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, 1998
-----------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
333-06609-01
Commission file number 333-06609-02
SPRINT SPECTRUM L.P.
SPRINT SPECTRUM FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 48-1165245
DELAWARE 43-1746537
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Nos.)
4900 Main Street, Kansas City, Missouri 64112
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (816) 559-1000
----------------------
Securities registered pursuant to Section 12(b) and 12(g) of the Act: None
The registrants meet the conditions set forth in General Instruction I (1) (a)
and (b) of Form 10-K and are therefore filing this Form with the reduced
disclosure format.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No____
Indicate by a 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. [ X ]
At March 1, 1999 the Sprint Spectrum Finance Corporation had 100 common shares
outstanding.
Documents Incorporated by Reference: None
<PAGE>
SPRINT SPECTRUM L.P.
SPRINT SPECTRUM FINANCE CORPORATION
SECURITIES AND EXCHANGE COMMISSION
ANNUAL REPORT ON FORM 10-K
Part I
- --------------------------------------------------------------------------------
Item 1. Business
- --------------------------------------------------------------------------------
Sprint Spectrum L.P. is a Delaware limited partnership formed in March 1995.
Sprint Spectrum refers to Sprint Spectrum L.P. and its subsidiaries.
The general partner of Sprint Spectrum is Sprint Spectrum Holding Company, L.P.
(Holdings), and the limited partner is MinorCo, L.P. (MinorCo). Both Holdings
and MinorCo are Delaware limited partnerships. In November 1998, Sprint Spectrum
became an indirect wholly owned subsidiary of Sprint Corporation when Sprint
acquired the remaining ownership interests of Tele-Communications, Inc., Cox
Communications, Inc. and Comcast Corporation in Holdings and MinorCo.
Sprint Spectrum is a provider of wireless personal communication services (PCS)
in the United States. It has the largest PCS license coverage of population
equivalents (Pops) of any U.S. PCS company. Sprint Spectrum's 30 wholly owned
markets cover 156 million Pops and include the New York, San Francisco, Detroit,
Dallas/Fort Worth and Boston/Providence major trading areas. Sprint Spectrum,
together with certain affiliates, has licenses to provide service to 270 million
people in all 50 states, Puerto Rico and the U.S. Virgin Islands.
Sprint Spectrum is subject to the jurisdiction of the Federal Communications
Commission.
Each of the markets in which Sprint Spectrum competes is served by other two-way
wireless service providers, including cellular and PCS operators and resellers.
A majority of the markets have five or more commercial mobile radio service
providers. Each of the top metropolitan markets has 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 service a significant
subscriber base.
Sprint Spectrum Finance Corporation (FinCo), a Delaware corporation formed in
May 1996, is a wholly owned subsidiary of Sprint Spectrum L.P. FinCo has nominal
assets and does not conduct any operations. It was formed to be a co-obligor of
certain securities issued by Sprint Spectrum. Because FinCo is a co-obligor,
certain institutional investors, who might otherwise be limited in their ability
to invest in securities issued by partnerships due to legal investment laws in
their states of organization or their charter documents, may be able to invest
in Sprint Spectrum's securities.
- --------------------------------------------------------------------------------
Item 2. Properties
- --------------------------------------------------------------------------------
Sprint Spectrum's properties consist mainly of network equipment, work in
progress and buildings and leasehold improvements. The following table
summarizes Sprint Spectrum's major assets as a percentage of total property,
plant and equipment at year-end 1998.
Property, plant and equipment
Network equipment 64.2%
Buildings and leasehold improvements
16.6%
Construction work in progress 13.5%
Other 5.7%
- -------------------------------------------- -------------
100.0%
-------------
Property, plant and equipment totaling $3.6 billion was pledged as security for
revolving credit facilities at year-end 1998.
- --------------------------------------------------------------------------------
Item 3. Legal Proceedings
- --------------------------------------------------------------------------------
Sprint Spectrum has been involved in legal proceedings in various states
concerning the suspension of the processing or approval of 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 Sprint Spectrum's network will not, in
the aggregate, significantly delay expansion of Sprint Spectrum's network
coverage.
Sprint Spectrum 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, management believes that the outcome
of such proceedings, individually or in the aggregate, will not have a material
adverse effect on Sprint Spectrum's financial condition or results of
operations.
<PAGE>
- --------------------------------------------------------------------------------
Item 4. Submission of Matters to a Vote of Security Holders
- --------------------------------------------------------------------------------
Omitted under the provisions of General Instruction I.
Part II
- --------------------------------------------------------------------------------
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- --------------------------------------------------------------------------------
At year-end 1998, Sprint Spectrum had no common equity.
- --------------------------------------------------------------------------------
Item 6. Selected Financial Data
- --------------------------------------------------------------------------------
Omitted under the provisions of General Instruction I.
- --------------------------------------------------------------------------------
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
For information required by Item 7, refer to the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" section of the
Financial Statements and Financial Statement Schedule filed as part of this
document.
- --------------------------------------------------------------------------------
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
- --------------------------------------------------------------------------------
Sprint Spectrum's exposure to market risk--through derivative financial
instruments and other financial instruments, such as long-term debt--is not
material.
- --------------------------------------------------------------------------------
Item 8. Financial Statements and Supplementary Data
- --------------------------------------------------------------------------------
For information required by Item 8, refer to the Sprint Spectrum's consolidated
financial statements and FinCo's financial statements filed as part of this
document.
- --------------------------------------------------------------------------------
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
- --------------------------------------------------------------------------------
None.
Part III
- --------------------------------------------------------------------------------
Item 10. Directors and Executive Officers of the Registrants
- --------------------------------------------------------------------------------
Omitted under the provisions of General Instruction I.
- --------------------------------------------------------------------------------
Item 11. Executive Compensation
- --------------------------------------------------------------------------------
Omitted under the provisions of General Instruction I.
- --------------------------------------------------------------------------------
Item 12. Security Ownership of Certain Beneficial Owners and Management
- --------------------------------------------------------------------------------
Omitted under the provisions of General Instruction I.
- --------------------------------------------------------------------------------
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------------------------------
Omitted under the provisions of General Instruction I.
<PAGE>
Part IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K
(a) 1. The consolidated financial statements of Sprint Spectrum and
financial statements of FinCo filed as part of this report are listed
in the index to Financial Statements and Financial Statement Schedule.
2. The consolidated financial statement schedule of Sprint Spectrum
filed as part of this report is listed in the Index to Financial
Statements and Financial Statement Schedule.
3. The following Exhibits are part of this report.
EXHIBITS
Articles of Incorporation and Bylaws:
(3.1) Certificate of Limited Partnership of Sprint Spectrum L.P.
(incorporated by reference to Exhibit 3.2 to Sprint Spectrum's
Form S-1 Registration Statement, Registration No. 333-06609,
filed on June 21, 1996).
(3.2) Agreement of Limited Partnership of MajorCo Sub, L.P. (renamed
Sprint Spectrum L.P), dated as of March 28, 1995, among
MajorCo, L.P. and MinorCo, L.P. (incorporated by reference to
Exhibit 3.6 to Sprint Spectrum's Form S-1 Registration
Statement, Registration No. 333-06609, filed on June 21,
1996).
(3.3) Certificate of Incorporation of Sprint Spectrum Finance
Corporation (incorporated by reference to Exhibit 3.3 to
Sprint Spectrum's Form S-1 Registration Statement,
Registration No. 333-06609, filed on June 21, 1996).
(3.4) Bylaws of Sprint Spectrum Finance Corporation (incorporated by
reference to Exhibit 3.4 to Sprint Spectrum's Form S-1
Registration Statement, Registration No. 333-06609, filed on
June 21, 1996).
Instruments Defining the Rights of Security Holders
(4.1) Senior Note Indenture (including form of Senior Note), dated
August 23, 1996, between Sprint Spectrum L.P., Sprint Spectrum
Finance Corporation, and The Bank of New York, as Trustee
(incorporated by reference to Exhibit 4.1 to Sprint Spectrum's
Form 10-Q for the quarter ended September 30, 1996, filed on
November 12, 1996).
(4.2) Senior Discount Note Indenture (including form of Senior
Discount Note), dated August 23, 1996, between Sprint Spectrum
L.P., Sprint Spectrum Finance Corporation, and The Bank of New
York, as Trustee (incorporated by reference to Exhibit 4.3 to
Sprint Spectrum's Form 10-Q for the quarter ended September
30, 1996 filed on November 12, 1996).
(4.3) Loans from Sprint Corporation to Sprint Spectrum L.P. are
governed by Sprint's Tracking Stock Policies (incorporated by
reference to Exhibit 4D to Post-Effective Amendment No. 2 to
Sprint Corporation's Form S-3 Registration Statement,
Registration No. 33-58488, filed on December 3, 1998).
Executive Compensation Arrangements
(10.1) Employment Agreement dated as of July 29, 1996, between Sprint
Spectrum Holding Company, L.P. and Andrew Sukawaty
(incorporated by reference to Exhibit 10.20 to Amendment No. 4
to Sprint Spectrum's Form S-1 Registration Statement,
Registration No. 333-06609, filed on August 12, 1996).
(10.2) Employment Agreement dated as of September 29, 1995, between
Sprint Spectrum Holding Company, L.P. and Joseph M. Gensheimer
(incorporated by reference to Exhibit 10.11 to
<PAGE>
Amendment No. 3 to Sprint Spectrum's Form S-1 Registration
Statement, Registration No.333-06609, filed on July 30, 1996).
(10.3) Employment Agreement dated January 21, 1997, between Sprint
Spectrum L.P. and Charles E. Levine (incorporated by reference
to Exhibit 10.4 to Sprint Spectrum's Form 10-Q for the quarter
ended March 31, 1997 filed on May 13, 1997).
(27) Financial Data Schedules
(a) Sprint Spectrum L.P.
(b) Sprint Spectrum Finance Corporation
Sprint Spectrum L.P. will furnish to the Securities and Exchange Commission,
upon request, a copy of the instruments (other than those listed above) defining
the rights of holders of its long-term debt.
(b) Reports on Form 8-K
Sprint Spectrum L.P. filed a Current Report on Form 8-K dated October 21,
1998 in which it reported the appointment of William J. Gunter as Chief
Financial Officer of Sprint Spectrum L.P.
Sprint Spectrum L.P. filed a Current Report on Form 8-K dated November 23,
1998 in which it reported the consummation of the restructuring of
partnership interests in Sprint Spectrum Holding Company, L.P.
<PAGE>
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 SPECTRUM L.P.
--------------------------------------------------
(Registrant)
By /s/ Andrew Sukawaty
--------------------------------------------------
Andrew Sukawaty
President and Chief Executive Officer
Date: March 25, 1999
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 25th day of March, 1999.
/s/ Andrew Sukawaty
--------------------------------------------------
Andrew Sukawaty
President and Chief Executive Officer
/s/ William J. Gunter
--------------------------------------------------
William J. Gunter
Chief Financial Officer
/s/ Eric R. Slusser
--------------------------------------------------
Eric R. Slusser
Controller
(Principal Accounting Officer)
<PAGE>
SIGNATURES
SPRINT SPECTRUM L.P.
--------------------------------------------------
(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 25th day of March, 1999.
/s/ J. Richard Devlin
--------------------------------------------------
J. Richard Devlin, Director
SWV Six Inc., a general partner of Sprint
Spectrum Holding Company, L.P., a
limited partnership that is general
partner of Sprint Spectrum L.P.
/s/ Don A. Jensen
--------------------------------------------------
Don A. Jensen, Director
SWV Six Inc., a general partner of Sprint
Spectrum Holding Company, L.P., a
limited partnership that is general
partner of Sprint Spectrum L.P.
/s/ Arthur B. Krause
--------------------------------------------------
Arthur B. Krause, Director
SWV Six Inc., a general partner of Sprint
Spectrum Holding Company, L.P., a
limited partnership that is general
partner of Sprint Spectrum L.P.
<PAGE>
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 SPECTRUM FINANCE CORPORATION
---------------------------------------------
(Registrant)
/s/ Andrew Sukawaty
---------------------------------------------
Andrew Sukawaty
President
Date: March 25, 1999
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 25th day of March, 1999.
/s/ Andrew Sukawaty
---------------------------------------------
Andrew Sukawaty
President and Director
(Principal Executive Officer)
/s/ William J. Gunter
---------------------------------------------
William J. Gunter
Vice President, Treasurer and Director
(Principal Financial Officer)
/s/ Eric R. Slusser
---------------------------------------------
Eric R. Slusser
Controller
(Principal Accounting Officer)
/s/ Joseph M. Gensheimer
---------------------------------------------
Joseph M. Gensheimer
Vice President, Secretary and Director
<PAGE>
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Page
Reference
-------------------
SPRINT SPECTRUM L.P.
<S> <C>
Management's Discussion and Analysis of Financial Condition and Results of Operations F-2
Consolidated Financial Statements
Independent Auditors' Report F-4
Consolidated Statements of Operations F-5
Consolidated Balance Sheets F-6
Consolidated Statements of Cash Flows F-7
Consolidated Statements of Changes in Partners' Capital F-8
Notes to Consolidated Financial Statements F-9
Finance Statement Schedule
Schedule II F-14
SPRINT SPECTRUM FINANCE CORPORATION
Management's Discussion and Analysis of Financial Condition and Results of Operations F-15
Financial Statements
Statements of Operations F-16
Balance Sheets F-16
Statements of Cash Flows F-16
Notes to Financial Statements F-17
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Sprint Spectrum L.P.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
General
- --------------------------------------------------------------------------------
Sprint Spectrum L.P., with its wholly owned subsidiaries, (Sprint Spectrum)
began commercial code division multiple access (CDMA) operations late in the
1996 fourth quarter.
In November 1998, Sprint Corporation purchased the remaining ownership interests
in Sprint Spectrum Holding Company, L.P. (Holdings) and MinorCo, L.P. from
Tele-Communications, Inc., Comcast Corporation and Cox Communications, Inc. At
that time, Sprint created the Sprint PCS Group, which consists of Sprint's
domestic wireless mobile phone services, including Sprint Spectrum.
- --------------------------------------------------------------------------------
Forward-Looking Information
- --------------------------------------------------------------------------------
Sprint Spectrum 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
Spectrum operates;
- the costs and business risks related to entering and expanding new
markets necessary to provide nationwide service and new services;
- the ability of Sprint Spectrum to establish a significant market
presence;
- the impact of any unusual items resulting from ongoing evaluations of
Sprint Spectrum's business strategies;
- unexpected results of litigation filed against Sprint Spectrum;
- the impact of the Year 2000 issue and any related noncompliance; and
- the possibility of one or more of the markets in which Sprint Spectrum
competes being affected by changes in economic or other factors such
as legal and regulatory changes or other external factors over which
Sprint Spectrum has no control.
- --------------------------------------------------------------------------------
Results of Operations
- --------------------------------------------------------------------------------
- ----------------------------------------------------
1998 1997
- ----------------------------------------------------
(in millions)
Net operating revenues $ 909.8 $ 235.5
- ----------------------------------------------------
Operating expenses
Costs of services and
products 925.2 541.0
Selling, general and
administrative 1,012.0 689.2
Depreciation and
amortization 591.4 304.0
- ----------------------------------------------------
Total operating expenses 2,528.6 1,534.2
- ----------------------------------------------------
Operating loss $ (1,618.8) $ (1,298.7)
------------------------
The wireless industry typically generates a significantly higher number of
subscriber additions and handset sales in the fourth quarter of each year versus
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.
Sprint Spectrum markets its products through multiple distribution channels,
including its own retail stores as well as other retail outlets. Equipment sales
to one retail outlet, and service revenues generated by sales to its customers,
accounted for roughly one-fourth of net operating revenues in 1998 and 1997
and the majority of net operating revenues in 1996.
Net Operating Revenues
Net operating revenues include subscriber revenues (including monthly recurring
charges and usage charges), roaming revenues and sales of handsets and accessory
equipment. Net operating revenues increased 286% in 1998, reflecting the launch
of new markets and the addition of new customers in 1998. Approximately 20% of
1998 net operating revenues, and 50% of 1997 net operating revenues, were from
sales of handsets and accessories. As part of Sprint Spectrum's marketing plans,
handsets are normally sold at prices well below Sprint Spectrum's cost.
Operating Expenses
Costs of services and products mainly includes handset and accessory costs,
interconnection costs, and switch and cell site expenses. These costs increased
71% in 1998 driven by the significant growth in customers and the expanded
market coverage.
<PAGE>
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 47% in 1998 reflecting increased marketing and
advertising costs to promote products and services, as well as increased labor
costs to support increased subscriber activity.
Depreciation and amortization expense increased 95% in 1998 mainly reflecting
the increase in network assets placed in service during 1998 and 1997 related to
market launches.
- --------------------------------------------------------------------------------
Nonoperating Items
- --------------------------------------------------------------------------------
Interest Expense
- ---------------------------------------------------
1998 1997
- ---------------------------------------------------
(in millions)
Interest expense on
outstanding debt $ 386.7 $ 117.7
Capitalized interest costs 35.8 97.4
- ---------------------------------------------------
Total interest costs on
outstanding debt $ 422.5 $ 215.1
-----------------------
Average debt outstanding $ 4,465.0 $ 1,907.8
-----------------------
Effective interest rate 9.5% 11.3%
-----------------------
Total interest costs on outstanding debt increased 96% reflecting increased
borrowings. The 1998 effective interest rate decreased mainly reflecting
favorable interest rates on revolving credit facilities.
Extraordinary Item
In 1998, Sprint Spectrum redeemed, prior to scheduled maturities, $2.9 billion
of vendor financing and term loans with a weighted average interest rate of
8.4%. This resulted in a $43 million extraordinary loss. The debt was repaid
using proceeds from senior notes payable to Sprint.
- --------------------------------------------------------------------------------
Liquidity and Capital Resources
- --------------------------------------------------------------------------------
Sprint Spectrum's liquidity and capital resources are managed by Sprint.
Sprint funds the Sprint PCS Group's (including Sprint Spectrum's) operating
losses, working capital and debt service requirements.
- --------------------------------------------------------------------------------
Year 2000 Issue
- --------------------------------------------------------------------------------
The "Year 2000" issue affects Sprint Spectrum's installed computer systems,
network elements, software applications, and other business systems that have
time-sensitive programs that may not properly reflect or recognize the year
2000. Because many computers and computer applications define dates by the last
two digits of the year, "00" may not be properly identified as the year 2000.
This error could result in miscalculations or system errors. The Year 2000 issue
may also affect the systems and applications of Sprint Spectrum's customers,
vendors, resellers or affiliates.
At the end of March 1999, Sprint Spectrum has completed an inventory and
assessment of its computer systems, network elements, software applications,
products and other business systems. Sprint Spectrum is progressing with
developing plans for remediation and testing of those systems and applications
which are impacted by the Year 2000 issue. Sprint Spectrum is using both
internal and external resources to identify, correct or reprogram, and test its
systems for Year 2000 compliance. It expects Year 2000 compliance for these
critical systems to be achieved in 1999.
Sprint Spectrum is also contacting others with whom it conducts business to
receive the appropriate warranties and assurances that those third parties are
or will be Year 2000 compliant. Sprint Spectrum relies on third-party vendors
for a significant portion of its important operating and computer system
functions and, therefore, is highly dependent on those vendors to remediate
network elements, computer systems, software applications and other business
systems. In addition, Sprint Spectrum uses publicly available services that are
acquired without contract, such as global positioning system timing signal, that
may be affected by the Year 2000 issue. While Sprint Spectrum believes these
systems will be Year 2000 compliant, it has no contractual or other right to
force compliance.
Sprint Spectrum expects to incur approximately $50 million in 1999 for its Year
2000 compliance program. If compliance is not achieved in a timely manner by
Sprint Spectrum, its affiliates or any significant third party, the Year 2000
issue could have a material adverse effect on Sprint Spectrum's operations.
Sprint Spectrum is focusing on identifying and addressing all aspects of its
operations that may be affected by the Year 2000 issue. Sprint Spectrum is
developing and will implement, if necessary, appropriate contingency plans to
mitigate, to the extent possible, the effects of any Year 2000 noncompliance.
- --------------------------------------------------------------------------------
Recently Issued Accounting Pronouncement
- --------------------------------------------------------------------------------
See Note 8 of Notes to Consolidated Financial Statements for a discussion of a
recently issued accounting pronouncement.
<PAGE>
INDEPENDENT AUDITORS' REPORT
Partners of Sprint Spectrum L.P.
We have audited the accompanying consolidated balance sheets of Sprint Spectrum
L.P. and subsidiaries (Sprint Spectrum) as of December 31, 1998 and 1997, and
the related consolidated statements of operations, changes in partners' capital
and cash flows for the three years in the period ended December 31, 1998. Our
audits also included the financial statement schedule (Schedule II). These
financial statements and Schedule II are the responsibility of Sprint Spectrum's
management. Our responsibility is to express an opinion on these consolidated
financial statements and Schedule II based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Sprint Spectrum L.P.
and subsidiaries at December 31, 1998 and 1997, and the results of their
operations and their cash flows for the three years then ended, in conformity
with generally accepted accounting principles. Also, in our opinion, Schedule
II, when considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly in all material respects the information set
forth therein.
Deloitte & Touche LLP
Kansas City, Missouri
February 2, 1999
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS Sprint Spectrum L.P.
(in millions)
- -------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Operating Revenues $ 909.8 $ 235.5 $ 4.2
- -------------------------------------------------------------------------------------------------------------------
Operating Expenses
Costs of services and products 925.2 541.0 36.1
Selling, general and administrative 1,012.0 689.2 312.7
Depreciation and amortization 591.4 304.0 11.3
- -------------------------------------------------------------------------------------------------------------------
Total operating expenses 2,528.6 1,534.2 360.1
- -------------------------------------------------------------------------------------------------------------------
Operating Loss (1,618.8) (1,298.7) (355.9)
Interest expense (386.7) (117.7) (0.5)
Other income, net 9.8 9.4 10.1
Equity in loss of unconsolidated partnership - - (92.3)
- -------------------------------------------------------------------------------------------------------------------
Loss before Extraordinary Item (1,995.7) (1,407.0) (438.6)
Extraordinary item (42.9) - -
- -------------------------------------------------------------------------------------------------------------------
Net Loss $ (2,038.6) $ (1,407.0) $ (438.6)
----------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS Sprint Spectrum L.P.
(in millions)
- -------------------------------------------------------------------------------------------------------------------------
December 31, 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
Assets
Current assets
<S> <C> <C>
Cash and equivalents $ 70.4 $ 67.2
Accounts receivable, net of allowance for doubtful
accounts of $15.8 and $9.0 225.6 96.3
Affiliate receivable 247.8 105.2
Inventories 91.7 96.9
Prepaid expenses and other assets 26.9 25.4
- -------------------------------------------------------------------------------------------------------------------------
Total current assets 662.4 391.0
Property, plant and equipment
Network equipment 2,936.9 2,137.8
Buildings and leasehold improvements 757.6 612.2
Construction work in progress 618.6 495.8
Other 258.8 138.6
- -------------------------------------------------------------------------------------------------------------------------
Total property, plant and equipment 4,571.9 3,384.4
Accumulated depreciation (772.2) (251.7)
- -------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 3,799.7 3,132.7
Intangible assets
PCS licenses 2,130.2 2,130.8
Microwave relocation costs 298.6 255.6
- -------------------------------------------------------------------------------------------------------------------------
Total intangible assets 2,428.8 2,386.4
Accumulated amortization (110.2) (50.2)
- -------------------------------------------------------------------------------------------------------------------------
Net intangible assets 2,318.6 2,336.2
Other assets 45.1 101.4
- -------------------------------------------------------------------------------------------------------------------------
Total $ 6,825.8 $ 5,961.3
-----------------------------------
Liabilities and Partners' Capital
Current liabilities
Current maturities of long-term debt $ 5.1 $ 11.4
Accounts payable 351.3 337.1
Advances from Sprint 235.0 -
Construction obligations 592.7 705.3
Accrued payroll 107.2 71.7
Accrued advertising 84.2 51.6
Accrued expenses and other current liabilities 263.9 150.4
- -------------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,639.4 1,327.5
- -------------------------------------------------------------------------------------------------------------------------
Long-term debt 5,414.1 3,101.5
Other noncurrent liabilities 79.9 54.0
Partners' capital and accumulated deficit:
Partners' capital 3,690.3 3,437.6
Accumulated deficit (3,997.9) (1,959.3)
- -------------------------------------------------------------------------------------------------------------------------
Total partners' capital and accumulated deficit (307.6) 1,478.3
- -------------------------------------------------------------------------------------------------------------------------
Total $ 6,825.8 $ 5,961.3
-----------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS Sprint Spectrum L.P.
(in millions)
- ------------------------------------------------------------------ ----------------- ----------------- ----------------
Years Ended December 31, 1998 1997 1996
- ------------------------------------------------------------------ ----------------- ----------------- ----------------
Operating Activities
<S> <C> <C> <C>
Net loss $ (2,038.6) $ (1,407.0) $ (438.6)
Adjustments to reconcile net loss to net cash provided (used) by
operating activities:
Equity in loss of unconsolidated partnership - - 92.3
Depreciation and amortization 591.4 304.0 11.3
Extraordinary loss 42.9 - -
Amortization of debt discount and issuance costs 53.6 48.1 14.0
Changes in assets and liabilities:
Receivables (271.9) (184.1) (17.0)
Inventories and other current assets 9.1 (34.5) (94.0)
Accounts payable and accrued expenses 240.7 392.4 926.5
Other noncurrent liabilities 25.9 37.6 9.5
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash provided (used) by operating activities (1,346.9) (843.5) 504.0
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Investing Activities
Capital expenditures (1,201.2) (1,980.1) (1,386.4)
Microwave relocation costs (47.0) (116.2) (135.8)
Loan to unconsolidated partnership - - (172.0)
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash used by investing activities (1,248.2) (2,096.3) (1,694.2)
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Financing Activities
Proceeds from long-term debt 4,999.2 2,316.2 674.2
Payments on long-term debt (2,888.6) (3.0) -
Advances from Sprint 235.0 - -
Debt issuance costs - (20.0) (71.8)
Partner capital contributions 252.7 663.8 669.5
Dividends paid - - (32.8)
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash provided by financing activities 2,598.3 2,957.0 1,239.1
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Increase in Cash and Equivalents 3.2 17.2 48.9
Cash and Equivalents at Beginning of Year 67.2 50.0 1.1
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Cash and Equivalents at End of Year $ 70.4 $ 67.2 $ 50.0
--- ------------- --- ------------- -- -------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL Sprint Spectrum L.P.
- ---------------------------------------------------------------------------------------------------------------------
Partners' Accumulated
(in millions) Capital Deficit Total
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning 1996 balance $ 2,296.8 $ (113.7) $ 2,183.1
Capital contributions 669.5 - 669.5
Net loss - (438.6) (438.6)
Transfer of investment in unconsolidated
partnership to Holdings (165.9) - (165.9)
Dividends to Holdings (32.8) - (32.8)
- ---------------------------------------------------------------------------------------------------------------------
Ending 1996 balance 2,767.6 (552.3) 2,215.3
Capital contributions 670.0 - 670.0
Net loss - (1,407.0) (1,407.0)
- ---------------------------------------------------------------------------------------------------------------------
Ending 1997 balance 3,437.6 (1,959.3) 1,478.3
Capital contributions 252.7 - 252.7
Net loss - (2,038.6) (2,038.6)
- ---------------------------------------------------------------------------------------------------------------------
Ending 1998 balance $ 3,690.3 $ (3,997.9) $ (307.6)
----------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Sprint Spectrum L.P.
- --------------------------------------------------------------------------------
1. PCS Restructuring
- --------------------------------------------------------------------------------
In November 1998, Sprint Corporation purchased the remaining ownership interests
in Sprint Spectrum Holding Company, L.P. (Holdings) and MinorCo, L.P. from
Tele-Communications, Inc., Comcast Corporation and Cox Communications, Inc. At
that time, Sprint created the Sprint PCS Group, which consists of Sprint's
domestic wireless mobile phone services, including Sprint Spectrum. This
transaction is referred to as the PCS Restructuring.
- --------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies
- --------------------------------------------------------------------------------
Basis of Consolidation and Presentation
The consolidated financial statements include the accounts of Sprint Spectrum
and its subsidiaries.
The consolidated financial statements are prepared using generally accepted
accounting principles. These principles require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported amounts of
revenues and expenses. Actual results could differ from those estimates.
Certain prior-year amounts have been reclassified to conform to the current-year
presentation. These reclassifications had no effect on the results of operations
or partners' capital as previously reported.
At the beginning of July 1996, Holdings transferred almost all of its operations
to Sprint Spectrum. The related transactions were treated as transactions
between entities under common control and accounted for similar to a pooling of
interests. The consolidated financial statements include the pooled operations
of Holdings through June 1996.
The financial position and results of operations of the separate pooled
operations at the end of June 1996 were as follows:
- --------------------------------------------------------
Sprint
Spectrum Holdings Combined
- --------------------------------------------------------
(in millions)
Total assets $ 2,268.8 $ 2,561.3 $ 2,561.3
Partners'
capital
& accumulated 2,258.4 2,469.5 2,472.4
deficit
Net loss (81.3) (158.2) (158.2)
Allocation of Shared Services
Sprint directly assigns, where possible, certain general and administrative
costs to Sprint Spectrum based on its actual use of those services. Where direct
assignment of costs is not possible, or practical, Sprint uses other methods to
estimate the assignment of costs to Sprint Spectrum.
Allocation of Financing
Financing activities for Sprint Spectrum are managed by Sprint on a centralized
basis. Debt incurred by Sprint on behalf of Sprint Spectrum is specifically
reflected in Sprint Spectrum's consolidated financial statements. Interest
expense is allocated to Sprint Spectrum based on an interest rate that is
largely equal to the rate the Sprint 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.
Income Taxes
Sprint Spectrum has not provided for federal or state income taxes since taxes
are the responsibility of the partners.
Revenue Recognition
Sprint Spectrum recognizes operating revenues as services are rendered or as
products are delivered to customers. Sprint Spectrum records operating revenues
net of an estimate for uncollectible accounts.
<PAGE>
Cash and Equivalents
Cash equivalents generally include all highly liquid investments with original
maturities of three months or less. They are stated at cost, which approximates
market value. Outstanding checks in excess of cash balances were included in
accounts payable. These amounts totaled $49 million at year-end 1998 and $30
million at year-end 1997. Sprint Spectrum had sufficient funds available to fund
these outstanding checks when they were presented for payment.
Inventories
Inventories are stated at the lower of cost (on a first in, first-out basis) or
replacement value.
<PAGE>
Property, Plant and Equipment
Property, plant and equipment is stated 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 charged to expense as incurred.
Capitalized Interest
Sprint Spectrum capitalizes interest costs related to network buildout and PCS
licenses. Interest capitalized totaled $36 million in 1998, $97 million in 1997
and $31 million in 1996.
PCS Licenses
Sprint Spectrum 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 $98 million at year-end 1998 and $45 million at year-end
1997.
Microwave Relocation Costs
Sprint Spectrum incurred costs related to microwave relocation in constructing
its PCS network. Microwave relocation costs are being amortized over the
remaining lives of the PCS licenses. Accumulated amortization totaled $12
million at year-end 1998 and $5 million at year-end 1997.
Trademark Agreement
Sprint(R) is a registered trademark of Sprint and Sprint PCS(SM) is a registered
service mark of Sprint. Sprint Spectrum uses these on a royalty-free basis under
trademark license agreements.
- --------------------------------------------------------------------------------
3. Investment in Unconsolidated Partnership
- --------------------------------------------------------------------------------
Before the end of August 1996, Sprint Spectrum had a 49% limited partnership
interest in American PCS, L.P. (APC), which provides PCS services in the
Washington D.C.--Baltimore major trading area (MTA). The investment was
accounted for using the equity method. In August 1996, Sprint Spectrum
transferred its interest in APC to Holdings. Through August 1996, APC's net
operating revenues were $41 million and its net loss was $124 million.
- --------------------------------------------------------------------------------
4. Employee Benefit Plans
- --------------------------------------------------------------------------------
Defined Contribution Plan
Sprint Spectrum sponsored a savings and retirement program for certain
employees. Sprint Spectrum matched contributions equal to 50% of the
contribution of each participant, up to the first 6% the employee elected to
contribute. Expense under the savings plan was $6 million in 1998, $5 million in
1997 and $1 million in 1996. Effective January 1999, Sprint Spectrum employees
began making contributions to Sprint's defined contribution plan. The existing
assets of the Sprint Spectrum savings plan were transferred to that defined
contribution plan in early 1999.
Defined Benefit Pension Plan
Effective January 1999, Sprint Spectrum employees also became eligible to
participate in Sprint's pension and postretirement plans.
Long-term Incentive Plan
Sprint Spectrum employees meeting certain eligibility requirements were included
in its 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 vest 25% per year beginning one year from the grant date and expire after
10 years. Under the 1996 plan, appreciation units vest 25% per year, beginning
two years from the grant date, and expire after 10 years.
In connection with the PCS Restructuring, Sprint discontinued the Sprint
Spectrum LTIP. The appreciation units were converted to shares of Sprint PCS
stock and options to buy PCS stock 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.
Sprint will issue the shares of PCS stock, and the options will become
exercisable, based on the vesting requirements of the converted units.
- --------------------------------------------------------------------------------
5. Long term Debt
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Sprint Spectrum's long-term debt at year-end was as follows:
Maturing 1998 1997
------------------------------------ --------------
(in millions)
Senior notes
<S> <C> <C> <C>
8.0% to 8.9% 2008 to 2028 $ 2,924.7 $ -
11.0% to 12.5% 2006 613.8 572.3
Revolving credit facilities
Variable rates 2005 1,695.0 605.0
Vendor financing
Variable rates 2007 - 1,612.9
Term loans
Variable rates 2005 - 300.0
Other
6.5% to 10.0% 1998 to 2006 185.7 22.7
-----------------------------------
5,419.2 3,112.9
Less: current maturities 5.1 11.4
-----------------------------------
Long-term debt $ 5,414.1 $ 3,101.5
-----------------------------------
</TABLE>
Long-term debt maturities during each of the next five years are as follows:
- ------------------------------------------------------
(in millions)
1999 $ 5.1
2000 0.1
2001 320.1
2002 300.1
2003 400.1
- ------------------------------------------------------
At year-end 1998, Sprint Spectrum had borrowed $1.7 billion with a weighted
average interest rate of 5.7% under its $1.7 billion revolving credit
facilities. At year-end 1997, Sprint Spectrum had borrowed $605 million with a
weighted average interest rate of 8.4% under these facilities.
In 1998, Sprint Spectrum redeemed, prior to scheduled maturities, $2.9 billion
of vendor financing and term loans with a weighted average interest rate of
8.4%. This resulted in a $43 million extraordinary loss. The debt was repaid
using proceeds from senior notes payable to Sprint. See Note 7 "Related Party
Transactions" for a discussion of notes payable to Sprint.
Sprint Spectrum's Senior Discount notes are recorded net of unamortized
discounts totaling $136 million at year-end 1998 and $178 million at year-end
1997.
Sprint Spectrum property, plant and equipment totaling $3.6 billion was pledged
as security for its revolving credit facilities at year-end 1998.
Sprint Spectrum has complied with all restrictive or financial covenants
relating to its debt arrangements at year-end 1998.
Sprint Spectrum estimates the fair value of its long-term debt using available
market information and appropriate valuation methodologies. As a result, the
following estimates do not necessarily represent the values Sprint Spectrum
could realize in a current market exchange. Although management is not aware of
any factors that would affect the year-end 1998 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
1998 may differ significantly.
The estimated fair value of Sprint Spectrum's long-term debt is based on quoted
market prices for publicly traded issues. The estimated fair value of all other
issues is based on the present value of estimated future cash flows using a
discount rate based on the risks involved. The estimated fair value of Sprint
Spectrum's long-term debt was $5.6 billion at year-end 1998 and $3.2 billion at
year-end 1997.
<PAGE>
- --------------------------------------------------------------------------------
6. Commitments and Contingencies
- --------------------------------------------------------------------------------
Litigation, Claims and Assessments
Various suits arising in the ordinary course of business are pending against
Sprint Spectrum. Management cannot predict the final outcome of these actions
but believes they will not be material to the consolidated financial statements.
Commitments
In 1998, Sprint Spectrum amended a procurement and services contract with a
vendor for the engineering and construction of a PCS network. This contract
provides for an initial term of three years with renewals for additional
one-year terms. At year-end 1998, $257 million had been purchased under the
commitment, leaving a remaining commitment of $143 million.
Sprint Spectrum has a purchase and supply contract with a vendor to purchase
handsets and other equipment through April 2000. Purchases under the agreement
totaled $289 million in 1998 and $148 million in 1997. At year-end 1998, the
remaining commitments totaled $163 million.
Sprint Spectrum has an agreement with a vendor to provide PCS call record and
retention services. Annual minimums range from $20 to $60 million through 2001.
The agreement has two automatic, two-year renewal periods, unless terminated by
Sprint Spectrum, which would be subject to specified termination penalties.
In 1997, Sprint Spectrum entered into a four and a half year contract for
consulting services. Sprint Spectrum used services under the contract totaling
$38 million in 1998 and $20 million in 1997. At year-end 1998, the remaining
commitment was $67 million.
Operating Leases
Minimum rental commitments at year-end 1998, for all noncancelable operating
leases, consisting mainly of leases for cell and switch sites and office space
are as follows:
- ------------------------------------------------------
(in millions)
1999 $ 111.7
2000 109.1
2001 74.3
2002 32.4
2003 11.9
Thereafter 29.9
- ------------------------------------------------------
Gross rental expense totaled $139 million in 1998, $81 million in 1997 and $13
million in 1996. Rental commitments for subleases 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.
- --------------------------------------------------------------------------------
7. Additional Financial Information
- --------------------------------------------------------------------------------
Supplemental Cash Flows Information
Sprint Spectrum paid cash for interest, net of capitalized interest, totaling
$189 million in 1998, $33 million in 1997 and $0.3 million in 1996.
Noncash activities for Sprint Spectrum included the following:
- ---------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------
(in millions)
Accrued interest
converted to
long-term debt $ 154.2 $ 51.7 $ -
------------------------------------
Contribution of PCS
license from Cox $ - $ 6.2 $ -
------------------------------------
Transfer of equity
interest in APC
to Holdings $ - $ - $ 165.9
------------------------------------
Related Party Transactions
Sprint
Sprint provides Sprint Spectrum with invoicing and operator services, and
switching equipment. Sprint Spectrum is also using Sprint as its interexchange
carrier. Sprint Spectrum recognized expense for these services totaling $125
million in 1998, $61 million in 1997 and $1 million in 1996. Sprint also
provides management, printing, mailing and warehousing services to Sprint
Spectrum totaling $25 million in 1998, $11 million in 1997 and $12 million in
1996.
Sprint participated in the syndication of $300 million of Sprint Spectrum's
vendor financing in 1997. As discussed in Note 5, all vendor financing was
repaid in 1998.
At year-end 1998, Sprint Spectrum had senior notes payable to Sprint totaling
$2.9 billion. See Note 2 for a more detailed description of how Sprint allocates
financing to Sprint Spectrum. In addition, Sprint Spectrum had other notes
payable to Sprint totaling $180 million. These notes mature in 2001 and have an
interest rate of 7.8%.
Sprint had an investment in Sprint Spectrum's Senior Discount notes totaling
$133 million at year-end 1998 and $118 million at year-end 1997.
<PAGE>
APC
Sprint Spectrum reimburses APC for certain allocated costs. In addition, APC
pays affiliation fees to Sprint Spectrum. Reimbursement costs totaled $15
million in 1998 and $14 million in 1997. Sprint Spectrum earned $4 million in
both 1998 and 1997 for affiliation fees. There were no reimbursement costs or
affiliation fees in 1996.
PhillieCo, L.P.
Sprint Spectrum provides various services and charges affiliation fees to
PhillieCo, L.P., which provides PCS services in the Philadelphia MTA. These
charges totaled $21 million in 1998 and $37 million in 1997. There were no
service charges or affiliation fees in 1996. Related charges included in the
affiliate receivable balance were $3 million at year-end 1998 and $37 million at
year-end 1997.
SprintCom, Inc.
In 1997, Sprint Spectrum began building the PCS network for SprintCom, Inc., a
wholly owned Sprint subsidiary. These services include engineering, management,
purchasing, accounting and other related services and totaled $100 million in
1998 and $29 million in 1997. Related charges included in the affiliate
receivable balance were $78 million at year-end 1998 and $14 million at year-end
1997.
Cox Communications PCS, L.P.
Cox Communications PCS, L.P., which provides PCS services in the Los
Angeles--San Diego--Las Vegas MTAs, reimburses Sprint Spectrum for certain
allocated costs and participates in certain handset agreements. Allocated costs
totaled $34 million in 1998, $20 million in 1997 and $7 million in 1996. Related
charges included in the affiliate receivable balance were $27 million at
year-end 1998 and $33 million at year-end 1997.
Major Customer
Sprint Spectrum markets its products through multiple distribution channels,
including its own retail stores as well as other retail outlets. Equipment sales
to one retail outlet, and service revenues generated by sales to its customers,
accounted for roughly one-fourth of net operating revenues in 1998 and 1997
and the majority of net operating revenues in 1996.
Concentrations of Credit Risk
Sprint Spectrum's accounts receivable are not subject to any concentration of
credit risk.
- --------------------------------------------------------------------------------
8. Recently Issued Accounting Pronouncement
- --------------------------------------------------------------------------------
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 was used
and whether it qualified for hedge accounting. When adopted in January 2000,
this statement is not expected to have a material impact on Sprint Spectrum's
combined financial statements.
- --------------------------------------------------------------------------------
9. Subsequent Event
- --------------------------------------------------------------------------------
In the 1999 first quarter, Sprint Spectrum used funds from Sprint to repay its
revolving credit facilities prior to scheduled maturities. This resulted in a
$33 million extraordinary loss. As a result, Sprint Spectrum's property, plant
and equipment is no longer pledged as security.
<PAGE>
<TABLE>
<CAPTION>
SPRINT SPECTRUM L.P.
SCHEDULE II -- CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1998, 1997 and 1996
Additions
---------------------------
Balance Charged to Balance
Beginning Charged to Other Other End of
of Year Income Accounts Deductions Year
- ----------------------------------------------------------------------------------------------------------------------
(in millions)
1998
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts $ 9.0 $ 60.7 $ - $ (53.9)(1)$ 15.8
--------------------------------------------------------------------------
1997
Allowance for doubtful accounts $ 0.2 $ 11.3 $ - $ (2.5)(1)$ 9.0
--------------------------------------------------------------------------
1996
Allowance for doubtful accounts $ - $ 0.2 $ - $ - $ 0.2
--------------------------------------------------------------------------
</TABLE>
(1) Accounts written off, net of recoveries.
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Sprint Spectrum
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Finance Corporation
Sprint Spectrum Finance Corporation (FinCo), a wholly owned subsidiary of Sprint
Spectrum L.P., was formed to be a co-obligor of certain securities issued by
Sprint Spectrum. FinCo has nominal assets and does not conduct any operations.
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS (Unaudited) Sprint Spectrum Finance Corporation
- --------------------------------------------------------------------------------------------------------------------
December 31, 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating expenses $ - $ 1,597 $ -
-----------------------------------------------
Net loss $ - $ 1,597 $ -
-----------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
BALANCE SHEETS (Unaudited) Sprint Spectrum Finance Corporation
- --------------------------------------------------------------------------------------------------------------------
December 31, 1998 1997
- --------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholder's Equity
<S> <C> <C>
Payable to Sprint Spectrum $ 1,497 $ 1,497
-------------------------------
Shareholder's equity
Common stock, $1.00 par value; 1,000 shares authorized;
100 shares issued and outstanding 100 100
Accumulated deficit (1,597) (1,597)
-------------------------------
Total shareholder's equity (1,497) (1,497)
-------------------------------
Total $ - $ -
-------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS (Unaudited) Sprint Spectrum Finance Corporation
- ------------------------------------------------------------------ ----------------- ----------------- --------------
Years Ended December 31, 1998 1997 1996
- ------------------------------------------------------------------ ----------------- ----------------- --------------
Operating Activities
<S> <C> <C> <C>
Net loss $ - $ (1,597) $ -
Adjustments to reconcile net loss to net cash used by operating
activities:
Decrease (Increase) in receivable from Sprint Spectrum - 100 (100)
Increase in payable to Sprint Spectrum - 1,497 -
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -----------
Net cash used by operating activities - - (100)
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -----------
Financing Activities
Common stock issued - - (100)
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -----------
Net cash used by financing activities - - (100)
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -----------
Change in Cash and Equivalents - - -
Cash and Equivalents at Beginning of Year - - -
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -----------
Cash and Equivalents at End of Year $ - $ - $ -
--- ------------- --- ------------- -- -----------
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (Unaudited) Sprint Spectrum
Finance Corporation
FinCo, a wholly owned subsidiary of Sprint Spectrum L.P., was formed to be a
co-obligor of certain securities issued by Sprint Spectrum. FinCo has nominal
assets and does not conduct any operations. At year-end 1998, FinCo was a
co-obligor of $614 million of Sprint Specectrum's senior notes. See Note 5 of
Sprint Spectrum L.P.'s Notes to Consolidated Financial Statements for more
information.
<PAGE>
EXHIBITS INDEX
Exhibit
Number
(27) Financial Data Schedules
(a) Sprint Spectrum L.P.
(b) Sprint Spectrum Finance Corporation
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001015551
<NAME> Sprint Spectrum L.P.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Dec-31-1998
<CASH> 70,400
<SECURITIES> 0
<RECEIVABLES> 489,200
<ALLOWANCES> 15,800
<INVENTORY> 91,700
<CURRENT-ASSETS> 662,400
<PP&E> 4,571,900
<DEPRECIATION> 772,200
<TOTAL-ASSETS> 6,825,800
<CURRENT-LIABILITIES> 1,639,400
<BONDS> 5,414,100
0
0
<COMMON> 0
<OTHER-SE> (307,600)
<TOTAL-LIABILITY-AND-EQUITY> 6,825,800
<SALES> 0
<TOTAL-REVENUES> 909,800
<CGS> 0
<TOTAL-COSTS> 1,516,600
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 386,700
<INCOME-PRETAX> (1,995,700)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,995,700)
<DISCONTINUED> 0
<EXTRAORDINARY> (42,900)
<CHANGES> 0
<NET-INCOME> (2,038,600)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001017358
<NAME> Sprint Spectrum Finance Corporation
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Dec-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 1,497
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (1,497)
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
