XNAS:LEAP Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012



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

(Mark One)
R
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the quarterly period ended March 31, 2012
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the transition period from            to           

Commission File Number: 001-34865
Leap Wireless International, Inc.
(Exact name of registrant as specified in its charter)
Delaware
33-0811062
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
5887 Copley Drive, San Diego, CA
92111
(Address of Principal Executive Offices)

(Zip Code)

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


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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes R No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes R  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer R
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
 
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No R

The number of shares outstanding of the registrant's common stock on April 20, 2012 was 79,201,868.




LEAP WIRELESS INTERNATIONAL, INC.

QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended March 31, 2012

TABLE OF CONTENTS






PART I

FINANCIAL INFORMATION

Item 1.
Financial Statements

LEAP WIRELESS INTERNATIONAL, INC.

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

 
March 31,
2012
 
December 31,
2011
 
(Unaudited)
 
 
Assets
 
 
 
Cash and cash equivalents
$
355,918

 
$
345,243

Short-term investments
280,787

 
405,801

Inventories
99,579

 
116,957

Deferred charges
57,656

 
57,979

Other current assets
130,611

 
134,457

Total current assets
924,551

 
1,060,437

Property and equipment, net
1,946,739

 
1,957,374

Wireless licenses
1,601,871

 
1,788,970

Assets held for sale (Note 7)
392,331

 
204,256

Goodwill (Note 2)
31,886

 
31,886

Intangible assets, net
36,680

 
41,477

Other assets
68,593

 
68,290

Total assets
$
5,002,651

 
$
5,152,690

Liabilities and Stockholders' Equity
 
 
 
Accounts payable and accrued liabilities
$
350,610

 
$
460,278

Current maturities of long-term debt
21,911

 
21,911

Other current liabilities
298,970

 
256,357

Total current liabilities
671,491

 
738,546

Long-term debt
3,200,591

 
3,198,749

Deferred tax liabilities
344,419

 
333,804

Other long-term liabilities
172,204

 
172,366

Total liabilities
4,388,705

 
4,443,465

Redeemable non-controlling interests
99,760

 
95,910

Commitments and contingencies (Note 11)

 


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; 79,203,276 and 78,924,049 shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively
8

 
8

Additional paid-in capital
2,170,639

 
2,175,436

Accumulated deficit
(1,655,751
)
 
(1,561,417
)
Accumulated other comprehensive loss
(710
)
 
(712
)
Total stockholders' equity
514,186

 
613,315

Total liabilities and stockholders' equity
$
5,002,651

 
$
5,152,690


See accompanying notes to condensed consolidated financial statements.


1



LEAP WIRELESS INTERNATIONAL, INC.

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

 
Three Months Ended March 31,
 
2012
 
2011
Revenues:
 
 
 
Service revenues
$
773,998

 
$
678,411

Equipment revenues
51,621

 
101,503

Total revenues
825,619

 
779,914

Operating expenses:
 
 
 
Cost of service (exclusive of items shown separately below)
261,311

 
235,945

Cost of equipment
247,847

 
229,795

Selling and marketing
95,554

 
109,852

General and administrative
89,699

 
95,409

Depreciation and amortization
146,543

 
126,674

Total operating expenses
840,954

 
797,675

Loss on sale or disposal of assets, net
(468
)
 
(349
)
Operating loss
(15,803
)
 
(18,110
)
Equity in net income of investees, net
193

 
1,179

Interest income
29

 
64

Interest expense
(67,042
)
 
(58,819
)
Loss before income taxes
(82,623
)
 
(75,686
)
Income tax expense
(11,711
)
 
(10,754
)
Net loss
(94,334
)
 
(86,440
)
Accretion of redeemable non-controlling interests
(4,105
)
 
(9,771
)
Net loss attributable to common stockholders
$
(98,439
)
 
$
(96,211
)
Loss per share attributable to common stockholders:
 
 
 
Basic
$
(1.28
)
 
$
(1.26
)
Diluted
$
(1.28
)
 
$
(1.26
)
Shares used in per share calculations:
 
 
 
Basic
77,025

 
76,374

Diluted
77,025

 
76,374

Other comprehensive loss:
 
 
 
Net loss
$
(94,334
)
 
$
(86,440
)
Net unrealized holding gains on investments, net of tax
2

 
9

Comprehensive loss
$
(94,332
)
 
$
(86,431
)

See accompanying notes to condensed consolidated financial statements.



2



LEAP WIRELESS INTERNATIONAL, INC.

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

 
Three Months Ended March 31,
 
2012
 
2011
Operating activities:
 
 
 
Net cash provided by operating activities
$
35,357

 
$
72,000

Investing activities:
 
 
 
Acquisition of a business

 
(850
)
Purchases of property and equipment
(146,314
)
 
(92,898
)
Change in prepayments for purchases of property and equipment
(1,940
)
 
217

Purchases of wireless licenses and spectrum clearing costs
(976
)
 
(2,294
)
Proceeds from sales of wireless licenses and operating assets
855

 

Purchases of investments
(77,149
)
 
(105,521
)
Sales and maturities of investments
202,107

 
61,257

Change in restricted cash

 
(700
)
Net cash used in investing activities
(23,417
)
 
(140,789
)
Financing activities:
 
 
 
Other
(1,265
)
 
(779
)
Net cash used in financing activities
(1,265
)
 
(779
)
Net increase (decrease) in cash and cash equivalents
10,675

 
(69,568
)
Cash and cash equivalents at beginning of period
345,243

 
350,790

Cash and cash equivalents at end of period
$
355,918

 
$
281,222

Supplementary disclosure of cash flow information:
 
 
 
Cash paid for interest
$
(21,372
)
 
$
(21,141
)
Cash paid for income taxes
$

 
$
(29
)

See accompanying notes to condensed consolidated financial statements.



3



LEAP WIRELESS INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1.
The Company

Leap Wireless International, Inc. (“Leap”), a Delaware corporation, together with its subsidiaries and consolidated joint ventures, is a wireless communications carrier that offers digital wireless services in the United States under the “Cricket®” brand. Cricket service offerings provide customers with unlimited nationwide wireless services for a flat rate without requiring a fixed-term contract or a credit check. The Company's primary service is Cricket Wireless, which offers customers unlimited nationwide voice and data services for a flat monthly rate. Leap conducts operations through its subsidiaries and has no independent operations or sources of income other than interest income and through 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 the Company's joint venture, STX Wireless Operations, LLC (“STX Operations”), which Cricket controls through a 75.75% controlling membership interest in its parent company STX Wireless, LLC (“STX Wireless”). In addition, Cricket owns an 85% non-controlling membership interest in Savary Island Wireless, LLC (“Savary Island”), which holds wireless spectrum in the upper Midwest portion of the U.S. and which leases a portion of that spectrum to Cricket. For more information regarding the ventures described above, see “Note 7. Significant Acquisitions and Other Transactions.”

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

Note 2.
Basis of Presentation and Significant Accounting Policies

Basis of Presentation

The accompanying interim condensed consolidated financial statements have been prepared without audit, in accordance with the instructions to Form 10-Q and therefore do not include all information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for a complete set of financial statements. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2011. 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 and consolidated joint ventures. The Company consolidates its non-controlling interest in Savary Island in accordance with the authoritative guidance for the consolidation of variable interest entities because Savary Island is a variable interest entity and, among other things, the Company has entered into an agreement with Savary Island's other member which establishes a specified purchase price in the event that it exercises its right to sell its membership interest to the Company. 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 months ended March 31, 2012 and 2011, all of the Company's revenues and long-lived assets related to operations in the United States.


4




Revenues

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

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

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

During the second half of 2012, the Company plans to broaden its use of a third-party logistics provider to manage the planning, purchasing and fulfillment of handsets and other devices, whereby the Company's third-party dealers, including nationwide retailers, will increasingly purchase handsets and other devices directly from the logistics provider. Under this arrangement, the Company, in most cases, will not hold title to, or have ownership in, the related device inventory shipped to its dealers. Accordingly, the Company will not record deferred equipment revenues or deferred charges on its balance sheet related to devices purchased by third-party dealers. Therefore, upon customer activation of these handsets and other devices, the Company will no longer record equipment revenue or cost of equipment. Fees paid to the logistics provider will be recorded as deferred costs upon shipment of devices to the dealers and be recognized in cost of equipment when service is activated by the customer. Handsets and other devices purchased by company-owned stores will continue to be accounted for as inventory and deferred equipment revenues until sold and activated by the customers at which time, equipment revenue and the related cost of equipment will be recognized.

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.

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.

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, which are not "all-inclusive," the Company separately bills and collects from its customers amounts owed and remitted to government


5



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 months ended March 31, 2012 and 2011, the total amount of regulatory fees and telecommunications taxes separately billed and collected from customers and recorded in service revenues was $4.1 million and $11.5 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 and has classified such amounts as restricted in its condensed consolidated balance sheets. 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 both March 31, 2012 and December 31, 2011, the Company had approximately $3.6 million and $8.8 million, respectively, of restricted cash, cash equivalents and short-term investments included in other current assets and other assets.

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 March 31, 2012, goodwill of $31.9 million primarily represented the excess of the purchase price over the fair values of the assets acquired (net of liabilities assumed, including the related deferred tax effects) by STX Wireless in connection with the formation of the joint venture. For more information regarding the joint venture, see "Note 7. Significant Acquisitions and Other Transactions."




6



Note 3.
Supplementary Balance Sheet Information (in thousands):
 
March 31,
2012
 
December 31,
2011
 
 
 
 
Other current assets:
 
 
 
Accounts receivable, net(1)
$
66,305

 
$
86,736

Prepaid expenses
44,895

 
28,327

Other
19,411

 
19,394

 
$
130,611

 
$
134,457

Property and equipment, net(2):
 
 
 
Network equipment
$
3,316,135

 
$
3,246,027

Computer hardware and software
463,846

 
455,873

Construction-in-progress
141,321

 
99,705

Other
106,137

 
111,510

 
4,027,439

 
3,913,115

Accumulated depreciation
(2,080,700
)
 
(1,955,741
)
 
$
1,946,739

 
$
1,957,374

Intangible assets, net:
 
 
 
Customer relationships
$
50,435

 
$
57,782

Trademarks
37,000

 
37,000

 
87,435

 
94,782

Accumulated amortization of customer relationships
(30,493
)
 
(33,704
)
Accumulated amortization of trademarks
(20,262
)
 
(19,601
)
 
$
36,680

 
$
41,477

Accounts payable and accrued liabilities:
 
 
 
Trade accounts payable
$
204,361

 
$
306,881

Accrued payroll and related benefits
54,212

 
66,229

Other accrued liabilities
92,037

 
87,168

 
$
350,610

 
$
460,278

Other current liabilities:
 
 
 
Deferred service revenue(3)
$
122,255

 
$
113,768

Deferred equipment revenue(4)
39,088

 
43,793

Accrued sales, telecommunications, property and other taxes payable
18,420

 
22,380

Accrued interest
100,868

 
58,553

Other
18,339

 
17,863

 
$
298,970

 
$
256,357

____________
(1)
Accounts receivable, net, consists primarily of amounts billed to third-party dealers for devices and accessories and amounts due from service providers related to interconnect and roaming agreements, net of an allowance for doubtful accounts.
(2)
As of March 31, 2012 and December 31, 2011, approximately $34.1 million and $32.3 million of assets were held by the Company under capital lease arrangements, respectively. Accumulated amortization relating to these assets totaled $19.4 million and $18.5 million as of March 31, 2012 and December 31, 2011, 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 which have not yet been purchased and activated by customers.



7



Note 4.
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 March 31, 2012 or December 31, 2011.
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 March 31, 2012 and December 31, 2011 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 March 31, 2012 or December 31, 2011.

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 March 31, 2012 and December 31, 2011 (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 March 31, 2012
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Money market funds
$

 
$
280,673

 
$

 
$
280,673

Commercial paper

 
97,167

 

 
97,167

U.S. government or government agency securities

 
188,619

 

 
188,619

Total
$

 
$
566,459

 
$

 
$
566,459




8



 
At Fair Value as of December 31, 2011
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Money market funds
$

 
$
224,383

 
$

 
$
224,383

Commercial paper

 
165,202

 

 
165,202

U.S. government or government agency securities

 
293,610

 

 
293,610

Total
$

 
$
683,195

 
$

 
$
683,195


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 March 31, 2012 and December 31, 2011, 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 March 31, 2012 and December 31, 2011 (in thousands):

 
As of March 31, 2012
 
Cost
 
Fair Value
 
 
 
 
Money market funds
$
280,673

 
$
280,673

Commercial paper
97,165

 
97,167

U.S. government or government agency securities
188,633

 
188,619

 
$
566,471

 
$
566,459


 
As of December 31, 2011
 
Cost
 
Fair Value
 
 
 
 
Money market funds
$
224,383

 
$
224,383

Commercial paper
165,201

 
165,202

U.S. government or government agency securities
293,626

 
293,610

 
$
683,210

 
$
683,195


Long-Term Debt

The Company reports its long-term debt obligations at amortized cost; however, for disclosure purposes, the Company is required to measure the fair value of outstanding debt on a recurring basis. The fair value of the Company's outstanding long-term debt is determined primarily by using quoted prices in active markets and was $3,323.8 million and $3,073.6 million as of March 31, 2012 and December 31, 2011, 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 March 31, 2012 and December 31, 2011, there were no non-financial assets that were measured and recorded at fair value on a non-recurring basis.




9



Note 5.
Long-Term Debt

Long-term debt as of March 31, 2012 and December 31, 2011 was comprised of the following (in thousands):

 
March 31,
2012
 
December 31,
2011
 
 
 
 
Convertible senior notes due 2014
$
250,000

 
$
250,000

Unsecured senior notes due 2015
300,000

 
300,000

Non-negotiable promissory note due 2015
21,911

 
21,911

Senior secured notes due 2016
1,100,000

 
1,100,000

Unamortized discount on $1,100 million senior secured notes due 2016
(28,189
)
 
(29,601
)
Unsecured senior notes due 2020
1,600,000

 
1,600,000

Unamortized discount on $1,600 million unsecured senior notes due 2020
(21,220
)
 
(21,650
)
 
3,222,502

 
3,220,660

Current maturities of long-term debt
(21,911
)
 
(21,911
)
 
$
3,200,591

 
$
3,198,749


Senior Notes

Convertible Senior Notes Due 2014

In June 2008, Leap issued $250 million of unsecured 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 secured and unsecured senior notes described below. The notes are effectively junior to all of Leap's existing and future secured obligations, including those under the senior secured notes described below, 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.

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.





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Unsecured Senior Notes Due 2015

In June 2008, Cricket issued $300 million of 10.0% unsecured senior notes due 2015 in a private placement to institutional buyers. The notes bear interest at the rate of 10.0% per year, payable semi-annually in cash in arrears, which interest payments commenced in January 2009. 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 for borrowed money of Leap, Cricket or any subsidiary guarantor. The notes and the guarantees are Leap's, Cricket's and the guarantors' general senior unsecured obligations and rank equally in right of payment with all of Leap's, Cricket's and the guarantors' existing and future unsubordinated unsecured indebtedness. The notes and the guarantees are effectively junior to Leap's, Cricket's and the guarantors' existing and future secured obligations, including those under the senior secured notes described below, 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 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)) and Savary Island 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 July 15, 2012, 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 July 15, 2012 plus (2) all remaining required interest payments due on such notes through July 15, 2012 (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 July 15, 2012, at a redemption price of 105.0% and 102.5% of the principal amount thereof if redeemed during the twelve months beginning on July 15, 2012 and 2013, respectively, or at 100% of the principal amount if redeemed during the twelve months beginning on July 15, 2014 or thereafter, plus accrued and unpaid interest, if any, thereon to the redemption date.

If a “change of control” occurs (which includes the acquisition of beneficial ownership of 35% or more of Leap's equity securities, 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.

Non-Negotiable Promissory Note Due 2015

Cricket service was previously offered in greater Chicago and Southern Wisconsin by Denali Spectrum, LLC (“Denali”), an entity in which the Company owned an 82.5% non-controlling membership interest. In December 2010, Cricket purchased the remaining 17.5% controlling membership interest in Denali that it did not previously own. As part of the purchase price, Cricket issued a five-year $45.5 million non-negotiable promissory note in favor of the former holder of such controlling membership interest, which matures on December 27, 2015. Interest on the outstanding principal balance of the note varies from year to year at rates ranging from approximately 5.0% to 8.3% and compounds annually. Under the note, Cricket is required to make principal payments of $8.5 million per year, with the remaining principal balance and all accrued interest payable at maturity. Cricket's obligations under the note are secured on a first-lien basis by certain assets of Savary Island. In May 2011, Cricket prepaid approximately $15.1 million in principal amount of the note. As of March 31, 2012 and December 31, 2011, $21.9 million in principal amount of indebtedness was outstanding under the note.

On November 3, 2011, Savary Island entered into a license purchase agreement with Cellco Partnership d/b/a Verizon Wireless ("Verizon Wireless"), as further discussed in Note 7, in which Savary Island has agreed to sell certain AWS spectrum in various markets to Verizon Wireless for $172 million. Certain of the spectrum Savary Island has agreed to sell to Verizon Wireless is secured by a lien in favor of the holder of the non-negotiable promissory note. Accordingly, in connection with the closing of the Verizon Wireless transaction, the Company expects to repay the balance of the non-negotiable promissory note in full. The closing of the Verizon Wireless transaction is subject to customary closing conditions, including the consent of the FCC. As the Company expects that the closing of the transaction will occur within a year, it has classified the entire balance of the non-negotiable promissory note as current maturities of long-term debt on its consolidated balance sheets as of March 31, 2012 and December 31, 2011.
  





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Senior Secured Notes Due 2016

In June 2009, Cricket issued $1,100 million of 7.75% senior secured notes due 2016 in a private placement to institutional buyers at an issue price of 96.134% of the principal amount, which notes were exchanged in December 2009 for identical notes that had been registered with the SEC. The $42.5 million discount to the net proceeds the Company received in connection with the issuance of the notes has been recorded in long-term debt in the condensed consolidated financial statements and is being accreted as an increase to interest expense over the term of the notes. At March 31, 2012, the effective interest rate on the notes was 7.95%, which includes 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 November 2009. The notes are guaranteed on a senior secured basis by Leap and each of its existing and future domestic subsidiaries (other than Cricket, which is the issuer of the notes) that guarantees any indebtedness of Leap, Cricket or any subsidiary guarantor. The notes and the guarantees are Leap's, Cricket's and the guarantors' senior secured obligations and are equal in right of payment with all of Leap's, Cricket's and the guarantors' existing and future unsubordinated indebtedness.

The notes and the guarantees are effectively senior to all of Leap's, Cricket's and the guarantors' existing and future unsecured indebtedness (including Cricket's $1,900 million aggregate principal amount of unsecured senior notes and, in the case of Leap, Leap's $250 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 senior secured notes and the guarantees.

The notes and the guarantees are secured on a pari passu basis with all of Leap's, Cricket's and the guarantors' obligations under any permitted parity lien debt that may be incurred in the future. Leap, Cricket and the guarantors are permitted to incur debt under existing and future secured credit facilities in an aggregate principal amount outstanding (including the aggregate principal amount outstanding of the senior secured notes) of up to the greater of $1,500 million and 2.5 times Leap's consolidated cash flow (excluding the consolidated cash flow of Savary Island, STX Wireless and Cricket Music) for the prior four fiscal quarters.

The notes and the guarantees 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 Savary Island, 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 Savary Island 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 and the guarantees are secured on a first-priority basis, equally and ratably with any future parity lien debt, 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).

Prior to May 15, 2012, 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 thereon to the redemption date, from the net cash proceeds of specified equity offerings. Prior to May 15, 2012, 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 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 May 15, 2012 plus (2) all remaining required interest payments due on such notes through May 15, 2012 (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 May 15, 2012, at a redemption price of 105.813%, 103.875% and 101.938% of the principal amount thereof if redeemed during the twelve months beginning on May 15, 2012, 2013 and 2014, respectively, or at 100% of the principal amount if redeemed during the twelve months beginning on May 15, 2015 or thereafter, plus accrued and unpaid interest thereon to the redemption date.

If a “change of control” occurs (which includes 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 thereon to the repurchase date.



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Unsecured Senior Notes Due 2020

In November 2010, Cricket issued $1,200 million of 7.75% unsecured 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 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 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% unsecured 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 in the condensed consolidated financial statements and is being accreted as an increase to interest expense over the term of the notes. At March 31, 2012, the effective interest rates on the initial $1,200 million tranche and the additional $400 million tranche of the notes were 7.87% and 7.81%, respectively, both of which include the effect of the discount accretion.

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

Note 6.
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 months ended March 31, 2012 and 2011, 8.7 million and 9.6 million common share equivalents were excluded in the computation of diluted loss per share, for the three months ended March 31, 2012 and 2011, respectively.



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Note 7.
Significant Acquisitions and Other Transactions

Other Transactions

On April 2, 2012, the Company and Savary Island entered into license exchange agreements with entities affiliated with T-Mobile USA, Inc. (collectively, “T-Mobile”). The transactions would result in the Company acquiring 10 MHz of additional AWS spectrum in Phoenix, Houston and two other Texas markets to supplement the spectrum the Company currently operates in those markets. The Company and Savary Island have agreed to assign T-Mobile spectrum in various markets in Alabama, Illinois, Missouri, Minnesota and Wisconsin. The transactions also include intra-market exchanges between the Company and T-Mobile in Philadelphia, Wilmington, Atlantic City and various markets in Texas and New Mexico. In connection with the closing of these transactions, the Company will cancel a portion of the indebtedness owed by Savary Island to Cricket. The closing of each transaction is subject to customary closing conditions, including the consent of the FCC. The wireless licenses to be assigned by the Company and Savary Island to T-Mobile have been classified as assets held for sale at their carrying value of $188.0 million in the Company's condensed consolidated balance sheet as of March 31, 2012, because at that time the terms of the exchange were substantially certain and the transaction had met all the criteria prescribed by the authoritative guidance for held-for-sale classification.
On November 3, 2011, the Company entered into license purchase agreements to acquire 12 MHz of 700 MHz A block spectrum in Chicago from Verizon Wireless for $204 million and to sell excess PCS and AWS spectrum in various markets across the U.S. to Verizon Wireless for $188 million. The closing of both transactions is subject to customary closing conditions, including the consent of the FCC. The Company currently anticipates that both transactions will close simultaneously. The wireless licenses to be sold by the Company to Verizon Wireless have been classified as assets held for sale at their carrying value of $119.1 million in the condensed consolidated balance sheets as of March 31, 2012 and December 31, 2011.
 
Also on November 3, 2011, Savary Island entered into a license purchase agreement with Verizon Wireless to sell AWS spectrum in various markets to Verizon Wireless for $172 million. Savary Island has agreed to use substantially all of the proceeds from this sale to prepay a portion of its indebtedness to Cricket under the Savary Island Credit Agreement at the closing of the transaction. The closing of the transaction is subject to customary closing conditions, including the consent of the FCC. The wireless licenses to be sold by Savary Island to Verizon Wireless have been classified as assets held for sale at their carrying value of $85.2 million in the condensed consolidated balance sheets as of March 31, 2012 and December 31, 2011.

On February 11, 2011, the Company entered into an agreement with Global Tower, LLC (“GTP”) to sell certain of the Company's telecommunications tower assets in one or more closings. During the second and third quarters of 2011, the Company sold those telecommunications towers and related assets for approximately $25.8 million in cash. The transaction was structured as a sale lease-back financing, in which the Company entered into a 10-year lease agreement with GTP to continue the 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. Cricket controls STX Operations through a 75.75% controlling membership interest in its parent company STX Wireless. On October 1, 2010, the Company and various entities doing business as Pocket Communications ("Pocket") contributed substantially all of their respective wireless spectrum and operating assets in the South Texas region to STX Wireless to create a joint venture to provide Cricket service 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 approximately $40.7 million in cash.

The joint venture strengthens the Company's presence and competitive positioning in the South Texas region. Commencing October 1, 2010, STX Operations began providing Cricket service to approximately 700,000 customers, of which approximately 323,000 were contributed by Pocket, with a network footprint covering population and potential customers ("POPs") of approximately 4.4 million.

The Company accounted for the acquisition of Pocket's business as a business purchase combination in accordance with the authoritative guidance for business combinations, with the Company as the acquirer. The consideration provided to Pocket, in exchange for Pocket's business, was allocated to the tangible and intangible assets acquired and liabilities assumed by STX Wireless based on their fair values as of October 1, 2010. The excess of the purchase price over the fair values of the net assets acquired was recorded as goodwill.



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Pocket's 24.25% non-controlling membership interest in STX Wireless was recorded in mezzanine equity as a component of redeemable non-controlling interests. The non-controlling interest was initially recognized as part of the purchase accounting in the amount of $51.5 million. The $51.5 million amount comprised the sum of Pocket's proportionate share (24.25%) of the fair value in the business contributed to the joint venture by Pocket plus its proportionate share (24.25%) of the net equity of the business contributed by Cricket.

The joint venture is controlled and managed by Cricket 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, Pocket is obligated to sell to the Company all of its membership interests in STX Wireless. The purchase price for Pocket's membership interests would be equal to 24.25% of the product of Leap's enterprise value-to-revenue multiple for the four most recently completed fiscal quarters multiplied by the total revenues of STX Wireless and its subsidiaries over that same period, subject to adjustment in certain circumstances. The purchase price 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 certain distributions made to Pocket, as well as 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 three months ended March 31, 2012 and for the year ended December 31, 2011, the Company recorded a net accretion expense of approximately $3.9 million and a net accretion benefit of $8.9 million, respectively, to bring the carrying value of Pocket's membership interests in STX Wireless to its estimated redemption value of $94.5 million and $90.7 million, respectively.

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. Such loans will 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.

In a separate transaction, on January 3, 2011, the Company acquired Pocket's customer assistance call center for $850,000. The Company accounted for this transaction as a business purchase combination in accordance with the authoritative guidance for business combinations. A portion of the purchase price was assigned to property and equipment and the remaining amount was allocated to goodwill.

During 2011, the Company completed the integration of the Cricket and Pocket operating assets in the South Texas region so that the combined network and retail operations of the STX Wireless joint venture operate more efficiently.

Savary Island Venture

Cricket owns an 85% non-controlling membership interest in Savary Island, which holds wireless spectrum in the upper Midwest portion of the U.S. and which leases a portion of that spectrum to Cricket. Cricket service was previously offered in greater Chicago and Southern Wisconsin by Denali, an entity in which the Company owned an 82.5% non-controlling membership interest. In December 2010, Cricket purchased the remaining 17.5% controlling membership interest in Denali that it did not previously own. Immediately prior to such purchase, Denali contributed all of its wireless spectrum outside of the Chicago and Southern Wisconsin operating markets and a related spectrum lease to Savary Island, a newly formed venture, in exchange for an 85% non-controlling membership interest. Savary Island acquired this spectrum as a “very small business” designated entity under FCC regulations. Ring Island Wireless, LLC (“Ring Island”) contributed $5.1 million of cash to Savary Island in exchange for a 15% controlling membership interest. On March 31, 2011, Denali and its subsidiaries were merged with and into Cricket, with Cricket as the surviving entity.

Under the amended and restated limited liability company agreement of Savary Island (the “Savary Island LLC Agreement”), Ring Island has the right to put its entire controlling membership interest in Savary Island to Cricket during the 30-day period commencing on the earlier to occur of May 1, 2012 (based on current FCC rules) and the date of a sale of all or substantially all


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of the assets, or the liquidation, of Savary Island, and during any 30-day period commencing after a breach by Cricket of its obligation to pay spectrum lease fees or fund working capital loans under the Savary Island Credit Agreement (see below) which breach has continued for 120 days after written notice of breach. The purchase price for such sale is an amount equal to Ring Island's equity contributions to Savary Island less any optional distributions made pursuant to the Savary Island LLC Agreement, plus $150,000 if the sale is consummated prior to May 1, 2017 without incurring any unjust enrichment payments. If the put option is exercised, the consummation of the sale will be subject to FCC approval. The Company has recorded this obligation to purchase Ring Island's controlling membership interest in Savary Island as a component of redeemable non-controlling interest in the condensed consolidated balance sheets. Savary Island has guaranteed Cricket's put obligations under the Savary Island LLC Agreement, which guaranty is secured on a first-lien basis by certain assets of Savary Island. Under the Savary Island LLC Agreement, Savary Island is also required to make monthly mandatory distributions to Ring Island. Savary Island is also party to a management services agreement with Cricket, pursuant to which Cricket provides management services to Savary Island in exchange for a management fee.
 
The Company attributes profits and losses to Ring Island's redeemable non-controlling interests each reporting period. To the extent that the redemption price for Ring Island's controlling membership interest exceeds the value of Ring Island's net interest in Savary Island 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.  However, the Company would not reduce the carrying amount of the redeemable non-controlling interest below the redemption price. Both the attribution of profit or loss and the accretion of the redeemable non-controlling interest are presented as a component of accretion of redeemable non-controlling interests and distributions, net of tax, in the condensed consolidated statements of comprehensive income.  As of March 31, 2012 and December 31, 2011, this redeemable non-controlling interest had a carrying value of $5.3 million.
 
At the closing of the formation of the venture, Savary Island assumed $211.6 million of the outstanding loans then owed by Denali and its subsidiaries to Cricket. In connection with Savary Island's assumption of such loans, Cricket, Savary Island and Savary Island's subsidiaries entered into an amended and restated senior secured credit agreement, dated as of December 27, 2010 (the “Savary Island Credit Agreement”) to amend and restate the terms of the Denali senior secured credit agreement applicable to the assumed loans. Under the Savary Island Credit Agreement, Cricket also agreed to loan Savary Island up to an additional $5.0 million to fund its working capital needs. In connection with the closing of a license exchange transaction with T-Mobile on November 30, 2011, Savary Island assigned 10 MHz of unused wireless spectrum in Indianapolis, IN and Minneapolis, MN to T-Mobile and Cricket canceled $41.1 million in principal amount of indebtedness owed by Savary Island under the Savary Island Credit Agreement. As of March 31, 2012 and December 31, 2011, borrowings outstanding under the Savary Island Credit Agreement (excluding accrued interest) totaled $170.5 million. Loans under the Savary Island Credit Agreement (including the assumed loans) accrue interest at the rate of 9.5% per annum and such interest is added to principal annually. All outstanding principal and accrued interest is due in May 2021. Outstanding principal and accrued interest are due in quarterly installments commencing May 2018. However, if Ring Island exercises its put under the Savary Island LLC Agreement prior to such date, then the amortization commencement date under the Savary Island Credit Agreement will be the later of the amortization commencement date and the put closing date. Savary Island may prepay loans under the Savary Island Credit Agreement at any time without premium or penalty. The obligations of Savary Island and its subsidiaries under the Savary Island Credit Agreement are secured by all of the personal property, fixtures and owned real property of Savary Island and its subsidiaries, subject to certain permitted liens. The Savary Island Credit Agreement and the related security agreements contain customary representations, warranties, covenants and conditions.

Note 8.
Arrangements with Variable Interest Entities and Joint Ventures

As described in Note 2, the Company consolidates its non-controlling membership interest in Savary Island in accordance with the authoritative guidance for the consolidation of variable interest entities because Savary Island is a variable interest entity and, among other things, the Company has entered into an agreement with Savary Island's other member which establishes a specified purchase price in the event that Ring Island exercises its right to sell its membership interest to the Company. Also, as described in Note 2, 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.









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The aggregate carrying amount and classification of the assets and liabilities of Savary Island, excluding intercompany accounts and transactions, as of March 31, 2012 and December 31, 2011 are presented in the table below (in thousands):

 
March 31,
2012
 
December 31,
2011
 
 
 
 
Assets
 
 
 
Cash and cash equivalents
$
11,051

 
$
7,084

Wireless licenses
34,022

 
41,947

Assets held for sale (1)
$
93,115

 
$
85,190

Total assets
$
138,188

 
$
134,221

Liabilities
 
 
 
Other current liabilities
$
8

 
$
5

Total liabilities
$
8

 
$
5


(1)
Represents the carrying value of wireless licenses to be sold to Verizon Wireless and assigned to T-Mobile at the closings under the license purchase and exchange agreements discussed in "Note 7. Significant Acquisitions and Other Transactions."

The following table provides a summary of the changes in value of the Company's redeemable non-controlling interests (in thousands):
 
Three Months Ended March 31,
 
2012
 
2011
 
 
 
 
Beginning balance, January 1
$
95,910

 
$
104,788

Accretion of redeemable non-controlling interests
4,105

 
9,771

Other
(255
)
 
(269
)
Ending balance, March 31,
$
99,760

 
$
114,290


Note 9.
Unrestricted Subsidiaries
In July 2011, the Company's board of directors designated Cricket Music and Cricket Music's wholly-owned subsidiary Cricket Music Operations, LLC (“Music Operations”) as “Unrestricted Subsidiaries” under the indentures governing Cricket's senior notes. Music Operations holds certain hardware, software and intellectual property relating to Cricket's Muve Music service. The financial position and results of operations of Cricket Music and Music Operations are included in the Company's condensed consolidated financial statements included in this report. Together with STX Wireless and Savary Island, Cricket Music and Music Operations are presented as “Non-Guarantors” within the Company's condensed consolidating financial statements included in Note 12.
As required by 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 March 31, 2012 and December 31, 2011 and results of operations of Cricket Music and Music Operations for the three months ended March 31, 2012 in the following tables separately (in thousands):

 
March 31,
2012
 
December 31,
2011
Assets
 
 
 
Cash and cash equivalents
$
1

 
$
1

Property and equipment, net
8,310

 
9,435

Total assets
$
8,311

 
$
9,436

Liabilities and stockholders' equity
 
 
 
Other current liabilities
2

 

Stockholders' equity
8,309

 
9,436

Total liabilities and stockholders' equity
$
8,311

 
$
9,436




17



 
Three Months Ended
 
March 31, 2012
Revenues
$

Operating expenses
 
Depreciation and amortization
$
1,124

Other
4

Total operating expenses
1,128

Operating loss
(1,128
)
Net loss
$
(1,128
)

Note 10.
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 2012 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 2012 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 months ended March 31, 2012 and 2011 by applying the actual effective tax rate to the year-to-date income (loss).

The Company periodically assesses the likelihood that its deferred tax assets will be recoverable from future taxable income. 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. 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 months ended March 31, 2012, 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 March 31, 2012 and December 31, 2011, the Company recorded a valuation allowance offsetting substantially all of its deferred tax assets.

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 March 31, 2012, the Company had federal and state NOLs of approximately $2.6 billion which begin to expire in 2022 for federal income tax purposes and of which $37.2 million will expire at the end of 2012 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 $991.4 million, the Company's ability to utilize these NOLs will depend upon the availability of future taxable income during the carryforward period 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. The occurrence of such a change generally limits the amount of NOL carryforwards a company could utilize in a given year to the aggregate fair market value of the company's common stock immediately prior to the ownership change, multiplied by the long-term tax-exempt interest rate in effect for the month of the ownership change.

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

On August 30, 2011, the Company’s board of directors adopted a Tax Benefit Preservation Plan to help deter acquisitions of Leap common stock that could result in an ownership change under Section 382 and thus help preserve the Company’s ability to


18



use its NOL carryforwards. 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.

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 11.
Commitments and Contingencies

As more fully described below, the Company is involved in a variety of lawsuits, claims, investigations and proceedings concerning intellectual property, commercial, business practices and other matters. Due in part to the expansion and development of its business operations, the Company has become subject to increased amounts of litigation, including disputes alleging intellectual property infringement.

The Company believes that any damage amounts alleged by plaintiffs in the matters discussed below 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. Unless otherwise indicated, the Company cannot currently estimate the possible loss or range of losses for the matters discussed below. 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.

Patent Litigation

DNT

On February 1, 2012, a matter brought against the Company by DNT LLC ("DNT") on May 1, 2009 in the United States District Court for the Eastern District of Virginia, Richmond Division was dismissed. DNT had alleged that the Company used, encouraged the use of, sold, offered for sale and/or imported voice and data service and wireless modem cards for computers designed to be used in conjunction with cellular networks and that such acts constituted both direct and indirect infringement of U.S. Reissued Patent No. RE37,660 entitled “Automatic Dialing System.” DNT had further alleged that the Company's infringement was willful, and the complaint sought an injunction against further infringement, unspecified damages (including enhanced damages) and attorneys' fees. The Company entered into an agreement with DNT to settle this matter on December 11, 2011.

Realtime Data

The Company is currently involved in a matter with Realtime Data, LLC ("Realtime") in the United States District Court for the Eastern District of Texas relating to alleged infringement of U.S. Patent Nos. 7,161,506, 7,321,937, 7,352,300 and 7,415,530. Realtime alleges that the Company and the other defendants, which include AT&T, Verizon Wireless, Sprint, T-Mobile and MetroPCS, each infringe these patents through their use of third-party compression software and servers for data optimization over their networks. The complaint seeks unspecified monetary damages as well as costs and attorneys' fees. The Company was originally sued by Realtime in this matter on September 23, 2010. The court held a claim construction hearing on the patents on April 12, 2012, and trial on this matter is scheduled to begin on February 11, 2013.

Other Litigation, Claims and Disputes

In addition to the matters described above, the Company is often involved in certain other matters which generally arise in the ordinary course of business and which seek monetary damages and other relief. Based upon information currently available to the Company, none of these other matters is expected to have a material adverse effect on the Company's business, financial condition or results of operations.





19



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.

Wholesale Agreement

In August 2010, the Company entered into a wholesale agreement with an affiliate of Sprint Nextel which the Company uses to offer Cricket services in nationwide retailers outside of the Company's 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 will pay Sprint a specified amount per month for each subscriber activated on its network, subject to periodic market-based adjustments. The Company has agreed to provide Sprint with a minimum of $300 million of revenue under the agreement, as amended, over the initial five-year term (against which the Company can credit up to $100 million of service revenue under other existing commercial arrangements between the companies), with a minimum of $20 million of revenue to be provided in 2011, a minimum of $75 million of revenue to be provided in 2012, a minimum of $80 million of revenue to be provided in 2013, a minimum of $75 million of revenue to be provided in 2014 and a minimum of $50 million of revenue to be provided in 2015. Any revenue provided by the Company in a given year above the minimum revenue commitment for that particular year will be 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 revenue commitment, with the percentage to be paid depending on the year in which the change of control agreement was entered into, being 30% for any such agreement entered into in 2012, 20% for any such agreement entered into in 2013 and 10% for any such agreement entered into in 2014 or 2015.

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 revenue 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.

Other Agreements

In April 2012, the Company entered into a multi-year supply agreement and began engineering and information technology development work with the supplier under the agreement in anticipation of Company purchases. The parties intend to negotiate and enter into a significant purchase commitment in connection with the supply agreement. The Company currently expects to enter into the purchase commitment in the near term. However, if the Company and the supplier do not agree upon a purchase commitment, the Company has agreed to pay the supplier $20 million to compensate the supplier for its effort and expense in connection with the development work.



20



Note 12.
Guarantor Financial Information

The $3,000 million of senior notes issued by Cricket (the “Issuing Subsidiary”) are comprised of $300 million of unsecured senior notes due 2015, $1,100 million of senior secured notes due 2016 and $1,600 million of unsecured senior notes due 2020. The notes are jointly and severally guaranteed on a full and unconditional basis by Leap (the “Guarantor Parent Company”) and Cricket License Company, LLC, a wholly-owned subsidiary of Cricket (the “Guarantor Subsidiary”).

The indentures governing these notes limit, 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, Savary Island, Cricket Music and their respective subsidiaries) and total consolidated Leap and subsidiaries as of March 31, 2012 and December 31, 2011 and for the three months ended March 31, 2012 and 2011 is presented below. The equity method of accounting is used to account for ownership interests in subsidiaries, where applicable.



21



Condensed Consolidating Balance Sheet as of March 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
$
67

 
$
257,955

 
$

 
$
97,896

 
$

 
$
355,918

Short-term investments

 
280,787

 

 

 

 
280,787

Inventories

 
94,621

 

 
4,958

 

 
99,579

Deferred charges

 
57,615

 

 
41

 

 
57,656

Other current assets
2,189

 
131,264

 

 
437

 
(3,279
)
 
130,611

Total current assets
2,256

 
822,242

 

 
103,332

 
(3,279
)
 
924,551

Property and equipment, net

 
1,879,265

 

 
67,474

 

 
1,946,739

Investments in and advances to affiliates and consolidated subsidiaries
819,546

 
2,260,469

 
29,550

 

 
(3,109,565
)
 

Wireless licenses

 

 
1,502,936

 
98,935

 

 
1,601,871

Assets held for sale

 

 
299,216

 
93,115

 

 
392,331

Goodwill

 
11,222

 

 
20,664

 

 
31,886

Intangible assets, net

 
16,738

 

 
19,942

 

 
36,680

Other assets
3,529

 
55,380

 

 
9,684

 

 
68,593

Total assets
$
825,331

 
$
5,045,316

 
$
1,831,702

 
$
413,146

 
$
(3,112,844
)
 
$
5,002,651

Liabilities and Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
 
Accounts payable and accrued liabilities
$
143

 
$
346,185

 
$

 
$
4,282

 
$

 
$
350,610

Current maturities of long-term debt

 
21,911

 

 

 

 
21,911

Intercompany payables
58,558

 
277,169

 

 
34,450

 
(370,177
)
 

Other current liabilities
2,444

 
282,571

 
2

 
17,232

 
(3,279
)
 
298,970

Total current liabilities
61,145

 
927,836

 
2

 
55,964

 
(373,456
)
 
671,491

Long-term debt
250,000

 
2,950,591

 

 
195,086

 
(195,086
)
 
3,200,591

Deferred tax liabilities

 
344,419

 

 

 

 
344,419

Other long-term liabilities

 
150,783

 

 
21,421

 

 
172,204

Total liabilities
311,145

 
4,373,629

 
2

 
272,471

 
(568,542
)
 
4,388,705

Redeemable non-controlling interests

 
99,760

 

 

 

 
99,760

Stockholders' equity
514,186

 
571,927

 
1,831,700

 
140,675

 
(2,544,302
)
 
514,186

Total liabilities and stockholders' equity
$
825,331

 
$
5,045,316

 
$
1,831,702

 
$
413,146

 
$
(3,112,844
)
 
$
5,002,651




22



Condensed Consolidating Balance Sheet as of December 31, 2011 (unaudited and in thousands):

 
Guarantor
Parent
Company
 
Issuing
Subsidiary
 
Guarantor
Subsidiary
 
Non-Guarantor
Subsidiaries
 
Consolidating
and
Eliminating
Adjustments
 
Consolidated
 
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
91

 
$
262,971

 
$

 
$
82,181

 
$

 
$
345,243

Short-term investments

 
405,801

 

 

 

 
405,801

Inventories

 
110,710

 

 
6,247

 

 
116,957

Deferred charges

 
57,936

 

 
43

 

 
57,979

Other current assets
2,279

 
131,331

 

 
849

 
(2
)
 
134,457

Total current assets
2,370

 
968,749

 

 
89,320

 
(2
)
 
1,060,437

Property and equipment, net

 
1,876,031

 

 
81,343

 

 
1,957,374

Investments in and advances to affiliates and consolidated subsidiaries
918,386

 
2,249,019

 
27,863

 

 
(3,195,268
)
 

Wireless licenses

 

 
1,682,111

 
106,859

 

 
1,788,970

Assets held for sale

 

 
119,066

 
85,190

 

 
204,256

Goodwill

 
11,222

 

 
20,664

 

 
31,886

Intangible assets, net

 
17,418

 

 
24,059

 

 
41,477

Other assets
3,894

 
59,592

 

 
4,804

 

 
68,290

Total assets
$
924,650

 
$
5,182,031

 
$
1,829,040

 
$
412,239

 
$
(3,195,270
)
 
$
5,152,690

Liabilities and Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
 
Accounts payable and accrued liabilities
$
79

 
$
447,293

 
$

 
$
12,906

 
$

 
$
460,278

Current maturities of long-term debt

 
21,911

 

 

 

 
21,911

Intercompany payables
56,009

 
281,546

 

 
32,811

 
(370,366
)
 

Other current liabilities
5,247

 
239,752

 

 
11,360

 
(2
)
 
256,357

Total current liabilities
61,335

 
990,502

 

 
57,077

 
(370,368
)
 
738,546

Long-term debt
250,000

 
2,948,749

 

 
190,572

 
(190,572
)
 
3,198,749

Deferred tax liabilities

 
333,804

 

 

 

 
333,804

Other long-term liabilities

 
148,362

 

 
24,004

 

 
172,366

Total liabilities
311,335

 
4,421,417

 

 
271,653

 
(560,940
)
 
4,443,465

Redeemable non-controlling interests

 
95,910

 

 

 

 
95,910

Stockholders' equity
613,315

 
664,704

 
1,829,040

 
140,586

 
(2,634,330
)
 
613,315

Total liabilities and stockholders' equity
$
924,650

 
$
5,182,031

 
$
1,829,040

 
$
412,239

 
$
(3,195,270
)
 
$
5,152,690




23



Condensed Consolidating Statement of Comprehensive Income for the Three Months Ended March 31, 2012 (unaudited and in thousands):

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

 
$
685,710

 
$

 
$
88,272

 
$
16

 
$
773,998

Equipment revenues

 
45,250

 

 
6,371

 

 
51,621

Other revenues

 
4,010

 
29,689

 
1,076

 
(34,775
)
 

Total revenues

 
734,970

 
29,689

 
95,719

 
(34,759
)
 
825,619

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

 
267,950

 

 
24,110

 
(30,749
)
 
261,311

Cost of equipment

 
219,348

 

 
28,499

 

 
247,847

Selling and marketing

 
85,033

 

 
10,521

 

 
95,554

General and administrative
2,737

 
78,485

 
190

 
12,297

 
(4,010
)
 
89,699

Depreciation and amortization

 
130,183

 

 
16,360

 

 
146,543

Total operating expenses
2,737

 
780,999

 
190

 
91,787

 
(34,759
)
 
840,954

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

 
(1,391
)
 

 
923

 

 
(468
)
Operating income (loss)
(2,737
)
 
(47,420
)
 
29,499

 
4,855

 

 
(15,803
)
Equity in net income (loss) of consolidated subsidiaries
(98,586
)
 
29,842

 

 

 
68,744

 

Equity in net income of investees, net

 
193

 

 

 

 
193

Interest income
6,063

 
4,540

 

 
2

 
(10,576
)
 
29

Interest expense
(3,179
)
 
(69,925
)
 

 
(4,514
)
 
10,576

 
(67,042
)
Income (loss) before income taxes
(98,439
)
 
(82,770
)
 
29,499

 
343

 
68,744

 
(82,623
)
Income tax expense

 
(11,711
)
 

 

 

 
(11,711
)
Net income (loss)
(98,439
)
 
(94,481
)
 
29,499

 
343

 
68,744

 
(94,334
)
Accretion of redeemable non-controlling interests

 
(4,105
)
 

 

 

 
(4,105
)
Net income (loss) attributable to common stockholders
$
(98,439
)
 
$
(98,586
)
 
$
29,499

 
$
343

 
$
68,744

 
$
(98,439
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
(98,439
)
 
(94,481
)
 
29,499

 
343

 
68,744

 
(94,334
)
Net unrealized holding gains on investments, net of tax
2

 
2

 

 

 
(2
)
 
2

Comprehensive income (loss)
$
(98,437
)
 
$
(94,479
)
 
$
29,499

 
$
343

 
$
68,742

 
$
(94,332
)



24



Condensed Consolidating Statement of Comprehensive Income for the Three Months Ended March 31, 2011 (unaudited and in thousands):

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

 
$
594,824

 
$

 
$
83,571

 
$
16

 
$
678,411

Equipment revenues

 
87,444

 

 
14,059

 

 
101,503

Other revenues

 
4,511

 
23,703

 
969

 
(29,183
)
 

Total revenues

 
686,779

 
23,703

 
98,599

 
(29,167
)
 
779,914

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

 
237,166

 

 
23,435

 
(24,656
)
 
235,945

Cost of equipment

 
199,901

 

 
29,894

 

 
229,795

Selling and marketing

 
93,324

 

 
16,528

 

 
109,852

General and administrative
2,752

 
81,789

 
188

 
15,191

 
(4,511
)
 
95,409

Depreciation and amortization

 
115,088

 

 
11,586

 

 
126,674

Total operating expenses
2,752

 
727,268

 
188

 
96,634

 
(29,167
)
 
797,675

Loss on sale or disposal of assets, net

 
(292
)
 

 
(57
)
 

 
(349
)
Operating income (loss)
(2,752
)
 
(40,781
)
 
23,515

 
1,908

 

 
(18,110
)
Equity in net income (loss) of consolidated subsidiaries
(96,361
)
 
20,445

 

 

 
75,916

 

Equity in net income of investees, net

 
1,179

 

 

 

 
1,179

Interest income
6,063

 
5,042

 

 

 
(11,041
)
 
64

Interest expense
(3,161
)
 
(61,721
)
 

 
(4,978
)
 
11,041

 
(58,819
)
Income (loss) before income taxes
(96,211
)
 
(75,836
)
 
23,515

 
(3,070
)
 
75,916

 
(75,686
)
Income tax expense

 
(10,754
)
 

 

 

 
(10,754
)
Net income (loss)
(96,211
)
 
(86,590
)
 
23,515

 
(3,070
)
 
75,916

 
(86,440
)
Accretion of redeemable non-controlling interests

 
(9,771
)
 

 

 

 
(9,771
)
Net income (loss) attributable to common stockholders
$
(96,211
)
 
$
(96,361
)
 
$
23,515

 
$
(3,070
)
 
$
75,916

 
$
(96,211
)
Other comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
(96,211
)
 
(86,590
)
 
23,515

 
(3,070
)
 
75,916

 
(86,440
)
Net unrealized holding gains on investments, net of tax
9

 
9

 

 

 
(9
)
 
9

Comprehensive income (loss)
$
(96,202
)
 
$
(86,581
)
 
$
23,515

 
$
(3,070
)
 
$
75,907

 
$
(86,431
)



25



Condensed Consolidating Statement of Cash Flows for the Three Months Ended March 31, 2012 (unaudited and in thousands):
 
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
$
(24
)
 
$
17,059

 
$

 
$
18,322

 
$

 
$
35,357