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, 1999
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, 2000 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 more than
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, construction
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 1999.
<TABLE>
<CAPTION>
Property, plant and equipment
<S> <C>
Network equipment 61.5%
Buildings and leasehold improvements 14.0%
Construction work in progress 18.4%
Other 6.1%
- -------------------------------------------- -------------
100.0%
-------------
</TABLE>
- --------------------------------------------------------------------------------
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 1999, Sprint Spectrum had no common equity and there is no market
for the common equity of FinCo.
- --------------------------------------------------------------------------------
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 and incorporated by reference herein.
- --------------------------------------------------------------------------------
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, from
changes in interest rates--is not material.
- --------------------------------------------------------------------------------
Item 8. Financial Statements and Supplementary Data
- --------------------------------------------------------------------------------
For information required by Item 8, refer to Sprint Spectrum's consolidated
financial statements and FinCo's financial statements, included in the Financial
Statements and Financial Statement Schedule sections, filed as part of this
document and incorporated by reference herein.
- --------------------------------------------------------------------------------
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
- --------------------------------------------------------------------------------
As previously reported in Sprint Spectrum's Current Report on Form 8-K dated
June 13, 1999, as amended, Deloitte & Touche LLP, the independent auditors for
Sprint Spectrum Holding Company, L.P., and its subsidiaries, including Sprint
Spectrum, was replaced by Ernst & Young LLP.
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) First Amendment to Agreement of Limited Partnership of Sprint
Spectrum L.P., effective as of February 29, 2000.
(3.4) 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).
(3.5) 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).
<PAGE>
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 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 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
No Current Reports on Form 8-K were filed in the 1999 fourth quarter.
<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)
/s/ Andrew Sukawaty
---------------------------------------------------
Andrew Sukawaty
President
Date: March 29, 2000
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 29th day of March, 2000.
/s/ Andrew Sukawaty
---------------------------------------------------
Andrew Sukawaty
President
(Principal Executive Officer)
/s/ William J. Gunter
---------------------------------------------------
William J. Gunter
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ Eric R. Slusser
---------------------------------------------------
Eric R. Slusser
Controller
<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 29th day of March, 2000.
/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 29, 2000
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 29th day of March, 2000.
/s/ Andrew Sukawaty
---------------------------------------------------
Andrew Sukawaty
President
(Principal Executive Officer)
/s/ William J. Gunter
---------------------------------------------------
William J. Gunter
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ Eric R. Slusser
---------------------------------------------------
Eric R. Slusser
Controller
/s/ Michael T. Hyde
---------------------------------------------------
Michael T. Hyde
Director
/s/ Don A. Jensen
---------------------------------------------------
Don A. Jensen
Director
/s/ Laura L. Ozenberger
---------------------------------------------------
Laura L. Ozenberger
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
Report of Independent Auditors F-4
Consolidated Statements of Operations F-6
Consolidated Balance Sheets F-7
Consolidated Statements of Cash Flows F-8
Consolidated Statements of Changes in Partners' Capital F-9
Notes to Consolidated Financial Statements F-10
Financial Statement Schedule
Schedule II F-16
SPRINT SPECTRUM FINANCE CORPORATION
Management's Discussion and Analysis of Financial Condition and Results of Operations F-17
Financial Statements
Statements of Operations F-18
Balance Sheets F-18
Statements of Cash Flows F-18
Note to Financial Statements F-19
</TABLE>
F-1
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Sprint Spectrum L.P.
- --------------------------------------------------------------------------------
General
- --------------------------------------------------------------------------------
Sprint Spectrum L.P., with its wholly owned subsidiaries (Sprint Spectrum),
began commercial code division multiple access operations late in the 1996
fourth quarter. Sprint Spectrum is wholly owned by Sprint Corporation (Sprint).
In October 1999, Sprint announced a definitive merger agreement with MCI
WorldCom. The merger is subject to the approvals of Sprint and MCI WorldCom
shareholders as well as approvals from the Federal Communications Commission,
the Justice Department, various state government bodies and foreign antitrust
authorities. The companies anticipate that the merger will close in the second
half of 2000.
In November 1998, Sprint 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 personal communication services (PCS), 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 seamless services and new services;
- the ability of Sprint Spectrum to continue to grow 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;
- uncertainties associated with the pending merger of Sprint and MCI
WorldCom;
- the possibility of one or more of the markets in which Sprint Spectrum
competes being affected by changes in political, economic or other
factors such as monetary policy, legal and regulatory changes or other
external factors over which Sprint Spectrum has no control; and
- other risks referenced from time to time in Sprint's or Sprint
Spectrum'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 Spectrum is not obligated to publicly release any revisions to
forward-looking statements to reflect events after the date of this report or
unforeseen events.
- --------------------------------------------------------------------------------
Results of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------
1999 1998
- -------------------------------------------------------
(millions)
<S> <C> <C>
Net operating revenues $ 2,138 $ 910
- -------------------------------------------------------
Operating expenses
Costs of services and
products 1,451 925
Selling, general and
administrative 1,382 1,012
Depreciation and
amortization 747 592
- -------------------------------------------------------
Total operating expenses 3,580 2,529
- -------------------------------------------------------
Operating loss $ (1,442) $ (1,619)
------------------------
</TABLE>
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 chain and the subsequent service revenues generated by sales to
its customers accounted for roughly one-fourth of net operating revenues in 1999
and 1998.
Net Operating Revenues
Net operating revenues include subscriber revenues and sales of handsets and
accessory equipment. Subscriber revenues consist of monthly recurring charges
and usage charges. Net operating revenues
F-2
<PAGE>
increased 135% in 1999, mainly reflecting the launch of new markets and the
addition of customers in 1999.
Average monthly service revenue per user (ARPU) has decreased due to a wider
acceptance of lower-priced, bundled minute rate plans.
Approximately 20% of 1999 and 1998 net operating revenues were from sales of
handsets and accessories. As part of Sprint Spectrum's marketing plans, handsets
are normally sold at prices below Sprint Spectrum's cost.
Average monthly customer churn rates have remained consistent during 1999 and
1998 in the mid 3% range.
Operating Expenses
Costs of services and products mainly includes handset and accessory costs,
switch and cell site expenses and other network-related costs. These costs
increased 57% in 1999 driven by the significant growth in customers and the
expanded market coverage.
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 37% 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 from the high-$500 range in 1998 to the low-$400
range in 1999. Lower handset unit costs and scale benefits from greater customer
additions have contributed to the improvement.
Cash cost per user (CCPU) consists of costs of service revenues, service
delivery and other general and administrative costs. CCPU decreased
approximately one-third in 1999 compared to 1998. The improvements reflect good
expense management and scale benefits resulting from the increased customer
base.
Depreciation and amortization expense, which increased 26% in 1999, consists
mainly of depreciation of network assets and amortization of intangible assets.
The intangible assets include PCS licenses, which are being amortized over 40
years, and microwave relocation costs, which are amortized over the remaining
life of the related PCS licenses. The increase in depreciation and amortization
expense reflects an increased property base.
- --------------------------------------------------------------------------------
Nonoperating Items
- --------------------------------------------------------------------------------
Interest Expense
Sprint Spectrum's effective interest rate on long-term debt was 9.0% in 1999 and
9.4% in 1998. The decrease in the effective interest rate mainly reflects
increased borrowings with lower interest rates.
Extraordinary Items
In 1999, Sprint Spectrum terminated its revolving credit facilities and repaid,
prior to scheduled maturities, the related outstanding balance of $1.7 billion.
These facilities had interest rates ranging from 5.6% to 6.3%. These repayments
resulted in a $33 million extraordinary loss. These short-term borrowings were
repaid with proceeds from long-term financing provided by Sprint.
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 allocated from 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
- --------------------------------------------------------------------------------
Sprint Spectrum successfully completed its Year 2000 readiness work and passed
through the January 1, 2000 rollover event while encountering no customer-
affecting outages or business interruptions. Since the inception of Sprint
Spectrum's Year 2000 readiness program through December 31, 1999, Sprint
Spectrum incurred approximately $45 million of costs associated with its Year
2000 readiness program. Sprint Spectrum does not expect to incur any significant
additional expenditures related to the Year 2000 issue.
- --------------------------------------------------------------------------------
Recently Issued Accounting Pronouncement
- --------------------------------------------------------------------------------
See Note 7 of Notes to Consolidated Financial Statements for a discussion of a
recently issued accounting pronouncement.
F-3
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Partners of Sprint Spectrum L.P.
We have audited the accompanying consolidated balance sheet of Sprint Spectrum
L.P. and subsidiaries (Sprint Spectrum) as of December 31, 1999, and the related
consolidated statements of operations, cash flows and changes in partners'
capital for the year then ended. Our audit also included the financial statement
schedule listed in the Index to Financial Statements and Financial Statement
Schedule. These financial statements and schedule are the responsibility of
Sprint Spectrum's management. Our responsibility is to express an opinion on
these consolidated financial statements and the schedule based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Sprint
Spectrum L.P. and subsidiaries at December 31, 1999, and the results of their
operations and their cash flows for the year then ended, 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 consolidated financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
Ernst & Young LLP
Kansas City, Missouri
February 1, 2000
F-4
<PAGE>
REPORT OF INDEPENDENT AUDITORS
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 the related
consolidated statements of operations, changes in partners' capital and cash
flows for the two 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 the results of their operations and
their cash flows for the two 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
F-5
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS Sprint Spectrum L.P.
(millions)
- -------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Operating Revenues $ 2,138 $ 910 $ 235
- -------------------------------------------------------------------------------------------------------------------
Operating Expenses
Costs of services and products 1,451 925 541
Selling, general and administrative 1,382 1,012 689
Depreciation and amortization 747 592 304
- -------------------------------------------------------------------------------------------------------------------
Total operating expenses 3,580 2,529 1,534
- -------------------------------------------------------------------------------------------------------------------
Operating Loss (1,442) (1,619) (1,299)
Interest expense (536) (387) (118)
Other income, net 13 10 10
- -------------------------------------------------------------------------------------------------------------------
Loss before Extraordinary Items (1,965) (1,996) (1,407)
Extraordinary items (33) (43) -
- -------------------------------------------------------------------------------------------------------------------
Net Loss $ (1,998) $ (2,039) $ (1,407)
----------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS Sprint Spectrum L.P.
(millions)
- -------------------------------------------------------------------------------------------------------------------------
December 31, 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
Assets
Current assets
<S> <C> <C>
Cash and equivalents $ 16 $ 70
Accounts receivable, net of allowance for doubtful
accounts of $36 and $16 361 226
Affiliate receivable 142 248
Inventories 310 92
Prepaid expenses and other assets 54 26
- -------------------------------------------------------------------------------------------------------------------------
Total current assets 883 662
Property, plant and equipment
Network equipment 3,838 2,937
Construction work in progress 1,151 619
Buildings and leasehold improvements 873 758
Other 381 258
- -------------------------------------------------------------------------------------------------------------------------
Total property, plant and equipment 6,243 4,572
Accumulated depreciation (1,447) (772)
- -------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 4,796 3,800
Intangible assets
PCS licenses 2,137 2,130
Microwave relocation costs 314 299
- -------------------------------------------------------------------------------------------------------------------------
Total intangible assets 2,451 2,429
Accumulated amortization (171) (110)
- -------------------------------------------------------------------------------------------------------------------------
Net intangible assets 2,280 2,319
Other assets 71 45
- -------------------------------------------------------------------------------------------------------------------------
Total $ 8,030 $ 6,826
-----------------------------------
Liabilities and Partners' Capital
Current liabilities
Current maturities of long-term debt $ 5 $ 5
Accounts payable 418 320
Affiliated payables to Sprint 274 31
Construction obligations 664 593
Accrued advertising 97 84
Accrued expenses and other current liabilities 405 371
- -------------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,863 1,404
Long-term debt 7,960 5,649
Other noncurrent liabilities 89 81
Partners' capital and accumulated deficit:
Partners' capital 4,114 3,690
Accumulated deficit (5,996) (3,998)
- -------------------------------------------------------------------------------------------------------------------------
Total partners' capital and accumulated deficit (1,882) (308)
- -------------------------------------------------------------------------------------------------------------------------
Total $ 8,030 $ 6,826
-----------------------------------
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
F-7
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS Sprint Spectrum L.P.
(millions)
- ------------------------------------------------------------------ ----------------- ----------------- ----------------
Years Ended December 31, 1999 1998 1997
- ------------------------------------------------------------------ ----------------- ----------------- ----------------
Operating Activities
<S> <C> <C> <C>
Net loss $ (1,998) $ (2,039) $ (1,407)
Adjustments to reconcile net loss to net cash used by operating
activities:
Depreciation and amortization 747 592 304
Extraordinary loss 33 43 -
Amortization of debt discount and issuance costs 56 54 48
Changes in assets and liabilities:
Receivables (35) (272) (184)
Inventories and other current assets (232) 9 (35)
Accounts payable and accrued expenses 428 241 392
Other noncurrent assets and liabilities 34 25 38
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash used by operating activities (967) (1,347) (844)
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Investing Activities
Capital expenditures (1,712) (1,248) (2,096)
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash used by investing activities (1,712) (1,248) (2,096)
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Financing Activities
Proceeds from long-term debt 4,074 5,234 2,316
Payments on long-term debt (1,875) (2,889) (3)
Partner capital contributions 426 253 664
Other - - (20)
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash provided by financing activities 2,625 2,598 2,957
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Increase (Decrease) in Cash and Equivalents (54) 3 17
Cash and Equivalents at Beginning of Year 70 67 50
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Cash and Equivalents at End of Year $ 16 $ 70 $ 67
--- ------------- --- ------------- -- -------------
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
F-8
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL Sprint Spectrum L.P.
(millions)
- ---------------------------------------------------------------------------------------------------------------------
Partners' Accumulated
Capital Deficit Total
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning 1997 balance $ 2,767 $ (552) $ 2,215
Capital contributions 670 - 670
Net loss - (1,407) (1,407)
- ---------------------------------------------------------------------------------------------------------------------
Ending 1997 balance 3,437 (1,959) 1,478
Capital contributions 253 - 253
Net loss - (2,039) (2,039)
- ---------------------------------------------------------------------------------------------------------------------
Ending 1998 balance 3,690 (3,998) (308)
Capital contributions 426 - 426
Net loss - (1,998) (1,998)
Other, net (2) - (2)
- ---------------------------------------------------------------------------------------------------------------------
Ending 1999 balance $ 4,114 $ (5,996) $ (1,882)
----------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Sprint Spectrum L.P.
- --------------------------------------------------------------------------------
1. General
- --------------------------------------------------------------------------------
Sprint Spectrum L.P., with its wholly owned subsidiaries (Sprint Spectrum),
began commercial code division multiple access operations late in the 1996
fourth quarter. Sprint Spectrum is wholly owned by Sprint Corporation (Sprint).
In October 1999, Sprint announced a definitive merger agreement with MCI
WorldCom. The merger is subject to the approvals of Sprint and MCI WorldCom
shareholders as well as approvals from the Federal Communications Commission,
the Justice Department, various state government bodies and foreign antitrust
authorities. The companies anticipate the merger will close in the second half
of 2000.
In November 1998, Sprint 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. This
transaction is referred to as the PCS Restructuring. At that time, Sprint
created the Sprint PCS Group, which consists of Sprint's domestic wireless
personal communication services (PCS). The Sprint PCS Group includes Sprint
Spectrum, American PCS, L.P. (APC), PhillieCo, L.P. (PhillieCo), SprintCom, Inc.
(SprintCom) and Cox Communications PCS, L.P. (Cox PCS).
Sprint's PCS stock, a separate class of Sprint common stock, is intended to
reflect the performance of the PCS Group.
- --------------------------------------------------------------------------------
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 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 partners' capital as previously reported.
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 indirect methods,
including time studies, to estimate the assignment of costs to Sprint Spectrum.
Sprint believes that the costs allocated are comparable to the costs that would
be incurred if Sprint Spectrum would have been operating on a stand-alone basis.
The allocation of shared services may change at the discretion of Sprint.
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
allocated to and reflected in Sprint Spectrum's consolidated financial
statements. Interest expense is allocated to Sprint Spectrum 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.
Under Sprint's centralized cash management program, Sprint or Sprint Spectrum
may advance funds to each other. These advances are accounted for as short-term
borrowings between the companies and bear interest at a market rate that is
substantially equal to the rate that the companies would be able to obtain from
third parties on a short-term basis.
The allocation of financing may change at the discretion of 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.
Cash and Equivalents
Cash equivalents generally include highly liquid investments with original
maturities of three months
F-10
<PAGE>
or less. They are stated at cost, which approximates market value. Sprint
Spectrum uses controlled disbursement banking arrangements as part of its cash
management program. Outstanding checks in excess of cash balances were included
in accounts payable. These amounts totaled $22 million at year-end 1999 and $49
million at year-end 1998. 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 (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
Sprint Spectrum capitalizes interest costs related to network buildout and PCS
licenses. Interest capitalized totaled $71 million in 1999, $36 million in 1998
and $97 million in 1997.
Intangible Assets
Sprint Spectrum evaluates the recoverability of intangible assets when events or
circumstances indicate that such assets might be impaired. Sprint Spectrum
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.
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 $152 million at year-end 1999 and $98 million at year-end
1998.
Microwave Relocation Costs
Sprint Spectrum 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
$19 million at year-end 1999 and $12 million at year-end 1998.
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. Employee Benefit Plans
- --------------------------------------------------------------------------------
Defined Benefit Pension Plan
Effective January 1999, most Sprint Spectrum 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 Consolidated Balance Sheets for the plan were accrued
pension costs of approximately $5 million at year-end 1999.
Net pension costs are determined for Sprint Spectrum based on a direct
calculation of service costs. Sprint Spectrum recorded net pension costs of
approximately $5 million in 1999.
Defined Contribution Plan
Prior to January 1999, 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% of compensation
that the employee elected to contribute. Expense under the savings plan was $6
million in 1998 and $5 million in 1997. 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 rolled over to Sprint's
defined contribution plan in early 1999. Sprint Spectrum recorded approximately
$10 million of expense in 1999 for matching contributions to the Sprint defined
contribution plans.
F-11
<PAGE>
Postretirement Benefits
Effective January 1999, most Sprint Spectrum 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 Consolidated Balance Sheets at year-end were accrued net
postretirement benefits costs of $1 million in 1999.
Net postretirement benefits costs are determined for Sprint Spectrum based on a
direct calculation of service costs. Sprint Spectrum recorded net postretirement
benefits costs of $1 million in 1999.
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.
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.
In 1999, Sprint began issuing the shares and options have become exercisable,
based on the vesting requirements of the converted units.
- --------------------------------------------------------------------------------
4. Long term Debt
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Sprint Spectrum's long-term debt at year-end was as follows:
- ------------------------------------------------------------------------------------------------------------------
Maturing 1999 1998
- ------------------------------------------------------------------------------------------------------------------
(millions)
Senior notes
<S> <C> <C> <C> <C>
7.6% to 9.5% (1) 2004 to 2028 $ 5,331 $ 2,925
11.0% to 12.5% 2001 to 2006 661 614
Notes payable and commercial paper (1) - 1,124 235
Revolving credit facilities
Variable rates - - 1,695
Intercompany notes with Sprint
7.8% 2001 to 2006 844 180
Other
6.5% 2000 5 5
- ------------------------------------------------------------------------------------------------------------------
7,965 5,654
Less: current maturities 5 5
- ------------------------------------------------------------------------------------------------------------------
Long-term debt $ 7,960 $ 5,649
-----------------------------------
(1) These borrowings were incurred by Sprint and allocated to Sprint Spectrum.
See Note 2 for a more detailed description of how Sprint allocates financing
to Sprint Spectrum.
</TABLE>
F-12
<PAGE>
Scheduled principal payments, excluding reclassified short-term borrowings,
during each of the next five years are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------
(millions)
<S> <C>
2000 $ 5
2001 192
2002 -
2003 -
2004 1,406
- ------------------------------------------------------
</TABLE>
Short-term Borrowings
Sprint allocated a portion of its notes payable and commercial paper to Sprint
Spectrum. Though Sprint's borrowings are renewable at various dates throughout
the year, they were classified as long-term debt because of Sprint's intent and
ability, through unused credit facilities, to refinance these borrowings on a
long-term basis. The weighted average interest rate charged to Sprint Spectrum
was 7.8% at year-end 1999 and 6.9% at year-end 1998.
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. In the 1999 first quarter, Sprint Spectrum terminated its revolving
credit facilities and repaid, prior to scheduled maturities, the related
outstanding balance of $1.7 billion. These facilities had interest rates ranging
from 5.6% to 6.3%. These repayments resulted in a $33 million extraordinary
loss. These short-term borrowings were repaid with the long-term financing
provided by Sprint.
Long-term Debt
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 allocated from Sprint.
In 1999, Sprint Spectrum used the proceeds from debt allocated from Sprint and
other borrowings from Sprint to fund new capital investments and to fund
operating losses and working capital requirements. See Note 6 "Related Party
Transactions" for a discussion of notes payable to Sprint.
Sprint Spectrum's Senior Discount notes are recorded net of unamortized
discounts totaling $89 million at year-end 1999 and $136 million at year-end
1998.
Other
Sprint Spectrum had complied with all restrictive or financial covenants
relating to its debt arrangements at year-end 1999.
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 1999 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
1999 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 $7.8 billion at year-end 1999 and $5.9 billion at
year-end 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. A portion of
these losses totaling $65 million were allocated to Sprint Spectrum and are
being amortized to interest expense using the effective interest method over the
term of the debt. At year-end 1999, Sprint Spectrum's share of the remaining
unamortized deferred loss totaled $59 million.
- --------------------------------------------------------------------------------
5. 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
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.
F-13
<PAGE>
Operating Leases
Minimum rental commitments at year-end 1999 for all noncancelable operating
leases, consisting mainly of leases for cell and switch sites and office space,
are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------
(millions)
<S> <C>
2000 $ 145
2001 106
2002 63
2003 39
2004 17
Thereafter 39
- ------------------------------------------------------
</TABLE>
Gross rental expense totaled $172 million in 1999, $139 million in 1998 and $81
million in 1997. 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.
- --------------------------------------------------------------------------------
6. Additional Financial Information
- --------------------------------------------------------------------------------
Supplemental Cash Flows Information
Sprint Spectrum paid cash for interest, net of capitalized interest, totaling
$455 million in 1999, $189 million in 1998 and $33 million in 1997.
Noncash activities for Sprint Spectrum included the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------
(millions)
Accrued interest
converted to
<S> <C> <C> <C>
long-term debt $ - $ 154 $ 52
-----------------------------------
</TABLE>
Related Party Transactions
Sprint
Sprint Spectrum is using Sprint's long distance division as its interexchange
carrier and purchasing wholesale long distance for resale to its customers.
Additionally, Sprint provided Sprint Spectrum with telemarketing services and
various other goods and services. Charges to Sprint Spectrum for these items
totaled $164 million in 1999, $125 million in 1998 and $61 million in 1997.
Sprint provided management, printing, mailing and warehousing services to Sprint
Spectrum totaling $40 million in 1999, $25 million in 1998 and $11 million in
1997.
Sprint Spectrum had borrowings allocated from Sprint totaling $6.5 billion at
year-end 1999 and $3.2 billion at year-end 1998. The difference between Sprint's
actual interest costs and the interest costs charged to Sprint Spectrum on
allocated debt totaled $108 million in 1999 and $9 million in 1998. See Note 2
for a more detailed description of how Sprint allocates financing to Sprint
Spectrum.
Sprint had an investment in Sprint Spectrum's Senior Discount notes totaling
$150 million at year-end 1999 and $134 million at year-end 1998. The related
interest expense totaled $16 million in 1999, $15 million in 1998 and $14
million in 1997.
Sprint loaned Sprint Spectrum $844 million in 1999, $180 million in 1998 and
$300 million in 1997. Sprint Spectrum repaid $180 million in 1999 and $300
million in 1998. Interest expense related to these borrowings totaled $60
million in 1999, $26 million in 1998 and $6 million in 1997.
APC
APC reimburses Sprint Spectrum for certain allocated costs. APC provides PCS
services in the Washington, DC - Baltimore major trading area (MTA). In
addition, APC pays affiliation fees to Sprint Spectrum. Reimbursement costs
totaled $60 million in 1999, $15 million in 1998 and $14 million in 1997. Sprint
Spectrum earned $6 million in 1999 and $4 million in both 1998 and 1997 for
affiliation fees. Sprint Spectrum had a receivable from APC totaling $8 million
at year-end 1999 and $72 million at year-end 1998.
PhillieCo
Sprint Spectrum provides various services and charges affiliation fees to
PhillieCo, which provides PCS services in the Philadelphia MTA. These charges
totaled $47 million in 1999, $21 million in 1998 and $37 million in 1997. Sprint
Spectrum had a receivable from PhillieCo totaling $5 million at year-end 1999
and $6 million at year-end 1998.
SprintCom
In 1997, Sprint Spectrum began building the PCS network for SprintCom. These
services include engineering, management, purchasing, accounting and other
related services and totaled $395 million in 1999, $100 million in 1998 and $29
million in 1997. Sprint Spectrum had a receivable from SprintCom totaling $98
million at year-end 1999 and $137 million at year-end 1998.
Cox PCS
Cox PCS, which provides PCS services in the Los Angeles--San Diego--Las Vegas
MTAs, reimburses
F-14
<PAGE>
Sprint Spectrum for certain allocated costs and participates in certain handset
agreements. Allocated costs totaled $121 million in 1999, $34 million in 1998
and $20 million in 1997. Sprint Spectrum had a receivable from Cox PCS totaling
$30 million at year-end 1999 and $28 million at year-end 1998.
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 chain and the subsequent service revenues generated by sales to
its customers accounted for roughly one-fourth of net operating revenues in
1999, 1998 and 1997.
Concentrations of Credit Risk
Sprint Spectrum's accounts receivable are not subject to any concentration of
credit risk.
- --------------------------------------------------------------------------------
7. 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 2001,
this statement is not expected to have a material impact on Sprint Spectrum's
consolidated financial statements.
F-15
<PAGE>
<TABLE>
<CAPTION>
SPRINT SPECTRUM L.P.
SCHEDULE II -- CONSOLIDATED VALUATION AND QUALIFYING
ACCOUNTS Years Ended December 31, 1999, 1998 and 1997
Additions
---------------------------
Balance Charged to Balance
Beginning Charged to Other Other End of
of Year Income Accounts Deductions Year
- ----------------------------------------------------------------------------------------------------------------------
(millions)
1999
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts $ 16 $ 178 $ - $ (158)(1) $ 36
--------------------------------------------------------------------------
1998
Allowance for doubtful accounts $ 9 $ 61 $ - $ (54)(1) $ 16
--------------------------------------------------------------------------
1997
Allowance for doubtful accounts $ - $ 11 $ - $ (2)(1) $ 9
--------------------------------------------------------------------------
(1) Accounts written off, net of recoveries.
</TABLE>
All other schedules are omitted because they are not applicable or because the
required information is contained in the consolidated financial statements or
notes thereto included in this document.
F-16
<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.
F-17
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS (Unaudited) Sprint Spectrum Finance Corporation
- --------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating expenses $ - $ - $ 1,597
- --------------------------------------------------------------------------------------------------------------------
Net loss $ - $ - $ 1,597
-----------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
BALANCE SHEETS (Unaudited) Sprint Spectrum Finance Corporation
- --------------------------------------------------------------------------------------------------------------------
December 31, 1999 1998
- --------------------------------------------------------------------------------------------------------------------
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, 1999 1998 1997
- ------------------------------------------------------------------ ----------------- ----------------- --------------
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
Increase in payable to Sprint Spectrum - - 1,497
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -----------
Net cash used by operating activities - - -
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -----------
Change in Cash and Equivalents - - -
Cash and Equivalents at Beginning of Year - - -
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -----------
Cash and Equivalents at End of Year $ - $ - $ -
--- ------------- --- ------------- -- -----------
</TABLE>
See accompanying Note to Financial Statements.
F-18
<PAGE>
- --------------------------------------------------------------------------------
NOTE 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 1999, FinCo was a
co-obligor of $661 million of Sprint Spectrum's senior notes. See Note 4 of
Sprint Spectrum's Notes to Consolidated Financial Statements for more
information.
F-19
<PAGE>
Exhibit 3.3
First Amendment to
Agreement of Limited Partnership
This First Amendment (the "Amendment") to that certain Agreement of Limited
Partnership of Sprint Spectrum L.P. (formerly known as MajorCo Sub, L.P.), dated
as of March 28, 1995 (the "Agreement") between Sprint Spectrum Holding Company,
L.P. (formerly known as MajorCo, L.P.) and MinorCo, L.P. is effective as of
February 29, 2000. Capitalized terms used herein and not otherwise defined have
the meaning given them in the Agreement.
1. Modification to Section 1.3. Section 1.3 of the Partnership Agreement is
deleted in its entirety and replaced with the following language:
1.3 Purpose.
(a) Subject to, and upon the terms and conditions of this Agreement,
the purposes of the Partnership are to (i) engage in the Wireless Business,
either directly or through one or more Subsidiaries, and to perform
activities in furtherance of such Wireless Business as may be approved from
time to time by the General Partner; (ii) engage in any other business and
perform any other services as may be approved by the General Partner; and
(iii) engage in any other business and perform any other services as
contemplated or required by actions or business plans approved by the
General Partner.
(b) The Partnership shall have all powers now or hereafter conferred
by the laws of the State of Delaware on limited partnership formed under
the Act and, subject to the limitations of this Agreement, may do any and
all lawful acts or things that are necessary, appropriate, incidental or
convenient for the furtherance and accomplishment of the purposes of the
Partnership. Without limiting the generality of the foregoing, and subject
to the terms of this Agreement, the Partnership may enter into, deliver and
perform all contracts, agreements and other undertakings and engage in all
activities and transactions as may be necessary or appropriate to carry out
its purposes and conduct it business.
2. Modifications to Section 1.10. The definitions for "NonExclusive
Services" and "Wireless Exclusive Services" are deleted in their entirety, and
the following definition for "Wireless Business" is added:
"Wireless Business" means (i) the business of providing wireless
services including wireless personal communication services and (ii)
engaging in activities that support, facilitate or relate to the business
described in clause (i)."
3. Continuing Effect. Except as expressly modified by this Amendment,
the Agreement continues unchanged and in full force and effect.
-1-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the day and year first above written.
SPRINT SPECTRUM
HOLDING COMPANY, L.P.
By: /s/ Don A. Jensen
Name: Don A. Jensen
Title: Vice President and Secretary
MINORCO, L.P.
By: SPRINT ENTERPRISES, L.P.,
Its General Partner
By: US TELECOM, INC.,
Its General Partner
By: /s/ Don A. Jensen
Name: Don A. Jensen
Title: Vice President and Secretary
-2-
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001015551
<NAME> Sprint Spectrum L.P.
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-END> Dec-31-1999
<CASH> 16
<SECURITIES> 0
<RECEIVABLES> 397
<ALLOWANCES> 36
<INVENTORY> 310
<CURRENT-ASSETS> 883
<PP&E> 6,243
<DEPRECIATION> 1,447
<TOTAL-ASSETS> 8,030
<CURRENT-LIABILITIES> 1,863
<BONDS> 7,960
0
0
<COMMON> 0
<OTHER-SE> (1,882)
<TOTAL-LIABILITY-AND-EQUITY> 8,030
<SALES> 0
<TOTAL-REVENUES> 2,138
<CGS> 0
<TOTAL-COSTS> 2,198
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 536
<INCOME-PRETAX> (1,965)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,965)
<DISCONTINUED> 0
<EXTRAORDINARY> (33)
<CHANGES> 0
<NET-INCOME> (1,998)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001017358
<NAME> Sprint Spectrum Finance Corporation
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-END> Dec-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
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<CURRENT-LIABILITIES> 1,497
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (1,497)
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<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
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<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
