Annex I
SPRINT CORPORATION
Consolidated Financial Information
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Sprint Corporation
(millions)
--------------------------------------------- --- ------------------------------- -- -------------------------------
Quarters Ended Year-to-Date
June 30, June 30,
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
2000 1999 2000 1999
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
<S> <C> <C> <C> <C>
Net Operating Revenues $ 5,793 $ 4,888 $ 11,272 $ 9,540
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Operating Expenses
Costs of services and products 2,973 2,536 5,812 5,055
Selling, general and administrative 1,504 1,434 3,022 2,801
Depreciation and amortization 1,007 890 1,973 1,746
Merger related costs 187 - 187 -
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total operating expenses 5,671 4,860 10,994 9,602
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Operating Income (Loss) 122 28 278 (62)
Interest expense (230) (208) (484) (399)
Other income, net 13 44 41 77
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Loss from continuing operations before
income taxes (95) (136) (165) (384)
Income tax benefit 4 33 9 110
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Loss from Continuing Operations (91) (103) (156) (274)
Discontinued operation, net - (66) 675 (94)
Extraordinary items, net - - (3) (21)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net Income (Loss) $ (91) $ (169) $ 516 $ (389)
--- ------------- -- -------------- -- ------------- --- -------------
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 June 30, 2000 1999 2000 1999
-------------------------------------------------------- ----------------------------- --- ------------------------------
FON Common Stock PCS Common Stock
----------------------------- ------------------------------
<S> <C> <C> <C> <C>
Earnings (Loss) Applicable to Common Stock $ 367 $ 387 $ (459) $ (558)
-- ----------- --- ---------- --- --- ---------- --- -----------
Diluted Earnings (Loss) per Common Share
Continuing operations $ 0.41 $ 0.51 $ (0.48) $ (0.61)
Discontinued operation - (0.07) - -
-------------------------------------------------------- -- ----------- --- ---------- --- --- ---------- --- -----------
Total $ 0.41 $ 0.44 $ (0.48) $ (0.61)
-- ----------- --- ---------- --- --- ---------- --- -----------
-- ----------- --- ---------- --- --- ---------- --- -----------
Diluted weighted average common shares 895.8 887.1 962.8 920.0
-- ----------- --- ---------- --- --- ---------- --- -----------
Basic Earnings (Loss) per Common Share
Continuing operations $ 0.42 $ 0.52 $ (0.48) $ (0.61)
Discontinued operation - (0.07) - -
-------------------------------------------------------- -- ----------- --- ---------- --- --- ---------- --- -----------
Total $ 0.42 $ 0.45 $ (0.48) $ (0.61)
-- ----------- --- ---------- --- --- ---------- --- -----------
-- ----------- --- ---------- --- --- ---------- --- -----------
Basic weighted average common shares 879.5 866.7 962.8 920.0
-- ----------- --- ---------- --- --- ---------- --- -----------
DIVIDENDS PER COMMON SHARE $ 0.125 $ 0.125 N/A N/A
-- ----------- --- ---------- --- --- ---------- --- -----------
-------------------------------------------------------------------------------------------------------------------------
Year-to-Date June 30, 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------------
FON Common Stock PCS Common Stock
----------------------------- ------------------------------
Earnings (Loss) Applicable to Common Stock $ 1,489 $ 795 $ (976) $ (1,188)
-- ----------- --- ---------- --- --- ---------- --- -----------
Diluted Earnings (Loss) per Common Share
Continuing operations $ 0.91 $ 1.01 $ (1.02) $ (1.31)
Discontinued operation 0.75 (0.11) - -
Extraordinary items - - - (0.02)
-------------------------------------------------------- -- ----------- --- ---------- --- --- ---------- --- -----------
Total $ 1.66 $ 0.90 $ (1.02) $ (1.33)
-- ----------- --- ---------- --- --- ---------- --- -----------
-- ----------- --- ---------- --- --- ---------- --- -----------
Diluted weighted average common shares 895.2 883.7 959.5 891.9
-- ----------- --- ---------- --- --- ---------- --- -----------
Basic Earnings (Loss) per Common Share
Continuing operations $ 0.93 $ 1.03 $ (1.02) $ (1.31)
Discontinued operation 0.77 (0.11) - -
Extraordinary items - - - (0.02)
-------------------------------------------------------- -- ----------- --- ---------- --- --- ---------- --- -----------
Total $ 1.70 $ 0.92 $ (1.02) $ (1.33)
-- ----------- --- ---------- --- --- ---------- --- -----------
-- ----------- --- ---------- --- --- ---------- --- -----------
Basic weighted average common shares 877.5 864.9 959.5 891.9
-- ----------- --- ---------- --- --- ---------- --- -----------
DIVIDENDS PER COMMON SHARE $ 0.25 $ 0.25 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
June 30, June 30,
--------------------------------------------- ----------------------------------- ----------------------------------
--------------------------------------------- ----------------- ----------------- ---------------- -----------------
2000 1999 2000 1999
--------------------------------------------- ----------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Net Income (Loss) $ (91) $ (169) $ 516 $ (389)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Other Comprehensive Income (Loss)
Unrealized holding gains (losses) on
securities (33) 10 (33) 4
Income tax (expense) benefit 12 (4) 12 (2)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net unrealized holding gains (losses) on
securities during the period (21) 6 (21) 2
Reclassification adjustment for gains
included in net income - (57) (32) (57)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total net unrealized holding losses on
securities (21) (51) (53) (55)
Foreign currency translation adjustments 3 - 3 -
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total other comprehensive loss (18) (51) (50) (55)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Comprehensive Income (Loss) $ (109) $ (220) $ 466 $ (444)
--- ------------- -- -------------- -- ------------- --- -------------
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS Sprint Corporation
(millions)
-------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
2000 1999
-------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Assets
Current assets
<S> <C> <C>
Cash and equivalents $ 199 $ 120
Accounts receivable, net of allowance for doubtful accounts of
$290 and $285 3,632 3,408
Inventories 731 777
Prepaid expenses 374 340
Income tax receivable - 411
Investments in equity securities - 317
Other 129 207
-------------------------------------------------------------------------------------------------------------------------
Total current assets 5,065 5,580
Investments in securities 65 147
Property, plant and equipment
FON Group 29,168 27,687
PCS Group 10,679 9,411
-------------------------------------------------------------------------------------------------------------------------
Total property, plant and equipment 39,847 37,098
Accumulated depreciation (16,600) (15,129)
-------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 23,247 21,969
Investments in and advances to affiliates 839 452
Intangible assets
Goodwill 5,760 5,745
PCS licenses 3,058 3,060
Other 1,562 1,453
-------------------------------------------------------------------------------------------------------------------------
Total intangible assets 10,380 10,258
Accumulated amortization (984) (691)
-------------------------------------------------------------------------------------------------------------------------
Net intangible assets 9,396 9,567
Net assets of discontinued operation - 394
Other 1,441 1,141
-------------------------------------------------------------------------------------------------------------------------
Total $ 40,053 $ 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)
-------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
2000 1999
-------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Liabilities and Shareholders' Equity
Current liabilities
<S> <C> <C>
Current maturities of long-term debt $ 522 $ 1,087
Accounts payable 1,503 1,462
Construction obligations 834 1,039
Accrued interconnection costs 598 683
Accrued taxes 363 410
Advance billings 322 323
Payroll and employee benefits 530 638
Other 1,325 1,190
-------------------------------------------------------------------------------------------------------------------------
Total current liabilities 5,997 6,832
Long-term debt and capital lease obligations 16,452 15,685
Deferred credits and other liabilities
Deferred income taxes and investment tax credits 1,548 1,511
Postretirement and other benefit obligations 1,067 1,064
Other 621 598
-------------------------------------------------------------------------------------------------------------------------
Total deferred credits and other liabilities 3,236 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, 796.9 and 788.0
shares issued and outstanding 1,594 1,576
PCS, par value $1.00 per share, 2,350.0 shares authorized, 923.7 and 910.4
shares issued and outstanding 924 910
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 9,105 8,569
Retained earnings 2,251 1,961
Treasury stock, at cost - (2)
Accumulated other comprehensive income 31 81
Other - 2
-------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 14,368 13,560
-------------------------------------------------------------------------------------------------------------------------
Total $ 40,053 $ 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 June 30, 2000 1999
------------------------------------------------------------------ ----------------- ----------------- ----------------
Operating Activities
<S> <C> <C>
Net income (loss) $ 516 $ (389)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Discontinued operation, net (675) 94
Extraordinary items, net 3 21
Equity in net losses of affiliates 61 25
Depreciation and amortization 1,973 1,746
Deferred income taxes and investment tax credits 104 (15)
Changes in assets and liabilities:
Accounts receivable, net (232) (440)
Inventories and other current assets 440 (484)
Accounts payable and other current liabilities (294) 103
Noncurrent assets and liabilities, net 100 (28)
Other, net (87) (67)
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash provided by operating activities 1,909 566
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Investing Activities
Capital expenditures (3,186) (2,630)
Investments in affiliates, net (849) (89)
Proceeds from sales of assets 217 90
Investments in broadband fixed wireless companies - (141)
Other, net 3 (78)
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash used by continuing operations (3,815) (2,848)
Proceeds from sale of investment in Global One 1,403 -
Net investing activities of discontinued operation - (168)
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash used by investing activities (2,412) (3,016)
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Financing Activities
Proceeds from long-term debt 1,558 3,523
Payments on long-term debt (1,050) (2,346)
Proceeds from common stock issued 203 945
Dividends paid (221) (216)
Other, net 92 42
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash provided by financing activities 582 1,948
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Increase (Decrease) in Cash and Equivalents 79 (502)
Cash and Equivalents at Beginning of Period 120 605
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Cash and Equivalents at End of Period $ 199 $ 103
--- ------------- -- -------------
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 June 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 - - - - 516 - - 516
FON common stock dividends - - - - (198) - - (198)
Class A common stock dividends - - - - (22) - - (22)
PCS preferred stock dividends - - - - (3) - - (3)
FON Series 1 common stock issued - 18 - 153 - - - 171
PCS Series 1 common stock issued - - 14 93 - - - 107
Treasury stock issued - - - - (4) 2 - (2)
Tax benefit from stock
compensation - - - 285 - - - 285
Other, net - - - 5 1 - (52) (46)
----------------------------------------------------------------------------------------------------------------------
June 2000 balance $ 216 $ 1,594 $ 1,171 $ 9,105 $ 2,251 $ - $ 31 $ 14,368
--------------------------------------------------------------------------------------
Shares Outstanding
------------------------------------------------------------------
Beginning 2000 balance 86.2 788.0 910.6
FON Series 1 common stock issued - 8.9 -
PCS Series 1 common stock issued - - 13.3
-------------------------------
June 2000 balance 86.2 796.9 923.9
-------------------------------
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).
</TABLE>
<PAGE>
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Unaudited) Sprint Corporation
--------------------------------------------------------------------------------
The information in this Form 10-Q has been prepared according to Securities and
Exchange Commission (SEC) rules and regulations. In our opinion, the
consolidated interim financial statements reflect all adjustments, consisting
only of normal recurring accruals, needed to fairly present Sprint Corporation's
consolidated financial position, results of operations, cash flows and
comprehensive income (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. 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.
--------------------------------------------------------------------------------
2. 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.
--------------------------------------------------------------------------------
3. 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 $66 million in the 1999
second quarter and $94 million in the 1999 year-to-date period.
<PAGE>
--------------------------------------------------------------------------------
4. Investments
--------------------------------------------------------------------------------
At the end of June 2000, investments accounted for using the equity method
consisted of the FON Group's investments in EarthLink, Call-Net 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
June 30, June 30,
----------------------------------- ----------------------------------
2000 1999 2000 1999
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions)
Results of operations
<S> <C> <C> <C> <C>
Net operating revenues $ 563 $ 370 $ 1,044 $ 767
--- ------------- -- -------------- -- ------------- --- -------------
Net operating loss $ (107) $ (53) $ (167) $ (85)
--- ------------- -- -------------- -- ------------- --- -------------
Net loss $ (225) $ (58) $ (362) $ (93)
--- ------------- -- -------------- -- ------------- --- -------------
Equity in net losses of affiliates $ (36) $ (16) $ (61) $ (25)
--- ------------- -- -------------- -- ------------- --- -------------
</TABLE>
--------------------------------------------------------------------------------
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
June 30,
-----------------------
2000 1999
---------------------------------------------------------
(millions)
Income tax benefit at the
federal statutory rate $ (58) $ (134)
Effect of:
State income taxes, net of
federal income tax effect 6 5
Equity in losses of foreign
joint ventures 23 4
Goodwill amortization 24 15
Other, net (4) -
---------------------------------------------------------
Income tax benefit $ (9) $ (110)
-----------------------
Effective income tax rate 5.5% 28.6%
-----------------------
--------------------------------------------------------------------------------
6. Long-term Debt and Capital Lease Obligations
--------------------------------------------------------------------------------
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
7.1% 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>
--------------------------------------------------------------------------------
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 June 30, FON Group PCS Group Eliminations Consolidated
--------------------------------------------------------------------------------------------------------------------
(millions)
2000
<S> <C> <C> <C> <C>
Net operating revenues $ 4,434 $ 1,460 $ (101) $ 5,793
Intergroup revenues 88 13 (101) -
Operating income (loss) 591 (469) - 122
1999
Net operating revenues $ 4,204 $ 736 $ (52) $ 4,888
Intergroup revenues 50 2 (52) -
Operating income (loss) 736 (708) - 28
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
Sprint Sprint Intergroup
Year-to-Date June 30, FON Group PCS Group Eliminations Consolidated
--------------------------------------------------------------------------------------------------------------------
(millions)
2000
Net operating revenues $ 8,831 $ 2,637 $ (196) $ 11,272
Intergroup revenues 179 17 (196) -
Operating income (loss) 1,349 (1,071) - 278
1999
Net operating revenues $ 8,311 $ 1,340 $ (111) $ 9,540
Intergroup revenues 109 2 (111) -
Operating income (loss) 1,473 (1,535) - (62)
--------------------------------------------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
10. Supplemental Cash Flows Information
--------------------------------------------------------------------------------
Sprint's cash paid (received) for interest and income taxes was as follows:
Year-to-Date
June 30,
-------------------------
2000 1999
-------------------------------------------------------
(millions)
Interest (net of capitalized
interest) $ 479 $ 356
-------------------------
Income taxes $ (415) $ (19)
-------------------------
Sprint's noncash activities included the following:
Year-to-Date
June 30,
-------------------------
2000 1999
-------------------------------------------------------
(millions)
Tax benefit from stock
compensation $ 285 $ 74
-------------------------
Debt redeemed with
investments in equity
securities $ 275 $ -
-------------------------
Common stock issued under
employee stock benefit
plans $ 102 $ 41
-------------------------
Stock received for stock
options exercised $ 44 $ 31
-------------------------
Common stock issued for Cox
PCS acquisition $ - $ 1,146
-------------------------
Capital lease obligations $ - $ 46
-------------------------
<PAGE>
--------------------------------------------------------------------------------
11. Subsequent Event
--------------------------------------------------------------------------------
In August 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 September 29, 2000.
--------------------------------------------------------------------------------
12. Recently Issued Accounting Pronouncement
--------------------------------------------------------------------------------
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 in the process of determining
the impact of SAB 101 on its financial statements. Based on a preliminary
analysis, SAB 101 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. 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.
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:
- Core businesses
- Long distance division
- Local division
- Product distribution and directory publishing businesses
- Activities to develop and deploy Sprint ION(SM), Integrated On-Demand
Network
- 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
8.2 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.
<PAGE>
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; and certain other telecommunications
investments and ventures. All of the investments and ventures are accounted for
on the equity basis.
--------------------------------------------------------------------------------
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 June 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 205 million people. The PCS Group provides nationwide
service through:
- operating its own digital network in major U.S. metropolitan areas,
- affiliating with other companies, mainly in and around smaller U.S.
metropolitan areas,
- roaming on other providers' analog cellular networks using
dual-band/dual-mode handsets, and
- roaming on other providers' digital PCS networks that use code
division multiple access.
The PCS Group also includes its recent investment in Pegaso Telecomunicaciones,
S.A. de C.V. (Pegaso), a wireless PCS operation in Mexico. This investment is
accounted for on the equity basis.
--------------------------------------------------------------------------------
Results of Operations
--------------------------------------------------------------------------------
Consolidated
Total net operating revenues were as follows:
<TABLE>
<CAPTION>
Quarters Ended Year-to-Date
June 30, June 30,
----------------------------------- ----------------------------------
2000 1999 2000 1999
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions)
<S> <C> <C> <C> <C>
FON Group $ 4,434 $ 4,204 $ 8,831 $ 8,311
PCS Group 1,460 736 2,637 1,340
Intergroup eliminations (101) (52) (196) (111)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net operating revenues $ 5,793 $ 4,888 $ 11,272 $ 9,540
--- ------------- -- -------------- -- ------------- --- -------------
Income (Loss) from continuing operations was as follows:
Quarters Ended Year-to-Date
June 30, June 30,
----------------------------------- ----------------------------------
2000 1999 2000 1999
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions)
FON Group $ 365 $ 452 $ 810 $ 886
PCS Group (456) (555) (966) (1,160)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Loss from continuing operations $ (91) $ (103) $ (156) $ (274)
--- ------------- -- -------------- -- ------------- --- -------------
</TABLE>
<PAGE>
Sprint FON Group
<TABLE>
<CAPTION>
Quarters Ended Year-to-Date
June 30, June 30,
----------------------------------- ----------------------------------
2000 1999 2000 1999
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions)
<S> <C> <C> <C> <C>
Net operating revenues $ 4,434 $ 4,204 $ 8,831 $ 8,311
Operating expenses 3,843 3,468 7,482 6,838
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Operating income $ 591 $ 736 $ 1,349 $ 1,473
--- ------------- -- -------------- -- ------------- --- -------------
Operating margin 13.3% 17.5% 15.3% 17.7%
--- ------------- -- -------------- -- ------------- --- -------------
</TABLE>
Net Operating Revenues
Net operating revenues were $4.4 billion for the 2000 second quarter, an
increase of 5% from $4.2 billion for the same 1999 period. The increase mainly
reflects growth in the FON Group's long distance and local divisions.
Net operating revenues for the first six months in 2000 increased 6% to $8.8
billion from $8.3 billion for the same 1999 period.
Long Distance Division
Net operating revenues increased 6% in the 2000 second quarter and 7% for the
2000 year-to-date period from the same 1999 periods. These increases mainly
reflect strong data services revenue growth. Calling volumes increased 19% in
the 2000 second quarter and 18% 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. Future revenue and operating income growth may be impacted by the
continuing pricing pressures being experienced by the long distance division.
Business market revenues increased 8% in the 2000 second quarter and 10% for the
2000 year-to-date period from the same 1999 periods. These increases mainly
reflect growth in data services and increased use of the Internet.
Residential market revenues increased 3% in the 2000 second quarter and remained
flat for the 2000 year-to-date period compared to the same 1999 periods due to
strong volume growth in residential long distance calls largely offset by lower
calling card and international revenues.
Wholesale market revenues increased 4% in the 2000 second quarter and 6% 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 in the 2000 first and
second quarters. Additional increases are primarily due to growth in private
line and toll free services offset by declining international voice revenues.
Local Division
Sprint's local division sold a customer service and telemarketing organization
to the PCS Group in the 2000 second quarter. For comparative purposes, the
following discussion assumes the sale occurred at the beginning of 1999.
Local division revenues increased 4% in the 2000 second quarter and year-to-date
periods 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 second
quarter with over 8.2 million switched access lines, a 4.5% 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 17%
during the past 12 months. This growth reflects many business customers
switching from individual lines to high capacity dedicated circuits.
Local service revenues grew 5% in the 2000 second quarter and 7% in the 2000
year-to-date period 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 and revenues from maintaining customer wiring
and equipment.
Network access revenues increased 9% in the 2000 second quarter and 8% in the
2000 year-to-date period from the same 1999 periods. The 2000 second quarter and
year-to-date revenues reflect a 7% and 8% respective increase in minutes of use,
increased special access services and the continued implementation of local
number portability charges. These increases were partly offset by FCC-mandated
access rate reductions.
<PAGE>
Toll service revenues decreased 19% in the 2000 second quarter and 21% 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, Sprint's overall intraLATA long distance
market share in the local division's territories has remained steady at
approximately 65% from the 1999 second quarter to the 2000 second quarter.
Other revenues decreased 7% in the 2000 second quarter and 10% 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' revenues increased
4% in the 2000 second quarter and 5% 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 second quarters and year-to-date periods.
Nonaffiliated revenues increased 8% in the 2000 second quarter and 12% in the
2000 year-to-date period compared with the same 1999 periods, but were partly
offset by a decrease in product sales to affiliates. The increases in
nonaffiliated revenues are mainly due to the expansion of certain existing sales
contracts. The change in the mix of the local division's capital program to more
electronics and software, which is more frequently purchased directly from
manufacturers, caused the decline in affiliate sales.
Operating Expenses
The FON Group's operating expenses increased 11% in the 2000 second quarter and
9% in the 2000 year-to-date period from the same 1999 periods.
Long Distance Division
Long distance division operating expenses increased 6% in the 2000 second
quarter and year-to-date periods from the same 1999 period.
Interconnection costs decreased 1% in the 2000 second quarter and increased 1%
in the 2000 year-to-date period from the same 1999 periods. The second quarter
decrease is due to reductions in per-minute international access costs as well
as domestic access costs, largely offset by increased calling volumes and costs
related to growth in non-minute driven revenues. The year-to-date increase
reflects increased calling volumes and costs related to growth in non-minute
driven revenues, largely offset by reductions in per-minute costs for both
domestic and international access. The domestic rate reductions were generally
due to FCC-mandated access rate reductions that took effect in July 1999. 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 48% in the 2000 second quarter and 36% in the 2000
year-to-date period from the same 1999 periods mainly due to the sales of
capacity on transoceanic cable in 2000.
Selling, general and administrative (SG&A) expense decreased 2% in the 2000
second quarter from the same 1999 period due to a strong emphasis on cost
control, partly offset by increased marketing and promotions in the business
market. SG&A expense increased 1% in the 2000 year-to-date period from the same
1999 period mainly reflecting increased marketing and promotions in the business
market.
Depreciation and amortization expense decreased 3% in the 2000 second quarter
and 2% in the 2000 year-to-date period from the same periods a year ago. These
decreases were generally 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 decreased 2% in the 2000 second quarter and 1%
in the 2000 year-to-date period from the same 1999 periods.
Costs of services and products decreased 1% in the 2000 second quarter and 2% in
the 2000 year-to-date period from the same 1999 periods due to a decline in
equipment sales and the success of cost control initiatives.
SG&A decreased 6% in the 2000 second quarter and 4% in the 2000 year-to-date
period from the same periods a year ago due to continued emphasis on cost
control, partly offset by increased customer service costs related to customer
access line growth.
Depreciation and amortization expense increased 6% in the 2000 second quarter
and 7% in the 2000 year-to-date period from the same 1999 periods reflecting
<PAGE>
increased capital expenditures in switching and transport technologies which
have shorter asset lives.
Product Distribution & Directory Publishing Businesses
Operating expenses increased 2% in the 2000 second quarter and 3% 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.
Sprint ION(SM)
Operating expenses for Sprint ION in the 2000 second quarter and year-to-date
periods reflect continued development and deployment activities including costs
for network research and testing, systems and operations development, product
development, and advertising 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.
The equity in losses of affiliates increased due to increased losses from
Call-Net. The 2000 year-to-date Call-Net losses include a restructuring charge
in the 2000 first quarter.
Sprint PCS Group
<TABLE>
<CAPTION>
Quarters Ended Year-to-Date
June 30, June 30,
----------------------------------- ----------------------------------
2000 1999 2000 1999
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions)
<S> <C> <C> <C> <C>
Net operating revenues $ 1,460 $ 736 $ 2,637 $ 1,340
Operating expenses 1,929 1,444 3,708 2,875
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Operating loss $ (469) $ (708) $ (1,071) $ (1,535)
--- ------------- -- -------------- -- ------------- --- -------------
</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 second
quarter and year-to-date period. These revenues were 30% of net operating
revenues in the 1999 second quarter and 29% in the 1999 year-to-date period.
Net Operating Revenues
The PCS Group's net operating revenues include subscriber revenues and sales of
handsets and accessory equipment. Subscriber revenues consist of monthly
recurring charges and usage charges. Subscriber revenues increased 106% in the
2000 second quarter and 109% 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 883,000 customers in the 2000 second quarter, 1.7 million
customers in the 2000 year-to-date period and ended the quarter with over 7.4
million customers in more than 300 metropolitan markets nationwide. Average
monthly service revenue per user (ARPU) was $58 for the 2000 second quarter and
$56 for the 2000 year-to-date period compared to $54 in the 1999 second quarter
and $53 in the 1999 year-to-date period. The increase in ARPU was partly due to
the implementation of activation charges in the 2000 second quarter.
Revenues from sales of handsets and accessories were approximately 15% of net
operating revenues in the 2000 second quarter and year-to-date periods. These
revenues were approximately 20% of the 1999 second quarter and year-to-date net
operating revenues. 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 42% in the 2000 second quarter and 34% 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 22% in the 2000 second
quarter and 23% in the 2000 year-to-date period from the same 1999 periods
reflecting
<PAGE>
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 23% in the 2000 second quarter
and 22% 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 6.8% in the 2000 second
quarter, 6.9% in the 2000 year-to-date period and 7.1% in the 1999 second
quarter and year-to-date periods. The decrease mainly reflects increased
borrowings with lower interest rates.
Interest costs on short-term borrowings classified as long-term debt and
deferred compensation plans have been excluded so as not to distort the
effective interest rate on long-term debt.
Other Income, Net
Other income consisted of the following:
<TABLE>
<CAPTION>
Quarters Ended Year-to-Date
June 30, June 30,
----------------------------------- ----------------------------------
2000 1999 2000 1999
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions)
<S> <C> <C> <C> <C>
Dividend and interest income $ 4 $ 5 $ 11 $ 13
Equity in net losses of affiliates (36) (16) (61) (25)
Net gains (losses) from investments (3) 35 23 35
Gains on sales of assets 51 - 79 -
Minority interest for Cox PCS - - - 20
Other, net (3) 20 (11) 34
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total $ 13 $ 44 $ 41 $ 77
--- ------------- -- -------------- -- ------------- --- -------------
</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 $66 million in the
second quarter of 1999 and $94 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.
<PAGE>
This resulted in a $21 million after-tax extraordinary loss for the PCS Group.
--------------------------------------------------------------------------------
Financial Condition
--------------------------------------------------------------------------------
June 30, December 31,
2000 1999
-----------------------------------------------------
(millions)
Consolidated assets $ 40,053 $ 39,250
--------------------------------
Sprint's consolidated assets increased $803 million in the 2000 year-to-date
period. Net property, plant and equipment increased $1.3 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. Investments in affiliates and other assets increased $687
million mainly reflecting capital contributions to the 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.
--------------------------------------------------------------------------------
Liquidity and Capital Resources
--------------------------------------------------------------------------------
Operating Activities
Year-to-Date
June 30,
-------------------------------
2000 1999
------------------------------------------------------
(millions)
Cash flows provided
by operating
activities $ 1,909 $ 566
-------------------------------
Operating cash flows in the 2000 year-to-date period increased $1.3 billion from
the same 1999 period. In 2000, cash outflows from working capital totaled $86
million compared with $821 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
June 30,
-------------------------------
2000 1999
------------------------------------------------------
(millions)
Cash flows used by
investing
activities $ (2,412) $ (3,016)
-------------------------------
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 $1.8 billion in the 2000
year-to-date period and $1.7 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. PCS Group capital
expenditures were $1.4 billion in the 2000 year-to-date period and $961 million
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, Pegaso
and other affiliates accounted for using the equity method.
Financing Activities
Year-to-Date
June 30,
-------------------------------
2000 1999
------------------------------------------------------
(millions)
Cash flows provided
by financing
activities $ 582 $ 1,948
-------------------------------
Financing activities in the 2000 year-to-date period mainly reflect a $508
million 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
$945 million and debt issuances of $3.5 billion, partly offset by payments on
long-term debt.
Sprint paid cash dividends of $221 million in the 2000 year-to-date period and
$216 million in the 1999 year-to-date period.
<PAGE>
Capital Requirements
Sprint's 2000 investing activities, mainly consisting of capital expenditures
and investments in affiliates, are expected to require cash of $7.7 to $8.3
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 $900 million to $1 billion of this amount. PCS
Group capital expenditures are expected to be between $2.9 and $3.1 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 $800 to $900 million. 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 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 June 30, 2000, Sprint had issued $2 billion of
these registered securities.
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 $12.7 billion at the end of June 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 June 30, 2000 or results of operations or cash flows for the quarter
ended June 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:
- the effects of vigorous competition in the markets in which Sprint
operates;
- the costs and business risks related to entering and expanding new
markets
<PAGE>
necessary to provide seamless services and new services;
- the ability of the PCS Group to continue to grow its market presence;
- the risks related to Sprint's investments in joint ventures;
- the impact of any unusual items resulting from ongoing evaluations of
Sprint's business strategies;
- regulatory risks, including the impact of the Telecommunications Act
of 1996;
- unexpected results of litigation filed against Sprint;
- 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
- other risks referenced from time to time in Sprint's filings with the
Securities and Exchange Commission.
The words "estimate," "project," "intend," "expect," "believe" and similar
expressions are intended to identify forward-looking statements. Forward-looking
statements are found throughout MD&A. The reader should not place undue reliance
on forward-looking statements, which speak only as of the date of this report.
Sprint 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
June 30, June 30,
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
2000 1999 2000 1999
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
<S> <C> <C> <C> <C>
Net Operating Revenues $ 4,434 $ 4,204 $ 8,831 $ 8,311
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Operating Expenses
Costs of services and products 2,098 1,901 4,129 3,762
Selling, general and administrative 1,031 1,047 2,094 2,049
Depreciation and amortization 551 520 1,096 1,027
Merger related costs 163 - 163 -
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total operating expenses 3,843 3,468 7,482 6,838
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Operating Income 591 736 1,349 1,473
Interest expense (11) (45) (50) (87)
Other income, net 27 47 34 56
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Income from continuing operations before
income taxes 607 738 1,333 1,442
Income tax expense (242) (286) (523) (556)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Income from Continuing Operations 365 452 810 886
Discontinued operation, net - (66) 675 (94)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net Income 365 386 1,485 792
Preferred stock dividends received 2 1 4 3
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Earnings applicable to common stock $ 367 $ 387 $ 1,489 $ 795
--- ------------- -- -------------- -- ------------- --- -------------
Diluted Earnings per Common Share
Continuing operations $ 0.41 $ 0.51 $ 0.91 $ 1.01
Discontinued operation - (0.07) 0.75 (0.11)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total $ 0.41 $ 0.44 $ 1.66 $ 0.90
--- ------------- -- -------------- -- ------------- --- -------------
Diluted weighted average common shares 895.8 887.1 895.2 883.7
--- ------------- -- -------------- -- ------------- --- -------------
Basic Earnings per Common Share
Continuing operations $ 0.42 $ 0.52 $ 0.93 $ 1.03
Discontinued operation - (0.07) 0.77 (0.11)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total $ 0.42 $ 0.45 $ 1.70 $ 0.92
--- ------------- -- -------------- -- ------------- --- -------------
Basic weighted average common shares 879.5 866.7 877.5 864.9
--- ------------- -- -------------- -- ------------- --- -------------
Dividends per Common Share $ 0.125 $ 0.125 $ 0.25 $ 0.25
--- ------------- -- -------------- -- ------------- --- -------------
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
June 30, June 30,
--------------------------------------------- ----------------- ----------------- ---------------- -----------------
2000 1999 2000 1999
--------------------------------------------- ----------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Net Income $ 365 $ 386 $ 1,485 $ 792
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Other Comprehensive Income (Loss)
Unrealized holding gains (losses) on
securities (35) 3 (39) (2)
Income tax (expense) benefit 12 (1) 14 1
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net unrealized holding gains (losses) on
securities during the period (23) 2 (25) (1)
Reclassification adjustment for gains
included in net income - (57) (32) (57)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total other comprehensive loss (23) (55) (57) (58)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Comprehensive Income $ 342 $ 331 $ 1,428 $ 734
--- ------------- -- -------------- -- ------------- --- -------------
See accompanying Condensed Notes to Combined Financial Statements (Unaudited).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMBINED BALANCE SHEETS Sprint FON Group
(millions)
-------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
2000 1999
-------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Assets
Current assets
<S> <C> <C>
Cash and equivalents $ 114 $ 104
Accounts receivable, net of allowance for doubtful accounts
of $214 and $228 2,952 2,836
Inventories 405 441
Prepaid expenses 260 251
Receivables from the PCS Group 510 136
Investments in equity securities - 316
Other 130 198
-------------------------------------------------------------------------------------------------------------------------
Total current assets 4,371 4,282
Investments in securities 52 139
Property, plant and equipment
Long distance division 10,307 9,824
Local division 16,342 15,828
Other 2,519 2,035
-------------------------------------------------------------------------------------------------------------------------
Total property, plant and equipment 29,168 27,687
Accumulated depreciation (14,560) (13,685)
-------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 14,608 14,002
Investments in and loans to the PCS Group 435 431
Investments in and advances to other affiliates 650 452
Intangible assets
Goodwill 1,229 1,223
Other 378 296
-------------------------------------------------------------------------------------------------------------------------
Total intangible assets 1,607 1,519
Accumulated amortization (172) (140)
-------------------------------------------------------------------------------------------------------------------------
Net intangible assets 1,435 1,379
Net assets of discontinued operation - 394
Other 1,035 724
-------------------------------------------------------------------------------------------------------------------------
Total $ 22,586 $ 21,803
-----------------------------------
Liabilities and Group Equity
Current liabilities
Current maturities of long-term debt $ 460 $ 902
Accounts payable 950 1,012
Accrued interconnection costs 598 683
Accrued taxes 197 162
Advance billings 322 323
Payroll and employee benefits 451 557
Other 782 662
-------------------------------------------------------------------------------------------------------------------------
Total current liabilities 3,760 4,301
Long-term debt and capital lease obligations 4,139 4,531
Deferred credits and other liabilities
Deferred income taxes and investment tax credits 1,202 935
Postretirement and other benefit obligations 1,067 1,064
Other 437 458
-------------------------------------------------------------------------------------------------------------------------
Total deferred credits and other liabilities 2,706 2,457
Group equity 11,981 10,514
-------------------------------------------------------------------------------------------------------------------------
Total $ 22,586 $ 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 June 30, 2000 1999
------------------------------------------------------------------ ----------------- ----------------- ----------------
Operating Activities
<S> <C> <C>
Net income $ 1,485 $ 792
Adjustments to reconcile net income to net cash provided by
operating activities:
Discontinued operation, net (675) 94
Equity in net losses of affiliates 47 25
Depreciation and amortization 1,096 1,027
Deferred income taxes and investment tax credits 336 39
Changes in assets and liabilities:
Accounts receivable, net (130) (315)
Inventories and other current assets 44 (54)
Accounts payable and other current liabilities 15 17
Affiliate receivables and payables, net (650) (281)
Noncurrent assets and liabilities, net 56 (31)
Other, net (78) (40)
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash provided by operating activities 1,546 1,273
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Investing Activities
Capital expenditures (1,751) (1,675)
Investments in affiliates, net (649) (89)
Proceeds from sales of assets 51 90
Advances to the PCS Group (86) -
Repayments of loans from Sprint PCS - 315
Investments in broadband fixed wireless companies - (141)
Other, net 1 5
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash used by continuing operations (2,434) (1,495)
Proceeds from sale of investment in Global One 1,403 -
Net investing activities of discontinued operation - (168)
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash used by investing activities (1,031) (1,663)
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Financing Activities
Proceeds from long-term debt 150 378
Allocation of long-term debt to the PCS Group - (244)
Payments on long-term debt (669) (15)
Dividends paid (214) (209)
Proceeds from common stock issued 137 102
Other, net 91 9
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash provided (used) by financing activities (505) 21
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Increase (Decrease) in Cash and Equivalents 10 (369)
Cash and Equivalents at Beginning of Period 104 432
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Cash and Equivalents at End of Period $ 114 $ 63
--- ------------- -- -------------
See accompanying Condensed Notes to Combined Financial Statements (Unaudited).
</TABLE>
<PAGE>
CONDENSED NOTES TO COMBINED FINANCIAL
STATEMENTS (Unaudited) Sprint FON Group
The information in this Form 10-Q has been prepared according to Securities and
Exchange Commission (SEC) rules and regulations. In our opinion, the combined
interim financial statements reflect all adjustments, consisting only of normal
recurring accruals, needed to fairly present the FON Group's combined financial
position, results of operations, cash flows and comprehensive income.
Certain information and footnote disclosures normally included in combined
financial statements prepared according to 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. 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 FON Group recognized a one-time, pre-tax charge
of $163 million, or 12 cents per share, for costs associated with the terminated
merger.
--------------------------------------------------------------------------------
2. 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:
- the combined historical balance sheets, results of operations and cash
flows for each of the Groups, with all significant intragroup amounts
and transactions eliminated,
- an allocation of Sprint's debt, including the related effects on
results of operations and cash flows, and
- 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.
<PAGE>
--------------------------------------------------------------------------------
3. 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 $66 million in the 1999 second quarter and $94 million in the 1999
year-to-date period.
--------------------------------------------------------------------------------
4. Investments
--------------------------------------------------------------------------------
At the end of June 2000, investments accounted for using the equity method
consisted of the FON Group's investments in EarthLink, Call-Net 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
June 30, June 30,
----------------------------------- ----------------------------------
2000 1999 2000 1999
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions)
Results of operations
<S> <C> <C> <C> <C>
Net operating revenues $ 541 $ 370 $ 1,022 $ 767
--- ------------- -- -------------- -- ------------- --- -------------
Net operating loss $ (63) $ (53) $ (123) $ (85)
--- ------------- -- -------------- -- ------------- --- -------------
Net loss $ (149) $ (58) $ (286) $ (93)
--- ------------- -- -------------- -- ------------- --- -------------
Equity in net losses of affiliates $ (22) $ (16) $ (47) $ (25)
--- ------------- -- -------------- -- ------------- --- -------------
</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
June 30,
-------------------------
2000 1999
-------------------------------------------------------
(millions)
Income tax expense at the
federal statutory rate $ 466 $ 505
Effect of:
State income taxes, net
of federal income tax 39 45
effect
Equity in losses of
foreign joint ventures 17 4
Goodwill amortization 5 -
Other, net (4) 2
-------------------------------------------------------
Income tax expense $ 523 $ 556
-------------------------
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
June 30,
2000
-------------------------------------------------------
(millions)
Beginning balance $ 10,514
Net income 1,485
Dividends (216)
Common stock issued 171
Tax benefit of stock
compensation 172
Other, net (145)
-------------------------------------------------------
Ending balance $ 11,981
------------------
<PAGE>
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
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 Corporate
Long Distribution and Sprint
Quarters Ended Distance Local & Directory Sprint Other Elim- FON
June 30, Division Division Publishing ION Ventures inations Group
-----------------------------------------------------------------------------------------------------------------------
(millions)
2000
<S> <C> <C> <C> <C> <C> <C> <C>
Net operating revenues $ 2,800 $ 1,421 $ 462 $ 2 $ 16 $ (267) $ 4,434
Affiliated revenues 94 87 174 - - (267) 88
Operating income (loss) 435 433 68 (155) (17) (173) 591
1999
Net operating revenues $ 2,633 $ 1,384 $ 446 $ - $ - $ (259) $ 4,204
Affiliated revenues 51 79 179 - - (259) 50
Operating income (loss) 400 375 59 (81) (4) (13) 736
-----------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
Product Corporate
Long Distribution and Sprint
Year-to-Date Distance Local & Directory Sprint Other Elim- FON
June 30, Division Division Publishing ION Ventures inations Group
-----------------------------------------------------------------------------------------------------------------------
(millions)
2000
Net operating revenues $ 5,537 $ 2,853 $ 916 $ 3 $ 34 $ (512) $ 8,831
Affiliated revenues 178 179 334 - - (512) 179
Operating income (loss) 866 849 135 (291) (30) (180) 1,349
1999
Net operating revenues $ 5,193 $ 2,755 $ 872 $ - $ - $ (509) $ 8,311
Affiliated revenues 114 151 353 - - (509) 109
Operating income (loss) 788 738 115 (133) (10) (25) 1,473
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
--------------------------------------------------------------------------------
10. Supplemental Cash Flows Information
--------------------------------------------------------------------------------
The FON Group's cash paid for interest and income taxes was as follows:
Year-to-Date
June 30,
-------------------------
2000 1999
-------------------------------------------------------
(millions)
Interest (net of capitalized
interest) $ 55 $ 83
-------------------------
Income taxes $ 649 $ 378
-------------------------
The FON Group's noncash activities included the following:
Year-to-Date
June 30,
-------------------------
2000 1999
-------------------------------------------------------
(millions)
Debt redeemed with
investments in equity
securities $ 275 $ -
-------------------------
Tax benefit from stock
compensation $ 172 $ 74
-------------------------
Common stock issued under
employee stock benefit
plans $ 33 $ 41
-------------------------
Stock received for stock
options exercised $ 23 $ 31
-------------------------
--------------------------------------------------------------------------------
11. Subsequent Event
--------------------------------------------------------------------------------
In August 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 September 29, 2000.
--------------------------------------------------------------------------------
12. Recently Issued Accounting Pronouncement
--------------------------------------------------------------------------------
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 in the process of
determining the impact of SAB 101 on its financial statements. Based on a
preliminary analysis, SAB 101 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
--------------------------------------------------------------------------------
Recent Developments
--------------------------------------------------------------------------------
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 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 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
8.2 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; and certain other telecommunications
investments and ventures. All of the investments and ventures are accounted for
on the equity basis.
--------------------------------------------------------------------------------
Results of Operations
--------------------------------------------------------------------------------
Net operating revenues were $4.4 billion for the 2000 second quarter, an
increase of 5% from $4.2 billion for the same 1999 period. Net operating
revenues for the first six months in 2000 increased 6% to $8.8 billion from $8.3
billion for the same 1999 period.
Net income was $365 million for the 2000 second quarter compared to $386 million
for the same 1999 period. Net income for the first six months in 2000 was $1.5
billion compared to $792 million 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 3 of Notes to Combined Financial
Statements.
Core Businesses
The FON Group's core businesses generated improved second quarter and
year-to-date net operating revenues compared to the same 1999 periods. Core
businesses exclude results from Sprint ION and other ventures. Second quarter
2000 and year-to-date long distance calling volumes increased 19% and 18%,
respectively, from the same 1999 periods. Access lines served by the local
division increased 4.5% during the past 12 months.
Excluding the merger related charge, operating income from core operations
improved 13% in the 2000 second quarter and year-to-date periods compared to the
same periods a year ago.
<PAGE>
--------------------------------------------------------------------------------
Segmental Results of Operations
--------------------------------------------------------------------------------
Long Distance Division
<TABLE>
<CAPTION>
Selected Operating Results
---------------------------------------------------------------------
Quarters Ended
June 30, Variance
---------------------------------- -------------------------------
2000 1999 $ %
---------------------------------------------- ---------------- ----------------- -- ------------- -----------------
(millions)
<S> <C> <C> <C> <C>
Net operating revenues $ 2,800 $ 2,633 $ 167 6.3%
---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating expenses
Interconnection 993 998 (5) (0.5)%
Operations 486 328 158 48.2%
Selling, general and administrative 649 663 (14) (2.1)%
Depreciation and amortization 237 244 (7) (2.9)%
---------------------------------------------- -- ------------- -- -------------- -- -------------
Total operating expenses 2,365 2,233 132 5.9%
---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating income $ 435 $ 400 $ 35 8.8%
-- ------------- -- -------------- -- -------------
Operating margin 15.5% 15.2%
-- ------------- -- --------------
Selected Operating Results
---------------------------------------------------------------------
Year-to-Date
June 30, Variance
---------------------------------- -------------------------------
2000 1999 $ %
---------------------------------------------- ---------------- ----------------- -- ------------- -----------------
(millions)
Net operating revenues $ 5,537 $ 5,193 $ 344 6.6%
---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating expenses
Interconnection 1,957 1,941 16 0.8%
Operations 920 677 243 35.9%
Selling, general and administrative 1,321 1,305 16 1.2%
Depreciation and amortization 473 482 (9) (1.9)%
---------------------------------------------- -- ------------- -- -------------- -- -------------
Total operating expenses 4,671 4,405 266 6.0%
---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating income $ 866 $ 788 $ 78 9.9%
-- ------------- -- -------------- -- -------------
Operating margin 15.6% 15.2%
-- ------------- -- --------------
</TABLE>
Net Operating Revenues
Net operating revenues increased 6% in the 2000 second quarter and 7% for the
2000 year-to-date period from the same 1999 periods. These increases mainly
reflect strong data services revenue growth. Calling volumes increased 19% in
the 2000 second quarter and 18% 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. Future revenue and operating income growth may be impacted by the
continuing pricing pressures being experienced by the long distance division.
Business Market
Business and data market revenues increased 8% in the 2000 second quarter and
10% for the 2000 year-to-date period from the same 1999 periods. Data services
showed strong growth because of continued demand and an increased use of the
Internet.
Residential Market
Residential market revenues increased 3% in the 2000 second quarter and remained
flat for the 2000 year-to-date period compared to the same 1999 periods due to
strong volume growth in residential long distance calls largely offset by lower
calling card usage and more competitive pricing in the international markets.
Domestic residential calling
<PAGE>
volumes increased in both the 2000 second quarter and year-to-date periods from
the same 1999 periods, but were partly offset by price reductions. Additionally,
revenues for the 2000 year-to-date period were partly offset 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. 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 mitigated the erosion of revenues from other
customers.
Wholesale Market
Wholesale market revenues increased 4% in the 2000 second quarter and 6% 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 the 2000 first and second
quarters. Additional increases are primarily due to growth in private line and
toll free 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 1% in the 2000 second
quarter from the same 1999 period due to reductions in per-minute international
access costs as well as domestic access costs, largely offset by increased
calling volumes and costs related to growth in non-minute driven revenues. These
costs increased 1% in the 2000 year-to-date period from the same 1999 period
reflecting increased calling volumes and costs related to growth in non-minute
driven revenues, largely offset by reductions in per-minute costs for both
domestic and international access. The domestic rate reductions were generally
due to FCC-mandated access rate reductions that took effect in July 1999. 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 35.5% of net operating revenues in the 2000 second quarter and 35.3% in the
2000 year-to-date period compared to 37.9% and 37.4% 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 48% in the 2000 second quarter and 36% in the 2000
year-to-date period from the same 1999 periods. These increases are mainly due
to the sales of capacity on transoceanic cable in 2000 and lower product costs
in the second quarter a year ago. Operations expense was 17.4% of net operating
revenues in the 2000 second quarter and 16.6% in the 2000 year-to-date period
compared to 12.5% and 13.0% for the same periods a year ago.
Selling, General and Administrative Expense
Selling, general and administrative (SG&A) expense decreased 2% in the 2000
second quarter from the same 1999 period due to strong emphasis on cost control,
partly offset by increased marketing and promotions in the business market. SG&A
expense increased 1% in the 2000 year-to-date period from the same 1999 period
mainly reflecting increased marketing and promotions in the business market.
SG&A expense was 23.1% of net operating revenues in the 2000 second quarter and
23.9% in the 2000 year-to-date period compared to 25.1% for the same periods a
year ago.
Depreciation and Amortization Expense
Depreciation and amortization expense decreased 3% in the 2000 second quarter
and 2% in the 2000 year-to-date period from the same periods a year ago. These
decreases were generally due to an adjustment to increase the depreciable lives
of certain assets, largely offset by an increased asset base. Depreciation and
amortization expense was 8.5% of net operating revenues in the 2000 second
quarter and 8.6% in the 2000 year-to-date period compared to 9.3% for the same
periods a year ago.
<PAGE>
Local Division
<TABLE>
<CAPTION>
Selected Operating Results
---------------------------------------------------------------------
Quarters Ended
June 30, Variance
----------------------------------- -------------------------------
2000 1999 $ %
--------------------------------------------- ----------------- ----------------- -- ------------- -----------------
(millions)
<S> <C> <C> <C> <C>
Net operating revenues $ 1,421 $ 1,384 $ 37 2.7%
--------------------------------------------- --- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 455 470 (15) (3.2)%
Selling, general and administrative 252 274 (22) (8.0)%
Depreciation and amortization 281 265 16 6.0%
--------------------------------------------- --- ------------- -- -------------- -- -------------
Total operating expenses 988 1,009 (21) (2.1)%
--------------------------------------------- --- ------------- -- -------------- -- -------------
Operating income $ 433 $ 375 $ 58 15.5%
--- ------------- -- -------------- -- -------------
Operating margin 30.5% 27.1%
--- ------------- -- --------------
Selected Operating Results
---------------------------------------------------------------------
Year-to-Date
June 30, Variance
----------------------------------- -------------------------------
2000 1999 $ %
--------------------------------------------- ----------------- ----------------- -- ------------- -----------------
(millions)
Net operating revenues $ 2,853 $ 2,755 $ 98 3.6%
--------------------------------------------- --- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 922 943 (21) (2.2)%
Selling, general and administrative 522 549 (27) (4.9)%
Depreciation and amortization 560 525 35 6.7%
--------------------------------------------- --- ------------- -- -------------- -- -------------
Total operating expenses 2,004 2,017 (13) (0.6)%
--------------------------------------------- --- ------------- -- -------------- -- -------------
Operating income $ 849 $ 738 $ 111 15.0%
--- ------------- -- -------------- -- -------------
Operating margin 29.8% 26.8%
--- ------------- -- --------------
</TABLE>
Net Operating Revenues
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 sale occurred at the beginning of
1999. Adjusting for this sale, operating margins would have been 30.0% for the
2000 year-to-date period, 27.4% for the 1999 second quarter and 27.1% for the
1999 year-to-date period.
Net operating revenues increased 4% in the 2000 second quarter and year-to-date
periods 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 second
quarter with over 8.2 million switched access lines, a 4.5% 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 17%
during the past 12 months. This growth reflects many business customers
switching from individual lines to high capacity dedicated circuits.
Local Service Revenues
Local service revenues, derived from local exchange services, grew 5% in the
2000 second quarter and 7% in the 2000 year-to-date period from the same 1999
periods because of strong demand for bundled
<PAGE>
services and customer access line growth. Revenue growth also reflects increased
sales of data products and revenues from maintaining customer wiring and
equipment.
Network Access Revenues
Network access revenues, derived from long distance phone companies using the
local network to complete calls, increased 9% in the 2000 second quarter and 8%
in the 2000 year-to-date period from the same 1999 periods. The 2000 second
quarter and year-to-date revenues reflect a 7% and 8% respective increase in
minutes of use, increased special access services and the continued
implementation of local number portability charges. These increases were partly
offset by FCC-mandated access rate reductions.
Toll Service Revenues
Toll service revenues are mainly derived from providing long distance services
within specified regional calling areas, or LATAs, that are beyond the local
calling area. These revenues decreased 19% in the 2000 second quarter and 21% 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, Sprint's overall intraLATA long distance
market share in the local division's territories has remained steady at
approximately 65% from the 1999 second quarter to the 2000 second quarter.
Other Revenues
Other revenues decreased 7% in the 2000 second quarter and 10% 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 decreased 1% in the 2000
second quarter and 2% in the 2000 year-to-date period compared to the same 1999
periods due to a decline in equipment sales and the success of cost control
initiatives. Costs of services and products was 32.0% of net operating revenues
in the 2000 second quarter and 32.1% in the 2000 year-to-date period compared to
33.6% and 34.0% for the same periods a year ago.
Selling, General and Administrative Expense
SG&A expense decreased 6% in the 2000 second quarter and 4% in the 2000
year-to-date period compared to the same 1999 periods. These decreases are
mainly due to continued emphasis on cost control, partly offset by increased
customer service costs related to customer access line growth. SG&A expense was
17.8% of net operating revenues in the 2000 second quarter and 18.2% in the 2000
year-to-date period compared to 19.7% for the same periods a year ago.
Depreciation and Amortization Expense
Depreciation and amortization expense increased 6% in the 2000 second quarter
and 7% 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 second quarter and
year-to-date periods compared to 19.3% and 19.2% for the same periods a year
ago.
<PAGE>
Product Distribution and Directory Publishing Businesses
<TABLE>
<CAPTION>
Selected Operating Results
---------------------------------------------------------------------
Quarters Ended
June 30, Variance
----------------------------------- -------------------------------
2000 1999 $ %
--------------------------------------------- ----------------- ----------------- -- ------------- -----------------
(millions)
<S> <C> <C> <C> <C>
Net operating revenues $ 462 $ 446 $ 16 3.6%
--------------------------------------------- --- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 359 351 8 2.3%
Selling, general and administrative 31 31 - -
Depreciation and amortization 4 5 (1) (20.0)%
--------------------------------------------- --- ------------- -- -------------- -- -------------
Total operating expenses 394 387 7 1.8%
--------------------------------------------- --- ------------- -- -------------- -- -------------
Operating income $ 68 $ 59 $ 9 15.3%
--- ------------- -- -------------- -- -------------
Operating margin 14.7% 13.2%
--- ------------- -- --------------
Selected Operating Results
---------------------------------------------------------------------
Year-to-Date
June 30, Variance
----------------------------------- -------------------------------
2000 1999 $ %
--------------------------------------------- ----------------- ----------------- -- ------------- -----------------
(millions)
Net operating revenues $ 916 $ 872 $ 44 5.0%
--------------------------------------------- --- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 710 685 25 3.6%
Selling, general and administrative 63 63 - -
Depreciation and amortization 8 9 (1) (11.1)%
--------------------------------------------- --- ------------- -- -------------- -- -------------
Total operating expenses 781 757 24 3.2%
--------------------------------------------- --- ------------- -- -------------- -- -------------
Operating income $ 135 $ 115 $ 20 17.4%
--- ------------- -- -------------- -- -------------
Operating margin 14.7% 13.2%
--- ------------- -- --------------
</TABLE>
Net operating revenues increased 4% in the 2000 second quarter and 5% 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
second quarters and year-to-date periods. Nonaffiliated revenues increased 8% in
the 2000 second quarter and 12% in the 2000 year-to-date period compared to the
same 1999 periods, but were partly offset by a decrease in product sales to
affiliates. These increases in nonaffiliated revenues are mainly due to the
expansion of certain existing sales contracts. The change in the mix of the
local division's capital program to more electronics and software, which is more
frequently purchased directly from manufacturers, caused the decline in
affiliate sales.
Operating expenses increased 2% in the 2000 second quarter and 3% 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.
<PAGE>
Sprint ION(SM)
<TABLE>
<CAPTION>
Quarters Ended Year-to-Date
June 30, June 30,
----------------------------------- ----------------------------------
2000 1999 2000 1999
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions)
<S> <C> <C> <C> <C>
Net operating revenues $ 2 $ - $ 3 $ -
--- ------------- -- -------------- -- ------------- --- -------------
Total operating expenses 157 81 294 133
--- ------------- -- -------------- -- ------------- --- -------------
Operating loss $ (155) $ (81) $ (291) $ (133)
--- ------------- -- -------------- -- ------------- --- -------------
</TABLE>
Operating expenses for Sprint ION in the 2000 second quarter and year-to-date
periods reflect continued development and deployment activities including costs
for network research and testing, systems and operations development, product
development, and advertising associated with market launches. Depreciation and
amortization expense increased $23 million in the 2000 second quarter and $43
million in the 2000 year-to-date period from $7 million and $13 million for the
same periods a year ago due to a rapidly increasing asset base.
Other Ventures
<TABLE>
<CAPTION>
Quarters Ended Year-to-Date
June 30, June 30,
----------------------------------- ----------------------------------
2000 1999 2000 1999
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions)
<S> <C> <C> <C> <C>
Net operating revenues $ 16 $ - $ 34 $ -
--- ------------- -- -------------- -- ------------- --- -------------
Total operating expenses 33 4 64 10
--- ------------- -- -------------- -- ------------- --- -------------
Operating loss $ (17) $ (4) $ (30) $ (10)
--- ------------- -- -------------- -- ------------- --- -------------
Equity in losses of affiliates $ (27) $ (16) $ (64) $ (31)
--- ------------- -- -------------- -- ------------- --- -------------
</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 losses of affiliates reflects increased losses from
Call-Net. The 2000 year-to-date Call-Net losses include a restructuring charge
in the 2000 first quarter.
--------------------------------------------------------------------------------
Nonoperating Items
--------------------------------------------------------------------------------
Interest Expense, Net
The FON Group's effective interest rate on long-term debt was 7.3% in the 2000
second quarter, 7.4% in the 2000 year-to-date period, and 8.0% in the 1999
second quarter and year-to-date periods. 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 and customer deposits have been excluded
so as not to distort the 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 difference between
Sprint's actual interest rates and the rates charged to the PCS Group is
reflected as a reduction in the FON Group's interest expense. These reductions,
which totaled $46 million in the 2000 second quarter, $91 million in the 2000
year-to-date period, $37 million in the 1999 second quarter and $67 million in
the 1999 year-to-date period, have also been excluded in computing the effective
interest rates above.
<PAGE>
Other Income, Net
Other income consisted of the following:
<TABLE>
<CAPTION>
Quarters Ended Year-to-Date
June 30, June 30,
----------------------------------- ----------------------------------
2000 1999 2000 1999
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions)
<S> <C> <C> <C> <C>
Dividend and interest income $ 9 $ 9 $ 20 $ 18
Equity in net losses of affiliates (22) (16) (47) (25)
Gain on sale of directory publishing
operation 45 - 45 -
Net gains (losses) from investments (3) 35 23 35
Other, net (2) 19 (7) 28
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total $ 27 $ 47 $ 34 $ 56
--- ------------- -- -------------- -- ------------- --- -------------
</TABLE>
During the 2000 second quarter, the FON Group sold a directory publishing
operation that was not affiliated with its 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 $66 million in the second quarter of 1999 and $94 million in the 1999
year-to-date period.
--------------------------------------------------------------------------------
Financial Condition
--------------------------------------------------------------------------------
June 30, December 31,
2000 1999
------------------------------------------------------
(millions)
Combined assets $ 22,586 $ 21,803
--------------------------------
The FON Group's combined assets increased $783 million in the 2000 year-to-date
period. Net property, plant and equipment increased $606 million reflecting
capital expenditures to support the core long distance and local network
enhancements, and Sprint ION development and hardware deployment. Investments in
affiliates and other assets increased $509 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
June 30,
-------------------------------
2000 1999
------------------------------------------------------
(millions)
Cash flows provided
by operating
activities $ 1,546 $ 1,273
-------------------------------
Operating cash flows increased $273 million mainly reflecting changes in cash
flows related to income taxes.
<PAGE>
Investing Activities
Year-to-Date
June 30,
-------------------------------
2000 1999
------------------------------------------------------
(millions)
Cash flows used by
investing
activities $ (1,031) $ (1,663)
-------------------------------
In February 2000, the FON Group received $1.4 billion from the sale of its
investment in Global One.
Capital expenditures totaled $1.8 billion in the 2000 year-to-date period and
$1.7 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.
Cash flows for the 1999 year-to-date period also include the repayment of loans
made to Sprint PCS prior to the Sprint restructuring.
"Investments in affiliates, net" consisted of FON Group's investments in
EarthLink and other affiliates accounted for using the equity method.
Financing Activities
Year-to-Date
June 30,
-------------------------------
2000 1999
------------------------------------------------------
(millions)
Cash flows provided
(used) by
financing
activities $ (505) $ 21
-------------------------------
Financing activities in the 2000 year-to-date period mainly reflect net payments
on borrowings totaling $519 million compared to net borrowings of $119 million
in the same 1999 period.
The FON Group paid cash dividends of $214 million in the 2000 year-to-date
period compared to $209 million in the same 1999 period.
Capital Requirements
The FON Group's 2000 investing activities, mainly consisting of capital
expenditures and investments in affiliates, are expected to require cash of $4.6
to $5.0 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 $900 million to $1
billion for capital expenditures in 2000. Investments in affiliates are expected
to require cash of $600 to $700 million. Dividend payments are expected to total
$435 million.
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>
COMBINED STATEMENTS OF OPERATIONS (Unaudited) Sprint PCS Group
(millions, except per share data)
--------------------------------------------- ----------------------------------- ----------------------------------
Quarters Ended Year-to-Date
June 30, June 30,
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
2000 1999 2000 1999
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
<S> <C> <C> <C> <C>
Net Operating Revenues $ 1,460 $ 736 $ 2,637 $ 1,340
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Operating Expenses
Costs of services and products 976 687 1,879 1,404
Selling, general and administrative 473 387 928 752
Depreciation and amortization 456 370 877 719
Merger related costs 24 - 24 -
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total operating expenses 1,929 1,444 3,708 2,875
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Operating Loss (469) (708) (1,071) (1,535)
Interest expense (224) (170) (444) (321)
Other income (expense), net (9) 4 17 30
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Loss before income taxes and extraordinary
items (702) (874) (1,498) (1,826)
Income tax benefit 246 319 532 666
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Loss before Extraordinary Items (456) (555) (966) (1,160)
Extraordinary items, net - - (3) (21)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net Loss (456) (555) (969) (1,181)
Preferred stock dividends (3) (3) (7) (7)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Loss applicable to common stock $ (459) $ (558) $ (976) $ (1,188)
--- ------------- -- -------------- -- ------------- --- -------------
Basic and Diluted Loss per
Common Share(1)
Continuing operations $ (0.48) $ (0.61) $ (1.02) $ (1.31)
Extraordinary items - - - (0.02)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total $ (0.48) $ (0.61) $ (1.02) $ (1.33)
--- ------------- -- -------------- -- ------------- --- -------------
Basic and diluted weighted average common
shares(1) 962.8 920.0 959.5 891.9
--- ------------- -- -------------- -- ------------- --- -------------
(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
June 30, June 30,
--------------------------------------------- ----------------------------------- ----------------------------------
2000 1999 2000 1999
--------------------------------------------- ----------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Net Loss $ (456) $ (555) $ (969) $ (1,181)
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Other Comprehensive Income
Unrealized holding gains on securities - - 3 -
Income tax expense - - (1) -
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Net unrealized holding gains on securities - - 2 -
Foreign currency translation adjustments 3 - 3 -
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total other comprehensive income 3 - 5 -
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Comprehensive Loss $ (453) $ (555) $ (964) $ (1,181)
--- ------------- -- -------------- -- ------------- --- -------------
See accompanying Condensed Notes to Combined Financial Statements (Unaudited).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMBINED BALANCE SHEETS Sprint PCS Group
(millions)
-------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
2000 1999
-------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Assets
Current assets
<S> <C> <C>
Cash and equivalents $ 85 $ 16
Accounts receivable, net of allowance for doubtful
accounts of $76 and $57 680 572
Inventories 326 336
Prepaid expenses 114 89
Current tax benefit receivable from the FON Group - 293
Other - 9
-------------------------------------------------------------------------------------------------------------------------
Total current assets 1,205 1,315
Property, plant and equipment
Network equipment 6,053 5,817
Construction work in progress 2,058 1,692
Buildings and leasehold improvements 1,834 1,235
Other 734 667
-------------------------------------------------------------------------------------------------------------------------
Total property, plant and equipment 10,679 9,411
Accumulated depreciation (2,006) (1,415)
-------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 8,673 7,996
Investment in affiliate 189 -
Intangible assets
Goodwill 4,531 4,522
PCS licenses 3,058 3,060
Customer base 735 726
Microwave relocation costs 404 377
Other 45 54
-------------------------------------------------------------------------------------------------------------------------
Total intangible assets 8,773 8,739
Accumulated amortization (812) (551)
-------------------------------------------------------------------------------------------------------------------------
Net intangible assets 7,961 8,188
Other 420 425
-------------------------------------------------------------------------------------------------------------------------
Total $ 18,448 $ 17,924
-----------------------------------
Liabilities and Group Equity
Current liabilities
Current maturities of long-term debt $ 62 $ 185
Accounts payable 553 450
Construction obligations 834 1,039
Accrued taxes 166 130
Accrued interest 120 120
Payables to the FON Group 510 136
Other 538 518
-------------------------------------------------------------------------------------------------------------------------
Total current liabilities 2,783 2,578
Long-term debt and capital lease obligations 12,473 11,304
Deferred credits and other liabilities
Deferred income taxes 352 582
Other 183 140
-------------------------------------------------------------------------------------------------------------------------
Total deferred credits and other liabilities 535 722
Group equity 2,657 3,320
-------------------------------------------------------------------------------------------------------------------------
Total $ 18,448 $ 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 June 30, 2000 1999
------------------------------------------------------------------ ----------------- ----------------- ----------------
Operating Activities
<S> <C> <C>
Net loss $ (969) $ (1,181)
Adjustments to reconcile net loss to net cash provided (used) by
operating activities:
Depreciation and amortization 877 719
Deferred income taxes (232) (54)
Extraordinary items, net 3 21
Changes in assets and liabilities:
Accounts receivable, net (102) (125)
Inventories and other current assets (15) (98)
Accounts payable and other current liabilities 102 (11)
Current tax benefit receivable from the FON Group 293 (231)
Receivables from and payables to the FON Group, net 357 281
Noncurrent assets and liabilities, net 44 3
Other, net 5 (5)
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash provided (used) by operating activities 363 (681)
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Investing Activities
Capital expenditures (1,435) (961)
Investment in affiliate (200) -
Proceeds from sale of assets 166 -
Advances to the FON Group - (541)
Other, net 2 (84)
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash used by investing activities (1,467) (1,586)
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Financing Activities
Proceeds from long-term debt 1,408 3,930
Payments on long-term debt (381) (2,646)
Dividends paid (7) (7)
Proceeds from common stock issued 66 843
Advances from the FON Group 86 -
Other, net 1 14
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Net cash provided by financing activities 1,173 2,134
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Increase (Decrease) in Cash and Equivalents 69 (133)
Cash and Equivalents at Beginning of Period 16 173
------------------------------------------------------------------ --- ------------- --- ------------- -- -------------
Cash and Equivalents at End of Period $ 85 $ 40
--- ------------- -- -------------
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. 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.
--------------------------------------------------------------------------------
2. 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:
- the combined historical balance sheets, results of operations and cash
flows for each of the Groups, with all significant intragroup amounts
and transactions eliminated,
- an allocation of Sprint's debt, including the related effects on
results of operations and cash flows, and
- an allocation of corporate overhead.
The PCS Group entities are commonly controlled companies and are wholly owned by
Sprint. Transactions between the PCS Group and the FON Group have not been
eliminated in the combined financial statements of either Group.
The PCS Group combined financial statements provide PCS shareholders with
financial information about the PCS Group operations. Investors in FON stock and
PCS stock are Sprint shareholders and are subject to risks related to all of
Sprint's businesses, assets and liabilities. Sprint retains ownership and
control of the assets and operations of each Group. Financial effects of either
Group that affect Sprint's results of operations or financial condition could
affect the results of operations or financial position of the other Group or the
market price of the 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.
<PAGE>
--------------------------------------------------------------------------------
3. Investment
--------------------------------------------------------------------------------
During the 2000 second quarter, the PCS Group purchased 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) from the inception of the
investment to date was as follows:
Inception-to-Date
June 30,
2000
-------------------------------------------------------
(millions)
Results of operations
Net operating revenues $ 22
------------------
Operating loss $ (44)
------------------
Net loss $ (76)
------------------
Equity in net loss of affiliate $ (14)
------------------
--------------------------------------------------------------------------------
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
June 30,
-------------------------
2000 1999
-------------------------------------------------------
(millions)
Income tax benefit at the
federal statutory rate $ (524) $ (639)
Effect of:
State income taxes, net
of federal income tax (33) (40)
effect
Equity in loss of foreign
affiliate 6 -
Goodwill amortization 19 15
Other, net - (2)
-------------------------------------------------------
Income tax benefit $ (532) $ (666)
-------------------------
Effective income tax rate 35.5% 36.5%
-------------------------
--------------------------------------------------------------------------------
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
June 30,
2000
-------------------------------------------------------
(millions)
Beginning balance $ 3,320
Net loss (969)
Dividends (7)
Common stock issued 107
Tax benefit of stock
compensation 113
Other, net 93
-------------------------------------------------------
Ending balance $ 2,657
------------------
--------------------------------------------------------------------------------
7. Litigation, Claims and Assessments
--------------------------------------------------------------------------------
PCS shareholders are subject to all of the risks related to an investment in
Sprint and the PCS Group, including the effects of any legal proceedings and
claims against the FON Group.
Various suits arising in the ordinary course of business are pending against
Sprint. Management cannot predict the final outcome of these actions but
believes they will not be material to the PCS Group's combined financial
statements.
--------------------------------------------------------------------------------
8. Supplemental Cash Flows Information
--------------------------------------------------------------------------------
The PCS Group's cash paid (received) for interest and income taxes was as
follows:
Year-to-Date
June 30,
-------------------------
2000 1999
-------------------------------------------------------
(millions)
Interest (net of capitalized
interest) $ 424 $ 273
-------------------------
Income taxes $ (1,064) $ (397)
-------------------------
<PAGE>
The PCS Group's noncash activities included the following:
Year-to-Date
June 30,
-------------------------
2000 1999
-------------------------------------------------------
(millions)
Tax benefit from stock
compensation $ 113 $ -
-------------------------
Common stock issued under
employee stock benefit
plans $ 69 $ -
-------------------------
Stock received for stock
options exercised $ 21 $ -
-------------------------
Common stock issued for Cox
PCS acquisition $ - $ 1,146
-------------------------
Capital lease obligations $ - $ 46
-------------------------
--------------------------------------------------------------------------------
9. Recently Issued Accounting Pronouncement
--------------------------------------------------------------------------------
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 in the process of
determining the impact of SAB 101 on its financial statements. Based on a
preliminary analysis, SAB 101 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
--------------------------------------------------------------------------------
Recent Developments
--------------------------------------------------------------------------------
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 June 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 205 million people. The PCS Group provides nationwide
service through:
- operating its own digital network in major U.S. metropolitan areas,
- affiliating with other companies, mainly in and around smaller U.S.
metropolitan areas,
- roaming on other providers' analog cellular networks using
dual-band/dual-mode handsets, and
- roaming on other providers' digital PCS networks that use code
division multiple access.
The PCS Group also includes its recent investment in Pegaso Telecomunicaciones,
S.A. de C.V. (Pegaso), a wireless PCS operation in Mexico. This investment is
accounted for on the equity basis.
The wireless industry 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.
--------------------------------------------------------------------------------
Results of Operations
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Selected Operating Results
---------------------------------------------------------------------
Quarters Ended
June 30, Variance
---------------------------------- -------------------------------
2000 1999 $ %
---------------------------------------------- ---------------- ----------------- -- ------------- -----------------
(millions)
<S> <C> <C> <C> <C>
Net operating revenues $ 1,460 $ 736 $ 724 98.4%
---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 976 687 289 42.1%
Selling, general and administrative 473 387 86 22.2%
Depreciation and amortization 456 370 86 23.2%
Merger related costs 24 - 24 NM
---------------------------------------------- -- ------------- -- -------------- -- -------------
Total operating expenses 1,929 1,444 485 33.6%
---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating loss $ (469) $ (708) $ 239 33.8%
-- ------------- -- -------------- -- -------------
Operating income (loss) before depreciation
and amortization and merger related costs $ 11 $ (338) $ 349 NM
-- ------------- -- -------------- -- -------------
NM = Not meaningful
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Selected Operating Results
---------------------------------------------------------------------
Year-to-Date
June 30, Variance
---------------------------------- -------------------------------
2000 1999 $ %
---------------------------------------------- ---------------- ----------------- -- ------------- -----------------
(millions)
<S> <C> <C> <C> <C>
Net operating revenues $ 2,637 $ 1,340 $ 1,297 96.8%
---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating expenses
Costs of services and products 1,879 1,404 475 33.8%
Selling, general and administrative 928 752 176 23.4%
Depreciation and amortization 877 719 158 22.0%
Merger related costs 24 - 24 NM
---------------------------------------------- -- ------------- -- -------------- -- -------------
Total operating expenses 3,708 2,875 833 29.0%
---------------------------------------------- -- ------------- -- -------------- -- -------------
Operating loss $ (1,071) $ (1,535) $ 464 30.2%
-- ------------- -- -------------- -- -------------
Operating loss before depreciation and
amortization and merger related costs $ (170) $ (816) $ 646 79.2%
-- ------------- -- -------------- -- -------------
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 second
quarter and year-to-date period. These revenues were 30% of net operating
revenues in the 1999 second quarter and 29% in the 1999 year-to-date period.
Net Operating Revenues
Net operating revenues include subscriber revenues and sales of handsets and
accessory equipment. Subscriber revenues consist of monthly recurring charges
and usage charges. Subscriber revenues increased 106% in the 2000 second quarter
and 109% 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
883,000 customers in the 2000 second quarter, 1.7 million customers in the 2000
year-to-date period and ended the quarter with over 7.4 million customers in
more than 300 metropolitan markets nationwide. Average monthly service revenue
per user (ARPU) was $58 for the 2000 second quarter and $56 for the 2000
year-to-date period compared to $54 in the 1999 second quarter and $53 in the
1999 year-to-date period. The increase in ARPU was partly due to the
implementation of activation charges in the 2000 second quarter.
Customer churn rates have improved from the 1999 second quarter and year-to-date
period and are currently in the mid-2% range. The improvements reflect increased
services and the success of several customer retention initiatives.
Revenues from sales of handsets and accessories were approximately 15% of net
operating revenues in the 2000 second quarter and year-to-date periods. These
revenues were approximately 20% of the 1999 second quarter and year-to-date net
operating revenues. 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 42% in the 2000 second quarter and 34% 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 22% in the 2000 second quarter and 23% 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 second quarter and
year-to-date period from the same 1999 periods. Lower handset unit costs and
scale benefits
<PAGE>
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 second quarter and nearly 30% in the 2000 year-to-date period
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 23% in the 2000 second quarter
and 22% 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
The PCS Group's effective interest rate on long-term debt was 8.6% for all
periods. Interest costs on short-term borrowings classified as long-term debt
and intergroup borrowings 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. The costs
resulting from this difference totaled $46 million in the 2000 second quarter,
$91 million in the 2000 year-to-date period, $37 million in the 1999 second
quarter and $67 million in the 1999 year-to-date period, and are reflected in
the effective interest rates above.
Other Income (Expense), Net
Other income (expense) consisted of the following:
<TABLE>
<CAPTION>
Quarters Ended Year-to-Date
June 30, June 30,
----------------------------------- ----------------------------------
2000 1999 2000 1999
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
(millions)
<S> <C> <C> <C> <C>
Dividend and interest income $ - $ - $ - $ 3
Equity in net loss of affiliate (14) - (14) -
Gains on sales of assets 6 - 34 -
Minority interest for Cox PCS - - - 20
Other, net (1) 4 (3) 7
--------------------------------------------- --- ------------- -- -------------- -- ------------- --- -------------
Total $ (9) $ 4 $ 17 $ 30
--- ------------- -- -------------- -- ------------- --- -------------
</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.
<PAGE>
--------------------------------------------------------------------------------
Financial Condition
--------------------------------------------------------------------------------
June 30, December 31,
2000 1999
------------------------------------------------------
(millions)
Combined assets $ 18,448 $ 17,924
--------------------------------
Net property, plant and equipment increased $677 million since year-end mainly
reflecting capital expenditures to support the PCS network buildout and
expansion, partly offset by year-to-date 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
June 30,
-------------------------------
2000 1999
------------------------------------------------------
(millions)
Cash flows provided
(used) by
operating
activities $ 363 $ (681)
-------------------------------
Cash flows from operating activities increased $1.0 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
June 30,
-------------------------------
2000 1999
------------------------------------------------------
(millions)
Cash flows used by
investing
activities $ (1,467) $ (1,586)
-------------------------------
Capital expenditures, which are the PCS Group's largest investing activity,
totaled $1.4 billion in the 2000 year-to-date period, compared to $961 million
in the 1999 year-to-date period. Capital expenditures in both years were mainly
for the continued buildout and expansion of the PCS network. In the 2000 second
quarter, the PCS Group purchased an ownership interest in Pegaso for $200
million. The investment is being accounted for using the equity method. In 2000,
the PCS Group sold portions of its customer base and the associated network
infrastructure to affiliates for $166 million. In the 1999 first quarter, the
PCS Group purchased PCS operations in Hawaii for $82 million.
Financing Activities
Year-to-Date
June 30,
-------------------------------
2000 1999
------------------------------------------------------
(millions)
Cash flows provided
by financing
activities $ 1,173 $ 2,134
-------------------------------
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 used mainly to repay existing debt and to fund working capital
requirements. In addition, the PCS Group received $843 million of net proceeds
from PCS common stock issuances. The proceeds were used primarily to fund
capital requirements and operating losses.
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
$3.3 billion. Capital expenditures are expected to be between $2.9 billion and
$3.1 billion. Investments in affiliates are expected to require cash of $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.
