...

  • Page 148
    ... Operating activities: Net cash provided by operating activities ...$ Investing activities: Acquisition of a business ...Purchases of and change in prepayments for purchases of property and equipment ...Purchases of wireless licenses and spectrum clearing costs ...Purchases of investments ...Sales...

  • Page 149
    ... at the reasonable assurance level as of December 31, 2012. (b) Management's Annual Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule...

  • Page 150
    ... in their report, which is included in "Item 8. Financial Statements and Supplementary Data" of this report. (d) Changes in Internal Control over Financial Reporting There were no changes in our internal control over financial reporting during the fiscal quarter ended December 31, 2012 that have...

  • Page 151
    ... Equity Compensation Plan Information The following table provides information as of December 31, 2012 with respect to equity compensation plans (including individual compensation arrangements) under which Leap common stock is authorized for issuance. Number of securities to be issued upon exercise...

  • Page 152
    ... under the Leap Wireless International, Inc. Amended and Restated Employee Stock Purchase Plan, or the ESPP, and 1,180,619 shares reserved for issuance under the 2004 Plan. Does not include 400,000 additional shares under the ESPP, which were approved by our Board on December 19, 2012, subject to...

  • Page 153
    ... The financial statements of Leap listed below are set forth in Item 8 of this report for the year ended December 31, 2012: Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets at December 31, 2012 and 2011 Consolidated Statements of Comprehensive Income for the years...

  • Page 154
    ...by reference to Exhibit 4.1 of Leap's Current Report on Form 8-K, filed with the SEC on May 23, 2011). Credit Agreement, dated as of October 10, 2012, among Cricket Communications, Inc., Leap Wireless International, Inc. and Deutsche Bank Trust Company Americas, as administrative agent (incorporated...

  • Page 155
    ... directors and officers (incorporated by reference to Exhibit 10.1 of Leap's Current Report on Form 8-K, filed with the SEC on December 1, 2011). Amended and Restated Executive Employment Agreement among Leap Wireless International, Inc., Cricket Communications, Inc., and S. Douglas Hutcheson, dated...

  • Page 156
    ... SEC on August 7, 2008). Employment Agreement, dated January 1, 2011, by and among Leap Wireless International, Inc., Cricket Communications, Inc. and Robert A. Young (incorporated by reference to Exhibit 10.12 of Leap's Annual Report on Form 10-K for the year ended December 31, 2010, filed with the...

  • Page 157
    ...Number Description 10.16# Leap Wireless International, Inc. 2004 Stock Option, Restricted Stock and Deferred Stock Unit Plan (incorporated by reference to Exhibit 10.1 of Leap's Current Report on Form 8-K, filed with the SEC on January 11, 2005). First Amendment to the Leap Wireless International...

  • Page 158
    ...Non-Employee Director Restricted Stock Award Grant Notice and Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.12.19 of Leap's Annual Report on Form 10-K for the year ended December 31, 2011, filed with the SEC on February 21, 2012). Form of Muve Music Performance Share Unit...

  • Page 159
    ... 14, 2012). Form of Stock Option Grant Notice and Non-Qualified Stock Option Agreement (Four-Year Time Based Vesting) granted under the 2009 Employment Inducement Equity Incentive Plan of Leap Wireless International, Inc. (incorporated by reference to Exhibit 10.15.1 of Leap's Annual Report on Form...

  • Page 160
    ... LEAP WIRELESS INTERNATIONAL, INC. By: /s/ S. DOUGLAS HUTCHESON S. Douglas Hutcheson Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates...

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  • Page 163
    ...Communications Inc. DESIGNED AND PRODUCED BY MENTUS, SAN DIEGO, CALIFORNIA. WWW.MENTUS.COM Mark J. Veyette Senior Vice President and Chief Information Officer STOCK INFORMATION AND DIVIDEND POLICY The common stock of the Company is traded on the NASDAQ® Global Select Market under the symbol "LEAP...

  • Page 164
    Leap Wireless International, Inc. 5887 Copley Drive San Diego, California 92111 T 1-858-882-6000 F 1-858-882-6070 W leapwireless.com + www.leapwireless.com/ar2012