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 June 30, 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 JUNE 30, 1999:
FON COMMON STOCK 781,270,186
PCS COMMON STOCK 429,330,031
CLASS A COMMON STOCK 86,236,036
<PAGE>
<TABLE>
<CAPTION>
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 7
Exhibits
ANNEX I
SPRINT CORPORATION
Consolidated Financial Information
Consolidated Statements of Operations I-1
Consolidated Statements of Comprehensive Income (Loss) I-3
Consolidated Balance Sheets I-4
Consolidated Statements of Cash Flows I-6
Consolidated Statement of Shareholders' Equity I-7
Condensed Notes to Consolidated Financial Statements I-8
Management's Discussion and Analysis of Financial Condition and Results of Operations I-13
ANNEX II
SPRINT FON GROUP
Combined Financial Information
Combined Statements of Operations II-1
Combined Statements of Comprehensive Income II-2
Combined Balance Sheets II-3
Combined Statements of Cash Flows II-4
Condensed Notes to Combined Financial Statements II-5
Management's Discussion and Analysis of Financial Condition and Results of Operations II-10
ANNEX III
SPRINT PCS GROUP
Combined Financial Information
Combined Statements of Operations III-1
Combined Balance Sheets III-2
Combined Statements of Cash Flows 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>
7
<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 June 30, 1999.
Item 2. Changes in Securities
On April 20, 1999, the Sprint Board declared a two-for-one stock split
of Sprint's 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 is 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 is 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 is 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 was also
adjusted. The First Series Convertible Preferred Stock now converts
into 6 shares of FON Common Stock and 1.5 shares of PCS Common Stock.
The Second Series Convertible Preferred Stock now converts into 6.18
shares of FON Common Stock and 1.54 shares of PCS Common Stock.
In May 1999, Sprint issued an aggregate of 24,299,504 shares of Series
2 PCS Stock that were not registered under the Securities Act of 1933
to affiliates of Cox Communications ("Cox") in exchange for their 40.8%
interest in Cox Communications PCS, L.P., which provides wireless
personal communications services in the Los Angeles --San Diego -- Las
Vegas MTA.
The sale of shares 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 all
material information regarding Sprint was available to Cox. Cox is an
accredited investor having sufficient knowledge and experience in
financial and business matters necessary to evaluate the merits and
risks of its investment. Cox was informed that the transaction was
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 June 30, 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 Sprint Board 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 Sprint Board 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 Sprint Board 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
Sprint's earnings, as adjusted, were inadequate to cover fixed charges
by $162 million in the 1999 second quarter and $438 million for the
1999 year-to-date period. Sprint's ratio of earnings to fixed charges
was 2.14 for the 1998 second quarter and 2.23 for the 1998 year-to-date
period. The ratios were 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.
<PAGE>
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) Summary of Amendments to Stock Based Plans in
Connection with the FON Common Stock Split.
(b) 1990 Stock Option Plan, as amended (filed as Exhibit
10(k) to Sprint Corporation Annual Report on Form 10-K
for the year ended December 31, 1998 and incorporated
herein by reference). Summary of Amendments to the 1990
Stock Option Plan. Also see Exhibit 10(a).
(c) Management Incentive Stock Option Plan, as amended
(filed as Exhibit 10(n) to Sprint Corporation Annual
Report on Form 10-K for the year ended December 31,
1998 and incorporated herein by reference). Summary of
Amendments to the Management Incentive Stock Option
Plan. Also see Exhibit 10(a).
(d) Executive Deferred Compensation Plan, as amended (filed
as Exhibit (10)(k) to Sprint Corporation Annual Report
on Form 10-K for the year ended December 31, 1996 and
incorporated herein by reference). Summary of
amendments (filed as Exhibit 10(c) to Sprint
Corporation Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998 and incorporated herein by
reference). Summary of additional amendments (filed as
Exhibit 10(m) to Sprint Corporation Annual Report on
Form 10-K for the year ended December 31, 1998 and
incorporated herein by reference). Summary of
Amendments to the Directors' Deferred Fee Plan, the
Executive Deferred Compensation Plan and the Centel
Directors Deferred Compensation Plan in Connection with
the FON Common Stock Split.
<PAGE>
(e) Directors' Deferred Fee Plan, as amended (filed as
Exhibit (10)(x) to Sprint Corporation Annual Report on
Form 10-K for the year ended December 31, 1996 and
incorporated herein by reference. Summary of amendments
(filed as Exhibit 10(c) to Sprint Corporation Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998
and incorporated herein by reference). Summary of
additional amendments (filed as Exhibit 10(m) to Sprint
Corporation Annual Report on Form 10-K for the year
ended December 31, 1998 and incorporated herein by
reference). Summary of Amendments to the Directors'
Deferred Fee Plan, the Executive Deferred Compensation
Plan and the Centel Directors Deferred Compensation
Plan in Connection with the FON Common Stock Split (see
Exhibit 10(d)).
(f) 1985 Stock Option Plan, as amended (filed as Exhibit
(10)(a) to Sprint Corporation Quarterly Report on Form
10-Q for the quarter ended September 30, 1997 and
incorporated herein by reference). Also see Exhibit
10(a).
(g) 1990 Restricted Stock Plan, as amended (filed as
Exhibit 10(l) to Sprint Corporation Annual Report on
Form 10-K for the year ended December 31, 1998 and
incorporated herein by reference). Also see Exhibit
10(a).
(h) 1997 Long-Term Stock Incentive Program (filed as part
of Annex VII to the proxy statement/prospectus that
forms a part of Sprint Corporation's Registration
Statement on Form S-4 (No. 333-65173) and incorporated
herein by reference). Also see Exhibit 10(a).
(i) Amended and Restated Centel Director Stock Option Plan
(filed as Exhibit 10(aa) to Sprint Corporation Annual
Report on Form 10-K for the year ended December 31,
1993, and incorporated herein by reference). Also see
Exhibit 10(a).
(j) Amended and Restated Centel Directors Deferred
Compensation Plan (filed as Exhibit (10)(c) to Sprint
Corporation Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997 and incorporated
herein by reference). Summary of Amendments to the
Directors' Deferred Fee Plan, the Executive Deferred
Compensation Plan and the Centel Directors Deferred
Compensation Plan (see Exhibit 10(d)).
(12) Computation of Ratio of Earnings to Fixed Charges
(27) Financial Data Schedule
(a) June 30, 1999
(b) Reports on Form 8-K
Sprint filed a Current Report on Form 8-K dated April 20, 1999, in
which it reported that it had announced first quarter 1999 results in
both its FON Group and its PCS Group. It also reported that the Sprint
Board had 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, and that Cox
Communications had exercised its right to require Sprint to purchase
Cox's 40.8% interest in Cox Communications PCS, L.P.
The news release regarding first quarter 1999 results, which was
included as an Exhibit to the Current Report, included the following
financial information:
Sprint FON Group Combined Statements of Income
Sprint FON Group Selected Operating Results
Sprint FON Group Condensed Combined Balance Sheets
Sprint FON Group Condensed Combined Cash Flow Information
Sprint PCS Group Combined Statements of Operations
Sprint PCS Group Condensed Combined Balance Sheets
Sprint PCS Group Condensed Combined Cash Flow Information
Sprint Corporation Condensed Consolidated Balance Sheets
Sprint Corporation Condensed Consolidated Cash Flow Information
<PAGE>
Sprint filed a Current Report on Form 8-K dated May 3, 1999, in which
it reported that it had entered into a definitive agreement to acquire
Videotron USA, the wireless broadband subsidiary of LE Groupe Videotron
Ltee, and to purchase Transworld Telecommunications Inc. It also
reported that it had previously agreed to acquire People's Choice TV
Corp. and American Telecasting, Inc.
Sprint filed a Current Report on Form 8-K dated June 13, 1999, in which
it reported that Deloitte & Touche LLP, the independent auditors for
Sprint Spectrum Holding Company, L.P., and its subsidiaries, had been
replaced by Ernst & Young LLP.
<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: August 16, 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) Summary of Amendments to Stock Based Plans in
Connection with the FON Common Stock Split.
(b) 1990 Stock Option Plan, as amended (filed as Exhibit
10(k) to Sprint Corporation Annual Report on Form 10-K
for the year ended December 31, 1998 and incorporated
herein by reference). Summary of Amendments to the 1990
Stock Option Plan. Also see Exhibit 10(a).
(c) Management Incentive Stock Option Plan, as amended
(filed as Exhibit 10(n) to Sprint Corporation Annual
Report on Form 10-K for the year ended December 31,
1998 and incorporated herein by reference). Summary of
Amendments to the Management Incentive Stock Option
Plan. Also see Exhibit 10(a).
(d) Executive Deferred Compensation Plan, as amended (filed
as Exhibit (10)(k) to Sprint Corporation Annual Report
on Form 10-K for the year ended December 31, 1996 and
incorporated herein by reference). Summary of
amendments (filed as Exhibit 10(c) to Sprint
Corporation Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998 and incorporated herein by
reference). Summary of additional amendments (filed as
Exhibit 10(m) to Sprint Corporation Annual Report on
Form 10-K for the year ended December 31, 1998 and
incorporated herein by reference). Summary of
Amendments to the Directors' Deferred Fee Plan, the
Executive Deferred Compensation Plan and the Centel
Directors Deferred Compensation Plan in Connection with
the FON Common Stock Split.
(e) Directors' Deferred Fee Plan, as amended (filed as
Exhibit (10)(x) to Sprint Corporation Annual Report on
Form 10-K for the year ended December 31, 1996 and
incorporated herein by reference. Summary of amendments
(filed as Exhibit 10(c) to Sprint Corporation Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998
and incorporated herein by reference). Summary of
additional amendments (filed as Exhibit 10(m) to Sprint
Corporation Annual Report on Form 10-K for the year
ended December 31, 1998 and incorporated herein by
reference). Summary of Amendments to the Directors'
Deferred Fee Plan, the Executive Deferred Compensation
Plan and the Centel Directors Deferred Compensation
Plan in Connection with the FON Common Stock Split (see
Exhibit 10(d)).
(f) 1985 Stock Option Plan, as amended (filed as Exhibit
(10)(a) to Sprint Corporation Quarterly Report on Form
10-Q for the quarter ended September 30, 1997 and
incorporated herein by reference). Also see Exhibit
10(a).
(g) 1990 Restricted Stock Plan, as amended (filed as
Exhibit 10(l) to Sprint Corporation Annual Report on
Form 10-K for the year ended December 31, 1998 and
incorporated herein by reference). Also see Exhibit
10(a).
(h) 1997 Long-Term Stock Incentive Program (filed as part
of Annex VII to the proxy statement/prospectus that
forms a part of Sprint Corporation's Registration
Statement on Form S-4 (No. 333-65173) and incorporated
herein by reference). Also see Exhibit 10(a).
(i) Amended and Restated Centel Director Stock Option Plan
(filed as Exhibit 10(aa) to Sprint Corporation Annual
Report on Form 10-K for the year ended December 31,
1993, and incorporated herein by reference). Also see
Exhibit 10(a).
(j) Amended and Restated Centel Directors Deferred
Compensation Plan (filed as Exhibit (10)(c) to Sprint
Corporation Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997 and incorporated
herein by reference). Summary of Amendments to the
Directors' Deferred Fee Plan, the Executive Deferred
Compensation Plan and the Centel Directors Deferred
Compensation Plan (see Exhibit 10(d)).
(12) Computation of Ratio of Earnings to Fixed Charges
(27) Financial Data Schedule
(a) June 30, 1999
Exhibit 10(a)
Summary of Amendments to Stock Based Plans
in Connection with the FON Common Stock Split
In connection with the 2-for-1 stock split of Sprint's FON Common Stock in the
form of a dividend paid in shares of FON Common Stock, each of Sprint's stock
based employee benefit plans and benefit plans for members of its Board of
Directors was amended to double the authorized number of shares of FON Common
Stock that remained available for issuance pursuant to that plan as of the
record date for the stock dividend.
In addition, where these plans contain a limitation on the number of shares of
FON Common Stock (or, in the case of Section 6.03 of the 1990 Stock Option Plan,
the number of shares of all classes of common stock) that can be subject to
awards granted, the plans were amended to double the number of shares subject to
each limitation. Outstanding options to purchase FON Common Stock were adjusted
to reflect the stock dividend by doubling the number of shares subject to each
option and dividing the strike price by two.
Plans that were amended include the 1985 Stock Option Plan, the 1990 Stock
Option Plan, the 1990 Restricted Stock Plan, the Management Incentive Stock
Option Plan, the 1997 Long-Term Stock Incentive Program, the Amended and
Restated Centel Director Stock Option Plan, the Amended and Restated Centel
Stock Option Plan and the 1988 Employees Stock Purchase Plan.
Exhibit 10(b)
Summary of Amendments to the
Management Incentive Stock Option Plan
The Management Incentive Stock Option Plan was amended, effective April 20,
1999, to add the following to Section 7(a):
If, in the judgment of the Company's
Corporate Secretary, the number of shares
available on the exercise of the original
options falls below a number sufficient to
provide for the grant of reload options and
for other purposes under the Plan, the
Company's Corporate Secretary may authorize
the issuance of reload options from any
other plan of the Company's under which
sufficient shares are authorized but not issued.
In addition, the Management Incentive Stock Option Plan
was amended as set forth in Exhibit 10(a).
Exhibit 10(c)
Summary of Amendments to the 1990 Stock Option Plan
The 1990 Stock Option Plan was amended, effective April 20, 1999, to add the
following sections:
11.02(i) Terms of a Foreign Reload Option.
A Foreign Reload Option shall be subject to
the terms and conditions set forth in the
plan in which the underlying reload right
was granted.
15.24 Foreign Reload Option.
"Foreign Reload Option" means a reload
option issued with respect to an option
issued under a plan of Sprint other than
this Plan.
Sections 15.24 to 15.55 were renumbered as Sections
15.25 to 15.56.
In addition, the 1990 Stock Option Plan was amended as
set forth in Exhibit 10(a).
Exhibit 10(d)
Summary of Amendments to the Directors' Deferred Fee Plan,
the Executive Deferred Compensation Plan
and the Centel Directors Deferred Compensation Plan
in Connection with the FON Common Stock Split
In connection with the 2-for-1 stock split of Sprint's FON Common Stock in the
form of a dividend paid in shares of FON Common Stock, the Directors' Deferred
Fee Plan and the Executive Deferred Compensation Plan were amended to double the
Share Units in Accounts B and BB to reflect the stock dividend. The Centel
Directors Deferred Compensation Plan was amended to double the Units in the FON
Tracking Stock Account.
<TABLE>
<CAPTION>
EXHIBIT (12)
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Unaudited) Sprint Corporation
Quarters Ended Year-to-Date
June 30, June 30,
---------------------------------------------------------------
1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Earnings
Income (loss) before income
<S> <C> <C> <C> <C>
taxes and extraordinary items $ (229) $ 359 $ (513) $ 720
Capitalized interest (28) (36) (58) (69)
Equity in (gains) losses of
less than 50% owned entities 95 (3) 133 18
- --------------------------------------------------------------------------------------------------------------------
Subtotal (162) 320 (438) 669
- --------------------------------------------------------------------------------------------------------------------
Fixed charges
Interest charges 240 197 464 396
Interest factor of operating
rents 58 84 132 147
- --------------------------------------------------------------------------------------------------------------------
Total fixed charges 298 281 596 543
- --------------------------------------------------------------------------------------------------------------------
Earnings, as adjusted $ 136 $ 601 $ 158 $ 1,212
---------------------------------------------------------------
Ratio of earnings to fixed charges(1) 0.46 2.14 0.27 2.23
---------------------------------------------------------------
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)Earnings, as adjusted, were inadequate to cover fixed charges by $162
million in the 1999 second quarter and $438 million for the 1999
year-to-date period.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-END> Jun-30-1999
<CASH> 103
<SECURITIES> 0
<RECEIVABLES> 3,363
<ALLOWANCES> 233
<INVENTORY> 575
<CURRENT-ASSETS> 4,596
<PP&E> 34,487
<DEPRECIATION> 14,311
<TOTAL-ASSETS> 36,099
<CURRENT-LIABILITIES> 5,665
<BONDS> 12,822
0
247
<COMMON> 2,220
<OTHER-SE> 11,520
<TOTAL-LIABILITY-AND-EQUITY> 36,099
<SALES> 0
<TOTAL-REVENUES> 9,645
<CGS> 0
<TOTAL-COSTS> 6,535
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 406
<INCOME-PRETAX> (513)
<INCOME-TAX> (145)
<INCOME-CONTINUING> (368)
<DISCONTINUED> 0
<EXTRAORDINARY> (21)
<CHANGES> 0
<NET-INCOME> (389)
<EPS-BASIC> 0<F1>
<EPS-DILUTED> 0<F1>
<FN>
<F1> FON Group EPS - Basic 0.92
FON Group EPS - Diluted 0.90
PCS Group EPS - Basic (2.66)
PCS Group EPS - Diluted (2.66)
In the 1999 second quarter, Sprint effected a two-for-one stock split of its
FON common stock. New shares were issued June 4, 1999 to shareholders of record
on May 13, 1999. Prior Financial Data Schedules have not been restated for this
stock split.
</FN>
</TABLE>
Annex I
SPRINT CORPORATION
Consolidated Financial Information
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Sprint Corporation
(millions)
- --------------------------------------------- ----------------------------------- ----------------------------------
Quarters Ended Year-to-Date
June 30, June 30,
- --------------------------------------------- ----------------------------------- ----------------------------------
1999 1998 1999 1998
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
<S> <C> <C> <C> <C>
Net Operating Revenues $ 4,928 $ 4,189 $ 9,645 $ 8,265
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Operating Expenses
Costs of services and products 2,380 2,127 4,795 4,197
Selling, general and administrative 1,635 1,227 3,172 2,411
Depreciation and amortization 885 650 1,740 1,258
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total operating expenses 4,900 4,004 9,707 7,866
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Operating Income (Loss) 28 185 (62) 399
Interest expense (212) (174) (406) (340)
Equity in loss of Global One (90) (42) (124) (87)
Other partners' loss in Sprint PCS - 335 - 640
Other income, net 45 55 79 108
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Income (Loss) before income taxes and
extraordinary items (229) 359 (513) 720
Income taxes 60 (148) 145 (298)
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Income (Loss) before Extraordinary Items (169) 211 (368) 422
Extraordinary items, net - - (21) (4)
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net Income (Loss) $ (169) 211 $ (389) 418
--- ------------- -- -------------
Preferred stock dividends paid (1) (1)
-- -------------- --- -------------
Earnings applicable to common stock $ 210 $ 417
-- -------------- --- -------------
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 June 30, 1999 1999 1998
- --------------------------------------------------------------------------------------------------------------------
FON PCS Sprint
Common Common Common
Stock Stock Stock
-----------------------------------------------
<S> <C> <C> <C>
Earnings (Loss) Applicable to Common Stock $ 387 $ (558) $ 210
-----------------------------------------------
Diluted Earnings (Loss) per Common Share $ 0.44 $ (1.21) $ 0.48
-----------------------------------------------
Diluted weighted average common shares 887.1 460.0 439.5
-----------------------------------------------
Basic Earnings (Loss) per Common Share $ 0.45 $ (1.21) $ 0.49
-----------------------------------------------
Basic weighted average common shares 866.7 460.0 430.5
-----------------------------------------------
DIVIDENDS PER COMMON SHARE
Sprint common stock N/A N/A $ 0.25
-----------------------------------------------
FON common stock $ 0.125 N/A N/A
-----------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Year-to-Date June 30, 1999 1999 1998
- --------------------------------------------------------------------------------------------------------------------
FON PCS Sprint
Common Common Common
Stock Stock Stock
-----------------------------------------------
<S> <C> <C> <C>
Earnings (Loss) Applicable to Common Stock $ 795 $ (1,188) $ 417
-----------------------------------------------
Diluted Earnings (Loss) per Common Share
Income (Loss) before extraordinary items $ 0.90 $ (2.62) $ 0.96
Extraordinary items, net - (0.04) (0.01)
- --------------------------------------------------------------------------------------------------------------------
Total $ 0.90 $ (2.66) $ 0.95
-----------------------------------------------
Diluted weighted average common shares 883.7 445.9 439.0
-----------------------------------------------
Basic Earnings (Loss) per Common Share
Income (Loss) before extraordinary items $ 0.92 $ (2.62) $ 0.98
Extraordinary items, net - (0.04) (0.01)
- --------------------------------------------------------------------------------------------------------------------
Total $ 0.92 $ (2.66) $ 0.97
-----------------------------------------------
Basic weighted average common shares 864.9 445.9 430.3
-----------------------------------------------
DIVIDENDS PER COMMON SHARE
Sprint common stock N/A N/A $ 0.50
-----------------------------------------------
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, basic and diluted earnings per common share for Sprint common
stock reflects earnings through the Recapitalization date, while basic
and diluted earnings (loss) per common share for FON common stock and
PCS common stock reflects results subsequent to that date. In the 1999
second quarter, Sprint effected a two-for-one stock split of its FON
common stock.
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 Year-to-Date
June 30, June 30,
- --------------------------------------------- ----------------------------------- ----------------------------------
1999 1998 1999 1998
- --------------------------------------------- ----------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Net Income (Loss) $ (169) $ 211 $ (389) $ 418
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Other Comprehensive Income (Loss)
Unrealized holding gains (losses) on
securities 10 (5) 4 14
Income taxes (4) 2 (2) (5)
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net unrealized holding gains (losses) on
securities during the period 6 (3) 2 9
Reclassification adjustment, net of tax (57) - (57) -
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total net unrealized holding gains (losses)
on securities (51) (3) (55) 9
Foreign currency translation adjustments - (3) - (2)
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total other comprehensive income (loss) (51) (6) (55) 7
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Comprehensive Income (Loss) $ (220) $ 205 $ (444) $ 425
--- ------------- -- -------------- -- ------------- --- -------------
See accompanying Condensed Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS Sprint Corporation
(millions)
- -------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
1999 1998
- -------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Assets
Current assets
<S> <C> <C>
Cash and equivalents $ 103 $ 605
Accounts receivable, net of allowance for doubtful accounts of
$233 and $186 3,130 2,690
Inventories 575 477
Prepaid expenses 338 260
Income tax receivable 333 171
Other 117 184
- -------------------------------------------------------------------------------------------------------------------------
Total current assets 4,596 4,387
Investments in equity securities 435 489
Property, plant and equipment
FON Group 26,488 25,156
PCS Group 7,999 6,988
- -------------------------------------------------------------------------------------------------------------------------
Total property, plant and equipment 34,487 32,144
Accumulated depreciation (14,311) (13,161)
- -------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 20,176 18,983
Investments in and advances to affiliates 699 645
Intangible assets
Goodwill 4,912 3,701
PCS licenses 3,057 3,037
Other 1,213 1,137
- -------------------------------------------------------------------------------------------------------------------------
Total intangible assets 9,182 7,875
Accumulated amortization (415) (182)
- -------------------------------------------------------------------------------------------------------------------------
Net intangible assets 8,767 7,693
Other assets 1,426 1,033
- -------------------------------------------------------------------------------------------------------------------------
Total $ 36,099 $ 33,230
-----------------------------------
See accompanying Condensed Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS (continued) Sprint Corporation
(millions, except per share data)
- -------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
1999 1998
- -------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Liabilities and Shareholders' Equity
Current liabilities
<S> <C> <C>
Current maturities of long-term debt $ 664 $ 247
Accounts payable 1,400 1,655
Construction obligations 939 979
Accrued interconnection costs 708 592
Accrued taxes 381 439
Advance billings 300 229
Other 1,273 1,299
- -------------------------------------------------------------------------------------------------------------------------
Total current liabilities 5,665 5,440
- -------------------------------------------------------------------------------------------------------------------------
Long-term debt and capital lease obligations 12,822 11,942
Deferred credits and other liabilities
Deferred income taxes and investment tax credits 2,060 1,830
Postretirement and other benefit obligations 1,055 1,064
Other 510 506
- -------------------------------------------------------------------------------------------------------------------------
Total deferred credits and other liabilities 3,625 3,400
Shareholders' equity
Common stock
Class A, par value $2.50 per share, 200.0 shares authorized, 86.2
shares issued and outstanding (each share represents the right to
one FON share and 1/2 PCS share) 216 216
FON, par value $2.00 per share, 4,200.0 shares authorized, 786.8 and 350.3
shares issued and 781.3 and 344.5 shares outstanding 1,574 701
PCS, par value $1.00 per share, 2,350.0 shares authorized, 430.5 and 375.4
shares issued and 429.3 and 372.7 shares outstanding 430 375
PCS preferred stock, no par, 0.3 shares authorized, 0.2 shares issued and
outstanding 247 247
Capital in excess of par or stated value 8,778 7,586
Retained earnings 2,965 3,651
Treasury stock, at cost, 6.7 and 8.5 shares (273) (426)
Accumulated other comprehensive income 49 104
Other 1 (6)
- -------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 13,987 12,448
- -------------------------------------------------------------------------------------------------------------------------
Total $ 36,099 $ 33,230
-----------------------------------
See accompanying Condensed Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Sprint Corporation
(millions)
- ------------------------------------------------------------------ ----------------- ----------------- ----------------
Year-to-Date June 30, 1999 1998
- ------------------------------------------------------------------ ----------------- ----------------- ----------------
Operating Activities
<S> <C> <C>
Net income (loss) $ (389) $ 418
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Equity in net losses of affiliates 149 522
Extraordinary items, net 21 1
Depreciation and amortization 1,740 935
Deferred income taxes and investment tax credits (15) (17)
Changes in assets and liabilities:
Accounts receivable, net (440) 3
Inventories and other current assets (484) (29)
Accounts payable and other current liabilities 104 615
Noncurrent assets and liabilities, net (28) (44)
Other, net (61) 4
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash provided by operating activities 597 2,408
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Investing Activities
Capital expenditures (2,630) (2,041)
Investments in and loans to affiliates, net (257) (451)
Investments in fixed wireless broadband licenses (141) -
Other, net 12 (17)
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash used by investing activities (3,016) (2,509)
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Financing Activities
Proceeds from long-term debt 3,523 495
Payments on long-term debt (2,346) (165)
Proceeds from PCS common stock issued 843 -
Dividends paid (216) (205)
Treasury stock purchased (48) (110)
Other, net 161 77
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash provided by financing activities 1,917 92
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Decrease in Cash and Equivalents (502) (9)
Cash and Equivalents at Beginning of Period 605 102
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Cash and Equivalents at End of Period $ 103 $ 93
--- ------------- -- -------------
See accompanying Condensed Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Unaudited) Sprint Corporation
(millions)
- ----------------------------------------------------------------------------------------------------------------------
Year-to-Date June 30, 1999
- ----------------------------------------------------------------------------------------------------------------------
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 $ 216 $ 701 $ 622 $ 7,586 $ 3,651 $ (426) $ 98 $12,448
Net loss - - - - (389) - - (389)
FON common stock dividends - - - - (184) - - (184)
Class A common stock dividends - - - - (32) - - (32)
PCS preferred stock dividends - - - - (7) - - (7)
PCS Series 1 common stock issued - - 25 658 - - - 683
PCS Series 2 common stock issued - - 24 1,122 - - - 1,146
PCS Series 3 common stock issued - - 7 163 - - - 170
Two-for-one stock split - 873 - (873) - - - -
Treasury stock purchased - - - - - (48) - (48)
Treasury stock issued - - - - (77) 201 - 124
Tax benefit from stock options
exercised - - - 74 - - - 74
Other, net - - (1) 48 3 - (48) 2
- ----------------------------------------------------------------------------------------------------------------------
June 1999 balance $ 216 $1,574 $ 677 $ 8,778 $ 2,965 $ (273) $ 50 $13,987
--------------------------------------------------------------------------------------
Shares Outstanding
- ------------------------------------------------------------------
Beginning 1999 balance 86.2 344.5 372.9
PCS Series 1 common stock issued - - 24.7
PCS Series 1 common stock
converted to PCS Series 3
common stock - - (0.9)
PCS Series 2 common stock issued - - 24.3
PCS Series 3 common stock issued - - 7.0
Two-for-one stock split - 433.5 -
Treasury stock purchased - (0.6) -
Treasury stock issued - 3.9 1.5
- ------------------------------------------------------------------
June 1999 balance 86.2 781.3 429.5
-------------------------------
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 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 year-to-date cash flows reflect the FON Group's operations as well as the
operations of SprintCom, Inc. 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 4).
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.
- --------------------------------------------------------------------------------
3. Acquisitions
- --------------------------------------------------------------------------------
In the 1999 second quarter, Sprint announced that it had agreed to acquire
People's Choice TV Corp. (PCTV), which owns fixed wireless broadband licenses in
several major markets in the Midwest and Southwest. PCTV common stockholders
will receive an aggregate of approximately $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 approximately $23 million. In addition, Sprint will also assume the
indebtedness of PCTV. PCTV had an aggregate of approximately $296 million of
indebtedness outstanding as of March 1999 according to its Form 10-Q.
In the 1999 second quarter, Sprint announced that it had agreed to acquire
American Telecasting, Inc. (ATI), which owns fixed wireless broadband licenses
in several major markets in the North Central and Western United States. ATI
common stockholders will receive an aggregate of approximately $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 approximately $249 million of
indebtedness outstanding as of March 1999 according to its Form 10-Q.
In the 1999 second quarter, Sprint announced that it had agreed to acquire
Videotron USA and Transworld Telecommunications Inc. (TTI). Sprint agreed to
purchase Videotron USA for approximately $180 million, less outstanding debt.
Sprint agreed to purchase TTI for approximately $30 million. Through these
acquisitions, Sprint will acquire the fixed wireless broadband licenses serving
several major markets in California, Florida, South Carolina and Washington.
In July 1999, Sprint announced that it had agreed to acquire the operating
subsidiaries of WBS America, LLC (WBS), which owns fixed wireless broadband
licenses in California and Florida markets. Sprint agreed to purchase these WBS
subsidiaries for approximately $108 million less assumed debt.
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 fixed wireless connections.
The transactions, which are subject to customary conditions, have received
Federal Trade Commission and U.S. Department of Justice approval, but are
awaiting approval by the Federal Communications Commission. These transactions
will be accounted for using the purchase method of accounting, and are expected
to close in the 1999 third and fourth quarters.
In the 1999 second quarter, Cox Communications, Inc. exercised a put option
requiring Sprint to purchase the remaining 40.8% interest in Cox PCS. Sprint
issued 24.3 million shares of low-vote PCS stock in exchange for this interest.
At that time, the shares were valued at $1.1 billion. Sprint accounted for the
transaction as a purchase. The excess of the purchase price over the fair value
of the net liabilities acquired totaled $1.2 billion and was allocated mainly to
goodwill, which is being amortized over 40 years.
<PAGE>
- --------------------------------------------------------------------------------
4. Investments
- --------------------------------------------------------------------------------
At the end of June 1999, investments accounted for using the equity method
consisted of the FON Group's investments in Global One, Earthlink, Call-Net 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:
<TABLE>
<CAPTION>
Quarters Ended Year-to-Date
June 30, June 30,
----------------------------------- ----------------------------------
1999 1998 1999 1998
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions)
Results of operations
<S> <C> <C> <C> <C>
Net operating revenues $ 612 $ 519 $ 1,264 $ 1,052
--- ------------- -- -------------- -- ------------- --- -------------
Net operating loss $ (209) $ (112) $ (392) $ (226)
--- ------------- -- -------------- -- ------------- --- -------------
Net loss $ (329) $ (154) $ (550) $ (301)
--- ------------- -- -------------- -- ------------- --- -------------
Sprint's net losses in affiliates $ (105) $ (36) $ (149) $ (86)
--- ------------- -- -------------- -- ------------- --- -------------
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
5. Income Taxes
- --------------------------------------------------------------------------------
The differences that caused Sprint's effective income tax rates to vary from the
35% federal statutory rate were as follows:
Year-to-Date
June 30,
-------------------------
1999 1998
- -------------------------------------------------------
(millions)
Income tax expense (benefit)
at the federal statutory $ (180) $ 252
rate
Effect of:
State income taxes, net
of federal income tax 5 26
effect
Equity in losses of
foreign joint ventures 13 20
Goodwill amortization 15 -
Other, net 2 -
- -------------------------------------------------------
Income tax expense (benefit) $ (145) $ 298
-------------------------
Effective income tax rate 28.3% 41.4%
-------------------------
- --------------------------------------------------------------------------------
6. Long-term Debt and Capital Lease Obligations
- --------------------------------------------------------------------------------
In the 1999 second quarter, Sprint issued $3.5 billion of 5-year, 10-year and
20-year senior notes registered with the SEC. These notes have interest rates
ranging from 5.9% to 6.9%. The proceeds were used mainly to repay short-term
borrowings classified as long-term debt.
- --------------------------------------------------------------------------------
7. Stock Split
- --------------------------------------------------------------------------------
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 were issued on June 4, 1999 to shareholders of record on May 13, 1999. A
comparable dividend was paid on the Class A common stock owned by FT and DT. FON
Group earnings per common share, dividends per common share and weighted average
common shares have been restated to reflect the stock split.
- --------------------------------------------------------------------------------
8. Litigation, Claims and Assessments
- --------------------------------------------------------------------------------
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 Sprint's consolidated financial
statements.
<PAGE>
- --------------------------------------------------------------------------------
9. 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. See
Note 8 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 June 30, FON Group PCS Group Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------
(millions)
1999
<S> <C> <C> <C> <C>
Net operating revenues $ 4,244 $ 736 $ (52) $ 4,928
Intergroup revenues 50 2 (52) -
Operating income (loss) 736 (708) - 28
1998
Net operating revenues $ 3,945 $ 265 $ (21) $ 4,189
Intergroup revenues 21 - (21) -
Operating income (loss) 692 (507) - 185
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Sprint Sprint Intergroup
Year-to-Date June 30, FON Group PCS Group Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------
(millions)
1999
<S> <C> <C> <C> <C>
Net operating revenues $ 8,416 $ 1,340 $ (111) $ 9,645
Intergroup revenues 109 2 (111) -
Operating income (loss) 1,473 (1,535) - (62)
1998
Net operating revenues $ 7,837 $ 468 $ (40) $ 8,265
Intergroup revenues 40 - (40) -
Operating income (loss) 1,375 (976) - 399
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
10. Supplemental Cash Flows Information
- --------------------------------------------------------------------------------
Sprint's cash paid (received) for interest and income taxes was as follows:
Year-to-Date
June 30,
-------------------------
1999 1998
- -------------------------------------------------------
(millions)
Interest (net of capitalized
interest) $ 390 $ 126
-------------------------
Income taxes $ (19) $ 224
-------------------------
Sprint's noncash activities included the following:
Year-to-Date
June 30,
-------------------------
1999 1998
- -------------------------------------------------------
(millions)
Capital lease obligations $ 77 $ 256
-------------------------
Common stock issued under
Sprint's ESPP $ 41 $ 3
-------------------------
Tax benefit from stock
options exercised $ 74 $ 19
-------------------------
Common stock issued under
long-term incentive plan $ 28 $ 4
-------------------------
Common stock issued for Cox
PCS acquisition $ 1,146 $ -
-------------------------
- --------------------------------------------------------------------------------
11. Subsequent Events
- --------------------------------------------------------------------------------
In July 1999, Sprint filed a shelf registration statement with the SEC covering
$4.0 billion of senior unsecured debt securities. The proceeds will be used
mainly to repay debt. Sprint may also use a portion of the proceeds for general
purposes, including working capital requirements, acquisitions, and new capital
investments.
In August 1999, Sprint entered into a long-term debt agreement to borrow $250
million from a financial institution. Sprint will use the proceeds for general
purposes, including working capital requirements, acquisitions, and new capital
investments.
Debt resulting from these borrowings will be allocated to the FON Group or the
PCS Group based on their cash requirements.
In August 1999, Sprint's Board of Directors declared dividends of 12.5 cents per
share on the Sprint FON common and Class A common stock and 37.5 cents per share
on both the first and second series convertible preferred stock. All dividends
will be paid September 30, 1999.
<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. (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.
In May 1999, Cox Communications, Inc. exercised a put option requiring Sprint to
purchase the remaining 40.8% interest in Cox PCS. Sprint issued 24.3 million
shares of low-vote PCS stock in exchange for this interest. At that time, the
shares were valued at $1.1 billion. Sprint accounted for the transaction as a
purchase. The excess of the purchase price over the fair value of the net
liabilities acquired totaled $1.2 billion and was allocated mainly to goodwill,
which is being amortized over 40 years.
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 mainly provides domestic and international voice, video and data
communications services.
Local Division
The local division consists of regulated local phone companies serving nearly
7.9 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.
<PAGE>
- --------------------------------------------------------------------------------
General Overview of the Sprint PCS Group
- --------------------------------------------------------------------------------
The PCS Group includes Sprint's domestic wireless PCS operations. It operates
the only 100% digital PCS wireless network in the United States with licenses to
provide service nationwide using a single frequency and a single technology. At
the end of June 1999, the PCS Group, together with certain affiliates, operated
PCS systems in 286 metropolitan markets, including 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 service
offered by the PCS Group and its affiliates now reaches over 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
<TABLE>
<CAPTION>
Total net operating revenues were as follows:
Quarters Ended Year-to-Date
June 30, June 30,
----------------------------------- ----------------------------------
1999 1998 1999 1998
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions)
<S> <C> <C> <C> <C>
FON Group $ 4,244 $ 3,945 $ 8,416 $ 7,837
PCS Group 736 265 1,340 468
Intergroup eliminations (52) (21) (111) (40)
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net operating revenues $ 4,928 $ 4,189 $ 9,645 $ 8,265
--- ------------- -- -------------- -- ------------- --- -------------
</TABLE>
<TABLE>
<CAPTION>
Income (Loss) before extraordinary items was as follows:
Quarters Ended Year-to-Date
June 30, June 30,
----------------------------------- ----------------------------------
1999 1998 1999 1998
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions)
<S> <C> <C> <C> <C>
FON Group $ 386 $ 364 $ 792 $ 720
PCS Group (555) (153) (1,160) (298)
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Income (Loss) before extraordinary items $ (169) $ 211 $ (368) $ 422
--- ------------- -- -------------- -- ------------- --- -------------
</TABLE>
Sprint FON Group
<TABLE>
<CAPTION>
Quarters Ended Year-to-Date
June 30, June 30,
----------------------------------- ----------------------------------
1999 1998 1999 1998
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions)
<S> <C> <C> <C> <C>
Net operating revenues $ 4,244 $ 3,945 $ 8,416 $ 7,837
Operating expenses 3,508 3,253 6,943 6,462
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Operating income $ 736 $ 692 $ 1,473 $ 1,375
--- ------------- -- -------------- -- ------------- --- -------------
Operating margin 17.3% 17.5% 17.5% 17.5%
--- ------------- -- -------------- -- ------------- --- -------------
</TABLE>
<PAGE>
Net Operating Revenues
Net operating revenues were $4.2 billion for the 1999 second quarter, an
increase of 8% from $3.9 billion for the same 1998 period. This increase mainly
reflects growth in the FON Group's long distance and local divisions.
Net operating revenues for the first six months in 1999 increased 7% to $8.4
billion from $7.8 billion for the same 1998 period.
Long Distance Division
All major market segments--business, residential and wholesale--contributed to
the increase in net operating revenues in both second quarter and year-to-date
1999 from the same 1998 periods. These increases mainly reflect strong data
services revenue growth and strong minute growth, partly offset by a more
competitive pricing environment. Second quarter and year-to-date 1999 long
distance calling volumes increased 24% from the same 1998 periods.
Business and data market revenues increased 11% in the 1999 second quarter and
12% for the 1999 year-to-date period from the same 1998 periods. These increases
reflect growth in data services as well as toll-free inbound and outbound calls.
Residential market revenues increased 5% in the 1999 second quarter and 6% in
the 1999 year-to-date period from the same 1998 periods. These increases reflect
strong volume growth in residential long distance calls, partly offset by lower
FON card usage. Other growth factors include increased prepaid card revenues and
calling card calls made by customers of local phone companies.
Wholesale market revenues increased 17% in the 1999 second quarter and 8% in the
1999 year-to-date period from the same 1998 periods. These reflect 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 5% in the 1999 second quarter and year-to-date
periods from the same 1998 periods. These increases mainly reflect customer
access line growth and increased sales of network-based services such as Caller
ID and Call Waiting. Customer access lines increased 5.3% during the past 12
months.
Local service revenues grew 10% in the 1999 second quarter and 9% in the 1999
year-to-date period from the same 1998 periods 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 1% in the 1999 second quarter and 3% in the
1999 year-to-date period from the same 1998 periods reflecting an 8% increase in
minutes of use, largely offset by FCC-mandated access rate reductions.
Toll service revenues decreased 15% in the 1999 second quarter and year-to-date
periods from the same 1998 periods, mainly reflecting increased competition,
which is expected to continue, in the intraLATA long distance market. In
addition, toll service areas are shrinking as certain local calling areas are
expanding. The reduced revenues were offset, in part, by increases in local
service revenues due to expanded local calling areas, and by increases in
network access revenues paid by other carriers providing intraLATA long distance
services to the local division's customers. Sprint's long distance division has
acquired some of the customer base which helps mitigate the erosion of these
revenues.
<PAGE>
Other revenues increased 5% in the 1999 second quarter and 6% in the 1999
year-to-date period from the same 1998 periods reflecting increased revenues
from billing and collection services and commission revenues, increased
equipment sales, and improvements in uncollectibles.
Product Distribution & Directory Publishing Businesses
The product distribution and directory publishing businesses' revenues remained
flat in the 1999 second quarter and increased 4% in the 1999 year-to-date period
from the same 1998 periods. Nonaffiliated revenues accounted for over one-half
of revenues in both the 1999 and 1998 second quarter and year-to-date periods.
These revenues increased 8% in the 1999 second quarter compared to the same
1998 period, but were offset by a decrease in product sales to affiliates. In
the 1999 year-to-date period these revenues increased 12% from the same 1998
period, but were only partly offset by a decrease in product sales to
affiliates.
Operating Expenses
The FON Group's operating expenses increased 8% in the 1999 second quarter and
7% in the 1999 year-to-date period from the same 1998 periods mainly to support
revenue growth.
Long Distance Division
Long distance division operating expenses increased 8% in the 1999 second
quarter and 1999 year-to-date periods from the same 1998 periods.
Interconnection costs increased reflecting the impact of increased calling
volumes in 1999, partly offset by reductions in per-minute costs for both
domestic and international access. 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 trend of declining unit costs for
international interconnection. These increased costs also reflect growth in
non-minute driven revenues.
Operations expense decreased due to a decline in product and service costs
partly offset by growth in data services and increases in network equipment
operating leases. Operations expense also includes costs related to Sprint's
efforts to achieve Year 2000 compliance.
Selling, general and administrative (SG&A) expense increased mainly 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 costs related to Sprint's efforts to
achieve Year 2000 compliance.
Depreciation and amortization expense 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 5% in the 1999 second quarter and 6%
for the 1999 year-to-date period from the same 1998 periods. Costs of services
and products increased reflecting customer access line growth, continued
emphasis on service levels, and increased equipment sales. Costs of services and
products also 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 and increased customer service costs related to customer access line
growth, partly offset by continued emphasis on cost control. SG&A also 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 amortization of costs related to the mid-1998 acquisition
of a directory sales organization and increased SG&A expense due to staffing
demands related to sales growth. The 1999 year-to-date period also reflects
increased cost of sales relating to increased sales.
Sprint ION(SM)
Operating expenses for Sprint ION in the 1999 second quarter and year-to-date
periods reflect 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 second quarter and year-to-date periods, 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.
<TABLE>
<CAPTION>
Sprint PCS Group
Quarters Ended Year-to-Date
June 30, June 30,
----------------------------------- ----------------------------------
1999 1998 1999 1998
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions)
<S> <C> <C> <C> <C>
Net operating revenues $ 736 $ 265 $ 1,340 $ 468
Operating expenses 1,444 772 2,875 1,444
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Operating loss $ (708) $ (507) $ (1,535) $ (976)
--- ------------- -- -------------- -- ------------- --- -------------
</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 30% of net operating revenues in the 1999 second quarter and 29%
in the 1999 year-to-date period.
Net Operating Revenues
The PCS Group's net operating revenues include subscriber revenues, roaming
revenues and sales of handsets and accessory equipment. Subscriber revenues
consist of monthly recurring charges and usage charges. Net operating revenues
increased 178% in the 1999 second quarter and 186% in the 1999 year-to-date
period from the same 1998 periods reflecting a 190% increase in the number of
customers over the past 12 months. The PCS Group added 617,000 customers in the
1999 second quarter and ended the quarter with nearly 4 million customers in 286
metropolitan markets nationwide. Average monthly service revenue per user (ARPU)
was $54 for the 1999 second quarter compared to $60 for the same 1998 period.
ARPU was $53 for the 1999 year-to-date period compared to $59 for the same 1998
period. ARPU has decreased from prior-year periods due to a wider acceptance of
lower-priced bundled minute rate plans.
Approximately 20% of the 1999 second quarter and year-to-date net operating
revenues and 16% of the 1998 second quarter and year-to-date 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
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 81% in the 1999 second quarter and 113% in the 1999 year-to-date
period from the same 1998 periods reflecting the significant growth in customers
and expanded market coverage, partly offset by a reduction in handset unit
costs.
SG&A expense mainly includes salary and benefits costs as well as marketing
costs to promote products and services. SG&A expense increased 82% in the 1999
second quarter and 76% in the 1999 year-to-date period from the same 1998
periods reflecting an expanded workforce to support subscriber growth and
increased marketing and selling costs. SG&A also includes costs related to
Sprint's efforts to achieve Year 2000 compliance.
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 104% in the 1999 second quarter and 123% in the 1999
year-to-date period from the same 1998 periods reflecting amortization of
intangible assets acquired in the PCS Restructuring in the 1998 fourth quarter
and in the Cox PCS purchase in the 1999 second quarter. It also reflects
depreciation of the network assets placed in service during 1999 and 1998. On a
pro forma basis, assuming the PCS Restructuring occurred at the beginning of
1998, depreciation and amortization expense would have increased 44% in the 1999
second quarter and 41% in the 1999 year-to-date period from the same 1998
periods.
<PAGE>
- --------------------------------------------------------------------------------
Nonoperating Items
- --------------------------------------------------------------------------------
Interest Expense
The effective interest rates in the following table represent long-term debt
only. Interest costs on short-term borrowings classified as long-term debt,
deferred compensation plans and customer deposits have been excluded so as not
to distort the effective interest rate on long-term debt.
<TABLE>
<CAPTION>
Quarters Ended Year-to-Date
June 30, June 30,
----------------------------------- ----------------------------------
1999 1998 1999 1998
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Effective interest rate on
<S> <C> <C> <C> <C>
long-term debt (1) 7.2% 9.0% 7.3% 8.9%
--- ------------- -- -------------- -- ------------- --- -------------
(1) The effective interest rate on long-term debt for the 1998 second quarter
and year-to-date periods is on a pro forma basis as if Sprint PCS long-term
debt had been included in Sprint's outstanding long-term debt balance during
those periods.
</TABLE>
<PAGE>
The decrease in Sprint's effective interest rate for the 1999 second quarter and
year-to-date periods mainly reflects increased borrowings with lower interest
rates.
Global One
Global One's revenues totaled $241 million in the 1999 second quarter compared
to $258 million for the same 1998 period. Year-to-date revenues were $496
million in 1999 compared to $523 million for the same period a year ago. Global
One revenues continue to be impacted by regional economic conditions and
competitive pricing pressures.
Sprint recorded losses related to Global One totaling $90 million in the 1999
second quarter and $124 million in the 1999 year-to-date period compared to $42
million and $87 million for the same periods a year ago. The 1999 second quarter
losses include a $27 million charge for fixed asset write-offs. In 1999, Global
One continues to extend its service offerings and make progress on network
enhancements, customer service and operational capabilities.
The three partners of Global One are in discussions to address alignment of
their respective international strategies. These discussions include the
possibility of restructuring the ownership of Global One. No decisions have been
made at this time.
Other Partners' Loss in 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.
<PAGE>
Other Income, Net
Other income consisted of the following:
<TABLE>
<CAPTION>
Quarters Ended Year-to-Date
June 30, June 30,
----------------------------------- ----------------------------------
1999 1998 1999 1998
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions)
<S> <C> <C> <C> <C>
Dividend and interest income $ 4 $ 19 $ 11 $ 36
Minority interest for Cox - 37 20 72
Net gains from equity investments 35 - 35 -
Other, net 6 (1) 13 -
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total $ 45 $ 55 $ 79 $ 108
--- ------------- -- -------------- -- ------------- --- -------------
</TABLE>
Dividend and interest income for the 1999 and 1998 second quarter and
year-to-date periods reflects interest earned on temporary investments. For the
1998 periods, it also reflects interest earned on loans to unconsolidated
affiliates.
Income Taxes
See Note 5 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.
<PAGE>
- --------------------------------------------------------------------------------
Financial Condition
- --------------------------------------------------------------------------------
June 30, December 31,
1999 1998
- ------------------------------------------------------
(millions)
Consolidated assets $ 36,099 $ 33,230
-------------------------------
Net property, plant and equipment increased $1.2 billion in the 1999
year-to-date period 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. In addition, net intangible assets increased $1.1
billion in the 1999 year-to-date period mainly reflecting the 1999 second
quarter acquisition of the remaining interest in Cox PCS. See "Liquidity and
Capital Resources" for more information about changes in Sprint's Consolidated
Balance Sheets.
- --------------------------------------------------------------------------------
Liquidity and Capital Resources
- --------------------------------------------------------------------------------
Consolidated year-to-date 1998 cash flows reflect the FON Group's operations as
well as the operations of SprintCom, Inc. and Sprint's investment in Sprint PCS.
Operating Activities
Year-to-Date
June 30,
-------------------------------
1999 1998
- ------------------------------------------------------
(millions)
Cash flows provided
by operating
activities $ 597 $ 2,408
-------------------------------
Operating cash flows decreased 75% in the 1999 year-to-date period mainly
reflecting increased outflows from working capital for both the FON Group and
the PCS Group as well as increased losses for the PCS Group.
Investing Activities
Year-to-Date
June 30,
-------------------------------
1999 1998
- ------------------------------------------------------
(millions)
Cash flows used by
investing
activities $ (3,016) $ (2,509)
-------------------------------
The FON Group's capital expenditures totaled $1.7 billion in the 1999
year-to-date period and $1.5 billion 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 $961 million in the 1999 year-to-date period and $552 million for the same
1998 period for SprintCom, Inc. alone. Capital expenditures in both years were
mainly for the continued buildout and expansion of the PCS network.
<PAGE>
"Investments in and loans to affiliates, net" consisted of the following:
Year-to-Date
June 30,
-------------------------------
1999 1998
- ------------------------------------------------------
(millions)
Sprint PCS
Capital contributions $ - $ 66
Loans and advances - 113
- ------------------------------------------------------
- 179
- ------------------------------------------------------
Global One
Capital contributions 292 284
Advances, net (124) (86)
- ------------------------------------------------------
168 198
- ------------------------------------------------------
Other, net 89 74
- ------------------------------------------------------
Total $ 257 $ 451
-------------------------------
In both the 1999 and 1998 year-to-date periods, "Other, net" includes an
investment in EarthLink by the FON Group. Capital contributions to Global One in
the 1999 and 1998 year-to-date periods were mainly used to repay advances and to
fund capital and operating requirements. 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.
Investing activities in 1999 also include cash payments for investments in
companies owning fixed wireless broadband licenses.
Financing Activities
Year-to-Date
June 30,
-------------------------------
1999 1998
- ------------------------------------------------------
(millions)
Cash flows provided
by financing
activities $ 1,917 $ 92
-------------------------------
Financing activities in the 1999 year-to-date period reflect net proceeds from
PCS common stock issued of $843 million. They also reflect debt issuances of
$3.5 billion offset by repayment of existing debt. In the 1998 year-to-date
period, financing activities mainly reflect proceeds from long-term debt
issuances offset by repayment of existing debt. Sprint paid cash dividends of
$216 million in the first six months of 1999 and $205 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 $6.5 to $7.1
billion. FON Group capital expenditures are expected to range between $3.8 and
$4.0 billion. Sprint ION is expected to require $600 to $700 million of this
amount. PCS Group capital expenditures are expected to be between $2.4 and $2.7
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 continue to make significant payments
to the PCS Group under this agreement because of expected PCS Group operating
losses.
The acquisitions of companies owning fixed wireless broadband licenses are
expected to require cash of $600 to $700 million for the acquisition of equity.
These acquisitions will also assume debt of $600 to $700 million. See Note 3 of
Condensed Notes to Consolidated Financial Statements.
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 $673 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 May 1999, Sprint issued $3.5 billion of senior notes registered with the
Securities and Exchange Commission (SEC). The proceeds were used mainly to repay
short-term borrowings classified as long-term debt. Sprint allocated $3.1
billion of the proceeds to the PCS Group with the remainder being allocated to
the FON Group.
Any borrowings Sprint may incur are ultimately limited by certain debt
covenants. Sprint could borrow up to $16.2 billion at the end of June 1999 under
the most restrictive of its debt covenants.
In June 1999, Sprint entered into a $1.0 billion financing agreement to sell, on
a continuous basis with recourse, an undivided percentage ownership interest in
a designated pool of its accounts receivable. Subsequent collections of
receivables sold to investors are typically reinvested in new receivables.
Sprint expects to draw on these funds in the 1999 third and fourth quarters.
In July 1999, Sprint filed a shelf registration statement with the SEC covering
$4.0 billion of senior unsecured debt securities. The proceeds will be used
mainly to repay debt. Sprint may also use a portion of the proceeds for general
purposes, including working capital requirements, acquisitions, and new capital
investments.
In August 1999, Sprint entered into a long-term debt agreement to borrow $250
million from a financial institution. Sprint will use the proceeds for general
purposes, including working capital requirements, acquisitions, and new capital
investments.
Borrowings during the remainder of 1999 will be allocated to the FON Group or
the PCS Group based on their cash requirements.
- --------------------------------------------------------------------------------
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.
<PAGE>
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. The exposure
from these international transactions was not material to the consolidated
financial position, results of operations or cash flows at June 30, 1999. In
addition, foreign currency transaction gains and losses were not material to
Sprint's year-to-date 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, software applications and other business systems.
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.
The PCS Group has also completed the renovation of its computer systems and
other business systems. Substantially all of the PCS Group's software
applications and network elements are renovated. 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 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 $220 million from inception through June
1999 for its Year 2000 remediation program and expects to incur approximately
$30 million through the remainder of 1999. The PCS Group incurred approximately
$25 million from inception through June 1999 for its Year 2000 remediation
program and expects to incur approximately $25 million through the remainder of
1999. 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 its 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.
<PAGE>
If the Year 2000 programs are not fulfilled in a timely manner by Sprint, or any
of its affiliates (including Global One) or any significant related third party
does not fulfill its own Year 2000 program in a timely manner, 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 before 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 were 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 that 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 Year-to-Date
June 30, June 30,
1999 1998 1999 1998
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
<S> <C> <C> <C> <C>
Net Operating Revenues $ 4,244 $ 3,945 $ 8,416 $ 7,837
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Operating Expenses
Costs of services and products 1,939 1,876 3,865 3,749
Selling, general and administrative 1,054 908 2,057 1,778
Depreciation and amortization 515 469 1,021 935
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total operating expenses 3,508 3,253 6,943 6,462
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Operating Income 736 692 1,473 1,375
Interest expense, net (49) (74) (94) (152)
Equity in loss of Global One (90) (42) (124) (87)
Other income, net 48 31 58 62
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Income before income taxes and
extraordinary item 645 607 1,313 1,198
Income taxes (259) (243) (521) (478)
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Income before Extraordinary Item 386 364 792 720
Extraordinary item, net - - - (4)
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net Income 386 364 792 716
Preferred stock dividends received (paid) 1 (1) 3 (1)
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Earnings applicable to common stock $ 387 $ 363 $ 795 $ 715
--- ------------- -- -------------- -- ------------- --- -------------
Diluted Earnings per Common Share(1) $ 0.44 $ 0.41 $ 0.90 $ 0.81
--- ------------- -- -------------- -- ------------- --- -------------
Diluted weighted average common shares(1)
887.1 879.0 883.7 878.0
--- ------------- -- -------------- -- ------------- --- -------------
Basic Earnings per Common Share(1) $ 0.45 $ 0.42 $ 0.92 $ 0.83
--- ------------- -- -------------- -- ------------- --- -------------
Basic weighted average common shares(1) 866.7 861.0 864.9 860.6
--- ------------- -- -------------- -- ------------- --- -------------
Dividends per Common Share(1) $ 0.125 $ 0.125 $ 0.25 $ 0.25
--- ------------- -- -------------- -- ------------- --- -------------
(1) Basic and diluted earnings per common share, weighted average common
shares, and dividends per common share for the 1998 second quarter and
year-to-date periods are pro forma and assume the Recapitalization occurred
at the beginning of 1998. In the 1999 second quarter, Sprint effected a
two-for-one stock split of its FON common stock. As a result, 1998 basic
and diluted earnings per common share, weighted average common shares and
dividends per common share for FON common stock have been restated.
See accompanying Condensed Notes to Combined Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMBINED STATEMENTS OF COMPREHENSIVE INCOME Sprint FON Group
(Unaudited)
(millions)
- --------------------------------------------- ----------------------------------- ----------------------------------
Quarters Ended Year-to-Date
June 30, June 30,
- --------------------------------------------- ----------------------------------- ----------------------------------
1999 1998 1999 1998
- --------------------------------------------- ----------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Net Income $ 386 $ 364 $ 792 $ 716
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Other Comprehensive Income (Loss)
Unrealized holding gains (losses) on
securities 3 (5) (2) 14
Income taxes (1) 2 1 (5)
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net unrealized holding gains (losses) on
securities during the period 2 (3) (1) 9
Reclassification adjustment, net of tax (57) - (57) -
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total net unrealized holding gains (losses)
on securities (55) (3) (58) 9
Foreign currency translation adjustments - (3) - (2)
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total other comprehensive income (loss) (55) (6) (58) 7
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Comprehensive Income $ 331 $ 358 $ 734 $ 723
--- ------------- -- -------------- -- ------------- --- -------------
See accompanying Condensed Notes to Combined Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMBINED BALANCE SHEETS Sprint FON Group
(millions)
- -------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
1999 1998
- -------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Assets
Current assets
<S> <C> <C>
Cash and equivalents $ 63 $ 432
Accounts receivable, net of allowance for doubtful accounts
of $195 and $175 2,699 2,384
Inventories 378 350
Prepaid expenses 249 199
Affiliated receivables from the PCS Group - 210
Other 120 194
- -------------------------------------------------------------------------------------------------------------------------
Total current assets 3,509 3,769
Investments in equity securities 433 489
Property, plant and equipment
Long distance division 9,529 9,241
Local division 15,495 14,858
Other 1,464 1,057
- -------------------------------------------------------------------------------------------------------------------------
Total property, plant and equipment 26,488 25,156
Accumulated depreciation (13,343) (12,692)
- -------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 13,145 12,464
Investments in and loans to the PCS Group 458 656
Investments in and advances to other affiliates 699 645
Other assets 1,169 978
- -------------------------------------------------------------------------------------------------------------------------
Total $ 19,413 $ 19,001
-----------------------------------
Liabilities and Group Equity
Current liabilities
Current maturities of long-term debt $ 480 $ 33
Accounts payable 1,037 1,284
Accrued interconnection costs 708 592
Accrued taxes 317 346
Advance billings 300 229
Affiliated payables to the PCS Group 160 17
Other 822 792
- -------------------------------------------------------------------------------------------------------------------------
Total current liabilities 3,824 3,293
Long-term debt and capital lease obligations 3,570 4,409
Deferred credits and other liabilities
Deferred income taxes and investment tax credits 848 828
Postretirement and other benefit obligations 1,055 1,064
Other 399 383
- -------------------------------------------------------------------------------------------------------------------------
Total deferred credits and other liabilities 2,302 2,275
Group equity 9,717 9,024
- -------------------------------------------------------------------------------------------------------------------------
Total $ 19,413 $ 19,001
-----------------------------------
See accompanying Condensed Notes to Combined Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMBINED STATEMENTS OF CASH FLOWS (Unaudited) Sprint FON Group
(millions)
- ------------------------------------------------------------------ ----------------- ----------------- ----------------
Year-to-Date June 30, 1999 1998
- ------------------------------------------------------------------ ----------------- ----------------- ----------------
Operating Activities
<S> <C> <C>
Net income $ 792 $ 716
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in net losses of affiliates 149 86
Depreciation and amortization 1,021 935
Deferred income taxes and investment tax credits 39 (75)
Changes in assets and liabilities:
Accounts receivable, net (315) 3
Inventories and other current assets (54) (10)
Accounts payable and other current liabilities (213) 132
Increase in payable to the PCS Group for current tax
benefits utilized 231 -
Affiliated receivables from and payables to the PCS Group, net (281) -
Noncurrent assets and liabilities, net (31) 16
Other, net (34) 6
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash provided by operating activities 1,304 1,809
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Investing Activities
Capital expenditures (1,675) (1,489)
Repayments from and (loans to) Sprint PCS 315 (114)
Investments in and loans to other affiliates, net (257) (272)
Investments in fixed wireless broadband licenses (141) -
Advances to the PCS Group - (186)
Equity transfers from the PCS Group, net - 165
Other, net 95 (16)
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash used by investing activities (1,663) (1,912)
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Financing Activities
Proceeds from long-term debt 378 495
Allocation of long-term debt to the PCS Group (244) -
Payments on long-term debt (15) (163)
Dividends paid (209) (205)
Other net change in group equity 65 (46)
Other, net 15 13
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash provided (used) by financing activities (10) 94
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Decrease in Cash and Equivalents (369) (9)
Cash and Equivalents at Beginning of Period 432 102
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Cash and Equivalents at End of Period $ 63 $ 93
--- ------------- -- -------------
See accompanying Condensed Notes to Combined Financial Statements.
</TABLE>
<PAGE>
CONDENSED NOTES TO COMBINED FINANCIAL STATEMENTS (Unaudited) Sprint FON 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 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 and are wholly owned by
Sprint. Transactions between the PCS Group and the FON Group have not been
eliminated in the combined financial statements of either Group.
The FON Group combined financial statements provide FON shareholders with
financial information about the FON Group operations. Investors in FON stock and
PCS stock are Sprint shareholders and are subject to risks related to all of
Sprint's businesses, assets and liabilities. Sprint retains ownership and
control of the assets and operations of each Group. Financial effects of either
Group that affect Sprint's results of operations or financial condition could
affect the results of operations or financial position of the other Group or the
market price of the 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.
<PAGE>
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. Acquisitions
- --------------------------------------------------------------------------------
In the 1999 second quarter, Sprint announced that it had agreed to acquire
People's Choice TV Corp. (PCTV), which owns fixed wireless broadband licenses in
several major markets in the Midwest and Southwest. PCTV common stockholders
will receive an aggregate of approximately $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 approximately $23 million. In addition, Sprint will also assume the
indebtedness of PCTV. PCTV had an aggregate of approximately $296 million of
indebtedness outstanding as of March 1999 according to its Form 10-Q.
In the 1999 second quarter, Sprint announced that it had agreed to acquire
American Telecasting, Inc. (ATI), which owns fixed wireless broadband licenses
in several major markets in the North Central and Western United States. ATI
common stockholders will receive an aggregate of approximately $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 approximately $249 million of
indebtedness outstanding as of March 1999 according to its Form 10-Q.
In the 1999 second quarter, Sprint announced that it had agreed to acquire
Videotron USA and Transworld Telecommunications Inc. (TTI). Sprint agreed to
purchase Videotron USA for approximately $180 million, less outstanding debt.
Sprint agreed to purchase TTI for approximately $30 million. Through these
acquisitions, Sprint will acquire the fixed wireless broadband licenses serving
several major markets in California, Florida, South Carolina and Washington.
In July 1999, Sprint announced that it had agreed to acquire the operating
subsidiaries of WBS America, LLC (WBS), which owns fixed wireless broadband
licenses in California and Florida markets. Sprint agreed to purchase these WBS
subsidiaries for approximately $108 million less assumed debt.
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 fixed wireless connections.
The transactions, which are subject to customary conditions, have received
Federal Trade Commission and U.S. Department of Justice approval, but are
awaiting approval by the Federal Communications Commission. These transactions
will be accounted for using the purchase method of accounting, and are expected
to close in the 1999 third and fourth quarters.
<PAGE>
- --------------------------------------------------------------------------------
4. Investments
- --------------------------------------------------------------------------------
At the end of June 1999, investments accounted for using the equity method
consisted of the FON Group's investments in Global One, Earthlink, Call-Net and
other strategic investments. Combined, summarized financial information (100%
basis) of these entities accounted for using the equity method was as follows:
<TABLE>
<CAPTION>
Quarters Ended Year-to-Date
June 30, June 30,
----------------------------------- ----------------------------------
1999 1998 1999 1998
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions)
Results of operations
<S> <C> <C> <C> <C>
Net operating revenues $ 612 $ 519 $ 1,264 $ 1,052
--- ------------- -- -------------- -- ------------- --- -------------
Operating loss $ (209) $ (112) $ (392) $ (226)
--- ------------- -- -------------- -- ------------- --- -------------
Net loss $ (329) $ (154) $ (550) $ (301)
--- ------------- -- -------------- -- ------------- --- -------------
FON Group's net losses in affiliates $ (105) $ (36) $ (149) $ (86)
--- ------------- -- -------------- -- ------------- --- -------------
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
5. 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:
Year-to-Date
June 30,
-------------------------
1999 1998
- -------------------------------------------------------
(millions)
Income tax expense at the
federal statutory rate $ 460 $ 419
Effect of:
State income taxes, net
of federal income tax 45 40
effect
Equity in losses of
foreign joint ventures 13 20
Other, net 3 (1)
- -------------------------------------------------------
Income tax expense $ 521 $ 478
-------------------------
Effective income tax rate 39.7% 39.9%
-------------------------
- --------------------------------------------------------------------------------
6. Group Equity
- --------------------------------------------------------------------------------
Year-to-Date
June 30,
1999
- -------------------------------------------------------
(millions)
Beginning balance $ 9,024
Net income 792
Dividends (216)
Equity issued 120
Equity repurchased (48)
Other, net 45
- -------------------------------------------------------
Ending balance $ 9,717
------------------
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 were issued on June 4, 1999 to shareholders of record on May 13, 1999. A
comparable dividend was paid on the Class A common stock owned by FT and DT. FON
Group earnings per common share, dividends per common share and weighted average
common shares have been restated to reflect the stock split.
- --------------------------------------------------------------------------------
7. 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.
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 FON Group's combined financial
statements.
<PAGE>
- --------------------------------------------------------------------------------
8. 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>
- -----------------------------------------------------------------------------------------------------------------------
Product Corporate
Long Distribution and Sprint
Quarters Ended Distance Local & Sprint Other Elim- FON
June 30, Division Division Directory ION Ventures inations Group
Publishing
- -----------------------------------------------------------------------------------------------------------------------
(millions)
1999
<S> <C> <C> <C> <C> <C> <C> <C>
Net operating revenues $ 2,673 $ 1,384 $ 446 $ - $ - $ (259) $ 4,244
Affiliated revenues 51 79 179 - - (259) 50
Operating income (loss) 400 375 59 (81) (4) (13) 736
1998
Net operating revenues $ 2,421 $ 1,330 $ 445 $ - $ - $ (251) $ 3,945
Affiliated revenues 40 35 197 - - (251) 21
Operating income (loss) 322 367 61 (28) (14) (16) 692
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Product Corporate
Long Distribution and Sprint
Year-to-Date Distance Local & Sprint Other Elim- FON
June 30, Division Division Directory ION Ventures inations Group
Publishing
- -----------------------------------------------------------------------------------------------------------------------
(millions)
1999
<S> <C> <C> <C> <C> <C> <C> <C>
Net operating revenues $ 5,298 $ 2,755 $ 872 $ - $ - $ (509) $ 8,416
Affiliated revenues 114 151 353 - - (509) 109
Operating income (loss) 788 738 115 (133) (10) (25) 1,473
1998
Net operating revenues $ 4,828 $ 2,639 $ 837 $ - $ - $ (467) $ 7,837
Affiliated revenues 40 95 372 - - (467) 40
Operating income (loss) 641 720 120 (45) (31) (30) 1,375
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
9. Supplemental Cash Flows Information
- --------------------------------------------------------------------------------
The FON Group's cash paid for interest and income taxes was as follows:
Year-to-Date
June 30,
-------------------------
1999 1998
- -------------------------------------------------------
(millions)
Interest (net of capitalized
interest) $ 106 $ 126
-------------------------
Income taxes $ 378 $ 224
-------------------------
The FON Group's noncash activities included common stock issued under Sprint's
ESPP, tax benefit from stock options exercised, and common stock issued under
the long-term incentive plan. The totals of these activities were as follows:
Year-to-Date
June 30,
-------------------------
1999 1998
- -------------------------------------------------------
(millions)
Noncash activity in group
equity $ 122 $ 26
-------------------------
- --------------------------------------------------------------------------------
10. Subsequent Events
- --------------------------------------------------------------------------------
In July 1999, Sprint filed a shelf registration statement with the SEC covering
$4.0 billion of senior unsecured debt securities. The proceeds will be used
mainly to repay debt. Sprint may also use a portion of the proceeds for general
purposes, including working capital requirements, acquisitions, and new capital
investments.
In August 1999, Sprint entered into a long-term debt agreement to borrow $250
million from a financial institution. Sprint will use the proceeds for general
purposes, including working capital requirements, acquisitions, and new capital
investments.
Debt resulting from these borrowings will be allocated to the FON Group or the
PCS Group based on their cash requirements.
In August 1999, Sprint's Board of Directors declared dividends of 12.5 cents per
share on the Sprint FON common and Class A common stock and 37.5 cents per share
on both the first and second series convertible preferred stock. All dividends
will be paid September 30, 1999.
<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 mainly provides domestic and international voice, video and data
communications services.
Local Division
The local division consists of regulated local phone companies serving nearly
7.9 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 second quarter, an
increase of 8% from $3.9 billion for the same 1998 period. Net operating
revenues for the first six months in 1999 increased 7% to $8.4 billion from $7.8
billion for the same 1998 period.
Net income was $386 million for the 1999 second quarter compared to $364 million
for the same 1998 period. Net income for the first six months in 1999 was $792
million compared to $716 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 second quarter and
year-to-date net operating revenues and operating income compared to the same
1998 periods. Core businesses exclude results from Sprint ION and other
ventures. Second quarter and year-to-date 1999 long distance calling volumes
increased 24% from the same 1998 periods. Access lines served by the local
division increased 5.3% 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
June 30, Variance
---------------------------------- -------------------------------
1999 1998 $ %
- ---------------------------------------------- ---------------- ----------------- -- ------------- -----------------
(millions)
<S> <C> <C> <C> <C>
Net operating revenues $ 2,673 $ 2,421 $ 252 10.4%
- ---------------------------------------------- -- ------------- -- -------------- -- ------------- -----------------
Operating expenses
Interconnection 1,037 953 84 8.8%
Operations 328 356 (28) (7.9)%
Selling, general and administrative 676 574 102 17.8%
Depreciation and amortization 232 216 16 7.4%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Total operating expenses 2,273 2,099 174 8.3%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating income $ 400 $ 322 $ 78 24.2%
-- ------------- -- -------------- -- -------------
Operating margin 15.0% 13.3%
-- ------------- -- --------------
</TABLE>
<TABLE>
<CAPTION>
Selected Operating Results
---------------------------------------------------------------------
Year-to-Date
June 30, Variance
---------------------------------- -------------------------------
1999 1998 $ %
- ---------------------------------------------- ---------------- ----------------- -- ------------- -----------------
(millions)
<S> <C> <C> <C> <C>
Net operating revenues $ 5,298 $ 4,828 $ 470 9.7%
- ---------------------------------------------- -- ------------- -- -------------- -- ------------- -----------------
Operating expenses
Interconnection 2,045 1,931 114 5.9%
Operations 677 700 (23) (3.3)%
Selling, general and administrative 1,329 1,128 201 17.8%
Depreciation and amortization 459 428 31 7.2%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Total operating expenses 4,510 4,187 323 7.7%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating income $ 788 $ 641 $ 147 22.9%
-- ------------- -- -------------- -- -------------
Operating margin 14.9% 13.3%
-- ------------- -- --------------
</TABLE>
<PAGE>
Net Operating Revenues
All major market segments--business, residential and wholesale--contributed to
the increase in net operating revenues in both second quarter and year-to-date
1999 from the same 1998 periods. The increase mainly reflects strong data
services revenue growth and strong minute growth, partly offset by a more
competitive pricing environment. Future revenue and operating income growth may
be impacted by the increased pricing pressures being experienced by the long
distance division.
Business and Data Market
Business and data market revenues increased 11% in the 1999 second quarter and
12% for the 1999 year-to-date period from the same 1998 periods. Data services
showed strong growth because of continued demand and an increased use of the
Internet. These increases also reflect strong calling volumes for inbound and
outbound toll-free calls made within the United States.
Residential Market
Residential market revenues increased 5% in the 1999 second quarter and 6% in
the 1999 year-to-date period from the same 1998 periods. These increases reflect
strong volume growth in residential long distance calls, partly offset by lower
FON card usage. Other growth factors include increased prepaid card revenues and
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 17% in the 1999 second quarter and 8% in the
1999 year-to-date period from the same 1998 periods. These reflect 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 9% in the 1999 second
quarter and 6% in the 1999 year-to-date period from the same 1998 periods
reflecting increased calling volumes in 1999, partly offset by reductions in
per-minute costs for both domestic and international access. 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 trend of
declining unit costs for international interconnection. These increased costs
also reflect growth in non-minute driven revenues. Interconnection costs were
38.8% of net operating revenues in the 1999 second quarter and 38.6% in the 1999
year-to-date period compared to 39.4% and 40.0% for the same periods 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
decreased 8% in the 1999 second quarter and 3% in the 1999 year-to-date period
from the same 1998 periods. These decreases were driven by a decline in product
and service costs partly offset by growth in data services and increases in
network equipment operating leases. 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 12.3%
of net operating revenues in the 1999 second quarter and 12.8% in the 1999
year-to-date period compared to 14.7% and 14.5% for the same periods a year ago.
Selling, General and Administrative Expense
Selling, general and administrative (SG&A) expense increased 18% in the 1999
second quarter and year-to-date periods from the same 1998 periods. These
increases mainly reflect 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 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 25.3% of net operating
revenues in the 1999 second quarter and 25.1% in the 1999 year-to-date period
compared to 23.7% and 23.4% for the same periods a year ago.
Depreciation and Amortization Expense
Depreciation and amortization expense increased 7% in the 1999 second quarter
and year-to-date periods from the same periods a year ago. These increases were
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 second quarter and year-to-date
periods compared to 8.9% for the 1998 second quarter and 8.8% for the 1998
year-to-date period.
<PAGE>
Local Division
<TABLE>
<CAPTION>
Selected Operating Results
---------------------------------------------------------------------
Quarters Ended
June 30, Variance
----------------------------------- -------------------------------
1999 1998 $ %
- --------------------------------------------- ----------------- ----------------- -- ------------- -----------------
(millions)
<S> <C> <C> <C> <C>
Net operating revenues $ 1,384 $ 1,330 $ 54 4.1%
- --------------------------------------------- --- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 470 441 29 6.6%
Selling, general and administrative 285 285 - -
Depreciation and amortization 254 237 17 7.2%
- --------------------------------------------- --- ------------- -- -------------- -- -------------
Total operating expenses 1,009 963 46 4.8%
- --------------------------------------------- --- ------------- -- -------------- -- -------------
Operating income $ 375 $ 367 $ 8 2.2%
--- ------------- -- -------------- -- -------------
Operating margin 27.1% 27.6%
--- ------------- -- --------------
</TABLE>
<TABLE>
<CAPTION>
Selected Operating Results
---------------------------------------------------------------------
Year-to-Date
June 30, Variance
----------------------------------- -------------------------------
1999 1998 $ %
- --------------------------------------------- ----------------- ----------------- -- ------------- -----------------
(millions)
<S> <C> <C> <C> <C>
Net operating revenues $ 2,755 $ 2,639 $ 116 4.4%
- --------------------------------------------- --- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 943 890 53 6.0%
Selling, general and administrative 569 560 9 1.6%
Depreciation and amortization 505 469 36 7.7%
- --------------------------------------------- --- ------------- -- -------------- -- -------------
Total operating expenses 2,017 1,919 98 5.1%
- --------------------------------------------- --- ------------- -- -------------- -- -------------
Operating income $ 738 $ 720 $ 18 2.5%
--- ------------- -- -------------- -- -------------
Operating margin 26.8% 27.3%
--- ------------- -- --------------
</TABLE>
<PAGE>
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 would have been 27.3% for the 1998
second quarter and 27.1% for the 1998 year-to-date period.
Net Operating Revenues
Net operating revenues increased 5% in the 1999 second quarter and year-to-date
periods from the same 1998 periods. These increases mainly reflect customer
access line growth and increased sales of network-based services such as Caller
ID and Call Waiting. Customer access lines increased 5.3% during the past 12
months.
Local Service Revenues
Local service revenues, derived from local exchange services, grew 10% in the
1999 second quarter and 9% in the 1999 year-to-date period from the same 1998
periods. 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 1% in the 1999 second quarter and 3%
in the 1999 year-to-date period from the same 1998 periods. The 1999 second
quarter and year-to-date revenues reflect an 8% increase in minutes of use,
largely 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 second quarter and
year-to-date periods from the same 1998 periods, mainly reflecting increased
competition, which is expected to continue, in the intraLATA long distance
market. In addition, toll service areas are shrinking as certain local calling
areas are expanding. The reduced revenues were offset, in part, by increases in
local service revenues due to expanded local calling areas, and by increases in
network access revenues paid by other carriers providing intraLATA long distance
services to the local division's customers. Sprint's long distance division has
acquired some of the customer base which helps mitigate the erosion of these
revenues.
Other Revenues
Other revenues increased 5% in the 1999 second quarter and 6% in the 1999
year-to-date period from the same 1998 periods reflecting increased revenues
from billing and collection services and commission revenues, increased
equipment sales, and 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 8% in the 1999
second quarter and 7% in the 1999 year-to-date period compared to the same 1998
periods reflecting customer access line growth, continued emphasis on service
levels and increased equipment sales. 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 34.0% of net operating revenues in the 1999 second quarter and
34.2% in the 1999 year-to-date period compared to 33.1% and 33.6% for the same
periods a year ago.
Selling, General and Administrative Expense
SG&A expense remained flat in the 1999 second quarter and increased 2% in the
1999 year-to-date period from the same 1998 periods. These increases were mainly
due to marketing costs to promote new products and services and increased
customer service costs related to customer access line growth, partly offset by
continued emphasis on cost control. 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 20.6% of net operating revenues in the 1999
second quarter and 20.7% in the 1999 year-to-date period compared to 21.6% and
21.4% for the same periods a year ago.
Depreciation and Amortization Expense
Depreciation and amortization expense increased 7% in the 1999 second quarter
and 8% in the 1999 year-to-date period compared to the same 1998 periods, 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 second quarter and
year-to-date periods compared to 18.0% and 17.9% for the same periods a year
ago.
<PAGE>
Product Distribution and Directory Publishing Businesses
<TABLE>
<CAPTION>
Selected Operating Results
---------------------------------------------------------------------
Quarters Ended
June 30, Variance
----------------------------------- -------------------------------
1999 1998 $ %
- --------------------------------------------- ----------------- ----------------- -- ------------- -----------------
(millions)
<S> <C> <C> <C> <C>
Net operating revenues $ 446 $ 445 $ 1 0.2%
- --------------------------------------------- --- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 351 357 (6) (1.7)%
Selling, general and administrative 31 26 5 19.2%
Depreciation and amortization 5 1 4 NM
- --------------------------------------------- --- ------------- -- -------------- -- -------------
Total operating expenses 387 384 3 0.8%
- --------------------------------------------- --- ------------- -- -------------- -- -------------
Operating income $ 59 $ 61 $ (2) (3.3)%
--- ------------- -- -------------- -- -------------
Operating margin 13.2% 13.7%
--- ------------- -- --------------
</TABLE>
<TABLE>
<CAPTION>
Selected Operating Results
---------------------------------------------------------------------
Year-to-Date
June 30, Variance
----------------------------------- -------------------------------
1999 1998 $ %
- --------------------------------------------- ----------------- ----------------- -- ------------- -----------------
(millions)
<S> <C> <C> <C> <C>
Net operating revenues $ 872 $ 837 $ 35 4.2%
- --------------------------------------------- --- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 685 661 24 3.6%
Selling, general and administrative 63 52 11 21.2%
Depreciation and amortization 9 4 5 NM
- --------------------------------------------- --- ------------- -- -------------- -- -------------
Total operating expenses 757 717 40 5.6%
- --------------------------------------------- --- ------------- -- -------------- -- -------------
Operating income $ 115 $ 120 $ (5) (4.2)%
--- ------------- -- -------------- -- -------------
Operating margin 13.2% 14.3%
--- ------------- -- --------------
NM = Not meaningful
</TABLE>
<PAGE>
Net operating revenues remained flat in the 1999 second quarter and increased 4%
in the 1999 year-to-date period from the same 1998 periods. Nonaffiliated
revenues accounted for over one-half of revenues in both the 1999 and 1998
second quarter and year-to-date periods. These revenues increased 8% in the 1999
second quarter, but were offset by a decrease in product sales to affiliates. In
the 1999 year-to-date period these revenues increased 12% from the same 1998
period, but were only partly offset by a decrease in product sales to
affiliates.
Operating expenses increased 1% in the 1999 second quarter and 6% in the 1999
year-to-date period compared to the same 1998 periods. These increases reflect
amortization of costs related to the mid-1998 acquisition of a directory sales
organization and increased SG&A expense due to staffing demands related to sales
growth. The 1999 year-to-date period also reflects increased cost of sales
relating to increased sales.
Sprint ION(SM)
<TABLE>
<CAPTION>
Quarters Ended Year-to-Date
June 30, June 30,
----------------------------------- ----------------------------------
1999 1998 1999 1998
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions)
<S> <C> <C> <C> <C>
Total operating expenses $ 81 $ 28 $ 133 $ 45
--- ------------- -- -------------- -- ------------- --- -------------
</TABLE>
Operating expenses for Sprint ION in the 1999 second quarter and year-to-date
periods reflect 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 $7 million in the 1999 second quarter and $13 million in
the 1999 year-to-date period compared to $1 million and $2 million for the same
periods a year ago.
<PAGE>
Other Ventures
<TABLE>
<CAPTION>
Quarters Ended Year-to-Date
June 30, June 30,
----------------------------------- ----------------------------------
1999 1998 1999 1998
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions)
<S> <C> <C> <C> <C>
Total operating expenses $ 4 $ 14 $ 10 $ 31
--- ------------- -- -------------- -- ------------- --- -------------
Equity in losses of affiliates $ (106) $ (48) $ (155) $ (98)
--- ------------- -- -------------- -- ------------- --- -------------
</TABLE>
Operating expenses in the 1998 second quarter and year-to-date periods 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.
Global One's revenues totaled $241 million in the 1999 second quarter compared
to $258 million for the same 1998 period. Year-to-date revenues were $496
million in 1999 compared to $523 million for the same period a year ago. Global
One revenues continue to be impacted by regional economic conditions and
competitive pricing pressures.
Sprint recorded losses related to Global One totaling $90 million in the 1999
second quarter and $124 million in the 1999 year-to-date period compared to $42
million and $87 million for the same periods a year ago. The 1999 second quarter
losses include a $27 million charge for fixed asset write-offs. In 1999, Global
One continues to extend its service offerings and make progress on network
enhancements, customer service and operational capabilities.
The three partners of Global One are in discussions to address alignment of
their respective international strategies. These discussions include the
possibility of restructuring the ownership of Global One. No decisions have been
made at this time.
<PAGE>
- --------------------------------------------------------------------------------
Nonoperating Items
- --------------------------------------------------------------------------------
Interest Expense, Net
The effective interest rates in the following table represent long-term debt
only. Interest costs on short-term borrowings classified as long-term debt,
intergroup borrowings, deferred compensation plans and customer deposits have
been excluded so as not to distort the effective interest rate on long-term
debt.
<TABLE>
<CAPTION>
Quarters Ended Year-to-Date
June 30, June 30,
----------------------------------- ----------------------------------
1999 1998 1999 1998
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
<S> <C> <C> <C> <C>
Effective interest rate on long-term debt 8.0% 8.1% 8.0% 8.1%
--- ------------- -- -------------- -- ------------- --- -------------
</TABLE>
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. These reductions, which totaled $37 million in the 1999 second
quarter and $67 million in the 1999 year-to-date period, have been excluded from
the effective interest rates above.
<PAGE>
Other Income, Net
Other income consisted of the following:
<TABLE>
<CAPTION>
Quarters Ended Year-to-Date
June 30, June 30,
----------------------------------- ----------------------------------
1999 1998 1999 1998
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions)
<S> <C> <C> <C> <C>
Dividend and interest income $ 8 $ 28 $ 17 $ 55
Net gains from equity investments 35 - 35 -
Other, net 5 3 6 7
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total $ 48 $ 31 $ 58 $ 62
--- ------------- -- -------------- -- ------------- --- -------------
</TABLE>
Dividend and interest income for the 1999 and 1998 second quarter and
year-to-date periods reflects interest earned on temporary investments. For the
1998 periods, it also reflects interest earned on loans to unconsolidated
affiliates.
Income Taxes
See Note 5 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
- --------------------------------------------------------------------------------
June 30, December 31,
1999 1998
- ------------------------------------------------------
(millions)
Combined assets $ 19,413 $ 19,001
-------------------------------
See "Liquidity and Capital Resources" for information about changes in the
Combined Balance Sheets.
- --------------------------------------------------------------------------------
Liquidity and Capital Resources
- --------------------------------------------------------------------------------
Operating Activities
Year-to-Date
June 30,
-------------------------------
1999 1998
- ------------------------------------------------------
(millions)
Cash flows provided
by operating
activities $ 1,304 $ 1,809
-------------------------------
The decrease in 1999 operating cash flows mainly reflects increased outflows
from working capital, partly offset by improved operating results in the FON
Group's core businesses.
Investing Activities
Year-to-Date
June 30,
-------------------------------
1999 1998
- ------------------------------------------------------
(millions)
Cash flows used by
investing
activities $ (1,663) $ (1,912)
-------------------------------
Capital expenditures, which are the FON Group's largest investing activity,
totaled $1.7 billion in the 1999 year-to-date period compared to $1.5 billion
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. In
addition, capital expenditures increased $169 million in the 1999 year-to-date
period from the same 1998 period due to Sprint ION development and hardware
deployment.
Cash flows for the 1999 year-to-date period also include the repayment of loans
made to Sprint PCS prior to the PCS Restructuring. In the 1998 year-to-date
period, the FON Group made 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:
Year-to-Date
June 30,
-------------------------------
1999 1998
- ------------------------------------------------------
(millions)
Global One
Capital contributions $ 292 $ 284
Advances, net (124) (86)
- ------------------------------------------------------
168 198
- ------------------------------------------------------
Other, net 89 74
- ------------------------------------------------------
Total $ 257 $ 272
-------------------------------
In both the 1999 and 1998 year-to-date periods, "Other, net" includes an
investment in EarthLink by the FON Group. Capital contributions to Global One in
the 1999 and 1998 year-to-date periods were mainly used to repay advances and to
fund capital and operating requirements.
Investing activities in 1999 also include cash payments for investments in
companies owning fixed wireless broadband licenses.
Financing Activities
Year-to-Date
June 30,
-------------------------------
1999 1998
- ------------------------------------------------------
(millions)
Cash flows provided
(used) by
financing
activities $ (10) $ 94
-------------------------------
Financing activities in the 1999 year-to-date period mainly reflect proceeds
from debt issuances of $378 million offset by net debt allocated to the PCS
Group of $244 million. Financing activities for the 1998 year-to-date period
mainly reflect long-term borrowings partly offset by payments on existing debt.
The FON Group paid cash dividends of $209 million in the first six months of
1999 compared to $205 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 continue to make significant payments
to the PCS Group under the tax sharing agreement because of expected PCS Group
operating losses.
The acquisitions of companies owning fixed wireless broadband licenses are
expected to require cash of $600 to $700 million for the acquisition of equity.
These acquisitions will also assume debt of $600 to $700 million. See Note 3 of
Sprint FON Group Condensed Notes to Combined Financial Statements.
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, software applications and other business systems.
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 $220 million from inception through June
1999 for its Year 2000 remediation program and expects to incur approximately
$30 million through 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 its
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.
If the Year 2000 program is not fulfilled in a timely manner by the FON Group,
or any of its affiliates (including Global One) or any significant third party
does not fulfill its own Year 2000 program in a timely manner, 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 were 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
that 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 Year-to-Date
June 30, June 30,
- --------------------------------------------- ----------------------------------- ----------------------------------
1999 1998 1999 1998
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
<S> <C> <C> <C> <C>
Net Operating Revenues $ 736 $ 265 $ 1,340 $ 468
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Operating Expenses
Costs of services and products 493 272 1,041 488
Selling, general and administrative 581 319 1,115 633
Depreciation and amortization 370 181 719 323
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total operating expenses 1,444 772 2,875 1,444
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Operating Loss (708) (507) (1,535) (976)
Interest expense (170) (119) (321) (223)
Other partners' loss in Sprint PCS - 335 - 640
Other income, net 4 43 30 81
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Loss before income taxes and extraordinary
item (874) (248) (1,826) (478)
Income taxes 319 95 666 180
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Loss before Extraordinary Item (555) (153) (1,160) (298)
Extraordinary item, net - - (21) -
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net Loss (555) $ (153) (1,181) $ (298)
-- -------------- --- -------------
Preferred stock dividends paid (3) (7)
- --------------------------------------------- --- ------------- -- -------------
Loss applicable to common stock $ (558) $ (1,188)
--- ------------- -- -------------
Basic and Diluted Loss per Common
Share(1)
Loss before extraordinary item $ (1.21) $ (0.98) $ (2.62) $ (1.95)
Extraordinary item, net - - (0.04) -
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total $ (1.21) $ (0.98) $ (2.66) $ (1.95)
--- ------------- -- -------------- -- ------------- --- -------------
Basic and diluted weighted average common
shares(1) 460.0 415.8 445.9 415.8
--- ------------- -- -------------- -- ------------- --- -------------
(1) Basic and diluted loss per common share and weighted average common shares
for the 1998 second quarter and year-to-date periods are pro forma and
assume the PCS Restructuring, Recapitalization and Top-up occurred at the
beginning of 1998. The 1998 fourth quarter write-off of $179 million of
acquired in-process research and development is excluded. 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)
- -------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
1999 1998
- -------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Assets
Current assets
<S> <C> <C>
Cash and equivalents $ 40 $ 173
Accounts receivable, net of allowance for
doubtful accounts of $38 and $11 431 306
Inventories 197 127
Current tax benefit receivable from the FON Group 401 170
Affiliated receivables from the FON Group 160 -
Prepaids and other current assets 89 79
- -------------------------------------------------------------------------------------------------------------------------
Total current assets 1,318 855
Property, plant and equipment
Network equipment 5,310 3,999
Construction work in progress 1,122 1,607
Buildings and leasehold improvements 1,158 1,026
Other 409 356
- -------------------------------------------------------------------------------------------------------------------------
Total property, plant and equipment 7,999 6,988
Accumulated depreciation (947) (453)
- -------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 7,052 6,535
Intangible assets
Goodwill 4,524 3,313
PCS licenses 3,057 3,037
Customer base 726 681
Microwave relocation costs 377 355
Other 54 45
- -------------------------------------------------------------------------------------------------------------------------
Total intangible assets 8,738 7,431
Accumulated amortization (305) (93)
- -------------------------------------------------------------------------------------------------------------------------
Net intangible assets 8,433 7,338
Other assets 590 410
- -------------------------------------------------------------------------------------------------------------------------
Total $ 17,393 $ 15,138
-----------------------------------
Liabilities and Group Equity
Current liabilities
Current maturities of long-term debt $ 184 $ 348
Accounts payable 363 371
Construction obligations 939 979
Accrued taxes 132 93
Accrued interest 121 92
Affiliated payables to the FON Group - 75
Accrued expenses and other current liabilities 352 442
- -------------------------------------------------------------------------------------------------------------------------
Total current liabilities 2,091 2,400
Long-term debt and capital lease obligations 9,393 7,847
Deferred credits and other liabilities
Deferred income taxes 1,220 1,013
Other 111 123
- -------------------------------------------------------------------------------------------------------------------------
Total deferred credits and other liabilities 1,331 1,136
Group equity 4,578 3,755
- -------------------------------------------------------------------------------------------------------------------------
Total $ 17,393 $ 15,138
-----------------------------------
See accompanying Condensed Notes to Combined Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMBINED STATEMENTS OF CASH FLOWS (Unaudited) Sprint PCS Group
(millions)
- ------------------------------------------------------------------ ----------------- ----------------- ----------------
Year-to-Date June 30, 1999 1998
- ------------------------------------------------------------------ ----------------- ----------------- ----------------
Operating Activities
<S> <C> <C>
Net loss $ (1,181) $ (298)
Adjustments to reconcile net loss to net cash provided (used) by
operating activities:
Equity in net losses of affiliates - 436
Depreciation and amortization 719 -
Deferred income taxes (54) 59
Extraordinary item, net 21 -
Current tax benefit used by the FON Group - (238)
Changes in assets and liabilities:
Accounts receivable, net (125) -
Inventories and other current assets (98) (20)
Accounts payable and other current liabilities (11) 483
Increase in receivable from the FON Group for current
tax benefits utilized (231) -
Affiliated receivables from and payables to the
FON Group, net 281 -
Noncurrent assets and liabilities, net 3 (62)
Other, net (5) -
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash provided (used) by operating activities (681) 360
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Investing Activities
Capital expenditures (961) (552)
Advances to the FON Group (541) -
Other, net (84) (66)
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash used by investing activities (1,586) (618)
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Financing Activities
Proceeds from long-term debt 3,930 -
Payments on long-term debt (2,646) -
Dividends paid (7) -
Proceeds from PCS common stock issued 843 -
Advances from the FON Group - 186
Equity transfers to the FON Group, net - (165)
Current tax benefit used by the FON Group - 238
Other, net 14 (1)
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash provided by financing activities 2,134 258
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Decrease in Cash and Equivalents (133) -
Cash and Equivalents at Beginning of Period 173 -
- ------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Cash and Equivalents at End of Period $ 40 $ -
--- ------------- -- -------------
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 are wholly owned by
Sprint. Transactions between the PCS Group and the FON Group have not been
eliminated in the combined financial statements of either Group.
The PCS Group combined financial statements provide PCS shareholders with
financial information about the PCS Group operations. Investors in FON stock and
PCS stock are Sprint shareholders and are subject to risks related to all of
Sprint's businesses, assets and liabilities. Sprint retains ownership and
control of the assets and operations of each Group. Financial effects of either
Group that affect Sprint's results of operations or financial condition could
affect the results of operations or financial position of the other Group or the
market price of the 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.
Sprint PCS' 1998 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 year-to-date cash flows reflect the
operations of SprintCom, Inc. 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. Acquisition of Cox PCS
- --------------------------------------------------------------------------------
In the 1999 second quarter, Cox Communications, Inc. exercised a put option
requiring Sprint to purchase the remaining 40.8% interest in Cox PCS. Sprint
issued 24.3 million shares of low-vote PCS stock in exchange for this interest.
At that time, the shares were valued at $1.1 billion. Sprint accounted for the
transaction as a purchase. The excess of the purchase price over the fair value
of the net liabilities acquired totaled $1.2 billion and was allocated mainly to
goodwill, which is being amortized over 40 years.
- --------------------------------------------------------------------------------
4. 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:
Year-to-Date
June 30,
-------------------------
1999 1998
- -------------------------------------------------------
(millions)
Income tax benefit at the
statutory rate $ (639) $ (167)
Effect of:
State income taxes, net
of federal income tax
effect (40) (14)
Goodwill amortization 15 -
Other, net (2) 1
- -------------------------------------------------------
Income tax benefit $ (666) $ (180)
-------------------------
Effective income tax rate 36.5% 37.7%
-------------------------
- --------------------------------------------------------------------------------
5. Long-term Debt and Capital Lease Obligations
- --------------------------------------------------------------------------------
In the 1999 year-to-date period, Sprint allocated $3.9 billion of debt to the
PCS Group consisting mainly of senior notes with 5-year, 10-year, 20-year and
30-year maturities. These notes have interest rates ranging from 7.6% to 9.0%,
which are based on rates the PCS Group would have been 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.
In the 1999 year-to-date period, the PCS Group repaid $2.6 billion of its
revolving credit facilities and other borrowings. These borrowings were repaid
with the long-term financing provided by Sprint.
- --------------------------------------------------------------------------------
6. Group Equity
- --------------------------------------------------------------------------------
Year-to-Date
June 30,
1999
- -------------------------------------------------------
(millions)
Beginning balance $ 3,755
Net loss (1,181)
Common stock issued 2,016
Other, net (12)
- -------------------------------------------------------
Ending balance $ 4,578
------------------
- --------------------------------------------------------------------------------
7. 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.
- --------------------------------------------------------------------------------
8. Supplemental Cash Flows Information
- --------------------------------------------------------------------------------
The PCS Group's cash paid (received) for interest and income taxes was as
follows:
Year-to-Date
June 30,
-------------------------
1999 1998
- -------------------------------------------------------
(millions)
Interest (net of capitalized
interest) $ 284 $ -
-------------------------
Income taxes $ (397) $ -
-------------------------
The PCS Group's noncash activities included the following:
Year-to-Date
June 30,
-------------------------
1999 1998
- -------------------------------------------------------
(millions)
Capital lease obligations $ 77 $ 256
-------------------------
Noncash activity in group
equity $ 21 $ -
-------------------------
Common stock issued for Cox
PCS acquisition $ 1,146 $ -
-------------------------
- --------------------------------------------------------------------------------
9. Subsequent Events
- --------------------------------------------------------------------------------
In July 1999, Sprint filed a shelf registration statement with the SEC covering
$4.0 billion of senior unsecured debt securities. The proceeds will be used
mainly to repay debt. Sprint may also use a portion of the proceeds for general
purposes, including working capital requirements, acquisitions and new capital
investments.
In August 1999, Sprint entered into a long-term debt agreement to borrow $250
million from a financial institution. Sprint will use the proceeds for general
purposes, including working capital requirements, acquisitions, and new capital
investments.
Debt resulting from these borrowings will be allocated to the FON Group or the
PCS Group based on their cash requirements.
<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 personal communication
services (PCS) operations. It operates the only 100% digital PCS wireless
network in the United States with licenses to provide service nationwide using a
single frequency and a single technology. At the end of June 1999, the PCS
Group, together with certain affiliates, operated PCS systems in 286
metropolitan markets, including 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 service offered by the PCS Group
and its affiliates now reaches over 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
compared to the remaining quarters. This is due to the use of retail
distribution, which is dependent on the holiday shopping season; the timing of
new products and service introductions; and aggressive marketing and sales
promotions.
<PAGE>
- --------------------------------------------------------------------------------
Results of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Selected Operating Results
---------------------------------------------------------------------
Quarters Ended
June 30, Variance
---------------------------------- -------------------------------
1999 1998 $ %
- ---------------------------------------------- ---------------- ----------------- -- ------------- -----------------
(millions)
<S> <C> <C> <C> <C>
Net operating revenues $ 736 $ 265 $ 471 177.7%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 493 272 221 81.3%
Selling, general and administrative 581 319 262 82.1%
Depreciation and amortization 370 181 189 104.4%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Total operating expenses 1,444 772 672 87.0%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating loss $ (708) $ (507) $ (201) (39.6)%
-- ------------- -- -------------- -- -------------
Operating loss before depreciation and
amortization $ (338) $ (326) $ (12) (3.7)%
-- ------------- -- -------------- -- -------------
</TABLE>
<TABLE>
<CAPTION>
Selected Operating Results
---------------------------------------------------------------------
Year-to-Date
June 30, Variance
---------------------------------- -------------------------------
1999 1998 $ %
- ---------------------------------------------- ---------------- ----------------- -- ------------- -----------------
(millions)
<S> <C> <C> <C> <C>
Net operating revenues $ 1,340 $ 468 $ 872 186.3%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 1,041 488 553 113.3%
Selling, general and administrative 1,115 633 482 76.1%
Depreciation and amortization 719 323 396 122.6%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Total operating expenses 2,875 1,444 1,431 99.1%
- ---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating loss $ (1,535) $ (976) $ (559) (57.3)%
-- ------------- -- -------------- -- -------------
Operating loss before depreciation and
amortization $ (816) $ (653) $ (163) (25.0)%
-- ------------- -- -------------- -- -------------
</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 30% of net operating revenues in the 1999 second quarter and 29%
in the 1999 year-to-date period.
Net Operating Revenues
Net operating revenues include subscriber revenues, roaming revenues and sales
of handsets and accessory equipment. Subscriber revenues consist of monthly
recurring charges and usage charges. Net operating revenues increased 178% in
the 1999 second quarter and 186% in the 1999 year-to-date period from the same
1998 periods reflecting a 190% increase in the number of customers over the past
12 months. The PCS Group added 617,000 customers in the 1999 second quarter and
ended the quarter with nearly 4 million customers in 286 metropolitan markets
nationwide. Average monthly service revenue per user (ARPU) was $54 for the 1999
second quarter compared to $60 for the same 1998 period. ARPU was $53 for the
1999 year-to-date period compared to $59 for the same 1998 period. ARPU has
decreased from prior-year periods due to a wider acceptance of lower-priced
bundled minute rate plans.
Approximately 20% of the 1999 second quarter and year-to-date net operating
revenues and 16% of the 1998 second quarter and year-to-date 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
81% in the 1999 second quarter and 113% in the 1999 year-to-date period from the
same 1998 periods reflecting the significant growth in customers and expanded
market coverage, partly offset by a reduction in handset unit costs.
Selling, general and administrative (SG&A) expense mainly includes salary and
benefits costs as well as marketing costs to promote products and services. SG&A
expense increased 82% in the 1999 second quarter and 76% in the 1999
year-to-date period from the same 1998 periods reflecting an expanded workforce
to support subscriber growth and increased marketing and selling costs. SG&A
also includes costs related to Sprint's efforts to achieve Year 2000 compliance.
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.
<PAGE>
Depreciation and amortization expense increased 104% in the 1999 second quarter
and 123% in the 1999 year-to-date period from the same 1998 periods reflecting
amortization of intangible assets acquired in the PCS Restructuring in the 1998
fourth quarter and in the Cox PCS purchase in the 1999 second quarter. It also
reflects depreciation of the network assets placed in service during 1999 and
1998. On a pro forma basis, assuming the PCS Restructuring occurred at the
beginning of 1998, depreciation and amortization expense would have increased
44% in the 1999 second quarter and 41% in the 1999 year-to-date period from the
same 1998 periods.
- --------------------------------------------------------------------------------
Nonoperating Items
- --------------------------------------------------------------------------------
Interest Expense
The effective interest rates in the following table represent long-term debt
only. Interest costs on short-term borrowings classified as long-term debt and
intergroup borrowings have been excluded so as not to distort the effective
interest rate on long-term debt.
<TABLE>
<CAPTION>
Quarters Ended Year-to-Date
June 30, June 30,
----------------------------------- ----------------------------------
1999 1998 1999 1998
- --------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Effective interest rate on
<S> <C> <C> <C> <C>
long-term debt(1) 8.7% 9.8% 9.0% 9.5%
--- ------------- -- -------------- -- ------------- --- -------------
(1)The effective interest rate on long-term debt for the 1998 second quarter
and year-to-date periods is on a pro forma basis as if Sprint PCS long-term
debt had been included in the PCS Group's outstanding long-term debt balance
during those periods.
</TABLE>
The decrease in the PCS Group's effective interest rate for the 1999 second
quarter and year-to-date periods mainly reflects increased borrowings with lower
interest rates.
Effective with the PCS Restructuring, interest expense on borrowings incurred by
Sprint and allocated to the PCS Group is based on rates the PCS Group would be
able to obtain from third parties as a direct or indirect wholly owned Sprint
subsidiary, but without the benefit of any guaranty by Sprint or any member of
the FON Group. Interest expense of PCS Group includes $37 million in the 1999
second quarter and $67 million in the 1999 year-to-date period resulting from
the difference between Sprint's actual interest rates and the rates charged to
the PCS Group. These costs are included in the effective interest rates above.
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.
Other Income, Net
Other income mainly includes minority interest in Cox PCS of $20 million for the
1999 year-to-date period compared with $72 million for the same period a year
ago. There is no minority interest in the 1999 second quarter compared to $37
million for the same period a year ago.
Income Taxes
See Note 4 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.
<PAGE>
- --------------------------------------------------------------------------------
Financial Condition
- --------------------------------------------------------------------------------
June 30, December 31,
1999 1998
- ------------------------------------------------------
(millions)
Combined assets $ 17,393 $ 15,138
-------------------------------
Net intangible assets increased $1.1 billion since year-end mainly reflecting
the 1999 second quarter acquisition of the remaining interest in Cox PCS partly
offset by year-to-date amortization.
Net property, plant and equipment increased $517 million since year-end mainly
reflecting capital expenditures to support the PCS network buildout and
expansion, partly offset by year-to-date depreciation.
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 $231
million reflecting the PCS Group's 1999 year-to-date current income tax benefit
recognized, offset by payments from the FON Group during the period.
- --------------------------------------------------------------------------------
Liquidity and Capital Resources
- --------------------------------------------------------------------------------
The PCS Group's year-to-date 1998 cash flows reflect the operations of
SprintCom, Inc. and Sprint's investment in Sprint PCS and therefore are not
comparable.
Operating Activities
Year-to-Date
June 30,
-------------------------------
1999 1998
- ------------------------------------------------------
(millions)
Cash flows provided
(used) by
operating
activities $ (681) $ 360
-------------------------------
Operating cash flows decreased $1.0 billion in the 1999 year-to-date period
reflecting increased losses for the PCS Group, as well as increased outflows
from working capital.
Investing Activities
Year-to-Date
June 30,
-------------------------------
1999 1998
- ------------------------------------------------------
(millions)
Cash flows used by
investing
activities $ (1,586) $ (618)
-------------------------------
Capital expenditures, which are the PCS Group's largest investing activity,
totaled $961 million in the 1999 year-to-date period, compared to $552 million
for the same 1998 period for SprintCom, Inc. alone. Capital expenditures in both
years were mainly for the buildout and expansion of the PCS network.
Financing Activities
Year-to-Date
June 30,
-------------------------------
1999 1998
- ------------------------------------------------------
(millions)
Cash flows provided
by financing
activities $ 2,134 $ 258
-------------------------------
In the 1999 year-to-date period, financing activities reflect proceeds from
long-term debt used mainly to repay existing debt and to fund working capital
requirements. In addition, the PCS Group received $843 million of net proceeds
from a secondary offering of PCS common stock in February. Financing activities
for the 1998 year-to-date period reflect advances from and equity transfers to
the FON 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 $2.4 and $2.7 billion. Additional funds
will be required to fund expected operating losses, working capital and debt
service requirements of the PCS Group.
PCS preferred stock dividend payments are expected to total $15 million in 1999,
including payments to the FON Group for its preferred intergroup interest.
<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 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.
The PCS Group has also completed the renovation of its computer systems and
other business systems. Substantially all of the PCS Group's software
applications and network elements are renovated. 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 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, it has no contractual or other right to force
compliance.
The PCS Group incurred approximately $25 million from inception through June
1999 for its Year 2000 remediation program and expects to incur approximately
$25 million through 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 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 its
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.
If the Year 2000 program is not fulfilled in a timely manner by the PCS Group,
or any of its affiliates or any significant third party does not fulfill its own
Year 2000 program in a timely manner, 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 before 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 were 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
that 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.
