<PAGE>
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K-2
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): April 11, 2000
MCI WORLDCOM, Inc.
(Exact Name of Registrant as Specified in its Charter)
Georgia 0-11258 58-1521612
(State or Other (Commission File (IRS Employer
Jurisdiction of Number) (Identification Number)
Incorporation)
500 Clinton Center Drive
Clinton, Mississippi 39056
(Address of Principal Executive Office)
Registrant's telephone number, including area code: (601) 460-5600
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<PAGE>
Item 5. OTHER EVENTS
On October 5, 1999, MCI WORLDCOM, Inc. ("MCI WorldCom" or the "Company")
announced that it had entered into an Agreement and Plan of Merger dated as of
October 4, 1999, which was amended and restated on March 8, 2000 (the "Sprint
Merger Agreement"), between MCI WorldCom and Sprint Corporation ("Sprint").
Under the terms of the Sprint Merger Agreement, Sprint will merge with and into
MCI WorldCom (the "Sprint Merger"). Sprint is a diversified telecommunications
company, providing long distance, local and wireless communications services.
Sprint's business is organized in two groups: the Sprint PCS group and Sprint
FON group. Sprint built and operates the United States' first nationwide all-
digital, fiber-optic network and is a leader in advanced data communications
services. In 1999 Sprint had $20 billion in annual revenues and serves more
than 20 million business and residential customers. Under the Sprint Merger
Agreement, each outstanding share of Sprint's FON common stock will be exchanged
for $76.00 of MCI WorldCom Common Stock, subject to a collar. In addition, each
share of Sprint's PCS common stock will be exchanged for one share of a new MCI
WorldCom PCS tracking stock and 0.116025 shares of MCI WorldCom Common Stock.
The terms of the MCI WorldCom PCS tracking stock will be virtually identical to
the terms of Sprint's PCS common stock and will be designed to track the
performance of the PCS business of the surviving company in the Sprint Merger.
Holders of Sprint class A stock will receive that amount of MCI WorldCom Common
Stock and MCI WorldCom PCS tracking stock as if such class A stock had been
converted into Sprint FON common stock and Sprint PCS common stock immediately
before the Sprint Merger. Holders of the other classes or series of Sprint
capital stock will receive one share of a class or series of the Company's
capital stock with virtually identical terms, which will be established in
connection with the Sprint Merger, for each share of Sprint capital stock that
they own. Sprint will redeem for cash each outstanding share of the Sprint first
and second series preferred stock before completion of the Sprint Merger. The
Sprint Merger, valued at approximately $129 billion, will be accounted for as a
purchase and will be tax-free to Sprint stockholders. The actual number of
shares of MCI WorldCom Common Stock to be exchanged for each share of Sprint's
FON common stock will be determined based on the average trading prices of MCI
WorldCom Common Stock prior to the closing, but will not be less than 1.4100
shares (if MCI WorldCom's average stock price equals or exceeds $53.9007) or
more than 1.8342 shares (if MCI WorldCom's average stock price equals or is less
than $41.4350). Consummation of the Sprint Merger is subject to various
conditions set forth in the Sprint Merger Agreement including the adoption of
the Sprint Merger Agreement by stockholders of Sprint, the approval of the
Sprint Merger by shareholders of MCI WorldCom, the approval of the issuance of
MCI WorldCom capital stock in the Sprint Merger by shareholders of MCI WorldCom,
certain U.S. and foreign regulatory approvals and other customary conditions.
Special meetings of the shareholders of the MCI WorldCom and Sprint have been
called for April 28, 2000 to vote on the merger proposals. It is anticipated
that the Sprint Merger will close in the second half of 2000.
INFORMATION ABOUT SPRINT
The following information related to Sprint was previously reported in Sprint's
Annual Report on Form 10-K (File no. 1-04721) for the fiscal year ended December
31, 1999 (the "Sprint Form 10-K") and has not been updated to reflect changes
since December 31, 1999. The following information has been extracted from the
Sprint Form 10-K and does not include all sections of the Sprint Form 10-K. To
the extent that any of the following information differs from the information
reported in Sprint's Form 10-K, the Sprint Form 10-K shall control.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial Statement of Business Acquired.
The financial statements of the business to be acquired, Sprint,
required by this item (and related Management's Discussion and Analysis of
Financial Condition and Results of Operations) are contained in the financial
statements and footnotes thereto listed in the Index on Page F-1 herein and
incorporated by reference herein.
Note: the above financial information for the three years ended
December 31, 1999 related to Sprint was previously filed in Sprint's
Annual Report on Form 10-K for the fiscal year ended December 31,
1999 (the "Sprint Form 10-K") and has not been updated to reflect
changes since December 31, 1999. To the extent the above financial
information differs from the financial information reported in the
Sprint Form 10-K, the Sprint Form 10-K shall control.
<PAGE>
The consolidated financial statements of MCI WorldCom for the year ended
December 31, 1999 are contained in its Annual Report on Form 10-K for the year
ended December 31, 1999 (File no. 0-11258) and incorporated by reference herein.
(b) Pro Forma Financial Information.
The pro forma financial information required by this item are
contained in the financial statements and footnotes thereto listed in the Index
on page F-1 and incorporated by reference herein.
(c) Exhibits.
See Exhibit Index
3
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: April 11, 2000
MCI WORLDCOM, Inc.
By: /s/ Scott D. Sullivan
-----------------------------------
Scott D. Sullivan
Chief Financial Officer
4
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Page Numbers
------------
<S> <C>
SPRINT CORPORATION
Management's Discussion and Analysis of Financial Condition and Results of
Operations F-2
Report of Independent Auditors F-11
Consolidated Statements of Operations for each of the three years ended
December 31, 1999 F-12
Consolidated Statements of Comprehensive Income (Loss) for each of the
three years ended December 31, 1999 F-14
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-15
Consolidated Statements of Cash Flows for each of the three years ended
December 31, 1999 F-16
Consolidated Statements of Shareholders' Equity for each of the three years
ended December 31, 1999 F-17
Notes to Consolidated Financial Statements F-18
Schedule II - Consolidated Valuation and Qualifying Accounts for each of
the three years ended December 31, 1999 F-37
SPRINT FON GROUP
Management's Discussion and Analysis of Financial Condition and Results of
Operations F-38
Report of Independent Auditors F-45
Combined Statements of Operations for each of the three years ended
December 31, 1999 F-46
Combined Statements of Comprehensive Income for each of the three years
ended December 31, 1999 F-47
Combined Balance Sheets as of December 31, 1999 and 1998 F-48
Combined Statements of Cash Flows for each of the three years ended
December 31, 1999 F-49
Notes to Combined Financial Statements F-50
Schedule II - Combined Valuation and Qualifying Accounts for each of the
three years ended December 31, 1999 F-62
SPRINT PCS GROUP
Management's Discussion and Analysis of Financial Condition and Results of
Operations F-63
Combined Financial Statements
Report of Independent Auditors F-68
Combined Statements of Operations for each of the three years ended
December 31, 1999 F-70
Combined Statements of Comprehensive Loss for each of the three years ended
December 31, 1999 F-71
Combined Balance Sheets as of December 31, 1999 and 1998 F-72
Combined Statements of Cash Flows for each of the three years ended
December 31, 1999 F-73
Notes to Combined Financial Statements F-74
Schedule II - Combined Valuation and Qualifying Accounts for each of the
three years ended December 31, 1999 F-86
MCI WORLDCOM, Inc. - for the fiscal December 31, 1999:
Unaudited Pro Forma Condensed Combined Financial Statements F-87
Unaudited Pro Forma Condensed Combined Balance Sheet as of December 31,
1999 F-88
Unaudited Pro Forma Condensed Combined Statement of Operations for the year
ended December 31, 1999 F-89
Notes to Unaudited Pro Forma Condensed Combined Financial Statements F-90
</TABLE>
F-1
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Sprint Corporation
- --------------------------------------------------------------------------------
General
- --------------------------------------------------------------------------------
In October 1999, Sprint announced a definitive merger agreement with MCI
WorldCom. Under the agreement, each share of Sprint FON stock will be exchanged
for $76 of MCI WorldCom common stock, subject to a collar. In addition, each
share of Sprint PCS stock will be exchanged for one share of a new WorldCom PCS
tracking stock and 0.116025 shares of MCI WorldCom common stock. The terms of
the WorldCom PCS tracking stock will be equivalent to those of Sprint's PCS
common stock and will track the performance of the company's personal
communication services (PCS) business. The merger is subject to the approvals
of Sprint and MCI WorldCom shareholders as well as approvals from the Federal
Communications Commission, the Justice Department, various state government
bodies and foreign antitrust authorities. The companies anticipate that the
merger will close in the second half of 2000.
In 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's equity share of the
results of Global One has been reported as a discontinued operation in Sprint's
earnings for all periods presented.
In November 1998, Sprint's shareholders approved the formation of the FON Group
and the PCS Group and the creation of the FON stock and the PCS stock. In
addition, Sprint purchased the remaining ownership interests in Sprint Spectrum
Holding Company, L.P. and PhillieCo, L.P. (together, Sprint PCS), other than a
minority interest in Cox Communications PCS, L.P. (Cox PCS). Sprint acquired
these ownership interests from Tele-Communications, Inc., Comcast Corporation
and Cox Communications, Inc. (the Cable Partners). In exchange, Sprint issued
the Cable Partners special low-vote PCS shares and warrants to acquire
additional PCS shares. Sprint also issued the Cable Partners shares of a new
class of preferred stock convertible into PCS shares. The purchase of the Cable
Partners' interests is referred to as the PCS Restructuring. In the 1999 second
quarter, Cox Communications, Inc. exercised a put option requiring Sprint to
purchase the remaining 40.8% interest in Cox PCS. Sprint issued additional low
vote PCS shares in exchange for this interest.
Also in November 1998, Sprint reclassified each of its publicly traded common
shares into one share of FON stock and 1/2 share of PCS stock. This
recapitalization was tax-free to shareholders. Each Class A common share owned
by FT and DT was reclassified to represent an equity interest in the FON Group
and the PCS Group that entitles FT and DT to one share of FON stock and 1/2
share of PCS stock. These transactions are referred to as the Recapitalization.
In connection with the PCS Restructuring, FT and DT purchased 5.1 million
additional PCS shares (pre-split basis) to maintain their combined 20% voting
power in Sprint (Top-up).
The PCS stock is intended to reflect the performance of Sprint's domestic
wireless 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 (other than Class A directors elected by FT
and DT) and most other company matters.
FON Group or PCS Group events affecting Sprint's consolidated statements of
operations and balance sheets could, in turn, affect the other Group's
financial statements or stock price.
Net losses of either Group, and dividends or distributions on, or repurchases
of, PCS stock or FON stock will reduce Sprint funds legally available for
dividends on both Groups' stock. Sprint does not expect to pay dividends on the
PCS shares in the foreseeable future.
Sprint's "Management's Discussion and Analysis of Financial Condition and
Results of Operations" (MD&A) should be read along with the FON Group's MD&A
and the PCS Group's MD&A.
F-2
<PAGE>
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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 necessary to provide seamless services and new services;
. the ability of the PCS Group to continue to grow a significant 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 (Telecom Act);
. unexpected results of litigation filed against Sprint;
. uncertainties associated with the pending merger of Sprint and MCI
WorldCom;
. 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.
- --------------------------------------------------------------------------------
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 primarily
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 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.
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.
- --------------------------------------------------------------------------------
General Overview of the Sprint PCS Group
- --------------------------------------------------------------------------------
The PCS Group includes Sprint's domestic wireless PCS operations. It operates
the only 100% digital PCS wireless network in the United States with licenses
to provide service nationwide using a single frequency and a single technology.
At year-end 1999, the PCS Group, together with affiliates, operated PCS systems
in over 360 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 PCS Group's service,
including affiliates, now reaches nearly 190 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
F-3
<PAGE>
. roaming on other providers' digital PCS networks that use code division
multiple access (CDMA).
- --------------------------------------------------------------------------------
Results of Operations
- --------------------------------------------------------------------------------
Consolidated
Total net operating revenues were as follows:
<TABLE>
- --------------------------------------------------
<CAPTION>
1999 1998 1997
- --------------------------------------------------
(millions)
<S> <C> <C> <C>
FON Group $17,016 $15,764 $14,564
PCS Group 3,180 1,225 --
Intergroup eliminations (268) (108) --
- --------------------------------------------------
Net operating revenues $19,928 $16,881 $14,564
-------------------------
</TABLE>
Income (Loss) from continuing operations was as follows:
<TABLE>
- -------------------------------------------------------------------
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------
(millions)
<S> <C> <C> <C>
FON Group $ 1,736 $ 1,675 $1,513
PCS Group (2,481) (1,090) (419)
- -------------------------------------------------------------------
Income (Loss) from continuing operations $ (745) $ 585 $1,094
-------------------------
</TABLE>
Sprint FON Group
<TABLE>
- --------------------------------------------------
<CAPTION>
1999 1998 1997
- --------------------------------------------------
(millions)
<S> <C> <C> <C>
Net operating revenues $17,016 $15,764 $14,564
Operating expenses 14,086 13,004 12,094
- --------------------------------------------------
Operating income $ 2,930 $ 2,760 $ 2,470
--------------------------
Operating margin 17.2% 17.5% 17.0%
--------------------------
Capital expenditures $ 3,534 $ 3,159 $ 2,709
--------------------------
</TABLE>
Net Operating Revenues
Net operating revenues increased 8% in 1999 and 1998. These increases mainly
reflect growth of the FON Group's long distance and local divisions.
Long Distance Division
All major market segments--business, residential and wholesale--contributed to
the increase in the long distance division's revenues in 1999 and 1998. The
increases mainly reflect strong data services revenue growth as well as strong
minute growth of 22% in 1999 and 15% in 1998, partly offset by a more
competitive pricing environment and a change in the mix of products sold.
Business and data market revenues increased 9% in 1999 and 15% in 1998. This
primarily reflects growth in data services.
Residential market revenues increased 7% in 1999 and 5% in 1998. These
increases reflect strong volume growth from long distance calls, partly offset
by lower rates. Growth in 1999 was also enhanced by Sprint Nickel Nights(R) as
well as increased prepaid card revenues.
Wholesale market revenues increased 15% in 1999 and 8% in 1998. This reflects
strong minute growth mainly from international calls and increased inbound and
outbound toll-free calls.
Local Division
Beginning in July 1997, Sprint changed its transfer pricing for certain
transactions between FON Group entities to more accurately reflect market
pricing. Sprint sold approximately 139,000 residential and business access
lines in Illinois in 1997 and the remaining 81,000 access lines in Illinois in
November 1998. For comparative purposes, the following discussion of local
division results assumes these transfer pricing changes and sales of exchanges
occurred at the beginning of 1997.
Local division revenues increased 6% in 1999 and 5% in 1998, mainly reflecting
customer access line growth and increased sales of network-based services such
as Caller ID and Call Waiting. Customer access lines increased 5% in both 1999
and 1998. Sales of network-based services increased in 1999 due to strong
demand for bundled services which combine local service, network-based features
and long distance calling. The increase in 1998 revenues also reflects
increased sales of equipment.
Local service revenues, which grew 9% in 1999 and 10% in 1998, increased due to
customer access line growth, continued demand for network-based services,
growth in data products and increased revenues from maintaining customer wiring
and equipment. Revenue growth in 1998 also reflects increased sales of private
line services.
Network access revenues increased 4% in 1999 and 1998 reflecting an 8% increase
in minutes of use in 1999 and 1998 and the 1999 implementation of local number
portability charges. These increases were partly offset by FCC-mandated access
rate reductions.
Toll service revenues decreased 11% in 1999 and 26% in 1998, mainly due to
increased competition in the intraLATA long distance market, which is expected
to continue. In addition, toll service areas are shrinking as certain local
calling areas are expanding. However, the reduced revenues are, in part, offset
by increases in local service revenues and by increases in network access
revenues paid by other carriers providing intraLATA long distance services to
the local division's customers. In addition, over one-third of the toll
customers lost by the local division have selected Sprint's long distance
division for intraLATA long distance service, which helps mitigate the erosion
of these revenues.
F-4
<PAGE>
Other revenues increased 7% in 1999 and 1998 reflecting increased equipment
sales of business systems and data networks as well as growth in telemarketing
and commission revenues. Revenue growth in 1999 also reflects improvements in
uncollectibles. The 1998 growth also reflects increased revenues from providing
billing and collection services.
Product Distribution & Directory Publishing Businesses
Beginning in July 1997, Sprint changed its transfer pricing for certain
transactions between FON Group entities to more accurately reflect market
pricing. The following discussion assumes these transfer pricing changes
occurred at the beginning of 1997.
The product distribution and directory publishing businesses' revenues
increased 3% in 1999 and 16% in 1998. Nonaffiliated revenues, which account for
roughly 60% of revenues in 1999 and 1998, increased 12% in 1999 and 10% in
1998. Sales to affiliates decreased 10% in 1999 and increased 27% in 1998. 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 in 1999. In 1998, the growth reflects the
centralization of certain local division purchasing and warehousing functions
at North Supply in 1997 resulting in affiliates purchasing more through North
Supply.
Other Ventures
The other ventures' 1999 revenues reflect the cable TV service revenues of the
broadband fixed wireless companies after their acquisition dates.
Operating Expenses
The FON Group's operating expenses increased 8% in 1999 and 1998 mainly to
support revenue growth.
Long Distance Division
Long distance division operating expenses increased 8% in 1999 and 1998.
Interconnection costs increased 5% in 1999 and decreased 1% in 1998. Increased
calling volumes were partially offset by reductions in per-minute costs for
both domestic and international access in 1999. The 1999 increase also reflects
costs related to growth in non-minute driven revenues. In 1998, reductions in
per minute costs more than offset the impact of increased calling volumes. The
rate reductions were generally due to domestic FCC-mandated access rate
reductions. Lower international per minute costs reflect continued competition.
Sprint expects government deregulation and competitive pressures to add to the
trend of declining unit costs for international interconnection. Operations
expense increased due to growth in data services as well as increases in
network equipment operating leases in both years. Selling, general and
administrative (SG&A) expense increased reflecting the overall growth of the
business as well as increased marketing and promotions to support products and
services.
Local Division
The following local division discussion assumes the transfer pricing changes
and sales of exchanges occurred at the beginning of 1997. See "Net Operating
Revenues--Local Division" for more details.
Local division operating expenses increased 5% in 1999 and 4% in 1998
reflecting increases in costs of services and products in 1999, SG&A expenses
in 1998 and depreciation and amortization in both years. Costs of services and
products increased in 1999 mainly due to customer access line growth and
increased equipment sales. SG&A increased in 1998 mainly because of increased
customer service costs related to customer access line growth and marketing
costs to promote new products and services. Depreciation and amortization
expense increased mainly because of increased capital expenditures in switching
and transport technologies which have shorter asset lives.
Product Distribution & Directory Publishing Businesses
The following discussion assumes the transfer pricing changes occurred at the
beginning of 1997. See "Net Operating Revenues--Product Distribution and
Directory Publishing Businesses" for more details.
The product distribution and directory publishing businesses' cost of services
and products increased 1% in 1999 and 19% in 1998 reflecting increased
equipment sales. SG&A expense increased 17% in both 1999 and 1998. The 1999
increase was the result of staffing demands related to nonaffiliated sales
growth. The 1998 increase was the result of costs related to the division's
acquisition of a sales force from another directory sales company in 1998.
Sprint ION(SM)
Operating expenses for Sprint ION in 1999 and 1998 reflect its initial
development and deployment activities and include costs for network research
and testing, systems and operations development, product development, and
advertising to increase public awareness.
Other Ventures
The other ventures' 1999 expenses reflect the cable TV service operations
expenses of the broadband fixed wireless companies after their acquisition
dates.
This segment's operating expenses in 1998 and 1997 mainly reflect activities
related to offering Internet services. In June 1998, the FON Group completed
the strategic alliance to combine its Internet business with Earthlink. As part
of the
F-5
<PAGE>
alliance, EarthLink obtained the FON Group's Sprint Internet Passport customers
and took over the day-to-day operations of those services. In exchange, Sprint
acquired an equity interest in EarthLink.
Sprint PCS Group
<TABLE>
- -----------------------------------------------
<CAPTION>
1999 1998 1997
- -----------------------------------------------
(millions)
<S> <C> <C> <C>
Net operating revenues $ 3,180 $ 1,225 $ --
Operating expenses 6,417 3,795 19
- -----------------------------------------------
Operating loss $(3,237) $(2,570) $(19)
-----------------------
Capital expenditures $ 2,580 $ 1,072 $154
-----------------------
</TABLE>
The PCS Group's 1999 results of operations reflect the first full year of
combined results after the PCS Restructuring. The PCS Group's 1998 results of
operations included SprintCom's operating results as well as Sprint PCS'
operating results on a consolidated basis for the entire year. Before 1998,
Sprint's investment in Sprint PCS was accounted for using the equity method.
(See "Pro Forma Sprint PCS Group" section below for a discussion of pro forma
results of operations.)
Operating expenses in 1998 include a write-off of $179 million associated with
the cost of nine in-process research and development projects acquired in
connection with the PCS Restructuring. Management has continued supporting
these research and development projects and believes the PCS Group has a
reasonable chance of successfully completing the projects. These projects are
intended to address new and emerging markets within the PCS wireless
communications industry, such as the rapid adoption of the Internet and the
rapid convergence of voice, data, and video. The failure of any particular
individual project in-process would not materially impact the PCS Group's
financial condition, results of operations or cash flows.
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 28% of net operating revenues in 1999 and
25% in 1998.
Pro Forma Sprint PCS Group
To provide a more meaningful analysis of the PCS Group's underlying operating
results, the following supplemental discussion presents 1998 and 1997 on a pro
forma basis and assumes the PCS Restructuring and the write-off of acquired in-
process research and development costs occurred at the beginning of 1997.
<TABLE>
- ------------------------------------------------------------------
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------
(millions)
<S> <C> <C> <C>
Net operating revenues $ 3,180 $ 1,225 $ 258
Operating expenses 6,417 3,865 2,540
- ------------------------------------------------------------------
Operating loss $(3,237) $(2,640) $(2,282)
--------------------------
Capital expenditures
(including capital lease obligations) $ 2,616 $ 2,904 $ 2,278
--------------------------
</TABLE>
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. The increases in the PCS Group's net
operating revenues mainly reflect the launch of new markets and a growing
customer base. The PCS Group ended 1999 with over 5.7 million customers in
nearly 330 markets nationwide. Affiliates had approximately 200,000 customers
in over 30 markets.
Approximately 20% of 1999 and 1998 net operating revenues, and nearly half of
1997 revenues, were from sales of handsets and accessories. As part of the PCS
Group's marketing plans, handsets are normally sold at prices below the PCS
Group's cost.
Operating Expenses
The PCS Group's operating expenses increased 66% in 1999 and 52% in 1998.
The PCS Group's costs of services and products mainly includes handset and
accessory costs, switch and cell site expenses and other network-related costs.
These costs increased $1.4 billion in 1999 and $908 million in 1998 driven by
the significant growth in customers and the expanded market coverage.
The PCS Group's SG&A expense mainly includes marketing costs to promote
products and services, as well as salary and benefit costs. SG&A expense
increased $675 million in 1999 and $579 million in 1998 reflecting an expanded
workforce to support subscriber growth and increased marketing and selling
costs.
Depreciation and amortization expense for the PCS Group, which increased $485
million in 1999 and $17 million in 1998, 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. The
increase in depreciation and amortization expense in 1999 reflects amortization
of intangible assets acquired in the PCS Restructuring and the Cox PCS purchase
as well as depreciation on an increased property base. The increase in 1998
reflects depreciation on an increased property base.
F-6
<PAGE>
- --------------------------------------------------------------------------------
Nonoperating Items
- --------------------------------------------------------------------------------
Interest Expense
The effective interest rates in the following table reflect interest expense on
long-term debt only. Interest costs on short-term borrowings classified as
long-term debt, deferred compensation plans and customer deposits have been
excluded so as not to distort the effective interest rates on long-term debt.
<TABLE>
- ---------------------------------------------
<CAPTION>
1999 1998 1997
- ---------------------------------------------
<S> <C> <C> <C>
Effective interest rate on
long-term debt(/1/) 7.0% 8.6% 8.0%
----------------
</TABLE>
(/1/)Theeffective interest rate on long-term debt for 1998 is on a pro forma
basis as if Sprint PCS' long-term debt had been included in Sprint's
outstanding long-term debt balance all year.
Sprint's effective interest rate on long-term debt decreased in 1999. In the
1998 fourth quarter, Sprint refinanced $3.3 billion of the PCS Group's debt
with borrowings which have lower interest rates. The decrease also reflects
additional borrowings with lower interest rates.
Sprint's 1998 interest costs include an entire year of Sprint PCS' interest due
to the PCS Restructuring. The increase in the 1998 effective interest rate on
long-term debt was mainly due to Sprint PCS' borrowings made before the PCS
Restructuring. These borrowings had higher interest rates than Sprint's
borrowings.
Equity in Sprint PCS Losses
Sprint PCS' results of operations for 1998 have been consolidated for the
entire year. The Cable Partners' share of losses through the PCS Restructuring
date has been reflected as "Other partners' loss in Sprint PCS" in the
Consolidated Statements of Operations. Prior to the PCS Restructuring, Sprint's
ownership interest in Sprint PCS was accounted for using the equity method.
Sprint's share of losses from Sprint PCS was $660 million in 1997.
Other Income, Net
Other income consisted of the following:
<TABLE>
- --------------------------------------------
<CAPTION>
1999 1998 1997
- --------------------------------------------
(millions)
<S> <C> <C> <C>
Dividend and interest income $23 $ 93 $ 75
Other, net 52 78 66
- --------------------------------------------
Total $75 $171 $141
--------------
</TABLE>
Dividend and interest income for all years reflects interest earned on
temporary investments. For 1998, it also reflects interest earned on loans to
unconsolidated affiliates and interest earned on short-term investments
following Sprint's $5.0 billion debt offering in late 1998. "Other, net" for
1999 mainly includes net gains on miscellaneous investment activities, partly
offset by losses from certain equity method investments. For 1998 and 1997, it
mainly reflects net gains on sales of local exchanges and certain other
investments, partly offset by losses from certain equity method investments.
Income Taxes
Sprint's consolidated effective tax rates were 30.5% in 1999, 43.7% in 1998 and
37.4% in 1997. See Note 7 of Notes to Consolidated Financial Statements for
information about the differences that caused the effective income tax rates to
vary from the statutory federal rate for income taxes related to continuing
operations.
Discontinued Operation, Net
As a result of Sprint's sale of its interest in Global One to FT and DT,
Sprint's equity share of the results of Global One has been reported as a
discontinued operation in Sprint's earnings for all periods presented.
Sprint recorded after-tax losses related to Global One totaling $130 million in
1999, $135 million in 1998 and $142 million in 1997. The 1999 amount includes a
$50 million tax benefit recorded to recognize tax assets related to previous
losses. The realization of these assets was uncertain until the sale agreement
was reached. The gain on the sale of Sprint's interest in Global One made it
apparent that these tax assets would be realized.
Extraordinary Items, Net
In 1999, Sprint redeemed, prior to scheduled maturities, $575 million of the
broadband fixed wireless companies' debt assumed by the FON Group and $2.2
billion of the PCS Group's revolving credit facilities and other borrowings.
These borrowings had interest rates ranging from 5.6% to 14.5%. This resulted
in a $60 million after-tax extraordinary loss for Sprint.
In 1998, Sprint redeemed, prior to scheduled maturities, $138 million of the
FON Group's debt and $3.3 billion of the PCS Group's debt. These borrowings had
interest rates ranging from 7.9% to 9.3%. This resulted in a $36 million after-
tax extraordinary loss for Sprint.
- --------------------------------------------------------------------------------
Financial Condition
- --------------------------------------------------------------------------------
<TABLE>
- ----------------------------------------
<CAPTION>
1999 1998
- ----------------------------------------
(millions)
<S> <C> <C>
Consolidated assets $39,250 $33,257
------------------
</TABLE>
Net property, plant and equipment increased $3.0 billion in 1999 reflecting
capital expenditures to support the PCS network buildout. The increase also
reflects capital expenditures to support the core
F-7
<PAGE>
long distance and local networks, Sprint ION development and expanded product
and service offerings. Net intangibles increased $1.9 billion mainly reflecting
goodwill resulting from the acquisition of the remaining interest in Cox PCS
and the purchase of the broadband fixed wireless companies. Sprint's debt-to-
capital ratio was 55.3% at year-end 1999 versus 49.5% at year-end 1998. See
"Liquidity and Capital Resources" for more information about changes in
Sprint's Consolidated Balance Sheets.
- --------------------------------------------------------------------------------
Liquidity and Capital Resources
- --------------------------------------------------------------------------------
Consolidated cash flows for 1998 include Sprint PCS' cash flows only after the
PCS Restructuring date. In 1997 and prior to the PCS Restructuring date in
1998, consolidated cash flows include SprintCom's cash flows and treat the
investment in Sprint PCS as an equity method investment.
Operating Activities
<TABLE>
- --------------------------------------------------------------------
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------
(millions)
<S> <C> <C> <C>
FON Group $ 3,713 $3,915 $2,899
PCS Group (1,692) (159) 38
Intergroup eliminations (69) 443 435
- --------------------------------------------------------------------
Cash flows provided by operating activities $ 1,952 $4,199 $3,372
-----------------------
</TABLE>
Operating cash flows decreased 54% in 1999 and increased 25% in 1998. The 1999
decrease reflects increases in working capital in both the FON Group and PCS
Group and the increased operating losses of the PCS Group, partly offset by the
FON Group's improved operating results. The 1998 increase mainly reflects
improved operating results in the FON Group's core businesses and decreases in
working capital in both the FON Group and the PCS Group.
Investing Activities
<TABLE>
- ------------------------------------------------------------------------
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------
(millions)
<S> <C> <C> <C>
FON Group $(3,965) $(3,098) $(3,827)
PCS Group (2,509) (861) (1,020)
Intergroup eliminations (299) (259) 547
- ------------------------------------------------------------------------
Cash flows used by investing activities from
continuing operations $(6,773) $(4,218) $(4,300)
--------------------------
</TABLE>
The FON Group's capital expenditures totaled $3.5 billion in 1999, $3.2 billion
in 1998 and $2.7 billion in 1997. Long distance capital expenditures were
incurred mainly to enhance network reliability, meet increased demand for voice
and data-related services and upgrade capabilities for providing new products
and services. The local division incurred capital expenditures to accommodate
access line growth, provide additional capacity for increased Internet traffic
and expand capabilities for providing enhanced services. Sprint ION capital
expenditures were made for continuing development and hardware deployment. PCS
Group capital expenditures, totaling $2.6 billion in 1999, $1.1 billion in 1998
and $154 million in 1997, were incurred to support the PCS network buildout.
(See the PCS Group's MD&A for a pro forma presentation of capital expenditures.)
In 1999, Sprint purchased several broadband fixed wireless companies for $618
million excluding assumed debt. Investing activities also include proceeds from
sales of assets totaling $243 million in 1999, $230 million in 1998 and $292
million in 1997. In addition, in 1997, Sprint paid $460 million toward the
purchase of its PCS licenses and purchased the net assets of Paranet, Inc. for
$375 million.
"Investments in and advances to affiliates, net" consisted of the following:
<TABLE>
- ---------------------------------------
<CAPTION>
1999 1998 1997
- ---------------------------------------
(millions)
<S> <C> <C> <C>
Sprint PCS
Capital contributions $-- $ 33 $406
Loans and advances, net -- 154 254
Capitalized interest -- -- 46
- ---------------------------------------
-- 187 706
Other, net 135 236 186
- ---------------------------------------
Total $135 $423 $892
--------------
</TABLE>
Amounts for Sprint PCS in 1998 reflect contributions and advances prior to the
PCS Restructuring. These amounts, as well as capital contributions and net
advances to Sprint PCS prior to 1998, were used to fund capital and operating
requirements. "Other, net" includes the FON Group's investments in EarthLink,
Call-Net and other miscellaneous ventures.
Financing Activities
<TABLE>
- ------------------------------------------------------------------
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------
(millions)
<S> <C> <C> <C>
FON Group $ 308 $ (219) $ 79
PCS Group 4,044 1,193 982
Intergroup eliminations 368 (184) (982)
- ------------------------------------------------------------------
Cash flows provided by financing activities $4,720 $ 790 $ 79
---------------------
</TABLE>
Financing activities in 1999 reflect proceeds from long-term debt of $6.9
billion, partly offset by payments on long-term debt. These net proceeds were
used mainly for capital investments and to fund the PCS Group's operating
losses. In 1998, Sprint borrowed $5.2 billion which was mainly used to repay
existing debt. In 1997, Sprint had net borrowings of $532 million, mainly to
fund investments in and loans to affiliates. Sprint paid dividends of $441
million in 1999 and $430 million in 1998 and 1997.
F-8
<PAGE>
Capital Requirements
Sprint's 2000 investing activities, mainly consisting of capital expenditures
and investments in affiliates, are expected to require cash of $6.5 to $7.0
billion. FON Group capital expenditures are expected to range between $3.9 and
$4.2 billion, and PCS Group capital expenditures are expected to be between
$2.4 and $2.6 billion. Investments in affiliates are expected to require cash
of approximately $200 million. Additional funds will be required to fund the
PCS Group's expected operating losses, working capital and debt service
requirements. Dividend payments are expected to approximate $450 million in
2000.
In connection with the PCS Restructuring, Sprint adopted a tax sharing
agreement that provides for the allocation of income taxes between the FON
Group and the PCS Group. Sprint expects the FON Group to make significant
payments to the PCS Group under this agreement because of expected PCS Group
operating losses in the near future. These payments will reflect the PCS
Group's incremental cumulative effect on Sprint's consolidated federal and
state tax liability and tax credit position. The PCS Group accrued current
benefits under the agreement totaling $887 million in 1999 and $190 million in
1998 and received related payments from the FON Group totaling $764 million in
1999 and $20 million in 1998. The remaining $293 million will be paid by the
FON Group during the first half of 2000. See Note 2 of Notes to Consolidated
Financial Statements, "Allocation of Federal and State Income Taxes," for more
details.
Liquidity
Sprint mainly uses commercial paper to fund its short-term working capital
needs. Sprint also uses the long-term bond market as well as other debt markets
to fund its needs. Sprint intends to continue borrowing funds through the U.S.
and international money and capital markets and bank credit markets to fund
capital expenditures, and operating and working capital requirements.
In 1998, Sprint replaced its previous $1.5 billion credit facility with $5.0
billion of new revolving credit facilities with syndicates of domestic and
international banks. These facilities expire in 2000 and 2003. Commercial paper
and certain bank notes payable are supported by Sprint's revolving credit
facilities. Sprint also has a separate five-year revolving credit facility with
a bank which expires in 2002. At year-end 1999, Sprint had total unused lines
of credit of $3.5 billion under these facilities.
In the 1999 third quarter, Sprint filed a shelf registration statement with the
SEC covering $4.0 billion of senior unsecured debt securities. At year-end
1999, Sprint had issued $750 million of debt securities under the shelf. These
securities have interest rates ranging from 6.4% to 6.5% and mature in 2001.
In June 1999, Sprint entered into a $1.0 billion financing agreement to sell,
on a continuous basis with recourse, undivided percentage ownership interests
in a designated pool of its accounts receivable. Subsequent collections of
receivables sold to investors are typically reinvested in new receivables. At
year-end 1999, Sprint had borrowed $900 million under this agreement. These
borrowings had a weighted average interest rate of 6.4% and mature in 2002.
Any borrowings Sprint may incur are ultimately limited by certain debt
covenants. Sprint could borrow up to an additional $11.3 billion at year-end
1999 under the most restrictive of its debt covenants.
- --------------------------------------------------------------------------------
Regulatory Developments
- --------------------------------------------------------------------------------
See "Regulatory Developments" in the FON Group's MD&A and the PCS Group's MD&A.
- --------------------------------------------------------------------------------
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
F-9
<PAGE>
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, results of operations or cash flows at year-end 1999. In
addition, foreign currency transaction gains and losses were not material to
Sprint's 1999 results of operations. Sprint has not entered into any
significant foreign currency forward contracts or other derivative instruments
to hedge the effects of adverse fluctuations in foreign exchange rates. As a
result, Sprint was not subject to material foreign exchange risk.
- --------------------------------------------------------------------------------
Year 2000 Issue
- --------------------------------------------------------------------------------
Sprint successfully completed its Year 2000 readiness work and passed through
the January 1, 2000 rollover event while encountering no customer-affecting
outages or business interruptions. Since the inception of Sprint's Year 2000
readiness program in 1996 through December 31, 1999, Sprint incurred
approximately $320 million of costs associated with its Year 2000 readiness
program. Sprint does not expect to incur any significant additional
expenditures related to the Year 2000 issue.
- --------------------------------------------------------------------------------
Recently Issued Accounting Pronouncement
- --------------------------------------------------------------------------------
See Note 14 of Notes to Consolidated Financial Statements for a discussion of a
recently issued accounting pronouncement.
F-10
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Sprint Corporation
We have audited the accompanying consolidated balance sheets of Sprint
Corporation (Sprint) as of December 31, 1999 and 1998, and the related
consolidated statements of operations, comprehensive income (loss), cash flows
and shareholders' equity for each of the three years in the period ended
December 31, 1999. Our audits also included the financial statement schedule
listed in the Index to Financial Statements and Financial Statement Schedules.
These financial statements and the schedule are the responsibility of the
management of Sprint. Our responsibility is to express an opinion on these
financial statements and the schedule based on our audits. We did not audit
the 1998 or 1997 consolidated financial statements of Sprint Spectrum Holding
Company, L.P., a wholly owned subsidiary of Sprint as of December 31, 1998 and
an investment in which Sprint had a 40% interest through November 23, 1998 (as
discussed in Note 1). Such financial statements reflect assets of $2.7 billion
as of December 31, 1998, and revenues of $1.2 billion for the year then ended
which we did not audit. Sprint's equity in the net loss of Sprint Spectrum
Holding Company, L.P. is stated at $625 million for the year ended December
31, 1997. The consolidated financial statements of Sprint Spectrum Holding
Company, L.P. have been audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the 1998 assets and
revenues and the 1997 equity in the net loss which we did not audit, is based
solely on the report of the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits and the
report of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Sprint at December
31, 1999 and 1998, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Ernst & Young LLP
Kansas City, Missouri
February 1, 2000
REPORT OF INDEPENDENT AUDITORS
The Board of Directors of Sprint Corporation and Partners of Sprint Spectrum
Holding Company, L.P.
We have audited the consolidated balance sheets of Sprint Spectrum Holding
Company, L.P. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations and cash flows for the two years
in the period ended December 31, 1998. Our audits also included the financial
statement schedule (Schedule II). These financial statements and Schedule II
are the responsibility of Partnership management. Our responsibility is to
express an opinion on these consolidated financial statements and Schedule II
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Sprint Spectrum Holding Company,
L.P. and subsidiaries at December 31, 1998 and 1997, and the results of their
operations and their cash flows for the two years ended December 31,1998, in
conformity with generally accepted accounting principles. Also, in our
opinion, Schedule II, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
Deloitte & Touche LLP
Kansas City, Missouri
February 2, 1999
F-11
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS Sprint Corporation
(millions)
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
Years Ended December 31, 1999 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Operating Revenues $19,928 $16,881 $14,564
- -------------------------------------------------------------------------------
Operating Expenses
Costs of services and products 10,606 8,996 7,142
Selling, general and administrative 5,977 4,806 3,258
Depreciation and amortization 3,652 2,710 1,713
Acquired in-process research and development costs -- 179 --
- -------------------------------------------------------------------------------
Total operating expenses 20,235 16,691 12,113
- -------------------------------------------------------------------------------
Operating Income (Loss) (307) 190 2,451
Interest expense (860) (718) (184)
Other partners' loss in Sprint PCS -- 1,251 --
Equity in loss of Sprint PCS -- -- (660)
Minority interest 20 145 --
Other income, net 75 171 141
- -------------------------------------------------------------------------------
Income (loss) from continuing operations before
income taxes (1,072) 1,039 1,748
Income tax (expense) benefit 327 (454) (654)
- -------------------------------------------------------------------------------
Income (Loss) from Continuing Operations (745) 585 1,094
Discontinued operation, net (130) (135) (142)
Extraordinary items, net (60) (36) --
- -------------------------------------------------------------------------------
Net Income (Loss) $ (935) $ 414 952
--------------------------
Preferred stock dividends (1)
--------
Earnings applicable to common stock $ 951
--------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-12
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS (continued) Sprint Corporation
(millions, except per share data)
<TABLE>
- -----------------------------------------------------------------------------
<CAPTION>
Years Ended December 31, 1999 1998(/1/) 1997
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
FON COMMON STOCK
Earnings applicable to common stock $ 1,574 $ 118
----------------
Diluted Earnings per Common Share(/2/)
Continuing operations $ 1.97 $ 0.18
Discontinued operation (0.15) (0.04)
Extraordinary items (0.04) --
- -----------------------------------------------------------------------------
Total $ 1.78 $ 0.14
----------------
Diluted weighted average common shares 887.2 869.0
----------------
Basic Earnings per Common Share(/2/)
Continuing operations $ 2.01 $ 0.18
Discontinued operation (0.15) (0.04)
Extraordinary items (0.05) --
- -----------------------------------------------------------------------------
Total $ 1.81 $ 0.14
----------------
Basic weighted average common shares 868.0 855.2
----------------
PCS COMMON STOCK
Loss applicable to common stock $(2,517) $ (559)
----------------
Basic and Diluted Loss per Common Share(/2/)
Continuing operations $ (2.71) $(0.63)
Extraordinary item (0.02) (0.04)
- -----------------------------------------------------------------------------
Total $ (2.73) $(0.67)
----------------
Basic and diluted weighted average common shares 920.4 831.6
----------------
SPRINT COMMON STOCK
Earnings applicable to common stock $ 853 $ 951
----------------
Diluted Earnings per Common Share
Continuing operations $ 2.19 $ 2.51
Discontinued operation (0.23) (0.33)
Extraordinary items (0.01) --
- -----------------------------------------------------------------------------
Total $ 1.95 $ 2.18
----------------
Diluted weighted average common shares 438.6 436.5
----------------
Basic Earnings per Common Share
Continuing operations $ 2.23 $ 2.54
Discontinued operation (0.24) (0.33)
Extraordinary items (0.01) --
- -----------------------------------------------------------------------------
Total $ 1.98 $ 2.21
----------------
Basic weighted average common shares 430.8 430.2
----------------
DIVIDENDS PER COMMON SHARE
FON common stock(/2/) $ 0.50 $0.125
----------------
Class A common stock $ 0.625 $ 1.00 $ 1.00
--------------------------
Sprint common stock $ 0.75 $ 1.00
----------------
</TABLE>
(/1/) As discussed in Note 1 of Notes to Consolidated Financial Statements, the
Recapitalization occurred in November 1998. As a result, earnings per
share for Sprint common stock reflects earnings through the
Recapitalization date, while earnings (loss) per share for FON common
stock and PCS common stock reflects results from that date to year-end
1998.
(/2/) In December 1999, the Sprint 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. In the
second quarter of 1999, Sprint effected a two-for-one stock split of its
Sprint FON common stock in the form of a stock dividend. As a result,
basic and diluted earnings per common share, weighted-average common
shares and dividends for Sprint FON common stock and Sprint PCS common
stock have been restated for periods prior to these stock splits.
See accompanying Notes to Consolidated Financial Statements.
F-13
<PAGE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) Sprint Corporation
(millions)
<TABLE>
- --------------------------------------------
<CAPTION>
Years Ended December 31, 1999 1998 1997
- --------------------------------------------
<S> <C> <C> <C>
Net Income (Loss) $(935) $414 $952
- --------------------------------------------
Other Comprehensive
Income (Loss)
Unrealized holding gains
on securities 54 21 12
Income tax expense (20) (8) (5)
- --------------------------------------------
Net unrealized holding
gains on securities
during the period 34 13 7
Reclassification
adjustment for gains
included in net income (57) -- --
- --------------------------------------------
Total net unrealized
holding gains (losses)
on securities (23) 13 7
Foreign currency
translation adjustments -- (2) 10
- --------------------------------------------
Total other
comprehensive income
(loss) (23) 11 17
- --------------------------------------------
Comprehensive Income
(Loss) $(958) $425 $969
-----------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-14
<PAGE>
CONSOLIDATED BALANCE SHEETS Sprint Corporation
(millions, except per share data)
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
December 31, 1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets
Cash and equivalents $ 120 $ 605
Accounts receivable, net of allowance for doubtful
accounts of $285 and $186 3,408 2,708
Inventories 777 477
Prepaid expenses 340 259
Income tax receivable 411 171
Investments in equity securities 317 --
Other 207 194
- -------------------------------------------------------------------------------
Total current assets 5,580 4,414
Investments in equity securities 147 489
Property, plant and equipment
FON Group 27,687 25,156
PCS Group 9,411 6,988
- -------------------------------------------------------------------------------
Total property, plant and equipment 37,098 32,144
Accumulated depreciation (15,129) (13,161)
- -------------------------------------------------------------------------------
Net property, plant and equipment 21,969 18,983
Investments in and advances to affiliates 452 463
Intangible assets
Goodwill 5,745 3,701
PCS licenses 3,060 3,037
Other 1,453 1,137
- -------------------------------------------------------------------------------
Total intangible assets 10,258 7,875
Accumulated amortization (691) (182)
- -------------------------------------------------------------------------------
Net intangible assets 9,567 7,693
Net assets of discontinued operation 394 182
Other 1,141 1,033
- -------------------------------------------------------------------------------
Total $ 39,250 $ 33,257
-------------------
Liabilities and Shareholders' Equity
Current liabilities
Current maturities of long-term debt $ 1,087 $ 247
Accounts payable 1,462 1,631
Construction obligations 1,039 979
Accrued interconnection costs 683 592
Accrued taxes 410 442
Advance billings 323 229
Payroll and employee benefits 638 416
Other 1,190 910
- -------------------------------------------------------------------------------
Total current liabilities 6,832 5,446
Long-term debt and capital lease obligations 15,685 11,942
Deferred credits and other liabilities
Deferred income taxes and investment tax credits 1,511 1,830
Postretirement and other benefit obligations 1,064 1,064
Other 598 527
- -------------------------------------------------------------------------------
Total deferred credits and other liabilities 3,173 3,421
Shareholders' equity
Common stock
Class A common stock, 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, 788.0 and 350.3 shares issued and 788.0
and 344.5 shares outstanding 1,576 701
PCS, par value $1.00 per share, 2,350.0 shares
authorized, 910.4 and 375.4 shares issued and 910.4
and 372.7 shares outstanding 910 375
PCS preferred stock, no par, 0.3 shares authorized, 0.2
shares issued and outstanding 247 247
Capital in excess of par or stated value 8,569 7,586
Retained earnings 1,961 3,651
Treasury stock, at cost, 0.0 and 8.5 shares (2) (426)
Accumulated other comprehensive income 81 104
Other 2 (6)
- -------------------------------------------------------------------------------
Total shareholders' equity 13,560 12,448
- -------------------------------------------------------------------------------
Total $ 39,250 $ 33,257
-------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-15
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS Sprint Corporation
(millions)
<TABLE>
- -----------------------------------------------------------------------------
<CAPTION>
Years Ended December 31, 1999 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income (loss) $ (935) $ 414 $ 952
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Discontinued operation, net 130 135 142
Extraordinary items, net 60 32 --
Equity in net losses of affiliates 70 892 682
Depreciation and amortization 3,652 2,042 1,713
Acquired in-process research and development
costs -- 179 --
Deferred income taxes and investment tax credits (333) 127 176
Net gains on sales of assets (183) (104) (93)
Changes in assets and liabilities, excluding the
PCS Restructuring in 1998:
Accounts receivable, net (700) 101 (127)
Inventories and other current assets (778) (189) (95)
Accounts payable and other current liabilities 906 733 21
Noncurrent assets and liabilities, net (63) (126) (18)
Other, net 126 (37) 19
- -----------------------------------------------------------------------------
Net cash provided by operating activities 1,952 4,199 3,372
- -----------------------------------------------------------------------------
Investing Activities
Capital expenditures (6,114) (4,231) (2,863)
Investments in and loans to affiliates, net (135) (423) (892)
Net proceeds from sales of assets 243 230 292
Purchase of broadband fixed wireless companies,
net of cash acquired (618) -- --
PCS licenses purchased -- -- (460)
Paranet acquisition -- -- (375)
Other, net (149) 206 (2)
- -----------------------------------------------------------------------------
Net cash used by continuing operations (6,773) (4,218) (4,300)
Net investing activities of discontinued
operation (384) (268) (200)
- -----------------------------------------------------------------------------
Net cash used by investing activities (7,157) (4,486) (4,500)
- -----------------------------------------------------------------------------
Financing Activities
Proceeds from long-term debt 6,921 5,213 867
Payments on long-term debt (2,949) (3,822) (135)
Net change in short-term borrowings -- -- (200)
Proceeds from common stock issued 688 -- --
Proceeds from sales of shares to FT and DT 269 85 --
Proceeds from treasury stock issued 134 60 57
Dividends paid (441) (430) (430)
Treasury stock purchased (48) (321) (145)
Other, net 146 5 65
- -----------------------------------------------------------------------------
Net cash provided by financing activities 4,720 790 79
- -----------------------------------------------------------------------------
Increase (Decrease) in Cash and Equivalents (485) 503 (1,049)
Cash and Equivalents at Beginning of Year 605 102 1,151
- -----------------------------------------------------------------------------
Cash and Equivalents at End of Year $ 120 $ 605 $ 102
--------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-16
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Sprint Corporation
(in millions)
<TABLE>
- -----------------------------------------------------------------------------------------------
<CAPTION>
PCS Capital
Common In Excess
Sprint FON and of Par or
Common Common Preferred Stated Retained Treasury
Stock Stock Stock Value Earnings Stock Other Total
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning 1997 balance $1,092 $ -- $ -- $ 4,426 $3,222 $(262) $ 42 $ 8,520
Net income -- -- -- -- 952 -- -- 952
Common stock dividends -- -- -- -- (343) -- -- (343)
Class A common stock
dividends -- -- -- -- (86) -- -- (86)
Treasury stock purchased -- -- -- -- -- (145) -- (145)
Treasury stock issued -- -- -- -- (49) 114 -- 65
Tax benefit from stock
options exercised -- -- -- 26 -- -- -- 26
Other, net -- -- -- 6 (3) -- 33 36
- -----------------------------------------------------------------------------------------------
Ending 1997 balance 1,092 -- -- 4,458 3,693 (293) 75 9,025
Net income -- -- -- -- 414 -- -- 414
Common stock dividends -- -- -- -- (345) -- -- (345)
Class A common stock
dividends -- -- -- -- (86) -- -- (86)
Sprint common stock
recapitalized (876) 701 175 -- -- -- -- --
PCS Series 2 common
stock issued -- -- 195 3,005 -- -- -- 3,200
PCS Series 3 common
stock issued -- -- 5 80 -- -- -- 85
PCS preferred stock
issued -- -- 247 -- -- -- -- 247
Treasury stock purchased -- -- -- -- -- (321) -- (321)
Treasury stock issued -- -- -- -- (24) 188 -- 164
Tax benefit from stock
options exercised -- -- -- 49 -- -- -- 49
Other, net -- -- -- (6) (1) -- 23 16
- -----------------------------------------------------------------------------------------------
Ending 1998 balance 216 701 622 7,586 3,651 (426) 98 12,448
Net loss -- -- -- -- (935) -- -- (935)
FON common stock
dividends -- -- -- -- (380) -- -- (380)
Class A common stock
dividends -- -- -- -- (54) -- -- (54)
PCS preferred stock
dividends -- -- -- -- (8) -- -- (8)
FON Series 3 common
stock issued -- 2 -- 50 -- -- -- 52
PCS Series 1 common
stock issued -- -- 27 674 -- -- -- 701
PCS Series 2 common
stock issued -- -- 24 1,122 -- -- -- 1,146
PCS Series 3 common
stock issued -- -- 7 210 -- -- -- 217
Two-for-one stock splits -- 873 477 (1,350) -- -- -- --
Treasury stock purchased -- -- -- -- -- (48) -- (48)
Treasury stock issued -- -- -- -- (315) 472 -- 157
Tax benefit from stock
options exercised -- -- -- 254 -- -- -- 254
Other, net -- -- -- 23 2 -- (15) 10
- -----------------------------------------------------------------------------------------------
Ending 1999 balance $ 216 $1,576 $1,157 $ 8,569 $1,961 $ (2) $ 83 $13,560
---------------------------------------------------------------------
Shares Outstanding
- ---------------------------------------------------
Beginning 1997 balance 430.1 -- --
Treasury stock purchased (3.0) -- --
Treasury stock issued 2.9 -- --
- ---------------------------------------------------
Ending 1997 balance 430.0 -- --
Sprint common stock
recapitalized (350.3) 350.3 175.2
Treasury shares
recapitalized 5.4 (5.4) (2.7)
Treasury stock purchased (4.2) (0.5) --
Treasury stock issued 5.3 0.1 --
PCS Series 2 common
stock issued -- -- 195.1
PCS Series 3 common
stock issued -- -- 5.1
PCS preferred stock
issued -- -- 0.2
- ---------------------------------------------------
Ending 1998 balance 86.2 344.5 372.9
FON Series 3 common
stock issued -- 1.2 --
PCS Series 1 common
stock issued -- -- 27.1
PCS Series 2 common
stock issued -- -- 24.3
PCS Series 3 common
stock issued -- -- 6.9
Two-for-one stock splits -- 433.5 476.7
Treasury stock purchased -- (0.6) --
Treasury stock issued -- 9.4 2.7
- ---------------------------------------------------
Ending 1999 balance 86.2 788.0 910.6
-------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Sprint Corporation
- --------------------------------------------------------------------------------
1. General
- --------------------------------------------------------------------------------
In October 1999, Sprint announced a definitive merger agreement with MCI
WorldCom. Under the agreement, each share of Sprint FON stock will be exchanged
for $76 of MCI WorldCom common stock, subject to a collar. In addition, each
share of Sprint PCS stock will be exchanged for one share of a new WorldCom PCS
tracking stock and 0.116025 shares of MCI WorldCom common stock. The terms of
the WorldCom PCS tracking stock will be equivalent to those of Sprint's PCS
common stock and will track the performance of the company's personal
communication services (PCS) business. The merger is subject to the approvals of
Sprint and MCI WorldCom shareholders as well as approvals from the Federal
Communications Commission, the Justice Department, various state government
bodies and foreign antitrust authorities. The companies anticipate the merger
will close in the second half of 2000.
In November 1998, Sprint's shareholders approved the formation of the FON Group
and the PCS Group and the creation of the FON stock and the PCS stock. In
addition, Sprint purchased the remaining ownership interests in Sprint Spectrum
Holding Company, L.P. and PhillieCo, L.P. (together, Sprint PCS), other than a
minority interest in Cox Communications PCS, L.P. (Cox PCS). Sprint acquired
these ownership interests from Tele-Communications, Inc., Comcast Corporation
and Cox Communications, Inc. (the Cable Partners). In exchange, Sprint issued
the Cable Partners special low-vote PCS shares and warrants to acquire
additional PCS shares. Sprint also issued the Cable Partners shares of a new
class of preferred stock convertible into PCS shares. The purchase of the Cable
Partners' interests is referred to as the PCS Restructuring. In the 1999 second
quarter, Sprint acquired the remaining minority interest in Cox PCS.
Also in November 1998, Sprint reclassified each of its publicly traded common
shares into one share of FON stock and 1/2 share of PCS stock. This
recapitalization was tax-free to shareholders. Each Class A common share owned
by France Telecom S.A. (FT) and Deutsche Telekom AG (DT) was reclassified to
represent an equity interest in the FON Group and the PCS Group that entitles
FT and DT to one share of FON stock and 1/2 share of PCS stock. These
transactions are referred to as the Recapitalization.
In connection with the PCS Restructuring, FT and DT purchased 5.1 million
additional PCS shares (pre-split basis) to maintain their combined 20% voting
power in Sprint (Top-up).
The PCS stock is intended to reflect the performance of Sprint's domestic
wireless PCS operations. The FON stock is intended to reflect the performance
of all of Sprint's other operations.
- --------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies
- --------------------------------------------------------------------------------
Basis of Consolidation and Presentation
The consolidated financial statements include the accounts of Sprint and its
wholly owned and majority-owned subsidiaries. Sprint PCS' results of operations
for 1998 have been consolidated for the entire year. The Cable Partners' share
of losses through the PCS Restructuring date has been reflected as "Other
partners' loss in Sprint PCS" in the Consolidated Statements of Operations.
Sprint PCS' financial position has been reflected on a consolidated basis at
year-end 1998. Before 1998, Sprint's investment in Sprint PCS was accounted for
using the equity method. Sprint's cash flows include Sprint PCS' cash flows
only after the PCS Restructuring date.
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.
Classification of Operations
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 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 million access lines in 18 states. It provides local services, access by
phone customers and other carriers to the local network, sales of
telecommunications equipment, and long distance services within certain
regional calling areas, or local access transport areas.
F-18
<PAGE>
In November 1998, Sprint sold its remaining 81,000 residential and business
access lines in Illinois.
Product Distribution & Directory Publishing Businesses
The product distribution business provides wholesale distribution services of
telecommunications products. The directory publishing business publishes and
markets white and yellow page phone directories.
Sprint ION(SM)
Sprint ION extends Sprint's existing 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.
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.
Sprint PCS Group
The PCS Group includes Sprint's domestic wireless PCS operations. It operates
the only 100% digital PCS wireless network in the United States, with licenses
to provide service nationwide using a single frequency and a single technology.
At year-end 1999, the PCS Group, together with affiliates, operated PCS systems
in over 360 metropolitan markets, including the 50 largest U.S. metropolitan
areas.
Allocation of Shared Services
Sprint directly assigns, where possible, certain general and administrative
costs to the FON Group and the PCS Group based on their actual use of those
services. Where direct assignment of costs is not possible, or practical,
Sprint uses other indirect methods, including time studies, to estimate the
assignment of costs to each Group. Sprint believes that the costs allocated are
comparable to the costs that would be incurred if the Groups would have been
operating on a stand-alone basis. The allocation of shared services may change
at the discretion of Sprint and does not require shareholder approval.
Allocation of Federal and State Income Taxes
Sprint files a consolidated federal income tax return and certain state income
tax returns which include FON Group and PCS Group results. In connection with
the PCS Restructuring, Sprint adopted a tax sharing agreement which provides
for the allocation of income taxes between the two Groups. The FON Group's
income taxes are calculated as if it files returns which exclude the PCS Group.
The PCS Group's income taxes reflect the PCS Group's incremental cumulative
impact on Sprint's consolidated income taxes. Intergroup tax payments are
satisfied on the date Sprint's related tax payment is due to or the refund is
received from the applicable tax authority.
Allocation of Group Financing
Financing activities for the Groups are managed by Sprint on a centralized
basis. Debt incurred by Sprint on behalf of the Groups is specifically
allocated to and reflected in the financial statements of the applicable Group.
Interest expense is allocated to the PCS Group based on an interest rate that
is substantially equal to the rate it would be able to obtain from third
parties as a direct or indirect wholly owned Sprint subsidiary, but without the
benefit of any guaranty by Sprint or any member of the FON Group. That interest
rate is higher than the rate Sprint obtains on borrowings. The difference
between Sprint's actual interest rate and the rate charged to the PCS Group is
reflected as a reduction in the FON Group's interest expense.
Under Sprint's centralized cash management program, one Group may advance funds
to the other Group. These advances are accounted for as short-term borrowings
between the Groups and bear interest at a market rate that is substantially
equal to the rate that Group would be able to obtain from third parties on a
short-term basis.
The allocation of Group financing activities may change at the discretion of
Sprint and does not require shareholder approval.
Income Taxes
Sprint records deferred income taxes based on temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
their tax bases.
Revenue Recognition
Sprint recognizes operating revenues as services are rendered or as products
are delivered to customers. Sprint records operating revenues net of an
estimate for uncollectible accounts. Sprint's directory publishing business
recognizes revenues for directory services over the life of the related
directory (amortization method).
F-19
<PAGE>
Cash and Equivalents
Cash equivalents generally include highly liquid investments with original
maturities of three months or less. They are stated at cost, which approximates
market value. Sprint uses controlled disbursement banking arrangements as part
of its cash management program. Outstanding checks in excess of cash balances,
which were included in accounts payable, totaled $204 million at year-end 1999
and $336 million at year-end 1998. Sprint had sufficient funds available to
fund the outstanding checks when they were presented for payment.
Investments in Equity Securities
Investments in equity securities are classified as available for sale and
reported at fair value (estimated based on quoted market prices). Gross
unrealized holding gains and losses are reflected in the Consolidated Balance
Sheets as adjustments to "Shareholders' equity--Accumulated other comprehensive
income," net of related income taxes.
Inventories
Inventories for the FON Group are stated at the lower of cost (principally
first-in, first-out method) or market value. Inventories for the PCS Group are
stated at the lower of cost (principally first-in, first-out) or replacement
value.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Generally, ordinary asset
retirements and disposals are charged against accumulated depreciation with no
gain or loss recognized. The cost of property, plant and equipment is generally
depreciated on a straight-line basis over estimated economic useful lives.
Repairs and maintenance costs are expensed as incurred.
Capitalized Interest
Capitalized interest totaled $151 million in 1999, $167 million in 1998 and $93
million in 1997. In 1999 and 1998, capitalized interest reflects capitalized
costs related to the PCS Group's network buildout and PCS licenses as well as
the FON Group's construction of capital assets. In 1997, capitalized interest
mainly reflected interest related to Sprint's investment in Sprint PCS. Sprint
capitalized these costs until July 1997 when Sprint PCS emerged from the
development stage.
Intangible Assets
Sprint evaluates the recoverability of intangible assets when events or
circumstances indicate that such assets might be impaired. Sprint determines
impairment by comparing the undiscounted future cash flows estimated to be
generated by these assets to their respective carrying value. In the event
impairment exists, a loss is recognized based on the amount by which the
carrying value exceeds the fair value of the asset.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the
net assets acquired in business combinations accounted for as purchases.
Goodwill is being amortized over five to 40 years using the straight-line
method. Accumulated amortization totaled $210 million at year-end 1999 and $63
million at year-end 1998.
PCS Licenses
The PCS Group acquired licenses from the Federal Communications Commission to
operate as a PCS service provider. These licenses are granted for up to 10-year
terms with renewals for additional 10-year terms if license obligations are
met. These licenses are recorded at cost and are amortized on a straight-line
basis over 40 years when service begins in a specific geographic area.
Accumulated amortization totaled $130 million at year-end 1999 and $51 million
at year-end 1998.
Earnings per Share
Earnings per share (EPS) was calculated on a consolidated basis until the PCS
stock and FON stock were created as part of the November 1998 PCS Restructuring
and Recapitalization. From that time forward, EPS was computed individually for
the FON Group and PCS Group.
In December 1999, the Sprint 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. In the second quarter
of 1999, Sprint effected a two-for-one split of its Sprint FON common stock. As
a result, basic and diluted earnings per common share, weighted-average common
shares and dividends for Sprint FON common stock and Sprint PCS common stock
have been restated for periods prior to these stock splits.
In 1999, the FON Group's convertible preferred dividends totaled $1 million and
dilutive securities (mainly options) totaled 19.2 million shares. From the
Recapitalization date to year-end 1998, the FON Group's convertible preferred
dividends totaled $0.1 million and dilutive securities (mainly options) totaled
13.8 million shares. Dilutive securities for the PCS Group mainly include
options, warrants and convertible preferred stock. These securities did not
have a dilutive effect because the PCS Group incurred net losses for 1999 and
1998. As a result, diluted loss per share equaled basic loss per share.
Sprint's convertible preferred dividends totaled $0.5 million in 1998 through
the Recapitalization date and in 1997. Dilutive securities, such as options,
included in the calculation of diluted weighted average common shares totaled
7.8 million in 1998 through the Recapitalization, and 6.3 million in 1997.
F-20
<PAGE>
Stock-based Compensation
Sprint adopted the pro forma disclosure requirements under Statement of
Financial Accounting Standards (SFAS) No. 123, "Stock-based Compensation," and
continues to apply Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," to its stock option and employee stock purchase
plans.
- --------------------------------------------------------------------------------
3. Business Combinations
- --------------------------------------------------------------------------------
Broadband Fixed Wireless Companies
In the second half of 1999, Sprint acquired People's Choice TV Corp. (PCTV),
American Telecasting, Inc. (ATI), Videotron USA and the operating subsidiaries
of WBS America, LLC.
These companies own broadband fixed wireless licenses in the Midwest,
Southwest, North Central, Western and Southeastern United States. Sprint paid
$618 million for the companies' outstanding stock and assumed $575 million of
the companies' debt. These notes were redeemed, prior to scheduled maturities,
in the 1999 fourth quarter (see Note 8).
These acquisitions were accounted for as purchases. The results of these
companies have been included in Sprint's consolidated financial statements
after the acquisition dates. The excess of the purchase price over the net
liabilities acquired totaled $835 million and was preliminarily allocated to
goodwill, which is being amortized on a straight-line basis over 40 years.
Cox PCS
In the 1999 second quarter, Cox Communications, Inc. exercised a put option
requiring Sprint to purchase the remaining 40.8% interest in Cox PCS. Sprint's
existing 59.2% interest in Cox PCS was reflected in Sprint's consolidated
financial statements on a consolidated basis. Sprint issued 24.3 million shares
of low-vote PCS stock (pre-split basis) in exchange for the remaining interest.
The shares were valued at $1.1 billion. Sprint accounted for the transaction as
a purchase.
The excess of the purchase price over the fair value of the net liabilities
acquired was allocated as follows:
<TABLE>
- -------------------------------------------------------------------------
<CAPTION>
1999
- -------------------------------------------------------------------------
(millions)
<S> <C>
Purchase price $1,146
Net liabilities acquired 99
Fair value assigned to customer base acquired (45)
Fair value assigned to PCS licenses (99)
Deferred taxes established on acquired assets and liabilities 88
- -------------------------------------------------------------------------
Goodwill $1,189
--------
</TABLE>
Goodwill is being amortized on a straight-line basis over 40 years.
PCS Restructuring
In November 1998, Sprint acquired the remaining interest in Sprint PCS (except
for the minority interest in Cox PCS) from the Cable Partners. In exchange,
Sprint issued the Cable Partners 195.1 million low-vote shares of PCS stock and
12.5 million warrants to purchase additional shares of PCS stock (on a pre-
split basis). The purchase price was $3.2 billion. In addition, Sprint issued
the Cable Partners shares of a new class of preferred stock convertible into
PCS shares.
Sprint accounted for the transaction as a purchase. The excess of the purchase
price over the fair value of the net liabilities acquired was allocated as
follows:
<TABLE>
- -------------------------------------------------------------------------
<CAPTION>
1998
- -------------------------------------------------------------------------
(millions)
<S> <C>
Purchase price including transaction costs $3,226
Net liabilities acquired 281
Fair value assigned to customer base acquired (681)
Fair value assigned to assembled workforce acquired (45)
Increase in property, plant and equipment to fair value (204)
Mark-to-market of long-term debt 85
Deferred taxes established on acquired assets and liabilities 678
In-process research and development costs (179)
- -------------------------------------------------------------------------
Goodwill $3,161
--------
</TABLE>
Goodwill is being amortized on a straight-line basis over 40 years.
With respect to the purchase price attributed to in-process research and
development (IPR&D), the acquired IPR&D was limited to significant new products
under development that were intended to address new and emerging market needs
and requirements, such as the rapid adoption of the Internet and the rapid
convergence of voice, data, and video. No routine research and development
projects, minor refinements, normal enhancements, or production activities were
included in the acquired IPR&D.
The income approach was the primary technique utilized in valuing the acquired
IPR&D. This approach included, but was not limited to, an analysis of (i) the
markets for each product; (ii) the completion costs for projects; (iii) the
expected cash flows attributable to the IPR&D projects; (iv) the risks related
to achieving these cash flows; and (v) the stage of development of each
project. The issue of alternative future use was extensively evaluated and
these technologies, once completed, could only be economically used for their
intended purposes.
Pro Forma Results
The following unaudited pro forma combined results of operations assume the PCS
Restructuring, Recapitalization, Top-up and the write-off of acquired
F-21
<PAGE>
IPR&D costs occurred at the beginning of 1997. These pro forma amounts are for
comparative purposes only and do not necessarily represent what actual results
of operations would have been had the transactions occurred at the beginning of
1997, nor do they indicate the results of future operations. Pro forma results
were as follows:
<TABLE>
- ---------------------------------------------------------------
<CAPTION>
1998 1997
- ---------------------------------------------------------------
(millions,
except
per share data)
<S> <C> <C>
Net operating revenues $16,881 $14,822
-----------------
Loss from continuing operations $ (172) $ (132)
-----------------
Net loss $ (343) $ (274)
-----------------
Basic and diluted loss per PCS common share:
Loss before extraordinary item $ (2.21) $ (1.98)
Extraordinary item (0.04) --
- ---------------------------------------------------------------
Total $ (2.25) $ (1.98)
---------------
</TABLE>
Paranet, Inc.
In September 1997, Sprint paid $375 million to purchase the net assets of
Houston-based Paranet, Inc., a provider of integration, management and support
services for computer networks.
The transaction was accounted for using the purchase method of accounting. As a
result, Sprint's financial statements reflect Sprint Paranet's results of
operations beginning in October 1997.
The excess of the purchase price over the tangible net assets acquired was $357
million. This excess was allocated to noncompete agreements and goodwill, and
is being amortized on a straight-line basis over four to 10 years.
- --------------------------------------------------------------------------------
4. Investments
- --------------------------------------------------------------------------------
Investments in Equity Securities
The cost of investments in equity securities was $154 million at year-end 1999
and $105 million at year-end 1998. Gross unrealized holding gains were $310
million at year-end 1999 and $384 million at year-end 1998. At year-end 1999,
$316 million of investments in equity securities are classified as current in
anticipation of using the investments to retire debt instruments (see Note 8).
The accumulated unrealized gains on investments in equity securities, net of
income taxes and the impact of the related debt instruments, were $84 million
at year-end 1999 and $107 million at year-end 1998 and are included in
"Accumulated other comprehensive income" in the Sprint Consolidated Balance
Sheets.
During 1999, Sprint sold available-for-sale securities with a cost basis of $14
million for $104 million. The $90 million gain was included in "Other income,
net" in Sprint's Consolidated Statements of Operations.
Investments in and Advances to Affiliates
At year-end 1999, investments accounted for using the equity method consisted
of the FON Group's investments in EarthLink, Call-Net and other strategic
investments.
In November 1998, Sprint assumed 100% ownership of Sprint PCS; as a result,
Sprint consolidated Sprint PCS' results in 1998. Prior to 1998, Sprint
accounted for its investment in Sprint PCS on the equity basis. Sprint PCS'
1997 results of operations are reflected in the unaudited pro forma disclosures
in Note 3.
Combined, unaudited, summarized financial information (100% basis) of other
entities accounted for using the equity method was as follows:
<TABLE>
- ------------------------------------------------
<CAPTION>
1999 1998 1997
- ------------------------------------------------
(millions)
<S> <C> <C> <C>
Results of operations
Net operating revenues $1,571 $1,242 $ 724
----------------------
Operating income (loss) $ (192) $ 67 $(246)
----------------------
Net loss $ (329) $ (145) $(287)
----------------------
Financial position
Current assets $1,524 $1,038
Noncurrent assets 2,749 2,401
- ----------------------------------------
Total $4,273 $3,439
--------------
Current liabilities $ 599 $ 538
Noncurrent liabilities 1,644 1,004
Owners' equity 2,030 1,897
- ----------------------------------------
Total $4,273 $3,439
--------------
</TABLE>
- --------------------------------------------------------------------------------
5. Discontinued Operation
- --------------------------------------------------------------------------------
In January 2000, Sprint reached a definitive agreement with Deutsche Telekom
and France Telecom 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's investment in the net assets of the discontinued operation, including
advances, totaled $394 million at year-end 1999 and $182 million at year-end
1998.
Sprint recorded after-tax losses related to Global One totaling $130 million in
1999, $135 million in 1998 and $142 million in 1997. The 1999 amount includes a
$50 million tax benefit recorded to recognize tax assets related to previous
losses. The realization of these assets was uncertain until the sale agreement
was reached. The gain on the sale of Sprint's interest in Global One made it
apparent that these tax assets would be realized.
Sprint provided various voice, data and administrative services to Global One
totaling $241 million in 1999, $277 million in 1998 and $415 million in 1997.
In addition, Global One provided data and administrative services to Sprint
totaling $139 million in 1999, $140 million in 1998 and $114 million in 1997.
Sprint's receivable from Global One was $107 million at year-
F-22
<PAGE>
end 1999 and $187 million at year-end 1998. Sprint's payable to Global One was
$36 million at year-end 1999 and $42 million at year-end 1998.
- --------------------------------------------------------------------------------
6. Employee Benefit Plans
- --------------------------------------------------------------------------------
Defined Benefit Pension Plan
Most FON Group and PCS Group employees are covered by a noncontributory defined
benefit pension plan. Benefits for plan participants belonging to unions are
based on negotiated schedules. For non-union participants, pension benefits are
based on years of service and the participants' compensation.
Sprint's policy is to make plan contributions equal to an actuarially
determined amount consistent with federal tax regulations. The funding
objective is to accumulate funds at a relatively stable rate over the
participants' working lives so benefits are fully funded at retirement.
The following table shows the changes in the projected benefit obligation:
<TABLE>
- --------------------------------------
<CAPTION>
1999 1998
- --------------------------------------
(millions)
<S> <C> <C>
Beginning balance $2,579 $2,241
Service cost 86 72
Interest cost 177 165
Amendments 7 9
Actuarial (gain) loss (326) 202
Benefits paid (122) (110)
- --------------------------------------
Ending balance $2,401 $2,579
--------------
</TABLE>
The following table shows the changes in plan assets:
<TABLE>
- ---------------------------------------------
<CAPTION>
1999 1998
- ---------------------------------------------
(millions)
<S> <C> <C>
Beginning balance $3,169 $2,929
Actual return on plan assets 622 350
Benefits paid (122) (110)
- ---------------------------------------------
Ending balance $3,669 $3,169
---------------
</TABLE>
At year-end, the funded status and amounts recognized in the Consolidated
Balance Sheets for the plan were as follows:
<TABLE>
- -----------------------------------------------------------
<CAPTION>
1999 1998
- -----------------------------------------------------------
(millions)
<S> <C> <C>
Plan assets in excess of
the projected benefit
obligation $ 1,268 $ 590
Unrecognized net gains (1,016) (375)
Unrecognized prior service cost 100 104
Unamortized transition
asset (72) (97)
- -----------------------------------------------------------
Prepaid pension cost $ 280 $ 222
---------------
Discount rate 8.25% 7.00%
---------------
Expected blended rate of future pay raises 5.25% 4.00%
---------------
</TABLE>
The net pension cost (credit) consisted of the following:
<TABLE>
- ----------------------------------------------------------------------
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------------
(millions)
<S> <C> <C> <C>
Service cost--
benefits earned
during the year $ 86 $ 72 $ 62
Interest on projected benefit obligation 177 165 149
Expected return on plan assets (300) (265) (194)
Amortization of unrecognized transition asset (25) (25) (25)
Recognition of prior service cost 12 11 9
Recognition of actuarial (gains)
and losses (8) (4) 1
- ----------------------------------------------------------------------
Net pension cost (credit) $ (58) $ (46) $ 2
--------------------
Discount rate 7.00% 7.25% 7.75%
--------------------
Expected long-term rate of return on plan assets 10.00% 10.00% 9.50%
--------------------
Expected blended rate of future pay raises 4.00% 4.25% 4.75%
--------------------
</TABLE>
Defined Contribution Plans
Sprint sponsors defined contribution employee savings plans covering most FON
Group and PCS Group employees. Participants may contribute portions of their
pay to the plans. For union employees, Sprint matches contributions based on
negotiated amounts. Sprint also matches contributions of non-union employees in
FON stock and PCS stock. The matching is equal to 50% of participants'
contributions up to 6% of their pay. In addition, Sprint may, at the discretion
of the Board of Directors, provide additional matching contributions based on
the performance of FON stock and PCS stock compared to other telecommunications
companies' stock. Sprint's matching contributions were $83 million in 1999 and
$54 million in 1998 and 1997. At year-end 1999, the plans held 33 million FON
shares and 27 million PCS shares (on a post-split basis).
Prior to January 1999, Sprint PCS sponsored a savings and retirement program
for certain employees. Sprint PCS matched contributions equal to 50% of the
contribution of each participant, up to the first 6% that the employee elected
to contribute. Expense under the savings plan was $7 million in 1998.
Postretirement Benefits
Sprint provides postretirement benefits (mainly medical and life insurance) to
most FON Group and PCS Group employees. Employees retiring before certain dates
are eligible for benefits at no cost, or at a reduced cost. Employees retiring
after certain dates are eligible for benefits on a shared-cost basis. Sprint
funds the accrued costs as benefits are paid.
F-23
<PAGE>
The following table shows the changes in the accumulated postretirement benefit
obligation:
<TABLE>
- --------------------------------
<CAPTION>
1999 1998
- --------------------------------
(millions)
<S> <C> <C>
Beginning balance $ 864 $ 832
Service cost 21 20
Interest cost 59 58
Actuarial gains (30) (6)
Benefits paid (38) (40)
- --------------------------------
Ending balance $ 876 $ 864
-------------
</TABLE>
Amounts included in the Consolidated Balance Sheets at year-end were as
follows:
<TABLE>
- -----------------------------------------------------
<CAPTION>
1999 1998
- -----------------------------------------------------
(millions)
<S> <C> <C>
Accumulated
postretirement benefit
obligation $ 876 $ 864
Unrecognized prior service cost 53 61
Unrecognized net gains 120 124
- -----------------------------------------------------
Accrued postretirement benefits cost $1,049 $1,049
---------------
Discount rate 8.25% 7.00%
---------------
</TABLE>
The assumed 2000 annual health care cost trend rates are 9.6% before Medicare
eligibility and 10.0% after Medicare eligibility. Both rates gradually decrease
to an ultimate level of 5% by 2010. A 1% increase in the rates would have
increased the 1999 accumulated postretirement benefit obligation by an
estimated $107 million. A 1% decrease would have reduced the obligation by an
estimated $89 million.
The net postretirement benefits cost consisted of the following:
<TABLE>
- ----------------------------------------------------------------------------
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------------------
(millions)
<S> <C> <C> <C>
Service cost--benefits earned
during the year $ 21 $ 20 $ 21
Interest on accumulated postretirement benefit obligation 59 58 52
Recognition of prior service cost (8) (6) --
Recognition of
actuarial gains (17) (21) (19)
- ----------------------------------------------------------------------------
Net postretirement benefits cost $ 55 $ 51 $ 54
-----------------
Discount rate 7.00% 7.25% 7.75%
-----------------
</TABLE>
For measurement purposes, the assumed 1999 weighted average annual health care
cost trend rates were 7.6% before Medicare eligibility and 8.1% after Medicare
eligibility. Both rates gradually decrease to an ultimate level of 5% by 2005.
A 1% increase in the rates would have increased the 1999 postretirement
benefits service and interest costs by an estimated $13 million. A 1% decrease
would have reduced the 1999 postretirement benefits service and interest costs
by an estimated $11 million.
- --------------------------------------------------------------------------------
7. Income Taxes
- --------------------------------------------------------------------------------
Income tax expense (benefit) allocated to continuing operations consists of the
following:
<TABLE>
- --------------------------------------------------------
<CAPTION>
1999 1998 1997
- --------------------------------------------------------
(millions)
<S> <C> <C> <C>
Current income tax expense (benefit)
Federal $ (34) $283 $399
State 40 44 79
- --------------------------------------------------------
Total current 6 327 478
- --------------------------------------------------------
Deferred income tax expense (benefit)
Federal (309) 120 181
State (24) 7 (5)
- --------------------------------------------------------
Total deferred (333) 127 176
- --------------------------------------------------------
Total $(327) $454 $654
-----------------
</TABLE>
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:
<TABLE>
- --------------------------------------------------------------------------
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------
(millions)
<S> <C> <C> <C>
Income tax expense (benefit)
at the federal statutory rate $(375) $364 $611
Effect of:
State income taxes, net of federal income tax effect 10 33 48
Equity in losses of foreign joint ventures 18 6 4
Write-off of in-process research and development costs -- 63 --
Goodwill amortization 34 3 --
Other, net (14) (15) (9)
- --------------------------------------------------------------------------
Income tax expense (benefit) $(327) $454 $654
------------------
Effective income tax rate 30.5% 43.7% 37.4%
------------------
</TABLE>
Income tax expense (benefit) allocated to other items was as follows:
<TABLE>
- ----------------------------------------------------------------
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------
(millions)
<S> <C> <C> <C>
Discontinued operation $(111) $(62) $(24)
Extraordinary items (34) (23) --
Unrealized holding gains on investments(/1/) 13 8 5
Stock ownership,
purchase and options
arrangements(/2/) (254) (49) (26)
- ----------------------------------------------------------------
</TABLE>
(/1/) These amounts have been recorded directly to "Shareholders' equity--
Accumulated other comprehensive income" in the Consolidated Balance
Sheets.
(/2/) These amounts have been recorded directly to "Shareholders' equity--
Capital in excess of par or stated value" in the Consolidated Balance
Sheets.
Sprint recognizes deferred income taxes for the temporary differences between
the carrying amounts of its assets and liabilities for financial statement
purposes and their tax bases. The sources of the
F-24
<PAGE>
differences that give rise to the deferred income tax assets and liabilities at
year-end 1999 and 1998, along with the income tax effect of each, were as
follows:
<TABLE>
- -----------------------------------------------------------
<CAPTION>
1999 Deferred
Income Tax
------------------
Assets Liabilities
- -----------------------------------------------------------
(millions)
<S> <C> <C>
Property, plant and equipment $ -- $2,473
Intangibles -- 452
Postretirement and other benefits 422 --
Reserves and allowances 149 --
Unrealized holding gains on investments -- 48
Operating loss carryforwards 1,189 --
Tax credit carryforwards 75 --
Other, net 177 --
- -----------------------------------------------------------
2,012 2,973
Less valuation allowance 466 --
- -----------------------------------------------------------
Total $1,546 $2,973
------------------
- -----------------------------------------------------------
<CAPTION>
1998 Deferred
Income Tax
------------------
Assets Liabilities
- -----------------------------------------------------------
(millions)
<S> <C> <C>
Property, plant and equipment $ -- $2,048
Intangibles -- 454
Postretirement and other benefits 419 --
Reserves and allowances 171 --
Unrealized holding gains on investments -- 60
Operating loss carryforwards 302 --
Other, net 142 --
- -----------------------------------------------------------
1,034 2,562
Less valuation allowance 249 --
- -----------------------------------------------------------
Total $ 785 $2,562
------------------
</TABLE>
Management believes it is more likely than not that these deferred income tax
assets, net of the valuation allowance, will be realized based on current
income tax laws and expectations of future taxable income stemming from the
reversal of existing deferred tax liabilities or ordinary operations.
Uncertainties surrounding income tax law changes, shifts in operations between
state taxing jurisdictions and future operating income levels may, however,
affect the ultimate realization of all or some of these deferred income tax
assets.
The valuation allowance related to deferred income tax assets increased $217
million in 1999 and $237 million in 1998 and decreased $2 million in 1997.
In 1999, Sprint acquired approximately $179 million of potential tax benefits
related to net operating loss carryforwards in the acquisitions of the
broadband fixed wireless companies. In 1998, Sprint acquired approximately $229
million of potential tax benefits related to net operating loss carryforwards
in the PCS Restructuring. The benefits from the acquisitions and PCS
Restructuring are subject to certain realization restrictions under various tax
laws. A valuation allowance was provided for the total of these benefits. If
these benefits are subsequently recognized, they will reduce goodwill or other
noncurrent intangible assets resulting from the application of the purchase
method of accounting for these transactions.
In connection with the PCS Restructuring, the PCS Group is required to
reimburse the FON Group and the Cable Partners for net operating loss and tax
credit carryforward benefits generated prior to the PCS Restructuring if
realization by the PCS Group produces a cash benefit that would not otherwise
have been realized. The reimbursement will equal 60% of the net cash benefit
received by the PCS Group and will be made to the FON Group in cash and to the
Cable Partners in shares of Series 2 PCS stock. The carryforward benefits
subject to this requirement total $259 million, which includes the $229 million
acquired in the PCS Restructuring.
At year-end 1999, Sprint had federal operating loss carryforwards of
approximately $2.7 billion and state operating loss carryforwards of
approximately $6.2 billion. Related to these loss carryforwards are federal tax
benefits of $938 million and state tax benefits of $385 million. In addition,
Sprint had available for income tax purposes federal alternative minimum tax
credit carryforwards of $49 million, state alternative minimum tax credit
carryforwards of $5 million, federal alternative minimum tax net operating loss
carryforwards of $933 million and state alternative minimum tax net operating
loss carryforwards of $359 million. The loss carryforwards expire in varying
amounts through 2019.
F-25
<PAGE>
- --------------------------------------------------------------------------------
8. Long-term Debt and Capital Lease Obligations
- --------------------------------------------------------------------------------
Sprint's consolidated long-term debt and capital lease obligations at year-end
was as follows:
<TABLE>
- -----------------------------------------------------------------------------------------
<CAPTION>
1999 1998
--------------------------- --------------------------
Sprint Sprint Sprint Sprint
FON PCS FON PCS
Maturing Group Group Consolidated Group Group Consolidated
- -----------------------------------------------------------------------------------------
(millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Senior notes
5.7% to 6.9%(/1/) 2001 to 2028 $1,105 $ 8,145 $ 9,250 $1,059 $3,941 $ 5,000
8.1% to 9.8% 2000 to 2003 632 -- 632 632 -- 632
11.0% to 12.5%(/2/) 2001 to 2006 -- 734 584 -- 699 565
Debentures and notes
5.8% to 9.6% 2000 to 2022 565 -- 565 565 -- 565
Notes payable and
commercial paper -- 294 1,971 2,265 472 274 746
First mortgage bonds
2.0% to 9.9% 1999 to 2025 1,295 -- 1,295 1,312 -- 1,312
Capital lease
obligations
5.2% to 14.0% 1999 to 2008 69 486 555 32 452 484
Revolving credit
facilities
Variable rates 2002 to 2006 900 -- 900 -- 1,800 1,800
Other(/2/),(/3/)
2.0% to 10.0% 1999 to 2007 573 153 726 370 1,029 1,085
- -----------------------------------------------------------------------------------------
5,433 11,489 16,772 4,442 8,195 12,189
Less: current
maturities(/2/) 902 185 1,087 33 348 247
- -----------------------------------------------------------------------------------------
Long-term debt and
capital lease
obligations(/2/) $4,531 $11,304 $15,685 $4,409 $7,847 $11,942
------------------------------------------------------
</TABLE>
(/1/) These borrowings were incurred by Sprint and allocated to the applicable
Group. Sprint's weighted average interest rate related to these borrowings
was 6.6% at year-end 1999 and 6.4% at year-end 1998. The weighted average
interest rate related to the borrowings allocated to the PCS Group was
approximately 8.7% at year-end 1999 and 8.5% at year-end 1998. See Note 2
for a more detailed description of how Sprint allocates financing to each
of the Groups.
(/2/) Consolidated debt does not equal the total of PCS Group and FON Group debt
due to intergroup debt eliminated in consolidation. The FON Group had an
investment in the PCS Group's Senior Discount notes totaling $150 million
at year-end 1999 and $134 million at year-end 1998. In addition, the PCS
Group had other long-term debt payable to the FON Group totaling $314
million at year-end 1998, including $134 million classified as current.
(/3/) Includes notes with a market value of $316 million at year-end 1999 and
$358 million at year-end 1998 recorded by the FON Group that may be
exchanged at maturity for SBC Communications, Inc. (SBC) common shares
owned by the FON Group or for cash. Based on SBC's closing price, had the
notes matured at year-end 1999, they could have been exchanged for 6.5
million SBC shares. At year-end 1999, Sprint held 7.5 million SBC shares,
which have been included in "Investments in equity securities" in the FON
Group's Combined Balance Sheets.
F-26
<PAGE>
Scheduled principal payments, excluding reclassified short-term borrowings,
during each of the next five years are as follows:
<TABLE>
- --------------------------
<CAPTION>
Sprint Sprint
FON PCS
Group Group Sprint
- --------------------------
(millions)
<S> <C> <C> <C>
2000 $ 902 $ 185 $1,087
2001 877 289 1,096
2002 1,339 59 1,398
2003 373 1,058 1,431
2004 144 1,042 1,186
- --------------------------
</TABLE>
Sprint
Short-term Borrowings
Sprint had bank notes payable totaling $670 million at year-end 1999 and $454
million at year-end 1998. In addition, Sprint had commercial paper borrowings
totaling $1.6 billion at year-end 1999 and $292 million at year-end 1998.
Though these borrowings are renewable at various dates throughout the year,
they were classified as long-term debt because of Sprint's intent and ability,
through unused credit facilities, to refinance these borrowings on a long-term
basis.
In 1998, Sprint replaced its previous $1.5 billion credit facility with new
facilities with syndicates of domestic and international banks. The new
facilities totaled $5.0 billion and expire in 2000 and 2003. Commercial paper
and certain bank notes payable are supported by Sprint's revolving credit
facilities. Certain other notes payable relate to a separate revolving credit
facility which expires in 2002. At year-end 1999, Sprint had total unused lines
of credit of $3.5 billion.
Bank notes outstanding had weighted average interest rates of 6.3% at year-end
1999 and 5.7% at year-end 1998. The weighted average interest rate of
commercial paper was 6.4% at year-end 1999 and 5.8% at year-end 1998.
Long-term Debt
In the 1999 third quarter, Sprint filed a shelf registration statement with the
SEC covering $4.0 billion of senior unsecured debt securities. At year-end
1999, Sprint had issued $750 million of debt securities under the shelf. These
securities have interest rates ranging from 6.4% to 6.5% and mature in 2001.
In August 1999, Sprint incurred other borrowings totaling $250 million which
mature in 2002 and have variable interest rates. At year-end 1999, the notes
had an interest rate of 6.1%.
In June 1999, Sprint entered into a $1.0 billion financing agreement to sell,
on a continuous basis with recourse, undivided percentage ownership interests
in a designated pool of its accounts receivable. Subsequent collections of
receivables sold to investors are typically reinvested in new
receivables. At year-end 1999, Sprint had borrowed $900 million with a weighted
average interest rate of 6.4% under this agreement. These borrowings mature in
2002.
In May 1999, Sprint issued $3.5 billion of senior notes registered with the
SEC. These notes have maturities ranging from 5 to 20 years and interest rates
ranging from 5.9% to 6.9%. In 1998, Sprint issued $5.0 billion of senior notes
registered with the SEC. These notes have maturities ranging from 5 to 30 years
and interest rates ranging from 5.7% to 6.9%.
Sprint FON Group
In 1999, the FON Group received a net allocation of $1.0 billion of debt from
Sprint. This debt was mainly used for new capital investments and acquisitions.
See Note 2 for a more detailed description of how Sprint allocates debt to the
Groups.
In the 1999 fourth quarter, Sprint redeemed, prior to scheduled maturities,
$575 million of the assumed broadband fixed wireless companies' debt with
interest rates ranging from 13.1% to 14.5%. This resulted in a $39 million
after-tax extraordinary loss for the FON Group. In 1998, Sprint redeemed, prior
to scheduled maturities, $138 million of FON Group debt with interest rates
ranging from 7.9% to 9.3%. This resulted in a $5 million after-tax
extraordinary loss for the FON Group.
FON Group gross property, plant and equipment totaling $14.3 billion was either
pledged as security for first mortgage bonds and certain notes or is restricted
for use as mortgaged property.
Sprint PCS Group
In 1999, Sprint allocated $5.9 billion of debt to the PCS Group. This debt was
mainly used to repay debt, to fund new capital investments and to fund
operating losses and working capital requirements.
In 1999, the PCS Group repaid $2.2 billion of its revolving credit facilities
and other borrowings prior to scheduled maturities. This resulted in a $21
million after-tax extraordianary loss.
In 1998, Sprint redeemed, prior to scheduled maturities, $3.3 billion of PCS
Group debt with a weighted average interest rate of 8.3%. This resulted in a
$31 million after-tax extraordinary loss for the PCS Group. The debt was repaid
with a portion of the proceeds from Sprint's $5.0 billion debt offering in
November 1998.
Other
Sprint, including the FON Group and the PCS Group, had complied with all
restrictive or financial covenants relating to its debt arrangements at year-
end 1999.
F-27
<PAGE>
- --------------------------------------------------------------------------------
9. Common Stock
- --------------------------------------------------------------------------------
Sprint FON Stock and Sprint PCS Stock
On December 14, 1999, the Sprint 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.
On April 20, 1999, the Board of Directors authorized a two-for-one stock split
of Sprint's FON common stock in the form of a stock dividend which was
distributed on June 4, 1999 to the FON shareholders.
In November 1998, Sprint recapitalized its common stock into FON stock and PCS
stock and restructured its interests in Sprint PCS. As a result, Sprint created
the following series of common stock:
. Series 1 FON stock and Series 1 PCS stock Existing Sprint common
shareholders received one share of FON stock and 1/2 share of PCS stock
for each Sprint share owned. Authorized shares totaled 2.5 billion for
the Series 1 FON stock and 1.25 billion for the Series 1 PCS stock.
. Series 2 FON stock and Series 2 PCS stock The Cable Partners received
PCS shares for their ownership interests in Sprint PCS. These shares
have 1/10 the voting power of the Series 1 and Series 3 PCS shares.
Authorized shares totaled 500 million for both the Series 2 FON stock
and Series 2 PCS stock.
. Series 3 FON stock and Series 3 PCS stock To maintain their combined
voting power at 20%, FT and DT purchased a combined total of 5.1 million
Series 3 PCS shares (pre-split basis) for $85 million at the time of the
restructuring. Series 3 FON and PCS stock is also used whenever FT and
DT purchase stock to maintain their voting power and would be used if FT
and DT were to elect to convert their Class A common shares into FON and
PCS stock. Authorized shares totaled 1.2 billion for the Series 3 FON
stock and 600 million for the Series 3 PCS stock.
At year-end 1999, Sprint had 22 thousand PCS treasury shares (post-split
basis), which were recorded at cost. The PCS shares are held by the FON Group
and represent an intergroup interest in the PCS Group which has been eliminated
in the Sprint Consolidated financial statements.
Beginning in November 2001, Sprint has the option to convert PCS shares into
FON shares.
Class A and Series 3 Common Stock
FT and DT own Series 3 FON common shares, Series 3 PCS common shares and Class
A common shares which represent approximately 20% of Sprint's voting power.
Sprint declared and paid Class A common dividends of 62.5 cents per share in
1999 and $1.00 per share in 1998 and 1997.
In February 1999, FT and DT purchased an aggregate of 6.1 million Series 3 PCS
shares (pre-split basis) for $169 million in conjunction with the registered
public offering of 24.4 million shares of Series 1 PCS stock (pre-split basis).
During 1999, FT and DT purchased an aggregate of 1.2 million shares of Series 3
FON shares (post-split basis) and 0.8 million additional Series 3 PCS shares
(pre-split basis) for $100 million to maintain their combined 20% voting power.
Additionally, during 1999, FT and DT bought Series 1 FON and Series 1 PCS
shares on the open market to maintain their combined 20% voting power. These
shares converted into Series 3 FON and Series 3 PCS shares.
In November 1998, 86.2 million Class A common shares were reclassified to
represent an equity interest in the FON Group (86.2 million shares) and the PCS
Group (43.1 million shares). FT and DT maintained their combined 20% voting
power in Sprint by purchasing an additional 5.1 million Series 3 PCS shares
(pre-split basis) for $85 million.
FT and DT, as Class A common, Series 3 FON and Series 3 PCS shareholders, have
the right in most cases to pro rata representation on Sprint's Board of
Directors. They may also purchase additional shares of FON stock and PCS stock
from Sprint to keep their ownership level at a combined 20%. FT and DT have
entered into a standstill agreement with Sprint restricting their ability to
acquire Sprint voting shares (other than as intended by their agreements with
Sprint). The standstill agreement also contains customary provisions
restricting FT and DT from initiating or participating in any proposal with
respect to the control of Sprint.
PCS Preferred Stock
As part of the PCS Restructuring, Sprint issued to the Cable Partners a new
class of convertible preferred stock convertible into PCS shares.
Common Stock Reserved for Future Grants
At year-end 1999, common stock reserved for future grants under stock option
plans or for future issuances under various other arrangements was as follows:
F-28
<PAGE>
Sprint FON Group
<TABLE>
- -------------------------------------------------------------------
<CAPTION>
Shares
- -------------------------------------------------------------------
(millions)
<S> <C>
Employees Stock Purchase Plan 12.9
Employee savings plans 6.5
Automatic Dividend Reinvestment Plan 2.3
Officer and key employees' and directors' stock options 11.6
Conversion of preferred stock and other 3.0
- -------------------------------------------------------------------
36.3
----
</TABLE>
Sprint PCS Group(/1/)
<TABLE>
- -------------------------------------------------------------------
<CAPTION>
Shares
- -------------------------------------------------------------------
(millions)
<S> <C>
Employees Stock Purchase Plan 0.9
Employee savings plans 3.3
Officer and key employees' and directors' stock options 15.9
Warrants issued to Cable Partners 24.9
Conversion of preferred stock and other 20.3
- -------------------------------------------------------------------
65.3
----
</TABLE>
(/1/) Restated to give effect to the February 2000 two-for-one stock split.
Shareholder Rights Plan
Under Sprint's Shareholder Rights Plan, one half of a preferred stock purchase
right is attached to each share of FON stock and PCS stock and one preferred
stock purchase right is attached to each share of Class A common stock. The
rights may be redeemed by Sprint at $0.01 per right and will expire in June
2007, unless extended. The rights are exercisable only if certain takeover
events occur and are entitled to the following (on a post-split basis):
. Each FON stock right entitles the holder to purchase 1/1,000 of a share
(Unit) of a no par Preferred Stock-Sixth Series at $275 per Unit.
. Each PCS stock right entitles the holder to purchase a Unit of a no par
Preferred Stock-Eighth Series at $150 per Unit.
. Each Class A right entitles the holder to purchase 1/2 Unit of Preferred
Stock-Sixth Series at $137.50 per 1/2 Unit and 1/4 Unit of Preferred
Stock-Eighth Series at $37.50 per 1/4 Unit.
Preferred Stock-Sixth Series is voting, cumulative and accrues dividends on a
quarterly basis generally equal to the greater of $100 per share or 2,000
times the total per share amount of all FON stock common dividends. Preferred
Stock-Eighth Series has the same features as the Sixth Series, but applies to
PCS shares. No Preferred Stock-Sixth Series or Preferred Stock-Eighth Series
were issued or outstanding at year-end 1999 or 1998.
Other
The indentures and financing agreements of certain of Sprint's subsidiaries
contain provisions limiting cash dividend payments on subsidiary common stock
held by Sprint. As a result, $552 million of those subsidiaries' $1.5 billion
total retained earnings was restricted at year-end 1999. The flow of cash in
the form of advances from the subsidiaries to Sprint is generally not
restricted.
- -------------------------------------------------------------------------------
10. Stock-based Compensation
- -------------------------------------------------------------------------------
Recapitalization and Stock Splits
Due to the Recapitalization and the FON and PCS stock splits, the number of
shares and the related exercise prices have been adjusted to maintain both the
total fair value of common stock underlying the options and ESPP share
elections, and the relationship between the market value of the common stock and
the exercise prices of the options and ESPP share elections.
Management Incentive Stock Option Plan
Under the Management Incentive Stock Option Plan (MISOP), Sprint has granted
stock options to employees who are eligible to receive annual incentive
compensation. Eligible employees are entitled to receive stock options in lieu
of a portion of the target incentive under Sprint's management incentive
plans. The options generally become exercisable on December 31 of the year
granted and have a maximum term of 10 years. MISOP options are granted with
exercise prices equal to the market price of the underlying common stock on
the grant date. At year-end 1999, authorized FON shares under this plan
approximated 24.1 million and authorized PCS shares approximated 14.5 million.
The authorized number of shares was increased by approximately 7.1 million FON
shares and 7.5 million PCS shares on January 1, 2000.
Stock Option Plan
Under the Sprint Stock Option Plan (SOP), Sprint has granted stock options to
officers and key employees. The options generally become exercisable at the
rate of 25% per year, beginning one year from the grant date, and have a
maximum term of 10 years. SOP options are granted with exercise prices equal
to the market price of the underlying common stock on the grant date. At year-
end 1999, authorized FON shares under this plan approximated 38.5 million and
authorized PCS shares approximated 40.6 million. These amounts were increased
by approximately 11.8 million FON shares and 12.7 million PCS shares on
January 1, 2000.
In 1997, Sprint granted performance-based stock options to certain key
executives. The FON Group expensed $9 million in 1999 and $14 million in 1998
and the PCS Group expensed $5 million in 1999 and $1 million in 1998 related
to these performance-based stock options.
Employees Stock Purchase Plan
Under Sprint's Employees Stock Purchase Plan (ESPP), employees may elect to
purchase FON common stock or PCS common stock at a price
F-29
<PAGE>
equal to 85% of the market value on the grant or exercise date, whichever is
less. At year-end 1999, authorized FON shares under this plan approximated 13.8
million and authorized PCS shares approximated 5.5 million.
Sprint PCS Long-term Incentive Plan
Prior to 1999, PCS Group employees meeting certain eligibility requirements
were included in Sprint PCS' long-term incentive plan (LTIP). Under this plan,
participants received appreciation units based on independent appraisals.
Appreciation on the units was based on annual independent appraisals. The 1997
plan year appreciation units vest 25% per year beginning one year from the
grant date and also expire after 10 years.
In connection with the PCS Restructuring, Sprint discontinued the Sprint PCS
LTIP plan. The appreciation units were converted to PCS shares and options to
buy PCS shares based on a formula designed to replace the appreciated value of
the units at the beginning of July 1998. For vested units at year-end 1998,
participants could elect to receive the appreciation in cash, or in shares and
options. Most elected to receive shares and options.
In 1999, Sprint began issuing the shares, and options have become exercisable,
based on the vesting requirements of the converted units. Assuming all
participants stay employed by Sprint until all replacement options and shares
are vested, Sprint will issue the remaining 1.7 million PCS shares and the
remaining 2.0 million PCS shares under option will become exercisable.
Pro Forma Disclosures
Pro forma net income (loss) and earnings (loss) per share have been determined
as if Sprint had used the fair value method of accounting for its stock option
grants and ESPP share elections after 1994. Under this method, compensation
expense is recognized over the applicable vesting periods and is based on the
shares under option and their related fair values on the grant date.
For 1999, the FON Group's pro forma net income was $1,434 million and pro forma
diluted EPS was $1.63. From the Recapitalization date through year-end 1998,
the FON Group's pro forma net income was $103 million and pro forma diluted EPS
was $0.12. The FON Group's pro forma net income was reduced by $10 million or
$0.01 per FON share in 1999 and $19 million or $0.02 per FON share in 1998 due
to additional compensation resulting from modifications to terms of options and
ESPP share elections related to the Recapitalization.
For 1999, the PCS Group's pro forma net loss was $2,578 million and pro forma
diluted loss per share was $2.82. The application of SFAS No. 123 did not have
a material impact on the PCS Group's pro forma net loss from the
Recapitalization date through year-end 1998. Sprint's pro forma net income and
earnings per share prior to the Recapitalization date were as follows:
<TABLE>
- ---------------------------------------------
<CAPTION>
1998(/1/) 1997
- ---------------------------------------------
(millions,
except per
share data)
<S> <C> <C>
Pro forma net income $ 785 $ 908
-----------------
Pro forma diluted earnings
per share $ 1.79 $ 2.11
-----------------
</TABLE>
(/1/)Reflects consolidated pro forma net income and earnings per share until
the Recapitalization date.
Fair Value Disclosures
MISOP and SOP
The following tables reflect the weighted average fair value per option
granted, as well as the significant weighted average assumptions used in
determining those fair values using the Black-Scholes pricing model:
FON Common Stock
<TABLE>
- ----------------------------------------
<CAPTION>
1999 MISOP SOP
- ----------------------------------------
<S> <C> <C>
Fair value on grant date $9.86 $12.09
Risk-free interest rate 4.8% 4.8%
Expected volatility 26.6% 26.6%
Expected dividend yield 1.3% 1.3%
Expected life (years) 4 6
</TABLE>
PCS Common Stock
<TABLE>
- ----------------------------------------
<CAPTION>
1999 MISOP SOP
- ----------------------------------------
<S> <C> <C>
Fair value on grant date $8.55 $10.12
Risk-free interest rate 4.8% 4.8%
Expected volatility 67.7% 67.7%
Expected dividend yield -- --
Expected life (years) 4 6
</TABLE>
<TABLE>
- --------------------------------
<CAPTION>
1998 SOP
- --------------------------------
<S> <C>
Fair value on grant date $5.44
Risk-free interest rate 4.4%
Expected volatility 75.0%
Expected dividend yield --
Expected life (years) 6
</TABLE>
Sprint Common Stock
<TABLE>
- -----------------------------------------
<CAPTION>
1998 MISOP SOP
- -----------------------------------------
<S> <C> <C>
Fair value on grant date $14.58 $16.00
Risk-free interest rate 5.5% 5.5%
Expected volatility 21.7% 21.7%
Expected dividend yield 1.7% 1.7%
Expected life (years) 5 6
- -----------------------------------------
<CAPTION>
1997 MISOP SOP
- -----------------------------------------
</TABLE>
<TABLE>
<S> <C> <C>
Fair value on grant date $9.66 $11.74
Risk-free interest rate 6.2% 6.2%
Expected volatility 22.8% 22.8%
Expected dividend yield 2.3% 2.3%
Expected life (years) 4 6
</TABLE>
F-30
<PAGE>
Employees Stock Purchase Plan
During 1999, FON Group and PCS Group employees elected to purchase 1.3 million
FON and 6.5 million PCS ESPP shares. Using the Black-Scholes pricing model, the
weighted average fair value is $11.12 per share for each FON election and $8.08
per share for each PCS election.
During 1998, FON Group employees elected to purchase 2.1 million ESPP shares
with each election having a weighted average fair value (using the Black-
Scholes pricing model) of $13.90 per share. No ESPP shares were offered in
1997.
Stock Options
Stock option plan activity was as follows:
FON stock option plan activity has been restated to give effect to the 1999
two-for-one stock split.
FON Common Stock
<TABLE>
- -----------------------------------------------
<CAPTION>
Weighted
Average
per
Sprint Share
FON Exercise
Shares Price
- -----------------------------------------------
(millions)
<S> <C> <C>
Converted in November 1998 47.6 $21.01
Exercised (0.2) 15.95
-----
Outstanding, year-end 1998 47.4 21.03
Granted 20.9 41.51
Exercised (13.5) 18.93
Forfeited/Expired (2.8) 28.61
-----
Outstanding, year-end 1999 52.0 $29.48
-----------------
</TABLE>
PCS stock option plan activity has been restated to give effect to the February
2000 two-for-one stock split.
PCS Common Stock
<TABLE>
- -----------------------------------------------
<CAPTION>
Weighted
Average
per
Sprint Share
PCS Exercise
Shares Price
- -----------------------------------------------
(millions)
<S> <C> <C>
Converted in November 1998 23.8 $ 4.58
Granted 5.4 7.92
----
Outstanding, year-end 1998 29.2 5.20
Granted 21.8 17.67
Exercised (9.2) 6.05
Forfeited/Expired (2.0) 9.64
----
Outstanding, year-end 1999 39.8 $11.64
----------------
</TABLE>
Sprint Common Stock
<TABLE>
- ---------------------------------------------------
<CAPTION>
Weighted
Average
per
Share
Sprint Exercise
Shares Price
- ---------------------------------------------------
(millions)
<S> <C> <C>
Outstanding, beginning of 1997 13.6 $29.42
Granted 9.4 46.14
Exercised (3.4) 27.17
Forfeited/Expired (0.9) 38.10
----
Outstanding, year-end 1997 18.7 37.85
Granted 9.1 59.73
Exercised (3.4) 33.54
Forfeited/Expired (0.6) 47.28
----
Converted in
November 1998 23.8 $46.60
----------------
</TABLE>
Options exercisable at year-end 1998 were 21.2 million FON options and 11.5
million PCS options. Sprint options exercisable were 8.3 million at year-end
1997. At year-end 1998, the weighted average exercise prices for exercisable
options were $18.83 for FON options and $4.41 for PCS options.
The following tables summarize outstanding and exercisable options at year-end
1999:
FON Common Stock
<TABLE>
- -----------------------------------------------
<CAPTION>
Options Outstanding
--------------------------------
Weighted
Average Weighted
Range of Remaining Average
Exercise Number Contractual Exercise
Prices Outstanding Life Price
- -----------------------------------------------
(millions) (years)
<S> <C> <C> <C>
$ 5.00-$ 9.99 0.3 1.3 $ 8.28
10.00- 19.99 12.0 6.2 16.67
20.00- 29.99 18.5 7.8 24.84
30.00- 39.99 17.9 8.8 38.59
40.00- 49.99 1.6 5.7 45.26
50.00- 59.99 0.5 5.9 52.34
60.00- 69.99 0.8 6.0 67.88
70.00- 79.99 0.4 6.4 74.00
- -----------------------------------------------
</TABLE>
<TABLE>
- -----------------------------------
<CAPTION>
Options Exercisable
--------------------
Weighted
Range of Average
Exercise Number Exercise
Prices Exercisable Price
- -----------------------------------
(millions)
<S> <C> <C>
$ 5.00-$ 9.99 0.3 $ 8.28
10.00- 19.99 9.6 16.23
20.00- 29.99 5.8 25.97
30.00- 39.99 8.4 38.21
- -----------------------------------
</TABLE>
F-31
<PAGE>
PCS Common Stock
<TABLE>
- -----------------------------------------------
<CAPTION>
Options Outstanding
--------------------------------
Weighted
Average Weighted
Range of Remaining Average
Exercise Number Contractual Exercise
Prices Outstanding Life Price
- -----------------------------------------------
(millions) (years)
<S> <C> <C> <C>
$ 2.00-$ 9.99 19.8 7.1 $ 5.36
10.00- 19.99 18.4 9.1 15.59
20.00- 29.99 0.3 6.6 27.11
30.00- 39.99 0.2 7.0 33.32
40.00- 49.99 0.2 6.5 45.95
50.00- 59.99 0.9 7.7 50.76
- -----------------------------------------------
</TABLE>
<TABLE>
- -----------------------------------
<CAPTION>
Options Exercisable
--------------------
Weighted
Range of Average
Exercise Number Exercise
Prices Exercisable Price
- -----------------------------------
(millions)
<S> <C> <C>
$ 2.00-$ 9.99 9.2 $ 4.74
10.00- 19.99 7.8 15.59
</TABLE>
- --------------------------------------------------------------------------------
11. Commitments and Contingencies
- --------------------------------------------------------------------------------
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.
Operating Leases
Sprint's minimum rental commitments at year-end 1999 for all noncancelable
operating leases, consisting mainly of leases for data processing equipment,
real estate, cell and switch sites, and office space are as follows:
<TABLE>
- ----------------------
<CAPTION>
(millions)
<S> <C>
2000 $676
2001 503
2002 346
2003 229
2004 141
Thereafter 423
- ----------------------
</TABLE>
Sprint's gross rental expense totaled $890 million in 1999, $730 million in
1998 and $410 million in 1997. Rental commitments for subleases, contingent
rentals and executory costs were not significant. The table excludes renewal
options related to certain cell and switch site leases. These renewal options
generally have five-year terms and may be exercised from time to time.
- --------------------------------------------------------------------------------
12. Financial Instruments
- --------------------------------------------------------------------------------
Fair Value of Financial Instruments
Sprint estimates the fair value of its financial instruments using available
market information and appropriate valuation methodologies. As a result, the
following estimates do not necessarily represent the values Sprint could
realize in a current market exchange. Although management is not aware of any
factors that would affect the year-end 1999 estimated fair values, those
amounts have not been comprehensively revalued for purposes of these financial
statements since that date. Therefore, estimates of fair value after year-end
1999 may differ significantly from the amounts presented below.
The carrying amounts and estimated fair values of Sprint's financial
instruments at year-end were as follows:
<TABLE>
- ----------------------------------------------------------------
<CAPTION>
1999
------------------
Estimated
Carrying Fair
Amount Value
- ----------------------------------------------------------------
(millions)
<S> <C> <C>
Cash and equivalents $ 120 $ 120
Investments in equity securities 464 464
Long-term debt and capital lease obligations 16,772 16,126
- ----------------------------------------------------------------
- ----------------------------------------------------------------
<CAPTION>
1998
------------------
Estimated
Carrying Fair
Amount Value
- ----------------------------------------------------------------
(millions)
<S> <C> <C>
Cash and equivalents $ 605 $ 605
Investments in equity securities 489 489
Long-term debt and capital lease obligations 12,189 12,771
- ----------------------------------------------------------------
</TABLE>
The carrying amounts of Sprint's cash and equivalents approximate fair value at
year-end 1999 and 1998. The estimated fair value of investments in equity
securities was based on quoted market prices. The estimated fair value of long-
term debt was based on quoted market prices for publicly traded issues. The
estimated fair value of all other issues was based on the present value of
estimated future cash flows using a discount rate based on the risks involved.
Concentrations of Credit Risk
Sprint's accounts receivable are not subject to any concentration of credit
risk. Sprint controls credit risk of its interest rate swap agreements and
foreign currency contracts through credit approvals, dollar exposure limits and
internal monitoring procedures. In the event of nonperformance by the
counterparties, Sprint's accounting loss would be limited to the net amount it
would be entitled to receive under the terms of the applicable interest rate
swap agreement or foreign currency contract. However, Sprint does not
anticipate nonperformance by any of the counterparties to these agreements.
Interest Rate Swap Agreements
Sprint uses interest rate swap agreements as part of its interest rate risk
management program. Net
F-32
<PAGE>
interest paid or received related to these agreements is recorded using the
accrual method and is recorded as an adjustment to interest expense. Sprint had
interest rate swap agreements with notional amounts of $598 million outstanding
at year-end 1999 and $134 million outstanding at year-end 1998. Net interest
expense (income) related to interest rate swap agreements was $1 million in
1999, $0.1 million in 1998 and $(0.2) million in 1997.
In 1998, Sprint deferred losses from the termination of interest rate swap
agreements used to hedge a portion of a $5.0 billion debt offering. These
losses, totaling $75 million, are being amortized to interest expense using the
effective interest method over the term of the debt. At year-end 1999, the
remaining unamortized deferred loss totaled $67 million.
Foreign Currency Contracts
As part of its foreign currency exchange risk management program, Sprint
purchases and sells over-the-counter forward contracts and options in various
foreign currencies. Sprint had outstanding open forward contracts to buy
various foreign currencies of $14 million at year-end 1999 and $18 million at
year-end 1998. Sprint had outstanding open purchase option contracts to call
various foreign currencies of $1 million at year-end 1999 and $10 million at
year-end 1998. The premium paid for an option is deferred and amortized over
the life of the option. The forward contracts and options open at year-end 1999
and 1998 all had original maturities of six months or less. The net gain or
loss recorded to reflect the fair value of these contracts is recorded in the
period incurred. Total net losses, including hedge costs, of $0.3 million in
1999, $0.6 million in 1998 and $0.1 million in 1997 were recorded related to
foreign currency transactions and contracts.
- --------------------------------------------------------------------------------
13. Additional Financial Information
- --------------------------------------------------------------------------------
Segment Information
The FON Group operates in five business segments, based on services and
products: the long distance division, the local division, the product
distribution and directory publishing businesses, activities to develop and
deploy Sprint ION(SM) and other ventures. See Note 12 of Sprint FON Group Notes
to the Combined Financial Statements for more information about the FON Group's
business segments.
The PCS Group businesses operate in a single segment.
Sprint generally accounts for transactions between segments based on fully
distributed costs, which Sprint believes approximates fair value.
F-33
<PAGE>
Industry segment financial information was as follows:
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
Sprint Sprint
FON PCS Intergroup
Group Group Eliminations(/1/) Consolidated
- -------------------------------------------------------------------------------
(millions)
<S> <C> <C> <C> <C>
1999
Net operating revenues $17,016 $ 3,180 $(268) $19,928
Intergroup revenues 264 4 (268) --
Depreciation and amortization 2,129 1,523 -- 3,652
Operating expenses 14,086 6,417 (268) 20,235
Operating income (loss) 2,930 (3,237) -- (307)
Operating margin 17.2% NM -- NM
Equity in losses of
affiliates (73) -- -- (73)
Capital expenditures 3,534 2,580 -- 6,114
Total assets 21,803 17,924 (477) 39,250
1998
Net operating revenues $15,764 $ 1,225 $(108) $16,881
Intergroup revenues 108 -- (108) --
Depreciation and amortization 1,921 789 -- 2,710
Operating expenses 13,004 3,795 (108) 16,691
Operating income (loss) 2,760 (2,570) -- 190
Operating margin 17.5% NM -- NM
Other partners' loss in
Sprint PCS -- 1,251 -- 1,251
Equity in losses of
affiliates (41) -- -- (41)
Capital expenditures 3,159 1,072 -- 4,231
Total assets 19,001 15,165 (909) 33,257
1997
Net operating revenues $14,564 $ -- $ -- $14,564
Depreciation and amortization 1,713 -- -- 1,713
Operating expenses 12,094 19 -- 12,113
Operating income (loss) 2,470 (19) -- 2,451
Operating margin 17.0% NM -- 16.8%
Equity in losses of
affiliates (10) (660) -- (670)
Capital expenditures 2,709 154 -- 2,863
Total assets 16,581 1,703 (10) 18,274
</TABLE>
NM = Not meaningful
(/1/) FON Group revenues eliminated in consolidation consist principally of
long-distance services provided to the PCS Group for resale to PCS
customers and for internal business use and telemarketing services
provided by the FON Group for PCS sales programs.
More than 95% of Sprint's revenues are from domestic customers located within
the United States.
Revenues from one customer of the FON Group represent approximately 4% of the
FON Group's net operating revenues in 1999 and 5% in 1998 and 1997.
Equipment sales to one retail chain and the subsequent service revenues
generated by sales to its customers represent approximately 28% of the PCS
Group's net operating revenues in 1999 and 25% in 1998.
F-34
<PAGE>
Supplemental Cash Flows Information
Sprint's cash paid (received) for interest and income taxes was as follows:
<TABLE>
- ------------------------------------------------------------------------------
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------
(millions)
<S> <C> <C> <C>
Interest (net of capitalized interest) $ 714 $ 217 $198
-------------------
Income taxes $ (131) $ 307 $366
-------------------
Sprint's noncash activities included the following:
- ------------------------------------------------------------------------------
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------
(millions)
<S> <C> <C> <C>
Common stock issued for Cox PCS acquisition $1,146 $ -- $--
-------------------
Debt assumed in the broadband fixed wireless acquisitions $ 575 $ -- $--
-------------------
Tax benefit from stock options exercised $ 254 $ 49 $ 26
-------------------
Stock received for stock options exercised $ 118 $ 18 $ 7
-------------------
Noncash extinguishment of debt $ 78 $ -- $--
-------------------
Capital lease obligations $ 77 $ 460 $ 30
-------------------
Common stock issued under Sprint's ESPP $ 72 $ 95 $ 5
-------------------
Common stock issued to the Cable Partners to purchase
Sprint PCS $ -- $3,200 $--
-------------------
Preferred stock issued to the Cable Partners in exchange
for interim financing $ -- $ 247 $--
-------------------
</TABLE>
See Note 3 for more details about the assets and liabilities acquired in
business combinations.
Related Party Transactions
The Cable Partners advanced PhillieCo $26 million in 1998 and $24 million in
1997. These advances were repaid in the 1999 first quarter.
- --------------------------------------------------------------------------------
14. Recently Issued Accounting Pronouncement
- --------------------------------------------------------------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This standard
requires all derivatives to be recorded on the balance sheet as either assets
or liabilities and be measured at fair value. Gains or losses from changes in
the derivative values are to be accounted for based on how the derivative was
used and whether it qualifies for hedge accounting. When adopted in January
2001, this statement is not expected to have a material impact on Sprint's
consolidated financial statements.
F-35
<PAGE>
- --------------------------------------------------------------------------------
15. Quarterly Financial Data (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter
------------------------------
1999 1st 2nd 3rd 4th
- ------------------------------------------------------------------------
(millions, except per share
data)
<S> <C> <C> <C> <C>
Net operating revenues(/1/) $4,652 $4,888 $5,068 $5,320
Operating income (loss) (90) 28 (64) (181)
Loss from continuing operations(/2/) (171) (103) (196) (275)
Net loss (220) (169) (256) (290)
Earnings (Loss) per common share from
continuing operations(/3/),(/4/)
FON common stock
Diluted 0.49 0.51 0.48 0.49
Basic 0.50 0.52 0.49 0.50
PCS common stock
Diluted and Basic (0.71) (0.61) (0.65) (0.75)
- ------------------------------------------------------------------------
<CAPTION>
Quarter
------------------------------
1998 1st 2nd 3rd 4th
- ------------------------------------------------------------------------
(millions, except per share
data)
<S> <C> <C> <C> <C>
Net operating revenues(/1/) $4,011 $4,126 $4,273 $4,471
Operating income (loss)(/6/) 214 185 148 (357)
Income (Loss) from continuing
operations(/2/),(/5/),(/6/) 249 247 251 (162)
Net income (loss)(/5/) 207 210 240 (243)
Earnings (Loss) per common share from
continuing operations(/3/),(/4/),(/7/)
Sprint common stock
Diluted 0.57 0.56 0.57 0.49
Basic 0.58 0.57 0.58 0.50
FON common stock
Diluted NA NA NA 0.18
Basic NA NA NA 0.18
PCS common stock
Diluted and Basic NA NA NA (0.63)
- ------------------------------------------------------------------------
</TABLE>
(/1/) Certain reclassifications were made from net operating revenues to
operating expenses from amounts reported in 1999 reports on Form 10-Q to
conform to current year presentation. These reclassifications had no
impact on operating income (loss) as previously reported.
(/2/) Quarterly income (loss) from continuing operations have been adjusted
from amounts reported in 1999 reports on Form 10-Q to reflect the
presentation of the equity investment in Global One as a discontinued
operation for all periods presented.
(/3/) In the 1999 second quarter, Sprint effected a two-for-one stock split of
its FON stock. FON Group earnings per share for prior periods have been
restated to reflect this stock split.
(/4/) On February 4, 2000, Sprint effected a two-for-one stock split of its PCS
stock. PCS Group loss per share for prior periods have been restated to
reflect this stock split.
(/5/) In the 1998 fourth quarter, the FON Group recorded net nonrecurring gains
of $104 million, mainly from the sale of local exchanges. This decreased
loss from continuing operations by $62 million.
(/6/) In the 1998 fourth quarter, the PCS Group recorded a nonrecurring charge
to write off $179 million of acquired IPR&D related to the PCS
Restructuring. This charge increased operating loss and loss from
continuing operations by $179 million.
(/7/) Fourth quarter 1998 reflects EPS for Sprint only through the date of the
November 1998 Recapitalization. EPS for the FON Group and the PCS Group
reflects EPS from the date of the Recapitalization through year-end 1998.
NA = Not applicable
- --------------------------------------------------------------------------------
16. Subsequent Event (Unaudited)
- --------------------------------------------------------------------------------
In February 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 March 30, 2000.
F-36
<PAGE>
SPRINT CORPORATION
SCHEDULE II--CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Additions
-------------------------------
Balance Charged Charged Balance
Beginning PCS to to Other Other End of
of Year Restructuring Income Accounts Deductions Year
- --------------------------------------------------------------------------------------------
(millions)
<S> <C> <C> <C> <C> <C> <C>
1999
Allowance for doubtful
accounts $186 $-- $655 $ 7 $(563)(/1/) $285
-----------------------------------------------------------------
Valuation allowance--
deferred income tax
assets $249 $-- $ 47 $179(/4/) $ (9) $466
-----------------------------------------------------------------
1998
Allowance for doubtful
accounts $147 $ 8(/2/) $379 $ 3 $(351)(/1/) $186
-----------------------------------------------------------------
Valuation allowance--
deferred income tax
assets $ 12 $229(/3/) $-- $ 16 $ (8) $249
-----------------------------------------------------------------
1997
Allowance for doubtful
accounts $117 $-- $389 $ 4 $(363)(/1/) $147
-----------------------------------------------------------------
Valuation allowance--
deferred income tax
assets $ 14 $-- $ 3 $-- $ (5) $ 12
-----------------------------------------------------------------
</TABLE>
(/1/) Accounts written off, net of recoveries.
(/2/) As discussed in Note 3, the PCS Group's assets and liabilities were
recorded at their fair values on the PCS Restructuring date. Therefore,
the data presented in this Schedule reflects activity since the PCS
Restructuring.
(/3/) Represents a valuation allowance for deferred income tax assets recorded
in connection with the PCS Restructuring.
(/4/) Represents a valuation allowance for deferred income tax assets relating
to the net operating loss carryforwards acquired in the purchase of the
broadband fixed wireless companies.
F-37
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Sprint FON Group
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
General
- -------------------------------------------------------------------------------
See Sprint's "Management's Discussion and Analysis of Financial Condition and
Results of Operations--General" for more information.
- -------------------------------------------------------------------------------
Forward-looking Information
- -------------------------------------------------------------------------------
See Sprint's "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Forward-looking Information" for a discussion of
forward-looking information.
- -------------------------------------------------------------------------------
Sprint FON Group
- -------------------------------------------------------------------------------
Core Businesses
Long Distance Division
The long distance division is the nation's third-largest long distance phone
company. It operates a nationwide, all-digital long distance communications
network that uses fiber-optic and electronic technology. The division
primarily 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 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, or LATAs.
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.
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.
- -------------------------------------------------------------------------------
Results of Operations
- -------------------------------------------------------------------------------
Total net operating revenues for 1999 were $17.0 billion, an 8% increase from
$15.8 billion in 1998. Total net operating revenues for 1997 were $14.6
billion.
Income from continuing operations was $1.7 billion in 1999 and 1998 and $1.5
billion in 1997.
Core Businesses
In 1999, the FON Group's core businesses generated improved net operating
revenues and operating income from 1998. Long distance calling volumes
increased 22% in 1999 and 15% in 1998. Access lines served by the local
division increased 5% in 1999 and 1998, excluding sales of local exchanges.
Core net income included net nonrecurring pretax gains of $104 million in 1998
and $51 million in 1997. These gains mainly consisted of sales of local
exchanges and certain investments, partly offset by litigation charges in
1997.
Excluding these nonrecurring items, operating income from core operations was
$3.3 billion in 1999, $2.9 billion in 1998 and $2.6 billion in 1997.
- -------------------------------------------------------------------------------
Segmental Results of Operations
- -------------------------------------------------------------------------------
Long Distance Division
<TABLE>
- -------------------------------------------------------------------
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------
(millions)
<S> <C> <C> <C>
Net operating revenues $10,567 $9,658 $8,684
- -------------------------------------------------------------------
Operating expenses
Interconnection 3,804 3,608 3,640
Operations 1,507 1,453 1,257
Selling, general and administrative(/1/) 2,629 2,312 2,014
Depreciation and amortization 993 918 748
- -------------------------------------------------------------------
Total operating expenses 8,933 8,291 7,659
- -------------------------------------------------------------------
Operating income $ 1,634 $1,367 $1,025
-----------------------
Operating margin 15.5% 14.2% 11.8%
-----------------------
Capital expenditures $ 1,209 $1,364 $1,223
-----------------------
</TABLE>
(/1/) The FON Group recorded nonrecurring litigation charges of $20 million in
1997.
F-38
<PAGE>
Net Operating Revenues
All major market segments--business, residential and wholesale--contributed to
the increase in net operating revenues in 1999 and 1998. The increases mainly
reflect strong data services revenue growth as well as strong minute growth of
22% in 1999 and 15% in 1998, partly offset by a more competitive pricing
environment and a change in the mix of products sold.
Business and Data Market
Business and data market revenues increased 9% in 1999 and 15% in 1998. Data
services showed strong growth because of continued demand and increased use of
the Internet. The increases also reflect strong calling volumes partly offset
by lower rates due to increased competition.
Residential Market
Residential market revenues increased 7% in 1999 and 5% in 1998. These
increases reflect strong volume growth from long distance calls, partly offset
by lower domestic and international rates. Growth was also enhanced by the
Sprint Nickel Nights(SM) product which generated increased sales in 1999. Other
growth factors included increased prepaid card revenues and increased sales of
Sprint Solutions(SM)--bundled local and long-distance services sold through
Sprint's local telephone operations.
Wholesale Market
Wholesale market revenues increased 15% in 1999 and 8% in 1998. This reflects
strong minute growth mainly from international calls and increased inbound and
outbound toll-free calls.
Interconnection Costs
Interconnection costs consist of amounts paid to local phone companies, other
domestic service providers and foreign phone companies to complete calls made
by the division's domestic customers. These costs increased 5% in 1999 and
decreased 1% in 1998. Increased calling volumes were partially offset by
reductions in per-minute costs for both domestic and international access in
1999. The 1999 increase in interconnection costs also reflects costs related to
growth in non-minute driven revenues. In 1998, reductions in per-minute costs
more than offset the impact of increased calling volumes. The rate reductions
were generally due to domestic FCC-mandated access rate reductions that took
effect in January and July 1998 and 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 36.0% of net
operating revenues in 1999, 37.4% in 1998 and 41.9% in 1997.
Operations Expense
Operations expense includes costs to operate and maintain the long distance
network and costs of equipment sales. It also includes costs to provide
operator, public payphone and video teleconferencing services as well as
telecommunications services for the hearing-impaired. Operations expense
increased 4% in 1999 and 16% in 1998. These increases were driven by growth in
data services as well as increases in network equipment operating leases in
both years. The 1998 increase also reflects the service costs of Paranet, which
was purchased in late 1997. Operations expense was 14.3% of net operating
revenues in 1999, 15.0% in 1998 and 14.5% in 1997.
Selling, General and Administrative Expense
Selling, general and administrative (SG&A) expense increased 14% in 1999 and
15% in 1998. These increases mainly reflect the overall growth of the business
as well as increased marketing and promotions to support products and services,
including the rollout of an airline alliance program which enables customers to
earn frequent flyer miles when they use Sprint's services. SG&A expense was
24.8% of net operating revenues in 1999, 23.9% in 1998 and 23.2% in 1997.
Depreciation and Amortization Expense
Depreciation and amortization expense increased 8% in 1999 and 23% in 1998.
These increases were generally due to an increased asset base to enhance
network reliability, meet increased demand for voice and data-related services
and upgrade capabilities for providing new products and services. The 1998
increase was also driven by capital additions having shorter average
depreciable lives. Depreciation and amortization expense was 9.4% of net
operating revenues in 1999, 9.5% in 1998 and 8.6% in 1997.
Local Division
<TABLE>
- -------------------------------------------------------------
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------
(millions)
<S> <C> <C> <C>
Net operating revenues $5,650 $5,372 $5,294
- -------------------------------------------------------------
Operating expenses
Costs of services and products 1,971 1,853 1,892
Selling, general and administrative 1,114 1,130 1,064
Depreciation and amortization 1,065 982 946
- -------------------------------------------------------------
Total operating expenses 4,150 3,965 3,902
- -------------------------------------------------------------
Operating income $1,500 $1,407 $1,392
<CAPTION>
----------------------
<S> <C> <C> <C>
Operating margin 26.5% 26.2% 26.3%
<CAPTION>
----------------------
<S> <C> <C> <C>
Capital expenditures $1,354 $1,374 $1,270
<CAPTION>
----------------------
</TABLE>
F-39
<PAGE>
Beginning in July 1997, Sprint changed its transfer pricing for certain
transactions between FON Group entities to more accurately reflect market
pricing. The main effect of this change was a reduction in the local division's
"Net Operating Revenues--Other Revenues." Sprint sold approximately 139,000
residential and business access lines in Illinois in 1997 and the remaining
81,000 access lines in Illinois in November 1998. For comparative purposes, the
following discussion of local division results assumes these transfer pricing
changes and sales of exchanges occurred at the beginning of 1997. Adjusting for
these transfer pricing changes and sales of exchanges, operating margins would
have been 26.0% in 1998 and 25.0% in 1997.
Net Operating Revenues
Net operating revenues increased 6% in 1999 and 5% in 1998. These increases
mainly reflect customer access line growth and increased sales of network-based
services such as Caller ID and Call Waiting. Customer access lines increased 5%
in both 1999 and 1998. Sales of network-based services increased in 1999 due to
strong demand for bundled services which combine local service, network-based
features and long distance calling. The increase in 1998 revenues also reflects
increased sales of equipment. Net operating revenues were $5.7 billion in 1999,
$5.3 billion in 1998 and $5.1 billion in 1997.
Local Service Revenues
Local service revenues, derived from local exchange services, grew 9% in 1999
and 10% in 1998 because of customer access line growth, continued demand for
network-based services, growth in data products and increased revenues from
maintaining customer wiring and equipment. Revenue growth in 1998 also reflects
increased sales of private line services.
Network Access Revenues
Network access revenues, derived from long distance phone companies using the
local network to complete calls, increased 4% in 1999 and in 1998. These
revenues reflect an 8% increase in minutes of use in 1999 and 1998 and the 1999
implementation of local number portability charges. These increases were partly
offset by access rate reductions mandated by the FCC. Access rate reductions
took effect in January and July 1998 and July 1999.
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 11% in 1999 and 26% in 1998, mainly
reflecting increased competition in the intraLATA long distance market, which
is expected to continue. In addition, toll service areas are shrinking as
certain local calling areas are expanding. However, the reduced revenues are,
in part, offset by increases in local service revenues and by increases in
network access revenues paid by other carriers providing intraLATA long
distance services to the local division's customers. In addition, over one-
third of the toll customers lost by the local division have selected Sprint's
long distance division for intraLATA long distance service, which helps
mitigate the erosion of these revenues.
Other Revenues
Other revenues increased 7% in 1999 and 1998 reflecting increased equipment
sales of business systems and data networks, as well as growth in telemarketing
and commission revenues. Revenue growth in 1999 also reflects improvements in
uncollectibles. The 1998 growth also reflects increased revenues from providing
billing and collection services.
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 expenses increased 7% in 1999 and
remained flat in 1998. The 1999 increase was driven by customer access line
growth, increased equipment sales, an increased emphasis on service levels,
increased telemarketing expenses and storm related costs. The 1998 cost
increases from customer access line growth and increased equipment sales were
offset by efficiencies from streamlining and standardizing business processes
and a reduction in pension costs due to increased returns on plan assets. Costs
of services and products were 34.9% of net operating revenues in 1999, 34.5% in
1998 and 36.1% in 1997.
Selling, General and Administrative Expense
SG&A expenses decreased 1% in 1999 and increased 8% in 1998. The 1999 decrease
is due to a strong emphasis on cost control, partly offset by increased
marketing costs to promote new products and services and costs related to
customer access line growth. The 1998 increase was mainly due to marketing
costs to promote new products and services and increased customer service costs
related to customer access line growth. Also impacting SG&A for 1998 was a
reduction in pension costs due to increased returns on plan assets. SG&A
expense was 19.7% of net operating revenues in 1999, 21.1% in 1998 and 20.5% in
1997.
Depreciation and Amortization Expense
Depreciation and amortization expense increased
9% in 1999 and 5% in 1998, mainly because of increased capital expenditures in
switching and transport technologies which have shorter asset lives.
Depreciation and amortization expense was 18.9% of net operating revenues in
1999, 18.4% in 1998 and 18.3% in 1997.
F-40
<PAGE>
Product Distribution and Directory Publishing Businesses
<TABLE>
<CAPTION>
- -------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------
(millions)
<S> <C> <C> <C>
Net operating revenues $1,731 $1,683 $1,454
- -------------------------------------------------------------
Operating expenses
Costs of services and products 1,345 1,330 1,173
Selling, general and administrative 127 109 93
Depreciation and amortization 17 13 9
- -------------------------------------------------------------
Total operating expenses 1,489 1,452 1,275
- -------------------------------------------------------------
Operating income $ 242 $ 231 $ 179
----------------------
Operating margin 14.0% 13.7% 12.3%
----------------------
Capital expenditures $ 36 $ 9 $ 11
----------------------
</TABLE>
Beginning in July 1997, Sprint changed its transfer pricing for certain
transactions between FON Group entities to more accurately reflect market
pricing. The following discussion assumes these transfer pricing changes
occurred at the beginning of 1997. Adjusting for these changes, the product
distribution and directory publishing businesses' operating margins would have
been 15.7% in 1997.
Net operating revenues increased 3% in 1999 and 16% in 1998. Nonaffiliated
revenues accounted for roughly 60% of revenues in 1999 and 1998. These revenues
increased 12% in 1999 and 10% in 1998. Sales to affiliates decreased 10% in
1999 and increased 27% in 1998. 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 in
1999. In 1998, the growth reflects the centralization of certain local division
purchasing and warehousing functions at North Supply in 1997 resulting in
affiliates purchasing more through North Supply.
Costs of services and products increased 1% in 1999 and 19% in 1998 reflecting
increased equipment sales. SG&A expense increased 17% in both 1999 and 1998.
The 1999 increase was the result of staffing demands related to nonaffiliated
sales growth. The 1998 increase was the result of costs related to the
division's acquisition of a sales force from another directory sales company in
1998.
Sprint ION(SM)
<TABLE>
<CAPTION>
- ------------------------------------
1999 1998 1997
- ------------------------------------
(millions)
<S> <C> <C> <C>
Operating expenses $358 $143 $ 5
--------------
Capital expenditures $542 $154 $46
--------------
</TABLE>
Operating expenses for Sprint ION in 1999 and 1998 reflect its initial
development and deployment activities and include costs for network research
and testing, systems and operations development, product development and
advertising to increase public awareness. Depreciation and amortization totaled
$38 million in 1999, $5 million in 1998 and $2 million in 1997.
Other Ventures
<TABLE>
<CAPTION>
- -------------------------------------------------
1999 1998 1997
- -------------------------------------------------
(millions)
<S> <C> <C> <C>
Net operating revenues $ 20 $-- $--
----------------
Operating expenses $ 68 $ 40 $ 84
----------------
Operating loss $(48) $(40) $(84)
----------------
Equity in losses of affiliates $(89) $(51) $(10)
----------------
Capital expenditures $ 23 $-- $ 17
----------------
</TABLE>
This segment includes the operating results of the cable TV service operations
of the broadband fixed wireless companies after their 1999 acquisition dates.
Operating expenses in 1998 and 1997 and capital expenditures in 1997 mainly
relate to the FON Group's offering of Internet services. In June 1998, the FON
Group completed the strategic alliance to combine its Internet business with
EarthLink. As part of the alliance, EarthLink obtained the FON Group's Sprint
Internet Passport customers and took over the day-to-day operations of those
services. In exchange, the FON Group acquired an equity interest in EarthLink.
As a result, beginning in 1998, the FON Group's share of EarthLink's losses has
been reflected in "Equity in losses of affiliates" above.
"Equity in losses of affiliates" mainly consists of losses from EarthLink and
Call-Net.
- --------------------------------------------------------------------------------
Nonoperating Items
- --------------------------------------------------------------------------------
Interest Expense
The effective interest rates in the following table reflect interest expense on
long-term debt only. Interest costs on short-term borrowings classified as
long-term debt, intergroup borrowings, deferred compensation plans and customer
deposits have been excluded so as not to distort the effective interest rates
on long-term debt.
<TABLE>
<CAPTION>
- ---------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------
<S> <C> <C> <C>
Effective interest rate on long-term debt 7.8% 7.9% 8.0%
--------------
</TABLE>
Effective with the PCS Restructuring, interest expense on borrowings incurred
by Sprint and allocated to the PCS Group is based on rates the PCS Group would
be able to obtain from third parties. Those interest rates are higher than the
rates Sprint obtains on the borrowings. 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
$157 million in 1999 and $11 million in 1998, have also been excluded in
computing the effective interest rates above. See Note 2 of Notes to Combined
Financial Statements for a more detailed description of Sprint's policies about
the allocation of Group financing.
F-41
<PAGE>
Other Income, Net
Other income consisted of the following:
<TABLE>
<CAPTION>
- --------------------------------------------
1999 1998 1997
- --------------------------------------------
(millions)
<S> <C> <C> <C>
Dividend and interest income $36 $ 74 $ 99
Other, net 13 79 66
- --------------------------------------------
Total $49 $153 $165
--------------
</TABLE>
Dividend and interest income for all years reflects interest earned on
temporary investments. For 1998, it also reflects interest earned on loans to
unconsolidated affiliates and interest earned on short-term investments
following Sprint's $5.0 billion debt offering in late 1998. "Other, net" for
1999 includes net gains on miscellaneous investment activities, partly offset
by losses from certain equity method investments. For 1998 and 1997, it mainly
reflects net gains on sales of local exchanges and certain investments, partly
offset by losses from certain equity method investments.
Income Taxes
The FON Group's effective tax rates were 37.9% in 1999, 37.3% in 1998 and 37.7%
in 1997. See Note 7 of Notes to Combined Financial Statements for information
about the differences that caused the effective income tax rates to vary from
the statutory federal rate for income taxes related to continuing operations.
Discontinued Operation, Net
As a result of Sprint's sale of its interest in Global One to Deutsche Telekom
and France Telecom, Sprint's equity share of the results of Global One has been
reported as a discontinued operation for all periods presented.
Sprint recorded after-tax losses related to Global One totaling $130 million in
1999, $135 million in 1998 and $142 million in 1997. The 1999 amount includes a
$50 million tax benefit recorded to recognize tax assets related to previous
losses. The realization of these assets was uncertain until the sale agreement
was reached. The gain on the sale of Sprint's interest in Global One made it
apparent that these tax assets would be realized.
Extraordinary Items, Net
In 1999, Sprint redeemed, prior to scheduled maturities, $575 million of the
broadband fixed wireless companies' debt, assumed by the FON Group, with
interest rates ranging from 13.1% to 14.5%. This resulted in a $39 million
after-tax extraordinary loss for the FON Group.
In 1998, Sprint redeemed, prior to scheduled maturities, $138 million of FON
Group debt with interest rates ranging from 7.9% to 9.3%. This resulted in a $5
million after-tax extraordinary loss.
- --------------------------------------------------------------------------------
Financial Condition
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------
1999 1998
- --------------------------------
(millions)
<S> <C> <C>
Combined assets $21,803 $19,001
---------------
</TABLE>
The increase in assets was due to capital expenditures to support the core long
distance and local networks and Sprint ION development as well as the purchase
of the broadband fixed wireless companies. See "Liquidity and Capital
Resources" for more information about changes in the Combined Balance Sheets.
- --------------------------------------------------------------------------------
Liquidity and Capital Resources
- --------------------------------------------------------------------------------
Operating Activities
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------
(millions)
<S> <C> <C> <C>
Cash flows provided by operating activities $3,713 $3,915 $2,899
--------------------
</TABLE>
The decrease in 1999 operating cash flows mainly reflects increases in working
capital partly offset by improved operating results. The increase in 1998
operating cash flows mainly reflects improved operating results in the FON
Group's core businesses and decreases in working capital.
Investing Activities
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------
(millions)
<S> <C> <C> <C>
Cash flows used by investing activities from
continuing operations $(3,965) $(3,098) $(3,827)
-------------------------
</TABLE>
Capital expenditures, which are the FON Group's largest investing activity,
totaled $3.5 billion in 1999, $3.2 billion in 1998 and $2.7 billion in 1997.
Long distance capital expenditures were incurred mainly to enhance network
reliability, meet increased demand for voice and data-related services and
upgrade capabilities for providing new products and services. The local
division incurred capital expenditures to accommodate access line growth,
provide additional capacity for increased Internet traffic and expand
capabilities for providing enhanced services. In addition, capital expenditures
increased $388 million in 1999 from 1998 due to Sprint ION development and
hardware deployment.
In 1999, Sprint purchased the net assets of several broadband fixed wireless
companies for $618 million, excluding assumed debt. In 1997, Sprint purchased
the net assets of Paranet for $375 million. See Note 3 of Notes to Combined
Financial Statements.
F-42
<PAGE>
In 1999, the FON Group received a payment of $314 million from the PCS Group on
its outstanding loan. The FON Group had advances to the PCS Group and loans to
Sprint PCS to fund capital and operating requirements. Loans to Sprint PCS in
1998 were partly offset by the repayment of a vendor financing loan. Equity
transfers to the PCS Group were also used to fund its capital and operating
requirements and were offset by current tax benefits used by the FON Group.
Investing activities also include net proceeds from sales of assets totaling
$90 million in 1999, $230 million in 1998 and $292 million in 1997.
"Investments in and loans to other affiliates, net" includes the FON Group's
investment in EarthLink, Call-Net and other miscellaneous ventures.
Financing Activities
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------
(millions)
<S> <C> <C> <C>
Cash flows provided (used) by financing activities $308 $(219) $79
----------------
</TABLE>
Financing activities during 1999 mainly reflect long-term borrowings of $1.0
billion, partly offset by payments on long-term debt of $529 million. In 1998,
financing activities mainly reflect long-term borrowings of $785 million partly
offset by payments on long-term debt of $388 million. In 1997, the FON Group
had net borrowings of $532 million, mainly to fund investments in and loans to
affiliates.
The FON Group paid dividends of $426 million in 1999 and $430 million in 1998
and 1997. The indicated annual dividend rate on FON stock is $0.50 per share.
Capital Requirements
The FON Group's 2000 investing activities, mainly consisting of capital
expenditures and investments in affiliates, are expected to require cash of
$4.1 to $4.4 billion. FON Group capital expenditures are expected to range
between $3.9 and $4.2 billion in 2000. The long distance and local divisions
will require the majority of this total. Sprint ION is expected to require $600
to $700 million for capital expenditures in 2000. Investments in affiliates are
expected to require cash of approximately $200 million. Dividend payments are
expected to approximate $435 million.
In connection with the PCS Restructuring, Sprint adopted a tax sharing
agreement that provides for the allocation of income taxes between the FON
Group and the PCS Group. Sprint expects the FON Group to make significant
payments to the PCS Group under this agreement because of expected PCS Group
operating losses in the near future. These payments will reflect the PCS
Group's incremental cumulative effect on Sprint's consolidated federal and
state tax liability and tax credit position. The PCS Group accrued current
benefits under the agreement totaling $887 million in 1999 and $190 million in
1998 and received related payments from the FON Group totaling $764 million in
1999 and $20 million in 1998. The remaining $293 million will be paid by the
FON Group during the first half of 2000. See Note 2 of Notes to Combined
Financial Statements, "Allocation of Federal and State Income Taxes" for more
details.
Liquidity
See Sprint's "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity" for a discussion of liquidity.
- --------------------------------------------------------------------------------
Regulatory Developments
- --------------------------------------------------------------------------------
Competitive Local Service
The Telecommunications Act of 1996 (Telecom Act) was designed to promote
competition in all aspects of telecommunications. It eliminated legal and
regulatory barriers to entry into local phone markets. It also required
incumbent local phone companies, among other things, to allow local resale at
wholesale rates, negotiate interconnection agreements, provide
nondiscriminatory access to unbundled network elements and allow collocation of
interconnection equipment by competitors. Sprint has obtained interconnection
and collocation agreements with a number of incumbent local telephone carriers,
and is rolling out Sprint ION in cities across the nation.
Sprint is also rolling out resold and UNE based local services obtained from
other local phone companies under the Telecom Act. This rollout of local
services obtained from other local phone companies will occur in major areas
across the nation not served by the LTD.
In January 1999, the Supreme Court affirmed the FCC's authority to establish
rules and prices relating to interconnection and unbundling of the incumbent
local phone companies' networks. The FCC subsequently reaffirmed in large part
the list of network elements incumbents are required to provide on an unbundled
basis, and strengthened collocation requirements. It also took steps to speed
the deployment of advanced technologies such as xDSL.
RBOC Long Distance Entry
The Telecom Act also allows RBOCs to provide in-region long distance service
once they obtain state certification of compliance with a competitive
"checklist," have a facilities-based competitor, and obtain a FCC ruling that
the provision of in-region long distance service is in the public interest. One
RBOC, Bell Atlantic, obtained FCC authorization to provide in-region long
distance service in New York in December 1999; RBOCs may gain such
F-43
<PAGE>
authorization in the near future in other states. The entry of the RBOCs into
the long distance market will impact competition, but the extent of the impact
will depend upon factors such as the RBOCs' competitive ability, the appeal of
the RBOC brand to different market segments, and the response of competitors.
Some of the impact on Sprint may be offset by wholesale revenues from those
RBOCs that choose to resell Sprint services.
Customer Service Slamming
The Telecom Act also established liability for the unauthorized switch of a
consumer's telephone service from one carrier to another (slamming). In late
1998, the FCC adopted new rules intended to prevent slamming and to compensate
victims of slamming; these rules were stayed by the Court of Appeals, and the
FCC is currently considering an industry proposal that would streamline the
process for adjudicating alleged slams.
Mergers
As a result of increasing competitive pressures, a number of carriers have
combined or proposed to combine. Sprint and MCI WorldCom filed a merger
application with the FCC (November 1999) and with the European Commission
(January 2000); Sprint and MCI WorldCom are also continuing to provide the
Department of Justice with information supporting the proposed merger. SBC
completed its merger with Ameritech in 1999; the Bell Atlantic-GTE proposed
merger remains pending before the FCC. In 1999, AT&T completed its merger with
TCI, and announced its pending merger with MediaOne. AT&T is expected to use
its newly acquired cable facilities to provide competitive local telephone
services.
Universal Services Requirements
The FCC continued to address issues related to Universal Service and access
charge reform. It increased the amount of money available to schools and
libraries under the "e-rate" program; adopted a computer model designed to
calculate "high cost" universal service subsidies (and to replace high cost
subsidies implicit in interstate access charges with explicit contributions);
and continued to shift certain non-traffic sensitive costs from usage-sensitive
to flat-rated access charges. Sprint's long distance and local divisions both
benefit from cost-based access charges. In addition, the shift in costs from
usage-sensitive to flat-rated access charges has contributed to sharp decreases
in long distance usage rate charges.
The FCC and many states have established "universal service" programs to ensure
affordable, quality local telecommunications services for all Americans. The
FON Group's assessment to fund these programs is typically a percentage of end-
user revenues. The FON Group's 1999 results contained assessments for 1999.
Currently, management cannot predict the extent of the FON Group's future
federal and state universal service assessments, or its ability to recover its
contributions from the universal service fund.
Communications Assistance for Law Enforcement Act
The Communications Assistance for Law Enforcement Act (CALEA) was enacted in
1994 to preserve electronic surveillance capabilities authorized by federal and
state law. CALEA requires local telecommunications companies to meet certain
"assistance capability requirements" by the end of June 2000 where circuit-
switching is used and by September 2001 where packet-switching is used. Where
circuit-switched technology was installed before 1995, reimbursement for
hardware and software upgrades to facilitate CALEA compliance was authorized.
The U.S. Department of Justice has published guidelines concerning what is
required for it to support, at the FCC, petitions for extension of the CALEA
enforcement deadlines. LTD uses circuit-switching for the bulk of its traffic
and most LTD switches were installed before 1995 and qualify for reimbursement
if upgrades are required by the Justice Department. Sprint ION uses packet
switching for its local operations. In the case of Sprint ION, CALEA compliance
capabilities are not currently available from equipment and software vendors
involved in Sprint ION's deployment. Sprint believes it will be in compliance
with CALEA by the appropriate deadlines for local circuit-switched equipment.
Sprint ION will apply for an extension for the local packet-based services to
allow for development of required hardware and software.
- --------------------------------------------------------------------------------
Financial Strategies
- --------------------------------------------------------------------------------
Financial strategies are determined by Sprint on a centralized basis. See
Sprint's "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Financial Strategies."
- --------------------------------------------------------------------------------
Year 2000 Issue
- --------------------------------------------------------------------------------
The FON Group successfully completed its Year 2000 readiness work and passed
through the January 1, 2000 rollover event while encountering no customer-
affecting outages or business interruptions. Since the inception of the FON
Group's Year 2000 readiness program in 1996 through December 31, 1999, the FON
Group incurred approximately $275 million of costs associated with its Year
2000 readiness program. The FON Group does not expect to incur any significant
additional expenditures related to the Year 2000 issue.
- --------------------------------------------------------------------------------
Recently Issued Accounting Pronouncement
- --------------------------------------------------------------------------------
See Note 13 of Notes to Combined Financial Statements for a discussion of a
recently issued accounting pronouncement.
F-44
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Sprint Corporation
We have audited the accompanying combined balance sheets of the Sprint FON
Group (as described in Note 2) as of December 31, 1999 and 1998, and the
related combined statements of operations, comprehensive income and cash flows
for each of the three years in the period ended December 31, 1999. Our audits
also included the financial statement schedule listed in the Index to
Financial Statements and Financial Statement Schedules. These financial
statements and the schedule are the responsibility of the management of Sprint
Corporation (Sprint). Our responsibility is to express an opinion on these
financial statements and the schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the
Sprint FON Group at December 31, 1999 and 1998, and the combined results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As more fully discussed in Note 2, the combined financial statements of the
Sprint FON Group should be read together with the audited consolidated
financial statements of Sprint.
Ernst & Young LLP
Kansas City, Missouri
February 1, 2000
F-45
<PAGE>
COMBINED STATEMENTS OF OPERATIONS Sprint FON Group
(millions, except per share data)
<TABLE>
- ---------------------------------------------------------------------------
<CAPTION>
Years Ended December 31, 1999 1998 1997
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Net Operating Revenues $17,016 $15,764 $14,564
- ---------------------------------------------------------------------------
Operating Expenses
Costs of services and products 7,724 7,346 7,142
Selling, general and administrative 4,233 3,737 3,239
Depreciation and amortization 2,129 1,921 1,713
- ---------------------------------------------------------------------------
Total operating expenses 14,086 13,004 12,094
- ---------------------------------------------------------------------------
Operating Income 2,930 2,760 2,470
Interest expense (182) (243) (208)
Other income, net 49 153 165
- ---------------------------------------------------------------------------
Income from continuing operations before income
taxes 2,797 2,670 2,427
Income taxes (1,061) (995) (914)
- ---------------------------------------------------------------------------
Income from Continuing Operations 1,736 1,675 1,513
Discontinued operation, net (130) (135) (142)
Extraordinary items, net (39) (5) --
- ---------------------------------------------------------------------------
Net Income 1,567 1,535 1,371
Preferred stock dividends received (paid) 7 -- (1)
- ---------------------------------------------------------------------------
Earnings applicable to common stock $ 1,574 $ 1,535 $ 1,370
-------------------------
Diluted Earnings per Common Share(/1/)
Continuing operations $ 1.97 $ 1.93 $ 1.73
Discontinued operation (0.15) (0.16) (0.16)
Extraordinary items (0.04) -- --
- ---------------------------------------------------------------------------
Total $ 1.78 $ 1.77 $ 1.57
-------------------------
Diluted weighted average common shares 887.2 868.9 873.0
-------------------------
Basic Earnings per Common Share(/1/)
Continuing operations $ 2.01 $ 1.96 $ 1.76
Discontinued operation (0.15) (0.16) (0.17)
Extraordinary items (0.05) -- --
- ---------------------------------------------------------------------------
Total $ 1.81 $ 1.80 $ 1.59
-------------------------
Basic weighted average common shares 868.0 854.0 860.5
-------------------------
Dividends per Common Share(/1/) $ 0.50 $ 0.50 $ 0.50
-------------------------
</TABLE>
(/1/) Basic and diluted earnings per common share, weighted average common
shares, and dividends per common share for 1998 and 1997 are pro forma,
unaudited and assume the Recapitalization occurred at the beginning of
1997. In the 1999 second quarter, Sprint effected a two-for-one stock
split of its FON common stock. As a result, 1998 and 1997 basic and
diluted earnings per common share, weighted average common shares and
dividends per common share have been restated.
See accompanying Notes to Combined Financial Statements.
F-46
<PAGE>
COMBINED STATEMENTS OF COMPREHENSIVE INCOME Sprint FON Group
(millions)
<TABLE>
- ------------------------------------------------------------------------------
<CAPTION>
Years Ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income $1,567 $1,535 $1,371
- ------------------------------------------------------------------------------
Other Comprehensive Income (Loss)
Unrealized holding gains on securities 33 28 12
Income tax expense (12) (10) (5)
- ------------------------------------------------------------------------------
Net unrealized holding gains on securities during the
period 21 18 7
Reclassification adjustment for gains included in net
income (57) -- --
- ------------------------------------------------------------------------------
Total net unrealized holding gains (losses) on
securities (36) 18 7
Foreign currency translation adjustments -- (2) 10
- ------------------------------------------------------------------------------
Total other comprehensive income (loss) (36) 16 17
- ------------------------------------------------------------------------------
Comprehensive Income $1,531 $1,551 $1,388
----------------------
</TABLE>
See accompanying Notes to Combined Financial Statements.
F-47
<PAGE>
COMBINED BALANCE SHEETS Sprint FON Group
(millions)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
December 31, 1999 1998
- -------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets
Cash and equivalents $ 104 $ 432
Accounts receivable, net of allowance for doubtful
accounts of $228 and $175 2,836 2,375
Inventories 441 350
Prepaid expenses 251 199
Receivables from the PCS Group 136 236
Investments in equity securities 316 --
Other 198 177
- -------------------------------------------------------------------------
Total current assets 4,282 3,769
Investments in equity securities 139 489
Property, plant and equipment
Long distance division 9,824 9,241
Local division 15,828 14,858
Other 2,035 1,057
- -------------------------------------------------------------------------
Total property, plant and equipment 27,687 25,156
Accumulated depreciation (13,685) (12,692)
- -------------------------------------------------------------------------
Net property, plant and equipment 14,002 12,464
Investments in and loans to the PCS Group 431 656
Investments in and advances to other affiliates 452 463
Intangible assets
Goodwill 1,223 388
Other 296 56
- -------------------------------------------------------------------------
Total intangible assets 1,519 444
Accumulated amortization (140) (89)
- -------------------------------------------------------------------------
Net intangible assets 1,379 355
Net assets of discontinued operation 394 182
Other assets 724 623
- -------------------------------------------------------------------------
Total $ 21,803 $ 19,001
------------------
Liabilities and Group Equity
Current liabilities
Current maturities of long-term debt $ 902 $ 33
Accounts payable 1,012 1,260
Accrued interconnection costs 683 592
Accrued taxes 162 349
Advance billings 323 229
Payroll and employee benefits 557 280
Other 662 530
- -------------------------------------------------------------------------
Total current liabilities 4,301 3,273
Long-term debt 4,531 4,409
Deferred credits and other liabilities
Deferred income taxes and investment tax credits 935 828
Postretirement and other benefit obligations 1,064 1,064
Other 458 403
- -------------------------------------------------------------------------
Total deferred credits and other liabilities 2,457 2,295
Group equity 10,514 9,024
- -------------------------------------------------------------------------
Total $ 21,803 $ 19,001
------------------
</TABLE>
See accompanying Notes to Combined Financial Statements.
F-48
<PAGE>
COMBINED STATEMENTS OF CASH FLOWS Sprint FON Group
(millions)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $ 1,567 $ 1,535 $ 1,371
Adjustments to reconcile net income to net cash
provided by operating activities:
Discontinued operation, net 130 135 142
Extraordinary items, net 39 1 --
Equity in net losses of affiliates 70 52 22
Depreciation and amortization 2,129 1,921 1,713
Deferred income taxes and investment tax credits 220 60 --
Net gains on sales of assets (158) (104) (93)
Changes in assets and liabilities:
Accounts receivable, net (459) 102 (127)
Inventories and other current assets (130) (19) (92)
Accounts payable and other current liabilities 152 347 (37)
Affiliate receivables and payables, net 88 (84) --
Noncurrent assets and liabilities, net (76) (24) (19)
Other, net 141 (7) 19
- -----------------------------------------------------------------------------
Net cash provided by operating activities 3,713 3,915 2,899
- -----------------------------------------------------------------------------
Investing Activities
Capital expenditures (3,534) (3,159) (2,709)
Repayments from (investments in and loans to)
Sprint PCS 314 (154) (300)
Investments in and loans to other affiliates, net (135) (236) (186)
Net proceeds from sales of assets 90 230 292
Purchase of broadband fixed wireless companies,
net of cash acquired (618) -- --
Advances to the PCS Group -- (64) --
Equity transfers from (to) the PCS Group -- 340 (547)
Paranet acquisition -- -- (375)
Other, net (82) (55) (2)
- -----------------------------------------------------------------------------
Net cash used by continuing operations (3,965) (3,098) (3,827)
Net investing activities of discontinued
operation (384) (268) (200)
- -----------------------------------------------------------------------------
Net cash used by investing activities (4,349) (3,366) (4,027)
- -----------------------------------------------------------------------------
Financing Activities
Proceeds from long-term debt 1,020 785 867
Payments on long-term debt (529) (388) (135)
Net change in short-term borrowings -- -- (200)
Proceeds from sales of shares to FT and DT 52 -- --
Proceeds from treasury stock issued 134 60 57
Dividends paid (426) (430) (430)
Treasury stock purchased (48) (321) (145)
Other, net 105 75 65
- -----------------------------------------------------------------------------
Net cash provided (used) by financing activities 308 (219) 79
- -----------------------------------------------------------------------------
Increase (Decrease) in Cash and Equivalents (328) 330 (1,049)
Cash and Equivalents at Beginning of Year 432 102 1,151
- -----------------------------------------------------------------------------
Cash and Equivalents at End of Year $ 104 $ 432 $ 102
-------------------------
</TABLE>
See accompanying Notes to Combined Financial Statements.
F-49
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS Sprint FON Group
- -------------------------------------------------------------------------------
1. General
- -------------------------------------------------------------------------------
In October 1999, Sprint announced a definitive merger agreement with MCI
WorldCom. Under the agreement, each share of Sprint FON stock will be
exchanged for $76 of MCI WorldCom common stock, subject to a collar. In
addition, each share of Sprint PCS stock will be exchanged for one share of a
new WorldCom PCS tracking stock and 0.116025 shares of MCI WorldCom common
stock. The terms of the WorldCom PCS tracking stock will be equivalent to
those of Sprint's PCS common stock and will track the performance of the
company's personal communication services (PCS) business. The merger is
subject to the approvals of Sprint and MCI WorldCom shareholders as well as
approvals from the Federal Communications Commission, the Justice Department,
various state government bodies and foreign antitrust authorities. The
companies anticipate that the merger will close in the second half of 2000.
In November 1998, Sprint's shareholders approved the formation of the FON
Group and the PCS Group and the creation of the FON stock and the PCS stock.
In addition, Sprint purchased the remaining ownership interests in Sprint
Spectrum Holding Company, L.P. and PhillieCo, L.P. (together, Sprint PCS),
other than a minority interest in Cox Communications PCS, L.P. (Cox PCS).
Sprint acquired these ownership interests from Tele-Communications, Inc.,
Comcast Corporation and Cox Communications, Inc. (the Cable Partners). In
exchange, Sprint issued the Cable Partners special low-vote PCS shares and
warrants to acquire additional PCS shares. Sprint also issued the Cable
Partners shares of a new class of preferred stock convertible into PCS shares.
The purchase of the Cable Partners' interests is referred to as the PCS
Restructuring. In the 1999 second quarter, Sprint acquired the remaining
minority interest in Cox PCS.
Also in November 1998, Sprint reclassified each of its publicly traded common
shares into one share of FON stock and 1/2 share of PCS stock. This
recapitalization was tax-free to shareholders. Each Class A common share owned
by France Telecom S.A. (FT) and Deutsche Telekom AG (DT) was reclassified to
represent an equity interest in the FON Group and the PCS Group that entitles
FT and DT to one share of FON stock and 1/2 share of PCS stock. These
transactions are referred to as the Recapitalization.
In connection with the PCS Restructuring, FT and DT purchased 5.1 million
additional PCS shares (pre-split basis) to maintain their combined 20% voting
power in Sprint (Top-up).
The PCS stock is intended to reflect the performance of Sprint's domestic
wireless PCS operations. The FON stock is intended to reflect the performance
of all of Sprint's other operations.
- -------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies
- -------------------------------------------------------------------------------
Basis of Combination and Presentation
The combined FON Group financial statements, together with the combined PCS
Group financial statements, include all the accounts in Sprint's consolidated
financial statements. The combined financial statements for each Group were
prepared on a basis that management believes is reasonable and proper and
include:
. 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 after the PCS Restructuring date.
The FON Group entities are commonly controlled companies. Transactions between
the PCS Group and the FON Group have not been eliminated in the combined
financial statements of either Group.
The FON Group combined financial statements provide FON shareholders with
financial information about the FON Group operations. Investors in FON stock
and PCS stock are Sprint shareholders and are subject to risks related to all
of Sprint's businesses, assets and liabilities. Sprint retains ownership and
control of the assets and operations of each Group. Financial effects of
either Group that affect Sprint's results of operations or financial condition
could affect the results of operations or financial position of the other
Group or the market price of the other Group's stock. Net losses of either
Group, and dividends or distributions on, or repurchases of, PCS stock or FON
stock will reduce Sprint funds legally available for dividends on both Groups'
stock. As a result, the FON Group combined financial statements should be read
along with Sprint's consolidated financial statements and the PCS Group's
combined financial statements.
The FON Group combined financial statements are prepared using 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.
F-50
<PAGE>
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).
Classification of Operations
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 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 million access lines in 18 states. It provides local 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, or local access transport areas. In November 1998,
Sprint sold its remaining 81,000 residential and business access lines in
Illinois.
Product Distribution and Directory Publishing Businesses
The product distribution business provides wholesale distribution services of
telecommunications products. The directory publishing business publishes and
markets white and yellow page phone directories.
Sprint ION(SM)
Sprint ION extends Sprint's existing 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.
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.
Allocation of Shared Services
Sprint directly assigns, where possible, certain general and administrative
costs to the FON Group and the PCS Group based on their actual use of those
services. Where direct assignment of costs is not possible, or practical,
Sprint uses other indirect methods, including time studies, to estimate the
assignment of costs to each Group. Sprint believes that the costs allocated are
comparable to the costs that would be incurred if the Groups would have been
operating on a stand-alone basis. The allocation of shared services may change
at the discretion of Sprint and does not require shareholder approval.
Allocation of Federal and State Income Taxes
Sprint files a consolidated federal income tax return and certain state income
tax returns which include FON Group and PCS Group results. In connection with
the PCS Restructuring, Sprint adopted a tax sharing agreement which provides
for the allocation of income taxes between the two Groups. The FON Group's
income taxes are calculated as if it files returns which exclude the PCS Group.
Intergroup tax payments are satisfied on the date Sprint's related tax payment
is due to or the refund is received from the applicable tax authority. The FON
Group accrued income taxes payable to the PCS Group in accordance with the tax
sharing agreement totaling $887 million in 1999 and $190 million in 1998.
Allocation of Group Financing
Financing activities for the Groups are managed by Sprint on a centralized
basis. Debt incurred by Sprint on behalf of the Groups is specifically
allocated to and reflected in the financial statements of the applicable Group.
Interest expense is allocated to the PCS Group based on an interest rate that
is substantially equal to the rate it would be able to obtain from third
parties as a direct or indirect wholly owned Sprint subsidiary, but without the
benefit of any guaranty by Sprint or any member of the FON Group. That interest
rate is higher than the rate Sprint obtains on borrowings. The difference
between Sprint's actual interest rate and the rate charged to the PCS Group is
reflected as a reduction in the FON Group's interest expense.
Under Sprint's centralized cash management program, one Group may advance funds
to the other Group. These advances are accounted for as short-term borrowings
between the Groups and bear interest at a market rate that is substantially
equal to the rate that Group would be able to obtain from third parties on a
short-term basis.
The allocation of Group financing activities may change at the discretion of
Sprint and does not require shareholder approval.
Income Taxes
The FON Group records deferred income taxes based on temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and their tax bases.
F-51
<PAGE>
Revenue Recognition
The FON Group recognizes operating revenues as services are rendered or as
products are delivered to customers. The FON Group records operating revenues
net of an estimate for uncollectible accounts. Sprint's directory publishing
business recognizes revenues for directory services over the life of the
related directory (amortization method).
Cash and Equivalents
Cash and equivalents generally include highly liquid investments with original
maturities of three months or less. They are stated at cost, which approximates
market value. Sprint uses controlled disbursement banking arrangements as part
of its cash management program. Outstanding checks in excess of cash balances
for the FON Group were included in accounts payable. These amounts totaled $174
million at year-end 1999 and $263 million at year-end 1998. The FON Group had
sufficient funds available to fund these outstanding checks when they were
presented for payment.
Investments in Debt and Equity Securities
Investments in debt and equity securities are classified as available for sale
and reported at fair value (estimated based on quoted market prices). Gross
unrealized holding gains and losses are reflected as adjustments to "Group
equity," net of related income taxes.
Inventories
Inventories are stated at the lower of cost (principally first-in, first-out
method) or market value.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Generally, ordinary asset
retirements and disposals are charged against accumulated depreciation with no
gain or loss recognized. The cost of property, plant and equipment is generally
depreciated on a straight-line basis over estimated economic useful lives.
Repair and maintenance costs are expensed as incurred.
Capitalized Interest
The FON Group capitalized interest costs related to constructing capital assets
of $43 million in 1999, $42 million in 1998 and $23 million in 1997. In
addition, Sprint capitalized interest costs related to the PCS Group's network
buildout. This capitalized interest totaled $61 million for 1998 and $24
million for 1997 and was contributed to, and will be amortized by, the PCS
Group. Sprint also capitalized interest costs related to its investment in
Sprint PCS until July 1997 when Sprint PCS emerged from the development stage.
This capitalized interest, totaling $142 million, was contributed to, and is
being amortized by, the PCS Group.
Intangible Assets
The FON Group evaluates the recoverability of intangible assets when events or
circumstances indicate that such assets might be impaired. The FON Group
determines impairment by comparing the undiscounted future cash flows estimated
to be generated by these assets to their respective carrying value. In the
event impairment exists, a loss is recognized based on the amount by which the
carrying value exceeds the fair value of the asset.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the
net assets acquired in business combinations accounted for as purchases.
Goodwill is being amortized over five to 40 years using the straight-line
method. Accumulated amortization totaled $94 million at year-end 1999 and $52
million at year-end 1998.
Earnings per Share
As a result of the Recapitalization, earnings per share for the FON Group for
1998 has been calculated based on the Group's income from November 1998 through
year-end 1998. It was not calculated on a Group basis for periods prior to
November 1998 because the FON stock was not part of Sprint's capital structure
at that time.
In the 1999 second quarter, Sprint effected a two-for-one split on its FON
common stock. As a result, basic and diluted earnings per common share,
weighted-average common shares and dividends for FON common stock have been
restated for periods prior to the stock split.
In 1999, the FON Group's convertible preferred dividends totaled $1 million and
dilutive securities (mainly options) totaled 19.2 million shares. From the
Recapitalization date to year-end 1998, the FON Group's convertible preferred
dividends totaled $0.1 million, and dilutive securities (mainly options)
totaled 13.8 million shares.
The FON Group's earnings per common share after the Recapitalization date was
as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------
1998
- ---------------------------------------------------
(millions,
except per
share data)
<S> <C>
Earnings applicable to common stock $ 118
------
Diluted earnings per common share
Continuing operations $ 0.18
Discontinued operation (0.04)
- ---------------------------------------------------
Total $ 0.14
------
Diluted weighted average common shares 869.0
------
Basic earnings per common share
Continuing operations $ 0.18
Discontinued operation (0.04)
- ---------------------------------------------------
Total $ 0.14
------
Basic weighted average common shares 855.2
------
</TABLE>
F-52
<PAGE>
Stock-based Compensation
The FON Group participates in the incentive-based stock option plans and
employee stock purchase plan administered by Sprint for executives and other
employees. Sprint adopted the pro forma disclosure requirements under Statement
of Financial Accounting Standards (SFAS) No. 123, "Stock-based Compensation,"
and continues to apply Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," to its stock option and employee stock purchase
plans. Had the FON Group applied SFAS 123, pro forma net income would have been
$1,434 million for 1999 and $103 million from the Recapitalization date through
year-end 1998. See Note 10 of Sprint's Notes to Consolidated Financial
Statements for more information about Sprint's stock-based compensation and the
FON Group's pro forma net income and earnings per share.
In 1997, Sprint granted performance-based stock options to certain key
executives. The FON Group expensed $9 million in 1999 and $14 million in 1998
related to these performance-based stock options.
- --------------------------------------------------------------------------------
3. Business Combinations
- --------------------------------------------------------------------------------
Broadband Fixed Wireless Companies
In the second half of 1999, Sprint acquired People's Choice TV Corp. (PCTV),
American Telecasting, Inc. (ATI), Videotron USA and the operating subsidiaries
of WBS America, LLC. These companies own broadband fixed wireless licenses in
the Midwest, Southwest, North Central, Western and Southeastern United States.
Sprint paid $618 million for the companies' outstanding stock and assumed $575
million of the companies' debt. These notes were redeemed, prior to scheduled
maturities, in the 1999 fourth quarter (see Note 8).
These acquisitions were accounted for as purchases. As a result, the financial
statements of these companies have been reflected in the FON Group's combined
financial statements after the acquisition dates. The excess of the purchase
price over the net liabilities acquired totaled $835 million and was
preliminarily allocated to goodwill, which is being amortized on a straight-
line basis over 40 years.
Paranet, Inc.
In September 1997, Sprint paid $375 million to purchase the net assets of
Houston-based Paranet, Inc., a provider of integration, management and support
services for computer networks.
The transaction was accounted for using the purchase method of accounting. As a
result, the FON Group's combined financial statements reflect Sprint Paranet's
results of operations beginning in October 1997.
The excess of the purchase price over the tangible net assets acquired was $357
million. This excess was allocated to noncompete agreements and goodwill, and
is being amortized on a straight-line basis over four to 10 years.
- --------------------------------------------------------------------------------
4. Investments
- --------------------------------------------------------------------------------
Investments in Equity Securities
The cost of investments in equity securities was $153 million at year-end 1999
and $105 million at year-end 1998. Gross unrealized holding gains were $302
million at year-end 1999 and $384 million at year-end 1998. At year-end 1999,
$316 million of investments in equity securities are classified as current in
anticipation of using the investments to retire debt instruments (see Note 8).
During 1999, the FON Group sold available-for-sale securities with a cost basis
of $14 million for $104 million. The $90 million gain was included in "Other
income, net" in the Combined Statements of Operations.
Investments in and Advances to Other Affiliates
At year-end 1999, investments accounted for using the equity method consisted
of the FON Group's investments in EarthLink, Call-Net and strategic
investments. Combined, unaudited, summarized financial information (100% basis)
of these entities and others accounted for using the equity method was as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------
1999 1998 1997
- ------------------------------------------------
(millions)
<S> <C> <C> <C>
Results of operations
Net operating revenues $1,571 $1,242 $ 724
---------------------
Operating income (loss) $ (192) $ 67 $(246)
---------------------
Net loss $ (329) $ (145) $(287)
---------------------
Financial position
Current assets $1,524 $1,038
Noncurrent assets 2,749 2,401
- ----------------------------------------
Total $4,273 $3,439
--------------
Current liabilities $ 599 $ 538
Noncurrent liabilities 1,644 1,004
Owners' equity 2,030 1,897
- ----------------------------------------
Total $4,273 $3,439
--------------
</TABLE>
- --------------------------------------------------------------------------------
5. Discontinued Operation
- --------------------------------------------------------------------------------
In January 2000, Sprint reached a definitive agreement with Deutsche Telekom
and France Telecom 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's investment in the net assets of the discontinued operation,
including advances, totaled $394 million at year-end 1999 and $182 million at
year-end 1998.
F-53
<PAGE>
The Fon Group recorded after-tax losses related to Global One totaling $130
million in 1999, $135 million in 1998 and $142 million in 1997. The 1999 amount
includes a $50 million tax benefit recorded to recognize tax assets related to
previous losses. The realization of these assets was uncertain until the sale
agreement was reached. The gain on the sale of Sprint's interest in Global One
made it apparent that these tax assets would be realized.
The FON Group provided various voice, data and administrative services to
Global One totaling $241 million in 1999, $277 million in 1998 and $415 million
in 1997. In addition, Global One provided data and administrative services to
the FON Group totaling $139 million in 1999, $140 million in 1998 and $114
million in 1997. The FON Group's receivable from Global One was $107 million at
year-end 1999 and $187 million at year-end 1998. The FON Group's payable to
Global One was $36 million at year-end 1999 and $42 million at year-end 1998.
- --------------------------------------------------------------------------------
6. Employee Benefit Plans
- --------------------------------------------------------------------------------
Defined Benefit Pension Plan
Most FON Group employees are covered by a noncontributory defined benefit
pension plan sponsored by Sprint. Benefits for plan participants belonging to
unions are based on negotiated schedules. For non-union participants, pension
benefits are based on years of service and the participants' compensation.
Sprint's policy is to make plan contributions equal to an actuarially
determined amount consistent with federal tax regulations. The funding
objective is to accumulate funds at a relatively stable rate over the
participants' working lives so benefits are fully funded at retirement.
Amounts included in the Combined Balance Sheets for the plan were prepaid
pension costs of $285 million at year-end 1999 and $222 million at year-end
1998.
Net pension costs or credits are determined for the FON Group based on a direct
calculation of service costs and interest on projected benefit obligations and
an appropriate allocation of unrecognized prior service costs, amortization of
unrecognized transition asset, actuarial gains and losses, and expected return
on plan assets. The FON Group recorded net pension credits (costs) of $63
million in 1999, $46 million in 1998 and $(2) million in 1997.
Defined Contribution Plans
Sprint sponsors defined contribution employee savings plans covering most FON
Group employees. Participants may contribute portions of their pay to the
plans. For union employees, Sprint matches contributions based on negotiated
amounts. Sprint also matches contributions of non-union employees in FON and
PCS stock. The matching is equal to 50% of participants' contributions up to 6%
of their pay. In addition, Sprint may, at the discretion of the Board of
Directors, provide additional matching contributions based on the performance
of FON and PCS stock compared to other telecommunications companies' stock. The
FON Group recorded expenses of $73 million in 1999 and $54 million in 1998 and
1997 for Sprint's matching contributions to the Sprint defined contribution
plans. At year-end 1999, Sprint's defined contribution plans held 33 million
FON shares and 27 million PCS shares (on a post-split basis).
Postretirement Benefits
Sprint provides postretirement benefits (principally medical and life insurance
benefits) to most FON Group employees. Employees retiring before certain dates
are eligible for benefits at no cost, or at a reduced cost. Employees retiring
after certain dates are eligible for benefits on a shared-cost basis. Sprint
funds the accrued costs as benefits are paid.
Amounts included in the Combined Balance Sheets at year-end were accrued
postretirement benefits costs of $1.0 billion in 1999 and 1998.
Net postretirement benefits costs are determined for the FON Group based on a
direct calculation of service costs and interest on accumulated postretirement
benefit obligations and an appropriate allocation of unrecognized prior service
costs and actuarial gains. The FON Group recorded net postretirement benefits
costs of $54 million in 1999, $51 million in 1998 and $54 million in 1997.
- --------------------------------------------------------------------------------
7. Income Taxes
- --------------------------------------------------------------------------------
Income tax expense allocated to continuing operations consisted of the
following:
<TABLE>
<CAPTION>
- --------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------
(millions)
<S> <C> <C> <C>
Current income tax expense
Federal $ 776 $861 $814
State 65 74 100
- --------------------------------------------------------
Total current 841 935 914
- --------------------------------------------------------
Deferred income tax expense (benefit)
Federal 170 38 (7)
State 50 22 7
- --------------------------------------------------------
Total deferred 220 60 --
- --------------------------------------------------------
Total $1,061 $995 $914
----------------
</TABLE>
F-54
<PAGE>
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:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------
(millions)
<S> <C> <C> <C>
Income tax expense at the federal statutory rate $979 $935 $849
Effect of:
State income taxes, net of federal income tax effect 75 62 70
Equity in losses of foreign joint ventures 18 6 4
Other, net (11) (8) (9)
- ------------------------------------------------------------------------------
Income tax expense $1,061 $995 $914
----------------------
Effective income tax rate 37.9% 37.3% 37.7%
----------------------
</TABLE>
Income tax expense (benefit) allocated to other items was as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------
(millions)
<S> <C> <C> <C>
Discontinued operation $(111) $(62) $(24)
Extraordinary items (23) (3) --
Unrealized holding gains on investments(/1/) 20 10 5
Stock ownership, purchase and options arrangements(/1/) (223) (49) (26)
- ---------------------------------------------------------------------------
</TABLE>
(/1/) These amounts have been recorded directly to "Group equity."
The FON Group recognizes deferred income taxes for the temporary differences
between the carrying amounts of its assets and liabilities for financial
statement purposes and their tax bases. The sources of the differences that
give rise to the deferred income tax assets and liabilities at year-end 1999
and 1998, along with the income tax effect of each, were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------
1999 Deferred
Income Tax
------------------
Assets Liabilities
- -----------------------------------------------------------
(millions)
<S> <C> <C>
Property, plant and equipment $-- $1,555
Postretirement and other benefits 422 --
Reserves and allowances 143 --
Unrealized holding gains on investments -- 52
Operating loss carryforwards 183 --
Tax credit carryforwards 22 --
Other, net 161 --
- -----------------------------------------------------------
931 1,607
Less valuation allowance 183 --
- -----------------------------------------------------------
Total $748 $1,607
-----------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------
1998 Deferred
Income Tax
------------------
Assets Liabilities
- -----------------------------------------------------------
(millions)
<S> <C> <C>
Property, plant and equipment $-- $1,402
Postretirement and other benefits 419 --
Reserves and allowances 149 --
Unrealized holding gains on investments -- 72
Other, net 117 --
- -----------------------------------------------------------
685 1,474
Less valuation allowance 4 --
- -----------------------------------------------------------
Total $681 $1,474
-----------------
</TABLE>
Management believes it is more likely than not that these deferred income tax
assets, net of the valuation allowance, will be realized based on current
income tax laws and expectations of future taxable income stemming from the
reversal of existing deferred tax liabilities or ordinary operations.
Uncertainties surrounding income tax law changes, shifts in operations between
state taxing jurisdictions, and future operating income levels may, however,
affect the ultimate realization of all or some of these deferred income tax
assets.
The valuation allowance related to deferred income tax assets increased $179
million in 1999 and decreased $8 million in 1998 and $2 million in 1997.
In 1999, the FON Group acquired approximately $179 million of potential tax
benefits related to net operating loss carryforwards in the acquisitions of the
broadband fixed wireless companies. These benefits are subject to certain
realization restrictions under various tax laws. A valuation allowance was
provided for the total of these benefits. If these benefits are subsequently
recognized, they will reduce goodwill or other noncurrent intangible assets
resulting from the application of the purchase method of accounting for these
transactions.
At year-end 1999, the FON Group had federal operating loss carryforwards of
$432 million and state operating loss carryforwards of $741 million. Related to
these loss carryforwards are federal tax benefits of $151 million and state tax
benefits of $49 million which expire in varying amounts through 2019.
F-55
<PAGE>
- --------------------------------------------------------------------------------
8. Long-term Debt and Capital Lease Obligations
- --------------------------------------------------------------------------------
Sprint's consolidated long-term debt and capital lease obligations at year-end
was as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
1999 1998
--------------------------- --------------------------
Sprint Sprint Sprint Sprint
FON PCS FON PCS
Maturing Group Group Consolidated Group Group Consolidated
- -----------------------------------------------------------------------------------------
(millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Senior notes
5.7% to 6.9%(/1/) 2001 to 2028 $1,105 $ 8,145 $ 9,250 $1,059 $3,941 $ 5,000
8.1% to 9.8% 2000 to 2003 632 -- 632 632 -- 632
11.0% to 12.5%(/2/) 2001 to 2006 -- 734 584 -- 699 565
Debentures and notes
5.8% to 9.6% 2000 to 2022 565 -- 565 565 -- 565
Notes payable and
commercial paper -- 294 1,971 2,265 472 274 746
First mortgage bonds
2.0% to 9.9% 1999 to 2025 1,295 -- 1,295 1,312 -- 1,312
Capital lease
obligations
5.2% to 14.0% 1999 to 2008 69 486 555 32 452 484
Revolving credit
facilities
Variable rates 2002 to 2006 900 -- 900 -- 1,800 1,800
Other(/2/),(/3/)
2.0% to 10.0% 1999 to 2007 573 153 726 370 1,029 1,085
- -----------------------------------------------------------------------------------------
5,433 11,489 16,772 4,442 8,195 12,189
Less: current
maturities(/2/) 902 185 1,087 33 348 247
- -----------------------------------------------------------------------------------------
Long-term debt and
capital lease
obligations(/2/) $4,531 $11,304 $15,685 $4,409 $7,847 $11,942
------------------------------------------------------
</TABLE>
(/1/) These borrowings were incurred by Sprint and allocated to the applicable
Group. Sprint's weighted average interest rate related to these borrowings
was 6.6% at year-end 1999 and 6.4% at year-end 1998. The weighted average
interest rate related to the borrowings allocated to the PCS Group was
approximately 8.7% at year-end 1999 and 8.5% at year-end 1998. See Note 2
for a more detailed description of how Sprint allocates financing to each
of the Groups.
(/2/) Consolidated debt does not equal the total of PCS Group and FON Group debt
due to intergroup debt eliminated in consolidation. The FON Group had an
investment in the PCS Group's Senior Discount notes totaling $150 million
at year-end 1999 and $134 million at year-end 1998. In addition, the PCS
Group had other long-term debt payable to the FON Group totaling $314
million at year-end 1998, including $134 million classified as current.
(/3/) Includes notes with a market value of $316 million at year-end 1999 and
$358 million at year-end 1998 recorded by the FON Group that may be
exchanged at maturity for SBC Communications, Inc. (SBC) common shares
owned by the FON Group or for cash. Based on SBC's closing price, had the
notes matured at year-end 1999, they could have been exchanged for 6.5
million SBC shares. At year-end 1999, Sprint held 7.5 million SBC shares,
which have been included in "Investments in equity securities" in the FON
Group's Combined Balance Sheets.
F-56
<PAGE>
Scheduled principal payments, excluding reclassified short-term borrowings,
during each of the next five years are as follows:
<TABLE>
<CAPTION>
- --------------------------
Sprint Sprint
FON PCS
Group Group Sprint
- --------------------------
(millions)
<S> <C> <C> <C>
2000 $ 902 $ 185 $1,087
2001 877 289 1,096
2002 1,339 59 1,398
2003 373 1,058 1,431
2004 144 1,042 1,186
- --------------------------
</TABLE>
Sprint
Short-term Borrowings
Sprint had bank notes payable totaling $670 million at year-end 1999 and $454
million at year-end 1998. In addition, Sprint had commercial paper borrowings
totaling $1.6 billion at year-end 1999 and $292 million at year-end 1998.
Though these borrowings are renewable at various dates throughout the year,
they were classified as long-term debt because of Sprint's intent and ability,
through unused credit facilities, to refinance these borrowings on a long-term
basis.
In 1998, Sprint replaced its previous $1.5 billion credit facility with new
facilities with syndicates of domestic and international banks. The new
facilities totaled $5.0 billion and expire in 2000 and 2003. Commercial paper
and certain bank notes payable are supported by Sprint's revolving credit
facilities. Certain other notes payable relate to a separate revolving credit
facility which expires in 2002. At year-end 1999, Sprint had total unused lines
of credit of $3.5 billion.
Bank notes outstanding had weighted average interest rates of 6.3% at year-end
1999 and 5.7% at year-end 1998. The weighted average interest rate of
commercial paper was 6.4% at year-end 1999 and 5.8% at year-end 1998.
Long-term Debt
In the 1999 third quarter, Sprint filed a shelf registration statement with the
SEC covering $4.0 billion of senior unsecured debt securities. At year-end
1999, Sprint had issued $750 million of debt securities under the shelf. These
securities have interest rates ranging from 6.4% to 6.5% and mature in 2001.
In August 1999, Sprint incurred other borrowings totaling $250 million which
mature in 2002 and have variable interest rates. At year-end 1999, the notes
had an interest rate of 6.1%.
In June 1999, Sprint entered into a $1.0 billion financing agreement to sell,
on a continuous basis with recourse, undivided percentage ownership interests
in a designated pool of its accounts receivable. Subsequent collections of
receivables sold to investors are typically reinvested in new receivables. At
year-end 1999, Sprint had borrowed $900 million with a weighted average
interest rate of 6.4% under this agreement. These borrowings mature in 2002.
In May 1999, Sprint issued $3.5 billion of senior notes registered with the
SEC. These notes have maturities ranging from 5 to 20 years and interest rates
ranging from 5.9% to 6.9%. In 1998, Sprint issued $5.0 billion of senior notes
registered with the SEC. These notes have maturities ranging from 5 to 30 years
and interest rates ranging from 5.7% to 6.9%.
Sprint FON Group
In 1999, the FON Group received a net allocation of $1.0 billion of debt from
Sprint. This debt was mainly used for new capital investments and acquisitions.
See Note 2 for a more detailed description of how Sprint allocates debt to the
Groups.
In the 1999 fourth quarter, Sprint redeemed, prior to scheduled maturities,
$575 million of the assumed broadband fixed wireless companies' debt with
interest rates ranging from 13.1% to 14.5%. This resulted in a $39 million
after-tax extraordinary loss for the FON Group. In 1998, Sprint redeemed, prior
to scheduled maturities, $138 million of FON Group debt with interest rates
ranging from 7.9% to 9.3%. This resulted in a $5 million after-tax
extraordinary loss for the FON Group.
FON Group gross property, plant and equipment totaling $14.3 billion was either
pledged as security for first mortgage bonds and certain notes or is restricted
for use as mortgaged property.
Other
Sprint, including the FON Group, had complied with all restrictive or financial
covenants relating to its debt arrangements at year-end 1999.
- --------------------------------------------------------------------------------
9. Group Equity
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------
(millions)
<S> <C> <C> <C>
Beginning balance $ 9,024 $7,639 $7,332
Net income 1,567 1,535 1,371
Dividends (427) (431) (429)
Equity issued 209 164 65
Equity repurchased (48) (321) (145)
Tax benefit from stock options exercised 223 49 26
Contributions to the PCS Group -- (146) (1,052)
Equity transfer from the PCS Group -- 460 435
Other comprehensive income (loss) (36) 16 17
Other, net 2 59 19
- ------------------------------------------------------------------
Ending balance $10,514 $9,024 $7,639
-----------------------
</TABLE>
F-57
<PAGE>
- --------------------------------------------------------------------------------
10. Commitments and Contingencies
- --------------------------------------------------------------------------------
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.
Operating Leases
The FON Group's minimum rental commitments at year-end 1999 for all
noncancelable operating leases, consisting mainly of leases for data processing
equipment and real estate, are as follows:
<TABLE>
<CAPTION>
- ----------------------
(millions)
<S> <C>
2000 $423
2001 299
2002 202
2003 148
2004 106
Thereafter 349
- ----------------------
</TABLE>
The FON Group's gross rental expense totaled $575 million in 1999, $474 million
in 1998 and $406 million in 1997. Rental commitments for subleases, contingent
rentals and executory costs were not significant.
- --------------------------------------------------------------------------------
11. Financial Instruments
- --------------------------------------------------------------------------------
Fair Value of Financial Instruments
Sprint estimates the fair value of the FON Group's financial instruments using
available market information and appropriate valuation methodologies. As a
result, the following estimates do not necessarily represent the values the FON
Group could realize in a current market exchange. Although management is not
aware of any factors that would affect the year-end 1999 estimated fair values,
those amounts have not been comprehensively revalued for purposes of these
financial statements since that date. Therefore, estimates of fair value after
year-end 1999 may differ significantly from the amounts presented below.
The carrying amounts and estimated fair values of the FON Group's financial
instruments at year-end were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
1999
-------------------
Carrying Estimated
Amount Fair Value
- -----------------------------------------------------------------
(millions)
<S> <C> <C>
Cash and equivalents $ 104 $ 104
Investment in affiliate debt securities 169 169
Investments in equity securities 455 455
Long-term debt and capital lease obligations 5,433 5,497
- -----------------------------------------------------------------
- -----------------------------------------------------------------
<CAPTION>
1998
-------------------
Carrying Estimated
Amount Fair Value
- -----------------------------------------------------------------
(millions)
<S> <C> <C>
Cash and equivalents $ 432 $ 432
Investment in affiliate debt securities 165 165
Investment in equity securities 489 489
Long-term debt and capital lease obligations 4,442 4,834
- -----------------------------------------------------------------
</TABLE>
The carrying amounts of the FON Group's cash and equivalents approximate fair
value at year-end 1999 and 1998. The estimated fair value of investments in
debt and equity securities was based on quoted market prices. The estimated
fair value of the FON Group's long-term debt was based on quoted market prices
for publicly traded issues. The estimated fair value of all other issues was
based on the present value of estimated future cash flows using a discount rate
based on the risks involved.
Concentrations of Credit Risk
The FON Group's accounts receivable are not subject to any concentration of
credit risk.
- --------------------------------------------------------------------------------
12. Additional Financial Information
- --------------------------------------------------------------------------------
Segment Information
The FON Group operates in five business segments, based on services and
products: the long distance division, the local division, the product
distribution and directory publishing businesses, activities to develop and
deploy Sprint ION(SM) and other ventures.
Sprint generally accounts for transactions between segments based on fully
distributed costs, which Sprint believes approximates fair value.
F-58
<PAGE>
Industry segment financial information was as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Product
Long Distribution Sprint
Distance Local & Directory Sprint Other Corporate and FON
Division Division Publishing ION(SM) Ventures(/1/) ElimInations(/2/) Group
- ---------------------------------------------------------------------------------------------------------
(millions)
<S> <C> <C> <C> <C> <C> <C> <C>
1999
Net operating revenues $10,567 $5,650 $1,731 $-- $ 20 $ (952) $17,016
Intercompany revenues 256 319 641 -- -- (952) 264
Depreciation and
amortization 993 1,065 17 38 18 (2) 2,129
Operating expenses 8,933 4,150 1,489 358 68 (912) 14,086
Operating income (loss) 1,634 1,500 242 (358) (48) (40) 2,930
Operating margin 15.5% 26.5% 14.0% NM NM -- 17.2%
Capital expenditures 1,209 1,354 36 542 23 370 3,534
Total assets 13,523 8,072 726 909 1,936 (3,363) 21,803
1998
Net operating revenues $ 9,658 $5,372 $1,683 $-- $ -- $ (949) $15,764
Intercompany revenues 137 208 712 -- -- (949) 108
Depreciation and
amortization 918 982 13 5 7 (4) 1,921
Operating expenses 8,291 3,965 1,452 143 40 (887) 13,004
Operating income (loss) 1,367 1,407 231 (143) (40) (62) 2,760
Operating margin 14.2% 26.2% 13.7% NM NM -- 17.5%
Capital expenditures 1,364 1,374 9 154 -- 258 3,159
Total assets 6,445 7,044 727 199 628 3,958 19,001
1997
Net operating revenues $ 8,684 $5,294 $1,454 $-- $ -- $ (868) $14,564
Intercompany revenues 3 294 571 -- -- (868) --
Depreciation and
amortization 748 946 9 2 9 (1) 1,713
Operating expenses 7,659 3,902 1,275 5 84 (831) 12,094
Operating income (loss) 1,025 1,392 179 (5) (84) (37) 2,470
Operating margin 11.8% 26.3% 12.3% NM NM -- 17.0%
Capital expenditures 1,223 1,270 11 46 17 142 2,709
Total assets 6,828 7,933 601 50 228 941 16,581
</TABLE>
NM = Not meaningful
(/1/) The "other ventures" segment's equity in losses of affiliates totaled $89
million in 1999, $51 million in 1998 and $10 million in 1997.
(/2/) Significant intercompany eliminations consist of local access charged to
the long distance division, equipment purchases from the product
distribution business and interexchange services provided to the local
division.
More than 95% of the FON Group's s revenues are from domestic customers located
within the United States.
Revenues of one customer represents approximately 4% of the FON Group's net
operating revenues in 1999 and 5% in 1998 and 1997.
F-59
<PAGE>
Supplemental Cash Flows Information
The FON Group's cash paid for interest and income taxes was as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------
(millions)
<S> <C> <C> <C>
Interest (net of capitalized interest) $ 82 $217 $198
--------------
Income taxes $633 $327 $366
--------------
</TABLE>
Noncash activities for the FON Group included the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------
(millions)
<S> <C> <C> <C>
Debt assumed in the broadband fixed wireless acquisitions $575 $-- $--
--------------
Tax benefit from stock options exercised $223 $ 49 $ 26
--------------
Stock received for stock options exercised $ 78 $ 18 $ 7
--------------
Noncash extinguishment of debt $ 78 $-- $--
--------------
Common stock issued under Sprint's ESPP $ 72 $ 95 $ 5
--------------
Capital lease obligations $ 41 $-- $ 30
--------------
</TABLE>
Intergroup Investments and Transactions
Sprint FON Group Investments in the Sprint PCS Group
The following table reflects the FON Group's noncurrent investments in the PCS
Group, which have been eliminated in Sprint's consolidated financial
statements:
<TABLE>
<CAPTION>
- -----------------------------------------------------
1999 1998
- -----------------------------------------------------
(millions)
<S> <C> <C>
Common and preferred intergroup interest $ 262 $ 311
Long-term loans -- 180
Investment in debt securities 169 165
- -----------------------------------------------------
Total $ 431 $ 656
-----------
</TABLE>
Common Intergroup Interest
The FON Group received a 1% intergroup interest in the PCS Group at the time of
the PCS Restructuring and Recapitalization. This interest represented 4.5
million PCS shares and included 2.7 million shares held in treasury by the FON
Group. During 1999, PCS shares were issued to FON Group employees, reducing the
FON Group's interest in the PCS Group.
The FON Group's share of the PCS Group's net loss totaled $13 million in 1999
and $6 million from the date of the PCS Restructuring to year-end 1998 and was
included in "Other income, net" in the Sprint FON Group Combined Statements of
Operations.
Preferred Intergroup Interest
The FON Group provided Sprint PCS and the PCS Group with interim financing from
the date the PCS Restructuring agreement was signed in May 1998 until it was
completed in November 1998. As part of the PCS Restructuring, Sprint converted
this financing, totaling $279 million, into an intergroup interest representing
0.3 million shares of 10-year PCS preferred stock convertible into a PCS common
intergroup interest. The PCS Group paid the FON Group dividends on the
preferred intergroup interest of $8 million in 1999 and $1 million in 1998.
Long-term Loans
Sprint provided Sprint PCS with additional interim financing of $180 million
from May 1998 through November 1998. This loan was repaid in 1999.
Intergroup Interest Income
The FON Group earned intergroup interest income of $16 million in 1999, $15
million in 1998 and $24 million in 1997 related to the FON Group's investment
in PCS Group debt securities and advances to the PCS Group. These amounts are
included in "Other income, net" in the Sprint FON Group Combined Statements of
Operations.
The difference between Sprint's actual interest costs and the interest costs
charged to the PCS Group on allocated debt totaled $157 million in 1999 and $11
million in 1998. These amounts are reflected as a reduction to "Interest
expense" in the Sprint FON Group Combined Statements of Operations. See Note 2
for a more detailed description of how Sprint allocates interest expense to
each of the Groups.
Intergroup Transactions
The PCS Group is using the long distance division as its interexchange carrier
and purchasing wholesale long distance for resale to its customers.
Additionally, the FON Group provided the PCS Group with telemarketing services
and various other goods and services. Charges to the PCS Group for these items
totaled $280 million in 1999 and $21 million from the PCS Restructuring date to
year-end 1998.
The FON Group provided management, printing, mailing and warehousing services
to the PCS Group. Charges to the PCS Group for these services totaled $65
million in 1999 and $5 million from the PCS Restructuring date to year-end
1998.
Related Party Transactions
Sprint PCS
The following discussion reflects related party transactions between Sprint and
Sprint PCS prior to the PCS Restructuring:
Sprint provided Sprint PCS with billing and operator services, and switching
equipment. Sprint PCS also used the long distance division as its interexchange
F-60
<PAGE>
carrier. Charges to Sprint PCS for these services totaled $104 million in 1998
and $61 million in 1997.
Sprint provided management, printing, mailing and warehousing services to
Sprint PCS. Charges to Sprint PCS for these services totaled $25 million in
1998 and $11 million in 1997.
Sprint had a vendor financing loan to Sprint PCS for $300 million at year-end
1997 which was repaid in 1998. Sprint also loaned Sprint PCS $114 million in
1998 and $21 million in 1997, which was repaid in the 1999 first quarter.
- --------------------------------------------------------------------------------
13. Recently Issued Accounting Pronouncement
- --------------------------------------------------------------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This standard
requires all derivatives to be recorded on the balance sheet as either assets
or liabilities and be measured at fair value. Gains or losses from changes in
the derivative values are to be accounted for based on how the derivative was
used and whether it qualifies for hedge accounting. When adopted in January
2001, this statement is not expected to have a material impact on the FON
Group's combined financial statements.
- --------------------------------------------------------------------------------
14. Quarterly Financial Data (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter
---------------------------
1999 1st 2nd 3rd 4th
- -------------------------------------------------------------------------
(millions, except per share
data)
<S> <C> <C> <C> <C>
Net operating revenues(/1/) $4,107 $4,204 $4,298 $4,407
Operating income 737 736 726 731
Income from continuing operations(/2/) 434 452 419 431
Net income 406 386 359 416
Earnings per common share from continuing
operations(/3/)
Diluted 0.49 0.51 0.48 0.49
Basic 0.50 0.52 0.49 0.50
- -------------------------------------------------------------------------
<CAPTION>
Quarter
---------------------------
1998 1st 2nd 3rd 4th
- -------------------------------------------------------------------------
(millions, except per share
data)
<S> <C> <C> <C> <C>
Net operating revenues(/1/) $3,827 $3,882 $3,977 $4,078
Operating income 683 692 713 672
Income from continuing operations(/2/),(/4/) 394 401 426 454
Net income(/4/) 352 364 415 404
Pro forma earnings per common share from
continuing operations(/3/),(/5/)
Diluted 0.45 0.45 0.48 0.52
Basic 0.46 0.46 0.49 0.53
- -------------------------------------------------------------------------
</TABLE>
(/1/) Certain reclassifications were made from net operating revenues to
operating expenses from amounts reported in 1999 reports on Form 10-Q to
conform to current year presentation. These reclassifications had no
impact on operating income as previously reported.
(/2/) Quarterly income from continuing operations has been adjusted from amounts
reported in 1999 reports on Form 10-Q to reflect the presentation of the
equity investment in Global One as a discontinued operation for all
periods presented.
(/3/) In the 1999 second quarter, Sprint effected a two-for-one stock split of
its FON stock. FON Group earnings per share for prior periods have been
restated to reflect this stock split.
(/4/) In the 1998 fourth quarter, the FON Group recorded net nonrecurring gains
of $104 million, mainly from the sale of local exchanges. This increased
income from continuing operations by $62 million.
(/5/) Pro forma earnings per share assumes the FON shares created in the
Recapitalization existed for all periods presented.
- --------------------------------------------------------------------------------
15. Subsequent Events (Unaudited)
- --------------------------------------------------------------------------------
In February 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 March 30, 2000.
F-61
<PAGE>
SPRINT FON GROUP
SCHEDULE II--COMBINED VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
Additions
----------------
Balance Charged Charged Balance
Beginning to to Other Other End of
of Year Income Accounts Deductions Year
- ----------------------------------------------------------------------------
(millions)
<S> <C> <C> <C> <C> <C>
1999
Allowance for doubtful
accounts $175 $383 $ 3 $(333)(/1/) $228
----------------------------------------------------
Valuation allowance--
deferred income tax
assets $ 4 $-- $179(/2/) $ -- $183
----------------------------------------------------
1998
Allowance for doubtful
accounts $147 $365 $ 3 $(340)(/1/) $175
----------------------------------------------------
Valuation allowance--
deferred income tax
assets $ 12 $-- $-- $ (8) $ 4
----------------------------------------------------
1997
Allowance for doubtful
accounts $117 $389 $ 4 $(363)(/1/) $147
----------------------------------------------------
Valuation allowance--
deferred income tax
assets $ 14 $ 3 $-- $ (5) $ 12
----------------------------------------------------
</TABLE>
(/1/) Accounts written off, net of recoveries.
(/2/) Represents a valuation allowance for deferred income tax assets relating
to the net operating loss carryforwards acquired in the purchase of the
broadband fixed wireless companies.
F-62
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Sprint PCS Group
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
General
- -------------------------------------------------------------------------------
See Sprint's "Management's Discussion and Analysis of Financial Condition and
Results of Operations--General" for more information.
- -------------------------------------------------------------------------------
Forward-looking Information
- -------------------------------------------------------------------------------
See Sprint's "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Forward-looking Information" for a discussion of
forward-looking information.
- -------------------------------------------------------------------------------
Sprint PCS Group
- -------------------------------------------------------------------------------
The PCS Group includes Sprint's domestic wireless personal communication
services (PCS) operations. It operates the only 100% digital PCS wireless
network in the United States with licenses to provide service nationwide using
a single frequency and a single technology. At year-end 1999, the PCS Group,
together with affiliates, operated PCS systems in over 360 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 nearly 190 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 wireless industry typically generates a significantly higher number of
subscriber additions and handset sales in the fourth quarter of each year
versus the remaining quarters. This is due to the use of retail distribution,
which is dependent on the holiday shopping season; the timing of new products
and service introductions; and aggressive marketing and sales promotions.
- -------------------------------------------------------------------------------
Results of Operations
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------
1999 1998 1997
- -----------------------------------------------
(millions)
<S> <C> <C> <C>
Net operating revenues $ 3,180 $ 1,225 $--
Operating expenses 6,417 3,795 19
- -----------------------------------------------
Operating loss $(3,237) $(2,570) $(19)
-----------------------
</TABLE>
The PCS Group's 1999 results of operations reflect the first full year of
combined results after the PCS Restructuring. The PCS Group's 1998 results of
operations included SprintCom's operating results
as well as Sprint PCS' operating results on a consolidated basis for the
entire year. Before 1998, Sprint's investment in Sprint PCS was accounted for
using the equity method.
Operating expenses in 1998 include a write-off of $179 million associated with
the cost of nine in-process research and development projects acquired in
connection with the PCS Restructuring. Management has continued supporting
these research and development projects and believes the PCS Group has a
reasonable chance of successfully completing the projects. These projects are
intended to address new and emerging markets within the PCS wireless
communications industry, such as the rapid adoption of the Internet and the
rapid convergence of voice, data, and video. The failure of any particular
individual project in-process would not materially impact the PCS Group's
financial condition, results of operations or cash flows.
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 28% of net operating
revenues in 1999 and 25% in 1998.
Pro Forma Sprint PCS Group
To provide a more meaningful analysis of the PCS Group's underlying operating
results, the following supplemental discussion presents 1998 and 1997 on a pro
forma basis and assumes the PCS Restructuring and the write-off of acquired
in-process research and development costs occurred at the beginning of 1997.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------
(millions)
<S> <C> <C> <C>
Net operating revenues $ 3,180 $ 1,225 $ 258
Operating expenses
Costs of services and products 3,150 1,758 850
Selling, general and administrative 1,744 1,069 490
Depreciation and amortization 1,523 1,038 1,021
Acquired in-process research and development costs -- -- 179
- -------------------------------------------------------------------------------
Total operating expenses 6,417 3,865 2,540
- -------------------------------------------------------------------------------
Operating loss $(3,237) $(2,640) $(2,282)
--------------------------
Capital expenditures
(including capital lease obligations) $ 2,616 $ 2,904 $ 2,278
--------------------------
</TABLE>
F-63
<PAGE>
Net Operating Revenues
<TABLE>
<CAPTION>
- --------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------
<S> <C> <C> <C>
Customers at year-end (millions) 5.7 2.6 0.9
--------------
Average monthly service revenue per user $ 54 $ 56 $ 49
--------------
</TABLE>
Net operating revenues include subscriber revenues and sales of handsets and
accessory equipment. Subscriber revenues consist of monthly recurring charges
and usage charges. The PCS Group's net operating revenues were $3.2 billion in
1999, $1.2 billion in 1998 and $258 million in 1997. The 1999 increase mainly
reflects the launch of nearly 60 new markets and the addition of 3.1 million
customers. The 1998 increase reflects the launch of nearly 90 new markets and
the addition of 1.7 million customers. Average monthly service revenue per user
(ARPU) has decreased from 1998 due to a wider acceptance of lower-priced,
bundled minute rate plans.
Approximately 20% of 1999 and 1998 net operating revenues, and nearly half of
1997 revenues, were from sales of handsets and accessories. As part of the PCS
Group's marketing plans, handsets are normally sold at prices below the PCS
Group's cost.
Average monthly customer churn rates have remained consistent during 1999 and
1998 in the mid 3% range.
Operating Expenses
Costs of services and products mainly include handset and accessory costs,
switch and cell site expenses and other network-related costs. These costs
increased $1.4 billion in 1999 and $908 million in 1998 driven by the
significant growth in customers and the expanded market coverage.
Selling, general and administrative (SG&A) expense mainly includes marketing
costs to promote products and services as well as salary and benefit costs.
SG&A expense increased $675 million in 1999 and $579 million in 1998 reflecting
an expanded workforce to support subscriber growth and increased marketing and
selling costs.
Acquisition costs per gross customer addition, including equipment subsidies
and marketing costs, have improved from the high-$500 range in 1998 to the low-
$400 range in 1999. Lower handset unit costs and scale benefits from greater
customer additions have contributed to the improvement.
Cash costs per user (CCPU) consists of costs of service revenues, service
delivery and other general and administrative costs. CCPU decreased 36% in 1999
compared to 1998. The improvements reflect good expense management and scale
benefits resulting from the increased customer base.
Depreciation and amortization expense, which increased $485 million in 1999 and
$17 million in 1998, 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. The increase in
depreciation and amortization expense in 1999 reflects amortization of
intangible assets acquired in the PCS Restructuring and the Cox PCS purchase as
well as depreciation on an increased property base. The increase in 1998
reflects depreciation on an increased property base.
- --------------------------------------------------------------------------------
Nonoperating Items
- --------------------------------------------------------------------------------
Interest Expense
The effective interest rates in the following table reflect interest expense on
long-term debt only. Interest costs on short-term borrowings classified as
long-term debt and intergroup borrowings have been excluded so as not to
distort the PCS Group's effective interest rates on long-term debt.
<TABLE>
<CAPTION>
- --------------------------------------------------------------
1999 1998
- --------------------------------------------------------------
<S> <C> <C>
Effective interest rate on long-term debt (/1/) 8.7% 9.4%
-------------
</TABLE>
(/1/) The effective interest rate on long-term debt for 1998 is on a pro forma
basis as if Sprint PCS' long-term debt had been included in the PCS
Group's outstanding long-term debt balance all year.
The decrease in the PCS Group's effective interest rate mainly reflects
increased borrowings with lower interest rates.
Effective with the PCS Restructuring, interest expense on borrowings incurred
by Sprint and allocated to the PCS Group is based on rates the PCS Group would
be able to obtain from third parties as a direct or indirect wholly owned
Sprint subsidiary, but without the benefit of any guaranty by Sprint or any
member of the FON Group. The PCS Group's interest expense includes $157 million
in 1999 and $11 million in 1998 resulting from the difference between Sprint's
actual interest rates and the rates charged to the PCS Group. These costs are
included in the effective interest rates above.
Equity in Sprint PCS Losses
Sprint PCS' results of operations for 1998 have been consolidated for the
entire year. The Cable Partners' share of losses through the PCS Restructuring
date has been reflected as "Other partners' loss in Sprint PCS" in the Combined
Statements of Operations. Prior to the PCS Restructuring, the PCS Group's
ownership interest in Sprint PCS was accounted for using the equity method. The
PCS Group's share of losses from Sprint PCS was $660 million in 1997.
Other Income, Net
Other income for 1999 mainly includes a gain on the sale of property totaling
$25 million and $13 million from the FON Group's interest in the PCS Group's
loss.
F-64
<PAGE>
Other income for 1998 consisted mainly of interest income totaling $34 million,
reflecting interest earned on partner contributions from the Sprint PCS
partners prior to the PCS Restructuring.
Income Taxes
The PCS Group's effective tax rates were 35.9% in 1999, 33.2% in 1998 and 38.3%
in 1997. See Note 5 of Notes to Combined Financial Statements for the
differences that caused the effective income tax rates to vary from the
statutory federal rate.
Extraordinary Items, Net
In 1999, Sprint redeemed, prior to scheduled maturities, $2.2 billion of the
PCS Groups revolving credit facilities and other borrowings. These borrowings
had interest rates ranging from 5.6% to 8.3%. This resulted in a $21 million
after-tax extraordinary loss. These short-term borrowings were repaid with
proceeds from long-term financing.
In 1998, Sprint redeemed, prior to scheduled maturities, $3.3 billion of PCS
Group debt with a weighted average interest rate of 8.3%. This resulted in a
$31 million after-tax extraordinary loss.
- --------------------------------------------------------------------------------
Financial Condition
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------
1999 1998
- --------------------------------
(millions)
<S> <C> <C>
Combined assets $17,924 $15,165
---------------
</TABLE>
Net property, plant and equipment increased $1.5 billion in 1999 reflecting
capital expenditures to support the PCS network buildout, partly offset by 1999
depreciation.
Net intangibles increased $850 million mainly reflecting goodwill resulting
from the 1999 acquisition of the remaining interest in Cox PCS, partly offset
by 1999 amortization. See "Liquidity and Capital Reserves" for more information
about changes in the Combined Balance Sheets.
- --------------------------------------------------------------------------------
Liquidity and Capital Resources
- --------------------------------------------------------------------------------
The PCS Group's cash flows for 1998 include Sprint PCS cash flows only after
the PCS Restructuring date. In 1997 and prior to the PCS Restructuring date in
1998, the PCS Group's cash flows include SprintCom's cash flows and treat the
investment in Sprint PCS as an equity method investment.
Operating Activities
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------
(millions)
<S> <C> <C> <C>
Cash flows provided (used) by operating activities $(1,692) $(159) $38
--------------------
</TABLE>
Cash flows used by operating activities increased $1.5 billion in 1999 and $197
million in 1998. The 1999 increase mainly reflects increased operating losses
for the PCS Group and an increase in working capital. The 1998 increase mainly
reflects increased operating losses, partly offset by a decrease in working
capital.
Investing Activities
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------
(millions)
<S> <C> <C> <C>
Cash flows used by investing activities $(2,509) $(861) $(1,020)
------------------------
</TABLE>
The PCS Group's main use of cash in 1999 and 1998 was to fund capital
expenditures for the PCS network buildout. In 1997, the PCS Group used cash to
acquire PCS licenses and to fund the initial operating losses of Sprint PCS.
Capital expenditures for the PCS Group totaled $2.6 billion in 1999, $1.1
billion in 1998 and $154 million in 1997.
Financing Activities
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------
(millions)
<S> <C> <C> <C>
Cash flows provided by financing activities $4,044 $1,193 $982
------------------
</TABLE>
In 1999, the PCS Group received $5.9 billion of proceeds from long-term debt
allocated from Sprint and $905 million of proceeds from stock issuances. These
proceeds were mainly used to repay existing debt and to fund the PCS Group's
capital expenditures and operating losses.
In 1998, the PCS Group used their allocated portion of the proceeds from
Sprint's $5.0 billion debt offering mainly to repay existing debt and to fund
capital expenditures. In 1997, the PCS Group used capital provided by the FON
Group mainly to fund its investing activities.
In connection with the PCS Restructuring, Sprint adopted a tax sharing
agreement that provides for the allocation of income taxes between the FON
Group and PCS Group. Sprint expects the FON Group to make significant payments
to the PCS Group under this agreement because of expected PCS Group operating
losses in the near future. These payments will reflect the PCS Group's
incremental cumulative effect on Sprint's consolidated federal and state tax
liability and tax credit position. The PCS Group accrued current benefits under
the agreement totaling $887 million in 1999 and $190 million in 1998 and
received related payments from the FON Group totaling $764 million in 1999 and
$20 million in 1998. The remaining $293 million will be paid by the FON Group
during the first half of 2000. See Note 2 of Notes to Combined Financial
Statements, "Allocation of Federal and State Income Taxes," for more details.
Capital Requirements
The PCS Group's 2000 investing activities, mainly consisting of capital
expenditures, are expected to be
F-65
<PAGE>
between $2.4 and $2.6 billion. Additional funds will be required to fund
expected operating losses, working capital and debt service requirements of the
PCS Group.
PCS preferred stock dividend payments are expected to total $15 million,
including payments to the FON Group for its preferred intergroup interest. See
Note 10 of Notes to Combined Financial Statements for a more detailed
discussion of the FON Group's preferred intergroup interest in the PCS Group.
Liquidity
See Sprint's "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity" for a discussion of liquidity.
- --------------------------------------------------------------------------------
Regulatory Developments
- --------------------------------------------------------------------------------
The FCC sets rules, regulations and policies to, among other things:
. grant licenses for PCS frequencies and license renewals,
. rule on assignments and transfers of control of PCS licenses,
. govern the interconnection of PCS networks with other wireless and
wireline carriers,
. establish access and universal service funding provisions,
. impose fines and forfeitures for violations of any of the FCC's rules,
and
. regulate the technical standards of PCS networks.
The FCC currently prohibits a single entity from having a combined attributable
interest (20% or greater interest in any license) in broadband PCS, cellular
and specialized mobile radio licenses totaling more than 45 megahertz (MHz) in
any geographic area except that in rural service areas no licensee may have an
attributable interest in more than 55 MHz of commercial mobile radio service
(CMRS) spectrum.
PCS License Transfers and Assignments
The FCC must approve any substantial changes in ownership or control of a PCS
license. Noncontrolling interests in an entity that holds a PCS license or
operates PCS networks generally may be bought or sold without prior FCC
approval. In addition, a recent FCC order requires only post-consummation
notification of certain pro forma assignments or transfers of control.
PCS License Conditions
All PCS licenses are granted for 10-year terms if the FCC's buildout
requirements are followed. Based on those requirements, all 30 MHz broadband
major trading area licensees must build networks offering coverage to 1/3 of the
population within five years and 2/3 within 10 years. All 10 MHz broadband PCS
licensees must build networks offering coverage to at least 1/4 of the
population within five years or make a showing of "substantial service" within
that five-year period. Licenses may be revoked if the rules are violated.
PCS licenses may be renewed for additional 10-year terms. Renewal applications
are not subject to auctions. However, third parties may oppose renewal
applications and/or file competing applications.
Other FCC Requirements
Broadband PCS providers cannot unreasonably restrict or prohibit other
companies from reselling their services. They also cannot unreasonably
discriminate against resellers. CMRS resale obligations will expire in 2002.
Local phone companies must program their networks to allow customers to change
service providers without changing phone numbers. This is referred to as
service provider number portability. CMRS providers are currently required to
deliver calls from their networks to ported numbers anywhere in the country. By
November 24, 2002, CMRS providers must be able to offer their own customers
number portability in their switches in the 100 largest metropolitan areas.
They must also be able to support nationwide roaming.
Broadband PCS and other CMRS providers may provide wireless local loop and
other fixed services that would directly compete with the wireline services of
local phone companies. Broadband PCS and other CMRS providers must implement
enhanced emergency 911 capabilities to be completed in phases by October 2001.
Communications Assistance for Law Enforcement Act
The Communications Assistance for Law Enforcement Act (CALEA) was enacted in
1994 to preserve electronic surveillance capabilities authorized by federal and
state law. CALEA requires telecommunications carriers to meet certain
"assistance capability requirements" by the end of June 2000. In 1997,
telecommunications industry standard-setting organizations agreed to a joint
standard to implement CALEA's capability requirements. The PCS Group believes
it will be in compliance with CALEA requirements.
Other Federal Regulations
Wireless systems must comply with certain FCC and Federal Aviation
Administration regulations about the siting, lighting and construction of
transmitter towers and antennas. In addition, certain FCC environmental
regulations may cause certain cell site locations to come under National
Environmental Policy Act (NEPA) regulation. NEPA requires carriers to meet
certain land use and radio frequency standards.
F-66
<PAGE>
Universal Service Requirements
The FCC and many states have established "universal service" programs to ensure
affordable, quality telecommunications services for all Americans. The PCS
Group's "contribution" to these programs is typically a percentage of end-user
revenues. The PCS Group's 1999 results contained assessments for 1999.
Currently, management cannot predict the extent of the PCS Group's future
federal and state universal service assessments, or its ability to recover its
contributions from the universal service fund.
- --------------------------------------------------------------------------------
Financial Strategies
- --------------------------------------------------------------------------------
Financial strategies are determined by Sprint on a centralized basis. See
Sprint's "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Financial Strategies."
- --------------------------------------------------------------------------------
Year 2000 Issue
- --------------------------------------------------------------------------------
The PCS Group successfully completed its Year 2000 readiness work and passed
through the January 1, 2000 rollover event while encountering no customer-
affecting outages or business interruptions. Since the inception of the PCS
Group's Year 2000 readiness program through December 31, 1999, the PCS Group
incurred approximately $45 million of costs associated with its Year 2000
readiness program. The PCS Group does not expect to incur any significant
additional expenditures related to the Year 2000 issue.
- --------------------------------------------------------------------------------
Recently Issued Accounting Pronouncement
- --------------------------------------------------------------------------------
See Note 11 of Notes to Combined Financial Statements for a discussion of a
recently issued accounting pronouncement.
F-67
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Sprint Corporation
We have audited the accompanying combined balance sheets of the Sprint PCS
Group (as described in Note 2) as of December 31, 1999 and 1998, and the
related combined statements of operations, comprehensive loss and cash flows
for each of the three years in the period ended December 31, 1999. Our audits
also included the financial statement schedule listed in the Index to
Financial Statements and Financial Statement Schedules. These financial
statements and the schedule are the responsibility of the management of Sprint
Corporation (Sprint). Our responsibility is to express an opinion on these
financial statements and the schedule based on our audits. We did not audit
the 1998 or 1997 consolidated financial statements of Sprint Spectrum Holding
Company, L.P., a wholly owned subsidiary of Sprint as of December 31, 1998 and
an investment in which Sprint had a 40% interest through November 23, 1998 (as
discussed in Note 1). Such financial statements reflect assets of $2.7 billion
as of December 31, 1998 and revenues of $1.2 billion for the year then ended
which we did not audit. The PCS Group's equity in the net loss of Sprint
Spectrum Holding Company, L.P. is stated at $625 million for the year ended
December 31, 1997. The consolidated financial statements and financial
statement schedule of Sprint Spectrum Holding Company, L.P. have been audited
by other auditors whose report has been furnished to us, and our opinion,
insofar as it relates to the 1998 assets and revenues and the 1997 equity in
the net loss which we did not audit, is based solely on the report of the
other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits and the
report of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
combined financial statements referred to above present fairly, in all
material respects, the combined financial position of the Sprint PCS Group at
December 31, 1999 and 1998, and the combined results of its operations and its
cash flows for each of the three years in the period ended December 31, 1999,
in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
As more fully discussed in Note 2, the combined financial statements of the
Sprint PCS Group should be read together with the audited consolidated
financial statements of Sprint.
Ernst & Young LLP
Kansas City, Missouri
February 1, 2000
F-68
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors of Sprint Corporation and Partners of Sprint Spectrum
Holding Company, L.P.
We have audited the consolidated balance sheets of Sprint Spectrum Holding
Company, L.P. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations and cash flows for the two years
in the period ended December 31, 1998. Our audits also included the financial
statement schedule (Schedule II). These financial statements and Schedule II
are the responsibility of Partnership management. Our responsibility is to
express an opinion on these consolidated financial statements and Schedule II
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Sprint Spectrum Holding Company,
L.P. and subsidiaries at December 31, 1998 and 1997, and the results of their
operations and their cash flows for the two years ended December 31, 1998 in
conformity with generally accepted accounting principles. Also, in our opinion,
Schedule II, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects the
information set forth therein.
Deloitte & Touche LLP
Kansas City, Missouri
February 2, 1999
F-69
<PAGE>
COMBINED STATEMENTS OF OPERATIONS Sprint PCS Group
(millions)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Operating Revenues $ 3,180 $ 1,225 $ --
- ------------------------------------------------------------------------------
Operating Expenses
Costs of services and products 3,150 1,758 --
Selling, general and administrative 1,744 1,069 19
Depreciation and amortization 1,523 789 --
Acquired in-process research and development costs -- 179 --
- ------------------------------------------------------------------------------
Total operating expenses 6,417 3,795 19
- ------------------------------------------------------------------------------
Operating Loss (3,237) (2,570) (19)
Interest expense (698) (491) --
Other partners' loss in Sprint PCS -- 1,251 --
Equity in loss of Sprint PCS -- -- (660)
Minority interest 20 145 --
Other income, net 46 34 --
- ------------------------------------------------------------------------------
Loss before income tax benefit and extraordinary
items (3,869) (1,631) (679)
Income tax benefit 1,388 541 260
- ------------------------------------------------------------------------------
Loss before Extraordinary Items (2,481) (1,090) (419)
Extraordinary items, net (21) (31) --
- ------------------------------------------------------------------------------
Net Loss (2,502) (1,121) (419)
Preferred stock dividends paid (15) (2) --
- ------------------------------------------------------------------------------
Loss applicable to common stock $(2,517) $(1,123) $ (419)
-------------------------
Basic and Diluted Loss per Common Share(/1/),(/2/)
Continuing operations $ (2.71) $ (2.21) $(1.98)
Extraordinary items (0.02) (0.04) --
- ------------------------------------------------------------------------------
Total $ (2.73) $ (2.25) $(1.98)
-------------------------
Basic and diluted weighted average common shares 920.4 831.6 831.6
-------------------------
</TABLE>
(/1/) Basic and diluted loss per common share and weighted average common shares
for 1998 and 1997 are pro forma, unaudited and assume the PCS
Restructuring, Recapitalization, Top-up and the write-off of $179 million
of acquired in-process research and development occurred at the beginning
of 1997. These pro forma amounts are for comparative purposes only and do
not necessarily represent what actual results of operations would have
been had the transactions occurred at the beginning of 1997, nor do they
indicate the results of future operations.
(/2/) In February 2000, Sprint effected a two-for-one stock split of its PCS
common stock. As a result, basic and diluted loss per common share and
weighted average common shares for periods before the stock split have
been restated.
See accompanying Notes to Combined Financial Statements.
F-70
<PAGE>
COMBINED STATEMENTS OF COMPREHENSIVE LOSS Sprint PCS Group
(millions)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997
- --------------------------------------------------------------------
<S> <C> <C> <C>
Net Loss $(2,502) $(1,121) $(419)
- --------------------------------------------------------------------
Other Comprehensive Income
Unrealized holding gains on securities 8 -- --
Income tax expense (3) -- --
- --------------------------------------------------------------------
Net unrealized holding gains on securities 5 -- --
- --------------------------------------------------------------------
Total other comprehensive income 5 -- --
- --------------------------------------------------------------------
Comprehensive Loss $(2,497) $(1,121) $(419)
------------------------
</TABLE>
See accompanying Notes to Combined Financial Statements.
F-71
<PAGE>
COMBINED BALANCE SHEETS Sprint PCS Group
(millions)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
December 31, 1999 1998
- -----------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets
Cash and equivalents $ 16 $ 173
Accounts receivable, net of allowance for doubtful
accounts of $57 and $11 572 333
Inventories 336 127
Prepaid expenses 89 60
Current tax benefit receivable from the FON Group 293 170
Other 9 19
- -----------------------------------------------------------------------
Total current assets 1,315 882
Property, plant and equipment
Network equipment 5,817 3,999
Construction work in progress 1,692 1,607
Buildings and leasehold improvements 1,235 1,026
Other 667 356
- -----------------------------------------------------------------------
Total property, plant and equipment 9,411 6,988
Accumulated depreciation (1,415) (453)
- -----------------------------------------------------------------------
Net property, plant and equipment 7,996 6,535
Intangible assets
Goodwill 4,522 3,313
PCS licenses 3,060 3,037
Customer base 726 681
Microwave relocation costs 377 355
Other 54 45
- -----------------------------------------------------------------------
Total intangible assets 8,739 7,431
Accumulated amortization (551) (93)
- -----------------------------------------------------------------------
Net intangible assets 8,188 7,338
Other assets 425 410
- -----------------------------------------------------------------------
Total $17,924 $15,165
-----------------
Liabilities and Group Equity
Current liabilities
Current maturities of long-term debt $ 185 $ 348
Accounts payable 450 371
Construction obligations 1,039 979
Accrued taxes 130 93
Payables to the FON Group 136 101
Other 638 534
- -----------------------------------------------------------------------
Total current liabilities 2,578 2,426
Long-term debt and capital lease obligations 11,304 7,847
Deferred credits and other liabilities
Deferred income taxes 582 1,013
Other 140 124
- -----------------------------------------------------------------------
Total deferred credits and other liabilities 722 1,137
Group equity 3,320 3,755
- -----------------------------------------------------------------------
Total $17,924 $15,165
-----------------
</TABLE>
See accompanying Notes to Combined Financial Statements.
F-72
<PAGE>
COMBINED STATEMENTS OF CASH FLOWS Sprint PCS Group
(in millions)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net loss $(2,502) $(1,121) $ (419)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Extraordinary items, net 21 31 --
Equity in net losses of affiliates -- 840 660
Acquired in-process research and development
costs -- 179 --
Depreciation and amortization 1,523 121 --
Deferred income taxes (553) 68 176
Current tax benefit used by the FON Group -- (460) (436)
Net gains on sales of assets (25) -- --
Changes in assets and liabilities, excluding the
PCS Restructuring:
Accounts receivable, net (241) (1) --
Inventories and other current assets (237) -- (3)
Accounts payable and other current liabilities 363 386 58
Current tax benefit receivable from the FON
Group (123) (170) --
Affiliate receivables and payables, net 35 101 --
Noncurrent assets and liabilities, net 13 (102) 1
Other, net 34 (31) 1
- -----------------------------------------------------------------------------
Net cash provided (used) by operating activities (1,692) (159) 38
- -----------------------------------------------------------------------------
Investing Activities
Capital expenditures (2,580) (1,072) (154)
Proceeds from sales of assets 153 -- --
Cash acquired in the PCS Restructuring -- 244 --
Investments in Sprint PCS -- (33) (406)
PCS licenses purchased -- -- (460)
Other, net (82) -- --
- -----------------------------------------------------------------------------
Net cash used by investing activities (2,509) (861) (1,020)
- -----------------------------------------------------------------------------
Financing Activities
Proceeds from long-term debt 5,901 4,428 --
Payments on long-term debt (2,734) (3,434) --
Proceeds from common stock issued 688 -- --
Proceeds from sales of shares to FT and DT 217 85 --
Dividends paid (15) -- --
Advances from the FON Group -- 64 --
Equity transfer (to) from the FON Group -- (340) 547
Current tax benefit used by the FON Group -- 460 435
Other, net (13) (70) --
- -----------------------------------------------------------------------------
Net cash provided by financing activities 4,044 1,193 982
- -----------------------------------------------------------------------------
Increase (Decrease) in Cash and Equivalents (157) 173 --
Cash and Equivalents at Beginning of Year 173 -- --
- -----------------------------------------------------------------------------
Cash and Equivalents at End of Year $ 16 $ 173 $ --
--------------------------
</TABLE>
See accompanying Notes to Combined Financial Statements.
F-73
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS Sprint PCS Group
- --------------------------------------------------------------------------------
1. General
- --------------------------------------------------------------------------------
In October 1999, Sprint announced a definitive merger agreement with MCI
WorldCom. Under the agreement, each share of Sprint FON stock will be exchanged
for $76 of MCI WorldCom common stock, subject to a collar. In addition, each
share of Sprint PCS stock will be exchanged for one share of a new WorldCom PCS
tracking stock and 0.116025 shares of MCI WorldCom common stock. The terms of
the WorldCom PCS tracking stock will be equivalent to those of Sprint's PCS
common stock and will track the performance of the company's personal
communication services (PCS) business. The merger is subject to the approvals
of Sprint and MCI WorldCom shareholders as well as approvals from the Federal
Communications Commission, the Justice Department, various state government
bodies and foreign antitrust authorities. The companies anticipate that the
merger will close in the second half of 2000.
In November 1998, Sprint's shareholders approved the formation of the FON Group
and the PCS Group and the creation of the FON stock and the PCS stock. In
addition, Sprint purchased the remaining ownership interests in Sprint Spectrum
Holding Company, L.P. and PhillieCo, L.P. (together, Sprint PCS), other than a
minority interest in Cox Communications PCS, L.P. (Cox PCS). Sprint acquired
these ownership interests from Tele-Communications, Inc., Comcast Corporation
and Cox Communications, Inc. (the Cable Partners). In exchange, Sprint issued
the Cable Partners special low-vote PCS shares and warrants to acquire
additional PCS shares. Sprint also issued the Cable Partners shares of a new
class of preferred stock convertible into PCS shares. The purchase of the Cable
Partners' interests is referred to as the PCS Restructuring. In the 1999 second
quarter, Cox Communications, Inc. exercised a put option requiring Sprint to
purchase the remaining 40.8% interest in Cox PCS. Sprint issued additional low
vote PCS shares in exchange for this interest.
Also in November 1998, Sprint reclassified each of its publicly traded common
shares into one share of FON stock and 1/2 share of PCS stock. This
recapitalization was tax-free to shareholders. Each Class A common share owned
by France Telecom S.A. (FT) and Deutsche Telekom AG (DT) was reclassified to
represent an equity interest in the FON Group and the PCS Group that entitles
FT and DT to one share of FON stock and 1/2 share of PCS stock. These
transactions are referred to as the Recapitalization.
In connection with the PCS Restructuring, FT and DT purchased 5.1 million
additional PCS shares (pre-split basis) to maintain their combined 20% voting
power in Sprint (Top-up).
The PCS stock is intended to reflect the performance of Sprint's domestic
wireless PCS operations. The FON stock is intended to reflect the performance
of all of Sprint's other operations.
- --------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies
- --------------------------------------------------------------------------------
Basis of Combination and Presentation
The combined PCS Group financial statements, together with the combined FON
Group financial statements, include all the accounts included in Sprint's
consolidated financial statements. The combined financial statements for each
Group were prepared on a basis that management believes is reasonable and
proper and include:
. 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 after the PCS Restructuring date.
The PCS Group entities are commonly controlled companies and are wholly owned
by Sprint. Transactions between the PCS Group and the FON Group have not been
eliminated in the combined financial statements of either Group.
The PCS Group combined financial statements provide PCS shareholders with
financial information about the PCS Group operations. Investors in FON stock
and PCS stock are Sprint shareholders and are subject to risks related to all
of Sprint's businesses, assets and liabilities. Sprint retains ownership and
control of the assets and operations of each Group. Financial effects of either
Group that affect Sprint's results of operations or financial condition could
affect the results of operations or financial position of the other Group or
the market price of the other Group's stock. Net losses of either Group, and
dividends or distributions on, or repurchases of, PCS stock or FON stock will
reduce Sprint funds legally available for dividends on both Groups' stock. As a
result, the PCS Group combined financial statements should be read along with
Sprint's consolidated financial statements and the FON Group's combined
financial statements.
Sprint PCS' results of operations for 1998 have been consolidated for the
entire year. The Cable Partners' share of losses through the PCS Restructuring
date has been reflected as "Other partners' loss in Sprint PCS" in the Combined
Statements of Operations. Sprint PCS financial position has been reflected on a
F-74
<PAGE>
consolidated basis at year-end 1998. Before 1998, Sprint's investment in Sprint
PCS was accounted for using the equity method. The PCS Group's cash flows
include Sprint PCS' cash flows only after the PCS Restructuring date.
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.
Classification of Operations
The PCS Group includes Sprint's domestic wireless PCS operations. It operates
the only 100% digital PCS wireless network in the United States with licenses
to provide nationwide service using a single frequency and a single technology.
At year-end 1999, the PCS Group, together with affiliates, operated PCS systems
in over 360 metropolitan markets including the 50 largest U.S. metropolitan
areas.
Allocation of Shared Services
Sprint directly assigns, where possible, certain general and administrative
costs to the FON Group and the PCS Group based on their actual use of those
services. Where direct assignment of costs is not possible, or practical,
Sprint uses indirect methods, including time studies, to estimate the
assignment of costs to each Group. Sprint believes that the costs allocated are
comparable to the costs that would be incurred if the Groups would have been
operating on a stand-alone basis. The allocation of shared services may change
at the discretion of Sprint and does not require shareholder approval.
Allocation of Federal and State Income Taxes
Sprint files a consolidated federal income tax return and certain state income
tax returns which include FON Group and PCS Group results. In connection with
the PCS Restructuring, Sprint adopted a tax sharing agreement which provides
for the allocation of income taxes between the two Groups. The PCS Group's
income taxes reflect the PCS Group's incremental cumulative impact on Sprint's
consolidated income taxes. Intergroup tax payments are satisfied on the date
Sprint's related tax payment is due to or the refund is received from the
applicable tax authority. The PCS Group accrued current income tax benefits in
accordance with the tax sharing agreement totaling $887 million in 1999 and
$190 million in 1998.
Allocation of Group Financing
Financing activities for the Groups are managed by Sprint on a centralized
basis. Debt incurred by Sprint on behalf of the Groups is specifically
allocated to and reflected in the financial statements of the applicable Group.
Interest expense is allocated to the PCS Group based on an interest rate that
is substantially equal to the rate it would be able to obtain from third
parties as a direct or indirect wholly owned Sprint subsidiary, but without the
benefit of any guaranty by Sprint or any member of the FON Group. That interest
rate is higher than the rate Sprint obtains on borrowings. The difference
between Sprint's actual interest rate and the rate charged to the PCS Group is
reflected as a reduction in the FON Group's interest expense.
Under Sprint's centralized cash management program, one Group may advance funds
to the other Group. These advances are accounted for as short-term borrowings
between the Groups and bear interest at a market rate that is substantially
equal to the rate that Group would be able to obtain from third parties on a
short-term basis.
The allocation of Group financing activities may change at the discretion of
Sprint and does not require shareholder approval.
Income Taxes
The PCS Group records deferred income taxes based on temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and their tax bases.
Revenue Recognition
The PCS Group recognizes operating revenues as services are rendered or as
products are delivered to customers. The PCS Group records operating revenues
net of an estimate for uncollectible accounts.
Cash and Equivalents
Cash equivalents generally include highly liquid investments with original
maturities of three months or less. They are stated at cost, which approximates
market value. Sprint uses controlled disbursement banking arrangements as part
of its cash management program. Outstanding checks in excess of cash balances
for the PCS Group were included in accounts payable. These amounts totaled $30
million at year-end 1999 and $73 million at year-end 1998. The PCS Group had
sufficient funds available to fund these outstanding checks when they were
presented for payment.
Inventories
Inventories are stated at the lower of cost (principally first-in, first-out
method) or replacement value.
F-75
<PAGE>
Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Generally, ordinary asset
retirements and disposals are charged against accumulated depreciation with no
gain or loss recognized. Property, plant and equipment is depreciated on a
straight-line basis over estimated economic useful lives. Repair and
maintenance costs are expensed as incurred.
Capitalized Interest
The PCS Group capitalizes interest costs related to network buildout and PCS
licenses, which totaled $108 million in 1999 and $64 million in 1998. In
addition, Sprint capitalized interest costs related to the PCS Group's network
buildout. This capitalized interest totaled $61 million for 1998 and $24
million for 1997 and was contributed to, and will be amortized by, the PCS
Group. Sprint also capitalized interest costs related to its investment in
Sprint PCS until July 1997 when Sprint PCS emerged from the development stage.
This capitalized interest, totaling $142 million, was contributed to, and is
being amortized by, the PCS Group.
Intangible Assets
The PCS Group evaluates the recoverability of intangible assets when events or
circumstances indicate that such assets might be impaired. The PCS Group
determines impairment by comparing the undiscounted future cash flows estimated
to be generated by these assets to their respective carrying value. In the
event impairment exists, a loss is recognized based on the amount by which the
carrying value exceeds the fair value of the asset.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the
net assets acquired in business combinations accounted for as purchases.
Goodwill is being amortized over 40 years using the straight-line method.
Accumulated amortization totaled $116 million at year-end 1999 and $11 million
at year-end 1998.
PCS Licenses
The PCS Group acquired licenses from the Federal Communications Commission
(FCC) to operate as a PCS service provider. These licenses are granted for up
to 10-year terms with renewals for additional 10-year terms if license
obligations are met. These licenses are recorded at cost and are amortized on a
straight-line basis over 40 years when service begins in a specific geographic
area. Accumulated amortization totaled $130 million at year-end 1999 and $51
million at year-end 1998.
Customer Base
The PCS Group capitalized the fair value of Sprint PCS' customer base acquired
in the PCS Restructuring and the fair value of Cox PCS' customer base when the
remaining minority interest in Cox PCS was acquired in the 1999 second quarter.
The customer base is being amortized over 30 months using the straight-line
method. Accumulated amortization totaled $277 million at year-end 1999 and $23
million at year-end 1998.
Microwave Relocation Costs
The PCS Group has incurred costs related to microwave relocation in
constructing the PCS network. Microwave relocation costs are being amortized
over the remaining lives of the PCS licenses. Accumulated amortization totaled
$15 million at year-end 1999 and $6 million at year-end 1998.
Loss per Share
As a result of the PCS Restructuring and the Recapitalization, loss per share
for the PCS Group for 1998 has been calculated based on the Group's net loss
from November 1998 through year-end 1998. It was not calculated on a Group
basis for periods prior to November 1998 because the PCS stock was not part of
Sprint's capital structure at that time.
On December 14, 1999, the Sprint 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. As a result, basic
and diluted loss per common share and weighted-average common shares for PCS
common stock have been restated for periods prior to the stock split.
Dilutive securities for the PCS Group mainly include options, warrants and
convertible preferred stock. These securities did not have a dilutive effect on
loss per share because the PCS Group incurred net losses for 1999 and 1998. As
a result, diluted loss per share equaled basic loss per share.
The PCS Group's basic and diluted loss per common share after the PCS
Restructuring and Recapitalization date was as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998
- ------------------------------------------------------------
(millions, except
per share data)
<S> <C>
Loss applicable to common stock $ (559)
------
Basic and diluted loss per common share:
Loss before extraordinary item $(0.63)
Extraordinary item (0.04)
- ----------------------------------------------------------
Total $(0.67)
------
Basic and diluted weighted average shares 831.6
------
</TABLE>
Stock-based Compensation
The PCS Group participates in the incentive-based stock option plans and
employee stock purchase
F-76
<PAGE>
plan administered by Sprint for executives and other employees. Sprint adopted
the pro forma disclosure requirements under Statement of Financial Accounting
Standards (SFAS) No. 123, "Stock-based Compensation," and continues to apply
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," to its stock option and employee stock purchase plans. Had the PCS
Group applied SFAS 123, pro forma net loss would have been $2,578 million in
1999 and would not have changed materially from the Recapitalization date
through year-end 1998. See Note 10 of Sprint's Notes to Consolidated Financial
Statements for more information about Sprint's stock-based compensation and the
PCS Group's pro forma net loss and loss per share.
In 1997, Sprint granted performance-based stock options to certain key
executives. The PCS Group expensed $5 million in 1999 and $1 million in 1998
related to these performance-based stock options.
- --------------------------------------------------------------------------------
3. Business Combinations
- --------------------------------------------------------------------------------
Cox PCS
In the 1999 second quarter, Cox Communications, Inc. exercised a put option
requiring Sprint to purchase the remaining 40.8% interest in Cox PCS. Sprint's
existing 59.2% interest in Cox PCS was reflected in the PCS Group combined
financial statements on a combined basis. Sprint issued 24.3 million shares of
low-vote PCS stock (pre-split basis) in exchange for the remaining interest.
The shares were valued at $1.1 billion. Sprint accounted for the transaction as
a purchase.
The excess of the purchase price over the fair value of the net liabilities
acquired was allocated as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999
- -------------------------------------------------------------------------
(millions)
<S> <C>
Purchase price $1,146
Net liabilities acquired 99
Fair value assigned to customer base acquired (45)
Fair value assigned to PCS licenses (99)
Deferred taxes established on acquired assets and liabilities 88
- -------------------------------------------------------------------------
Goodwill $1,189
------
</TABLE>
Goodwill is being amortized on a straight-line basis over 40 years.
PCS Restructuring
In November 1998, Sprint acquired the remaining interest in Sprint PCS (except
for the minority interest in Cox PCS) from the Cable Partners. In exchange,
Sprint issued the Cable Partners 195.1 million low-vote shares of PCS stock and
12.5 million warrants to purchase additional shares of PCS stock (on a pre-
split basis). The purchase price was $3.2 billion. In addition, Sprint issued
the Cable Partners shares of a new class of preferred stock convertible into
PCS shares.
Sprint accounted for the transaction as a purchase. The excess of the purchase
price over the fair value of the net liabilities acquired was allocated as
follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998
- -------------------------------------------------------------------------
(millions)
<S> <C>
Purchase price including transaction costs $ 3,226
Net liabilities acquired 281
Fair value assigned to customer base acquired (681)
Fair value assigned to assembled workforce acquired (45)
Increase in property, plant and equipment to fair value (204)
Mark-to-market of long-term debt 85
Deferred taxes established on acquired assets and liabilities 678
In-process research and development costs (179)
- -------------------------------------------------------------------------
Goodwill $ 3,161
-------
</TABLE>
Goodwill is being amortized on a straight-line basis over 40 years.
With respect to the purchase price attributed to in-process research and
development (IPR&D), the acquired IPR&D was limited to significant new products
under development that were intended to address new and emerging market needs
and requirements, such as the rapid adoption of the Internet and the rapid
convergence of voice, data, and video. No routine research and development
projects, minor refinements, normal enhancements, or production activities were
included in the acquired IPR&D.
The income approach was the primary technique utilized in valuing the acquired
IPR&D. This approach included, but was not limited to, an analysis of (i) the
markets for each product; (ii) the completion costs for projects; (iii) the
expected cash flows attributable to the IPR&D projects; (iv) the risks related
to achieving these cash flows; and (v) the stage of development of each
project. The issue of alternative future use was extensively evaluated and
these technologies, once completed, could only be economically used for their
intended purposes.
F-77
<PAGE>
Sprint PCS Group Pro Forma Results
The following unaudited pro forma combined results of operations for the PCS
Group assume the PCS Restructuring, Recapitalization, Top-up and the write-off
of acquired IPR&D costs occurred at the beginning of 1997. These pro forma
amounts are for comparative purposes only and do not necessarily represent what
actual results of operations would have been had the transactions occurred at
the beginning of 1997, nor do they indicate the results of future operations.
Pro forma results were as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------
(millions,
except per
share data)
<S> <C> <C>
Net operating revenues $ 1,225 $ 258
----------------
Loss before extraordinary items $(1,847) $(1,645)
----------------
Net loss $(1,878) $(1,645)
----------------
Basic and diluted loss
per common share:
Loss before extraordinary items $ (2.21) $ (1.98)
Extraordinary items (0.04) --
- ---------------------------------------------------
Total $ (2.25) $ (1.98)
----------------
</TABLE>
- --------------------------------------------------------------------------------
4. Employee Benefit Plans
- --------------------------------------------------------------------------------
Defined Benefit Pension Plan
Effective January 1999, most PCS Group employees became eligible to participate
in Sprint's pension plans. Pension benefits are based on years of service and
the participants' compensation.
Sprint's policy is to make plan contributions equal to an actuarially
determined amount consistent with federal tax regulations. The funding
objective is to accumulate funds at a relatively stable rate over the
participants' working lives so benefits are fully funded at retirement.
Amounts included in the Combined Balance Sheets for the plan were accrued
pension costs of $5 million at year-end 1999.
Net pension costs are determined for the PCS Group based on a direct
calculation of service costs. The PCS Group recorded net pension costs of $5
million in 1999.
Defined Contribution Plan
Prior to January 1999, Sprint PCS sponsored a savings and retirement program
for certain employees. Sprint PCS matched contributions equal to 50% of the
contribution of each participant, up to the first 6% that the employee elected
to contribute. Expense under the savings plan was $7 million in 1998. Effective
January 1999, the PCS Group employees began making contributions to Sprint's
defined contribution plan. The existing assets of the Sprint PCS savings plan
were rolled over to Sprint's defined contribution plan in early 1999. The PCS
Group recorded $10 million of expense in 1999 for Sprint's matching
contributions to the Sprint defined contribution plans. At year-end 1999,
Sprint's defined contribution plans held 33 million FON shares and 27 million
PCS shares (on a post-split basis).
Postretirement Benefits
Effective January 1999, most PCS Group employees also became eligible for
postretirement benefits (principally medical and life insurance benefits).
Retiring employees are eligible for benefits on a shared-cost basis. Sprint
funds the accrued costs as benefits are paid.
Amounts included in the Combined Balance Sheets at year-end were accrued
postretirement benefits costs of $1 million in 1999.
Net postretirement benefits costs are determined for the PCS Group based on a
direct calculation of service costs. The PCS Group recorded net postretirement
benefits costs of $1 million in 1999.
- --------------------------------------------------------------------------------
5. Income Taxes
- --------------------------------------------------------------------------------
Income tax benefits allocated to continuing operations consisted of the
following:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------
(millions)
<S> <C> <C> <C>
Current income tax benefit
Federal $ (810) $(579) $(415)
State (25) (30) (21)
- -------------------------------------------------------------
Total current (835) (609) (436)
- -------------------------------------------------------------
Deferred income tax expense (benefit)
Federal (479) 83 188
State (74) (15) (12)
- -------------------------------------------------------------
Total deferred (553) 68 176
- -------------------------------------------------------------
Total $(1,388) $(541) $(260)
----------------------
</TABLE>
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:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------------
(millions)
<S> <C> <C> <C>
Income tax benefit at the statutory rate $ (1,354) $ (571) $ (238)
Effect of:
State income taxes, net of federal income tax effect (64) (29) (21)
Write-off of in-process research and development
costs -- 63 --
Goodwill amortization 34 3 --
Other, net (4) (7) (1)
- -------------------------------------------------------------------------------
Income tax benefit $ (1,388) $ (541) $ (260)
-------------------------
Effective income tax rate 35.9% 33.2% 38.3%
-------------------------
</TABLE>
F-78
<PAGE>
Income tax expense (benefit) allocated to other items was as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------
(millions)
<S> <C> <C> <C>
Extraordinary items $(11) $(20) $--
Unrealized holding gains on investments(/1/) 3 -- --
Stock ownership, purchase and options arrangements(/1/) (31) -- --
- -------------------------------------------------------------------------
</TABLE>
(/1/) These amounts have been recorded directly to "Group equity."
The PCS Group recognizes deferred income taxes for the temporary differences
between the carrying amounts of its assets and liabilities for financial
statement purposes and their tax bases. The sources of the differences that
give rise to the deferred income tax assets and liabilities at year-end 1999
and 1998, along with the income tax effect of each, were as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 Deferred
Income Tax
------------------
Assets Liabilities
- -------------------------------------------------
(millions)
<S> <C> <C>
Property, plant and equipment $ -- $ 811
Intangibles -- 453
Capitalized interest -- 108
Operating loss carryforwards 1,006 --
Tax credit carryforwards 53 --
Other, net 21 --
- -------------------------------------------------
1,080 1,372
Less valuation allowance 283 --
- -------------------------------------------------
Total $ 797 $1,372
------------------
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 Deferred
Income Tax
------------------
Assets Liabilities
- -------------------------------------------------
(millions)
<S> <C> <C>
Property, plant and equipment $-- $ 542
Intangibles -- 454
Capitalized interest -- 103
Reserves and allowances 22 --
Operating loss carryforwards 295 --
Tax credit carryforwards 27 --
Other, net 5 --
- -------------------------------------------------
349 1,099
Less valuation allowance 245 --
- -------------------------------------------------
Total $104 $1,099
-----------------
</TABLE>
Management believes it is more likely than not that these deferred income tax
assets, net of the valuation allowance, will be realized based on current
income tax laws and expectations of future taxable income stemming from the
reversal of existing deferred tax liabilities or ordinary operations.
Uncertainties surrounding income tax law changes, shifts in operations between
state taxing jurisdictions, and future operating income levels may, however,
affect the ultimate realization of all or some of these deferred income tax
assets.
The valuation allowance related to deferred income tax assets increased $38
million in 1999.
The PCS Group acquired approximately $229 million of potential tax benefits
related to net operating loss carryforwards in the PCS Restructuring which are
subject to certain realization restrictions under various tax laws. A valuation
allowance was provided for the total of these benefits. If these benefits are
subsequently recognized, they will reduce the goodwill or other noncurrent
intangible assets resulting from the PCS Restructuring.
In connection with the PCS Restructuring, the PCS Group is required to
reimburse the FON Group and the Cable Partners for net operating loss and tax
credit carryforward benefits generated prior to the PCS Restructuring if
realization by the PCS Group produces a cash benefit that would not otherwise
have been realized. The reimbursement will equal 60% of the net cash benefit
received by the PCS Group and will be made to the FON Group in cash and to the
Cable Partners in shares of Series 2 PCS stock. The carryforward benefits
subject to this requirement totaled $259 million, which includes the $229
million acquired in the PCS Restructuring.
At year-end 1999, the PCS Group had federal operating loss carryforwards of
approximately $2.3 billion and state operating loss carryforwards of
approximately $5.5 billion. Related to these loss carryforwards are federal tax
benefits of $787 million and state tax benefits of $336 million. In addition,
the PCS Group had available for income tax purposes federal alternative minimum
tax credit carryforwards of $49 million, state alternative minimum tax credit
carryforwards of $5 million, federal alternative minimum tax net operating loss
carryforwards of $933 million, and state alternative minimum tax net operating
loss carryforwards of $359 million. The loss carryforwards expire in varying
amounts through 2019.
F-79
<PAGE>
- --------------------------------------------------------------------------------
6. Long-term Debt and Capital Lease Obligations
- --------------------------------------------------------------------------------
Sprint's consolidated long-term debt and capital lease obligations at year-end
was as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
----------------------------- ---------------------------
Sprint Sprint Sprint Sprint
FON PCS FON PCS
Maturing Group Group Consolidated Group Group Consolidated
- --------------------------------------------------------------------------------------------
(millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Senior notes
5.7% to 6.9%(/1/) 2001 to 2028 $ 1,105 $ 8,145 $ 9,250 $1,059 $ 3,941 $ 5,000
8.1% to 9.8% 2000 to 2003 632 -- 632 632 -- 632
11.0% to 12.5%(/2/) 2001 to 2006 -- 734 584 -- 699 565
Debentures and notes
5.8% to 9.6% 2000 to 2022 565 -- 565 565 -- 565
Notes payable and
commercial paper -- 294 1,971 2,265 472 274 746
First mortgage bonds
2.0% to 9.9% 1999 to 2025 1,295 -- 1,295 1,312 -- 1,312
Capital lease
obligations
5.2% to 14.0% 1999 to 2008 69 486 555 32 452 484
Revolving credit
facilities
Variable rates 2002 to 2006 900 -- 900 -- 1,800 1,800
Other(/2/),(/3/)
2.0% to 10.0% 1999 to 2007 573 153 726 370 1,029 1,085
- --------------------------------------------------------------------------------------------
5,433 11,489 16,772 4,442 8,195 12,189
Less: current
maturities(/2/) 902 185 1,087 33 348 247
- --------------------------------------------------------------------------------------------
Long-term debt and
capital lease
obligations(/2/) $ 4,531 $ 11,304 $15,685 $4,409 $ 7,847 $11,942
---------------------------------------------------------
</TABLE>
(/1/) These borrowings were incurred by Sprint and allocated to the applicable
Group. Sprint's weighted average interest rate related to these borrowings
was 6.6% at year-end 1999 and 6.4% at year-end 1998. The weighted average
interest rate related to the borrowings allocated to the PCS Group was
approximately 8.7% at year-end 1999 and 8.5% at year-end 1998. See Note 2
for a more detailed description of how Sprint allocates financing to each
of the Groups.
(/2/) Consolidated debt does not equal the total of PCS Group and FON Group debt
due to intergroup debt eliminated in consolidation. The FON Group had an
investment in the PCS Group's Senior Discount notes totaling $150 million
at year-end 1999 and $134 million at year-end 1998. In addition, the PCS
Group had other long-term debt payable to the FON Group totaling $314
million at year-end 1998, including $134 million classified as current.
(/3/) Includes notes with a market value of $316 million at year-end 1999 and
$358 million at year-end 1998 recorded by the FON Group that may be
exchanged at maturity for SBC Communications, Inc. (SBC) common shares
owned by the FON Group or for cash. Based on SBC's closing price, had the
notes matured at year-end 1999, they could have been exchanged for 6.5
million SBC shares. At year-end 1999, Sprint held 7.5 million SBC shares,
which have been included in "Investments in equity securities" in the FON
Group's Combined Balance Sheets.
F-80
<PAGE>
Scheduled principal payments, excluding reclassified short-term borrowings,
during each of the next five years are as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Sprint Sprint
FON PCS
Group Group Sprint
- --------------------------
(millions)
<S> <C> <C> <C>
2000 $ 902 $ 185 $1,087
2001 877 289 1,096
2002 1,339 59 1,398
2003 373 1,058 1,431
2004 144 1,042 1,186
- --------------------------
</TABLE>
Sprint
Short-term Borrowings
Sprint had bank notes payable totaling $670 million at year-end 1999 and $454
million at year-end 1998. In addition, Sprint had commercial paper borrowings
totaling $1.6 billion at year-end 1999 and $292 million at year-end 1998.
Though these borrowings are renewable at various dates throughout the year,
they were classified as long-term debt because of Sprint's intent and ability,
through unused credit facilities, to refinance these borrowings on a long-term
basis.
In 1998, Sprint replaced its previous $1.5 billion credit facility with new
facilities with syndicates of domestic and international banks. The new
facilities totaled $5.0 billion and expire in 2000 and 2003. Commercial paper
and certain bank notes payable are supported by Sprint's revolving credit
facilities. Certain other notes payable relate to a separate revolving credit
facility which expires in 2002. At year-end 1999, Sprint had total unused lines
of credit of $3.5 billion.
Bank notes outstanding had weighted average interest rates of 6.3% at year-end
1999 and 5.7% at year-end 1998. The weighted average interest rate of
commercial paper was 6.4% at year-end 1999 and 5.8% at year-end 1998.
Long-term Debt
In the 1999 third quarter, Sprint filed a shelf registration statement with the
SEC covering $4.0 billion of senior unsecured debt securities. At year-end
1999, Sprint had issued $750 million of debt securities under the shelf. These
securities have interest rates ranging from 6.4% to 6.5% and mature in 2001.
In August 1999, Sprint incurred other borrowings totaling $250 million which
mature in 2002 and have variable interest rates. At year-end 1999, the notes
had an interest rate of 6.1%.
In June 1999, Sprint entered into a $1.0 billion financing agreement to sell,
on a continuous basis with recourse, undivided percentage ownership interests
in a designated pool of its accounts receivable. Subsequent collections of
receivables sold to investors are typically reinvested in new receivables. At
year-end 1999, Sprint had borrowed $900 million with a weighted average
interest rate of 6.4% under this agreement. These borrowings mature in 2002.
In May 1999, Sprint issued $3.5 billion of senior notes registered with the
SEC. These notes have maturities ranging from 5 to 20 years and interest rates
ranging from 5.9% to 6.9%. In 1998, Sprint issued $5.0 billion of senior notes
registered with the SEC. These notes have maturities ranging from 5 to 30 years
and interest rates ranging from 5.7% to 6.9%.
Sprint PCS Group
In 1999, Sprint allocated $5.9 billion of debt to the PCS Group. This debt was
mainly used to repay debt, to fund new capital investments and to fund
operating losses and working capital requirements. See Note 2 for a more
detailed description of how Sprint allocates debt to the Groups.
In 1999, the PCS Group repaid $2.2 billion of its revolving credit facilities
and other borrowings prior to scheduled maturities. This resulted in a $21
million after-tax extraordinary loss.
In 1998, Sprint redeemed, prior to scheduled maturities, $3.3 billion of PCS
Group debt with a weighted average interest rate of 8.3%. This resulted in a
$31 million after-tax extraordinary loss for the PCS Group. The debt was repaid
with a portion of the proceeds from Sprint's $5.0 billion debt offering in
November 1998.
Other
Sprint, including the PCS Group, had complied with all restrictive or financial
covenants relating to its debt arrangements at year-end 1999.
- --------------------------------------------------------------------------------
7. Group Equity
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------
(millions)
<S> <C> <C> <C>
Beginning balance $ 3,755 $ 1,386 $1,188
Net loss (2,502) (1,121) (419)
Dividends (15) (2) --
Common stock issued 2,064 3,285 --
Tax benefit from stock options exercised 31 -- --
Preferred stock issued -- 247 --
Preferred intergroup interest -- 279 --
Contributions from the FON Group -- 146 1,052
Equity transfers to the FON Group -- (460) (435)
Other, net (13) (5) --
- -------------------------------------------------------------------
Ending balance $ 3,320 $ 3,755 $1,386
------------------------
</TABLE>
F-81
<PAGE>
- --------------------------------------------------------------------------------
8. Commitments and Contingencies
- --------------------------------------------------------------------------------
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 combined financial
statements.
Operating Leases
The PCS Group's minimum rental commitments at year-end 1999 for all
noncancelable operating leases, consisting mainly of leases for cell and switch
sites and office space, are as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(millions)
<S> <C>
2000 $253
2001 204
2002 144
2003 81
2004 35
Thereafter 74
- ----------------------
</TABLE>
The PCS Group's gross rental expense totaled $315 million in 1999, $256 million
in 1998 and $4 million in 1997. The table excludes renewal options related to
certain cell and switch site leases. These renewal options generally have five-
year terms and may be exercised from time to time.
- --------------------------------------------------------------------------------
9. Financial Instruments
- --------------------------------------------------------------------------------
Fair Value of Financial Instruments
Sprint estimates the fair value of the PCS Group's financial instruments using
available market information and appropriate valuation methodologies. As a
result, the following estimates do not necessarily represent the values the PCS
Group could realize in a current market exchange. Although management is not
aware of any factors that would affect the year-end 1999 estimated fair values,
those amounts have not been comprehensively revalued for purposes of these
financial statements since that date. Therefore, estimates of fair value after
year-end 1999 may differ significantly from the amounts presented below.
The carrying amounts and estimated fair values of the PCS Group's financial
instruments at year-end were as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999
------------------
Estimated
Carrying Fair
Amount Value
- ----------------------------------------------------------------
(millions)
<S> <C> <C>
Cash and equivalents $ 16 $ 16
Investments in equity securities 9 9
Long-term debt and capital lease obligations 11,489 11,054
- ----------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998
------------------
Estimated
Carrying Fair
Amount Value
- ----------------------------------------------------------------
(millions)
<S> <C> <C>
Cash and equivalents $ 173 $ 173
Long-term debt and capital lease obligations 8,195 8,385
- ----------------------------------------------------------------
</TABLE>
The carrying amounts of the PCS Group's cash and equivalents approximate fair
value at year-end 1999 and 1998. The estimated fair value of investments in
equity securities was based on quoted market prices. The estimated fair value
of the PCS Group's long-term debt was based on quoted market prices for
publicly traded issues. The estimated fair value of all other issues was based
on the present value of estimated future cash flows using a discount rate based
on the risks involved.
Concentrations of Credit Risk
The PCS Group's accounts receivable are not subject to any concentration of
credit risk.
Interest Rate Swap Agreements
In 1998, Sprint deferred losses from the termination of interest rate swap
agreements used to hedge a portion of a $5.0 billion debt offering. These
losses, totaling $75 million, were allocated to the PCS Group and are being
amortized to interest expense using the effective interest method over the term
of the debt. At year-end 1999, the remaining unamortized deferred loss totaled
$67 million.
- --------------------------------------------------------------------------------
10. Additional Financial Information
- --------------------------------------------------------------------------------
Supplemental Cash Flows Information
The PCS Group received cash from the FON Group of $764 million in 1999 and $20
million in 1998 related to income taxes.
The PCS Group paid $632 million for interest (net of capitalized interest) in
1999.
Noncash activities for the PCS Group included the following:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
- -------------------------------------------------------------------------------
(millions)
<S> <C> <C>
Common stock issued for Cox PCS acquisition $1,146 $ --
-------------
Stock received for stock options exercised $ 40 $ --
-------------
Capital lease obligations $ 36 $ 460
-------------
Tax benefit from stock options exercised $ 31 $ --
-------------
Common stock issued to the Cable Partners to purchase Sprint PCS $ -- $3,200
-------------
Conversion of interim financing to preferred intergroup interest $ -- $ 279
-------------
Preferred stock issued to the Cable Partners in exchange for
interim financing $ -- $ 247
-------------
</TABLE>
F-82
<PAGE>
See Note 3 for more details about the assets and liabilities acquired in the
Cox PCS purchase and the PCS Restructuring.
Intergroup Investments and Transactions
Sprint FON Group Investments in the Sprint PCS Group
The following table reflects the FON Group's noncurrent investments in the PCS
Group, which have been eliminated in Sprint's consolidated financial
statements:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
- -----------------------------------------------------
(millions)
<S> <C> <C>
Common and preferred intergroup interest $ 262 $ 311
Long-term loans -- 180
Investment in debt securities 169 165
- -----------------------------------------------------
Total $ 431 $ 656
-----------
</TABLE>
Common Intergroup Interest
The FON Group received a 1% intergroup interest in the PCS Group at the time of
the PCS Restructuring and Recapitalization. This interest represented 4.5
million PCS shares, and included 2.7 million shares held in treasury by the FON
Group. During 1999, PCS shares were issued to FON Group employees, reducing the
FON Group's interest in the PCS Group.
The FON Group's share of the PCS Group's net loss totaled $13 million in 1999
and $6 million from the date of the PCS Restructuring to year-end 1998 and was
included in "Other income, net" in the Sprint PCS Group Combined Statements of
Operations.
Preferred Intergroup Interest
The FON Group provided Sprint PCS and the PCS Group with interim financing from
the date the PCS Restructuring agreement was signed in May 1998 until it was
completed in November 1998. As part of the PCS Restructuring, Sprint converted
this financing, totaling $279 million, into an intergroup interest representing
0.3 million shares of 10-year PCS preferred stock convertible into a PCS common
intergroup interest. The PCS Group paid the FON Group dividends on the
preferred intergroup interest of $8 million in 1999 and $1 million in 1998.
Long-term Loans
Sprint provided Sprint PCS with additional interim financing of $180 million
from May 1998 through November 1998. This loan was repaid in 1999.
Intergroup Interest Expense
The PCS Group incurred intergroup interest expense of $16 million in 1999, $15
million in 1998 and $24 million in 1997 related to the FON Group's investment
in PCS Group debt securities and advances from the FON Group. The difference
between Sprint's actual interest costs and the interest costs charged to the
PCS Group on allocated debt totaled $157 million in 1999 and $11 million in
1998. These amounts are included in "Interest expense" in the Sprint PCS Group
Combined Statements of Operations. See Note 2 for a more detailed description
of how Sprint allocates interest expense to each of the Groups.
Intergroup Transactions
The PCS Group is using the long distance division as its interexchange carrier
and purchasing wholesale long distance for resale to its customers.
Additionally, the FON Group provided the PCS Group with telemarketing services
and various other goods and services. Charges to the PCS Group for these items
totaled $280 million in 1999 and $21 million from the PCS Restructuring date to
year-end 1998.
The FON Group provided management, printing, mailing and warehousing services
to the PCS Group. Charges to the PCS Group for these services totaled $65
million in 1999 and $5 million from the PCS Restructuring date to year-end
1998.
Related Party Transactions
Sprint PCS Group
The Cable Partners advanced PhillieCo $26 million in 1998 and $24 million in
1997. These advances were repaid in the 1999 first quarter.
Sprint PCS
The following discussion reflects related party transactions between Sprint and
Sprint PCS prior to the PCS Restructuring:
Sprint provided Sprint PCS with billing and operator services, and switching
equipment. Sprint PCS also used the long distance division as its interexchange
carrier. Charges to Sprint PCS for these services totaled $104 million in 1998
and $61 million in 1997.
Sprint provided management, printing, mailing and warehousing services to
Sprint PCS. Charges to Sprint PCS for these services totaled $25 million in
1998 and $11 million in 1997.
Sprint had a vendor financing loan to Sprint PCS for $300 million at year-end
1997 which was repaid in 1998. Sprint also loaned Sprint PCS $114 million in
1998 and $21 million in 1997, which was repaid in the 1999 first quarter.
Major Customer
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 28% of net operating revenues in 1999 and
25% in 1998.
F-83
<PAGE>
- --------------------------------------------------------------------------------
11. Recently Issued Accounting Pronouncement
- --------------------------------------------------------------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS No.133,
"Accounting for Derivative Instruments and Hedging Activities." This standard
requires all derivatives to be recorded on the balance sheet as either assets
or liabilities and be measured at fair value. Gains or losses from changes in
the derivative values are to be accounted for based on how the derivative was
used and whether it qualified for hedge accounting. When adopted in January
2001, this statement is not expected to have a material impact on the PCS
Group's combined financial statements.
F-84
<PAGE>
- --------------------------------------------------------------------------------
12. Quarterly Financial Data (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter
--------------------------------------
1999 1st 2nd 3rd 4th
- -------------------------------------------------------------------------------
(millions, except per share data)
<S> <C> <C> <C> <C>
Net operating revenues $ 604 $ 736 $ 844 $ 996
Operating loss (827) (708) (790) (912)
Loss before extraordinary items (605) (555) (615) (706)
Net loss (626) (555) (615) (706)
Diluted and basic loss per common
share before extraordinary items(/3/) (0.71) (0.61) (0.65) (0.75)
<CAPTION>
Quarter
--------------------------------------
1998 1st 2nd 3rd 4th
- -------------------------------------------------------------------------------
(millions, except per share data)
<S> <C> <C> <C> <C>
Net operating revenues $ 203 $ 265 $ 320 $ 437
Operating loss(/1/) (469) (507) (565) (1,029)
Loss before extraordinary items(/1/) (145) (154) (175) (616)
Net loss(/1/) (145) (154) (175) (647)
Pro forma diluted and basic loss per
common share before extraordinary
items(/2/),(/3/) (0.48) (0.49) (0.52) (0.72)
</TABLE>
(/1/) In the 1998 fourth quarter, the PCS Group recorded a nonrecurring charge
to write off $179 million of acquired IPR&D costs related to the PCS
Restructuring. This charge increased operating loss and loss before
extraordinary items by $179 million.
(/2/) Pro forma loss per share assumes the PCS Restructuring, Recapitalization,
Top-up and the PCS Group's write-off of $179 million of acquired IPR&D
occurred at the beginning of 1997. These pro forma amounts are for
comparative purposes only and do not necessarily represent what actual
results of operations would have been had the transactions occurred at the
beginning of 1997, nor do they indicate the results of future operations.
(/3/) On February 4, 2000, Sprint effected a two-for-one stock split of its PCS
stock. PCS Group loss per share for prior periods have been restated to
reflect this stock split.
F-85
<PAGE>
SPRINT PCS GROUP
SCHEDULE II--COMBINED VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
Additions
-------------------------------
Balance Charged Charged Balance
Beginning PCS to to Other Other End of
of Year Restructuring Income Accounts Deductions Year
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(millions)
1999
Allowance for doubtful
accounts $ 11 $-- $272 $ 4 $(230)(/3/) $ 57
----------------------------------------------------------------
Valuation allowance--
deferred income tax
assets $245 $-- $ 47 $-- $ (9) $283
----------------------------------------------------------------
1998
Allowance for doubtful
accounts $-- $ 8(/1/) $ 14 $-- $ (11)(/3/) $ 11
----------------------------------------------------------------
Valuation allowance--
deferred income tax
assets $-- $229(/2/) $-- $ 16 $ -- $245
----------------------------------------------------------------
</TABLE>
There was no activity in the valuation and qualifying accounts for 1997.
(/1/) As discussed in Note 3 of the Notes to Combined Financial Statements, the
PCS Group's assets and liabilities were recorded at their fair values on
the PCS Restructuring date. Therefore, the data presented in this schedule
reflects activity since the PCS Restructuring.
(/2/) Represents a valuation allowance for deferred income tax assets recorded
in connection with the PCS Restructuring.
(/3/) Accounts written off, net of recoveries.
F-86
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements
give effect to the merger of MCI WorldCom and Sprint under the purchase method
of accounting. These pro forma statements are presented for illustrative
purposes only. The pro forma adjustments are based upon available information
and assumptions that management believes are reasonable. The pro forma
condensed combined financial statements do not purport to represent what the
results of operations or financial position of MCI WorldCom would actually have
been if the merger had in fact occurred on such dates, nor do they purport
to project the results of operations or financial position of MCI WorldCom for
any future period or as of any date, respectively.
Under the purchase method of accounting, tangible and identifiable
intangible assets acquired and liabilities assumed are recorded at their
estimated fair values. The excess of the purchase price, including estimated
fees and expenses related to the merger, over the net assets acquired is
classified as goodwill on the accompanying unaudited pro forma condensed
combined balance sheet. The estimated fair values and useful lives of assets
acquired and liabilities assumed are based on a preliminary valuation and are
subject to final valuation adjustments which may cause some of the intangibles
to be amortized over a shorter life than the goodwill amortization period of 20
years. MCI WorldCom intends to undertake a study to determine the allocation of
the total purchase price to the various assets acquired, including in-process
research and development, and the liabilities assumed. MCI WorldCom's
management currently believes that amounts allocated to goodwill will be
amortized over a life not to exceed 25 years while other intangibles may be
amortized over shorter periods, which would reduce net income reported by
WorldCom.
The unaudited pro forma condensed combined balance sheet as of December 31,
1999 was prepared by combining the balance sheet at December 31, 1999 for MCI
WorldCom with the balance sheet at December 31, 1999 for Sprint, giving effect
to the merger as though it had been completed on December 31, 1999.
The unaudited pro forma condensed combined statement of operations for the
year ended December 31, 1999, was prepared by combining MCI WorldCom's statement
of operations for the year ended December 31, 1999 with Sprint's statement of
operations for the year ended December 31, 1999, giving effect to the merger as
though it had occurred on January 1, 1999. This unaudited pro forma condensed
combined financial data does not give effect to any restructuring costs or to
any potential cost savings or other operating efficiencies that could result
from the Sprint merger.
The consolidated historical financial statements of Sprint for the year ended
December 31, 1999, are derived from audited consolidated financial statements
contained in this current report on Form 8-K-2. The consolidated financial
statements of MCI WorldCom for the year ended December 31, 1999 are contained in
MCI WorldCom's Annual Report on Form 10-K for the year ended December 31, 1999
(File no. 0-11258) and incorporated by reference herein.
On December 14, 1999, the Sprint board of directors authorized a two-for-one
stock split of its Sprint PCS common stock in the form of a stock dividend
which was distributed on February 4, 2000. All Sprint PCS group per share data
and numbers of Sprint PCS common shares have been restated to
reflect this stock split.
You should read the financial information in this section along with MCI
WorldCom's and Sprint's historical consolidated financial statements and
accompanying notes incorporated by reference or contained in this current report
on Form 8-K-2.
F-87
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET (1)
As of December 31, 1999
(In millions)
<TABLE>
<CAPTION>
WorldCom
MCI WorldCom Sprint Pro Forma Pro Forma
Historical (2) Historical (2) Adjustments Combined
-------------- -------------- ----------- ----------
<S> <C> <C> <C> <C>
Current assets.............. $10,324 $ 5,580 $ -- $ 15,904
Property, plant and
equipment, net............. 28,618 21,969 -- 50,587
Goodwill and PCS licenses,
net........................ 42,325 8,465 (8,465)(3) 150,310
107,985 (3)
Other intangibles, net...... 4,983 1,102 -- 6,085
Other assets................ 4,822 2,134 -- 6,956
------- ------- -------- --------
Total assets............. $91,072 $39,250 $ 99,520 $229,842
======= ======= ======== ========
Current liabilities......... $17,209 $ 6,832 $ -- $ 24,041
Long-term debt.............. 13,128 15,685 -- 28,813
Other liabilities........... 6,100 3,163 -- 9,263
Minority interests.......... 2,599 -- -- 2,599
Mandatorily redeemable
preferred stock............ 798 10 (10)(4) 808
10 (5)
Shareholders' equity
Preferred stock............ -- -- -- --
Common stock............... 28 -- 15 (5) 43
Class A common stock....... -- 216 (216)(4) --
FON common stock........... -- 1,576 (1,576)(4) --
PCS common stock........... -- 910 (910)(4) 953
953 (5)
PCS preferred stock........ -- 247 (247)(4) 247
247 (5)
Paid in capital............ 52,108 8,569 (8,569)(4) 163,973
111,865 (5)
Retained earnings
(deficit)................. (928) 1,961 (1,961)(4) (928)
Other...................... 30 81 (81)(4) 30
------- ------- -------- --------
Total
shareholders' equity.... 51,238 13,560 99,520 164,318
------- ------- -------- --------
Total liabilities and
shareholders' equity.... $91,072 $39,250 $ 99,520 $229,842
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
F-88
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (1)
For the Year Ended December 31, 1999
(In millions, except per share data)
<TABLE>
<CAPTION>
MCI Sprint WorldCom
WorldCom Sprint FON WorldCom PCS PCS
Historical Historical Pro Forma Pro Forma Historical Pro Forma Pro Forma Intergroup WorldCom
(2) (2) Adjustments Combined (2) Adjustments Combined Eliminations Consolidated
---------- ----------- ----------- --------- ---------- ----------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.................. $37,120 $17,016 $ (536)(6) $53,600 $ 3,180 $ -- $ 3,180 $(268)(7) $56,512
Operating expenses:
Line costs............... 15,951 7,724 (536)(6) 23,139 3,150 -- 3,150 (268)(7) 26,021
Selling, general and
administrative.......... 8,935 4,233 -- 13,168 1,744 -- 1,744 -- 14,912
Goodwill and PCS licenses
amortization............ 1,207 42 (42)(9) 4,210 184 (184)(9) 2,397 -- 6,607
3,003 (8) 2,397 (8)
Depreciation and other
amortization............ 3,147 2,087 -- 5,234 1,339 -- 1,339 -- 6,573
In-process research and
Development and other
Charges................. (8) -- -- (8) -- -- -- -- (8)
------- ------- ------- ------- ------- ------- ------- ----- -------
Operating income
(loss)................... 7,888 2,930 (2,961) 7,857 (3,237) (2,213) (5,450) -- 2,407
Other income (expense):
Interest expense......... (966) (182) -- (1,148) (698) -- (698) 20 (7) (1,826)
Other.................... 242 49 -- 291 46 -- 46 (20)(7) 317
------- ------- ------- ------- ------- ------- ------- ----- -------
Income (loss) before
income taxes and minority
interests................ 7,164 2,797 (2,961) 7,000 (3,889) (2,213) (6,102) -- 898
Provision (benefit) for
income taxes............. 2,965 1,061 -- 4,026 (1,388) -- (1,388) -- 2,638
------- ------- ------- ------- ------- ------- ------- ----- -------
Income (loss) before
minority interests....... 4,199 1,736 (2,961) 2,974 (2,501) (2,213) (4,714) -- (1,740)
Minority interests........ 186 -- -- 186 (20) -- (20) -- 166
------- ------- ------- ------- ------- ------- ------- ----- -------
Income (loss) before
discontinued operations
and extraordinary
items.................... 4,013 1,736 (2,961) 2,788 (2,481) (2,213) (4,694) -- (1,906)
Distributions on
subsidiary trust
mandatorily redeemable
preferred securities..... 63 -- -- 63 -- -- -- -- 63
Preferred dividend
requirements............. 9 (7) -- 2 15 -- 15 -- 17
------- ------- ------- ------- ------- ------- ------- ----- -------
Net income (loss)
applicable to common
shareholders before
discontinued operations
and extraordinary
items.................... $ 3,941 $ 1,743 $(2,961) $ 2,723 $(2,496) $(2,213) $(4,709) $ -- $(1,986)
======= ======= ======= ======= ======= ======= ======= ===== =======
Weighted average number of
shares issued and
outstanding:
Basic.................... 2,821 868 1,492 4,313 920 920 920
======= ======= ====== ======= ======= ======= =======
Diluted.................. 2,925 887 1,522 4,447 920 920 920
======= ======= ====== ======= ======= ======= =======
Earnings (loss)
per share (10):
Basic.................... $ 1.40 $ 2.01 $ 0.63 $ (2.71) $ (5.12)
======= ======= ======= ======= =======
Diluted.................. $ 1.35 $ 1.97 $ 0.61 $ (2.71) $ (5.12)
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of this statement.
F-89
<PAGE>
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
1. The unaudited pro forma financial data do not give effect to any
restructuring costs or to any potential cost savings or other operating
efficiencies that could result from the merger. MCI WorldCom is in the
process of developing its plan to integrate the operations of Sprint which
may include exit costs. As a result of this plan, a charge, or increase to
purchase cost, which may be material but which cannot be quantified at the
date of this current report on Form 8-K-2, is expected to be recognized in
the period in which such exit plan has been approved by the appropriate level
of management. Furthermore, the unaudited pro forma financial data do not
reflect any expense of intangible assets attributable to the value of any in-
process research and development projects of Sprint at the time of the
merger. However, MCI WorldCom intends to undertake a study to determine the
allocation of the total purchase price to the various assets acquired,
including in-process research and development, and the liabilities assumed.
To the extent that a portion of the purchase price is allocated to in-process
research and development projects of Sprint, a charge would be recognized in
the period in which the merger occurs. The unaudited pro forma financial data
are not necessarily indicative of the operating results or financial position
that would have occurred had the merger been completed at the dates
indicated, nor are they necessarily indicative of future operating results or
financial position. The purchase accounting adjustments made in connection
with the development of the unaudited pro forma condensed combined financial
statements are preliminary and have been made solely for purposes of
developing such pro forma financial information.
2. In November 1998, Sprint stockholders approved the formation of the Sprint
FON Group and the Sprint PCS Group and the creation of the Sprint FON common
stock and the Sprint PCS common stock. The Sprint PCS common stock was
designed to reflect the performance of Sprint's domestic wireless personal
communication services (PCS) operations. The Sprint FON common stock was
designed to reflect the performance of all of Sprint's other operations.
The following table presents a reconciliation of Sprint's consolidated
results of operations for the year ended December 31, 1999 (in millions):
<TABLE>
<CAPTION>
Sprint Sprint
FON PCS Intergroup Sprint
Group Group Eliminations Consolidated
-------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues.............................. $17,016 $ 3,180 $(268) $19,928
Line costs............................ 7,724 3,150 (268) 10,606
Selling, general and
administrative....................... 4,233 1,744 -- 5,977
Goodwill and PCS licenses
amortization......................... 42 184 -- 226
Depreciation and other
amortization......................... 2,087 1,339 -- 3,426
------- ------- ----- -------
Operating income (loss)............... 2,930 (3,237) -- (307)
Other income (expense):
Interest expense..................... (182) (698) 20 (860)
Other................................ 49 66 (20) 95
------- ------- ----- -------
Income (loss) before income
taxes................................ 2,797 (3,869) -- (1,072)
Provision (benefit) for income
taxes................................ 1,061 (1,388) -- (327)
------- ------- ----- -------
Income (loss) before discontinued
operations and extraordinary
items................................ 1,736 (2,481) -- (745)
Preferred dividends................... (7) 15 -- 8
------- ------- ----- -------
Net income (loss) applicable to
common shareholders before
discontinued operations and
extraordinary items.................. $ 1,743 $(2,496) $ -- $ (753)
======= ======= ===== =======
</TABLE>
F-90
<PAGE>
3. This adjustment reflects the excess of consideration over net assets
acquired. The following is a calculation (in millions, except per share
data):
Sprint FON common stock outstanding at December 31, 1999......... 788
Shares issuable upon conversion of Sprint FT/DT class A stock
outstanding at December 31, 1999 (represents the right to one
share of Sprint series 3 FON common stock)...................... 86
Shares issuable upon conversion of Sprint first and second series
preferred stock................................................. 2
---------
Sprint FON common stock assumed outstanding at December 31,
1999............................................................ 876
Assumed FON exchange ratio per share............................. 1.5960
---------
WorldCom group common stock assumed to be issuable for Sprint FON
common stock.................................................... 1,398
---------
Sprint PCS common stock outstanding at December 31, 1999 (as
restated to account for Sprint's two-for-one stock split of its
Sprint PCS common stock which was effected on February 4,
2000)........................................................... 910
Shares issuable upon conversion of Sprint FT/DT class A stock
outstanding at December 31, 1999 (represents the right to one-
half share of one share of Sprint series 3 PCS common stock).... 43
Shares issuable upon conversion of Sprint seventh series
preferred stock................................................. 16
Shares issuable upon conversion of Sprint first and second series
preferred stock................................................. 1
---------
Sprint PCS common stock assumed outstanding at December 31, 1999
(as restated to account for Sprint's two-for-one stock split of
its Sprint PCS common stock which was effected on February 4,
2000)........................................................... 970
PCS exchange ratio per share..................................... 0.116025
---------
WorldCom group common stock assumed to be issuable for Sprint PCS
common stock.................................................... 113
---------
Total WorldCom group common stock assumed to be issuable......... 1,511
WorldCom group common stock assumed average price based on the
MCI WorldCom common stock average closing price before and after
the merger was announced (as adjusted to account for MCI
WorldCom's three-for-two stock split which was effected on
December 30, 1999).............................................. $ 47.6181
---------
$ 71,951
Fair value of FON options........................................ 2,493
---------
74,444
---------
Total WorldCom PCS group common stock assumed to be issuable..... 970
WorldCom PCS group common stock assumed average price based on
the average closing price of Sprint series 1 PCS common stock
before and after the merger was announced....................... $ 37.235
---------
$ 36,118
Fair value of PCS options........................................ 2,268
---------
38,386
Estimated transaction costs...................................... 250
---------
Total consideration.............................................. 113,080
Elimination of Sprint's historical goodwill and PCS licenses at
December 31, 1999.............................................. 8,465
Historical net book value at December 31, 1999 of Sprint net
assets acquired................................................. (13,560)
---------
Excess of consideration over net assets acquired................. $ 107,985
=========
F-91
<PAGE>
The determination of the fair value for Sprint capital stock has been based
upon the assumed FON exchange ratio. The actual FON exchange ratio may vary
as described in Current Report on Form 8-K-1 dated April 11, 2000 (filed
April 11, 2000)(File no. 0-11258) and incorporated by reference in this
Current Report Form 8-K-2. For securities other than the Sprint FON common
stock and the Sprint PCS common stock, their fair values were determined
based upon the securities into which they convert.
The total consideration will be allocated to the assets and liabilities of
Sprint based on their estimated fair value. The excess of consideration over
the historical book value of Sprint's net assets acquired has been
preliminarily allocated to goodwill. A final allocation of the purchase price
to the assets acquired and liabilities assumed of Sprint is dependent upon
valuations and studies that have not progressed to a stage where there is
sufficient information to make such an allocation in the accompanying pro
forma financial information. These valuations are expected to be completed
around the effective date of the merger. MCI WorldCom's management believes
the consideration in excess of the historical book value of Sprint's net
assets acquired primarily comprises goodwill and other intangible assets. To
the extent that a portion of the purchase price is allocated to in-process
research and development projects for which technological feasibility has not
been established and the technology has no future alternative use, a charge
would be recognized in the period in which the merger occurs (See Note 1).
Additionally, the merger agreement provides that, in several circumstances,
MCI WorldCom or Sprint may be required to pay the other party a termination
fee of $2.5 billion. If such a payment is made it would be reflected in the
financial statements in the period in which such an event occurs. Concurrent
with the merger agreement the companies have also entered into various
commercial agreements enabling Sprint to purchase MCI WorldCom's
international communications products and services, providing for the
purchase by the parties of local access and transport services from each
other and allowing MCI WorldCom to offer Sprint's PCS services. The
accounting for those relationships will be reflected in the operations of the
respective company when the services are provided and disclosed, if material,
in the footnotes to the financial statements. Before the execution of the
merger agreement, Sprint entered into contingency employment and non-compete
agreements with certain key employees that provide various benefits including
compensation payments if employment is involuntarily terminated following a
change of control. A change of control is deemed to occur if a third party
acquires 20% or more of the outstanding voting stock of Sprint or if there is
a change of a majority of the Sprint board of directors within a two-year
period. Amounts contingently payable under these agreements not currently
reflected in the pro formas could approximate $100 million. Should these
amounts become payable, the amounts would be included in the allocation of
the purchase price.
4. These adjustments represent the elimination of Sprint's shareholders'
equity accounts and the Sprint first series preferred stock and the Sprint
second series preferred stock.
5. These adjustments represent the issuance of:
(a) approximately 1,501 million shares of WorldCom group common stock at an
assumed FON exchange ratio of 1.5960 shares of WorldCom group common
stock for each share of Sprint FON common stock outstanding and each
share of Sprint FT/DT class A stock outstanding, 0.116025 shares of
WorldCom group common stock for each share of Sprint PCS common stock
outstanding and 0.0580125 shares of WorldCom group common stock for each
share of Sprint FT/DT class A stock outstanding. The actual FON exchange
ratio may vary as described in MCI WorldCom's Form 8-K-1 dated April 11,
2000 (filed April 11, 2000) (File no. 0-11258) and incorporated by
reference in this Current Report on Form 8-K-2.
(b) approximately 953 million shares of WorldCom PCS group common stock for
the shares of Sprint PCS common stock outstanding and one-half of a share
of WorldCom PCS group common stock for each share of Sprint FT/DT class A
stock outstanding.
F-92
<PAGE>
(c) approximately 95 shares of WorldCom series 5 preferred stock for the
shares of Sprint fifth series preferred stock outstanding.
(d) approximately 247,000 shares of WorldCom series 7 preferred stock for
the shares of Sprint seventh series preferred stock outstanding.
6. These estimated adjustments eliminate the revenues and corresponding line
costs attributable to the intercompany transactions between MCI WorldCom
and Sprint.
7. These adjustments eliminate the intergroup transactions between Sprint's
FON and PCS groups.
8. This entry reflects the adjustment to amortization for the effect of the
excess of consideration over net assets acquired in the merger. For purposes
of the unaudited pro forma condensed combined financial statements, the
excess consideration has been amortized over an estimated life of 20 years.
MCI WorldCom's management currently believes that amounts allocated to
goodwill will be amortized over a life not to exceed 25 years while other
intangible assets may be amortized over shorter periods, consequently
reducing net income reported by WorldCom. Assuming an estimated useful life
of 10 years, each $1 billion of consideration allocated to intangible assets
other than goodwill would have the effect of decreasing net income by
approximately $31 million annually. A final determination of the lives
attributable to the intangible assets has not yet been made (See Note 1). As
discussed in Note 3, a portion of the excess consideration may be allocated
to in-process research and development projects. To the extent amounts are
allocated to in-process research and development projects, pro forma
amortization expense would be ratably reduced accordingly. For example, if
$500 million were allocated to in-process research and development projects,
it would have the effect of increasing net income in subsequent periods by
approximately $25 million.
Excess consideration and the related amortization expense was allocated
between Sprint's FON and PCS groups based upon the amount of consideration
to be issued to each group and their respective net assets at December 31,
1999. Additionally, since the value of WorldCom group common stock to be
exchanged for Sprint FON common stock is subject to a collar, the final
determination of the value of WorldCom group common stock to be exchanged
may not be known until completion of the merger. However, any impact on the
total consideration exchanged for the shares of Sprint FON common stock due
to a movement of the MCI WorldCom common stock price outside the collar
described below is not expected to significantly impact the purchase price.
For purposes of the unaudited pro forma condensed combined financial
statements, the total consideration and related amortization is based upon a
value of $76.00 per share for each share of Sprint FON common stock
exchanged, which represents the value of the WorldCom group common stock to
be exchanged if the average closing price of MCI WorldCom common stock is
greater than $41.4350 and less than $53.9007 before the completion of
merger. If the average closing price per share of MCI WorldCom common stock
equals or exceeds $53.9007, the FON exchange ratio will be 1.4100; and if it
equals or is less than $41.4350, the FON exchange ratio will be 1.8342.
9. These entries represent the estimated elimination of Sprint's historical
goodwill and PCS licenses amortization.
10. Pro forma per share data are based on the number of shares of WorldCom
common and common equivalent shares that would have been outstanding had
the merger occurred on January 1, 1999.
F-93
<PAGE>
EXHIBIT INDEX
Exhibit No. Description of Exhibit
- ----------- ----------------------
2.1 Amended and Restated Agreement and Plan of Merger dated as of
March 8, 2000, between MCI WORLDCOM, Inc. and Sprint Corporation
(filed as Annex 1 to the Proxy Statement/Prospectus dated March
9, 2000 included in MCI WorldCom's Registration statement on Form
S-4, Registration No. 333-90421 and incorporated herein by
reference)*
23.1 Consent of Ernst & Young LLP
23.2 Consent of Deloitte & Touche LLP
99.1 MCI WORLDCOM, Inc. Financial statements and related notes as of
and for the three years ended December 31, 1999 (incorporated
herein by reference to WorldCom's Annual Report on Form 10-K for
the year ended December 31, 1999 (File No. 0-11258))
* The Registrant hereby agrees to furnish supplementally a copy of omitted
schedules to this Agreement to the Securities and Exchange Commission upon its
request.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statements (Form
S-3, No. 33-77964; Form S-3, No. 333-10455; Form S-3, No.333-10459; Form S-3,
No. 333-20911; Form S-3, No. 333-45067; Form S-3, No. 333-45127; Form S-3,
No. 333-60859; Form S-3, No. 333-85431; Form S-4, No. 333-90421; Form S-8,
No. 33-52168; Form S-8, No. 33-69322; Form S-8, No. 33-71450; Form S-8,
No. 33-89072; Form S-8, No. 333-02115; Form S-8, No. 333-10349; Form S-8,
No. 333-16531; Form S-8, No. 333-16015; Form S-8, No. 333-30279; Form S-8,
No. 333-30281; Form S-8, No. 333-45079; Form S-8, No. 333-45095; Form S-8,
No. 333-45083; Form S-8, No. 333-62609; Form S-8, No. 333-62613; Form S-8,
No. 333-36901; Form S-8, No. 333-85393; Form S-8, No. 333-85389; and Form S-8,
No. 333-85919) of MCI WORLDCOM, Inc. of our reports dated February 1, 2000 with
respect to the consolidated financial statements and schedule of Sprint
Corporation and the combined financial statements and schedules of the Sprint
FON Group and the Sprint PCS Group included in this Current Report (Form 8-K-2)
dated April 11, 2000.
ERNST & YOUNG LLP
Kansas City, Missouri
April 11, 2000
<PAGE>
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements (Nos.
33-77964, 333-10455, 333-10459, 333-20911, 333-45067, 333-45127, 333-60859 and
333-85431) on Form S-3 and Registration Statements (Nos. 33-52168, 33-69322,
33-71450, 33-89072, 333-02115, 333-10349, 333-16531, 333-16015, 333-30279, 333-
30281, 333-45079, 333-45095, 333-45083, 333-62609, 333-62613, 333-36901, 333-
85393, 333-85389 and 333-85919) on Form S-8 and in Registration Statement No.
333-90421 on Form S-4 of MCI WORLDCOM, Inc. of our report dated February 2,
1999, on the consolidated financial statements of Sprint Spectrum Holding
Company, L.P. and subsidiaries for each of the two years in the period ended
December 31, 1998, appearing in this Report on Form 8-K of MCI WORLDCOM, Inc.
Kansas City, Missouri
April 10, 2000
