SAMPLE. Company Risk Highlights. Financial Risks

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1 CFRA COMPANY RISK DASHBOARD Leap Wireless International, Inc. (LEAP) Updated: December 8, 11 Company Risk Highlights CFRA s Risk Dashboard provides multiple views of a company s risk. Each risk metric should be evaluated only within the framework of the methodology applied. For example, the earnings quality risk metric (QuickScore) is not comparable to the company s sustainability score (IVA). Please note that as metrics are derived from various research groups, we do our best to include the most recent update. Also note that research for global companies is based on their ADR. Company Overview Ticker: LEAP Financial Risks Revenue growth has accelerated in the last four quarters, with revenues up 6.6% in 3Q11. However, a slight increase in the level of accounts receivable may indicate that collection risk has increased. Medium Accounts receivable as measured in days (DSO) rose to 1 days, which represents at least a thirteenquarter high and contrasts with a range of 4 to 7 days in the prior twelve quarters. For a company in the telecom space, an increase in DSO could signal higher collection risk that may lead to higher bad debt charges in future periods. Question for Management: What is the primary reason for the faster growth in accounts receivable relative to revenues in 3Q11? Has collection risk increased? Deferred revenue measured in days (DSDR) increased slightly to 17 days in 3Q11 from 16 days in the prior year and is now close to the thirteen-quarter high of 18 days. CFRA is typically concerned when DSDR declines significantly as it may signal upcoming pressure on future revenue growth. Industry: Communication Services Leap Wireless International, Inc. (Leap) is a wireless communications carrier that offers digital wireless services in the United States under the Cricket brand. Leap s Cricket service offerings provide customers with unlimited wireless services for a flat rate without requiring a fixed term contract or a credit check. Cricket service is offered by Cricket, a wholly owned subsidiary of Leap, and is also offered by LCW Wireless Operations, LLC (LCW Operations), Denali Spectrum Operations, LLC (Denali Operations), and STX Wireless Operations, LLC (STX Operations). It controls STX Operations through a 75.75% controlling interest in its parent company, STX Wireless, LLC (STX Wireless). On March 3, 1, it acquired an additional 3.9% interest in LCW Wireless from CSM Wireless, LLC (CSM). On August 5, 1, it acquired the remaining 5.4% of the interests in LCW Wireless. Inventory trend is not concerning as the current level represents a four year low for the third quarter. Inventory measured in days (DSI) was just 14 days as of 3Q11 versus 17 days in the prior year and days two years ago. Had DSI increased significantly, we would have raised concern regarding possible future margin pressure from increased promotional activities or impairment charges. Although LEAP has not been profitable, CFFO has been positive and actually increased in the latest quarter. In addition, we see no risk of near-term liquidity pressure as LEAP has no current debt, has remained free cash flow positive, and had $8. million in cash and short term investments as of 3Q11. Risk Metrics Earnings Quality (QuickScore) Cash Flow Quality (QuickScore) Governance (GRId) # of Pending Class Actions M&A Activity 3 3 Average N/A Page 1

2 Key Risk Indicators Updated: December 8, 11 5 Year Market Cap Risk Highlights 3 Year Peak Market Cap Year Peak Market Cap 95.9 Debt Coverage Ratio. Altman Z Score CFRA Peer Group Clearwire (CLWR) U.S. Cellular Corp. (USM) Metro PCS Communications (PCS) 9 Dec 6 9 Jun 7 9 Dec 7 9 Jun 8 9 Dec 8 9 Jun 9 9 Dec 9 9 Jun 1 9 Dec 1 9 Jun 11 LEAP PCS USM CLWR 5 Year Price and Volume N/A N/A N/A 5,, 45,, 4,, 35,, 3,, 5,,,, 15,, 1,, 5,, 9 Dec 6 9 Jun 7 9 Dec 7 9 Jun 8 9 Dec 8 9 Jun 9 9 Dec 9 9 Jun 1 9 Dec 1 9 Jun Volume Closing Price Page

3 Financial Risk Indicators Updated: December 8, 11 Earnings QuickScore (QS) 1 Cash Flow QuickScore 1 3/1 Earnings QS Peer Group Average 3/1 Earnings QS Peer Group Average 3Q8 4Q8 1Q9 Q9 3Q9 4Q9 1Q1 Q1 3Q1 4Q1 1Q11 Q11 3Q11 3Q8 4Q8 1Q9 Q9 3Q9 4Q9 1Q1 Q1 3Q1 4Q1 1Q11 Q11 3Q11 Earnings QS Industry Average Earnings QS Industry Average Earnings QS Class Action Risk Average Risk 3 1 Cash Flow QS Class Action Risk 3 Average Risk 1 3Q8 4Q8 1Q9 Q9 3Q9 4Q9 1Q1 Q1 3Q1 4Q1 1Q11 Q11 3Q11 3Q8 4Q8 1Q9 Q9 3Q9 4Q9 1Q1 Q1 3Q1 4Q1 1Q11 Q11 3Q11 Earnings Class Action Risk Earnings Class Action Risk Earnings QS Peer Comparison Cash Flow QS Peer Comparison Q8 4Q8 1Q9 Q9 3Q9 4Q9 1Q1 Q1 3Q1 4Q1 1Q11 Q11 3Q11 3Q8 4Q8 1Q9 Q9 3Q9 4Q9 1Q1 Q1 3Q1 4Q1 1Q11 Q11 3Q11 LEAP CLWR PCS USM LEAP CLWR PCS USM Page 3

4 Financial Risk Indicators Updated: December 8, 11 Earnings Quality Metrics 3Q11 Q11 1Q11 4Q1 3Q1 Q1 1Q1 4Q9 3Q9 Q9 1Q9 4Q8 3Q8 Revenue Growth Q/Q.3%.4% 1.1% 17.4% 4.8% 3.1% 9.1%.3% 1.7% 13.1% 4.4% 4.5% Revenue Growth Y/Y 6.6%.% 19.% 18.1%.5% 6.% 11.4% 15.4%.6% 5.8% 5.3%.7% 1.% Gross margin.5% 5.8% 4.% 4.3% 31.% 37.% 3.% 31.7% 33.5% 36.% 33.% 34.8% 33.8% SG&A/Revenue 1.4% 3.5% 6.3% 7.9% 31.% 9.% 31.% 3.6% 33.1% 31.4% 34.% 33.9% 33.% R&D/Revenue D&A/Revenue D&A/Average PP&E Operating Margin 1.%.3%.% 3.6% 7.9% 1.% 1.%.4% 4.6%.7%.8%.5% Effective Tax Rate 14.4%.3% 14.% 16.7%.9% 179.9%.8% 1.% 16.6% 7.4% 16.9% 18.7% 5.8% Net Margin 9.% 8.5% 1.3% 35.% 88.9%.8% 1.4% 1.3% 1.7% 1.5% 8.5% 1.5% 9.8% DSO DSI DSP DSDR Soft Assets/Revenue 13.9% 16.4% 13.% 1.3% 14.% 1.% 14.% 13.% 1.1% 11.9% 6.1% 1.1% 6.5% Soft Liab/Revenue 6.% 51.% 51.9% 51.1% 63.6% 55.% 57.6% 55.4% 58.% 55.5% 56.3% 55.% 6.% ADA/Receivables PP&E/Total Assets 37.6% 38.7% 41.8% 4.1% 41.8% 39.5% 39.8% 39.4% 38.9% 37.9% 38.7% 36.4% 3.6% Intang./Total Assets 38.8% 39.% 4.% 4.% 4.3% 37.% 37.% 36.1% 36.% 35.8% 38.% 37.% 36.6% Debt/Equity 466.% 44.% 347.% 31.% 5.% 169.% 168.% 16.% 159.% 154.% 163.% 16.% 155.% CapEx/D&A Free Cash Flow Free Cash Flow TTM CFFO TTM CFFO TTM OI Page 4

5 Financial Risk Indicators Updated: December 8, 11 DSO Comparison 35 DSI Comparison Q8 4Q8 1Q9 Q9 3Q9 4Q9 1Q1 Q1 3Q1 4Q1 1Q11 Q11 3Q11 3Q8 4Q8 1Q9 Q9 3Q9 4Q9 1Q1 Q1 3Q1 LEAP CLWR PCS USM LEAP CLWR PCS USM Operating and Gross Margins PP&E and Intangibles as % of Total Assets 4Q1 1Q11 Q11 3Q11 4.% 45.% 35.% 4.% 3.% 35.% 5.%.% 15.% 1.% 5.% 3.% 5.%.% 15.%.% 1.% 5.% 5.% 1.% 3Q8 4Q8 1Q9 Q9 3Q9 4Q9 1Q1 Q1 3Q1 4Q1 1Q11 Q11 3Q11.% 3Q8 4Q8 1Q9 Q9 3Q9 4Q9 1Q1 Q1 3Q1 4Q1 1Q11 Q11 3Q11 Gross margin Operating margin PP&E/Total Assets Intang./Total Assets Page 5

6 Financial Risk Indicators Updated: December 8, 11 Risk assessment checklist Allowance for doubtful accounts and provisions for bad debts If disclosed, a decline in the related bad debt expense relative to sales Inventory accounting and analysis Large increases in obsolescence reserves Depreciation of property plant and equipment (PP&E) Significant decline in allowance for doubtful accounts relative to gross accounts receivable Changes in handset inventory accounting policies Rising inventory levels relative to cost of handset sales Depreciation consistently lower than capital expenditures Footnote disclosure of change in depreciable lives of PP&E Longer depreciable lives for PP&E than competitors Decline in depreciation expense relative to gross PP&E Capitalized interest Increase in interest capitalization as a percentage of capital expenditures Change in capitalized interest as a percentage of total interest costs Capitalized operating costs Increase in capital expenditures relative to revenue Declines in operating costs relative to revenue Stock based compensation Decrease in expected volatility assumption, expected life of option assumption of risk free rate assumption Increase in stock-based compensation relative to cash compensation expense Restructuring and other special charges Recurring and/or significan special charges, adjust to previous one-time charges, inclusion of operating costs in restructuring charges Accelerating the recognition of revenue Growth in accounts receivable and/or declines in deferred revenue. Change in revenue recognition disclosure Busines combinations - Risks related to purchase accounting A significant reduction in the acquired company's tangible assets if you are able to obtain historical financials of the target company Large purchase price adjustments which increase the amount of goodwill recorded Goodwill accounting for a higher portion of the purchase price allocation versus other acquisition in the industry Presentation of non-gaap operating metrics Change in definition of key operating (non-gaap) metrics Lack of definition for key operating (non-gaap) metrics Unusual volatility in operating (non-gaap) metric Page 6

7 Class Action Risk Updated: December 8, 11 Securities Class Action(s) Case ID Case Name Federal Court Filing Date Settlement Date 7.45 Leap Wireless International, Inc. (LEAP) USDC - California (Southern) Nov 7, 7 Oct 4, 1 ($13,75,) Named Defendants: Leap Wireless International, Inc., S. Douglas Hutcheson - CEO and Acting CFO, Grant A. Burton - VP, Chief Accounting Officer and Controller, Amin. I. Khalifa - Executive Vice President and CFO The Complaint alleges as follows: During the Class Period, defendants made materially false and misleading statements regarding the Company's business and prospects to artificially inflate the value of Leap stock. Specifically, throughout the Class Period, the defendants made material misrepresentations and omissions of fact regarding the Company's revenues beginning in fiscal year 4 and continuing through the second quarter of fiscal 7. The Company reported revenues of $86 million for fiscal year 4; $914.7 million for fiscal year 5; $1.136 billion for fiscal year 6; $389.4 million for the first quarter of fiscal year 7; and, $393. million for the second quarter of fiscal 7. As a result of the defendants' misrepresentations, Leap stock traded at artificially inflated prices during the class period, trading as high as $99. in July 7. The Company shocked the market on November 9, 7 when it announced, "it will restate its financial statements for fiscal years 4, 5 and 6 and for the first and second quarters of 7 to correct for errors in previously reported service revenues, equipment revenues, and operating expenses." As a result, on November 9, 7, Leap's common stock closed at $36.7 per share, declining 37% from the previous trading day's close of $58.1, on very heavy trading volume of 11,377,5 shares, over six times the prior trading days' volume, and representing a loss of market capitalization of over $4 million. Page 7

8 Governance Risk Updated: December 8, 11 Board Structure Factor 87.5% of the board is independent and was elected by shareholders (GRId Question ID: 1) The chairman of the board is an independent director (GRId Question ID: 14) 1.% of the nomination committee is independent (GRId Question ID: 19) 1.% of the compensation committee is independent (GRId Question ID: 5) 1.% of the audit committee is independent (GRId Question ID: 31) The CEO does not serve on an excessive number of outside boards (GRId Question ID: 37). non-executive(s) serve on an excessive number of outside boards (GRId Question ID: 38) All directors attended at least 75% of the board meetings or had a valid excuse for absences (GRId Question ID: 45) The company discloses board/governance guidelines (GRId Question ID: 46) Outside directors met without management present (GRId Question ID: 47). director(s) received withhold/against votes of 5% or greater at the last annual meeting (GRId Question ID: 49).% of directors were involved in material RPTs (GRId Question ID: 5) There are no directors involved in RPTs (GRId Question ID: 51) The company has a plurality vote standard without a director resignation policy (GRId Question ID: 5) Impact 1. All rights reserved. This document may not be repro Page 8

9 CFRA COMPANY RISK DASHBOARD: LEAP WIRELESS INTERNATIONAL, INC. (LEAP) Executive Compensation Risk Updated: December 8, 11 Page 9

10 CFRA COMPANY RISK DASHBOARD: LEAP WIRELESS INTERNATIONAL, INC. (LEAP) Executive Compensation Risk Updated: December 8, 11 Page 1

11 North America Europe + 1 (1) () cservices@cfraresearch.com CFRA research is delivered by Institutional Shareholder Services Inc. ( ISS ). ISS is a indirect wholly-owned subsidiary of MSCI Inc. ( MSCI ). MSCI is a publicly traded company on the NYSE (Ticker: MSCI). As such, MSCI is not generally aware of who its stockholders are at any given point in time. ISS has, however, established policies and procedures to restrict the involvement of any of MSCI s non-employee stockholders, their affiliates and board members in the content of ISS' analyses. Neither MSCI s non-employee stockholders, their affiliates nor MSCI s non-management board members are informed of the contents of any of ISS analyses prior to their publication or dissemination. The issuer that is the subject of this analysis may be a client of CFRA, ISS, ICS, or another MSCI subsidiary, or the parent of, or affiliated with, a client of CFRA, ISS, ICS, or another MSCI subsidiary. This analysis has not been submitted to, nor received approval from, the United States Securities and Exchange Commission or any other regulatory body. While ISS exercised due care in compiling this analysis, it makes no warranty, express or implied, regarding the accuracy, completeness or usefulness of this information and assumes no liability with respect to the consequences of relying on this information for investment or other purposes. In particular, the research provided is not intended to constitute an offer, solicitation or advice to buy or sell securities. This issuer may have purchased self-assessment tools and publications from ISS Corporate Services, Inc. ("ICS"), a wholly-owned subsidiary of Institutional Shareholder Services Inc. ("ISS"), or ICS may have provided advisory or analytical services to the issuer in connection with the proxies described in this report. No employee of ICS played a role in the

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