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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1997
-----------------------------
OR
[ ] 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 1-4721
SPRINT CORPORATION
(Exact name of registrant as specified in its charter)
KANSAS 48-0457967
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
P.O. Box 11315, Kansas City, Missouri 64112
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (913) 624-3000
---------------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------------------------- -----------------------------------------
Preferred Stock, without par value
First series, $7.50 stated value New York Stock Exchange
Second series, $6.25 stated value New York Stock Exchange
Common stock, $2.50 par value, and Rights New York Stock Exchange
(shares outstanding at January 30, 1998, Chicago Stock Exchange
343,786,235) Pacific Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 these shorter period that the registrant was
required to file these reports), and (2) has been subject to these filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of voting stock held by non-affiliates at January 30,
1998, is $20,411,378,123.
Documents incorporated by reference.
Registrant's definitive proxy statement filed under Regulation 14A promulgated
by the Securities and Exchange Commission under the Securities Exchange Act of
1934, which definitive proxy statement is to be filed within 120 days after the
end of Registrant's fiscal year ended December 31, 1997, is incorporated by
reference in Part III hereof.
SPRINT CORPORATION
SECURITIES AND EXCHANGE COMMISSION
ANNUAL REPORT ON FORM 10-K
Part I
Item 1. Business
The Corporation
Sprint Corporation, incorporated in 1938 under the laws of Kansas, is mainly a
holding company. The principal activities of Sprint and its subsidiaries
(Sprint) include domestic and international long distance and local exchange
telecommunications services. Other activities include emerging businesses and
product distribution and directory publishing as discussed below.
Regulatory Developments
The Telecommunications Act of 1996 (Telecom Act), which was signed into law in
February 1996, was designed to promote competition in all aspects of
telecommunications. It eliminated legal and regulatory barriers to entry into
local telephone markets. It also required incumbent local exchange carriers
(LECs), among other things, to allow local resale at wholesale rates, negotiate
interconnection agreements, provide nondiscriminatory access to unbundled
network elements and allow collocation of interconnection equipment by
competitors. The Telecom Act also allows Bell Operating Companies (BOCs) to
provide in-region long distance service once they obtain state certification of
compliance with a competitive "checklist," have a facilities-based competitor,
and obtain a ruling from the Federal Communications Commission (FCC) that the
provision of in-region long distance service is in the public interest. The
Telecom Act's impact on Sprint remains unclear because the rules for competition
are still being decided by regulators and the courts.
Sprint has filed for competitive local exchange carrier (CLEC) status in most
states in anticipation of the local markets opening to competition; however,
currently, Sprint is not actively marketing CLEC services. See "Emerging
Businesses" for more information. In those areas where Sprint is the incumbent
LEC, local competition is expected to eventually result in some loss of market
share. Because Sprint's LEC operations are geographically dispersed and largely
in rural markets, local competition is expected to occur more gradually.
In accordance with the Telecom Act, the FCC adopted detailed rules in 1996 to
govern interconnection to incumbent local networks by new market entrants. Some
LECs and state public utility commissions appealed these rules to the U.S. Court
of Appeals, which prevented most of the pricing rules from taking effect,
pending a full review by the court.
In 1997, the court struck down the FCC's pricing rules. It ruled that the
Telecom Act left jurisdiction over pricing matters to the states. The court also
struck down certain other FCC rules on jurisdictional or substantive grounds.
The U.S. Supreme Court has agreed to review the appeals court decision.
In 1997, the FCC issued important decisions on the structure and level of access
charges and universal service. These decisions will impact the industry in
several ways, including the following:
- An additional subsidy was created to support telecommunications
services for schools, libraries and rural health care providers. All
carriers providing telecommunications services will be required to
fund this program, which is capped at $2.7 billion per year. However,
LECs can pass their portion of these costs on to long distance
carriers.
- Per-minute interstate access rates charged by LECs will decline over
time to become cost-based, beginning in July 1997.
- Certain monthly flat-rate charges paid by some local telephone
customers will increase beginning in 1998.
- Certain per-minute access charges paid by long distance companies were
converted to flat monthly charges based on pre-subscribed lines.
- A basis has been established for replacing implicit access subsidies
with an explicit interstate universal service fund beginning in 1999.
A number of LECs, long distance companies and others have appealed some or all
of the FCC's orders. The effective date of the orders has not been delayed, but
the appeals are expected to take a year or more to conclude. The impact of these
FCC decisions on Sprint is difficult to determine, but is not expected to be
material.
Some BOCs have also challenged the Telecom Act restrictions on their entry into
long distance markets as unconstitutional. A federal district court in Wichita
Falls, Texas, ruled the restrictions unlawful because they constituted a
legislative act that imposed punishment without a judicial proceeding. The
United States government, along with Sprint and others, filed appeals of this
decision. The federal district court delayed implementing its decision pending
resolution of the appeals.
In 1997, several BOCs claimed they met the competitive checklist and sought FCC
approval to offer in-region long distance service. These applications were
denied by the FCC. Even if BOCs were to get authority to offer in-region long
distance services, it is likely that any loss of revenues at the retail level
would be offset in whole or in part because Sprint is the underlying network
provider to some regional BOCs.
Core Businesses
Long Distance Division
The long distance division is the nation's third-largest long distance telephone
company. It operates a nationwide all-digital long distance communications
network that uses state-of-the-art fiber-optic and electronic technology. The
division mainly provides domestic and international voice, video and data
communications services. It offers its services to the public subject to varying
levels of state and federal regulation, but rates are not subject to rate-base
regulation except nominally in some states. The division's net operating
revenues were $9.0 billion in 1997, $8.3 billion in 1996 and $7.3 billion in
1995.
AT&T continues to dominate the long distance communications market. MCI
Communications Corporation (MCI) is the nation's second largest long distance
telephone company. The division competes with AT&T, MCI and other
telecommunications providers in all segments of the long distance communications
market. Competition is based on price and pricing plans, the types of services
offered, customer service, and communications quality, reliability and
availability.
See "Regulatory Developments" for a discussion of the new telecommunications
legislation and related regulatory developments, and the potential impact on the
long distance division.
Local Division
The local division consists of regulated LECs serving more than 7 million access
lines in 19 states. It provides local exchange services, access by telephone
customers and other carriers to Sprint's local exchange facilities, sales of
telecommunications equipment and long distance services within specified
geographical areas.
The division's net operating revenues were $5.3 billion in 1997, $5.1 billion in
1996 and $4.7 billion in 1995. The division's major revenue categories as a
percentage of the division's total net operating revenues were as follows:
1997 1996 1995
- -------------------------------------------------------------- -- ------------- --- ------------- -- -------------
Local service 43.1% 40.6% 40.0%
Network access 36.1 36.5 36.4
Toll service 6.4 8.2 10.3
Other 14.4 14.7 13.3
- -------------------------------------------------------------- -- ------------- --- ------------- -- -------------
100.0% 100.0% 100.0%
-- ------------- --- ------------- -- -------------
AT&T is the division's largest customer for network access services. In 1997 and
1996, 13% of the division's net operating revenues were from services (mainly
network access services) provided to AT&T compared with 15% in 1995. On a
consolidated basis, revenues from AT&T were 5% of Sprint's revenues in 1997 and
1996 and 6% in 1995. While AT&T is a significant customer, Sprint does not
believe the division's revenues are dependent on AT&T, as customers' demand for
interLATA long distance telephone service is not tied to any one long distance
carrier.
The division's LECs are subject to FCC jurisdiction, as well as state public
utility commission (PUC) jurisdiction in each state in which the LECs operate.
In each state in which the PUCs exercise authority to grant certificates of
public convenience and necessity, the LECs have been granted certificates of
indefinite duration to provide local exchange telephone service in their current
service areas.
See "Regulatory Developments" for a discussion of the new telecommunications
legislation and related regulatory developments, and the potential impact on the
local division.
Product Distribution and Directory Publishing Division
The product distribution and directory publishing (PDDP) businesses consist of
North Supply Company (North Supply) and Sprint Publishing & Advertising (SPA).
North Supply is a wholesale distributor of telecommunications products. Products
range from basics --wire and cable, telephones and repair parts -- to complete
private branch exchange systems, transmission systems and security and alarm
equipment. Competition in North Supply's markets demands a high level of
customer service to succeed, as a number of competitors, including other
national wholesale distributors, sell the same products and services.
SPA publishes and markets white and yellow page telephone directories in certain
of Sprint's local exchange areas, as well as in the greater metropolitan areas
of Milwaukee, Wisconsin and Chicago, Illinois. SPA's revenues are mainly derived
from selling directory advertisements. SPA competes with telephone directory
publishers and other advertising media for advertising revenues.
Emerging Businesses
Emerging businesses consists of consumer Internet access services, mainly
through Sprint Internet Passport;(SM) CLEC services; international development
activities (outside the scope of Global One); PCS controlled by Sprint; and
integration management and support services for computer networks (Sprint
Paranet).
In 1996, Sprint began offering Internet services to consumers through Sprint
Internet Passport.(SM) In 1997, Sprint launched Sprint Internet Private
Passport,(SM) which provides customized, private Internet access services to
businesses.
In February 1998, Sprint announced it was forming a broad business relationship
with EarthLink Network Inc. (EarthLink), an Internet service provider. As part
of this relationship, EarthLink will obtain Sprint's Internet Passport customers
and will take over the day-to-day operations of those services. This
relationship requires regulatory approval and is expected to close in the 1998
second quarter.
To take advantage of newly competitive markets, Sprint initiated efforts to
enter local markets across the United States by filing for CLEC status. However,
Sprint has stopped actively marketing its CLEC services until the rules for
local competition become clearer, economics improve and more effective working
arrangements and electronic interfaces with incumbent LECs can be developed.
While Sprint's measured course on entering the CLEC market has enabled it to
avoid significant losses, Sprint continues to devote significant resources
toward developing a distinct approach.
See "Regulatory Developments" for a discussion of the new telecommunications
legislation and related regulatory developments, and the potential impact on
Sprint's emerging businesses.
Sprint has undertaken efforts to pursue selected business opportunities in key
countries and markets around the world. Projects will be selected based on their
ability to provide significant growth and financial return, the impact on Global
One's position in world markets, and the traffic volumes carried on Sprint's
U.S. networks.
As part of an overall strategy to increase personal communication services (PCS)
coverage, Sprint directly acquired the rights to PCS licenses. The licenses
cover 139 markets across the United States, reaching a total population of 70
million. Sprint plans to affiliate these licenses with the licenses previously
acquired by Sprint Spectrum Holding Company, L.P. (Sprint PCS). With this
affiliation, licensed coverage for Sprint-branded PCS will include nearly 260
million people across the United States, Puerto Rico and the U.S. Virgin
Islands. Sprint began construction in some markets in 1997. While zoning issues
will dictate the rate of buildout progress, Sprint hopes to achieve coverage in
areas that could reach 25 to 30 million people by the end of 1998.
In September 1997, Sprint acquired Houston-based Paranet, Inc., which will allow
Sprint to capitalize on the accelerating demand for network management services.
Sprint Paranet's design, implementation and consultation expertise should also
enable Sprint to maintain and add to its traditional long distance revenues.
Strategic Alliances
Sprint PCS
Sprint is a 40% partner in Sprint PCS, a partnership with Tele-Communications,
Inc., Comcast Corporation and Cox Communications, Inc. Sprint PCS is building
the nation's first single-technology, all-digital, state-of-the-art wireless
network to provide PCS across the United States. Sprint PCS offers services in
more than 130 metropolitan markets, which include more than 600 cities.
On January 1, 1998, a "Deadlock Event" occurred due to the failure of the Sprint
PCS partnership board to approve the proposed Sprint PCS budget and business
plan. Under the partnership agreement, if a partner refers the issue for
resolution pursuant to specified procedures and it remains unresolved, buy/sell
provisions can be triggered, which could result in Sprint either increasing or
selling its partnership interest. Discussions among the partners about
restructuring their interests in Sprint PCS are ongoing. However, there is no
certainty the discussions will result in a change to the partnership structure.
Global One
Sprint is also a partner in Global One, a joint venture with Deutsche Telekom AG
(DT) and France Telecom (FT) to provide seamless global telecommunications
services to business, residential and carrier markets worldwide. Sprint is a
one-third partner in Global One's operating group serving Europe (excluding
France and Germany), and is a 50% partner in Global One's operating group for
the worldwide activities outside the United States and Europe.
DT and FT each own 10% of Sprint's voting equity through Sprint's Class A common
stock. As Class A common shareholders, they have the right in most cases to
proportionate representation on Sprint's Board of Directors. They may also
purchase additional Class A common shares from Sprint to keep their ownership
level at 10% each.
Environment
Sprint's environmental compliance and remediation expenditures mainly result
from the operation of standby power generators for its telecommunications
equipment. The expenditures arise in connection with standards compliance,
permits or occasional remediation, which are usually related to generators,
batteries or fuel storage. Sprint has been identified as a potentially
responsible party at sites relating to either landfill contamination or
discontinued power generation operations. Sprint's environmental compliance and
remediation expenditures have not been material to its financial statements or
to its operations and are not expected to have any future material effects.
Patents, Trademarks and Licenses
Sprint owns numerous patents, patent applications and trademarks in the United
States and other countries. Sprint is also licensed under domestic and foreign
patents and trademarks owned by others. In total, these patents, patent
applications, trademarks and licenses are of material importance to Sprint's
business. Generally, Sprint's trademarks and trademark licenses have no
limitation on duration; Sprint's patents and licensed patents have lives
generally ranging from one to 17 years.
Sprint's PCS licenses have an initial duration of 10 years. Sprint expects to
renew these licenses for additional 10 year terms under FCC rules.
Employee Relations
At year-end 1997, Sprint had approximately 51,000 employees, of whom 22% are
represented by unions. During 1997, Sprint had no material work stoppages caused
by labor controversies.
Information as to Industry Segments
For information required by this section, refer to the "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Segmental
Results of Operations" and Note 15 of the "Notes to Consolidated Financial
Statements" sections of the Financial Statements and Financial Statement
Schedules filed as part of this report.
Item 2. Properties
Sprint's total property, plant and equipment totaled $23.2 billion at year-end
1997, of which $14.0 billion relates to local communications services and $8.2
billion relates to long distance communications services. These properties
mainly consist of land, buildings, digital fiber-optic network, switching
equipment, microwave radio and cable and wire facilities. Sprint leases certain
switching equipment and several general office facilities. The long distance
division has been granted easements, rights-of-way and rights-of-occupancy,
mainly by railroads and other private landowners, for its fiber-optic network.
PDDP's properties mainly consist of office and warehouse facilities to support
the business units in the distribution of telecommunications products and
publication of telephone directories.
Sprint owns its corporate headquarters building and other property located in
the greater Kansas City metropolitan area.
Property, plant and equipment totaling $12.9 billion is either pledged as
security for first mortgage bonds and certain notes or is restricted for use as
mortgaged property.
Item 3. Legal Proceedings
Various suits arising in the ordinary course of business are pending against
Sprint. Management cannot predict the final outcome of these actions, but
believes they will not result in a material effect on Sprint's consolidated
financial statements.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the fourth quarter
of 1997.
Item 10(b). Executive Officers of the Registrant
Office Name Age
- -------------------------------------------------------------- --------------------------------- ------
Chairman and Chief Executive Officer William T. Esrey (1) 58
President and Chief Operating Officer Ronald T. LeMay (2) 52
President and Chief Operating Officer - Local
Telecommunications Division Michael B. Fuller (3) 53
President and Chief Operating Officer - Long Distance
Division Patti S. Manuel (4) 41
President - National Integrated Services Kevin E. Brauer (5) 47
Executive Vice President - General Counsel and External
Affairs J. Richard Devlin (6) 47
Executive Vice President - Chief Financial Officer Arthur B. Krause (7) 56
Senior Vice President - Corporate Finance Gene M. Betts (8) 45
Senior Vice President - External Affairs John R. Hoffman (9) 52
Senior Vice President - Controller John P. Meyer (10) 47
Senior Vice President - Strategic Planning and Corporate
Development Theodore H. Schell (11) 53
Senior Vice President - Treasurer M. Jeannine Strandjord (12) 52
Senior Vice President - Human Resources I. Benjamin Watson (13) 49
Vice President - Secretary Don A. Jensen (14) 62
(1) Mr. Esrey was elected Chairman in 1990. He was elected Chief Executive
Officer and a member of the Board of Directors in 1985.
(2) Mr. LeMay was first elected President and Chief Operating Officer in
February 1996. From July 1997 to October 1997, he served as Chairman and
Chief Executive Officer of Waste Management, Inc., a provider of
comprehensive waste management services. He was re-elected President and
Chief Operating Officer of Sprint effective October 1997. From 1995 to
1996 Mr. LeMay served as Vice Chairman of Sprint. He also served as Chief
Executive Officer of Spectrum Holding Company, L.P. from 1995 to 1996.
From 1989 to 1995, he served as President and Chief Operating Officer -
Long Distance Division. Mr. LeMay served on Sprint's Board of Directors
from 1993 until he went to work for Waste Management, Inc. He was
re-elected to Sprint's Board of Directors in December 1997.
(3) Mr. Fuller was elected President and Chief Operating Officer - Local
Telecommunications Division in October 1996. From 1990 to 1996, he served
as President of United Telephone - Midwest Group, an operating group of
subsidiaries of Sprint.
(4) Ms. Manuel was elected President and Chief Operating Officer - Long
Distance Division in February 1998. She was also elected as President and
Chief Operating Officer of Sprint Communications Company L.P. (the Limited
Partnership), a subsidiary of Sprint, in February 1998. She had served as
President of Sprint Business, a division of the Limited Partnership, since
May 1997. From 1994 to 1997, she was President of sales and marketing for
Sprint Business. She was named President of marketing for Sprint Business
in 1993.
(5) Mr. Brauer was elected President - National Integrated Services in October
1997. He had served as Senior Vice President since June 1997. From 1992 to
1997, he was President of Sprint Business.
(6) Mr. Devlin was elected Executive Vice President - General Counsel and
External Affairs in 1989.
(7) Mr. Krause was elected Executive Vice President - Chief Financial Officer
in 1988.
(8) Mr. Betts was elected Senior Vice President in 1990.
(9) Mr. Hoffman was elected Senior Vice President - External Affairs in 1990.
(10) Mr. Meyer was elected Senior Vice President - Controller in 1993.
(11) Mr. Schell was elected Senior Vice President - Strategic Planning and
Corporate Development in 1990.
(12) Ms. Strandjord was elected Senior Vice President - Treasurer in 1990.
(13) Mr. Watson was elected Senior Vice President - Human Resources in 1993.
(14) Mr. Jensen was elected Vice President - Secretary in 1975.
There are no known family relationships between any of the persons named
above or between any of these persons and any outside directors of Sprint.
Officers are elected annually.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market Price Per Share
- --------------------------------------------------------------------------------------------------------------------
1997 1996
--------------------------------------------- ----------------------------------------------
High Low Period High Low Period
-- ----------- --- ---------- --- ----------- --- ----------- -- ------------- --- ---------
First quarter $ 48 $ 38 3/8 $ 45 3/8 $ 38 5/8* $ 31 15/16* $ 38
Second quarter 52 3/4 42 1/4 52 1/4 44 3/8 37 1/2 42
Third quarter 52 5/8 44 50 42 7/8 34 1/2 38 7/8
Fourth quarter 60 5/8 48 3/4 58 5/8 44 37 1/2 39 7/8
- --------------------- -- ----------- --- ---------- --- ----------- -- --- ----------- -- ------------- --- ---------
* Adjusted to reflect the spinoff of Sprint's Cellular division in March 1996.
As of February 27, 1998, Sprint had approximately 85,000 common stock record
holders and two Class A common stock record holders. The principal trading
market for Sprint's common stock is the New York Stock Exchange. The common
stock is also listed and traded on the Chicago Stock Exchange and Pacific
Exchange. The Class A common stock is not publicly traded. Sprint declared
common stock dividends of $0.25 per share during each quarter of 1997 and 1996.
Sprint declared Class A common stock dividends of $0.25 per share during each
quarter of 1997 and during the last three quarters of 1996.
Item 6. Selected Financial Data
For information required by Item 6, refer to the "Selected Financial Data"
section of the Financial Statements and Financial Statement Schedules filed as
part of this report.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
For information required by Item 7, refer to the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" section of the
Financial Statements and Financial Statement Schedules filed as part of this
report.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Sprint's exposure to market risk - through derivative financial instruments and
other financial instruments, such as investments in marketable securities and
long-term debt - is not material.
Item 8. Financial Statements and Supplementary Data
For information required by Item 8, refer to the "Consolidated Financial
Statements" and "Financial Statement Schedule" sections of the Financial
Statements and Financial Statement Schedules filed as part of this report.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
Part III
Item 10. Directors and Executive Officers of the Registrant
Pursuant to Instruction G(3) to Form 10-K, the information relating to Directors
of Sprint required by Item 10 is incorporated by reference from Sprint's
definitive proxy statement which is to be filed pursuant to Regulation 14A
within 120 days after the end of Sprint's fiscal year ended December 31, 1997.
For information pertaining to Executive Officers of Sprint, as required by
Instruction 3 of Paragraph (b) of Item 401 of Regulation S-K, refer to the
"Executive Officers of the Registrant" section of Part I of this report.
Pursuant to Instruction G(3) to Form 10-K, the information relating to
compliance with Section 16(a) required by Item 10 is incorporated by reference
from Sprint's definitive proxy statement which is to be filed pursuant to
Regulation 14A within 120 days after the end of Sprint's fiscal year ended
December 31, 1997.
Item 11. Executive Compensation
Pursuant to Instruction G(3) to Form 10-K, the information required by Item 11
is incorporated by reference from Sprint's definitive proxy statement which is
to be filed pursuant to Regulation 14A within 120 days after the end of Sprint's
fiscal year ended December 31, 1997.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Pursuant to Instruction G(3) to Form 10-K, the information required by Item 12
is incorporated by reference from Sprint's definitive proxy statement which is
to be filed pursuant to Regulation 14A within 120 days after the end of Sprint's
fiscal year ended December 31, 1997.
Item 13. Certain Relationships and Related Transactions
Pursuant to Instruction G(3) to Form 10-K, the information required by Item 13
is incorporated by reference from Sprint's definitive proxy statement which is
to be filed pursuant to Regulation 14A within 120 days after the end of Sprint's
fiscal year ended December 31, 1997.
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. The consolidated financial statements of Sprint filed as part of
this report are listed in the Index to Financial Statements and
Financial Statement Schedules.
2. The consolidated financial statement schedule of Sprint filed as part
of this report is listed in the Index to Financial Statements and
Financial Statement Schedules.
3. The following exhibits are filed as part of this report:
EXHIBITS
(3) Articles of Incorporation and Bylaws:
(a) Articles of Incorporation, as amended (filed as Exhibit
3(a) to Sprint Corporation Quarterly Report on Form
10-Q for the quarter ended June 30, 1997 and
incorporated herein by reference).
(b) Bylaws, as amended (filed as Exhibit 3(a) to Sprint
Corporation Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996 and incorporated
herein by reference).
(4) Instruments defining the Rights of Sprint's Equity Security
Holders:
(a) The rights of Sprint's equity security holders are
defined in the Fifth, Sixth, Seventh and Eighth
Articles of Sprint's Articles of Incorporation. See
Exhibit 3(a).
(b) Rights Agreement dated as of June 9, 1997, between
Sprint Corporation and UMB Bank, n.a. as Rights Agent
(filed as Exhibit 1 to Sprint Corporation Registration
Statement on Form 8-A dated June 12, 1997 (File No.
1-4721), and incorporated herein by reference).
(c) Standstill Agreement dated as of July 31, 1995, by and
among Sprint Corporation, France Telecom and Deutsche
Telekom AG (filed as Exhibit (10)(c) to Sprint
Corporation Quarterly Report on Form 10-Q for the
quarter ended June 30, 1995 and incorporated herein by
reference).
(d) Amendments to Certain Agreements and Interpretation,
dated June 24, 1997, by and among Sprint Corporation,
France Telecom and Deutsche Telekom AG (filed as
Exhibit 4(d) to Sprint Corporation Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997 and
incorporated herein by reference).
(e) Indenture, dated as of March 1, 1983, between Sprint
Corporation (formerly United Telecommunications, Inc.)
and The Bank of New York (formerly Irving Trust
Company), as Trustee (filed as Exhibit 4-A to United
Telecommunications, Inc. Registration Statement No.
33-4563 and incorporated herein by reference).
(f) First Supplemental Indenture, dated as of April 1,
1986, between Sprint Corporation (formerly United
Telecommunications, Inc.) and The Bank of New York
(formerly Irving Trust Company), as Trustee (filed as
Exhibit 4(d) to Sprint Corporation Annual Report on
Form 10-K for the year ended December 31, 1991 and
incorporated herein by reference).
(g) Second Supplemental Indenture, dated as of May 1, 1990,
between Sprint Corporation (formerly United
Telecommunications, Inc.) and The Bank of New York, as
Trustee (filed as Exhibit 4(e) to United
Telecommunications, Inc. Annual Report on Form 10-K for
the year ended December 31, 1990 and incorporated
herein by reference).
(h) Form of Indenture, dated as of July 1, 1992, between
Sprint Corporation and The First National Bank of
Chicago, as Trustee (filed as Exhibit 4-A to Sprint
Corporation Registration Statement No. 33-48689 and
incorporated herein by reference).
(i) Form of Indenture, dated as of June 15, 1993, among
Sprint Capital Corporation, Sprint Corporation and The
Bank of New York, as Trustee (filed as Exhibit 4-A to
Sprint Corporation Registration Statement No. 33-64564
and incorporated herein by reference).
(10) Material Agreements - Joint Ventures:
(a) Joint Venture Agreement dated as of June 22, 1995 among
Sprint Corporation, Sprint Global Venture, Inc., France
Telecom and Deutsche Telekom AG (filed as Exhibit
(10)(a) to Sprint Corporation Quarterly Report on Form
10-Q for the quarter ended June 30, 1995 and
incorporated herein by reference).
(b) Amendment No. 1 to Joint Venture Agreement, dated as of
January 31, 1996, among Sprint Corporation, Sprint
Global Venture, Inc., France Telecom, Deutsche Telekom
AG and Atlas Telecommunications, S.A. (filed as Exhibit
99A to Sprint Corporation Current Report on Form 8-K
dated January 31, 1996 and incorporated herein by
reference).
(c) Investment Agreement dated as of July 31, 1995 among
Sprint Corporation, France Telecom and Deutsche Telekom
AG (including as an exhibit the Stockholders' Agreement
among France Telecom, Deutsche Telekom AG and Sprint
Corporation) (filed as Exhibit (10)(b) to Sprint
Corporation Quarterly Report on Form 10-Q for the
quarter ended June 30, 1995 and incorporated herein by
reference).
(d) Amended and Restated Agreement of Limited Partnership
of MajorCo., L.P., dated as of January 31, 1996, among
Sprint Spectrum, L.P., TCI Network Services, Comcast
Telephony Services and Cox Telephony Partnership (filed
as Exhibit 99C to Sprint Corporation Current Report on
Form 8-K dated January 31, 1996 and incorporated herein
by reference).
(e) Parents Agreement dated as of January 31, 1996, between
Sprint Corporation and Tele-Communications, Inc. (filed
as Exhibit 99D to Sprint Corporation Current Report on
Form 8-K dated January 31, 1996 and incorporated herein
by reference).
(f) Parents Agreement dated as of January 31, 1996, between
Sprint Corporation and Comcast Corporation (filed as
Exhibit 99E to Sprint Corporation Current Report on
Form 8-K dated January 31, 1996 and incorporated herein
by reference).
(g) Parents Agreement dated as of January 31, 1996, between
Sprint Corporation and Cox Communications, Inc. (filed
as Exhibit 99F to Sprint Corporation Current Report on
Form 8-K dated January 31, 1996 and incorporated herein
by reference).
(10) Executive Compensation Plans and Arrangements:
(h) 1985 Stock Option Plan, as amended (filed as Exhibit
(10)(a) to Sprint Corporation Quarterly Report on Form
10-Q for the quarter ended September 30, 1997 and
incorporated herein by reference).
(i) 1990 Stock Option Plan, as amended (filed as Exhibit
(99) to Sprint Corporation Registration Statement No.
333-46491 and incorporated herein by reference).
(j) 1990 Restricted Stock Plan, as amended (filed as
Exhibit (99) to Sprint Corporation Registration
Statement No. 333-46487 and incorporated herein by
reference).
(k) Executive Deferred Compensation Plan, as amended (filed
as Exhibit (10)(k) to Sprint Corporation Annual Report
on Form 10-K for the year ended December 31, 1996 and
incorporated herein by reference).
(l) Management Incentive Stock Option Plan, as amended
(filed as Exhibit (10)(c) to Sprint Corporation
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997 and incorporated herein by reference).
(m) 1997 Long-Term Stock Incentive Program (filed as
Exhibit (99) to Sprint Corporation Registration
Statement No. 33-25449 and incorporated herein by
reference).
(n) Sprint Supplemental Executive Retirement Plan (filed as
Exhibit (10)(i) to Sprint Corporation Quarterly Report
on Form 10-Q for the quarter ended September 30, 1995
and incorporated herein by reference).
(o) Amended and Restated Centel Directors Deferred
Compensation Plan (filed as Exhibit (10)(c) to Sprint
Corporation Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997 and incorporated
herein by reference).
(p) Restated Memorandum Agreements Respecting Supplemental
Pension Benefits between Sprint Corporation (formerly
United Telecommunications, Inc.) and two of its current
and former executive officers (filed as Exhibit 10(i)
to Sprint Corporation Annual Report on Form 10-K for
the year ended December 31, 1992, and incorporated
herein by reference).
(q) Executive Long-Term Incentive Plan (filed as Exhibit
10(j) to Sprint Corporation Annual Report on Form 10-K
for the year ended December 31, 1993 and incorporated
herein by reference).
(r) Executive Management Incentive Plan (filed as Exhibit
10(k) to Sprint Corporation Annual Report on Form 10-K
for the year ended December 31, 1993 and incorporated
herein by reference).
(s) Long-Term Incentive Compensation Plan, as amended
(filed as Exhibit 10(i) to Sprint Corporation Quarterly
Report on Form 10-Q for the quarter ended September 30,
1996, and incorporated herein by reference).
(t) Short-Term Incentive Compensation Plan (filed as
Exhibit 10(k) to United Telecommunications, Inc. Annual
Report on Form 10-K for the year ended December 31,
1989, and incorporated herein by reference).
(u) Retirement Plan for Directors, as amended (filed as
Exhibit (10)(u) to Sprint Corporation Annual Report on
Form 10-K for the year ended December 31, 1996 and
incorporated herein by reference).
(v) Key Management Benefit Plan, as amended (filed as
Exhibit 10(g) to Sprint Corporation Quarterly Report on
Form 10-Q for the quarter ended September 30, 1996 and
incorporated herein by reference).
(w) Agreements Regarding Special Compensation and Post
Employment Restrictive Covenants between Sprint
Corporation and certain of its Executive Officers
(filed as Exhibit 10(x) to Sprint Corporation Annual
Report on Form 10-K for the year ended December 31,
1993, Exhibit 10(d) to Sprint Corporation Quarterly
Report on Form 10-Q for the quarter ended September 30,
1994, Exhibit 10 (h) to Sprint Corporation Quarterly
Report on Form 10-Q for the quarter ended March 31,
1996 and Exhibit (10)(w) to Sprint Corporation Annual
Report on Form 10-K for the year ended December 31,
1996 and incorporated herein by reference). Agreements
Regarding Special Compensation and Post Employment
Restrictive Covenants between Sprint Corporation and
four of its Executive Officers.
(x) Director's Deferred Fee Plan, as amended (filed as
Exhibit (10)(x) to Sprint Corporation Annual Report on
Form 10-K for the year ended December 31, 1996 and
incorporated herein by reference).
(y) Form of Contingency Employment Agreements between
Sprint Corporation and certain of its executive
officers (filed as Exhibit 10(b) to Sprint Corporation
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1995, and incorporated herein by reference).
(z) Form of Indemnification Agreements between Sprint
Corporation (formerly United Telecommunications, Inc.)
and its Directors and Officers (filed as Exhibit 10(s)
to Sprint Corporation Annual Report on Form 10-K for
the year ended December 31, 1991, and incorporated
herein by reference).
(aa) Summary of Executive Officer and Board of Directors
Benefits (filed as Exhibit (10)(k) to Sprint
Corporation Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996 and incorporated
herein by reference).
(bb) Description of Retirement Agreement between Sprint
Corporation and one of its executive officers.
(cc) Amended and Restated Centel Director Stock Option Plan
(filed as Exhibit 10(aa) to Sprint Corporation Annual
Report on Form 10-K for the year ended December 31,
1993, and incorporated herein by reference).
(12) Computation of Ratio of Earnings to Fixed Charges
(21) Subsidiaries of Registrant
(23) (a) Consent of Ernst & Young LLP
(b) Consent of Deloitte & Touche LLP
(27) Financial Data Schedules
(a) December 31, 1997
(b) September 30, 1997 Restated
(c) June 30, 1997 Restated
(d) March 31, 1997 Restated
(e) December 31, 1996 Restated
(f) September 30, 1996 Restated
(g) June 30, 1996 Restated
(h) March 31, 1996 Restated
(i) December 31, 1995 Restated
Sprint will furnish to the Securities and Exchange Commission, upon request, a
copy of the instruments defining the rights of holders of its long-term debt.
The total amount of securities authorized under any of said instruments (other
than those listed above) does not exceed 10% of the total assets of Sprint.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended December
31, 1997.
(c) Exhibits are listed in Item 14(a).
(d) The consolidated financial statements and consolidated financial
statement schedule of Sprint Spectrum Holding Company, L.P. filed as
part of this report are listed in the Index to Financial Statements and
Financial Statement Schedules.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SPRINT CORPORATION
(Registrant)
By /s/ W. T. Esrey
William T. Esrey
Chairman and Chief Executive Officer
Date: March 5, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on the 5th day of March, 1998.
/s/ W. T. Esrey
William T. Esrey
Chairman and Chief Executive Officer
/s/ Arthur B. Krause
Arthur B. Krause
Executive Vice President and
Chief Financial Officer
/s/ John P. Meyer
John P. Meyer
Senior Vice President and Controller
Principal Accounting Officer
SIGNATURES
SPRINT CORPORATION
(Registrant)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on the 5th day of March, 1998.
/s/ DuBose Ausley
DuBose Ausley, Director
/s/ Warren L. Batts
Warren L. Batts, Director
/s/ Michel Bon
Michel Bon, Director
/s/ Ruth M. Davis
Ruth M. Davis, Director
/s/ W. T. Esrey
William T. Esrey, Director
/s/ Irvine O. Hockaday, Jr.
Irvine O. Hockaday, Jr., Director
/s/ Harold S. Hook
Harold S. Hook, Director
/s/ Ronald T. LeMay
Ronald T. LeMay, Director
/s/ Linda K. Lorimer
Linda K. Lorimer, Director
/s/ Charles E. Rice
Charles E. Rice, Director
/s/ Ron Sommer
Ron Sommer, Director
/s/ Stewart Turley
Stewart Turley, Director
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES Sprint Corporation
Page Reference
---------------------
Selected Financial Data F-2
Management's Discussion and Analysis of Financial Condition and Results of Operations
F-3
Consolidated Financial Statements (audited by Ernst & Young LLP):
Management Report F-17
Report of Independent Auditors F-18
Consolidated Statements of Income for each of the three years ended December 31, 1997 F-19
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-20
Consolidated Statements of Cash Flows for each of the three years ended
December 31, 1997 F-21
Consolidated Statements of Common Stock and Other Shareholders' Equity for each of
the three years ended December 31, 1997 F-22
Notes to Consolidated Financial Statements F-23
Financial Statement Schedule (audited by Ernst & Young LLP):
Schedule II - Consolidated Valuation and Qualifying Accounts for each of the
three years ended December 31, 1997 F-43
Financial Statement Schedule (audited by Deloitte & Touche LLP):
Separate Financial Statements of 50% or Less Owned Entities -
Sprint Spectrum Holding Company, L.P. Financial Statements and Financial Statement
Schedule
Report of Independent Auditors F-45
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-46
Consolidated Statements of Operations for each of the three years ended
December 31, 1997 F-47
Consolidated Statements of Changes in Partners' Capital for each of the three
years ended December 31, 1997 F-48
Consolidated Statements of Cash Flows for each of the three years ended
December 31, 1997 F-49
Notes to Consolidated Financial Statements F-50
Schedule II - Consolidated Valuation and Qualifying Accounts for each of the
three years ended December 31, 1997 F-68
Certain financial statement schedules have been omitted because the required
information is not present, or has been included in the consolidated
financial statements and related notes.
F-1
SELECTED FINANCIAL DATA
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------
(in millions, except per share data)
Results of Operations
Net operating revenues $ 14,873.9 $ 13,887.5 $ 12,735.3 $ 11,964.8 $ 10,894.9 $ 10,093.3
Operating income (1) 2,451.4 2,267.2 1,834.3 1,690.7 1,214.1 1,199.8
Income from continuing
operations (1), (2) 952.5 1,190.9 946.1 899.2 517.1 550.6
Earnings per common share
from continuing operations (1), (2)
Basic 2.21 2.82 2.71 2.59 1.51 1.63
Diluted 2.18 2.79 2.69 2.56 1.49 1.62
Dividends per common share 1.00 1.00 1.00 1.00 1.00 1.00
Financial Position
Total assets $ 18,184.8 $ 16,826.4 $ 15,074.3 $ 14,425.2 $ 13,781.8 $ 13,308.4
Property, plant and equipment, net 11,494.1 10,464.1 9,715.8 10,258.8 9,883.1 9,895.6
Total debt (including short-term
borrowings) 3,879.6 3,273.9 5,668.9 4,927.7 5,084.1 5,436.7
Redeemable preferred stock 11.5 11.8 32.5 37.1 38.6 40.2
Common stock and other shareholders'
equity 9,025.2 8,519.9 4,642.6 4,524.8 3,918.3 3,971.6
Cash Flow Data
Cash from operating activities -
continuing operations(3) $ 3,379.0 $ 2,403.6 $ 2,609.6 $ 2,339.6 $ 2,007.8 $ 2,397.3
Capital expenditures 2,862.6 2,433.6 1,857.3 1,751.6 1,429.8 1,342.4
Sprint adopted Statement of Financial Accounting Standards No.128, "Earnings per
Share" (EPS), at year-end 1997 (see Note 11 of Notes to Consolidated Financial
Statements). EPS amounts have been restated to comply with this new standard.
All EPS amounts discussed in this report represent "basic" EPS as defined in the
new standard.
Certain prior-year amounts have been reclassified to conform to the current-year
presentation. These reclassifications had no effect on the results of operations
or shareholders' equity as previously reported.
(1) During 1997 and 1996, Sprint recorded nonrecurring charges of $20 and $60
million, respectively, related to litigation within the long distance
division. These charges reduced income from continuing operations by $13
million ($0.03 per share) in 1997 and $36 million ($0.09 per share) in
1996.
During 1995, Sprint recorded a nonrecurring charge of $88 million related
to a restructuring within the local division, which reduced income from
continuing operations by $55 million ($0.16 per share).
During 1993, Sprint recorded nonrecurring charges of $293 million related
to (a) transaction costs from the merger with Centel Corporation and
expenses of integrating and restructuring the operations of the two
companies and (b) a realignment and restructuring within the long distance
division. These charges reduced income from continuing operations by $193
million ($0.57 per share).
(2) During 1997, Sprint recognized gains of $45 million on sales of local
exchanges and a $26 million gain on the sale of an equity investment in an
equipment provider. These gains increased income from continuing operations
by $27 million ($0.06 per share) and $17 million ($0.04 per share),
respectively.
During 1994, Sprint recognized a $35 million gain on the sale of equity
securities, which increased income from continuing operations by $22
million ($0.06 per share).
During 1993, due to the enactment of the Revenue Reconciliation Act of
1993, Sprint adjusted its deferred income tax assets and liabilities to
reflect the increased tax rate. This adjustment reduced income from
continuing operations by $11 million ($0.03 per share).
During 1992, Sprint recognized gains of $81 million on sales of local
exchanges, which increased income from continuing operations by $44 million
($0.13 per share).
(3) The 1996 amount was reduced by $600 million for cash required to terminate
an accounts receivable sales agreement. The 1992 amount includes $300
million of cash proceeds from the sale of accounts receivable.
F-2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Sprint Corporation
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Sprint Corporation, with its subsidiaries, (Sprint) includes certain estimates,
projections and other forward-looking statements in its reports, in
presentations to analysts and others, and in other publicly available material.
Future performance cannot be ensured. Actual results may differ materially from
those in the forward-looking statements. Factors that could cause actual results
to differ materially from estimates or projections contained in the
forward-looking statements include:
- the effects of vigorous competition in the markets in which Sprint
operates;
- the cost of entering new markets necessary to provide
seamless services;
- the risks related to Sprint's investments in Global One, Sprint
Spectrum Holding Company, L.P. (Sprint PCS) and other joint ventures;
- the impact of any unusual items resulting from ongoing evaluations of
Sprint's business strategies;
- requirements imposed on Sprint or latitude allowed its competitors by
the Federal Communications Commission (FCC) or state regulatory
commissions under the Telecommunications Act of 1996 (Telecom Act);
- unexpected results of litigation filed against Sprint; and - the
possibility of one or more of the markets in which Sprint competes
being impacted by changes in political, economic or other factors such
as monetary policy, legal and regulatory changes or other external
factors over which Sprint has no control.
Core Businesses
Long Distance Division
The long distance division is the nation's third-largest long distance telephone
company. It operates a nationwide, all-digital long distance communications
network using state-of-the-art fiber-optic and electronic technology. The
division mainly provides domestic and international voice, video and data
communications services. It offers its services to the public subject to varying
levels of state and federal regulation.
Local Division
The local division consists of regulated local exchange carriers (LECs) serving
more than 7 million access lines in 19 states. It provides local exchange
services, access by telephone customers and other carriers to Sprint's local
exchange facilities, sales of telecommunications equipment and long distance
services within specified geographical areas.
Product Distribution and Directory Publishing Division
The product distribution and directory publishing businesses provide wholesale
distribution services of telecommunications products, and publish and market
white and yellow page telephone directories.
Emerging Businesses
Emerging businesses consists of consumer Internet access services, mainly
through Sprint Internet Passport (sm); competitive local exchange carrier (CLEC)
services; international development activities (outside the scope of Global
One); personal communication services (PCS) controlled by Sprint; and
integration, management and support services for computer networks (Sprint
Paranet).
F-3
Strategic Alliances
Global One
Sprint is a partner in Global One, a joint venture with Deutsche Telekom AG (DT)
and France Telecom (FT) to provide seamless global telecommunications services
to business, residential and carrier markets worldwide. Sprint is a one-third
partner in Global One's operating group serving Europe (excluding France and
Germany) and is a 50% partner in Global One's operating group for the worldwide
activities outside the United States and Europe.
DT and FT each own 10% of Sprint's voting equity through Sprint's Class A common
stock. As Class A common shareholders, they have the right in most cases to
proportionate representation on Sprint's Board of Directors. They may also
purchase additional Class A common shares from Sprint to keep their ownership
level at 10% each. See Note 7 of Notes to Consolidated Financial Statements for
more information.
Sprint's long distance division contributed certain assets and related
operations of its international business unit to Global One when the venture was
formed in January 1996.
Sprint PCS
Sprint is a 40% partner in Sprint PCS, a partnership with Tele-Communications,
Inc., Comcast Corporation and Cox Communications, Inc. Sprint PCS is building
the nation's first single-technology, all- digital, state-of-the-art wireless
network to provide PCS across the United States. PCS uses digital technology,
which has sound quality superior to existing cellular technology and is less
susceptible to interference and eavesdropping. PCS also offers features such as
voice mail and Caller ID. Sprint PCS offers service in more than 130
metropolitan markets, which include more than 600 cities.
As part of an overall strategy to increase PCS coverage, Sprint directly
acquired the rights to PCS licenses covering 139 markets across the United
States. These licenses reach a total population of 70 million people. Sprint
expects to affiliate these licenses with Sprint PCS. With this affiliation,
licensed coverage for Sprint-branded PCS will include nearly 260 million people
across the United States, Puerto Rico and the U.S. Virgin Islands.
On January 1, 1998, a "Deadlock Event" occurred due to the failure of the
partnership board to approve the proposed Sprint PCS budget and business plan.
Under the partnership agreement, if a partner refers the issue for resolution
pursuant to specified procedures and it remains unresolved, buy/sell provisions
can be triggered, which could result in Sprint either increasing or selling its
partnership interest. Discussions among the partners about restructuring their
interests in Sprint PCS are ongoing. However, there is no certainty the
discussions will result in a change to the partnership structure.
Spinoff of Cellular Division
In March 1996, Sprint completed the tax-free spinoff of Sprint's cellular
division (Cellular) to Sprint common shareholders (Spinoff). See "Liquidity and
Capital Resources - Discontinued Operation" for more information.
F-4
Regulatory Developments
The Telecom Act, which was signed into law in February 1996, was designed to
promote competition in all aspects of telecommunications. It eliminated legal
and regulatory barriers to entry into local telephone markets. It also required
incumbent LECs, among other things, to allow local resale at wholesale rates,
negotiate interconnection agreements, provide nondiscriminatory access to
unbundled network elements and allow collocation of interconnection equipment by
competitors. The Telecom Act also allows Bell Operating Companies (BOCs) to
provide in-region long distance service once they obtain state certification of
compliance with a competitive "checklist," have a facilities-based competitor,
and obtain an FCC ruling that the provision of in-region long distance service
is in the public interest. The Telecom Act's impact on Sprint remains unclear
because the rules for competition are still being decided by regulators and the
courts.
Sprint has filed for CLEC status in most states in anticipation of the local
markets opening to competition; however, Sprint currently is not actively
marketing CLEC services. See "Segmental Results of Operations Emerging
Businesses" for more information. In those areas where Sprint is the incumbent
LEC, local competition is expected to eventually result in some loss of market
share. Because Sprint's LEC operations are geographically dispersed and largely
in rural markets, local competition is expected to occur more gradually.
In accordance with the Telecom Act, the FCC adopted detailed rules in 1996 to
govern interconnection to incumbent local networks by new market entrants. Some
LECs and state public utility commissions appealed these rules to the U.S. Court
of Appeals, which prevented most of the pricing rules from taking effect,
pending a full review by the court.
In 1997, the court struck down the FCC's pricing rules. It ruled that the
Telecom Act left jurisdiction over pricing matters to the states. The court also
struck down certain other FCC rules on jurisdictional or substantive grounds.
The U.S. Supreme Court has agreed to review the appeals court decision.
In 1997, the FCC issued important decisions on the structure and level of access
charges and universal service. These decisions will impact the industry in
several ways, including the following:
- An additional subsidy was created to support telecommunications
services for schools, libraries and rural health care providers. All
carriers providing telecommunications services will be required to
fund this program, which is capped at $2.7 billion per year. However,
LECs can pass their portion of these costs on to long distance
carriers.
- Per-minute interstate access rates charged by LECs will decline over
time to become cost-based, beginning in July 1997.
- Certain monthly flat-rate charges paid by some local telephone
customers will increase beginning in 1998.
- Certain per-minute access charges paid by long distance companies were
converted to flat monthly charges based on pre-subscribed lines.
- A basis has been established for replacing implicit access subsidies
with an explicit interstate universal service fund beginning in 1999.
F-5
A number of LECs, long distance companies and others have appealed some or all
of the FCC's orders. The effective date of the orders has not been delayed, but
the appeals are expected to take a year or more to conclude. The impact of these
FCC decisions on Sprint is difficult to determine, but is not expected to be
material.
Some BOCs have also challenged the Telecom Act restrictions on their entry into
long distance markets as unconstitutional. A federal district court in Wichita
Falls, Texas, ruled the restrictions unlawful because they constituted a
legislative act that imposed punishment without a judicial proceeding. The
United States government, along with Sprint and others, filed appeals of this
decision. The federal district court delayed implementing its decision pending
resolution of the appeals.
In 1997, several BOCs claimed they met the competitive checklist and sought FCC
approval to offer in-region long distance service. These applications were
denied by the FCC. Even if BOCs were to get authority to offer in-region long
distance services, it is likely that any loss of revenues at the retail level
would be offset in whole or in part because Sprint is the underlying network
provider to some regional BOCs.
Results of Operations
Sprint adopted Statement of Financial Accounting Standards (SFAS) No.128,
"Earnings per Share" (EPS), at year-end 1997 (see Note 11 of Notes to
Consolidated Financial Statements). EPS amounts have been restated to comply
with this new standard. All EPS amounts in the following discussions represent
"basic" EPS as defined in SFAS 128.
Consolidated
Total net operating revenues for 1997 were $14.9 billion, a 7% increase from
$13.9 billion in 1996. Total net operating revenues for 1995 were $12.7 billion.
Income from continuing operations was $953 million ($2.21 per share) in 1997
compared with $1.2 billion ($2.82 per share) in 1996 and $946 million ($2.71 per
share) in 1995.
Core Businesses
Sprint's core businesses generated record levels of net operating revenues and
improved operating results in 1997. Core results exclude the impact from joint
ventures and emerging businesses. Long distance calling volumes increased 14% in
1997, and access lines served by the local division grew 5.6%, excluding sales
of local exchanges during 1997. Excluding nonrecurring items, income from core
operations was $1.6 billion ($3.73 per share) in 1997 versus $1.4 billion ($3.42
per share) in 1996 and $1.0 billion ($2.97 per share) in 1995.
Nonrecurring Items
Consolidated and core income from continuing operations for 1997 include gains
on sales of local exchanges ($0.06 per share) and a gain on the sale of an
equity investment in an equipment provider ($0.04 per share). In addition, 1997
and 1996 include litigation charges within the long distance division ($0.03 per
share and $0.09 per share, respectively). The 1995 amounts include a charge for
restructuring the local division ($0.16 per share).
F-6
Segmental Results of Operations
Long Distance Division
- -------------------------------------------------------------- -- ------------- --- ------------- -- -------------
1997 1996 1995
- -------------------------------------------------------------- -- ------------- --- ------------- -- -------------
(in millions)
Net operating revenues $ 8,954.8 $ 8,302.1 $ 7,277.4
Operating expenses
Interconnection 3,941.1 3,722.7 3,102.7
Operations 1,236.6 1,051.8 1,046.6
Selling, general and administrative 1,962.9 1,970.3 1,839.7
Depreciation and amortization 716.7 633.3 581.6
- -------------------------------------------------------------- -- ------------- --- ------------- -- -------------
Total operating expenses 7,857.3 7,378.1 6,570.6
- -------------------------------------------------------------- -- ------------- --- ------------- -- -------------
Operating income $ 1,097.5 $ 924.0 $ 706.8
-- ------------- --- ------------- -- -------------
Operating margin 12.3% 11.1% 9.7%
-- ------------- --- ------------- -- -------------
Capital expenditures $ 1,218.1 $ 1,133.7 $ 861.7
-- ------------- --- ------------- -- -------------
Identifiable assets $ 6,464.6 $ 5,997.7 $ 4,799.0
-- ------------- --- ------------- -- -------------
During 1997 and 1996, Sprint recorded nonrecurring litigation charges of $20 and
$60 million, respectively (see Note 9 of Notes to Consolidated Financial
Statements). In January 1996, the division contributed certain international
assets and related operations to Global One. For comparative purposes, the
following discussion of long distance division operating results excludes the
nonrecurring charges and assumes the contribution occurred at the beginning of
1995. Operating margins would have been 12.5% in 1997, 12.0% in 1996 and 10.9%
in 1995.
Net Operating Revenues
Net operating revenues increased 8% in 1997 and 17% in 1996. All major market
segments -- residential, business and wholesale -- contributed to these
increases. In general, the increases reflect strong calling volume growth of 14%
in 1997 and 20% in 1996 and continued growth in the data services market.
Revenue growth in 1997 was affected by a more competitive pricing environment, a
change in the mix of products sold and an increase in the bad debt provision.
Management continues to monitor Sprint's credit extension policies to ensure
they remain effective. In addition, 1996 includes revenues from carrying the
Internal Revenue Service 800 help line traffic, a service Sprint no longer
provides, while 1997 reflects lower yields on other government contracts.
Residential Market -- Residential market revenues reflect the continuing success
of Sprint Sense,(R) a flat-rate calling plan, as well as growth in 1997 from
international calls, prepaid phone cards and casual callers accessing the Sprint
network.
Business Market -- Business market revenues reflect increased calling volumes
for toll-free and direct-distance-dialing toll (WATS) calls made within the
United States. Growth in the small and medium business market was due to the
continuing success of the division's small business product, Fridays Free. Data
services, which includes sales of capacity on Sprint's network to Internet
service providers, showed strong growth because of continued demand and expanded
service offerings.
Wholesale Market -- The wholesale market showed strong growth in both domestic
and international markets. Domestic increases mainly reflect increased WATS
calling volumes, partly offset by a decline in rates due to increased
competition.
F-7
Interconnection Costs
Interconnection costs consist of amounts paid to LECs, other domestic service
providers and foreign telephone companies to complete calls made by the
division's domestic customers. These costs increased 6% in 1997 and 20% in 1996,
reflecting strong growth in calling volumes, partly offset by lower unit costs
for both domestic and international access. The lower domestic rates are
generally due to FCC-mandated access rate reductions that took effect in July
1997 -- see "Regulatory Developments" for more information. Interconnection
costs were 44.0% of net operating revenues in 1997, 45.0% in 1996 and 43.9% in
1995.
Operations Expense
Operations expense mainly consists of costs related to operating and maintaining
the long distance network and costs of equipment sales. It also includes costs
of providing operator, public payphone and video teleconferencing services, as
well as telecommunications services for the hearing-impaired. Operations expense
increased 20% in 1997 and 17% in 1996. As a percentage of net operating
revenues, operations expense was 13.8% in 1997, 12.5% in 1996 and 12.4% in 1995.
The 1997 increases were mainly due to increased costs related to FCC-mandated
payments to public payphone providers, network equipment leasing costs, costs
related to data services growth and equipment sales. The 1996 increase in
expense reflects overall revenue growth.
Selling, General and Administrative Expense
Selling, general and administrative (SG&A) expense increased 2% in 1997 and 8%
in 1996. These increases reflect the overall growth of the division's operating
activities as well as increases in marketing and promotions to support products
and services. The 1997 increase also reflects increased information technology
costs to support network quality, and customer acquisition and customer
management. SG&A expense was 21.7% of net operating revenues in 1997, 22.9% in
1996 and 24.8% in 1995. These improvements reflect continued cost control and
business process improvement efforts.
Depreciation and Amortization Expense
Depreciation and amortization expense increased 13% in 1997 and 12% in 1996,
generally because of an increased asset base. Capital expenditures were incurred
mainly to enhance network reliability, meet increased demand for data-related
services and upgrade capabilities for providing new products and services.
Depreciation and amortization expense was 8.0% of net operating revenues in
1997, 7.6% in 1996 and 8.0% in 1995.
F-8
Local Division
- -------------------------------------------------------------- -- ------------- --- ------------- -- -------------
1997 1996 1995
- -------------------------------------------------------------- -- ------------- --- ------------- -- -------------
(in millions)
Net operating revenues $ 5,290.2 $ 5,126.8 $ 4,690.0
Operating expenses
Costs of services and products 1,888.1 1,842.5 1,769.5
Selling, general and administrative 1,074.0 1,038.2 956.5
Depreciation and amortization 934.1 909.1 835.6
Restructuring costs - - 87.6
- -------------------------------------------------------------- -- ------------- --- ------------- -- -------------
Total operating expenses 3,896.2 3,789.8 3,649.2
- -------------------------------------------------------------- -- ------------- --- ------------- -- -------------
Operating income $ 1,394.0 $ 1,337.0 $ 1,040.8
-- ------------- --- ------------- -- -------------
Operating margin 26.4% 26.1% 22.2%
-- ------------- --- ------------- -- -------------
Capital expenditures $ 1,258.4 $ 1,142.6 $ 950.8
-- ------------- --- ------------- -- -------------
Identifiable assets $ 7,609.7 $ 7,425.4 $ 6,962.0
-- ------------- --- ------------- -- -------------
Beginning in July 1997, Sprint changed its transfer pricing for certain
transactions between affiliates to more accurately reflect market pricing. The
main effect of the pricing change was to reduce "Other Revenues." For
comparative purposes, the following discussion of local division operating
results assumes these pricing changes occurred at the beginning of 1995.
Operating margins would have been 25.6% in 1997, 24.5% in 1996 and 22.3% in 1995
(excluding the restructuring charge).
Net Operating Revenues
Net operating revenues increased 4% in 1997 and 9% in 1996 mainly because of
customer access line growth. Excluding sales of local exchanges in 1997, access
line growth was 5.6% in both 1997 and 1996. Net operating revenues were $5,231.7
million in 1997, $5,013.3 million in 1996 and $4,581.2 million in 1995.
Local Service Revenues -- Local service revenues, derived from local exchange
services, increased 10% in 1997 and 11% in 1996. These increases reflect strong
economic growth in the division's service areas and increases in second-line
service for existing business and residential customers to meet their lifestyle
and data access needs. Local service revenues also increased because of extended
area calling plans and increased demand for advanced intelligent network
services, such as Caller ID and Call Waiting.
Network Access Revenues -- Network access revenues, derived from interexchange
long distance carriers' use of the local network to complete calls, increased 2%
in 1997 and 10% in 1996. The increases were largely due to increased calling
volumes of 6% in 1997 and 10% in 1996. The 1997 revenue growth was partly offset
by FCC-mandated access rate reductions effective in July 1997 -- see "Regulatory
Developments" for more information. In addition, the FCC's 1995 interim
interstate price cap plan increased network access revenues for 1996 and had a
nominal effect on 1995.
Toll Service Revenues -- Toll service revenues are mainly derived from providing
long distance services within specified geographical areas, or local access
transport areas (LATAs). These revenues decreased 19% in 1997 and 13% in 1996.
During 1996 and 1995, the division resold interexchange long distance services
in some of its service areas. This reseller service was phased out through early
1997, accounting for a large portion of the 1997 decline. Some of those
customers, however, became customers of Sprint's long distance division, which
has reduced the overall impact on Sprint. The decreases in toll service revenues
also reflect extended local area calling plans and increased competition in the
intrastate long distance market since interexchange long distance carriers now
provide intraLATA long distance services in many states. The declines in toll
service revenues were partly offset by related increases in the division's local
and network access revenues.
F-9
Other Revenues -- Other revenues are mainly derived from telecommunications
equipment sales, directory sales and listing services, and billing and
collection services. These revenues increased 10% in 1997 and 24% in 1996,
mainly because of increased equipment sales. A major factor in the 1996 growth
was the introduction of enhanced telephone instruments, such as Caller ID units.
Costs of Services and Products
Costs of services and products consists of costs related to operating and
maintaining the local network and costs of equipment sales. These expenses
increased 3% in 1997 and 4% in 1996 because of customer access line growth and
increased equipment sales. Both years also reflect savings from the division's
restructuring of the network function. Costs of services and products were 36.0%
of net operating revenues in 1997, 36.7% in 1996 and 38.5% in 1995. The
improvement in 1996 compared with 1995 reflects the capitalization of switch
software costs beginning in 1996, as discussed in "Depreciation and Amortization
Expense."
Selling, General and Administrative Expense
SG&A expense increased 3% in 1997 and 9% in 1996. These increases were mainly
due to increased customer service costs related to access line growth and
marketing costs to promote new products and services. These increases were
partly offset by savings from the division's restructuring of the finance
function and general cost control measures. SG&A expense was 20.6% of net
operating revenues in 1997, 20.7% in 1996 and 21.0% in 1995.
Depreciation and Amortization Expense
Depreciation and amortization expense increased 3% in 1997 and 9% in 1996,
mainly because of plant additions. The 1996 increase also reflects the initial
year of amortizing capitalized switch software costs. At year-end 1995, Sprint
adopted accounting principles for a competitive marketplace and discontinued
applying SFAS No. 71, "Accounting for the Effects of Certain Types of
Regulation," to its local division (see Note 13 of Notes to Consolidated
Financial Statements). As a result, certain accumulated depreciation balances
were increased; plant asset lives were shortened to reflect their economic
lives; and switch software costs, which were previously expensed as incurred,
are now capitalized and amortized over their estimated economic lives.
Depreciation and amortization expense was 17.8% of net operating revenues in
1997, 18.1% in 1996 and 18.2% in 1995.
Restructuring Costs
In 1995, Sprint recorded an $88 million charge to restructure the division (see
Note 15 of Notes to Consolidated Financial Statements).
Product Distribution and Directory Publishing Division
- -------------------------------------------------------------- -- ------------- --- ------------- -- -------------
1997 1996 1995
- -------------------------------------------------------------- -- ------------- --- ------------- -- -------------
(in millions)
Net operating revenues $ 1,454.3 $ 1,225.4 $ 1,147.6
Operating expenses
Costs of services and products 1,172.9 1,025.7 965.8
Selling, general and administrative 93.3 90.9 87.7
Depreciation and amortization 8.2 7.2 7.4
- -------------------------------------------------------------- -- ------------- --- ------------- -- -------------
Total operating expenses 1,274.4 1,123.8 1,060.9
- -------------------------------------------------------------- -- ------------- --- ------------- -- -------------
Operating income $ 179.9 $ 101.6 $ 86.7
-- ------------- --- ------------- -- -------------
Operating margin 12.4% 8.3% 7.6%
-- ------------- --- ------------- -- -------------
Capital expenditures $ 10.5 $ 9.4 $ 7.8
-- ------------- --- ------------- -- -------------
Identifiable assets $ 519.0 $ 446.1 $ 395.4
-- ------------- --- ------------- -- -------------
F-10
Beginning in July 1997, Sprint changed its transfer pricing for certain
transactions between affiliates to more accurately reflect market pricing. Had
these pricing changes occurred at the beginning of 1995, net operating revenues
would have increased 19% to $1,445.1 million in 1997 from $1,214.3 million in
1996. Revenues would have been $1,138.9 million in 1995. Sales to non-affiliates
in 1997 compared with 1996 remained relatively flat because of increased
competition. Cost of services and products would have increased 22% to $1,115.9
million in 1997 from $918.2 million in 1996. Costs of services and products
would have been $863.4 million in 1995. The growth in revenues and costs of
services and products reflects increased sales of telecommunications equipment
and distribution services to the local division.
Operating margins would have been 15.8% in 1997, 16.3% in 1996 and 15.8% in
1995.
Emerging Businesses
- -------------------------------------------------------------- -- ------------- --- ------------- -- -------------
1997 1996
- -------------------------------------------------------------- -- ------------- --- ------------- -- -------------
(in millions)
Net operating revenues $ 57.4 $ 0.5
--- ------------- -- -------------
Operating loss $ (183.0) $ (63.8)
--- ------------- -- -------------
Capital expenditures $ 233.3 $ 49.9
--- ------------- -- -------------
Identifiable assets $ 1,290.3 $ 138.3
--- ------------- -- -------------
Revenues in 1997 increased mainly because of Sprint Paranet and Sprint Internet
access services. Operating losses for both years largely reflect activities to
develop or enter newly competitive domestic and international markets, such as
Internet access and competitive local services.
During 1996, Sprint began offering Internet services to consumers through Sprint
Internet Passport. (sm) During 1997, Sprint launched Sprint Internet Private
Passport, (sm) which provides customized, private Internet access services to
businesses.
In February 1998, Sprint announced it was forming a broad business relationship
with EarthLink Network Inc. (EarthLink), an Internet service provider. As part
of this relationship, EarthLink will obtain Sprint's Internet Passport customers
and will take over the day-to-day operations of those services. This will create
a combined base of 600,000 Internet access customers, and enable Sprint to build
its brand equity and market share. This relationship requires regulatory
approval and is expected to close in the 1998 second quarter.
During the 1997 third quarter, Sprint stopped actively marketing its CLEC
services until the rules for local competition become clearer, economics
improve, and more effective working arrangements and electronic interfaces with
incumbent LECs can be developed. While Sprint's measured course on entering the
CLEC market has enabled it to avoid significant losses, Sprint continues to
devote significant resources toward developing a distinct approach.
As part of an overall strategy to achieve nationwide PCS coverage, Sprint
directly acquired PCS licenses for $544 million. The licenses cover 139 markets
across the United States, reaching a total population of 70 million. Sprint
plans to affiliate these licenses with the licenses previously acquired by
Sprint PCS. With this affiliation, licensed coverage for Sprint-branded PCS will
include nearly 260 million people across the United States, Puerto Rico and the
U.S. Virgin Islands. Sprint began construction in some markets in 1997. While
zoning issues will dictate the rate of buildout progress, Sprint hopes to
achieve coverage in areas that could reach 25 to 30 million people by the end of
1998. Excluding the PCS license costs, Sprint expects capital expenditures to
total $1.8 billion in 1998 for network buildout.
In September 1997, Sprint acquired Houston-based Paranet, Inc., which will allow
Sprint to capitalize on the accelerating demand for network management services.
Sprint Paranet's design, implementation and consultation expertise should also
enable Sprint to maintain and add to its traditional long distance revenues. See
Note 12 of Notes to Consolidated Financial Statements for more information about
the Paranet acquisition.
F-11
Nonoperating Items
Interest Expense
Interest costs on borrowings consist of the following:
- -------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
(in millions)
Interest expense on outstanding debt $ 159.9 $ 161.2 $ 231.0
Interest expense related to Cellular (1) - 21.5 124.0
Capitalized interest costs 93.0 104.0 57.0
- -------------------------------------------------------------------------------------------------------------------
Total interest costs on outstanding debt $ 252.9 $ 286.7 $ 412.0
----------------------------------------------------
Average debt outstanding $ 3,251.3 $ 3,604.9 $ 5,505.2
----------------------------------------------------
Effective interest rate 7.8% 8.0% 7.5%
----------------------------------------------------
(1) Interest expense related to Cellular is included in "Discontinued
operation, net" on the Consolidated Statements of Income.
Average debt outstanding decreased $1.9 billion in 1996, generally because of
repayments funded by a portion of the cash received from DT and FT for their
equity investments in Sprint and from Cellular's repayment of intercompany debt
in connection with the Spinoff. Sprint's effective interest rate increased to
8.0% in 1996 from 7.5% in 1995, mainly because of the decline in short-term
borrowings as a percentage of total borrowings.
Sprint capitalizes interest costs on its investment in the directly acquired PCS
licenses and the related network buildout. Through June 1997, Sprint also
capitalized interest costs on borrowings related to its investment in Sprint
PCS. Sprint stopped capitalizing these costs in July 1997 because Sprint PCS no
longer qualified as a development-stage company.
Global One
Losses and related venture costs from Global One totaled $162 million in 1997,
$82 million in 1996 and $23 million in 1995. The increased losses in 1997 were
due to higher operating costs within Global One's existing global markets due to
the slower-than-expected integration of the parent companies' networks and
start-up related costs. Global One has begun a thorough review of operations,
including network deployment, and management and support systems, in an effort
to improve efficiencies and reduce operating costs.
Sprint PCS
Sprint PCS' revenues totaled $249 million in 1997 and $4 million in 1996.
Sprint's share of operating losses from Sprint PCS and its affiliates was $660
million in 1997, $192 million in 1996 and $31 million in 1995. The 1997 losses
reflect marketing and promotional costs to support a growing customer base. In
early 1998, Sprint PCS' customer base exceeded 1 million customers. The venture
plans to continue to aggressively obtain new customers, which will likely result
in higher losses in 1998 compared with 1997.
Average monthly revenue per customer in 1997 approximated $64, which is higher
than wireless industry averages. This higher average is being driven by
marketing plans that both target and encourage higher usage. Sprint PCS customer
churn rates and customer marketing costs have been as expected at this stage of
development. As the PCS markets mature and Sprint PCS gains additional scale,
both of these measures are expected to trend toward cellular industry levels.
F-12
Other Income (Expense), Net
Other income (expense) consists of the following:
- -------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
(in millions)
Dividend and interest income $ 75.4 $ 99.7 $ 12.6
Net gains on sales of assets 71.5 15.9 -
Loss on sales of accounts receivable - (4.2) (38.6)
Other, net (6.4) 3.9 (12.9)
- -------------------------------------------------------------------------------------------------------------------
Total other income (expense), net $ 140.5 $ 115.3 $ (38.9)
----------------------------------------------------
Dividend and interest income for 1997 and 1996 reflects income earned on the
cash received from DT and FT for their equity investment in Sprint, as well as
Cellular's repayment of intercompany debt in connection with the Spinoff. Sprint
has since invested these funds in strategic initiatives and has decreased
certain borrowings, reducing the balance held in temporary investments in 1997.
In 1997, Sprint recognized pretax gains of $45 million on sales of local
exchanges. Also in 1997, Sprint sold its equity interest in an equipment
provider, resulting in a $26 million pretax gain.
Income Taxes
Sprint's effective tax rates were 39.8% in 1997, 37.7% in 1996 and 36.1% in
1995. See Note 4 of Notes to Consolidated Financial Statements for information
about the differences that cause the effective income tax rate to vary from the
statutory federal rate.
Discontinued Operation, Net
Sprint recognized an after-tax loss of $3 million ($0.01 per share) in 1996 and
after-tax income of $15 million ($0.04 per share) in 1995 related to its
investment in Cellular. Cellular was spun off to Sprint common shareholders in
March 1996 (see Note 14 of Notes to Consolidated Financial Statements).
Extraordinary Items, Net
During 1996, Sprint redeemed, prior to maturity, $190 million of debt with
interest rates ranging from 6.0% to 9.5%. This resulted in a $5 million ($0.01
per share) after-tax loss.
At year-end 1995, Sprint adopted accounting principles for a competitive
marketplace and discontinued applying SFAS 71 to its local division (see Note 13
of Notes to Consolidated Financial Statements). This resulted in an after-tax,
noncash extraordinary charge of $565 million ($1.62 per share) in 1995.
Financial Condition
Sprint's consolidated assets totaled $18.2 billion at year-end 1997 versus $16.8
billion at year-end 1996. Net property, plant and equipment increased $1.0
billion in 1997, mainly because of increased capital expenditures to support the
core long distance and local networks.
At year-end 1997, Sprint's total capitalization was $12.9 billion. Total
capitalization consists of short-term borrowings, long-term debt (including
current maturities), redeemable preferred stock, and common stock and other
shareholders' equity. Short-term borrowings and long-term debt (including
current maturities) increased to 30.0% of total capitalization at year-end 1997
from 27.7% at year-end 1996. See "Liquidity and Capital Resources" for
additional discussions of changes in Sprint's Consolidated Balance Sheets.
F-13
Liquidity and Capital Resources
Operating Activities - Continuing Operations
Cash flows from operating activities, which are Sprint's main source of
liquidity, were $3.4 billion in 1997, $2.4 billion in 1996 and $2.6 billion in
1995. The growth in 1997 operating cash flows reflects improved operating
results in Sprint's core businesses, partly offset by increased losses from its
emerging businesses. During 1996, Sprint terminated an accounts receivable sales
agreement, which reduced cash flows by $600 million. Excluding this termination,
1996 cash flows increased $394 million, mainly because of improved operating
results in all divisions.
Investing Activities - Continuing Operations
Sprint's investing activities used cash of $4.5 billion in 1997, $3.1 billion in
1996 and $2.9 billion in 1995. Capital expenditures, which are Sprint's largest
investing activity, were $2.9 billion in 1997, $2.4 billion in 1996 and $1.9
billion in 1995.
Long distance capital expenditures were incurred mainly to enhance network
reliability, meet increased demand for data-related services and upgrade
capabilities for providing new products and services. The local division
incurred capital expenditures to accommodate access line growth and expand
capabilities for providing enhanced services.
In 1997, Sprint paid the remaining $460 million for its directly owned PCS
licenses, bringing total payments to $544 million. Also in 1997, Sprint
purchased the net assets of Paranet, Inc. for $375 million (see Note 12 of Notes
to Consolidated Financial Statements).
"Investments in and loans to affiliates, net" consists of the following:
1997 1996 1995
- -------------------------------------------------------------- -- ------------- --- ------------- -- -------------
(in millions)
Sprint PCS(1)
Capital contributions $ 405.9 $ 297.6 $ 910.9
Loans and advances, net 254.1 67.1 -
Capitalized interest 46.3 96.3 43.2
Investments in debt securities - 100.0 -
- -------------------------------------------------------------- -- ------------- --- ------------- -- -------------
706.3 561.0 954.1
- -------------------------------------------------------------- -- ------------- --- ------------- -- -------------
Global One
Capital contribution - 39.5 -
Advances, net 199.7 - -
- -------------------------------------------------------------- -- ------------- --- ------------- -- -------------
199.7 39.5 -
- -------------------------------------------------------------- -- ------------- --- ------------- -- -------------
Other, net 185.8 41.9 37.8
- -------------------------------------------------------------- -- ------------- --- ------------- -- -------------
Total $ 1,091.8 $ 642.4 $ 991.9
-- ------------- --- ------------- -- -------------
(1) Includes Sprint PCS and its affiliates.
The capital contributions, and loans and advances, to Sprint PCS in 1997 and
1996 were used to fund its capital and operating requirements. The 1995
contributions were mainly used to fund payments for PCS licenses. In 1997,
Sprint PCS borrowed $300 million from Sprint under a vendor financing facility.
In July 1997, Sprint began amortizing the capitalized interest costs over the
lives of the related assets. In 1996, Sprint purchased $183 million (face value)
of Sprint PCS Senior Discount notes for $100 million.
F-14
Financing Activities
Sprint's financing activities provided cash of $72 million in 1997, $479 million
in 1996 and $423 million in 1995. In 1997, Sprint borrowed $867 million, mainly
to fund investments in and loans to affiliates. In 1996, DT and FT acquired
Class A common shares for a combined total of $3.7 billion. Sprint mainly used
these proceeds, and the cash from Cellular repaying intercompany debt, to reduce
outstanding debt. In 1995, Sprint increased its short-term borrowings by $1.1
billion to fund commitments related to Sprint PCS and repay long-term debt.
Sprint paid common and preferred dividends totaling $430 million in 1997, $420
million in 1996 and $352 million in 1995. Sprint's indicated annual dividend
rate on common stock is currently $1.00 per share.
Sprint purchased 3 and 10 million treasury shares in 1997 and 1996,
respectively. Sprint may repurchase common shares on the open market through
1998 to meet share issuance requirements for employee benefit plans and for the
conversion of preferred stock.
Discontinued Operation
In connection with the March 1996 Spinoff, Cellular repaid $1.4 billion of
intercompany debt owed to Sprint. Prior to the Spinoff, Cellular's investing
activities required net cash of $141 and $325 million in 1996 and 1995,
respectively, mainly to fund capital expenditures and acquire cellular
properties.
Capital Requirements
Sprint's 1998 investing activities, consisting of capital expenditures and
investments in affiliates, are expected to require cash of $5.4 to $6.1 billion.
Dividend payments are expected to total $430 million in 1998. These requirements
will be funded with cash from operating activities and external sources.
External borrowings are expected to total $2.0 to $2.5 billion in 1998.
Sprint expects to spend $5.0 to $5.5 billion on capital expenditures in 1998. Of
this total, the long distance and local divisions will require an estimated $2.7
to $3.0 billion. The remainder will mainly be used to build out the network for
the new PCS markets directly owned by Sprint.
Sprint PCS will require $200 to $300 million to fund operating cash requirements
and to continue its network buildout. Global One will also require $200 to $300
million to fund operations and ongoing development activities.
Liquidity
At year-end 1997, Sprint could borrow $1.0 billion under a revolving credit
agreement with a syndicate of domestic and international banks. In addition, in
1997, Sprint negotiated a separate five-year revolving credit facility with a
bank. At year-end 1997, Sprint's unused capacity under the committed portion of
this facility was $100 million. Sprint may also offer for sale up to $1.1
billion of debt securities under shelf registration statements filed with the
Securities and Exchange Commission. Any borrowings Sprint may incur are
ultimately limited by certain debt covenants. At year-end 1997, Sprint could
borrow up to $13.5 billion under the most restrictive of its debt covenants.
The most restrictive covenant related to dividends results from Sprint's
revolving credit agreement. Among other restrictions, Sprint must maintain
specified levels of consolidated net worth. As a result, $2.7 billion of
Sprint's $3.7 billion retained earnings was restricted from the payment of
dividends at year-end 1997.
F-15
Financial Strategies
General Hedging Policies
Sprint selectively enters into interest rate swap and cap agreements to manage
its exposure to interest rate changes on its debt. Sprint also enters into
forward contracts and options in foreign currencies to reduce the impact of
changes in foreign exchange rates. Sprint seeks to minimize counterparty credit
risk through stringent credit approval and review processes, the selection of
only the most creditworthy counterparties, continual review and monitoring of
all counterparties, and thorough legal review of contracts. Sprint also controls
exposure to market risk by regularly monitoring changes in foreign exchange and
interest rate positions under normal and stress conditions to ensure they do not
exceed established limits.
Sprint's derivative transactions are used for hedging purposes only and comply
with Board-approved policies. Senior management receives monthly status updates
of all outstanding derivative positions.
Interest Rate Risk Management
Sprint's interest rate risk management program focuses on minimizing exposure to
interest rate movements, setting an optimal mixture of floating- and fixed-rate
debt, and minimizing liquidity risk. Sprint uses simulation analysis to assess
its interest rate exposure and establish the desired ratio of floating- and
fixed-rate debt. To the extent possible, Sprint manages interest rate exposure
and the floating-to-fixed ratio through its borrowings, but sometimes uses
interest rate swaps and caps to adjust its risk profile.
Foreign Exchange Risk Management
Sprint's foreign exchange risk management program focuses on hedging transaction
exposure to optimize consolidated cash flow. Sprint's main transaction exposure
results from net payments made to overseas telecommunications companies for
completing international calls made by Sprint's domestic customers.
Year 2000 Issue
The "Year 2000" issue affects Sprint's installed computer systems, network
elements, software applications, and other business systems that have
time-sensitive programs that may not properly reflect or recognize the year
2000. Because many computers and computer applications define dates by the last
two digits of the year, "00" may not be properly identified as the year 2000.
This error could result in miscalculations or system failures.
Sprint started a program in 1996 to identify and address the Year 2000 issue. It
is taking an inventory of its network and computer systems and is creating and
implementing plans to make them Year 2000 compliant. Sprint is using both
internal and external sources to identify, correct or reprogram, and test its
systems for Year 2000 compliance. The total cost of modifications and
conversions is not known at this time; however, it is not expected to be
material to Sprint's financial position, results of operations or cash flows and
is being expensed as incurred.
The Year 2000 issue may also affect the systems and applications of Sprint's
customers, vendors or resellers. Sprint is also contacting others with whom it
conducts business to receive the appropriate warranties and assurances that
those third parties are, or will be, Year 2000 compliant.
If compliance is not achieved in a timely manner, the Year 2000 issue could have
a material effect on Sprint's operations. However, Sprint is focusing on
identifying and addressing all aspects of its operations that may be affected by
the Year 2000 issue and is addressing the most critical applications first. As a
result, Sprint management does not believe its operations will be materially
adversely affected.
Impact of Recently Issued Accounting Pronouncements
See Note 16 of Notes to Consolidated Financial Statements for a discussion of
recently issued accounting pronouncements.
F-16
MANAGEMENT REPORT
The management of Sprint Corporation has the responsibility for the integrity
and objectivity of the information contained in this Annual Report. Management
is responsible for the consistency of reporting such information and for
ensuring that generally accepted accounting principles are used.
In discharging this responsibility, management maintains a comprehensive system
of internal controls and supports an extensive program of internal audits, has
made organizational arrangements providing appropriate divisions of
responsibility and has established communication programs aimed at assuring that
its policies, procedures and codes of conduct are understood and practiced by
its employees.
The consolidated financial statements included in this Annual Report have been
audited by Ernst & Young LLP, independent auditors. Their audit was conducted in
accordance with generally accepted auditing standards and their report is
included herein.
The responsibility of the Board of Directors for these financial statements is
pursued mainly through its Audit Committee. The Audit Committee, composed
entirely of directors who are not officers or employees of Sprint, meets
periodically with the internal auditors and independent auditors, both with and
without management present, to assure that their respective responsibilities are
being fulfilled. The internal and independent auditors have full access to the
Audit Committee to discuss auditing and financial reporting matters.
/s/ W. T. Esrey
William T. Esrey
Chairman and Chief Executive Officer
/s/ Arthur B. Krause
Arthur B. Krause
Executive Vice President and Chief Financial Officer
F-17
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Sprint Corporation
We have audited the accompanying consolidated balance sheets of Sprint
Corporation (Sprint) as of December 31, 1997 and 1996, and the related
consolidated statements of income, cash flows, and common stock and other
shareholders' equity for each of the three years in the period ended December
31, 1997. Our audits also included the financial statement schedule (Schedule
II) listed in the Index to Financial Statements and Financial Statement
Schedules. These financial statements and Schedule II are the responsibility of
the management of Sprint. Our responsibility is to express an opinion on these
financial statements and Schedule II based on our audits. The 1997 financial
statements and financial statement schedule of Sprint Spectrum Holding Company,
L.P., a partnership in which Sprint has a 40% interest, have been audited by
other auditors whose report has been furnished to us; insofar as our opinion on
the 1997 consolidated financial statements relates to data included for Sprint
Spectrum Holding Company, L.P., it is based solely on their report. In the
consolidated financial statements, Sprint's equity in Sprint Spectrum Holding
Company, L.P. is stated at $749 million at December 31, 1997, and Sprint's
equity in the net loss of Sprint Spectrum Holding Company, L.P. is stated at
$625 million for the year then ended.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Sprint at December 31,
1997 and 1996, and the consolidated results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule (Schedule II), when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
As discussed in Note 13 to the consolidated financial statements, Sprint
discontinued accounting for the operations of its local telecommunications
division in accordance with Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of Regulation," in 1995.
ERNST & YOUNG LLP
Kansas City, Missouri
February 3, 1998
F-18
CONSOLIDATED STATEMENTS OF INCOME Sprint Corporation
- -------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
(in millions, except per share data)
Net Operating Revenues $ 14,873.9 $ 13,887.5 $ 12,735.3
Operating Expenses
Costs of services and products 7,451.0 6,912.9 6,504.9
Selling, general and administrative 3,245.2 3,116.4 2,842.1
Depreciation and amortization 1,726.3 1,591.0 1,466.4
Restructuring costs - - 87.6
-------------------------------------------------------------------------------------------------------------
Total operating expenses 12,422.5 11,620.3 10,901.0
-------------------------------------------------------------------------------------------------------------
Operating Income 2,451.4 2,267.2 1,834.3
Interest expense (187.2) (196.7) (260.7)
Equity in loss of Global One (162.1) (82.1) (22.9)
Equity in loss of Sprint PCS and affiliates (659.6) (191.8) (31.4)
Other income (expense), net 140.5 115.3 (38.9)
- -------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes 1,583.0 1,911.9 1,480.4
Income taxes (630.5) (721.0) (534.3)
- -------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations 952.5 1,190.9 946.1
Discontinued operation, net - (2.6) 14.5
Extraordinary items, net - (4.5) (565.3)
- -------------------------------------------------------------------------------------------------------------------
Net Income 952.5 1,183.8 395.3
Preferred stock dividends (1.0) (1.3) (2.6)
- -------------------------------------------------------------------------------------------------------------------
Earnings applicable to common stock $ 951.5 $ 1,182.5 $ 392.7
-----------------------------------------------
Basic Earnings per Common Share
Continuing operations $ 2.21 $ 2.82 $ 2.71
Discontinued operation - (0.01) 0.04
Extraordinary items - (0.01) (1.62)
- -------------------------------------------------------------------------------------------------------------------
Total $ 2.21 $ 2.80 $ 1.13
-----------------------------------------------
Basic weighted average common shares 430.2 421.7 348.7
-----------------------------------------------
Diluted Earnings per Common Share
Continuing operations $ 2.18 $ 2.79 $ 2.69
Discontinued operation - (0.01) 0.04
Extraordinary items - (0.01) (1.61)
- -------------------------------------------------------------------------------------------------------------------
Total $ 2.18 $ 2.77 $ 1.12
-----------------------------------------------
Diluted weighted average common shares 436.5 427.0 351.3
-----------------------------------------------
Dividends per Common Share $ 1.00 $ 1.00 $ 1.00
-----------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
F-19
CONSOLIDATED BALANCE SHEETS Sprint Corporation
- ------------------------------------------------------------------------------------------------------------------------
December 31, 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
(in millions, except per share
data)
Assets
Current assets
Cash and equivalents $ 101.7 $ 1,150.6
Accounts receivable, net of allowance for doubtful accounts of $146.7 and
$117.4 2,495.6 2,343.6
Inventories 352.0 305.3
Notes and other receivables 464.6 101.9
Other 358.7 331.5
- -------------------------------------------------------------------------------------------------------------------------
Total current assets 3,772.6 4,232.9
- -------------------------------------------------------------------------------------------------------------------------
Investments in equity securities 303.0 254.5
- -------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment
Long distance communications services 8,245.5 7,467.8
Local communications services 14,011.5 13,368.7
Other 953.9 574.3
- -------------------------------------------------------------------------------------------------------------------------
Total property, plant and equipment 23,210.9 21,410.8
Less accumulated depreciation 11,716.8 10,946.7
- -------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 11,494.1 10,464.1
- -------------------------------------------------------------------------------------------------------------------------
Investments in and advances to affiliates 1,427.5 1,527.1
- -------------------------------------------------------------------------------------------------------------------------
Other assets 1,187.6 347.8
- -------------------------------------------------------------------------------------------------------------------------
Total $ 18,184.8 $ 16,826.4
------------------------------------
Liabilities and Shareholders' Equity
Current liabilities
Current maturities of long-term debt $ 131.0 $ 99.1
Short-term borrowings - 200.0
Accounts payable 1,100.1 1,026.7
Accrued interconnection costs 672.7 709.0
Accrued taxes 270.7 189.2
Advance billings 202.9 199.7
Other 699.4 770.6
- ------------------------------------------------------------------------------------------------------------------------
Total current liabilities 3,076.8 3,194.3
- ------------------------------------------------------------------------------------------------------------------------
Long-term debt 3,748.6 2,974.8
- ------------------------------------------------------------------------------------------------------------------------
Deferred credits and other liabilities
Deferred income taxes and investment tax credits 1,016.5 846.9
Postretirement and other benefit obligations 947.4 919.7
Other 358.8 359.0
- ------------------------------------------------------------------------------------------------------------------------
Total deferred credits and other liabilities 2,322.7 2,125.6
- ------------------------------------------------------------------------------------------------------------------------
Redeemable preferred stock 11.5 11.8
- ------------------------------------------------------------------------------------------------------------------------
Common stock and other shareholders' equity
Common stock, par value $2.50 per share, 1,000.0 shares authorized, 350.3
shares issued, and 343.8 and 343.9 shares outstanding 875.7 875.7
Class A common stock, par value $2.50 per share, 500.0 shares authorized,
86.2 shares issued and outstanding 215.6 215.6
Capital in excess of par or stated value 4,457.7 4,425.9
Retained earnings 3,693.1 3,222.4
Treasury stock, at cost, 6.5 and 6.4 shares (292.9) (262.2)
Other 76.0 42.5
-----------------------------------------------------------------------------------------------------------------
Total common stock and other shareholders' equity 9,025.2 8,519.9
- ------------------------------------------------------------------------------------------------------------------------
Total $ 18,184.8 $ 16,826.4
----------------------------------
See accompanying Notes to Consolidated Financial Statements.
F-20
CONSOLIDATED STATEMENTS OF CASH FLOWS Sprint Corporation
- ----------------------------------------------------------------- ----------------- ---------------- -----------------
Years Ended December 31, 1997 1996 1995
- ----------------------------------------------------------------- ----------------- ---------------- -----------------
(in millions)
Operating Activities
Net income $ 952.5 $ 1,183.8 $ 395.3
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in net losses of affiliates 843.7 273.7 39.1
Extraordinary items, net - 4.9 565.3
Depreciation and amortization 1,726.3 1,591.0 1,466.4
Deferred income taxes and investment tax credits 165.7 (10.3) 5.8
Net (gains) losses on sales of assets (93.2) 7.5 4.2
Changes in assets and liabilities:
Accounts receivable, net (127.0) (982.1) (135.4)
Inventories and other current assets (94.4) 15.7 (38.6)
Accounts payable and other current liabilities 18.0 362.0 178.1
Noncurrent assets and liabilities, net (18.4) (25.5) 123.0
Other, net 5.8 (17.1) 6.4
- ----------------------------------------------------------------- --- ------------- -- ------------- --- -------------
Net cash provided by continuing operations 3,379.0 2,403.6 2,609.6
Net cash provided (used) by cellular division - (0.1) 162.5
- ----------------------------------------------------------------- --- ------------- -- ------------- --- -------------
Net cash provided by operating activities 3,379.0 2,403.5 2,772.1
- ----------------------------------------------------------------- --- ------------- -- ------------- --- -------------
Investing Activities
Capital expenditures (2,862.6) (2,433.6) (1,857.3)
Purchase of PCS licenses (460.1) (84.0) -
Investments in and loans to affiliates, net (1,091.8) (642.4) (991.9)
Paranet acquisition (375.0) - -
Proceeds from sales of assets 292.3 2.1 6.7
Other, net (2.3) 42.4 (17.1)
- ----------------------------------------------------------------- --- ------------- -- ------------- --- -------------
Net cash used by continuing operations (4,499.5) (3,115.5) (2,859.6)
Repayment by cellular division of intercompany advances - 1,400.0 -
Net cash used by cellular division - (140.7) (324.6)
- ----------------------------------------------------------------- --- ------------- -- ------------- --- -------------
Net cash used by investing activities (4,499.5) (1,856.2) (3,184.2)
- ----------------------------------------------------------------- --- ------------- -- ------------- --- -------------
Financing Activities
Payments on long-term debt (135.0) (433.1) (630.0)
Proceeds from long-term debt 866.5 9.4 260.7
Net change in short-term borrowings (200.0) (1,986.8) 1,109.5
Proceeds from Class A common stock issued - 3,661.3 -
Dividends paid (430.0) (419.6) (351.5)
Treasury stock purchased (144.5) (407.2) -
Other, net 114.6 55.1 33.9
- ----------------------------------------------------------------- --- ------------- -- ------------- --- -------------
Net cash provided by financing activities 71.6 479.1 422.6
- ----------------------------------------------------------------- --- ------------- -- ------------- --- -------------
Increase (Decrease) in Cash and Equivalents (1,048.9) 1,026.4 10.5
Cash and Equivalents at Beginning of Year 1,150.6 124.2 113.7
- ----------------------------------------------------------------- --- ------------- -- ------------- --- -------------
Cash and Equivalents at End of Year $ 101.7 $ 1,150.6 $ 124.2
--- ------------- -- ------------- --- -------------
See accompanying Notes to Consolidated Financial Statements.
F-21
CONSOLIDATED STATEMENTS OF COMMON STOCK AND OTHER SHAREHOLDERS' EQUITY Sprint Corporation
- -------------------------------------------------------------------------------------------------------------------------
Capital
in Excess
Common Class A of Par or
Shares Common Common Stated Retained Treasury
Outstanding Stock Stock Value Earnings Stock Other Total
- -------------------------------------------------------------------------------------------------------------------------
(in millions)
Beginning 1995 balance 348.3 $ 871.4 $ - $ 942.9 $ 2,730.6 $ (9.6) $ (10.5) $ 4,524.8
Net income - - - - 395.3 - - 395.3
Common stock dividends - - - - (348.9) - - (348.9)
Common stock issued 0.6 1.4 - 13.5 - - - 14.9
Treasury stock issued 0.3 - - - (3.5) 9.6 - 6.1
Change in unrealized
holding gains on
investments, net - - - - - - 54.6 54.6
Other, net - 0.1 - 3.6 (0.6) - (7.3) (4.2)
- -------------------------------------------------------------------------------------------------------------------------
Ending 1995 balance 349.2 872.9 - 960.0 2,772.9 - 36.8 4,642.6
Net income - - - - 1,183.8 - - 1,183.8
Common stock dividends - - - - (346.1) - - (346.1)
Class A common stock and
preference stock
dividends - - - - (74.9) - - (74.9)
Common stock issued 1.1 2.5 - 17.5 - - - 20.0
Class A common stock
issued 86.2 - 215.6 3,436.3 - - - 3,651.9
Treasury stock purchased (10.1) - - - - (407.2) - (407.2)
Treasury stock issued 3.7 - - - (52.9) 145.0 - 92.1
Spinoff of cellular - - - - (260.2) - - (260.2)
division
Other, net - 0.3 - 12.1 (0.2) - 5.7 17.9
- -------------------------------------------------------------------------------------------------------------------------
Ending 1996 balance 430.1 875.7 215.6 4,425.9 3,222.4 (262.2) 42.5 8,519.9
Net income - - - - 952.5 - - 952.5
Common stock dividends - - - - (343.3) - - (343.3)
Class A common stock
dividends - - - - (86.2) - - (86.2)
Treasury stock purchased (3.0) - - - - (144.5) - (144.5)
Treasury stock issued 2.9 - - - (48.8) 113.8 - 65.0
Tax benefit from stock
options exercised - - - 26.2 - - - 26.2
Other, net - - - 5.6 (3.5) - 33.5 35.6
- -------------------------------------------------------------------------------------------------------------------------
Ending 1997 balance 430.0 $ 875.7 $ 215.6 $ 4,457.7 $ 3,693.1 $ (292.9) $ 76.0 $ 9,025.2
-----------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Sprint Corporation
1. Summary of Significant Accounting Policies
Basis of Consolidation and Presentation
The consolidated financial statements include the accounts of Sprint Corporation
and its wholly owned and majority-owned subsidiaries (Sprint). Investments in
entities in which Sprint exercises significant influence, but does not control,
are accounted for using the equity method (see Note 2).
The consolidated financial statements are prepared according to generally
accepted accounting principles. These principles require 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. Actual results could differ from
those estimates.
Certain prior-year amounts have been reclassified to conform to the current-year
presentation. These reclassifications had no effect on the results of operations
or shareholders' equity as previously reported.
Sprint applied Statement of Financial Accounting Standards (SFAS) No. 71,
"Accounting for the Effects of Certain Types of Regulation," to its financial
statements until December 1995. Under SFAS 71, revenues and related net income
resulting from transactions between Sprint's nonregulated operations and its
regulated local exchange carriers were not eliminated from the consolidated
financial statements. Revenues from these intercompany transactions were $262
million in 1995. All other significant intercompany transactions have been
eliminated.
Classification of Operations
The long distance division provides domestic and international voice, video and
data communications services. The division offers its services to the public
subject to varying levels of state and federal regulation, but rates are
generally not subject to rate-base regulation.
The local division consists of regulated telephone companies. These operations
provide local exchange services, access by telephone customers and other
carriers to local exchange facilities, sales of telecommunications equipment and
long distance services within specified geographical areas.
The product distribution and directory publishing division provides wholesale
distribution services of telecommunications products, and publishes and markets
white and yellow page telephone directories.
Emerging businesses consists of activities related to consumer Internet access
services, mainly through Sprint Internet Passport (sm); competitive local
exchange carrier services; personal communication services (PCS) controlled by
Sprint; international development activities (outside the scope of the Global
One joint venture); and integration, management and support services for
computer networks through Sprint Paranet.
Revenue Recognition
Sprint recognizes operating revenues as services are rendered or as products are
delivered to customers. Sprint records operating revenues net of an estimate for
uncollectible accounts.
F-23
1. Summary of Significant Accounting Policies (continued)
Cash and Equivalents
Cash equivalents generally include highly liquid investments with original
maturities of three months or less. They are stated at cost, which approximates
market value. Sprint uses controlled disbursement banking arrangements as part
of its cash management program. Outstanding checks in excess of cash balances,
which were included in accounts payable, totaled $225 million at year-end 1997
and $127 million at year-end 1996. Sprint had sufficient funds available to fund
these outstanding checks when they were presented for payment.
Investments in Debt and Equity Securities
Investments in debt and equity securities are classified as available for sale
and reported at fair value (estimated based on quoted market prices). Gross
unrealized holding gains and losses are reflected as adjustments to "Common
stock and other shareholders' equity - Other," net of related income taxes.
Inventories
Inventories are stated at the lower of cost (principally first-in, first-out
method) or market.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Generally, ordinary asset
retirements and disposals are charged against accumulated depreciation with no
gain or loss recognized. Repairs and maintenance costs are expensed as incurred.
Depreciation
The cost of property, plant and equipment is generally depreciated on a
straight-line basis over estimated economic useful lives. Prior to Sprint's
discontinued use of SFAS 71 at year-end 1995, the cost of property, plant and
equipment for the local division had been generally depreciated on a
straight-line basis over lives prescribed by regulatory commissions.
Income Taxes
Sprint records deferred income taxes based on certain temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for tax purposes.
Investment tax credits related to regulated telephone property, plant and
equipment have been deferred and are being amortized over the estimated useful
lives of the related assets.
Capitalized Interest
Sprint capitalizes interest costs related to constructing capital assets, and to
its investments in Sprint Spectrum Holding Company, L.P. (Sprint PCS) and its
directly owned PCS licenses. Sprint stopped capitalizing interest on its Sprint
PCS investment in July 1997 because Sprint PCS no longer qualified as a
development-stage company. Capitalized interest totaled $93 million in 1997,
$104 million in 1996 and $57 million in 1995.
F-24
2. Investments
Investments in Equity Securities
The cost of investments in equity securities was $105 million at year-end 1997
and 1996. Gross unrealized holding gains were $198 million at year-end 1997 and
$149 million at year-end 1996.
Investments in and Loans to Affiliates
Investments accounted for using the equity method mainly consist of Sprint's
investments in Sprint PCS and Global One.
Sprint is a 40% partner in Sprint PCS, a partnership with Tele-Communications,
Inc., Comcast Corporation and Cox Communications, Inc. Sprint PCS is building
the nation's first single-technology, state-of-the-art wireless network to
provide PCS across the United States.
Sprint is a also a partner in Global One, a joint venture with Deutsche Telekom
AG (DT) and France Telecom (FT) formed to provide seamless global
telecommunications services to business, residential and carrier markets
worldwide. Sprint is a one-third partner in Global One's operating group serving
Europe (excluding France and Germany), and is a 50% partner in Global One's
operating group for the worldwide activities outside the United States and
Europe. At year-end 1997, Sprint's share of underlying equity in Global One's
net assets exceeded the carrying value of Sprint's investment in Global One by
$158 million. This difference is being amortized through January 2001.
Combined, summarized financial information (100% basis) of all entities
accounted for using the equity method is as follows:
1997 1996 1995
- -------------------------------------------------------------- -- ------------- --- ------------- -- -------------
(in millions)
Results of operations
Net operating revenues $ 2,195.6 $ 1,727.9 $ 779.5
-- ------------- --- ------------- -- -------------
Operating loss $ (2,162.2) $ (794.0) $ (58.3)
-- ------------- --- ------------- -- -------------
Net loss $ (2,459.0) $ (844.3) $ (90.6)
-- ------------- --- ------------- -- -------------
Financial position
Current assets $ 2,331.5 $ 1,360.7
Noncurrent assets 10,861.0 6,779.3
- -------------------------------------------------------------- -- ------------- --- -------------
Total $ 13,192.5 $ 8,140.0
-- ------------- --- -------------
Current liabilities $ 2,800.2 $ 1,185.5
Noncurrent liabilities 6,395.2 2,042.1
Owners' equity 3,997.1 4,912.4
- -------------------------------------------------------------- -- ------------- --- -------------
Total $ 13,192.5 $ 8,140.0
-- ------------- --- -------------
At year-end 1997 and 1996, Sprint's investment in Sprint PCS, including advances
and a vendor financing loan, totaled $1.2 billion. Sprint's investment in Global
One, including advances, totaled $93 and $38 million, respectively.
In 1996, Sprint purchased $183 million (face value) of Sprint PCS Senior
Discount notes for $100 million. The bonds mature in 2006. At year-end 1997 and
1996, the accreted cost of the notes was $118 and $104 million and gross
unrealized holding gains totaled $24 and $18 million, respectively. This
investment has been included in "Current assets - Other" on the Consolidated
Balance Sheets.
F-25
3. Employee Benefit Plans
Defined Benefit Pension Plan
Substantially all Sprint employees are covered by a noncontributory defined
benefit pension plan. Benefits for plan participants represented by collective
bargaining units are based on negotiated schedules of defined amounts. For
participants not covered by collective bargaining agreements, the plan provides
pension benefits based on years of service and participants' compensation.
Sprint's policy is to make annual plan contributions equal to an actuarially
determined amount consistent with applicable federal tax regulations. The
funding objective is to accumulate funds at a relatively stable rate over the
participants' working lives so benefits are fully funded at retirement. At
year-end 1997, the plan's assets consisted mainly of investments in corporate
equity securities and U.S. government and corporate debt securities.
The net pension cost (credit) consists of the following:
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
(in millions)
Service cost -- benefits earned during the period $ 61.7 $ 65.4 $ 51.8
Interest cost on projected benefit obligation 148.9 138.5 129.7
Actual return on plan assets (448.5) (353.0) (472.1)
Net amortization and deferral 240.0 159.4 287.9
- -------------------------------------------------------------------------------------------------------------------
Net pension cost (credit) $ 2.1 $ 10.3 $ (2.7)
----------------------------------------------------
Discount rate 7.75% 7.25% 8.50%
Expected long-term rate of return on plan assets 9.50% 9.50% 9.50%
Anticipated composite rate of future compensation increases 4.75% 4.25% 5.00%
At year-end, the funded status and amounts recognized in the Consolidated
Balance Sheets for the plan were as follows:
1997 1996
- -------------------------------------------------------------------------------------------------------------------
(in millions)
Actuarial present value of benefit obligations
Vested benefit obligation $ (1,966.7) $ (1,713.6)
-----------------------------------
Accumulated benefit obligation $ (2,129.6) $ (1,864.1)
-----------------------------------
Projected benefit obligation $ (2,240.9) $ (1,967.0)
Plan assets at fair value 2,929.4 2,584.2
- -------------------------------------------------------------------------------------------------------------------
Plan assets in excess of the projected benefit obligation 688.5 617.2
Unrecognized net gains (585.2) (481.8)
Unrecognized prior service cost 105.4 100.4
Unamortized transition asset (122.1) (147.1)
- -------------------------------------------------------------------------------------------------------------------
Prepaid pension cost $ 86.6 $ 88.7
-----------------------------------
Discount rate 7.25% 7.75%
Anticipated composite rate of future compensation increases 4.25% 4.75%
F-26
3. Employee Benefit Plans (continued)
Defined Contribution Plans
Sprint sponsors defined contribution employee savings plans covering
substantially all employees. Participants may contribute portions of their pay
to the plans. For employees represented by collective bargaining units, Sprint
matches contributions based on negotiated amounts. Sprint also matches
contributions of employees not covered by collective bargaining agreements. For
those participants, Sprint matches their contributions in Sprint common stock.
The matching is equal to 50% of participants' contributions up to 6% of their
pay. In addition, Sprint may, at the discretion of the Board of Directors,
provide matching contributions based on the performance of Sprint common stock
compared to other telecommunications companies' stock. Sprint's matching
contributions were $54 million in 1997, $56 million in 1996 and $51 million in
1995. At year-end 1997, the plans held 20 million Sprint common shares.
Postretirement Benefits
Sprint provides postretirement benefits (principally medical benefits) to
substantially all employees. Employees retiring before certain dates are
eligible for benefits at no cost, or at a reduced cost. Employees retiring after
certain dates are eligible for benefits on a shared-cost basis. Sprint funds the
accrued costs as benefits are paid.
The net postretirement benefits cost consists of the following:
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
(in millions)
Service cost -- benefits earned during the year $ 20.8 $ 21.7 $ 22.2
Interest on accumulated postretirement benefit obligation 52.3 49.9 58.7
Net amortization and deferral (19.4) (13.7) (9.4)
- -------------------------------------------------------------------------------------------------------------------
Net postretirement benefits cost $ 53.7 $ 57.9 $ 71.5
----------------------------------------------------
Discount rate 7.75% 7.25% 8.50%
For measurement purposes, the assumed 1997 weighted average annual health care
cost trend rate was 9%, gradually decreasing to an ultimate level of 5% by 2005.
A 1% increase in the rate would have increased the 1997 net postretirement
benefits cost by an estimated $12 million.
Amounts included in the Consolidated Balance Sheets at year-end are as follows:
1997 1996
- ------------------------------------------------------------------------------- --- ------------- -- -------------
(in millions)
Accumulated postretirement benefit obligation
Retirees $ 328.3 $ 277.9
Active plan participants --
Fully eligible 145.2 127.6
Other 269.9 320.7
- ------------------------------------------------------------------------------- --- ------------- -- -------------
743.4 726.2
Unrecognized prior service benefit 5.4 5.7
Unrecognized net gains 190.0 178.7
- ------------------------------------------------------------------------------- --- ------------- -- -------------
Accrued postretirement benefits cost $ 938.8 $ 910.6
--- ------------- -- -------------
Discount rate 7.25% 7.75%
F-27
The assumed 1998 annual health care cost trend rate was 8.5%, gradually
decreasing to an ultimate level of 5% by 2005. A 1% increase in the rate would
have increased the 1997 accumulated postretirement benefit obligation by an
estimated $61 million.
4. Income Taxes
Income tax expense allocated to continuing operations consists of the following:
1997 1996 1995
- --------------------------------------------------------------- -- -------------- -- ------------- --- -------------
(in millions)
Current income tax expense
Federal $ 385.9 $ 655.4 $ 437.4
State 78.9 75.9 91.1
- --------------------------------------------------------------- -- -------------- -- ------------- --- -------------
Total current 464.8 731.3 528.5
- --------------------------------------------------------------- -- -------------- -- ------------- --- -------------
Deferred income tax expense (benefit)
Federal 174.3 (22.2) 45.9
State (4.8) 23.5 (23.6)
Amortization of deferred investment tax credits (3.8) (11.6) (16.5)
- --------------------------------------------------------------- -- -------------- -- ------------- --- -------------
Total deferred 165.7 (10.3) 5.8
- --------------------------------------------------------------- -- -------------- -- ------------- --- -------------
Total $ 630.5 $ 721.0 $ 534.3
-- -------------- -- ------------- --- -------------
The differences that cause the effective income tax rate to vary from the
statutory federal rate of 35% were as follows:
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
(in millions)
Income tax expense at the statutory rate $ 554.1 $ 669.2 $ 518.1
Less investment tax credits included in income 3.8 11.6 16.5
- -------------------------------------------------------------------------------------------------------------------
Expected federal income tax expense after investment tax
credits 550.3 657.6 501.6
Effect of
State income taxes, net of federal income tax effect 48.2 64.6 43.9
Equity in losses of foreign joint ventures 36.4 8.6 -
Other, net (4.4) (9.8) (11.2)
- -------------------------------------------------------------------------------------------------------------------
Income tax expense, including investment tax credits $ 630.5 $ 721.0 $ 534.3
-----------------------------------------------------
Effective income tax rate 39.8% 37.7% 36.1%
-----------------------------------------------------
Income tax expense (benefit) allocated to other items was as follows:
1997 1996 1995
- ---------------------------------------------------------------- --- ------------ -- ------------- -- ------------
(in millions)
Discontinued operation $ - $ 7.0 $ 31.2
Extraordinary items - (2.9) (437.4)
Unrealized holding gains on investments (1) 4.4 1.7 30.7
Stock ownership, purchase and options arrangements (1) (26.2) (14.1) (7.5)
- ---------------------------------------------------------------- --- ------------ -- ------------- -- ------------
(1) These amounts have been recorded directly to "Common stock and other
shareholders' equity - Other."
F-28
4. Income Taxes (continued)
Sprint recognizes deferred income taxes for the temporary differences between
the carrying amounts of its assets and liabilities for financial statement
purposes and their tax bases. The sources of the differences that give rise to
the deferred income tax assets and liabilities at year-end 1997 and 1996, along
with the income tax effect of each, were as follows:
1997 Deferred Income Tax 1996 Deferred Income Tax
------------- -- ------------- --- ------------- -- -------------
Assets Liabilities Assets Liabilities
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
(in millions)
Property, plant and equipment $ - $ 1,488.8 $ - $ 1,304.3
Postretirement and other benefits 376.1 - 360.3 -
Reserves and allowances 111.3 - 115.6 -
Unrealized holding gains on investments - 61.7 - 57.3
Other, net 108.5 - 106.8 -
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
595.9 1,550.5 582.7 1,361.6
Less valuation allowance 11.8 - 13.7 -
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
Total $ 584.1 $ 1,550.5 $ 569.0 $ 1,361.6
--- ------------- -- ------------- --- ------------- -- -------------
The valuation allowance related to deferred income tax assets decreased $2
million in 1997 and $4 million in 1996 and 1995.
Management believes it is more likely than not that these deferred income tax
assets, net of the allowance, will be realized based on current income tax laws
and expectations of future taxable income stemming from the reversal of existing
deferred tax liabilities or ordinary operations. Uncertainties surrounding
income tax law changes, shifts in operations between state taxing jurisdictions,
and future operating income levels may, however, affect the ultimate realization
of all or some of these deferred income tax assets.
At year-end 1997, Sprint had available for income tax purposes $4 million of
state alternative minimum tax credit carryforwards to offset state income tax
payable in future years. In addition, Sprint had tax benefits of $49 million
related to state operating loss carryforwards. The loss carryforwards expire in
varying amounts per year from 1998 through 2012.
F-29
5. Borrowings
Long-term Debt
Long-term debt at year-end was as follows:
Maturing 1997 1996
- --------------------------------------------------------------------------------------------------------------------
(in millions)
Corporate
Senior notes
8.1% to 9.8% 1998 to 2002 $ 475.3 $ 475.3
9.5% 2003 to 2007 200.0 200.0
Debentures
9.0% to 9.3% 2019 to 2022 350.0 350.0
Notes payable and commercial paper - 866.5 -
Other
5.4% to 8.9% (1) 1998 to 2006 237.5 194.9
Long Distance Division
Vendor financing agreements
7.4% to 8.9% 1997 to 1999 23.8 44.8
Other
6.2% to 8.4% 1997 to 2007 16.5 23.1
Local Division
First mortgage bonds
2.0% to 7.8% 1997 to 2002 452.3 487.0
4.0% to 7.8% 2003 to 2007 346.0 346.8
6.9% to 9.8% 2008 to 2012 116.7 116.7
6.9% to 8.8% 2013 to 2017 169.6 169.8
8.8% to 9.9% 2018 to 2022 244.9 245.7
7.1% to 8.4% 2023 to 2027 145.0 145.0
Debentures and notes
5.8% to 9.6% 1998 to 2020 237.0 275.3
Other
2.0% to 9.8% 1998 to 2006 4.6 6.2
Unamortized debt discount (6.1) (6.7)
- --------------------------------------------------------------------------------------------------------------------
3,879.6 3,073.9
Less current maturities 131.0 99.1
- --------------------------------------------------------------------------------------------------------------------
Long-term debt $ 3,748.6 $ 2,974.8
-----------------------------------
(1) Notes may be exchanged at maturity for Southern New England
Telecommunications Corporation (SNET) common shares owned by Sprint, or for
cash. Based on SNET's closing market price, had the notes matured at
year-end 1997, they could have been exchanged for 3.8 million SNET shares.
At year-end 1997, Sprint held 4.2 million SNET shares, which have been
included in "Investments in equity securities" on the Consolidated Balance
Sheets.
F-30
5. Borrowings (continued)
Long-term debt maturities, excluding reclassified short-term borrowings, during
each of the next five years are as follows:
- -------------------------------------------------------------------------------------------------------------------
(in millions)
1998 $ 131.0
1999 33.4
2000 693.3
2001 40.8
2002 354.5
- -------------------------------------------------------------------------------------------------------------------
Property, plant and equipment with a total cost of $12.9 billion is either
pledged as security for first mortgage bonds and certain notes or is restricted
for use as mortgaged property.
During 1996, Sprint redeemed, prior to scheduled maturities, $190 million of
debt with interest rates ranging from 6.0% to 9.5%. This resulted in a $5
million after-tax extraordinary loss.
Short-term Borrowings
At year-end 1997, Sprint had borrowed $618 million of bank notes payable and
$249 million of commercial paper. Though these borrowings are renewable at
various dates throughout the year, they have been classified as long-term debt
because of Sprint's intent and ability, through unused credit facilities, to
refinance these borrowings. Commercial paper and certain bank notes payable are
supported by Sprint's revolving credit facility with a syndicate of domestic and
international banks. Other notes payable relate to a separate revolving credit
facility that Sprint executed with a bank in 1997. At year-end 1997, Sprint's
unused lines of credit totaled $1.1 billion.
Bank notes outstanding at year-end 1997 and 1996 had weighted average interest
rates of 6.1% and 5.9%, respectively. At year-end 1997, the weighted average
interest rate of commercial paper was 6.8%.
Other
Sprint was in compliance with all restrictive or financial covenants relating to
its debt arrangements at year-end 1997.
F-31
6. Redeemable Preferred Stock
Sprint has approximately 22 million authorized preferred shares, including
nonredeemable preferred stock. The redeemable preferred stock outstanding, at
year-end, is as follows:
1997 1996
- -------------------------------------------------------------------------------------------------------------------
(in millions, except per
share and share data)
Fifth series -- stated value $100,000 per share, shares -- 95, voting,
cumulative 6% annual dividend rate $ 9.5 $ 9.5
Other -- stated value $100 per share, shares -- 19,493 and 22,800, 4.7% annual
dividend rate 2.0 2.3
- -------------------------------------------------------------------------------------------------------------------
Total $ 11.5 $ 11.8
-----------------------------------
Sprint's Fifth series preferred stock must be redeemed in full in 2003. If less
than full dividends have been paid for four consecutive dividend periods, or if
dividends in arrears exceed an amount equal to the dividends for six dividend
periods, the Fifth series preferred shareholders may elect a majority of
directors standing for election until all dividends in arrears have been paid.
7. Common Stock
Common Stock
At year-end 1997, common stock reserved for future grants under stock option
plans or for future issuances under various other arrangements was as follows:
Shares
- ----------------------------------------------------------------------------------------------------------------
(in millions)
Employees Stock Purchase Plan 6.4
Employee savings plans 3.4
Automatic Dividend Reinvestment Plan 1.2
Officer and key employees' and directors' stock options 8.2
Conversion of preferred stock and other 1.4
- ----------------------------------------------------------------------------------------------------------------
Total 20.6
------------------
Under a Shareholder Rights Plan, one preferred stock purchase right is attached
to each common and Class A common share. Each right is exercisable only if
certain takeover events occur. Each right will initially entitle the holder to
purchase 1/1000 of a share (a Unit) of a no par Preferred Stock-Sixth Series,
Junior Participating (Preferred Stock) at $225 per Unit or, in certain cases,
common stock. The Preferred Stock is voting, cumulative and accrues dividends on
a quarterly basis generally equal to the greater of $100 per share or 1,000
times the total per share amount of all common dividends. No Preferred Stock
shares were issued or outstanding at year-end 1997. The rights may be redeemed
by Sprint at $0.01 per right and will expire in June 2007, unless extended.
During 1997, 1996 and 1995, Sprint declared and paid annual common stock
dividends of $1.00 per share. The most restrictive covenant related to common
dividends results from Sprint's $1.5 billion revolving credit agreement. Among
other restrictions, this agreement requires Sprint to maintain specified levels
of consolidated net worth. Due to this requirement, $2.7 billion of Sprint's
$3.7 billion consolidated retained earnings was effectively restricted from the
payment of dividends at year-end 1997. The indentures and financing agreements
of certain of Sprint's subsidiaries contain provisions limiting cash dividend
payments on subsidiary common stock held by Sprint. As a result, $567 million of
those subsidiaries' $1.3 billion total retained earnings was restricted at
year-end 1997. The flow of cash in the form of advances from the subsidiaries to
Sprint is generally not restricted.
F-32
7. Common Stock (continued)
During 1990, the Savings Plan Trust, an employee savings plan, acquired common
stock from Sprint in exchange for a $75 million promissory note payable to
Sprint. The note bears interest at 9% and is to be repaid from common stock
dividends received by the plan and contributions made to the plan by Sprint
according to plan provisions. The remaining $34 million note receivable balance
at year-end 1997 is reflected as a reduction to "Common stock and other
shareholders' equity - Other."
Class A Common Stock
In January 1996, DT and FT acquired shares of a new class of convertible
preference stock for a combined total of $3.0 billion. This resulted in DT and
FT each holding 7.5% of Sprint's voting power. In April 1996, following the
spinoff of Sprint's cellular division (Cellular) (see Note 14), the preference
stock was converted into Class A common stock, and DT and FT each acquired
additional Class A common shares. Following their combined investment of $3.7
billion, DT and FT each own Class A common shares with 10% of Sprint's voting
power. During 1997, Sprint declared and paid Class A common dividends of $1.00
per share. During 1996, preference dividends totaled $0.16 per share, and Class
A common dividends totaled $0.75 per share.
DT and FT, as Class A common shareholders, have the right in most circumstances
to proportionate representation on Sprint's Board of Directors. They may also
purchase additional Class A common shares from Sprint to keep their ownership
level at 10% each. DT and FT have entered into a standstill agreement with
Sprint restricting their ability to acquire Sprint voting shares (other than as
intended by their investment agreement with Sprint and related agreements). The
standstill agreement also contains customary provisions restricting DT and FT
from initiating or participating in any proposal with respect to the control of
Sprint.
8. Stock-based Compensation
Sprint's Management Incentive Stock Option Plan (MISOP) provides for the
granting of stock options to employees who are eligible to receive annual
incentive compensation. Eligible employees are entitled to receive stock options
in lieu of a portion of the target incentive under Sprint's management incentive
plans. The options generally become exercisable on December 31 of the year
granted and have a maximum term of 10 years. MISOP options are granted with
exercise prices equal to the market price of Sprint's common stock on the grant
date. At year-end 1997, authorized shares under this plan approximated 11
million. This amount increased by approximately 3 million shares on January 1,
1998.
The Sprint Corporation Stock Option Plan (SOP) provides for the granting of
stock options to officers and key employees. The options generally become
exercisable at the rate of 25% per year, beginning one year from the grant date,
and have a maximum term of 10 years. SOP options are granted with exercise
prices equal to the market price of Sprint's common stock on the grant date. At
year-end 1997, authorized shares under this plan approximated 20 million.
Every two years, the Employees Stock Purchase Plan (ESPP) offers all employees
the election to purchase Sprint common stock at a price equal to 85% of the
market value on the grant or exercise date, whichever is less. At year-end 1997,
authorized shares under this plan approximated 18 million.
In 1996, Sprint adopted the pro forma disclosure requirements under SFAS No.
123, "Accounting for Stock-based Compensation," and continued to apply
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees," to its stock option and employee stock purchase plans. Under APB
25, Sprint has recognized no compensation expense related to these plans.
Pro forma net income and earnings per share (EPS) have been determined as if
Sprint had used the fair value method of accounting for its stock option grants
and ESPP share elections after 1994. Under this method, compensation expense is
recognized over the applicable vesting periods and is based on the shares under
option and their related fair values on the grant date.
F-33
8. Stock-based Compensation (continued)
The following pro forma information will not likely represent the information
reported in future years because options granted and ESPP shares elected after
1994 will continue to vest over the next several years. In addition,
compensation expense resulting from the spinoff of Cellular (Spinoff) (see Note
14) will decline over the next several years.
Sprint's pro forma net income and EPS were as follows:
1997(1) 1996 (1) 1995
- -------------------------------------------------------------- -- ------------- --- ------------- -- -------------
(in millions, except per share data)
Pro forma net income $ 908 $ 1,158 $ 388
-- ------------- --- ------------- -- -------------
Pro forma basic EPS $ 2.11 $ 2.74 $ 1.11
-- ------------- --- ------------- -- -------------
(1) Pro forma net income was reduced by $3 million ($0.01 per share) in 1997 and $6 million ($0.01 per share) in 1996 due
to additional compensation resulting from modifications to terms of options and ESPP share elections made in
connection with the Spinoff.
During 1996, Sprint employees elected to purchase 2.8 million ESPP shares with a
weighted average fair value (using the Black-Scholes pricing model) of $10.06
per share. No ESPP shares were offered in 1997 or 1995.
The following tables reflect the weighted average fair value per option granted
during the year, as well as the significant weighted average assumptions used in
determining those fair values using the Black-Scholes pricing model:
1997 MISOP SOP
- -------------------------------------------------------------------------------------------------------------------
Fair value on grant date $ 9.66 $ 11.74
Risk-free interest rate 6.2% 6.2%
Expected volatility 22.8% 22.8%
Expected dividend yield 2.3% 2.3%
Expected life (years) 4 6
- -------------------------------------------------------------------------------------------------------------------
1996 MISOP SOP
- -------------------------------------------------------------------------------------------------------------------
Fair value on grant date $ 9.17 $ 10.96
Risk-free interest rate 5.2% 5.2%
Expected volatility 23.3% 23.3%
Expected dividend yield 2.5% 2.5%
Expected life (years) 4 6
- -------------------------------------------------------------------------------------------------------------------
1995 MISOP SOP
- -------------------------------------------------------------------------------------------------------------------
Fair value on grant date $ 6.67 $ 8.73
Risk-free interest rate 6.9% 7.2%
Expected volatility 23.3% 23.3%
Expected dividend yield 2.5% 2.5%
Expected life (years) 4 6
- -------------------------------------------------------------------------------------------------------------------
F-34
8. Stock-based Compensation (continued)
Stock option plan activity was as follows:
Weighted
Average per
Share
Exercise
Shares (1) Price (1)
- --------------------------------------------------- ------------- --- ----------- ------------- --- --------------
(in millions, except per share
data)
Outstanding, beginning of 1995 9.3 $ 24.67
Granted 4.3 24.69
Exercised (0.8) 19.81
Forfeited / Expired (0.5) 27.06
-------------
Outstanding, year-end 1995 12.3 24.88
Granted 4.9 36.94
Exercised (2.6) 22.28
Forfeited / Expired (1.0) 29.22
-------------
Outstanding, year-end 1996 13.6 29.42
Granted 9.4 46.14
Exercised (3.4) 27.17
Forfeited / Expired (0.9) 38.10
-------------
Outstanding, year-end 1997 18.7 $ 37.85
------------- -- -----------
(1) Due to the Spinoff, the shares and related exercise prices have been
adjusted to maintain both the total fair market value of common stock
underlying the options, and the relationship between the market value of
Sprint's common stock and the option's exercise price.
Outstanding options held by Cellular employees were converted into options
and grants to purchase Cellular common stock and are not included in the
above table.
After adjustment for the Spinoff, options exercisable at year-end 1996 and 1995
were 8.4 and 6.4 million, respectively. At year-end 1996, the weighted average
exercise price for exercisable options was $27.77. The following table
summarizes outstanding and exercisable options at year-end 1997:
Options Outstanding Options Exercisable
------------------------------------------------ --------------------------------
Weighted
Average
Remaining Weighted Weighted Average
Number Contractual Average Number Exercise
Range of Outstanding Life Exercise Exercisable Price
Exercise Prices (in millions) (in years) Price (in millions)
- ---------------------------- --------------- --------------- -- ------------- --- --------------- -- -------------
$11.92 - $14.96 0.1 2.2 $ 14.31 0.1 $ 14.31
$15.18 - $19.24 0.1 3.7 17.91 0.1 17.91
$20.08 - $24.50 2.7 6.2 23.71 1.7 23.30
$25.11 - $29.96 1.8 4.7 27.38 1.4 26.80
$30.22 - $39.94 5.0 7.6 35.16 3.0 34.28
$40.06 - $49.88 7.3 8.5 44.88 1.9 43.33
$50.31 - $58.38 1.7 7.4 51.92 0.1 51.69
- ---------------------------- --------------- --------------- -- ------------- --- --------------- -- -------------
F-35
9. Commitments and Contingencies
Litigation, Claims and Assessments
In December 1996, an arbitration panel entered a $61 million award in favor of
Network 2000 Communications Corporation (Network 2000) on its breach of contract
claim against Sprint. The arbitrators directed Sprint to pay one-half of this
award to Network 2000. The remainder was directed to be paid to the Missouri
state court in which a proposed class action by Network 2000's independent
marketing representatives against Network 2000 and Sprint is pending.
Sprint filed an action in federal district court seeking to have the arbitration
panel's award struck down, modified, or corrected, and asking the court to enter
an order regarding the distribution of the award. In April 1997, the court
denied Sprint's request that the arbitration award be struck down and granted
Network 2000's request that the award be confirmed.
In June 1997, Sprint recorded an additional $20 million charge in connection
with the settlement of both the class action lawsuit against Sprint and Network
2000 and the related claims of Network 2000 against Sprint. The court has
preliminarily approved the class action settlement and final approval is
expected. Sprint believes this will complete the Network 2000 litigation.
Various other suits arising in the ordinary course of business are pending
against Sprint. Management cannot predict the final outcome of these actions but
believes they will not result in a material effect on Sprint's consolidated
financial statements.
Commitments
Sprint expects to invest $200 to $300 million in Sprint PCS in 1998 to continue
its network buildout and for operating cash requirements. Sprint also expects
Global One to require $200 to $300 million for ongoing operating and capital
requirements.
Contingencies
On January 1, 1998, a "Deadlock Event" occurred due to the failure of the Sprint
PCS partnership board to approve the proposed Sprint PCS budget and business
plan. Under the partnership agreement, if a partner refers the issue for
resolution pursuant to specified procedures and it remains unresolved, buy/sell
provisions can be triggered, which could result in Sprint either increasing or
selling its partnership interest. Discussions among the partners about
restructuring their interests in Sprint PCS are ongoing. However, there is no
certainty the discussions will result in a change to the partnership structure.
Operating Leases
Minimum rental commitments at year-end 1997 for all noncancelable operating
leases, consisting mainly of leases for data processing equipment and real
estate, are as follows:
- -------------------------------------------------------------------------------------------------------------------
(in millions)
1998 $ 324.1
1999 276.4
2000 174.2
2001 119.1
2002 97.1
Thereafter 243.7
- -------------------------------------------------------------------------------------------------------------------
Gross rental expense totaled $410 million in 1997, $401 million in 1996 and $402
million in 1995. Rental commitments for subleases, contingent rentals and
executory costs were not significant.
F-36
10. Financial Instruments
Fair Value of Financial Instruments
Sprint estimates the fair value of its financial instruments using available
market information and appropriate valuation methodologies. As a result, the
following estimates do not necessarily represent the values Sprint could realize
in a current market exchange. Although management is not aware of any factors
that would affect the estimated fair values presented at year-end 1997, those
amounts have not been comprehensively revalued for purposes of these financial
statements since that date. Therefore, estimates of fair value after year-end
1997 may differ significantly from the amounts presented below. The carrying
amounts and estimated fair values of Sprint's financial instruments at year-end
were as follows:
1997 1996
------------------------------ ------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
(in millions)
Financial assets
Cash and equivalents $ 101.7 $ 101.7 $ 1,150.6 $ 1,150.6
Investment in affiliate debt securities 142.4 142.4 122.5 122.5
Investments in equity securities 303.0 303.0 254.5 254.5
Financial liabilities
Short-term borrowings - - 200.0 200.0
Long-term debt
Corporate 2,129.3 2,301.8 1,220.2 1,348.9
Long distance division 40.3 41.7 67.9 69.0
Local division 1,710.0 1,812.3 1,785.8 1,846.9
Other financial instruments
Interest rate swap agreements - 0.3 - 0.2
Foreign currency contracts (0.6) (0.6) (0.5) (0.5)
- -------------------------------------------- --- ------------- -- ------------- --- ------------- -- -------------
The carrying values of Sprint's cash and equivalents approximate fair value at
year-end 1997 and 1996. The estimated fair value of Sprint's investments in debt
and equity securities is based on quoted market prices. The estimated fair value
of Sprint's long-term debt is based on quoted market prices for publicly traded
issues. The estimated fair value of all other issues is based on the present
value of estimated future cash flows using a discount rate based on the risks
involved. The estimated fair value of interest rate swap agreements is the
amount Sprint would receive to terminate the swap agreements at year-end 1997
and 1996, taking into account the then-current interest rates. The estimated
fair value of foreign currency contracts is the replacement cost of the
contracts at year-end 1997 and 1996, taking into account the then-current
foreign currency exchange rates.
Concentrations of Credit Risk
Sprint's accounts receivable are not subject to any concentration of credit
risk. Sprint controls credit risk of its interest rate swap agreements and
foreign currency contracts through credit approvals, dollar exposure limits and
internal monitoring procedures. In the event of nonperformance by the
counterparties, Sprint's accounting loss would be limited to the net amount it
would be entitled to receive under the terms of the applicable interest rate
swap agreement or foreign currency contract. However, Sprint does not anticipate
nonperformance by any of the counterparties related to these agreements.
Interest Rate Swap Agreements
Sprint uses interest rate swap agreements as part of its interest rate risk
management program. Net interest paid or received related to these agreements is
recorded using the accrual method and is recorded as an adjustment to interest
expense. Sprint had interest rate swap agreements with notional amounts of $150
and $350 million outstanding at year-end 1997 and 1996, respectively. Net
interest expense (income) related to interest rate swap agreements was
$(200,000) in 1997, $2 million in 1996
F-37
10. Financial Instruments (continued)
and $(400,000) in 1995. There were no deferred gains or losses related to any
terminated interest rate swap agreements at year-end 1997, 1996 or 1995.
Foreign Currency Contracts
As part of its foreign currency exchange risk management program, Sprint
purchases and sells over-the-counter forward contracts and options in various
foreign currencies. Sprint had outstanding $29 and $46 million of open forward
contracts to buy various foreign currencies at year-end 1997 and 1996,
respectively. Sprint had $14 and $3 million of outstanding open purchase option
contracts to call various foreign currencies at year-end 1997 and 1996,
respectively. The premium paid for an option is expensed as incurred. The fair
value of an option is recorded as an asset at the end of each period. The
forward contracts and options open at year-end 1997 and 1996 all had original
maturities of six months or less. The net gain or loss recorded to reflect the
fair value of these contracts is recorded in the period incurred. Total net
losses of $40,000 in 1997, $400,000 in 1996 and $1 million in 1995 were recorded
related to foreign currency transactions and contracts.
11. Earnings per Share
In February 1997, the Financial Accounting Standards Board issued (FASB) SFAS
No. 128, "Earnings per Share." This new standard simplifies the EPS calculation
and makes the U.S. standard for computing EPS more consistent with international
accounting standards. Sprint adopted SFAS 128 at year-end 1997. EPS for prior
years has been restated to comply with SFAS 128.
Under SFAS 128, primary EPS was replaced with a simpler calculation called basic
EPS. Basic EPS is calculated by dividing income available to common shareholders
by the weighted average common shares outstanding. Previously, primary EPS was
based on the weighted average of both outstanding and issuable shares assuming
all dilutive options had been exercised. Under SFAS 128, fully diluted EPS has
not changed significantly, but has been renamed diluted EPS. Diluted EPS
includes the effect of all potentially dilutive securities, such as options and
convertible preferred stock.
Sprint's convertible preferred stock dividends were $0.5 million in 1997, 1996
and 1995. Dilutive securities, such as options (see Note 8), included in the
calculation of diluted weighted average common shares were 6.3 million shares in
1997, 5.3 million shares in 1996 and 2.6 million shares in 1995.
12. Paranet Acquisition
On September 30, 1997, Sprint paid $375 million to purchase the net assets of
Houston-based Paranet, Inc., a provider of integration, management and support
services for computer networks. Sprint could pay up to an additional $70 million
if Sprint Paranet meets certain financial targets through 1998.
The transaction was accounted for using the purchase method of accounting. As a
result, Sprint's financial statements reflect Sprint Paranet's results of
operations beginning in October 1997.
The excess of the purchase price over the tangible net assets acquired was $357
million. This excess was allocated to noncompete agreements and goodwill, and
will be amortized on a straight-line basis over four to 10 years.
F-38
13. Adoption of Accounting Principles for a Competitive Marketplace
At year-end 1995, Sprint determined that its local division no longer met the
criteria necessary for the continued use of SFAS 71. As a result, 1995 operating
results included a noncash, extraordinary charge of $565 million, net of income
tax benefits of $437 million. The decision to discontinue using SFAS 71 was
based on changes in the regulatory framework and the convergence of competition
in the telecommunications industry.
The 1995 extraordinary charge recognized when Sprint discontinued using SFAS 71
consisted of the following:
Pretax After-Tax
- ------------------------------------------------------------------------- -- ----------------- -- -----------------
(in millions)
Increase in accumulated depreciation $ 979.1 $ 607.9
Recognition of switch software asset (99.5) (61.7)
Elimination of other net regulatory asset 123.1 76.3
-- ----------------- -- -----------------
Total $ 1,002.7 622.5
-- -----------------
Tax-related net regulatory liabilities (43.9)
Accelerated amortization of investment tax credits (13.3)
-- -----------------
Extraordinary charge $ 565.3
-- -----------------
14. Spinoff of Cellular Division
In March 1996, Sprint completed the tax-free spinoff of Cellular to Sprint
common shareholders. To complete the Spinoff, Sprint distributed all Cellular
common shares at a rate of one share for every three Sprint common shares held.
In addition, Cellular repaid $1.4 billion of its intercompany debt owed to
Sprint. Sprint also contributed to Cellular's equity capital $185 million of
debt owed by Cellular in excess of the amount repaid.
Cellular's net operating results, as summarized below, were separately
classified as a discontinued operation in the Consolidated Statements of Income.
Interest expense was allocated to Cellular based on the assumed repayment of
intercompany debt to Sprint by Cellular. The operating expenses as presented
below do not include Cellular's share of Sprint's general corporate overhead
expenses. These expenses, totaling $2 million in 1996 and $13 million in 1995,
were reallocated to Sprint's other operating segments.
1996 (1) 1995
- -------------------------------------------------------------------------------------------------------------------
(in millions)
Net operating revenues $ 190.2 $ 834.4
Operating expenses 156.0 675.6
- -------------------------------------------------------------------------------------------------------------------
Operating income 34.2 158.8
Interest expense (21.5) (124.0)
Other income (expense), net (8.3) 10.9
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes 4.4 45.7
Income taxes (7.0) (31.2)
- -------------------------------------------------------------------------------------------------------------------
Income (Loss) from cellular division $ (2.6) $ 14.5
-----------------------------------
(1) 1996 reflects Cellular's operating results only through the date of the Spinoff.
F-39
15. Additional Financial Information
Segment Information
Information related to Sprint's operating business segments is included in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Segmental Results of Operations." The net operating revenues and
operating expenses shown in those tables include revenues and expenses
eliminated in consolidation. The amounts eliminated are as follows:
1997 1996 1995
- ----------------------------------------------------------------- --- ------------- -- ------------- --- -------------
(in millions)
Long distance division $ 3.3 $ 30.9 $ 38.9
Local division 309.0 410.5 266.4
Product distribution and directory publishing 570.5 325.9 336.8
Intercompany revenues not eliminated under SFAS 71 - - (262.4)
- ----------------------------------------------------------------- --- ------------- -- ------------- --- -------------
Net operating revenues 882.8 767.3 379.7
Operating expenses 845.8 735.7 379.7
- ----------------------------------------------------------------- --- ------------- -- ------------- --- -------------
Operating income $ 37.0 $ 31.6 $ -
--- ------------- -- ------------- --- -------------
Capital expenditures and identifiable assets not related to operating segments
are as follows:
1997 1996 1995
- ----------------------------------------------------------------- --- ------------- -- ------------- --- -------------
(in millions)
Capital expenditures $ 142.3 $ 98.0 $ 37.0
--- ------------- -- ------------- --- -------------
Identifiable assets $ 2,301.2 $ 2,818.9 $ 2,917.9
--- ------------- -- ------------- --- -------------
Sprint's identifiable assets not related to operating segments mainly include
investments and loans to affiliates as well as corporate property, plant and
equipment. The 1995 amounts include the net assets of the discontinued cellular
division.
Supplemental Cash Flows Information
1997 1996 1995
- -------------------------------------------------------------- -- ------------- --- ------------- -- -------------
(in millions)
Cash paid for:
Interest (net of amounts capitalized)
Continuing operations $ 197.9 $ 212.1 $ 263.5
-- ------------- --- ------------- -- -------------
Cellular division $ - $ 21.5 $ 124.0
-- ------------- --- ------------- -- -------------
Income taxes $ 365.8 $ 695.3 $ 532.8
-- ------------- --- ------------- -- -------------
- -------------------------------------------------------------- -- ------------- --- ------------- -- -------------
Noncash activities:
Capital lease obligations $ 30.1 $ - $ -
-- ------------- --- ------------- -- -------------
Tax benefit from stock options exercised $ 26.2 $ 14.1 $ 7.5
-- ------------- --- ------------- -- -------------
Net book value of assets and liabilities contributed to
Global One $ - $ 73.3 $ -
-- ------------- --- ------------- -- -------------
Common stock issued under Sprint's ESPP $ 5.2 $ 65.2 $ 3.0
-- ------------- --- ------------- -- -------------
During 1996, Sprint completed the Spinoff (see Note 14) which had no immediate
effect on cash flows other than Cellular's repayment of $1.4 billion in
intercompany debt owed to Sprint.
F-40
15. Additional Financial Information (continued)
Supplemental Related Party Transactions
Sprint provided various voice, data and administrative services to Global One
totaling $415 million in 1997 and $361 million in 1996. In addition, Global One
provided data and administrative services to Sprint totaling $114 million in
1997 and $130 million in 1996. At year-end 1997 and 1996, Sprint's receivable
from Global One was $154 and $163 million, respectively, and Sprint's payable to
Global One was $104 and $49 million, respectively.
Restructuring Charge
In 1995, Sprint's local division recorded an $88 million restructuring charge,
which reduced income from continuing operations by $55 million ($0.16 per
share). The restructuring plan included the planned elimination over several
years of approximately 1,600 positions, mainly in the network and finance
functions. Through 1997, most of the positions have been eliminated resulting in
termination benefit payments of $42 million, with the remainder to be paid in
1998 and 1999.
16. Recently Issued Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS 130 establishes standards for the reporting and display of comprehensive
income and its components. Comprehensive income includes all changes in equity
during a period except those due to owner investments and distributions. It
includes items such as foreign currency translation adjustments, and unrealized
gains and losses on available-for-sale securities. This standard does not change
the display or components of present-day net income. Sprint will present the
required disclosures in its financial statements beginning in the 1998 first
quarter. SFAS 130 is not expected to have a material impact on Sprint.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This new standard requires companies to
disclose segment data based on how management makes decisions about allocating
resources to segments and how it measures segment performance. SFAS 131 requires
companies to disclose a measure of segment profit or loss (operating income, for
example), segment assets, and reconciliations to consolidated totals. It also
requires entity-wide disclosures about a company's products and services, its
major customers and the material countries in which it holds assets and reports
revenues. Sprint will adopt SFAS 131 in its 1998 year-end financial statements.
This statement is not expected to have a significant effect on Sprint's reported
segments.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." SFAS 132 standardizes the
disclosure requirements for pensions and postretirement benefits where
practical. It also eliminates certain disclosures and requires additional
information on changes in benefit obligations and fair values of plan assets.
Sprint will adopt SFAS 132 in its 1998 year-end financial statements. SFAS 132
is not expected to have a significant effect on Sprint's pension and
postretirement benefit plan disclosures.
F-41
17. Quarterly Financial Data (Unaudited)
Quarter
--- ----------- -- ---------------------------- -- -----------
1997 1st 2nd 3rd 4th
- --------------------------------------------------- --- ----------- -- ------------ -- ------------ -- -----------
(in millions, except per share data)
Net operating revenues(1) $ 3,578.5 $ 3,667.5 $ 3,778.9 $ 3,849.0
Operating income(1), (2) 604.7 595.5 640.7 610.5
Income before extraordinary items(2), (3) 290.0 255.9 211.7 194.9
Net income 290.0 255.9 211.7 194.9
EPS from income before extraordinary
items(4)
Basic $ 0.67 $ 0.59 $ 0.49 $ 0.45
Diluted $ 0.67 $ 0.59 $ 0.49 $ 0.45
- --------------------------------------------------- --- ----------- -- ------------ -- ------------ -- -----------
Quarter
--- ----------- -- ------------ -- ------------ -- -----------
1996 1st 2nd 3rd 4th
- --------------------------------------------------- --- ----------- -- ------------ -- ------------ -- -----------
(in millions, except per share data)
Net operating revenues(1) $ 3,335.3 $ 3,471.3 $ 3,502.5 $ 3,578.4
Operating income(1), (2) 574.9 580.9 598.9 512.5
Income before extraordinary items(2) 309.3 316.8 316.2 246.0
Net income 309.3 316.8 312.4 245.3
EPS from income before extraordinary
items(4)
Basic $ 0.78 $ 0.74 $ 0.73 $ 0.57
Diluted $ 0.77 $ 0.73 $ 0.73 $ 0.56
- --------------------------------------------------- --- ----------- -- ------------ -- ------------ -- -----------
(1) Consolidated net operating revenues and operating expenses reflect certain
reclassifications to conform to the current presentation. These
reclassifications had no effect on operating income or net income.
(2) In the 1997 second quarter and the 1996 fourth quarter, Sprint recorded
nonrecurring charges of $20 and $60 million, respectively, related to
litigation within the long distance division. These charges reduced income
from continuing operations by $13 million ($0.03 per share) and $36 million
($0.09 per share), respectively (see Note 9).
(3) In the 1997 fourth quarter, Sprint recognized gains of $45 million on sales
of local exchanges and a $26 million gain on the sale of an equity
investment in an equipment provider. These gains increased income from
continuing operations by $27 million ($0.06 per share) and $17 million
($0.04 per share), respectively.
(4) Sprint adopted SFAS 128 at year-end 1997 (see Note 11). All EPS amounts
comply with this new standard.
F-42
SPRINT CORPORATION
SCHEDULE II -- CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1997, 1996 and 1995
Additions
---------------------------
Balance Charged to Balance
beginning Charged to other Other end of
of year income accounts deductions year
- -------------------------------------------------------------------------------------------------------------------
(in millions)
1997
Allowance for doubtful accounts $ 117.4 $ 388.9 $ 4.0 $ (363.6) (1) $ 146.7
-----------------------------------------------------------------------------
Valuation allowance - deferred
income tax assets $ 13.7 $ 2.6 $ - $ (4.5) $ 11.8
-----------------------------------------------------------------------------
1996
Allowance for doubtful accounts $ 125.8 $ 248.5 $ (1.5) $ (255.4) (1) $ 117.4
-----------------------------------------------------------------------------
Valuation allowance - deferred
income tax assets $ 17.4 $ 1.9 $ - $ (5.6) $ 13.7
-----------------------------------------------------------------------------
1995
Allowance for doubtful accounts $ 87.5 $ 219.2 $ 7.0 $ (187.9) (1) $ 125.8
-----------------------------------------------------------------------------
Valuation allowance - deferred
income tax assets $ 21.1 $ 4.3 $ - $ (8.0) $ 17.4
-----------------------------------------------------------------------------
(1) Accounts written off, net of recoveries.
F-43
SPRINT SPECTRUM HOLDING COMPANY, L.P. AND SUBSIDIARIES
Consolidated Financial Statements for the Years Ended
December 31, 1997, 1996 and 1995
and Independent Auditors' Report
F-44
INDEPENDENT AUDITORS' REPORT
Partners of Sprint Spectrum Holding Company, L.P.
Kansas City, Missouri
We have audited the accompanying consolidated balance sheets of Sprint Spectrum
Holding Company, L.P. and subsidiaries ("the Partnership") as of December 31,
1997 and 1996, and the related consolidated statements of operations, changes in
partners' capital and cash flows for the three years in the period ended
December 31, 1997. Our audits also included the financial statement schedule
(Schedule II) listed on page F-68. These financial statements and financial
statement schedule are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Sprint Spectrum
Holding Company, L.P. and subsidiaries at December 31, 1997 and 1996, and the
results of their operations and their cash flows for the three years then ended,
in conformity with generally accepted accounting principles. Also, in our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
The Partnership was in the development stage at December 31, 1996; during the
year ended December 31, 1997, the Partnership completed its development
activities and commenced its planned principal operations.
Deloitte & Touche LLP
February 3, 1998
F-45
SPRINT SPECTRUM HOLDING COMPANY, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
December 31, December 31,
1997 1996
--------------------- ---------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................................... $ 117,164 $ 69,988
Accounts receivable, net........................................... 113,507 3,310
Receivable from affiliates......................................... 96,291 12,901
Inventory.......................................................... 101,366 72,414
Prepaid expenses and other assets, net............................. 28,495 14,260
Note receivable--unconsolidated partnership......................... - 226,670
--------------------- ---------------------
Total current assets............................................. 456,823 399,543
INVESTMENT IN PCS LICENSES, net....................................... 2,303,398 2,122,908
INVESTMENTS IN UNCONSOLIDATED PARTNERSHIP(S).......................... 273,541 179,085
PROPERTY, PLANT AND EQUIPMENT, net.................................... 3,429,238 1,408,680
MICROWAVE RELOCATION COSTS, net....................................... 264,215 135,802
MINORITY INTEREST .................................................... 56,667 -
OTHER ASSETS, net..................................................... 113,127 77,383
===================== =====================
TOTAL ASSETS.......................................................... $ 6,897,009 $ 4,323,401
===================== =====================
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Advances from partners............................................. $ - $ 167,818
Accounts payable................................................... 415,944 196,146
Payable to affiliate............................................... 11,933 5,626
Accrued interest................................................... 56,678 34,057
Accrued expenses................................................... 231,429 47,173
Current maturities of long-term debt............................... 34,562 49
--------------------- ---------------------
Total current liabilities........................................ 750,546 450,869
CONSTRUCTION OBLIGATIONS.............................................. 705,280 714,934
LONG-TERM DEBT........................................................ 3,533,954 686,192
OTHER NONCURRENT LIABILITIES.......................................... 48,975 11,356
COMMITMENTS AND CONTINGENCIES
LIMITED PARTNER INTEREST IN CONSOLIDATED
SUBSIDIARY......................................................... 13,722 13,397
PARTNERS' CAPITAL AND ACCUMULATED DEFICIT:
Partners' capital.................................................. 3,964,750 3,003,484
Accumulated deficit ............................................... (2,120,218) (556,831)
--------------------- ---------------------
Total partners' capital.......................................... 1,844,532 2,446,653
===================== =====================
TOTAL LIABILITIES AND PARTNERS' CAPITAL............................... $ 6,897,009 $ 4,323,401
===================== =====================
See notes to consolidated financial statements.
F-46
SPRINT SPECTRUM HOLDING COMPANY, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
For the Years Ended December 31,
---------------------------------------------------------------
1997 1996 1995
------------------ ------------------ -------------------
OPERATING REVENUES....................... $ 248,607 $ 4,175 $ -
OPERATING EXPENSES:
Cost of revenues...................... 555,030 36,076 -
Selling, general and administrative... 696,911 312,697 66,340
Depreciation and amortization......... 307,400 11,275 211
------------------ ------------------ -------------------
Total operating expenses............ 1,559,341 360,048 66,551
------------------ ------------------ -------------------
LOSS FROM OPERATIONS..................... (1,310,734) (355,873) (66,551)
OTHER INCOME (EXPENSE):
Interest income....................... 26,456 8,593 460
Interest expense...................... (121,844) (323) -
Other income.......................... 5,474 1,586 38
Equity in loss of unconsolidated
partnerships........................ (168,935) (96,850) (46,206)
------------------ ------------------ -------------------
Total other income (expense)........ (258,849) (86,994) (45,708)
------------------ ------------------ -------------------
NET LOSS BEFORE MINORITY INTEREST (1,569,583) (442,867) (112,259)
MINORITY INTEREST........................ 6,196 (227) 1,830
------------------ ------------------ -------------------
NET LOSS................................. $ (1,563,387) $ (443,094) $ (110,429)
================== ================== ===================
See notes to consolidated financial statements.
F-47
SPRINT SPECTRUM HOLDING COMPANY, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(In Thousands)
Partners' Accumulated
Capital Deficit Total
------------------- ------------------- --------------------
BALANCE, January 1, 1995........................ $ 123,438 $ (3,308) $ 120,130
Contributions of capital........................ 2,168,368 - 2,168,368
Net loss........................................ - (110,429) (110,429)
------------------- ------------------- --------------------
BALANCE, December 31, 1995...................... 2,291,806 (113,737) 2,178,069
Contributions of capital........................ 711,678 - 711,678
Net loss........................................ - (443,094) (443,094)
------------------- ------------------- --------------------
BALANCE, December 31, 1996...................... 3,003,484 (556,831) 2,446,653
Contributions of capital........................ 973,001 - 973,001
Net loss........................................ - (1,563,387) (1,563,387)
Return of capital .............................. (11,735) - (11,735)
------------------- ------------------- --------------------
BALANCE, December 31, 1997...................... $ 3,964,750 $ (2,120,218) $ 1,844,532
=================== =================== ====================
See notes to consolidated financial statements.
F-48
SPRINT SPECTRUM HOLDING COMPANY, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
For the Years Ended December 31,
-----------------------------------------------------------------
1997 1996 1995
-------------------- -------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................ $ (1,563,387) $ (443,094) $ (110,429)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Equity in loss of unconsolidated partnership........... 168,935 96,850 46,206
Minority interest...................................... (6,196) 227 (1,830)
Depreciation and amortization.......................... 307,930 11,275 242
Amortization of debt discount and issuance costs...... 49,061 14,008 -
Changes in assets and liabilities, net of effects of acquisition of APC:
Receivables.......................................... (182,882) (15,871) (340)
Inventory............................................ (24,870) (72,414) -
Prepaid expenses and other assets.................... (12,497) (21,608) (178)
Accounts payable and accrued expenses................ 371,168 231,754 47,503
Other noncurrent liabilities......................... 37,619 9,500 1,856
-------------------- -------------------- -------------------
Net cash used in operating activities.......... (855,119) (189,373) (16,970)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................... (2,041,313) (1,386,346) (31,763)
Proceeds on sale of equipment.......................... - - 37
Microwave relocation costs, net........................ (116,278) (135,828) -
Purchase of PCS licenses............................... - - (2,006,156)
Purchase of APC, net of cash acquired.................. (6,764) - -
Investment in unconsolidated partnerships.............. (191,171) (190,390) (131,752)
Loan to unconsolidated partnership..................... (111,468) (231,964) (655)
Payment received on loan to unconsolidated partnership. 246,670 5,950 -
-------------------- -------------------- -------------------
Net cash used in investing activities.......... (2,220,324) (1,938,578) (2,170,289)
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from partners................................. - 167,818 -
Net borrowing under revolving credit agreement......... 605,000 - -
Proceeds from issuance of long-term debt............... 1,763,045 674,201 -
Change in construction obligations..................... (9,654) 714,934
Payments on long-term debt............................. (170,809) (24) -
Debt issuance costs.................................... (20,000) (71,791) -
Partner capital contributions.......................... 966,772 711,678 2,183,368
Return of capital...................................... (11,735) - -
-------------------- -------------------- -------------------
Net cash provided by financing activities...... 3,122,619 2,196,816 2,183,368
-------------------- -------------------- -------------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................................... 47,176 68,865 (3,891)
CASH AND CASH EQUIVALENTS, Beginning of Period.......... 69,988 1,123 5,014
==================== ==================== ===================
CASH AND CASH EQUIVALENTS, End of Period................ $ 117,164 $ 69,988 $ 1,123
==================== ==================== ===================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
.......... Interest paid, net of amount capitalized $ 35,629 $ 323 $ -
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Accrued interest of $51,673 related to vendor financing was converted to long-term debt during the year ended December 31,
1997.
A PCS license covering the Omaha MTA and valued at $6,229 was contributed to the Company by Cox Communications during the
year ended December 31, 1997.
See notes to consolidated financial statements.
F-49
SPRINT SPECTRUM HOLDING COMPANY, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Sprint Spectrum Holding Company, L.P. ("Holdings" or the "Company") is a limited
partnership formed in Delaware on March 28, 1995, by Sprint Enterprises, L.P.,
TCI Spectrum Holdings, Inc., Cox Telephony Partnership and Comcast Telephony
Services (together the "Partners"). Holdings was formed pursuant to a
reorganization of the operations of an existing partnership, WirelessCo, L.P.
("WirelessCo") which transferred certain operating functions to Holdings. The
Partners are subsidiaries of Sprint Corporation ("Sprint"), Tele-Communications,
Inc. ("TCI"), Cox Communications, Inc. ("Cox"), and Comcast Corporation
("Comcast", and together with Sprint, TCI and Cox, the "Parents"), respectively.
The Company and certain other affiliated partnerships offer services as Sprint
PCS.
The Partners of the Company have the following ownership interests as of
December 31, 1997, and 1996:
Sprint Enterprises, L.P. 40%
TCI Spectrum Holdings, Inc. 30%
Cox Telephony Partnership 15%
Comcast Telephony Services 15%
Each Partner's ownership interest consists of a 99% general partner interest and
a 1% limited partnership interest.
The Company is consolidated with its subsidiaries, including NewTelco, L.P.
("NewTelco") and Sprint Spectrum L.P., which, in turn, has several subsidiaries.
Sprint Spectrum L.P.'s subsidiaries are Sprint Spectrum Equipment Company, L.P.
("EquipmentCo"), Sprint Spectrum Realty Company, L.P. ("RealtyCo"), Sprint
Spectrum Finance Corporation ("FinCo"), and WirelessCo. RealtyCo and EquipmentCo
were organized on May 15, 1996 for the purpose of holding personal
communications service ("PCS") network-related real estate interests and assets.
FinCo was formed on May 20, 1996 to be a co-obligor of the debt obligations
discussed in Note 5. Additionally, the results of American PCS, L.P. ("APC") are
consolidated from November 1997, the date the Federal Communications
Commission ("FCC") approved Holdings as the new managing partner (Note 4). APC,
through subsidiaries, owns a PCS license for and operates a broadband GSM
(global system for mobile communications) in the Washington D.C./Baltimore Major
Trading Area ("MTA"), and is in the process of building a code division multiple
access ("CDMA") overlay for its existing GSM PCS system. APC includes American
PCS Communications, LLC, APC PCS, LLC, APC Realty and Equipment Company, LLC and
American Personal Communications Holdings, Inc. MinorCo, L.P. ("MinorCo") holds
the minority ownership interests in NewTelco, Sprint Spectrum L.P., EquipmentCo,
RealtyCo and WirelessCo at December 31, 1997 and 1996, and APC at December 31,
1997.
Venture Formation and Affiliated Partnerships - A Joint Venture Formation
Agreement (the "Formation Agreement"), dated as of October 24, 1994, and
subsequently amended as of March 28, 1995, and January 31, 1996, was entered
into by the Parents, pursuant to which the Parents agreed to form certain
entities to (i) provide national wireless telecommunications services, including
acquisition and development of PCS licenses, (ii) develop a PCS wireless system
in the Los Angeles-San Diego MTA, and (iii) take certain other actions.
F-50
On October 24, 1994, WirelessCo was formed and on March 28, 1995, additional
partnerships were formed consisting of Holdings, MinorCo, NewTelco, and Sprint
Spectrum L.P. The Partners' ownership interests in WirelessCo were initially
held directly by the Partners as of October 24, 1994, the formation date of
WirelessCo, but were subsequently contributed to Holdings and then to Sprint
Spectrum L.P. on March 28, 1995.
Sprint Spectrum Holding Company, L.P. Partnership Agreement - The Amended and
Restated Agreement of Limited Partnership of MajorCo, L.P. (the "Holdings
Agreement"), dated as of January 31, 1996, among Sprint Enterprises, L.P., TCI
Spectrum Holdings, Inc., Comcast Telephony Services and Cox Telephony
Partnership provides that the purpose of the Company is to engage in wireless
communications services.
The Holdings Agreement generally provides for the allocation of profits and
losses according to each Partner's proportionate percentage interest, after
giving effect to special allocations. After special allocations, profits are
allocated to partners to the extent of and in proportion to cumulative net
losses previously allocated. Losses are allocated, after considering special
allocations, according to each Partner's allocation of net profits previously
allocated.
The Holdings Agreement provides for planned capital contributions by the
Partners ("Total Mandatory Contributions") of $4.2 billion, which includes
agreed upon values attributable to the contributions of certain additional PCS
licenses by a Partner. The Total Mandatory Contributions amount is required to
be contributed in accordance with capital contribution schedules to be set forth
in approved annual budgets. The partnership board of Holdings may request
capital contributions to be made in the absence of an approved budget or more
quickly than provided for in an approved budget, but always subject to the Total
Mandatory Contributions limit. The proposed budget for fiscal 1998 has not yet
been approved by the partnership board, which has resulted in the occurrence of
a Deadlock Event (as defined) under the Holdings Agreement as of January 1,
1998. If the 1998 proposed budget is not approved through resolution procedures
set forth in the Holdings Agreement, certain specified buy/sell procedures may
be triggered which may result in a restructuring of the partners' interest in
the Company or, in limited circumstances, liquidation of the Company. As of
December 31, 1997, approximately $4.0 billion of the Total Mandatory
Contributions had been contributed by the Partners to Holdings and its
affiliated partnerships, of which approximately $3.3 billion had been
contributed to Sprint Spectrum L.P.
Emergence from Development Stage Company - Prior to the third quarter of 1997,
the Company reported its operations as a development stage enterprise. The
Company has commenced service in all of the MTAs in which it owns a license. As
a result, the Company is no longer considered a development stage enterprise,
and the balance sheets and statements of operations and of cash flows are no
longer presented in development stage format.
Management believes that the Company will incur additional losses in 1998 and
require additional financial resources to support the current level of
operations and the remaining network buildout for the year ended December 31,
1998. Management believes the Company has the ability to obtain the required
levels of financing through additional financing arrangements or additional
equity funding from the Partners.
F-51
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The assets, liabilities, results of operations and cash
flows of entities in which the Company has a controlling interest have been
consolidated. All significant intercompany accounts and transactions have been
eliminated.
Minority Interests - MinorCo, the limited partner in NewTelco, has been
allocated approximately $0.3 million and $0.2 million in income for the years
ended December 31, 1997, and 1996, respectively. Losses of $1.8 million for the
year ended December 31, 1995 incurred by NewTelco as losses in excess of the
general partner's capital accounts (which consisted of $1,000) are to be
allocated to the limited partner to the extent of its capital account.
In November 1997, concurrent with the acquisition discussed in Note 4, American
Personal Communications II, L.P. ("APC II") became the minority owner in APC.
APC II has been allocated approximately $6.5 million in losses in APC since the
date of acquisition. Prior to November 1997, APC II, as majority owner, had been
allocated approximately $50 million in losses in excess of its investment. At
December 31, 1997, after consolidation of APC, the total of such losses,
approximately $56.7 million, was recorded as minority interest in the Company's
consolidated balance sheet. This treatment reflects that APC II continued to be
responsible for funding its share of losses until January 1, 1998 when the
Company acquired the remaining interest in APC.
Trademark Agreement - Sprint(R) is a registered trademark of Sprint
Communications Company L.P. and Sprint(R) and Sprint PCS(R) are licensed to the
Company on a royalty-free basis pursuant to a trademark license agreement
between the Company and Sprint Communications Company L.P.
Revenue Recognition - Operating revenues for PCS services are recognized as
service is rendered. Operating revenues for equipment sales are recognized at
the time the equipment is delivered to a customer or an unaffiliated agent.
Cost of Equipment - The Company uses multiple distribution channels for its
inventory, including third-party retailers, Company-owned retail stores, its
direct sales force and telemarketing. Cost of equipment varies by distribution
channel and includes the cost of multiple models of handsets, related accessory
equipment, and warehousing and shipping expenses.
Cash and Cash Equivalents - The Company considers all highly liquid instruments
with original maturities of three months or less to be cash equivalents. The
Company maintains cash and cash equivalents in financial institutions with the
highest credit ratings.
Accounts Receivable - Accounts receivable are net of an allowance for doubtful
accounts of approximately $9.0 million and $0.2 million at December 31, 1997 and
1996, respectively.
Inventory - Inventory consists of wireless communication equipment (primarily
handsets). Inventory is stated at lower of cost (on a first-in, first-out basis)
or replacement value. Any losses on the sales of handsets are recognized at the
time of sale.
Property, Plant and Equipment - Property, plant and equipment are stated at cost
or fair value at the date of acquisition. Construction work in progress
represents costs incurred to design and construct the PCS network. Repair and
maintenance costs are charged to expense as incurred. When network equipment is
retired, or otherwise disposed of, its book value, net of salvage, is charged to
accumulated depreciation. When non-network equipment is sold, retired or
abandoned, the cost and accumulated depreciation are relieved and any gain or
loss is recognized. Property, plant and equipment are depreciated using the
straight-line method based on estimated useful lives of the assets. Depreciable
lives range from 3 to 20 years.
F-52
Equipment under Capital Leases - APC leases certain of its office and other
equipment under capital lease agreements. The assets and liabilities under
capital leases are recorded at the lesser of the present value of aggregate
future minimum lease payments, including estimated bargain purchase options, or
the fair value of the assets under lease. Assets under these capital leases are
depreciated over their estimated useful lives of 5 to 7 years. Depreciation
related to capital leases is included within depreciation expense.
Investment in PCS Licenses - During 1994 and 1995, the Federal Communications
Commission ("FCC") auctioned PCS licenses in specific geographic service areas.
The FCC grants licenses for terms of up to ten years, and generally grants
renewals if the licensee has complied with its license obligations. The Company
believes it will be able to secure renewal of the PCS licenses held by its
subsidiaries. PCS licenses are amortized over estimated useful lives of 40 years
once placed in service. Accumulated amortization for PCS licenses totaled
approximately $45.2 million and $1.7 million as of December 31, 1997, and 1996,
respectively. There was no amortization in 1995.
Microwave Relocation Costs - The Company has also incurred costs associated with
microwave relocation in the construction of the PCS network. Microwave
relocation costs are amortized over estimated useful lives of 40 years once
placed in service. Accumulated amortization for microwave relocation costs
totaled approximately $5.2 million as of December 31, 1997. There was no
amortization in 1996 or 1995.
Intangible Assets - The ongoing value and remaining useful life of intangible
assets are subject to periodic evaluation. The Company currently expects the
carrying amounts to be fully recoverable. Impairments of intangibles and
long-lived assets are assessed based on an undiscounted cash flow methodology.
Capitalized Interest - Interest costs associated with the construction of
capital assets (including the PCS licenses) incurred during the period of
construction are capitalized. The total interest costs capitalized in 1997 and
1996 were approximately $98.6 million and $30.5 million, respectively. There
were no amounts capitalized in 1995.
Debt Issuance Costs - Included in other assets are costs associated with
obtaining financing. Such costs are capitalized and amortized to interest
expense over the term of the related debt instruments using the effective
interest method. Accumulated amortization for the years ended December 31, 1997
and 1996 were approximately $13.4 million and $1.9 million, respectively. There
was no amortization in 1995.
Operating Leases - Rent expense is recognized on the straight-line basis over
the life of the lease agreement, including renewal periods. Lease expense
recognized in excess of cash expended is included in non-current liabilities in
the consolidated balance sheet.
Major Customer - The Company markets its products through multiple distribution
channels, including Company-owned retail stores and third-party retail outlets.
The Company's subscribers are disbursed throughout the United States. Sales to
one third-party retail customer represented approximately 21% and 88% of
operating revenue in the consolidated statements of operations for the years
ended December 31, 1997 and 1996, respectively. The Company reviews the credit
history of retailers prior to extending credit and maintains allowances for
potential credit losses. The Company believes that its risk from concentration
of credit is limited.
Income Taxes - The Company has not provided for federal or state income taxes
since such taxes are the responsibility of the individual Partners.
F-53
Financial Instruments - The carrying value of the Company's short-term financial
instruments, including cash and cash equivalents, receivables from customers and
affiliates and accounts payable approximates fair value. The fair value of the
Company's long-term debt is based on quoted market prices for the same issues or
current rates offered to the Company for similar debt. A summary of the fair
value of the Company's long-term debt at December 31, 1997 and 1996 is included
in Note 5.
The fair value of the interest rate contracts is the estimated net amount that
APC would pay to terminate the contracts at the balance sheet date. The fair
value of the fixed rate loans is estimated using discounted cash flow analysis
based on APC's current incremental borrowing rate at which similar borrowing
agreements would be made under current conditions.
Derivative Financial Instruments - Derivative financial instruments (interest
rate contracts) are utilized by APC to reduce interest rate risk. APC has
established a control environment which includes risk assessment and management
approval, reporting and monitoring of derivative financial instrument
activities. APC does not hold or issue derivative financial instruments for
trading purposes.
The differentials to be received or paid under interest rate contracts that are
matched against underlying debt instruments and qualify for settlement
accounting are recognized in income over the life of the contracts as
adjustments to interest expense. Gains and losses on terminations of interest
rate contracts are recognized as other income or expense when terminated in
conjunction with the retirement of associated debt. Gains and losses on
terminations of interest rate contracts not associated with the retirement of
debt are deferred and amortized to interest expense over the remaining life of
the associated debt to the extent that such debt remains outstanding.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Reclassifications - Certain reclassifications have been made to the 1996 and
1995 consolidated financial statements to conform to the 1997 consolidated
financial statement presentation.
F-54
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at December 31, 1997 and
1996 (in thousands):
1997 1996
---- ----
Land $ 1,444 $ 905
Buildings and leasehold improvements 618,281 86,467
Fixtures and office furniture 165,998 68,210
Network equipment 2,265,213 255,691
Telecommunications plant - construction work in progress 632,922 1,006,990
------------------ ------------------
3,683,858 1,418,263
Less accumulated depreciation (254,620) (9,583)
------------------ ------------------
$ 3,429,238 $ 1,408,680
================== ==================
Depreciation expense on property, plant and equipment was approximately $244.9
million, $ 9.6 million, and $0.2 million for the years ended December 31, 1997,
1996 and 1995, respectively.
4. INVESTMENTS IN PARTNERSHIPS
APC - On January 9, 1995, WirelessCo acquired a 49% limited partnership interest
in APC. In September 1997, Holdings increased its ownership in APC to a 58.3%
through additional capital contributions of $30 million, and became the managing
partner upon FCC approval in November, 1997. As of January 1, 1998, Holdings and
MinorCo increased their ownership percentages to 99.75% and 0.25%, respectively,
of the partnership interests for approximately $30 million.
The acquisition increasing ownership to 58.3% was accounted for as a purchase
and, accordingly, the operating results of APC has been included in the
Company's consolidated financial statements since the date of the FCC's approval
of the acquisition. The purchase price was allocated to the assets acquired and
the liabilities assumed based on a preliminary estimate of fair value. The
following table reflects the total of APC's assets and liabilities at the date
of acquisition:
Assets acquired $ 503
Cash paid (30)
Minority interest 50
-------------
Liabilities assumed $ 523
==============
The ultimate allocation of the purchase price may differ from the initial
estimate.
F-55
The following unaudited pro forma financial information assumes the acquisition
had occurred on January 1 of each year and that the Company had owned 100% of
APC and consolidated its results in the financial statements:
Proforma - Sprint Spectrum Holding Company, L.P.
1997 1996
------------------- -------------------
Net sales...................... $ 355,038 $ 76,013
Net loss (before minority interest). (1,646,551) (553,274)
Pro forma data does not purport to be indicative of the results that would have
been obtained had these events actually occurred at the beginning of the periods
presented and is not intended to be a projection of future results.
Prior to acquisition of controlling interest, the Company's investment in APC
was accounted for under the equity method. The partnership agreement between the
Company and APC II specified that losses were allocated based on percentage
ownership interests and certain other factors. In January 1997, the Company and
APC II amended the APC partnership agreement with respect to the allocation of
profits and losses. For financial reporting purposes, profits and losses were
allocated in proportion to Holdings' and APC II's respective partnership
interests, except for costs related to stock appreciation rights and interest
expense attributable to the FCC interest payments which were allocated entirely
to APC II. Losses of approximately $60 million, $97 million and $46 million for
the years ended December 31, 1997, 1996 and 1995, respectively, are included in
equity in losses of unconsolidated subsidiaries during the period prior to the
acquisition of controlling interest.
Cox Communications PCS, L.P. - On December 31, 1996, the Company acquired a 49%
limited partner interest in Cox Communications PCS, L.P. ("Cox PCS"). Cox
Pioneer Partnership ("CPP") holds a 50.5% general and a 0.5% limited partner
interest and is the general and managing partner. The investment in Cox PCS is
accounted for under the equity method. Under the terms of the partnership
agreement, CPP and the Company are obligated to, among other things: (a) upon
FCC consent to the assumption and recognition of the license payment obligations
by Cox PCS, CPP is obligated to make capital contributions in an amount equal to
such liability and related interest (the PCS license covering the Los
Angeles-San Diego MTA was contributed to Cox PCS in March 1997) (b) the Company
is obligated to make capital contributions of approximately $368.9 million to
Cox PCS; (c) the Company is not obligated to make any cash capital contributions
upon the assumption by Cox PCS of the FCC payment obligations until CPP has
contributed cash in an amount equal to the aggregate principal and interest of
such obligations; and, (d) CPP and the Company are obligated to make additional
capital contributions in an amount equal to such partner's percentage interest
times the amount of additional capital contributions being requested.
As of December 31, 1997, approximately $348.2 million in equity, including $2.45
million to PCS Leasing Co, L.P. ("LeasingCo"), a subsidiary of Cox PCS, had been
contributed to Cox PCS by the Company. Through December 31, 1996, $168 million
had been contributed to Cox PCS. Losses are allocated to the partners based on
their ownership percentages. Subsequent to December 31, 1997, the Company
completed its funding obligation to Cox PCS under the partnership agreement.
Concurrent with this funding, the Company paid approximately $33.2 million in
interest that had accrued on the unfunded capital obligation.
Additionally, the Company acquired a 49% limited partner interest in LeasingCo.
LeasingCo was formed to acquire, construct or otherwise develop equipment and
other personal property to be leased to Cox PCS. The Company is not obligated to
make additional capital contributions to LeasingCo beyond the initial funding of
approximately $2.45 million .
F-56
Under the partnership agreement, CPP has the right to require that Holdings
acquire all or part of CPP's interest in Cox PCS based on fair market value at
the time of the transaction. Subsequent to December 31, 1997, CPP elected to
exercise this right. As a result, the Company intends to acquire 10.2% of Cox
PCS, subject to FCC approval, which will give the Company controlling interest.
The purchase price, currently estimated at $80 million, will be based on the
fair market value of Cox PCS as determined by independent appraisals. Through
December 2008, CPP may put any remaining interest in Cox PCS to the Company.
5. LONG-TERM DEBT AND BORROWING ARRANGEMENTS
Long-term debt consists of the following as of December 31, 1997 and 1996 (in
thousands):
1997 1996
----------------- -----------------
11% Senior Notes due in 2006 $ 250,000 $ 250,000
121/2% Senior Discount Notes due in 2006, net of
unamortized discount of $177,720 and $214,501 at
December 31, 1997 and 1996, respectively 322,280 285,499
Credit Facility - term loans 300,000 150,000
Credit Facility - revolving credit 605,000 -
Vendor Financing 1,612,914 -
APC Senior Secured Term Loan Facility 220,000 -
APC Senior Secured Reducing Revolving Credit Facility -
141,429
Due To FCC, net of unamortized discount of $11,989 -
90,355
Other 26,538 742
-----------------
-----------------
Total debt 3,568,516 686,241
Less current maturities 34,562 49
----------------- -----------------
Long-term debt $ 3,533,954 $ 686,192
================= =================
Senior Notes and Senior Discount Notes - In August 1996, Sprint Spectrum L.P.
and Sprint Spectrum Finance Corporation (together, the "Issuers") issued $250
million aggregate principal amount of 11% Senior Notes due 2006 ("the Senior
Notes"), and $500 million aggregate principal amount at maturity of 12 1/2%
Senior Discount Notes due 2006 (the "Senior Discount Notes" and, together with
the Senior Notes, the "Notes"). The Senior Discount Notes were issued at a
discount to their aggregate principal amount at maturity and generated proceeds
of approximately $273 million. Cash interest on the Senior Notes will accrue at
a rate of 11% per annum and is payable semi-annually in arrears on each February
15 and August 15, commencing February 15, 1997. Cash interest will not accrue or
be payable on the Senior Discount Notes prior to August 15, 2001. Thereafter,
cash interest on the Senior Discount Notes will accrue at a rate of 12 1/2% per
annum and will be payable semi-annually in arrears on each February 15 and
August 15, commencing February 15, 2002.
On August 15, 2001, the Issuers will be required to redeem an amount equal to
$384.772 per $1,000 principal amount at maturity of each Senior Discount Note
then outstanding ($192 million in aggregate principal amount at maturity,
assuming all of the Senior Discount Notes remain outstanding at such date).
F-57
The Notes are redeemable at the option of the Issuers, in whole or in part, at
any time on or after August 15, 2001 at the redemption prices set forth below,
respectively, plus accrued and unpaid interest, if any, to the redemption date,
if redeemed during the 12 month period beginning on August 15 of the years
indicated below:
Senior Discount
Senior Notes Notes
Redemption Price Redemption Price
Year
--------- ---------------------------------------
2001 105.500% 110.000%
2002 103.667% 106.500%
2003 101.833% 103.250%
2004 and thereafter 100.000% 100.000%
In addition, prior to August 15, 1999, the Issuers may redeem up to 35% of the
originally issued principal amount of the Notes with the net proceeds of one or
more public equity offerings, provided that at least 65% of the originally
issued principal amount at maturity of the Senior Notes and Senior Discount
Notes would remain outstanding immediately after giving effect to such
redemption. The redemption price of the Senior Notes is equal to 111.0% of the
principal amount of the Senior Notes so redeemed, plus accrued and unpaid
interest, if any, to the redemption date. The redemption price of the Senior
Discount Notes is equal to 112.5% of the accreted value at the redemption date
of the Senior Discount Notes so redeemed.
The Notes contain certain restrictive covenants, including (among other
requirements) limitations on additional indebtedness, limitations on restricted
payments, limitations on liens, and limitations on dividends and other payment
restrictions affecting certain restricted subsidiaries.
Bank Credit Facility -Sprint Spectrum L.P. (the "Borrower") entered into an
agreement with The Chase Manhattan Bank ("Chase") as agent for a group of
lenders for a $2 billion bank credit facility dated October 2, 1996. The
proceeds of this facility are to be used to finance working capital needs,
subscriber acquisition costs, capital expenditures and other general Borrower
purposes.
The facility consists of a revolving credit commitment of $1.7 billion and a
$300 million term loan commitment. In November 1997, certain terms relating to
the financial and operating conditions were amended. As of December 31, 1997,
$605 million had been drawn at a weighted average interest rate of 8.42%, with
$1.1 billion remaining available. There were no borrowings under the revolving
credit commitment as of December 31, 1996. Commitment fees for the revolving
portion of the agreement are payable quarterly based on average unused revolving
commitments. As of February 15, 1998, the Company had borrowed an additional
$225 million under the revolving credit facility.
The revolving credit commitment expires July 13, 2005. Availability will be
reduced in quarterly installments ranging from $75 million to $175 million
commencing January 2002. Further reductions may be required after January 1,
2002 to the extent that the Borrower meets certain financial conditions.
The term loans are due in sixteen consecutive quarterly installments beginning
January 2002 in aggregate principal amounts of $125,000 for each of the first
fifteen payments with the remaining aggregate outstanding principal amount of
the term loans due as the last installment.
Interest on the term loans and/or the revolving credit loans is at the
applicable LIBOR rate plus 2.5% ("Eurodollar Loans"), or the greater of the
prime rate or 0.5% plus the Federal Funds effective rate, plus 1.5% ("ABR
Loans"), at the Borrower's option. The interest rate may be adjusted downward
for improvements in the bond rating and/or leverage ratios. Interest on ABR
Loans and Eurodollar Loans with interest period terms in excess of 3 months is
payable quarterly. Interest on Eurodollar Loans with interest period terms of
less than 3 months is payable on the last day of the interest period. As of
December 31, 1997 and 1996, the weighted average interest rate on the term loans
was 8.39% and 8.19%, respectively.
F-58
Borrowings under the Bank Credit Facility are secured by the Borrower's
interests in WirelessCo, RealtyCo and EquipmentCo and certain other personal and
real property (the "Shared Lien"). The Shared Lien equally and ratably secures
the Bank Credit Facility, the Vendor Financing agreements (discussed below) and
certain other indebtedness of the Borrower. The credit facility is jointly and
severally guaranteed by WirelessCo, RealtyCo and EquipmentCo and is non-recourse
to the Parents and the Partners.
The Bank Credit Facility agreement and Vendor Financing agreements contain
certain restrictive financial and operating covenants, including (among other
requirements) maximum debt ratios (including debt to total capitalization),
limitations on capital expenditures, limitations on additional indebtedness and
limitations on dividends and other payment restrictions affecting certain
restricted subsidiaries. The loss of the right to use the Sprint(R) trademark,
the termination or non-renewal of any FCC license that reduces population
coverage below specified limits, or certain changes in controlling interest in
the Borrower, as defined, among other provisions, constitute events of default.
Vendor Financing - As of October 2, 1996, the Company entered into financing
agreements with Northern Telecom, Inc. ("Nortel") and Lucent Technologies, Inc.
("Lucent" and together with Nortel, the "Vendors") for multiple drawdown term
loan facilities totaling $1.3 billion and $1.8 billion, respectively. The
proceeds of such facilities are to be used to finance the purchase of goods and
services provided by the Vendors. Additionally, the commitments allow for the
conversion of accrued interest into additional principal. Such conversions do
not reduce the availability under the commitments. Interest accruing on the debt
outstanding at December 31, 1997, can be converted into additional principal
through February 8, 1999 and March 30, 1999, for Lucent and Nortel,
respectively.
On April 30, 1997 and November 20, 1997, the Company amended the terms of its
financing agreement with Nortel. The amendments provide for a syndication of the
financing commitment between Nortel, several banks and other vendors (the
"Nortel Lenders"), and the modification of certain operating and financial
covenants. The commitment provides financing in two phases. During the first
phase, the Nortel Lenders will finance up to $800 million. Under the second
phase, the Nortel Lenders will finance up to an additional $500 million upon the
achievement of certain operating and financial conditions, as amended. As of
December 31, 1997, $630 million, including converted accrued interest of $18.6
million, had been borrowed at a weighted average interest rate of 8.98% with
$189 million remaining available under the first phase. In addition, the Company
paid $20 million in origination fees upon the initial drawdown under the first
phase and will be obligated to pay additional origination fees on the date of
the initial drawdown loan under the second phase. As of February 15, 1998, the
Company had borrowed an additional $47.0 million under the Nortel facility.
There were no borrowings under the Nortel facility at December 31, 1996.
On May 29, 1997 and November 20, 1997, the Company amended the terms of its
financing agreement with Lucent. The amendments provide for a syndication of the
financing commitment between Lucent, Sprint and other banks and vendors (the
"Lucent Lenders"), and the modification of certain operating and financial
covenants. The Lucent Lenders have committed to financing up to $1.5 billion
through December 31, 1997, and up to an aggregate of $1.8 billion thereafter.
The Company pays a facility fee on the daily amount of certain loans outstanding
under the agreement, payable quarterly. The Lucent agreement terminates June 30,
2001. As of December 31, 1997, the Company had borrowed approximately $983
million, including converted accrued interest of $33.1 million, under the Lucent
facility at a weighted average interest rate of 8.94%, with $850 million
remaining available. As of February 15, 1998, the Company had borrowed an
additional $104.1 million under the Lucent facility. There were no borrowings
under the Lucent facility at December 31, 1996.
F-59
The principal amounts of the loans drawn under both the Nortel and Lucent
agreements are due in twenty consecutive quarterly installments, commencing on
the date which is thirty-nine months after the last day of such "Borrowing Year"
(defined in the agreements as any one of the five consecutive 12-month periods
following the date of the initial drawdown of the loan). The aggregate amount
due each year is equal to percentages ranging from 10% to 30% multiplied by the
total principal amount of loans during each Borrowing Year.
The agreements provide two borrowing rate options. During the first phase of the
Nortel agreement and throughout the term of the Lucent agreement "ABR Loans"
bear interest at the greater of the prime rate or 0.5% plus the Federal Funds
effective rate, plus 2%. "Eurodollar Loans" bear interest at the London
interbank (LIBOR) rate (any one of the 30-, 60- or 90-day rates, at the
discretion of the Company), plus 3%. During the second phase of the Nortel
agreement, ABR Loans bear interest at the greater of the prime rate or 0.5% plus
the Federal Funds effective rate, plus 1.5%; and Eurodollar loans bear interest
at the LIBOR rate plus 2.5%. Interest from the date of each loan through one
year after the last day of the Borrowing Year is added to the principal amount
of each loan. Thereafter, interest is payable quarterly.
Borrowings under the Vendor Financing are secured by the Shared Lien. The Vendor
Financing is jointly and severally guaranteed by WirelessCo, RealtyCo, and
EquipmentCo and is non-recourse to the Parents and the Partners.
Certain amounts included under construction obligations on the consolidated
balance sheets may be financed under the Vendor Financing agreements.
Due to FCC - APC became obligated to the FCC for $102 million upon receipt of
the commercial PCS license covering the Washington D.C./Baltimore MTA. In March
1996, the FCC determined that interest on the amount due would begin to accrue
on March 8, 1996, at an interest rate of 7.75%. Beginning with the first payment
due in April 1996, the FCC granted two years of interest-only payments followed
by three years of principal and interest payments. Based on the interest and
payment provisions determined by the FCC and APC's incremental borrowing rate
for similar debt at the time the debt was issued, APC has accrued interest
beginning upon receipt of the license at an effective rate of 13%.
In connection with the acquisition discussed in Note 4, Holdings became
responsible for making principal and interest payments under the APC's
obligation to the FCC.
APC Senior Secured Credit Facilities - As of February 7, 1997, American PCS
Communications, LLC entered into credit facilities of $420 million, consisting
of a term loan facility of $220 million and a reducing revolving credit facility
of $200 million (together, the "Credit Agreement"). The Credit Agreement is
secured by first priority liens on all the equity interests held by American PCS
Communications LLC in its direct subsidiaries, including the equity interests of
the subsidiaries which will hold APC's PCS license and certain real property
interest and equipment and a first priority security interest in, and mortgages
on, substantially all other intangible and tangible assets of APC and
subsidiaries. The Credit Agreement matures February 7, 2005, with an interest
rate of LIBOR plus 2.25%. The interest rate may be stepped down over the term of
the credit agreement based on the ratio of outstanding debt to earnings before
interest, tax, depreciation and amortization. Proceeds from the Credit Agreement
were used to repay the outstanding financing from Holdings as of the closing
date of the credit agreement, capital expenditures for the communications
systems, general working capital requirements, and net operating losses.
The Credit Agreement contains covenants which require APC to maintain certain
levels of wireless subscribers, as well as other financial and non-financial
requirements.
F-60
In January 1998 APC completed negotiations with its lenders to amend the Credit
Agreement. As amended, the Credit Agreement contains certain covenants which,
among other things, contain certain restrictive financial and operating
covenants including, maximum debt ratios (including debt to total
capitalization) and limitations on capital expenditures. The covenants require
American PCS Communications, LLC to enter into interest rate contracts on a
quarterly basis to protect and limit the interest rate on 40% of its aggregate
debt outstanding.
Other Debt - At December 31, 1997, other debt included a note payable to Lucent
for the financing of debt issuance costs, a note payable for certain leasehold
improvements, and capital leases acquired in the purchase of APC. Maturities on
the debt range from 3 to 10 years, at interest rates from 8.32% to 21%.
Interest Rate Contracts - As of December 31, 1997, APC had entered into nine
interest rate contracts (swaps and a collar), with an aggregate notional amount
of $122 million. Under the agreements APC pays a fixed rate and receives a
variable rate such that it will protect APC against interest rate fluctuations
on a portion of its variable rate debt. The fixed rates paid by APC on the
interest rate swap contracts range from approximately 5.97% to 6.8%. Option
features contained in certain of the swaps operate in a manner such that the
interest rate protection in some cases is effective only when rates are outside
a certain range. Under the collar arrangement, APC will receive 6.19% when LIBOR
falls below 6.19% and pay 8% when LIBOR exceeds 8%. The contracts expire in
2001. The fair value of the interest rate contracts at December 31, 1997 was an
unrealized loss of approximately $1.3 million. The notional amounts represent
reference balances upon which payments and receipts are based and consequently
are not indicative of the level of risk or cash requirements under the
contracts. APC has exposure to credit risk to the counterparty to the extent it
would have to replace the interest rate swap contract in the market when and if
a counterparty were to fail to meet its obligations. The counterparties to all
contracts are primary dealers that meet APC's criteria for managing credit
exposures.
F-61
Fair Value - The estimated fair value of the Company's long-term debt at
December 31, 1997 and 1996 is as follows (in thousands):
1997 1996
---------------------------------- ---------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------------- --------------- -------------- ---------------
11% Senior Notes $ 250,000 $ 280,650 $ 250,000 $ 270,625
12 1/2% Senior Discount Notes 322,280 389,300 285,499 337,950
Credit facility - term loans 300,000 300,000 150,000 151,343
Credit facility - revolver 605,000 605,000 - -
Vendor facility - Lucent 983,299 983,299 - -
Vendor facility - Nortel 629,615 629,615 - -
APC Senior Secured Term Loan Facility
220,000 220,000 - -
APC Senior Secured Reducing Revolving
Credit Facility 141,429 141,429 - -
FCC debt 90,355 98,470 - -
At December 31, 1997, scheduled maturities of long-term debt and capital leases
during each of the next five years are as follows (in thousands):
Long-term Capital
mm
Debt Leases
------------- -------------
1998 $ 29,800 $ 5,411
1999 40,425 3,667
2000 53,624 591
2001 395,291 42
2002 583,113 -
-------------
9,711
Less interest (898)
-------------
Present value of minimum
lease payments 8,813
=============
6. COMMITMENTS AND CONTINGENCIES
Operating Leases - Minimum rental commitments as of December 31, 1997, for all
noncancelable operating leases, consisting principally of leases for cell and
switch sites and office space, for the next five years, are as follows (in
thousands):
1998 $ 135,124
1999 131,279
2000 104,658
2001 63,379
2002 21,254
Gross rental expense for cell and switch sites aggregated approximately $92.1
million and $13.1 million for the years ended December 31, 1997 and 1996,
respectively. Gross rental expense for office space approximated $33.2 million,
$11.4 million, and $0.7 million for the years ended December 31, 1997, 1996, and
1995, respectively. Certain cell and switch site leases contain renewal options
(generally for terms of 5 years) that may be exercised from time to time and are
excluded from the above amounts.
F-62
Procurement Contracts - On January 31, 1996, the Company entered into
procurement and services contracts with AT&T Corp. (subsequently assigned to
Lucent ) and Nortel for the engineering and construction of a PCS network. Each
contract provides for an initial term of ten years with renewals for additional
one-year periods. The Vendors must achieve substantial completion of the PCS
network within an established time frame and in accordance with criteria
specified in the procurement contracts. Pricing for the initial equipment,
software and engineering services has been established in the procurement
contracts. The procurement contracts provide for payment terms based on delivery
dates, substantial completion dates, and final acceptance dates. In the event of
delay in the completion of the PCS network, the procurement contracts provide
for certain amounts to be paid to the Company by the Vendors. The minimum
commitments for the initial term are $0.8 billion and $1.0 billion from Lucent
and Nortel, respectively, which include, but are not limited to, all equipment
required for the establishment and installation of the PCS network.
Handset Purchase Agreements - In June, 1996, the Company entered into a
three-year purchase and supply agreement with a vendor for the purchase of
handsets and other equipment totaling approximately $500 million. During 1997
and 1996, the Company purchased $332.7 million and $85 million under the
agreement, respectively. The total purchase commitment must be satisfied by
April 30, 1998.
In September, 1996, the Company entered into another three-year purchase and
supply agreement with a second vendor for the purchase of handsets and other
equipment totaling more than $600 million, with purchases that commenced in
April, 1997. During 1997, the Company purchased $147.6 million under the
agreement. The total purchase commitment must be satisfied by April 2000.
Service Agreements - The Company has entered into an agreement with a vendor to
provide PCS call record and retention services. Monthly rates per subscriber are
variable based on overall subscriber volume. If subscriber fees are less than
specified annual minimum charges, the Company will be obligated to pay the
difference between the amounts paid for processing fees and the annual minimum.
Annual minimums range from $20 million to $60 million through 2001. The
agreement extends through December 31, 2001, with two automatic, two-year
renewal periods, unless terminated by the Company. The Company may terminate the
agreement prior to the expiration date, but would be subject to specified
termination penalties.
The Company has also entered into an agreement with a vendor to provide prepaid
calling services. Monthly rates per minute of use are based on overall call
volume. If the average minutes of use are less than monthly specified minimums,
the Company is obligated to pay the difference between the average minutes used
at the applicable rates and the monthly minimum. Monthly minimums range from
$40,000 to $50,000 during the initial term. Certain installation and setup fees
for processing and database centers are also included in the agreement and are
dependent upon a need for such centers. The agreement extends through July 1999,
with successive one-year term renewals, unless terminated by the Company. The
Company may terminate the agreement prior to the expiration date, but would be
subject to specified termination penalties.
In January 1997, the Company entered into a four and one-half year contract for
consulting services. Under the terms of the agreement, consulting services will
be provided at specified hourly rates for a minimum number of hours. The total
commitment is approximately $125 million over the term of the agreement.
Litigation - The Company is involved in various legal proceedings incidental to
the conduct of its business. While it is not possible to determine the ultimate
disposition of each of these proceedings, the Company believes that the outcome
of such proceedings, individually and in the aggregate, will not have a material
adverse effect on the Company's financial condition or results of operations.
F-63
7. EMPLOYEE BENEFITS
Employees performing services for the Company were employed by Sprint through
December 31, 1995. Amounts paid to Sprint relating to pension expense and
employer contributions to the Sprint Corporation 401(k) plan for these employees
approximated $0.3 million in 1995.
The Company maintains short-term and long-term incentive plans. All salaried
employees of Sprint Spectrum L.P. are eligible for the short-term incentive plan
commencing at date of hire. Employees of APC are covered by the APC plans.
Short-term incentive compensation is based on incentive targets established for
each position based on the Company's overall compensation strategy. Targets
contain both an objective Company component and a personal objective component.
Charges to operations for the short-term plan approximated $20.0 million, $12.3
million, and $3.5 million for the years ended December 31, 1997, 1996, and 1995,
respectively.
Long-Term Compensation Obligation - The Company has two long-term incentive
plans, the 1996 Plan and the 1997 Plan. Employees meeting certain eligibility
requirements are considered to be participants in each plan. Participants in the
1996 Plan will receive 100% of the pre-established targets for the period from
July 1, 1995 to June 30, 1996 (the "Introductory Term"). Participants in the
1996 Plan elected either a payout of the amount due or converted 50% or 100% of
the award to appreciation units. Unless converted to appreciation units, payment
for the Introductory Term of the 1996 Plan will be made in the third quarter of
1998. Under the 1996 plan, appreciation units vest 25% per year commencing on
the second anniversary of the date of grant and expire after a term of ten
years. The 1997 Plan appreciation units vest 25% per year commencing on the
first anniversary of the date of the grant and also expire after ten years. For
the years ended December 31, 1997, 1996, and 1995, $18.1 million, $9.5 million,
and $1.9 million, respectively, has been expensed under both plans. At December
31, 1997 a total of approximately 103 million units have been authorized for
grant for both plans. The Company has applied APB Opinion No. 25, "Accounting
for Stock Issued to Employees" for 1997 and 1996. No significant difference
would have resulted if SFAS No. 123, "Accounting for Stock-Based Compensation"
had been applied.
Savings Plan - Effective January, 1996, the Company established a savings and
retirement program (the "Savings Plan") for certain employees, which qualifies
under Section 401(k) of the Internal Revenue Code. Most permanent full-time, and
certain part-time, employees are eligible to become participants in the plan
after one year of service or upon reaching age 35, whichever occurs first.
Participants make contributions to a basic before tax account and supplemental
before tax account. The maximum contribution for any participant for any year is
16% of such participant's compensation. For each eligible employee who elects to
participate in the Savings Plan and makes a contribution to the basic before tax
account, the Company makes a matching contribution. The matching contributions
equal 50% of the amount of the basic before tax contribution of each participant
up to the first 6% that the employee elects to contribute. Contributions to the
Savings Plan are invested, at the participant's discretion, in several
designated investment funds. Distributions from the Savings Plan generally will
be made only upon retirement or other termination of employment, unless deferred
by the participant. Expense under the Savings Plan approximated $4.9 million and
$1.1 million in 1997 and 1996, respectively.
APC also has an employee savings plan that qualifies under Section 401(k) of the
Internal Revenue code. All APC employees completing one year of service are
eligible and may contribute up to 15% of their pretax earnings. APC matches 100%
of the first 3% of the employee's contribution. Employees are immediately fully
vested in APC's contributions. In addition, APC makes discretionary
contributions on behalf of eligible participants in the amount of 2% of
employee's compensation. Expenses relating to the employee savings plan have not
been significant since the date of acquisition.
F-64
Profit Sharing (Retirement) Plan - Effective January, 1996, the Company
established a profit sharing plan for its employees. Employees are eligible to
participate in the plan after completing one year of service. Profit sharing
contributions are based on the compensation, age, and years of service of the
employee. Profit sharing contributions are deposited into individual accounts of
the Company's retirement plan. Vesting occurs once a participant completes five
years of service. For the years ended December 31, 1997 and 1996, expense under
the profit sharing plan approximated $2.5 million and $0.7 million,
respectively.
Deferred Compensation Plan for Executives - Effective January, 1997, the Company
established a non-qualified deferred compensation plan which permits certain
eligible executives to defer a portion of their compensation. The plan allows
the participants to defer up to 80% of their base salary and up to 100% of their
annual short-term incentive compensation. The deferred amounts earn interest at
the prime rate. Payments will be made to participants upon retirement,
disability, death or the expiration of the deferral election under the payment
method selected by the participant.
8. RELATED PARTY TRANSACTIONS
Business Services - The Company reimburses Sprint for certain accounting and
data processing services, for participation in certain advertising contracts,
for certain cash payments made by Sprint on behalf of the Company and other
management services. The Company is allocated the costs of such services based
on direct usage. Allocated expenses of approximately $10.5 million, $11.9
million, and $2.6 million are included in selling, general and administrative
expense in the consolidated statements of operations for 1997, 1996, and 1995,
respectively. In addition to the miscellaneous services agreement described
above, the Company has entered into agreements with Sprint for invoicing
services, operator services, and switching equipment. The Company is also
using Sprint as its interexchange carrier, with the agreement for such
services covered under the Holdings partnership agreement. Charges are based
on the volume of services provided, and are similar to those that would be
incurred with an unrelated third-party vendor.
APC - The Company entered into an affiliation agreement with APC in January 1995
which provides for the reimbursement of certain allocable costs and payment of
affiliation fees. For the year ended December 31, 1997, the reimbursement of
allocable costs of approximately $14.0 million is included in selling, general
and administrative expenses. There were no reimbursements recognized in 1996 or
1995. Additionally, affiliation fees are recognized based on a percentage of
APC's net revenues. During the year ended December 31, 1997, affiliation fees of
$4.2 million are included in other income.
Cox PCS - Concurrent with the execution of the partnership agreement, the
Company entered into an affiliation agreement with Cox PCS which provides for
the reimbursement of certain allocable costs and payment of affiliate fees. For
the years ended December 31, 1997 and 1996, allocable costs of approximately
$20.0 million and $7.3 million, respectively, are netted against selling,
general and administrative expenses in the accompanying consolidated statements
of operations. Of these total allocated costs, approximately $1.6 million and
$7.3 million were included in receivables from affiliates in the consolidated
balance sheets. In addition, the Company purchases certain equipment, such as
handsets, on behalf of Cox PCS. Receivables from affiliates for handsets and
related equipment were approximately $31.2 million and $6 million at December
31, 1997 and 1996, respectively.
F-65
PhillieCo, L.P. - The Company provides various services to PhillieCo, L.P.
("PhillieCo"), a limited partnership organized by and among subsidiaries of
Sprint, TCI and Cox. PhillieCo owns a PCS license for the Philadelphia MTA.
During the year ended December 31, 1997, costs for services incurred during 1996
and 1997 of $36.3 million were allocated to PhillieCo and are included as a
reduction of selling, general and administrative expenses in the accompanying
consolidated statements of operations. Additionally, affiliation fees are
recognized based on a percentage of PhillieCo's net revenues. During the year
ended December 31, 1997, affiliation fees of $0.3 million are included in other
income in the accompanying consolidated statements of operations. The allocated
costs and affiliate fees of $36.6 million are included in receivable from
affiliates at December 31, 1997 and were paid during January 1998.
There were no such costs at December 31, 1996.
SprintCom, Inc. - The Company provides services to SprintCom, Inc.
("SprintCom"), an affiliate of Sprint. The Company is currently building out the
network infrastructure in certain BTA markets where SprintCom was awarded
licenses. Such services include engineering, management, purchasing, accounting
and other related services. For the year ended December 31, 1997, costs for
services provided of $29.1 million were allocated to SprintCom, and are included
as a reduction of selling, general and administrative expenses in the
accompanying consolidated statements of operations. Of the total allocated
costs, approximately $14.0 million are included in receivables from affiliates
at December 31, 1997. No such costs were incurred in 1996.
Paging Services - In 1996, the Company commenced paging services pursuant to
agreements with Paging Network Equipment Company and Sprint Communications
Company L.P. ("Sprint Communications"). For the years ended December 31, 1997
and 1996, Sprint Communications received agency fees of approximately $10.6
million and $4.9 million, respectively.
Advances from Partners - In December 1996, the Partners advanced approximately
$168 million to the Company, which was contributed to Cox PCS (Note 4). The
advances were repaid in February 1997.
F-66
9. QUARTERLY FINANCIAL DATA (Unaudited)
Summarized quarterly financial data for 1997 and 1996 is as follows (in
thousands):
1997 First Second Third Fourth
---- ----- ------ ----- ------
Operating revenues................... $ 9,467 $ 25,386 $ 72,534 $ 141,220
Operating expenses................... 200,281 303,098 455,236 600,726
Net loss............................. 188,884 287,664 420,914 665,925
1996
Operating revenues................... $ - $ - $ - $ 4,175
Operating expenses................... 30,978 46,897 87,135 195,038
Net loss............................. 67,425 90,770 101,497 183,402
10. SUBSEQUENT EVENTS
Subsequent to December 31, 1997, the Company reorganized operations under which
certain field offices will be consolidated. Costs associated with this
reorganization are expected to be recorded in the first quarter of 1998 and will
consist primarily of severance pay, write-off of certain leasehold improvements
and termination payments under lease agreements.
F-67
SCHEDULE II
SPRINT SPECTRUM HOLDING COMPANY, L.P. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 1997, 1996 and 1995
(In Thousands)
Additions
-------------------------------
Balance at Charged to Charged to
Beginning Costs and Other Other Balance at
Description of Year Expense Accounts Deductions End of Year
- -------- ---------------------------------- ------------ -------------- ------------- ------------- -------------
Receivables
1997 Allowance for doubtful accounts 202 11,277 - 2,447 (1) 9,032
1996 Allowance for doubtful accounts - 202 - - 202
1995 Allowance for doubtful accounts - - - - -
(1) Accounts written off, net of recoveries
F-68
EXHIBIT INDEX
EXHIBIT
NUMBER
(3) Articles of Incorporation and Bylaws:
(a) Articles of Incorporation, as amended (filed as Exhibit
3(a) to Sprint Corporation Quarterly Report on Form
10-Q for the quarter ended June 30, 1997 and
incorporated herein by reference).
(b) Bylaws, as amended (filed as Exhibit 3(a) to Sprint
Corporation Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996 and incorporated
herein by reference).
(4) Instruments defining the Rights of Sprint's Equity Security
Holders:
(a) The rights of Sprint's equity security holders are
defined in the Fifth, Sixth, Seventh and Eighth
Articles of Sprint's Articles of Incorporation. See
Exhibit 3(a).
(b) Rights Agreement dated as of June 9, 1997, between
Sprint Corporation and UMB Bank, n.a. as Rights Agent
(filed as Exhibit 1 to Sprint Corporation Registration
Statement on Form 8-A dated June 12, 1997 (File No.
1-4721), and incorporated herein by reference).
(c) Standstill Agreement dated as of July 31, 1995, by and
among Sprint Corporation, France Telecom and Deutsche
Telekom AG (filed as Exhibit (10)(c) to Sprint
Corporation Quarterly Report on Form 10-Q for the
quarter ended June 30, 1995 and incorporated herein by
reference).
(d) Amendments to Certain Agreements and Interpretation,
dated June 24, 1997, by and among Sprint Corporation,
France Telecom and Deutsche Telekom AG (filed as
Exhibit 4(d) to Sprint Corporation Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997 and
incorporated herein by reference).
(e) Indenture, dated as of March 1, 1983, between Sprint
Corporation (formerly United Telecommunications, Inc.)
and The Bank of New York (formerly Irving Trust
Company), as Trustee (filed as Exhibit 4-A to United
Telecommunications, Inc. Registration Statement No.
33-4563 and incorporated herein by reference).
(f) First Supplemental Indenture, dated as of April 1,
1986, between Sprint Corporation (formerly United
Telecommunications, Inc.) and The Bank of New York
(formerly Irving Trust Company), as Trustee (filed as
Exhibit 4(d) to Sprint Corporation Annual Report on
Form 10-K for the year ended December 31, 1991 and
incorporated herein by reference).
(g) Second Supplemental Indenture, dated as of May 1, 1990,
between Sprint Corporation (formerly United
Telecommunications, Inc.) and The Bank of New York, as
Trustee (filed as Exhibit 4(e) to United
Telecommunications, Inc. Annual Report on Form 10-K for
the year ended December 31, 1990 and incorporated
herein by reference).
(h) Form of Indenture, dated as of July 1, 1992, between
Sprint Corporation and The First National Bank of
Chicago, as Trustee (filed as Exhibit 4-A to Sprint
Corporation Registration Statement No. 33-48689 and
incorporated herein by reference).
(i) Form of Indenture, dated as of June 15, 1993, among
Sprint Capital Corporation, Sprint Corporation and The
Bank of New York, as Trustee (filed as Exhibit 4-A to
Sprint Corporation Registration Statement No. 33-64564
and incorporated herein by reference).
(10) Material Agreements - Joint Ventures:
(a) Joint Venture Agreement dated as of June 22, 1995 among
Sprint Corporation, Sprint Global Venture, Inc., France
Telecom and Deutsche Telekom AG (filed as Exhibit
(10)(a) to Sprint Corporation Quarterly Report on Form
10-Q for the quarter ended June 30, 1995 and
incorporated herein by reference).
(b) Amendment No. 1 to Joint Venture Agreement, dated as of
January 31, 1996, among Sprint Corporation, Sprint
Global Venture, Inc., France Telecom, Deutsche Telekom
AG and Atlas Telecommunications, S.A. (filed as Exhibit
99A to Sprint Corporation Current Report on Form 8-K
dated January 31, 1996 and incorporated herein by
reference).
(c) Investment Agreement dated as of July 31, 1995 among
Sprint Corporation, France Telecom and Deutsche Telekom
AG (including as an exhibit the Stockholders' Agreement
among France Telecom, Deutsche Telekom AG and Sprint
Corporation) (filed as Exhibit (10)(b) to Sprint
Corporation Quarterly Report on Form 10-Q for the
quarter ended June 30, 1995 and incorporated herein by
reference).
(d) Amended and Restated Agreement of Limited Partnership
of MajorCo., L.P., dated as of January 31, 1996, among
Sprint Spectrum, L.P., TCI Network Services, Comcast
Telephony Services and Cox Telephony Partnership (filed
as Exhibit 99C to Sprint Corporation Current Report on
Form 8-K dated January 31, 1996 and incorporated herein
by reference).
(e) Parents Agreement dated as of January 31, 1996, between
Sprint Corporation and Tele-Communications, Inc. (filed
as Exhibit 99D to Sprint Corporation Current Report on
Form 8-K dated January 31, 1996 and incorporated herein
by reference).
(f) Parents Agreement dated as of January 31, 1996, between
Sprint Corporation and Comcast Corporation (filed as
Exhibit 99E to Sprint Corporation Current Report on
Form 8-K dated January 31, 1996 and incorporated herein
by reference).
(g) Parents Agreement dated as of January 31, 1996, between
Sprint Corporation and Cox Communications, Inc. (filed
as Exhibit 99F to Sprint Corporation Current Report on
Form 8-K dated January 31, 1996 and incorporated herein
by reference).
(10) Executive Compensation Plans and Arrangements:
(h) 1985 Stock Option Plan, as amended (filed as Exhibit
(10)(a) to Sprint Corporation Quarterly Report on Form
10-Q for the quarter ended September 30, 1997 and
incorporated herein by reference).
(i) 1990 Stock Option Plan, as amended (filed as Exhibit
(99) to Sprint Corporation Registration Statement No.
333-46491 and incorporated herein by reference).
(j) 1990 Restricted Stock Plan, as amended (filed as
Exhibit (99) to Sprint Corporation Registration
Statement No. 333-46487 and incorporated herein by
reference).
(k) Executive Deferred Compensation Plan, as amended (filed
as Exhibit (10)(k) to Sprint Corporation Annual Report
on Form 10-K for the year ended December 31, 1996 and
incorporated herein by reference).
(l) Management Incentive Stock Option Plan, as amended
(filed as Exhibit (10)(c) to Sprint Corporation
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997 and incorporated herein by reference).
(m) 1997 Long-Term Stock Incentive Program (filed as
Exhibit (99) to Sprint Corporation Registration
Statement No. 33-25449 and incorporated herein by
reference).
(n) Sprint Supplemental Executive Retirement Plan (filed as
Exhibit (10)(i) to Sprint Corporation Quarterly Report
on Form 10-Q for the quarter ended September 30, 1995
and incorporated herein by reference).
(o) Amended and Restated Centel Directors Deferred
Compensation Plan (filed as Exhibit (10)(c) to Sprint
Corporation Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997 and incorporated
herein by reference).
(p) Restated Memorandum Agreements Respecting Supplemental
Pension Benefits between Sprint Corporation (formerly
United Telecommunications, Inc.) and two of its current
and former executive officers (filed as Exhibit 10(i)
to Sprint Corporation Annual Report on Form 10-K for
the year ended December 31, 1992, and incorporated
herein by reference).
(q) Executive Long-Term Incentive Plan (filed as Exhibit
10(j) to Sprint Corporation Annual Report on Form 10-K
for the year ended December 31, 1993 and incorporated
herein by reference).
(r) Executive Management Incentive Plan (filed as Exhibit
10(k) to Sprint Corporation Annual Report on Form 10-K
for the year ended December 31, 1993 and incorporated
herein by reference).
(s) Long-Term Incentive Compensation Plan, as amended
(filed as Exhibit 10(i) to Sprint Corporation Quarterly
Report on Form 10-Q for the quarter ended September 30,
1996, and incorporated herein by reference).
(t) Short-Term Incentive Compensation Plan (filed as
Exhibit 10(k) to United Telecommunications, Inc. Annual
Report on Form 10-K for the year ended December 31,
1989, and incorporated herein by reference).
(u) Retirement Plan for Directors, as amended (filed as
Exhibit (10)(u) to Sprint Corporation Annual Report on
Form 10-K for the year ended December 31, 1996 and
incorporated herein by reference).
(v) Key Management Benefit Plan, as amended (filed as
Exhibit 10(g) to Sprint Corporation Quarterly Report on
Form 10-Q for the quarter ended September 30, 1996 and
incorporated herein by reference).
(w) Agreements Regarding Special Compensation and Post
Employment Restrictive Covenants between Sprint
Corporation and certain of its Executive Officers
(filed as Exhibit 10(x) to Sprint Corporation Annual
Report on Form 10-K for the year ended December 31,
1993, Exhibit 10(d) to Sprint Corporation Quarterly
Report on Form 10-Q for the quarter ended September 30,
1994, Exhibit 10 (h) to Sprint Corporation Quarterly
Report on Form 10-Q for the quarter ended March 31,
1996 and Exhibit (10)(w) to Sprint Corporation Annual
Report on Form 10-K for the year ended December 31,
1996 and incorporated herein by reference). Agreements
Regarding Special Compensation and Post Employment
Restrictive Covenants between Sprint Corporation and
four of its Executive Officers.
(x) Director's Deferred Fee Plan, as amended (filed as
Exhibit (10)(x) to Sprint Corporation Annual Report on
Form 10-K for the year ended December 31, 1996 and
incorporated herein by reference).
(y) Form of Contingency Employment Agreements between
Sprint Corporation and certain of its executive
officers (filed as Exhibit 10(b) to Sprint Corporation
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1995, and incorporated herein by reference).
(z) Form of Indemnification Agreements between Sprint
Corporation (formerly United Telecommunications, Inc.)
and its Directors and Officers (filed as Exhibit 10(s)
to Sprint Corporation Annual Report on Form 10-K for
the year ended December 31, 1991, and incorporated
herein by reference).
(aa) Summary of Executive Officer and Board of Directors
Benefits (filed as Exhibit (10)(k) to Sprint
Corporation Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996 and incorporated
herein by reference).
(bb) Description of Retirement Agreement between Sprint
Corporation and one of its executive officers.
(cc) Amended and Restated Centel Director Stock Option Plan
(filed as Exhibit 10(aa) to Sprint Corporation Annual
Report on Form 10-K for the year ended December 31,
1993, and incorporated herein by reference).
(12) Computation of Ratio of Earnings to Fixed Charges
(21) Subsidiaries of Registrant
(23) (a) Consent of Ernst & Young LLP
(b) Consent of Deloitte & Touche LLP
(27) Financial Data Schedules
(a) December 31, 1997
(b) September 30, 1997 Restated
(c) June 30, 1997 Restated
(d) March 31, 1997 Restated
(e) December 31, 1996 Restated
(f) September 30, 1996 Restated
(g) June 30, 1996 Restated
(h) March 31, 1996 Restated
(i) December 31, 1995 Restated