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FORM 10-Q

(Mark One)

For the quarterly period ended June 30, 2003

OR

For the transition period from ____________ to ____________ .

Commission File Number 0-29752

Leap Wireless International, Inc.

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

     Not applicable
(Former name, former address and former fiscal year, if changed since last reported)

     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 ninety days. Yes [X] No [  ]

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

     The number of shares of registrant’s common stock outstanding on September 17, 2003 was 58,704,192.

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LEAP WIRELESS INTERNATIONAL, INC.

QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended June 30, 2003

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PART I
FINANCIAL INFORMATION

Item 1. Financial Statements

LEAP WIRELESS INTERNATIONAL, INC.
(DEBTORS-IN-POSSESSION)

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)

See accompanying notes to condensed consolidated financial statements.

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LEAP WIRELESS INTERNATIONAL, INC.
(DEBTORS-IN-POSSESSION)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share data)

See accompanying notes to condensed consolidated financial statements.

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LEAP WIRELESS INTERNATIONAL, INC.
(DEBTORS-IN-POSSESSION)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)

See accompanying notes to condensed consolidated financial statements.

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LEAP WIRELESS INTERNATIONAL, INC.
(DEBTORS-IN-POSSESSION)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. The Company and Nature of Business

     Leap Wireless International, Inc., a Delaware corporation, together with its wholly owned subsidiaries (the “Company”), is a wireless communications carrier that offers digital wireless service in the United States under the brand “Cricket^®.” Leap Wireless International, Inc. (“Leap”) conducts operations through its subsidiaries. Leap has no independent operations or sources of operating revenue other than through dividends, if any, from its operating subsidiaries. Cricket service is operated by the Company’s wholly owned subsidiary, Cricket Communications, Inc. (“Cricket”), a wholly owned subsidiary of Cricket Communications Holdings, Inc. (“Cricket Communications Holdings”). Cricket and the related subsidiaries of Leap and Cricket that hold assets that are used in the Cricket business or that hold assets pledged under Cricket’s senior secured vendor credit facilities are collectively referred to herein as the “Cricket companies.” The Company has launched wireless service in 40 markets, although the Company has announced that it intends to discontinue service in its Hickory, North Carolina market as of September 30, 2003 (Note 8).

Note 2. Proceedings Under Chapter 11 of the Bankruptcy Code

     On April 13, 2003 (the “Petition Date”), Leap, Cricket and substantially all of their subsidiaries filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code (“Chapter 11”) in the United States Bankruptcy Court for the Southern District of California (the “Bankruptcy Court”) (jointly administered as Case Nos. 03-03470-LA to 03-03535-LA). These entities comprise substantially all of the operations of the Company. Each of the debtors continues to manage its properties and operate its business as a “debtor-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with Sections 1107(a) and 1108 of Chapter 11.

     The Company’s Chapter 11 filings raise substantial doubt about its ability to continue as a going concern.

Plan of Reorganization Procedures

     As provided by Chapter 11, for 120 days after the Petition Date, the debtors have the exclusive right to propose and file a plan of reorganization with the Bankruptcy Court and an additional 60 days within which to solicit acceptance by creditors and equity security holders, if required, of any such plan. The Bankruptcy Court may shorten or extend the period of exclusivity for cause shown and, as long as the period of exclusivity continues, no other party may file a plan of reorganization. In addition, the debtors may request an extension of the exclusivity period. On August 4, 2003, the debtors filed a motion with the Bankruptcy Court seeking to extend the period during which the debtors have the exclusive right to propose and file a plan of reorganization to December 9, 2003 and to extend the period within which to solicit acceptance of the Plan (defined below) to February 9, 2004. The Bankruptcy Court has scheduled a hearing for September 25, 2003 to consider such motions. However, there can be no assurance that the Bankruptcy Court will grant such an extension. If the debtors fail to obtain an extension of the exclusivity period, any party in interest, including a creditor, an equity security holder or a committee of creditors, may then file a proposed plan of reorganization for the debtors.

     Under Chapter 11, the debtor files a disclosure statement with the Bankruptcy Court at the time it files a plan of reorganization. The disclosure statement summarizes the terms of the debtor’s plan of reorganization and contains information concerning, among other matters, the debtor’s history, business, results of operations, management, properties and liabilities and the assets available for distribution under its plan, as well as the anticipated organization and operation of the reorganized company. The disclosure statement also describes certain effects of plan confirmation, certain risk factors associated with the plan, the manner in which distributions will be made to the debtor’s creditors under the plan for all amounts that were owed to such parties on the petition date, and the confirmation process and voting procedures that holders of claims in impaired classes must follow for their votes to be counted.

     On July 30, 2003, the debtors filed their Fifth Amended Joint Plan of Reorganization (the “Plan”) and the accompanying disclosure statement (the “Disclosure Statement”) with the Bankruptcy Court. The Plan was the product of vigorous negotiations between the Company, the informal committee of Cricket’s senior secured vendor debtholders (the “Cricket Informal Creditors’ Committee”), the Official Unsecured Creditors Committee at Leap (the “Leap Official Creditors’ Committee”) and an informal

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committee of Leap’s noteholders (prior to the formation of the Leap Official Creditors’ Committee). Each of the Cricket Informal Creditors’ Committee and the Leap Official Creditors’ Committee has recommended to the creditors it represents that they vote in favor of approval of the Plan. On July 31, 2003, after notice and prior hearings, the Bankruptcy Court approved the Disclosure Statement, and the debtors then mailed the Plan and accompanying Disclosure Statement to, and began soliciting approval of the Plan from, those creditors entitled to vote on the Plan. The deadline to vote on the Plan was September 8, 2003. Based on a tabulation of votes received, the Company believes it has received sufficient affirmative votes from creditors to confirm the Plan, subject to approval of the Bankruptcy Court after the upcoming confirmation hearing. The Bankruptcy Court has scheduled the confirmation hearing for the Plan to commence the week of September 29, 2003. MCG has objected to the confirmation hearings proceeding as scheduled, and the Bankruptcy Court has scheduled a hearing to consider those objections on September 25, 2003. There can be no assurance that the confirmation hearings will be conducted on the current schedule, that the Plan will be confirmed by the Bankruptcy Court, or that such Plan will be consummated.

     Under the Plan, Cricket’s senior secured vendor debtholders will receive on the effective date of the Plan, on a pro rata basis, (1) senior secured notes with a face value of $350 million issued by reorganized Cricket, and (2) newly-issued shares of reorganized Leap common stock constituting 96.5% of the issued and outstanding equity of reorganized Leap as of the effective date of the Plan.

     Under the Plan, on or about 11 days after the confirmation date of the Plan, (1) holders of allowed general unsecured claims against Leap (including the unsecured claims of holders of Leap’s senior notes and senior discount notes) will receive on a pro rata basis, beneficial interests in a creditor trust (the “Leap Creditor Trust”) and will grant and receive certain releases to and from other creditors and (2) the Leap Creditor Trust will receive Leap’s unsecured cash, cash equivalents and short-term investments and interest thereon (which aggregated approximately $84.9 million as of June 30, 2003), less a reserve for administrative and priority claims and disputed claims against Leap, for distribution to the holders of allowed Leap general unsecured claims. In addition, on the effective date of the Plan, the Leap Creditor Trust will receive (1) newly issued shares of reorganized Leap common stock constituting 3.5% of the issued and outstanding equity of reorganized Leap as of the effective date of the Plan, for distribution to the holders of allowed Leap general unsecured claims, on a pro rata basis, and (2) other assets not used in the Cricket business (including a note receivable of $35.0 million that is currently in dispute (Note 7), nine wireless licenses, Leap’s equity interest in IAT Communications, Inc., certain causes of action and avoidance actions, certain tax refunds, and reimbursement of cash deposits previously made by Leap for contracts that will be assumed by reorganized Leap in connection with the bankruptcy proceedings) to be liquidated and the cash proceeds thereof distributed to the holders of allowed Leap general unsecured claims. Holders of secured claims with respect to Leap’s senior notes also will receive, on a pro rata basis, approximately $200,000 in cash previously pledged to secure payments of interest to the senior noteholders. On May 7, 2003, approximately $14.1 million of restricted cash that secured Leap’s obligations under its senior notes was distributed to the holders of Leap’s senior notes, as permitted by an order of the Bankruptcy Court.

     Under the Plan, the outstanding shares of Leap common stock, warrants and options will be cancelled and the holders of such interests will not receive any distributions under the Plan.

     Under the Plan, the holders of general unsecured claims against Cricket will receive de minimus or no distributions in respect of their claims. Holders of general unsecured claims against the other subsidiaries of Leap and Cricket will receive no distributions under the Plan.

     The Plan contains other customary terms and conditions, and will require approval by the Federal Communications Commission (“FCC”) for the transfer of wireless licenses associated with the change of control that will occur upon the Company’s emergence from bankruptcy.

     The foregoing summary does not purport to be complete and is qualified in its entirety by reference to the petitions and the motions, pleadings and papers on file with the Bankruptcy Court, including the Plan and the accompanying Disclosure Statement, which were filed as Exhibits 2.1 and 2.2, respectively, to Leap’s Current Report on Form 8-K dated July 30, 2003. The Disclosure Statement includes detailed information about the Plan. Nothing contained in this Form 10-Q is intended to be, nor should it be construed as, a solicitation for a vote on the Plan, which can only occur based on the official disclosure statement package that, as described above, was mailed to those creditors entitled to vote on the Plan on or about August 7, 2003.

First Day Motions and Other Chapter 11 Matters

     Since the filing of the bankruptcy petitions, the Bankruptcy Court has granted various debtor motions for relief designed to permit the debtors to continue their operations and business relationships with customers, vendors, employees and others and has entered orders authorizing the debtors to pay pre-petition and post-petition employee wages, salaries, benefits and certain other employee obligations and enter into certain executive severance agreements during the pendency of the Chapter 11 proceedings. In addition, the Bankruptcy Court has granted Cricket’s motion for an interim order authorizing the use of its cash collateral pursuant

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to a budget approved by the Cricket Informal Creditors’ Committee and its financial advisor. From time to time, the debtors have brought additional motions before the Bankruptcy Court for the approval of various matters as required by Chapter 11.

     Although the debtors are authorized to operate their business and manage their properties as debtors-in-possession, they may not engage in transactions outside the ordinary course of business without complying with the notice and hearing provisions of Chapter 11 and obtaining prior Bankruptcy Court approval. The Leap Official Creditors’ Committee has been appointed by the United States Trustee. The Leap Official Creditors’ Committee and various other parties in interest, including creditors holding pre-petition claims, such as the Cricket Informal Creditors’ Committee, have the right to appear and be heard on all matters that come before the Bankruptcy Court. In response to a motion by Gabelli Asset Management, Inc. and MCG PCS, Inc. (“MCG”) for the appointment of an equity security holders committee, the Bankruptcy Court issued a memorandum opinion dated June 16, 2003, declining to appoint an official equity committee. MCG has objected to the Plan and a number of other important positions taken by the debtors in connection with their Chapter 11 proceedings. The Company expects that MCG will continue to object to positions taken by the debtors in the bankruptcy proceedings.

     Shortly after the Petition Date, the debtors began notifying all known or potential creditors of the Chapter 11 filings. The Chapter 11 filings triggered defaults on substantially all debt and lease obligations of the debtors. Under Section 362 of Chapter 11, most pending pre-petition claims and litigation against the debtors were stayed automatically and, absent further order of the Bankruptcy Court, no party may take any action to recover such pre-petition claims, enforce any pre-petition lien against or obtain possession of any property from the debtors. In addition, pursuant to Section 365 of Chapter 11, the debtors may reject or assume pre-petition executory contracts and unexpired nonresidential real property leases, and parties affected by rejections of these contracts or leases may file claims with the Bankruptcy Court in accordance with Chapter 11. Unless otherwise agreed, the assumption of an executory contract or lease generally will require the debtors to cure all prior defaults under the related executory contract or lease, including all pre-petition liabilities. Under the Plan, any such cure amounts shall be the responsibility of reorganized Cricket. The Company has filed lists of executory contracts and unexpired leases it intends to accept and reject with the Bankruptcy Court, although these lists are subject to amendment. The Company expects that liabilities subject to the proceedings will arise in the future as a result of the rejection of executory contracts and leases, and from the determination of the Bankruptcy Court (or agreement by parties in interest) of allowed claims for contingencies and other disputed amounts.

     Under Chapter 11, the rights and treatment of pre-petition creditors and equity security holders may be substantially altered. For example, under the priority scheme established by Chapter 11, certain post-petition liabilities and pre-petition liabilities need to be satisfied before stockholders are entitled to receive any distribution. Although the ultimate recovery to our creditors and common stockholders, if any, will not be determined until the confirmation and effectiveness of a plan of reorganization, under the Plan, the outstanding shares of Leap common stock, warrants and options will be cancelled, and the holders of such interests will not receive any distributions.

     Under any plan of reorganization in the Chapter 11 proceedings, management of Leap expects that there will be no value flowing to Leap as a result of its ownership interest in the Cricket companies, that unsecured claims against Leap will be satisfied at a fraction of their face value, and that there will be no value available for distribution to the common stockholders of Leap. Similarly, management expects that the holders of general unsecured claims against Cricket will receive de minimus or no distributions in respect of their claims. As a result, any investment in Leap or Cricket is highly speculative. Accordingly, the Company urges that appropriate caution be exercised with respect to existing and future investments in any equity or debt securities of Leap or Cricket.

     The Company currently expects that the Chapter 11 proceedings will not affect its ability to provide uninterrupted service to its customers. However, the Company believes that the Chapter 11 proceedings have negatively impacted its ability to attract and retain customers. The rights of the Company’s creditors and equity security holders will be determined through the Chapter 11 proceedings. However, the Company cannot provide any assurances as to the effect of the Chapter 11 proceedings on its business, creditors or equity security holders. The Company’s future results are dependent upon, among other things, the Company confirming and implementing a plan of reorganization with the Bankruptcy Court.

Liquidity

     As a result of the existing events of default under Cricket’s senior secured vendor credit facilities with Lucent Technologies, Inc. (“Lucent”), Nortel Networks, Inc. (“Nortel”), and Ericsson Credit AB and an affiliate (“Ericsson”), the credit facility lenders terminated their commitments under those agreements and the indebtedness under these facilities was accelerated by their terms. In addition, as a result of such defaults, the lenders under the facilities have the right to foreclose on the assets that have been pledged to secure these outstanding loans (with any such foreclosure now subject to the approval of the Bankruptcy Court). To date, the senior secured vendor debtholders have not exercised any material creditor remedies under the senior secured vendor

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credit facilities other than the termination of their commitments and the automatic acceleration of their debt. Because of the existing defaults under the senior secured vendor credit facilities and because Cricket is currently unable to fully repay the amounts outstanding under such facilities, and has been unable to raise new funds which would enable it to repay such amounts, the stock of the Cricket companies has no value to Leap. Payments of principal, interest and fees due under the senior secured vendor credit facilities and the purchase agreements with Lucent, Nortel and Ericsson generally are stayed during the pendency of the Chapter 11 proceedings.

     There can be no assurance that vendors and suppliers will continue to provide normal trade terms or credit on terms acceptable to the Cricket companies, if at all, or that customers will continue to do business with the Cricket companies. Generally, since the Chapter 11 filings, the Cricket companies have successfully continued to purchase goods and services from their vendors, although a number of vendors have shortened net payment terms, reduced the Cricket companies’ credit limits, or required the Cricket companies to pay for goods and services in advance. In addition, Lucent, a supplier of network products and services to the Cricket companies, declined to sell new products and services to the Cricket companies while the Cricket companies and Lucent negotiated the terms under which the Cricket companies will assume their contract with Lucent. Lucent has resumed selling services and supplies to the Cricket companies on a limited basis.

     If Cricket becomes unable to use cash collateral or a plan of reorganization is not confirmed or does not become effective, the Cricket companies may be forced to liquidate under the applicable provisions of the United States Bankruptcy Code. There can be no assurance of the level of recovery the Cricket senior secured vendor debtholders would receive in such a liquidation, and it is unlikely that any unsecured creditor of Cricket would receive any recovery in a liquidation.

     In August 2002, Leap issued 21,020,431 shares of common stock to MCG pursuant to a binding arbitration award. The Company’s issuance of these shares caused a change in the Company’s ownership as defined under Internal Revenue Code Section 382. Accordingly, the Company’s ability to utilize its net operating loss and capital loss carryforwards is subject to an annual limitation. Under the Plan, there will also be an additional change in the Company’s ownership in connection with its emergence from bankruptcy, which may further limit its ability to utilize its net operating loss and capital loss carryforwards. The Plan contemplates a significant reduction of the Company’s outstanding indebtedness and, as a result, the Company expects to realize a significant amount of cancellation of indebtedness income. Although the Company should not be required to recognize such cancellation of indebtedness income for tax purposes, the Company will be required to reduce its net operating loss and capital loss carryforwards by the amount of such income realized. If the amount of the cancellation of indebtedness income exceeds the amount of the Company’s net operating loss and capital loss carryforwards, the Company may be required to reduce other tax attributes (e.g., tax basis in its assets) by the amount of such excess. The Plan further contemplates the merger of certain subsidiaries and the transfer of the stock of certain Leap subsidiaries to Cricket. Management believes that these mergers and transfers will not result in significant income tax to the Company; however, if any changes to the Plan or additional mergers and transfers cannot be structured in a tax-efficient manner, the Company may owe significant income taxes as a result.

Note 3. Basis of Presentation

Interim Financial Statements

     The accompanying interim condensed consolidated financial statements have been prepared by the Company 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 for a complete set of financial statements. These condensed consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2002 filed with the Securities and Exchange Commission on April 15, 2003, and amended on April 16, 2003. In the opinion of management, the unaudited financial information for the interim periods presented reflects all adjustments necessary for a fair presentation. These adjustments are of a normal and recurring nature except for those adjustments described in this Note. The interim condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the continuity of operations, realization of assets and satisfaction of liabilities in the ordinary course of business. 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 accounts of Leap and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in the condensed consolidated financial statements. The

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Company has continued to present the financial statements of Leap and its wholly owned subsidiaries on a consolidated basis while in bankruptcy because Leap and each of its subsidiaries that has filed for bankruptcy continues to manage its properties and operate its business as a debtor-in-possession; management expects, and the Plan contemplates, that Leap will remain the ultimate parent of each of its subsidiaries (subject to any merger among subsidiaries); and, except for assets to be transferred to the Leap Creditor Trust, management expects that Leap and its subsidiaries will retain substantially all of their assets through the date of the Company’s emergence from bankruptcy.

Accounting Under Chapter 11

     As of the Petition Date, the Company implemented American Institute of Certified Public Accountants’ Statement of Position (“SOP”) 90-7, “Financial Reporting by Entities in Reorganization under the Bankruptcy Code.” SOP 90-7 requires that the Company’s pre-petition liabilities that are subject to compromise be reported separately on the balance sheet at an estimate of the amount that will ultimately be allowed by the Bankruptcy Court. SOP 90-7 also requires separate reporting of certain expenses, realized gains and losses and provisions for losses related to the Chapter 11 filings as reorganization items. In addition, the Company ceased accruing interest and amortizing debt discounts and debt issuance costs for pre-petition debt that is subject to compromise, which include its senior notes, senior discount notes, vendor financing agreements, note payable and Qualcomm Incorporated term loan.

     The Company expects that, upon the effective date of a plan of reorganization, it will implement fresh start reporting under the provisions of SOP 90-7, because the reorganization value of the emerging entity immediately before the date of confirmation is expected to be less than the total of all post-petition liabilities and allowed claims, and the holders of existing voting shares immediately before confirmation are expected to receive less than 50 percent of the voting shares of the emerging entity on a non-temporary basis. Under fresh start reporting:

	•		the Company’s reorganization value will be allocated to the fair value of its assets and any portion of the reorganization value that cannot be attributed to specific tangible or identified intangible assets will be reported as an intangible asset referred to as “reorganization value in excess of amounts allocable to identifiable assets”;
	•