Annex I
SPRINT CORPORATION
Consolidated Financial Information
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Sprint Corporation
(millions)
--------------------------------------------- --- ------------------------------- -- -------------------------------
Quarters Ended Year-to-Date
September 30, September 30,
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
2000 1999 2000 1999
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
<S> <C> <C> <C> <C>
Net Operating Revenues $ 5,965 $ 5,068 $ 17,237 $ 14,608
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Operating Expenses
Costs of services and products 3,026 2,703 8,838 7,758
Selling, general and administrative 1,520 1,497 4,542 4,298
Depreciation and amortization 1,062 932 3,035 2,678
Merger related costs - - 187 -
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total operating expenses 5,608 5,132 16,602 14,734
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Operating Income (Loss) 357 (64) 635 (126)
Interest expense (233) (201) (717) (600)
Other income (expense), net (89) (9) (48) 68
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Income (Loss) from continuing operations
before income taxes 35 (274) (130) (658)
Income tax (expense) benefit (41) 78 (32) 188
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Loss from Continuing Operations (6) (196) (162) (470)
Discontinued operation, net - (60) 675 (154)
Extraordinary items, net - - (3) (21)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net Income (Loss) $ (6) $ (256) $ 510 $ (645)
--- ------------- -- -------------- -- ------------- --- -------------
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS (continued) Sprint Corporation
(Unaudited)
(millions, except per share data)
--------------------------------------------------------------------------- ---------------------------------------------
Quarters Ended September 30, 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------------
FON Common Stock PCS Common Stock
----------------------------- ------------------------------
<S> <C> <C> <C> <C>
Earnings (Loss) Applicable to Common Stock $ 385 $ 361 $ (394) $ (619)
-- ----------- --- ---------- --- --- ---------- --- -----------
Diluted Earnings (Loss) per Common Share
Continuing operations $ 0.43 $ 0.48 $ (0.41) $ (0.65)
Discontinued operation - (0.07) - -
-------------------------------------------------------- -- ----------- --- ---------- --- --- ---------- --- -----------
Total $ 0.43 $ 0.41 $ (0.41) $ (0.65)
-- ----------- --- ---------- --- --- ---------- --- -----------
Diluted weighted average common shares 890.8 886.7 971.3 946.6
-- ----------- --- ---------- --- --- ---------- --- -----------
Basic Earnings (Loss) per Common Share
Continuing operations $ 0.44 $ 0.49 $ (0.41) $ (0.65)
Discontinued operation - (0.07) - -
-------------------------------------------------------- -- ----------- --- ---------- --- --- ---------- --- -----------
Total $ 0.44 $ 0.42 $ (0.41) $ (0.65)
-- ----------- --- ---------- --- --- ---------- --- -----------
Basic weighted average common shares 884.2 869.4 971.3 946.6
-- ----------- --- ---------- --- --- ---------- --- -----------
DIVIDENDS PER COMMON SHARE $ 0.125 $ 0.125 N/A N/A
-- ----------- --- ---------- --- --- ---------- --- -----------
-------------------------------------------------------------------------------------------------------------------------
Year-to-Date September 30, 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------------
FON Common Stock PCS Common Stock
----------------------------- ------------------------------
Earnings (Loss) Applicable to Common Stock $ 1,874 $ 1,156 $ (1,370) $ (1,807)
-- ----------- --- ---------- --- --- ---------- --- -----------
Diluted Earnings (Loss) per Common Share
Continuing operations $ 1.34 $ 1.48 $ (1.42) $ (1.97)
Discontinued operation 0.76 (0.17) - -
Extraordinary items - - - (0.02)
-------------------------------------------------------- -- ----------- --- ---------- --- --- ---------- --- -----------
Total $ 2.10 $ 1.31 $ (1.42) $ (1.99)
-- ----------- --- ---------- --- --- ---------- --- -----------
Diluted weighted average common shares 894.5 884.3 963.5 910.3
-- ----------- --- ---------- --- --- ---------- --- -----------
Basic Earnings (Loss) per Common Share
Continuing operations $ 1.36 $ 1.51 $ (1.42) $ (1.97)
Discontinued operation 0.77 (0.18) - -
Extraordinary items - - - (0.02)
-------------------------------------------------------- -- ----------- --- ---------- --- --- ---------- --- -----------
Total $ 2.13 $ 1.33 $ (1.42) $ (1.99)
-- ----------- --- ---------- --- --- ---------- --- -----------
Basic weighted average common shares 879.8 866.4 963.5 910.3
-- ----------- --- ---------- --- --- ---------- --- -----------
DIVIDENDS PER COMMON SHARE $ 0.375 $ 0.375 N/A N/A
-- ----------- --- ---------- --- --- ---------- --- -----------
Note: In the 2000 first quarter, Sprint effected a two-for-one stock split of its PCS common stock. As a result, 1999 basic and
diluted loss per common share and weighted average common shares have been restated.
N/A = Not applicable
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) Sprint Corporation
(Unaudited)
(millions)
--------------------------------------------- ----------------------------------- ----------------------------------
Quarters Ended Year-to-Date
September 30, September 30,
--------------------------------------------- ----------------------------------- ----------------------------------
2000 1999 2000 1999
--------------------------------------------- ----------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
Net Income (Loss) $ (6) $ (256) $ 510 $ (645)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Other Comprehensive Income (Loss)
Unrealized holding gains (losses) on
securities 5 (4) (28) -
Income tax (expense) benefit (2) 2 10 -
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net unrealized holding gains (losses) on
securities during the period 3 (2) (18) -
Reclassification adjustment for gains
included in net income (8) - (40) (57)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total net unrealized holding losses on
securities (5) (2) (58) (57)
Foreign currency translation adjustments 1 - 4 -
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total other comprehensive loss (4) (2) (54) (57)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Comprehensive Income (Loss) $ (10) $ (258) $ 456 $ (702)
--- ------------- -- -------------- -- ------------- --- -------------
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS Sprint Corporation
(millions)
-------------------------------------------------------------------------------------------------------------------------
September 30, December 31,
2000 1999
-------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Assets
Current assets
<S> <C> <C>
Cash and equivalents $ 219 $ 120
Accounts receivable, net of allowance for doubtful accounts of
$326 and $285 3,825 3,408
Inventories 807 777
Prepaid expenses 362 340
Income tax receivable - 411
Investments in equity securities - 317
Other 113 207
-------------------------------------------------------------------------------------------------------------------------
Total current assets 5,326 5,580
Investments in securities 81 147
Property, plant and equipment
FON Group 29,968 27,687
PCS Group 11,321 9,411
-------------------------------------------------------------------------------------------------------------------------
Total property, plant and equipment 41,289 37,098
Accumulated depreciation (17,392) (15,129)
-------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 23,897 21,969
Investments in and advances to affiliates 745 452
Intangible assets
Goodwill 5,777 5,745
PCS licenses 3,059 3,060
Other 1,580 1,453
-------------------------------------------------------------------------------------------------------------------------
Total intangible assets 10,416 10,258
Accumulated amortization (1,133) (691)
-------------------------------------------------------------------------------------------------------------------------
Net intangible assets 9,283 9,567
Net assets of discontinued operation - 394
Other 1,513 1,141
-------------------------------------------------------------------------------------------------------------------------
Total $ 40,845 $ 39,250
-----------------------------------
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS (continued) Sprint Corporation
(millions, except per share data)
-------------------------------------------------------------------------------------------------------------------------
September 30, December 31,
2000 1999
-------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Liabilities and Shareholders' Equity
Current liabilities
<S> <C> <C>
Current maturities of long-term debt $ 491 $ 1,087
Accounts payable 1,532 1,462
Construction obligations 853 1,039
Accrued interconnection costs 559 683
Accrued taxes 429 410
Advance billings 352 323
Payroll and employee benefits 448 638
Accrued interest 408 264
Other 1,064 926
-------------------------------------------------------------------------------------------------------------------------
Total current liabilities 6,136 6,832
Long-term debt and capital lease obligations 17,151 15,685
Deferred credits and other liabilities
Deferred income taxes and investment tax credits 1,459 1,511
Postretirement and other benefit obligations 1,071 1,064
Other 638 598
-------------------------------------------------------------------------------------------------------------------------
Total deferred credits and other liabilities 3,168 3,173
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, 798.8 and 788.0
shares issued and 797.1 and 788.0 shares outstanding 1,598 1,576
PCS, par value $1.00 per share, 2,350.0 shares authorized, 930.4 and 910.4
shares issued and outstanding 930 910
PCS preferred stock, no par, 0.3 shares authorized, 0.2 shares issued and
outstanding 247 247
Capital in excess of par or stated value 9,303 8,569
Retained earnings 2,119 1,961
Treasury stock, at cost, 1.7 and 0.0 shares (50) (2)
Accumulated other comprehensive income 27 81
Other - 2
-------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 14,390 13,560
-------------------------------------------------------------------------------------------------------------------------
Total $ 40,845 $ 39,250
-----------------------------------
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Sprint Corporation
(millions)
------------------------------------------------------------------ ----------------- ----------------- ----------------
Year-to-Date September 30, 2000 1999
------------------------------------------------------------------ ----------------- ----------------- ----------------
Operating Activities
<S> <C> <C>
Net income (loss) $ 510 $ (645)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Discontinued operation, net (675) 154
Extraordinary items, net 3 21
Equity in net losses of affiliates 197 49
Depreciation and amortization 3,035 2,678
Deferred income taxes and investment tax credits 9 16
Changes in assets and liabilities:
Accounts receivable, net (424) (606)
Inventories and other current assets 414 (637)
Accounts payable and other current liabilities (39) 399
Noncurrent assets and liabilities, net 24 (95)
Other, net (127) (6)
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash provided by operating activities 2,927 1,328
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Investing Activities
Capital expenditures (4,765) (4,035)
Investments in affiliates, net (882) (102)
Proceeds from sales of assets 255 90
Purchase of broadband fixed wireless companies,
net of cash acquired - (271)
Other, net (23) (171)
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash used by continuing operations (5,415) (4,489)
Proceeds from sale of investment in Global One 1,403 -
Net investing activities of discontinued operation - (295)
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash used by investing activities (4,012) (4,784)
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Financing Activities
Proceeds from long-term debt 2,411 4,944
Payments on long-term debt (1,244) (2,417)
Dividends paid (333) (328)
Proceeds from common stock issued 264 1,011
Treasury stock purchased (61) (48)
Other, net 147 115
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash provided by financing activities 1,184 3,277
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Increase (Decrease) in Cash and Equivalents 99 (179)
Cash and Equivalents at Beginning of Period 120 605
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Cash and Equivalents at End of Period $ 219 $ 426
--- ------------- -- -------------
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Unaudited) Sprint Corporation
(millions)
----------------------------------------------------------------------------------------------------------------------
Year-to-Date September 30, 2000
----------------------------------------------------------------------------------------------------------------------
PCS
Common Capital
Sprint 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 2000 balance $ 216 $ 1,576 $ 1,157 $ 8,569 $ 1,961 $ (2) $ 83 $ 13,560
Net income - - - - 510 - - 510
FON common stock dividends - - - - (298) - - (298)
Class A common stock dividends - - - - (33) - - (33)
PCS preferred stock dividends - - - - (5) - - (5)
FON Series 1 common stock issued - 22 - 182 - - - 204
PCS Series 1 common stock issued - - 20 146 - - - 166
Treasury stock purchased - - - - - (61) - (61)
Treasury stock issued - - - - (18) 13 - (5)
Tax benefit from stock
compensation - - - 406 - - - 406
Other, net - - - - 2 - (56) (54)
----------------------------------------------------------------------------------------------------------------------
September 2000 balance $ 216 $ 1,598 $ 1,177 $ 9,303 $ 2,119 $ (50) $ 27 $ 14,390
--------------------------------------------------------------------------------------
Shares Outstanding
------------------------------------------------------------------
Beginning 2000 balance 86.2 788.0 910.6
FON Series 1 common stock issued - 10.8 -
PCS Series 1 common stock issued - - 20.0
Treasury stock purchased - (2.0) -
Treasury stock issued - 0.3 -
-------------------------------
September 2000 balance 86.2 797.1 930.6
-------------------------------
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).
</TABLE>
<PAGE>
CONDENSED NOTES TO CONSOLIDATED FINANCIAL Sprint Corporation
STATEMENTS (Unaudited)
--------------------------------------------------------------------------------
The information in this Form 10-Q has been prepared according to Securities and
Exchange Commission (SEC) rules and regulations. In our opinion, the
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 (loss).
Certain information and footnote disclosures normally included in consolidated
financial statements prepared according to accounting principles generally
accepted in the United States have been condensed or omitted. As a result, you
should read these financial statements along with Sprint Corporation's 1999 Form
10-K. Operating results for the 2000 year-to-date period do not necessarily
represent the results that may be expected for the year ending December 31,
2000.
--------------------------------------------------------------------------------
1. Basis of Consolidation and Presentation
--------------------------------------------------------------------------------
The consolidated financial statements include the accounts of Sprint and its
wholly owned and majority-owned subsidiaries. The PCS stock is intended to
reflect the performance of Sprint's wireless PCS operations. The FON stock is
intended to reflect the performance of all of Sprint's other operations.
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 accounting principles
generally accepted in the United States. These principles require management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities, and the
reported amounts of revenues and expenses. Actual results could differ from
those estimates.
Certain prior-year amounts have been reclassified to conform to the current-year
presentation. These reclassifications had no effect on the results of operations
or shareholders' equity as previously reported.
--------------------------------------------------------------------------------
2. Discontinued Operation
--------------------------------------------------------------------------------
In January 2000, Sprint reached a definitive agreement with France Telecom S.A.
(FT) and Deutsche Telekom AG (DT) to sell its interest in Global One. In
February 2000, Sprint received $1.1 billion in cash and was repaid $276 million
for advances for its entire stake in Global One.
Sprint recorded an after-tax gain related to the sale of its interest in Global
One of $675 million in the first quarter of 2000. Sprint recorded after-tax
losses related to its share of losses from Global One of $60 million in the 1999
third quarter and $154 million in the 1999 year-to-date period.
--------------------------------------------------------------------------------
3. Merger Termination
--------------------------------------------------------------------------------
On July 13, 2000, Sprint and WorldCom, Inc. announced that the boards of
directors of both companies terminated their merger agreement, previously
announced in October 1999, as a result of regulatory opposition to the merger.
In the 2000 second quarter, Sprint recognized a one-time, pre-tax charge of $187
million for costs associated with the terminated merger.
<PAGE>
--------------------------------------------------------------------------------
4. Investments
--------------------------------------------------------------------------------
At the end of September 2000, investments accounted for using the equity method
consisted of the FON Group's investments in EarthLink, Call-Net, Intelig and
other strategic investments and the PCS Group's investment in Pegaso
Telecomunicaciones, S.A. de C.V., a wireless PCS operation in Mexico. Combined,
unaudited, summarized financial information (100% basis) of entities accounted
for using the equity method was as follows:
<TABLE>
<CAPTION>
Quarters Ended Year-to-Date
September 30, September 30,
----------------------------------- ----------------------------------
2000 1999 2000 1999
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions)
Results of operations
<S> <C> <C> <C> <C>
Net operating revenues $ 655 $ 403 $ 1,699 $ 1,170
--- ------------- -- -------------- -- ------------- --- -------------
Net operating loss $ (449) $ (53) $ (616) $ (138)
--- ------------- -- -------------- -- ------------- --- -------------
Net loss $ (453) $ (114) $ (815) $ (207)
--- ------------- -- -------------- -- ------------- --- -------------
Equity in net losses of affiliates $ (120) $ (25) $ (181) $ (50)
--- ------------- -- -------------- -- ------------- --- -------------
</TABLE>
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5. Income Taxes
--------------------------------------------------------------------------------
The differences that caused Sprint's effective income tax rates to vary from the
35% federal statutory rate for income taxes related to continuing operations
were as follows:
Year-to-Date
September 30,
-----------------------
2000 1999
---------------------------------------------------------
(millions)
Income tax benefit at the
federal statutory rate $ (46) $ (230)
Effect of:
State income taxes, net of
federal income tax effect 13 11
Equity in losses of foreign
joint ventures 38 14
Goodwill amortization 38 25
Other, net (11) (8)
---------------------------------------------------------
Income tax expense (benefit) $ 32 $ (188)
-----------------------
Effective income tax rate (24.6)% 28.6%
-----------------------
--------------------------------------------------------------------------------
6. Long-term Debt and Capital Lease Obligations
--------------------------------------------------------------------------------
In August 2000, Sprint renewed its $3.0 billion 364 day revolving credit
facility with a syndicate of domestic and international banks to support
commercial paper operations. At September 30, 2000, the entire credit facility
was unused.
In June 2000, Sprint issued $1.25 billion of debt securities registered with the
SEC. These borrowings, which mature in 2002 and have interest rates ranging from
7.0% to 7.6%, were allocated to the PCS Group.
In the 2000 first quarter, Sprint exchanged 6.6 million common shares of SBC
Communications, Inc. for certain notes payable of the FON Group. The notes had a
market value of $275 million on the maturity date and $316 million at year-end
1999. The notes had an interest rate of 8.3%.
In the 2000 first quarter, Sprint repaid, prior to scheduled maturities, $127
million of the PCS Group's notes payable to the FCC. These notes had an interest
rate of 7.8%. This resulted in a $3 million after-tax extraordinary loss.
--------------------------------------------------------------------------------
7. Stock Split
--------------------------------------------------------------------------------
In December 1999, Sprint's Board of Directors authorized a two-for-one stock
split of Sprint's PCS common stock in the form of a stock dividend which was
distributed on February 4, 2000 to the PCS shareholders. A comparable dividend
was paid on the Class A common stock owned by FT and DT. PCS Group loss per
share and weighted average common shares for the prior periods 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>
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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 9 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 September 30, FON Group PCS Group Eliminations(1) Consolidated
--------------------------------------------------------------------------------------------------------------------
(millions)
2000
<S> <C> <C> <C> <C>
Net operating revenues $ 4,403 $ 1,673 $ (111) $ 5,965
Intergroup revenues 101 10 (111) -
Operating income (loss) 724 (367) - 357
1999
Net operating revenues $ 4,298 $ 844 $ (74) $ 5,068
Intergroup revenues 70 4 (74) -
Operating income (loss) 726 (790) - (64)
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
Sprint Sprint Intergroup
Year-to-Date September 30, FON Group PCS Group Eliminations(1) Consolidated
--------------------------------------------------------------------------------------------------------------------
(millions)
2000
Net operating revenues $ 13,234 $ 4,310 $ (307) $ 17,237
Intergroup revenues 280 27 (307) -
Operating income (loss) 2,073 (1,438) - 635
1999
Net operating revenues $ 12,609 $ 2,184 $ (185) $ 14,608
Intergroup revenues 179 6 (185) -
Operating income (loss) 2,199 (2,325) - (126)
--------------------------------------------------------------------------------------------------------------------
(1) Revenues eliminated in consolidation consist principally of long-distance services provided to the PCS Group for resale to PCS
customers and for internal business use and telemarketing services provided by the FON Group for PCS sales programs.
</TABLE>
<PAGE>
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10. Supplemental Cash Flows Information
--------------------------------------------------------------------------------
Sprint's cash paid (received) for interest and income taxes was as follows:
Year-to-Date
September 30,
-------------------------
2000 1999
-------------------------------------------------------
(millions)
Interest (net of capitalized
interest) $ 592 $ 418
-------------------------
Income taxes $ (400) $ (15)
-------------------------
Sprint's noncash activities included the following:
Year-to-Date
September 30,
-------------------------
2000 1999
-------------------------------------------------------
(millions)
Tax benefit from stock
compensation $ 406 $ 140
-------------------------
Debt redeemed with
investments in equity
securities $ 275 $ -
-------------------------
Common stock issued under
employee stock benefit
plans $ 173 $ 98
-------------------------
Stock received for stock
options exercised $ 64 $ 44
-------------------------
Common stock issued for Cox
PCS acquisition $ - $ 1,146
-------------------------
Capital lease obligations $ - $ 36
-------------------------
Debt assumed in purchase of
broadband fixed wireless
companies $ - $ 574
-------------------------
--------------------------------------------------------------------------------
11. Subsequent Event
--------------------------------------------------------------------------------
In October 2000, Sprint's Board of Directors declared dividends of 12.5 cents
per share on the Sprint FON common stock and Class A common stock. Dividends
will be paid December 28, 2000.
--------------------------------------------------------------------------------
12. Recently Issued Accounting Pronouncements
--------------------------------------------------------------------------------
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" (SAB 101). In June 2000, the SEC issued an
amendment to SAB 101 which delayed the effective date for registrants with
fiscal years that begin after December 15, 1999. The effective date for Sprint
will be for the quarter ending December 31, 2000. The deferral of
telecommunication service activation fees and certain related costs are
specifically addressed in SAB 101 and Sprint is completing the analysis of the
impact of SAB 101 on its financial statements. SAB 101 is not expected to have a
material impact on Sprint's consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This standard requires all derivatives to be recorded
on the balance sheet as either assets or liabilities and be measured at fair
value. Gains or losses from changes in the derivative values are to be accounted
for based on how the derivative was used and whether it qualifies for hedge
accounting. When adopted in January 2001, this statement is not expected to have
a material impact on Sprint's consolidated financial statements.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Sprint Corporation
--------------------------------------------------------------------------------
General
--------------------------------------------------------------------------------
On July 13, 2000, Sprint and WorldCom, Inc. (WorldCom) announced that the boards
of directors of both companies terminated their merger agreement, previously
announced in October 1999, as a result of regulatory opposition to the merger.
In the 2000 second quarter, Sprint recognized a one-time, pre-tax charge of $187
million for costs associated with the terminated merger.
Sprint has been reassessing the FON Group business strategies in response to the
cancellation of its planned merger with WorldCom and the recent changes in the
overall telecommunications industry. This reassessment may impact the valuation
of various FON Group assets and investments. Sprint anticipates that this
valuation analysis will be concluded before year-end.
The PCS stock is intended to reflect the performance of Sprint's wireless PCS
operations. These operations are referred to as the PCS Group.
The FON stock is intended to reflect the performance of all of Sprint's other
operations. These operations are referred to as the FON Group and include the
following:
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 strategic ventures.
FON and PCS shareholders are subject to the risks related to all of Sprint's
businesses, assets and liabilities. Owning FON or PCS shares does not represent
a direct legal interest in the assets and liabilities of the Groups. Rather,
shareholders remain invested in Sprint and continue to vote as a single voting
class for Board member elections and most other company matters.
FON Group or PCS Group events affecting Sprint's consolidated statements of
operations and balance sheets could, in turn, affect the other Group's financial
statements or stock price.
Net losses of either Group, and dividends or distributions on, or repurchases
of, PCS stock or FON stock, will reduce Sprint funds legally available for
dividends on both FON stock and PCS 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.
--------------------------------------------------------------------------------
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 that uses 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 more than
8.3 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 is developing and deploying new integrated communications services,
referred to as Sprint ION. Sprint ION extends Sprint's existing network
capabilities to the customer and enables Sprint to provide the network
infrastructure to meet customers' demands for advanced services including
integrated voice, data, Internet and video. It is also expected to be the
foundation for Sprint to provide new competitive local service. Beginning in
2000, the Sprint ION segment includes costs to develop high-speed data services
and Sprint ION services for the Multipoint Multichannel Distribution Services
broadband fixed wireless platform.
<PAGE>
Other Ventures
The "other ventures" segment includes the cable TV service operations of the
broadband fixed wireless companies acquired in the second half of 1999.
This segment also includes the FON Group's investments in EarthLink, Inc., an
Internet service provider; Call-Net, a long distance provider in Canada
operating under the Sprint brand name; Intelig, a long distance provider in
Brazil; and certain other telecommunications investments and ventures. All of
the investments and ventures are accounted for using the equity method.
--------------------------------------------------------------------------------
General Overview of the Sprint PCS Group
--------------------------------------------------------------------------------
The PCS Group includes Sprint's wireless PCS operations. It operates the only
100% digital PCS wireless network in the United States with licenses to provide
service nationwide using a single frequency and a single technology. At the end
of September 2000, the PCS Group operated PCS systems in more than 300
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 more than 213 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 PCS Group also provides wholesale PCS services to companies that resell the
services to their customers on a retail basis. These companies pay the PCS Group
a discounted price for their customers' usage, but bear the costs of acquisition
and customer service.
The PCS Group also includes its investment in Pegaso Telecomunicaciones, S.A. de
C.V. (Pegaso), a wireless PCS operation in Mexico. This investment is accounted
for using the equity method.
--------------------------------------------------------------------------------
Results of Operations
--------------------------------------------------------------------------------
Consolidated
Total net operating revenues were as follows:
<TABLE>
<CAPTION>
Quarters Ended Year-to-Date
September 30, September 30,
----------------------------------- ----------------------------------
2000 1999 2000 1999
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions)
<S> <C> <C> <C> <C>
FON Group $ 4,403 $ 4,298 $ 13,234 $ 12,609
PCS Group 1,673 844 4,310 2,184
Intergroup eliminations (111) (74) (307) (185)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net operating revenues $ 5,965 $ 5,068 $ 17,237 $ 14,608
--- ------------- -- -------------- -- ------------- --- -------------
Income (Loss) from continuing operations was as follows:
Quarters Ended Year-to-Date
September 30, September 30,
----------------------------------- ----------------------------------
2000 1999 2000 1999
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions)
FON Group $ 384 $ 419 $ 1,194 $ 1,305
PCS Group (390) (615) (1,356) (1,775)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Loss from continuing operations $ (6) $ (196) $ (162) $ (470)
--- ------------- -- -------------- -- ------------- --- -------------
</TABLE>
<PAGE>
Sprint FON Group
<TABLE>
<CAPTION>
Quarters Ended Year-to-Date
September 30, September 30,
----------------------------------- ----------------------------------
2000 1999 2000 1999
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions)
<S> <C> <C> <C> <C>
Net operating revenues $ 4,403 $ 4,298 $ 13,234 $ 12,609
Operating expenses 3,679 3,572 11,161 10,410
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Operating income $ 724 $ 726 $ 2,073 $ 2,199
--- ------------- -- -------------- -- ------------- --- -------------
Operating margin 16.4% 16.9% 15.7% 17.4%
--- ------------- -- -------------- -- ------------- --- -------------
</TABLE>
Net Operating Revenues
Net operating revenues were $4.4 billion for the 2000 third quarter, an increase
of 2% from $4.3 billion for the same 1999 period. Net operating revenues for the
first nine months in 2000 increased 5% to $13.2 billion from $12.6 billion for
the same 1999 period.
Long Distance Division
Net operating revenues increased 3% in the 2000 third quarter and 5% for the
2000 year-to-date period from the same 1999 periods. These increases mainly
reflect strong data services revenue growth. Calling volumes increased 16% in
the 2000 third quarter and 17% in the 2000 year-to-date period compared to the
same periods a year ago, but were largely offset by a more competitive pricing
environment and a reduction in access cost pass-throughs resulting from the
implementation of an access reform proposal by the Coalition for Affordable
Local and Long distance Service (CALLS) in the 2000 third quarter. Future
revenue and operating income growth may be impacted by the continuing pricing
pressures being experienced by the long distance division.
Business and data market revenues increased 7% in the 2000 third quarter and 9%
for the 2000 year-to-date period from the same 1999 periods. Data services
showed strong growth from continued demand and an increased use of the Internet.
Residential market revenues decreased 6% in the 2000 third quarter and 2% for
the 2000 year-to-date period compared to the same 1999 periods. The decrease in
the 2000 third quarter was mainly due to the implementation of the CALLS
proposal at the beginning of the quarter. Revenues for the 2000 third quarter
and year-to-date periods also declined due to lower calling card usage partly
offset by an increase in international revenues. Additionally, revenues for the
2000 year-to-date period were affected by the loss of a major Local Exchange
Carrier calling card contract. However, Sprint has entered into another calling
card contract that will partially replace the lost revenues. Domestic
residential revenues declined in both the 2000 third quarter and year-to-date
periods from the same 1999 periods due to price reductions which were partly
offset by increased calling volumes. Residential market revenues have benefited
from the success of bundled services sales by the local division. Revenue growth
from customers within Sprint's local territories has helped mitigate the erosion
of revenues from other customers.
Wholesale market revenues increased 2% in the 2000 third quarter and 5% in the
2000 year-to-date period from the same 1999 periods. These increases are largely
the result of sales of capacity on transoceanic cable. Additional increases are
primarily due to growth in private line and data services offset by declining
international voice revenues.
Local Division
At the beginning of the 2000 third quarter, Sprint changed its transfer pricing
for certain transactions between FON Group entities. The main effect of this
change was a reduction in the local division's "Net Operating Revenues - Other
Revenues." In addition, Sprint's local division sold a customer service and
telemarketing organization to the PCS Group at the beginning of the 2000 second
quarter. For comparative purposes, the following discussion assumes the transfer
pricing change and the sale of the customer service and telemarketing
organization occurred at the beginning of 1999.
Local division revenues increased 3% in the 2000 third quarter and 4% in the
2000 year-to-date period from the same 1999 periods. These increases mainly
reflect increased sales of network-based services such as Caller ID and Call
Waiting and steady customer access line growth. Sales of network-based services
increased due to strong demand for bundled services which combine local service,
network-based features and long distance calling. The local division ended the
2000 third quarter with over 8.3 million switched access lines, a 4.6% increase
during the past 12 months. On a voice-grade equivalent basis, which includes
both traditional switched services and high capacity lines, access lines grew
18% during the past 12 months. This growth reflects many business customers
switching from individual lines to high capacity dedicated circuits.
<PAGE>
Local service revenues grew 7% in the 2000 third quarter and year-to-date
periods from the same 1999 periods because of strong demand for bundled services
and customer access line growth. Revenue growth also reflects increased sales of
data products.
Network access revenues increased 2% in the 2000 third quarter and 6% in the
2000 year-to-date period from the same 1999 periods. The 2000 third quarter and
year-to-date revenues reflect a 5% and 7% respective increase in minutes of use
and increased revenues from special access services. These increases were offset
by FCC-mandated access rate reductions which included the implementation of the
CALLS proposal beginning in the 2000 third quarter.
Toll service revenues decreased 24% in the 2000 third quarter and 22% in the
2000 year-to-date period from the same 1999 periods, reflecting increased
competition, which is expected to continue, in the intraLATA long distance
market. These decreases also reflect the success of sales of bundled services
which shift intraLATA customers to Sprint's long distance division. Despite the
losses realized by the local division, overall, Sprint has maintained
approximately a two-thirds market share of intraLATA long distance in the local
division's territories from the 1999 third quarter to the 2000 third quarter.
Other revenues decreased 1% in the 2000 third quarter and 7% in the 2000
year-to-date period from the same 1999 periods mainly due to a decrease in
equipment sales as a result of a planned shift in focus to selling only higher
margin products.
Product Distribution & Directory Publishing Businesses
The product distribution and directory publishing businesses' net operating
revenues increased 11% in the 2000 third quarter and 7% in the 2000 year-to-date
period from the same 1999 periods. Nonaffiliated revenues accounted for
approximately 60% of revenues in both the 2000 and 1999 third quarters and
year-to-date periods. Nonaffiliated revenues increased 7% in the 2000 third
quarter and 10% in the 2000 year-to-date period compared with the same 1999
periods. The increase in nonaffiliated revenues in the third quarter was mainly
due to the consolidation of a directory publishing partnership. Beginning in the
2000 third quarter, the directory publishing partnership, previously accounted
for as an equity method investment, was fully consolidated due to a
restructuring in the partnership management. The year-to-date increase was
largely due to an increased volume of equipment sales resulting from the
expansion of certain existing sales contracts, mainly in the 2000 first quarter.
Affiliate revenues increased 19% in the 2000 third quarter and 2% in the 2000
year-to-date period compared to the same 1999 periods. The third quarter
increase was mainly the result of the mid-year change in the local division's
capital program to more network equipment and components. Additionally,
affiliate sales were lower beginning in the 1999 third quarter due to the change
in the local division's capital program to more electronics and software, which
was more frequently purchased directly from manufacturers.
Sprint ION(SM)
Net operating revenues for Sprint ION in 2000 reflect revenues from the initial
launches of both Sprint ION and broadband fixed wireless services.
Operating Expenses
The FON Group's operating expenses increased 3% in the 2000 third quarter and 7%
in the 2000 year-to-date period from the same 1999 periods.
Long Distance Division
Long distance division operating expenses increased 3% in the 2000 third quarter
and 5% in the 2000 year-to-date period from the same 1999 periods.
Interconnection costs decreased 4% in the 2000 third quarter and 1% in the 2000
year-to-date period from the same 1999 periods. The decreases were due to
reductions in per-minute international access costs as well as domestic access
costs and a decline in international calling volumes, largely offset by costs
related to growth in non-minute driven revenues and increased domestic calling
volumes. The domestic rate reductions were generally due to the FCC-mandated
access rate reductions that took effect in July 1999 and July 2000. The access
rate reductions in July 2000 included the implementation of the CALLS proposal.
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.
Operations expense increased 28% in the 2000 third quarter and 33% in the 2000
year-to-date period from the same 1999 periods largely due to increased
equipment sales and sales of capacity on transoceanic cable in 2000 and lower
product costs in the third quarter a year ago. Excluding the costs of equipment
and capacity sales, operations expense increased 5% in the 2000 third quarter
and 7% in the 2000 year-to-date period from the same 1999 periods due to
increased costs of other products and services.
Selling, general and administrative (SG&A) expense decreased 1% in the 2000
third quarter and remained flat in the 2000 year-to-date period from the same
1999 periods due to a strong emphasis on cost control, partly offset by
increased marketing and promotions in the business market.
<PAGE>
Depreciation and amortization expense remained flat in the 2000 third quarter
and decreased 1% in the 2000 year-to-date period from the same periods a year
ago due to an adjustment to increase the depreciable lives of certain assets,
largely offset by an increased asset base.
Local Division
The following local division discussion assumes the sale of a customer service
and telemarketing organization occurred at the beginning of 1999. See "Net
Operating Revenues - Local Division" for more details.
Local division operating expenses were flat in the 2000 third quarter and
year-to-date periods compared with the same 1999 periods.
Costs of services and products increased 2% in the 2000 third quarter and
decreased 1% in the 2000 year-to-date period from the same 1999 periods. The
increase in the 2000 third quarter was due to access line growth and increased
repair and maintenance expenses associated with wet weather conditions, partly
offset by a decline in equipment sales and the success of cost control
initiatives. The decrease in the 2000 year-to-date costs was due to a decline in
equipment sales and the success of cost control initiatives.
SG&A expense decreased 7% in the 2000 third quarter and 5% in the 2000
year-to-date period from the same periods a year ago due to continued emphasis
on cost control.
Depreciation and amortization expense increased 5% in the 2000 third quarter and
6% in the 2000 year-to-date period from the same 1999 periods reflecting
increased capital expenditures in switching and transport technologies which
have shorter asset lives.
Product Distribution & Directory Publishing Businesses
Operating expenses increased 11% in the 2000 third quarter and 6% in the 2000
year-to-date period compared to the same 1999 periods reflecting increased costs
of services and products related to the increased volume of equipment sales. The
increases were also due to the consolidation of the directory publishing
partnership beginning in the 2000 third quarter.
Sprint ION(SM)
Operating expenses for Sprint ION in the 2000 third 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 associated with market launches. Depreciation and
amortization expense increased due to a rapidly increasing asset base.
Other Ventures
The "other ventures" segment includes the operating results of the cable TV
service operations of the broadband fixed wireless companies acquired in the
second half of 1999.
Equity in net losses of affiliates increased significantly in the 2000 third
quarter and year-to-date periods compared with the same 1999 periods reflecting
losses from Intelig and increased losses from Call-Net. Sprint ceased
recognizing its portion of Intelig losses during the proposed WorldCom/Sprint
merger due to the Brazilian government's requirement for Sprint to divest
Intelig and limit its management participation. In the 2000 third quarter, the
Brazilian government informed Sprint that it was no longer required to divest
Intelig and could fully participate in its management as a result of the
termination of the proposed merger. Therefore, Sprint resumed equity method
accounting and recorded the previously unrecognized losses in the 2000 third
quarter. The 2000 year-to-date Call-Net losses include Sprint's portion of a
restructuring charge recorded by Call-Net in the 2000 first quarter.
<PAGE>
Sprint PCS Group
<TABLE>
<CAPTION>
Quarters Ended Year-to-Date
September 30, September 30,
----------------------------------- ----------------------------------
2000 1999 2000 1999
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions)
<S> <C> <C> <C> <C>
Net operating revenues $ 1,673 $ 844 $ 4,310 $ 2,184
Operating expenses 2,040 1,634 5,748 4,509
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Operating loss $ (367) $ (790) $ (1,438) $ (2,325)
--- ------------- -- -------------- -- ------------- --- -------------
</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 retail chain and the subsequent service revenues generated by sales to
its customers accounted for 25% of net operating revenues in the 2000 third
quarter and year-to-date periods. These revenues were 29% of net operating
revenues in the 1999 third quarter and year-to-date periods.
Net Operating Revenues
The PCS Group's net operating revenues include subscriber revenues and sales of
handsets and accessory equipment. Subscriber revenues consist of monthly
recurring charges, usage charges and activation fees. Subscriber revenues
increased 105% in the 2000 third quarter and 108% in the 2000 year-to-date
period from the same 1999 periods mainly reflecting an increase in the average
number of customers. The PCS Group added 911,000 customers in the 2000 third
quarter, including 72,000 purchased from a reseller. The PCS Group added 2.6
million customers in the 2000 year-to-date period, ending the quarter with over
8.3 million customers in more than 300 metropolitan markets nationwide. Average
monthly service revenue per user (ARPU) was $59 for the 2000 third quarter and
$58 for the 2000 year-to-date period compared to $54 in the 1999 third quarter
and year-to-date periods. The increase in ARPU was partly due to the
implementation of activation charges in the 2000 second quarter. Additionally,
the companies that the PCS Group serves on a wholesale basis added 122,000
customers in the 2000 third quarter, excluding the 72,000 sold to the PCS Group.
These companies added 188,000 customers in the 2000 year-to-date period, ending
the quarter with approximately 260,000 customers.
Revenues from sales of handsets and accessories were approximately 14% of net
operating revenues in the 2000 third quarter and 15% in the 2000 year-to-date
period. These revenues as a percentage of net operating revenues were
approximately 17% in the 1999 third quarter and 19% in the 1999 year-to-date
period. 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 include handset and
accessory costs, switch and cell site expenses and other network-related costs.
These costs increased 30% in the 2000 third quarter and 32% in the 2000
year-to-date period from the same 1999 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 marketing costs to promote products and services as
well as salary and benefit costs. SG&A expense increased 16% in the 2000 third
quarter and 21% in the 2000 year-to-date period from the same 1999 periods
reflecting an expanded workforce to support subscriber growth and increased
marketing and selling costs.
Depreciation and amortization expense consists mainly of depreciation of network
assets and amortization of intangible assets. The intangible assets include
goodwill, PCS licenses, customer base, microwave relocation costs and assembled
workforce, which are being amortized over 30 months to 40 years.
Depreciation and amortization expense increased 24% in the 2000 third quarter
and 23% in the 2000 year-to-date period from the same 1999 periods mainly
reflecting depreciation of the network assets placed in service during 2000 and
1999. It also reflects amortization of intangible assets acquired in the Cox PCS
purchase in the 1999 second quarter.
--------------------------------------------------------------------------------
Nonoperating Items
--------------------------------------------------------------------------------
Interest Expense
Sprint's effective interest rate on long-term debt was 6.9% in the 2000 third
quarter and year-to-date periods and in the 1999 third quarter. The rate for the
1999 year-to-date period was 7.0%.
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.
<PAGE>
Other Income (Expense), Net
Other income (expense) consisted of the following:
<TABLE>
<CAPTION>
Quarters Ended Year-to-Date
September 30, September 30,
----------------------------------- ----------------------------------
2000 1999 2000 1999
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions)
<S> <C> <C> <C> <C>
Dividend and interest income $ 9 $ 7 $ 20 $ 20
Equity in net losses of affiliates (120) (25) (181) (50)
Gains on sales of assets 13 6 92 6
Net gains from investments - - 23 35
Minority interest for Cox PCS - - - 20
Other, net 9 3 (2) 37
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total $ (89) $ (9) $ (48) $ 68
--- ------------- -- -------------- -- ------------- --- -------------
</TABLE>
Gains on sales of assets mainly reflect the 2000 second quarter sale of a
directory publishing operation that was not affiliated with Sprint's local
territories. The 2000 year-to-date period also includes gains on sales of
certain PCS Group customers and associated network infrastructure.
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 federal statutory rate for income taxes related to continuing
operations.
Discontinued Operation, Net
In February 2000, Sprint sold its interest in Global One to France Telecom S.A.
and Deutsche Telekom AG. As a result of Sprint's sale of its interest in Global
One, Sprint's gain on sale and its equity share of the results of Global One
have been reported as a discontinued operation for all periods presented.
Sprint recorded an after-tax gain related to the sale of its interest in Global
One of $675 million in the first quarter of 2000. Sprint recorded after-tax
losses related to its share of losses from Global One of $60 million in the
third quarter of 1999 and $154 million in the 1999 year-to-date period.
Extraordinary Items, Net
In the 2000 first quarter, Sprint repaid, prior to scheduled maturities, $127
million of the PCS Group's notes payable to the FCC. These notes had an interest
rate of 7.8%. This resulted in a $3 million after-tax extraordinary loss for the
PCS Group.
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 a weighted average
interest rate equal to the London Inter-Bank Offered Rate plus 40 basis points.
This resulted in a $21 million after-tax extraordinary loss for the PCS Group.
--------------------------------------------------------------------------------
Financial Condition
--------------------------------------------------------------------------------
September 30, December 31,
2000 1999
--------------------------------------------------------
(millions)
Consolidated assets $ 40,845 $ 39,250
-----------------------------------
Sprint's consolidated assets increased $1.6 billion in the 2000 year-to-date
period. Net property, plant and equipment increased $1.9 billion reflecting
capital expenditures to support the PCS network build-out and expansion, core
long distance and local network enhancements, and Sprint ION development and
hardware deployment, partly offset by depreciation and network asset sales.
Investments in affiliates and other assets increased $665 million mainly
reflecting capital contributions to Sprint's equity method investees, partly
offset by equity in net losses of those affiliates. Offsetting decreases in
Sprint's consolidated assets primarily reflect the cash from the sale of the net
assets of the Global One discontinued operation and the receipt of an income tax
refund used to repay debt. Sprint's assets also decreased due to the exchange of
investments in equity securities for certain notes payable. See "Liquidity and
Capital Resources" for more information about changes in Sprint's Consolidated
Balance Sheets.
<PAGE>
--------------------------------------------------------------------------------
Liquidity and Capital Resources
--------------------------------------------------------------------------------
Operating Activities
Year-to-Date
September 30,
-------------------------------
2000 1999
------------------------------------------------------
(millions)
Cash flows provided
by operating
activities $ 2,927 $ 1,328
-------------------------------
Operating cash flows in the 2000 year-to-date period increased $1.6 billion from
the same 1999 period. In 2000, cash outflows from working capital totaled $49
million compared with $844 million in the 1999 year-to-date period. The increase
in operating cash flows also reflects decreased operating losses for the PCS
Group.
Investing Activities
Year-to-Date
September 30,
-------------------------------
2000 1999
------------------------------------------------------
(millions)
Cash flows used by
investing
activities $ (4,012) $ (4,784)
-------------------------------
In February 2000, Sprint received $1.4 billion from the sale of its interest in
Global One. The proceeds were used to repay existing debt and fund the PCS
Group's capital expenditures.
The FON Group's capital expenditures totaled $2.7 billion in the 2000
year-to-date period and $2.5 billion in the 1999 year-to-date period. Long
distance capital expenditures were incurred mainly to enhance network
reliability, meet increased demand for 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. Sprint ION capital expenditures
were incurred for development and hardware deployment. Other FON Group capital
expenditures were incurred mainly for Sprint's World Headquarters Campus. PCS
Group capital expenditures were $2.1 billion in the 2000 year-to-date period and
$1.6 billion in the 1999 year-to-date period. Capital expenditures in both years
were mainly for the continued buildout and expansion of the PCS network.
"Investments in affiliates, net" consisted of investments in EarthLink,
Intelig, Pegaso and other affiliates accounted for using the equity method.
Financing Activities
Year-to-Date
September 30,
-------------------------------
2000 1999
------------------------------------------------------
(millions)
Cash flows provided
by financing
activities $ 1,184 $ 3,277
-------------------------------
Financing activities in the 2000 year-to-date period mainly reflect a $1.2
billion net increase in long-term debt. In June 2000, Sprint issued $1.25
billion of debt securities registered with the SEC. These borrowings, which
mature in 2002, were allocated to the PCS Group. Financing activities in the
1999 year-to-date period mainly reflect proceeds from common stock issuances of
$1.0 billion and a $2.5 billion net increase in long-term debt.
Sprint paid cash dividends of $333 million in the 2000 year-to-date period and
$328 million in the 1999 year-to-date period.
Capital Requirements
Sprint's 2000 investing activities, mainly consisting of capital expenditures
and investments in affiliates, are expected to require cash of $7.8 to $8.5
billion. FON Group capital expenditures are expected to range between $4.0 and
$4.3 billion. Including the investments in broadband fixed wireless facilities,
Sprint ION is expected to require $600 to $700 million of this amount. PCS Group
capital expenditures are expected to be between $2.9 and $3.2 billion.
Additional funds will be required to fund the PCS Group's expected operating
losses, working capital and debt service requirements. Investments in affiliates
are expected to require cash of $900 million to $1 billion. Dividend payments
are expected to total $450 million in 2000.
Sprint's tax sharing agreement 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.
Liquidity
In August 2000, Sprint renewed its $3.0 billion 364 day revolving credit
facility with a syndicate of domestic and international banks to support
commercial paper operations. At September 30, 2000, the entire credit facility
was unused.
In July 1999, Sprint filed a shelf registration statement with the SEC covering
$4.0 billion of senior unsecured debt securities to be used mainly to repay debt
and for general purposes, including working capital requirements, acquisitions,
and new capital investments. At September 30, 2000, Sprint had issued $2.0
billion of these registered securities.
<PAGE>
Borrowings during the remainder of 2000 will be allocated to the FON Group or
the PCS Group based on their cash requirements.
Any borrowings Sprint may incur are ultimately limited by certain debt
covenants. Sprint could borrow up to $11.7 billion at the end of September 2000
under the most restrictive of its debt covenants.
--------------------------------------------------------------------------------
Financial Strategies
--------------------------------------------------------------------------------
General Hedging Policies
Sprint selectively enters into interest rate swap and cap agreements to manage
its exposure to interest rate changes on its debt. Sprint also enters into
forward contracts and options in foreign currencies to reduce the impact of
changes in foreign exchange rates. Sprint seeks to minimize counterparty credit
risk through stringent credit approval and review processes, the selection of
only the most creditworthy counterparties, continual review and monitoring of
all counterparties, and thorough legal review of contracts. Sprint also controls
exposure to market risk by regularly monitoring changes in foreign exchange and
interest rate positions under normal and stress conditions to ensure they do not
exceed established limits.
Sprint's derivative transactions are used for hedging purposes only and comply
with Board-approved policies. Senior management receives frequent status updates
of all outstanding derivative positions.
Interest Rate Risk Management
Sprint's interest rate risk management program focuses on minimizing exposure to
interest rate movements, setting an optimal mixture of floating- and fixed-rate
debt, and minimizing liquidity risk. Sprint uses simulation analysis to assess
its interest rate exposure and establish the desired ratio of floating- and
fixed-rate debt. To the extent possible, Sprint manages interest rate exposure
and the floating-to-fixed ratio through its borrowings, but sometimes uses
interest rate swaps and caps to adjust its risk profile.
Foreign Exchange Risk Management
Sprint's foreign exchange risk management program focuses on hedging transaction
exposure to optimize consolidated cash flow. Sprint's main transaction exposure
results from net payments made to overseas telecommunications companies for
completing international calls made by Sprint's domestic customers. These
international operations were not material to the consolidated financial
position at September 30, 2000 or results of operations or cash flows for the
quarter ended September 30, 2000. In addition, foreign currency transaction
gains and losses were not material to Sprint's year-to-date 2000 results of
operations. Sprint has not entered into any significant foreign currency forward
contracts or other derivative instruments to hedge the effects of adverse
fluctuations in foreign exchange rates. As a result, Sprint was not subject to
material foreign exchange risk.
--------------------------------------------------------------------------------
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 continue to grow its market presence;
o the risks related to Sprint's investments in joint ventures;
o the impact of any unusual items resulting from ongoing evaluations of
Sprint's business strategies;
o regulatory risks, including the impact of the Telecommunications Act
of 1996;
o unexpected results of litigation filed against Sprint;
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; and
o other risks referenced from time to time in Sprint's filings with the
Securities and Exchange Commission.
<PAGE>
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.
<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
September 30, September 30,
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
2000 1999 2000 1999
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
<S> <C> <C> <C> <C>
Net Operating Revenues $ 4,403 $ 4,298 $ 13,234 $ 12,609
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Operating Expenses
Costs of services and products 2,103 1,982 6,232 5,744
Selling, general and administrative 1,003 1,051 3,097 3,100
Depreciation and amortization 573 539 1,669 1,566
Merger related costs - - 163 -
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total operating expenses 3,679 3,572 11,161 10,410
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Operating Income 724 726 2,073 2,199
Interest expense (8) (32) (58) (119)
Other income (expense), net (84) (11) (50) 45
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Income from continuing operations before
income taxes 632 683 1,965 2,125
Income tax expense (248) (264) (771) (820)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Income from Continuing Operations 384 419 1,194 1,305
Discontinued operation, net - (60) 675 (154)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net Income 384 359 1,869 1,151
Preferred stock dividends received 1 2 5 5
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Earnings applicable to common stock $ 385 $ 361 $ 1,874 $ 1,156
--- ------------- -- -------------- -- ------------- --- -------------
Diluted Earnings per Common Share
Continuing operations $ 0.43 $ 0.48 $ 1.34 $ 1.48
Discontinued operation - (0.07) 0.76 (0.17)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total $ 0.43 $ 0.41 $ 2.10 $ 1.31
--- ------------- -- -------------- -- ------------- --- -------------
Diluted weighted average common shares 890.8 886.7 894.5 884.3
--- ------------- -- -------------- -- ------------- --- -------------
Basic Earnings per Common Share
Continuing operations $ 0.44 $ 0.49 $ 1.36 $ 1.51
Discontinued operation - (0.07) 0.77 (0.18)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total $ 0.44 $ 0.42 $ 2.13 $ 1.33
--- ------------- -- -------------- -- ------------- --- -------------
Basic weighted average common shares 884.2 869.4 879.8 866.4
--- ------------- -- -------------- -- ------------- --- -------------
Dividends per Common Share $ 0.125 $ 0.125 $ 0.375 $ 0.375
--- ------------- -- -------------- -- ------------- --- -------------
See accompanying Condensed Notes to Combined Financial Statements (Unaudited).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMBINED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) Sprint FON Group
(millions)
--------------------------------------------- ----------------------------------- ----------------------------------
Quarters Ended Year-to-Date
September 30, September 30,
--------------------------------------------- ----------------- ----------------- ---------------- -----------------
2000 1999 2000 1999
--------------------------------------------- ----------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Net Income $ 384 $ 359 $ 1,869 $ 1,151
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Other Comprehensive Income (Loss)
Unrealized holding gains (losses) on
securities 6 (9) (33) (11)
Income tax (expense) benefit (2) 3 12 4
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net unrealized holding gains (losses) on
securities during the period 4 (6) (21) (7)
Reclassification adjustment for gains
included in net income - - (32) (57)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total other comprehensive income (loss) 4 (6) (53) (64)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Comprehensive Income $ 388 $ 353 $ 1,816 $ 1,087
--- ------------- -- -------------- -- ------------- --- -------------
See accompanying Condensed Notes to Combined Financial Statements (Unaudited).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMBINED BALANCE SHEETS Sprint FON Group
(millions)
-------------------------------------------------------------------------------------------------------------------------
September 30, December 31,
2000 1999
-------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Assets
Current assets
<S> <C> <C>
Cash and equivalents $ 129 $ 104
Accounts receivable, net of allowance for doubtful accounts
of $233 and $228 3,051 2,836
Inventories 440 441
Prepaid expenses 255 251
Receivables from the PCS Group 397 136
Investments in equity securities - 316
Other 113 198
-------------------------------------------------------------------------------------------------------------------------
Total current assets 4,385 4,282
Investments in securities 81 139
Property, plant and equipment
Long distance division 10,593 9,824
Local division 16,613 15,828
Other 2,762 2,035
-------------------------------------------------------------------------------------------------------------------------
Total property, plant and equipment 29,968 27,687
Accumulated depreciation (15,005) (13,685)
-------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 14,963 14,002
Investments in and loans to the PCS Group 442 431
Investments in and advances to other affiliates 570 452
Intangible assets
Goodwill 1,232 1,223
Other 379 296
-------------------------------------------------------------------------------------------------------------------------
Total intangible assets 1,611 1,519
Accumulated amortization (189) (140)
-------------------------------------------------------------------------------------------------------------------------
Net intangible assets 1,422 1,379
Net assets of discontinued operation - 394
Other 1,113 724
-------------------------------------------------------------------------------------------------------------------------
Total $ 22,976 $ 21,803
-----------------------------------
Liabilities and Group Equity
Current liabilities
Current maturities of long-term debt $ 321 $ 902
Accounts payable 1,019 1,012
Accrued interconnection costs 559 683
Accrued taxes 238 162
Advance billings 352 323
Payroll and employee benefits 365 557
Other 721 662
-------------------------------------------------------------------------------------------------------------------------
Total current liabilities 3,575 4,301
Long-term debt and capital lease obligations 4,297 4,531
Deferred credits and other liabilities
Deferred income taxes and investment tax credits 1,333 935
Postretirement and other benefit obligations 1,071 1,064
Other 439 458
-------------------------------------------------------------------------------------------------------------------------
Total deferred credits and other liabilities 2,843 2,457
Group equity 12,261 10,514
-------------------------------------------------------------------------------------------------------------------------
Total $ 22,976 $ 21,803
-----------------------------------
See accompanying Condensed Notes to Combined Financial Statements (Unaudited).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMBINED STATEMENTS OF CASH FLOWS (Unaudited) Sprint FON Group
(millions)
------------------------------------------------------------------ ----------------- ----------------- ----------------
Year-to-Date September 30, 2000 1999
------------------------------------------------------------------ ----------------- ----------------- ----------------
Operating Activities
<S> <C> <C>
Net income $ 1,869 $ 1,151
Adjustments to reconcile net income to net cash provided by
operating activities:
Discontinued operation, net (675) 154
Equity in net losses of affiliates 166 49
Depreciation and amortization 1,669 1,566
Deferred income taxes and investment tax credits 456 148
Changes in assets and liabilities:
Accounts receivable, net (228) (367)
Inventories and other current assets 51 (89)
Accounts payable and other current liabilities 81 (234)
Receivables from and payables to the PCS Group, net (551) (104)
Noncurrent assets and liabilities, net (39) (85)
Other, net (95) 12
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash provided by operating activities 2,704 2,201
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Investing Activities
Capital expenditures (2,655) (2,455)
Investments in affiliates, net (681) (102)
Proceeds from sales of assets 51 90
Repayments of loans made to Sprint PCS - 315
Purchase of broadband fixed wireless companies,
net of cash acquired - (271)
Other, net 5 (101)
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash used by continuing operations (3,280) (2,524)
Proceeds from sale of investment in Global One 1,403 -
Net investing activities of discontinued operation - (295)
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash used by investing activities (1,877) (2,819)
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Financing Activities
Proceeds from long-term debt 340 1,536
Allocation of long-term debt to the PCS Group - (785)
Payments on long-term debt (844) (34)
Dividends paid (322) (317)
Proceeds from common stock issued 156 155
Treasury stock purchased (61) (48)
Net payments for intergroup stock-based compensation grants (130) -
Other, net 59 89
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash provided (used) by financing activities (802) 596
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Increase (Decrease) in Cash and Equivalents 25 (22)
Cash and Equivalents at Beginning of Period 104 432
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Cash and Equivalents at End of Period $ 129 $ 410
--- ------------- -- -------------
See accompanying Condensed Notes to Combined Financial Statements (Unaudited).
</TABLE>
<PAGE>
CONDENSED NOTES TO COMBINED FINANCIAL Sprint FON Group
STATEMENTS (Unaudited)
The information in this Form 10-Q has been prepared according to Securities and
Exchange Commission (SEC) rules and regulations. In our opinion, the combined
interim financial statements reflect all adjustments, consisting only of normal
recurring accruals, needed to fairly present the FON Group's combined financial
position, results of operations, cash flows and comprehensive income.
Certain information and footnote disclosures normally included in combined
financial statements prepared according to accounting principles generally
accepted in the United States have been condensed or omitted. As a result, you
should read these financial statements along with Sprint Corporation's 1999 Form
10-K. Operating results for the 2000 year-to-date period do not necessarily
represent the results that may be expected for the year ending December 31,
2000.
--------------------------------------------------------------------------------
1. Basis of Combination and Presentation
--------------------------------------------------------------------------------
The PCS stock is intended to reflect the performance of Sprint's wireless PCS
operations. The FON stock is intended to reflect the performance of all of
Sprint's other operations.
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 are
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.
The FON Group entities are commonly controlled companies. Transactions between
the PCS Group and the FON Group have not been eliminated in the combined
financial statements of either Group.
The FON Group combined financial statements provide FON shareholders with
financial information about the FON Group operations. Investors in FON stock and
PCS stock are Sprint shareholders and are subject to risks related to all of
Sprint's businesses, assets and liabilities. Sprint retains ownership and
control of the assets and operations of each Group. Financial effects of either
Group that affect Sprint's results of operations or financial condition could
affect the results of operations or financial position of the other Group or the
market price of the stock tracking the other Group. Net losses of either Group,
and dividends or distributions on, or repurchases of, PCS stock or FON stock,
will reduce Sprint funds legally available for dividends on both FON stock and
PCS stock. As a result, the FON Group combined financial statements should be
read along with Sprint's consolidated financial statements and the PCS Group's
combined financial statements.
Investments in entities in which the FON Group exercises significant influence,
but does not control, are accounted for using the equity method (see Note 4).
The FON Group combined financial statements are prepared using accounting
principles generally accepted in the United States. These principles require
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities, and
the reported amounts of revenues and expenses. Actual results could differ from
those estimates.
Certain prior-year amounts have been reclassified to conform to the current-year
presentation. These reclassifications had no effect on the results of operations
or group equity as previously reported.
--------------------------------------------------------------------------------
2. Discontinued Operation
--------------------------------------------------------------------------------
In January 2000, Sprint reached a definitive agreement with France Telecom S.A.
and Deutsche Telekom AG to sell its interest in Global One. In February 2000,
Sprint received $1.1 billion in cash and was repaid $276 million for advances
for its entire stake in Global One.
The FON Group recorded an after-tax gain related to the sale of Sprint's
interest in Global One of $675 million in the first quarter of 2000. The FON
Group recorded after-tax losses related to its share of losses from Global One
of $60 million in the 1999 third quarter and $154 million in the 1999
year-to-date period.
--------------------------------------------------------------------------------
3. Merger Termination
--------------------------------------------------------------------------------
On July 13, 2000, Sprint and WorldCom, Inc. announced that the boards of
directors of both companies terminated their merger agreement, previously
announced in October 1999, as a result of regulatory opposition to the merger.
<PAGE>
In the 2000 second quarter, the FON Group recognized a one-time, pre-tax charge
of $163 million, or 12 cents per share, for costs associated with the terminated
merger.
--------------------------------------------------------------------------------
4. Investments
--------------------------------------------------------------------------------
At the end of September 2000, investments accounted for using the equity method
consisted of the FON Group's investments in EarthLink, Call-Net, Intelig and
other strategic investments. Combined, unaudited, summarized financial
information (100% basis) of entities accounted for using the equity method was
as follows:
<TABLE>
<CAPTION>
Quarters Ended Year-to-Date
September 30, September 30,
----------------------------------- ----------------------------------
2000 1999 2000 1999
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions)
Results of operations
<S> <C> <C> <C> <C>
Net operating revenues $ 622 $ 403 $ 1,644 $ 1,170
--- ------------- -- -------------- -- ------------- --- -------------
Net operating loss $ (403) $ (53) $ (526) $ (138)
--- ------------- -- -------------- -- ------------- --- -------------
Net loss $ (420) $ (114) $ (706) $ (207)
--- ------------- -- -------------- -- ------------- --- -------------
Equity in net losses of affiliates $ (103) $ (25) $ (150) $ (50)
--- ------------- -- -------------- -- ------------- --- -------------
</TABLE>
--------------------------------------------------------------------------------
5. Income Taxes
--------------------------------------------------------------------------------
The differences that caused the FON Group's effective income tax rates to vary
from the 35% federal statutory rate for income taxes related to continuing
operations were as follows:
Year-to-Date
September 30,
-------------------------
2000 1999
-------------------------------------------------------
(millions)
Income tax expense at the
federal statutory rate $ 687 $ 744
Effect of:
State income taxes, net
of federal income tax
effect 59 67
Equity in losses of
foreign joint ventures 25 14
Goodwill amortization 9 -
Other, net (9) (5)
-------------------------------------------------------
Income tax expense $ 771 $ 820
-------------------------
Effective income tax rate 39.2% 38.6%
-------------------------
--------------------------------------------------------------------------------
6. Long-term Debt and Capital Lease Obligations
--------------------------------------------------------------------------------
In the 2000 first quarter, the FON Group exchanged 6.6 million common shares of
SBC Communications, Inc. for certain notes payable. The notes had a market value
of $275 million on the maturity date and $316 million at year-end 1999. The
notes had an interest rate of 8.3%.
--------------------------------------------------------------------------------
7. Group Equity
--------------------------------------------------------------------------------
Year-to-Date
September 30,
2000
-------------------------------------------------------
(millions)
Beginning balance $ 10,514
Net income 1,869
Dividends (325)
Common stock issued 197
Treasury stock purchased (61)
Tax benefit of stock
compensation 252
Other, net (185)
-------------------------------------------------------
Ending balance $ 12,261
------------------
--------------------------------------------------------------------------------
8. 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>
--------------------------------------------------------------------------------
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.
Industry segment financial information was as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
Product
Long Distribution Corporate Sprint
Quarters Ended Distance Local & Sprint Other and FON
September 30, Division Division Directory ION Ventures Eliminations(1) Group
Publishing
-----------------------------------------------------------------------------------------------------------------------
(millions)
2000
<S> <C> <C> <C> <C> <C> <C> <C>
Net operating revenues $ 2,746 $ 1,422 $ 487 $ 2 $ 15 $ (269) $ 4,403
Affiliated revenues 102 86 182 - - (269) 101
Operating income (loss) 436 399 75 (167) (11) (8) 724
1999
Net operating revenues $ 2,669 $ 1,416 $ 437 $ - $ 1 $ (225) $ 4,298
Affiliated revenues 64 78 153 - - (225) 70
Operating income (loss) 415 378 64 (110) (7) (14) 726
-----------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
Product
Long Distribution Corporate Sprint
Year-to-Date Distance Local & Sprint Other and FON
September 30, Division Division Directory ION Ventures Eliminations(1) Group
Publishing
-----------------------------------------------------------------------------------------------------------------------
(millions)
2000
Net operating revenues $ 8,283 $ 4,275 $ 1,403 $ 5 $ 49 $ (781) $ 13,234
Affiliated revenues 280 265 516 - - (781) 280
Operating income (loss) 1,302 1,248 210 (458) (41) (188) 2,073
1999
Net operating revenues $ 7,862 $ 4,171 $ 1,309 $ - $ 1 $ (734) $ 12,609
Affiliated revenues 178 229 506 - - (734) 179
Operating income (loss) 1,203 1,116 179 (243) (17) (39) 2,199
-----------------------------------------------------------------------------------------------------------------------
(1) Significant intercompany eliminations consist of local access charged to the long distance division, equipment purchases from
the product distribution business and interexchange services provided to the local division. In 2000, corporate operating loss
includes a $163 million charge recorded in the 2000 second quarter for costs associated with the terminated merger between
Sprint and WorldCom, Inc.
</TABLE>
<PAGE>
--------------------------------------------------------------------------------
10. Supplemental Cash Flows Information
--------------------------------------------------------------------------------
The FON Group's cash paid for interest and income taxes was as follows:
Year-to-Date
September 30,
-------------------------
2000 1999
-------------------------------------------------------
(millions)
Interest (net of capitalized
interest) $ 79 $ 96
-------------------------
Income taxes $ 512 $ 658
-------------------------
The FON Group's noncash activities included the following:
Year-to-Date
September 30,
-------------------------
2000 1999
-------------------------------------------------------
(millions)
Debt redeemed with
investments in equity
securities $ 275 $ -
-------------------------
Tax benefit from stock
compensation $ 252 $ 140
-------------------------
Common stock issued under
employee stock benefit
plans $ 79 $ 73
-------------------------
Stock received for stock
options exercised $ 28 $ 44
-------------------------
Debt assumed in purchase of
broadband fixed wireless
companies $ - $ 574
-------------------------
--------------------------------------------------------------------------------
11. Subsequent Event
--------------------------------------------------------------------------------
In October 2000, Sprint's Board of Directors declared dividends of 12.5 cents
per share on the Sprint FON common stock and Class A common stock. Dividends
will be paid December 28, 2000.
--------------------------------------------------------------------------------
12. Recently Issued Accounting Pronouncements
--------------------------------------------------------------------------------
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" (SAB 101). In June 2000, the SEC issued an
amendment to SAB 101 which delayed the effective date for registrants with
fiscal years that begin after December 15, 1999. The effective date for Sprint
will be for the quarter ending December 31, 2000. The deferral of
telecommunication service activation fees and certain related costs are
specifically addressed in SAB 101 and the FON Group is completing the analysis
of the impact of SAB 101 on its financial statements. SAB 101 is not expected to
have a material impact on the FON Group's combined financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This standard requires all derivatives to be recorded
on the balance sheet as either assets or liabilities and be measured at fair
value. Gains or losses from changes in the derivative values are to be accounted
for based on how the derivative was used and whether it qualifies for hedge
accounting. When adopted in January 2001, this statement is not expected to have
a material impact on the FON Group's combined financial statements.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Sprint FON Group
--------------------------------------------------------------------------------
General
--------------------------------------------------------------------------------
On July 13, 2000, Sprint and WorldCom, Inc. (WorldCom) announced that the boards
of directors of both companies terminated their merger agreement, previously
announced in October 1999, as a result of regulatory opposition to the merger.
In the 2000 second quarter, the FON Group recognized a one-time, pre-tax charge
of $163 million, or 12 cents per share, for costs associated with the terminated
merger.
Sprint has been reassessing the FON Group business strategies in response to the
cancellation of its planned merger with WorldCom and the recent changes in the
overall telecommunications industry. This reassessment may impact the valuation
of various FON Group assets and investments. Sprint anticipates that this
valuation analysis will be concluded before year-end.
--------------------------------------------------------------------------------
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 that uses 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 more than
8.3 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 is developing and deploying new integrated communications services,
referred to as Sprint ION. Sprint ION extends Sprint's existing network
capabilities to the customer and enables Sprint to provide the network
infrastructure to meet customers' demands for advanced services including
integrated voice, data, Internet and video. It is also expected to be the
foundation for Sprint to provide new competitive local service. Beginning in
2000, the Sprint ION segment includes costs to develop high-speed data services
and Sprint ION services for the Multipoint Multichannel Distribution Services
broadband fixed wireless platform.
Other Ventures
The "other ventures" segment includes the cable TV service operations of the
broadband fixed wireless companies acquired in the second half of 1999.
This segment also includes the FON Group's investments in EarthLink, Inc., an
Internet service provider; Call-Net, a long distance provider in Canada
operating under the Sprint brand name; Intelig, a long distance provider in
Brazil; and certain other telecommunications investments and ventures. All of
the investments and ventures are accounted for using the equity method.
--------------------------------------------------------------------------------
Results of Operations
--------------------------------------------------------------------------------
Net operating revenues were $4.4 billion for the 2000 third quarter, an increase
of 2% from $4.3 billion for the same 1999 period. Net operating revenues for the
first nine months in 2000 increased 5% to $13.2 billion from $12.6 billion for
the same 1999 period.
Net income was $384 million for the 2000 third quarter compared to $359 million
for the same 1999 period. Net income for the first nine months in 2000 was $1.9
billion compared to $1.2 billion for the same 1999 period. Net income for the
2000 year-to-date period includes a $675 million gain related to the sale of the
FON Group's interest in Global One. See Note 2 of Notes to Combined Financial
Statements.
Core Businesses
The FON Group's core businesses generated improved third quarter and
year-to-date net operating revenues compared to the same 1999 periods. Core
businesses exclude results from Sprint ION and other ventures. Third quarter
2000 and year-to-date long distance calling volumes increased 16% and 17%,
respectively, from the same 1999 periods. Access lines served by the local
division increased 4.6% during the past 12 months.
<PAGE>
Operating income from core operations improved 7% in the 2000 third quarter
compared to the same period a year ago. Excluding the merger related charge,
operating income improved 11% in the 2000 year-to-date period compared to the
same period a year ago.
--------------------------------------------------------------------------------
Segmental Results of Operations
--------------------------------------------------------------------------------
Long Distance Division
<TABLE>
<CAPTION>
Selected Operating Results
---------------------------------------------------------------------
Quarters Ended
September 30, Variance
---------------------------------- -------------------------------
2000 1999 $ %
---------------------------------------------- ---------------- ----------------- -- ------------- -----------------
(millions)
<S> <C> <C> <C> <C>
Net operating revenues $ 2,746 $ 2,669 $ 77 2.9%
---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating expenses
Interconnection 935 977 (42) (4.3)%
Operations 496 389 107 27.5%
Selling, general and administrative 626 635 (9) (1.4)%
Depreciation and amortization 253 253 - -
---------------------------------------------- -- ------------- -- -------------- -- -------------
Total operating expenses 2,310 2,254 56 2.5%
---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating income $ 436 $ 415 $ 21 5.1%
-- ------------- -- -------------- -- -------------
Operating margin 15.9% 15.5%
-- ------------- -- --------------
Selected Operating Results
---------------------------------------------------------------------
Year-to-Date
September 30, Variance
---------------------------------- -------------------------------
2000 1999 $ %
---------------------------------------------- ---------------- ----------------- -- ------------- -----------------
(millions)
Net operating revenues $ 8,283 $ 7,862 $ 421 5.4%
---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating expenses
Interconnection 2,892 2,918 (26) (0.9)%
Operations 1,416 1,066 350 32.8%
Selling, general and administrative 1,947 1,940 7 0.4%
Depreciation and amortization 726 735 (9) (1.2)%
---------------------------------------------- -- ------------- -- -------------- -- -------------
Total operating expenses 6,981 6,659 322 4.8%
---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating income $ 1,302 $ 1,203 $ 99 8.2%
-- ------------- -- -------------- -- -------------
Operating margin 15.7% 15.3%
-- ------------- -- --------------
</TABLE>
Net Operating Revenues
Net operating revenues increased 3% in the 2000 third quarter and 5% for the
2000 year-to-date period from the same 1999 periods. These increases mainly
reflect strong data services revenue growth. Calling volumes increased 16% in
the 2000 third quarter and 17% in the 2000 year-to-date period compared to the
same periods a year ago, but were largely offset by a more competitive pricing
environment and a reduction in access cost pass-throughs resulting from the
implementation of an access reform proposal by the Coalition for Affordable
Local and Long distance Service (CALLS) in the 2000 third quarter. Future
revenue and operating income growth may be impacted by the continuing pricing
pressures being experienced by the long distance division.
<PAGE>
Business Market
Business and data market revenues increased 7% in the 2000 third quarter and 9%
for the 2000 year-to-date period from the same 1999 periods. Data services
showed strong growth from continued demand and increased use of the Internet.
Residential Market
Residential market revenues decreased 6% in the 2000 third quarter and 2% for
the 2000 year-to-date period compared to the same 1999 periods. The decrease in
the 2000 third quarter was largely due to the implementation of the CALLS
proposal at the beginning of the quarter. Revenues for the 2000 third quarter
and year-to-date periods declined due to lower calling card usage partly offset
by an increase in international revenues. Additionally, revenues for the 2000
year-to-date period were affected by the loss of a major Local Exchange Carrier
calling card contract. However, Sprint has entered into another calling card
contract that will partially replace the lost revenues. Domestic residential
revenues declined in both the 2000 third quarter and year-to-date periods from
the same 1999 periods due to price reductions which were partly offset by
increased calling volumes. Residential market revenues have benefited from the
success of bundled services sales by the local division. Revenue growth from
customers within Sprint's local territories has helped mitigate the erosion of
revenues from other customers.
Wholesale Market
Wholesale market revenues increased 2% in the 2000 third quarter and 5% in the
2000 year-to-date period from the same 1999 periods. These increases are largely
due to the sales of capacity on transoceanic cable in 2000. Additional increases
are primarily due to growth in private line and data services offset by
declining international voice revenues.
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 decreased 4% in the 2000 third
quarter and 1% in the 2000 year-to-date period from the same 1999 periods. The
decreases were due to reductions in per-minute international access costs as
well as domestic access costs and a decline in international calling volumes,
largely offset by costs related to growth in non-minute driven revenues and
increased domestic calling volumes. The domestic rate reductions were generally
due to the FCC-mandated access rate reductions that took effect in July 1999 and
July 2000. The access rate reductions in July 2000 included the implementation
of the CALLS proposal. 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.
Interconnection costs were 34.0% of net operating revenues in the 2000 third
quarter and 34.9% in the 2000 year-to-date period compared to 36.6% and 37.1%
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 and transmission capacity sales. It also includes
costs to provide operator, public payphone and video teleconferencing services
as well as telecommunications services for the hearing-impaired. Operations
expense increased 28% in the 2000 third quarter and 33% in the 2000 year-to-date
period from the same 1999 periods largely due to increased equipment sales and
sales of capacity on transoceanic cable in 2000 and lower product costs in the
third quarter a year ago. Excluding the costs of equipment and capacity sales,
operations expense increased 5% in the 2000 third quarter and 7% in the 2000
year-to-date period from the same 1999 periods due to increased costs of other
products and services. Operations expense was 18.1% of net operating revenues in
the 2000 third quarter and 17.1% in the 2000 year-to-date period compared to
14.6% and 13.6% for the same periods a year ago.
Selling, General and Administrative Expense
Selling, general and administrative (SG&A) expense decreased 1% in the 2000
third quarter and remained flat in the 2000 year-to-date period from the same
1999 periods due to strong emphasis on cost control, partly offset by increased
marketing and promotions in the business market. SG&A expense was 22.8% of net
operating revenues in the 2000 third quarter and 23.5% in the 2000 year-to-date
period compared to 23.8% and 24.7% for the same periods a year ago.
Depreciation and Amortization Expense
Depreciation and amortization expense remained flat in the 2000 third quarter
and decreased 1% in the 2000 year-to-date period from the same periods a year
ago due to an adjustment to increase the depreciable lives of certain assets,
largely offset by an increased asset base. Depreciation and amortization expense
was 9.2% of net operating revenues in the 2000 third quarter and 8.8% in the
2000 year-to-date period compared to 9.5% and 9.3% for the same periods a year
ago.
<PAGE>
Local Division
<TABLE>
<CAPTION>
Selected Operating Results
---------------------------------------------------------------------
Quarters Ended
September 30, Variance
----------------------------------- -------------------------------
2000 1999 $ %
--------------------------------------------- ----------------- ----------------- -- ------------- -----------------
(millions)
<S> <C> <C> <C> <C>
Net operating revenues $ 1,422 $ 1,416 $ 6 0.4%
--------------------------------------------- --- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 486 489 (3) (0.6)%
Selling, general and administrative 256 279 (23) (8.2)%
Depreciation and amortization 281 270 11 4.1%
--------------------------------------------- --- ------------- -- -------------- -- -------------
Total operating expenses 1,023 1,038 (15) (1.4)%
--------------------------------------------- --- ------------- -- -------------- -- -------------
Operating income $ 399 $ 378 $ 21 5.6%
--- ------------- -- -------------- -- -------------
Operating margin 28.1% 26.7%
--- ------------- -- --------------
Selected Operating Results
---------------------------------------------------------------------
Year-to-Date
September 30, Variance
----------------------------------- -------------------------------
2000 1999 $ %
--------------------------------------------- ----------------- ----------------- -- ------------- -----------------
(millions)
Net operating revenues $ 4,275 $ 4,171 $ 104 2.5%
--------------------------------------------- --- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 1,408 1,432 (24) (1.7)%
Selling, general and administrative 778 828 (50) (6.0)%
Depreciation and amortization 841 795 46 5.8%
--------------------------------------------- --- ------------- -- -------------- -- -------------
Total operating expenses 3,027 3,055 (28) (0.9)%
--------------------------------------------- --- ------------- -- -------------- -- -------------
Operating income $ 1,248 $ 1,116 $ 132 11.8%
--- ------------- -- -------------- -- -------------
Operating margin 29.2% 26.8%
--- ------------- -- --------------
</TABLE>
Net Operating Revenues
At the beginning of the 2000 third quarter, Sprint changed its transfer pricing
for certain transactions between FON Group entities. The main effect of this
change was a reduction in the local division's "Net Operating Revenues - Other
Revenues." In addition, Sprint's local division sold a customer service and
telemarketing organization to the PCS Group at the beginning of the 2000 second
quarter. For comparative purposes, the following discussion of local division
results assumes the transfer pricing change and the sale of the customer service
and telemarketing organization occurred at the beginning of 1999. Adjusting for
the transfer pricing change and this sale, operating margins would have been
28.9% for the 2000 year-to-date period and 26.4% for the 1999 third quarter and
year-to-date periods.
Net operating revenues increased 3% in the 2000 third quarter and 4% for the
2000 year-to-date period from the same 1999 periods. These increases mainly
reflect increased sales of network-based services such as Caller ID and Call
Waiting and steady customer access line growth. Sales of network-based services
increased due to strong demand for bundled services which combine local service,
network-based features and long distance calling. The local division ended the
2000 third quarter with over 8.3 million switched access lines, a 4.6% increase
during the past 12 months. On a voice-grade equivalent basis, which includes
both traditional switched services and high capacity lines, access lines grew
18% during the past 12 months. This growth reflects many business customers
switching from individual lines to high capacity dedicated circuits.
<PAGE>
Local Service Revenues
Local service revenues, derived from local exchange services, grew 7% in the
2000 third quarter and year-to-date periods from the same 1999 periods because
of strong demand for bundled services and customer access line growth. Revenue
growth also reflects increased sales of data products.
Network Access Revenues
Network access revenues, derived from long distance phone companies using the
local network to complete calls, increased 2% in the 2000 third quarter and 6%
in the 2000 year-to-date period from the same 1999 periods. The 2000 third
quarter and year-to-date revenues reflect a 5% and 7% respective increase in
minutes of use and increased revenues from special access services. These
increases were offset by FCC-mandated access rate reductions which included the
implementation of the CALLS proposal beginning in the 2000 third quarter.
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 24% in the 2000 third quarter and 22% in
the 2000 year-to-date period from the same 1999 periods, reflecting increased
competition, which is expected to continue, in the intraLATA long distance
market. These decreases also reflect the success of sales of bundled services
which shift intraLATA customers to Sprint's long distance division. Despite the
losses realized by the local division, overall, Sprint has maintained
approximately a two-thirds market share of intraLATA long distance in the local
division's territories from the 1999 third quarter to the 2000 third quarter.
Other Revenues
Other revenues decreased 1% in the 2000 third quarter and 7% in the 2000
year-to-date period from the same 1999 periods mainly due to a decrease in
equipment sales as a result of a planned shift in focus to selling only higher
margin products.
Costs of Services and Products
Costs of services and products include costs to operate and maintain the local
network and costs of equipment sales. These costs increased 2% in the 2000 third
quarter and decreased 1% in the 2000 year-to-date period compared to the same
1999 periods. The increase in the 2000 third quarter was due to access line
growth and increased repair and maintenance expenses associated with wet weather
conditions, partly offset by a decline in equipment sales and the success of
cost control initiatives. The decrease in the 2000 year-to-date costs was due to
a decline in equipment sales and the success of cost control initiatives. Costs
of services and products was 34.2% of net operating revenues in the 2000 third
quarter and 33.0% in the 2000 year-to-date period compared to 34.4% for the same
periods a year ago.
Selling, General and Administrative Expense
SG&A expense decreased 7% in the 2000 third quarter and 5% in the 2000
year-to-date period compared to the same 1999 periods. These decreases are
mainly due to continued emphasis on cost control. SG&A expense was 18.0% of net
operating revenues in the 2000 third quarter and 18.2% in the 2000 year-to-date
period compared to 19.8% for the same periods a year ago.
Depreciation and Amortization Expense
Depreciation and amortization expense increased 5% in the 2000 third quarter and
6% in the 2000 year-to-date period compared to the same 1999 periods reflecting
increased capital expenditures in switching and transport technologies which
have shorter asset lives. Depreciation and amortization expense was 19.7% of net
operating revenues in the 2000 third quarter and 19.9% in the 2000 year-to-date
period compared to 19.4% for the same periods a year ago.
<PAGE>
Product Distribution and Directory Publishing Businesses
<TABLE>
<CAPTION>
Selected Operating Results
---------------------------------------------------------------------
Quarters Ended
September 30, Variance
----------------------------------- -------------------------------
2000 1999 $ %
--------------------------------------------- ----------------- ----------------- -- ------------- -----------------
(millions)
<S> <C> <C> <C> <C>
Net operating revenues $ 487 $ 437 $ 50 11.4%
--------------------------------------------- --- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 375 338 37 10.9%
Selling, general and administrative 33 31 2 6.5%
Depreciation and amortization 4 4 - -
--------------------------------------------- --- ------------- -- -------------- -- -------------
Total operating expenses 412 373 39 10.5%
--------------------------------------------- --- ------------- -- -------------- -- -------------
Operating income $ 75 $ 64 $ 11 17.2%
--- ------------- -- -------------- -- -------------
Operating margin 15.4% 14.6%
--- ------------- -- --------------
Selected Operating Results
---------------------------------------------------------------------
Year-to-Date
September 30, Variance
----------------------------------- -------------------------------
2000 1999 $ %
--------------------------------------------- ----------------- ----------------- -- ------------- -----------------
(millions)
Net operating revenues $ 1,403 $ 1,309 $ 94 7.2%
--------------------------------------------- --- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 1,085 1,023 62 6.1%
Selling, general and administrative 96 94 2 2.1%
Depreciation and amortization 12 13 (1) (7.7)%
--------------------------------------------- --- ------------- -- -------------- -- -------------
Total operating expenses 1,193 1,130 63 5.6%
--------------------------------------------- --- ------------- -- -------------- -- -------------
Operating income $ 210 $ 179 $ 31 17.3%
--- ------------- -- -------------- -- -------------
Operating margin 15.0% 13.7%
--- ------------- -- --------------
</TABLE>
Net operating revenues increased 11% in the 2000 third quarter and 7% in the
2000 year-to-date period compared to the same 1999 periods. Nonaffiliated
revenues accounted for approximately 60% of revenues in both the 2000 and 1999
third quarters and year-to-date periods. Nonaffiliated revenues increased 7% in
the 2000 third quarter and 10% in the 2000 year-to-date period compared to the
same 1999 periods. The increase in nonaffiliated revenues in the third quarter
was mainly due to the consolidation of a directory publishing partnership.
Beginning in the 2000 third quarter, the directory publishing partnership,
previously accounted for as an equity method investment, was fully consolidated
due to a restructuring in the partnership management. The year-to-date increase
was largely due to an increased volume of equipment sales resulting from the
expansion of certain existing sales contracts, mainly in the 2000 first quarter.
Affiliated revenues increased 19% in the 2000 third quarter and 2% in the 2000
year-to-date period compared to the same 1999 periods. The third quarter
increase is mainly the result of the mid-year change in the local division's
capital program to more network equipment and components. Additionally,
affiliate sales were lower beginning in the 1999 third quarter due to the change
in the local division's capital program to more electronics and software, which
was more frequently purchased directly from manufacturers.
Operating expenses increased 11% in the 2000 third quarter and 6% in the 2000
year-to-date period compared to the same 1999 periods reflecting increased costs
of services and products related to the increased volume of equipment sales. The
increases were also due to the consolidation of the directory publishing
partnership.
<PAGE>
Sprint ION(SM)
<TABLE>
<CAPTION>
Quarters Ended Year-to-Date
September 30, September 30,
----------------------------------- ----------------------------------
2000 1999 2000 1999
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions)
<S> <C> <C> <C> <C>
Net operating revenues $ 2 $ - $ 5 $ -
--- ------------- -- -------------- -- ------------- --- -------------
Total operating expenses 169 110 463 243
--- ------------- -- -------------- -- ------------- --- -------------
Operating loss $ (167) $ (110) $ (458) $ (243)
--- ------------- -- -------------- -- ------------- --- -------------
</TABLE>
Net operating revenues for Sprint ION in 2000 reflect revenues from the initial
launches of both Sprint ION and broadband fixed wireless services.
Operating expenses for Sprint ION in the 2000 third 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 associated with market launches. Depreciation and
amortization expense increased $22 million in the 2000 third quarter and $65
million in the 2000 year-to-date period from $11 million and $24 million for the
same periods a year ago due to a rapidly increasing asset base.
Other Ventures
<TABLE>
<CAPTION>
Quarters Ended Year-to-Date
September 30, September 30,
----------------------------------- ----------------------------------
2000 1999 2000 1999
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions)
<S> <C> <C> <C> <C>
Net operating revenues $ 15 $ 1 $ 49 $ 1
--- ------------- -- -------------- -- ------------- --- -------------
Total operating expenses 26 8 90 18
--- ------------- -- -------------- -- ------------- --- -------------
Operating loss $ (11) $ (7) $ (41) $ (17)
--- ------------- -- -------------- -- ------------- --- -------------
Equity in net losses of affiliates $ (105) $ (36) $ (169) $ (67)
--- ------------- -- -------------- -- ------------- --- -------------
</TABLE>
This segment includes the operating results of the cable TV service operations
of the broadband fixed wireless companies acquired in the second half of 1999.
The increase in equity in net losses of affiliates reflects losses from Intelig
and increased losses from Call-Net. The FON Group ceased recognizing its portion
of Intelig losses during the proposed WorldCom/Sprint merger due to the
Brazilian government's requirement for Sprint to divest Intelig and limit its
management participation. In the 2000 third quarter, the Brazilian government
informed Sprint that it was no longer required to divest Intelig and could fully
participate in its management as a result of the termination of the proposed
merger. Therefore, the FON Group resumed equity method accounting and recorded
the previously unrecognized losses in the 2000 third quarter. The 2000
year-to-date Call-Net losses include the FON Group's portion of a restructuring
charge recorded by Call-Net in the 2000 first quarter.
<PAGE>
--------------------------------------------------------------------------------
Nonoperating Items
--------------------------------------------------------------------------------
Interest Expense
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 as follows:
<TABLE>
<CAPTION>
Quarters Ended Year-to-Date
September 30, September 30,
----------------------------------- ----------------------------------
2000 1999 2000 1999
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions)
<S> <C> <C> <C> <C>
FON Group interest costs $ 68 $ 77 $ 236 $ 235
Credit from the PCS Group (60) (45) (178) (116)
--- ------------- -- -------------- -- ------------- --- -------------
Interest expense $ 8 $ 32 $ 58 $ 119
--- ------------- -- -------------- -- ------------- --- -------------
</TABLE>
The FON Group's effective interest rate on long-term debt was 7.3% in the 2000
third quarter, 7.4% in the 2000 year-to-date period, 7.7% in the 1999 third
quarter and 7.9% in the 1999 year-to-date period. The decrease mainly reflects
increased borrowings with lower interest rates.
Interest costs on short-term borrowings classified as long-term debt, intergroup
borrowings, deferred compensation plans, customer deposits, and the credit from
the PCS Group detailed above have been excluded so as not to distort the
effective interest rate on long-term debt.
Other Income (Expense), Net
Other income (expense) consisted of the following:
<TABLE>
<CAPTION>
Quarters Ended Year-to-Date
September 30, September 30,
----------------------------------- ----------------------------------
2000 1999 2000 1999
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions)
<S> <C> <C> <C> <C>
Dividend and interest income $ 14 $ 10 $ 34 $ 28
Equity in net losses of affiliates (103) (25) (150) (50)
Gains on sales of assets - 6 45 6
Net gains from investments - - 23 35
Other, net 5 (2) (2) 26
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total $ (84) $ (11) $ (50) $ 45
--- ------------- -- -------------- -- ------------- --- -------------
</TABLE>
Gains on sales of assets mainly reflect the 2000 second quarter sale of a
directory publishing operation that was not affiliated with the FON Group's
local territories.
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 federal statutory rate for income taxes related to continuing operations.
Discontinued Operation, Net
In February 2000, Sprint sold its interest in Global One to France Telecom S.A.
and Deutsche Telekom AG. As a result of Sprint's sale of its interest in Global
One, the FON Group's gain on sale and its equity share of the results of Global
One have been reported as a discontinued operation for all periods presented.
The FON Group recorded an after-tax gain related to the sale of Sprint's
interest in Global One of $675 million in the first quarter of 2000. The FON
Group recorded after-tax losses related to its share of losses from Global One
of $60 million in the third quarter of 1999 and $154 million in the 1999
year-to-date period.
<PAGE>
--------------------------------------------------------------------------------
Financial Condition
--------------------------------------------------------------------------------
September 30, December 31,
2000 1999
------------------------------------------------------
(millions)
Combined assets $ 22,976 $ 21,803
--------------------------------
The FON Group's combined assets increased $1.2 billion in the 2000 year-to-date
period. Net property, plant and equipment increased $961 million reflecting
capital expenditures to support the core long distance and local network
enhancements, and Sprint ION development and hardware deployment, partly offset
by depreciation. Investments in affiliates and other assets increased $507
million mainly reflecting capital contributions to the FON Group's equity method
investees, partly offset by equity in net losses of those affiliates. Offsetting
decreases in the FON Group's combined assets primarily reflect the cash from the
sale of the net assets of the Global One discontinued operation used to repay
debt. The FON Group's assets also decreased due to the exchange of investments
in equity securities for certain notes payable. See "Liquidity and Capital
Resources" for more information about changes in the FON Group's Combined
Balance Sheets.
--------------------------------------------------------------------------------
Liquidity and Capital Resources
--------------------------------------------------------------------------------
Operating Activities
Year-to-Date
September 30,
-------------------------------
2000 1999
------------------------------------------------------
(millions)
Cash flows provided
by operating
activities $ 2,704 $ 2,201
-------------------------------
Operating cash flows increased $503 million in the 2000 year-to-date period
mainly reflecting changes in cash flows related to income taxes.
Investing Activities
Year-to-Date
September 30,
-------------------------------
2000 1999
------------------------------------------------------
(millions)
Cash flows used by
investing
activities $ (1,877) $ (2,819)
-------------------------------
In February 2000, the FON Group received $1.4 billion from the sale of its
investment in Global One.
Capital expenditures totaled $2.7 billion in the 2000 year-to-date period and
$2.5 billion in the same 1999 period. Long distance capital expenditures were
incurred mainly to enhance network reliability, meet increased demand for
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. Sprint ION
capital expenditures were incurred for development and hardware deployment.
Other FON Group capital expenditures were incurred for Sprint's World
Headquarters Campus.
"Investments in affiliates, net" consisted of FON Group's investments in
EarthLink, Intelig and other affiliates accounted for using the equity method.
Cash flows for the 1999 year-to-date period also include the repayment of loans
made to Sprint PCS prior to the Sprint restructuring and payments for the
purchases of broadband fixed wireless companies.
Financing Activities
Year-to-Date
September 30,
-------------------------------
2000 1999
------------------------------------------------------
(millions)
Cash flows provided
(used) by financing
activities $ (802) $ 596
-------------------------------
Financing activities in the 2000 year-to-date period mainly reflect net payments
on borrowings totaling $504 million compared to net borrowings of $717 million
in the same 1999 period.
The FON Group paid cash dividends of $322 million in the 2000 year-to-date
period compared to $317 million in the same 1999 period.
Also included in the 2000 year-to-date financing activities is a $130 million
payment to the PCS Group to compensate for the net amount of PCS stock-based
compensation granted to FON Group employees and FON stock-based compensation
granted to PCS Group employees.
Capital Requirements
The FON Group's 2000 investing activities, mainly consisting of capital
expenditures and investments in affiliates, are expected to require cash of $4.7
to $5.1 billion. FON Group capital expenditures are expected to range between
$4.0 and $4.3 billion in 2000. The long distance and local divisions will
require the majority of this total. Including the investments in broadband fixed
wireless facilities, Sprint ION is expected to require $600 million to $700
million for capital expenditures in 2000. Investments in affiliates are expected
to require cash of $700 to $800 million. Dividend payments are expected to total
$435 million.
<PAGE>
Sprint's tax sharing agreement 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.
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."
--------------------------------------------------------------------------------
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.
<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
September 30, September 30,
--------------------------------------------- ----------------------------------- ----------------------------------
2000 1999 2000 1999
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
<S> <C> <C> <C> <C>
Net Operating Revenues $ 1,673 $ 844 $ 4,310 $ 2,184
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Operating Expenses
Costs of services and products 1,034 795 2,913 2,199
Selling, general and administrative 517 446 1,445 1,198
Depreciation and amortization 489 393 1,366 1,112
Merger related costs - - 24 -
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total operating expenses 2,040 1,634 5,748 4,509
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Operating Loss (367) (790) (1,438) (2,325)
Interest expense (229) (176) (673) (497)
Other income (expense), net (1) 9 16 39
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Loss before income taxes and extraordinary
items (597) (957) (2,095) (2,783)
Income tax benefit 207 342 739 1,008
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Loss before Extraordinary Items (390) (615) (1,356) (1,775)
Extraordinary items, net - - (3) (21)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net Loss (390) (615) (1,359) (1,796)
Preferred stock dividends (4) (4) (11) (11)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Loss applicable to common stock $ (394) $ (619) $ (1,370) $ (1,807)
--- ------------- -- -------------- -- ------------- --- -------------
Basic and Diluted Loss per
Common Share(1)
Continuing operations $ (0.41) $ (0.65) $ (1.42) $ (1.97)
Extraordinary items - - - (0.02)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total $ (0.41) $ (0.65) $ (1.42) $ (1.99)
--- ------------- -- -------------- -- ------------- --- -------------
Basic and diluted weighted average common
shares(1) 971.3 946.6 963.5 910.3
--- ------------- -- -------------- -- ------------- --- -------------
(1) In the 2000 first quarter, Sprint effected a two-for-one stock split of its PCS common stock. As a result, 1999 basic and
diluted loss per common share and weighted average common shares have been restated.
See accompanying Condensed Notes to Combined Financial Statements (Unaudited).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMBINED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited) Sprint PCS Group
(millions)
--------------------------------------------- ----------------------------------- ----------------------------------
Quarters Ended Year-to-Date
September 30, September 30,
--------------------------------------------- ----------------------------------- ----------------------------------
2000 1999 2000 1999
--------------------------------------------- ----------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Net Loss $ (390) $ (615) $ (1,359) $ (1,796)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Other Comprehensive Income (Loss)
Unrealized holding gains on securities 2 - 5 -
Income tax expense (1) - (2) -
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net unrealized holding gains on securities
during the period 1 - 3 -
Reclassification adjustment for gains
included in net income (8) - (8) -
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total net unrealized holding losses on
securities (7) - (5) -
Foreign currency translation adjustments 1 - 4 -
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total other comprehensive loss (6) - (1) -
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Comprehensive Loss $ (396) $ (615) $ (1,360) $ (1,796)
--- ------------- -- -------------- -- ------------- --- -------------
See accompanying Condensed Notes to Combined Financial Statements (Unaudited).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMBINED BALANCE SHEETS Sprint PCS Group
(millions)
-------------------------------------------------------------------------------------------------------------------------
September 30, December 31,
2000 1999
-------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Assets
Current assets
<S> <C> <C>
Cash and equivalents $ 90 $ 16
Accounts receivable, net of allowance for doubtful
accounts of $93 and $57 774 572
Inventories 367 336
Prepaid expenses 107 89
Current tax benefit receivable from the FON Group - 293
Other - 9
-------------------------------------------------------------------------------------------------------------------------
Total current assets 1,338 1,315
Property, plant and equipment
Network equipment 6,813 5,817
Construction work in progress 1,752 1,692
Buildings and leasehold improvements 1,952 1,235
Other 804 667
-------------------------------------------------------------------------------------------------------------------------
Total property, plant and equipment 11,321 9,411
Accumulated depreciation (2,349) (1,415)
-------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 8,972 7,996
Investments in affiliates 175 -
Intangible assets
Goodwill 4,545 4,522
PCS licenses 3,059 3,060
Customer base 747 726
Microwave relocation costs 408 377
Other 46 54
-------------------------------------------------------------------------------------------------------------------------
Total intangible assets 8,805 8,739
Accumulated amortization (944) (551)
-------------------------------------------------------------------------------------------------------------------------
Net intangible assets 7,861 8,188
Other 400 425
-------------------------------------------------------------------------------------------------------------------------
Total $ 18,746 $ 17,924
-----------------------------------
Liabilities and Group Equity
Current liabilities
Current maturities of long-term debt $ 170 $ 185
Accounts payable 513 450
Construction obligations 853 1,039
Accrued taxes 191 130
Accrued interest 265 120
Payables to the FON Group 397 136
Other 606 518
-------------------------------------------------------------------------------------------------------------------------
Total current liabilities 2,995 2,578
Long-term debt and capital lease obligations 13,018 11,304
Deferred credits and other liabilities
Deferred income taxes 133 582
Other 200 140
-------------------------------------------------------------------------------------------------------------------------
Total deferred credits and other liabilities 333 722
Group equity 2,400 3,320
-------------------------------------------------------------------------------------------------------------------------
Total $ 18,746 $ 17,924
-----------------------------------
See accompanying Condensed Notes to Combined Financial Statements (Unaudited).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMBINED STATEMENTS OF CASH FLOWS (Unaudited) Sprint PCS Group
(millions)
------------------------------------------------------------------ ----------------- ----------------- ----------------
Year-to-Date September 30, 2000 1999
------------------------------------------------------------------ ----------------- ----------------- ----------------
Operating Activities
<S> <C> <C>
Net loss $ (1,359) $ (1,796)
Adjustments to reconcile net loss to net cash provided (used) by
operating activities:
Extraordinary items, net 3 21
Equity in net loss of affiliate 31 -
Depreciation and amortization 1,366 1,112
Deferred income taxes (447) (130)
Changes in assets and liabilities:
Accounts receivable, net (196) (239)
Inventories and other current assets (48) (210)
Accounts payable and other current liabilities 291 304
Current tax benefit receivable from the FON Group 293 (202)
Receivables from and payables to the FON Group, net 258 306
Noncurrent assets and liabilities, net 63 (9)
Other, net (32) 14
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash provided (used) by operating activities 223 (829)
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Investing Activities
Capital expenditures (2,110) (1,580)
Investments in affiliates (201) -
Proceeds from sale of assets 204 -
Other, net (11) (82)
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash used by investing activities (2,118) (1,662)
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Financing Activities
Proceeds from long-term debt 2,071 4,193
Payments on long-term debt (400) (2,698)
Dividends paid (11) (11)
Proceeds from common stock issued 108 856
Net proceeds from intergroup stock-based compensation grants 130 -
Other, net 71 (6)
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash provided by financing activities 1,969 2,334
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Increase (Decrease) in Cash and Equivalents 74 (157)
Cash and Equivalents at Beginning of Period 16 173
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Cash and Equivalents at End of Period $ 90 $ 16
--- ------------- -- -------------
See accompanying Condensed Notes to Combined Financial Statements (Unaudited).
</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, cash flows and comprehensive loss.
Certain information and footnote disclosures normally included in combined
financial statements prepared according to accounting principles generally
accepted in the United States have been condensed or omitted. As a result, you
should read these financial statements along with Sprint Corporation's 1999 Form
10-K. Operating results for the 2000 year-to-date period do not necessarily
represent the results that may be expected for the year ending December 31,
2000.
--------------------------------------------------------------------------------
1. Basis of Combination and Presentation
--------------------------------------------------------------------------------
The PCS stock is intended to reflect the performance of Sprint's wireless PCS
operations. The FON stock is intended to reflect the performance of all of
Sprint's other operations.
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 are
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.
The PCS Group entities are commonly controlled companies. Transactions between
the PCS Group and the FON Group have not been eliminated in the combined
financial statements of either Group.
The PCS Group combined financial statements provide PCS shareholders with
financial information about the PCS Group operations. Investors in FON stock and
PCS stock are Sprint shareholders and are subject to risks related to all of
Sprint's businesses, assets and liabilities. Sprint retains ownership and
control of the assets and operations of each Group. Financial effects of either
Group that affect Sprint's results of operations or financial condition could
affect the results of operations or financial position of the other Group or the
market price of the stock tracking the other Group. Net losses of either Group,
and dividends or distributions on, or repurchases of, PCS stock or FON stock,
will reduce Sprint funds legally available for dividends on both FON stock and
PCS stock. As a result, the PCS Group combined financial statements should be
read along with Sprint's consolidated financial statements and the FON Group's
combined financial statements.
Investments in entities in which the PCS Group exercises significant influence,
but does not control, are accounted for using the equity method (see Note 3).
The PCS Group combined financial statements are prepared using accounting
principles generally accepted in the United States. These principles require
management to make estimates and assumptions that affect the reported amounts of
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.
--------------------------------------------------------------------------------
2. Merger Termination
--------------------------------------------------------------------------------
On July 13, 2000, Sprint and WorldCom, Inc. announced that the boards of
directors of both companies terminated their merger agreement, previously
announced in October 1999, as a result of regulatory opposition to the merger.
In the 2000 second quarter, the PCS Group recognized a one-time, pre-tax charge
of $24 million, or 2 cents per share, for costs associated with the terminated
merger.
<PAGE>
--------------------------------------------------------------------------------
3. Investment
--------------------------------------------------------------------------------
During the 2000 second quarter, the PCS Group made an investment in Pegaso
Telecomunicaciones, S.A. de C.V., a wireless PCS operation in Mexico. The PCS
Group accounts for this investment using the equity method. Unaudited,
summarized financial information (100% basis) of this entity was as follows:
Quarter Ended Inception-to-Date
September 30, September 30,
2000 2000
------------------------------------------------------
(millions)
Results of operations
Net operating
revenues $ 33 $ 55
----------------------------------
Operating loss $ (46) $ (90)
----------------------------------
Net loss $ (33) $ (109)
----------------------------------
Equity in net
loss of $ (17) $ (31)
affiliate
----------------------------------
--------------------------------------------------------------------------------
4. Income Taxes
--------------------------------------------------------------------------------
The differences that caused the PCS Group's effective income tax rates to vary
from the 35% federal statutory rate for income taxes related to continuing
operations were as follows:
Year-to-Date
September 30,
-------------------------
2000 1999
-------------------------------------------------------
(millions)
Income tax benefit at the
federal statutory rate $ (733) $ (974)
Effect of:
State income taxes, net
of federal income tax
effect (46) (56)
Equity in loss of foreign
affiliate 13 -
Goodwill amortization 29 25
Other, net (2) (3)
-------------------------------------------------------
Income tax benefit $ (739) $ (1,008)
-------------------------
Effective income tax rate 35.3% 36.2%
-------------------------
--------------------------------------------------------------------------------
5. Long-term Debt and Capital Lease Obligations
--------------------------------------------------------------------------------
During the 2000 year-to-date period, Sprint allocated to the PCS Group $1.25
billion of debt consisting of notes with 2-year maturities. These notes have
interest rates ranging from 9.2% to 9.3%, 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 guarantee by Sprint or
any member of the FON Group.
In the 2000 first quarter, Sprint repaid, prior to scheduled maturities, $127
million of the PCS Group's notes payable to the FCC. These notes had an interest
rate of 7.8%. This resulted in a $3 million after-tax extraordinary loss.
--------------------------------------------------------------------------------
6. Group Equity
--------------------------------------------------------------------------------
Year-to-Date
September 30,
2000
-------------------------------------------------------
(millions)
Beginning balance $ 3,320
Net loss (1,359)
Dividends (11)
Common stock issued 166
Tax benefit of stock
compensation 154
Other, net 130
-------------------------------------------------------
Ending balance $ 2,400
------------------
--------------------------------------------------------------------------------
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
September 30,
-------------------------
2000 1999
-------------------------------------------------------
(millions)
Interest (net of capitalized
interest) $ 513 $ 322
-------------------------
Income taxes $ (912) $ (673)
-------------------------
<PAGE>
The PCS Group's noncash activities included the following:
Year-to-Date
September 30,
-------------------------
2000 1999
-------------------------------------------------------
(millions)
Tax benefit from stock
compensation $ 154 $ -
-------------------------
Common stock issued under
employee stock benefit
plans $ 94 $ 25
-------------------------
Stock received for stock
options exercised $ 36 $ -
-------------------------
Common stock issued for Cox
PCS acquisition $ - $ 1,146
-------------------------
Capital lease obligations $ - $ 36
-------------------------
--------------------------------------------------------------------------------
9. Recently Issued Accounting Pronouncements
--------------------------------------------------------------------------------
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" (SAB 101). In June 2000, the SEC issued an
amendment to SAB 101 which delayed the effective date for registrants with
fiscal years that begin after December 15, 1999. The effective date for Sprint
will be for the quarter ending December 31, 2000. The deferral of
telecommunication service activation fees and certain related costs are
specifically addressed in SAB 101 and the PCS Group is completing the analysis
of the impact of SAB 101 on its financial statements. SAB 101 is not expected to
have a material impact on the PCS Group's combined financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This standard requires all derivatives to be recorded
on the balance sheet as either assets or liabilities and be measured at fair
value. Gains or losses from changes in the derivative values are to be accounted
for based on how the derivative was used and whether it qualifies for hedge
accounting. When adopted in January 2001, this statement is not expected to have
a material impact on the PCS Group's combined financial statements.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Sprint PCS Group
--------------------------------------------------------------------------------
General
--------------------------------------------------------------------------------
On July 13, 2000, Sprint and WorldCom, Inc. announced that the boards of
directors of both companies terminated their merger agreement, previously
announced in October 1999, as a result of regulatory opposition to the merger.
In the 2000 second quarter, the PCS Group recognized a one-time pre-tax charge
of $24 million, or 2 cents per share, for costs associated with the terminated
merger.
--------------------------------------------------------------------------------
Sprint PCS Group
--------------------------------------------------------------------------------
The PCS Group includes Sprint's wireless PCS operations. It operates the only
100% digital PCS wireless network in the United States with licenses to provide
service nationwide using a single frequency and a single technology. At the end
of September 2000, the PCS Group operated PCS systems in more than 300
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 more than 213 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 PCS Group also provides wholesale PCS services to companies that resell the
services to their customers on a retail basis. These companies pay the PCS Group
a discounted price for their customers' usage, but bear the costs of acquisition
and customer service.
The PCS Group also includes its investment in Pegaso Telecomunicaciones, S.A. de
C.V. (Pegaso), a wireless PCS operation in Mexico. This investment is accounted
for using the equity method.
The wireless industry, including the PCS Group, typically generates a 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
September 30, Variance
---------------------------------- -------------------------------
2000 1999 $ %
---------------------------------------------- ---------------- ----------------- -- ------------- -----------------
(millions)
<S> <C> <C> <C> <C>
Net operating revenues $ 1,673 $ 844 $ 829 98.2%
---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 1,034 795 239 30.1%
Selling, general and administrative 517 446 71 15.9%
Depreciation and amortization 489 393 96 24.4%
---------------------------------------------- -- ------------- -- -------------- -- -------------
Total operating expenses 2,040 1,634 406 24.8%
---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating loss $ (367) $ (790) $ 423 53.5%
-- ------------- -- -------------- -- -------------
Operating income (loss) before depreciation
and amortization $ 122 $ (397) $ 519 NM
-- ------------- -- -------------- -- -------------
NM = Not meaningful
Selected Operating Results
---------------------------------------------------------------------
Year-to-Date
September 30, Variance
---------------------------------- -------------------------------
2000 1999 $ %
---------------------------------------------- ---------------- ----------------- -- ------------- -----------------
(millions)
Net operating revenues $ 4,310 $ 2,184 $ 2,126 97.3%
---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 2,913 2,199 714 32.5%
Selling, general and administrative 1,445 1,198 247 20.6%
Depreciation and amortization 1,366 1,112 254 22.8%
Merger related costs 24 - 24 NM
---------------------------------------------- -- ------------- -- -------------- -- -------------
Total operating expenses 5,748 4,509 1,239 27.5%
---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating loss $ (1,438) $ (2,325) $ 887 38.2%
-- ------------- -- -------------- -- -------------
Operating loss before depreciation and
amortization and merger related costs $ (48) $ (1,213) $ 1,165 96.0%
-- ------------- -- -------------- -- -------------
NM = Not meaningful
</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 retail chain and the subsequent service revenues generated by sales to
its customers accounted for 25% of net operating revenues in the 2000 third
quarter and year-to-date periods. These revenues were 29% of net operating
revenues in the 1999 third quarter and year-to-date periods.
Net Operating Revenues
Net operating revenues include subscriber revenues and sales of handsets and
accessory equipment. Subscriber revenues consist of monthly recurring charges,
usage charges and activation fees. Subscriber revenues increased 105% in the
2000 third quarter and 108% in the 2000 year-to-date period from the same 1999
periods mainly reflecting an increase in the average number of customers. The
PCS Group added 911,000 customers in the 2000 third quarter, including 72,000
purchased from a reseller. The PCS group added 2.6 million customers in the 2000
<PAGE>
year-to-date period, ending the quarter with over 8.3 million customers in more
than 300 metropolitan markets nationwide. Average monthly service revenue per
user (ARPU) was $59 for the 2000 third quarter and $58 for the 2000 year-to-date
period compared to $54 in the 1999 third quarter and year-to-date periods. The
increase in ARPU was partly due to the implementation of activation charges in
the 2000 second quarter. Additionally, the companies that the PCS Group serves
on a wholesale basis added 122,000 customers in the 2000 third quarter,
excluding the 72,000 sold to the PCS Group. These companies added 188,000
customers in the 2000 year-to-date period, ending the quarter with approximately
260,000 customers.
Customer churn rates have improved from the 1999 third quarter and year-to-date
periods and are currently near 3%. The improvements reflect increased services
and the success of several customer retention initiatives.
Revenues from sales of handsets and accessories were approximately 14% of net
operating revenues in the 2000 third quarter and 15% in the 2000 year-to-date
period. These revenues as a percentage of net operating revenues were
approximately 17% in the 1999 third quarter and 19% in the 1999 year-to-date
period. As part of the PCS Group's marketing plans, handsets are normally sold
at prices below the PCS Group's cost.
Operating Expenses
Costs of services and products mainly include handset and accessory costs,
switch and cell site expenses and other network-related costs. These costs
increased 30% in the 2000 third quarter and 32% in the 2000 year-to-date period
from the same 1999 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 marketing
costs to promote products and services as well as salary and benefit costs. SG&A
expense increased 16% in the 2000 third quarter and 21% in the 2000 year-to-date
period from the same 1999 periods reflecting an expanded workforce to support
subscriber growth and increased marketing and selling costs.
Acquisition costs per gross customer addition, including equipment subsidies and
marketing costs, have improved approximately 20% in the 2000 third quarter and
year-to-date periods from the same 1999 periods. Lower handset unit costs and
scale benefits from greater customer additions have contributed to the
improvement.
Cash costs per user (CCPU) consists of costs of service revenues, service
delivery and other general and administrative costs. CCPU decreased more than
25% in the 2000 third quarter and year-to-date periods from the same 1999
periods. The improvements reflect successful expense management and scale
benefits resulting from the increased customer base.
Depreciation and amortization expense consists mainly of depreciation of network
assets and amortization of intangible assets. The intangible assets include
goodwill, PCS licenses, customer base, microwave relocation costs and assembled
workforce, which are being amortized over 30 months to 40 years.
Depreciation and amortization expense increased 24% in the 2000 third quarter
and 23% in the 2000 year-to-date period from the same 1999 periods mainly
reflecting depreciation of the network assets placed in service during 2000 and
1999. The year-to-date increase also reflects amortization of intangible assets
acquired in the Cox PCS purchase in the 1999 second quarter.
--------------------------------------------------------------------------------
Nonoperating Items
--------------------------------------------------------------------------------
Interest Expense
The PCS Group's effective interest rate on long-term debt was 8.7% in the 2000
third quarter, 8.6% in the 2000 year-to-date period, 8.5% in 1999 third quarter
and 8.6% in the 1999 year-to-date period. Interest costs on short-term
borrowings classified as long-term debt, intergroup borrowings and deferred
compensation plans have been excluded so as not to distort the PCS Group's
effective interest rate on long-term debt.
Interest expense on borrowings incurred by Sprint and allocated to the PCS Group
is based on rates the PCS Group would be able to obtain from third parties as a
direct or indirect wholly owned Sprint subsidiary, but without the benefit of
any guaranty by Sprint or any member of the FON Group. The PCS Group's interest
expense includes interest costs resulting from the difference between Sprint's
actual interest rates and the rates charged to the PCS Group. These costs are
reflected in the effective interest rates above.
<PAGE>
Other Income (Expense), Net
Other income (expense) consisted of the following:
<TABLE>
<CAPTION>
Quarters Ended Year-to-Date
September 30, September 30,
----------------------------------- ----------------------------------
2000 1999 2000 1999
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions)
<S> <C> <C> <C> <C>
Dividend and interest income $ - $ 1 $ - $ 4
Equity in net loss of affiliate (17) - (31) -
Gains on sales of assets 13 - 47 -
Minority interest for Cox PCS - - - 20
Other, net 3 8 - 15
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total $ (1) $ 9 $ 16 $ 39
--- ------------- -- -------------- -- ------------- --- -------------
</TABLE>
Gains on sales of assets reflect the sales of certain customers and associated
network infrastructure during 2000.
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 federal
statutory rate for income taxes related to continuing operations.
Extraordinary Items, Net
In the 2000 first quarter, Sprint repaid, prior to scheduled maturities, $127
million of the PCS Group's notes payable to the FCC. These notes had an interest
rate of 7.8%. This resulted in a $3 million after-tax extraordinary loss.
In 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 a weighted average
interest rate equal to the London Inter-Bank Offered Rate plus 40 basis points.
This resulted in a $21 million after-tax extraordinary loss.
--------------------------------------------------------------------------------
Financial Condition
--------------------------------------------------------------------------------
September December 31,
30,
2000 1999
------------------------------------------------------
(millions)
Combined assets $ 18,746 $ 17,924
--------------------------------
Net property, plant and equipment increased $976 million since year-end mainly
reflecting capital expenditures to support the PCS network buildout and
expansion, partly offset by depreciation and network asset sales.
Sprint's tax sharing agreement provides for the allocation of income taxes
between the FON Group and the PCS Group. The current tax benefit receivable from
the FON Group decreased $293 million reflecting payments from the FON Group for
income taxes during the period.
--------------------------------------------------------------------------------
Liquidity and Capital Resources
--------------------------------------------------------------------------------
Operating Activities
Year-to-Date
September 30,
-------------------------------
2000 1999
------------------------------------------------------
(millions)
Cash flows provided
(used) by operating
activities $ 223 $ (829)
-------------------------------
Cash flows from operating activities increased $1.1 billion in the 2000
year-to-date period primarily reflecting decreased operating losses for the PCS
Group as well as decreases in working capital.
Investing Activities
Year-to-Date
September 30,
-------------------------------
2000 1999
------------------------------------------------------
(millions)
Cash flows used by
investing
activities $ (2,118) $ (1,662)
-------------------------------
Capital expenditures, which are the PCS Group's largest investing activity,
totaled $2.1 billion in the 2000 year-to-date period, compared to $1.6 billion
in the 1999 year-to-date period. Capital expenditures in both years were mainly
for the continued buildout and expansion of the PCS network.
<PAGE>
Financing Activities
Year-to-Date
September 30,
-------------------------------
2000 1999
------------------------------------------------------
(millions)
Cash flows provided
by financing
activities $ 1,969 $ 2,334
-------------------------------
In the 2000 year-to-date period, financing activities mainly reflect proceeds
from long-term debt used to fund capital requirements and repay existing debt.
In the 1999 year-to-date period, financing activities reflect proceeds from
long-term debt and net proceeds from PCS common stock issuances of $856 million.
These proceeds were also used primarily to fund capital requirements and repay
existing debt.
Also included in the 2000 year-to-date financing activities is $130 million
received from the FON Group to compensate for the net amount of PCS stock-based
compensation granted to FON Group employees and FON stock-based compensation
granted to PCS Group employees.
Capital Requirements
The PCS Group's 2000 investing activities, mainly consisting of capital
expenditures and investments in affiliates, are expected to be between $3.1 and
$3.4 billion. Capital expenditures are expected to be between $2.9 billion and
$3.2 billion. Investments in affiliates are expected to require cash of
approximately $200 million. 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 2000,
including payments to the FON Group for its preferred intergroup interest.
Liquidity
See Sprint's "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity" for a discussion of liquidity.
--------------------------------------------------------------------------------
Financial Strategies
--------------------------------------------------------------------------------
Financial strategies are determined by Sprint on a centralized basis. See
Sprint's "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Financial Strategies."
--------------------------------------------------------------------------------
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.
