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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, 2000
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 No. 1-04721
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, 64112
Kansas City, Missouri (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, (913) 624-3000
including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
FON Common Stock, Series 1, $2.00
par value, and FON Group Rights New York Stock Exchange
PCS Common Stock, Series 1, $1.00
par value, and PCS Group Rights New York Stock Exchange
Guarantees of Sprint Capital
Corporation 6.875% Notes due 2028 New York Stock 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 such 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 and non-voting stock held by non-affiliates at
February 28, 2001, was $37,426,477,728.
COMMON SHARES OUTSTANDING AT FEBRUARY 28, 2001:
FON COMMON STOCK 799,223,455
PCS COMMON STOCK 935,235,668
CLASS A COMMON STOCK 86,236,036
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, 2000, is incorporated by
reference in Part III hereof.
SECURITIES AND EXCHANGE COMMISSION
ANNUAL REPORT ON FORM 10-K Sprint Corporation
Part I
- --------------------------------------------------------------------------------
Item 1. Business
- --------------------------------------------------------------------------------
The Corporation
Sprint Corporation, incorporated in 1938 under the laws of Kansas, is mainly a
holding company.
In November 1998, Sprint's shareholders approved the formation of the FON Group
and the PCS Group and the creation of the FON stock and the PCS stock. In
addition, Sprint purchased the remaining ownership interests in Sprint Spectrum
Holding Company, L.P. and PhillieCo, L.P. (together, Sprint PCS), other than a
minority interest in Cox Communications PCS, L.P. (Cox PCS). Sprint acquired
these ownership interests from Tele-Communications, Inc. (TCI), Comcast
Corporation and Cox Communications, Inc. (the Cable Partners). In exchange,
Sprint issued the Cable Partners special low-vote PCS shares and warrants to
acquire additional PCS shares. Sprint also issued the Cable Partners shares of
a new class of preferred stock convertible into PCS shares. The purchase of the
Cable Partners' interests is referred to as the PCS Restructuring. In the 1999
second quarter, Cox Communications, Inc. exercised a put option requiring
Sprint to purchase the remaining 40.8% interest in Cox PCS. Sprint issued
additional low vote PCS shares in exchange for this interest.
Also in November 1998, Sprint reclassified each of its publicly traded common
shares into one share of FON stock and 1/2 share of PCS stock. This
recapitalization was tax-free to shareholders. Each Class A common share owned
by France Telecom (FT) and Deutsche Telekom AG (DT) was reclassified to
represent an equity interest in the FON Group and the PCS Group that entitled
FT and DT to one share of FON stock and 1/2 share of PCS stock. These
transactions are referred to as the Recapitalization.
The PCS stock is intended to reflect the performance of Sprint's wireless PCS
operations. These operations are referred to as the PCS Group.
The FON stock is intended to reflect the performance of all of Sprint's other
operations. These operations are referred to as the FON Group and include the
following:
. Global markets division
. Local division
. Product distribution and directory publishing businesses.
Characteristics of Tracking Stock
FON and PCS shareholders are subject to the risks related to all of Sprint's
businesses, assets and liabilities. Owning FON or PCS shares does not represent
a direct legal interest in the assets and liabilities of the Groups. Rather,
shareholders remain invested in Sprint and continue to vote as a single voting
class for Board member elections and most other company matters.
The vote per share of the PCS stock is different from the vote of the FON
stock. The FON stock has one vote per share. The vote of the PCS stock is based
on the market price of a share of PCS stock relative to the market price of a
share of FON stock for a period of time prior to the record date for a
shareholders meeting. The shares of PCS stock held by the Cable Partners have
1/10 of the vote per share of the publicly traded PCS stock except where there
is a class vote. The shares held by the Cable Partners convert into full voting
PCS stock upon sale to the public.
The price of the FON stock may not accurately reflect the performance of the
FON Group and the price of the PCS stock may not accurately reflect the
performance of the PCS Group. Events affecting the results of one Group could
adversely affect the results of the other Group and the stock price of the
stock tracking the other Group. Net losses of either Group, and dividends or
distributions on, or repurchases of, one stock will reduce Sprint funds legally
available for dividends on both stocks. Debt incurred by either Group could
affect the credit rating of Sprint as a whole and increase borrowing costs for
both Groups.
Holders of one of the stocks may have different or conflicting interests from
the holders of the other stock. For example, conflicts could arise with respect
to decisions by the Sprint Board to (1) convert the outstanding shares of PCS
stock into shares of FON stock, (2) sell assets of a Group, either to the other
Group or to a third party, (3) transfer assets from one Group to the other
Group, (4) formulate public policy positions which could have an unequal effect
on the interests of the FON Group and the PCS Group, (5) allocate consideration
in a merger to holders of FON stock or PCS stock, and (6) make operational and
financial decisions with respect to one Group that could be considered to be
detrimental to the other Group. Material conflicts are addressed in accordance
with the Tracking Stock Policies adopted by the Sprint Board. In addition, the
Board has appointed a committee of its members (the Capital Stock Committee) to
interpret and oversee the implementation of these policies.
Transfers of assets from the FON Group to the PCS Group treated as an equity
contribution will result in an increase in the intergroup interest of the FON
Group in the PCS Group. This interest is similar to the FON Group holding PCS
stock. A transfer of funds from the PCS Group to the FON Group would
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decrease the intergroup interest. An intergroup interest of the PCS Group in
the FON Group cannot be created.
If either the FON Group or the PCS Group were a stand-alone entity, a person
that does not wish to negotiate with management could seek to acquire such
Group by means of a tender offer or proxy contest involving only that entity's
shareholders. However, because the FON Group and the PCS Group are each part of
Sprint, acquiring either Group without negotiation with Sprint's management
would require a proxy contest or tender offer that yielded control of Sprint
generally and would likely require solicitations to shareholders of both
Groups.
Sprint FON Group
General Overview of the Sprint FON Group
The FON Group is comprised of the global markets division, the local division
and the product distribution and directory publishing businesses. The main
activities of the global markets division include domestic and international
long distance communications (except for consumer long distance services used
by customers within Sprint's local franchise territories), Sprint ION(SM),
broadband fixed wireless services and certain other ventures. The activities of
the local division include local exchange communications and consumer long
distance services used by customers within Sprint's local franchise
territories. The FON Group is the nation's third-largest provider of long
distance services.
Global Markets Division
The global markets division's financial performance for 2000, 1999 and 1998 is
summarized as follows:
- ----------------------------------------------
2000 1999 1998
- ----------------------------------------------
(millions)
Net operating revenues $10,528 $10,308 $9,541
--------------------------
Operating income(/1/) $ 585 $ 1,175 $1,190
--------------------------
(/1/) Includes a $238 million nonrecurring asset write-down in 2000.
Global Markets Division
General
The global markets division provides a broad suite of communications services
targeted to domestic business and residential customers, multinational
corporations and other communications companies. These services include
domestic and international voice; data communications such as Internet and
frame relay access and transport, web hosting, virtual private networks, and
managed security services; and broadband services.
Sprint is deploying integrated communications services, referred to as Sprint
ION. Sprint ION extends Sprint's existing network capabilities to the customer
and enables Sprint to provide the network infrastructure to meet customers'
demands for advanced services including integrated voice, data, Internet and
video. It is also expected to be the foundation for Sprint to provide advanced
services in the competitive local service market. Sprint uses various advanced
services last-mile technologies, including dedicated access and Digital
Subscriber Line (xDSL), and expects to use Multipoint Multichannel Distribution
Services (MMDS).
The global markets division also includes the operating results of the cable TV
service operations of the broadband fixed wireless companies after their 1999
acquisition dates. During 2000, Sprint converted several markets served by MMDS
capabilities from cable TV services to high-speed data services. The global
markets division's operating results reflect the development costs and the
operating revenues and expenses of these broadband fixed wireless services.
Sprint intends to provide broadband data and voice services to additional
markets served by these capabilities.
The global markets division also reflects the costs of establishing
international operations beginning in 2000.
This division also includes the FON Group's investments in EarthLink, Inc., an
Internet service provider; Call-Net, a long distance provider in Canada;
Intelig, a long distance provider in Brazil; and certain other
telecommunications investments and ventures.
Competition
The division competes with AT&T, WorldCom and other telecommunications
providers in all segments of the long distance communications market. AT&T
continues to have the largest market share of the domestic long distance
communications market. Emerging competitors are targeting the high-end data
market and are offering deeply discounted rates in exchange for high-volume
traffic as they attempt to fill their networks with traffic volume. Certain
Regional Bell Operating Companies (RBOCS) have obtained authorization to
provide in-region long distance service in certain states, which has heightened
competition in those states. Competition in long distance is based on price and
pricing plans, the types of services offered, customer service, and
communications quality, reliability and availability.
Strategy
In order to achieve profitable market share growth in an increasingly
competitive long distance communications environment, the global markets
division intends to leverage its principal strategic assets: its high-capacity
national fiber-optic network, its tier one IP network, its large base of
business and residential customers, its established national brand, and
offerings available from other FON Group operating entities and the PCS Group.
The long
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distance operation will focus on expanding its presence in the high-growth data
communications markets and intends to become the provider of choice for
delivery of end-to-end service to business and residential customers. The FON
Group continues to deploy network and systems infrastructure which provides
reliability, cost effectiveness and technological improvements. In order to
create integrated product offerings for its customers, the FON Group is
solidifying the linkage of its long distance operation with Sprint's other
operations such as the local division and the PCS Group.
The long distance operation also supports Sprint ION activities. Sprint ION's
integrated services capability is expected to generate increased demand for
Sprint's products and services, and at the same time reduce the costs to
provide those services.
Sprint ION intends to rely largely on the transmission infrastructure of the
long distance operation, Sprint's MMDS capabilities and, to a lesser extent, on
the transmission infrastructure of the local division. Sprint will evaluate
whether facilities should be built, leased or acquired where they currently do
not exist. Because a great amount of future investment will be related to
specific customer contracts, Sprint expects to manage its investment in Sprint
ION consistent with customer demand.
Local Division
General
The local division (LTD) consists mainly of regulated local phone companies
serving approximately 8.3 million access lines in 18 states. LTD provides local
phone services, access by phone customers and other carriers to LTD's local
network, consumer long distance services to customers within its franchise
territories, sales of telecommunications equipment, and other long distance
services within certain regional calling areas, or LATAs.
LTD's financial performance for 2000, 1999 and 1998 is summarized as follows:
- --------------------------------------------
2000 1999 1998
- --------------------------------------------
(millions)
Net operating revenues $6,155 $5,958 $5,599
-----------------------
Operating income $1,763 $1,553 $1,401
-----------------------
AT&T is LTD's largest customer for network access services. The division's net
operating revenues from services (mainly network access services) provided to
AT&T were 8% in 2000, 10% in 1999 and 12% in 1998. Revenues from AT&T were 3%
of the FON Group's revenues in 2000 and 4% in 1999 and 1998.
Competition
Because LTD operations are largely in secondary and tertiary markets,
competition in its markets is occurring more gradually. There is already
competition for business and residential customers in urban areas served by LTD
and for business customers located in most areas. Telecommunications mergers
may accelerate competition in the areas served by LTD. There continues to be
significant competition in toll services. Competition in these services is
based on price and pricing plans, the types of services offered, customer
service, and communications quality, reliability and availability. In addition,
wireless services will continue to grow as an alternative to wireline services
as a means of reaching local customers.
Strategy
LTD has embarked on a growth strategy whereby it will aggressively market to
its local customers Sprint's entire product portfolio as well as its core
product line of advanced network features and data products. LTD also supports
the FON Group's initiatives with Sprint ION. See "Global Markets Division--
Strategy" for more details.
Product Distribution and Directory Publishing Businesses
The product distribution business provides wholesale distribution services of
telecommunications products. The directory publishing business publishes and
markets white and yellow page phone directories.
The financial performance for the product distribution and directory publishing
businesses for 2000, 1999 and 1998 is summarized as follows:
- --------------------------------------------
2000 1999 1998
- --------------------------------------------
(millions)
Net operating revenues $1,936 $1,758 $1,709
-----------------------
Operating income $ 284 $ 242 $ 231
-----------------------
Sprint PCS Group
General Overview of the Sprint PCS Group
The PCS Group includes Sprint's wireless PCS operations. It operates a 100%
digital PCS wireless network in the United States with licenses to provide
service nationwide using a single frequency and a single technology. At year-
end 2000, the PCS Group, together with affiliates, operated PCS systems in over
300 metropolitan markets, including the 50 largest U.S. metropolitan areas. The
PCS Group has licenses to serve the entire U.S. population, including Puerto
Rico and the U.S. Virgin Islands. The service offered by the PCS Group and its
affiliates now reaches more than 220 million people. The PCS Group provides
nationwide service through:
. operating its own digital network in major U.S. metropolitan areas,
. affiliating with other companies, mainly in and around smaller U.S.
metropolitan areas,
3
. roaming on other providers' analog cellular networks using dual-
band/dual-mode handsets, and
. roaming on other providers' digital PCS networks that use code division
multiple access (CDMA).
The PCS group also provides wholesale PCS services to companies that resell the
services to their customers on a retail basis. These companies pay the PCS
Group a discounted price for their customers' usage, but bear the costs of
acquisition and customer service.
The PCS Group also includes its investment in Pegaso Telecomunicaciones, S.A.
de C.V. (Pegaso), a wireless PCS operation in Mexico. This investment is
accounted for using the equity method.
The financial performance for the PCS Group for 2000, 1999 and 1998 is
summarized as follows:
- -----------------------------------------------------
2000 1999 1998
- -----------------------------------------------------
(millions)
Net operating
revenues(/1/) $ 6,341 $ 3,373 $ 1,294
---------------------------------
Operating loss(/1/),(/2/) $(1,928) $(3,237) $(2,570)
---------------------------------
Other partners' loss in
Sprint PCS $ -- $ -- $ 1,251
---------------------------------
(/1/) The PCS Group's 1998 results of operations included SprintCom's operating
results as well as Sprint PCS' operating results on a consolidated basis
for the entire year.
(/2/) Includes a $24 million charge in 2000 for costs associated with the
terminated merger between Sprint and WorldCom and a nonrecurring charge
to write-off $179 million of acquired in-process research and development
costs related to the PCS Restructuring in 1998. For further discussion,
see the PCS Group's "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Competition
Each of the markets in which the PCS Group competes is served by other two-way
wireless service providers, including cellular and PCS operators and resellers.
A majority of the markets will have five or more commercial mobile radio
service (CMRS) providers and each of the top 50 metropolitan markets have at
least one other PCS competitor in addition to two cellular incumbents. Many of
these competitors have been operating for a number of years and currently serve
a significant subscriber base.
Strategy
The business objective of the PCS Group is to expand network coverage and
increase market penetration by aggressively marketing competitively priced PCS
products and services under the Sprint and Sprint PCS brand names, offering
enhanced services and seeking to provide superior customer service. The
principal elements of the PCS Group's strategy for achieving these goals are:
. Operating a nationwide digital wireless network
. Leveraging Sprint's national brand
. Utilizing state-of-the-art CDMA technology
. Delivering superior value to its customers
. Growing its customer base using multiple distribution channels
. Continuing to expand coverage
. Offering PCS services in combination with FON Group services
Regulatory Developments
Sprint FON Group
Competitive Local Service
The Telecommunications Act of 1996 (Telecom Act) was designed to promote
competition in all aspects of telecommunications. It eliminated legal and
regulatory barriers to entry into local phone markets. It also required
incumbent local exchange carriers (ILECs), 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. Sprint has obtained interconnection
and collocation agreements with a number of ILECs, and is rolling out Sprint
ION in selected cities across the nation, using collocation and unbundled
network elements obtained from ILECs.
In January 1999, the Supreme Court affirmed the authority of the Federal
Communications Commission (FCC) to establish rules and prices relating to
interconnection and unbundling of the ILECs' networks. The FCC subsequently
reaffirmed in large part the list of network elements incumbents are required
to provide on an unbundled basis, and strengthened collocation requirements. It
also took steps to speed the deployment of advanced technologies such as xDSL.
In July 2000, the U.S. Court of Appeals for the Eighth Circuit invalidated the
pricing standards the FCC had adopted for unbundled network elements and resale
of ILEC services. The court also refused to reconsider, in light of the Supreme
Court decision discussed above, the court's prior holding that ILECs could not
be required to combine unbundled network elements on behalf of other carriers.
In January 2001, the U.S. Supreme Court granted certiorari of three issues from
the Eighth Circuit decision. The Supreme Court will review whether the Telecom
Act forecloses the cost methodology adopted by the FCC for interconnection
rates with the ILECs. A related
4
issue dealing with whether rejection of historical costs is a taking will also
be considered. Finally, the Supreme Court will consider whether ILECs have a
duty under the Telecom Act to combine previously uncombined network elements
when requested and for a fee. If the Supreme Court affirms the Eighth Circuit's
decision, the FCC or the state regulatory commissions would have to formulate
new pricing standards for unbundled network elements and interconnection.
Separately, in a March 2000 decision, the U.S. Court of Appeals for the
District of Columbia Circuit remanded to the FCC the issue of what types of
equipment ILECs must allow competitors to collocate in their offices. The FCC
has received comments and reply comments on whether and how to change its
collocation rules in light of the D.C. Circuit's decision.
RBOC Long Distance Entry
The Telecom Act also allows RBOCs 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
RBOC's have gained authorization to provide in-region long distance service in
four states. Verizon obtained FCC authorization for New York in December 1999;
SBC obtained FCC authorization to provide in-region services in Texas in June
2000 and in Oklahoma and Kansas in January 2001. RBOCs may gain such
authorization in the near future in other states. The entry of the RBOCs into
the long distance market will impact competition, but the extent of the impact
will depend upon factors such as the RBOCs' competitive ability, the appeal of
the RBOC brand to different market segments, and the response of competitors.
Some of the impact on Sprint may be offset by wholesale revenues from those
RBOCs which choose to resell Sprint services.
Customer Service Slamming
The Telecom Act also established liability for the unauthorized switching of a
consumer's telephone service from one carrier to another (slamming). In late
1998, the FCC adopted new rules intended to prevent slamming and to compensate
victims of slamming. The compensation rules were stayed by the Court of Appeals
for the District of Columbia Circuit. In May 2000, the FCC modified the process
for adjudicating alleged slams. The D.C. Circuit then lifted its stay and the
new rules went into effect on November 28, 2000.
Mergers
A number of mergers received final regulatory approval in 2000 and early 2001.
The Qwest-US West merger was approved by the FCC in March 2000; the Bell
Atlantic-GTE merger was approved by the FCC in June 2000; and the AT&T-MediaOne
merger was approved by the FCC in June 2000. Finally, the AOL-Time Warner
merger received approval from the FCC in January 2001.
Universal Service Requirements
The FCC continues to address issues related to universal service and access
reform. In May 2000, the FCC adopted an access reform plan that substantially
reduced switched access charges paid by long distance carriers to the large
ILECs and created a new universal service fund that offsets a portion of this
reduction in access charges. In connection with its advocacy of this plan,
Sprint committed that it would flow through the reductions in switched access
costs over the five-year life of the plan to both business and residential
customers. Sprint also committed to certain other pricing actions, including
eliminating charges to residential and single-line business customers which had
been used to pass through certain access costs that were eliminated by this
plan, and maintaining, for the duration of the plan, at least one pricing
option that does not include a minimum usage charge. The FCC order adopting
this access reform plan requires Sprint to adhere to these commitments. The
FCC's order has been appealed to the U.S. Court of Appeals for the Fifth
Circuit.
The FCC and many states have established "universal service" programs to ensure
affordable, quality local telecommunications services for all Americans. The
FON Group's assessment to fund these programs is typically a percentage of
interstate and international end-user revenues. Currently, management cannot
predict the extent of the FON Group's future federal and state universal
service assessments, or its ability to recover its contributions to the
universal service fund from its customers.
Communications Assistance for Law Enforcement Act
The Communications Assistance for Law Enforcement Act (CALEA) was enacted in
1994 to preserve electronic surveillance capabilities authorized by federal and
state law. CALEA requires telecommunications companies to meet certain
"assistance capability requirements" by the end of June 2000 where circuit-
switching is used and by September 2001 where packet-switching is used. Where
circuit-switched technology was installed before 1995, reimbursement for
hardware and software upgrades to facilitate CALEA compliance was authorized.
The U.S. Department of Justice (DOJ) has published guidelines concerning what
is required for it to support, at the FCC, petitions for extension of the CALEA
enforcement deadlines; however, the FCC did not require carriers to have DOJ
concurrence to seek an extension. LTD uses circuit-switching for the bulk of
its traffic and most LTD switches were installed before 1995 and qualify
5
for reimbursement if upgrades are required by the DOJ. Sprint ION uses packet
switching for its local operations. In the case of Sprint ION, CALEA compliance
capabilities are not currently available from equipment and software vendors
involved in Sprint ION's deployment. LTD has obtained an extension for CALEA
compliance until June 30, 2001 and has been in discussions with the DOJ which
resulted in an agreement on a deployment schedule for CALEA within LTD. LTD
expects the DOJ to provide a letter of support for use with the FCC in
obtaining a further extension consistent with the agreed upon deployment
schedule. Sprint ION will apply for an extension for the local packet-based
services to allow for development of required hardware and software.
Sprint PCS Group
The FCC sets rules, regulations and policies to, among other things:
. grant licenses for PCS frequencies and license renewals,
. rule on assignments and transfers of control of PCS licenses,
. govern the interconnection of PCS networks with other wireless and
wireline carriers,
. establish access and universal service funding provisions,
. impose fines and forfeitures for violations of any of the FCC's rules,
and
. regulate the technical standards of PCS networks.
The FCC currently prohibits a single entity from having a combined attributable
interest (20% or greater interest in any license) in broadband PCS, cellular
and specialized mobile radio licenses totaling more than 45 megahertz (MHz) in
any geographic area except that in rural service areas no licensee may have an
attributable interest in more than 55 MHz of CMRS spectrum.
PCS License Transfers and Assignments
The FCC must approve any substantial changes in ownership or control of a PCS
license. Noncontrolling interests in an entity that holds a PCS license or
operates PCS networks generally may be bought or sold without prior FCC
approval. In addition, the FCC now requires only post-consummation notification
of certain pro forma assignments or transfers of control.
PCS License Conditions
All PCS licenses are granted for 10-year terms if the FCC's buildout
requirements are followed. Based on those requirements, all 30 MHz broadband
major trading area (MTA) licensees must build networks offering coverage to 1/3
of the population within five years and 2/3 within 10 years. In June 2000, the
PCS Group met its five-year buildout requirement in all its MTA markets. All 10
MHz broadband PCS licensees must build networks offering coverage to at least
1/4 of the population within five years or make a showing of "substantial
service" within that five-year period. Sprint anticipates that it will meet the
10 MHZ five-year buildout requirement by the April 2002 deadline. Licenses may
be revoked if the rules are violated.
PCS licenses may be renewed for additional 10-year terms. Renewal applications
are not subject to auctions. However, third parties may oppose renewal
applications.
Other FCC Requirements
Broadband PCS providers cannot unreasonably restrict or prohibit other
companies from reselling their services. They also cannot unreasonably
discriminate against resellers. CMRS resale obligations will expire in 2002.
Local exchange carriers must program their networks to allow customers to
retain, at the same location, existing telephone numbers when switching from
one telecommunications carrier to another. This is referred to as service
provider number portability. CMRS providers are currently required to deliver
calls from their networks to ported numbers anywhere in the country. By
November 24, 2002, all covered CMRS providers must provide a database solution
for number portability. The solution must be able to support roaming. Covered
CMRS providers must provide number portability in the 100 largest metropolitan
statistical areas, in compliance with certain FCC performance criteria, but
only at the request of another carrier (CMRS provider or local exchange
carrier).
Broadband PCS and other CMRS providers may provide wireless local loop and
other fixed services that would directly compete with the wireline services of
local phone companies. Broadband PCS and other CMRS providers must implement
enhanced emergency 911 capabilities in a two-tiered manner. In the first phase,
wireless carriers must identify the base station from which a call originated.
In the second phase, wireless carriers must provide location within a radius as
small as fifty meters. Implementation of the more complex Phase II location
requirements must begin by October 1, 2001.
Communications Assistance for Law Enforcement Act
CALEA requires telecommunications carriers, including Sprint, to modify their
equipment, facilities and services to allow for authorized electronic
surveillance based on either industry or FCC standards. In 1997, industry-
setting organizations developed interim standards for wireline, cellular and
broadband PCS carriers to comply with CALEA. In
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August 1999, the FCC supplemented the interim industry standards with six
additional capabilities. For interim industry standards, the deadline for
compliance was June 30, 2000, and for the additional standards established by
the FCC, the deadline is September 30, 2001. In August 2000, an appellate court
vacated the FCC's decision relative to four of the capabilities and remanded
the matter for further FCC consideration.
Sprint PCS believes that it is in compliance with all existing CALEA
requirements. However, Sprint PCS filed a petition for an extension of the June
30, 2000 deadline until June 30, 2001 in the event that the FCC determines that
Sprint PCS must use a specific vendor solution to automatically provide mobile
service assistance information under Section 103 (d) of CALEA. Specifically,
this section requires a CMRS carrier to identify (a) whether a
customer/interception subject is traveling "in network: but outside the
customer's service area," and (b) the service provider if the subject is
roaming on another CMRS network. While Sprint PCS is capable of providing this
information upon a specific request by law enforcement, it cannot provide the
information automatically. The FCC has not ruled on Sprint PCS' motion for an
extension of the June 30, 2000 deadline; however, Sprint PCS is deemed to have
an extension of the deadline until March 31, 2001 unless the FCC revokes the
extension before that deadline or issues a final order with a different
deadline.
Other Federal Regulations
Wireless systems must comply with certain FCC and Federal Aviation
Administration regulations about the siting, lighting and construction of
transmitter towers and antennas. In addition, FCC environmental regulations may
cause certain cell site locations to come under National Environmental Policy
Act (NEPA) and National Historic Preservation Act (NHPA) regulation. The FCC's
NEPA and NHPA rules require carriers to meet certain land use and radio
frequency standards.
Universal Service Requirements
The FCC and many states have established "universal service" programs to ensure
affordable, quality telecommunications services for all Americans. The PCS
Group's "contribution" to these programs is typically a percentage of end-user
revenues. Currently, management cannot predict the extent of the PCS Group's
future federal and state universal service assessments, or its ability to
recover its contributions from the universal service fund.
Environmental Compliance
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 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 adverse effects on the FON Group or the
PCS Group.
Patents, Trademarks and Licenses
Sprint owns numerous patents, patent applications, service marks and trademarks
in the United States and other countries. Sprint expects to apply for and
develop trademarks, service marks and patents for the benefit of the Groups in
the ordinary course of business. Sprint is a registered trademark of Sprint and
Sprint PCS is a registered service mark of Sprint. Sprint is also licensed
under domestic and foreign patents and trademarks owned by others. In total,
these patents, patent applications, trademarks, service marks and licenses are
of material importance to the business. Generally, Sprint's trademarks,
trademark licenses and service marks have no limitation on duration; Sprint's
patents and licensed patents have remaining lives generally ranging from one to
19 years.
Pursuant to certain of the PCS Group's third party supplier contracts, the PCS
Group has certain rights to use third party supplier trademarks in connection
with the buildout, marketing and operation of its network.
Employee Relations
At year-end 2000, Sprint had approximately 84,100 employees. Approximately
10,100 FON Group employees were represented by unions. During 2000, Sprint had
no material work stoppages caused by labor controversies.
Management
For information concerning the executive officers of Sprint, see "Executive
Officers of the Registrant" in this document.
Information as to Business Segments
For information required by this section, refer to Sprint's "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the FON Group's "Management's Discussion and Analysis of Financial Condition
and Results of Operations." Also refer to Note 15 of Sprint's "Notes to
Consolidated Financial Statements" and Note 14 of the FON Group's "Notes to
Combined Financial Statements" sections of the Financial Statements and
Financial Statement Schedules filed as part of this document.
7
- --------------------------------------------------------------------------------
Item 2. Properties
- --------------------------------------------------------------------------------
Sprint's gross property, plant and equipment totaled $43.1 billion at year-end
2000, of which $16.8 billion relates to the FON Group's local communications
services, $12.5 billion relates to the FON Group's global markets
communications services, $12.1 billion relates to the PCS Group's PCS wireless
services and the remainder relates to the FON Group's product distribution and
directory publishing businesses' properties and general support assets.
The FON Group's gross property, plant and equipment totaled $31.0 billion at
year-end 2000. 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 operation has been granted easements,
rights-of-way and rights-of-occupancy, mainly by railroads and other private
landowners, for its fiber-optic network.
The product distribution and directory publishing businesses' properties mainly
consist of office and warehouse facilities to support the business units in the
distribution of telecommunications products and publication of telephone
directories.
The PCS Group's properties consist of leased and owned office space for its
corporate operations, network monitoring personnel, customer care centers and
retail stores, and PCS network assets including base transceiver stations,
switching equipment and towers. The PCS Group leases space for base station
towers and switch sites for its PCS network. At year-end 2000, the PCS Group
had under lease (or options to lease) approximately 17,300 cell sites.
Sprint owns its corporate headquarters building and is in the process of
building a $1 billion corporate campus in the greater Kansas City metropolitan
area.
Gross property, plant and equipment totaling $16.1 billion for the FON Group is
either pledged as security for first mortgage bonds and certain notes or is
restricted for use as mortgaged property.
- --------------------------------------------------------------------------------
Item 3. Legal Proceedings
- --------------------------------------------------------------------------------
In December 2000, Amalgamated Bank, an institutional shareholder, filed a
derivative action purportedly on behalf of Sprint against certain of its
current and former officers and directors in the Jackson County, Missouri,
Circuit Court. The complaint alleges that the individual defendants breached
their fiduciary duties to Sprint and were unjustly enriched by making
undisclosed amendments to Sprint's stock option plans, by failing to disclose
certain information concerning regulatory approval of the proposed merger of
Sprint and WorldCom, and by overstating Sprint's earnings for the first quarter
of 2000. The plaintiff seeks damages, to be paid to Sprint, in an unspecified
amount. Two additional, substantially identical, derivative actions by other
shareholders of Sprint have been filed.
The PCS Group has been involved in legal proceedings in various states
concerning the suspension of the processing or approval of permits for wireless
telecommunications towers, the denial of applications for permits and other
issues arising in connection with tower siting. There can be no assurance that
such litigation and similar actions taken by others seeking to block the
construction of individual cell sites of the PCS Group's network will not, in
the aggregate, significantly delay further expansion of the PCS Group's network
coverage.
In early 2000, Sprint utilized the Environmental Protection Agency's (EPA's)
self-policing policy and disclosed to the EPA its failure to maintain certain
records and file certain reports for a portion of its facilities. Sprint also
informed the EPA that it had corrected the violations and implemented policies
to prevent a reoccurrence. After discussing the matter with the EPA, Sprint
believes that it will be assessed a fine of approximately $250,000, which
represents the EPA's estimate of the economic benefits that Sprint derived from
the violations.
Sprint is involved in various other legal proceedings incidental to the conduct
of its business. While it is not possible to determine the ultimate disposition
of each of these proceedings, Sprint believes that the outcome of such
proceedings, individually or in the aggregate, will not have a material adverse
effect on Sprint's, the FON Group's or the PCS Group's financial conditions or
results of operations.
- --------------------------------------------------------------------------------
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 2000.
8
- --------------------------------------------------------------------------------
Item 10(b). Executive Officers of the Registrant
- --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Office Name Age
- -------------------------------------------------------------------------------
Chairman and Chief Executive Officer William T. Esrey(/1/) 61
President and Chief Operating Officer Ronald T. LeMay(/2/) 55
President--Local Telecommunications Division Michael B. Fuller(/3/) 56
President--Technology Services Don G. Hallacy(/4/) 44
President--National Integrated Services Arthur A. Kurtze(/5/) 56
President--Global Markets Group Len J. Lauer(/6/) 43
President--Sprint PCS Charles E. Levine(/7/) 47
Executive Vice President--General Counsel and
External Affairs J. Richard Devlin(/8/) 50
Executive Vice President--Chief Financial Officer Arthur B. Krause(/9/) 59
Senior Vice President and Treasurer Gene M. Betts(/10/) 48
Senior Vice President--Public Affairs and Brand
Management Forrest E. Mattix(/11/) 47
Senior Vice President and Controller John P. Meyer(/12/) 50
Senior Vice President--Strategic
Planning/Corporate Development Liane J. Pelletier(/13/) 43
Senior Vice President--Human Resources I. Benjamin Watson(/14/) 52
(/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
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 Sprint Spectrum Holding Company from 1995 to 1996.
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--Local Telecommunications Division in
1996. From 1990 to 1996, he served as President of United Telephone--
Midwest Group, an operating group of subsidiaries of Sprint.
(/4/) Mr. Hallacy was elected President--Technology Services in October 2000.
He had served as President of Sprint's Internet business unit since April
2000. Mr. Hallacy served as President and Chief Executive Officer of
Eltrax Systems, Inc., a full service Internet application service
provider, from April 1999 to April 2000. Prior to joining Eltrax, he had
served since 1996 as a Vice President of Sprint/United Management
Company, a subsidiary of Sprint. From 1995 to 1996, he was Assistant Vice
President, Product Marketing for Sprint/United Management Company.
(/5/) Mr. Kurtze was elected President--National Integrated Services in June
2000. He had served as Senior Vice President--One Sprint Strategic
Development since February 1999. From 1995 to 1999, he served as Chief
Operating Officer of Sprint Spectrum Holding Company.
(/6/) Mr. Lauer became President--Global Markets Group in September 2000. He
had been elected President--Sprint Business in June 2000. Mr. Lauer
served as President--Consumer Services Group of Sprint/United Management
Company from 1999 to 2000. He joined Sprint in 1998 as Senior Vice
President--Quality, Development and Public Relations. From 1995 to 1998,
he had been President and Chief Executive Officer of Bell Atlantic--New
Jersey, a telecommunications company.
(/7/) Mr. Levine was elected President--Sprint PCS in February 2001. He had
served as Chief Operating Officer--PCS since October 2000. He had served
as Chief Sales and Marketing Officer of Sprint Spectrum Holding Company
since 1998. Mr. Levine joined Sprint Spectrum Holding Company in 1997 as
Chief Marketing Officer. Before joining Sprint Spectrum Holding Company,
he was President of Octel Link, a voice mail equipment and services
provider, and Senior Vice President of Octel Services from 1994 to 1996.
(/8/) Mr. Devlin was elected Executive Vice President--General Counsel and
External Affairs in 1989.
(/9/) Mr. Krause was elected Executive Vice President--Chief Financial Officer
in 1988.
(/10/) Mr. Betts was elected Senior Vice President in 1990. He was elected
Treasurer in December 1998.
(/11/) Mr. Mattix was elected Senior Vice President--Public Affairs and Brand
Management in August 2000. He had served as Chief Public Relations
Officer of Sprint Spectrum Holding Company since 1996. Before joining
Sprint Spectrum Holding Company, he was Vice President--Public
Relations for US WEST Communications, Inc., a communications company.
(/12/) Mr. Meyer was elected Senior Vice President--Controller in 1993.
(/13/) Ms. Pelletier was elected Senior Vice President--Strategic
Planning/Corporate Development in August 2000. She had served as Vice
President--Corporate Strategy of Sprint/United Management Company since
1995.
(/14/) Mr. Watson was elected Senior Vice President--Human Resources in 1993.
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.
9
Part II
- --------------------------------------------------------------------------------
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- --------------------------------------------------------------------------------
Common Stock Data
- ------------------------------------
2000 Market Price
--------------------
End of
High Low Period
- ------------------------------------
FON Stock
First quarter $67.81 $55.13 $63.00
Second quarter 67.00 50.98 51.50
Third quarter 54.81 24.31 29.31
Fourth quarter 29.56 19.63 20.31
PCS Stock(/1/)
First quarter 66.94 42.56 65.50
Second quarter 66.00 44.06 59.50
Third quarter 65.88 27.81 35.13
Fourth quarter 39.19 19.38 20.44
- ------------------------------------
1999 Market Price
--------------------
End of
High Low Period
- ------------------------------------
FON Stock(/2/)
First quarter $50.34 $36.88 $49.06
Second quarter 57.47 48.63 53.00
Third quarter 55.69 42.63 54.25
Fourth quarter 75.94 54.00 67.31
PCS Stock(/1/)
First quarter 24.16 10.44 22.16
Second quarter 30.38 20.75 28.50
Third quarter 39.13 26.47 37.28
Fourth quarter 57.22 33.41 51.25
(/1/) In the 2000 first quarter, Sprint effected a two-for-one stock split of
its Sprint PCS common stock. Market prices prior to the split have been
restated.
(/2/) In the 1999 second quarter, Sprint effected a two-for-one stock split of
its Sprint FON common stock. Market prices prior to the split have been
restated.
As of February 28, 2001, Sprint had approximately 71,000 FON stock record
holders, 64,000 PCS stock record holders and two Class A common stock record
holders. The principal trading market for Sprint's FON stock and PCS stock is
the New York Stock Exchange. The Class A common stock is not publicly traded.
Adjusting for the effects of the two-for-one split of the FON Stock in the 1999
second quarter, Sprint paid a FON stock dividend of $0.125 per share in each of
the quarters of 2000 and 1999. Sprint paid Class A common stock dividends of
$0.125 per share in each of the quarters of 2000 and each of the last three
quarters of 1999 and $0.25 per share in the first quarter of 1999. Sprint does
not intend to pay dividends on the PCS stock in the foreseeable future.
- --------------------------------------------------------------------------------
Item 6. Selected Financial Data
- --------------------------------------------------------------------------------
The information required by Item 6 is incorporated by reference from Annex I,
Annex II and Annex III included herein.
- --------------------------------------------------------------------------------
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
The information required by Item 7 is incorporated by reference from Annex I,
Annex II and Annex III included herein.
- --------------------------------------------------------------------------------
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
- --------------------------------------------------------------------------------
Sprint's exposure to market risk--through derivative financial instruments,
other financial instruments, such as investments in marketable securities and
long-term debt, from changes in interest rates and from changes in foreign
currency exchange rates--is not material.
- --------------------------------------------------------------------------------
Item 8. Financial Statements and Supplementary Data
- --------------------------------------------------------------------------------
The information required by Item 8 is incorporated by reference from Annex I,
Annex II and Annex III included herein.
- --------------------------------------------------------------------------------
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
- --------------------------------------------------------------------------------
No reportable items.
10
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,
2000.
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 document.
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, 2000.
- --------------------------------------------------------------------------------
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, 2000.
- --------------------------------------------------------------------------------
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, 2000.
- --------------------------------------------------------------------------------
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, 2000.
11
Part IV
- --------------------------------------------------------------------------------
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- --------------------------------------------------------------------------------
(a)1. The consolidated financial statements of Sprint and the combined
financial statements of the FON Group and the PCS Group, 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 and the combined
financial statement schedules of the FON Group and the PCS Group, filed
as part of this report, are 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's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2000 and incorporated herein by
reference).
(b) Bylaws, as amended (filed as Exhibit 3(b) to Sprint Corporation's
Quarterly Report on Form 10-Q for the quarter ended March 31,
2000 and incorporated herein by reference).
(4) Instruments defining the Rights of Sprint's 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 November 23, 1998, between Sprint
Corporation and UMB Bank, n.a. (filed as Exhibit 4.1 to Amendment
No. 1 to Sprint Corporation's Registration Statement on Form 8-A
relating to Sprint's PCS Group Rights, filed November 25, 1998,
and incorporated herein by reference).
(c) Tracking Stock Policies of Sprint Corporation (filed as Exhibit
4D to Post-Effective Amendment No. 2 to Sprint Corporation's
Registration Statement on Form S-3 (No. 33-58488) and
incorporated herein by reference).
(d) Amended and Restated Standstill Agreement dated November 23,
1998, by and among Sprint Corporation, France Telecom and
Deutsche Telekom AG (filed as Exhibit 4E to Post-Effective
Amendment No. 2 to Sprint Corporation's Registration Statement on
Form S-3 (No. 33-58488) and incorporated herein by reference) as
amended by the Master Transfer Agreement dated January 21, 2000
between and among France Telecom, Deutsche Telekom AG, NAB
Nordamerika Beteiligungs Holding GmbH, Atlas Telecommunications,
S.A., Sprint Corporation, Sprint Global Venture, Inc. and the JV
Entities set forth in Schedule II thereto (filed as Exhibit 2 to
Sprint Corporation's Current Report on Form 8-K dated January 26,
2000 and incorporated herein by reference).
(e) Indenture, dated as of October 1, 1998, among Sprint Capital
Corporation, Sprint Corporation and Bank One, N.A., as Trustee
(filed as Exhibit 4(b) to Sprint Corporation's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1998, and
incorporated herein by reference).
(f) First Supplemental Indenture, dated as of January 15, 1999, among
Sprint Capital Corporation, Sprint Corporation and Bank One,
N.A., as Trustee (filed as Exhibit 4(b) to Sprint Corporation
Current Report on Form 8-K dated February 2, 1999 and
incorporated herein by reference).
(g) Indenture, dated as of October 1, 1998, between Sprint
Corporation and Bank One, N.A., as Trustee (filed as Exhibit 4(a)
to Sprint Corporation's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998, and incorporated herein by
reference).
12
(h) First Supplemental Indenture, dated as of January 15, 1999,
between Sprint Corporation and Bank One, N.A., as Trustee (filed
as Exhibit 4(a) to Sprint Corporation Current Report on Form 8-K
dated February 2, 1999 and incorporated herein by reference).
(10) Material Agreements
(a) Amended and Restated Stockholders' Agreement among France
Telecom, Deutsche Telekom AG and Sprint Corporation, dated as of
November 23, 1998 (filed as Exhibit 10(c) to Sprint Corporation
Annual Report on Form 10-K for the year ended December 31, 1998
and incorporated herein by reference) as amended by the Master
Transfer Agreement dated January 21, 2000 between and among
France Telecom, Deutsche Telekom AG, NAB Nordamerika Beteiligungs
Holding GmbH, Atlas Telecommunications, S.A., Sprint Corporation,
Sprint Global Venture, Inc. and the JV Entities set forth in
Schedule II thereto (filed as Exhibit 2 to Sprint Corporation's
Current Report on Form 8-K dated January 26, 2000 and
incorporated herein by reference).
(b) Amended and Restated Registration Rights Agreement, dated as of
November 23, 1998, among Sprint Corporation, France Telecom and
Deutsche Telekom A.G. (filed as Exhibit 10.1 to Amendment No. 1
to Sprint Corporation Registration Statement on Form S-3 (No.
333-64241) and incorporated herein by reference) as amended by
the Master Transfer Agreement dated January 21, 2000 between and
among France Telecom, Deutsche Telekom AG, NAB Nordamerika
Beteiligungs Holding GmbH, Atlas Telecommunications, S.A., Sprint
Corporation, Sprint Global Venture, Inc. and the JV Entities set
forth in Schedule II thereto (filed as Exhibit 2 to Sprint
Corporation's Current Report on Form 8-K dated January 26, 2000
and incorporated herein by reference) and as further amended by
the Offering Process Agreement dated as of February 20, 2001
between and among France Telecom, Deutsche Telekom AG, NAB
Nordamerika Beteiligungs Holding GmbH and Sprint Corporation.
(c) Registration Rights Agreement, dated as of November 23, 1998,
among Sprint Corporation, Tele-Communications, Inc., Comcast
Corporation and Cox Communications, Inc. (filed as Exhibit 10.2
to Amendment No. 1 to Sprint Corporation Registration Statement
on Form S-3 (No. 333-64241) and incorporated herein by
reference).
(d) Standstill Agreements, dated May 26, 1996, between Sprint
Corporation and each of Tele-Communications, Inc., Comcast
Corporation and Cox Communications, Inc. (filed as Exhibit 10(g)
to Sprint Corporation Annual Report on Form 10-K for the year
ended December 31, 1998 and incorporated herein by reference).
(e) 364-Day Credit Agreement, dated as of August 4, 2000, among
Sprint Corporation and Sprint Capital Corporation, as Borrowers,
and the initial Lenders named therein, as Initial Lenders, and
Citibank, N.A., as Administrative Agent, and Salomon Smith Barney
Inc., as Book Manager and Arranger, and Morgan Guaranty Trust
Company of New York, as Syndication Agent, and Bank of America,
N.A. and The Chase Manhattan Bank, as Documentation Agents (filed
as Exhibit 10(a) to Sprint Corporation's Quarterly Report on Form
10-Q for the quarter ended September 30, 2000 and incorporated
herein by reference).
(f) Five-Year Credit Agreement, dated as of August 7, 1998, among
Sprint Corporation and Sprint Capital Corporation, as Borrowers,
and the initial Lenders named therein, as Initial Lenders, and
Citibank, N.A., as Administrative Agent, and Morgan Guaranty
Trust Company of New York, as Syndication Agent, and Bank of
America National Trust and Savings Association and The Chase
Manhattan Bank, as Documentation Agents (filed as Exhibit 10.24
to Sprint Corporation Registration Statement on Form S-3 (No.
333-64241) and incorporated herein by reference).
(10) Executive Compensation Plans and Arrangements:
(g) 1990 Stock Option Plan, as amended.
(h) 1990 Restricted Stock Plan, as amended (filed as Exhibit 10(h) to
Sprint Corporation Annual Report on Form 10-K for the year ended
December 3, 1999 and incorporated herein by reference).
(i) Executive Deferred Compensation Plan, as amended (filed as
Exhibit 10(i) to Sprint Corporation Annual Report on Form 10-K
for the year ended December 31, 1999 and incorporated herein by
reference). Summary of Amendments to the Executive Deferred
Compensation Plan.
(j) Management Incentive Stock Option Plan, as amended.
13
(k) 1997 Long-Term Stock Incentive Program, as amended (filed as
Exhibit 10(d) to Sprint Corporation Quarterly Report on Form 10-Q
for the quarter ended September 30, 2000 and incorporated herein
by reference).
(l) 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).
(m) Amended and Restated Centel Directors Deferred Compensation Plan
(filed as Exhibit 10(m) to Sprint Corporation Annual Report on
Form 10-K for the year ended December 31, 1999 and incorporated
herein by reference).
(n) 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).
(o) 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).
(p) 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).
(q) 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).
(r) Management Incentive Plan, as amended.
(s) 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).
(t) 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).
(u) Agreements Regarding Special Compensation and Post Employment
Restrictive Covenants between Sprint Corporation and certain of
its Executive Officers (filed as 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, Exhibit
10(w) to Sprint Corporation Annual Report on Form 10-K for the
year ended December 31, 1997, Exhibit 10(b) to Sprint Corporation
Quarterly Report on Form 10-Q for the quarter ended June 30,
1998, and Exhibit 10.4 to Sprint Spectrum L.P. Quarterly Report
on Form 10-Q for the quarter ended March 31, 1997 and
incorporated herein by reference).
(v) Director's Deferred Fee Plan, as amended (filed as Exhibit 10 (v)
to Sprint Corporation Annual Report on Form 10-K for the year
ended December 31, 1999 and incorporated herein by reference).
(w) Form of Contingency Employment Agreements between Sprint
Corporation and certain of its executive officers (filed as
Exhibit 10(h) to Sprint Corporation Quarterly Report on Form 10-Q
for the quarter ended September 30, 2000 and incorporated herein
by reference).
(x) 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).
(y) Summary of Executive Officer Benefits and Board of Directors
Benefits and Fees.
(z) 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).
(aa) Special Incentive Plan (filed as Exhibit 10(g) to Sprint
Corporation Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000 and incorporated herein by reference).
14
(bb) Employment Agreements dated as of February 26, 2001 by and among
Sprint Corporation, Sprint/United Management Company and William
T. Esrey and Ronald T. LeMay.
(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
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
On October 17, 2000, Sprint filed a Current Report on Form 8-K dated
October 17, 2000, in which it reported that it had announced that its Board
of Directors had approved a proposal to offer employees a choice to cancel
certain stock options granted to them in 2000 in exchange for new options,
to be granted six months and one day from the date the old options are
cancelled, to purchase an equal number of the same class of shares.
On February 20, 2001, Sprint filed a Current Report on Form 8-K dated
December 13, 2000, in which it reported that it had announced fourth
quarter 2000 and calendar year 2000 results. It also reported that, on
December 13, 2000, a shareholder had filed a derivative action purportedly
on behalf of Sprint against certain of its current and former officers and
directors.
The news release regarding fourth quarter 2000 and calendar year 2000
results, which was included in the Current Report, included the following
financial information:
FON Group Combined Statements of Operations
FON Group Selected Operating Results
FON Group Proforma Financial Information
FON Group Supplemental Operating Information
FON Group Condensed Combined Balance Sheets
FON Group Condensed Combined Cash Flow Information
PCS Group Combined Statements of Operations
PCS Group Supplemental Operating Information
PCS Group Net Customer Additions
PCS Group Condensed Combined Balance Sheets
PCS Group Condensed Combined Cash Flow Information
Sprint Corporation Condensed Consolidated Balance Sheets
Sprint Corporation Condensed Consolidated Cash Flow Information
(c) Exhibits are listed in Item 14(a).
15
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 12, 2001
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 12th day of March, 2001.
/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
16
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 12th day of March, 2001.
/s/ DuBose Ausley /s/ Ronald T. LeMay
- ------------------------------------- -------------------------------------
DuBose Ausley, Director Ronald T. LeMay, Director
/s/ Warren L. Batts /s/ Linda K. Lorimer
- ------------------------------------- -------------------------------------
Warren L. Batts, Director Linda K. Lorimer, Director
/s/ W. T. Esrey /s/ Charles E. Rice
- ------------------------------------- -------------------------------------
William T. Esrey, Director Charles E. Rice, Director
/s/ Irvine O. Hockaday, Jr. /s/ Louis W. Smith
- ------------------------------------- -------------------------------------
Irvine O. Hockaday, Jr., Director Louis W. Smith, Director
/s/ Harold S. Hook /s/ Stewart Turley
- ------------------------------------- -------------------------------------
Harold S. Hook, Director Stewart Turley, Director
17
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Page
Reference
ANNEX I ---------
SPRINT CORPORATION
Selected Financial Data I-1
Management's Discussion and Analysis of Financial Condition and
Results of Operations I-3
Consolidated Financial Statements
Management Report I-13
Report of Independent Auditors I-14
Consolidated Statements of Operations for each of the three years
ended December 31, 2000 I-15
Consolidated Statements of Comprehensive Income (Loss) for each of
the three years ended December 31, 2000 I-17
Consolidated Balance Sheets as of December 31, 2000 and 1999 I-18
Consolidated Statements of Cash Flows for each of the three years
ended December 31, 2000 I-19
Consolidated Statements of Shareholders' Equity for each of the
three years ended December 31, 2000 I-20
Notes to Consolidated Financial Statements I-21
Financial Statement Schedule
Schedule II--Consolidated Valuation and Qualifying Accounts for each
of the three years ended December 31, 2000 I-41
ANNEX II
SPRINT FON GROUP
Selected Financial Data II-1
Management's Discussion and Analysis of Financial Condition and
Results of Operations II-2
Combined Financial Statements
Management Report II-10
Report of Independent Auditors II-10
Combined Statements of Operations for each of the three years ended
December 31, 2000 II-11
Combined Statements of Comprehensive Income for each of the three
years ended December 31, 2000 II-12
Combined Balance Sheets as of December 31, 2000 and 1999 II-13
Combined Statements of Cash Flows for each of the three years ended
December 31, 2000 II-14
Notes to Combined Financial Statements II-15
Financial Statement Schedule
Schedule II--Combined Valuation and Qualifying Accounts for each of
the three years ended December 31, 2000 II-28
ANNEX III
SPRINT PCS GROUP
Selected Financial Data III-1
Management's Discussion and Analysis of Financial Condition and
Results of Operations III-2
Combined Financial Statements
Management Report III-8
Report of Independent Auditors III-9
Combined Statements of Operations for each of the three years ended
December 31, 2000 III-11
Combined Statements of Comprehensive Loss for each of the three
years ended December 31, 2000 III-12
Combined Balance Sheets as of December 31, 2000 and 1999 III-13
Combined Statements of Cash Flows for each of the three years ended
December 31, 2000 III-14
Notes to Combined Financial Statements III-15
Financial Statement Schedule
Schedule II--Combined Valuation and Qualifying Accounts for each of
the three years ended December 31, 2000 III-28
Annex I
SPRINT CORPORATION
Consolidated Financial Information
SELECTED FINANCIAL DATA Sprint Corporation
- -------------------------------------------------------------------------------
2000 1999 1998(/1/) 1997(/1/) 1996(/1/)
- -------------------------------------------------------------------------------
(millions, except per share data)
Results of Operations
- -------------------------------------------------------------------------------
Net operating revenues $23,613 $20,265 $17,144 $14,947 $13,874
Operating income
(loss)(/2/) 505 (307) 190 2,451 2,267
Income (Loss) from
continuing
operations(/2/),(/3/) (576) (745) 585 1,094 1,253
Earnings per Share and
Dividends
- -------------------------------------------------------------------------------
Earnings per common share
from Continuing
operations:(/2/),(/3/)
Diluted $ NA $ NA $ NM $ 2.51 $ 2.93
Basic NA NA NM 2.54 2.97
Dividends per common
share NA NA 0.75 1.00 1.00
Earnings (Loss) per Share
and Dividends(/4/),(/5/)
- -------------------------------------------------------------------------------
Earnings (Loss) per
common share from
Continuing
operations:(/2/),(/3/)
Sprint FON Group
(diluted) $ 1.45 $ 1.97 $ 1.93 $ 1.73 $ 1.61
Sprint FON Group (basic) 1.47 2.01 1.96 1.76 1.63
Sprint PCS Group
(diluted and basic) (1.95) (2.71) (2.21) (1.98) NA
Dividends per FON common
share 0.50 0.50 0.50 0.50 0.50
Financial Position
- -------------------------------------------------------------------------------
Total assets $42,601 $39,250 $33,257 $18,274 $16,915
Property, plant and
equipment, net 25,316 21,969 18,983 11,494 10,464
Total debt (including
short-term borrowings) 18,719 16,772 12,189 3,880 3,274
Shareholders' equity 13,963 13,560 12,448 9,025 8,520
Cash Flow Data
- -------------------------------------------------------------------------------
Net cash from operating
activities--continuing
operations(/6/) $ 4,315 $ 1,952 $ 4,199 $ 3,372 $ 2,404
Capital expenditures 7,152 6,114 4,231 2,863 2,434
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/) Sprint's 1998 results of operations include Sprint PCS' operating results
on a consolidated basis for the entire year. The cable partners' share of
losses through the PCS restructuring date has been reflected as "Other
partners' loss in Sprint PCS" in the Consolidated Statements of
Operations. Before 1998, Sprint's investment in Sprint PCS was accounted
for using the equity method. Sprint PCS' financial position at year-end
1998 has also been reflected on a consolidated basis. Cash flow data
reflects Sprint PCS' cash flows only after the PCS restructuring date.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--General" for more information.
(/2/) In 2000, the FON Group recorded a nonrecurring charge of $238 million,
which principally represents a write-down of goodwill, and a $163 million
nonrecurring charge for costs associated with the proposed WorldCom
merger, which was terminated. The PCS Group recorded costs associated
with the terminated WorldCom merger of $24 million. These charges reduced
operating income by $425 million and increased the loss from continuing
operations by $273 million. In 1998, the PCS Group recorded a
nonrecurring charge to write off $179 million of acquired in-process
research and development costs related to the PCS restructuring. This
charge reduced operating income and income from continuing operations by
$179 million. The FON Group recorded nonrecurring charges of $20 million
in 1997 and $60 million in 1996 related to litigation within the global
markets division. These charges reduced income from continuing operations
by $13 million in 1997 and $36 million in 1996.
(/3/) In 2000, the FON Group recorded nonrecurring charges of $122 million
related to write-downs of certain equity investments. These charges
increased the loss from continuing operations by $109 million. Also in
2000, the FON Group recorded net nonrecurring gains of $71 million from
the sale of an independent directory publishing operation and from
investment activities, which reduced the loss from continuing operations
by $44 million. In 2000, the PCS Group recorded a net nonrecurring gain
of $28 million from the sale of customers and network infrastructure to a
PCS affiliate. This gain reduced the loss from continuing operations by
$18 million. In 1999, the FON Group recorded net nonrecurring gains of
$54 million from investment activities which reduced the loss from
continuing operations by $35 million. In 1998, the FON Group recorded net
nonrecurring gains of $104 million mainly from the sale of local
exchanges. This increased income from continuing operations by $62
million. In 1997, the FON Group recorded nonrecurring gains of $71
million mainly from sales of local exchanges and certain investments.
These gains increased income from continuing operations by $44 million.
(/4/) In the 2000 first quarter, Sprint effected a two-for-one stock split of
Sprint's PCS common stock. In the 1999 second quarter, Sprint effected a
two-for-one stock split of its Sprint FON common stock. As a result,
diluted and basic earnings per common share and dividends for Sprint FON
common stock and diluted and basic loss per common share for Sprint PCS
common stock have been restated for periods before these stock splits.
I-1
(/5/) Earnings per share and dividends for the FON Group for periods prior to
1999 are on a pro forma basis and assume the FON shares created in the
1998 recapitalization of Sprint's common stock existed for such periods.
Loss per share for the PCS Group for periods prior to 1999 is on a pro
forma basis and assumes the PCS restructuring, the recapitalization, the
purchase of 5.1 million PCS shares by France Telecom and Deutsche Telekom
that occurred in connection with the restructuring and the PCS Group's
write-off of $179 million of acquired in-process research and development
costs occurred at the beginning of 1997. These pro forma amounts are for
comparative purposes only and do not necessarily represent what actual
results of operations would have been had the transactions occurred at
the beginning of 1997, nor do they indicate the results of future
operations.
(/6/) The 1996 amount was reduced by $600 million for cash required to
terminate an accounts receivable sales agreement.
NM = Not meaningful
NA = Not applicable
I-2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Sprint Corporation
- --------------------------------------------------------------------------------
General
- --------------------------------------------------------------------------------
On July 13, 2000, Sprint and WorldCom, Inc. (WorldCom) announced that the
boards of directors of both companies terminated their merger agreement,
previously announced in October 1999, as a result of regulatory opposition to
the merger. In the 2000 second quarter, Sprint recognized a one-time, pre-tax
charge of $187 million for costs associated with the terminated merger.
In the 2000 fourth quarter, Sprint completed its analysis of the valuation of
various FON Group assets and investments resulting from its reassessment of the
FON Group's business strategies in response to recent changes in the overall
telecommunications industry. This analysis resulted in two asset impairment
charges. The first was a $238 million pre-tax charge primarily related to
goodwill associated with Sprint's Paranet operations. The second was an $87
million pre-tax charge related to the write-down of an equity method
investment.
In January 2000, Sprint reached a definitive agreement with France Telecom (FT)
and Deutsche Telekom AG (DT) to sell its interest in Global One. In February
2000, Sprint received $1.1 billion in cash and was repaid $276 million for
advances for its entire stake in Global One. Sprint's equity share of the
results of Global One has been reported as a discontinued operation in Sprint's
earnings for all periods presented.
In November 1998, Sprint's shareholders approved the formation of the FON Group
and the PCS Group and the creation of the FON stock and the PCS stock. In
addition, Sprint purchased the remaining ownership interests in Sprint Spectrum
Holding Company, L.P. and PhillieCo, L.P. (together, Sprint PCS), other than a
minority interest in Cox Communications PCS, L.P. (Cox PCS). Sprint acquired
these ownership interests from Tele-Communications, Inc., Comcast Corporation
and Cox Communications, Inc. (the Cable Partners). In exchange, Sprint issued
the Cable Partners special low-vote PCS shares and warrants to acquire
additional PCS shares. Sprint also issued the Cable Partners shares of a new
class of preferred stock convertible into PCS shares. The purchase of the Cable
Partners' interests is referred to as the PCS Restructuring. In the 1999 second
quarter, Cox Communications, Inc. exercised a put option requiring Sprint to
purchase the remaining 40.8% interest in Cox PCS. Sprint issued additional low
vote PCS shares in exchange for this interest.
Also in November 1998, Sprint reclassified each of its publicly traded common
shares into one share of FON stock and 1/2 share of PCS stock. This
recapitalization was tax-free to shareholders. Each Class A common share owned
by FT and DT was reclassified to represent an equity interest in the FON Group
and the PCS Group that entitles FT and DT to one share of FON stock and 1/2
share of PCS stock. These transactions are referred to as the Recapitalization.
In connection with the PCS Restructuring, FT and DT purchased 5.1 million
additional PCS shares (pre-split basis) to maintain their voting power in
Sprint (Top-up).
The PCS stock is intended to reflect the performance of Sprint's wireless PCS
operations. These operations are referred to as the PCS Group.
The FON stock is intended to reflect the performance of all of Sprint's other
operations. During 2000, Sprint changed the FON Group's segment reporting to
align financial reporting with changes in how Sprint manages the FON Group's
operations and assesses its performance. The FON group operates in the
following segments:
. Global markets division
. Local division
. Product distribution and directory publishing businesses.
FON and PCS shareholders are subject to the risks related to all of Sprint's
businesses, assets and liabilities. Owning FON or PCS shares does not represent
a direct legal interest in the assets and liabilities of the Groups. Rather,
shareholders remain invested in Sprint and continue to vote as a single voting
class for Board member elections and most other company matters.
FON Group or PCS Group events affecting Sprint's consolidated statements of
operations and balance sheets could, in turn, affect the other Group's
financial statements or stock price.
Net losses of either Group, and dividends or distributions on, or repurchases
of, PCS stock or FON stock will reduce Sprint funds legally available for
dividends on both Groups' stock. Sprint does not expect to pay dividends on the
PCS shares in the foreseeable future.
Sprint's "Management's Discussion and Analysis of Financial Condition and
Results of Operations" (MD&A) should be read along with the FON Group's MD&A
and the PCS Group's MD&A.
I-3
- --------------------------------------------------------------------------------
Forward-looking Information
- --------------------------------------------------------------------------------
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.
Some factors that could cause actual results to differ include:
. the effects of vigorous competition in the markets in which Sprint
operates;
. the costs and business risks associated with providing new services and
entering new markets necessary to provide nationwide or global services;
. the ability of the PCS Group to continue to grow a significant market
presence;
. the effects of mergers and consolidations within the telecommunications
industry;
. the uncertainties related to Sprint's strategic investments;
. the impact of any unusual items resulting from ongoing evaluations of
Sprint's business strategies;
. unexpected results of litigation filed against Sprint;
. 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, including the impact
of the Telecommunications Act of 1996 (Telecom Act), or other external
factors over which Sprint has no control; and
. other risks referenced from time to time in Sprint's filings with the
Securities and Exchange Commission.
The words "estimate," "project," "intend," "expect," "believe" and similar
expressions are intended to identify forward-looking statements. Forward-
looking statements are found throughout MD&A. The reader should not place undue
reliance on forward-looking statements, which speak only as of the date of this
report. Sprint is not obligated to publicly release any revisions to forward-
looking statements to reflect events after the date of this report or
unforeseen events.
- --------------------------------------------------------------------------------
General Overview of the Sprint FON Group
- --------------------------------------------------------------------------------
Global Markets Division
The global markets division provides a broad suite of communications services
targeted to domestic business and residential customers, multinational
corporations and other communications companies. These services include
domestic and international voice; data communications such as Internet and
frame relay access and transport, web hosting, virtual private networks, and
managed security services; and broadband services.
Sprint is deploying integrated communications services, referred to as Sprint
ION(SM). Sprint ION extends Sprint's existing network capabilities to the
customer and enables Sprint to provide the network infrastructure to meet
customers' demands for advanced services including integrated voice, data,
Internet and video. It is also expected to be the foundation for Sprint to
provide advanced services in the competitive local service market. Sprint uses
various advanced services last-mile technologies, including dedicated access
and Digital Subscriber Line (xDSL), and expects to use Multipoint Multichannel
Distribution Services (MMDS).
The global markets division also includes the operating results of the cable TV
service operations of the broadband fixed wireless companies after their 1999
acquisition dates. During 2000, Sprint converted several markets served by MMDS
capabilities from cable TV services to high-speed data services. Global markets
division's operating results reflect the development costs and the operating
revenues and expenses of these broadband fixed wireless services. Sprint
intends to provide broadband data and voice services to additional markets
served by these capabilities.
Included in the global markets division are the costs of establishing
international operations beginning in 2000.
This division also includes the FON Group's investments in EarthLink, Inc., an
Internet service provider; Call-Net, a long distance provider in Canada;
Intelig, a long distance provider in Brazil; and certain other
telecommunications investments and ventures.
Local Division
The local division consists mainly of regulated local phone companies serving
approximately 8.3 million access lines in 18 states. It provides local phone
services, access by phone customers and other carriers to its local network,
consumer long distance services to customers within its franchise territories,
sales of telecommunications equipment, and other long distance services within
certain regional calling areas.
Product Distribution and Directory Publishing Businesses
The product distribution business provides wholesale distribution services of
telecommunications products. The directory publishing business publishes and
markets white and yellow page phone directories.
I-4
- --------------------------------------------------------------------------------
General Overview of the Sprint PCS Group
- --------------------------------------------------------------------------------
The PCS Group includes Sprint's wireless PCS operations. It operates the only
100% digital PCS wireless network in the United States with licenses to provide
service nationwide using a single frequency and a single technology. At year-
end 2000, the PCS Group, together with affiliates, operated PCS systems in over
300 metropolitan markets, including the 50 largest U.S. metropolitan areas. The
PCS Group has licenses to serve more than 280 million people in all 50 states,
Puerto Rico and the U.S. Virgin Islands. The PCS Group's service, including
affiliates, now reaches more than 220 million people. The PCS Group provides
nationwide service through:
. operating its own digital network in major U.S. metropolitan areas,
. affiliating with other companies, mainly in and around smaller U.S.
metropolitan areas,
. roaming on other providers' analog cellular networks using dual-
band/dual-mode handsets, and
. roaming on other providers' digital PCS networks that use code division
multiple access (CDMA).
The PCS Group also provides wholesale PCS services to companies that resell the
services to their customers on a retail basis. These companies pay the PCS
Group a discounted price for their customers' usage, but bear the costs of
acquisition and customer service.
The PCS Group also includes its investment in Pegaso Telecomunicaciones, S.A.
de C.V. (Pegaso), a wireless PCS operation in Mexico. This investment is
accounted for using the equity method.
The wireless industry, including the PCS Group, typically generates a
significantly higher number of subscriber additions and handset sales in the
fourth quarter of each year compared to the remaining quarters. This is due to
the use of retail distribution, which is dependent on the holiday shopping
season; the timing of new products and service introductions; and aggressive
marketing and sales promotions.
- --------------------------------------------------------------------------------
Results of Operations
- --------------------------------------------------------------------------------
Consolidated
Total net operating revenues were as follows:
- -------------------------------------------
2000 1999 1998
- -------------------------------------------
(millions)
FON Group $17,688 $17,160 $15,958
PCS Group 6,341 3,373 1,294
Intergroup
eliminations (416) (268) (108)
- -------------------------------------------
Net operating
revenues $23,613 $20,265 $17,144
-------------------------
Income (Loss) from continuing operations was as follows:
- --------------------------------------------
2000 1999 1998
- --------------------------------------------
(millions)
FON Group $ 1,292 $ 1,736 $ 1,675
PCS Group (1,868) (2,481) (1,090)
- --------------------------------------------
Income (Loss)
from continuing
operations $ (576) $ (745) $ 585
-------------------------
Income (loss) from continuing operations as presented in the above table
includes nonrecurring items. In 2000, these items include charges of $152
million primarily related to a write-down of goodwill within the FON Group,
$121 million for costs associated with the terminated WorldCom merger, $109
million for the write-downs of certain equity investments within the FON Group,
net gains of $44 million from the sale of an independent directory publishing
operation and investment activities in the FON Group, and a $18 million gain
from the sale of customers and network infrastructure to a PCS affiliate. 1999
includes a gain of $35 million from investment activities in the FON Group.
1998 includes a charge to write-off $179 million of acquired in-process
research and development costs related to the PCS restructuring, and a gain of
$62 million mainly from the sale of local exchanges by the FON Group.
Sprint FON Group
- --------------------------------------------
2000 1999 1998
- --------------------------------------------
(millions)
Net operating
revenues $17,688 $17,160 $15,958
Operating
expenses 15,255 14,230 13,198
- --------------------------------------------
Operating income $ 2,433 $ 2,930 $ 2,760
-------------------------
Operating margin 13.8% 17.1% 17.3%
-------------------------
Capital
expenditures $ 4,105 $ 3,534 $ 3,159
-------------------------
Operating expenses in 2000 include charges of $238 million, primarily related
to a write-down of goodwill within the global markets division, and a $163
million charge for costs associated with the terminated WorldCom merger. These
items have been excluded from the following discussions.
Beginning in 2000, the FON Group combined its long distance operation, Sprint
ION, broadband fixed wireless services and certain other ventures into one
division, global markets, to align financial reporting with changes in how
Sprint manages operations and assesses performance. The global markets division
now includes four major revenue streams: voice, data, Internet and other. In
connection with the resegmentation, the FON Group shifted the recognition of
consumer long distance revenues and expenses associated with customers in its
local franchise territories from the global markets division to the local
division. Prior periods have been restated to reflect these changes.
I-5
Net Operating Revenues
Net operating revenues increased 3% in 2000 and 8% in 1999. These increases
reflect growth in each of the three FON Group segments: global markets, local
and product distribution and directory publishing.
Global Markets Division
Net operating revenues increased 2% in 2000 and 8% in 1999. The increases
mainly reflect strong data communications services revenue growth. A more
competitive pricing environment and a change in the mix of products sold more
than offset minute growth of 18% in 2000. Strong minute growth of 22% in 1999
was partly offset by a more competitive pricing environment and a change in the
mix of products sold. The minute growth in 2000 was also offset by a reduction
in access cost pass-throughs resulting from the implementation of the Coalition
for Affordable Local and Long Distance Service proposal (CALLS).
Voice revenues decreased 5% in 2000 and increased 5% in 1999. The 2000 decrease
was largely due to a decline in consumer voice revenues as a result of a more
competitive pricing environment, lower calling card usage due to the increased
use of wireless phones, and the implementation of CALLS. The 1999 increase
mainly reflects increased wholesale voice revenues due to strong minute growth
mainly from international calls and increased inbound and outbound toll-free
calls.
Data revenues reflect sales of current-generation data services, including
asynchronous transfer mode and frame relay services. These revenues increased
14% in 2000 and 21% in 1999 due to increased sales as a result of an increased
emphasis on these services.
Internet revenues increased 50% in 2000 and 42% in 1999 due to strong growth in
dial-up Internet service provider-related revenues and dedicated service
revenues. Internet revenues showed strong growth because of continued demand
and increased use of the Internet.
Other revenues increased 5% in 2000 and decreased 13% in 1999. The 2000
increase was due to sales of capacity on transoceanic cable and the inclusion
of a full year of revenues from the cable TV service operations of the
broadband fixed wireless companies purchased in 1999 largely offset by a
decline in legacy data services. The 1999 decrease was due to a decline in
legacy data services.
Local Division
Beginning in July 2000, Sprint changed its transfer pricing for certain
transactions between FON Group entities to more accurately reflect market
pricing. In addition, Sprint's local division sold a customer service and
telemarketing organization to the PCS Group at the beginning of the 2000 second
quarter. In November 1998, Sprint sold approximately 81,000 access lines in
Illinois. For comparative purposes, the following discussion of local division
results assumes the transfer pricing change, the sale of the customer service
and telemarketing organization, and the sale of exchanges occurred at the
beginning of 1998.
Net operating revenues increased 5% in 2000 and 7% in 1999. These increases
mainly reflect increased sales of network-based services such as Caller ID and
Call Waiting, increased long distance revenues, and customer access line
growth. Sales of network-based services and long distance services increased
due to strong demand for bundled services which combine local service, network-
based features and long distance calling. Customer access lines increased 4% in
2000 and 5% in 1999.
Local service revenues, derived from local exchange services, grew 6% in 2000
and 9% in 1999 because of continued demand for network-based services, customer
access line growth and growth in data products. Revenue growth in 1999 also
reflects increased revenues from maintaining customer wiring and equipment.
Network access revenues, derived from long distance phone companies using the
local network to complete calls, increased 4% in 2000 and 2% in 1999. These
revenues reflect increased revenues from special access services and a 2% and
4% increase in minutes of use in 2000 and 1999, respectively. These increases
were offset by FCC-mandated access rate reductions. Access rate reductions took
effect in January and July 1998, July 1999 and July 2000.
Toll service revenues are mainly derived from providing consumer long distance
services to customers within Sprint's local franchise territories and other
long distance services within specified regional calling areas, or LATAs, that
are beyond the local calling area. These revenues increased 17% in 2000 and 22%
in 1999. These increases reflect the success of bundled services which include
long distance calling.
Other revenues decreased 11% in 2000 and 1% in 1999. The decrease in 2000 was
mainly due to a decrease in equipment sales as a result of a planned shift in
focus to selling higher margin products.
Product Distribution & Directory Publishing Businesses
Net operating revenues increased 10% in 2000 and 3% in 1999. Nonaffiliated
revenues accounted for over 60% of revenues in 2000 and 1999. These revenues
increased 11% in 2000 and 12% in 1999. The increase in nonaffiliated revenues
in 2000 was
I-6
mainly due to the consolidation of a directory publishing partnership. In the
second half of 2000, the directory publishing partnership, previously accounted
for as an equity method investment, was fully consolidated due to a
restructuring in the partnership management. Sales to affiliates increased 8%
in 2000 and decreased 10% in 1999 due to changes in the local divisions capital
program.
Operating Expenses
The FON Group's operating expenses increased 4% in 2000 and 8% in 1999, mainly
to support revenue growth.
Global Markets Division
Global markets division total operating expenses increased 6% in 2000 and 9% in
1999. Costs of services and products include interconnection costs paid to
local phone companies, other domestic service providers and foreign phone
companies to complete calls made by the division's domestic customers, costs to
operate and maintain the long distance network, costs of equipment and
transmission capacity sales, and costs related to the development and
deployment of Sprint ION. Costs of services and products increased 12% in 2000
and 3% in 1999.
Interconnection costs remained flat in 2000 and increased 3% in 1999.
Reductions in per-minute international access costs as well as domestic access
costs offset the impact of increased calling volumes in 2000. Increased calling
volumes in 1999 were partly offset by reductions in per-minute costs for both
domestic and international access. The domestic rate reductions were generally
due to the FCC-mandated access rate reductions that took effect in January and
July 1998, July 1999 and July 2000. The access rate reductions in July 2000
included the implementation of CALLS.
All other costs of services and products increased 42% in 2000 and 5% in 1999.
The 2000 increase was largely due to the expansion of Sprint ION business
services nationwide and the launch of consumer services in select markets as
well as increased sales of capacity on transoceanic cable. Increased costs of
services and products in both 2000 and 1999 were driven by growth in data
services. The 1999 increase was also impacted by increases in network equipment
operating leases expense.
Selling, general and administrative (SG&A) expense decreased 4% in 2000 and
increased 19% in 1999. The 2000 decrease is due to a strong emphasis on cost
control. The 1999 increase mainly reflects the overall growth of the business
as well as increased marketing and promotions to support products and services,
including the rollout of an airline alliance program which enabled customers to
earn frequent flyer miles when they used Sprint's services.
SG&A expense includes costs associated with the continued development and
deployment activities for Sprint ION, including costs for systems and
operations development, product development and advertising associated with
market launches.
Depreciation and amortization expense increased 7% in 2000 and 13% in 1999. The
increases mainly reflect a rapidly increasing asset base for Sprint ION as well
as an increased asset base to enhance network reliability, meet increased
demand for voice and data-related services and upgrade capabilities for
providing new products and services.
Local Division
The following local division discussion assumes the transfer pricing changes,
the sale of the customer service and telemarketing organization and sales of
exchanges occurred at the beginning of 1998. See "Net Operating Revenues--Local
Division" for more details.
Local division operating expenses increased 1% in 2000 and increased 5% in
1999. Costs of services and products include costs to operate and maintain the
local network and costs of equipment sales. These costs decreased 1% in 2000
and increased 6% in 1999. The 2000 decrease was due to the decline in equipment
sales and the success of cost control initiatives. The 1999 increase was driven
by customer access line growth, increased equipment sales, an increased
emphasis on service levels, increased telemarketing expenses and storm related
costs.
SG&A expense decreased 1% in 2000 and remained flat in 1999. The 2000 decrease
was due to a strong emphasis on cost control. In 1999, increased marketing
costs to promote new products and services and increased customer service costs
related to customer access line growth was offset by a strong emphasis on cost
control.
Depreciation and amortization expense increased 7% in 2000 and 9% in 1999,
mainly from increased capital expenditures in switching and transport
technologies which have shorter asset lives.
Product Distribution & Directory Publishing Businesses
The product distribution and directory publishing businesses' costs of services
and products increased 9% in 2000 and increased 1% in 1999 reflecting increased
equipment sales. The 2000 increase was also due to the consolidation of the
directory publishing partnership. SG&A expense increased 14% in 2000 and 1999.
The 2000 increase was due to costs related to the transformation of the product
distribution business to a web-enabled business as well as the consolidation of
the directory publishing partnership. The 1999 increase was the result of
staffing demands related to nonaffiliated sales growth.
I-7
Sprint PCS Group
- --------------------------------------------------
2000 1999 1998
- --------------------------------------------------
(millions)
Net operating revenues $ 6,341 $ 3,373 $ 1,294
Operating expenses 8,269 6,610 3,864
- --------------------------------------------------
Operating loss $(1,928) $(3,237) $(2,570)
------------------------------
Capital expenditures $ 3,047 $ 2,580 $ 1,072
------------------------------
The PCS Group's 1999 results of operations reflect the first full year of
combined results after the PCS Restructuring. The PCS Group's 1998 results of
operations included SprintCom's operating results as well as Sprint PCS'
operating results on a consolidated basis for the entire year. (See "Pro Forma
Sprint PCS Group" section below for a discussion of pro forma results of
operations.)
In 2000, operating expenses include a nonrecurring charge of $24 million for
costs associated with the terminated WorldCom merger. In 1998, operating
expenses include a write-off of $179 million associated with the cost of nine
in-process research and development projects acquired in connection with the
PCS Restructuring.
The PCS Group markets its products through multiple distribution channels,
including its own retail stores as well as other retail outlets. Equipment
sales to one retail chain and the subsequent service revenues generated by
sales to its customers accounted for 25% of net operating revenues in 2000, 28%
in 1999 and 25% in 1998.
Pro Forma Sprint PCS Group
To provide a more meaningful analysis of the PCS Group's underlying operating
results, the following supplemental discussion presents 1998 on a pro forma
basis and assumes the PCS Restructuring and the write-off of acquired in-
process research and development costs occurred prior to 1998.
- -------------------------------------------------------------------------
2000 1999 1998
- -------------------------------------------------------------------------
(millions)
Net operating revenues $ 6,341 $ 3,373 $ 1,294
Operating expenses 8,269 6,610 3,934
- -------------------------------------------------------------------------
Operating loss $(1,928) $(3,237) $(2,640)
-----------------------------------------------------
Capital expenditures (including capital lease
obligations) $ 3,047 $ 2,616 $ 2,904
-----------------------------------------------------
Net Operating Revenues
Net operating revenues include subscriber revenues and sales of handsets and
accessory equipment. Subscriber revenues consist of monthly recurring charges,
usage charges and activation fees. Subscriber revenues increased 94% in 2000
mainly reflecting an increase in the average number of customers. The PCS Group
added 3.8 million customers in 2000 to end the year with over 9.5 million
customers in more than 300 metropolitan markets nationwide. Average monthly
service revenue per user (ARPU) was $59 for 2000 compared to $58 in 1999 and
$60 in 1998. The increase in ARPU in 2000 was partly due to the implementation
of activation charges in the second quarter. Subscriber revenues were also
aided by the increase in resale customers. The companies that the PCS Group
serves on a wholesale basis added 238,000 customers in 2000, ending the year
with approximately 310,000 customers.
In 2000, the customer churn rate improved to 2.8% from 3.4% in 1999 and 3.3% in
1998. The improvement reflects expanded network coverage and the success of
several customer retention initiatives.
Revenues from sales of handsets and accessories were approximately 14% of net
operating revenues in 2000, 17% in 1999 and 18% in 1998. As part of the PCS
Group's marketing plans, handsets are normally sold at prices below the PCS
Group's cost.
Operating Expenses
Costs of services and products mainly include handset and accessory costs,
switch and cell site expenses and other network-related costs. These costs
increased 25% in 2000 and 79% in 1999 reflecting the significant growth in
customers and expanded market coverage, partly offset by a reduction in handset
unit costs.
SG&A expense mainly includes marketing costs to promote products and services
as well as salary and benefit costs. SG&A expense increased 25% in 2000 and 70%
in 1999 reflecting an expanded workforce to support subscriber growth and
increased marketing and selling costs.
Acquisition costs per gross customer addition, including equipment subsidies
and marketing costs, have improved approximately 19% in 2000 and 26% in 1999.
Lower handset unit costs and scale benefits from greater customer additions
have contributed to the improvement.
Cash costs per user (CCPU) consists of costs of service revenues, service
delivery and other general and administrative costs. CCPU was $35 in 2000, $48
in 1999 and $73 in 1998. The improvements reflect successful expense management
and scale benefits resulting from the increased customer base.
Depreciation and amortization expense consists mainly of depreciation of
network assets and amortization of intangible assets. The intangible assets
include goodwill, PCS licenses, customer base, microwave relocation costs and
assembled workforce.
I-8
Depreciation and amortization expense increased 23% in 2000 and 47% in 1999
mainly reflecting depreciation of the network assets placed in service during
2000 and 1999. The increases also reflect amortization of intangible assets
acquired in the Cox PCS purchase in the 1999 second quarter.
- --------------------------------------------------------------------------------
Nonoperating Items
- --------------------------------------------------------------------------------
Interest Expense
The effective interest rates in the following table reflect interest expense on
long-term debt only. Interest costs on short-term borrowings classified as
long-term debt, deferred compensation plans and customer deposits have been
excluded so as not to distort the effective interest rates on long-term debt.
- --------------------------------------------
2000 1999 1998
- --------------------------------------------
Effective interest rate on
long-term debt(/1/) 6.9% 7.0% 8.6%
---------------------
(/1/) The effective interest rate on long-term debt for 1998 is on a pro forma
basis as if Sprint PCS' long-term debt had been included in Sprint's
outstanding long-term debt balance all year.
Sprint's effective interest rate on long-term debt decreased in 1999 and 2000.
In the 1998 fourth quarter, Sprint refinanced $3.3 billion of the PCS Group's
debt with borrowings which have lower interest rates. The decreases also
reflect additional borrowings with lower interest rates.
Other Partners' Loss in Sprint PCS
Sprint PCS' results of operations for 1998 have been consolidated for the
entire year. The Cable Partners' share of losses through the PCS Restructuring
date has been reflected as "Other partners' loss in Sprint PCS" in the
Consolidated Statements of Operations.
Other Income (Expense), Net
Other income (expense) consisted of the following:
- ------------------------------------------------------
2000 1999 1998
- ------------------------------------------------------
(millions)
Dividend and interest income $ 30 $ 23 $ 93
Equity in net losses of affiliates (236) (73) (41)
Gains on sales of assets 92 102 156
Net losses from investments (102) (15) --
Other, net (1) 38 (37)
- ------------------------------------------------------
Total $(217) $ 75 $171
------------------------------
Dividend and interest income for all years reflects dividends earned on cost
method investments and interest earned on temporary investments. For 1998, it
also reflects interest earned on loans to unconsolidated affiliates, interest
earned on partner contributions from the Sprint PCS partners prior to the PCS
restructuring and interest earned on short-term investments following Sprint's
$5.0 billion debt offering in late 1998.
Equity in net losses of affiliates mainly includes losses from Intelig, Call-
Net, EarthLink and Pegaso. The 2000 increase is mainly due to increased Intelig
losses and losses from Pegaso after the PCS Group's 2000 second quarter initial
investment.
Gain on sales of assets in 2000 include the sale of an independent publishing
operation and the sale of certain wireless customers and associated network
infrastructure. The 1999 gains include a gain on the sale of an investment
security and a gain on the sale of network infrastructure. The 1998 gains
mainly reflect net gains on sales of local exchanges. Net losses from
investments in 2000 mainly include write-downs of certain equity investments.
Income Taxes
Sprint's consolidated effective tax rates were 17.9% in 2000, 30.5% in 1999 and
43.7% in 1998. See Note 9 of Notes to Consolidated Financial Statements for
information about the differences that caused the effective income tax rates to
vary from the statutory federal rate for income taxes related to continuing
operations.
Discontinued Operation, Net
In the 2000 first quarter, Sprint sold its interest in Global One to France
Telecom and Deutsche Telekom AG. Sprint received $1.1 billion in cash and was
repaid $276 million for advances for its entire stake in Global One. As a
result of Sprint's sale of its interest in Global One, Sprint's gain on sale
and its equity share of the results of Global One have been reported as a
discontinued operation for all periods presented.
In 2000, Sprint recorded an after-tax gain related to the sale of its interest
in Global One of $675 million. Sprint recorded after-tax losses related to
Global One of $130 million in 1999 and $135 million in 1998.
Extraordinary Items, Net
In 2000, Sprint redeemed, prior to scheduled maturities, $25 million of the FON
Group's debt and $127 million of the PCS Group's debt. These borrowings had
interest rates ranging from 7.8% to 9.7%. This resulted in a $4 million after-
tax extraordinary loss for Sprint.
In 1999, Sprint redeemed, prior to scheduled maturities, $575 million of the
broadband fixed wireless companies' debt assumed by the FON Group and $2.2
billion of the PCS Group's revolving credit facilities and other borrowings.
These borrowings had interest rates ranging from 5.6% to 14.5%. This resulted
in a $60 million after-tax extraordinary loss for Sprint.
I-9
In 1998, Sprint redeemed, prior to scheduled maturities, $138 million of the
FON Group's debt and $3.3 billion of the PCS Group's debt. These borrowings had
interest rates ranging from 7.9% to 9.3%. This resulted in a $36 million after-
tax extraordinary loss for Sprint.
- --------------------------------------------------------------------------------
Financial Condition
- --------------------------------------------------------------------------------
- ------------------------------------
2000 1999
- ------------------------------------
(millions)
Consolidated assets $42,601 $39,250
---------------
Sprint's consolidated assets increased $3.4 billion in 2000. Net property,
plant and equipment increased $3.3 billion reflecting capital expenditures to
support the PCS network buildout, long distance and local network enhancements,
and Sprint ION development and hardware deployment, partly offset by
depreciation and network asset sales. Investments in affiliates and other
assets increased $715 million, mainly reflecting capital contributions to
Sprint's equity method investees, partly offset by equity in net losses of
those affiliates and the write-down of certain equity method investments.
Offsetting decreases in Sprint's consolidated assets primarily include the
exchange of investments in equity securities for certain notes payable, the
write-down of goodwill and the sale of the net assets of the Global One
discontinued operation. Sprint's debt-to-capital ratio was 57.3% at year-end
2000 versus 55.3% at year-end 1999. See "Liquidity and Capital Resources" for
more information about changes in Sprint's Consolidated Balance Sheets.
- --------------------------------------------------------------------------------
Liquidity and Capital Resources
- --------------------------------------------------------------------------------
Consolidated cash flows for 1998 include Sprint PCS' cash flows only after the
PCS Restructuring date.
Operating Activities
- ---------------------------------------------------------------------
2000 1999 1998
- ---------------------------------------------------------------------
(millions)
FON Group $4,323 $ 3,713 $3,915
PCS Group (8) (1,692) (159)
Intergroup eliminations -- (69) 443
-----------------------
Cash flows provided by operating activities $4,315 $ 1,952 $4,199
-----------------------
Operating cash flows increased $2.4 billion in 2000 and decreased $2.2 billion
in 1999. The 2000 increase reflects decreases in working capital requirements
in both the FON Group and the PCS Group and improved operating results in the
PCS Group. The 1999 decrease mainly reflects increases in working capital in
both the FON Group and the PCS Group and the increased operating losses of the
PCS Group, partly offset by the FON Groups improved operating results.
Investing Activities
- -------------------------------------------------------------------
2000 1999 1998
- -------------------------------------------------------------------
(millions)
FON Group $(3,336) $(4,349) $(3,366)
PCS Group (3,054) (2,509) (861)
Intergroup eliminations (17) (299) (259)
- -------------------------------------------------------------------
Cash flows used by investing activities $(6,407) $(7,157) $(4,486)
-------------------------
The FON Group's capital expenditures totaled $4.1 billion in 2000, $3.5 billion
in 1999 and $3.2 billion in 1998. Global markets division capital expenditures
were incurred mainly to enhance network reliability, meet increased demand for
voice and data-related services, upgrade capabilities for providing new
products and services and to continue development and hardware deployment of
Sprint ION. The local division incurred capital expenditures to accommodate
access line growth, provide additional capacity for increased Internet traffic
and expand capabilities for providing enhanced services. Other FON Group
capital expenditures were incurred mainly for Sprint's World Headquarters
Campus. PCS Group capital expenditures, totaling $3.0 billion in 2000, $2.6
billion in 1999 and $1.1 billion in 1998, were incurred to support the PCS
network buildout. (See the PCS Group's MD&A for a pro forma presentation of
capital expenditures.)
In 2000, investing activities include $1.4 billion of proceeds from the sale of
the FON Group's interest in Global One. Investing activities also include
proceeds from sales of other assets totaling $258 million in 2000, $243 million
in 1999 and $230 million in 1998. In 1999, Sprint purchased several broadband
fixed wireless companies for $618 million excluding assumed debt.
"Investments in and loans to affiliates, net" were $889 million in 2000, $135
million in 1999 and $423 million in 1998. These amounts were for investments in
affiliates accounted for using the equity method, primarily EarthLink, Intelig
and Pegaso. Amounts for 1998 also include contributions and advances to Sprint
PCS prior to the PCS Restructuring.
I-10
Financing Activities
- -------------------------------------------------------------------
2000 1999 1998
- -------------------------------------------------------------------
(millions)
FON Group $ (969) $ 308 $ (219)
PCS Group 3,163 4,044 1,193
Intergroup eliminations 17 368 (184)
- -------------------------------------------------------------------
Cash flows provided by financing activities $2,211 $4,720 $ 790
----------------------------------------------
Financing activities reflect net proceeds from long-term debt of $2.3 billion
in 2000, $4.0 billion in 1999 and $1.4 billion in 1998. These net proceeds were
used mainly for capital investments and to fund the PCS Group's operating
losses. Sprint paid dividends of $448 million in 2000, $441 million in 1999 and
$430 million in 1998.
Also included in financing activities is proceeds from Sprint's employee stock
purchase plan of $182 million in 2000, $136 million in 1999 and $24 million in
1998.
Capital Requirements
Sprint's 2001 investing activities, mainly consisting of capital expenditures
and investments in affiliates, are expected to require cash of $9.8 to $10.3
billion. FON Group capital expenditures are expected to range between $6.0 and
$6.2 billion, and PCS Group capital expenditures are expected to be between
$3.3 and $3.5 billion. Investments in affiliates are expected to be between
$450 and $550 million. Dividend payments are expected to approximate $455
million in 2001.
In connection with the PCS Restructuring, Sprint adopted a tax sharing
agreement that provides for the allocation of income taxes between the FON
Group and the PCS Group. Sprint expects the FON Group to continue to make
significant payments to the PCS Group under this agreement because of expected
PCS Group operating losses in the near future and from using the PCS Group's
net operating loss carryforwards. These payments reflect the PCS Group's
incremental cumulative effect on Sprint's consolidated federal and state tax
liability and tax credit position. The PCS Group received payments from the FON
Group totaling $872 million in 2000, $764 million in 1999 and $20 million in
1998. See Note 1 of Notes to Consolidated Financial Statements, "Allocation of
Federal and State Income Taxes," for more details.
Liquidity
Sprint mainly uses commercial paper to fund its short-term working capital
needs. Sprint also uses the long-term bond market as well as other debt markets
to fund its needs. Sprint intends to continue borrowing funds through the U.S.
and international money and capital markets and bank credit markets to fund
capital expenditures and operating and working capital requirements.
Sprint also intends to sell $3 billion of PCS common stock in an underwritten
public offering when market or other conditions indicate that such a course of
action is advisable.
Sprint currently has revolving credit facilities with syndicates of domestic
and international banks totaling $5 billion; $3 billion of which is a 364 day
facility, renewed in August 2000, expiring in 2001, and $2 billion is a 5 year
facility expiring in 2003. Commercial paper and certain bank notes are
supported by Sprint's revolving credit facilities. Certain other notes payable
relate to a separate revolving credit facility which expires in 2002. At year-
end 2000, Sprint had total unused lines of credit of $1.8 billion.
In June 2000, Sprint issued $1.25 billion of debt securities under its $4
billion shelf registration statement with the SEC. These borrowings mature in
2002 and have interest rates ranging from 6.9% to 7.6%. At year-end 2000,
Sprint had issued a total of $2 billion of debt securities under the shelf. In
January 2001, Sprint issued debt securities using the remainder of the shelf.
See Note 18 of Notes to Consolidated Financial Statements.
In June 1999, Sprint entered into a $1 billion financing agreement to sell, on
a continuous basis with recourse, undivided percentage ownership interests in a
designated pool of its accounts receivable. Subsequent collections of
receivables sold to investors are typically reinvested in new receivables. At
year-end 2000, Sprint had borrowed $900 million with a weighted average
interest rate of 6.9% under this agreement. These borrowings mature in 2002.
Any borrowings Sprint may incur are ultimately limited by certain debt
covenants. Sprint could borrow up to an additional $9.6 billion at year-end
2000 under the most restrictive of its debt covenants.
- --------------------------------------------------------------------------------
Regulatory Developments
- --------------------------------------------------------------------------------
See "Regulatory Developments" in the FON Group's MD&A and the PCS Group's MD&A.
- --------------------------------------------------------------------------------
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
I-11
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 frequent 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. These international operations were not material
to the consolidated financial position, results of operations or cash flows at
year-end 2000. In addition, foreign currency transaction gains and losses were
not material to Sprint's 2000 results of operations. Sprint has not entered
into any significant foreign currency forward contracts or other derivative
instruments to hedge the effects of adverse fluctuations in foreign exchange
rates. As a result, Sprint was not subject to material foreign exchange risk.
- --------------------------------------------------------------------------------
Recently Issued Accounting Pronouncements
- --------------------------------------------------------------------------------
See Note 16 of Notes to Consolidated Financial Statements for a discussion of
recently issued accounting pronouncements.
I-12
MANAGEMENT REPORT
Sprint Corporation's management is responsible for the integrity and
objectivity of the information contained in this document. Management is
responsible for the consistency of reporting this information and for ensuring
that accounting principles generally accepted in the United States 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 principles of business conduct are understood
and practiced by its employees.
The financial statements included in this document have been audited by Ernst &
Young LLP, independent auditors. Their audits were conducted using auditing
standards generally accepted in the United States and their reports are
included herein.
The Board of Director's responsibility 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
I-13
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, 2000 and 1999, and the related
consolidated statements of operations, comprehensive income (loss), cash flows
and shareholders' equity for each of the three years in the period ended
December 31, 2000. Our audits also included the financial statement schedule
listed in the Index to Financial Statements and Financial Statement Schedules.
These financial statements and the schedule are the responsibility of the
management of Sprint. Our responsibility is to express an opinion on these
financial statements and the schedule based on our audits. We did not audit
the 1998 consolidated financial statements of Sprint Spectrum Holding Company,
L.P., a wholly owned subsidiary of Sprint as of December 31, 1998 and an
investment in which Sprint had a 40% interest through November 23, 1998 (as
discussed in Note 1). Such financial statements reflect revenues of $1.2
billion for the year ended December 31, 1998. The consolidated financial
statements and financial statement schedule of Sprint Spectrum Holding
Company, L.P. have been audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the 1998 revenues
for Sprint Spectrum Holding Company, L.P., is based solely on the report of
the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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
financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Sprint at December 31, 2000
and 1999, and the consolidated results of its operations and its cash flows
for each of the three years in the period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedule, 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 7 to the consolidated financial statements, in 2000
Sprint changed its accounting for service activation and certain installation
fee revenues.
Ernst & Young LLP
Kansas City, Missouri
February 1, 2001
REPORT OF INDEPENDENT AUDITORS
The Board of Directors of Sprint Corporation and Partners of Sprint Spectrum
Holding Company, L.P.
We have audited the consolidated statements of operations and cash flows of
Sprint Spectrum Holding Company, L.P. and subsidiaries for the year ended
December 31, 1998. Our audit also included the 1998 financial statement
schedule (Schedule II). These financial statements and Schedule II are the
responsibility of Partnership management. Our responsibility is to express an
opinion on these consolidated financial statements and Schedule II based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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 audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the results of operations and cash flows of Sprint Spectrum
Holding Company, L.P. and subsidiaries for the year ended December 31,1998, in
conformity with generally accepted accounting principles. Also, in our
opinion, Schedule II, when considered in relation to the basic 1998
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
Deloitte & Touche LLP
Kansas City, Missouri
February 2, 1999
I-14
CONSOLIDATED STATEMENTS OF OPERATIONS Sprint Corporation
(millions)
- -------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998
- -------------------------------------------------------------------------------
Net Operating Revenues $23,613 $20,265 $17,144
- -------------------------------------------------------------------------------
Operating Expenses
Costs of services and products 11,620 10,363 8,813
Selling, general and administrative 6,919 6,557 5,252
Depreciation 3,538 3,146 2,548
Amortization 606 506 162
Asset write-down and merger related costs 425 -- --
Acquired in-process research and development costs -- -- 179
- -------------------------------------------------------------------------------
Total operating expenses 23,108 20,572 16,954
- -------------------------------------------------------------------------------
Operating Income (Loss) 505 (307) 190
Interest expense (990) (860) (718)
Other partners' loss in Sprint PCS -- -- 1,251
Minority interest -- 20 145
Other income (expense), net (217) 75 171
- -------------------------------------------------------------------------------
Income (loss) from continuing operations before
income taxes (702) (1,072) 1,039
Income tax (expense) benefit 126 327 (454)
- -------------------------------------------------------------------------------
Income (Loss) from Continuing Operations (576) (745) 585
Discontinued operation, net 675 (130) (135)
Extraordinary items, net (4) (60) (36)
Cumulative effect of change in accounting principle (2) -- --
- -------------------------------------------------------------------------------
Net Income (Loss) $ 93 $ (935) $ 414
-------------------------
See accompanying Notes to Consolidated Financial Statements.
I-15
CONSOLIDATED STATEMENTS OF OPERATIONS (continued) Sprint Corporation
(millions, except per share data)
- -------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998(/1/)
- -------------------------------------------------------------------------------
FON COMMON STOCK
Earnings applicable to common stock $ 1,971 $ 1,574 $ 118
-------------------------
Diluted Earnings per Common Share(/2/)
Continuing operations $ 1.45 $ 1.97 $ 0.18
Discontinued operation 0.76 (0.15) (0.04)
Extraordinary items -- (0.04) --
- ---------------------------------------------------------------------
Total $ 2.21 $ 1.78 $ 0.14
-------------------------
Diluted weighted average common shares 892.4 887.2 869.0
-------------------------
Basic Earnings per Common Share(/2/)
Continuing operations $ 1.47 $ 2.01 $ 0.18
Discontinued operation 0.77 (0.15) (0.04)
Extraordinary items -- (0.05) --
- ---------------------------------------------------------------------
Total $ 2.24 $ 1.81 $ 0.14
-------------------------
Basic weighted average common shares 880.9 868.0 855.2
-------------------------
PCS COMMON STOCK
Loss applicable to common stock $(1,885) $(2,517) $ (559)
-------------------------
Basic and Diluted Loss per Common
Share(/2/)
Continuing operations $ (1.95) $ (2.71) $(0.63)
Extraordinary items -- (0.02) (0.04)
- ---------------------------------------------------------------------
Total $ (1.95) $ (2.73) $(0.67)
-------------------------
Basic and diluted weighted average common
shares 966.5 920.4 831.6
-------------------------
SPRINT COMMON STOCK
Earnings applicable to common stock $ 853
-------
Diluted Earnings per Common Share
Continuing operations $ 2.19
Discontinued operation (0.23)
Extraordinary items (0.01)
- ---------------------------------------------------------------------
Total $ 1.95
-------
Diluted weighted average common shares 438.6
-------
Basic Earnings per Common Share
Continuing operations $ 2.23
Discontinued operation (0.24)
Extraordinary items (0.01)
- ---------------------------------------------------------------------
Total $ 1.98
-------
Basic weighted average common shares 430.8
-------
DIVIDENDS PER COMMON SHARE
FON common stock(/2/) $ 0.50 $ 0.50 $0.125
-------------------------
Class A common stock $ 0.50 $ 0.625 $ 1.00
-------------------------
Sprint common stock $ 0.75
-------
(/1/) As discussed in Note 1 of Notes to Consolidated Financial Statements, the
Recapitalization occurred in November 1998. As a result, earnings per
share for Sprint common stock reflects earnings through the
Recapitalization date, while earnings (loss) per share for FON common
stock and PCS common stock reflects results from that date to year-end
1998.
(/2/) In the 2000 first quarter, Sprint effected a two-for-one stock split of
its PCS common stock. In the 1999 second quarter, Sprint effected a two-
for-one stock split of its Sprint FON common stock. As a result, basic
and diluted earnings per common share, weighted average common shares and
dividends for Sprint FON common stock and Sprint PCS common stock have
been restated for periods prior to these stock splits.
See accompanying Notes to Consolidated Financial Statements.
I-16
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) Sprint Corporation
(millions)
- ------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998
- ------------------------------------------------------------------------------
Net Income (Loss) $ 93 $(935) $414
- ------------------------------------------------------------------------------
Other Comprehensive Income (Loss)
Unrealized holding gains (losses) on securities (64) 54 21
Income tax (expense) benefit 23 (20) (8)
- ------------------------------------------------------------------------------
Net unrealized holding gains (losses) on securities during
the period (41) 34 13
Reclassification adjustment for net gains included in net
income (10) (57) --
- ------------------------------------------------------------------------------
Total net unrealized holding gains (losses) on securities (51) (23) 13
Foreign currency translation adjustments (9) -- (2)
- ------------------------------------------------------------------------------
Total other comprehensive income (loss) (60) (23) 11
- ------------------------------------------------------------------------------
Comprehensive Income (Loss) $ 33 $(958) $425
-----------------
See accompanying Notes to Consolidated Financial Statements.
I-17
CONSOLIDATED BALANCE SHEETS Sprint Corporation
(millions, except per share data)
- -------------------------------------------------------------------------------
December 31, 2000 1999
- -------------------------------------------------------------------------------
Assets
Current assets
Cash and equivalents $ 239 $ 120
Accounts receivable, net of allowance for doubtful
accounts of $389 and $274 4,028 3,408
Inventories 949 777
Prepaid expenses 366 340
Income tax receivable -- 411
Investments in equity securities -- 317
Other 391 207
- -------------------------------------------------------------------------------
Total current assets 5,973 5,580
Investments in securities 66 147
Property, plant and equipment
FON Group 30,998 27,687
PCS Group 12,117 9,411
- -------------------------------------------------------------------------------
Total property, plant and equipment 43,115 37,098
Accumulated depreciation (17,799) (15,129)
- -------------------------------------------------------------------------------
Net property, plant and equipment 25,316 21,969
Investments in and advances to affiliates 607 452
Intangible assets
Goodwill 5,425 5,745
PCS licenses 3,059 3,060
Other 1,588 1,453
- -------------------------------------------------------------------------------
Total intangible assets 10,072 10,258
Accumulated amortization (1,134) (691)
- -------------------------------------------------------------------------------
Net intangible assets 8,938 9,567
Net assets of discontinued operation -- 394
Other assets 1,701 1,141
- -------------------------------------------------------------------------------
Total $42,601 $39,250
----------------
Liabilities and Shareholders' Equity
Current liabilities
Current maturities of long-term debt $ 1,205 $ 1,087
Accounts payable 2,285 1,462
Construction obligations 997 1,039
Accrued interconnection costs 547 683
Accrued taxes 440 410
Advance billings 607 323
Payroll and employee benefits 498 638
Other 1,389 1,190
- -------------------------------------------------------------------------------
Total current liabilities 7,968 6,832
Long-term debt and capital lease obligations 17,514 15,685
Deferred credits and other liabilities
Deferred income taxes and investment tax credits 1,360 1,511
Postretirement and other benefit obligations 1,077 1,064
Other 719 598
- -------------------------------------------------------------------------------
Total deferred credits and other liabilities 3,156 3,173
Shareholders' equity
Common stock
Class A common stock, par value $2.50 per share, 200.0
shares authorized, 86.2 shares issued and outstanding
(each share represents the right to one FON share and
1/2 PCS share) 216 216
FON, par value $2.00 per share, 4,200.0 shares
authorized, 798.8 and 788.0 shares issued and 798.4 and
788.0 shares outstanding 1,598 1,576
PCS, par value $1.00 per share, 2,350.0 shares
authorized, 933.1 and 910.4 shares issued and 933.1 and
910.4 shares outstanding 933 910
PCS preferred stock, no par, 0.3 shares authorized, 0.2
shares issued and outstanding 247 247
Capital in excess of par or stated value 9,380 8,569
Retained earnings 1,578 1,961
Treasury stock, at cost, 0.4 and 0.0 shares (10) (2)
Accumulated other comprehensive income 21 81
Other -- 2
- -------------------------------------------------------------------------------
Total shareholders' equity 13,963 13,560
- -------------------------------------------------------------------------------
Total $42,601 $39,250
----------------
See accompanying Notes to Consolidated Financial Statements.
I-18
CONSOLIDATED STATEMENTS OF CASH FLOWS Sprint Corporation
(millions)
- -----------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998
- -----------------------------------------------------------------------------
Operating Activities
Net income (loss) $ 93 $ (935) $ 414
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Discontinued operation, net (675) 130 135
Extraordinary items, net 4 60 32
Equity in net losses of affiliates 256 70 892
Depreciation and amortization 4,144 3,652 2,042
Acquired in-process research and development
costs -- -- 179
Deferred income taxes and investment tax credits (205) (333) 127
Net gains on sales of assets (130) (183) (104)
Net losses on write-down of assets 365 102 --
Changes in assets and liabilities, excluding the
PCS Restructuring in 1998:
Accounts receivable, net (640) (700) 101
Inventories and other current assets 146 (778) (189)
Accounts payable and other current liabilities 947 906 733
Noncurrent assets and liabilities, net (26) (63) (126)
Other, net 36 24 (37)
- -----------------------------------------------------------------------------
Net cash provided by operating activities 4,315 1,952 4,199
- -----------------------------------------------------------------------------
Investing Activities
Capital expenditures (7,152) (6,114) (4,231)
Investments in and loans to affiliates, net (889) (135) (423)
Net proceeds from sales of assets 258 243 230
Purchase of broadband fixed wireless companies,
net of cash acquired -- (618) --
Other, net (27) (149) 206
- -----------------------------------------------------------------------------
Net cash used by continuing operations (7,810) (6,773) (4,218)
Proceeds from the sale of Global One 1,403 -- --
Net investing activities of discontinued
operation -- (384) (268)
- -----------------------------------------------------------------------------
Net cash used by investing activities (6,407) (7,157) (4,486)
- -----------------------------------------------------------------------------
Financing Activities
Proceeds from long-term debt 3,613 6,921 5,213
Payments on long-term debt (1,356) (2,949) (3,822)
Proceeds from common stock issued 269 957 85
Proceeds from treasury stock issued 12 134 60
Dividends paid (448) (441) (430)
Treasury stock purchased (61) (48) (321)
Other, net 182 146 5
- -----------------------------------------------------------------------------
Net cash provided by financing activities 2,211 4,720 790
- -----------------------------------------------------------------------------
Increase (Decrease) in Cash and Equivalents 119 (485) 503
- -----------------------------------------------------------------------------
Cash and Equivalents at Beginning of Year 120 605 102
- -----------------------------------------------------------------------------
Cash and Equivalents at End of Year $ 239 $ 120 $ 605
-------------------------
See accompanying Notes to Consolidated Financial Statements.
I-19
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Sprint Corporation
(millions)
- ----------------------------------------------------------------------------------------------
PCS Capital
Common In Excess
Sprint FON and of Par or
Common Common Preferred Stated Retained Treasury
Stock Stock Stock Value Earnings Stock Other Total
- ----------------------------------------------------------------------------------------------
Beginning 1998 balance $1,092 $ -- $ -- $4,458 $3,693 $(293) $75 $ 9,025
Net income -- -- -- -- 414 -- -- 414
Common stock dividends -- -- -- -- (345) -- -- (345)
Class A common stock
dividends -- -- -- -- (86) -- -- (86)
Sprint common stock
recapitalized (876) 701 175 -- -- -- -- --
PCS Series 2 common
stock issued -- -- 195 3,005 -- -- -- 3,200
PCS Series 3 common
stock issued -- -- 5 80 -- -- -- 85
PCS preferred stock
issued -- -- 247 -- -- -- -- 247
Treasury stock purchased -- -- -- -- -- (321) -- (321)
Treasury stock issued -- -- -- -- (24) 188 -- 164
Tax benefit from stock
compensation -- -- -- 49 -- -- -- 49
Other, net -- -- -- (6) (1) -- 23 16
- ----------------------------------------------------------------------------------------------
Ending 1998 balance 216 701 622 7,586 3,651 (426) 98 12,448
Net loss -- -- -- -- (935) -- -- (935)
FON common stock
dividends -- -- -- -- (380) -- -- (380)
Class A common stock
dividends -- -- -- -- (54) -- -- (54)
PCS preferred stock
dividends -- -- -- -- (8) -- -- (8)
FON Series 3 common
stock issued -- 2 -- 50 -- -- -- 52
PCS Series 1 common
stock issued -- -- 27 674 -- -- -- 701
PCS Series 2 common
stock issued -- -- 24 1,122 -- -- -- 1,146
PCS Series 3 common
stock issued -- -- 7 210 -- -- -- 217
Two-for-one stock splits -- 873 477 (1,350) -- -- -- --
Treasury stock purchased -- -- -- -- -- (48) -- (48)
Treasury stock issued -- -- -- -- (315) 472 -- 157
Tax benefit from stock
compensation -- -- -- 254 -- -- -- 254
Other, net -- -- -- 23 2 -- (15) 10
- ----------------------------------------------------------------------------------------------
Ending 1999 balance 216 1,576 1,157 8,569 1,961 (2) 83 13,560
Net income -- -- -- -- 93 -- -- 93
FON common stock
dividends -- -- -- -- (398) -- -- (398)
Class A common stock
dividends -- -- -- -- (44) -- -- (44)
PCS preferred stock
dividends -- -- -- -- (7) -- -- (7)
FON Series 1 common
stock issued -- 22 -- 180 -- -- -- 202
PCS Series 1 common
stock issued -- -- 23 207 -- -- -- 230
Treasury stock purchased -- -- -- -- -- (61) -- (61)
Treasury stock issued -- -- -- -- (29) 53 -- 24
Tax benefit from stock
compensation -- -- -- 424 -- -- -- 424
Other, net -- -- -- -- 2 -- (62) (60)
- ----------------------------------------------------------------------------------------------
Ending 2000 balance $ 216 $1,598 $1,180 $9,380 $1,578 $ (10) $21 $13,963
---------------------------------------------------------------------
Shares Outstanding
- --------------------------------------------------
Beginning 1998 balance 430.0 -- --
Sprint common stock
recapitalized (350.3) 350.3 175.2
Treasury shares
recapitalized 5.4 (5.4) (2.7)
Treasury stock purchased (4.2) (0.5) --
Treasury stock issued 5.3 0.1 --
PCS Series 2 common
stock issued -- -- 195.1
PCS Series 3 common
stock issued -- -- 5.1
PCS preferred stock
issued -- -- 0.2
- --------------------------------------------------
Ending 1998 balance 86.2 344.5 372.9
FON Series 3 common
stock issued -- 1.2 --
PCS Series 1 common
stock issued -- -- 27.1
PCS Series 2 common
stock issued -- -- 24.3
PCS Series 3 common
stock issued -- -- 6.9
Two-for-one stock splits -- 433.5 476.7
Treasury stock purchased -- (0.6) --
Treasury stock issued -- 9.4 2.7
- --------------------------------------------------
Ending 1999 balance 86.2 788.0 910.6
FON Series 1 common
stock issued -- 10.8 --
PCS Series 1 common
stock issued -- -- 22.7
Treasury stock purchased -- (2.0) --
Treasury stock issued -- 1.6 --
- --------------------------------------------------
Ending 2000 balance 86.2 798.4 933.3
-------------------------
See accompanying Notes to Consolidated Financial Statements.
I-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Sprint Corporation
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
- --------------------------------------------------------------------------------
Tracking Stock Formation
In November 1998, Sprint's shareholders approved the formation of the FON Group
and the PCS Group and the creation of the FON stock and the PCS stock. In
addition, Sprint purchased the remaining ownership interests in Sprint Spectrum
Holding Company, L.P. and PhillieCo, L.P. (together, Sprint PCS), other than a
minority interest in Cox Communications PCS, L.P. (Cox PCS). Sprint acquired
these ownership interests from Tele-Communications, Inc., Comcast Corporation
and Cox Communications, Inc. (the Cable Partners). In exchange, Sprint issued
the Cable Partners special low-vote PCS shares and warrants to acquire
additional PCS shares. Sprint also issued the Cable Partners shares of a new
class of preferred stock convertible into PCS shares. The purchase of the Cable
Partners' interests is referred to as the PCS Restructuring. In the 1999 second
quarter, Sprint acquired the remaining minority interest in Cox PCS.
Also in November 1998, Sprint reclassified each of its publicly traded common
shares into one share of FON stock and 1/2 share of PCS stock. This
recapitalization was tax-free to shareholders. Each Class A common share owned
by France Telecom (FT) and Deutsche Telekom AG (DT) was reclassified to
represent an equity interest in the FON Group and the PCS Group that entitles
FT and DT to one share of FON stock and 1/2 share of PCS stock. These
transactions are referred to as the Recapitalization.
In connection with the PCS Restructuring, FT and DT purchased 5.1 million
additional PCS shares (pre-split basis) to maintain their voting power in
Sprint (Top-up).
The PCS stock is intended to reflect the performance of Sprint's wireless PCS
operations. The FON stock is intended to reflect the performance of all of
Sprint's other operations.
Basis of Consolidation and Presentation
The consolidated financial statements include the accounts of Sprint and its
wholly owned and majority-owned subsidiaries. Sprint PCS' results of operations
for 1998 have been consolidated for the entire year. The Cable Partners' share
of losses through the PCS Restructuring date has been reflected as "Other
partners' loss in Sprint PCS" in the Consolidated Statements of Operations.
Sprint PCS' financial position has been reflected on a consolidated basis at
year-end 1998. Before 1998, Sprint's investment in Sprint PCS was accounted for
using the equity method. Sprint's cash flows include Sprint PCS' cash flows
only after the PCS Restructuring date.
Investments in entities in which Sprint exercises significant influence, but
does not control, are accounted for using the equity method (see Note 3).
The consolidated financial statements are prepared using accounting principles
generally accepted in the United States. 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.
Classification of Operations
Sprint FON Group
Global Markets Division
The global markets division provides a broad suite of communications services
targeted to domestic business and residential customers, multinational
corporations and other communications companies. These services include
domestic and international voice; data communications such as Internet and
frame relay access and transport, web hosting, virtual private networks, and
managed security services; and broadband services.
Sprint is deploying integrated communications services, referred to as Sprint
ION(SM). Sprint ION extends Sprint's existing network capabilities to the
customer and enables Sprint to provide the network infrastructure to meet
customers' demands for advanced services including integrated voice, data,
Internet and video. It is also expected to be the foundation for Sprint to
provide advanced services in the competitive local service market. Sprint uses
various advanced services last-mile technologies, including dedicated access
and Digital Subscriber Line (xDSL), and expects to use Multipoint Multichannel
Distribution Services (MMDS).
The global markets division also includes the operating results of the cable TV
service operations of the broadband fixed wireless companies after their 1999
acquisition dates. During 2000, Sprint converted several markets served by MMDS
capabilities from cable TV services to high-speed
I-21
data services. The global markets division's operating results reflect the
development costs and the operating revenues and expenses of these broadband
fixed wireless services. Sprint intends to provide broadband data and voice
services to additional markets served by these capabilities.
Included in the global markets division are the costs of establishing
international operations beginning in 2000.
This division also includes the FON Group's investments in EarthLink, Inc., an
Internet service provider; Call-Net, a long distance provider in Canada
operating under the Sprint brand name; Intelig, a long distance provider in
Brazil; and certain other telecommunications investments and ventures.
Local Division
The local division consists mainly of regulated local phone companies serving
approximately 8.3 million access lines in 18 states. It provides local
services, access by phone customers and other carriers to the local network,
consumer long distance services to customers within its franchise territories,
sales of telecommunications equipment, and other long distance services within
certain regional calling areas, or LATAs.
Product Distribution & Directory Publishing Businesses
The product distribution business provides wholesale distribution services of
telecommunications products. The directory publishing business publishes and
markets white and yellow page phone directories.
Sprint PCS Group
The PCS Group includes Sprint's wireless PCS operations. It operates the only
100% digital PCS wireless network in the United States with licenses to provide
service nationwide using a single frequency and a single technology. At year-
end 2000, the PCS Group, together with affiliates, operated PCS systems in over
300 metropolitan markets, including the 50 largest U.S. metropolitan areas.
Allocation of Shared Services
Sprint directly assigns, where possible, certain general and administrative
costs to the FON Group and the PCS Group based on their actual use of those
services. Where direct assignment of costs is not possible, or practical,
Sprint uses other indirect methods, including time studies, to estimate the
assignment of costs to each Group. Sprint believes that the costs allocated are
comparable to the costs that would be incurred if the Groups would have been
operating on a stand-alone basis. The allocation of shared services may change
at the discretion of Sprint and does not require shareholder approval.
Allocation of Federal and State Income Taxes
Sprint files a consolidated federal income tax return and certain state income
tax returns which include FON Group and PCS Group results. In connection with
the PCS Restructuring, Sprint adopted a tax sharing agreement which provides
for the allocation of income taxes between the two Groups. The FON Group's
income taxes are calculated as if it files returns which exclude the PCS Group.
The PCS Group's income taxes reflect the PCS Group's incremental cumulative
impact on Sprint's consolidated income taxes. Intergroup tax payments are
satisfied on the date Sprint's related tax payment is due to or the refund is
received from the applicable tax authority.
The tax sharing agreement applies to tax years ending on or before December 31,
2001. For periods after December 31, 2001, Sprint's board of directors will
adopt a tax sharing arrangement that will be designed to allocate tax benefits
and burdens fairly between the FON Group and the PCS Group.
Allocation of Group Financing
Financing activities for the Groups are managed by Sprint on a centralized
basis. Debt incurred by Sprint on behalf of the Groups is specifically
allocated to and reflected in the financial statements of the applicable Group.
Interest expense is allocated to the PCS Group based on an interest rate that
is substantially equal to the rate it would be able to obtain from third
parties as a direct or indirect wholly owned Sprint subsidiary, but without the
benefit of any guaranty by Sprint or any member of the FON Group. That interest
rate is higher than the rate Sprint obtains on borrowings. The difference
between Sprint's actual interest rate and the rate charged to the PCS Group is
reflected as a reduction in the FON Group's interest expense.
Under Sprint's centralized cash management program, one Group may advance funds
to the other Group. These advances are accounted for as short-term borrowings
between the Groups and bear interest at a market rate that is substantially
equal to the rate that Group would be able to obtain from third parties on a
short-term basis.
The allocation of Group financing activities may change at the discretion of
Sprint and does not require shareholder approval.
Income Taxes
Sprint records deferred income taxes based on temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
their tax bases.
I-22
Revenue Recognition
Sprint recognizes operating revenues as services are rendered or as products
are delivered to customers. Service activation and certain installation fees
are deferred and amortized over the average life of the service. Sprint's
directory publishing business recognizes revenues for directory services over
the life of the related directory (amortization method).
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 $636 million at year-end 2000
and $204 million at year-end 1999. Sprint had sufficient funds available to
fund the outstanding checks when they were presented for payment.
Investments in Equity Securities
Investments in 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 in the Consolidated Balance
Sheets as adjustments to "Shareholders' equity--Accumulated other comprehensive
income," net of related income taxes.
Inventories
Inventories for the FON Group are stated at the lower of cost (principally
first-in, first-out method) or market value. Inventories for the PCS Group are
stated at the lower of cost (principally first-in, first-out) or replacement
value.
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. The cost of property, plant and equipment is generally
depreciated on a straight-line basis over estimated economic useful lives.
Repair and maintenance costs are expensed as incurred.
Capitalized Interest
Capitalized interest totaled $175 million in 2000, $151 million in 1999 and
$167 million in 1998. Capitalized interest mainly reflects capitalized costs
related to the PCS Group's network buildout and PCS licenses as well as the FON
Group's construction of capital assets.
Intangible Assets
Sprint evaluates the recoverability of intangible assets when events or
circumstances indicate that such assets might be impaired. Sprint determines
impairment by comparing the undiscounted future cash flows estimated to be
generated by these assets to their respective carrying value. In the event
impairment exists, a loss is recognized based on the amount by which the
carrying value exceeds the fair value of the asset.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the
net assets acquired in business combinations accounted for as purchases.
Goodwill is being amortized over five to 40 years using the straight-line
method. Accumulated amortization totaled $259 million at year-end 2000 and $210
million at year-end 1999.
PCS Licenses
The PCS Group acquired licenses from the Federal Communications Commission to
operate as a PCS service provider. These licenses are granted for up to 10-year
terms with renewals for additional 10-year terms if license obligations are
met. These licenses are recorded at cost and are amortized on a straight-line
basis over 40 years when service begins in a specific geographic area.
Accumulated amortization totaled $206 million at year-end 2000 and $130 million
at year-end 1999.
Earnings per Share
Earnings per share (EPS) was calculated on a consolidated basis until the PCS
stock and FON stock were created as part of the November 1998 PCS Restructuring
and Recapitalization. From that time forward, EPS is computed individually for
the FON Group and PCS Group.
In the 2000 first quarter, Sprint effected a two-for-one stock split of its PCS
common stock. In the 1999 second quarter, Sprint effected a two-for-one split
of its FON common stock. As a result, basic and diluted earnings per common
share and weighted average common shares for Sprint FON common stock and Sprint
PCS common stock and dividends for Sprint FON common stock have been restated
for periods prior to these stock splits.
The FON Group's convertible preferred dividends totaled $1 million in 2000 and
1999 and dilutive securities (mainly options) totaled 11.5 million shares in
2000 and 19.2 million shares in 1999. From the Recapitalization date to year-
end 1998, the FON Group's convertible preferred dividends totaled $0.1 million
and dilutive securities (mainly options) totaled 13.8 million shares. Dilutive
securities for the PCS Group mainly include options, warrants and convertible
preferred stock. These securities did not have a dilutive effect on loss per
share because the PCS Group incurred net losses for 2000, 1999 and 1998. As a
result, diluted loss per share equaled basic loss per share.
Sprint's convertible preferred dividends totaled $0.5 million in 1998 through
the Recapitalization date. Dilutive securities, such as options, included in
the
I-23
calculation of diluted weighted average common shares totaled 7.8 million in
1998 through the Recapitalization.
Stock-based Compensation
Sprint adopted the pro forma disclosure requirements under Statement of
Financial Accounting Standards (SFAS) No. 123, "Stock-based Compensation," and
continues to apply Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations to its stock option and
employee stock purchase plans.
- --------------------------------------------------------------------------------
2. Business Combinations
- --------------------------------------------------------------------------------
Broadband Fixed Wireless Companies
In the second half of 1999, Sprint acquired People's Choice TV Corp. (PCTV),
American Telecasting, Inc. (ATI), Videotron USA and the operating subsidiaries
of WBS America, LLC. These companies own broadband fixed wireless licenses in
the Midwest, Southwest, North Central, Western and Southeastern United States.
Sprint paid $618 million for the companies' outstanding stock and assumed $575
million of the companies' debt. These notes were redeemed, prior to scheduled
maturities, in the 1999 fourth quarter (see Note 10).
These acquisitions were accounted for as purchases. The results of these
companies have been included in Sprint's consolidated financial statements
after the acquisition dates. The excess of the purchase price over the net
liabilities acquired totaled $835 million and was allocated to goodwill, which
is being amortized on a straight-line basis over 40 years.
Cox PCS
In the 1999 second quarter, Cox Communications, Inc. exercised a put option
requiring Sprint to purchase the remaining 40.8% interest in Cox PCS. Sprint's
existing 59.2% interest in Cox PCS was reflected in Sprint's consolidated
financial statements on a consolidated basis. Sprint issued 24.3 million shares
of low-vote PCS stock (pre-split basis) in exchange for the remaining interest.
The shares were valued at $1.1 billion. Sprint accounted for the transaction as
a purchase.
The excess of the purchase price over the fair value of the net liabilities
acquired was allocated as follows:
- -------------------------------------------------------------------------
1999
- -------------------------------------------------------------------------
(millions)
Purchase price $1,146
Net liabilities acquired 99
Fair value assigned to customer base acquired (45)
Fair value assigned to PCS licenses (99)
Deferred taxes established on acquired assets and liabilities 88
- -------------------------------------------------------------------------
Goodwill $1,189
------
Goodwill is being amortized on a straight-line basis over 40 years.
PCS Restructuring
In November 1998, Sprint acquired the remaining interest in Sprint PCS (except
for the minority interest in Cox PCS) from the Cable Partners. In exchange,
Sprint issued the Cable Partners 195.1 million low-vote shares of PCS stock and
12.5 million warrants to purchase additional shares of PCS stock (on a pre-
split basis). The purchase price was $3.2 billion. In addition, Sprint issued
the Cable Partners shares of a new class of preferred stock convertible into
PCS shares.
Sprint accounted for the transaction as a purchase. The excess of the purchase
price over the fair value of the net liabilities acquired was allocated as
follows:
- -------------------------------------------------------------------------
1998
- -------------------------------------------------------------------------
(millions)
Purchase price including transaction costs $3,226
Net liabilities acquired 281
Fair value assigned to customer base acquired (681)
Fair value assigned to assembled workforce acquired (45)
Increase in property, plant and equipment to fair value (204)
Mark-to-market of long-term debt 85
Deferred taxes established on acquired assets and liabilities 678
In-process research and development costs (179)
- -------------------------------------------------------------------------
Goodwill $3,161
------
Goodwill is being amortized on a straight-line basis over 40 years.
With respect to the purchase price attributed to in-process research and
development (IPR&D), the acquired IPR&D was limited to significant new products
under development that were intended to address new and emerging market needs
and requirements, such as the rapid adoption of the Internet and the rapid
convergence of voice, data, and video. No routine research and development
projects, minor refinements, normal enhancements, or production activities were
included in the acquired IPR&D.
The income approach was the primary technique utilized in valuing the acquired
IPR&D. This approach included, but was not limited to, an analysis of (1) the
markets for each product; (2) the completion costs for projects; (3) the
expected cash flows attributable to the IPR&D projects; (4) the risks related
to achieving these cash flows; and (5) the stage of development of each
project. The issue of alternative future use was extensively evaluated and
these technologies, once completed, could only be economically used for their
intended purposes.
I-24
Pro Forma Results
The following unaudited pro forma consolidated results of operations assume the
PCS Restructuring, Recapitalization, Top-up and the write-off of acquired IPR&D
costs occurred prior to 1998. These pro forma amounts are for comparative
purposes only and do not necessarily represent what actual results of
operations would have been had the transactions occurred prior to 1998, nor do
they indicate the results of future operations. Pro forma results were as
follows:
- ---------------------------------------------
1998
- ---------------------------------------------
(millions,
except per
share data)
Net operating revenues $17,144
--------------
Loss from continuing operations $ (172)
--------------
Net loss $ (343)
--------------
Basic and diluted loss per PCS
common share:
Loss before extraordinary item $ (2.21)
Extraordinary item (0.04)
- ---------------------------------------------
Total $ (2.25)
--------------
- --------------------------------------------------------------------------------
3. Investments
- --------------------------------------------------------------------------------
Investments in Securities
The cost of investments in securities was $13 million at year-end 2000 and $154
million at year-end 1999. Gross unrealized holding gains were $53 million at
year-end 2000 and $310 million at year-end 1999.
The accumulated unrealized gains on investments in securities, net of income
taxes and the impact of the related debt instruments, were $33 million at year-
end 2000 and $84 million at year-end 1999 and are included in "Accumulated
other comprehensive income" in the Sprint Consolidated Balance Sheets.
In the 2000 fourth quarter, Sprint recorded a write-down of securities with a
cost basis of $48 million due to a decline in market value that was considered
other than temporary. The $48 million charge was included in "Other income
(expense), net" in Sprint's Consolidated Statements of Operations.
During 2000, Sprint used equity securities with a cost basis of $94 million to
retire debt instruments (see Note 10). Sprint recorded a $45 million gain
associated with the transaction which was included in "Other income (expense),
net" in Sprint's Consolidated Statements of Operations. At year-end 1999, the
fair value of these equity securities were classified as current assets.
During 1999, Sprint sold available-for-sale securities with a cost basis of $14
million for $104 million. The $90 million gain was included in "Other income
(expense), net" in Sprint's Consolidated Statements of Operations.
Investments in and Advances to Affiliates
At year-end 2000, investments accounted for using the equity method consisted
of the FON Group's investments in Intelig, EarthLink and other strategic
investments and the PCS Group's investment in Pegaso Telecomunicaciones, S.A.
de C.V., a wireless PCS operation in Mexico. In February 2001, Sprint modified
its relationship with EarthLink which resulted in its investment being
accounted for as a cost method investment beginning that month (see Note 18).
In the 2000 fourth quarter, Sprint completed an analysis of the valuation of
its equity method investments in response to changes in the overall
telecommunications industry. The analysis resulted in an $87 million charge for
the write-down of an equity method investment which was included in "Other
income (expense), net" in Sprint's Consolidated Statements of Operations.
In November 1998, Sprint assumed 100% ownership of Sprint PCS; as a result,
Sprint consolidated Sprint PCS' results in 1998.
Combined, unaudited, summarized financial information (100% basis) of other
entities accounted for using the equity method was as follows:
- -------------------------------------------------
2000 1999 1998
- -------------------------------------------------
(millions)
Results of operations
Net operating revenues $ 2,195 $1,571 $1,242
----------------------------
Operating income (loss) $ (826) $ (192) $ 67
----------------------------
Net loss $(1,062) $ (329) $ (145)
----------------------------
Financial position
Current assets $ 1,470 $1,524 $1,038
Noncurrent assets 2,900 2,749 2,401
- -------------------------------------------------
Total $ 4,370 $4,273 $3,439
----------------------------
Current liabilities $ 1,102 $ 599 $ 538
Noncurrent liabilities 533 1,644 1,004
Owners' equity 2,735 2,030 1,897
- -------------------------------------------------
Total $ 4,370 $4,273 $3,439
----------------------------
- --------------------------------------------------------------------------------
4. Asset Write-down
- --------------------------------------------------------------------------------
In the 2000 fourth quarter, Sprint completed its analysis of the valuation of
various FON Group assets resulting from its reassessment of the FON Group's
business strategies in response to recent changes within the overall
telecommunications industry. This analysis resulted in a $238 million pre-tax
charge, primarily related to the impairment of goodwill associated with the
global markets division's Paranet operations.
I-25
- --------------------------------------------------------------------------------
5. Merger Termination
- --------------------------------------------------------------------------------
On July 13, 2000, Sprint and WorldCom, Inc. announced that the boards of
directors of both companies terminated their merger agreement, previously
announced in October 1999, as a result of regulatory opposition to the merger.
In the 2000 second quarter, Sprint recognized a one-time, pre-tax charge of
$187 million for costs associated with the terminated merger.
- --------------------------------------------------------------------------------
6. Discontinued Operation
- --------------------------------------------------------------------------------
In the 2000 first quarter, Sprint sold its interest in Global One to France
Telecom and Deutsche Telekom AG. Sprint received $1.1 billion in cash and was
repaid $276 million for advances for its entire stake in Global One. As a
result of Sprint's sale of its interest in Global One, Sprint's gain on the
sale and equity share of the results of Global One have been reported as a
discontinued operation for all periods presented.
In 2000, Sprint recorded an after-tax gain related to the sale of its interest
in Global One of $675 million. Sprint recorded after-tax losses related to
Global One totaling $130 million in 1999 and $135 million in 1998.
- --------------------------------------------------------------------------------
7. Cumulative Effect of Change in Accounting Principle
- --------------------------------------------------------------------------------
Sprint implemented SEC Staff Accounting Bulletin No. 101, "Revenue Recognition
in Financial Statements," during the fourth quarter of 2000, effective as of
the beginning of the year. This bulletin requires activation and installation
fee revenues that do not represent a separate earnings process to be deferred
and recognized over the estimated service period. Associated incremental direct
costs may also be deferred, but only to the extent of revenues subject to
deferral. The FON Group recorded a $2 million charge for the cumulative effect
of change in accounting principle in 2000. The effect of the change on the nine
months ended September 30, 2000 was to decrease revenues and expenses by $68
million.
- --------------------------------------------------------------------------------
8. Employee Benefit Plans
- --------------------------------------------------------------------------------
Defined Benefit Pension Plan
Most FON Group and PCS Group employees are covered by a noncontributory defined
benefit pension plan. Benefits for plan participants belonging to unions are
based on negotiated schedules. For non-union participants, pension benefits are
based on years of service and the participants' compensation.
Sprint's policy is to make plan contributions equal to an actuarially
determined amount consistent with 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.
The following table shows the changes in the projected benefit obligation:
- --------------------------------------
2000 1999
- --------------------------------------
(millions)
Beginning balance $2,401 $2,579
Service cost 77 86
Interest cost 194 177
Amendments 8 7
Actuarial (gain) loss 90 (326)
Benefits paid (136) (122)
- --------------------------------------
Ending balance $2,634 $2,401
--------------
The following table shows the changes in plan assets:
- ---------------------------------------------
2000 1999
- ---------------------------------------------
(millions)
Beginning balance $3,669 $3,169
Actual return on plan assets (157) 622
Benefits paid (136) (122)
- ---------------------------------------------
Ending balance $3,376 $3,669
--------------
At year-end, the funded status and amounts recognized in the Consolidated
Balance Sheets for the plan were as follows:
- --------------------------------------------------------------------------
2000 1999
- --------------------------------------------------------------------------
(millions)
Plan assets in excess of the projected benefit obligation $ 742 $ 1,268
Unrecognized net gains (396) (1,016)
Unrecognized prior service cost 96 100
Unamortized transition asset (47) (72)
- --------------------------------------------------------------------------
Prepaid pension cost $ 395 $ 280
--------------
Discount rate 8.00% 8.25%
--------------
Expected blended rate of future pay raises 4.50% 5.25%
--------------
The net pension credit consisted of the following:
- -------------------------------------------------------------------------
2000 1999 1998
- -------------------------------------------------------------------------
(millions)
Service cost--benefits earned during the year $ 77 $ 86 $ 72
Interest on projected benefit obligation 194 177 165
Expected return on plan assets (336) (300) (265)
Amortization of unrecognized transition asset (25) (25) (25)
Recognition of prior service cost 12 12 11
Recognition of actuarial gains (37) (8) (4)
- -------------------------------------------------------------------------
Net pension credit $ (115) $ (58) $ (46)
----------------------
Discount rate 8.25% 7.00% 7.25%
----------------------
Expected long-term rate of return on plan assets 10.00% 10.00% 10.00%
----------------------
Expected blended rate of future pay raises 5.25% 4.00% 4.25%
----------------------
I-26
Defined Contribution Plans
Sprint sponsors defined contribution employee savings plans covering most FON
Group and PCS Group employees. Participants may contribute portions of their
pay to the plans. For union employees, Sprint matches contributions based on
negotiated amounts. Sprint also matches contributions of non-union employees in
FON stock and PCS 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 additional matching contributions based on
the performance of FON stock and PCS stock compared to other telecommunications
companies' stock. Sprint's matching contributions were $112 million in 2000,
$83 million in 1999 and $54 million in 1998. At year-end 2000, the plans held
34 million FON shares and 31 million PCS shares.
Prior to January 1999, Sprint PCS sponsored a savings and retirement program
for certain employees. Sprint PCS matched contributions equal to 50% of the
contribution of each participant, up to the first 6% that the employee elected
to contribute. Expense under the savings plan was $7 million in 1998.
Postretirement Benefits
Sprint provides postretirement benefits (mainly medical and life insurance) to
most FON Group and PCS Group 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 following table shows the changes in the accumulated postretirement benefit
obligation:
- --------------------------------
2000 1999
- --------------------------------
(millions)
Beginning balance $ 876 $ 864
Service cost 17 21
Interest cost 71 59
Actuarial gains (2) (30)
Benefits paid (52) (38)
- --------------------------------
Ending balance $ 910 $ 876
------------
Amounts included in the Consolidated Balance Sheets at year-end were as
follows:
- --------------------------------------------------------------
2000 1999
- --------------------------------------------------------------
(millions)
Accumulated postretirement benefit obligation $ 910 $ 876
Unrecognized prior service cost 74 53
Unrecognized net gains 75 120
- --------------------------------------------------------------
Accrued postretirement benefits cost $1,059 $1,049
--------------
Discount rate 8.00% 8.25%
--------------
The assumed 2001 annual health care cost trend rates are 9.0% before Medicare
eligibility and 9.5% after Medicare eligibility. Both rates gradually decrease
to an ultimate level of 5% by 2010. A 1% increase in the rates would have
increased the 2000 accumulated postretirement benefit obligation by an
estimated $161 million. A 1% decrease would have reduced the obligation by an
estimated $119 million.
The net postretirement benefits cost consisted of the following:
- ----------------------------------------------------------------------------
2000 1999 1998
- ----------------------------------------------------------------------------
(millions)
Service cost--benefits earned
during the year $ 17 $ 21 $ 20
Interest on accumulated postretirement benefit obligation 71 59 58
Recognition of prior service cost (9) (8) (6)
Recognition of actuarial gains (17) (17) (21)
- ----------------------------------------------------------------------------
Net postretirement benefits cost $ 62 $ 55 $ 51
----------------
Discount rate 8.25% 7.00% 7.25%
----------------
For measurement purposes, the assumed 2000 weighted average annual health care
cost trend rates were 9.6% before Medicare eligibility and 10.0% after Medicare
eligibility. Both rates gradually decrease to an ultimate level of 5% by 2010.
A 1% increase in the rates would have increased the 2000 postretirement
benefits service and interest costs by an estimated $17 million. A 1% decrease
would have reduced the 2000 postretirement benefits service and interest costs
by an estimated $12 million.
- --------------------------------------------------------------------------------
9. Income Taxes
- --------------------------------------------------------------------------------
Income tax expense (benefit) allocated to continuing operations consists of the
following:
- ---------------------------------------
2000 1999 1998
- ---------------------------------------
(millions)
Current income tax
expense (benefit)
Federal $ 24 $ (34) $283
State 55 40 44
- ---------------------------------------
Total current 79 6 327
- ---------------------------------------
Deferred income tax
expense (benefit)
Federal (173) (309) 120
State (32) (24) 7
- ---------------------------------------
Total deferred (205) (333) 127
- ---------------------------------------
Total $(126) $(327) $454
------------------
I-27
The differences that caused Sprint's effective income tax rates to vary from
the 35% federal statutory rate for income taxes related to continuing
operations were as follows:
- -------------------------------------------------------------------------------
2000 1999 1998
- -------------------------------------------------------------------------------
(millions)
Income tax expense (benefit) at the federal statutory rate $(246) $(375) $364
Effect of:
State income taxes, net of federal income tax effect 15 10 33
Equity in losses of foreign joint ventures 48 18 6
Write down of equity method investment 30 -- --
Write-off of in-process research and development costs -- -- 63
Goodwill amortization 52 37 3
Other, net (25) (17) (15)
- -------------------------------------------------------------------------------
Income tax expense (benefit) $(126) $(327) $454
-------------------
Effective income tax rate 17.9% 30.5% 43.7%
-------------------
Income tax expense (benefit) allocated to other items was as follows:
- ---------------------------------------------------------------------------
2000 1999 1998
- ---------------------------------------------------------------------------
(millions)
Discontinued operation $370 $(111) $(62)
Extraordinary items (3) (34) (23)
Unrealized holding gains (losses) on investments(/1/) (29) (13) 8
Stock ownership, purchase and options arrangements(/2/) (424) (254) (49)
- ---------------------------------------------------------------------------
(/1/) These amounts have been recorded directly to "Shareholders' equity--
Accumulated other comprehensive income" in the Consolidated Balance
Sheets.
(/2/) These amounts have been recorded directly to "Shareholders' equity--
Capital in excess of par or stated value" in the Consolidated Balance
Sheets.
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 2000 and 1999, along
with the income tax effect of each, were as follows:
- -----------------------------------------------------------
2000 Deferred
Income Tax
------------------
Assets Liabilities
- -----------------------------------------------------------
(millions)
Property, plant and equipment $ -- $3,161
Intangibles -- 386
Postretirement and other benefits 428
Reserves and allowances 214 --
Unrealized holding gains on investments -- 19
Operating loss carryforwards 2,011 --
Tax credit carryforwards 127 --
Other, net 162 --
- -----------------------------------------------------------
2,942 3,566
Less valuation allowance 598 --
- -----------------------------------------------------------
Total $2,344 $3,566
------------------
- -----------------------------------------------------------
1999 Deferred
Income Tax
------------------
Assets Liabilities
- -----------------------------------------------------------
(millions)
Property, plant and equipment $ -- $2,473
Intangibles -- 452
Postretirement and other benefits 422 --
Reserves and allowances 149 --
Unrealized holding gains on investments -- 48
Operating loss carryforwards 1,203 --
Tax credit carryforwards 75 --
Other, net 177 --
- -----------------------------------------------------------
2,026 2,973
Less valuation allowance 480 --
- -----------------------------------------------------------
Total $1,546 $2,973
------------------
Management believes it is more likely than not that these deferred income tax
assets, net of the valuation 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.
The valuation allowance related to deferred income tax assets increased $118
million in 2000 and $231 million in 1999.
In 1999, Sprint acquired approximately $193 million of potential tax benefits
related to net operating loss carryforwards in the acquisitions of the
broadband
I-28
fixed wireless companies. In 1998, Sprint acquired approximately $229 million
of potential tax benefits related to net operating loss carryforwards in the
PCS Restructuring. The benefits from the acquisitions and PCS Restructuring are
subject to certain realization restrictions under various tax laws. A valuation
allowance was provided for the total of these benefits. If these benefits are
subsequently recognized, they will reduce goodwill or other noncurrent
intangible assets resulting from the application of the purchase method of
accounting for these transactions.
In connection with the PCS Restructuring, the PCS Group is required to
reimburse the FON Group and the Cable Partners for net operating loss and tax
credit carryforward benefits generated prior to the PCS Restructuring if
realization by the PCS Group produces a cash benefit that would not otherwise
have been realized. The reimbursement will equal 60% of the net cash benefit
received by the PCS Group and will be made to the FON Group in cash and to the
Cable Partners in shares of Series 2 PCS stock. The carryforward benefits
subject to this requirement total $259 million, which includes the $229 million
acquired in the PCS Restructuring.
At year-end 2000, Sprint had federal operating loss carryforwards of
approximately $4.7 billion and state operating loss carryforwards of
approximately $8.1 billion. Related to these loss carryforwards are federal tax
benefits of $1.6 billion and state tax benefits of $575 million. In addition,
Sprint had available for income tax purposes federal alternative minimum tax
credit carryforwards of $33 million, state alternative minimum tax credit
carryforwards of $5 million, federal alternative minimum tax net operating loss
carryforwards of $2.2 billion and state alternative minimum tax net operating
loss carryforwards of $682 million. The loss carryforwards expire in varying
amounts through 2020.
- --------------------------------------------------------------------------------
10. Long-term Debt and Capital Lease Obligations
- --------------------------------------------------------------------------------
Sprint's consolidated long-term debt and capital lease obligations at year-end
was as follows:
- ------------------------------------------------------------------------------------------
2000 1999
--------------------------- ---------------------------
Sprint Sprint Sprint Sprint
FON PCS FON PCS
Maturing Group Group Consolidated Group Group Consolidated
- ------------------------------------------------------------------------------------------
(millions)
Senior notes
5.7% to 7.6%(/1/) 2001 to 2028 $1,105 $ 9,395 $10,500 $1,105 $ 8,145 $ 9,250
8.1% to 9.8% 2000 to 2003 382 -- 382 632 -- 632
11.0% to 12.5%(/2/) 2001 to 2006 -- 776 607 -- 734 584
Debentures and notes
5.8% to 9.6% 2000 to 2022 500 -- 500 565 -- 565
Notes payable and
commercial paper -- 157 3,797 3,954 294 1,971 2,265
First mortgage bonds
5.9% to 9.9% 2000 to 2025 1,085 -- 1,085 1,295 -- 1,295
Capital lease
obligations
5.2% to 14.0% 2000 to 2008 61 408 469 69 486 555
Revolving credit
facilities Variable
rates 2002 900 -- 900 900 -- 900
Other
2.0% to 10.0% 2000 to 2006 318 4 322 573 153 726
- ------------------------------------------------------------------------------------------
4,508 14,380 18,719 5,433 11,489 16,772
Less: current
maturities(/2/) 1,026 244 1,205 902 185 1,087
- ------------------------------------------------------------------------------------------
Long-term debt and
capital lease
obligations(/2/) $3,482 $14,136 $17,514 $4,531 $11,304 $15,685
------------------------------------------------------
(/1/) These borrowings were incurred by Sprint and allocated to the applicable
Group. Sprint's weighted average interest rate related to these
borrowings was 6.7% at year-end 2000 and 6.6% at year-end 1999. The
weighted average interest rate related to the borrowings allocated to the
PCS Group was approximately 8.8% at year-end 2000 and 8.7% at year-end
1999. See Note 1 for a more detailed description of how Sprint allocates
financing to each of the Groups.
(/2/) Consolidated debt does not equal the total of PCS Group and FON Group
debt due to intergroup debt eliminated in consolidation. The FON Group
had an investment in the PCS Group's Senior Discount notes totaling $169
million at year-end 2000, including $65 million classified as current,
and $150 million at year-end 1999.
I-29
Scheduled principal payments, excluding reclassified short-term borrowings,
during each of the next five years are as follows:
- -------------------------------
Sprint Sprint
FON PCS
Group Group Sprint
- -------------------------------
(millions)
2001(/1/) $1,026 $ 258 $1,214
2002 1,339 1,309 2,648
2003 372 1,060 1,432
2004 144 1,062 1,206
2005 122 61 183
- -------------------------------
(/1/) The 2001 scheduled principal payments do not equal current maturities as
these amounts reflect the maturity value of the scheduled payment on the
PCS Group's Senior Discount notes.
Included in the above schedule are payments on PCS Group debt that are to be
made in Japanese yen. The yen needed to satisfy the obligations is currently
held on deposit by the PCS Group and included in "Other assets" on the PCS
Group's Combined Balance Sheets. The scheduled yen payments included in the
above schedule are $1 million in 2003, $20 million in 2004 and $43 million in
2005.
Sprint
Short-term Borrowings
Sprint had bank notes payable totaling $676 million at year-end 2000 and $670
million at year-end 1999. In addition, Sprint had commercial paper borrowings
totaling $3.3 billion at year-end 2000 and $1.6 billion at year-end 1999.
Though these borrowings are renewable at various dates throughout the year,
they were classified as long-term debt because of Sprint's intent and ability
to refinance these borrowings on a long-term basis through unused credit
facilities and unissued debt under Sprint's shelf registration.
Sprint currently has revolving credit facilities with syndicates of domestic
and international banks totaling $5 billion; $3 billion of which is a 364 day
facility, renewed in August 2000, expiring in 2001, and $2 billion is a 5 year
facility expiring in 2003. Commercial paper and certain bank notes are
supported by Sprint's revolving credit facilities. Certain other notes payable
relate to a separate revolving credit facility which expires in 2002. At year-
end 2000, Sprint had total unused lines of credit of $1.8 billion.
Bank notes outstanding had weighted average interest rates of 7.1% at year-end
2000 and 6.3% at year-end 1999. The weighted average interest rate of
commercial paper was 7.5% at year-end 2000 and 6.4% at year-end 1999.
Long-term Debt
In June 2000, Sprint issued $1.25 billion of debt securities under its $4
billion shelf registration statement with the SEC. These borrowings mature in
2002 and have interest rates ranging from 6.9% to 7.6%. At year-end 2000,
Sprint had issued a total of $2 billion of debt securities under the shelf. In
January 2001, Sprint issued securities using the remaining amount of the shelf
(see Note 18).
In June 1999, Sprint entered into a $1 billion financing agreement to sell, on
a continuous basis with recourse, undivided percentage ownership interests in a
designated pool of its accounts receivable. Subsequent collections of
receivables sold to investors are typically reinvested in new receivables. At
year-end 2000, Sprint had borrowed $900 million with a weighted average
interest rate of 6.9% under this agreement. These borrowings mature in 2002.
Sprint FON Group
In 2000, the FON Group received an allocation of $344 million of debt from
Sprint. This debt was mainly used to repay existing debt and to fund new
capital investments. See Note 1 for a more detailed description of how Sprint
allocates debt to the Groups.
In the 2000 fourth quarter, Sprint redeemed, prior to scheduled maturities, $25
million of FON Group debt with a weighted average interest rate of 9.6%. This
resulted in a $1 million after-tax extraordinary loss for the FON Group.
In the 2000 first quarter, Sprint exchanged 6.6 million common shares of SBC
Communications, Inc. for certain notes payable of the FON Group. The notes had
a market value of $275 million on the maturity date and $316 million at year-
end 1999. The notes had an interest rate of 8.3%.
In the 1999 fourth quarter, Sprint redeemed, prior to scheduled maturities,
$575 million of the assumed broadband fixed wireless companies' debt with
interest rates ranging from 13.1% to 14.5%. This resulted in a $39 million
after-tax extraordinary loss for the FON Group.
In 1998, Sprint redeemed, prior to scheduled maturities, $138 million of FON
Group debt with interest rates ranging from 7.9% to 9.3%. This resulted in a $5
million after-tax extraordinary loss for the FON Group.
FON Group gross property, plant and equipment totaling $16.1 billion was either
pledged as security for first mortgage bonds and certain notes or is restricted
for use as mortgaged property.
Sprint PCS Group
In 2000, Sprint allocated $3.3 billion of debt to the PCS Group. This debt was
mainly used to fund new capital investments and to repay existing debt.
I-30
In the 2000 first quarter, Sprint repaid, prior to scheduled maturities, $127
million of the PCS Group's notes payable to the FCC. These notes had an
interest rate of 7.8%. This resulted in a $3 million after-tax extraordinary
loss.
In 1999, the PCS Group repaid $2.2 billion of its revolving credit facilities
and other borrowings prior to scheduled maturities. This resulted in a $21
million after-tax extraordianary loss.
In 1998, Sprint redeemed, prior to scheduled maturities, $3.3 billion of PCS
Group debt with a weighted average interest rate of 8.3%. This resulted in a
$31 million after-tax extraordinary loss for the PCS Group.
Other
Sprint, including the FON Group and the PCS Group, had complied with all
restrictive or financial covenants relating to its debt arrangements at year-
end 2000.
- -------------------------------------------------------------------------------
11. Common Stock
- -------------------------------------------------------------------------------
Sprint FON Stock and Sprint PCS Stock
On December 14, 1999, the Sprint Board of Directors authorized a two-for-one
stock split of Sprint's PCS common stock in the form of a stock dividend which
was distributed on February 4, 2000 to the PCS shareholders.
On April 20, 1999, the Sprint Board of Directors authorized a two-for-one
stock split of Sprint's FON common stock in the form of a stock dividend which
was distributed on June 4, 1999 to the FON shareholders.
All share, earnings per share and dividends per share amounts have been
restated to reflect the stock splits.
In November 1998, Sprint recapitalized its common stock into FON stock and PCS
stock and restructured its interests in Sprint PCS. As a result, Sprint
created the following series of common stock:
. Series 1 FON stock and Series 1 PCS stock
Existing Sprint common shareholders received one share of FON stock and 1/2
share of PCS stock for each Sprint share owned. Authorized shares totaled
2.5 billion for the Series 1 FON stock and 1.25 billion for the Series 1
PCS stock. Shares issued at year-end 2000 were 710.2 million and 507.4
million, respectively. Shares outstanding at year-end 2000 were 709.8
million and 507.4 million, respectively.
. Series 2 FON stock and Series 2 PCS stock
The Cable Partners received PCS shares for their ownership interests in
Sprint PCS. These shares have 1/10 the voting power of the Series 1 and
Series 3 PCS shares. Authorized shares totaled 500 million for both the
Series 2 FON stock and Series 2 PCS stock. PCS shares issued and
outstanding at year-end 2000 were 355.4 million. No FON shares have been
issued.
. Series 3 FON stock and Series 3 PCS stock
To maintain their voting power, FT and DT purchased a combined total of 5.1
million Series 3 PCS shares (pre-split basis) for $85 million at the time
of the restructuring. Series 3 FON and PCS stock is also used whenever FT
and DT purchase stock to maintain their voting power and could be used if
FT and DT were to elect to convert their Class A common shares into FON and
PCS stock. Authorized shares totaled 1.2 billion for the Series 3 FON stock
and 600 million for the Series 3 PCS stock. Shares issued and outstanding
at year-end 2000 were 88.6 million and 70.3 million, respectively.
At year-end 1999, Sprint had 22 thousand PCS treasury shares, which were
recorded at cost. The PCS shares were held by the FON Group and represented an
intergroup interest in the PCS Group which was eliminated in the Sprint
Consolidated financial statements.
Beginning in November 2001, Sprint has the option to convert PCS shares into
FON shares.
Class A and Series 3 Common Stock
FT and DT own Series 3 FON common shares, Series 3 PCS common shares and Class
A common shares which represent approximately 19% of Sprint's voting power at
year end 2000. Sprint declared and paid Class A common dividends of 50 cents
per share in 2000, 62.5 cents per share in 1999 and $1.00 per share in 1998.
In February 1999, FT and DT purchased an aggregate of 12.2 million Series 3
PCS shares for $169 million in conjunction with the registered public offering
of 48.8 million shares of Series 1 PCS stock. During 1999, FT and DT purchased
an aggregate of 1.2 million shares of Series 3 FON shares and 1.6 million
additional Series 3 PCS shares for $100 million to maintain their voting
power.
Additionally, during 1999, FT and DT bought Series 1 FON and Series 1 PCS
shares on the open market to maintain their voting power. These shares
converted into Series 3 FON and Series 3 PCS shares. FT and DT did not
purchase any FON or PCS shares from Sprint or on the open market during 2000.
I-31
In November 1998, 86.2 million Class A common shares were reclassified to
represent an equity interest in the FON Group (86.2 million shares) and the PCS
Group (43.1 million shares). FT and DT maintained their voting power in Sprint
by purchasing an additional 10.2 million Series 3 PCS shares for $85 million.
FT and DT may purchase additional shares of FON stock and PCS stock from Sprint
to maintain their current ownership level. FT and DT have entered into a
standstill agreement with Sprint restricting their ability to acquire Sprint
voting shares (other than as intended by their agreements with Sprint). The
standstill agreement also contains customary provisions restricting FT and DT
from initiating or participating in any proposal with respect to the control of
Sprint. In February 2001, a registration statement covering the FON shares FT
and DT own was filed with the SEC (see Note 18).
PCS Preferred Stock
As part of the PCS Restructuring, Sprint issued to the Cable Partners a new
class of convertible preferred stock convertible into PCS shares.
Common Stock Reserved for Future Grants
At year-end 2000, common stock reserved for future grants under stock option
plans or for future issuances under various other arrangements was as follows:
Sprint FON Group
- -------------------------------------------------------------------
Shares
- -------------------------------------------------------------------
(millions)
Employees Stock Purchase Plan 10.5
Employee savings plans 5.4
Automatic Dividend Reinvestment Plan 2.3
Officer and key employees' and directors' stock options 22.1
Other 1.4
- -------------------------------------------------------------------
41.7
----------------------------------
Sprint PCS Group
- -------------------------------------------------------------------
Shares
- -------------------------------------------------------------------
(millions)
Employees Stock Purchase Plan 3.7
Employee savings plans 2.3
Officer and key employees' and directors' stock options 19.8
Warrants issued to Cable Partners 24.9
Conversion of preferred stock and other 18.5
- -------------------------------------------------------------------
69.2
----------------------------------
Shareholder Rights Plan
Under Sprint's Shareholder Rights Plan, one half of a preferred stock purchase
right is attached to each share of FON stock and PCS stock and one preferred
stock purchase right is attached to each share of Class A common stock. The
rights may be redeemed by Sprint at $0.01 per right and will expire in June
2007, unless extended. The rights are exercisable only if certain takeover
events occur and are entitled to the following:
. Each FON stock right entitles the holder to purchase 1/1,000 of a share
(Unit) of a no par Preferred Stock-Sixth Series at $275 per Unit.
. Each PCS stock right entitles the holder to purchase a Unit of a no par
Preferred Stock-Eighth Series at $150 per Unit.
. Each Class A right entitles the holder to purchase 1/2 Unit of Preferred
Stock-Sixth Series at $137.50 per 1/2 Unit and 1/4 Unit of Preferred
Stock-Eighth Series at $37.50 per 1/4 Unit.
Preferred Stock-Sixth Series is voting, cumulative and accrues dividends on a
quarterly basis generally equal to the greater of $100 per share or 2,000 times
the total per share amount of all FON stock common dividends. Preferred Stock-
Eighth Series has the same features as the Sixth Series, but applies to PCS
shares. No Preferred Stock-Sixth Series or Preferred Stock-Eighth Series were
issued or outstanding at year-end 2000 or 1999.
Other
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, $545 million of those subsidiaries' $1.6 billion
total retained earnings was restricted at year-end 2000. The flow of cash in
the form of advances from the subsidiaries to Sprint is generally not
restricted.
- --------------------------------------------------------------------------------
12. Stock-based Compensation
- --------------------------------------------------------------------------------
Due to the Recapitalization and the FON and PCS stock splits, the number of
shares and the related exercise prices have been adjusted to maintain both the
total fair value of common stock underlying the options and Employee Stock
Purchase Plan (ESPP) share elections, and the relationship between the market
value of the common stock and the exercise prices of the options and ESPP share
elections.
During 2000, the FON Group paid $80 million to the PCS Group to compensate for
the net amount of PCS stock-based compensation granted to FON Group employees
and FON stock-based compensation granted to PCS Group employees. The value paid
for stock-based compensation is determined at the time of the grants.
I-32
During 2000, options outstanding for more than one year at the date of
shareholder approval of Sprint's proposed merger with WorldCom became fully
vested as of that date.
During 2000, the Sprint Board of Directors approved an Exchange Program to give
Sprint employees a choice to cancel stock options granted to them in 2000 in
exchange for an equal number of new options in the future. The new options will
be granted on May 11, 2001, and the exercise price will be the market price on
that date. No members of Sprint's Board of Directors were eligible for the
Exchange Program. Options cancelled on November 10, 2000 under the terms of the
Exchange Program were 16.2 million FON options and 13.1 million PCS options.
Management Incentive Stock Option Plan
Under the Management Incentive Stock Option Plan (MISOP), Sprint has granted
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 the underlying common stock on the grant date. At
year-end 2000, authorized FON shares under this plan approximated 27.4 million
and authorized PCS shares approximated 16.8 million. The authorized number of
shares was increased by approximately 7.2 million FON shares and 7.8 million
PCS shares on January 1, 2001.
Stock Option Plan
Under the Sprint Stock Option Plan (SOP), Sprint has granted 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 the underlying common stock on the grant date. At year-end
2000, authorized FON shares under this plan approximated 54.8 million and
authorized PCS shares approximated 42.6 million.
In 2000, Sprint granted special stock options (Retention) to executives who
agreed to defer the benefit of the accelerated vesting of stock options until
the close or cancellation of the proposed WorldCom merger. These options were
designed to retain these executives following Sprint's special meeting of
shareholders in connection with the proposed WorldCom merger. In addition,
Sprint granted a portion of the annual options grants (Accelerated) normally
expected to be made in early 2001 to officers and key employees. The granting
of these options was accelerated to help retain employees.
In 1997, Sprint granted performance-based stock options to certain key
executives. The FON Group expensed $5 million in 2000, $9 million in 1999 and
$14 million in 1998 and the PCS Group expensed $3 million in 2000, $5 million
in 1999 and $1 million in 1998 related to these performance-based stock
options. The 2000 amount reflects expense through the date of the shareholder
approval of the proposed WorldCom merger. At that time, all of these options
became vested. An additional $29 million of expense related to these options
was included in "Asset write-down and merger related costs" in Sprint's
Consolidated Statements of Operations.
Employees Stock Purchase Plan
Under Sprint's ESPP, employees may elect to purchase FON common stock or PCS
common stock at a price equal to 85% of the market value on the grant or
exercise date, whichever is less. At year-end 2000, authorized FON shares under
this plan approximated 12.1 million and authorized PCS shares approximated 7.6
million.
Sprint PCS Long-term Incentive Plan
Prior to 1999, PCS Group employees meeting certain eligibility requirements
were included in Sprint PCS' long-term incentive plan (LTIP). Under this plan,
participants received appreciation units based on independent appraisals.
Appreciation on the units was based on annual independent appraisals. The 1997
plan year appreciation units vested 25% per year beginning one year from the
grant date and also expire after 10 years.
In connection with the PCS Restructuring, Sprint discontinued the Sprint PCS
LTIP plan. The appreciation units were converted to PCS shares and options to
buy PCS shares, based on a formula designed to replace the appreciated value of
the units at the beginning of July 1998. For vested units at year-end 1998,
participants could elect to receive the appreciation in cash, or in shares and
options. Most elected to receive shares and options.
In 1999, Sprint began issuing the shares, and options became exercisable, based
on the vesting requirements of the converted units. At the end of 2000, all
replacement options and shares were fully vested.
Pro Forma Disclosures
Pro forma net income (loss) and earnings (loss) per share have been determined
as if Sprint had used the fair value method of accounting for its stock option
grants and ESPP share elections. Under this method, compensation expense is
recognized over the applicable vesting periods and is based on the
I-33
shares under option and their related fair values on the grant date.
The FON Group's pro forma net income was $1,668 million for 2000 and $1,434
million for 1999 and pro forma diluted EPS was $1.88 for 2000 and $1.63 for
1999. From the Recapitalization date through year-end 1998, the FON Group's pro
forma net income was $103 million and pro forma diluted EPS was $0.12. The FON
Group's pro forma net income was reduced by $10 million or $0.01 per FON share
in 2000 and 1999, and $19 million or $0.02 per FON share in 1998 due to
additional compensation resulting from modifications to terms of options and
ESPP share elections related to the Recapitalization.
The PCS Group's pro forma net loss was $2,135 million in 2000 and $2,578
million in 1999 and pro forma diluted loss per share was $2.22 in 2000 and
$2.82 in 1999. The application of SFAS No. 123 did not have a material impact
on the PCS Group's pro forma net loss from the Recapitalization date through
year-end 1998.
Prior to the Recapitalization date, Sprint's pro forma net income was $785
million in 1998 and pro forma diluted earnings per share was $1.79 in 1998.
Fair Value Disclosures
The following tables reflect the weighted average fair value per option
granted, as well as the significant weighted average assumptions used in
determining those fair values using the Black-Scholes pricing model:
FON Common Stock
- -----------------------------------------------
2000 MISOP SOP
- -----------------------------------------------
Fair value on grant date $24.24 $23.86
Risk-free interest rate 6.8% 6.1%
Expected volatility 26.7% 26.6%
Expected dividend yield 0.8% 0.8%
Expected life (years) 6 6
- -----------------------------------------------
2000 Accelerated Retention
- -----------------------------------------------
Fair value on grant date $13.77 $22.92
Risk-free interest rate 6.1% 6.6%
Expected volatility 33.2% 26.7%
Expected dividend yield 1.4% 0.8%
Expected life (years) 6 6
- -----------------------------------------------
1999 MISOP SOP
- -----------------------------------------------
Fair value on grant date $ 9.86 $12.09
Risk-free interest rate 4.8% 4.8%
Expected volatility 26.6% 26.6%
Expected dividend yield 1.3% 1.3%
Expected life (years) 4 6
PCS Common Stock
- -----------------------------------------------
2000 MISOP SOP
- -----------------------------------------------
Fair value on grant date $33.06 $33.93
Risk-free interest rate 6.8% 6.1%
Expected volatility 63.2% 67.7%
Expected dividend yield -- --
Expected life (years) 6 6
- -----------------------------------------------
2000 Accelerated Retention
- -----------------------------------------------
Fair value on grant date $35.30 $34.83
Risk-free interest rate 6.1% 6.6%
Expected volatility 63.8% 63.2%
Expected dividend yield -- --
Expected life (years) 6 6
- -----------------------------------------------
1999 MISOP SOP
- -----------------------------------------------
Fair value on grant date $ 8.55 $10.12
Risk-free interest rate 4.8% 4.8%
Expected volatility 67.7% 67.7%
Expected dividend yield -- --
Expected life (years) 4 6
- -----------------------------------------------
1998 SOP
- -----------------------------------------------
Fair value on grant date $ 5.44
Risk-free interest rate 4.4%
Expected volatility 75.0%
Expected dividend yield --
Expected life (years) 6
Sprint Common Stock
- -----------------------------------------
1998 MISOP SOP
- -----------------------------------------
Fair value on grant date $14.58 $16.00
Risk-free interest rate 5.5% 5.5%
Expected volatility 21.7% 21.7%
Expected dividend yield 1.7% 1.7%
Expected life (years) 5 6
Employees Stock Purchase Plan
During 2000, FON Group and PCS Group employees elected to purchase 2.3 million
FON and 5.4 million PCS ESPP shares. Using the Black-Scholes pricing model, the
weighted average fair value was $12.99 per share for each FON election and
$20.68 per share for each PCS election.
During 1999, FON Group and PCS Group employees elected to purchase 1.3 million
FON and 6.5 million PCS ESPP shares. Using the Black-Scholes pricing model, the
weighted average fair value was $11.12 per share for each FON election and
$8.08 per share for each PCS election.
During 1998, FON Group employees elected to purchase 2.1 million ESPP shares
with each election having a weighted average fair value (using the Black-
Scholes pricing model) of $13.90 per share.
I-34
Stock Options
Stock option plan activity was as follows:
FON Common Stock
- -----------------------------------------------
Weighted
Average
per
Sprint Share
FON Exercise
Shares Price
- -----------------------------------------------
(millions)
Converted in November 1998 47.6 $21.01
Exercised (0.2) 15.95
-----
Outstanding, year-end 1998 47.4 21.03
Granted 20.9 41.51
Exercised (13.5) 18.93
Forfeited/Expired (2.8) 28.61
-----
Outstanding, year-end 1999 52.0 29.48
Granted 24.3 58.61
Exercised (11.5) 26.32
Forfeited/Expired (20.0) 58.48
-----
Outstanding, year-end 2000 44.8 $33.12
----------------------
PCS Common Stock
- -----------------------------------------------
Weighted
Average
per
Sprint Share
PCS Exercise
Shares Price
- -----------------------------------------------
(millions)
Converted in November 1998 23.8 $ 4.58
Granted 5.4 7.92
-----
Outstanding, year-end 1998 29.2 5.20
Granted 21.8 17.67
Exercised (9.2) 6.05
Forfeited/Expired (2.0) 9.64
-----
Outstanding, year-end 1999 39.8 11.64
Granted 19.1 52.68
Exercised (16.2) 10.84
Forfeited/Expired (15.8) 52.08
-----
Outstanding, year-end 2000 26.9 $17.43
----------------------
Sprint Common Stock
- ---------------------------------------------------
Weighted
Average
per
Share
Sprint Exercise
Shares Price
- ---------------------------------------------------
(millions)
Outstanding, beginning of 1998 18.7 $37.85
Granted 9.1 59.73
Exercised (3.4) 33.54
Forfeited/Expired (0.6) 47.28
----
Converted in November 1998 23.8 $46.60
-------------------------
The following tables summarize outstanding and exercisable options at year-end
2000:
FON Common Stock
- -----------------------------------------------
Options Outstanding
--------------------------------
Weighted
Average Weighted
Range of Remaining Average
Exercise Number Contractual Exercise
Prices Outstanding Life Price
- -----------------------------------------------
(millions) (years)
$ 5.00-$ 9.99 0.2 0.5 $ 8.67
10.00- 19.99 8.1 5.2 16.62
20.00- 29.99 14.4 6.8 24.73
30.00- 39.99 14.8 8.0 38.51
40.00- 49.99 2.3 5.9 44.64
50.00- 59.99 0.7 5.5 53.63
60.00- 69.99 3.9 7.9 64.71
70.00- 79.99 0.4 5.6 74.02
- -----------------------------------------------
- -----------------------------------
Options Exercisable
--------------------
Weighted
Range of Average
Exercise Number Exercise
Prices Exercisable Price
- -----------------------------------
(millions)
$ 5.00-$ 9.99 0.2 $ 8.67
10.00- 19.99 8.1 16.62
20.00- 29.99 14.3 24.71
30.00- 39.99 13.9 38.63
40.00- 49.99 1.4 45.60
50.00- 59.99 0.4 52.08
60.00- 69.99 1.5 64.73
70.00- 79.99 0.4 74.02
- -----------------------------------
PCS Common Stock
- --------------------------------------------------------------------------------
Options Outstanding
--------------------------------
Weighted
Average Weighted
Range of Remaining Average
Exercise Number Contractual Exercise
Prices Outstanding Life Price
- -----------------------------------------------
(millions) (years)
$ 2.00-$ 9.99 11.5 6.2 $ 5.26
10.00- 19.99 10.6 8.0 15.60
20.00- 29.99 0.3 5.8 26.59
30.00- 39.99 0.3 6.4 33.16
40.00- 49.99 0.4 6.3 46.44
50.00- 59.99 3.4 8.4 53.07
60.00- 69.99 0.4 7.3 62.82
- -----------------------------------------------
- -----------------------------------
Options Exercisable
--------------------
Weighted
Range of Average
Exercise Number Exercise
Prices Exercisable Price
- -----------------------------------
(millions)
$ 2.00-$ 9.99 11.5 $ 5.26
10.00- 19.99 10.6 15.60
20.00- 29.99 0.2 27.10
30.00- 39.99 0.2 32.78
40.00- 49.99 0.2 45.88
50.00- 59.99 1.4 52.32
- -----------------------------------
I-35
- --------------------------------------------------------------------------------
13. Commitments and Contingencies
- --------------------------------------------------------------------------------
Litigation, Claims and Assessments
In December 2000, Amalgamated Bank, an institutional shareholder, filed a
derivative action purportedly on behalf of Sprint against certain of its
current and former officers and directors in the Jackson County, Missouri,
Circuit Court. The complaint alleges that the individual defendants breached
their fiduciary duties to Sprint and were unjustly enriched by making
undisclosed amendments to Sprint's stock option plans, by failing to disclose
certain information concerning regulatory approval of the proposed merger of
Sprint and WorldCom, and by overstating Sprint's earnings for the first quarter
of 2000. The plaintiff seeks damages, to be paid to Sprint, in an unspecified
amount. Two additional, substantially identical, derivative actions by other
shareholders have been filed.
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 be material to Sprint's consolidated financial
statements.
Commitments
The PCS Group has purchase commitments with various vendors to purchase
handsets and other equipment through 2001. Outstanding commitments at year-end
2000 were approximately $830 million. Purchases under these commitments during
2000 totaled approximately $2 million.
Operating Leases
Sprint's minimum rental commitments at year-end 2000 for all noncancelable
operating leases, consisting mainly of leases for data processing equipment,
real estate, cell and switch sites, and office space, are as follows:
- ----------------------
(millions)
2001 $577
2002 409
2003 283
2004 194
2005 119
Thereafter 364
- ----------------------
Sprint's gross rental expense totaled $1.0 billion in 2000, $890 million in
1999 and $730 million in 1998. Rental commitments for subleases, contingent
rentals and executory costs were not significant. The table excludes renewal
options related to certain cell and switch site leases. These renewal options
generally have five-year terms and may be exercised from time to time.
- --------------------------------------------------------------------------------
14. 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 year-end 2000 estimated fair values, those
amounts have not been comprehensively revalued for purposes of these financial
statements since that date. Therefore, estimates of fair value after year-end
2000 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:
- -----------------------------------------------------------------
2000
-------------------
Carrying Estimated
Amount Fair Value
- -----------------------------------------------------------------
(millions)
Cash and equivalents $ 239 $ 239
Investments in securities 66 66
Long-term debt and capital lease obligations 18,719 17,823
- -----------------------------------------------------------------
- -----------------------------------------------------------------
1999
-------------------
Carrying Estimated
Amount Fair Value
- -----------------------------------------------------------------
(millions)
Cash and equivalents $ 120 $ 120
Investments in securities 464 464
Long-term debt and capital lease obligations 16,772 16,126
- -----------------------------------------------------------------
The carrying amounts of Sprint's cash and equivalents approximate fair value at
year-end 2000 and 1999. The estimated fair value of investments in equity
securities was based on quoted market prices. The estimated fair value of long-
term debt was based on quoted market prices for publicly traded issues. The
estimated fair value of all other issues was based on the present value of
estimated future cash flows using a discount rate based on the risks involved.
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.
I-36
However, Sprint does not anticipate nonperformance by any of the counterparties
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 $1.0 billion outstanding at year-end 2000 and $598 million
outstanding at year-end 1999. Net interest expense related to interest rate
swap agreements was $2 million in 2000, $1 million in 1999 and $0.1 million in
1998.
In 1998, Sprint deferred losses from the termination of interest rate swap
agreements used to hedge a portion of a $5.0 billion debt offering. These
losses, totaling $75 million, are being amortized to interest expense using the
effective interest method over the term of the debt. At year-end 2000, the
remaining unamortized deferred loss totaled $61 million.
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 open forward contracts to buy
various foreign currencies of $23 million at year-end 2000 and $14 million at
year-end 1999. Sprint had outstanding open purchase option contracts to call
various foreign currencies of $1 million at year-end 1999. There were no such
contracts open at year-end 2000. The premium paid for an option is deferred and
amortized over the life of the option. The forward contracts and options open
at year-end 2000 and 1999 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. Including hedge costs, a net gain of $0.4
million was recorded in 2000, a net loss of $0.3 million was recorded in 1999,
and a net loss of $0.6 million was recorded in 1998.
- --------------------------------------------------------------------------------
15. Additional Financial Information
- --------------------------------------------------------------------------------
Segment Information
The FON Group operates in three business segments, based on how Sprint manages
the FON Group's operations and assesses its performance: the global markets
division, the local division and the product distribution and directory
publishing businesses. See Note 14 of Sprint FON Group's Notes to the Combined
Financial Statements for more information about the FON Group's business
segments.
The PCS Group businesses operate in a single segment.
Sprint generally accounts for transactions between segments based on fully
distributed costs, which Sprint believes approximates fair value.
I-37
Segment financial information was as follows:
- ---------------------------------------------------------------------------
Sprint Sprint Intergroup
FON Group PCS Group Eliminations(/1/) Consolidated
- ---------------------------------------------------------------------------
(millions)
2000
Net operating revenues $17,688 $ 6,341 $(416) $23,613
Intergroup revenues 381 35 (416) --
Depreciation and
amortization 2,267 1,877 -- 4,144
Operating expenses 15,255 8,269 (416) 23,108
Operating income (loss) 2,433 (1,928) -- 505
Operating margin 13.8% NM -- 2.1%
Equity in losses of
affiliates (181) (55) -- (236)
Capital expenditures 4,105 3,047 -- 7,152
Total assets 23,649 19,763 (811) 42,601
1999
Net operating revenues $17,160 $ 3,373 $(268) $20,265
Intergroup revenues 264 4 (268) --
Depreciation and
amortization 2,129 1,523 -- 3,652
Operating expenses 14,230 6,610 (268) 20,572
Operating income (loss) 2,930 (3,237) -- (307)
Operating margin 17.1% NM -- NM
Equity in losses of
affiliates (73) -- -- (73)
Capital expenditures 3,534 2,580 -- 6,114
Total assets 21,803 17,924 (477) 39,250
1998
Net operating revenues $15,958 $ 1,294 $(108) $17,144
Intergroup revenues 108 -- (108) --
Depreciation and
amortization 1,921 789 -- 2,710
Operating expenses 13,198 3,864 (108) 16,954
Operating income (loss) 2,760 (2,570) -- 190
Operating margin 17.3% NM -- NM
Other partners' loss in
Sprint PCS -- 1,251 -- 1,251
Equity in losses of
affiliates (41) -- -- (41)
Capital expenditures 3,159 1,072 -- 4,231
Total assets 19,001 15,165 (909) 33,257
NM = Not meaningful
(/1/) FON Group revenues eliminated in consolidation consist principally of
long-distance services provided to the PCS Group for resale to PCS
customers and for internal business use and telemarketing services
provided by the FON Group for PCS sales programs.
More than 95% of Sprint's revenues are from domestic customers located within
the United States.
Equipment sales to one retail chain and the subsequent service revenues
generated by sales to its customers represent approximately 25% of the PCS
Group's net operating revenues in 2000, 28% in 1999 and 25% in 1998.
I-38
Supplemental Cash Flows Information
Sprint's cash paid (received) for interest and income taxes was as follows:
- -----------------------------------------------------------
2000 1999 1998
- -----------------------------------------------------------
(millions)
Interest (net of capitalized interest) $1,022 $ 714 $217
------------------------------------
Income taxes $ (386) $(131) $307
------------------------------------
Sprint's noncash activities included the following:
- -----------------------------------------------------------------------------
2000 1999 1998
- -----------------------------------------------------------------------------
(millions)
Tax benefit from stock options exercised $424 $ 254 $ 49
-------------------------------------------------------
Stock received for stock options exercised $ 69 $ 118 $ 18
-------------------------------------------------------
Noncash extinguishment of debt $275 $ 78 $ --
-------------------------------------------------------
Common stock issued under Sprint's employee benefit stock
plans $255 $ 144 $ 99
-------------------------------------------------------
Capital lease obligations $-- $ 77 $ 460
-------------------------------------------------------
Common stock issued for Cox PCS acquisition $-- $1,146 $ --
-------------------------------------------------------
Debt assumed in the broadband fixed wireless acquisitions $-- $ 575 $ --
-------------------------------------------------------
Common stock issued to the Cable Partners to purchase
Sprint PCS $-- $ -- $3,200
-------------------------------------------------------
Preferred stock issued to the Cable Partners in exchange
for interim financing $-- $ -- $ 247
-------------------------------------------------------
See Note 2 for more details about the assets and liabilities acquired in
business combinations.
Related Party Transactions
The Cable Partners advanced PhillieCo $26 million in 1998. This advance was
repaid in the 1999 first quarter.
- --------------------------------------------------------------------------------
16. Recently Issued Accounting Pronouncements
- --------------------------------------------------------------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This standard
requires all derivatives to be recorded on the balance sheet as either assets
or liabilities and be measured at fair value. Gains or losses from changes in
the derivative values are to be accounted for based on how the derivative is
used and whether it qualifies for hedge accounting. When this statement was
adopted in January 2001, it had no material impact on Sprint's consolidated
financial statements.
In September 2000, the Financial Accounting Standards Board issued SFAS No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities--a replacement of FASB Statement No. 125." This
statement revises the standards for accounting for securitizations and other
transfers of financial assets and provides consistent standards for
distinguishing transfers from sales and secured borrowings. This statement is
effective for transactions occurring after March 31, 2001 and is not expected
to have a material impact on Sprint's consolidated financial statements.
I-39
- --------------------------------------------------------------------------------
17. Quarterly Financial Data (Unaudited)
- --------------------------------------------------------------------------------
Quarter
--------------------------------
2000 1st 2nd 3rd 4th(/1/)
- -----------------------------------------------------------------------
(millions, except per share
data)
Net operating revenues(/2/)(/3/) $5,529 $5,821 $6,040 $6,223
Operating income (loss) 156 122 357 (130)
Loss from continuing operations (65) (91) (6) (414)
Net income (loss)(/3/) 605 (91) (6) (415)
Earnings (Loss) per common share from
continuing operations
FON common stock
Diluted 0.50 0.41 0.43 0.11
Basic 0.51 0.42 0.44 0.11
PCS common stock
Diluted and Basic (0.54) (0.48) (0.41) (0.53)
- -----------------------------------------------------------------------
Quarter
--------------------------------
1999 1st 2nd 3rd 4th
- -----------------------------------------------------------------------
(millions, except per share
data)
Net operating revenues(/2/) $4,735 $4,982 $5,158 $5,390
Operating income (loss) (90) 28 (64) (181)
Loss from continuing operations (171) (103) (196) (275)
Net loss (220) (169) (256) (290)
Earnings (Loss) per common share from
continuing operations(/4/),(/5/)
FON common stock
Diluted 0.49 0.51 0.48 0.49
Basic 0.50 0.52 0.49 0.50
PCS common stock
Diluted and Basic (0.71) (0.61) (0.65) (0.75)
- -----------------------------------------------------------------------
(/1/) See Notes 3 and 4 of Notes to Consolidated Financial Statements for
information about nonrecurring charges recorded in the 2000 fourth
quarter.
(/2/) Certain reclassifications were made between net operating revenues and
operating expenses from amounts reported in the 2000 reports on Form 10-Q
to conform to industry events or practices. These reclassifications had
no impact on operating income (loss) as previously reported.
(/3/) In the 2000 fourth quarter, Sprint adopted SEC Staff Accounting Bulletin
No. 101, "Revenue Recognition in Financial Statements," (SAB 101). As
required by SAB 101, 2000 net operating revenues have been restated from
amounts reported in the 2000 quarterly reports on Form 10-Q. Net
operating revenues were reduced by $4 million in the 2000 first quarter,
$31 million in the 2000 second quarter and $33 million in the 2000 third
quarter. Sprint also restated the 2000 first quarter net income by
recording a $2 million loss for the cumulative effect of change in
accounting principle at the effective adoption date of SAB 101.
(/4/) In the 1999 second quarter, Sprint effected a two-for-one stock split of
its FON stock. FON Group earnings per share for prior periods have been
restated to reflect this stock split.
(/5/) In the 2000 first quarter, Sprint effected a two-for-one stock split of
its PCS stock. PCS Group loss per share for prior periods have been
restated to reflect this stock split.
- --------------------------------------------------------------------------------
18. Subsequent Events (Unaudited)
- --------------------------------------------------------------------------------
In January 2001, Sprint issued $2.4 billion of debt securities. Sprint had $2
billion of unissued securities under its existing shelf registration statement
with the SEC, and registered an additional $400 million prior to the issuance.
These borrowings have interest rates ranging from 7.1% to 7.6% and have
scheduled maturities in 2006 and 2011. The proceeds were allocated to the PCS
Group and used mainly to repay existing debt.
In February 2001, Sprint agreed to end its exclusive alliance with EarthLink
and relinquished its seats on EarthLink's Board of Directors. As a result of
these changes, Sprint will now treat its investment in EarthLink as a cost
method investment.
In February 2001, Sprint filed a registration statement with the SEC for a
secondary offering of 174.8 million shares of FON stock (including 22.8 million
shares to cover over-allotments) owned by FT and DT, including the FON stock
underlying the Class A common stock. Sprint will not receive any of the
proceeds from the sale of this stock.
In February 2001, Sprint's Board of Directors declared dividends of 12.5 cents
per share on the Sprint FON common stock and Class A common stock. Dividends
will be paid March 30, 2001.
I-40
SPRINT CORPORATION
SCHEDULE II--CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2000, 1999 and 1998
Additions (Deductions)
---------------------------------
Balance Charged Balance
Beginning PCS Charged to Other Other End of
of Year Restructuring to Income Accounts Deductions Year
- ---------------------------------------------------------------------------------------------
(millions)
2000
Allowance for doubtful
accounts $274 $-- $666 $ 8 $(559)(/1/) $389
------------------------------------------------------------------
Valuation allowance--
deferred income tax
assets $480 $-- $115 $ 3 $ -- $598
------------------------------------------------------------------
1999
Allowance for doubtful
accounts $182 $-- $584 $ 7 $(499)(/1/) $274
------------------------------------------------------------------
Valuation allowance--
deferred income tax
assets $249 $-- $ 47 $193(/4/) $ (9) $480
------------------------------------------------------------------
1998
Allowance for doubtful
accounts $147 $ 8(/2/) $367 $ 3 $(343)(/1/) $182
------------------------------------------------------------------
Valuation allowance--
deferred income tax
assets $ 12 $229(/3/) $-- $ 16 $ (8) $249
------------------------------------------------------------------
(/1/) Accounts written off, net of recoveries.
(/2/) As discussed in Note 2, the PCS Group's assets and liabilities were
recorded at their fair values on the PCS Restructuring date. Therefore,
the data presented in this Schedule reflects activity since the PCS
Restructuring.
(/3/) Represents a valuation allowance for deferred income tax assets recorded
in connection with the PCS Restructuring.
(/4/) Represents a valuation allowance for deferred income tax assets relating
to the net operating loss carryforwards acquired in the purchase of the
broadband fixed wireless companies.
I-41
[SPRINT Logo]
Annex II
Sprint FON Group
Combined Financial Information
SELECTED FINANCIAL DATA Sprint FON Group
- ------------------------------------------------------------------------------
2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------
(millions, except per share data)
Results of Operations
- ------------------------------------------------------------------------------
Net operating revenues $17,688 $17,160 $15,958 $14,947 $13,874
Operating income(/1/) 2,433 2,930 2,760 2,470 2,268
Income from continuing
operations(/1/),(/2/) 1,292 1,736 1,675 1,513 1,373
Earnings per Share and Dividends(/3/)
- ------------------------------------------------------------------------------
Earnings per common share from
continuing
operations(/1/),(/2/),(/3/)
Diluted $ 1.45 $ 1.97 $ 1.93 $ 1.73 $ 1.61
Basic 1.47 2.01 1.96 1.76 1.63
Dividends per common share $ .50 $ .50 $ .50 $ .50 $ .50
Financial Position
- ------------------------------------------------------------------------------
Total assets $23,649 $21,803 $19,001 $16,581 $15,655
Property, plant and equipment, net 15,833 14,002 12,464 11,307 10,464
Total debt (including short-term
borrowings) 4,508 5,433 4,442 3,880 3,274
Group equity 12,343 10,514 9,024 7,639 7,332
Cash Flow Data
- ------------------------------------------------------------------------------
Cash from operating activities(/4/) $ 4,323 $ 3,713 $ 3,915 $ 2,899 $ 2,267
Capital expenditures 4,105 3,534 3,159 2,709 2,434
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 group equity as previously reported.
The FON Group was created as a result of the PCS Restructuring and
Recapitalization. See Sprint's "Management's Discussion and Analysis of
Financial Condition and Results of Operations--General" for more information.
(/1/) In 2000, the FON Group recorded a nonrecurring charge of $238 million
which principally represents a write-down of goodwill, and a $163
million nonrecurring charge for costs associated with the proposed
WorldCom merger, which was terminated. These charges reduced operating
income by $401 million and income from continuing operations by $257
million. The FON Group recorded nonrecurring charges of $20 million in
1997 and $60 million in 1996 related to litigation within the global
markets division. These charges reduced income from continuing
operations by $13 million in 1997 and $36 million in 1996.
(/2/) In 2000, the FON Group recorded nonrecurring charges of $122 million
related to write-downs of certain equity investments. These charges
reduced income from continuing operations by $109 million. Also in 2000,
the FON Group recorded net nonrecurring gains of $71 million from the
sale of an independent directory publishing operation and from
investment activities, which increased income from continuing operations
by $44 million. In 1999, the FON Group recorded net nonrecurring gains
of $54 million from investment activities which increased income from
continuing operations by $35 million. In 1998, the FON Group recorded
net nonrecurring gains of $104 million mainly from the sale of local
exchanges. This increased income from continuing operations by $62
million. In 1997, the FON Group recorded nonrecurring gains of $71
million mainly from sales of local exchanges and certain investments.
These gains increased income from continuing operations by $44 million.
(/3/) In the 1999 second quarter, Sprint effected a two-for-one stock split of
its FON common stock. As a result, diluted and basic earnings per common
share and dividends have been restated for periods before this stock
split. Earnings per common share and dividends for the FON Group for
periods before 1999 are on a pro forma basis and assume the FON shares
created in the 1998 recapitalization of Sprint's common stock existed
for all periods presented.
(/4/) The 1996 amount was reduced by $600 million for cash required to
terminate an accounts receivable sales agreement.
II-1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Sprint FON Group
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
General
- -------------------------------------------------------------------------------
See Sprint's "Management's Discussion and Analysis of Financial Condition and
Results of Operations--General" for more information.
- -------------------------------------------------------------------------------
Forward-looking Information
- -------------------------------------------------------------------------------
See Sprint's "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Forward-looking Information" for a discussion of
forward-looking information.
- -------------------------------------------------------------------------------
Sprint FON Group
- -------------------------------------------------------------------------------
During 2000, the FON Group changed its segment reporting to align financial
reporting with changes in how Sprint manages the FON Group's operations and
assesses its performance. The FON Group operates in three business segments:
the global markets division, the local division and the product distribution
and directory publishing businesses.
Global Markets Division
The global markets division provides a broad suite of communications services
targeted to domestic business and residential customers, multinational
corporations and other communications companies. These services include
domestic and international voice; data communications such as Internet and
frame relay access and transport, web hosting, virtual private networks, and
managed security services; and broadband services.
Sprint is deploying integrated communications services, referred to as Sprint
ION(SM). Sprint ION extends Sprint's existing network capabilities to the
customer and enables Sprint to provide the network infrastructure to meet
customers' demands for advanced services including integrated voice, data,
Internet and video. It is also expected to be the foundation for Sprint to
provide advanced services in the competitive local service market. Sprint uses
various advanced services last-mile technologies, including dedicated access
and Digital Subscriber Line (xDSL), and expects to use Multipoint Multichannel
Distribution Services (MMDS).
The global markets division also includes the operating results of the cable
TV service operations of the broadband fixed wireless companies after their
1999 acquisition dates. During 2000, Sprint converted several markets served
by MMDS capabilities from cable TV services to high-speed data services.
Global markets operating results reflect the development costs and the
operating revenues and expenses of these broadband fixed wireless services.
Sprint intends to provide broadband data and voice services to additional
markets served by these capabilities.
Included in the global markets division are the costs of establishing
international operations beginning in 2000.
This division also includes the FON Group's investments in EarthLink, Inc., an
Internet service provider; Call-Net, a long distance provider in Canada
operating under the Sprint brand name; Intelig, a long distance provider in
Brazil; and certain other telecommunications investments and ventures.
Local Division
The local division consists mainly of regulated local phone companies serving
approximately 8.3 million access lines in 18 states. It provides local phone
services, access by phone customers and other carriers to its local network,
consumer long distance services to customers within its franchise territories,
sales of telecommunications equipment, and other long distance services within
certain regional calling areas, or LATAs.
Product Distribution and Directory Publishing Businesses
The product distribution business provides wholesale distribution services of
telecommunications products. The directory publishing business publishes and
markets white and yellow page phone directories.
- -------------------------------------------------------------------------------
Results of Operations
- -------------------------------------------------------------------------------
- -----------------------------------------
2000 1999 1998
- -----------------------------------------
(millions)
Net operating
revenues $17,688 $17,160 $15,958
Operating
expenses 15,255 14,230 13,198
- -----------------------------------------
Operating income $ 2,433 $ 2,930 $ 2,760
----------------------
Income from
continuing
operations $ 1,292 $ 1,736 $ 1,675
----------------------
Capital
expenditures $ 4,105 $ 3,534 $ 3,159
----------------------
In 2000, operating expenses include nonrecurring charges of $238 million
primarily related to a write-down of goodwill, and $163 million for costs
associated with the terminated WorldCom merger. These charges reduced
operating income by $401 million and income from continuing operations by $257
million. Income from continuing operations in
II-2
2000 also includes a nonrecurring charge of $109 million related to the write-
downs of certain equity investments and net nonrecurring gains of $44 million
from the sale of an independent directory publishing operation and from
investment activities. In 1999, income from continuing operations includes net
nonrecurring gains of $35 million from investment activities. In 1998, income
from continuing operations includes a nonrecurring gain of $62 million mainly
from the sale of local exchanges.
Excluding nonrecurring items, operating income was $2.8 billion in 2000, $2.9
billion in 1999 and $2.8 billion in 1998; income from continuing operations was
$1.6 billion in 2000, $1.7 billion in 1999 and $1.6 billion in 1998.
- --------------------------------------------------------------------------------
Segmental Results of Operations
- --------------------------------------------------------------------------------
Beginning in 2000, the FON Group combined its long distance operation, Sprint
ION, broadband fixed wireless services and certain other ventures into one
division, global markets, to align financial reporting with changes in how
Sprint manages operations and assesses performance. The global markets division
now includes four major revenue streams: voice, data, Internet and other. In
connection with the resegmentation, the FON Group shifted the recognition of
consumer long distance revenues and expenses associated with customers in its
local franchise territories from the global markets division to the local
division. Prior periods have been restated to reflect these changes.
Global Markets Division
- --------------------------------------------
2000 1999 1998
- --------------------------------------------
(millions)
Net operating
revenues
Voice $ 7,094 $ 7,445 $7,079
Data 1,937 1,696 1,396
Internet 920 615 434
Other 577 552 632
- --------------------------------------------
Total net
operating
revenues 10,528 10,308 9,541
- --------------------------------------------
Operating
expenses
Costs of
services and
products 5,558 4,947 4,784
Selling, general
and
administrative 3,026 3,141 2,639
Depreciation and
amortization 1,121 1,045 928
Asset write-down 238 -- --
- --------------------------------------------
Total operating
expenses 9,943 9,133 8,351
- --------------------------------------------
Operating income $ 585 $ 1,175 $1,190
-------------------------
Operating margin 5.6% 11.4% 12.5%
-------------------------
Capital
expenditures $ 2,294 $ 1,774 $1,518
-------------------------
Net Operating Revenues
Net operating revenues increased 2% in 2000 and 8% in 1999. The increases
mainly reflect strong data communications services revenue growth. A more
competitive pricing environment and a change in the mix of products sold more
than offset minute growth of 18% in 2000. Strong minute growth of 22% in 1999
was partly offset by a more competitive pricing environment and a change in the
mix of products sold. The minute growth in 2000 was also offset by a reduction
in access cost pass-throughs resulting from the implementation of the Coalition
for Affordable Local and Long Distance Service proposal (CALLS).
Voice Revenues
Voice revenues decreased 5% in 2000 and increased 5% in 1999. The 2000 decrease
was largely due to a decline in consumer voice revenues as a result of a more
competitive pricing environment, lower calling card usage due to the increased
use of wireless phones, and the implementation of CALLS. The 1999 increase
mainly reflects increased wholesale voice revenues due to strong minute growth
mainly from international calls and increased inbound and outbound toll-free
calls.
Data Revenues
Data revenues reflect sales of current-generation data services including
asynchronous transfer mode and frame relay services. These revenues increased
14% in 2000 and 21% in 1999 due to increased sales as a result of an increase
emphasis on these services.
Internet Revenues
Internet revenues increased 50% in 2000 and 42% in 1999 due to strong growth in
dial-up Internet service provider-related revenues and dedicated service
revenues. Internet revenues showed strong growth because of continued demand
and increased use of the Internet.
Other Revenues
Other revenues increased 5% in 2000 and decreased 13% in 1999. The 2000
increase was due to sales of capacity on transoceanic cable and the inclusion
of a full year of revenues from the cable TV service operations of the
broadband fixed wireless companies purchased in 1999 largely offset by a
decline in legacy data services. The 1999 decrease was due to a decline in
legacy data services.
Costs of Services and Products
Costs of services and products include interconnection costs paid to local
phone companies, other domestic service providers and foreign phone companies
to complete calls made by the division's domestic customers, costs to operate
and maintain the long distance network, costs of equipment and transmission
capacity sales, and costs related to the
II-3
development and deployment of Sprint ION. These costs increased 12% in 2000 and
3% in 1999.
Interconnection costs remained flat in 2000 and increased 3% in 1999.
Reductions in per-minute international access costs as well as domestic access
costs offset the impact of increased calling volumes in 2000. Increased calling
volumes in 1999 were partly offset by reductions in per-minute costs for both
domestic and international access. The domestic rate reductions were generally
due to the FCC-mandated access rate reductions that took effect in January and
July 1998, July 1999 and July 2000. The access rate reductions in July 2000
included the implementation of CALLS.
All other costs of services and products increased 42% in 2000 and 5% in 1999.
The 2000 increase was largely due to the expansion of Sprint ION business
services nationwide and the launch of consumer services in select markets as
well as increased sales of capacity on transoceanic cable. Increased costs of
services and products in both 2000 and 1999 were driven by growth in data
services. The 1999 increase was also impacted by increases in network equipment
operating leases expense.
Total costs of services and products for global markets were 52.8% of net
operating revenues in 2000, 48.0% in 1999 and 50.1% in 1998.
Selling, General and Administrative Expense
Selling, general and administrative (SG&A) expense decreased 4% in 2000 and
increased 19% in 1999. The 2000 decrease is due to a strong emphasis on cost
control. The 1999 increase mainly reflects the overall growth of the business
as well as increased marketing and promotions to support products and services,
including the rollout of an airline alliance program which enabled customers to
earn frequent flyer miles when they used Sprint's services.
SG&A expense includes costs associated with the continued development and
deployment activities for Sprint ION, including costs for systems and
operations development, product development and advertising associated with
market launches. SG&A expense for Sprint ION was $281 million in 2000, $320
million in 1999 and $138 million in 1998.
Total SG&A expense for the global markets division was 28.7% of net operating
revenues in 2000, 30.5% in 1999 and 27.7% in 1998.
Depreciation and Amortization Expense
Depreciation and amortization expense increased 7% in 2000 and 13% in 1999. The
increases mainly reflect a rapidly increasing asset base for Sprint ION as well
as an increased asset base to enhance network reliability, meet increased
demand for voice and data-related services and upgrade capabilities for
providing new products and services. Depreciation and amortization expense was
10.6% of net operating revenues in 2000, 10.1% in 1999 and 9.7% in 1998.
Local Division
- -------------------------------------------------------------
2000 1999 1998
- -------------------------------------------------------------
(millions)
Net operating revenues
Local service $2,846 $2,677 $2,469
Network access 1,987 1,918 1,894
Toll service 717 611 503
Other 605 752 733
- -------------------------------------------------------------
Total net operating revenues $6,155 $5,958 $5,599
- -------------------------------------------------------------
Operating expenses
Costs of services and products 1,965 2,016 1,889
Selling, general and administrative 1,288 1,320 1,325
Depreciation and amortization 1,139 1,069 984
- -------------------------------------------------------------
Total operating expenses 4,392 4,405 4,198
- -------------------------------------------------------------
Operating income $1,763 $1,553 $1,401
----------------------------------------
Operating margin 28.6% 26.1% 25.0%
----------------------------------------
Capital expenditures $1,371 $1,354 $1,374
----------------------------------------
Beginning in July 2000, Sprint changed its transfer pricing for certain
transactions between FON Group entities to more accurately reflect market
pricing. The main effect of this change was a reduction in the local division's
"Net Operating Revenues--Other Revenues." In addition, Sprint's local division
sold a customer service and telemarketing organization to the PCS Group at the
beginning of the 2000 second quarter and sold approximately 81,000 access lines
in Illinois in November 1998. For comparative purposes, the following
discussion of local division results assumes the transfer pricing change, the
sale of the customer service and telemarketing organization, and the sale of
exchanges occurred at the beginning of 1998. Adjusting for these changes,
operating margins would have been 28.4% in 2000, 25.7% in 1999 and 24.4% in
1998.
Net Operating Revenues
Net operating revenues increased 5% in 2000 and 7% in 1999. These increases
mainly reflect increased sales of network-based services such as Caller ID and
Call Waiting, increased long distance revenues, and customer access line
growth. Sales of network-based services and long distance services increased
due to strong demand for bundled services which combine local service, network-
based features and long distance calling. Customer access lines increased 4% in
2000 and 5% in 1999. Net operating revenues were $6.1 billion in 2000, $5.8
billion in 1999 and $5.5 billion in 1998.
II-4
Local Service Revenues
Local service revenues, derived from local exchange services, grew 6% in 2000
and 9% in 1999 because of continued demand for network-based services, customer
access line growth and growth in data products. Revenue growth in 1999 also
reflects increased revenues from maintaining customer wiring and equipment.
Network Access Revenues
Network access revenues, derived from long distance phone companies using the
local network to complete calls, increased 4% in 2000 and 2% in 1999. These
revenues reflect increased revenues from special access services and a 2% and
4% increase in minutes of use in 2000 and 1999, respectively. These increases
were offset by FCC-mandated access rate reductions. Access rate reductions took
effect in January and July 1998, July 1999 and July 2000.
Toll Service Revenues
Toll service revenues are mainly derived from providing consumer long distance
services to customers within Sprint's local franchise territories and other
long distance services within specified regional calling areas, or LATAs, that
are beyond the local calling area. These revenues increased 17% in 2000 and 22%
in 1999. These increases reflect the success of bundled services which include
long distance calling.
Other Revenues
Other revenues decreased 11% in 2000 and 1% in 1999. The decrease in 2000 was
mainly due to a decrease in equipment sales as a result of a planned shift in
focus to selling higher margin products.
Costs of Services and Products
Costs of services and products include costs to operate and maintain the local
network and costs of equipment sales. These costs decreased 1% in 2000 and
increased 6% in 1999. The 2000 decrease was due to a decline in equipment sales
and the success of cost control initiatives. The 1999 increase was driven by
customer access line growth, an increased emphasis on service levels and storm
related costs. Costs of services and products were 31.9% of net operating
revenues in 2000, 33.8% in 1999 and 34.1% in 1998.
Selling, General and Administrative Expense
SG&A expenses decreased 1% in 2000 and remained flat in 1999. The 2000 decrease
was due to a strong emphasis on cost control. In 1999, increased marketing
costs to promote new products and services and increased customer service costs
related to customer access line growth was offset by a strong emphasis on cost
control. SG&A expense was 21.0% of net operating revenues in 2000, 22.3% in
1999 and 23.6% in 1998.
Depreciation and Amortization Expense
Depreciation and amortization expense increased 7% in 2000 and 9% in 1999,
mainly from increased capital expenditures in switching and transport
technologies which have shorter asset lives. Depreciation and amortization
expense was 18.7% of net operating revenues in 2000, 18.2% in 1999 and 17.9% in
1998.
Product Distribution and Directory Publishing Businesses
- -------------------------------------------------------------
2000 1999 1998
- -------------------------------------------------------------
(millions)
Net operating revenues $1,936 $1,758 $1,709
- -------------------------------------------------------------
Operating expenses
Costs of services and products 1,460 1,345 1,330
Selling, general and administrative 176 154 135
Depreciation and amortization 16 17 13
- -------------------------------------------------------------
Total operating expenses 1,652 1,516 1,478
- -------------------------------------------------------------
Operating income $ 284 $ 242 $ 231
----------------------------------------
Operating margin 14.7% 13.8% 13.5%
----------------------------------------
Capital expenditures $ 8 $ 36 $ 9
----------------------------------------
Net operating revenues increased 10% in 2000 and 3% in 1999. Nonaffiliated
revenues accounted for over 60% of revenues in 2000 and 1999. These revenues
increased 11% in 2000 and 12% in 1999. The increase in nonaffiliated revenues
in 2000 was mainly due to the consolidation of a directory publishing
partnership. In the second half of 2000, the directory publishing partnership,
previously accounted for as an equity method investment, was fully consolidated
due to a restructuring in the partnership management. Sales to affiliates
increased 8% in 2000 and decreased 10% in 1999 due to changes in the local
division's capital program.
Costs of services and products increased 9% in 2000 and increased 1% in 1999
reflecting increased equipment sales. The 2000 increase was also due to the
consolidation of the directory publishing partnership. SG&A expense increased
14% in 2000 and 1999. The 2000 increase was due to costs related to the
transformation of the product distribution business to a web-enabled business
as well as the consolidation of the directory publishing partnership. The 1999
increase was the result of staffing demands related to nonaffiliated sales
growth.
II-5
- --------------------------------------------------------------------------------
Nonoperating Items
- --------------------------------------------------------------------------------
Interest Expense
Effective with the PCS Restructuring, interest expense on borrowings incurred
by Sprint and allocated to the PCS Group is based on the rates the PCS Group
could obtain from third parties. These interest rates are higher than the rates
Sprint obtains on the borrowings. The difference between Sprint's actual
interest rates and the rates charged to the PCS Group is reflected as a
reduction in the FON Group's interest expense as follows:
- ----------------------------------------------
2000 1999 1998
- ----------------------------------------------
(millions)
FON Group interest costs $ 311 $ 349 $254
Credit from the PCS Group (235) (167) (11)
- ----------------------------------------------
Interest expense $ 76 $ 182 $243
----------------------
See Note 1 of Notes to Combined Financial Statements for a more detailed
description about the allocation of Group financing.
The effective interest rates in the following table reflect interest costs on
long-term debt only. Interest costs on short-term borrowings classified as
long-term debt, intergroup borrowings, deferred compensation plans, customer
deposits and the credit from the PCS Group detailed above have been excluded so
as not to distort the effective interest rates on long-term debt.
- -----------------------------------------------------------
2000 1999 1998
- -----------------------------------------------------------
Effective interest rate on long-term debt 7.4% 7.8% 7.9%
----------------------------------
The decreases in effective interest rates mainly reflect the retirement of debt
with higher interest rates.
Other Income (Expense), Net
Other income (expense) consisted of the following:
- ------------------------------------------------------
2000 1999 1998
- ------------------------------------------------------
(millions)
Dividend and interest income $ 48 $ 35 $ 74
Equity in net losses of affiliates (181) (73) (41)
Gains on sales of assets 45 77 156
Net losses from investments (102) (15) --
Other, net 3 25 (36)
- ------------------------------------------------------
Total $(187) $ 49 $153
------------------------------
Dividend and interest income for all years reflects dividends earned on cost
method investments and interest earned on temporary investments. For 1998, it
also reflects interest earned on loans to unconsolidated affiliates and
interest earned on short-term investments following Sprint's $5.0 billion debt
offering in late 1998.
Equity in net losses of affiliates mainly includes losses from Intelig, Call-
Net and EarthLink. The 2000 increase is mainly due to increased Intelig losses.
Gains on sales of assets in 2000 reflect the sale of an independent publishing
operation. The 1999 gains mainly include the gain on the sale of an investment
security. The 1998 gains mainly reflect net gains on sales of local exchanges.
In 2000, net losses from investments mainly include the write-downs of certain
equity investments.
Income Taxes
The FON Group's effective tax rates were 40.5% in 2000, 37.9% in 1999 and 37.3%
in 1998. See Note 9 of Notes to Combined Financial Statements for information
about the differences that caused the effective income tax rates to vary from
the statutory federal rate for income taxes related to continuing operations.
Discontinued Operation, Net
In the 2000 first quarter, Sprint sold its interest in Global One to France
Telecom and Deutsche Telekom AG. Sprint received $1.1 billion in cash and was
repaid $276 million for advances for its entire stake in Global One. As a
result of Sprint's sale of its interest in Global One, the FON Group's gain on
sale and its equity share of the results of Global One have been reported as a
discontinued operation for all periods presented.
In 2000, the FON Group recorded an after-tax gain related to the sale of its
interest in Global One of $675 million. The FON Group recorded after-tax losses
related to Global One of $130 million in 1999 and $135 million in 1998.
Extraordinary Items, Net
In 2000, Sprint redeemed, prior to scheduled maturities, $25 million of the FON
Group's debt with interest rates ranging from 9.6% to 9.7%. This resulted in a
$1 million after-tax extraordinary loss for the FON Group.
In 1999, Sprint redeemed, prior to scheduled maturities, $575 million of the
broadband fixed wireless companies' debt, assumed by the FON Group, with
interest rates ranging from 13.1% to 14.5%. This resulted in a $39 million
after-tax extraordinary loss for the FON Group.
In 1998, Sprint redeemed, prior to scheduled maturities, $138 million of FON
Group debt with interest rates ranging from 7.9% to 9.3%. This resulted in a $5
million after-tax extraordinary loss.
II-6
- --------------------------------------------------------------------------------
Financial Condition
- --------------------------------------------------------------------------------
- --------------------------------
2000 1999
- --------------------------------
(millions)
Combined assets $23,649 $21,803
---------------
The FON Group's combined assets increased $1.8 billion in 2000. Net property,
plant and equipment increased $1.8 billion reflecting capital expenditures to
support long distance and local network enhancements and Sprint ION development
and hardware deployment, partly offset by depreciation. Investments in
affiliates and other assets increased $475 million mainly reflecting capital
contributions to the FON Group's equity method investees, partly offset by
equity in net losses of those affiliates and the write-down of certain equity
investments. Offsetting decreases in the FON Group's combined assets primarily
reflect the exchange of investments in equity securities for certain notes
payable, the write-down of goodwill and other related assets of the FON Group's
professional services business and the sale of the net assets of the Global One
discontinued operation. See "Liquidity and Capital Resources" for more
information about changes in the Combined Balance Sheets.
- --------------------------------------------------------------------------------
Liquidity and Capital Resources
- --------------------------------------------------------------------------------
Operating Activities
- -----------------------------------------------------------------
2000 1999 1998
- -----------------------------------------------------------------
(millions)
Cash flows provided by operating activities $4,323 $3,713 $3,915
--------------------
Operating cash flows increased $610 million in 2000 and decreased $202 million
in 1999. The 2000 increase mainly reflects decreases in working capital
requirements. The 1999 decrease mainly reflects increases in working capital
partly offset by improved operating results.
Investing Activities
- -------------------------------------------------------------------
2000 1999 1998
- -------------------------------------------------------------------
(millions)
Cash flows used by investing activities $(3,336) $(4,349) $(3,366)
-------------------------
Capital expenditures, which are the FON Group's largest investing activity,
totaled $4.1 billion in 2000, $3.5 billion in 1999 and $3.2 billion in 1998.
Global markets division capital expenditures were incurred mainly to enhance
network reliability, meet increased demand for voice and data-related services,
upgrade capabilities for providing new products and services and to continue
development and hardware deployment of Sprint ION. The local division incurred
capital expenditures to accommodate access line growth, provide additional
capacity for increased Internet traffic and expand capabilities for providing
enhanced services. Other FON Group capital expenditures were incurred mainly
for Sprint's World Headquarters Campus.
In 2000, investing activities include $1.4 billion of proceeds from the sale of
the FON Group's interest in Global One. Investing activities also include
proceeds from sales of other assets totaling $51 million in 2000, $90 million
in 1999 and $230 million in 1998. In 1999, Sprint purchased the net assets of
several broadband fixed wireless companies for $618 million, excluding assumed
debt.
"Investments in and loans to other affiliates, net" includes the FON Group's
investment in EarthLink, Intelig and other affiliates.
In 1999, the FON Group received a payment of $314 million from the PCS Group on
its outstanding loan. The FON Group had advances to the PCS Group and loans to
Sprint PCS to fund capital and operating requirements. Loans to Sprint PCS in
1998 were partly offset by the repayment of a vendor financing loan. Equity
transfers to the PCS Group were also used to fund its capital and operating
requirements and were offset by current tax benefits used by the FON Group.
Financing Activities
- ----------------------------------------------------------------------
2000 1999 1998
- ----------------------------------------------------------------------
(millions)
Cash flows provided (used) by financing activities $(969) $308 $(219)
-----------------
Financing activities mainly reflect net payments on long-term debt of $605
million in 2000, and net proceeds of $491 million in 1999 and $397 million in
1998. The FON Group paid dividends of $433 million in 2000, $426 million in
1999 and $430 million in 1998. The indicated annual dividend rate on FON stock
is $0.50 per share.
Also included in the 2000 financing activities is an $80 million payment to the
PCS Group to compensate for the net amount of PCS stock-based compensation
granted to FON Group employees and FON stock-based compensation granted to PCS
Group employees. In addition, the FON Group received net proceeds from Sprint's
employee stock purchase plan of $50 million in 2000, $136 million in 1999 and
$24 million in 1998.
Capital Requirements
The FON Group's 2001 investing activities, mainly consisting of capital
expenditures and investments in affiliates, are expected to require cash of
$6.1 to
II-7
$6.3 billion. FON Group capital expenditures are expected to range between $6.0
and $6.2 billion in 2001. The global markets division and local division will
require the majority of this total. Investments in affiliates are expected to
require cash of approximately $100 million. Dividend payments are expected to
approximate $440 million.
In connection with the PCS Restructuring, Sprint adopted a tax sharing
agreement that provides for the allocation of income taxes between the FON
Group and the PCS Group. Sprint expects the FON Group to continue to make
significant payments to the PCS Group under this agreement because of expected
PCS Group operating losses in the near future and from using the PCS Group's
net operating loss carryforwards. These payments reflect the PCS Group's
incremental cumulative effect on Sprint's consolidated federal and state tax
liability and tax credit position. The PCS Group received payments from the FON
Group totaling $872 million in 2000, $764 million in 1999 and $20 million in
1998. See Note 1 of Notes to Combined Financial Statements, "Allocation of
Federal and State Income Taxes" for more details.
Liquidity
See Sprint's "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity" for a discussion of liquidity.
- --------------------------------------------------------------------------------
Regulatory Developments
- --------------------------------------------------------------------------------
Competitive Local Service
The Telecommunications Act of 1996 (Telecom Act) was designed to promote
competition in all aspects of telecommunications. It eliminated legal and
regulatory barriers to entry into local phone markets. It also required
incumbent local exchange carriers (ILECs), 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. Sprint has obtained interconnection
and collocation agreements with a number of ILECs, and is rolling out Sprint
ION in selected cities across the nation, using collocation and unbundled
network elements obtained from ILECs.
In January 1999, the Supreme Court affirmed the FCC's authority to establish
rules and prices relating to interconnection and unbundling of the ILECs'
networks. The FCC subsequently reaffirmed in large part the list of network
elements ILECs are required to provide on an unbundled basis, and strengthened
collocation requirements. It also took steps to speed the deployment of
advanced technologies such as xDSL.
In July 2000, the U.S. Court of Appeals for the Eighth Circuit invalidated the
pricing standards the FCC had adopted for unbundled network elements and resale
of ILEC services. The court also refused to reconsider, in light of the Supreme
Court decision discussed above, the court's prior holding that ILECs could not
be required to combine unbundled network elements on behalf of other carriers.
In January 2001, the U.S. Supreme Court granted certiorari of three issues from
the Eighth Circuit decision. The Supreme Court will review whether the Telecom
Act forecloses the cost methodology adopted by the FCC for interconnection
rates with the ILECs. A related issue dealing with whether rejection of
historical costs is a taking will also be considered. Finally, the Supreme
Court will consider whether ILECs have a duty under the Telecom Act to combine
previously uncombined network elements when requested and for a fee. If the
Supreme Court affirms the Eighth Circuit's decision, the FCC or the state
regulatory commissions would have to formulate new pricing standards for
unbundled network elements and interconnection.
Separately, in a March 2000 decision, the U.S. Court of Appeals for the
District of Columbia Circuit remanded to the FCC the issue of what types of
equipment ILECs must allow competitors to collocate in their offices. The FCC
has received comments and reply comments on whether and how to change its
collocation rules in light of the D.C. Circuit's decision.
RBOC Long Distance Entry
The Telecom Act also allows RBOCs 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
RBOC's have gained authorization to provide in-region long distance service in
four states. Verizon obtained FCC authorization for New York in December 1999;
SBC obtained FCC authorization to provide in-region services in Texas in June
2000 and in Oklahoma and Kansas in January 2001. RBOCs may gain such
authorization in the near future in other states. The entry of the RBOCs into
the long distance market will impact competition, but the extent of the impact
will depend upon factors such as the RBOCs' competitive ability, the appeal of
the RBOC brand to different market segments, and the response of competitors.
Some of the impact on Sprint may be offset by wholesale revenues from those
RBOCs that choose to resell Sprint services.
Customer Service Slamming
The Telecom Act also established liability for the unauthorized switching of a
consumer's telephone service from one carrier to another (slamming). In
II-8
late 1998, the FCC adopted new rules intended to prevent slamming and to
compensate victims of slamming. The compensation rules were stayed by the Court
of Appeals for the District of Columbia Circuit. In May 2000, the FCC modified
the process for adjudicating alleged slams. The D.C. Circuit then lifted its
stay and the new rules went into effect on November 28, 2000.
Mergers
A number of mergers received final regulatory approval in 2000 and early 2001.
The Qwest- US West merger was approved by the FCC in March 2000; the Bell
Atlantic-GTE merger was approved by the FCC in June 2000; and the AT&T-MediaOne
merger was approved by the FCC in June 2000. Finally, the AOL-Time Warner
merger received approval from the FCC in January 2001.
Universal Service Requirements
The FCC continues to address issues related to universal service and access
reform. In May 2000, the FCC adopted an access reform plan that substantially
reduced switched access charges paid by long distance carriers to the large
ILECs and created a new universal service fund that offsets a portion of this
reduction in access charges. In connection with its advocacy of this plan,
Sprint committed that it would flow through the reductions in switched access
costs over the five-year life of the plan to both business and residential
customers. Sprint also committed to certain other pricing actions, including
eliminating charges to residential and single-line business customers which had
been used to pass through certain access costs that were eliminated by this
plan, and maintaining, for the duration of the plan, at least one pricing
option that does not include a minimum usage charge. The FCC order adopting
this access reform plan requires Sprint to adhere to these commitments. The
FCC's order has been appealed to the U.S. Court of Appeals for the Fifth
Circuit.
The FCC and many states have established "universal service" programs to ensure
affordable, quality local telecommunications services for all Americans. The
FON Group's assessment to fund these programs is typically a percentage of
interstate and international end-user revenues. Currently, management cannot
predict the extent of the FON Group's future federal and state universal
service assessments, or its ability to recover its contributions to the
universal service fund from its customers.
Communications Assistance for Law Enforcement Act
The Communications Assistance for Law Enforcement Act (CALEA) was enacted in
1994 to preserve electronic surveillance capabilities authorized by federal and
state law. CALEA requires telecommunications companies to meet certain
"assistance capability requirements" by the end of June 2000 where circuit-
switching is used and by September 2001 where packet-switching is used. Where
circuit-switched technology was installed before 1995, reimbursement for
hardware and software upgrades to facilitate CALEA compliance was authorized.
The U.S. Department of Justice (DOJ) has published guidelines concerning what
is required for it to support, at the FCC, petitions for extension of the CALEA
enforcement deadlines; however, the FCC did not require carriers to have DOJ
concurrence to seek an extension. LTD uses circuit-switching for the bulk of
its traffic and most LTD switches were installed before 1995 and qualify for
reimbursement if upgrades are required by the DOJ. Sprint ION uses packet
switching for its local operations. In the case of Sprint ION, CALEA compliance
capabilities are not currently available from equipment and software vendors
involved in Sprint ION's deployment. LTD has obtained an extension for CALEA
compliance until June 30, 2001 and has been in discussions with the DOJ which
resulted in an agreement on a deployment schedule for CALEA within LTD. LTD
expects the DOJ to provide a letter of support for use with the FCC in
obtaining a further extension consistent with the agreed upon deployment
schedule. Sprint ION will apply for an extension for the local packet-based
services to allow for development of required hardware and software.
- --------------------------------------------------------------------------------
Financial Strategies
- --------------------------------------------------------------------------------
Financial strategies are determined by Sprint on a centralized basis. See
Sprint's "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Financial Strategies."
- --------------------------------------------------------------------------------
Recently Issued Accounting Pronouncements
- --------------------------------------------------------------------------------
See Note 15 of Notes to Combined Financial Statements for a discussion of
recently issued accounting pronouncements.
II-9
MANAGEMENT REPORT
Sprint Corporation's management is responsible for the integrity and
objectivity of the information contained in this annex. Management is
responsible for the consistency of reporting this information and for ensuring
that accounting principles generally accepted in the United States 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 principles of business conduct are
understood and practiced by its employees.
The combined financial statements included in this annex have been audited by
Ernst & Young LLP, independent auditors. Their audits were conducted using
auditing standards generally accepted in the United States and their report is
included herein.
The Board of Director's responsibility for these combined 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
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Sprint Corporation
We have audited the accompanying combined balance sheets of the Sprint FON
Group (as described in Note 1) as of December 31, 2000 and 1999, and the
related combined statements of operations, comprehensive income and cash flows
for each of the three years in the period ended December 31, 2000. Our audits
also included the financial statement schedule listed in the Index to
Financial Statements and Financial Statement Schedules. These financial
statements and the schedule are the responsibility of the management of Sprint
Corporation (Sprint). Our responsibility is to express an opinion on these
financial statements and the schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of the Sprint FON Group
at December 31, 2000 and 1999, and the combined results of its operations and
its cash flows for each of the three years in the period ended December 31,
2000, in conformity with accounting principles generally accepted in the
United States. Also, in our opinion, the related financial statement schedule,
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 7 to the combined financial statements, in 2000 the
Sprint Fon Group changed its accounting for service activation and certain
installation fee revenues.
As more fully discussed in Note 1, the combined financial statements of the
Sprint FON Group should be read together with the audited consolidated
financial statements of Sprint.
Ernst & Young LLP
Kansas City, Missouri
February 1, 2001
II-10
COMBINED STATEMENTS OF OPERATIONS Sprint FON Group
(millions, except per share data)
- -------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998
- -------------------------------------------------------------------------------
Net Operating Revenues $17,688 $17,160 $15,958
- -------------------------------------------------------------------------------
Operating Expenses
Costs of services and products 8,094 7,481 7,163
Selling, general and administrative 4,493 4,620 4,114
Depreciation 2,199 2,086 1,878
Amortization 68 43 43
Asset write-down and merger related costs 401 -- --
- -------------------------------------------------------------------------------
Total operating expenses 15,255 14,230 13,198
- -------------------------------------------------------------------------------
Operating Income 2,433 2,930 2,760
Interest expense (76) (182) (243)
Other income (expense), net (187) 49 153
- -------------------------------------------------------------------------------
Income from continuing operations before income
taxes 2,170 2,797 2,670
Income taxes (878) (1,061) (995)
- -------------------------------------------------------------------------------
Income from Continuing Operations 1,292 1,736 1,675
Discontinued operation, net 675 (130) (135)
Extraordinary items, net (1) (39) (5)
Cumulative effect of change in accounting principle (2) -- --
- -------------------------------------------------------------------------------
Net Income 1,964 1,567 $ 1,535
Preferred stock dividends received, net 7 7 --
- -------------------------------------------------------------------------------
Earnings applicable to common stock $ 1,971 $ 1,574 $ 1,535
-------------------------
Diluted Earnings per Common Share(/1/)
Continuing operations $ 1.45 $ 1.97 $ 1.93
Discontinued operation 0.76 (0.15) (0.16)
Extraordinary items -- (0.04) --
- -------------------------------------------------------------------------------
Total $ 2.21 $ 1.78 $ 1.77
-------------------------
Diluted weighted average common shares 892.4 887.2 868.9
-------------------------
Basic Earnings per Common Share(/1/)
Continuing operations $ 1.47 $ 2.01 $ 1.96
Discontinued operation 0.77 (0.15) (0.16)
Extraordinary items -- (0.05) --
- -------------------------------------------------------------------------------
Total $ 2.24 $ 1.81 $ 1.80
-------------------------
Basic weighted average common shares 880.9 868.0 854.0
-------------------------
Dividends per Common Share(/1/) $ 0.50 $ 0.50 $ 0.50
-------------------------
(/1/) Basic and diluted earnings per common share, weighted average common
shares, and dividends per common share for 1998 are pro forma, unaudited
and assume the Recapitalization occurred prior to 1998. In the 1999
second quarter, Sprint effected a two-for-one stock split of its FON
common stock. As a result, 1998 basic and diluted earnings per common
share, weighted average common shares and dividends per common share
have been restated.
See accompanying Notes to Combined Financial Statements.
II-11
COMBINED STATEMENTS OF COMPREHENSIVE INCOME Sprint FON Group
(millions)
- ------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998
- ------------------------------------------------------------------------------
Net Income $1,964 $1,567 $1,535
- ------------------------------------------------------------------------------
Other Comprehensive Income
Unrealized holding gains (losses) on securities (69) 33 28
Income tax (expense) benefit 25 (12) (10)
- ------------------------------------------------------------------------------
Net unrealized holding gains (losses) on securities
during the period (44) 21 18
Reclassification adjustment for net gains included in
net income (2) (57) --
- ------------------------------------------------------------------------------
Total net unrealized holding gains (losses) on
securities (46) (36) 18
Foreign currency translation adjustments (12) -- (2)
- ------------------------------------------------------------------------------
Total other comprehensive income (loss) (58) (36) 16
- ------------------------------------------------------------------------------
Comprehensive Income $1,906 $1,531 $1,551
----------------------
See accompanying Notes to Combined Financial Statements.
II-12
COMBINED BALANCE SHEETS Sprint FON Group
(millions)
- -----------------------------------------------------------------------
December 31, 2000 1999
- -----------------------------------------------------------------------
Assets
Current assets
Cash and equivalents $ 122 $ 104
Accounts receivable, net of allowance for doubtful
accounts of $293 and $228 3,126 2,836
Inventories 434 441
Prepaid expenses 276 251
Receivables from the PCS Group 361 136
Investments in equity securities -- 316
Other 193 198
- -----------------------------------------------------------------------
Total current assets 4,512 4,282
Investments in securities 66 139
Property, plant and equipment
Global markets division 12,512 10,602
Local division 16,835 15,828
Other 1,651 1,257
- -----------------------------------------------------------------------
Total property, plant and equipment 30,998 27,687
Accumulated depreciation (15,165) (13,685)
- -----------------------------------------------------------------------
Net property, plant and equipment 15,833 14,002
Investments in and loans to the PCS Group 383 431
Investments in and advances to other affiliates 459 452
Intangible assets
Goodwill 877 1,223
Other 384 296
- -----------------------------------------------------------------------
Total intangible assets 1,261 1,519
Accumulated amortization (57) (140)
- -----------------------------------------------------------------------
Net intangible assets 1,204 1,379
Net assets of discontinued operation -- 394
Other assets 1,192 724
- -----------------------------------------------------------------------
Total $23,649 $21,803
----------------
Liabilities and Group Equity
Current liabilities
Current maturities of long-term debt $ 1,026 $ 902
Accounts payable 1,598 1,012
Accrued interconnection costs 547 683
Accrued taxes 264 162
Advance billings 462 323
Payroll and employee benefits 377 557
Other 730 662
- -----------------------------------------------------------------------
Total current liabilities 5,004 4,301
Long-term debt 3,482 4,531
Deferred credits and other liabilities
Deferred income taxes and investment tax credits 1,276 935
Postretirement and other benefit obligations 1,077 1,064
Other 467 458
- -----------------------------------------------------------------------
Total deferred credits and other liabilities 2,820 2,457
Group equity 12,343 10,514
- -----------------------------------------------------------------------
Total $23,649 $21,803
----------------
See accompanying Notes to Combined Financial Statements.
II-13
COMBINED STATEMENTS OF CASH FLOWS Sprint FON Group
(millions)
- -----------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998
- -----------------------------------------------------------------------------
Operating Activities
Net income $ 1,964 $ 1,567 $ 1,535
Adjustments to reconcile net income to net cash
provided by operating activities:
Discontinued operation, net (675) 130 135
Extraordinary items, net 1 39 1
Equity in net losses of affiliates 201 70 52
Depreciation and amortization 2,267 2,129 1,921
Deferred income taxes and investment tax credits 386 220 60
Net gains on sales of assets (83) (158) (104)
Net losses on write-down of assets 365 102 --
Changes in assets and liabilities:
Accounts receivable, net (316) (459) 102
Inventories and other current assets 39 (130) (19)
Accounts payable and other current liabilities 711 152 347
Affiliate receivables and payables, net (422) 88 (84)
Noncurrent assets and liabilities, net (103) (76) (24)
Other, net (12) 39 (7)
- -----------------------------------------------------------------------------
Net cash provided by operating activities 4,323 3,713 3,915
- -----------------------------------------------------------------------------
Investing Activities
Capital expenditures (4,105) (3,534) (3,159)
Repayments from (investments in and loans to)
Sprint PCS -- 314 (154)
Investments in and loans to other affiliates, net (686) (135) (236)
Net proceeds from sales of assets 51 90 230
Purchase of broadband fixed wireless companies,
net of cash acquired -- (618) --
Advances from (to) the PCS Group 17 -- (64)
Equity transfers from the PCS Group -- -- 340
Other, net (16) (82) (55)
- -----------------------------------------------------------------------------
Net cash used by continuing operations (4,739) (3,965) (3,098)
Proceeds from the sale of Global One 1,403 -- --
Net investing activities of discontinued
operation -- (384) (268)
- -----------------------------------------------------------------------------
Net cash used by investing activities (3,336) (4,349) (3,366)
- -----------------------------------------------------------------------------
Financing Activities
Proceeds from long-term debt 344 1,020 785
Payments on long-term debt (949) (529) (388)
Proceeds from common stock issued 148 52 --
Proceeds from treasury stock issued 12 134 60
Dividends paid (433) (426) (430)
Treasury stock purchased (61) (48) (321)
Other, net (30) 105 75
- -----------------------------------------------------------------------------
Net cash provided (used) by financing activities (969) 308 (219)
- -----------------------------------------------------------------------------
Increase (Decrease) in Cash and Equivalents 18 (328) 330
Cash and Equivalents at Beginning of Year 104 432 102
- -----------------------------------------------------------------------------
Cash and Equivalents at End of Year $ 122 $ 104 $ 432
--------------------------
See accompanying Notes to Combined Financial Statements.
II-14
NOTES TO COMBINED FINANCIAL STATEMENTS Sprint FON Group
- -------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
- -------------------------------------------------------------------------------
Tracking Stock Formation
In November 1998, Sprint's shareholders approved the formation of the FON
Group and the PCS Group and the creation of the FON stock and the PCS stock.
In addition, Sprint purchased the remaining ownership interests in Sprint
Spectrum Holding Company, L.P. and PhillieCo, L.P. (together, Sprint PCS),
other than a minority interest in Cox Communications PCS, L.P. (Cox PCS).
Sprint acquired these ownership interests from Tele-Communications, Inc.,
Comcast Corporation and Cox Communications, Inc. (the Cable Partners). In
exchange, Sprint issued the Cable Partners special low-vote PCS shares and
warrants to acquire additional PCS shares. Sprint also issued the Cable
Partners shares of a new class of preferred stock convertible into PCS shares.
The purchase of the Cable Partners' interests is referred to as the PCS
Restructuring. In the 1999 second quarter, Sprint acquired the remaining
minority interest in Cox PCS.
Also in November 1998, Sprint reclassified each of its publicly traded common
shares into one share of FON stock and 1/2 share of PCS stock. This
recapitalization was tax-free to shareholders. Each Class A common share owned
by France Telecom (FT) and Deutsche Telekom AG (DT) was reclassified to
represent an equity interest in the FON Group and the PCS Group that entitles
FT and DT to one share of FON stock and 1/2 share of PCS stock. These
transactions are referred to as the Recapitalization.
In connection with the PCS Restructuring, FT and DT purchased 5.1 million
additional PCS shares (pre-split basis) to maintain their voting power in
Sprint (Top-up).
The PCS stock is intended to reflect the performance of Sprint's wireless PCS
operations. The FON stock is intended to reflect the performance of all of
Sprint's other operations.
Basis of Combination and Presentation
The combined FON Group financial statements, together with the combined PCS
Group financial statements, include all the accounts in Sprint's consolidated
financial statements. The combined financial statements for each Group were
prepared on a basis that management believes is reasonable and proper and
include:
. the combined balance sheets, results of operations and cash flows for
each of the Groups, with all significant intragroup amounts and
transactions eliminated,
. an allocation of Sprint's debt, including the related effects on results
of operations and cash flows, and
. an allocation of corporate overhead after the PCS Restructuring date.
The FON Group entities are commonly controlled companies. Transactions between
the PCS Group and the FON Group have not been eliminated in the combined
financial statements of either Group.
The FON Group combined financial statements provide FON shareholders with
financial information about the FON Group operations. Investors in FON stock
and PCS stock are Sprint shareholders and are subject to risks related to all
of Sprint's businesses, assets and liabilities. Sprint retains ownership and
control of the assets and operations of each Group. Financial effects of
either Group that affect Sprint's results of operations or financial condition
could affect the results of operations or financial position of the other
Group or the market price of the stock tracking the other Group. Net losses of
either Group, and dividends or distributions on, or repurchases of, PCS stock
or FON stock will reduce Sprint funds legally available for dividends on both
FON stock and PCS stock. As a result, the FON Group combined financial
statements should be read along with Sprint's consolidated financial
statements and the PCS Group's combined financial statements.
Investments in entities in which the FON Group exercises significant
influence, but does not control, are accounted for using the equity method
(see Note 3).
The FON Group combined financial statements are prepared using accounting
principles generally accepted in the United States. 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 group equity as previously reported.
Classification of Operations
Global Markets Division
The global markets division provides a broad suite of communications services
targeted to domestic business and residential customers, multinational
II-15
corporations and other communications companies. These services include
domestic and international voice; data communications such as Internet and
frame relay access and transport, web hosting, virtual private networks, and
managed security services; and broadband services.
Sprint is deploying integrated communications services, referred to as Sprint
ION(SM). Sprint ION extends Sprint's existing network capabilities to the
customer and enables Sprint to provide the network infrastructure to meet
customers' demands for advanced services including integrated voice, data,
Internet and video. It is also expected to be the foundation for Sprint to
provide advanced services in the competitive local service market. Sprint uses
various advanced services last-mile technologies, including dedicated access
and Digital Subscriber Line (xDSL), and expects to use Multipoint Multichannel
Distribution Services (MMDS).
The global markets division also includes the operating results of the cable TV
service operations of the broadband fixed wireless companies after their 1999
acquisition dates. During 2000, Sprint converted several markets served by MMDS
capabilities from cable TV services to high-speed data services. Global markets
division's operating results reflect the development costs and the operating
revenues and expenses of these broadband fixed wireless services. Sprint
intends to provide broadband data and voice services to additional markets
served by these capabilities.
Included in the global markets division are the costs of establishing
international operations beginning in 2000.
This division also includes the FON Group's investments in EarthLink, Inc., an
Internet service provider; Call-Net, a long distance provider in Canada
operating under the Sprint brand name; Intelig, a long distance provider in
Brazil, and certain other telecommunications investments and ventures.
Local Division
The local division consists mainly of regulated local phone companies serving
approximately 8.3 million access lines in 18 states. It provides local
services, access by phone customers and other carriers to its local network,
consumer long distance services to customers within its franchise territories,
sales of telecommunications equipment, and other long distance services within
certain regional calling areas, or LATAs.
Product Distribution and Directory Publishing Businesses
The product distribution business provides wholesale distribution services of
telecommunications products. The directory publishing business publishes and
markets white and yellow page phone directories.
Allocation of Shared Services
Sprint directly assigns, where possible, certain general and administrative
costs to the FON Group and the PCS Group based on their actual use of those
services. Where direct assignment of costs is not possible, or practical,
Sprint uses other indirect methods, including time studies, to estimate the
assignment of costs to each Group. Sprint believes that the costs allocated are
comparable to the costs that would be incurred if the Groups would have been
operating on a stand-alone basis. The allocation of shared services may change
at the discretion of Sprint and does not require shareholder approval.
Allocation of Federal and State Income Taxes
Sprint files a consolidated federal income tax return and certain state income
tax returns which include FON Group and PCS Group results. In connection with
the PCS Restructuring, Sprint adopted a tax sharing agreement which provides
for the allocation of income taxes between the two Groups. The FON Group's
income taxes are calculated as if it files returns which exclude the PCS Group.
Intergroup tax payments are satisfied on the date Sprint's related tax payment
is due to or the refund is received from the applicable tax authority. The FON
Group accrued income taxes payable to the PCS Group in accordance with the tax
sharing agreement totaling $605 million in 2000, $887 million in 1999 and $190
million in 1998.
The tax sharing agreement applies to tax years ending on or before December 31,
2001. For periods after December 31, 2001, Sprint's board of directors will
adopt a tax sharing agreement that will be designed to allocate tax benefits
and burdens fairly between the FON Group and the PCS Group.
Allocation of Group Financing
Financing activities for the Groups are managed by Sprint on a centralized
basis. Debt incurred by Sprint on behalf of the Groups is specifically
allocated to and reflected in the financial statements of the applicable Group.
Interest expense is allocated to the PCS Group based on an interest rate that
is substantially equal to the rate it would be able to obtain from third
parties as a direct or indirect wholly owned Sprint subsidiary, but without the
benefit of any guaranty by Sprint or any member of the FON Group. That interest
rate is higher than the rate Sprint obtains on borrowings. The difference
between Sprint's actual interest rate and the rate charged to the PCS Group is
reflected as a reduction in the FON Group's interest expense.
II-16
Under Sprint's centralized cash management program, one Group may advance funds
to the other Group. These advances are accounted for as short-term borrowings
between the Groups and bear interest at a market rate that is substantially
equal to the rate that Group would be able to obtain from third parties on a
short-term basis.
The allocation of Group financing activities may change at the discretion of
Sprint and does not require shareholder approval.
Income Taxes
The FON Group records deferred income taxes based on temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and their tax bases.
Revenue Recognition
The FON Group recognizes operating revenues as services are rendered or as
products are delivered to customers. Service activation and certain
installation fees are deferred and amortized over the average life of the
service. Sprint's directory publishing business recognizes revenues for
directory services over the life of the related directory (amortization
method).
Cash and Equivalents
Cash and 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
for the FON Group were included in accounts payable. These amounts totaled $614
million at year-end 2000 and $174 million at year-end 1999. The FON Group 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 "Group
equity," net of related income taxes.
Inventories
Inventories are stated at the lower of cost (principally first-in, first-out
method) or market value.
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. The cost of property, plant and equipment is generally
depreciated on a straight-line basis over estimated economic useful lives.
Repair and maintenance costs are expensed as incurred.
Capitalized Interest
The FON Group capitalized interest costs related to constructing capital assets
of $22 million in 2000, $43 million in 1999 and $42 million in 1998. In
addition, Sprint capitalized interest costs related to the PCS Group's network
buildout. Capitalized interest totaled $61 million for 1998 and was contributed
to, and is being amortized by, the PCS Group.
Intangible Assets
The FON Group evaluates the recoverability of intangible assets when events or
circumstances indicate that such assets might be impaired. The FON Group
determines impairment by comparing the undiscounted future cash flows estimated
to be generated by these assets to their respective carrying value. In the
event impairment exists, a loss is recognized based on the amount by which the
carrying value exceeds the fair value of the asset.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the
net assets acquired in business combinations accounted for as purchases.
Goodwill is being amortized over five to 40 years using the straight-line
method. Accumulated amortization totaled $28 million at year-end 2000 and $94
million at year-end 1999.
Earnings per Share
As a result of the Recapitalization, earnings per share for the FON Group for
1998 has been calculated based on the Group's income from November 1998 through
year-end 1998. It was not calculated on a Group basis for periods prior to
November 1998 because the FON stock was not part of Sprint's capital structure
at that time.
In the 1999 second quarter, Sprint effected a two-for-one split on its FON
common stock. As a result, basic and diluted earnings per common share,
weighted average common shares and dividends for FON common stock have been
restated for periods prior to the stock split.
The FON Group's convertible preferred dividends totaled $1 million in 2000 and
1999 and dilutive securities (mainly options) totaled 11.5 million shares in
2000 and 19.2 million shares in 1999. From the Recapitalization date to year-
end 1998, the FON Group's convertible preferred dividends totaled $0.1 million,
and dilutive securities (mainly options) totaled 13.8 million shares.
II-17
The FON Group's earnings per common share in 1998 after the Recapitalization
date was as follows:
- ---------------------------------------------------
1998
- ---------------------------------------------------
(millions,
except per
share data)
Earnings applicable to common stock $ 118
------
Diluted earnings per common share
Continuing operations $ 0.18
Discontinued operation (0.04)
- ---------------------------------------------------
Total $ 0.14
------
Diluted weighted average common shares 869.0
------
Basic earnings per common share
Continuing operations $ 0.18
Discontinued operation (0.04)
- ---------------------------------------------------
Total $ 0.14
------
Basic weighted average common shares 855.2
------
Stock-based Compensation
The FON Group participates in the incentive-based stock option plans and
employee stock purchase plan administered by Sprint for executives and other
employees. Sprint adopted the pro forma disclosure requirements under Statement
of Financial Accounting Standards (SFAS) No. 123, "Stock-based Compensation,"
and continues to apply Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations to its stock option
and employee stock purchase plans. Had the FON Group applied SFAS 123, pro
forma net income would have been $1,668 million for 2000, $1,434 million for
1999 and $103 million from the Recapitalization date through year-end 1998. See
Note 12 of Sprint's Notes to Consolidated Financial Statements for more
information about Sprint's stock-based compensation and the FON Group's pro
forma net income and earnings per share.
In 1997, Sprint granted performance-based stock options to certain key
executives. The FON Group expensed $5 million in 2000, $9 million in 1999 and
$14 million in 1998 related to these performance-based stock options. The 2000
amount reflects expense through the date of the shareholder approval of the
proposed WorldCom merger. At that time, all of these options became vested. An
additional $19 million of expense related to these options was included in
"Asset write-down and merger related costs" in the Combined Statements of
Operations.
- --------------------------------------------------------------------------------
2. Business Combinations
- --------------------------------------------------------------------------------
Broadband Fixed Wireless Companies
In the second half of 1999, Sprint acquired People's Choice TV Corp. (PCTV),
American Telecasting, Inc. (ATI), Videotron USA and the operating subsidiaries
of WBS America, LLC. These companies own broadband fixed wireless licenses in
the Midwest, Southwest, North Central, Western and Southeastern United States.
Sprint paid $618 million for the companies' outstanding stock and assumed $575
million of the companies' debt. These notes were redeemed, prior to scheduled
maturities, in the 1999 fourth quarter (see Note 10).
These acquisitions were accounted for as purchases. As a result, the financial
statements of these companies have been reflected in the FON Group's combined
financial statements after the acquisition dates. The excess of the purchase
price over the net liabilities acquired totaled $835 million and was allocated
to goodwill, which is being amortized on a straight-line basis over 40 years.
- --------------------------------------------------------------------------------
3. Investments
- --------------------------------------------------------------------------------
Investments in Securities
The cost of investments in securities was $13 million at year-end 2000 and $153
million at year-end 1999. Gross unrealized holding gains were $53 million at
year-end 2000 and $302 million at year-end 1999.
In the 2000 fourth quarter, the FON Group recorded a write-down of securities
with a cost basis of $48 million due to a decline in market value that was
considered other than temporary. The $48 million charge was included in "Other
income (expense), net" in the Combined Statements of Operations.
During 2000, Sprint used equity securities with a cost basis of $94 million to
retire debt instruments (see Note 10). The FON Group recorded a $45 million
gain associated with the transaction which was included in "Other income
(expense), net" in the Combined Statements of Operations. At year-end 1999,
these equity securities were classified as current assets at their fair value.
During 1999, the FON Group sold available-for-sale securities with a cost basis
of $14 million for $104 million. The $90 million gain was included in "Other
income (expense), net" in the Combined Statements of Operations.
Investments in and Advances to Other Affiliates
At year-end 2000, investments accounted for using the equity method consisted
of the FON Group's investments in Intelig, EarthLink and certain other
strategic investments. In February 2001, Sprint modified its relationship with
EarthLink which resulted in the FON Group's investment being accounted for as a
cost method investment (see Note 17).
II-18
In the 2000 fourth quarter, Sprint completed an analysis of the valuation of
its equity method investments in response to changes in the overall
telecommunications industry. The analysis resulted in an $87 million charge for
the write-down of an equity method investment which was included in "Other
income (expense), net" in the FON Group's Combined Statements of Operations.
Combined, unaudited, summarized financial information (100% basis) of these
entities and others accounted for using the equity method was as follows:
- -------------------------------------------------
2000 1999 1998
- -------------------------------------------------
(millions)
Results of operations
Net operating revenues $2,091 $1,571 $1,242
----------------------------
Operating income (loss) $ (649) $ (192) $ 67
----------------------------
Net loss $ (870) $ (329) $ (145)
----------------------------
Financial position
Current assets $1,393 $1,524 $1,038
Noncurrent assets 2,184 2,749 2,401
- -------------------------------------------------
Total $3,577 $4,273 $3,439
----------------------------
Current liabilities $ 735 $ 599 $ 538
Noncurrent liabilities 206 1,644 1,004
Owners' equity 2,636 2,030 1,897
- -------------------------------------------------
Total $3,577 $4,273 $3,439
----------------------------
- --------------------------------------------------------------------------------
4. Asset Write-down
- --------------------------------------------------------------------------------
In the 2000 fourth quarter, Sprint completed its analysis of the valuation of
various FON Group assets resulting from its reassessment of the FON Group's
business strategies in response to recent changes within the overall
telecommunications industry. This analysis resulted in a $238 million pre-tax
charge, primarily related to the impairment of goodwill associated with the
global markets division's Paranet operations.
- --------------------------------------------------------------------------------
5. Merger Termination
- --------------------------------------------------------------------------------
On July 13, 2000, Sprint and WorldCom, Inc. announced that the boards of
directors of both companies terminated their merger agreement, previously
announced in October 1999, as a result of regulatory opposition to the merger.
In the 2000 second quarter, the FON Group recognized a one-time, pre-tax charge
of $163 million for costs associated with the terminated merger.
- --------------------------------------------------------------------------------
6. Discontinued Operation
- --------------------------------------------------------------------------------
In the 2000 first quarter, Sprint sold its interest in Global One to FT and DT.
Sprint received $1.1 billion in cash and was repaid $276 million for advances
for its entire stake in Global One. As a result of Sprint's sale of its
interest in Global One, Sprint's gain on the sale and equity share of the
results of Global One have been reported as a discontinued operation for all
periods presented.
In 2000, the FON Group recorded an after-tax gain related to the sale of its
interest in Global One of $675 million. The FON Group recorded after-tax losses
related to Global One totaling $130 million in 1999 and $135 million in 1998.
- --------------------------------------------------------------------------------
7. Cumulative Effect of Change in Accounting Principle
- --------------------------------------------------------------------------------
The FON Group implemented SEC Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements," during the fourth quarter of 2000,
effective the beginning of the year. This bulletin requires activation and
installation fee revenues that do not represent a separate earnings process to
be deferred and recognized over the estimated service period. Associated
incremental direct costs may also be deferred, but only to the extent of
revenues subject to deferral. The FON Group recorded a $2 million charge for
the cumulative effect of change in accounting principle in 2000. The change had
no material impact on the nine months ended September 30, 2000.
- --------------------------------------------------------------------------------
8. Employee Benefit Plans
- --------------------------------------------------------------------------------
Defined Benefit Pension Plan
Most FON Group employees are covered by a noncontributory defined benefit
pension plan sponsored by Sprint. Benefits for plan participants belonging to
unions are based on negotiated schedules. For non-union participants, pension
benefits are based on years of service and the participants' compensation.
Sprint's policy is to make plan contributions equal to an actuarially
determined amount consistent with 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.
Amounts included in the Combined Balance Sheets for the plan were prepaid
pension costs of $407 million at year-end 2000 and $285 million at year-end
1999.
Net pension costs or credits are determined for the FON Group based on a direct
calculation of service costs and interest on projected benefit obligations and
an appropriate allocation of unrecognized prior service costs, amortization of
unrecognized transition asset, actuarial gains and losses, and expected return
on plan assets. The FON Group recorded net
II-19
pension credits of $122 million in 2000, $63 million in 1999 and $46 million in
1998.
Defined Contribution Plans
Sprint sponsors defined contribution employee savings plans covering most FON
Group employees. Participants may contribute portions of their pay to the
plans. For union employees, Sprint matches contributions based on negotiated
amounts. Sprint also matches contributions of non-union employees in FON and
PCS 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 additional matching contributions based on the performance
of FON and PCS stock compared to other telecommunications companies' stock. The
FON Group recorded expenses of $95 million in 2000, $73 million in 1999 and $54
million in 1998 for Sprint's matching contributions to the Sprint defined
contribution plans. At year-end 2000, Sprint's defined contribution plans held
34 million FON shares and 31 million PCS shares.
Postretirement Benefits
Sprint provides postretirement benefits (mainly medical and life insurance
benefits) to most FON Group 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.
Amounts included in the Combined Balance Sheets at year-end were accrued
postretirement benefits costs of $1.1 billion in 2000 and $1.0 billion in 1999.
Net postretirement benefits costs are determined for the FON Group based on a
direct calculation of service costs and interest on accumulated postretirement
benefit obligations and an appropriate allocation of unrecognized prior service
costs and actuarial gains. The FON Group recorded net postretirement benefits
costs of $62 million in 2000, $54 million in 1999 and $51 million in 1998.
- --------------------------------------------------------------------------------
9. Income Taxes
- --------------------------------------------------------------------------------
Income tax expense allocated to continuing operations consisted of the
following:
- ---------------------------------------------
2000 1999 1998
- ---------------------------------------------
(millions)
Current income tax expense
Federal $429 $ 776 $861
State 63 65 74
- ---------------------------------------------
Total current 492 841 935
- ---------------------------------------------
Deferred income tax expense
Federal 338 170 38
State 48 50 22
- ---------------------------------------------
Total deferred 386 220 60
- ---------------------------------------------
Total $878 $1,061 $995
----------------------
The differences that caused the FON Group's effective income tax rates to vary
from the 35% federal statutory rate for income taxes related to continuing
operations were as follows:
- --------------------------------------------------------------------------
2000 1999 1998
- --------------------------------------------------------------------------
(millions)
Income tax expense at the federal statutory rate $759 $ 979 $935
Effect of:
State income taxes, net of federal income tax effect 72 75 62
Equity in losses of foreign joint ventures 25 18 6
Write down of equity method investment 30 -- --
Other, net (8) (11) (8)
- --------------------------------------------------------------------------
Income tax expense $878 $1,061 $995
---------------------------------------------------
Effective income tax rate 40.5% 37.9% 37.3%
---------------------------------------------------
Income tax expense (benefit) allocated to other items was as follows:
- ----------------------------------------------------------------------------
2000 1999 1998
- ----------------------------------------------------------------------------
(millions)
Discontinued operation $ 370 $(111) $(62)
Extraordinary items (1) (23) (3)
Unrealized holding gains (losses) on investments(/1/) (26) (20) 10
Stock ownership, purchase and options arrangements(/1/) (276) (223) (49)
- ----------------------------------------------------------------------------
(/1/) These amounts have been recorded directly to "Group equity."
The FON Group 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 2000
and 1999, along with the income tax effect of each, were as follows:
- -----------------------------------------------------------
2000 Deferred
Income Tax
------------------
Assets Liabilities
- -----------------------------------------------------------
(millions)
Property, plant and equipment $-- $1,891
Postretirement and other benefits 428 --
Reserves and allowances 175 --
Unrealized holding gains on investments -- 26
Operating loss carryforwards 217 --
Other, net 144 --
- -----------------------------------------------------------
964 1,917
Less valuation allowance 273 --
- -----------------------------------------------------------
Total $691 $1,917
---------------------------------
II-20
- -----------------------------------------------------------
1999 Deferred
Income Tax
------------------
Assets Liabilities
- -----------------------------------------------------------
(millions)
Property, plant and equipment $-- $1,555
Postretirement and other benefits 422 --
Reserves and allowances 143 --
Unrealized holding gains on investments -- 52
Operating loss carryforwards 197 --
Tax credit carryforwards 22 --
Other, net 161
- -----------------------------------------------------------
945 1,607
Less valuation allowance 197 --
- -----------------------------------------------------------
Total $748 $1,607
---------------------------------
Management believes it is more likely than not that these deferred income tax
assets, net of the valuation 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.
The valuation allowance related to deferred income tax assets increased $76
million in 2000 and $193 million in 1999.
In 1999, the FON Group acquired approximately $193 million of potential tax
benefits related to net operating loss carryforwards in the acquisitions of the
broadband fixed wireless companies. These benefits are subject to certain
realization restrictions under various tax laws. A valuation allowance was
provided for the total of these benefits. If these benefits are subsequently
recognized, they will reduce goodwill or other noncurrent intangible assets
resulting from the application of the purchase method of accounting for these
transactions.
At year-end 2000, the FON Group had federal operating loss carryforwards of
$514 million and state operating loss carryforwards of $923 million. Related to
these loss carryforwards are federal tax benefits of $180 million and state tax
benefits of $56 million which expire in varying amounts through 2020.
- --------------------------------------------------------------------------------
10. Long-term Debt and Capital Lease Obligations
- --------------------------------------------------------------------------------
Sprint's consolidated long-term debt and capital lease obligations at year-end
was as follows:
- ------------------------------------------------------------------------------------------
2000 1999
--------------------------- ---------------------------
Sprint Sprint Sprint Sprint
FON PCS FON PCS
Maturing Group Group Consolidated Group Group Consolidated
- ------------------------------------------------------------------------------------------
(millions)
Senior notes
5.7% to 7.6%(/1/) 2001 to 2028 $1,105 $ 9,395 $10,500 $1,105 $ 8,145 $ 9,250
8.1% to 9.8% 2000 to 2003 382 -- 382 632 -- 632
11.0% to 12.5%(/2/) 2001 to 2006 -- 776 607 -- 734 584
Debentures and notes
5.8% to 9.6% 2000 to 2022 500 -- 500 565 -- 565
Notes payable and
commercial paper -- 157 3,797 3,954 294 1,971 2,265
First mortgage bonds
5.9% to 9.9% 2000 to 2025 1,085 -- 1,085 1,295 -- 1,295
Capital lease
obligations
5.2% to 14.0% 2000 to 2008 61 408 469 69 486 555
Revolving credit
facilities
Variable rates 2002 900 -- 900 900 -- 900
Other
2.0% to 10.0% 2000 to 2006 318 4 322 573 153 726
- ------------------------------------------------------------------------------------------
4,508 14,380 18,719 5,433 11,489 16,772
Less: current
maturities(/2/) 1,026 244 1,205 902 185 1,087
- ------------------------------------------------------------------------------------------
Long-term debt and
capital lease
obligations(/2/) $3,482 $14,136 $17,514 $4,531 $11,304 $15,685
------------------------------------------------------
(/1/) These borrowings were incurred by Sprint and allocated to the applicable
Group. Sprint's weighted average interest rate related to these
borrowings was 6.7% at year-end 2000 and 6.6% at year-end 1999. The
weighted average interest rate related to the borrowings allocated to the
PCS Group was approximately 8.8% at year-end 2000 and 8.7% at year-end
1999. See Note 1 for a more detailed description of how Sprint allocates
financing to each of the Groups.
(/2/) Consolidated debt does not equal the total of PCS Group and FON Group
debt due to intergroup debt eliminated in consolidation. The FON Group
had an investment in the PCS Group's Senior Discount notes totaling $169
million at year-end 2000, including $65 million classified as current,
and $150 million at year-end 1999.
II-21
Scheduled principal payments, excluding reclassified short-term borrowings,
during each of the next five years are as follows:
- -------------------------------
Sprint Sprint
FON PCS
Group Group Sprint
- -------------------------------
(millions)
2001(/1/) $1,026 $ 258 $1,214
2002 1,339 1,309 2,648
2003 372 1,060 1,432
2004 144 1,062 1,206
2005 122 61 183
- -------------------------------
(/1/) The 2001 scheduled principal payments do not equal current maturities as
these amounts reflect the maturity value of the scheduled payment on the
PCS Group's Senior Discount notes.
Included in the above schedule are payments on PCS Group debt that are to be
made in Japanese yen. The yen needed to satisfy the obligations is currently
held on deposit by the PCS Group and included in "Other assets" on the PCS
Group's Combined Balance Sheets. The scheduled yen payments included in the
above schedule are $1 million in 2003, $20 million in 2004 and $43 million in
2005.
Sprint
Short-term Borrowings
Sprint had bank notes payable totaling $676 million at year-end 2000 and $670
million at year-end 1999. In addition, Sprint had commercial paper borrowings
totaling $3.3 billion at year-end 2000 and $1.6 billion at year-end 1999.
Though these borrowings are renewable at various dates throughout the year,
they were classified as long-term debt because of Sprint's intent and ability
to refinance these borrowings on a long-term basis through unused credit
facilities and unissued debt under Sprint's shelf registration.
Sprint currently has revolving credit facilities with syndicates of domestic
and international banks totaling $5 billion; $3 billion of which is a 364 day
facility, renewed in August 2000, expiring in 2001, and $2 billion is a 5 year
facility expiring in 2003. Commercial paper and certain bank notes are
supported by Sprint's revolving credit facilities. Certain other notes payable
relate to a separate revolving credit facility which expires in 2002. At year-
end 2000, Sprint had total unused lines of credit of $1.8 billion.
Bank notes outstanding had weighted average interest rates of 7.1% at year-end
2000 and 6.3% at year-end 1999. The weighted average interest rate of
commercial paper was 7.5% at year-end 2000 and 6.4% at year-end 1999.
Long-term Debt
In June 2000, Sprint issued $1.25 billion of debt securities under its $4
billion shelf registration statement with the SEC. These borrowings mature in
2002 and have interest rates ranging from 6.9% to 7.6%. At year-end 2000,
Sprint had issued a total of $2 billion of debt securities under the shelf. In
January 2001, Sprint issued securities using the remaining amount of the shelf
(see Note 18 of Notes to Sprint's Consolidated Financial Statements).
In June 1999, Sprint entered into a $1 billion financing agreement to sell, on
a continuous basis with recourse, undivided percentage ownership interests in a
designated pool of its accounts receivable. Subsequent collections of
receivables sold to investors are typically reinvested in new receivables. At
year-end 2000, Sprint had borrowed $900 million with a weighted average
interest rate of 6.9% under this agreement. These borrowings mature in 2002.
Sprint FON Group
In 2000, the FON Group received an allocation of $344 million of debt from
Sprint. This debt was mainly used to repay existing debt and to fund new
capital investments. See Note 1 for a more detailed description of how Sprint
allocates debt to the Groups.
In the 2000 fourth quarter, Sprint redeemed, prior to scheduled maturities, $25
million of FON Group debt with a weighted average interest rate of 9.6%. This
resulted in a $1 million after-tax extraordinary loss for the FON Group.
In the 2000 first quarter, Sprint exchanged 6.6 million common shares of SBC
Communications, Inc. for certain notes payable of the FON Group. The notes had
a market value of $275 million on the maturity date and $316 million at year-
end 1999. The notes had an interest rate of 8.3%.
In the 1999 fourth quarter, Sprint redeemed, prior to scheduled maturities,
$575 million of the assumed broadband fixed wireless companies' debt with
interest rates ranging from 13.1% to 14.5%. This resulted in a $39 million
after-tax extraordinary loss for the FON Group.
In 1998, Sprint redeemed, prior to scheduled maturities, $138 million of FON
Group debt with interest rates ranging from 7.9% to 9.3%. This resulted in a $5
million after-tax extraordinary loss for the FON Group.
FON Group gross property, plant and equipment totaling $16.1 billion was either
pledged as security for first mortgage bonds and certain notes or is restricted
for use as mortgaged property.
II-22
Other
Sprint, including the FON Group, had complied with all restrictive or financial
covenants relating to its debt arrangements at year-end 2000.
- --------------------------------------------------------------------------------
11. Group Equity
- --------------------------------------------------------------------------------
- -------------------------------------------------------------
2000 1999 1998
- -------------------------------------------------------------
(millions)
Beginning balance $10,514 $ 9,024 $7,639
Net income 1,964 1,567 1,535
Dividends (435) (427) (431)
Common stock issued 202 209 164
Treasury stock purchased (61) (48) (321)
Tax benefit of stock compensation 276 223 49
Contributions to the PCS Group -- -- (146)
Equity transfer from the PCS Group -- -- 460
Other comprehensive income (loss) (58) (36) 16
Other, net (59) 2 59
- -------------------------------------------------------------
Ending balance $12,343 $10,514 $9,024
------------------------------------------
- --------------------------------------------------------------------------------
12. Commitments and Contingencies
- --------------------------------------------------------------------------------
Litigation, Claims and Assessments
FON shareholders are subject to all of the risks related to an investment in
Sprint and the FON Group, including the effects of any legal proceedings and
claims against the PCS Group.
In December 2000, Amalgamated Bank, an institutional shareholder, filed a
derivative action purportedly on behalf of Sprint against certain of its
current and former officers and directors in the Jackson County, Missouri,
Circuit Court. The complaint alleges that the individual defendants breached
their fiduciary duties to Sprint and were unjustly enriched by making
undisclosed amendments to Sprint's stock option plans, by failing to disclose
certain information concerning regulatory approval of the proposed merger of
Sprint and WorldCom, and by overstating Sprint's earnings for the first quarter
of 2000. The plaintiff seeks damages, to be paid to Sprint, in an unspecified
amount. Two additional, substantially identical, derivative actions by other
shareholders have been filed.
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 be material to the FON Group's combined financial
statements.
Operating Leases
The FON Group's minimum rental commitments at year-end 2000 for all
noncancelable operating leases, consisting mainly of leases for data processing
equipment and real estate, are as follows:
- ----------------------
(millions)
2001 $372
2002 252
2003 175
2004 124
2005 93
Thereafter 301
- ----------------------
The FON Group's gross rental expense totaled $643 million in 2000, $575 million
in 1999 and $474 million in 1998. Rental commitments for subleases, contingent
rentals and executory costs were not significant.
- --------------------------------------------------------------------------------
13. Financial Instruments
- --------------------------------------------------------------------------------
Fair Value of Financial Instruments
Sprint estimates the fair value of the FON Group's financial instruments using
available market information and appropriate valuation methodologies. As a
result, the following estimates do not necessarily represent the values the FON
Group could realize in a current market exchange. Although management is not
aware of any factors that would affect the year-end 2000 estimated fair values,
those amounts have not been comprehensively revalued for purposes of these
financial statements since that date. Therefore, estimates of fair value after
year-end 2000 may differ significantly from the amounts presented below.
The carrying amounts and estimated fair values of the FON Group's financial
instruments at year-end were as follows:
- -----------------------------------------------------------------
2000
-------------------
Carrying Estimated
Amount Fair Value
- -----------------------------------------------------------------
(millions)
Cash and equivalents $ 122 $ 122
Investment in affiliate debt securities 188 188
Investments in securities 66 66
Long-term debt and capital lease obligations 4,508 4,539
- -----------------------------------------------------------------
- -----------------------------------------------------------------
1999
-------------------
Carrying Estimated
Amount Fair Value
- -----------------------------------------------------------------
(millions)
Cash and equivalents $ 104 $ 104
Investment in affiliate debt securities 169 169
Investments in securities 455 455
Long-term debt and capital lease obligations 5,433 5,497
- -----------------------------------------------------------------
II-23
The carrying amounts of the FON Group's cash and equivalents approximate fair
value at year-end 2000 and 1999. The estimated fair value of investments in
debt and equity securities was based on quoted market prices. The estimated
fair value of the FON Group's long-term debt was based on quoted market prices
for publicly traded issues. The estimated fair value of all other issues was
based on the present value of estimated future cash flows using a discount rate
based on the risks involved.
Concentrations of Credit Risk
The FON Group's accounts receivable are not subject to any concentration of
credit risk.
- --------------------------------------------------------------------------------
14. Additional Financial Information
- --------------------------------------------------------------------------------
Segment Information
The FON Group operates in three business segments, based on how Sprint manages
the FON Group's operations and assesses its performance: the global markets
division, the local division, and the product distribution and directory
publishing businesses. Beginning in 2000, the FON Group combined its long
distance operation, Sprint ION and broadband fixed wireless services and
certain other ventures into one division, global markets. Along with creating
the global markets division, the FON Group shifted the recognition of consumer
long distance revenues and expenses associated with customers in its local
franchise territories from the global markets division to the local division.
Prior periods have been restated to reflect these changes.
Sprint generally accounts for transactions between segments based on fully
distributed costs, which Sprint believes approximates fair value.
Segment financial information was as follows:
- ------------------------------------------------------------------------------
Product
Global Distribution Corporate Sprint
Markets Local & Directory and FON
Division Division Publishing Eliminations(/1/) Group
- ------------------------------------------------------------------------------
(millions)
2000
Net operating
revenues $10,528 $6,155 $1,936 $ (931) $17,688
Intercompany
revenue 105 137 689 (931) --
Depreciation and
amortization 1,121 1,139 16 (9) 2,267
Operating expenses 9,943 4,392 1,652 (732) 15,255
Operating income
(loss) 585 1,763 284 (199) 2,433
Operating margin 5.6% 28.6% 14.7% -- 13.8%
Capital
expenditures 2,294 1,371 8 432 4,105
Total assets 12,042 9,219 845 1,543 23,649
1999
Net operating
revenues $10,308 $5,958 $1,758 $ (864) $17,160
Intercompany
revenue 93 133 638 (864) --
Depreciation and
amortization 1,045 1,069 17 (2) 2,129
Operating expenses 9,133 4,405 1,516 (824) 14,230
Operating income
(loss) 1,175 1,553 242 (40) 2,930
Operating margin 11.4% 26.1% 13.8% -- 17.1%
Capital
expenditures 1,774 1,354 36 370 3,534
Total assets 10,661 8,641 651 1,850 21,803
1998
Net operating
revenues $ 9,541 $5,599 $1,709 $ (891) $15,958
Intercompany
revenue 53 130 708 (891) --
Depreciation and
amortization 928 984 13 (4) 1,921
Operating expenses 8,351 4,198 1,478 (829) 13,198
Operating income
(loss) 1,190 1,401 231 (62) 2,760
Operating margin 12.5% 25.0% 13.5% -- 17.3%
Capital
expenditures 1,518 1,374 9 258 3,159
Total assets 8,008 8,176 612 2,205 19,001
(/1/) Significant intercompany eliminations consist of equipment purchases from
the product distribution business, local access charged to the global
markets division and interexchange services provided to the local
division. In 2000, corporate operating loss includes a $163 million
charge for costs associated with the terminated merger between Sprint and
WorldCom, Inc.
More than 95% of the FON Group's revenues are from domestic customers located
within the United States.
II-24
Net operating revenues by product and services were as follows:
- -------------------------------------------------------------------------
Product
Global Distribution Sprint
Markets Local & Directory FON
Division Division Publishing Eliminations Group
- -------------------------------------------------------------------------
(millions)
2000
Voice $ 7,094 $ -- $ -- $(105) $ 6,989
Data 1,937 -- -- -- 1,937
Internet 920 -- -- -- 920
Local service -- 2,846 -- -- 2,846
Network access -- 1,987 -- (133) 1,854
Toll service -- 717 -- -- 717
Product distribution -- -- 1,468 (689) 779
Directory publishing -- -- 468 -- 468
Other 577 605 -- (4) 1,178
---------------------------------------------------
Total net operating
revenues $10,528 $6,155 $1,936 $(931) $17,688
---------------------------------------------------
1999
Voice $ 7,445 $ -- $ -- $ (93) $ 7,352
Data 1,696 -- -- -- 1,696
Internet 615 -- -- -- 615
Local service -- 2,677 -- -- 2,677
Network access -- 1,918 -- (130) 1,788
Toll service -- 611 -- -- 611
Product distribution -- -- 1,350 (638) 712
Directory publishing -- -- 408 -- 408
Other 552 752 -- (3) 1,301
---------------------------------------------------
Total net operating
revenues $10,308 $5,958 $1,758 $(864) $17,160
---------------------------------------------------
1998
Voice $ 7,079 $ -- $ -- $ (53) $ 7,026
Data 1,396 -- -- -- 1,396
Internet 434 -- -- -- 434
Local service -- 2,469 -- -- 2,469
Network access -- 1,894 -- (127) 1,767
Toll service -- 503 -- -- 503
Product distribution -- -- 1,315 (708) 607
Directory publishing -- -- 394 -- 394
Other 632 733 -- (3) 1,362
---------------------------------------------------
Total net operating
revenues $ 9,541 $5,599 $1,709 $(891) $15,958
---------------------------------------------------
Supplemental Cash Flows Information
The FON Group's cash paid for interest and income taxes was as follows:
- ------------------------------------------------------
2000 1999 1998
- ------------------------------------------------------
(millions)
Interest (net of capitalized interest) $113 $ 82 $217
--------------
Income taxes $486 $633 $327
--------------
Noncash activities for the FON Group included the following:
- -------------------------------------------------------------------------
2000 1999 1998
- -------------------------------------------------------------------------
(millions)
Tax benefit from stock options exercised $276 $223 $ 49
--------------
Stock received for stock options exercised $ 29 $ 78 $ 18
--------------
Noncash extinguishment of debt $275 $ 78 $--
--------------
Common stock issued under employee benefit stock plans $106 $ 95 $ 99
--------------
Capital lease obligations $-- $ 41 $--
--------------
Debt assumed in the broadband fixed wireless acquisitions $-- $575 $--
--------------
II-25
Intergroup Investments and Transactions
Sprint FON Group Investments in the Sprint PCS Group
The following table reflects the FON Group's investments in the PCS Group,
which have been eliminated in Sprint's consolidated financial statements:
- -----------------------------------------------------
2000 1999
- -----------------------------------------------------
(millions)
Common and preferred intergroup interest $ 260 $ 262
Investment in debt securities(/1/) 188 169
- -----------------------------------------------------
Total $ 448 $ 431
-----------
(/1/) $65 million is classified as current at year-end 2000 and is included in
"Receivables from the PCS Group" in the FON Group's Combined Balance
Sheets.
Common Intergroup Interest
The FON Group received a 1% intergroup interest in the PCS Group at the time of
the PCS Restructuring and Recapitalization. Subsequently, PCS shares
representing the intergroup interest were issued to FON Group employees,
exhausting the FON Group's interest in the PCS Group in January 2000.
The FON Group's share of the PCS Group's net loss totaled $13 million in 1999
and $6 million from the date of the PCS Restructuring to year-end 1998 and was
included in "Other income, net" in the Sprint FON Group Combined Statements of
Operations. As the intergroup interest was exhausted in 2000, no additional PCS
Group losses were recognized by the FON Group in 2000.
Preferred Intergroup Interest
The FON Group provided Sprint PCS and the PCS Group with interim financing from
the date the PCS Restructuring agreement was signed in May 1998 until it was
completed in November 1998. As part of the PCS Restructuring, Sprint converted
this financing, totaling $279 million, into an intergroup interest representing
0.3 million shares of 10-year PCS preferred stock convertible into a PCS common
intergroup interest. The PCS Group paid the FON Group dividends on the
preferred intergroup interest of $8 million in 2000 and 1999 and $1 million in
1998.
Long-term Loans
Sprint provided Sprint PCS with additional interim financing of $180 million
from May 1998 through November 1998. This loan was repaid in 1999.
Intergroup Interest Income
The difference between Sprint's actual interest costs and the interest costs
charged to the PCS Group on allocated debt totaled $235 million in 2000, $167
million in 1999 and $11 million in 1998. These amounts are reflected as a
reduction to "Interest expense" in the Sprint FON Group Combined Statements of
Operations. See Note 1 for a more detailed description of how Sprint allocates
interest expense to each of the Groups.
The FON Group earned intergroup interest income of $19 million in 2000, $16
million in 1999 and $15 million in 1998 related to the FON Group's investment
in PCS Group debt securities. These amounts are included in "Other income, net"
in the Sprint FON Group Combined Statements of Operations.
Intergroup Transactions
The PCS Group uses the long distance operation as its interexchange carrier and
purchases wholesale long distance for resale to its customers. Additionally,
the FON Group provides the PCS Group with Caller ID services and various other
goods and services. Charges to the PCS Group for these items totaled $396
million in 2000, $280 million in 1999 and $21 million from the PCS
Restructuring date to year-end 1998.
The PCS Group provides the FON Group with access to its network and
telemarketing and various other services. Charges to the FON Group for these
items totaled $35 million in 2000 and $4 million in 1999.
The FON Group provides management, printing, mailing and warehousing services
to the PCS Group. Charges to the PCS Group for these services totaled $150
million in 2000, $65 million in 1999 and $5 million from the PCS Restructuring
date to year-end 1998.
Related Party Transactions
Sprint PCS
The following discussion reflects related party transactions between Sprint and
Sprint PCS prior to the PCS Restructuring:
Sprint provided Sprint PCS with billing and operator services, and switching
equipment. Sprint PCS also used the long distance operation as its
interexchange carrier. Charges to Sprint PCS for these services totaled $104
million in 1998.
Sprint provided management, printing, mailing and warehousing services to
Sprint PCS. Charges to Sprint PCS for these services totaled $25 million in
1998.
Sprint had a vendor financing loan to Sprint PCS for $300 million at year-end
1997 which was repaid in 1998. Sprint also loaned Sprint PCS $114 million in
1998, which was repaid in the 1999 first quarter.
II-26
- --------------------------------------------------------------------------------
15. Recently Issued Accounting Pronouncements
- --------------------------------------------------------------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This standard
requires all derivatives to be recorded on the balance sheet as either assets
or liabilities and be measured at fair value. Gains or losses from changes in
the derivative values are to be accounted for based on how the derivative is
used and whether it qualifies for hedge accounting. When this statement was
adopted in January 2001, it had no material impact on the FON Group's combined
financial statements.
In September 2000, the Financial Accounting Standards Board issued SFAS No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities--a replacement of FASB Statement No. 125." This
statement revises the standards for accounting for securitizations and other
transfers of financial assets and provides consistent standards for
distinguishing transfers from sales and secured borrowings. This statement is
effective for transactions occurring after March 31, 2001 and is not expected
to have a material impact on the FON Group's combined financial statements.
- --------------------------------------------------------------------------------
16. Quarterly Financial Data (Unaudited)
- --------------------------------------------------------------------------------
Quarter
-----------------------------
2000 1st 2nd 3rd 4th(/1/)
- ------------------------------------------------------------------------
(millions, except per share
data)
Net operating revenues(/2/)(/3/) $4,404 $4,446 $4,444 $4,394
Operating income 758 591 724 360
Income from continuing operations 445 365 384 98
Net income(/3/) 1,118 365 384 97
Earnings per common share from continuing
operations
Diluted 0.50 0.41 0.43 0.11
Basic 0.51 0.42 0.44 0.11
- ------------------------------------------------------------------------
Quarter
-----------------------------
1999 1st 2nd 3rd 4th
- ------------------------------------------------------------------------
(millions, except per share
data)
Net operating revenues(/2/) $4,157 $4,254 $4,331 $4,418
Operating income 737 736 726 731
Income from continuing operations 434 452 419 431
Net income 406 386 359 416
Earnings per common share from continuing
operations(/4/)
Diluted 0.49 0.51 0.48 0.49
Basic 0.50 0.52 0.49 0.50
- ------------------------------------------------------------------------
(/1/) See Notes 3 and 4 of Notes to Combined Financial Statements for
information about nonrecurring charges recorded in the 2000 fourth
quarter.
(/2/) Certain reclassifications were made between net operating revenues and
operating expenses from amounts reported in the 2000 quarterly reports on
Form 10-Q to conform to industry events or practices. These
reclassifications had no impact on operating income as previously
reported.
(/3/) In the 2000 fourth quarter, the FON Group adopted SEC Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements," (SAB
101). As required by SAB 101, 2000 net operating revenues have been
restated from amounts reported in the 2000 quarterly reports on Form 10-
Q. Net operating revenues were reduced by $4 million in the 2000 first
quarter, and increased by $1 million in the 2000 second quarter and $3
million in the 2000 third quarter. The FON Group also restated the 2000
first quarter net income by recording a $2 million loss for the
cumulative effect of change in accounting principle at the effective
adoption date of SAB 101.
(/4/) In the 1999 second quarter, Sprint effected a two-for-one stock split of
its FON stock. FON Group earnings per share for prior periods have been
restated to reflect this stock split.
- --------------------------------------------------------------------------------
17. Subsequent Events (Unaudited)
- --------------------------------------------------------------------------------
In February 2001, Sprint agreed to end its exclusive alliance with EarthLink
and relinquished its seats on EarthLink's Board of Directors. As a result of
these changes, Sprint will now treat its investment in EarthLink as a cost
method investment.
In February 2001, Sprint filed a registration statement with the SEC for a
secondary offering of 174.8 million shares of FON stock (including 22.8 million
shares to cover over-allotments) owned by FT and DT, including the FON stock
underlying the Class A common stock. Sprint will not receive any of the
proceeds from the sale of this stock.
In February 2001, Sprint's Board of Directors declared dividends of 12.5 cents
per share on the Sprint FON common stock and Class A common stock. Dividends
will be paid March 30, 2001.
II-27
SPRINT FON GROUP
SCHEDULE II--COMBINED VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2000, 1999 and 1998
- -----------------------------------------------------------------------------
Additions
----------------
Balance Charged Charged Balance
Beginning to to Other Other End of
of Year Income Accounts Deductions Year
- -----------------------------------------------------------------------------
(millions)
2000
Allowance for doubtful
accounts $228 $414 $ (1) $(348)(/1/) $293
----------------------------------------------------
Valuation allowance--
deferred income tax
assets $197 $ 76 $-- $ -- $273
----------------------------------------------------
1999
Allowance for doubtful
accounts $175 $383 $ 3 $(333)(/1/) $228
----------------------------------------------------
Valuation allowance--
deferred income tax
assets $ 4 $-- $193(/2/) $ -- $197
----------------------------------------------------
1998
Allowance for doubtful
accounts $147 $365 $ 3 $(340)(/1/) $175
----------------------------------------------------
Valuation allowance--
deferred income tax
assets $ 12 $-- $-- $ (8) $ 4
----------------------------------------------------
(/1/) Accounts written off, net of recoveries.
(/2/) Represents a valuation allowance for deferred income tax assets relating
to the net operating loss carryforwards acquired in the purchase of the
broadband fixed wireless companies.
II-28
[SPRINT LOGO]
Annex III
Sprint PCS Group
Combined Financial Information
SELECTED FINANCIAL DATA Sprint PCS Group
- -------------------------------------------------------------------------------
2000 1999 1998(/1/) 1997(/1/) 1996(/1/)
- -------------------------------------------------------------------------------
(millions, except per share data)
Results of Operations
- -------------------------------------------------------------------------------
Net operating revenues $ 6,341 $ 3,373 $ 1,294 $ -- $ --
Operating loss(/2/) (1,928) (3,237) (2,570) (19) (1)
Other partners' loss in Sprint
PCS -- -- 1,251 -- --
Equity in loss of Sprint PCS -- -- -- (660) (192)
Loss before extraordinary
items(/2/),(/3/) (1,868) (2,481) (1,090) (419) (120)
Net loss(/2/),(/3/) (1,871) (2,502) (1,121) (419) (120)
Loss per Share(/4/),(/5/)
- -------------------------------------------------------------------------------
Diluted and basic loss per
common share before
extraordinary items $ (1.95) $ (2.71) $ (2.21) $(1.98) NA
Financial Position
- -------------------------------------------------------------------------------
Total assets $19,763 $17,924 $15,165 $1,703 $1,260
Property, plant and equipment,
net 9,522 7,996 6,535 187 --
Investment in Sprint PCS -- -- -- 784 1,176
Total debt 14,380 11,489 8,195 -- --
Group equity 1,892 3,320 3,755 1,386 1,188
Cash Flow Data
- -------------------------------------------------------------------------------
Net cash provided (used) by
operating activities $ (8) $(1,692) $ (159) $ 38 $ (1)
Capital expenditures 3,047 2,580 1,072 154 --
PCS license purchases -- -- -- 460 84
Investments in Sprint PCS -- -- 33 406 298
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 Group equity as previously reported.
(/1/) Results of operations for 1998 include Sprint PCS' operating results on
a consolidated basis for the entire year. The cable partners' share of
losses through the PCS restructuring date has been reflected as "Other
partners' loss in Sprint PCS" in the Combined Statements of Operations.
Before 1998, the PCS Group's investment in Sprint PCS was accounted for
using the equity method. Sprint PCS' financial position at year-end 1998
has also been reflected on a consolidated basis. Cash flow data reflects
Sprint PCS' cash flows only after the PCS restructuring date. See
Sprint's "Management's Discussion and Analysis of Financial Condition
and Results of Operations--General" for more information.
(/2/) In 2000, the PCS Group recorded costs associated with the terminated
WorldCom merger of $24 million. This charge increased the loss before
extraordinary items and net loss by $16 million. In 1998, the PCS Group
recorded a nonrecurring charge to write off $179 million of acquired in-
process research and development costs related to the PCS restructuring.
This charge increased operating loss, loss before extraordinary items
and net loss by $179 million.
(/3/) In 2000, the PCS group recorded a net nonrecurring gain of $28 million
from the sale of customers and network infrastructure to a PCS
affiliate. This gain reduced the loss before extraordinary items and net
loss by $18 million.
(/4/) In the 2000 first quarter, Sprint effected a two-for-one stock split of
its PCS common stock. As a result, diluted and basic loss per common
share have been restated for periods before this stock split.
(/5/) Loss per share for the PCS Group for periods prior to 1999 is on a pro
forma basis and assumes the PCS restructuring, the recapitalization, the
purchase of 5.1 million PCS shares by France Telecom and Deutsche
Telekom that occurred in connection with the restructuring and the PCS
Group's write-off of $179 million of acquired in-process research and
development costs occurred at the beginning of 1997. These pro forma
amounts are for comparative purposes only and do not necessarily
represent what actual results of operations would have been had the
transactions occurred at the beginning of 1997, nor do they indicate the
results of future operations.
NA = not applicable
III-1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Sprint PCS Group
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
General
- -------------------------------------------------------------------------------
See Sprint's "Management's Discussion and Analysis of Financial Condition and
Results of Operations--General" for more information.
- -------------------------------------------------------------------------------
Forward-looking Information
- -------------------------------------------------------------------------------
See Sprint's "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Forward-looking Information" for a discussion of
forward-looking information.
- -------------------------------------------------------------------------------
Sprint PCS Group
- -------------------------------------------------------------------------------
The PCS Group includes Sprint's wireless personal communication services (PCS)
operations. It operates the only 100% digital PCS wireless network in the
United States with licenses to provide service nationwide using a single
frequency and a single technology. At year-end 2000, the PCS Group, together
with affiliates, operated PCS systems in over 300 metropolitan markets,
including the 50 largest U.S. metropolitan areas. The PCS Group has licenses
to serve more than 280 million people in all 50 states, Puerto Rico and the
U.S. Virgin Islands. The service offered by the PCS Group and its affiliates
now reaches more than 220 million people. The PCS Group provides nationwide
service through:
. operating its own digital network in major U.S. metropolitan areas,
. affiliating with other companies, mainly in and around smaller U.S.
metropolitan areas,
. roaming on other providers' analog cellular networks using dual-
band/dual-mode handsets, and
. roaming on other providers' digital PCS networks that use code division
multiple access (CDMA).
The PCS Group also provides wholesale PCS services to companies that resell
the services to their customers on a retail basis. These companies pay the PCS
Group a discounted price for their customers' usage, but bear the costs of
acquisition and customer service.
The PCS Group also includes its investment in Pegaso Telecomunicaciones, S.A.
de C.V. (Pegaso), a wireless PCS operation in Mexico. This investment is
accounted for using the equity method.
The wireless industry, including the PCS Group, typically generates a
significantly higher number of subscriber additions and handset sales in the
fourth quarter of each year compared to the remaining quarters. This is due to
the use of retail distribution, which is dependent on the holiday shopping
season; the timing of new products and service introductions; and aggressive
marketing and sales promotions.
- -------------------------------------------------------------------------------
Results of Operations
- -------------------------------------------------------------------------------
- -----------------------------------------------------------
2000 1999 1998
- -----------------------------------------------------------
(millions)
Net operating revenues $ 6,341 $ 3,373 $ 1,294
Operating expenses 8,269 6,610 3,864
- -----------------------------------------------------------
Operating loss $(1,928) $(3,237) $(2,570)
---------------------------------------
Loss from continuing operations $(1,868) $(2,481) $(1,090)
---------------------------------------
Capital expenditures $ 3,047 $ 2,580 $ 1,072
---------------------------------------
The PCS Group's 1999 results of operations reflect the first full year of
combined results after the PCS Restructuring. The PCS Group's 1998 results of
operations included SprintCom's operating results as well as Sprint PCS'
operating results on a consolidated basis for the entire year. (See "Pro Forma
Sprint PCS Group" section below for a discussion of pro forma results of
operations.)
In 2000, operating expenses include a nonrecurring charge of $24 million for
costs associated with the terminated WorldCom merger. This charge increased
the loss from continuing operations by $16 million. Also included in the 2000
loss from continuing operations is a nonrecurring gain of $18 million from the
sale of customers and network infrastructure to a PCS affiliate. In 1998,
operating expenses and loss from continuing operations include a write-off of
$179 million associated with the cost of nine in-process research and
development projects acquired in connection with the PCS Restructuring.
The PCS Group markets its products through multiple distribution channels,
including its own retail stores as well as other retail outlets. Equipment
sales to one retail chain and the subsequent service revenues generated by
sales to its customers accounted for 25% of net operating revenues in 2000,
28% in 1999 and 25% in 1998.
Pro Forma Sprint PCS Group
To provide a more meaningful analysis of the PCS Group's underlying operating
results, the following supplemental discussion presents 1998 on a pro forma
basis and assumes the PCS Restructuring and the write-off of acquired in-
process research and development costs occurred prior to 1998.
III-2
- ---------------------------------------------------------------------------
2000 1999 1998
- ---------------------------------------------------------------------------
(millions)
Net operating revenues $ 6,341 $ 3,373 $ 1,294
Operating expenses
Costs of services and products 3,942 3,150 1,758
Selling, general and administrative 2,426 1,937 1,138
Depreciation and amortization 1,877 1,523 1,038
Merger related costs 24 -- --
- ---------------------------------------------------------------------------
Total operating expenses 8,269 6,610 3,934
- ---------------------------------------------------------------------------
Operating loss $(1,928) $(3,237) $(2,640)
-------------------------------------------------------
Capital expenditures (including capital lease
obligations) $ 3,047 $ 2,616 $ 2,904
-------------------------------------------------------
Net Operating Revenues
- ---------------------------------------------------------------------------
2000 1999 1998
- ---------------------------------------------------------------------------
Customers at year-end (millions) 9.5 5.7 2.6
-------------------------------------------------------
Average monthly service revenue per user (ARPU) $ 59 $ 58 $ 60
-------------------------------------------------------
Net operating revenues include subscriber revenues and sales of handsets and
accessory equipment. Subscriber revenues consist of monthly recurring charges,
usage charges and activation fees. Subscriber revenues increased 94% in 2000
mainly reflecting an increase in the average number of customers. The PCS Group
added 3.8 million customers in 2000 to end the year with over 9.5 million
customers in more than 300 metropolitan markets nationwide. The increase in
ARPU in 2000 was partly due to the implementation of activation charges in the
second quarter. Subscriber revenues were also aided by the increase in resale
customers. The companies that the PCS Group serves on a wholesale basis added
238,000 customers in 2000, ending the year with approximately 310,000
customers.
In 2000, the customer churn rate improved to 2.8% from 3.4% in 1999 and 3.3% in
1998. The improvement reflects expanded network coverage and the success of
several customer retention initiatives.
Revenues from sales of handsets and accessories were approximately 14% of net
operating revenues in 2000, 17% in 1999 and 18% in 1998. As part of the PCS
Group's marketing plans, handsets are normally sold at prices below the PCS
Group's cost.
Operating Expenses
Costs of services and products mainly include handset and accessory costs,
switch and cell site expenses and other network-related costs. These costs
increased 25% in 2000 and 79% in 1999 reflecting the significant growth in
customers and expanded market coverage, partly offset by a reduction in handset
unit costs.
Selling, general and administrative (SG&A) expense mainly includes marketing
costs to promote products and services as well as salary and benefit costs.
SG&A expense increased 25% in 2000 and 70% in 1999 reflecting an expanded
workforce to support subscriber growth and increased marketing and selling
costs.
Acquisition costs per gross customer addition, including equipment subsidies
and marketing costs, have improved approximately 19% in 2000 and 26% in 1999.
Lower handset unit costs and scale benefits from greater customer additions
have contributed to the improvement.
Cash costs per user (CCPU) consists of costs of service revenues, service
delivery and other general and administrative costs. CCPU was $35 in 2000, $48
in 1999 and $73 in 1998. The improvements reflect successful expense management
and scale benefits resulting from the increased customer base.
Depreciation and amortization expense consists mainly of depreciation of
network assets and amortization of intangible assets. The intangible assets
include goodwill, PCS licenses, customer base, microwave relocation costs and
assembled workforce.
Depreciation and amortization expense increased 23% in 2000 and 47% in 1999
mainly reflecting depreciation of the network assets placed in service during
2000 and 1999. The increases also reflects amortization of intangible assets
acquired in the Cox PCS purchase in the 1999 second quarter.
- --------------------------------------------------------------------------------
Nonoperating Items
- --------------------------------------------------------------------------------
Interest Expense
The effective interest rates in the following table reflect interest expense on
long-term debt only. Interest costs on short-term borrowings classified as
long-term debt, intergroup borrowings and deferred compensation plans have been
excluded so as not to distort the PCS Group's effective interest rates on long-
term debt.
- -----------------------------------------------------------------
2000 1999 1998
- -----------------------------------------------------------------
Effective interest rate on long-term debt (/1/) 8.7% 8.7% 9.4%
----------------------------------------
(/1/) The effective interest rate on long-term debt for 1998 is on a pro forma
basis as if Sprint PCS' long-term debt had been included in the PCS
Group's outstanding long-term debt balance all year.
III-3
The decrease in the PCS Group's effective interest rate from 1998 mainly
reflects increased borrowings with lower interest rates.
Effective with the PCS Restructuring, interest expense on borrowings incurred
by Sprint and allocated to the PCS Group is based on rates the PCS Group would
be able to obtain from third parties as a direct or indirect wholly owned
Sprint subsidiary, but without the benefit of any guaranty by Sprint or any
member of the FON Group. The PCS Group's interest expense includes $235 million
in 2000, $167 million in 1999 and $11 million in 1998 resulting from the
difference between Sprint's actual interest rates and the rates charged to the
PCS Group. These costs are derived from both long-term and short-term allocated
borrowings. Only the long-term portion of these costs are included in the
effective interest rates above.
Other Partners' Loss in Sprint PCS
Sprint PCS' results of operations for 1998 have been consolidated for the
entire year. The Cable Partners' share of losses through the PCS Restructuring
date has been reflected as "Other partners' loss in Sprint PCS" in the Combined
Statements of Operations.
Other Income (Expense), Net
Other income (expense) consisted of the following:
- ------------------------------------------------
2000 1999 1998
- ------------------------------------------------
(millions)
Equity in net loss of affiliate $(55) $-- $--
Gains on sales of assets 47 25 --
Other, net (3) 21 34
- ------------------------------------------------
Total $(11) $ 46 $ 34
---------------
Other expense for 2000 mainly includes the PCS Group's share of losses of
Pegaso and gains on sales of assets including certain customers and associated
network infrastructure and certain other investments. Other income for 1999
mainly includes a gain on the sale of network infrastructure totaling $25
million and $13 million from the FON Group's interest in the PCS Group's loss.
Other income for 1998 consisted mainly of interest income totaling $34 million,
reflecting interest earned on partner contributions from the Sprint PCS
partners prior to the PCS Restructuring.
Income Taxes
The PCS Group's effective tax rates were 35.0% in 2000, 35.9% in 1999 and 33.2%
in 1998. See Note 6 of Notes to Combined Financial Statements for information
about the differences that caused the effective income tax rates to vary from
the statutory federal rate for income taxes related to loss before
extraordinary items.
Extraordinary Items, Net
In 2000, Sprint redeemed, prior to scheduled maturities, $127 million of the
PCS Group's notes payable to the FCC. These notes had an interest rate of 7.8%.
This resulted in a $3 million after-tax extraordinary loss.
In 1999, Sprint redeemed, prior to scheduled maturities, $2.2 billion of the
PCS Groups revolving credit facilities and other borrowings. These borrowings
had interest rates ranging from 5.6% to 8.3%. This resulted in a $21 million
after-tax extraordinary loss. These short-term borrowings were repaid with
proceeds from long-term financing.
In 1998, Sprint redeemed, prior to scheduled maturities, $3.3 billion of PCS
Group debt with a weighted average interest rate of 8.3%. This resulted in a
$31 million after-tax extraordinary loss.
- --------------------------------------------------------------------------------
Financial Condition
- --------------------------------------------------------------------------------
- --------------------------------
2000 1999
- --------------------------------
(millions)
Combined assets $19,763 $17,924
---------------
Net property, plant and equipment increased $1.5 billion in 2000 reflecting
capital expenditures to support the PCS network buildout, partly offset by
depreciation and network asset sales.
Net intangibles decreased $454 million mainly reflecting amortization of the
customer base and goodwill. See "Liquidity and Capital Resources" for more
information about changes in the Combined Balance Sheets.
- --------------------------------------------------------------------------------
Liquidity and Capital Resources
- --------------------------------------------------------------------------------
The PCS Group's cash flows for 1998 include Sprint PCS' cash flows only after
the PCS Restructuring date.
Operating Activities
- --------------------------------------------------------------
2000 1999 1998
- --------------------------------------------------------------
(millions)
Cash flows used by operating activities $(8) $(1,692) $(159)
--------------------
Cash flows used by operating activities decreased $1.7 billion in 2000 and
increased $1.5 billion in 1999. The 2000 decrease mainly reflects decreased
operating losses for the PCS Group and a decrease in working capital. The 1999
increase mainly reflects increased operating losses and an increase in working
capital.
III-4
Investing Activities
- -----------------------------------------------------------------
2000 1999 1998
- -----------------------------------------------------------------
(millions)
Cash flows used by investing activities $(3,054) $(2,509) $(861)
--------------------------------------------
The PCS Group's main use of cash in 2000, 1999 and 1998 was to fund capital
expenditures for the PCS network buildout. Capital expenditures for the PCS
Group totaled $3.0 billion in 2000, $2.6 billion in 1999 and $1.1 billion in
1998. Investing activities also include sales of assets of $207 million in
2000 and $153 million in 1999. "Investments in affiliates" mainly reflects the
PCS Group's investment in Pegaso.
Financing Activities
- -----------------------------------------------------------------
2000 1999 1998
- -----------------------------------------------------------------
(millions)
Cash flows provided by financing activities $3,163 $4,044 $1,193
--------------------------------------------
Financing activities reflect net proceeds from long-term debt allocated from
Sprint of $2.9 billion in 2000, $3.2 billion in 1999 and $1 billion in 1998.
In addition, the PCS Group received $121 million in 2000 and $905 million in
1999 from stock issuances, including stock option exercises. These proceeds
were primarily used to fund the PCS Group's capital expenditures and operating
losses.
Also included in the 2000 financing activities is $80 million received from
the FON Group to compensate for the net amount of PCS stock-based compensation
granted to FON Group employees and FON stock-based compensation granted to PCS
Group employees. In addition, the PCS Group received $132 million of proceeds
from Sprint's employee stock purchase plan in 2000.
In connection with the PCS Restructuring, Sprint adopted a tax sharing
agreement that provides for the allocation of income taxes between the FON
Group and PCS Group. Sprint expects the FON Group to continue to make
significant payments to the PCS Group under this agreement because of expected
PCS Group operating losses in the near future and from using the PCS Group's
net operating loss carryforwards. These payments will reflect the PCS Group's
incremental cumulative effect on Sprint's consolidated federal and state tax
liability and tax credit position. The PCS Group received payments from the
FON Group totaling $872 million in 2000, $764 million in 1999 and $20 million
in 1998. See Note 1 of Notes to Combined Financial Statements, "Allocation of
Federal and State Income Taxes," for more details.
Capital Requirements
The PCS Group's 2001 investing activities, mainly consisting of capital
expenditures and investments in affiliates, are expected to be between $3.7
and $4.0 billion. Capital expenditures are expected to range between $3.3 and
$3.5 billion, and investments in affiliates are expected to be between $350
and $450 million.
PCS preferred stock dividend payments are expected to total $15 million,
including payments to the FON Group for its preferred intergroup interest. See
Note 11 of Notes to Combined Financial Statements for a more detailed
discussion of the FON Group's preferred intergroup interest in the PCS Group.
Liquidity
See Sprint's "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity" for a discussion of liquidity.
- -------------------------------------------------------------------------------
Regulatory Developments
- -------------------------------------------------------------------------------
The FCC sets rules, regulations and policies to, among other things:
. grant licenses for PCS frequencies and license renewals,
. rule on assignments and transfers of control of PCS licenses,
. govern the interconnection of PCS networks with other wireless and
wireline carriers,
. establish access and universal service funding provisions,
. impose fines and forfeitures for violations of any of the FCC's rules,
and
. regulate the technical standards of PCS networks.
The FCC currently prohibits a single entity from having a combined
attributable interest (20% or greater interest in any license) in broadband
PCS, cellular and specialized mobile radio licenses totaling more than 45
megahertz (MHz) in any geographic area except that in rural service areas no
licensee may have an attributable interest in more than 55 MHz of commercial
mobile radio service (CMRS) spectrum.
PCS License Transfers and Assignments
The FCC must approve any substantial changes in ownership or control of a PCS
license. Noncontrolling interests in an entity that holds a PCS license or
operates PCS networks generally may be bought or sold without prior FCC
approval. In addition, the FCC now requires only post-consummation
notification of certain pro forma assignments or transfers of control.
III-5
PCS License Conditions
All PCS licenses are granted for 10-year terms if the FCC's buildout
requirements are followed. Based on those requirements, all 30 MHz broadband
major trading area (MTA) licensees must build networks offering coverage to 1/3
of the population within five years and 2/3 within 10 years. In June 2000, the
PCS Group met its five-year buildout requirement in all its MTA markets. All 10
MHz broadband PCS licensees must build networks offering coverage to at least
1/4 of the population within five years or make a showing of "substantial
service" within that five-year period. Sprint anticipates that it will meet the
10 MHz five-year buildout requirement by the April 2002 deadline. Licenses may
be revoked if the rules are violated.
PCS licenses may be renewed for additional 10-year terms. Renewal applications
are not subject to auctions. However, third parties may oppose renewal
applications.
Other FCC Requirements
Broadband PCS providers cannot unreasonably restrict or prohibit other
companies from reselling their services. They also cannot unreasonably
discriminate against resellers. CMRS resale obligations will expire in 2002.
Local exchange carriers must program their networks to allow customers to
retain, at the same location, existing telephone numbers when switching from
one telecommunications carrier to another. This is referred to as service
provider number portability. CMRS providers are currently required to deliver
calls from their networks to ported numbers anywhere in the country. By
November 24, 2002, all covered CMRS providers must provide a database solution
for number portability. The solution must be able to support roaming. Covered
CMRS providers must provide number portability in the 100 largest metropolitan
statistical areas, in compliance with certain FCC performance criteria, but
only at the request of another carrier (CMRS provider or local exchange
carrier).
Broadband PCS and other CMRS providers may provide wireless local loop and
other fixed services that would directly compete with the wireline services of
local phone companies. Broadband PCS and other CMRS providers must implement
enhanced emergency 911 capabilities in a two-tiered manner. In the first phase,
wireless carriers must identify the base station from which a call originated.
In the second phase, wireless carriers must provide location within a radius as
small as fifty meters. Implementation of the more complex Phase II location
requirements must begin by October 1, 2001.
Communications Assistance for Law Enforcement Act
The Communications Assistance for Law Enforcement Act (CALEA) was enacted in
1994 to preserve electronic surveillance capabilities by law enforcement
officials in the face of rapidly changing telecommunications technology.
This act requires telecommunications carriers, including Sprint, to modify
their equipment, facilities and services to allow for authorized electronic
surveillance based on either industry or FCC standards. In 1997, industry-
setting organizations developed interim standards for wireline, cellular and
broadband PCS carriers to comply with CALEA. In August 1999, the FCC
supplemented the interim industry standards with six additional capabilities.
For interim industry standards, the deadline for compliance was June 30, 2000,
and for the additional standards established by the FCC, the deadline is
September 30, 2001. In August 2000, an appellate court vacated the FCC's
decision relative to four of the capabilities and remanded the matter for
further FCC consideration.
Sprint PCS believes that it is in compliance with all existing CALEA
requirements. However, Sprint PCS filed a petition for an extension of the June
30, 2000 deadline until June 30, 2001 in the event that the FCC determines that
Sprint PCS must use a specific vendor solution to automatically provide mobile
service assistance information under Section 103 (d) of CALEA. Specifically,
this section requires a CMRS carrier to identify (a) whether a
customer/interception subject is traveling "in network: but outside the
customer's service area," and (b) the service provider if the subject is
roaming on another CMRS network. While Sprint PCS is capable of providing this
information upon a specific request by law enforcement, it cannot provide the
information automatically. The FCC has not ruled on Sprint PCS' motion for an
extension of the June 30, 2000 deadline; however, Sprint PCS is deemed to have
an extension of the deadline until March 31, 2001 unless the FCC revokes the
extension before that deadline or issues a final order with a different
deadline.
Other Federal Regulations
Wireless systems must comply with certain FCC and Federal Aviation
Administration regulations about the siting, lighting and construction of
transmitter towers and antennas. In addition, FCC environmental regulations may
cause certain cell site locations to come under National Environmental Policy
Act (NEPA) and National Historic Preservation Act (NHPA) regulation. The FCC's
NEPA and NHPA rules require carriers to meet certain land use and radio
frequency standards.
III-6
Universal Service Requirements
The FCC and many states have established "universal service" programs to ensure
affordable, quality telecommunications services for all Americans. The PCS
Group's "contribution" to these programs is typically a percentage of end-user
revenues. Currently, management cannot predict the extent of the PCS Group's
future federal and state universal service assessments, or its ability to
recover its contributions from the universal service fund.
- --------------------------------------------------------------------------------
Financial Strategies
- --------------------------------------------------------------------------------
Financial strategies are determined by Sprint on a centralized basis. See
Sprint's "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Financial Strategies."
- --------------------------------------------------------------------------------
Recently Issued Accounting Pronouncements
- --------------------------------------------------------------------------------
See Note 12 of Notes to Combined Financial Statements for a discussion of
recently issued accounting pronouncements.
III-7
MANAGEMENT REPORT
Sprint Corporation's management is responsible for the integrity and
objectivity of the information contained in this annex. Management is
responsible for the consistency of reporting this information and for ensuring
that accounting principles generally accepted in the United States 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 principles of business conduct are understood
and practiced by its employees.
The combined financial statements included in this annex have been audited by
Ernst & Young LLP, independent auditors. Their audits were conducted using
auditing standards generally accepted in the United States and their report is
included herein.
The Board of Director's responsibility for these combined 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
III-8
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Sprint Corporation
We have audited the accompanying combined balance sheets of the Sprint PCS
Group (as described in Note 1) as of December 31, 2000 and 1999, and the
related combined statements of operations, comprehensive loss and cash flows
for each of the three years in the period ended December 31, 2000. Our audits
also included the financial statement schedule listed in the Index to
Financial Statements and Financial Statement Schedules. These financial
statements and the schedule are the responsibility of the management of Sprint
Corporation (Sprint). Our responsibility is to express an opinion on these
financial statements and the schedule based on our audits. We did not audit
the 1998 consolidated financial statements of Sprint Spectrum Holding Company,
L.P., a wholly owned subsidiary of Sprint as of December 31, 1998 and an
investment in which Sprint had a 40% interest through November 23, 1998 (as
discussed in Note 1). Such financial statements reflect revenues of $1.2
billion for the year ended December 31, 1998. The consolidated financial
statements and financial statement schedule of Sprint Spectrum Holding
Company, L.P. have been audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the 1998 revenues,
is based solely on the report of the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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
financial statements referred to above present fairly, in all material
respects, the combined financial position of the Sprint PCS Group at December
31, 2000 and 1999, and the combined results of its operations and its cash
flows for each of the three years in the period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedule, 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 1 to the combined financial statements, in 2000 the
Sprint PCS Group changed its accounting for activation fee revenues.
As more fully discussed in Note 1, the combined financial statements of the
Sprint PCS Group should be read together with the audited consolidated
financial statements of Sprint.
Ernst & Young LLP
Kansas City, Missouri
February 1, 2001
III-9
REPORT OF INDEPENDENT AUDITORS
The Board of Directors of Sprint Corporation and Partners of Sprint Spectrum
Holding Company, L.P.
We have audited the consolidated statements of operations and cash flows of
Sprint Spectrum Holding Company, L.P. and subsidiaries for the year ended
December 31, 1998. Our audit also included the 1998 financial statement
schedule (Schedule II). These financial statements and Schedule II are the
responsibility of Partnership management. Our responsibility is to express an
opinion on these consolidated financial statements and Schedule II based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the results of operations and cash flows of Sprint Spectrum
Holding Company, L.P. and subsidiaries for the year ended December 31, 1998 in
conformity with generally accepted accounting principles. Also, in our opinion,
Schedule II, when considered in relation to the basic 1998 consolidated
financial statements taken as a whole, presents fairly, in all material
respects the information set forth therein.
Deloitte & Touche LLP
Kansas City, Missouri
February 2, 1999
III-10
COMBINED STATEMENTS OF OPERATIONS Sprint PCS Group
(millions, except per share data)
- -------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998
- -------------------------------------------------------------------------------
Net Operating Revenues $ 6,341 $ 3,373 $ 1,294
- -------------------------------------------------------------------------------
Operating Expenses
Costs of services and products 3,942 3,150 1,758
Selling, general and administrative 2,426 1,937 1,138
Depreciation 1,339 1,060 670
Amortization 538 463 119
Merger related costs 24 -- --
Acquired in-process research and development costs -- -- 179
- -------------------------------------------------------------------------------
Total operating expenses 8,269 6,610 3,864
- -------------------------------------------------------------------------------
Operating Loss (1,928) (3,237) (2,570)
Interest expense (933) (698) (491)
Other partners' loss in Sprint PCS -- -- 1,251
Minority interest -- 20 145
Other income (expense), net (11) 46 34
- -------------------------------------------------------------------------------
Loss before income tax benefit and extraordinary
items (2,872) (3,869) (1,631)
Income tax benefit 1,004 1,388 541
- -------------------------------------------------------------------------------
Loss before Extraordinary Items (1,868) (2,481) (1,090)
Extraordinary items, net (3) (21) (31)
- -------------------------------------------------------------------------------
Net Loss (1,871) (2,502) (1,121)
Preferred stock dividends paid (14) (15) (2)
- -------------------------------------------------------------------------------
Loss applicable to common stock $(1,885) $(2,517) $(1,123)
-------------------------
Basic and Diluted Loss per Common Share(/1/),(/2/)
Continuing operations $ (1.95) $ (2.71) $ (2.21)
Extraordinary items -- (0.02) (0.04)
- -------------------------------------------------------------------------------
Total $ (1.95) $ (2.73) $ (2.25)
-------------------------
Basic and diluted weighted average common shares 966.5 920.4 831.6
-------------------------
(/1/) Basic and diluted loss per common share and weighted average common
shares for 1998 is pro forma, unaudited and assume the PCS
Restructuring, Recapitalization, Top-up and the write-off of $179
million of acquired in-process research and development occurred prior
to 1998. These pro forma amounts are for comparative purposes only and
do not necessarily represent what actual results of operations would
have been had the transactions occurred prior to 1998, nor do they
indicate the results of future operations.
(/2/) In the 2000 first quarter, Sprint effected a two-for-one stock split of
its PCS common stock. As a result, basic and diluted loss per common
share and weighted average common shares for periods before the stock
split have been restated.
See accompanying Notes to Combined Financial Statements.
III-11
COMBINED STATEMENTS OF COMPREHENSIVE LOSS Sprint PCS Group
(millions)
- -----------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998
- -----------------------------------------------------------------------------
Net Loss $(1,871) $(2,502) $(1,121)
- -----------------------------------------------------------------------------
Other Comprehensive Loss
Unrealized holding gains on securities 5 8 --
Income tax expense (2) (3) --
- -----------------------------------------------------------------------------
Net unrealized holding gains on securities during
the period 3 5 --
Reclassification adjustment for gains included in
net loss (8) -- --
- -----------------------------------------------------------------------------
Total net unrealized holding gains (losses) on
securities (5) 5 --
Foreign currency translation adjustments 3 -- --
- -----------------------------------------------------------------------------
Total other comprehensive income (loss) (2) 5 --
- -----------------------------------------------------------------------------
Comprehensive Loss $(1,873) $(2,497) $(1,121)
-------------------------
See accompanying Notes to Combined Financial Statements.
III-12
COMBINED BALANCE SHEETS Sprint PCS Group
(millions)
- -----------------------------------------------------------------------
December 31, 2000 1999
- -----------------------------------------------------------------------
Assets
Current assets
Cash and equivalents $ 117 $ 16
Accounts receivable, net of allowance for doubtful
accounts of $96 and $46 902 572
Inventories 515 336
Prepaid expenses 90 89
Current tax benefit receivable from the FON Group 26 293
Other 200 9
- -----------------------------------------------------------------------
Total current assets 1,850 1,315
Property, plant and equipment
Network equipment 7,540 5,817
Construction work in progress 1,713 1,692
Buildings and leasehold improvements 2,108 1,235
Other 756 667
- -----------------------------------------------------------------------
Total property, plant and equipment 12,117 9,411
Accumulated depreciation (2,595) (1,415)
- -----------------------------------------------------------------------
Net property, plant and equipment 9,522 7,996
Investments in affiliates 148 --
- -----------------------------------------------------------------------
Intangible assets
Goodwill 4,548 4,522
PCS licenses 3,059 3,060
Customer base 747 726
Microwave relocation costs 411 377
Other 46 54
- -----------------------------------------------------------------------
Total intangible assets 8,811 8,739
Accumulated amortization (1,077) (551)
- -----------------------------------------------------------------------
Net intangible assets 7,734 8,188
Other assets 509 425
- -----------------------------------------------------------------------
Total $19,763 $17,924
----------------
Liabilities and Group Equity
Current liabilities
Current maturities of long-term debt $ 244 $ 185
Accounts payable 687 450
Construction obligations 997 1,039
Accrued taxes 203 130
Payables to the FON Group 296 136
Other 965 638
- -----------------------------------------------------------------------
Total current liabilities 3,392 2,578
Long-term debt and capital lease obligations 14,136 11,304
Deferred credits and other liabilities
Deferred income taxes 90 582
Other 253 140
- -----------------------------------------------------------------------
Total deferred credits and other liabilities 343 722
Group equity 1,892 3,320
- -----------------------------------------------------------------------
Total $19,763 $17,924
----------------
See accompanying Notes to Combined Financial Statements.
III-13
COMBINED STATEMENTS OF CASH FLOWS Sprint PCS Group
(millions)
- --------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998
- --------------------------------------------------------------------------------
Operating Activities
Net loss $(1,871) $(2,502) $(1,121)
Adjustments to reconcile net loss to net cash used
by operating activities:
Extraordinary items, net 3 21 31
Equity in net loss of affiliate 55 -- 840
Acquired in-process research and development costs -- -- 179
Depreciation and amortization 1,877 1,523 121
Deferred income taxes (591) (553) 68
Current tax benefit used by the FON Group -- -- (460)
Net gains on sales of assets (47) (25) --
Changes in assets and liabilities, excluding the
PCS Restructuring in 1998:
Accounts receivable, net (324) (241) (1)
Inventories and other current assets (304) (237) --
Accounts payable and other current liabilities 647 363 386
Current tax benefit receivable from the FON Group 267 (123) (170)
Affiliate receivables and payables, net 155 35 101
Noncurrent assets and liabilities, net 77 13 (102)
Other, net 48 34 (31)
- --------------------------------------------------------------------------------
Net cash used by operating activities (8) (1,692) (159)
- --------------------------------------------------------------------------------
Investing Activities
Capital expenditures (3,047) (2,580) (1,072)
Proceeds from sales of assets 207 153 --
Investments in affiliates (203) -- --
Cash acquired in the PCS Restructuring -- -- 244
Investments in Sprint PCS -- -- (33)
Other, net (11) (82) --
- --------------------------------------------------------------------------------
Net cash used by investing activities (3,054) (2,509) (861)
- --------------------------------------------------------------------------------
Financing Activities
Proceeds from long-term debt 3,269 5,901 4,428
Payments on long-term debt (407) (2,734) (3,434)
Advances from (to) the FON Group (17) -- 64
Proceeds from common stock issued 121 905 85
Dividends paid (15) (15) --
Equity transfer to the FON Group -- -- (340)
Current tax benefit used by the FON Group -- -- 460
Other, net 212 (13) (70)
- --------------------------------------------------------------------------------
Net cash provided by financing activities 3,163 4,044 1,193
- --------------------------------------------------------------------------------
Increase (Decrease) in Cash and Equivalents 101 (157) 173
Cash and Equivalents at Beginning of Year 16 173 --
- --------------------------------------------------------------------------------
Cash and Equivalents at End of Year $ 117 $ 16 $ 173
--------------------------
See accompanying Notes to Combined Financial Statements.
III-14
NOTES TO COMBINED FINANCIAL STATEMENTS Sprint PCS Group
- -------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
- -------------------------------------------------------------------------------
Tracking Stock Formation
In November 1998, Sprint's shareholders approved the formation of the FON
Group and the PCS Group and the creation of the FON stock and the PCS stock.
In addition, Sprint purchased the remaining ownership interests in Sprint
Spectrum Holding Company, L.P. and PhillieCo, L.P. (together, Sprint PCS),
other than a minority interest in Cox Communications PCS, L.P. (Cox PCS).
Sprint acquired these ownership interests from Tele-Communications, Inc.,
Comcast Corporation and Cox Communications, Inc. (the Cable Partners). In
exchange, Sprint issued the Cable Partners special low-vote PCS shares and
warrants to acquire additional PCS shares. Sprint also issued the Cable
Partners shares of a new class of preferred stock convertible into PCS shares.
The purchase of the Cable Partners' interests is referred to as the PCS
Restructuring. In the 1999 second quarter, Cox Communications, Inc. exercised
a put option requiring Sprint to purchase the remaining 40.8% interest in Cox
PCS. Sprint issued additional low vote PCS shares in exchange for this
interest.
Also in November 1998, Sprint reclassified each of its publicly traded common
shares into one share of FON stock and 1/2 share of PCS stock. This
recapitalization was tax-free to shareholders. Each Class A common share owned
by France Telecom (FT) and Deutsche Telekom AG (DT) was reclassified to
represent an equity interest in the FON Group and the PCS Group that entitles
FT and DT to one share of FON stock and 1/2 share of PCS stock. These
transactions are referred to as the Recapitalization.
In connection with the PCS Restructuring, FT and DT purchased 5.1 million
additional PCS shares (pre-split basis) to maintain their voting power in
Sprint (Top-up).
The PCS stock is intended to reflect the performance of Sprint's wireless PCS
operations. The FON stock is intended to reflect the performance of all of
Sprint's other operations.
Basis of Combination and Presentation
The combined PCS Group financial statements, together with the combined FON
Group financial statements, include all the accounts included in Sprint's
consolidated financial statements. The combined financial statements for each
Group were prepared on a basis that management believes is reasonable and
proper and include:
. the combined balance sheets, results of operations and cash flows for
each of the Groups, with all significant intragroup amounts and
transactions eliminated,
. an allocation of Sprint's debt, including the related effects on results
of operations and cash flows, and
. an allocation of corporate overhead after the PCS Restructuring date.
The PCS Group entities are commonly controlled companies and are wholly owned
by Sprint. Transactions between the PCS Group and the FON Group have not been
eliminated in the combined financial statements of either Group.
The PCS Group combined financial statements provide PCS shareholders with
financial information about the PCS Group operations. Investors in FON stock
and PCS stock are Sprint shareholders and are subject to risks related to all
of Sprint's businesses, assets and liabilities. Sprint retains ownership and
control of the assets and operations of each Group. Financial effects of
either Group that affect Sprint's results of operations or financial condition
could affect the results of operations or financial position of the other
Group or the market price of the stock tracking the other Group. Net losses of
either Group, and dividends or distributions on, or repurchases of, PCS stock
or FON stock will reduce Sprint funds legally available for dividends on both
FON and PCS stock. As a result, the PCS Group combined financial statements
should be read along with Sprint's consolidated financial statements and the
FON Group's combined financial statements.
Sprint PCS' results of operations for 1998 have been consolidated for the
entire year. The Cable Partners' share of losses through the PCS Restructuring
date has been reflected as "Other partners' loss in Sprint PCS" in the
Combined Statements of Operations. Sprint PCS financial position has been
reflected on a consolidated basis at year-end 1998. Before 1998, Sprint's
investment in Sprint PCS was accounted for using the equity method. The PCS
Group's cash flows include Sprint PCS' cash flows only after the PCS
Restructuring date.
Investments in entities in which the PCS Group exercises significant
influence, but does not control, are accounted for using the equity method
(see Note 3).
The PCS Group combined financial statements are prepared using accounting
principles generally accepted in the United States. These principles require
management to make estimates and assumptions that affect the reported amounts
of
III-15
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 group equity as previously reported.
Classification of Operations
The PCS Group includes Sprint's wireless PCS operations. It operates the only
100% digital PCS wireless network in the United States with licenses to provide
nationwide service using a single frequency and a single technology. At year-
end 2000, the PCS Group, together with affiliates, operated PCS systems in over
300 metropolitan markets including the 50 largest U.S. metropolitan areas.
Allocation of Shared Services
Sprint directly assigns, where possible, certain general and administrative
costs to the FON Group and the PCS Group based on their actual use of those
services. Where direct assignment of costs is not possible, or practical,
Sprint uses indirect methods, including time studies, to estimate the
assignment of costs to each Group. Sprint believes that the costs allocated are
comparable to the costs that would be incurred if the Groups would have been
operating on a stand-alone basis. The allocation of shared services may change
at the discretion of Sprint and does not require shareholder approval.
Allocation of Federal and State Income Taxes
Sprint files a consolidated federal income tax return and certain state income
tax returns which include FON Group and PCS Group results. In connection with
the PCS Restructuring, Sprint adopted a tax sharing agreement which provides
for the allocation of income taxes between the two Groups. The PCS Group's
income taxes reflect the PCS Group's incremental cumulative impact on Sprint's
consolidated income taxes. Intergroup tax payments are satisfied on the date
Sprint's related tax payment is due to or the refund is received from the
applicable tax authority. The PCS Group accrued current income tax benefits in
accordance with the tax sharing agreement totaling $605 million in 2000, $887
million in 1999 and $190 million in 1998.
The tax sharing agreement applies to tax years ending on or before December 31,
2001. For periods after December 31, 2001, Sprint's board of directors will
adopt a tax sharing arrangement that will be designed to allocate tax benefits
and burdens fairly between the FON Group and the PCS Group.
Allocation of Group Financing
Financing activities for the Groups are managed by Sprint on a centralized
basis. Debt incurred by Sprint on behalf of the Groups is specifically
allocated to and reflected in the financial statements of the applicable Group.
Interest expense is allocated to the PCS Group based on an interest rate that
is substantially equal to the rate it would be able to obtain from third
parties as a direct or indirect wholly owned Sprint subsidiary, but without the
benefit of any guaranty by Sprint or any member of the FON Group. That interest
rate is higher than the rate Sprint obtains on borrowings. The difference
between Sprint's actual interest rate and the rate charged to the PCS Group is
reflected as a reduction in the FON Group's interest expense.
Under Sprint's centralized cash management program, one Group may advance funds
to the other Group. These advances are accounted for as short-term borrowings
between the Groups and bear interest at a market rate that is substantially
equal to the rate that Group would be able to obtain from third parties on a
short-term basis.
The allocation of Group financing activities may change at the discretion of
Sprint and does not require shareholder approval.
Income Taxes
The PCS Group records deferred income taxes based on temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and their tax bases.
Revenue Recognition
The PCS Group recognizes operating revenues as services are rendered or as
products are delivered to customers. Service activation fees are deferred and
amortized over the average life of the service.
The PCS Group implemented SEC Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements," during the fourth quarter of 2000,
effective the beginning of the year. This bulletin requires activation and
installation fee revenues that do not represent a separate earnings process to
be deferred and recognized over the estimated service period. Associated
incremental direct costs may also be deferred, but only to the extent of
revenues subject to deferral. The effect of the change on the nine months ended
September 30, 2000 was to decrease revenues and expenses by $68 million.
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
III-16
market value. Sprint uses controlled disbursement banking arrangements as part
of its cash management program. Outstanding checks in excess of cash balances
for the PCS Group were included in accounts payable. These amounts totaled $22
million at year-end 2000 and $30 million at year-end 1999. The PCS Group had
sufficient funds available to fund these outstanding checks when they were
presented for payment.
Inventories
Inventories are stated at the lower of cost (principally first-in, first-out
method) or replacement value.
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. Property, plant and equipment is depreciated on a
straight-line basis over estimated economic useful lives. Repair and
maintenance costs are expensed as incurred.
Capitalized Interest
The PCS Group capitalizes interest costs related to network buildout and PCS
licenses, which totaled $153 million in 2000, $108 million in 1999 and $64
million in 1998. In addition, Sprint capitalized interest costs related to the
PCS Group's network buildout. This capitalized interest totaled $61 million for
1998 and was contributed to, and is being amortized by, the PCS Group.
Intangible Assets
The PCS Group evaluates the recoverability of intangible assets when events or
circumstances indicate that such assets might be impaired. The PCS Group
determines impairment by comparing the undiscounted future cash flows estimated
to be generated by these assets to their respective carrying value. In the
event impairment exists, a loss is recognized based on the amount by which the
carrying value exceeds the fair value of the asset.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the
net assets acquired in business combinations accounted for as purchases.
Goodwill is being amortized over 40 years using the straight-line method.
Accumulated amortization totaled $231 million at year-end 2000 and $116 million
at year-end 1999.
PCS Licenses
The PCS Group acquired licenses from the Federal Communications Commission
(FCC) to operate as a PCS service provider. These licenses are granted for up
to 10-year terms with renewals for additional 10-year terms if license
obligations are met. These licenses are recorded at cost and are amortized on a
straight-line basis over 40 years when service begins in a specific geographic
area. Accumulated amortization totaled $206 million at year-end 2000 and $130
million at year-end 1999.
Customer Base
The PCS Group capitalized the fair value of Sprint PCS' customer base acquired
in the PCS Restructuring and the fair value of Cox PCS' customer base when the
remaining minority interest in Cox PCS was acquired in the 1999 second quarter.
The customer base is being amortized over 30 months using the straight-line
method. Accumulated amortization totaled $596 million at year-end 2000 and $277
million at year-end 1999.
Microwave Relocation Costs
The PCS Group has incurred costs related to microwave relocation in
constructing the PCS network. Microwave relocation costs are being amortized
over the remaining lives of the PCS licenses. Accumulated amortization totaled
$24 million at year-end 2000 and $15 million at year-end 1999.
Loss per Share
As a result of the PCS Restructuring and the Recapitalization, loss per share
for the PCS Group for 1998 has been calculated based on the Group's net loss
from November 1998 through year-end 1998. It was not calculated on a Group
basis for periods prior to November 1998 because the PCS stock was not part of
Sprint's capital structure at that time.
In the 2000 first quarter, Sprint effected a two-for-one split of its PCS
common stock. As a result, basic and diluted loss per common share and weighted
average common shares for PCS common stock have been restated for periods prior
to the stock split.
Dilutive securities for the PCS Group mainly include options, warrants and
convertible preferred stock. These securities did not have a dilutive effect on
loss per share because the PCS Group incurred net losses for 2000, 1999 and
1998. As a result, diluted loss per share equaled basic loss per share.
III-17
The PCS Group's basic and diluted loss per common share in 1998 after the PCS
Restructuring and Recapitalization date was as follows:
- ------------------------------------------------------------
1998
- ------------------------------------------------------------
(millions, except
per share data)
Loss applicable to common stock $ (559)
------
Basic and diluted loss per common share:
Loss before extraordinary item $(0.63)
Extraordinary item (0.04)
- ------------------------------------------------------------
Total $(0.67)
------
Basic and diluted weighted average shares 831.6
------
Stock-based Compensation
The PCS Group participates in the incentive-based stock option plans and
employee stock purchase plan administered by Sprint for executives and other
employees. Sprint adopted the pro forma disclosure requirements under Statement
of Financial Accounting Standards (SFAS) No. 123, "Stock-based Compensation,"
and continues to apply Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations to its stock option
and employee stock purchase plans. Had the PCS Group applied SFAS 123, pro
forma net loss would have been $2,135 million in 2000, $2,578 million in 1999
and would not have changed materially from the Recapitalization date through
year-end 1998. See Note 12 of Sprint's Notes to Consolidated Financial
Statements for more information about Sprint's stock-based compensation and the
PCS Group's pro forma net loss and loss per share.
In 1997, Sprint granted performance-based stock options to certain key
executives. The PCS Group expensed $3 million in 2000, $5 million in 1999 and
$1 million in 1998 related to these performance-based stock options. The 2000
amount reflects expense through the date of the shareholder approval of the
proposed WorldCom merger. At that time, all of these options became vested. An
additional $10 million of expense related to these options was included in
"Merger related costs" in the Combined Statements of Operations.
- --------------------------------------------------------------------------------
2. Business Combinations
- --------------------------------------------------------------------------------
Cox PCS
In the 1999 second quarter, Cox Communications, Inc. exercised a put option
requiring Sprint to purchase the remaining 40.8% interest in Cox PCS. Sprint's
existing 59.2% interest in Cox PCS was reflected in the PCS Group combined
financial statements on a combined basis. Sprint issued 24.3 million shares of
low-vote PCS stock (pre-split basis) in exchange for the remaining interest.
The shares were valued at $1.1 billion. Sprint accounted for the transaction as
a purchase.
The excess of the purchase price over the fair value of the net liabilities
acquired was allocated as follows:
- -------------------------------------------------------------------------
1999
- -------------------------------------------------------------------------
(millions)
Purchase price $1,146
Net liabilities acquired 99
Fair value assigned to customer base acquired (45)
Fair value assigned to PCS licenses (99)
Deferred taxes established on acquired assets and liabilities 88
- -------------------------------------------------------------------------
Goodwill $1,189
------
Goodwill is being amortized on a straight-line basis over 40 years.
PCS Restructuring
In November 1998, Sprint acquired the remaining interest in Sprint PCS (except
for the minority interest in Cox PCS) from the Cable Partners. In exchange,
Sprint issued the Cable Partners 195.1 million low-vote shares of PCS stock and
12.5 million warrants to purchase additional shares of PCS stock (on a pre-
split basis). The purchase price was $3.2 billion. In addition, Sprint issued
the Cable Partners shares of a new class of preferred stock convertible into
PCS shares.
Sprint accounted for the transaction as a purchase. The excess of the purchase
price over the fair value of the net liabilities acquired was allocated as
follows:
- -------------------------------------------------------------------------
1998
- -------------------------------------------------------------------------
(millions)
Purchase price including transaction costs $3,226
Net liabilities acquired 281
Fair value assigned to customer base acquired (681)
Fair value assigned to assembled workforce acquired (45)
Increase in property, plant and equipment to fair value (204)
Mark-to-market of long-term debt 85
Deferred taxes established on acquired assets and liabilities 678
In-process research and development costs (179)
- -------------------------------------------------------------------------
Goodwill $3,161
------
Goodwill is being amortized on a straight-line basis over 40 years.
III-18
With respect to the purchase price attributed to in-process research and
development (IPR&D), the acquired IPR&D was limited to significant new products
under development that were intended to address new and emerging market needs
and requirements, such as the rapid adoption of the Internet and the rapid
convergence of voice, data, and video. No routine research and development
projects, minor refinements, normal enhancements, or production activities were
included in the acquired IPR&D.
The income approach was the primary technique utilized in valuing the acquired
IPR&D. This approach included, but was not limited to, an analysis of (1) the
markets for each product; (2) the completion costs for projects; (3) the
expected cash flows attributable to the IPR&D projects; (4) the risks related
to achieving these cash flows; and (5) the stage of development of each
project. The issue of alternative future use was extensively evaluated and
these technologies, once completed, could only be economically used for their
intended purposes.
Sprint PCS Group Pro Forma Results
The following unaudited pro forma combined results of operations for the PCS
Group assume the PCS Restructuring, Recapitalization, Top-up and the write-off
of acquired IPR&D costs occurred prior to 1998. These pro forma amounts are for
comparative purposes only and do not necessarily represent what actual results
of operations would have been had the transactions occurred prior to 1998, nor
do they indicate the results of future operations. Pro forma results were as
follows:
- -----------------------------------------------------------
1998
- -----------------------------------------------------------
(millions, except
per share data)
Net operating revenues $ 1,294
-------
Loss before extraordinary items $(1,847)
-------
Net loss $(1,878)
-------
Basic and diluted loss per common share:
Loss before
extraordinary items $ (2.21)
Extraordinary items (0.04)
- -----------------------------------------------------------
Total $ (2.25)
-------
- --------------------------------------------------------------------------------
3. Investment
- --------------------------------------------------------------------------------
During the 2000 second quarter, the PCS Group made an investment in Pegaso
Telecomunicaciones, S.A. de C.V., a wireless PCS operation in Mexico. The PCS
Group accounts for this investment using the equity method. Unaudited,
summarized financial information (100% basis) of this entity was as follows:
- -----------------------------------
2000
- -----------------------------------
(millions)
Results of operations
Net operating revenues $ 104
-----
Operating loss $(177)
-----
Net loss $(192)
-----
Financial position
Current assets $ 77
Noncurrent assets 716
- -----------------------------------
Total $ 793
-----
Current liabilities $ 367
Noncurrent liabilities 327
Owners' equity 99
- -----------------------------------
Total $ 793
-----
- --------------------------------------------------------------------------------
4. Merger Termination
- --------------------------------------------------------------------------------
On July 13, 2000, Sprint and WorldCom, Inc. announced that the boards of
directors of both companies terminated their merger agreement, previously
announced in October 1999, as a result of regulatory opposition to the merger.
In the 2000 second quarter, the PCS Group recognized a one-time, pre-tax charge
of $24 million for costs associated with the terminated merger.
- --------------------------------------------------------------------------------
5. Employee Benefit Plans
- --------------------------------------------------------------------------------
Defined Benefit Pension Plan
Effective January 1999, most PCS Group employees became eligible to participate
in Sprint's pension plans. Pension benefits are based on years of service and
the participants' compensation.
Sprint's policy is to make plan contributions equal to an actuarially
determined amount consistent with 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.
Amounts included in the Combined Balance Sheets for the plan were accrued
pension costs of $12 million at year-end 2000 and $5 million at year-end 1999.
Net pension costs are determined for the PCS Group based on a direct
calculation of service costs. The PCS Group recorded net pension costs of $7
million in 2000 and $5 million in 1999.
III-19
Defined Contribution Plan
Prior to January 1999, Sprint PCS sponsored a savings and retirement program
for certain employees. Sprint PCS matched contributions equal to 50% of the
contribution of each participant, up to the first 6% that the employee elected
to contribute. Expense under the savings plan was $7 million in 1998. Effective
January 1999, the PCS Group employees began making contributions to Sprint's
defined contribution plan. The existing assets of the Sprint PCS savings plan
were rolled over to Sprint's defined contribution plan in early 1999. The PCS
Group recorded expense of $17 million in 2000 and $10 million in 1999 for
Sprint's matching contributions to the Sprint defined contribution plans. At
year-end 2000, Sprint's defined contribution plans held 34 million FON shares
and 31 million PCS shares.
Postretirement Benefits
Effective January 1999, most PCS Group employees also became eligible for
postretirement benefits (principally medical and life insurance benefits).
Retiring employees are eligible for benefits on a shared-cost basis. Sprint
funds the accrued costs as benefits are paid.
Amounts included in the Combined Balance Sheets at year-end were accrued
postretirement benefits costs of $1 million in 2000 and 1999.
Net postretirement benefits costs are determined for the PCS Group based on a
direct calculation of service costs. The PCS Group recorded net postretirement
benefits costs of $0.2 million in 2000 and $1 million in 1999.
- --------------------------------------------------------------------------------
6. Income Taxes
- --------------------------------------------------------------------------------
Income tax benefits allocated to continuing operations consisted of the
following:
- ---------------------------------------------------------------
2000 1999 1998
- ---------------------------------------------------------------
(millions)
Current income tax benefit
Federal $ (405) $ (810) $(579)
State (8) (25) (30)
- ---------------------------------------------------------------
Total current (413) (835) (609)
- ---------------------------------------------------------------
Deferred income tax expense (benefit)
Federal (511) (479) 83
State (80) (74) (15)
- ---------------------------------------------------------------
Total deferred (591) (553) 68
- ---------------------------------------------------------------
Total $(1,004) $(1,388) $(541)
-------------------------------------------
The differences that caused the PCS Group's effective income tax rates to vary
from the 35% federal statutory rate for income taxes related to continuing
operations were as follows:
- -------------------------------------------------------------------------------
2000 1999 1998
- -------------------------------------------------------------------------------
(millions)
Income tax benefit at the statutory rate $(1,005) $(1,354) $(571)
Effect of:
State income taxes, net of federal income tax effect (57) (64) (29)
Goodwill amortization 38 34 3
Equity in losses of foreign joint venture 23 -- --
Write-off of in-process research and development
costs -- -- 63
Other, net (3) (4) (7)
- -------------------------------------------------------------------------------
Income tax benefit $(1,004) $(1,388) $(541)
-----------------------------------------------------------
Effective income tax rate 35.0% 35.9% 33.2%
-----------------------------------------------------------
Income tax expense (benefit) allocated to other items was as follows:
- --------------------------------------------------------------------------
2000 1999 1998
- --------------------------------------------------------------------------
(millions)
Extraordinary items $ (2) $(11) $(20)
Unrealized holding gains (losses) on investments(/1/) (3) 3 --
Stock ownership, purchase and options arrangements(/1/) (148) (31) --
- --------------------------------------------------------------------------
(/1/) These amounts have been recorded directly to "Group equity."
III-20
The PCS Group 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 2000
and 1999, along with the income tax effect of each, were as follows:
- -------------------------------------------------
2000 Deferred
Income Tax
------------------
Assets Liabilities
- -------------------------------------------------
(millions)
Property, plant and equipment $ -- $1,156
Intangibles -- 386
Capitalized interest -- 114
Reserves and allowances 39 --
Operating loss carryforwards 1,794 --
Tax credit carryforwards 127 --
Other, net 18 --
- -------------------------------------------------
1,978 1,656
Less valuation allowance 325 --
- -------------------------------------------------
Total $1,653 $1,656
-----------------------
- -------------------------------------------------
1999 Deferred
Income Tax
------------------
Assets Liabilities
- -------------------------------------------------
(millions)
Property, plant and equipment $ -- $ 811
Intangibles -- 453
Capitalized interest -- 108
Operating loss carryforwards 1,006 --
Tax credit carryforwards 53 --
Other, net 21 --
- -------------------------------------------------
1,080 1,372
Less valuation allowance 283 --
- -------------------------------------------------
Total $ 797 $1,372
-----------------------
Management believes it is more likely than not that these deferred income tax
assets, net of the valuation 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.
The valuation allowance related to deferred income tax assets increased $42
million in 2000 and $38 million in 1999.
In 1998, the PCS Group acquired approximately $229 million of potential tax
benefits related to net operating loss carryforwards in the PCS Restructuring
which are subject to certain realization restrictions under various tax laws. A
valuation allowance was provided for the total of these benefits. If these
benefits are subsequently recognized, they will reduce the goodwill or other
noncurrent intangible assets resulting from the PCS Restructuring.
In connection with the PCS Restructuring, the PCS Group is required to
reimburse the FON Group and the Cable Partners for net operating loss and tax
credit carryforward benefits generated prior to the PCS Restructuring if
realization by the PCS Group produces a cash benefit that would not otherwise
have been realized. The reimbursement will equal 60% of the net cash benefit
received by the PCS Group and will be made to the FON Group in cash and to the
Cable Partners in shares of Series 2 PCS stock. The carryforward benefits
subject to this requirement totaled $259 million, which includes the $229
million acquired in the PCS Restructuring.
At year-end 2000, the PCS Group had federal operating loss carryforwards of
approximately $4.2 billion and state operating loss carryforwards of
approximately $7.2 billion. Related to these loss carryforwards are federal tax
benefits of $1.5 billion and state tax benefits of $519 million. In addition,
the PCS Group had available for income tax purposes federal alternative minimum
tax credit carryforwards of $33 million, state alternative minimum tax credit
carryforwards of $5 million, federal alternative minimum tax net operating loss
carryforwards of $2.2 billion, and state alternative minimum tax net operating
loss carryforwards of $682 million. The loss carryforwards expire in varying
amounts through 2020.
III-21
- --------------------------------------------------------------------------------
7. Long-term Debt and Capital Lease Obligations
- --------------------------------------------------------------------------------
Sprint's consolidated long-term debt and capital lease obligations at year-end
was as follows:
- ------------------------------------------------------------------------------------------
2000 1999
--------------------------- ---------------------------
Sprint Sprint Sprint Sprint
FON PCS FON PCS
Maturing Group Group Consolidated Group Group Consolidated
- ------------------------------------------------------------------------------------------
(millions)
Senior notes
5.7% to 7.6%(/1/) 2001 to 2028 $1,105 $ 9,395 $10,500 $1,105 $ 8,145 $ 9,250
8.1% to 9.8% 2000 to 2003 382 -- 382 632 -- 632
11.0% to 12.5%(/2/) 2001 to 2006 -- 776 607 -- 734 584
Debentures and notes
5.8% to 9.6% 2000 to 2022 500 -- 500 565 -- 565
Notes payable and
commercial paper -- 157 3,797 3,954 294 1,971 2,265
First mortgage bonds
5.9% to 9.9% 2000 to 2025 1,085 -- 1,085 1,295 -- 1,295
Capital lease
obligations
5.2% to 14.0% 2000 to 2008 61 408 469 69 486 555
Revolving credit
facilities
Variable rates 2002 900 -- 900 900 -- 900
Other
2.0% to 10.0% 2000 to 2006 318 4 322 573 153 726
- ------------------------------------------------------------------------------------------
4,508 14,380 18,719 5,433 11,489 16,772
Less: current
maturities(/2/) 1,026 244 1,205 902 185 1,087
- ------------------------------------------------------------------------------------------
Long-term debt and
capital lease
obligations(/2/) $3,482 $14,136 $17,514 $4,531 $11,304 $15,685
------------------------------------------------------
(/1/) These borrowings were incurred by Sprint and allocated to the applicable
Group. Sprint's weighted average interest rate related to these
borrowings was 6.7% at year-end 2000 and 6.6% at year-end 1999. The
weighted average interest rate related to the borrowings allocated to the
PCS Group was approximately 8.8% at year-end 2000 and 8.7% at year-end
1999. See Note 1 for a more detailed description of how Sprint allocates
financing to each of the Groups.
(/2/) Consolidated debt does not equal the total of PCS Group and FON Group
debt due to intergroup debt eliminated in consolidation. The FON Group
had an investment in the PCS Group's Senior Discount notes totaling $169
million at year-end 2000, including $65 million classified as current,
and $150 million at year-end 1999.
III-22
Scheduled principal payments, excluding reclassified short-term borrowings,
during each of the next five years are as follows:
- -------------------------------
Sprint Sprint
FON PCS
Group Group Sprint
- -------------------------------
(millions)
2001(/1/) $1,026 $ 258 $1,214
2002 1,339 1,309 2,648
2003 372 1,060 1,432
2004 144 1,062 1,206
2005 122 61 183
- -------------------------------
(/1/) The 2001 scheduled principal payments do not equal current maturities as
these amounts reflect the maturity value of the scheduled payment on the
PCS Group's Senior Discount notes.
Included in the above schedule are payments on PCS Group debt that are to be
made in Japanese yen. The yen needed to satisfy the obligations is currently
held on deposit by the PCS Group and included in "Other assets" on the PCS
Group's Combined Balance Sheets. The scheduled yen payments included in the
above schedule are $1 million in 2003, $20 million in 2004 and $43 million
in 2005.
Sprint
Short-term Borrowings
Sprint had bank notes payable totaling $676 million at year-end 2000 and $670
million at year-end 1999. In addition, Sprint had commercial paper borrowings
totaling $3.3 billion at year-end 2000 and $1.6 billion at year-end 1999.
Though these borrowings are renewable at various dates throughout the year,
they were classified as long-term debt because of Sprint's intent and ability
to refinance these borrowings on a long-term basis through unused credit
facilities and unissued debt under Sprint's shelf registration.
Sprint currently has revolving credit facilities with syndicates of domestic
and international banks totaling $5 billion; $3 billion of which is a 364 day
facility, renewed in August 2000, expiring in 2001, and $2 billion is a 5 year
facility expiring in 2003. Commercial paper and certain bank notes are
supported by Sprint's revolving credit facilities. Certain other notes payable
relate to a separate revolving credit facility which expires in 2002. At year-
end 2000, Sprint had total unused lines of credit of $1.8 billion.
Bank notes outstanding had weighted average interest rates of 7.1% at year-end
2000 and 6.3% at year-end 1999. The weighted average interest rate of
commercial paper was 7.5% at year-end 2000 and 6.4% at year-end 1999.
Long-term Debt
In June 2000, Sprint issued $1.25 billion of debt securities under its $4
billion shelf registration statement with the SEC. These borrowings mature in
2002 and have interest rates ranging from 6.9% to 7.6%. At year-end 2000,
Sprint had issued a total of $2 billion of debt securities under the shelf. In
January 2001, Sprint issued securities using the remaining amount of the shelf
(see Note 14).
In June 1999, Sprint entered into a $1 billion financing agreement to sell, on
a continuous basis with recourse, undivided percentage ownership interests in a
designated pool of its accounts receivable. Subsequent collections of
receivables sold to investors are typically reinvested in new receivables. At
year-end 2000, Sprint had borrowed $900 million with a weighted average
interest rate of 6.9% under this agreement. These borrowings mature in 2002.
Sprint PCS Group
In 2000, Sprint allocated $3.3 billion of debt to the PCS Group. This debt was
mainly used to fund new capital investments and repay existing debt.
In the 2000 first quarter, Sprint repaid, prior to scheduled maturities, $127
million of the PCS Group's notes payable to the FCC. These notes had an
interest rate of 7.8%. This resulted in a $3 million after-tax extraordinary
loss.
In 1999, the PCS Group repaid $2.2 billion of its revolving credit facilities
and other borrowings prior to scheduled maturities. This resulted in a $21
million after-tax extraordinary loss.
In 1998, Sprint redeemed, prior to scheduled maturities, $3.3 billion of PCS
Group debt with a weighted average interest rate of 8.3%. This resulted in a
$31 million after-tax extraordinary loss for the PCS Group.
Other
Sprint, including the PCS Group, had complied with all restrictive or financial
covenants relating to its debt arrangements at year-end 2000.
III-23
- --------------------------------------------------------------------------------
8. Group Equity
- --------------------------------------------------------------------------------
- ----------------------------------------------------------
2000 1999 1998
- ----------------------------------------------------------
(millions)
Beginning balance $3,320 $3,755 $1,386
Net loss (1,871) (2,502) (1,121)
Dividends (14) (15) (2)
Common stock issued 230 2,064 3,285
Tax benefit of stock compensation 148 31 --
Preferred stock issued -- -- 247
Preferred intergroup interest -- -- 279
Contributions from the FON Group -- -- 146
Equity transfers to the FON Group -- -- (460)
Other comprehensive income (loss) (2) 5 --
Other, net 81 (18) (5)
- ----------------------------------------------------------
Ending balance $1,892 $3,320 $3,755
-------------------------------------
- --------------------------------------------------------------------------------
9. Commitments and Contingencies
- --------------------------------------------------------------------------------
Litigation, Claims and Assessments
PCS shareholders are subject to all of the risks related to an investment in
Sprint and the PCS Group, including the effects of any legal proceedings and
claims against the FON Group.
In December 2000, Amalgamated Bank, an institutional shareholder, filed a
derivative action purportedly on behalf of Sprint against certain of its
current and former officers and directors in the Jackson County, Missouri,
Circuit Court. The complaint alleges that the individual defendants breached
their fiduciary duties to Sprint and were unjustly enriched by making
undisclosed amendments to Sprint's stock option plans, by failing to disclose
certain information concerning regulatory approval of the proposed merger of
Sprint and WorldCom, and by overstating Sprint's earnings for the first quarter
of 2000. The plaintiff seeks damages, to be paid to Sprint, in an unspecified
amount. Two additional, substantially identical, derivative actions by other
shareholders have been filed.
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 be material to the PCS Group combined financial
statements.
Commitments
The PCS Group has purchase commitments with various vendors to purchase
handsets and other equipment through 2001. Outstanding commitments at year-end
2000 were approximately $830 million. Purchases under these commitments during
2000 totaled approximately $2 million.
Operating Leases
The PCS Group's minimum rental commitments at year-end 2000 for all
noncancelable operating leases, consisting mainly of leases for cell and switch
sites and office space, are as follows:
- ----------------------
(millions)
2001 $205
2002 157
2003 108
2004 70
2005 26
Thereafter 63
- ----------------------
The PCS Group's gross rental expense totaled $400 million in 2000, $315 million
in 1999 and $256 million in 1998. The table excludes renewal options related to
certain cell and switch site leases. These renewal options generally have five-
year terms and may be exercised from time to time.
- --------------------------------------------------------------------------------
10. Financial Instruments
- --------------------------------------------------------------------------------
Fair Value of Financial Instruments
Sprint estimates the fair value of the PCS Group's financial instruments using
available market information and appropriate valuation methodologies. As a
result, the following estimates do not necessarily represent the values the PCS
Group could realize in a current market exchange. Although management is not
aware of any factors that would affect the year-end 2000 estimated fair values,
those amounts have not been comprehensively revalued for purposes of these
financial statements since that date. Therefore, estimates of fair value after
year-end 2000 may differ significantly from the amounts presented below.
The carrying amounts and estimated fair values of the PCS Group's financial
instruments at year-end were as follows:
- -----------------------------------------------------------------
2000
-------------------
Carrying Estimated
Amount Fair Value
- -----------------------------------------------------------------
(millions)
Cash and equivalents $ 117 $ 117
Long-term debt and capital lease obligations 14,380 13,741
- -----------------------------------------------------------------
III-24
- -----------------------------------------------------------------
1999
-------------------
Carrying Estimated
Amount Fair Value
- -----------------------------------------------------------------
(millions)
Cash and equivalents $ 16 $ 16
Investment in equity securities 9 9
Long-term debt and capital lease obligations 11,489 11,054
- -----------------------------------------------------------------
The carrying amounts of the PCS Group's cash and equivalents approximate fair
value at year-end 2000 and 1999. The estimated fair value of investments in
equity securities was based on quoted market prices. The estimated fair value
of the PCS Group's long-term debt was based on quoted market prices for
publicly traded issues. The estimated fair value of all other issues was based
on the present value of estimated future cash flows using a discount rate based
on the risks involved.
Concentrations of Credit Risk
The PCS Group's accounts receivable are not subject to any concentration of
credit risk.
Interest Rate Swap Agreements
In 1998, Sprint deferred losses from the termination of interest rate swap
agreements used to hedge a portion of a $5.0 billion debt offering. These
losses, totaling $75 million, were allocated to the PCS Group and are being
amortized to interest expense using the effective interest method over the term
of the debt. At year-end 2000, the remaining unamortized deferred loss totaled
$61 million.
- --------------------------------------------------------------------------------
11. Additional Financial Information
- --------------------------------------------------------------------------------
Supplemental Cash Flows Information
The PCS Group's cash paid (received) for interest and income taxes was as
follows:
- -----------------------------------------------------------
2000 1999 1998
- -----------------------------------------------------------
(millions)
Interest (net of capitalized interest) $ 909 $ 632 $--
-----------------------------------
Income taxes $(872) $(764) $(20)
-----------------------------------
Noncash activities for the PCS Group included the following:
- ----------------------------------------------------------------------------
2000 1999 1998
- ----------------------------------------------------------------------------
(millions)
Tax benefit from stock options exercised $148 $ 31 $ --
------------------------------------------------------
Stock received for stock options exercised $ 40 $ 40 $ --
------------------------------------------------------
Common stock issued under employee benefit stock plans $149 $ 49 $ --
------------------------------------------------------
Capital lease obligations $-- $ 36 $ 460
------------------------------------------------------
Common stock issued for Cox PCS acquisition $-- $1,146 $ --
------------------------------------------------------
Common stock issued to the Cable Partners to purchase
Sprint PCS $-- $ -- $3,200
------------------------------------------------------
Preferred stock issued to the Cable Partners in exchange
for interim financing $-- $ -- $ 247
------------------------------------------------------
Conversion of interim financing to preferred intergroup
interest $-- $ -- $ 279
------------------------------------------------------
See Note 2 for more details about the assets and liabilities acquired in the
Cox PCS purchase and the PCS Restructuring.
Intergroup Investments and Transactions
Sprint FON Group Investments in the Sprint PCS Group
The following table reflects the FON Group's investments in the PCS Group,
which have been eliminated in Sprint's consolidated financial statements:
- -----------------------------------------------------
2000 1999
- -----------------------------------------------------
(millions)
Common and preferred intergroup interest $ 260 $ 262
Investment in debt securities 188 169
- -----------------------------------------------------
Total $ 448 $ 431
------------------------
Common Intergroup Interest
The FON Group received a 1% intergroup interest in the PCS Group at the time of
the PCS Restructuring and Recapitalization. Subsequently, PCS shares
representing the intergroup interest were issued to FON Group employees,
exhausting the FON Group's interest in the PCS Group in January 2000.
The FON Group's share of the PCS Group's net loss totaled $13 million in 1999
and $6 million from the date of the PCS Restructuring to year-end 1998 and was
included in "Other income, net" in the Sprint FON Group Combined Statements of
Operations. As the intergroup interest was exhausted in 2000, no additional PCS
Group losses were recognized by the FON Group in 2000.
III-25
Preferred Intergroup Interest
The FON Group provided Sprint PCS and the PCS Group with interim financing from
the date the PCS Restructuring agreement was signed in May 1998 until it was
completed in November 1998. As part of the PCS Restructuring, Sprint converted
this financing, totaling $279 million, into an intergroup interest representing
0.3 million shares of 10-year PCS preferred stock convertible into a PCS common
intergroup interest. The PCS Group paid the FON Group dividends on the
preferred intergroup interest of $8 million in 2000 and 1999 and $1 million in
1998.
Long-term Loans
Sprint provided Sprint PCS with additional interim financing of $180 million
from May 1998 through November 1998. This loan was repaid in 1999.
Intergroup Interest Expense
The difference between Sprint's actual interest costs and the interest costs
charged to the PCS Group on allocated debt totaled $235 million in 2000, $167
million in 1999 and $11 million in 1998. Additionally, the PCS Group incurred
intergroup interest expense of $19 million in 2000, $16 million in 1999 and $15
million in 1998 related to the FON Group's investment in PCS Group debt
securities. These amounts are included in "Interest expense" in the Sprint PCS
Group Combined Statements of Operations. See Note 1 for a more detailed
description of how Sprint allocates interest expense to each of the Groups.
Intergroup Transactions
The PCS Group uses the long distance operation as its interexchange carrier and
purchases wholesale long distance for resale to its customers. Additionally,
the FON Group provides the PCS Group with Caller ID services and various other
goods and services. Charges to the PCS Group for these items totaled $396
million in 2000, $280 million in 1999 and $21 million from the PCS
Restructuring date to year-end 1998.
The PCS Group provides the FON Group with access to its network and
telemarketing and various other services. Charges to the FON Group for these
items totaled $35 million in 2000 and $4 million in 1999.
The FON Group provides management, printing, mailing and warehousing services
to the PCS Group. Charges to the PCS Group for these services totaled $150
million in 2000, $65 million in 1999 and $5 million from the PCS Restructuring
date to year-end 1998.
Related Party Transactions
Sprint PCS Group
The Cable Partners advanced PhillieCo $26 million in 1998. These advances were
repaid in the 1999 first quarter.
Sprint PCS
The following discussion reflects related party transactions between Sprint and
Sprint PCS prior to the PCS Restructuring:
Sprint provided Sprint PCS with billing and operator services, and switching
equipment. Sprint PCS also used the long distance operation as its
interexchange carrier. Charges to Sprint PCS for these services totaled $104
million in 1998.
Sprint provided management, printing, mailing and warehousing services to
Sprint PCS. Charges to Sprint PCS for these services totaled $25 million in
1998.
Sprint had a vendor financing loan to Sprint PCS for $300 million at year-end
1997 which was repaid in 1998. Sprint also loaned Sprint PCS $114 million in
1998, which was repaid in the 1999 first quarter.
Major Customer
The PCS Group markets its products through multiple distribution channels,
including its own retail stores as well as other retail outlets. Equipment
sales to one retail chain and the subsequent service revenues generated by
sales to its customers accounted for 25% of net operating revenues in 2000, 28%
in 1999 and 25% in 1998.
- --------------------------------------------------------------------------------
12. Recently Issued Accounting Pronouncements
- --------------------------------------------------------------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS No.133,
"Accounting for Derivative Instruments and Hedging Activities." This standard
requires all derivatives to be recorded on the balance sheet as either assets
or liabilities and be measured at fair value. Gains or losses from changes in
the derivative values are to be accounted for based on how the derivative is
used and whether it qualifies for hedge accounting. When this statement was
adopted in January 2001, it had no material impact on the PCS Group's combined
financial statements.
In September 2000, the Financial Accounting Standards Board issued SFAS No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities--a replacement of FASB Statement No. 125." This
statement revises the standards for accounting for securitizations and other
transfers of financial assets and provides consistent standards for
distinguishing transfers from sales and secured borrowings. This statement is
effective for transactions occurring after March 31, 2001 and is not expected
to have a material impact on the PCS Group's combined financial statements.
III-26
- --------------------------------------------------------------------------------
13. Quarterly Financial Data (Unaudited)
- --------------------------------------------------------------------------------
Quarter
------------------------------
2000 1st 2nd 3rd 4th
- -------------------------------------------------------------------------------
(millions, except per share
data)
Net operating revenues(/1/) $1,220 $1,476 $1,707 $1,938
Operating loss (602) (469) (367) (490)
Loss before extraordinary items (510) (456) (390) (512)
Net loss (513) (456) (390) (512)
Diluted and basic loss per common share before
extraordinary items (0.54) (0.48) (0.41) (0.53)
Quarter
------------------------------
1999 1st 2nd 3rd 4th
- -------------------------------------------------------------------------------
(millions, except per share
data)
Net operating revenues(/1/) $ 637 $ 780 $ 901 $1,055
Operating loss (827) (708) (790) (912)
Loss before extraordinary items (605) (555) (615) (706)
Net loss (626) (555) (615) (706)
Diluted and basic loss per common share before
extraordinary items(/2/) (0.71) (0.61) (0.65) (0.75)
(/1/) Certain reclassifications were made between net operating revenues and
operating expenses from amounts reported in the 2000 quarterly reports on
Form 10-Q to conform to industry events or practices. These
reclassifications had no impact on operating loss as previously reported.
Additionally, in the 2000 fourth quarter, the PCS Group adopted SEC Staff
Accounting Bulletin No. 101, "Revenue recognition in Financial
Statements," (SAB 101). As required by SAB 101, 2000 net operating
revenues have been restated from amounts reported in the 2000 quarterly
reports on Form 10-Q. Net operating revenues were unchanged in the 2000
first quarter and reduced by $32 million in the 2000 second quarter and
$36 million in the 2000 third quarter.
(/2/) In the 2000 first quarter, Sprint effected a two-for-one stock split of
its PCS stock. PCS Group loss per share for prior periods have been
restated to reflect this stock split.
- --------------------------------------------------------------------------------
14. Subsequent Event (Unaudited)
- --------------------------------------------------------------------------------
In January 2001, Sprint issued $2.4 billion of debt securities. Sprint had $2
billion of unissued securities under its existing shelf registration statement
with the SEC, and registered an additional $400 million prior to the issuance.
These borrowings have interest rates ranging from 7.1% to 7.6% and have
scheduled maturities in 2006 and 2011. The proceeds were allocated to the PCS
Group and used mainly to repay existing debt.
III-27
SPRINT PCS GROUP
SCHEDULE II--COMBINED VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2000, 1999 and 1998
Additions
-------------------------------
Balance Charged Charged Balance
Beginning PCS to to Other Other End of
of Year Restructuring Income Accounts Deductions Year
- -----------------------------------------------------------------------------------------
(millions)
2000
Allowance for doubtful
accounts $ 46 $-- $252 $ 9 $(211)(/3/) $ 96
----------------------------------------------------------------
Valuation allowance--
deferred income tax
assets $283 $-- $ 39 $ 3 $ -- $325
----------------------------------------------------------------
1999
Allowance for doubtful
accounts $ 7 $-- $201 $ 4 $(166)(/3/) $ 46
----------------------------------------------------------------
Valuation allowance--
deferred income tax
assets $245 $-- $ 47 $-- $ (9) $283
----------------------------------------------------------------
1998
Allowance for doubtful
accounts $-- $ 8(/1/) $ 2 $-- $ (3)(/3/) $ 7
----------------------------------------------------------------
Valuation allowance--
deferred income tax
assets $-- $229(/2/) $-- $ 16 $ -- $245
----------------------------------------------------------------
(/1/) As discussed in Note 1 of the Notes to Combined Financial Statements, the
PCS Group's assets and liabilities were recorded at their fair values on
the PCS Restructuring date. Therefore, the data presented in this
schedule reflects activity since the PCS Restructuring.
(/2/) Represents a valuation allowance for deferred income tax assets recorded
in connection with the PCS Restructuring.
(/3/) Accounts written off, net of recoveries.
III-28