UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 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
Commission file number 1-4721
SPRINT CORPORATION
(Exact name of registrant as specified in its charter)
KANSAS 48-0457967
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
P.O. Box 11315, Kansas City, Missouri 64112
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (913) 624-3000
----------------------------
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for these shorter period that the registrant was
required to file these reports), and (2) has been subject to these filing
requirements for the past 90 days.
Yes X No
COMMON SHARES OUTSTANDING AT MARCH 31, 1999:
FON COMMON STOCK 346,309,543
PCS COMMON STOCK 404,363,327
CLASS A COMMON STOCK 86,236,036
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TABLE OF CONTENTS
Page
Reference
Part I - Financial Information
<S> <C>
Item 1. Financial Statements 1
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 1
Item 3. Quantitative and Qualitative Disclosures About Market Risk 1
Part II - Other Information
Item 1. Legal Proceedings 2
Item 2. Changes in Securities 2
Item 3. Defaults Upon Senior Securities 2
Item 4. Submission of Matters to a Vote of Security Holders 2
Item 5. Other Information 3
Item 6. Exhibits and Reports on Form 8-K 4
Signature 5
Exhibits
ANNEX I
SPRINT CORPORATION
Consolidated Financial Information
Consolidated Statements of Operations for the quarters ended March 31, 1999 and 1998 I-1
Consolidated Statements of Comprehensive Income (Loss) for the quarters ended March 31, 1999 and 1998 I-3
Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998 I-4
Consolidated Statements of Cash Flows for the quarters ended March 31, 1999 and 1998 I-6
Consolidated Statement of Shareholders' Equity for the quarter ended March 31, 1999 I-7
Condensed Notes to Consolidated Financial Statements I-8
Management's Discussion and Analysis of Financial Condition and Results of Operations I-12
ANNEX II
SPRINT FON GROUP
Combined Financial Information
Combined Statements of Operations for the quarters ended March 31, 1999 and 1998 II-1
Combined Statements of Comprehensive Income for the quarters ended March 31, 1999 and 1998 II-2
Combined Balance Sheets as of March 31, 1999 and December 31, 1998 II-3
Combined Statements of Cash Flows for the quarters ended March 31, 1999 and 1998 II-4
Condensed Notes to Combined Financial Statements II-5
Management's Discussion and Analysis of Financial Condition and Results of Operations II-9
ANNEX III
SPRINT PCS GROUP
Combined Financial Information
Combined Statements of Operations for the quarters ended March 31, 1999 and 1998 III-1
Combined Balance Sheets as of March 31, 1999 and December 31, 1998 III-2
Combined Statements of Cash Flows for the quarters ended March 31, 1999 and 1998 III-3
Condensed Notes to Combined Financial Statements III-4
Management's Discussion and Analysis of Financial Condition and Results of Operations III-7
</TABLE>
1
<PAGE>
Part I - Financial Information
Item 1. Financial Statements
For information required by Item 1, refer to the Sprint Corporation
consolidated financial statements filed as part of this document in
Annex I, the Sprint FON Group combined financial statements filed as
part of this document in Annex II and the Sprint PCS Group combined
financial statements filed as part of this document in Annex III.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
For information required by Item 2, refer to the "Sprint Corporation
Management's Discussion and Analysis of Financial Condition and Results
of Operations" filed as part of this document in Annex I, the "Sprint
FON Group Management's Discussion and Analysis of Financial Condition
and Results of Operations" filed as part of this document in Annex II
and the "Sprint PCS Group Management's Discussion and Analysis of
Financial Condition and Results of Operations" filed as part of this
document in Annex III.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Sprint's exposure to market risk through derivative financial
instruments and other financial instruments, such as investments in
marketable securities and long-term debt, is not material. There have
been no material changes in market risk since year-end 1998.
<PAGE>
PART II. - Other Information
Item 1. Legal Proceedings
There were no reportable events during the quarter ended March 31,
1999.
Item 2. Changes in Securities
On April 20, 1999, the Sprint Board declared a 2-for-1 stock split of
its FON Common Stock in the form of a dividend payable in shares of FON
Common Stock. As required by Sprint's Articles of Incorporation, the
Board adjusted the Liquidation Units attributed to each share of FON
Common Stock. Following distribution of the stock dividend, one-half of
a Liquidation Unit will be attributed to each share of FON Common
Stock.
A dividend payable in shares of FON Common Stock was also declared on
the Class A Common Stock. Consequently, the Board made a similar
adjustment to the number of Liquidation Units attributed to the Class A
Common Stock. Following distribution of the stock dividend, one-half of
a Liquidation Unit will be attributed to each share of FON Common Stock
underlying the Class A Common Stock.
The Board also adjusted the number of FON Group Rights associated with
each share of FON Common Stock under Sprint's Shareholder Rights Plan.
Following distribution of the stock dividend, one-half of a FON Group
Right will be associated with each share of FON Common Stock. A
comparable adjustment was made to the Rights associated with the Class
A Common Stock.
The number of shares of FON Common Stock into which Sprint's First and
Second Series Convertible Preferred Stock can be converted will also
adjust following the record date for the stock dividend. The First
Series Convertible Preferred Stock will convert into 6 shares of FON
Common Stock and 1.5 shares of PCS Common Stock. The Second Series
Convertible Preferred Stock will convert into 6.18 shares of FON Common
Stock and 1.54 shares of PCS Common Stock.
In February 1999, Sprint issued an aggregate of 6,100,750 shares of
Series 3 PCS stock that were not registered under the Securities Act of
1933, as amended, to FT and DT for an aggregate of $169 million. These
shares were purchased by FT and DT in conjunction with the registered
public offering of 24,403,000 shares of Series 1 PCS stock in order to
maintain their aggregate voting power at 20% of Sprint's outstanding
voting power.
The sale of shares to FT and DT was exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) of the
Securities Act. No solicitation was made to sell such shares to the
public and FT and DT were each provided with all material information
that was available regarding Sprint. FT and DT are accredited investors
having sufficient knowledge and experience in financial and business
matters necessary to evaluate the merits and risks of their investment.
FT and DT were informed that the transactions were being effected
without registration under the Securities Act and that the shares
acquired could not be resold without registration under the Securities
Act unless the sale is effected pursuant to an exemption from the
registration requirements of the Securities Act.
Item 3. Defaults Upon Senior Securities
There were no reportable events during the quarter ended March 31,
1999.
Item 4. Submission of Matters to a Vote of Security Holders
Annual Meeting
On April 20, 1999, Sprint held its Annual Meeting of Shareholders. In
addition to the election of three Class I Directors to serve for a term
of three years, the shareholders approved the appointment of Ernst &
Young LLP as independent auditors for Sprint. The shareholders did not
approve three shareholder proposals.
<PAGE>
The following votes were cast for each of the following nominees for
Director or were withheld with respect to such nominees:
For Withheld
------------------------- --------------------- ---------------------
Warren L. Batts 320,962,700 2,220,545
Irvine O. Hockaday, Jr. 321,084,553 2,098,692
Ronald T. LeMay 320,979,855 2,203,390
The following votes were cast with respect to the proposal to approve
the appointment of Ernst & Young LLP as independent auditors of Sprint
for 1999:
For 426,388,442
Against 1,608,423
Abstain 686,188
The following votes were cast with respect to a shareholder proposal
urging the Board of Directors of Sprint to adopt a policy eliminating
fees paid to Directors for attending board and committee meetings:
For 17,725,430
Against 365,291,693
Abstain 6,130,652
Broker non-votes 39,535,278
The following votes were cast with respect to a shareholder proposal
urging the Board of Directors of Sprint to establish a political "Soft
Dollar" or "Soft Money" contributions program that includes features
for shareholders to be provided contribution guidelines and
comprehensive political contribution reporting upon request:
For 32,085,747
Against 341,787,581
Abstain 15,274,447
Broker non-votes 39,535,278
The following votes were cast with respect to a shareholder proposal
urging the Board of Directors of Sprint to adopt a policy against
making compensation awards to officers and Directors which are
contingent on a change of control of Sprint unless such awards are
submitted to a vote of shareholders and approved by a majority of the
votes cast:
For 113,734,488
Against 268,082,998
Abstain 7,330,288
Broker non-votes 39,535,279
Item 5. Other Information
Ratio of Earnings to Fixed Charges
For the 1999 first quarter, Sprint's earnings, as adjusted, were
inadequate to cover fixed charges by $276 million. For the 1998 first
quarter, Sprint's ratio of earnings to fixed charges was 2.33. The
ratio was computed by dividing fixed charges into the sum of earnings
(after certain adjustments) and fixed charges. Earnings include income
from continuing operations before taxes, plus equity in the net losses
of less-than-50%-owned entities, less capitalized interest. Fixed
charges include (a) interest on all debt of continuing operations
(including amortization of debt issuance costs), (b) the interest
component of operating rents, and (c) the pre-tax cost of subsidiary
preferred stock dividends.
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Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report:
(3) Articles of Incorporation and Bylaws:
(a) Articles of Incorporation, as amended (filed as Exhibit
4A to Post-Effective Amendment No. 2 to Sprint
Corporation's Registration Statement on Form S-3 (No.
33-58488) and incorporated herein by reference).
(b) Bylaws, as amended (filed as Exhibit 4C to
Post-Effective Amendment No. 2 to Sprint Corporation's
registration Statement on Form S-3 (No. 33-58488) and
incorporated herein by reference).
(4) Instruments defining the Rights of Sprint's Equity Security
Holders:
(a) The rights of Sprint's equity security holders are
defined in the Fifth, Sixth, Seventh and Eighth
Articles of Sprint's Articles of Incorporation. See
Exhibit 3(a).
(b) Rights Agreement dated as of November 23, 1998, between
Sprint Corporation and UMB Bank, n.a. (filed as Exhibit
4.1 to Amendment No. 1 to Sprint Corporation's
Registration Statement on Form 8-A relating to Sprint's
PCS Group Rights, filed November 25, 1998, and
incorporated herein by reference).
(c) Amended and Restated Standstill Agreement dated
November 23, 1998, by and among Sprint Corporation,
France Telecom S.A. and Deutsche Telekom AG (filed as
Exhibit 4E to Post-Effective Amendment No. 2 to Sprint
Corporation's Registration Statement on Form S-3 (No.
33-58488) and incorporated herein by reference).
(10) Executive Compensation Plans and Arrangements
(a) Form of Contingency Employment Agreements between
Sprint Corporation and certain of its executive
officers.
(12) Computation of Ratio of Earnings to Fixed Charges
(27) Financial Data Schedule
(a) March 31, 1999
(b) Reports on Form 8-K
Sprint filed a Current Report on Form 8-K dated February 2, 1999, in
which it reported that it had announced fourth quarter 1998 and
calendar year 1998 results in both its FON Group and its PCS Group. It
also reported that the Clinton administration's annual budget proposal
contained a recommendation to change the tax treatment of tracking
stocks.
The news release regarding fourth quarter 1998 and calendar year 1998
results, which was included as an Exhibit to the Current Report,
included the following financial information:
FON Group Combined Statements of Income
FON Group Selected Operating Results
FON Group Condensed Combined Balance Sheets
FON Group Condensed Cash Flow Information
PCS Group Combined Statements of Operations
PCS Group Condensed Combined Balance Sheets
PCS Group Combined Cash Flow Information
Sprint Corporation Condensed Consolidated Balance Sheets
Sprint Corporation Condensed Consolidated Cash Flow Information
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPRINT CORPORATION
(Registrant)
By /s/ John P. Meyer
John P. Meyer
Senior Vice President -- Controller
Principal Accounting Officer
Dated: May 13, 1999
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER
(3) Articles of Incorporation and Bylaws:
(a) Articles of Incorporation, as amended (filed as Exhibit
4A to Post-Effective Amendment No. 2 to Sprint
Corporation's Registration Statement on Form S-3 (No.
33-58488) and incorporated herein by reference).
(b) Bylaws, as amended (filed as Exhibit 4C to
Post-Effective Amendment No. 2 to Sprint Corporation's
registration Statement on Form S-3 (No. 33-58488) and
incorporated herein by reference).
(4) Instruments defining the Rights of Sprint's Equity Security
Holders:
(a) The rights of Sprint's equity security holders are
defined in the Fifth, Sixth, Seventh and Eighth
Articles of Sprint's Articles of Incorporation. See
Exhibit 3(a).
(b) Rights Agreement dated as of November 23, 1998, between
Sprint Corporation and UMB Bank, n.a. (filed as Exhibit
4.1 to Amendment No. 1 to Sprint Corporation's
Registration Statement on Form 8-A relating to Sprint's
PCS Group Rights, filed November 25, 1998, and
incorporated herein by reference).
(c) Amended and Restated Standstill Agreement dated
November 23, 1998, by and among Sprint Corporation,
France Telecom S.A. and Deutsche Telekom AG (filed as
Exhibit 4E to Post-Effective Amendment No. 2 to Sprint
Corporation's Registration Statement on Form S-3 (No.
33-58488) and incorporated herein by reference).
(10) Executive Compensation Plans and Arrangements
(a) Form of Contingency Employment Agreements between
Sprint Corporation and certain of its executive
officers.
(12) Computation of Ratio of Earnings to Fixed Charges
(27) Financial Data Schedule
(a) March 31, 1999
Exhibit (10)(a)
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Contingency Employment Agreement
by and between
Sprint Corporation
(the "Company")
and
...................
("you")
Dated as of ..............
(the "Effective Date")
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<PAGE>
1. Term of Agreement.
This Agreement shall commence on the date hereof and shall continue in effect
through the end of the day immediately preceding the third anniversary of the
Effective Date; provided, however, that commencing on the third anniversary of
the Effective Date, and each successive third anniversary thereafter, the term
of this Agreement shall automatically be extended for three additional years
unless, not later than the date of such anniversary, the Company shall have
given notice that it does not wish to extend this Agreement; provided, further,
if "a change in control of the Company" (as defined in Section 13.01) shall have
occurred during the original or extended term of this Agreement, this Agreement
shall continue in effect for a period of thirty-six (36) months beyond the month
in which such change in control occurred; provided, further, this Agreement
shall terminate on the earliest of the date you reach age 65, the date you
actually retire, or the Agreement otherwise lapses as set forth in this
paragraph. The obligations of the Company to make payments hereunder shall
survive the expiration of the term of this Agreement.
2. Duties During Employment.
You agree that while you are employed by Sprint Corporation (the "Company"), you
shall devote your full time and best efforts exclusively to the business and
affairs of the Company and do your utmost to promote its interests. All
references in this Agreement to employment with the Company shall be deemed to
include employment with Sprint/United Management Company (the "Management
Company") or any other affiliate of the Company (the "Employer Company").
Related references to the Company or Employer Company shall be deemed to include
the Management Company or other employer affiliate of the Company as the context
requires, and such interpretation shall not be construed to limit the
obligations of the Company under this Agreement. It is understood that you will
receive no benefits under this Agreement unless and until there is a change in
control of the Company and your employment is terminated thereafter (other than
by reason of your death or retirement at age 65) by you for Good Reason (as
defined in Section 13.04) or by the Company without Cause (as defined in Section
13.03).
3. Rights Accrued Through Date of Termination.
This agreement shall not reduce, impede or hinder any rights which you accrue as
a result of your performance of services as an employee of the Employer Company.
If your employment is terminated following a change in control of the Company,
the Company shall pay you your salary through the Date of Termination at the
rate in effect at the time Notice of Termination is given, plus all other
amounts and benefits to which you are entitled under the Company's disability,
retirement, insurance and all other benefit and compensation programs then in
effect in accordance with the terms of such programs. "Date of Termination"
shall mean the 30th day after Notice of Termination (as defined in Section 10)
is given.
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<PAGE>
4. Benefit Package.
Within three years following a change in control of the Company if your
employment by the Employer Company shall be terminated (in circumstances other
than normal retirement or death) (a) by the Company other than for Cause, or (b)
by you for Good Reason, then you shall be entitled to the following payments and
benefits (all as provided in Section 13.05):
(a) 35 months' salary payments at highest monthly base salary;
(b) 3 payments based on annual short-term and long-term incentive payments;
(c) The following additional benefits:
(1) Deferred Compensation: interest rate of 3% plus Moody's Index rate
(2) Benefits under Key Management Benefit Plan
(3) Savings Plan, Nonvested Company Contribution
(d) Retirement Benefits:
(1) 3 years' service credit based on the Company Pension Plan
(2) Post-retirement benefits if you are age 55 or have 10 years' service
(3) Maximum benefits under any individual Pension Supplemental Agree-
ments
(4) No Early Retirement Reduction based on the Company Pension Plan
(e) Continuation of medical, dental, life insurance and disability coverages
for 35 months, or until you are re-employed
(f) Payment of attorney fees and expenses connected with enforcing this Agree-
ment
(g) Payment of Outplacement fees
5. Time of Payments.
5.01. Timing.
The payments provided for in Sections 13.05(a) and 13.05(b) shall be made
commencing not later than the fifth day following the Date of Termination,
provided, however, that if the amount of payments to be made on the first
payment date cannot be calculated on or before such day, the Company shall pay
to you on such day an estimate, as calculated in good faith by the Company, of
the minimum amount of such payments and shall pay the remainder of such payments
due on such date (together with interest at the rate provided in Section
280G(d)(4) of the Code) as soon as the amount thereof can be calculated but in
no event later than the sixtieth day after the Date of Termination.
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5.02. Excess Payments Constitute Loan.
In the event that any estimated payment is determined to be in excess of the
amount due, such excess shall constitute a loan by the Company to you, payable
on the 90th day after demand by the Company (together with interest at the rate
provided in Section 280G(d)(4) of the Code).
6. Lump Sum Election.
You shall have the right to elect to have all or a portion of the payments to be
made pursuant to Sections 13.05(a) and 13.05(b) paid in a lump sum. If you make
this election, the amount paid to you shall equal the present value of the
payments or portion thereof, as calculated by the Company's independent auditors
using the discount rate specified in Section 280G(d)(4) of the Code.
7. No Mitigation or Offsets.
You shall not be required to mitigate the amount of any payment by seeking other
employment or otherwise, nor shall the amount of any payment or benefit provided
for be reduced by any compensation earned by you as the result of employment by
another employer, by retirement benefits, by offset against any amount claimed
to be owed by you to the Company, or otherwise, except as specifically provided
in this Agreement.
8. Successor Assumption of Agreement.
The Company will require any successor (whether direct or indirect, by purchase,
merger, consolidation or otherwise) to all or substantially all of the business
and/or assets of the Company to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no such succession had taken place. Failure of the
Company to obtain such assumption and agreement as of the effectiveness of any
such succession shall be a breach of this Agreement and shall entitle you to
compensation from the Company in the same amount and on the same terms hereunder
as if you had terminated your employment for Good Reason following a change in
control of the Company, provided you give Notice of Termination within 90 days
after the effective date of such succession. As used in this Agreement,
"Company" shall mean the Company as hereinbefore defined and any successor to
its business and/or assets as aforesaid which assumes and agrees to perform this
Agreement by operation of law, or otherwise.
9. Benefits to Personal Representatives.
This Agreement shall inure to the benefit of and be enforceable by your personal
or legal representatives, executors, administrators, successors, heirs,
distribu- tees, devisees and legatees. All benefits hereunder shall be subject
to your beneficiary designations in effect under the appropriate benefit plan
with reference to which you have elected to receive benefits; such designations
are incorporated by reference as if fully set forth in this Agreement. If you
should die, all amounts payable to you hereunder shall be paid in accordance
with the terms
4
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of this Agreement to your devisee, legatee or other designee or, if
there is no such designee, to your estate.
10. Notice.
Any purported termination of this Agreement or of your employment by the
Employer Company or by you shall be communicated by written Notice of
Termination to the other party hereto. "Notice of Termination" shall mean a
notice which shall indicate the specific termination provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination under the provision so indicated.
Notices and all other communications provided for in the Agreement shall be in
writing and shall be deemed to have been duly given when delivered or mailed by
United States registered mail, return receipt requested, postage prepaid,
addressed to the respective addresses set forth on the first page of this
Agreement, provided that all notice to the Company shall be directed to the
Secretary of the Company, or to such other address as either party may have
furnished to the other in writing in accordance herewith, except that notice of
change of address shall be effective only upon receipt.
11. Resolution of Controversies.
You shall be entitled to seek specific performance of your right to be paid to
the Date of Termination during the pendency of any dispute or controversy
arising under or in connection with this Agreement. All other disputes, claims
or controversies arising under or in connection with this Agreement shall be
settled exclusively by binding arbitration in the greater Kansas City area in
accordance with the rules of the American Arbitration Association then in
effect; provided, however, that three arbitrators shall be appointed, one by the
Company, one by you and the third of whom shall be appointed by the first two
arbitrators.
12. Miscellaneous.
12.01. Written Modification.
No provisions of this Agreement may be modified, waived or discharged unless
such waiver, modification or discharge is agreed to in writing.
12.02. Waivers.
No waiver by either party hereto at any time of any breach by the other party
hereto of, or in compliance with, any condition or provision of this Agreement
to be performed by such other party shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or subsequent
time.
12.03. No Prior Representations.
No agreements or representations, oral or otherwise, express or implied, with
respect to the subject matter hereof have been made by either party which are
not expressly set forth in this Agreement.
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<PAGE>
12.04. Governing Law.
The validity, interpretation, construction and performance of this Agreement
shall be governed by the laws of the State of Kansas.
12.05. Successor Laws and Plans.
All references to sections of the Securities Exchange Act of 1934 ("Exchange
Act") or the Internal Revenue Code ("Code") shall be deemed also to refer to any
successor provisions to such sections. All references to provisions of the
Company's Pension Plan and all other Company benefit plans shall be deemed also
to refer to amended provisions of such plans and to provisions of successor or
substitute plans.
12.06. Payments Net of Withholding.
Any payments provided for hereunder shall be paid net of any applicable
withholding required under federal, state or local law.
12.07. Captions.
Captions are intended for reference only and shall not constitute a part of this
Agreement.
12.08. Partial Invalidity.
The invalidity or unenforceability of any provision of this Agreement shall not
affect the validity or enforceability of any other provision of this Agreement,
which shall remain in full force and effect.
12.09. Counterparts.
This Agreement may be executed in several counterparts, each of which shall be
deemed to be an original but all of which together will constitute one and the
same instrument.
12.10. Further Undertaking.
The Company shall take every reasonable step necessary to maximize the payments
and benefits received or to be received by you in connection with a change in
control of the Company (whether pursuant to the terms of this Agreement or any
other plan, arrangement or agreement with the Company, with any person whose
actions result in a change in control or with any person affiliated with the
Company or such person) (collectively "Total Payments").
13. Definitions and Detailed Provisions.
13.01. Change in Control of the Company.
For purposes of this Agreement, a "change in control of the Company" means a
"Change in Control" as defined at the time of any such event by the Company's
1990 Stock Option Plans or any successor plan thereto. If no such plan is at
anytime in effect, the definition as set forth in the last such plan to be in
effect shall control this Agreement.
6
<PAGE>
13.02. Retirement.
Termination of your employment based on "Retirement" shall mean termination in
accordance with the Company's Pension Plan or in accordance with any retirement
arrangement established with your written consent with respect to you.
13.03. Cause.
Termination by the Employer Company of your employment for "Cause"
shall
mean termination upon
(i) the willful and continued failure by you to substantially
perform your duties with the Employer Company (other than any such
failure resulting from your incapacity due to physical or mental illness
or any such actual or anticipated failure after the issuance of a Notice
of Termination by you for Good Reason) after a written demand for
substantial performance is delivered to you, which demand specifically
identifies the manner in which the Board believes that you have not
substantially performed your duties, or
(ii) the willful engaging by you in conduct which is demonstrably and mate-
rially injurious to the Company, monetarily or otherwise.
For purposes of this Subsection, no act, or failure to act, on your part shall
be deemed "willful" unless done, or omitted to be done, by you not in good faith
and without reasonable belief that your action or omission was in the best
interest of the Company. Notwithstanding the foregoing, you shall not be deemed
to have been terminated for Cause unless and until there shall have been
delivered to you a copy of a resolution duly adopted by the affirmative vote of
not less than three-fourths of the entire membership of the Board at a meeting
of the Board called and held for such purpose (after reasonable notice to you
and an opportunity for you, together with your counsel, to be heard before the
Board), finding that in the good faith opinion of the Board you were guilty of
conduct set forth above in the first sentence of this subsection and specifying
the particulars thereof in detail. Delivery of such Resolution shall constitute
Notice of Termination for cause by the Company.
13.04. Good Reason.
You shall be entitled to terminate your employment for Good Reason, except that
you shall not be entitled to give Notice of Termination during any period in
which you are unable to substantially perform your duties with the Employer
Company due to physical or mental illness. Your continued employment shall not
constitute consent to, or a waiver of rights with respect to, any circumstance
constituting Good Reason hereunder. For purposes of this Agreement, "Good
Reason" shall mean, without your express written consent, the occurrence of any
of the following circumstances unless such circumstances are fully corrected
prior to the Date of Termination specified in the Notice of Termination given in
respect thereof:
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<PAGE>
(i) the assignment to you of any duties inconsistent with your
status as an officer of the Company or a substantial adverse
alteration in the nature or status of your responsibilities
from those in effect immediately prior to the change in control
of the Company or any downgrading of your position from that in
effect immediately prior to the change in control of the Company;
(ii) a reduction by the Company in your annual base salary as in effect on
the date hereof or as the same may be increased from time to time except
for across-the-board salary reductions similarly affecting all officers
of the Company and all officers of any business entity or
entities in control of the Company;
(iii) the failure by the Company or Employer Company, without your consent,
to pay to you any portion of your current compensation within
seven (7) days of the date such compensation is due except
pursuant to an across-the-board compensation deferral similarly
affecting all officers of the Company and all officers of any
business entity or entities in control of the Company;
(iv) the relocation of the Company's principal executive offices to a
location outside the metropolitan area in which such offices are
located immediately prior to the change in control of the Company; or
(v) the Company's requiring you to be based anywhere other than the Com-
pany's principal executive offices except for required travel on the
Company's business to an extent substantially consistent with
your present business travel obligations; or
(vi) the Company's requiring you to travel to an extent substantially
inconsistent with your present business travel obligations;
(vii) a substantial adverse alteration in the physical conditions under or in
which you are expected to perform your duties other than an
alteration similarly affecting all officers of the Company and all
officers of any person in control of the Company;
(viii) the failure by the Company to continue in effect any compensation plan
in which you participate immediately prior to the change in
control of the Company which is material to your total compensation,
including but not limited to the Company's Short-term and Long-term
Incentive Plans or any substitute plans adopted prior to the change in
control, unless an equitable arrangement (embodied in an ongoing
substitute or alternative plan) has been made with respect to
such plan, or the failure by the Company to continue your
participation therein (or in such substitute or alternative plan) on a
basis not materially less favorable, both in terms of the amount of
benefits provided and the level of your participation relative to other
participants, as existed at the time of the change in control;
(ix) the failure by the Company to continue to provide you with benefits sub-
stantially similar to those enjoyed by you under any of the
Company's
8
<PAGE>
plans, including but not limited to the Company's Pension Plan,
Stock Option Plan, Savings Plan, Supplemental Employee Retirement
Agreement, Key Management Benefit Plan, Executive Deferred Compensation
Plan, life insurance, medical, health and accident, or disability
plans in which you were participating at the time of the change in
control of the Company; the taking of any action by the Company which
would directly or indirectly materially reduce any of such benefits or
deprive you of any material fringe benefit enjoyed by you at the time of
the change in control of the Company; or the failure by the Company to
provide you with the number of paid vacation days to which you are
entitled on the basis of years of service with the Company in accordance
with the Company's normal vacation policy in effect at the time
of the change in control of the Company; unless an equitable
arrangement (embodied in an ongoing substitute or alternative
plan) has been made with respect to such benefits;
(x) the failure of the Company to obtain a satisfactory agreement from any
successor to assume and agree to perform this Agreement, as contemplated
in Section 8 hereof; or
(xi) any attempted termination of your employment which is not effected pur-
suant to a Notice of Termination satisfying the requirements of Sections
10 and 13.03 above; for purposes of this Agreement, no such attempted
termination shall be effective.
13.05. Benefit Package.
(a) Payments in Lieu of Salary.
In lieu of any further salary payments to you for periods subsequent to
the Date of Termination, the Company shall pay to you monthly (for a
period of 35 months or until the month in which you reach 65
years of age, whichever first occurs) a monthly payment equal to your
highest monthly base salary (including any deferred amounts) paid during
the 36-month period prior to the Date of Termination.
(b) Payments in Lieu of Incentive Compensation.
In lieu of any payments under, and notwithstanding any provisions of the
long-term and short-term incentive plans, the Company shall pay
to you in three equal installments on the first day of
the 13th, 25th and 35th months following the Date of Termination an
amount equal to the sum of (i) the highest short-term incentive payment
and (ii) the highest long-term incentive payment received by you during
the 36-month period prior to the Date of Termination under the long-term
and short-term incentive plans.
(c) Savings, Deferred Compensation and Other Plans.
(1) Deferred Compensation Interest Rate For purposes of the Executive.
Deferred Compensation Plan, notwithstanding any provision to
the contrary in such plan, the rate at which interest will be
credited to your
9
<PAGE>
Deferred Compensation Account AA (as defined in such plan) will be
equal to the Moody's Index plus 3% (as defined in such plan) or the
maximum interest rate allowed under such Plan if and as amended.
(2) Key Management Benefit Plan Benefits.
For purposes of the Key Management Benefit Plan, even if you are
not 60 years of age on the Date of Termination, you shall
be deemed to have remained a Key Executive (as defined in such
plan) until age 60.
(3) Savings Plan, Nonvested Company Contribution.
Notwithstanding anything in the Company Savings Plan, you shall be
entitled to receive the nonvested portion of your Company Contribu-
tion Account as of the Date of Termination.
(d) Retirement Benefits.
In addition to the retirement benefits to which you are entitled under
the Company's Pension Plan or any successor plans thereto:
(i) you will be credited with three years of additional service
at your highest annual compensation rate during the term of
this Agreement for purposes of determining the amount of your
pension;
(ii) if you are at least 55 years of age or have 10 years of credited
pension service at the Date of Termination, you will, at
the time of your retirement, receive the life and medical post-
retirement benefits that would be due to a retiree under the
Company's Pension Plan;
(iii) for purposes of any Supplemental Employee Retirement Agreement,
if applicable, you shall be credited as of the Date of Termination
with the maximum number of years of service at your highest annual
compensation rate during the term of this Agreement potentially
available to you under such agreement; and
(iv) if you take early retirement, the Company shall supplement your
pension so that you are, notwithstanding the Company's
Pension Plan early retirement provisions, not subject to any
early retirement pension reduction.
(e) Medical, Dental, Insurance, Disability Insurance.
For a thirty-five (35) month period after Termination, the Company shall
arrange to provide you with or reimburse you for life,
disability, medical and dental insurance coverages substantially similar
and at the same cost to you as those which active employees at the same
grade level receive during such period, provided, however, such
coverages shall cease immediately if you obtain subsequent employment.
(f) Attorney Fees and Expenses.
The Company also shall pay to you all reasonable legal fees and expenses
incurred by you in seeking to obtain or enforce any right or benefit
provided by this Agreement. Such payments shall be made
within five (5) days
10
<PAGE>
after your request for payment accompanied with such evidence of fees and
expenses incurred as the Company reasonably may require.
(g) Outplacement Fees.
The Company shall also pay to you all fees and expenses incurred by you
for the services of a recognized outplacement firm of your selection.
Such payments shall be made within five (5) days after
your request for payment accompanied with such evidence of fees and
expenses incurred as the Company reasonably may require.
(h) Tax Reimbursement.
If the benefits provided under this Agreement, either alone or together
with other benefits you receive from the Company, would constitute an
"excess parachute payment," as defined in Section 280G of the Code,
the Company shall pay you an additional amount such that the net amount
retained by you after payment of any excise tax that would be imposed
by Section 4999 of the Code (Excise Tax) and any federal, state and local
income tax, FICA tax and Excise Tax payable with respect to the
payment provided for in this subsection 13.05(h), shall be equal to
the benefits provided for under this Agreement. For the purpose of
determining the amount of the payment provided for in this subsection,
you shall be deemed to pay federal, state and local income taxes
at the highest marginal rates in effect as of the Date of
Termination and the calculation of federal income tax shall take
into account the deduction of any state and local income taxes.
In Witness Whereof, you and the Company have executed this Agreement as
of April 20, 1999.
Sprint Corporation
by: . . . . . . . . . . . . . . .
, Vice President
and Secretary
. . . . . . . . . . . . . .
Executive
11
<TABLE>
<CAPTION>
EXHIBIT (12)
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Unaudited) Sprint Corporation
Quarters Ended
March 31,
-------------------------------
1999 1998
- --------------------------------------------------------------------------------------------------------------------
Earnings
Income (loss) before income
<S> <C> <C>
taxes and extraordinary items $ (283.9) $ 360.2
Capitalized interest (30.4) (33.2)
Equity in losses of less than
50% owned entities 38.2 21.0
- --------------------------------------------------------------------------------------------------------------------
Subtotal (276.1) 348.0
- --------------------------------------------------------------------------------------------------------------------
Fixed charges
Interest charges 224.8 199.3
Interest factor of operating rents 74.1 63.0
Pre-tax cost of preferred stock
dividends of subsidiaries - 0.1
- --------------------------------------------------------------------------------------------------------------------
Total fixed charges 298.9 262.4
- --------------------------------------------------------------------------------------------------------------------
Earnings, as adjusted $ 22.8 $ 610.4
-------------------------------
Ratio of earnings to fixed charges(1) - 2.33
-------------------------------
Note: The ratio was computed by dividing fixed charges into the sum of
earnings (after certain adjustments) and fixed charges. Earnings
include income from continuing operations before taxes, plus equity in
the net losses of less-than-50% owned entities, less capitalized
interest. Fixed charges include (a) interest on all debt of continuing
operations (including amortization of debt issuance costs), (b) the
interest component of operating rents, and (c) the pre-tax cost of
subsidiary preferred stock dividends.
(1) For the 1999 first quarter, earnings, as adjusted, were inadequate to cover fixed charges by $276 million.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-END> Mar-31-1999
<CASH> 148,400
<SECURITIES> 0
<RECEIVABLES> 3,049,900
<ALLOWANCES> 198,200
<INVENTORY> 500,400
<CURRENT-ASSETS> 4,151,800
<PP&E> 33,382,300
<DEPRECIATION> 13,758,900
<TOTAL-ASSETS> 33,721,100
<CURRENT-LIABILITIES> 5,457,800
<BONDS> 11,758,500
0
246,800
<COMMON> 1,322,300
<OTHER-SE> 11,502,700
<TOTAL-LIABILITY-AND-EQUITY> 33,721,100
<SALES> 0
<TOTAL-REVENUES> 4,717,200
<CGS> 0
<TOTAL-COSTS> 3,270,700
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 194,400
<INCOME-PRETAX> (283,900)
<INCOME-TAX> (85,100)
<INCOME-CONTINUING> (198,800)
<DISCONTINUED> 0
<EXTRAORDINARY> (20,600)
<CHANGES> 0
<NET-INCOME> (219,400)
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0<F1>
<FN>
<F1> FON Group EPS - Basic 0.94
FON Group EPS - Diluted 0.93
PCS Group EPS - Basic (1.46)
PCS Group EPS - Diluted (1.46)
</FN>
</TABLE>
Annex I
SPRINT CORPORATION
Consolidated Financial Information
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Sprint Corporation
(millions)
- -------------------------------------------------------------------------------------------------------------------
Quarters Ended March 31, 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Operating Revenues $ 4,717.2 $ 4,075.5
- -------------------------------------------------------------------------------------------------------------------
Operating Expenses
Costs of services and products 2,416.0 2,069.5
Selling, general and administrative 1,537.0 1,183.6
Depreciation and amortization 854.7 608.2
- -------------------------------------------------------------------------------------------------------------------
Total operating expenses 4,807.7 3,861.3
- -------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) (90.5) 214.2
Interest expense (194.4) (166.1)
Equity in loss of Global One (34.5) (45.2)
Other partners' loss in Sprint PCS - 305.2
Other income, net 35.5 52.1
- -------------------------------------------------------------------------------------------------------------------
Income (Loss) before income taxes and extraordinary items (283.9) 360.2
Income taxes 85.1 (149.5)
- -------------------------------------------------------------------------------------------------------------------
Income (Loss) before Extraordinary Items (198.8) 210.7
Extraordinary items, net (20.6) (4.4)
- -------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ (219.4) 206.3
---------------
Preferred stock dividends (0.3)
---------------
Earnings applicable to common stock $ 206.0
---------------
See accompanying Condensed Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS (continued) Sprint Corporation
(Unaudited)
(millions, except per share data)
- -------------------------------------------------------------------------------------------------------------------
Quarters Ended March 31, 1999 1999 1998
- -------------------------------------------------------------------------------------------------------------------
FON PCS Sprint
Common Common Common
Stock Stock Stock
----------------------------------------------
<S> <C> <C> <C>
Earnings (Loss) Applicable to Common Stock $ 407.8 $ (629.1) $ 206.0
----------------------------------------------
Diluted Earnings (Loss) per Common Share
Income (Loss) before extraordinary items $ 0.93 $ (1.41) $ 0.48
Extraordinary items - (0.05) (0.01)
- -------------------------------------------------------------------------------------------------------------------
Total $ 0.93 $ (1.46) $ 0.47
----------------------------------------------
Diluted weighted average common shares 440.4 431.7 438.7
----------------------------------------------
Basic Earnings (Loss) per Common Share
Income (Loss) before extraordinary items $ 0.94 $ (1.41) $ 0.49
Extraordinary items - (0.05) (0.01)
- -------------------------------------------------------------------------------------------------------------------
Total $ 0.94 $ (1.46) $ 0.48
----------------------------------------------
Basic weighted average common shares 431.6 431.7 430.1
----------------------------------------------
DIVIDENDS PER COMMON SHARE
Sprint common stock N/A N/A $ 0.25
----------------------------------------------
FON common stock $ 0.25 N/A N/A
----------------------------------------------
Note: As discussed in Note 1 of Condensed Notes to Consolidated Financial
Statements, the Recapitalization occurred in November 1998. As a
result, earnings per share for Sprint common stock reflects earnings
through the Recapitalization date, while earnings (loss) per share for
FON common stock and PCS common stock reflects results subsequent to
that date.
N/A = Not applicable
See accompanying Condensed Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) Sprint Corporation
(Unaudited)
(millions)
----------------------------------
Quarters Ended March 31, 1999 1998
- --------------------------------------------- ----------------- ----------------- ---------------- -----------------
<S> <C> <C>
Net Income (Loss) $ (219.4) $ 206.3
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Other Comprehensive Income (Loss)
Unrealized holding gains (losses) on securities (5.5) 18.5
Income taxes 2.0 (6.7)
- --------------------------------------------------------------- -- -------------- -- ------------- --- -------------
Net unrealized holding gains (losses) on securities (3.5) 11.8
Foreign currency translation adjustments - 0.5
- --------------------------------------------------------------- -- -------------- -- ------------- --- -------------
Total other comprehensive income (loss) (3.5) 12.3
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Comprehensive Income (Loss) $ (222.9) $ 218.6
-- ------------- --- -------------
See accompanying Condensed Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS Sprint Corporation
(millions)
- -------------------------------------------------------------------------------------------------------------------------
March 31, December 31,
1999 1998
- -------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Assets
Current assets
<S> <C> <C>
Cash and equivalents $ 148.4 $ 605.2
Accounts receivable, net of allowance for doubtful accounts of
$198.2 and $185.5 2,851.7 2,690.7
Inventories 500.4 477.1
Prepaid expenses 369.0 259.8
Notes and other receivables 77.3 118.2
Other 205.0 236.9
- -------------------------------------------------------------------------------------------------------------------------
Total current assets 4,151.8 4,387.9
Investments in equity securities 455.4 489.2
Property, plant and equipment
FON Group 25,831.4 25,156.0
PCS Group 7,550.9 6,988.3
- -------------------------------------------------------------------------------------------------------------------------
Total property, plant and equipment 33,382.3 32,144.3
Accumulated depreciation (13,758.9) (13,161.3)
- -------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 19,623.4 18,983.0
Investments in and advances to affiliates 613.9 645.0
Intangible assets
Goodwill 3,723.0 3,701.4
PCS licenses 3,057.2 3,036.6
Other 1,168.9 1,137.4
- -------------------------------------------------------------------------------------------------------------------------
Total intangible assets 7,949.1 7,875.4
Accumulated amortization (295.6) (182.4)
- -------------------------------------------------------------------------------------------------------------------------
Net intangible assets 7,653.5 7,693.0
Other 1,223.1 1,033.0
- -------------------------------------------------------------------------------------------------------------------------
Total $ 33,721.1 $ 33,231.1
-----------------------------------
See accompanying Condensed Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS (continued) Sprint Corporation
(millions, except per share data)
- -------------------------------------------------------------------------------------------------------------------------
March 31, December 31,
1999 1998
- -------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Liabilities and Shareholders' Equity
Current liabilities
<S> <C> <C>
Current maturities of long-term debt $ 345.1 $ 246.9
Accounts payable 1,444.4 1,654.9
Construction obligations 890.1 978.9
Accrued interconnection costs 738.9 592.4
Accrued taxes 418.6 439.9
Advance billings 293.0 229.3
Other 1,327.7 1,298.8
- -------------------------------------------------------------------------------------------------------------------------
Total current liabilities 5,457.8 5,441.1
- -------------------------------------------------------------------------------------------------------------------------
Long-term debt and capital lease obligations 11,758.5 11,942.4
Deferred credits and other liabilities
Deferred income taxes and investment tax credits 1,903.4 1,830.3
Postretirement and other benefit obligations 1,053.7 1,064.1
Other 475.9 504.9
- -------------------------------------------------------------------------------------------------------------------------
Total deferred credits and other liabilities 3,433.0 3,399.3
Shareholders' equity
Common stock
Class A, par value $2.50 per share, 200.0 shares authorized,
86.2 shares issued and outstanding 215.6 215.6
FON, par value $2.00 per share, 4,200.0 shares authorized, 350.3 and 350.3
shares issued and 346.3 and 344.5 shares outstanding 700.5 700.5
PCS, par value $1.00 per share, 2,350.0 shares authorized, 406.2 and 375.4
shares issued and 404.4 and 372.7 shares outstanding 406.2 375.4
PCS preferred stock, no par, 0.3 shares authorized, 0.2 shares issued and
outstanding 246.8 246.8
Capital in excess of par or stated value 8,477.3 7,586.2
Retained earnings 3,278.4 3,650.9
Treasury stock, at cost, 5.8 and 8.5 shares (352.4) (426.0)
Accumulated other comprehensive income 100.1 103.6
Other (0.7) (4.7)
- -------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 13,071.8 12,448.3
- -------------------------------------------------------------------------------------------------------------------------
Total $ 33,721.1 $ 33,231.1
-----------------------------------
See accompanying Condensed Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Sprint Corporation
(millions)
- ------------------------------------------------------------------ ----------------- ----------------- ----------------
Quarters Ended March 31, 1999 1998
- ------------------------------------------------------------------ ----------------- ----------------- ----------------
Operating Activities
<S> <C> <C>
Net income (loss) $ (219.4) $ 206.3
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Equity in net losses of affiliates 43.8 260.0
Extraordinary items, net 20.6 1.1
Depreciation and amortization 854.7 466.6
Deferred income taxes and investment tax credits (20.7) (101.9)
Changes in assets and liabilities:
Accounts receivable, net (160.1) (23.5)
Inventories and other current assets (270.2) (60.1)
Accounts payable and other current liabilities 167.7 246.7
Noncurrent assets and liabilities, net (48.4) (10.0)
Other, net 12.1 3.2
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash provided by operating activities 380.1 988.4
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Investing Activities
Capital expenditures (1,317.3) (787.9)
Investments in and loans to affiliates, net (67.5) (212.6)
Other, net (87.2) 4.3
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash used by investing activities (1,472.0) (996.2)
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Financing Activities
Proceeds from long-term debt 1,702.6 289.5
Payments on long-term debt (1,835.5) (130.3)
Proceeds from PCS common stock issued 841.9 -
Dividends paid (101.8) (97.7)
Treasury stock purchased (45.4) (48.8)
Other, net 73.3 51.6
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash provided by financing activities 635.1 64.3
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Increase (Decrease) in Cash and Equivalents (456.8) 56.5
Cash and Equivalents at Beginning of Period 605.2 101.7
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Cash and Equivalents at End of Period $ 148.4 $ 158.2
--- ------------- -- -------------
See accompanying Condensed Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Unaudited) Sprint Corporation
(millions)
- ---------------------------------------------------------------------------------------------------------------------
PCS
Sprint Common Capital
Class A FON and In Excess
Common Common Preferred of Par or Retained Treasury
Stock Stock Stock Stated Earnings Stock Other Total
Value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning 1999 balance $ 215.6 $ 700.5 $ 622.2 $ 7,586.2 $ 3,650.9 $(426.0) $ 98.9 $12,448.3
Net loss -- -- -- -- (219.4) -- -- (219.4)
FON common stock dividends -- -- -- -- (86.4) -- -- (86.4)
Class A common stock dividends -- -- -- -- (21.6) -- -- (21.6)
PCS Series 1 common stock issued -- -- 23.8 656.5 -- -- -- 680.3
PCS Series 3 common stock issued -- -- 7.0 162.7 -- -- -- 169.7
Treasury stock purchased -- -- -- -- -- (45.4) -- (45.4)
Treasury stock issued -- -- -- -- -- 79.5 -- 79.5
Tax benefit from stock options
exercised -- -- -- 51.4 -- -- -- 51.4
Other, net -- -- -- 20.5 (45.1) 39.5 0.5 15.4
- ---------------------------------------------------------------------------------------------------------------------
March 1999 balance $ 215.6 $ 700.5 $ 653.0 $ 8,477.3 $ 3,278.4 $(352.4) $ 99.4 $13,071.8
-------------------------------------------------------------------------------------
Shares Outstanding
Beginning 1999 balance 86.2 344.5 372.9
PCS Series 1 common stock issued -- -- 23.8
PCS Series 3 common stock issued -- -- 7.0
Treasury stock purchased -- (0.6) --
Treasury stock issued -- 2.4 0.9
- -----------------------------------------------------------------
March 1999 balance 86.2 346.3 404.6
------------------------------
See accompanying Condensed Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
CONDENSED NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Unaudited) Sprint Corporation
The information in this Form 10-Q has been prepared according to Securities and
Exchange Commission (SEC) rules and regulations. In our opinion, the
consolidated interim financial statements reflect all adjustments (consisting
only of normal recurring accruals) needed to fairly present Sprint Corporation's
consolidated financial position, results of operations, cash flows and
comprehensive income.
Certain information and footnote disclosures normally included in consolidated
financial statements prepared according to generally accepted accounting
principles have been condensed or omitted. As a result, you should read these
financial statements along with Sprint Corporation's 1998 Form 10-K. Operating
results for the 1999 year-to-date period do not necessarily represent the
results that may be expected for the year ending December 31, 1999.
- --------------------------------------------------------------------------------
1. PCS Restructuring and Recapitalization
- --------------------------------------------------------------------------------
In November 1998, Sprint's shareholders approved the formation of the FON Group
and the PCS Group and the creation of the FON stock and the PCS stock. In
addition, Sprint purchased the remaining ownership interests in Sprint Spectrum
Holding Company, L.P. and PhillieCo, L.P. (together, Sprint PCS), other than a
minority interest in Cox Communications PCS, L.P. (Cox PCS). Sprint acquired
these ownership interests from Tele-Communications, Inc., Comcast Corporation
and Cox Communications, Inc. (the Cable Partners). In exchange, Sprint issued
the Cable Partners special low-vote PCS shares and warrants to acquire
additional PCS shares. Sprint also issued the Cable Partners shares of a new
class of preferred stock convertible into PCS shares. The purchase of the Cable
Partners' interests is referred to as the PCS Restructuring.
Also in November 1998, Sprint reclassified each of its publicly traded common
shares into one share of FON stock and 1/2 share of PCS stock. This
recapitalization was tax-free to shareholders. Each Class A common share owned
by France Telecom S.A. (FT) and Deutsche Telekom AG (DT) was reclassified to
represent an equity interest in the FON Group and the PCS Group that entitles FT
and DT to one share of FON stock and 1/2 share of PCS stock. These transactions
are referred to as the Recapitalization.
In connection with the PCS Restructuring, FT and DT purchased 5.1 million
additional PCS shares to maintain their combined 20% voting power in Sprint.
The PCS stock is intended to reflect the performance of Sprint's domestic
wireless personal communication services (PCS) operations. The FON stock is
intended to reflect the performance of all of Sprint's other operations.
- --------------------------------------------------------------------------------
2. Basis of Consolidation and Presentation
- --------------------------------------------------------------------------------
The consolidated financial statements include the accounts of Sprint and its
wholly owned and majority-owned subsidiaries. Sprint PCS' 1998 first quarter
results of operations have been consolidated. The Cable Partners' share of
losses through the PCS Restructuring date has been reflected as "Other partners'
loss in Sprint PCS" in the Consolidated Statements of Operations. Sprint PCS'
financial position has been reflected on a consolidated basis at year-end 1998.
Sprint's 1998 first quarter cash flows reflect the FON Group's operations as
well as the operations of SprintCom and Sprint's investment in Sprint PCS.
Investments in entities in which Sprint exercises significant influence, but
does not control, are accounted for using the equity method (see Note 3).
The consolidated financial statements are prepared using generally accepted
accounting principles. These principles require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported amounts of
revenues and expenses. Actual results could differ from those estimates.
Certain prior-year amounts have been reclassified to conform to the current-year
presentation. These reclassifications had no effect on the results of operations
or shareholders' equity as previously reported.
<PAGE>
- --------------------------------------------------------------------------------
3. Investments
- --------------------------------------------------------------------------------
At the end of March 1999, investments accounted for using the equity method
consisted of the FON Group's investments in Global One, Call-Net, EarthLink and
other strategic investments.
In November 1998, Sprint assumed 100% ownership of Sprint PCS; as a result,
Sprint consolidated Sprint PCS' results in 1998. Combined, summarized financial
information (100% basis) of entities, exclusive of Sprint PCS, accounted for
using the equity method was as follows:
Quarters Ended
March 31,
-----------------------
1999 1998
- ------------------ -- --------- -- --------- -- --------
(millions)
Results of operations
Net operating revenues $ 652.0 $ 533.1
-- --------- -- --------
Operating loss $ (182.8) $ (114.1)
-- --------- -- --------
Net loss $ (220.8) $ (147.4)
-- --------- -- --------
Sprint's net losses in
affiliates $ (43.8) $ (50.3)
-- --------- -- --------
- --------------------------------------------------------------------------------
4. Income Taxes
- --------------------------------------------------------------------------------
The differences that caused Sprint's effective income tax rates to vary from the
35% federal statutory rate were as follows:
Quarters Ended
March 31,
-----------------------
1999 1998
- ---------------------------------------------------------
(millions)
Income tax expense (benefit) at
the federal statutory rate $ (99.4) $ 126.1
Effect of:
State income taxes, net of
federal income tax effect 3.0 11.5
Equity in losses of foreign
joint ventures 5.0 9.7
Goodwill amortization 6.8 -
Other, net (0.5) 2.2
- ---------------------------------------------------------
Income tax expense (benefit) $ (85.1) $ 149.5
-----------------------
Effective income tax rate 30.0% 41.5%
-----------------------
- --------------------------------------------------------------------------------
5. Litigation, Claims and Assessments
- --------------------------------------------------------------------------------
In December 1996, an arbitration panel entered a $61 million award in favor of
Network 2000 Communications Corporation on its breach of contract claim against
Sprint. In June 1997, Sprint recorded additional expense of $20 million. This
charge related to the settlement of both the claims of Network 2000 against
Sprint and a related class action lawsuit against Sprint and Network 2000. In
June 1998, the court approved the class action settlement. Some potential class
members appealed the approval of the settlement. The appeal was dismissed in
April 1999, which makes the class action settlement final.
Other suits arising in the ordinary course of business are pending against
Sprint. Management cannot predict the final outcome of these actions but
believes they will not be material to Sprint's consolidated financial
statements.
<PAGE>
- --------------------------------------------------------------------------------
6. Segment Information
- --------------------------------------------------------------------------------
The FON Group operates in five business segments, based on services and
products: the long distance division, the local division, the product
distribution and directory publishing businesses, activities to develop and
deploy Sprint ION(SM) and other ventures. See Note 7 of Sprint FON Group
Condensed Notes to Combined Financial Statements for more information about the
FON Group's business segments.
The PCS Group businesses operate in a single segment.
Industry segment financial information was as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Sprint Sprint Intergroup
Quarters Ended March 31, FON Group PCS Group Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------
(millions)
1999
<S> <C> <C> <C> <C>
Net operating revenues $ 4,172.2 $ 604.2 $ (59.2) $ 4,717.2
Intergroup revenues 58.8 0.4 (59.2) -
Operating income (loss) 737.3 (827.8) - (90.5)
1998
Net operating revenues $ 3,891.7 $ 203.3 $ (19.5) $ 4,075.5
Intergroup revenues 19.5 - (19.5) -
Operating income (loss) 683.0 (468.8) - 214.2
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
7. Supplemental Cash Flows Information
- --------------------------------------------------------------------------------
Sprint's cash paid for interest and income taxes was as follows:
Quarters Ended
March 31,
-------------------------
1999 1998
- --------------------------------------------------------
(millions)
Interest (net of capitalized
interest) $ 131.5 $ 57.4
-------------------------
Income taxes $ 20.8 $ 200.3
-------------------------
Sprint's noncash activities include the following:
Quarters Ended
March 31,
-------------------------
1999 1998
- --------------------------------------------------------
(millions)
Capital lease obligations $ 77.2 $ 80.9
-------------------------
Common stock issued under
Sprint's ESPP $ 23.7 $ 1.3
-------------------------
Tax benefit from stock
options exercised $ 51.4 $ 11.0
-------------------------
Common stock issued under
long-term incentive plan $ 32.2 $ 4.2
-------------------------
- --------------------------------------------------------------------------------
8. Subsequent Events
- --------------------------------------------------------------------------------
In April 1999, Sprint's Board of Directors approved a two-for-one stock split of
Sprint FON stock in the form of a dividend payable in Sprint FON shares. New
shares will be issued on June 4, 1999 to shareholders of record on May 13, 1999.
A comparable dividend will be paid on the Class A common stock owned by FT and
DT.
In April 1999, Sprint's Board of Directors declared dividends of 12.5 cents per
share on the Sprint FON stock and 37.5 cents per share on both the first and
second series convertible preferred stock. The FON Stock dividends reflect the
effect of the two-for-one stock split. All dividends will be paid June 30, 1999.
In April 1999, Sprint announced that it had agreed to acquire People's Choice TV
Corp. (PCTV), a provider of wireless broadband services in several major markets
in the midwest and southwest. PCTV common stockholders will receive an aggregate
of $129 million in cash in the merger, not including amounts to be paid if
outstanding options and warrants are exercised prior to closing. Sprint also
acquired or entered into options to acquire convertible preferred stock of PCTV
from certain stockholders for an aggregate of $23 million.
<PAGE>
In addition, Sprint will also assume the indebtedness of PCTV. PCTV had an
aggregate of $287 million of indebtedness outstanding as of year-end 1998
according to its Form 10-K for the 1998 fiscal year.
In April 1999, Sprint announced that it had agreed to acquire American
Telecasting, Inc. (ATI), a provider of wireless broadband services in several
major markets in the north central and western United States. ATI common
stockholders will receive an aggregate of $168 million in cash in the merger,
not including amounts to be paid if outstanding options and warrants are
exercised prior to closing. In addition, Sprint will also assume the
indebtedness of ATI. ATI had an aggregate of $240 million of indebtedness
outstanding as of year-end 1998 according to its Form 10-K for the fiscal year.
In May 1999, Sprint announced that it had agreed to acquire Videotron USA and
Transworld Telecommunications Inc. (TTI). Sprint agreed to purchase 100% of
Videotron USA for approximately $180 million. Videotron USA owns the wireless
licenses serving the Tampa Bay area and Greenville, South Carolina as well as a
majority interest in the licenses for several major markets in California and
Washington. The remaining interest in those licenses is owned by TTI. Sprint
agreed to purchase TTI for approximately $30 million.
These acquisitions will provide Sprint, through Sprint ION(SM), with the ability
to provide high bandwidth data, voice, Internet and video conferencing services
directly to consumers in the related markets through terrestrial wireless
connections. The transactions are subject to customary conditions, including
regulatory approval. The Videotron, TTI, PCTV and ATI transactions are subject
to approval by their stockholders. These transactions, which will be accounted
for using the purchase method of accounting, are expected to close in the 1999
third and fourth quarters.
In April 1999, Cox Communications, Inc. exercised a put option requiring Sprint
to purchase the remaining 40.8% interest in Cox PCS for 24.3 million shares of
Series 2 PCS stock. The transaction is expected to close in the 1999 second
quarter.
In May 1999, Sprint issued $3.5 billion of senior notes registered with the SEC.
The proceeds will be used mainly to repay existing debt. It is expected that all
or a significant portion of the debt will be allocated to the PCS Group.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Sprint Corporation
- --------------------------------------------------------------------------------
General
- --------------------------------------------------------------------------------
In November 1998, Sprint's shareholders approved the formation of the FON Group
and the PCS Group and the creation of the FON stock and the PCS stock. In
addition, Sprint purchased the remaining ownership interests in Sprint Spectrum
Holding Company, L.P. and PhillieCo, L.P. (together, Sprint PCS), other than a
minority interest in Cox Communications PCS, L.P. Sprint acquired these
ownership interests from Tele-Communications, Inc., Comcast Corporation and Cox
Communications, Inc. (the Cable Partners). In exchange, Sprint issued the Cable
Partners special low-vote PCS shares and warrants to acquire additional PCS
shares. Sprint also issued the Cable Partners shares of a new class of preferred
stock convertible into PCS shares. The purchase of the Cable Partners' interests
is referred to as the PCS Restructuring.
Also in November 1998, Sprint reclassified each of its publicly traded common
shares into one share of FON stock and 1/2 share of PCS stock. This
recapitalization was tax-free to shareholders. Each Class A common share owned
by France Telecom S.A. (FT) and Deutsche Telekom AG (DT) was reclassified to
represent an equity interest in the FON Group and the PCS Group that entitles FT
and DT to one share of FON stock and 1/2 share of PCS stock. These transactions
are referred to as the Recapitalization.
In connection with the PCS Restructuring, FT and DT purchased 5.1 million
additional PCS shares to maintain their combined 20% voting power in Sprint.
The PCS stock is intended to reflect the performance of Sprint's domestic
wireless personal communication services (PCS) operations. These operations are
referred to as the PCS Group.
The FON stock is intended to reflect the performance of all of Sprint's other
operations. These operations are referred to as the FON Group and include the
following:
o Core businesses
o Long distance division
o Local division
o Product distribution and directory publishing businesses
o Activities to develop and deploy Sprint ION(SM), Integrated On-Demand
Network
o Other ventures, including Sprint's investment in Global One.
FON and PCS shareholders are subject to the risks related to all of Sprint's
businesses, assets and liabilities. Owning FON or PCS shares does not represent
a direct legal interest in the assets and liabilities of the Groups. Rather,
shareholders remain invested in Sprint and continue to vote as a single voting
class for Board member elections (other than Class A directors elected by FT and
DT and most other company matters.
FON Group or PCS Group events affecting Sprint's consolidated statements of
operations and balance sheets could, in turn, affect the other Group's financial
statements or stock price.
Net losses of either Group, and dividends or distributions on, or repurchases
of, PCS stock or FON stock, will reduce Sprint funds legally available for
dividends on both Groups' stock. Sprint does not expect to pay dividends on the
PCS shares in the foreseeable future.
Sprint's "Management's Discussion and Analysis of Financial Condition and
Results of Operations" (MD&A) should be read along with the FON Group's MD&A and
the PCS Group's MD&A.
- --------------------------------------------------------------------------------
Forward-looking Information
- --------------------------------------------------------------------------------
Sprint includes certain estimates, projections and other forward-looking
statements in its reports, in presentations to analysts and others, and in other
publicly available material. Future performance cannot be ensured. Actual
results may differ materially from those in the forward-looking statements. Some
factors that could cause actual results to differ include:
o the effects of vigorous competition in the markets in which Sprint
operates;
o the costs and business risks related to entering and expanding new
markets necessary to provide seamless services and new services;
o the ability of the PCS Group to grow its market presence;
o the risks related to Sprint's investments in Global One and other
joint ventures;
o the impact of any unusual items resulting from ongoing evaluations
of Sprint's business strategies;
o requirements imposed on Sprint or latitude allowed its competitors by
the Federal Communications Commission (FCC) or state regulatory
commissions under the Telecommunications Act of 1996;
o the effects of mergers and consolidations within the telecommunications
industry;
o unexpected results of litigation filed against Sprint;
o the impact of the Year 2000 issue and any related noncompliance; and
o the possibility of one or more of the markets in which Sprint competes
being impacted by changes in political, economic or other factors such
as monetary policy, legal and regulatory changes or other external
factors over which Sprint has no control.
The words "estimate," "project," "intend," "expect," "believe" and similar
expressions are intended to identify forward-looking statements. Forward-looking
statements are found throughout MD&A. The reader should not place undue reliance
on forward-looking statements, which speak only as of the date of this report.
Sprint is not obligated to publicly release any revisions to forward-looking
statements to reflect events after the date of this report or unforeseen events.
- --------------------------------------------------------------------------------
General Overview of the Sprint FON Group
- --------------------------------------------------------------------------------
Core Businesses
Long Distance Division
The long distance division is the nation's third-largest long distance phone
company. It operates a nationwide, all-digital long distance communications
network using state-of-the-art fiber-optic and electronic technology. The
division provides domestic and international voice, video and data
communications services as well as integration management and support services
for computer networks.
Local Division
The local division consists of regulated local phone companies serving nearly
7.8 million access lines in 18 states. It provides local phone services, access
by phone customers and other carriers to its local network, sales of
telecommunications equipment, and long distance services within certain regional
calling areas.
Product Distribution and Directory Publishing Businesses
The product distribution business provides wholesale distribution services of
telecommunications products. The directory publishing business publishes and
markets white and yellow page phone directories.
Sprint ION(SM)
Sprint ION extends Sprint's existing advanced network capabilities to the
customer and enables Sprint to provide the network infrastructure to meet
customers' demands for data, Internet, and video. It is also expected to be the
foundation for Sprint to provide new competitive local service.
Other Ventures
The "other ventures" segment includes the FON Group's investment in Global One,
a joint venture with FT and DT. Sprint is a 1/3 partner in Global One's
operating group serving Europe (excluding France and Germany) and is a 50%
partner in Global One's operating group for the worldwide activities outside the
United States and Europe. The segment also includes the FON Group's investments
in EarthLink Network, Inc., an Internet service provider; Call-Net, a long
distance provider in Canada operating under the Sprint brand name; and certain
other telecommunications investments and ventures. All of these investments are
accounted for on the equity basis.
- --------------------------------------------------------------------------------
General Overview of the Sprint PCS Group
- --------------------------------------------------------------------------------
The PCS Group includes Sprint's domestic wireless mobile phone services. It
operates the only 100% digital PCS wireless network in the United States with
licenses to provide nationwide service using a single frequency and a single
technology. At the end of March 1999, the PCS Group, together with certain
affiliates, operated PCS systems in the 50 largest U.S. metropolitan areas. The
PCS Group has licenses to serve more than 270 million people in all 50 states,
Puerto Rico and the U.S. Virgin Islands. The PCS Group's service now reaches
nearly 170 million people. The PCS Group provides nationwide service through:
o operating its own digital network in major U.S. metropolitan areas,
o affiliating with other companies, mainly in and around smaller U.S.
metropolitan areas,
o roaming on other providers' analog cellular networks using
Dual-Band/Dual-Mode handsets, and
o roaming on other providers' digital PCS networks that use code
division multiple access.
<PAGE>
- --------------------------------------------------------------------------------
Results of Operations
- --------------------------------------------------------------------------------
Consolidated
Total net operating revenues were as follows:
Quarters Ended
March 31,
------------------------
1999 1998
- -------------------------------------------------------
(millions)
FON Group $ 4,172.2 $ 3,891.7
PCS Group 604.2 203.3
Intergroup eliminations (59.2) (19.5)
- -------------------------------------------------------
Net operating revenues $ 4,717.2 $ 4,075.5
------------------------
Income (Loss) before extraordinary items was as follows:
Quarters Ended
March 31,
------------------------
1999 1998
- -------------------------------------------------------
(millions)
FON Group $ 406.2 $ 355.9
PCS Group (605.0) (145.2)
- -------------------------------------------------------
Income (Loss) before
extraordinary items $ (198.8)$ 210.7
------------------------
Sprint FON Group
Quarters Ended
March 31,
------------------------
1999 1998
- -------------------------------------------------------
(millions)
Net operating revenues $ 4,172.2 $ 3,891.7
Operating expenses 3,434.9 3,208.7
- -------------------------------------------------------
Operating income $ 737.3 $ 683.0
------------------------
Operating margin 17.7% 17.6%
------------------------
Net Operating Revenues
Net operating revenues were $4.2 billion for the 1999 first quarter, an increase
of 7% from the same 1998 period. This increase mainly reflects growth of the
FON Group's long distance and local divisions.
Long Distance Division
All major market segments--business, residential and wholesale--contributed to
the increase in net operating revenues in the 1999 first quarter from the same
1998 period. First quarter 1999 long distance calling volumes increased 24% from
the same 1998 period. The increase mainly reflects strong data services revenue
growth and strong minute growth, partly offset by a more competitive pricing
environment and larger percentage of wholesale minutes, which have a lower
yield.
Business and data market revenues increased 13% in the 1999 first quarter from
the same 1998 period. This reflects growth in data services as well as toll-free
inbound and outbound calls.
Residential market revenues increased 7% in the 1999 first quarter from the same
1998 period. This increase reflects strong volume growth in residential long
distance calls. Growth was enhanced by Sprint Sense Anytime(R) and Sprint
Unlimited(R). Other growth factors include increased prepaid card revenues and
calling card calls made by customers of local phone companies.
Wholesale market revenues increased 6% in the 1999 first quarter from the same
1998 period. This reflects strong minute growth mainly from international calls
and increased inbound and outbound toll-free calls.
Local Division
Sprint sold its remaining 81,000 residential and business access lines in
Illinois in November 1998. For comparative purposes, the following discussion of
local division results assumes the sale occurred at the beginning of 1998.
Local division revenues increased 6% in the 1999 first quarter from the same
1998 period. This increase mainly reflects customer access line growth and
increased sales of network-based services such as Caller ID and Call Waiting.
Customer access lines increased 5.2% during the past 12 months.
Local service revenues grew 8% in the 1999 first quarter from the same 1998
period because of customer access line growth and continued demand for
network-based services. Revenue growth also reflects increased sales of private
line services and revenues from maintaining customer wiring and equipment.
Network access revenues increased 5% in the 1999 first quarter from the same
1998 period reflecting an 8% increase in minutes of use, partly offset by
FCC-mandated access rate reductions.
Toll service revenues decreased 15% in the 1999 first quarter from the same 1998
period, mainly reflecting increased competition, which is expected to continue,
in the intraLATA long distance market. In addition, toll service areas are
shrinking because certain local calling areas are expanding. The reduced
revenues were offset, in part, by increases in local service revenues and by
increases in network access revenues paid by other carriers providing intraLATA
long distance services to the local division's customers.
<PAGE>
Other revenues increased 6% in the 1999 first quarter from the same 1998 period
reflecting increased revenues from billing and collection services and
commission revenues, as well as improvements in uncollectibles.
Product Distribution & Directory Publishing Businesses
The product distribution and directory publishing businesses' revenues increased
9% in the 1999 first quarter from the same 1998 period. Nonaffiliated revenues
accounted for approximately 60% of revenues in both the 1999 and 1998 first
quarters. These revenues increased 16% in the 1999 first quarter while sales to
affiliates remained flat.
Operating Expenses
The FON Group's operating expenses increased 7% in the 1999 first quarter from
the same 1998 period mainly to support revenue growth.
Long Distance Division
Long distance division operating expenses increased 7% in the 1999 first quarter
from the same 1998 period. Interconnection costs increased reflecting the impact
of increased calling volume in the 1999 first quarter which was partly offset by
reductions in per-minute costs for both domestic and international access and an
improved product mix of non-minute driven revenues and other dedicated products.
The domestic rate reductions were generally due to FCC-mandated access rate
reductions. Lower international per minute costs reflect continued competition.
Sprint expects government deregulation and competitive pressures to add to the
continued trend of declining unit costs for international interconnection.
Operations expense increased due to growth in data services as well as increases
in network equipment operating leases partly offset by a decrease in product and
service costs. Operations expense also includes costs related to Sprint's
efforts to achieve Year 2000 compliance.
Selling, general and administrative (SG&A) expense increased reflecting the
overall growth of the business as well as increased marketing and promotions to
support products and services including the rollout of an airline alliance
program which enables customers to earn frequent flyer miles when they use
Sprint's services. SG&A also includes increased costs related to Sprint's
efforts to achieve Year 2000 compliance.
Depreciation and amortization increased reflecting an increased asset base to
enhance network reliability, meet increased demand for voice and data-related
services and upgrade capabilities for providing new products and services.
Local Division
The following local division discussion assumes the sale of exchanges occurred
at the beginning of 1998. See "Net Operating Revenues--Local Division" for more
details.
Local division operating expenses increased 6% in the 1999 first quarter from
the same 1998 period. Costs of services and products increased reflecting
customer access line growth and continued emphasis on service levels. Costs of
services and products includes costs related to Sprint's efforts to achieve Year
2000 compliance.
SG&A increased mainly due to marketing costs to promote new products and
services, costs related to recently implemented financial software and increased
customer service costs related to customer access line growth. SG&A includes
costs related to Sprint's efforts to achieve Year 2000 compliance.
Depreciation and amortization expense increased reflecting increased capital
expenditures in switching and transport technologies which have shorter asset
lives.
Product Distribution & Directory Publishing Businesses
The product distribution and directory publishing businesses' operating expenses
increased reflecting increased cost of sales.
Sprint ION(SM)
Operating expenses for Sprint ION in the 1999 first quarter reflect its
continued development and deployment activities including costs for network
research and testing, systems and operations development, product development,
and advertising to increase public awareness.
<PAGE>
Other Ventures
In the 1998 first quarter, the "other ventures" segment's operating expenses
mainly reflect activities related to offering Internet services. In June 1998,
the FON Group completed the strategic alliance to combine its Internet business
with EarthLink. As part of the alliance, EarthLink obtained the FON Group's
Sprint Internet Passport customers and took over the day-to-day operations of
those services. At the same time, Sprint acquired an equity interest in
EarthLink.
Sprint PCS Group
Quarters Ended
March 31,
---------------------
1999 1998
- -----------------------------------------------------
(millions)
Net operating revenues $ 604.2 $ 203.3
Operating expenses 1,432.0 672.1
- ------------------------------------------------------
Operating loss $ (827.8) $ (468.8)
----------------------
The PCS Group markets its products through multiple distribution channels,
including its own retail stores as well as other retail outlets. Equipment sales
to one retailer, and the related service revenues generated by such sales,
accounted for 28% of net operating revenues in the 1999 first quarter.
Net Operating Revenues
The PCS Group's 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 197% from the
same 1998 period reflecting a 200% increase in the number of customers. The PCS
Group added approximately 763,000 customers in the 1999 first quarter and had
nearly 3.4 million customers in more than 280 markets nationwide at the end of
March 1999. Average monthly service revenue per user (ARPU) was $52 for the 1999
first quarter and $57 for the same 1998 period. ARPU decreased due to a wider
acceptance of lower rate usage plans.
Approximately 20% of the 1999 first quarter net operating revenues, and 15% of
the 1998 first quarter net operating revenues were from sales of handsets and
accessories. As part of the PCS Group's marketing plans, handsets are normally
sold at prices well below the PCS Group's cost.
Operating Expenses
The PCS Group's costs of services and products mainly includes handset and
accessory costs, interconnection costs, and switch and cell site expenses. These
costs increased 153% in the 1999 first quarter reflecting the significant growth
in customers and expanded market coverage, offset by a reduction in handset unit
costs.
SG&A expense mainly includes marketing costs to promote products and services,
as well as salary and benefits costs. SG&A expense increased 70% reflecting
increased marketing and advertising costs and labor costs to support the growth
in subscriber activity.
Depreciation and amortization expense consists of depreciation of network assets
and amortization of intangible assets. The intangible assets include goodwill,
PCS licenses, customer base, microwave relocation costs and assembled workforce,
which are being amortized over three to 40 years. Depreciation and amortization
expense increased 146% reflecting amortization of intangible assets acquired in
the PCS Restructuring and depreciation of the network assets placed in service
after the 1998 first quarter. On a pro forma basis, assuming the PCS
Restructuring occurred at the beginning of 1998, depreciation and amortization
expense would have increased 38%.
<PAGE>
- --------------------------------------------------------------------------------
Nonoperating Items
- --------------------------------------------------------------------------------
Interest Expense
Interest costs in the following table only reflect interest costs on borrowings.
Interest costs related to deferred compensation plans and customer deposits have
been excluded so as not to distort the effective interest rate on borrowings.
Quarters Ended
March 31,
--------------------------
1999 1998
- ----------------------------------------------------
(millions)
Interest expense on
outstanding debt $ 175.0 $ 127.6
Capitalized interest
costs 30.4 33.2
- ----------------------------------------------------
Total interest costs on
outstanding debt $ 205.4 $ 160.8
--------------------------
Average debt
outstanding(1) $ 11,922.6 $ 8,151.1
--------------------------
Effective interest rate 6.9% 7.9%
--------------------------
(1) Average debt outstanding for the 1998 first quarter is on a pro forma basis
as if Sprint PCS debt had been included in Sprint's outstanding debt balance
for the entire quarter.
The reduction in the effective interest rate reflects the refinancing of higher
interest PCS Group debt in the 1998 fourth quarter and 1999 first quarter. The
debt was repaid mainly using proceeds from Sprint's $5.0 billion debt offering,
which carries a lower interest rate to Sprint. In addition, the 1999 first
quarter reflects an increase in short-term borrowings, which have lower interest
rates.
Global One
Sprint recorded losses related to Global One totaling $35 million in the 1999
first quarter versus $45 million for the same period a year ago. In the 1999
first quarter, Global One continued to make progress on network enhancements,
customer service and cost and revenue alignment initiatives. Global One is
continuing these initiatives, which are expected to result in future
nonrecurring charges.
Sprint PCS
Prior to the PCS Restructuring, Sprint's ownership interest in Sprint PCS was
accounted for using the equity method. In 1998, the Cable Partners' share of
losses through the PCS Restructuring date has been reflected as "Other partners'
loss in Sprint PCS" in the Consolidated Statements of Operations.
Other Income, Net
Other income consisted of the following:
Quarters Ended
March 31,
----------------------
1999 1998
- ----------------------------------------------------
(millions)
Dividend and interest income $ 8.5 $ 16.2
Minority interest for Cox 20.0 33.7
Other, net 7.0 2.2
- ----------------------------------------------------
Total $ 35.5 $ 52.1
----------------------
Dividend and interest income for the 1999 and 1998 first quarters reflects
interest earned on temporary investments. For the 1998 first quarter, it also
reflects interest earned on loans to unconsolidated affiliates.
<PAGE>
Income Taxes
See Note 4 of Condensed Notes to Consolidated Financial Statements for
information about the differences that caused the effective income tax rates to
vary from the statutory federal rate.
Extraordinary Items, Net
In the 1999 first quarter, Sprint terminated some of the PCS Group's 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%. This resulted in a $21 million after-tax extraordinary loss
for the PCS Group.
In the 1998 first quarter, Sprint redeemed, prior to scheduled maturities, $115
million of FON Group debt with a 9.25% interest rate. This resulted in a $4
million after-tax extraordinary loss for the FON Group.
- --------------------------------------------------------------------------------
Financial Condition
- --------------------------------------------------------------------------------
March 31, December 31,
1999 1998
- ------------------------------------------------------
(millions)
Consolidated assets $ 33,721.1 $ 33,231.1
-------------------------------
Net property, plant and equipment increased $640 million in the 1999 first
quarter reflecting capital expenditures to support the PCS network buildout and
expansion as well as capital expenditures to support the core long distance and
local networks. See "Liquidity and Capital Resources" for more information about
changes in Sprint's Consolidated Balance Sheets.
- --------------------------------------------------------------------------------
Liquidity and Capital Resources
- --------------------------------------------------------------------------------
Consolidated first quarter 1998 cash flows reflect the FON Group's operations as
well as the operations of SprintCom and Sprint's investment in Sprint PCS.
Operating Activities
Quarters Ended
March 31,
----------------------
1999 1998
- -----------------------------------------------------
(millions)
Cash flows provided by
operating activities $ 380.1$ 988.4
----------------------
Operating cash flows decreased 62% in the 1999 first quarter reflecting
increased losses for the PCS Group and increased outflows from working capital
for both the FON Group and the PCS Group.
Investing Activities
Quarters Ended
March 31,
-----------------------
1999 1998
-----------------------
(millions)
Cash flows used by investing
activities $ (1,472.0)$ (996.2)
-----------------------
The FON Group's capital expenditures totaled $806 million in the 1999 first
quarter and $609 million for the same period a year ago. Long distance capital
expenditures were incurred mainly to enhance network reliability, meet increased
demand for voice and data-related services and upgrade capabilities for
providing new products and services. The local division incurred capital
expenditures to accommodate access line growth and expand capabilities for
providing enhanced services. PCS Group capital expenditures were $512 million in
the 1999 first quarter and $179 million for the same 1998 period for SprintCom
alone. Capital expenditures in both years were mainly for the buildout and
expansion of the PCS network.
<PAGE>
"Investments in and loans to affiliates, net" consisted of the following:
Quarters Ended
March 31,
------------------------
1999 1998
- ------------------------------------------------------
(millions)
Sprint PCS
Capital contributions $ - $ 33.5
Loans and advances - 90.0
- ------------------------------------------------------
- 123.5
- ------------------------------------------------------
Global One
Capital contributions - 283.5
Advances, net - (199.7)
- ------------------------------------------------------
- 83.8
- ------------------------------------------------------
Other, net 67.5 5.3
- ------------------------------------------------------
Total $ 67.5 $ 212.6
------------------------
In the 1999 first quarter, "Other, net" includes an additional investment in
EarthLink by the FON Group. Amounts for Sprint PCS in 1998 reflect contributions
and advances prior to the PCS Restructuring. These amounts were used to fund
capital and operating requirements. Capital contributions to Global One in 1998
were mainly used to repay advances and to fund capital and operating
requirements.
Financing Activities
Quarters Ended
March 31,
------------------------
1999 1998
- ------------------------------------------------------
(millions)
Cash flows provided by
financing activities $ 635.1 $ 64.3
------------------------
Financing activities in the 1999 first quarter reflect proceeds from PCS common
stock issued of $842 million, partly offset by net payments on long-term debt.
In the 1998 first quarter, financing activities mainly reflect proceeds from
long-term debt issuances offset by repayment of existing debt. Sprint paid
dividends of $102 million in the 1999 first quarter and $98 million for the same
period a year ago.
Capital Requirements
Sprint's 1999 investing activities, mainly consisting of capital expenditures
and investments in affiliates, are expected to require cash of $7.0 to $7.6
billion. FON Group capital expenditures are expected to range between $3.8 and
$4.0 billion, and PCS Group capital expenditures are expected to be between $2.9
and $3.2 billion. Additional funds will be required to fund the PCS Group's
expected operating losses, working capital and debt service requirements.
Investments in affiliates are expected to require cash of $300 to $400 million.
Dividend payments are expected to total $455 million in 1999.
In connection with the PCS Restructuring, Sprint adopted a tax sharing agreement
that provides for the allocation of income taxes between the FON Group and the
PCS Group. Sprint expects the FON Group to make significant payments to the PCS
Group under this agreement because of expected PCS Group operating losses in the
near future.
The acquisition of companies in the broadband terrestrial wireless industry such
as Videotron USA, Transworld Telecommunications Inc, People's Choice TV Corp.
and American Telecasting, Inc. are expected to require cash of $1.0 to $1.2
billion for the acquisition of equity and the assumption of indebtedness. See
Condensed Notes to Consolidated Financial Statements--Subsequent Events.
In April 1999, Cox Communications, Inc. exercised a put option requiring Sprint
to purchase its remaining 40.8% interest in Cox PCS for 24.3 million shares of
Series 2 PCS stock. This transaction is expected to close during the 1999 second
quarter.
Liquidity
In February 1999, Sprint completed an offering of Series 1 PCS stock. In this
offering, Sprint sold 24.4 million shares at a price to the public of $28.75 per
share. The net proceeds to Sprint totaled $672 million. In connection with this
offering, FT and DT purchased 6.1 million shares of Series 3 PCS stock. The net
proceeds from the public offering and purchase by FT and DT were attributed to
the PCS Group and were used for the continued buildout of the PCS network and
working capital needs.
In the 1999 first quarter, Sprint increased its short-term borrowings by $1.7
billion. These borrowings 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.
<PAGE>
Any borrowings Sprint may incur are ultimately limited by certain debt
covenants. Sprint could borrow up to $15.5 billion at the end of March 1999
under the most restrictive of its debt covenants. For some borrowings, Sprint
must maintain certain levels of consolidated net worth.
In May 1999, Sprint issued $3.5 billion of senior notes registered with the
Securities and Exchange Commission. The proceeds will be used mainly to repay
existing debt. It is expected that all or a significant portion of the debt will
be allocated to the PCS Group.
- --------------------------------------------------------------------------------
Financial Strategies
- --------------------------------------------------------------------------------
General Hedging Policies
Sprint selectively enters into interest rate swap and cap agreements to manage
its exposure to interest rate changes on its debt. Sprint also enters into
forward contracts and options in foreign currencies to reduce the impact of
changes in foreign exchange rates. Sprint seeks to minimize counterparty credit
risk through stringent credit approval and review processes, the selection of
only the most creditworthy counterparties, continual review and monitoring of
all counterparties, and thorough legal review of contracts. Sprint also controls
exposure to market risk by regularly monitoring changes in foreign exchange and
interest rate positions under normal and stress conditions to ensure they do not
exceed established limits.
Sprint's derivative transactions are used for hedging purposes only and comply
with Board-approved policies. Senior management receives frequent status updates
of all outstanding derivative positions.
Interest Rate Risk Management
Sprint's interest rate risk management program focuses on minimizing exposure to
interest rate movements, setting an optimal mixture of floating- and fixed-rate
debt, and minimizing liquidity risk. Sprint uses simulation analysis to assess
its interest rate exposure and establish the desired ratio of floating- and
fixed-rate debt. To the extent possible, Sprint manages interest rate exposure
and the floating-to-fixed ratio through its borrowings, but sometimes uses
interest rate swaps and caps to adjust its risk profile.
Foreign Exchange Risk Management
Sprint's foreign exchange risk management program focuses on hedging transaction
exposure to optimize consolidated cash flow. Sprint's main transaction exposure
results from net payments made to overseas telecommunications companies for
completing international calls made by Sprint's domestic customers. These
international transactions were not material to the consolidated financial
position, results of operations or cash flows at quarter-end 1999. In addition,
foreign currency transaction gains and losses were not material to Sprint's
first quarter 1999 results of operations. Sprint has not entered into any
significant foreign currency forward contracts or other derivative instruments
to hedge the effects of adverse fluctuations in foreign exchange rates. As a
result, Sprint was not subject to material foreign exchange risk.
- --------------------------------------------------------------------------------
Year 2000 Issue
- --------------------------------------------------------------------------------
The "Year 2000" issue affects Sprint's installed computer systems, network
elements, software applications and other business systems that have
time-sensitive programs that may not properly reflect or recognize the year
2000. Because many computers and computer applications define dates by the last
two digits of the year, "00" may not be properly identified as the year 2000.
This error could result in miscalculations or systems failures. The Year 2000
issue may also affect the systems and applications of Sprint's customers,
vendors, resellers or affiliates.
The FON Group started a program in 1996 to identify and address the Year 2000
issue. It has completed an inventory and Year 2000 assessment of its principal
computer systems, network elements, software applications and other business
systems. The FON Group has also completed the renovation of these computer
systems, network elements, other business systems and more than 98% of its
software applications. Year 2000 testing began in the 1998 third quarter and
will be completed in 1999. The FON Group is using both internal and external
resources to identify, correct or reprogram, and test its systems for Year 2000
compliance. It is also contacting others with whom it conducts business to
receive the proper warranties and assurances that those third parties, including
affiliates, are or will be Year 2000 compliant.
The PCS Group has completed an inventory and assessment of its computer systems,
network elements, software applications, products and other business systems.
Testing began in the 1999 first quarter and is forecasted to be completed by
year-end. The PCS Group 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.
<PAGE>
The PCS Group is also contacting others with whom it conducts business to
receive the proper warranties and assurances that those third parties, including
affiliates, are or will be Year 2000 compliant. The PCS Group relies on
third-party vendors for a significant portion of its important operating and
computer system functions and is highly dependent on those third-party vendors
to remediate and test network elements, computer systems, software applications
and other business systems. However, the PCS Group is reviewing test results
provided by its vendors to help ensure Year 2000 compliance. In addition, the
PCS Group 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 the PCS Group believes these publicly
available systems will be Year 2000 compliant, the PCS Group has no
contractual or other right to force compliance.
The FON Group incurred approximately $185 million through March 1999 for its
Year 2000 remediation program and expects to incur approximately $65 million
throughout the remainder of 1999. The PCS Group incurred approximately $15
million through March 1999 and expects to incur approximately $35 million
throughout the remainder of 1999 for its Year 2000 remediation program. These
programs are designed to assure the proper functioning of critical and secondary
elements for Year 2000 compliance. When these programs are fulfilled, Sprint has
a high degree of confidence that elements within its control will function
through the upcoming date changes. However, two risks remain: (1) the risk to
Sprint if the Year 2000 programs are not fulfilled, and (2) the risk stemming
from elements vulnerable to the Year 2000 programs which are beyond Sprint's
control.
With regards to the first risk, if the Year 2000 programs are not fulfilled in a
timely manner by Sprint, its affiliates (including Global One), or any
significant related third party, the Year 2000 issue could have a material
adverse effect on Sprint's operations. Sprint is focusing on identifying and
addressing all aspects of its operations that may be affected by the Year 2000
issue.
With regards to the second risk, Sprint is evaluating events beyond its control
that could occur prior to and after the arrival of the year 2000. Sprint is
reviewing its existing disaster recovery plans and developing additional
contingency and business continuity plans to prepare for the year 2000. Most of
these plans are scheduled to be completed in the second quarter. Sprint will
implement, if necessary, appropriate contingency and business continuity plans
to mitigate to the extent possible the effects of any Year 2000 noncompliance.
Sprint has begun to review the risks related to a worst case scenario, which
could result from a Year 2000 related failure. This scenario could result in a
temporary disruption to normal business operations and could impact Sprint's
financial performance. Based upon the work completed to date, Sprint believes
that such an occurrence is unlikely. Nevertheless, certain elements related to
the Year 2000 readiness of suppliers, utilities, interconnecting carriers and
customers are beyond Sprint's control and could fail. Sprint does not believe
that the failure of such elements could cause a major breakdown within its
normal business operations.
<PAGE>
Annex II
Sprint FON Group
Combined Financial Information
<PAGE>
<TABLE>
<CAPTION>
COMBINED STATEMENTS OF OPERATIONS (Unaudited) Sprint FON Group
(millions, except per share data)
- -------------------------------------------------------------------------------------------------------------------
Quarters Ended March 31, 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Operating Revenues $ 4,172.2 $ 3,891.7
- -------------------------------------------------------------------------------------------------------------------
Operating Expenses
Costs of services and products 1,925.7 1,871.9
Selling, general and administrative 1,003.2 870.2
Depreciation and amortization 506.0 466.6
- -------------------------------------------------------------------------------------------------------------------
Total operating expenses 3,434.9 3,208.7
- -------------------------------------------------------------------------------------------------------------------
Operating Income 737.3 683.0
Interest expense, net (44.6) (77.6)
Equity in loss of Global One (34.5) (45.2)
Other income, net 10.1 30.9
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes and extraordinary item 668.3 591.1
Income taxes (262.1) (235.2)
- -------------------------------------------------------------------------------------------------------------------
Income before Extraordinary Item 406.2 355.9
Extraordinary item, net - (4.4)
- -------------------------------------------------------------------------------------------------------------------
Net Income 406.2 351.5
Preferred stock dividends received (paid) 1.6 (0.3)
- -------------------------------------------------------------------------------------------------------------------
Earnings applicable to common stock $ 407.8 $ 351.2
------------------------------
Diluted Earnings per Common Share(1) $ 0.93 $ 0.80
------------------------------
Diluted weighted average common shares(1) 440.4 438.7
------------------------------
Basic Earnings per Common Share(1) $ 0.94 $ 0.82
------------------------------
Basic weighted average common shares(1) 431.6 430.1
------------------------------
Dividends per Common Share(1) $ 0.25 $ 0.25
------------------------------
(1) Basic and diluted earnings per common share, weighted average common shares,
and dividends per common share for the 1998 first quarter are pro forma and
assume the Recapitalization occurred at the beginning of 1998.
N/A = Not applicable
See accompanying Condensed Notes to Combined Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMBINED STATEMENTS OF COMPREHENSIVE INCOME Sprint FON Group
(Unaudited)
(millions)
----------------------------------
Quarters Ended March 31, 1999 1998
- --------------------------------------------------------------- ----------------- ---------------- -----------------
<S> <C> <C>
Net Income $ 406.2 $ 351.5
- --------------------------------------------------------------- -- -------------- -- ------------- --- -------------
Other Comprehensive Income (Loss)
Unrealized holding gains (losses) on securities (4.6) 18.5
Income taxes 1.6 (6.7)
- --------------------------------------------------------------- -- -------------- -- ------------- --- -------------
Net unrealized holding gains (losses) on securities (3.0) 11.8
Foreign currency translation adjustments - 0.5
- --------------------------------------------------------------- -- -------------- -- ------------- --- -------------
Total other comprehensive income (loss) (3.0) 12.3
- --------------------------------------------------------------- -- -------------- -- ------------- --- -------------
Comprehensive Income $ 403.2 $ 363.8
-- ------------- --- -------------
See accompanying Condensed Notes to Combined Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMBINED BALANCE SHEETS Sprint FON Group
(millions)
- -------------------------------------------------------------------------------------------------------------------------
March 31, December 31,
1999 1998
- -------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Assets
Current assets
<S> <C> <C>
Cash and equivalents $ 83.4 $ 432.5
Accounts receivable, net of allowance for doubtful accounts
of $172.3 and $174.8 2,494.6 2,384.3
Inventories 338.2 349.7
Prepaid expenses 273.8 199.4
Affiliated receivables from the PCS Group 192.1 209.9
Other 91.4 192.3
- -------------------------------------------------------------------------------------------------------------------------
Total current assets 3,473.5 3,768.1
Investments in equity securities 455.4 489.2
Property, plant and equipment
Long distance division 9,415.2 9,241.3
Local division 15,199.6 14,858.5
Other 1,216.6 1,056.2
- -------------------------------------------------------------------------------------------------------------------------
Total property, plant and equipment 25,831.4 25,156.0
Accumulated depreciation (13,051.4) (12,692.0)
- -------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 12,780.0 12,464.0
- -------------------------------------------------------------------------------------------------------------------------
Investments in and loans to the PCS Group 649.8 656.1
Investments in and advances to other affiliates 613.9 645.0
Other assets 1,048.6 978.4
- -------------------------------------------------------------------------------------------------------------------------
Total $ 19,021.2 $ 19,000.8
-----------------------------------
Liabilities and Group Equity
Current liabilities
Current maturities of long-term debt $ 163.0 $ 33.3
Accounts payable 925.4 1,283.7
Accrued interconnection costs 738.9 592.4
Accrued taxes 457.9 346.5
Advance billings 293.0 229.3
Other 831.0 808.2
- -------------------------------------------------------------------------------------------------------------------------
Total current liabilities 3,409.2 3,293.4
Long-term debt 3,948.5 4,408.8
Deferred credits and other liabilities
Deferred income taxes and investment tax credits 828.1 828.3
Postretirement and other benefit obligations 1,053.7 1,064.1
Other 380.6 381.7
- -------------------------------------------------------------------------------------------------------------------------
Total deferred credits and other liabilities 2,262.4 2,274.1
Group equity 9,401.1 9,024.5
- -------------------------------------------------------------------------------------------------------------------------
Total $ 19,021.2 $ 19,000.8
-----------------------------------
See accompanying Condensed Notes to Combined Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMBINED STATEMENTS OF CASH FLOWS (Unaudited) Sprint FON Group
(millions)
- ------------------------------------------------------------------ ----------------- ----------------- ----------------
Quarters Ended March 31, 1999 1998
- ------------------------------------------------------------------ ----------------- ----------------- ----------------
Operating Activities
<S> <C> <C>
Net income $ 406.2 $ 351.5
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 506.0 466.6
Equity in net losses of affiliates 43.8 50.3
Deferred income taxes and investment tax credits 23.5 (114.7)
Changes in assets and liabilities:
Accounts receivable, net (110.3) (23.5)
Inventories and other current assets (10.0) (44.9)
Accounts payable and other current liabilities (228.2) 109.6
Increase in payable to the PCS Group for current tax benefits utilized 264.7 -
Affiliated receivables from and payables to the PCS Group, net (91.2) -
Noncurrent assets and liabilities, net (38.0) (13.2)
Other, net (3.6) 4.3
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash provided by operating activities 762.9 786.0
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Investing Activities
Capital expenditures (805.7) (609.3)
Repayments from and (loans to) Sprint PCS 134.7 (90.0)
Investments in and loans to other affiliates, net (67.5) (89.1)
Advances to the PCS Group - (79.9)
Equity transfers from the PCS Group, net - 70.2
Other, net (5.0) 4.3
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash used by investing activities (743.5) (793.8)
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Financing Activities
Proceeds from long-term debt - 289.5
Allocation of long-term debt to the PCS Group (277.5) -
Payments on long-term debt (12.1) (130.3)
Dividends paid (101.8) (97.7)
Other net change in group equity 25.8 (3.5)
Other, net (2.9) 6.3
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash provided (used) by financing activities (368.5) 64.3
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Increase (Decrease) in Cash and Equivalents (349.1) 56.5
Cash and Equivalents at Beginning of Period 432.5 101.7
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Cash and Equivalents at End of Period $ 83.4 $ 158.2
--- ------------- -- -------------
See accompanying Condensed Notes to Combined Financial Statements.
</TABLE>
<PAGE>
CONDENSED NOTES TO COMBINED FINANCIAL STATEMENTS Sprint FON Group
(Unaudited)
The information in this Form 10-Q has been prepared according to Securities and
Exchange Commission (SEC) rules and regulations. In our opinion, the combined
interim financial statements reflect all adjustments (consisting only of normal
recurring accruals) needed to fairly present the FON Group's combined financial
position, results of operations, cash flows and comprehensive income.
Certain information and footnote disclosures normally included in combined
financial statements prepared according to generally accepted accounting
principles have been condensed or omitted. As a result, you should read these
financial statements along with Sprint Corporation's 1998 Form 10-K. Operating
results for the 1999 year-to-date period do not necessarily represent the
results that may be expected for the year ending December 31, 1999.
- --------------------------------------------------------------------------------
1. PCS Restructuring and Recapitalization
- --------------------------------------------------------------------------------
In November 1998, Sprint's shareholders approved the formation of the FON Group
and the PCS Group and the creation of the FON stock and the PCS stock. In
addition, Sprint purchased the remaining ownership interests in Sprint Spectrum
Holding Company, L.P. and PhillieCo, L.P. (together, Sprint PCS), other than a
minority interest in Cox Communications PCS, L.P. (Cox PCS). Sprint acquired
these ownership interests from Tele-Communications, Inc., Comcast Corporation
and Cox Communications, Inc. (the Cable Partners). In exchange, Sprint issued
the Cable Partners special low-vote PCS shares and warrants to acquire
additional PCS shares. Sprint also issued the Cable Partners shares of a new
class of preferred stock convertible into PCS shares. The purchase of the Cable
Partners' interests is referred to as the PCS Restructuring.
Also in November 1998, Sprint reclassified each of its publicly traded common
shares into one share of FON stock and 1/2 share of PCS stock. This
recapitalization was tax-free to shareholders. Each Class A common share owned
by France Telecom S.A. (FT) and Deutsche Telekom AG (DT) was reclassified to
represent an equity interest in the FON Group and the PCS Group that entitles FT
and DT to one share of FON stock and 1/2 share of PCS stock. These transactions
are referred to as the Recapitalization.
In connection with the PCS Restructuring, FT and DT purchased 5.1 million
additional PCS shares to maintain their combined 20% voting power in Sprint.
The PCS stock is intended to reflect the performance of Sprint's domestic
wireless personal communication services (PCS) operations. The FON stock is
intended to reflect the performance of all of Sprint's other operations.
- --------------------------------------------------------------------------------
2. Basis of Combination and Presentation
- --------------------------------------------------------------------------------
The combined FON Group financial statements, together with the combined PCS
Group financial statements, include all the accounts in Sprint's consolidated
financial statements. The combined financial statements for each Group were
prepared on a basis that management believes is reasonable and proper and
include:
o the combined historical balance sheets, results of operations and cash
flows for each of the Groups, with all significant intragroup amounts
and transactions eliminated,
o an allocation of Sprint's debt, including the related effects on
results of operations and cash flows, and
o an allocation of corporate overhead after the PCS Restructuring date.
The FON Group entities are commonly controlled companies. Transactions between
the PCS Group and the FON Group have not been eliminated in the combined
financial statements of either Group.
The FON Group combined financial statements provide FON shareholders with
financial information about the FON Group operations. Investors in FON stock and
PCS stock are Sprint shareholders and are subject to risks related to all of
Sprint's businesses, assets and liabilities. Sprint retains ownership and
control of the assets and operations of each Group (subject to a minority
interest in Cox PCS). Financial effects of either Group that affect Sprint's
results of operations or financial condition could affect the results of
operations or financial position of the other Group or the market price of the
other Group's stock. Net losses of either Group, and dividends or distributions
on, or repurchases of PCS stock or FON stock, will reduce Sprint funds legally
available for dividends on both Groups' stock. As a result, the FON Group
combined financial statements should be read along with Sprint's consolidated
financial statements and the PCS Group's combined financial statements.
The FON Group combined 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 group equity as previously reported.
- --------------------------------------------------------------------------------
3. Investments
- --------------------------------------------------------------------------------
At the end of March 1999, investments accounted for using the equity method
consisted of the FON Group's investments in Global One, Call-Net, EarthLink and
other strategic investments. Combined, summarized financial information (100%
basis) of these entities accounted for using the equity method was as follows:
Quarter Ended
March 31,
-----------------------
1999 1998
- -------------------------------------------------------
(millions)
Results of
operations
Net operating
revenues $ 652.0 $ 533.1
-----------------------
Operating loss $ (182.8)$ (114.1)
-----------------------
Net loss $ (220.8)$ (147.4)
-----------------------
FON Group's net
losses in
affiliates $ (43.8)$ (50.3)
-----------------------
- --------------------------------------------------------------------------------
4. Income Taxes
- --------------------------------------------------------------------------------
The differences that caused the FON Group's effective income tax rates to vary
from the 35% federal statutory rate were as follows:
Quarter Ended
March 31,
-----------------------
1999 1998
- -------------------------------------------------------
(millions)
Income tax expense at the
federal statutory rate $ 233.9 $ 206.9
Effect of:
State income taxes, net of
federal income tax effect 22.1 17.9
Equity in losses of foreign
joint ventures 5.0 9.7
Other, net 1.1 0.7
- -------------------------------------------------------
Income tax expense $ 262.1 $ 235.2
-----------------------
Effective income
tax rate 39.2% 39.8%
-----------------------
- --------------------------------------------------------------------------------
5. Group Equity
- --------------------------------------------------------------------------------
Quarter Ended
March 31,
1999
-----------------------------------------------------
(millions)
Beginning balance $ 9,024.5
Net income 406.2
Dividends (108.0)
Equity issued 78.6
Equity repurchased (45.4)
Other, net 45.2
-----------------------------------------------------
Ending balance $ 9,401.1
--------------
- --------------------------------------------------------------------------------
6. Litigation, Claims and Assessments
- --------------------------------------------------------------------------------
FON shareholders are subject to all of the risks related to an investment in
Sprint and the FON Group, including the effects of any legal proceedings and
claims against the PCS Group.
In December 1996, an arbitration panel entered a $61 million award in favor of
Network 2000 Communications Corporation on its breach of contract claim against
Sprint. In June 1997, the FON Group recorded additional expense of $20 million.
This charge related to the settlement of both the claims of Network 2000 against
Sprint and a related class action lawsuit against Sprint and Network 2000. In
June 1998, the court approved the class action settlement. Some potential class
members appealed the approval of the settlement. The appeal was dismissed in
April 1999, which makes the class action settlement final.
Other suits arising in the ordinary course of business are pending against
Sprint. Management cannot predict the final outcome of these actions but
believes they will not be material to the FON Group's combined financial
statements.
<PAGE>
- --------------------------------------------------------------------------------
7. Segment Information
- --------------------------------------------------------------------------------
The FON Group operates in five business segments, based on services and
products: the long distance division, the local division, the product
distribution and directory publishing businesses, activities to develop and
deploy Sprint ION(SM), Integrated On-Demand Network, and other ventures.
Industry segment financial information was as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Produce
Distribution Corporate
Long & and Sprint
Quarters Ended Distance Local Directory Sprint Other Elim- FON
March 31, Division Division Publishing ION Ventures inations Group
- -----------------------------------------------------------------------------------------------------------------------
(millions)
1999
<S> <C> <C> <C> <C> <C> <C> <C>
Net operating revenues $ 2,625.2 $ 1,371.7 $ 425.4 $ - $ - $ (250.1) $ 4,172.2
Affiliated revenues 62.7 72.4 173.8 - - (250.1) 58.8
Operating income (loss) 387.5 364.7 55.5 (52.4) (6.1) (11.9) 737.3
1998
Net operating revenues $ 2,407.1 $ 1,309.6 $ 391.2 $ - $ - $ (216.2) $ 3,891.7
Affiliated revenues - 60.1 175.6 - - (216.2) 19.5
Operating income (loss) 319.3 351.9 59.2 (16.8) (16.6) (14.0) 683.0
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
8. Supplemental Cash Flows Information
- --------------------------------------------------------------------------------
The FON Group's cash paid for interest and income taxes was as follows:
Quarters Ended
March 31,
----------------------
1999 1998
- --------------------------------------------------------
(millions)
Interest (net of capitalized
interest) $ 24.5 $ 57.4
----------------------
Income taxes $ 185.0 $ 200.3
----------------------
Noncash activities for the FON Group consisted of the following:
Quarters Ended
March 31,
----------------------
1999 1998
- --------------------------------------------------------
(millions)
Noncash activity in group equity $ 80.6 $ 16.5
----------------------
- --------------------------------------------------------------------------------
9. Subsequent Events
- --------------------------------------------------------------------------------
In April 1999, Sprint's Board of Directors approved a two-for-one stock split of
Sprint FON Stock in the form of a dividend payable in Sprint FON shares. New
shares will be issued on June 4, 1999 to shareholders of record on May 13, 1999.
A comparable dividend will be paid on the Class A common stock owned by FT and
DT.
In April 1999, Sprint's Board of Directors declared dividends of 12.5 cents per
share on the Sprint FON stock and 37.5 cents per share on both the first and
second series convertible preferred stock. The FON stock dividends reflect the
effect of the two-for-one stock split. All dividends will be paid June 30, 1999.
In April 1999, Sprint announced that it had agreed to acquire People's Choice TV
Corp. (PCTV), a provider of wireless broadband services in several major markets
in the midwest and southwest. PCTV common stockholders will receive an aggregate
of $129 million in cash in the merger, not including amounts to be paid if
outstanding options and warrants are exercised prior to closing. Sprint also
acquired or entered into options to acquire convertible preferred stock of PCTV
from certain stockholders for an aggregate of $23 million. In addition, Sprint
will also assume the indebtedness of PCTV. PCTV had an aggregate of $287 million
of indebtedness outstanding as of year-end 1998 according to its Form 10-K
for the 1998 fiscal year.
<PAGE>
In April 1999, Sprint announced that it had agreed to acquire American
Telecasting, Inc. (ATI), a provider of wireless broadband services in several
major markets in the north central and western United States. ATI common
stockholders will receive an aggregate of $168 million in cash in the merger,
not including amounts to be paid if outstanding options and warrants are
exercised prior to closing. In addition, Sprint will also assume the
indebtedness of ATI. ATI had an aggregate of $240 million of indebtedness
outstanding as of year-end 1998 according to its Form 10-K for the fiscal year.
In May 1999, Sprint announced that it had agreed to acquire Videotron USA and
Transworld Telecommunications Inc. (TTI). Sprint agreed to purchase 100% of
Videotron USA for approximately $180 million. Videotron USA owns the wireless
licenses serving the Tampa Bay area and Greenville, South Carolina as well as a
majority interest in the licenses for several major markets in California and
Washington. The remaining interest in those licenses is owned by TTI. Sprint
agreed to purchase TTI for approximately $30 million.
These acquisitions will provide Sprint, through Sprint ION(SM), with the ability
to provide high bandwidth data, voice, Internet and video conferencing services
directly to consumers in the related markets through terrestrial wireless
connections. The transactions are subject to customary conditions, including
regulatory approval. The Videotron, TTI, PCTV and ATI transactions are subject
to approval by their stockholders. These transactions which will be accounted
for using the purchase method of accounting, are expected to close in the 1999
third and fourth quarters.
In May 1999, Sprint issued $3.5 billion of senior notes registered with the SEC.
The proceeds will be used mainly to repay existing debt. It is expected that all
or a significant portion of the debt will be allocated to the PCS Group.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Sprint FON Group
- --------------------------------------------------------------------------------
General
- --------------------------------------------------------------------------------
See Sprint's "Management's Discussion and Analysis of Financial Condition and
Results of Operations--General" for a discussion of the PCS Restructuring and
the Recapitalization.
- --------------------------------------------------------------------------------
Forward-looking Information
- --------------------------------------------------------------------------------
See Sprint's "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Forward-looking Information" for a discussion of
forward-looking information.
- --------------------------------------------------------------------------------
Sprint FON Group
- --------------------------------------------------------------------------------
Core Businesses
Long Distance Division
The long distance division is the nation's third-largest long distance phone
company. It operates a nationwide, all-digital long distance communications
network using state-of-the-art fiber-optic and electronic technology. The
division provides domestic and international voice, video and data
communications services as well as integration management and support services
for computer networks.
Local Division
The local division consists of regulated local phone companies serving nearly
7.8 million access lines in 18 states. It provides local phone services, access
by phone customers and other carriers to its local network, sales of
telecommunications equipment, and long distance services within certain regional
calling areas.
Product Distribution and Directory Publishing Businesses
The product distribution business provides wholesale distribution services of
telecommunications products. The directory publishing business publishes and
markets white and yellow page phone directories.
Sprint ION(SM)
Sprint ION extends Sprint's existing advanced network capabilities to the
customer and enables Sprint to provide the network infrastructure to meet
customers' demands for data, Internet, and video. It is also expected to be the
foundation for Sprint to provide new competitive local service.
Other Ventures
The "other ventures" segment includes the FON Group's investment in Global One,
a joint venture with FT and DT. Sprint is a 1/3 partner in Global One's
operating group serving Europe (excluding France and Germany) and is a 50%
partner in Global One's operating group for the worldwide activities outside the
United States and Europe. This segment also includes the FON Group's investments
in EarthLink Network, Inc., an Internet service provider; Call-Net, a long
distance provider in Canada operating under the Sprint brand name; and certain
other telecommunications investments and ventures. All of these investments are
accounted for on the equity basis.
- --------------------------------------------------------------------------------
Results of Operations
- --------------------------------------------------------------------------------
Net operating revenues were $4.2 billion for the 1999 first quarter, an increase
of 7% from the same 1998 period.
Net income was $406 million for the 1999 first quarter versus $352 million for
the same 1998 period. Net income for 1998 includes a $4 million extraordinary
charge related to the early extinguishment of debt.
Core Businesses
The FON Group's core businesses generated improved first quarter net operating
revenues and operating income versus the same 1998 period. Core businesses
exclude results from Sprint ION and other ventures. First quarter 1999 long
distance calling volumes increased 24% from the same 1998 period. Access lines
served by the local division increased 5.2% during the past 12 months, excluding
the sale of local exchanges in November 1998 (see "Segmental Results of
Operations--Local Division" for further details.)
<PAGE>
- --------------------------------------------------------------------------------
Segmental Results of Operations
- --------------------------------------------------------------------------------
Long Distance Division
<TABLE>
<CAPTION>
Selected Operating Results
---------------------------------------------------------------------
Quarters Ended
March 31, Variance
---------------------------------- -------------------------------
1999 1998 $ %
- ---------------------------------------------- ---------------- ----------------- -- ------------- -----------------
(millions)
<S> <C> <C> <C> <C>
Net operating revenues $ 2,625.2 $ 2,407.1 $ 218.1 9.1%
- ---------------------------------------------- -- ------------- -- -------------- -- ------------- -----------------
Operating expenses
Interconnection 1,009.4 977.3 32.1 3.3%
Operations 348.6 343.9 4.7 1.4%
Selling, general and administrative 652.6 554.3 98.3 17.7%
Depreciation and amortization 227.1 212.3 14.8 7.0%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Total operating expenses 2,237.7 2,087.8 149.9 7.2%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating income $ 387.5 $ 319.3 $ 68.2 21.4%
-- ------------- -- -------------- -- -------------
Operating margin 14.8% 13.3%
-- ------------- -- --------------
</TABLE>
Net Operating Revenues
All major market segments--business, residential and wholesale--contributed to
the increase in net operating revenues in the 1999 first quarter from the same
1998 period. The increase mainly reflects strong data services revenue growth
and strong minute growth, partly offset by a more competitive pricing
environment and a larger percentage of wholesale minutes, which have a lower
yield.
Business and Data Market
Business and data market revenues increased 13% in the 1999 first quarter from
the same 1998 period. Data services showed strong growth because of accelerated
use of the Internet and expanded service offerings. The increase also reflects
strong calling volumes for inbound and outbound toll-free calls made within the
United States.
Residential Market
Residential market revenues increased 7% in the 1999 first quarter from the same
1998 period. This increase reflects strong volume growth in residential long
distance calls. Growth was enhanced by the Sprint Sense Anytime(R) "10 by 24"
product--dime-a-minute calls, 24 hours a day--and Sprint Unlimited(R)--unlimited
long distance weekend calling for a monthly flat fee. Other growth factors
include increased prepaid card revenues as well as calling card calls made by
customers of local phone companies. Through various agreements Sprint has with
local phone companies, their customers use the Sprint network when making long
distance calls.
Wholesale Market
Wholesale market revenues increased 6% in the 1999 first quarter from the same
1998 period. This reflects strong minute growth mainly from international calls
and increased inbound and outbound toll-free calls.
Interconnection Costs
Interconnection costs consist of amounts paid to local phone companies, other
domestic service providers and foreign phone companies to complete calls made by
the division's domestic customers. These costs increased 3% in the 1999 first
quarter from the same 1998 period. The impact of increased calling volumes in
the 1999 first quarter was partly offset by reductions in per-minute costs for
both domestic and international access and an improved product mix of non-minute
driven revenues and other dedicated products. The domestic rate reductions were
generally due to FCC-mandated access rate reductions. Lower international per
minute costs reflect continued competition. Sprint expects government
deregulation and competitive pressures to add to the continued trend of
declining unit costs for international interconnection. Interconnection costs
were 38.5% of net operating revenues in the 1999 first quarter versus 40.6% for
the same period a year ago.
Operations Expense
Operations expense includes costs to operate and maintain the long distance
network and costs of equipment sales. It also includes costs to provide
operator, public payphone and video teleconferencing services as well as
telecommunications services for the hearing-impaired. Operations expense
increased 1% in the 1999 first quarter from the same 1998 period. This increase
was driven by growth in data services as well as increases in network equipment
operating leases partly offset by a decrease in product and service costs.
Operations expense also includes costs related to Sprint's efforts to achieve
Year 2000 compliance for its telecommunications network and operating systems.
Operations expense was 13.3% of net operating revenues in the 1999 first quarter
versus 14.3% for the same period a year ago.
Selling, General and Administrative Expense
Selling, general and administrative (SG&A) expense increased 18% in the 1999
first quarter from the same 1998 period. This increase mainly reflects the
overall growth of the business as well as increased marketing and promotions to
support products and services, including the rollout of an airline alliance
program, which enables customers to earn frequent flyer miles when they use
Sprint's services. SG&A also includes increased costs related to Sprint's
efforts to achieve Year 2000 compliance for information systems and applications
supporting processes such as billing, customer service and other administrative
support services. SG&A expense was 24.8% of net operating revenues in the 1999
first quarter versus 23.0% for the same period a year ago.
Depreciation and Amortization Expense
Depreciation and amortization expense increased 7% in the 1999 first quarter
from the same period a year ago. This increase was generally due to an increased
asset base to enhance network reliability, meet increased demand for voice and
data-related services and upgrade capabilities for providing new products and
services. Depreciation and amortization expense was 8.6% of net operating
revenues in the 1999 first quarter versus 8.8% for the same period a year ago.
<PAGE>
Local Division
<TABLE>
<CAPTION>
Selected Operating Results
---------------------------------------------------------------------
Quarters Ended
March 31, Variance
----------------------------------- -------------------------------
1999 1998 $ %
- --------------------------------------------- ----------------- ----------------- -- ------------- -----------------
(millions)
<S> <C> <C> <C> <C>
Net operating revenues $ 1,371.7 $ 1,309.6 $ 62.1 4.7%
- --------------------------------------------- --- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 471.3 448.7 22.6 5.0%
Selling, general and administrative 285.1 275.9 9.2 3.3%
Depreciation and amortization 250.6 233.1 17.5 7.5%
- --------------------------------------------- --- ------------- -- -------------- -- -------------
Total operating expenses 1,007.0 957.7 49.3 5.1%
- --------------------------------------------- --- ------------- -- -------------- -- -------------
Operating income $ 364.7 $ 351.9 $ 12.8 3.6%
--- ------------- -- -------------- -- -------------
Operating margin 26.6% 26.9%
--- ------------- -- --------------
</TABLE>
Sprint sold its remaining 81,000 residential and business access lines in
Illinois in November 1998. For comparative purposes, the following discussion of
local division results assumes the sale occurred at the beginning of 1998.
Adjusting for this sale, operating margin for the 1998 first quarter would have
been 26.8%.
<PAGE>
Net Operating Revenues
Net operating revenues increased 6% in the 1999 first quarter from the same 1998
period. This increase mainly reflects customer access line growth and increased
sales of network-based services such as Caller ID and Call Waiting. Customer
access lines increased 5.2% during the past 12 months.
Local Service Revenues
Local service revenues, derived from local exchange services, grew 8% in the
1999 first quarter from the same 1998 period. Local service revenues increased
because of customer access line growth and continued demand for network-based
services. Revenue growth also reflects increased sales of private line services
and revenues from maintaining customer wiring and equipment.
Network Access Revenues
Network access revenues, derived from long distance phone companies using the
local network to complete calls, increased 5% in the 1999 first quarter from the
same 1998 period. The 1999 first quarter revenues reflect an 8% increase in
minutes of use, partly offset by FCC-mandated access rate reductions.
Toll Service Revenues
Toll service revenues are mainly derived from providing long distance services
within specified regional calling areas, or LATAs, that are beyond the local
calling area. These revenues decreased 15% in the 1999 first quarter from the
same 1998 period, mainly reflecting increased competition, which is expected to
continue, in the intraLATA long distance market. In addition, toll service areas
are shrinking because certain local calling areas are expanding. The reduced
revenues were offset, in part, by increases in local service revenues and by
increases in network access revenues paid by other carriers providing intraLATA
long distance services to the local division's customers.
Other Revenues
Other revenues increased 6% in the 1999 first quarter from the same 1998 period
reflecting increased revenues from billing and collection services and
commission revenues, as well as improvements in uncollectibles.
Costs of Services and Products
Costs of services and products includes costs to operate and maintain the local
network and costs of equipment sales. This expense increased 6% in the 1999
first quarter compared to the same 1998 period reflecting customer access line
growth and continued emphasis on service levels. Costs of services and products
also includes costs related to Sprint's efforts to achieve Year 2000 compliance
for its telecommunications network and operating systems. Costs of services and
products was 34.4% of net operating revenues in the 1999 first quarter versus
34.2% for the same period a year ago.
Selling, General and Administrative Expense
SG&A expenses increased 3% in the 1999 first quarter from the same 1998 period.
This increase was mainly due to marketing costs to promote new products and
services, costs related to recently implemented financial software and increased
customer service costs related to customer access line growth. SG&A also
includes costs related to Sprint's efforts to achieve Year 2000 compliance for
information systems and applications supporting such processes as billing,
customer service, and other administrative support services. SG&A expense was
20.7% of net operating revenues in the 1999 first quarter versus 21.2% for the
same period a year ago.
Depreciation and Amortization Expense
Depreciation and amortization expense increased 8% in the 1999 first quarter
compared to the same 1998 period, mainly because of increased capital
expenditures in switching and transport technologies which have shorter asset
lives. Depreciation and amortization expense was 18.3% of net operating revenues
in the 1999 first quarter versus 17.8% for the same period a year ago.
<PAGE>
Product Distribution and Directory Publishing Businesses
<TABLE>
<CAPTION>
Selected Operating Results
---------------------------------------------------------------------
Quarters Ended
March 31, Variance
----------------------------------- -------------------------------
1999 1998 $ %
- --------------------------------------------- ----------------- ----------------- -- ------------- -----------------
(millions)
<S> <C> <C> <C> <C>
Net operating revenues $ 425.4 $ 391.2 $ 34.2 8.7%
- --------------------------------------------- --- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 334.5 303.9 30.6 10.1%
Selling, general and administrative 31.2 25.9 5.3 20.5%
Depreciation and amortization 4.2 2.2 2.0 90.9%
- --------------------------------------------- --- ------------- -- -------------- -- -------------
Total operating expenses 369.9 332.0 37.9 11.4%
- --------------------------------------------- --- ------------- -- -------------- -- -------------
Operating income $ 55.5 $ 59.2 $ (3.7) (6.3)%
--- ------------- -- -------------- -- -------------
Operating margin 13.0% 15.1%
--- ------------- -- --------------
</TABLE>
Net operating revenues increased 9% in the 1999 first quarter from the same 1998
period. Nonaffiliated revenues accounted for approximately 60% of revenues in
both the 1999 and 1998 first quarters. These revenues increased 16% in the 1999
first quarter while sales to affiliates remained flat.
Operating expenses increased 11% in the 1999 first quarter compared to the same
1998 period reflecting increased cost of sales.
Sprint ION(SM)
Quarters Ended
March 31,
------------------------
1999 1998
- ---------------------------------------------------------
(millions)
Total operating expenses $ 52.4 $ 16.8
------------------------
Operating expenses for Sprint ION in the 1999 first quarter reflect its
continued development and deployment activities including costs for network
research and testing, systems and operations development, product development,
and advertising to increase public awareness. Depreciation and amortization
totaled $6 million in the 1999 first quarter compared to $1 million for the same
period a year ago.
Other Ventures
Quarters Ended
March 31,
-----------------------
1999 1998
- -----------------------------------------------------
(millions)
Total operating expenses $ 6.1 $ 16.6
-----------------------
Equity in losses of
affiliates $ (50.8) $ (50.1)
-----------------------
Operating expenses in the 1998 first quarter mainly relate to the FON Group's
offering of Internet services. In June 1998, the FON Group completed the
strategic alliance to combine its Internet business with EarthLink. As part of
the alliance, EarthLink obtained the FON Group's Sprint Internet Passport
customers and took over the day-to-day operations of those services. At the same
time, the FON Group acquired an equity interest in EarthLink. As a result, after
June 1998, the FON Group's share of EarthLink's losses has been reflected in
"Equity in losses of affiliates" above.
Sprint recorded losses related to Global One totaling $35 million in the 1999
first quarter versus $45 million for the same period a year ago. In the 1999
first quarter, Global One continued to make progress on network enhancements,
customer service and cost and revenue alignment initiatives. Global One is
continuing these initiatives, which are expected to result in future recurring
charges.
<PAGE>
- --------------------------------------------------------------------------------
Nonoperating Items
- --------------------------------------------------------------------------------
Interest Expense
Interest costs in the following table only reflect interest costs on borrowings.
Interest costs related to deferred compensation plans, customer deposits and
intergroup borrowings have been excluded so as not to distort the effective
interest rate on borrowings.
Quarters Ended
March 31,
----------------------
1999 1998
- ----------------------------------------------------
(millions)
Interest expense on
outstanding debt $ 96.5 $ 65.4
Interest credit from PCS (29.8) -
Group
Capitalized interest costs 4.6 7.7
- ----------------------------------------------------
Total interest costs on
outstanding debt $ 71.3 $ 73.1
----------------------
Average debt outstanding $ 3,990.8 $ 3,893.1
----------------------
Effective interest rate 7.1% 7.5%
----------------------
The decrease in the FON Group's effective interest rate for the 1999 first
quarter reflects an increase in short-term borrowings, which have lower interest
rates.
Effective with the PCS Restructuring, interest expense on borrowings incurred by
Sprint and allocated to the PCS Group is based on rates the PCS Group would be
able to obtain from third parties as a direct or indirect wholly owned Sprint
subsidiary, but without the benefit of any guaranty by Sprint or any member of
the FON Group. The difference between Sprint's actual interest rates and the
rates charged to the PCS Group is reflected as a reduction in the FON Group's
interest expense.
Other Income, Net
Other income consisted of the following:
Quarters Ended
March 31,
-----------------------
1999 1998
- ------------------------------------------------------
(millions)
Dividend and interest income $ 9.5 $ 26.1
Other, net 0.6 4.8
- ------------------------------------------------------
Total $ 10.1 $ 30.9
-----------------------
Dividend and interest income for the 1999 and 1998 first quarters reflects
interest earned on temporary investments. For the 1998 first quarter, it also
reflects interest earned on loans to unconsolidated affiliates. The decrease in
"Other, net" mainly reflects increased losses from certain equity method
investments.
Income Taxes
See Note 4 of Condensed Notes to Combined Financial Statements for information
about the differences that caused the effective income tax rates to vary from
the statutory federal rate.
Extraordinary Item, Net
In the 1998 first quarter, Sprint redeemed, prior to scheduled maturities, $115
million of FON Group debt with a 9.25% interest rate. This resulted in a $4
million after-tax extraordinary loss.
<PAGE>
- --------------------------------------------------------------------------------
Financial Condition
- --------------------------------------------------------------------------------
March 31, December 31,
1999 1998
- ------------------------------------------------------
(millions)
Combined assets $ 19,021.2 $ 19,000.8
-------------------------------
See "Liquidity and Capital Resources" for information about changes in the
Combined Balance Sheets.
- --------------------------------------------------------------------------------
Liquidity and Capital Resources
- --------------------------------------------------------------------------------
Operating Activities
Quarters Ended
March 31,
----------------------
1999 1998
- -----------------------------------------------------
(millions)
Cash flows provided by
operating activities $ 762.9 $ 786.0
----------------------
The decrease in 1999 operating cash flows mainly reflects improved operating
results in the FON Group's core businesses offset by increased outflows from
working capital.
<PAGE>
Investing Activities
Quarters Ended
March 31,
-----------------------
1999 1998
-----------------------
(millions)
Cash flows used by investing
activities $ (743.5)$ (793.8)
-----------------------
Capital expenditures, which are the FON Group's largest investing activity,
totaled $806 million in the 1999 first quarter versus $609 million for the same
1998 period. Long distance capital expenditures were incurred mainly to enhance
network reliability, meet increased demand for voice and data-related services
and upgrade capabilities for providing new products and services. The local
division incurred capital expenditures to accommodate access line growth and
expand capabilities for providing enhanced services.
Cash flows for the 1999 first quarter also include the repayment of a loan made
to Sprint PCS prior to the PCS Restructuring. In the 1998 first quarter, the FON
Group had advances to the PCS Group and loans to Sprint PCS to fund capital and
operating requirements. Equity transfers from the PCS Group were mainly for the
current tax benefits used by the FON Group.
"Investments in and loans to other affiliates, net" consisted of the following:
Quarters Ended
March 31,
------------------------
1999 1998
- ------------------------------------------------------
(millions)
Global One
Capital contributions $ - $ 283.5
Advances, net - (199.7)
- ------------------------------------------------------
- 83.8
Other, net 67.5 5.3
- ------------------------------------------------------
Total $ 67.5 $ 89.1
------------------------
In the 1999 first quarter, "Other, net" includes an additional investment in
EarthLink by the FON Group. Capital contributions to Global One in the 1998
first quarter were mainly used to repay advances and to fund capital and
operating requirements.
Financing Activities
Quarters Ended
March 31,
------------------------
1999 1998
- ------------------------------------------------------
(millions)
Cash flows provided (used)
by financing activities $ (368.5)$ 64.3
------------------------
Financing activities during the 1999 first quarter mainly reflect net debt
allocated to the PCS Group of $278 million. Financing activities for the 1998
first quarter mainly reflect long-term borrowings offset by payments on existing
debt.
The FON Group paid dividends of $102 million in the 1999 first quarter versus
$98 million for the same period a year ago.
Capital Requirements
The FON Group's 1999 investing activities, mainly consisting of capital
expenditures and investments in affiliates, are expected to require cash of $4.1
to $4.4 billion. FON Group capital expenditures are expected to range between
$3.8 and $4.0 billion in 1999. The long distance and local divisions will
require the majority of this total. Sprint ION is expected to require $600 to
$700 million for capital expenditures in 1999. Investment in affiliates are
expected to require cash of $300 to $400 million. Dividend payments are expected
to total $440 million.
In connection with the PCS Restructuring, Sprint adopted a tax sharing agreement
that provides for the allocation of income taxes between the FON Group and the
PCS Group. Sprint expects the FON Group to make significant payments to the PCS
Group under the tax sharing agreement because of expected PCS Group operating
losses in the near future.
The acquisition of companies in the broadband terrestrial wireless industry such
as Videotron USA, Transworld Telecommunications Inc, People's Choice TV Corp.
and American Telecasting, Inc. are expected to require cash of $1.0 to $1.2
billion for the acquisition of equity and the assumption of indebtedness. See
Condensed Notes to the FON Group Combined Financial Statements--Subsequent
Events.
<PAGE>
Liquidity
See Sprint's "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity" for a discussion of liquidity.
- --------------------------------------------------------------------------------
Financial Strategies
- --------------------------------------------------------------------------------
Financial strategies are determined by Sprint on a centralized basis. See
Sprint's "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Financial Strategies."
- --------------------------------------------------------------------------------
Year 2000 Issue
- --------------------------------------------------------------------------------
The "Year 2000" issue affects the FON Group's installed computer systems,
network elements, software applications and other business systems that have
time-sensitive programs that may not properly reflect or recognize the year
2000. Because many computers and computer applications define dates by the last
two digits of the year, "00" may not be properly identified as the year 2000.
This error could result in miscalculations or system failures. The Year 2000
issue may also affect the systems and applications of the FON Group's customers,
vendors, resellers or affiliates.
The FON Group started a program in 1996 to identify and address the Year 2000
issue. It has completed an inventory and Year 2000 assessment of its principal
computer systems, network elements, software applications and other business
systems. The FON Group has also completed the renovation of these computer
systems, network elements, other business systems and more than 98% of its
software applications. Year 2000 testing began in the 1998 third quarter and
will be completed in 1999. The FON Group is using both internal and external
sources to identify, correct or reprogram, and test its systems for Year 2000
compliance. The FON Group is also contacting others with whom it conducts
business to receive the proper warranties and assurances that those third
parties, including affiliates, are or will be, Year 2000 compliant.
The FON Group incurred approximately $185 million through March 1999 for its
Year 2000 remediation program and expects to incur approximately $65 million
throughout the remainder of 1999. This program is designed to assure the proper
functioning of critical and secondary elements for Year 2000 compliance. When
this program is fulfilled, the FON Group has a high degree of confidence that
elements within its control will function through the upcoming date changes.
However, two risks remain: (1) the risk to the FON Group if the Year 2000
program is not fulfilled, and (2) the risk stemming from elements vulnerable to
the Year 2000 problem which are beyond the FON Group's control.
With regards to the first risk, if the Year 2000 program is not fulfilled in a
timely manner by the FON Group, its affiliates (including Global One) or any
significant third party, the Year 2000 issue could have a material adverse
effect on the FON Group's operations. The FON Group is focusing on identifying
and addressing all aspects of its operations that may be affected by the Year
2000 issue.
With regards to the second risk, the FON Group is evaluating events beyond its
control that could occur prior to and after the arrival of the year 2000. The
FON Group is reviewing its existing disaster recovery plans and developing
additional contingency and business continuity plans to prepare for the Year
2000. Most of these plans are scheduled to be completed in the second quarter.
The FON Group will implement, if necessary, appropriate contingency and business
continuity plans to mitigate to the extent possible the effects of any Year 2000
noncompliance.
The FON Group has begun to review the risks related to a worst case scenario,
which could result from a Year 2000 related failure. This scenario could result
in a temporary disruption to normal business operations and could impact the FON
Group's financial performance. Based upon the work completed to date, the FON
Group believes that such an occurrence is unlikely. Nevertheless, certain
elements related to the Year 2000 readiness of suppliers, utilities,
interconnecting carriers and customers are beyond the FON Group's control and
could fail. The FON Group does not believe that the failure of such elements
could cause a major breakdown within its normal operations.
<PAGE>
Annex III
Sprint PCS Group
Combined Financial Information
<PAGE>
<TABLE>
<CAPTION>
COMBINED STATEMENTS OF OPERATIONS (Unaudited) Sprint PCS Group
(millions, except per share data)
- -------------------------------------------------------------------------------------------------------------------
Quarters Ended March 31, 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Operating Revenues $ 604.2 $ 203.3
- -------------------------------------------------------------------------------------------------------------------
Operating Expenses
Costs of services and products 549.5 217.1
Selling, general and administrative 533.8 313.4
Depreciation and amortization 348.7 141.6
- -------------------------------------------------------------------------------------------------------------------
Total operating expenses 1,432.0 672.1
- -------------------------------------------------------------------------------------------------------------------
Operating Loss (827.8) (468.8)
Interest expense (151.7) (104.7)
Other partners' loss in Sprint PCS - 305.2
Other income, net 27.3 37.4
- -------------------------------------------------------------------------------------------------------------------
Loss before income tax benefit and extraordinary item (952.2) (230.9)
Income taxes 347.2 85.7
- -------------------------------------------------------------------------------------------------------------------
Loss before Extraordinary Item (605.0) (145.2)
Extraordinary item, net (20.6) -
- -------------------------------------------------------------------------------------------------------------------
Net Loss (625.6) $ (145.2)
---------------
Preferred stock dividends (3.5)
- ----------------------------------------------------------------------------------------------------
Loss applicable to common stock $ (629.1)
---------------
Basic and Diluted Loss per Common Share(1)
Loss before extraordinary item $ (1.41) $ (0.97)
Extraordinary item (0.05) -
- -------------------------------------------------------------------------------------------------------------------
Total $ (1.46) $ (0.97)
------------------------------
Basic and diluted weighted average common shares(1) 431.7 415.8
------------------------------
(1) Basic and diluted loss per common share and weighted average common shares
for the 1998 first quarter are pro forma and assume the PCS Restructuring,
Recapitalization and Top-up occurred at the beginning of 1998 and exclude
the write-off of $179 million of acquired in-process research and
development. These pro forma amounts are for comparative purposes only and
do not necessarily represent what actual results of operations would have
been had the transactions occurred at the beginning of 1998, nor do they
indicate the results of future operations.
See accompanying Condensed Notes to Combined Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMBINED BALANCE SHEETS Sprint PCS Group
(millions)
- -------------------------------------------------------------------------------------------------------------------------
March 31, December 31,
1999 1998
- -------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Assets
Current assets
<S> <C> <C>
Cash and equivalents $ 65.0 $ 172.7
Accounts receivable, net of allowance for
doubtful accounts of $25.9 and $10.7 357.1 306.4
Inventories 162.2 127.4
Current tax benefit receivable from the FON Group 435.2 170.5
Prepaids and other current assets 95.2 78.8
- -------------------------------------------------------------------------------------------------------------------------
Total current assets 1,114.7 855.8
Property, plant and equipment
Network equipment 5,032.7 3,998.8
Construction work in progress 993.0 1,607.2
Buildings and leasehold improvements 1,127.1 1,026.3
Other 398.1 356.0
- -------------------------------------------------------------------------------------------------------------------------
Total property, plant and equipment 7,550.9 6,988.3
Accumulated depreciation (689.0) (453.4)
- -------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 6,861.9 6,534.9
Intangible assets
Goodwill 3,335.0 3,313.4
PCS licenses 3,057.2 3,036.6
Customer base 681.4 681.4
Microwave relocation costs 378.0 354.5
Other 53.4 45.4
------------------------------------------------------------------------------------------------------------------------
Total intangible assets 7,505.0 7,431.3
Accumulated amortization (195.9) (93.5)
- -------------------------------------------------------------------------------------------------------------------------
Net intangible assets 7,309.1 7,337.8
Other assets 410.9 409.9
- -------------------------------------------------------------------------------------------------------------------------
Total $ 15,696.6 $ 15,138.4
-----------------------------------
Liabilities and Group Equity
Current liabilities
Current maturities of long-term debt $ 182.1 $ 348.3
Accounts payable 519.0 371.2
Construction obligations 890.1 978.9
Accrued taxes 97.0 93.4
Accrued interest 135.1 92.3
Affiliated payables to the FON Group 192.1 75.2
Accrued expenses and other current liabilities 380.2 440.4
- -------------------------------------------------------------------------------------------------------------------------
Total current liabilities 2,395.6 2,399.7
Long-term debt and capital lease obligations 8,127.1 7,846.7
Deferred credits and other liabilities
Deferred income taxes 1,086.9 1,013.3
Other 95.4 123.2
- -------------------------------------------------------------------------------------------------------------------------
Total deferred credits and other liabilities 1,182.3 1,136.5
Group equity 3,991.6 3,755.5
- -------------------------------------------------------------------------------------------------------------------------
Total $ 15,696.6 $ 15,138.4
-----------------------------------
See accompanying Condensed Notes to Combined Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMBINED STATEMENTS OF CASH FLOWS (Unaudited) Sprint PCS Group
(millions)
- ------------------------------------------------------------------ ----------------- ----------------- ----------------
Quarters Ended March 31, 1999 1998
- ------------------------------------------------------------------ ----------------- ----------------- ----------------
Operating Activities
<S> <C> <C>
Net loss $ (625.6) $ (145.2)
Adjustments to reconcile net loss to net cash provided (used) by
operating activities:
Equity in net losses of affiliates - 209.7
Deferred income taxes 63.8 12.8
Depreciation and amortization 348.7 -
Extraordinary item, net 20.6 -
Current tax benefit used by the FON Group - (98.4)
Changes in assets and liabilities:
Accounts receivable, net (49.8) -
Inventories and other current assets (69.4) (15.2)
Accounts payable and other current liabilities 97.1 137.1
Increase in receivable from the FON Group for current tax benefits
utilized (264.7) -
Affiliate receivables from and payables to the
FON Group, net 91.2 -
Noncurrent assets and liabilities, net (10.4) 3.2
Other, net 26.9 -
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash provided (used) by operating activities (371.6) 104.0
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Investing Activities
Capital expenditures (511.6) (178.6)
Purchase of PrimeCo Hawaii (82.2) -
Investments in Sprint PCS - (33.5)
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash used by investing activities (593.8) (212.1)
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Financing Activities
Proceeds from long-term debt 1,980.1 -
Payments on long-term debt (1,958.1) -
Proceeds from PCS common stock issued 841.9 -
Advances from the FON Group - 79.9
Equity transfers to the FON Group, net - (70.2)
Current tax benefit used by the FON Group - 98.4
Other, net (6.2) -
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash provided by financing activities 857.7 108.1
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Decrease in Cash and Equivalents (107.7) -
Cash and Equivalents at Beginning of Period 172.7 -
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Cash and Equivalents at End of Period $ 65.0 $ -
--- ------------- -- -------------
See accompanying Condensed Notes to Combined Financial Statements.
</TABLE>
<PAGE>
CONDENSED NOTES TO COMBINED FINANCIAL STATEMENTS (Unaudited) Sprint PCS Group
The information in this Form 10-Q has been prepared according to Securities and
Exchange Commission (SEC) rules and regulations. In our opinion, the combined
interim financial statements reflect all adjustments (consisting only of normal
recurring accruals) needed to fairly present the PCS Group's combined financial
position, results of operations and cash flows.
Certain information and footnote disclosures normally included in combined
financial statements prepared according to generally accepted accounting
principles have been condensed or omitted. As a result, you should read these
financial statements along with Sprint Corporation's 1998 Form 10-K. Operating
results for the 1999 year-to-date period do not necessarily represent the
results that may be expected for the year ending December 31, 1999.
- --------------------------------------------------------------------------------
1. PCS Restructuring and Recapitalization
- --------------------------------------------------------------------------------
In November 1998, Sprint's shareholders approved the formation of the FON Group
and the PCS Group and the creation of the FON stock and the PCS stock. In
addition, Sprint purchased the remaining ownership interests in Sprint Spectrum
Holding Company, L.P. and PhillieCo, L.P. (together, Sprint PCS), other than a
minority interest in Cox Communications PCS, L.P. (Cox PCS). Sprint acquired
these ownership interests from Tele-Communications, Inc., Comcast Corporation
and Cox Communications, Inc. (the Cable Partners). In exchange, Sprint issued
the Cable Partners special low-vote PCS shares and warrants to acquire
additional PCS shares. Sprint also issued the Cable Partners shares of a new
class of preferred stock convertible into PCS shares. The purchase of the Cable
Partners' interests is referred to as the PCS Restructuring.
Also in November 1998, Sprint reclassified each of its publicly traded common
shares into one share of FON stock and 1/2 share of PCS stock. This
recapitalization was tax-free to shareholders. Each Class A common share owned
by France Telecom S.A. (FT) and Deutsche Telekom AG (DT) was reclassified to
represent an equity interest in the FON Group and the PCS Group that entitles FT
and DT to one share of FON stock and 1/2 share of PCS stock. These transactions
are referred to as the Recapitalization.
In connection with the PCS Restructuring, FT and DT purchased 5.1 million
additional PCS shares to maintain their combined 20% voting power in Sprint
(Top-up).
The PCS stock is intended to reflect the performance of Sprint's domestic
wireless personal communication services (PCS) operations. The FON stock is
intended to reflect the performance of all of Sprint's other operations.
- --------------------------------------------------------------------------------
2. Basis of Combination and Presentation
- --------------------------------------------------------------------------------
The combined PCS Group financial statements, together with the combined FON
Group financial statements, include all the accounts in Sprint's consolidated
financial statements. The combined financial statements for each Group were
prepared on a basis that management believes is reasonable and proper and
include:
o the combined historical balance sheets, results of operations and cash
flows for each of the Groups, with all significant intragroup amounts
and transactions eliminated,
o an allocation of Sprint's debt, including the related effects on
results of operations and cash flows, and
o an allocation of corporate overhead after the PCS Restructuring date.
The PCS Group entities are commonly controlled companies and, with the exception
of Cox PCS, are wholly owned by Sprint. Transactions between the PCS Group and
the FON Group have not been eliminated in the combined financial statements of
either Group.
The PCS Group combined financial statements provide PCS shareholders with
financial information about the PCS Group operations. Investors in FON stock and
PCS stock are Sprint shareholders and are subject to risks related to all of
Sprint's businesses, assets and liabilities. Sprint retains ownership and
control of the assets and operations of each Group (subject to a minority
interest in Cox PCS). Financial effects of either Group that affect Sprint's
results of operations or financial condition could affect the results of
operations or financial position of the other Group or the market price of the
other Group's stock. Net losses of either Group, and dividends or distributions
on, or repurchases of, PCS stock or FON stock will reduce Sprint funds legally
available for dividends on both Groups' stock. As a result, the PCS Group
combined financial statements should be read along with Sprint's consolidated
financial statements and the FON Group's combined financial statements.
<PAGE>
Sprint PCS' 1998 first quarter results of operations have been consolidated. The
Cable Partners' share of losses through the PCS Restructuring date has been
reflected as "Other partners' loss in Sprint PCS" in the Combined Statements of
Operations. Sprint PCS' financial position has been reflected on a consolidated
basis at year-end 1998. The PCS Group's 1998 first quarter cash flows reflect
the operations of SprintCom and Sprint's investment in Sprint PCS.
The PCS Group combined 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 group equity as previously reported.
- --------------------------------------------------------------------------------
3. Income Taxes
- --------------------------------------------------------------------------------
The differences that caused the PCS Group's effective income tax rates to vary
from the 35% statutory federal rate were as follows:
Quarters Ended
March 31,
----------------------
1999 1998
- -----------------------------------------------------
(millions)
Income tax benefit at the
statutory rate $ (333.3) $ (80.8)
Effect of:
State income taxes, net of
federal income tax effect (19.1) (6.4)
Goodwill amortization 6.8 -
Other, net (1.6) 1.5
- -----------------------------------------------------
Income tax benefit $ (347.2) $ (85.7)
----------------------
Effective income tax rate 36.5% 37.1%
----------------------
- --------------------------------------------------------------------------------
4. Group Equity
- --------------------------------------------------------------------------------
Quarters Ended
March 31,
1999
-----------------------------------------------------
(millions)
Beginning balance $ 3,755.5
Net loss (625.6)
Common stock issued 868.6
Other, net (6.9)
-----------------------------------------------------
Ending balance $ 3,991.6
------------------
- --------------------------------------------------------------------------------
5. Litigation, Claims and Assessments
- --------------------------------------------------------------------------------
PCS shareholders are subject to all of the risks related to an investment in
Sprint and the PCS Group, including the effects of any legal proceedings and
claims against the FON Group.
Various suits arising in the ordinary course of business are pending against
Sprint. Management cannot predict the final outcome of these actions but
believes they will not be material to the PCS Group's combined financial
statements.
<PAGE>
- --------------------------------------------------------------------------------
6. Supplemental Cash Flows Information
- --------------------------------------------------------------------------------
The PCS Group's cash paid (received) for interest and income taxes was as
follows:
Quarters Ended
March 31,
----------------------
1999 1998
- -----------------------------------------------------
(millions)
Interest (net of capitalized
interest) $ 107.0 $ -
----------------------
Income taxes $ (164.2)$ -
----------------------
Noncash activities for the PCS Group included the following:
Quarters Ended
March 31,
----------------------
1999 1998
- -----------------------------------------------------
(millions)
Capital lease obligations $ 77.2 $ 80.9
----------------------
Noncash activity in group
equity $ 26.7 $ -
----------------------
<PAGE>
- --------------------------------------------------------------------------------
7. Subsequent Events
- --------------------------------------------------------------------------------
In April 1999, Cox Communications, Inc. exercised a put option requiring Sprint
to purchase the remaining 40.8% interest in Cox PCS for 24.3 million shares of
Series 2 PCS stock. The transaction is expected to close during the 1999 second
quarter.
In May 1999, Sprint issued $3.5 billion of senior notes registered with the SEC.
The proceeds will be used mainly to repay existing debt. It is expected that all
or a significant portion of the debt will be allocated to the PCS Group.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Sprint PCS Group
- --------------------------------------------------------------------------------
General
- --------------------------------------------------------------------------------
See Sprint's "Management's Discussion and Analysis of Financial Condition and
Results of Operations--General" for a discussion of the PCS Restructuring and
the Recapitalization.
- --------------------------------------------------------------------------------
Forward-looking Information
- --------------------------------------------------------------------------------
See Sprint's "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Forward-looking Information" for a discussion of
forward-looking information.
- --------------------------------------------------------------------------------
Sprint PCS Group
- --------------------------------------------------------------------------------
The PCS Group includes Sprint's domestic wireless mobile phone services. It
operates the only 100% digital PCS wireless network in the United States with
licenses to provide nationwide service using a single frequency and a single
technology. At the end of March 1999, the PCS Group, together with certain
affiliates, operated PCS systems in the 50 largest U.S. metropolitan areas. The
PCS Group has licenses to serve more than 270 million people in all 50 states,
Puerto Rico and the U.S. Virgin Islands. The PCS Group's service now reaches
nearly 170 million people. The PCS Group provides nationwide service through:
o operating its own digital network in major U.S. metropolitan areas,
o affiliating with other companies, mainly in and around smaller U.S.
metropolitan areas,
o roaming on other providers' analog cellular networks using
Dual-Band/Dual-Mode handsets, and
o roaming on other providers' digital PCS networks that use code
division multiple access.
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.
<PAGE>
- --------------------------------------------------------------------------------
Results of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Selected Operating Results
---------------------------------------------------------------------
Quarters Ended
March 31, Variance
---------------------------------- -------------------------------
1999 1998 $ %
- ---------------------------------------------- ---------------- ----------------- -- ------------- -----------------
(millions)
<S> <C> <C> <C> <C>
Net operating revenues $ 604.2 $ 203.3 $ 400.9 197.2%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 549.5 217.1 332.4 153.1%
Selling, general and administrative 533.8 313.4 220.4 70.3%
Depreciation and amortization 348.7 141.6 207.1 146.3%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Total operating expenses 1,432.0 672.1 759.9 113.1%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating loss $ (827.8) $ (468.8) $ (359.0) 76.6%
-- ------------- -- -------------- -- -------------
Operating loss before depreciation and
amortization $ (479.1) $ (327.2) $ (151.9) 46.4%
-- ------------- -- -------------- -- -------------
</TABLE>
The PCS Group markets its products through multiple distribution channels,
including its own retail stores as well as other retail outlets. Equipment sales
to one retailer, and the related service revenues generated by such sales,
accounted for 28% of net operating revenues in the 1999 first quarter.
<PAGE>
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 197% from the same 1998 period
reflecting a 200% increase in the number of customers. The PCS Group added
approximately 763,000 customers in the 1999 first quarter and had nearly 3.4
million customers in more than 280 markets nationwide at the end of March 1999.
Average monthly service revenue per user (ARPU) was $52 for the 1999 first
quarter and $57 for the same 1998 period. ARPU decreased due to a wider
acceptance of lower rate usage plans.
Approximately 20% of the 1999 first quarter net operating revenues, and 15% of
the 1998 first quarter net operating revenues were from sales of handsets and
accessories. As part of the PCS Group's marketing plans, handsets are normally
sold at prices below the PCS Group's cost.
Operating Expenses
Costs of services and products mainly includes handset and accessory costs,
interconnection costs, and switch and cell site expenses. These costs increased
153% in the 1999 first quarter reflecting the significant growth in customers
and expanded market coverage, offset by a reduction in handset unit costs.
Selling, general and administrative (SG&A) expense mainly includes marketing
costs to promote products and services, as well as salary and benefits costs.
SG&A expense increased 70% reflecting increased marketing and advertising costs
and labor costs to support the growth in subscriber activity.
Depreciation and amortization expense consists of depreciation of network assets
and amortization of intangible assets. The intangible assets include goodwill,
PCS licenses, customer base, microwave relocation costs and assembled
workforce, which are being amortized over three to 40 years. Depreciation and
amortization expense increased 146% reflecting amortization of intangible assets
acquired in the PCS Restructuring and depreciation of the network assets placed
in service after the 1998 first quarter. On a pro forma basis, assuming the PCS
Restructuring occurred at the beginning of 1998, depreciation and amortization
expense would have increased 38%.
- --------------------------------------------------------------------------------
Nonoperating Items
- --------------------------------------------------------------------------------
Interest Expense
Interest costs in the following table only reflect interest costs on borrowings.
Quarters Ended
March 31,
--------------------------
1999 1998
- ------------------------------------------------------
(millions)
Interest expense on
outstanding debt $ 150.8 $ 78.7
Capitalized interest costs 25.8 25.5
- ------------------------------------------------------
Total interest costs on
outstanding debt $ 176.6 $ 104.2
--------------------------
Average debt outstanding(1) $ 8,255.0 $ 4,508.9
--------------------------
Effective interest rate 8.6% 9.2%
--------------------------
(1) Average debt outstanding for the 1998 first quarter is on a pro forma basis
as if Sprint PCS debt had been included in the PCS Group's outstanding debt
balance for the entire quarter.
The decrease in the PCS Group's effective interest rate for the 1999 first
quarter mainly reflects an increase in short-term borrowings allocated from
Sprint, which have lower interest rates.
Effective with the PCS Restructuring, interest expense on borrowings incurred by
Sprint and allocated to the PCS Group is based on rates the PCS Group would be
able to obtain from third parties as a direct or indirect wholly owned Sprint
subsidiary, but without the benefit of any guaranty by Sprint or any member of
the FON Group. The difference between Sprint's actual interest rates and the
rates charged to the PCS Group totaled $30 million in the 1999 first quarter.
During the 1999 first quarter, Sprint allocated $1.8 billion of senior notes and
short-term borrowings to the PCS Group.
Other Partners' Loss in Sprint PCS
Prior to the PCS Restructuring, the PCS Group's ownership interest in Sprint PCS
was accounted for using the equity method. In 1998, the Cable Partners' share of
losses through the PCS Restructuring date has been reflected as "Other partners'
loss in Sprint PCS" in the Combined Statements of Operations.
<PAGE>
Other Income, Net
Other income for the 1999 first quarter mainly includes minority interest in Cox
PCS of $20 million compared with $34 million for the same 1998 period.
Income Taxes
See Note 3 of Condensed Notes to Combined Financial Statements for the
differences that caused the effective income tax rates to vary from the
statutory federal rate.
Extraordinary Item, Net
In the 1999 first quarter, Sprint terminated some of the PCS Group's 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%. This resulted in a $21 million after-tax extraordinary loss.
- --------------------------------------------------------------------------------
Financial Condition
- --------------------------------------------------------------------------------
March 31, December 31,
1999 1998
- -----------------------------------------------------
(millions)
Combined assets $ 15,696.6 $ 15,138.4
--------------------------------
The increase in assets from year-end partly reflects the current tax benefit
receivable from the FON Group. This increase of $265 million was driven by the
PCS Group's 1999 first quarter current income tax benefit, offset by payments
from the FON Group during the period. This benefit was used by the FON Group
under the tax sharing agreement as discussed in "Liquidity and Capital
Resources."
Net property, plant and equipment increased $327 million since year-end 1998
mainly reflecting capital expenditures to support the PCS network buildout and
expansion.
- --------------------------------------------------------------------------------
Liquidity and Capital Resources
- --------------------------------------------------------------------------------
The PCS Group's first quarter 1998 cash flows reflect the operations of
SprintCom and Sprint's investment in Sprint PCS and accordingly are not
comparable.
Operating Activities
Quarters Ended
March 31
----------------------
1999 1998
- ------------------------------------------------------
(millions)
Cash flows provided (used) by
operating activities $ (371.6) $ 104.0
----------------------
Operating cash flows decreased $476 million in the 1999 first quarter reflecting
increased losses for the PCS Group, as well as increased outflows from working
capital. In connection with the PCS Restructuring, Sprint adopted a tax sharing
agreement that provides for the allocation of income taxes between the FON Group
and the PCS Group. The current tax benefit receivable from the FON Group
increased reflecting the PCS Group's 1999 first quarter income tax benefit,
offset by payments from the FON Group during the period.
Investing Activities
Quarters Ended
March 31,
----------------------
1999 1998
- ------------------------------------------------------
(millions)
Cash flows used by investing
activities $ (593.8) $ (212.1)
----------------------
Capital expenditures, which are the PCS Group's largest investing activity,
totaled $512 million in the 1999 first quarter, versus $179 million for the same
1998 period for SprintCom alone. Capital expenditures in both years were mainly
for the buildout and expansion of the PCS network. Also in the 1999 first
quarter, the PCS Group invested $82 million to purchase PCS operations in
Hawaii.
Financing Activities
Quarters Ended
March 31,
----------------------
1999 1998
- ------------------------------------------------------
(millions)
Cash flows provided by
financing activities $ 857.7 $ 108.1
----------------------
In the 1999 first quarter, financing activities reflect proceeds from
long-term debt offset by payments on existing debt. In addition, the PCS Group
received $842 million of proceeds from a secondary offering of PCS common stock
in February. Financing activities for the 1998 first quarter reflect advances
to and equity transfers from the PCS Group as well as current tax benefits used
by the FON Group.
Capital Requirements
The PCS Group's 1999 investing activities, mainly consisting of capital
expenditures, are expected to be between $2.9 and $3.2 billion. Additional funds
will be required to fund expected operating losses, working capital and debt
service requirements of the PCS Group.
In April 1999, Cox exercised a put option that requires Sprint to purchase
the remaining 40.8% interest in Cox PCS for 24.3 million shares of Series 2
PCS stock. This transaction is expected to close during the 1999 second
quarter.
PCS preferred stock dividend payments are expected to total $15 million in 1999,
including payments to the FON Group for its preferred intergroup interest.
Liquidity
See Sprint's "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity" for a discussion of liquidity.
- --------------------------------------------------------------------------------
Financial Strategies
- --------------------------------------------------------------------------------
Financial strategies are determined by Sprint on a centralized basis. See
Sprint's "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Financial Strategies."
- --------------------------------------------------------------------------------
Year 2000 Issue
- --------------------------------------------------------------------------------
The "Year 2000" issue affects the PCS Group's installed computer systems,
network elements, software applications, and other business systems that have
time-sensitive programs that may not properly reflect or recognize the year
2000. Because many computers and computer applications define dates by the last
two digits of the year, "00" may not be properly identified as the year 2000.
This error could result in miscalculations or system failures. The Year 2000
issue may also affect the systems and applications of the PCS Group's
customers, vendors, resellers or affiliates.
The PCS Group has completed an inventory and assessment of its computer systems,
network elements, software applications, products and other business systems.
Testing began in the 1999 first quarter and is forecasted to be completed by
year-end. The PCS Group 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.
The PCS Group 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. The PCS Group relies on third-party vendors for
a significant portion of its important operating and computer system functions
and is highly dependent on those third-party vendors to remediate and test
network elements, computer systems, software applications and other business
systems. However, the PCS Group is reviewing test results provided by its
vendors to help ensure Year 2000 compliance. In addition, the PCS Group 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 the PCS Group believes these publicly available systems
will be Year 2000 compliant, it has no contractual or other right to force
compliance.
The PCS Group incurred approximately $15 million through March 1999 and expects
to incur approximately $35 million throughout the remainder of 1999 for its Year
2000 remediation program. This program is designed to assure the proper
functioning of critical and secondary elements for Year 2000 compliance. When
this program is fulfilled, the PCS Group has a high degree of confidence that
elements within its control will function through the upcoming date changes.
However, two risks remain: (1) the risk to the PCS Group if the Year 2000
program is not fulfilled, and (2) the risk stemming from elements vulnerable to
the Year 2000 problem which are beyond the PCS Group's control.
With regards to the first risk, if the Year 2000 program is not fulfilled in a
timely manner by the PCS Group, its affiliates or any significant third party,
the Year 2000 issue could have a material adverse effect on the PCS Group's
operations. The PCS Group is focusing on identifying and addressing all aspects
of its operations that may be affected by the Year 2000 issue.
With regards to the second risk, the PCS Group is evaluating events beyond its
control that could occur prior to and after the arrival of the year 2000. The
PCS Group is reviewing its existing disaster recovery plans and developing
additional contingency and business continuity plans to prepare for the year
2000. Most of these plans are scheduled to be completed in the second quarter.
The PCS Group will implement, if necessary, appropriate contingency and business
continuity plans to mitigate to the extent possible the effects of any Year 2000
noncompliance.
The PCS Group has begun to review the risks related to a worst case scenario,
which could result from a Year 2000 related failure. This scenario could result
in a temporary disruption to normal business operations and could impact the PCS
Group's financial performance. Based upon the work completed to date, the PCS
Group believes that such an occurrence is unlikely. Nevertheless, certain
elements related to the Year 2000 readiness of suppliers, utilities,
interconnecting carriers and customers are beyond the PCS Group's control and
could fail. At this point, the PCS Group does not believe that the failure of
such elements could cause a major breakdown within its normal operations.
