UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2000
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OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from____________________to____________________
Commission file number 1-04721
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SPRINT CORPORATION
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(Exact name of registrant as specified in its charter)
KANSAS 48-0457967
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
P.O. Box 11315, Kansas City, Missouri 64112
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (913) 624-3000
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
-------------------------------------------------------- ------------------------------------------------------------
FON Common Stock, Series 1, $2.00 par value, and FON New York Stock Exchange
Group Rights
PCS Common Stock, Series 1, $1.00 par value, and PCS New York Stock Exchange
Group Rights
Guarantees of Sprint Capital Corporation 6.875% Notes New York Stock Exchange
due 2028
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file these reports), and (2) has been subject to these filing
requirements for the past 90 days.
Yes X No ___
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
Aggregate market value of voting and non-voting stock held by non-affiliates at
February 28, 2001, was $37,426,477,728.
COMMON SHARES OUTSTANDING AT FEBRUARY 28, 2001:
FON COMMON STOCK 799,223,455
PCS COMMON STOCK 935,235,668
CLASS A COMMON STOCK 86,236,036
Documents incorporated by reference.
------------------------------------
Registrant's definitive proxy statement filed under Regulation 14A promulgated
by the Securities and Exchange Commission under the Securities Exchange Act of
1934, which definitive proxy statement is to be filed within 120 days after the
end of Registrant's fiscal year ended December 31, 2000, is incorporated by
reference in Part III hereof.
EXPLANATORY NOTE
Sprint Corporation hereby amends its Annual Report on Form 10-K for the
year ended December 31, 2000 (the "Form 10-K") as set forth in this Annual
Report on Form 10-K/A (the "Form 10-K/A"). This Form 10-K/A includes amendments
to the following sections of the Form 10-K:
. Item 1. Business;
. Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters;
. Item 6. Selected Financial Data;
. Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations;
. Item 8. Financial Statements and Supplementary Data; and
. Annex II and Annex III.
All other items of the Form 10-K are simply restated herein and have not
been amended.
SECURITIES AND EXCHANGE COMMISSION
ANNUAL REPORT ON FORM 10-K Sprint Corporation
Part I
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Item 1. Business
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The Corporation
Sprint Corporation, incorporated in 1938 under the laws of Kansas, is mainly a
holding company.
Sprint is a global communications company and a leader in integrating long-
distance, local service, and wireless communications. Sprint is also one of the
largest carriers of Internet traffic using its tier one Internet protocol
network, which provides connectivity to any point on the Internet either through
its own network or via direct connections with another backbone provider. Sprint
is the nation's third-largest provider of long distance services and operates
nationwide, all-digital long distance and tier one Internet protocol networks
using fiber-optic and electronic technology. In addition, Sprint's local
division currently serves approximately 8.3 million access lines in 18 states.
Sprint also operates the only 100% digital personal communications service, or
PCS, wireless network in the United States with licenses to provide service
nationwide using a single frequency band and a single technology. Sprint owns
PCS licenses to provide service to the entire United States population,
including Puerto Rico and the U.S. Virgin Islands.
In November 1998, Sprint's shareholders approved the allocation of all of
Sprint's assets and liabilities into two groups, the FON Group and the PCS
Group, as well as 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. (TCI), 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 (FT) and Deutsche Telekom AG (DT) 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.
Operating Segments
Sprint's business is divided into four lines of business: the global markets
division, the local division, the product distribution and directory publishing
businesses and the PCS wireless telephony products and services business. The
FON Group includes the global markets division, the local division and the
product distribution and directory publishing businesses, and the PCS Group
includes the PCS wireless telephony products and services business. The PCS
common stock is intended to reflect the financial results and economic value of
the PCS wireless telephony products and services business. The FON common stock
is intended to reflect the financial results and economic value of the global
markets division, the local division and the product distribution and directory
publishing businesses. For financial information relating to Sprint's segments,
see Note 16 to Sprint's consolidated financial statements under Item 8--
Financial Statements and Supplementary Data in this Form 10-K/A.
During 2000, Sprint changed the FON Group's segment reporting to align financial
reporting with changes in how Sprint manages the FON Group's operations and
assesses its performance. As a result, all previously reported financial
information relating to these segments has been restated to reflect the new
composition of each segment.
Characteristics of Tracking Stock
FON common stock and PCS common stock are intended to reflect the performance of
the FON and PCS Groups. However, they are classes of common stock of Sprint, not
of the group they are intended to track. Accordingly, FON and PCS shareholders
are subject to the risks related to an equity investment in Sprint and all of
Sprint's businesses, assets and liabilities. Shares of FON common stock and PCS
common stock do not represent a direct legal interest in the assets and
liabilities of the groups, as Sprint
1
owns all of the assets and liabilities of both of the groups. Sprint's Board
may, subject to the restrictions in Sprint's articles of incorporation, change
the allocation of the assets and liabilities that comprise each of the FON Group
and the PCS Group without shareholder approval.
Holders of FON and PCS common stock generally vote as a single class on all
matters submitted to a vote of Sprint's shareholders, including the election of
directors. The vote per share of the PCS stock is different from the vote of the
FON stock. The FON stock has one vote per share. The vote of the PCS stock is
based on the market price of a share of PCS stock relative to the market price
of a share of FON stock for a period of time prior to the record date for a
shareholders meeting. The shares of PCS stock held by the Cable Partners have
1/10 of the vote per share of the publicly traded PCS stock except where there
is a class vote. The shares held by the Cable Partners convert into full voting
PCS stock upon sale to the public.
The market price of the FON common stock may not accurately reflect the reported
financial results and prospects of the FON Group or the dividend policies
established by Sprint's Board of Directors with respect to the FON common stock.
The market price of the PCS common stock may not accurately reflect the reported
financial results and prospects of the PCS group or the dividend policies
established by Sprint's Board with respect to the PCS common stock. Events
affecting Sprint generally or the results of one group could adversely affect
the results of operations of the other group or the market price of the stock
tracking the other group. Net losses of either group, and dividends or
distributions on, or repurchases of, one stock will reduce Sprint funds legally
available for dividends on both stocks. Debt incurred by either group could
affect the credit rating of Sprint as a whole and increase borrowing costs for
both groups.
Holders of one of the stocks may have different or conflicting interests from
the holders of the other stock. For example, conflicts could arise with respect
to decisions by the Sprint Board to (1) convert the outstanding shares of PCS
stock into shares of FON stock, (2) sell assets of a group to a third party, (3)
transfer assets from one group to the other group, (4) formulate public policy
positions which could have an unequal effect on the interests of the FON Group
and the PCS Group, (5) allocate consideration in a merger to holders of FON
stock or PCS stock, and (6) make operational and financial decisions with
respect to one group that could be considered to be detrimental to the other
group. Material conflicts are addressed in accordance with the Tracking Stock
Policies adopted by the Sprint Board. In addition, the Board has appointed a
committee of its members (the Capital Stock Committee) to interpret and oversee
the implementation of these policies.
Under the applicable corporate law, Sprint's Board owes its fiduciary duties to
all of Sprint's shareholders. Neither the FON Group nor the PCS Group has a
separate board of directors to represent solely the interests of the holders of
FON common stock or PCS common stock. Consequently, there is no board of
directors that owes separate duties to the holders of either the FON common
stock or the PCS common stock. The Tracking Stock Policies provide that the
Board, in resolving material matters in which the holders of FON common stock
and PCS common stock have potentially divergent interests, will act in the best
interests of Sprint and all of its common shareholders after giving fair
consideration to the potentially divergent interests of the holders of the
separate classes of Sprint common stock. The Tracking Stock Policies may be
changed by the Board without shareholder approval.
If either the FON Group or the PCS Group were a stand-alone entity, a person
that does not wish to negotiate with management could seek to acquire such group
by means of a tender offer or proxy contest involving only that entity's
shareholders. However, because the FON Group and the PCS Group are each part of
Sprint, acquiring either group without negotiation with Sprint's management
would require a proxy contest or tender offer that yielded control of Sprint
generally and would likely require solicitations to shareholders of both groups.
Sprint FON Group
General Overview of the Sprint FON Group
The FON Group is comprised of the global markets division, the local division
and the product distribution and directory publishing businesses. The main
activities of the global markets division include domestic and international
long distance communications (except for consumer long distance services used by
customers within Sprint's local franchise territories), Sprint ION(SM),
broadband fixed wireless services and certain other ventures. The activities of
the local division include local exchange communications and consumer long
distance services used by customers within Sprint's local franchise territories.
The FON Group is the nation's third-largest provider of long distance services.
2
Global Markets Division
The global markets division's financial performance for 2000, 1999 and 1998 is
summarized as follows:
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2000 1999 1998
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(millions)
Net operating revenues $ 10,528 $ 10,308 $ 9,541
---------------------------------------------------
Operating income/(1)/ $ 585 $ 1,175 $ 1,190
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/(1)/ Includes a $238 million nonrecurring asset write-down in 2000.
General
The global markets division provides a broad suite of communications services
targeted to domestic business and residential customers, multinational
corporations and other communications companies. These services include domestic
and international voice; data communications such as Internet and frame relay
access and transport, web hosting, virtual private networks, and managed
security services; and broadband services.
Sprint is deploying 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 advanced
services in the competitive local service market. Sprint uses various advanced
services last-mile technologies, including dedicated access and Digital
Subscriber Line (xDSL), and expects to use Multipoint Multichannel Distribution
Services (MMDS).
The global markets division also includes the operating results of the cable TV
service operations of the broadband fixed wireless companies after their 1999
acquisition dates. During 2000, Sprint converted several markets served by MMDS
capabilities from cable TV services to high-speed data services. The global
markets division's operating results reflect the development costs and the
operating revenues and expenses of these broadband fixed wireless services.
Sprint intends to provide broadband data and voice services to additional
markets served by these capabilities.
The global markets division also reflects the costs of establishing
international operations beginning in 2000.
This division also includes the FON Group's investments in EarthLink, Inc., an
Internet service provider; Call-Net, a long distance provider in Canada;
Intelig, a long distance provider in Brazil; and certain other
telecommunications investments and ventures.
Competition
The division competes with AT&T, WorldCom and other telecommunications providers
in all segments of the long distance communications market. AT&T continues to
have the largest market share of the domestic long distance communications
market. Emerging competitors are targeting the high-end data market and are
offering deeply discounted rates in exchange for high-volume traffic as they
attempt to fill their networks with traffic volume. Certain Regional Bell
Operating Companies (RBOCS) have obtained authorization to provide in-region
long distance service in certain states, which has heightened competition in
those states. Competition in long distance is based on price and pricing plans,
the types of services offered, customer service, and communications quality,
reliability and availability.
Strategy
In order to achieve profitable market share growth in an increasingly
competitive long distance communications environment, the global markets
division intends to leverage its principal strategic assets: its high-capacity
national fiber-optic network, its tier one Internet Protocol network, its large
base of business and residential customers, its established national brand, and
offerings available from other FON Group operating entities and the PCS Group.
The long distance operation will focus on expanding its presence in the high-
growth data communications markets and intends to become the provider of choice
for delivery of end-to-end service to business and residential customers. The
FON Group continues to deploy network and systems infrastructure which provides
reliability, cost effectiveness and technological improvements. In order to
create integrated product offerings for its customers, the FON Group is
solidifying the linkage of its long distance operation with Sprint's other
operations such as the local division and the PCS Group.
The long distance operation also supports Sprint ION activities. Sprint ION's
integrated services capability is expected to generate increased demand for
Sprint's products and services, and at the same time reduce the costs to provide
those services.
Sprint ION intends to rely largely on the transmission infrastructure of the
long distance operation, Sprint's MMDS capabilities and, to a lesser extent, on
the
3
transmission infrastructure of the local division. Sprint will evaluate whether
facilities should be built, leased or acquired where they currently do not
exist. Because a great amount of future investment will be related to specific
customer contracts, Sprint expects to manage its investment in Sprint ION
consistent with customer demand.
Local Division
General
The local division (LTD) consists mainly of regulated local phone companies
serving approximately 8.3 million access lines in 18 states. LTD provides local
phone services, access by phone customers and other carriers to LTD's local
network, consumer long distance services to customers within its franchise
territories, sales of telecommunications equipment, and other long distance
services within certain regional calling areas, or LATAs.
LTD's financial performance for 2000, 1999 and 1998 is summarized as follows:
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2000 1999 1998
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(millions)
Net operating
revenues $ 6,155 $ 5,958 $ 5,599
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Operating income $ 1,763 $ 1,553 $ 1,401
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AT&T is LTD's largest customer for network access services. The division's net
operating revenues from services (mainly network access services) provided to
AT&T were 8% in 2000, 10% in 1999 and 12% in 1998. Revenues from AT&T were 3% of
the FON Group's revenues in 2000 and 4% in 1999 and 1998.
Competition
Because LTD operations are largely in secondary and tertiary markets,
competition in its markets is occurring more gradually. There is already
competition for business and residential customers in urban areas served by LTD
and for business customers located in most areas. Telecommunications mergers may
accelerate competition in the areas served by LTD. There continues to be
significant competition in toll services. Competition in these services is based
on price and pricing plans, the types of services offered, customer service, and
communications quality, reliability and availability. In addition, wireless
services will continue to grow as an alternative to wireline services as a means
of reaching local customers.
Strategy
LTD has embarked on a growth strategy whereby it will aggressively market to its
local customers Sprint's entire product portfolio as well as its core product
line of advanced network features and data products. LTD also supports the FON
Group's initiatives with Sprint ION. See "Global Markets Division--Strategy" for
more details.
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.
The financial performance for the product distribution and directory publishing
businesses for 2000, 1999 and 1998 is summarized as follows:
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2000 1999 1998
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(millions)
Net operating
revenues $ 1,936 $ 1,758 $ 1,709
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Operating income $ 284 $ 242 $ 231
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Sprint PCS Group
General Overview of the Sprint PCS Group
The PCS Group includes Sprint's wireless personal communication services (PCS)
operations. It operates a 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 2000, the PCS Group, together with affiliates,
operated PCS systems in over 300 metropolitan markets, including the 50 largest
U.S. metropolitan areas. The PCS Group has licenses to serve the entire U.S.
population, including Puerto Rico and the U.S. Virgin Islands. The service
offered by the PCS Group and its affiliates now reaches more than 220 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 (CDMA).
The PCS group also provides wholesale PCS services to companies that resell the
services to their customers on a retail basis. These companies pay the PCS Group
a discounted price for their customers' usage, but bear the costs of acquisition
and customer service.
The PCS Group also includes its investment in Pegaso Telecomunicaciones, S.A. de
C.V. (Pegaso), a wireless PCS operation in Mexico. This investment is accounted
for using the equity method.
4
The financial performance for the PCS Group for 2000, 1999 and 1998 is
summarized as follows:
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2000 1999 1998
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(millions)
Net operating
revenues/(1)/ $ 6,341 $ 3,373 $ 1,294
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Operating loss/(1),(2)/ $ (1,928) $ (3,237) $ (2,570)
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Other partners' loss in
Sprint PCS $ - $ - $ 1,251
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/(1)/ 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.
/(2)/ Includes a $24 million charge in 2000 for costs associated with the
terminated merger between Sprint and WorldCom and a nonrecurring charge to
write-off $179 million of acquired in-process research and development
costs related to the PCS Restructuring in 1998. For further discussion,
see the PCS Group's "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Competition
Each of the markets in which the PCS Group competes is served by other two-way
wireless service providers, including cellular and PCS operators and resellers.
A majority of the markets will have five or more commercial mobile radio service
(CMRS) providers and each of the top 50 metropolitan markets have at least one
other PCS competitor in addition to two cellular incumbents. Many of these
competitors have been operating for a number of years and currently serve a
significant subscriber base.
Strategy
The business objective of the PCS Group is to expand network coverage and
increase market penetration by aggressively marketing competitively priced PCS
products and services under the Sprint and Sprint PCS brand names, offering
enhanced services and seeking to provide superior customer service. The
principal elements of the PCS Group's strategy for achieving these goals are:
. Operating a nationwide digital wireless network
. Leveraging Sprint's national brand
. Utilizing state-of-the-art CDMA technology
. Delivering superior value to its customers
. Growing its customer base using multiple distribution channels
. Continuing to expand coverage
. Offering PCS services in combination with FON Group services
5
Regulatory Developments
Sprint FON Group
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 exchange carriers (ILECs), 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 ILECs, and is rolling out Sprint ION
in selected cities across the nation, using collocation and unbundled network
elements obtained from ILECs.
In January 1999, the Supreme Court affirmed the authority of the Federal
Communications Commission (FCC) to establish rules and prices relating to
interconnection and unbundling of the ILECs' 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.
In July 2000, the U.S. Court of Appeals for the Eighth Circuit invalidated the
pricing standards the FCC had adopted for unbundled network elements and resale
of ILEC services. The court also refused to reconsider, in light of the Supreme
Court decision discussed above, the court's prior holding that ILECs could not
be required to combine unbundled network elements on behalf of other carriers.
In January 2001, the U.S. Supreme Court granted certiorari of three issues from
the Eighth Circuit decision. The Supreme Court will review whether the Telecom
Act forecloses the cost methodology adopted by the FCC for interconnection rates
with the ILECs. A related issue dealing with whether rejection of historical
costs is a taking will also be considered. Finally, the Supreme Court will
consider whether ILECs have a duty under the Telecom Act to combine previously
uncombined network elements when requested and for a fee. If the Supreme Court
affirms the Eighth Circuit's decision, the FCC or the state regulatory
commissions would have to formulate new pricing standards for unbundled network
elements and interconnection.
Separately, in a March 2000 decision, the U.S. Court of Appeals for the District
of Columbia Circuit remanded to the FCC the issue of what types of equipment
ILECs must allow competitors to collocate in their offices. The FCC has received
comments and reply comments on whether and how to change its collocation rules
in light of the D.C. Circuit's decision.
6
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 an FCC ruling that
the provision of in-region long distance service is in the public interest. The
RBOC's have gained authorization to provide in-region long distance service in
four states. Verizon obtained FCC authorization for New York in December 1999;
SBC obtained FCC authorization to provide in-region services in Texas in June
2000 and in Oklahoma and Kansas in January 2001. RBOCs may gain such
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 which choose to resell Sprint services.
Customer Service Slamming
The Telecom Act also established liability for the unauthorized switching 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. The compensation rules were stayed by the Court of Appeals
for the District of Columbia Circuit. In May 2000, the FCC modified the process
for adjudicating alleged slams. The D.C. Circuit then lifted its stay and the
new rules went into effect on November 28, 2000.
Mergers
A number of mergers received final regulatory approval in 2000 and early 2001.
The Qwest- US West merger was approved by the FCC in March 2000; the Bell
Atlantic-GTE merger was approved by the FCC in June 2000; and the AT&T-MediaOne
merger was approved by the FCC in June 2000. Finally, the AOL-Time Warner merger
received approval from the FCC in January 2001.
Universal Service Requirements
The FCC continues to address issues related to universal service and access
reform. In May 2000, the FCC adopted an access reform plan that substantially
reduced switched access charges paid by long distance carriers to the large
ILECs and created a new universal service fund that offsets a portion of this
reduction in access charges. In connection with its advocacy of this plan,
Sprint committed that it would flow through the reductions in switched access
costs over the five-year life of the plan to both business and residential
customers. Sprint also committed to certain other pricing actions, including
eliminating charges to residential and single-line business customers which had
been used to pass through certain access costs that were eliminated by this
plan, and maintaining, for the duration of the plan, at least one pricing option
that does not include a minimum usage charge. The FCC order adopting this access
reform plan requires Sprint to adhere to these commitments. The FCC's order has
been appealed to the U.S. Court of Appeals for the Fifth Circuit.
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
interstate and international end-user revenues. 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 to the universal
service fund from its customers.
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 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 (DOJ) has published guidelines concerning what is
required for it to support, at the FCC, petitions for extension of the CALEA
enforcement deadlines; however, the FCC did not require carriers to have DOJ
concurrence to seek an extension. 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 DOJ. 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. LTD has obtained an extension for CALEA
compliance until June 30, 2001 and has been in discussions with the DOJ which
resulted in an agreement on a deployment schedule for CALEA within LTD. LTD
expects the DOJ to provide a letter of support for use with the FCC in obtaining
a further extension consistent with the agreed upon deployment schedule. Sprint
ION will apply for an extension for the local packet-based services to allow for
development of required hardware and software.
7
Sprint PCS Group
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 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, the FCC now 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 (MTA) licensees must build networks offering coverage to 1/3
of the population within five years and 2/3 within 10 years. In June 2000, the
PCS Group met its five-year buildout requirement in all its MTA markets. 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. Sprint anticipates that it will meet the
10 MHZ five-year buildout requirement by the April 2002 deadline. 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.
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 exchange carriers must program their networks to allow customers to
retain, at the same location, existing telephone numbers when switching from one
telecommunications carrier to another. 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,
all covered CMRS providers must provide a database solution for number
portability. The solution must be able to support roaming. Covered CMRS
providers must provide number portability in the 100 largest metropolitan
statistical areas, in compliance with certain FCC performance criteria, but only
at the request of another carrier (CMRS provider or local exchange carrier).
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 in a two-tiered manner. In the first phase, wireless
carriers must identify the base station from which a call originated. In the
second phase, wireless carriers must provide location within a radius as small
as fifty meters. Implementation of the more complex Phase II location
requirements must begin by October 1, 2001.
Communications Assistance for Law Enforcement Act
CALEA requires telecommunications carriers, including Sprint, to modify their
equipment, facilities and services to allow for authorized electronic
surveillance based on either industry or FCC standards. In 1997, industry-
setting organizations developed interim standards for wireline, cellular and
broadband PCS carriers to comply with CALEA. In August 1999, the FCC
supplemented the interim industry standards with six additional capabilities.
For interim industry standards, the deadline for compliance was June 30, 2000,
and for the additional standards established by the FCC, the deadline is
September 30, 2001. In August 2000, an appellate court vacated the FCC's
decision relative to four of the capabilities and remanded the matter for
further FCC consideration.
8
Sprint PCS believes that it is in compliance with all existing CALEA
requirements. However, Sprint PCS filed a petition for an extension of the June
30, 2000 deadline until June 30, 2001 in the event that the FCC determines that
Sprint PCS must use a specific vendor solution to automatically provide mobile
service assistance information under Section 103 (d) of CALEA. Specifically,
this section requires a CMRS carrier to identify (a) whether a
customer/interception subject is traveling "in network: but outside the
customer's service area," and (b) the service provider if the subject is roaming
on another CMRS network. While Sprint PCS is capable of providing this
information upon a specific request by law enforcement, it cannot provide the
information automatically. The FCC has not ruled on Sprint PCS' motion for an
extension of the June 30, 2000 deadline; however, Sprint PCS is deemed to have
an extension of the deadline until March 31, 2001 unless the FCC revokes the
extension before that deadline or issues a final order with a different
deadline.
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, FCC environmental regulations may
cause certain cell site locations to come under National Environmental Policy
Act (NEPA) and National Historic Preservation Act (NHPA) regulation. The FCC's
NEPA and NHPA rules require carriers to meet certain land use and radio
frequency standards.
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. 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.
Environmental Compliance
Sprint's environmental compliance and remediation expenditures mainly result
from the operation of standby power generators for its telecommunications
equipment. The expenditures arise in connection with standards compliance,
permits or occasional remediation, which are usually related to generators,
batteries or fuel storage. Sprint has been identified as a potentially
responsible party at sites relating to discontinued power generation operations.
Sprint's environmental compliance and remediation expenditures have not been
material to its financial statements or to its operations and are not expected
to have any future material adverse effects on the FON Group or the PCS Group.
9
Patents, Trademarks and Licenses
Sprint owns numerous patents, patent applications, service marks and trademarks
in the United States and other countries. Sprint expects to apply for and
develop trademarks, service marks and patents for the benefit of the groups in
the ordinary course of business. Sprint is a registered trademark of Sprint and
Sprint PCS is a registered service mark of Sprint. Sprint is also licensed under
domestic and foreign patents and trademarks owned by others. In total, these
patents, patent applications, trademarks, service marks and licenses are of
material importance to the business. Generally, Sprint's trademarks, trademark
licenses and service marks have no limitation on duration; Sprint's patents and
licensed patents have remaining lives generally ranging from one to 19 years.
Pursuant to certain of the PCS Group's third party supplier contracts, the PCS
Group has certain rights to use third party supplier trademarks in connection
with the buildout, marketing and operation of its network.
Employee Relations
At year-end 2000, Sprint had approximately 84,100 employees. Approximately
10,100 FON Group employees were represented by unions. During 2000, Sprint had
no material work stoppages caused by labor controversies.
Management
For information concerning the executive officers of Sprint, see "Executive
Officers of the Registrant" in this document.
Information as to Business Segments
For information required by this section, refer to Sprint's "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
also refer to Note 16 of Sprint's "Notes to Consolidated Financial Statements"
section of the Financial Statements filed as part of this document.
--------------------------------------------------------------------------------
Item 2. Properties
--------------------------------------------------------------------------------
Sprint's gross property, plant and equipment totaled $43.1 billion at year-end
2000, of which $16.8 billion relates to the FON Group's local communications
services, $12.5 billion relates to the FON Group's global markets communications
services, $12.1 billion relates to the PCS Group's PCS wireless services and the
remainder relates to the FON Group's product distribution and directory
publishing businesses' properties and general support assets.
The FON Group's gross property, plant and equipment totaled $31.0 billion at
year-end 2000. These properties mainly consist of land, buildings, digital
fiber-optic network, switching equipment, microwave radio and cable and wire
facilities. Sprint leases certain switching equipment and several general office
facilities. The long distance operation has been granted easements, rights-of-
way and rights-of-occupancy, mainly by railroads and other private landowners,
for its fiber-optic network.
The product distribution and directory publishing businesses' properties mainly
consist of office and warehouse facilities to support the business units in the
distribution of telecommunications products and publication of telephone
directories.
The PCS Group's properties consist of leased and owned office space for its
corporate operations, network monitoring personnel, customer care centers and
retail stores, and PCS network assets including base transceiver stations,
switching equipment and towers. The PCS Group leases space for base station
towers and switch sites for its PCS network. At year-end 2000, the PCS Group had
under lease (or options to lease) approximately 17,300 cell sites.
Sprint owns its corporate headquarters building and is in the process of
building a $1 billion corporate campus in the greater Kansas City metropolitan
area.
Gross property, plant and equipment totaling $16.1 billion for the FON Group is
either pledged as security for first mortgage bonds and certain notes or is
restricted for use as mortgaged property.
--------------------------------------------------------------------------------
Item 3. Legal Proceedings
--------------------------------------------------------------------------------
In December 2000, Amalgamated Bank, an institutional shareholder, filed a
derivative action purportedly on behalf of Sprint against certain of its current
and former officers and directors in the Jackson County, Missouri, Circuit
Court. The complaint alleges that the individual defendants breached their
fiduciary duties to Sprint and were unjustly enriched by making undisclosed
amendments to Sprint's stock option plans, by failing to disclose certain
information concerning regulatory approval of the proposed merger of Sprint and
WorldCom, and by overstating Sprint's earnings for the first quarter of 2000.
The plaintiff seeks damages, to be paid to Sprint, in an unspecified amount. Two
additional, substantially identical, derivative actions by other shareholders of
Sprint have been filed.
10
The PCS Group has been involved in legal proceedings in various states
concerning the suspension of the processing or approval of permits for wireless
telecommunications towers, the denial of applications for permits and other
issues arising in connection with tower siting. There can be no assurance that
such litigation and similar actions taken by others seeking to block the
construction of individual cell sites of the PCS Group's network will not, in
the aggregate, significantly delay further expansion of the PCS Group's network
coverage.
In early 2000, Sprint utilized the Environmental Protection Agency's (EPA's)
self-policing policy and disclosed to the EPA its failure to maintain certain
records and file certain reports for a portion of its facilities. Sprint also
informed the EPA that it had corrected the violations and implemented policies
to prevent a reoccurrence. After discussing the matter with the EPA, Sprint
believes that it will be assessed a fine of approximately $250,000, which
represents the EPA's estimate of the economic benefits that Sprint derived from
the violations.
Sprint is involved in various other legal proceedings incidental to the conduct
of its business. While it is not possible to determine the ultimate disposition
of each of these proceedings, Sprint believes that the outcome of such
proceedings, individually or in the aggregate, will not have a material adverse
effect on Sprint's, the FON Group's or the PCS Group's financial conditions or
results of operations.
-----------------------------------------------------------
Item 4. Submission of Matters to a Vote of Security Holders
-----------------------------------------------------------
No matter was submitted to a vote of security holders during the fourth quarter
of 2000.
Item 10(b). Executive Officers of the Registrant
Office Name Age
------------------------------------------------------------------ --------------------------------- -------
Chairman and Chief Executive Officer William T. Esrey (1) 61
President and Chief Operating Officer Ronald T. LeMay (2) 55
President--Local Telecommunications Division Michael B. Fuller (3) 56
President--Technology Services Don G. Hallacy (4) 44
President--National Integrated Services Arthur A. Kurtze (5) 56
President--Global Markets Group Len J. Lauer (6) 43
President--Sprint PCS Charles E. Levine (7) 47
Executive Vice President--General Counsel and External Affairs J. Richard Devlin (8) 50
Executive Vice President--Chief Financial Officer Arthur B. Krause (9) 59
Senior Vice President and Treasurer Gene M. Betts (10) 48
Senior Vice President--Public Affairs and Brand Management Forrest E. Mattix (11) 47
Senior Vice President and Controller John P. Meyer (12) 50
Senior Vice President--Strategic Planning/Corporate Development Liane J. Pelletier (13) 43
Senior Vice President--Human Resources I. Benjamin Watson (14) 52
/(1)/ Mr. Esrey was elected Chairman in 1990. He was elected Chief Executive
Officer and a member of the Board of Directors in 1985.
/(2)/ Mr. LeMay was first elected President and Chief Operating Officer in
1996. From July 1997 to October 1997, he served as Chairman and Chief
Executive Officer of Waste Management, Inc., a provider of comprehensive
waste management services. He was re-elected President and Chief
Operating Officer of Sprint effective October 1997. From 1995 to 1996 Mr.
LeMay served as Vice Chairman of Sprint. He also served as Chief
Executive Officer of Sprint Spectrum Holding Company from 1995 to 1996.
Mr. LeMay served on Sprint's Board of Directors from 1993 until he went
to work for Waste Management, Inc. He was re-elected to Sprint's Board of
Directors in December 1997.
/(3)/ Mr. Fuller was elected President--Local Telecommunications Division in
1996. From 1990 to 1996, he served as President of United Telephone--
Midwest Group, an operating group of subsidiaries of Sprint.
/(4)/ Mr. Hallacy was elected President--Technology Services in October 2000.
He had served as President of Sprint's Internet business unit since April
2000. Mr. Hallacy served as President and Chief Executive Officer of
Eltrax Systems, Inc., a full service Internet application service
provider, from April 1999 to April 2000. Prior to joining Eltrax, he had
served since 1996 as a Vice President of Sprint/United Management
Company, a subsidiary of Sprint. From 1995 to 1996, he was Assistant Vice
President, Product Marketing for Sprint/United Management Company.
/(5)/ Mr. Kurtze was elected President--National Integrated Services in June
2000. He had served as Senior Vice President--One Sprint Strategic
Development since February 1999. From 1995 to 1999, he served as Chief
Operating Officer of Sprint Spectrum Holding Company.
/(6)/ Mr. Lauer became President--Global Markets Group in September 2000. He
had been elected President--Sprint Business in June 2000. Mr. Lauer
served as President--Consumer Services Group of Sprint/United Management
Company from 1999 to 2000. He joined Sprint in 1998 as Senior Vice
President--Quality, Development and Public Relations. From 1995 to 1998,
he had been President and Chief Executive Officer of Bell Atlantic--New
Jersey, a telecommunications company.
/(7)/ Mr. Levine was elected President--Sprint PCS in February 2001. He had
served as Chief Operating Officer--PCS since October 2000. He had served
as Chief Sales and Marketing Officer of Sprint Spectrum Holding Company
since 1998. Mr. Levine joined Sprint Spectrum Holding Company in 1997 as
Chief Marketing Officer. Before joining Sprint Spectrum Holding Company,
he was President of Octel Link, a voice mail equipment and services
provider, and Senior Vice President of Octel Services from 1994 to 1996.
/(8)/ Mr. Devlin was elected Executive Vice President--General Counsel and
External Affairs in 1989.
/(9)/ Mr. Krause was elected Executive Vice President--Chief Financial Officer
in 1988.
/(10)/ Mr. Betts was elected Senior Vice President in 1990. He was elected
Treasurer in December 1998.
/(11)/ Mr. Mattix was elected Senior Vice President--Public Affairs and Brand
Management in August 2000. He had served as Chief Public Relations
Officer of Sprint Spectrum Holding Company since 1996. Before joining
Sprint Spectrum Holding Company, he was Vice President--Public Relations
for US WEST Communications, Inc., a communications company.
/(12)/ Mr. Meyer was elected Senior Vice President--Controller in 1993.
/(13)/ Ms. Pelletier was elected Senior Vice President--Strategic
Planning/Corporate Development in August 2000. She had served as Vice
President--Corporate Strategy of Sprint/United Management Company since
1995.
/(14)/ Mr. Watson was elected Senior Vice President--Human Resources in 1993.
There are no known family relationships between any of the persons named above
or between any of these persons and any outside directors of Sprint. Officers
are elected annually.
11
Part II
-----------------------------------------------------------------------------
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
-----------------------------------------------------------------------------
Common Stock Data
---------------------------------------------------------------------------
2000 Market Price
--------------------------------------------
End
of
High Low Period
---------------------------------------------------------------------------
FON Stock,
Series 1
First quarter $ 67.81 $ 55.13 $ 63.00
Second quarter 67.00 50.98 51.50
Third quarter 54.81 24.31 29.31
Fourth quarter 29.56 19.63 20.31
PCS Stock,
Series 1/(1)/
First quarter 66.94 42.56 65.50
Second quarter 66.00 44.06 59.50
Third quarter 65.88 27.81 35.13
Fourth quarter 39.19 19.38 20.44
---------------------------------------------------------------------------
1999 Market Price
--------------------------------------------
End
of
High Low Period
---------------------------------------------------------------------------
FON Stock,
Series 1/(2)/
First quarter $ 50.34 $ 36.88 $ 49.06
Second quarter 57.47 48.63 53.00
Third quarter 55.69 42.63 54.25
Fourth quarter 75.94 54.00 67.31
PCS Stock,
Series 1/(1)/
First quarter 24.16 10.44 22.16
Second quarter 30.38 20.75 28.50
Third quarter 39.13 26.47 37.28
Fourth quarter 57.22 33.41 51.25
(1/)/ In the 2000 first quarter, Sprint effected a two-for-one stock split of
its Sprint PCS common stock. Market prices prior to the split have been
restated.
/(2)/ In the 1999 second quarter, Sprint effected a two-for-one stock split of
its Sprint FON common stock. Market prices prior to the split have been
restated.
As of February 28, 2001, Sprint had approximately 71,000 FON stock, series 1
record holders, 64,000 PCS stock, series 1 record holders, two FON stock, series
3 record holders, four PCS stock, series 2 record holders, two PCS stock, series
3 record holders, and two Class A common stock record holders. The principal
trading market for Sprint's FON stock, Series 1 and PCS stock, Series 1 is the
New York Stock Exchange. The FON stock, Series 3, the PCS stock, Series 2 and 3
and the Class A common stock are not publicly traded. Adjusting for the effects
of the two-for-one split of the FON Stock in the 1999 second quarter, Sprint
paid a FON stock dividend of $0.125 per share in each of the quarters of 2000
and 1999. Sprint paid Class A common stock dividends of $0.125 per share in
each of the quarters of 2000 and each of the last three quarters of 1999 and
$0.25 per share in the first quarter of 1999. Sprint does not intend to pay
dividends on the PCS stock in the foreseeable future.
12
=============================================================================================================================
Item 6. Selected Financial Data
=============================================================================================================================
Consolidated Selected Financial Data
-----------------------------------------------------------------------------------------------------------------------------
2000 1999 1998/(1)/ 1997/(1)/ 1996/(1)/
-----------------------------------------------------------------------------------------------------------------------------
(millions, except per share data)
Results of Operations
-----------------------------------------------------------------------------------------------------------------------------
Net operating revenues $ 23,613 $ 20,265 $ 17,144 $ 14,947 $ 13,874
Operating income (loss) 505 (307) 190 2,451 2,267
Income (Loss) from continuing operations (576) (745) 585 1,094 1,253
Earnings per Share and Dividends
-----------------------------------------------------------------------------------------------------------------------------
Earnings per Sprint common share from
continuing operations:/(2)/
Diluted $ NA $ NA $ 2.19 $ 2.51 $ 2.93
Basic NA NA 2.23 2.54 2.97
Dividends per Sprint common share NA NA 0.75 1.00 1.00
Earnings (Loss) per Share and Dividends
-----------------------------------------------------------------------------------------------------------------------------
Earnings (Loss) per common share from
continuing operations:/(2)/, /(3)/
Sprint FON Group (diluted) $ 1.45 $ 1.97 $ 0.18 $ NA $ NA
Sprint FON Group (basic) 1.47 2.01 0.18 NA NA
Sprint PCS Group (diluted and basic) (1.95) (2.71) (0.63) NA NA
Dividends per FON common share 0.50 0.50 0.125 NA NA
Financial Position
-----------------------------------------------------------------------------------------------------------------------------
Total assets $ 42,601 $ 39,250 $ 33,257 $ 18,274 $ 16,915
Property, plant and equipment, net 25,316 21,969 18,983 11,494 10,464
Total debt (including long-term borrowings and
redeemable preferred stock) 18,975 17,028 12,445 3,891 3,086
Shareholders' equity 13,716 13,313 12,202 9,025 8,520
Cash Flow Data
-----------------------------------------------------------------------------------------------------------------------------
Net cash from operating activities -- continuing
operations/(4)/ $ 4,315 $ 1,952 $ 4,199 $ 3,372 $ 2,404
Capital expenditures 7,152 6,114 4,231 2,863 2,434
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.
/(1)/ Sprint's 1998 results of operations include Sprint PCS' operating results
on a consolidated basis 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. Before 1998, Sprint's investment in Sprint PCS was accounted
for using the equity method. Sprint PCS' financial position at year-end
1998 has also been reflected on a consolidated basis. Cash flow data
reflects Sprint PCS' cash flows only after the PCS Restructuring date. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--General" for more information.
/(2)/ 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.
/(3)/ In the 2000 first quarter, Sprint effected a two-for-one stock split of
Sprint's PCS common stock. In the 1999 second quarter, Sprint effected a
two-for-one stock split of its Sprint FON common stock. As a result,
diluted and basic earnings per common share and dividends for Sprint FON
common stock and diluted and basic loss per common share for Sprint PCS
common stock have been restated for periods before these stock splits.
/(4)/ The 1996 amount was reduced by $600 million for cash required to
terminate an accounts receivable sales agreement.
NA = Not applicable
=============================================================================================================================
Item 6. Selected Financial Data (continued)
=============================================================================================================================
Consolidating Selected Financial Data
-----------------------------------------------------------------------------------------------------------------------------
2000 1999 1998/(1)/ 1997/(1)/ 1996/(1)/
-----------------------------------------------------------------------------------------------------------------------------
(millions, except per share data)
Results of Operations
-----------------------------------------------------------------------------------------------------------------------------
Net operating revenues
Sprint FON Group $ 17,688 $ 17,160 $ 15,958 $ 14,947 $ 13,874
Sprint PCS Group 6,341 3,373 1,294 - -
Eliminations (416) (268) (108) - -
-----------------------------------------------------------------
Consolidated $ 23,613 $ 20,265 $ 17,144 $ 14,947 $ 13,874
=================================================================
Operating income (loss)/(3)/
Sprint FON Group $ 2,433 $ 2,930 $ 2,760 $ 2,470 $ 2,268
Sprint PCS Group (1,928) (3,237) (2,570) (19) (1)
-----------------------------------------------------------------
Consolidated $ 505 $ (307) $ 190 $ 2,451 $ 2,267
=================================================================
Income (Loss) from continuing operations
Sprint FON Group $ 1,292 $ 1,736 $ 1,675 $ 1,513 $ 1,373
Sprint PCS Group (1,868) (2,481) (1,090) (419) (120)
-----------------------------------------------------------------
Consolidated $ (576) $ (745) $ 585 $ 1,094 $ 1,253
=================================================================
Earnings per Share and Dividends
-----------------------------------------------------------------------------------------------------------------------------
Earnings per Sprint common share from
continuing operations:/(2)/, /(3)/, /(4)/
Diluted $ NA $ NA $ 2.19 $ 2.51 $ 2.93
Basic NA NA 2.23 2.54 2.97
Dividends per Sprint common share $ NA $ NA $ 0.75 $ 1.00 $ 1.00
Earnings (Loss) per Share and Dividends
-----------------------------------------------------------------------------------------------------------------------------
Earnings (Loss) per common share from
continuing operations:/(2)/, /(3)/, /(4)/, /(5)/
Sprint FON Group (diluted) $ 1.45 $ 1.97 $ 0.18 $ NA $ NA
Sprint FON Group (basic) 1.47 2.01 0.18 NA NA
Sprint PCS Group (diluted and basic) (1.95) (2.71) (0.63) NA NA
Dividends per FON common share $ 0.50 $ 0.50 $ 0.125 $ NA $ NA
Financial Position
-----------------------------------------------------------------------------------------------------------------------------
Total assets
Sprint FON Group $ 23,649 $ 21,803 $ 19,001 $ 16,581 $ 15,655
Sprint PCS Group 19,763 17,924 15,165 1,703 1,260
Eliminations (811) (477) (909) (10) -
-----------------------------------------------------------------
Consolidated $ 42,601 $ 39,250 $ 33,257 $ 18,274 $ 16,915
=================================================================
Property, plant and equipment, net
Sprint FON Group $ 15,833 $ 14,002 $ 12,464 $ 11,307 $ 10,464
Sprint PCS Group 9,522 7,996 6,535 187 -
Eliminations (39) (29) (16) - -
-----------------------------------------------------------------
Consolidated $ 25,316 $ 21,969 $ 18,983 $ 11,494 $ 10,464
=================================================================
Total debt (including long-term borrowings and
redeemable preferred stock)
Sprint FON Group $ 4,518 $ 5,443 $ 4,452 $ 3,891 $ 3,086
Sprint PCS Group 14,906 12,015 8,721 - -
Eliminations (449) (430) (728) - -
-----------------------------------------------------------------
Consolidated $ 18,975 $ 17,028 $ 12,445 $ 3,891 $ 3,086
=================================================================
Shareholders' equity
Sprint FON Group $ 12,343 $ 10,514 $ 9,024 $ 7,639 $ 7,332
Sprint PCS Group 1,366 2,794 3,229 1,386 1,188
Eliminations 7 5 (51) - -
-----------------------------------------------------------------
Consolidated $ 13,716 $ 13,313 $ 12,202 $ 9,025 $ 8,520
=================================================================
Cash Flow Data
-----------------------------------------------------------------------------------------------------------------------------
Net cash from operating activities -- continuing
operations/(6)/
Sprint FON Group $ 4,323 $ 3,713 $ 3,915 $ 2,899 $ 2,267
Sprint PCS Group (8) (1,692) (159) 38 (1)
Eliminations - (69) 443 435 138
-----------------------------------------------------------------
Consolidated $ 4,315 $ 1,952 $ 4,199 $ 3,372 $ 2,404
=================================================================
Capital expenditures
Sprint FON Group $ 4,105 $ 3,534 $ 3,159 $ 2,709 $ 2,434
Sprint PCS Group 3,047 2,580 1,072 154 -
-----------------------------------------------------------------
Consolidated $ 7,152 $ 6,114 $ 4,231 $ 2,863 $ 2,434
=================================================================
13
--------------------------------------------------------------------------------
Item 6. Selected Financial Data (continued)
--------------------------------------------------------------------------------
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.
/(1)/ Sprint's 1998 results of operations include Sprint PCS' operating results
on a consolidated basis 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. Before 1998, Sprint's investment in Sprint PCS was accounted
for using the equity method. Sprint PCS' financial position at year-end
1998 has also been reflected on a consolidated basis. Cash flow data
reflects Sprint PCS' cash flows only after the PCS Restructuring date. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--General" for more information.
/(2)/ 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.
/(3)/ In 2000, the FON Group recorded a nonrecurring charge of $238 million,
which principally represents a write-down of goodwill, and a $163 million
nonrecurring charge for costs associated with the proposed WorldCom
merger, which was terminated. The PCS Group recorded costs associated with
the terminated WorldCom merger of $24 million. These charges reduced
operating income by $425 million and increased the loss from continuing
operations by $273 million. In 1998, the PCS Group recorded a nonrecurring
charge to write off $179 million of acquired in-process research and
development costs related to the PCS Restructuring. This charge reduced
operating income and income from continuing operations by $179 million.
The FON Group recorded nonrecurring charges of $20 million in 1997 and $60
million in 1996 related to litigation within the global markets division.
These charges reduced income from continuing operations by $13 million in
1997 and $36 million in 1996.
/(4)/ In 2000, the FON Group recorded nonrecurring charges of $122 million
related to write-downs of certain equity investments. These charges
increased the loss from continuing operations by $109 million. Also in
2000, the FON Group recorded net nonrecurring gains of $71 million from
the sale of an independent directory publishing operation and from
investment activities, which reduced the loss from continuing operations
by $44 million. In 2000, the PCS Group recorded a net nonrecurring gain of
$28 million from the sale of customers and network infrastructure to a PCS
affiliate. This gain reduced the loss from continuing operations by $18
million. In 1999, the FON Group recorded net nonrecurring gains of $54
million from investment activities which reduced the loss from continuing
operations by $35 million. In 1998, 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. In 1997, the FON Group recorded nonrecurring gains of $71 million
mainly from sales of local exchanges and certain investments. These gains
increased income from continuing operations by $44 million.
/(5)/ In the 2000 first quarter, Sprint effected a two-for-one stock split of
Sprint's PCS common stock. In the 1999 second quarter, Sprint effected a
two-for-one stock split of its Sprint FON common stock. As a result,
diluted and basic earnings per common share and dividends for Sprint FON
common stock and diluted and basic loss per common share for Sprint PCS
common stock have been restated for periods before these stock splits.
/(6)/ The 1996 amount was reduced by $600 million for cash required to
terminate an accounts receivable sales agreement.
NA = Not applicable
14
--------------------------------------------------------------------------------
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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 associated with providing new services
and entering new markets necessary to provide nationwide or global
services;
. the ability of the PCS Group to continue to grow a significant market
presence;
. the effects of mergers and consolidations within the
telecommunications industry;
. the uncertainties related to Sprint's strategic investments;
. the impact of any unusual items resulting from ongoing evaluations of
Sprint's business strategies;
. unexpected results of litigation filed against Sprint;
. the possibility of one or more of the markets in which Sprint competes
being impacted by changes in political, economic or other factors such
as monetary policy, legal and regulatory changes including the impact
of the Telecommunications Act of 1996 (Telecom Act), 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
--------------------------------------------------------------------------------
Sprint is a global communications company and a leader in integrating long-
distance, local service, and wireless communications. Sprint is also one of the
largest carriers of Internet traffic using its tier one Internet protocol
network, which provides connectivity to any point on the Internet either through
its own network or via direct connections with another backbone provider. Sprint
is the nation's third-largest provider of long distance services and operates
nationwide, all-digital long distance and tier one Internet protocol networks
using fiber-optic and electronic technology. In addition, the local division
currently serves approximately 8.3 million access lines in 18 states. Sprint
also operates the only 100% digital PCS, wireless network in the United States
with licenses to provide service nationwide using a single frequency band and a
single technology. Sprint owns PCS licenses to provide service to the entire
United States population, including Puerto Rico and the U.S. Virgin Islands.
On July 13, 2000, Sprint and WorldCom, Inc. (WorldCom) announced that the boards
of directors of both companies terminated their merger agreement, previously
announced in October 1999, as a result of regulatory opposition to the merger.
In the 2000 second quarter, Sprint recognized a one-time, pre-tax charge of $187
million for costs associated with the terminated merger.
In the 2000 fourth quarter, Sprint completed its analysis of the valuation of
various FON Group assets and investments resulting from its reassessment of the
FON Group's business strategies in response to recent changes in the overall
telecommunications industry. This analysis resulted in two asset impairment
charges. The first was a $238 million pre-tax charge primarily related to
goodwill associated with Sprint's Paranet operations. The second was an $87
million pre-tax charge related to the write-down of an equity method investment.
In January 2000, Sprint reached a definitive agreement with France Telecom (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.
15
In November 1998, Sprint's shareholders approved the allocation of all of
Sprint's assets and liabilities into two groups, the FON Group and the PCS
Group, as well as 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 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 voting power in Sprint
(Top-up).
Operating Segments
Sprint's business is divided into four lines of business: the global markets
division, the local division, the product distribution and directory publishing
businesses and the PCS wireless telephony products and services business. The
FON Group includes the global markets division, the local division and the
product distribution and directory publishing businesses, and the PCS Group
includes the PCS wireless telephony products and services business. The PCS
common stock is intended to reflect the financial results and economic value of
the PCS wireless telephony products and services business. The FON common stock
is intended to reflect the financial results and economic value of the global
markets division, the local division and the product distribution and directory
publishing businesses.
During 2000, Sprint changed the FON Group's segment reporting to align financial
reporting with changes in how Sprint manages the FON Group's operations and
assesses its performance. As a result, all previously reported financial
information relating to these segments has been restated to reflect the new
composition of each segment.
Board Discretion Regarding Tracking Stocks
Sprint's Board has the discretion to, among other things, make operating and
financial decisions that could favor one group over the other and, subject to
the restrictions in Sprint's articles of incorporation, to change the allocation
of the assets and liabilities that comprise each of the FON Group and the PCS
Group without stockholder approval. Under the applicable corporate law, Sprint's
Board owes its fiduciary duties to all of Sprint's shareholders and there is no
board of directors that owes separate duties to the holders of either the FON
common stock or the PCS common stock. The Tracking Stock Policies provide
that the Board, in resolving material matters in which the holders of FON common
stock and PCS common stock have potentially divergent interests, will act in the
best interests of Sprint and all of its common shareholders after giving fair
consideration to the potentially divergent interests of the holders of the
separate classes of Sprint common stock. These policies may be changed by the
Board without shareholder approval. Given the Board's discretion in these
matters, it may be difficult to assess the future prospects of each Group based
on past performance.
The FON Group and PCS Group are part of Sprint and, as a result, separate
financial statements for the Groups are not required. Sprint has, however,
included as Annex I and Annex II to this Form 10-K/A additional financial
information relating to each Group to help investors assess the financial
performance of the tracked businesses.
--------------------------------------------------------------------------------
General Overview of the Sprint FON Group
--------------------------------------------------------------------------------
Global Markets Division
The global markets division provides a broad suite of communications services
targeted to domestic business and residential customers, multinational
corporations and other communications companies. These services include domestic
and international voice; Internet; data communications such as frame relay
access and transport, web hosting, virtual private networks, and managed
security services; and broadband services.
Sprint is deploying integrated communications services, referred to as Sprint
ION(SM). Sprint ION
16
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 advanced services in
the competitive local service market. Sprint uses various advanced services
last-mile technologies, including dedicated access and Digital Subscriber Line
(xDSL), and expects to use Multipoint Multichannel Distribution Services (MMDS).
The global markets division also includes the operating results of the cable TV
service operations of the broadband fixed wireless companies after their 1999
acquisition dates. During 2000, Sprint converted several markets served by MMDS
capabilities from cable TV services to high-speed data services. Global markets
division's operating results reflect the development costs and the operating
revenues and expenses of these broadband fixed wireless services. Sprint intends
to provide broadband data and voice services to additional markets served by
these capabilities.
Included in the global markets division are the costs of establishing
international operations beginning in 2000.
This division also includes the FON Group's investments in EarthLink, Inc., an
Internet service provider; Call-Net, a long distance provider in Canada;
Intelig, a long distance provider in Brazil; and certain other
telecommunications investments and ventures.
Local Division
The local division consists mainly of regulated local phone companies serving
approximately 8.3 million access lines in 18 states. It provides local phone
services, access by phone customers and other carriers to its local network,
consumer long distance services to customers within its franchise territories,
sales of telecommunications equipment, and other 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.
--------------------------------------------------------------------------------
General Overview of the Sprint PCS Group
--------------------------------------------------------------------------------
The PCS Group includes Sprint's wireless PCS operations. It operates the only
100% digital PCS wireless network in the United States with licenses to provide
service nationwide using a single frequency and a single technology. At year-end
2000, the PCS Group, together with affiliates, operated PCS systems in over 300
metropolitan markets, including the 50 largest U.S. metropolitan areas. The PCS
Group has licenses to serve more than 280 million people in all 50 states,
Puerto Rico and the U.S. Virgin Islands. The PCS Group's service, including
affiliates, now reaches more than 220 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 (CDMA).
The PCS Group also provides wholesale PCS services to companies that resell the
services to their customers on a retail basis. These companies pay the PCS Group
a discounted price for their customers' usage, but bear the costs of acquisition
and customer service.
The PCS Group also includes its investment in Pegaso Telecomunicaciones, S.A. de
C.V. (Pegaso), a wireless PCS operation in Mexico. This investment is accounted
for using the equity method.
The wireless industry, including the PCS Group, typically generates a
significantly higher number of subscriber additions and handset sales in the
fourth quarter of each year compared to the remaining quarters. This is due to
the use of retail distribution, which is dependent on the holiday shopping
season; the timing of new products and service introductions; and aggressive
marketing and sales promotions.
--------------------------------------------------------------------------------
Consolidated Results of Operations
--------------------------------------------------------------------------------
Total net operating revenues were as follows:
--------------------------------------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------
(millions)
FON Group $ 17,688 $ 17,160 $ 15,958
PCS Group 6,341 3,373 1,294
Intergroup
eliminations (416) (268) (108)
--------------------------------------------------------------------------------
Net operating
revenues $ 23,613 $ 20,265 $ 17,144
===========================================================
Income (Loss) from continuing operations was as follows:
--------------------------------------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------
(millions)
FON Group $ 1,292 $ 1,736 $ 1,675
PCS Group (1,868) (2,481) (1,090)
--------------------------------------------------------------------------------
Income (Loss) from
continuing
operations $ (576) $ (745) $ 585
===========================================================
17
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.
The PCS Group markets its products through multiple distribution channels,
including its own retail stores as well as other retail outlets. Equipment sales
to one retail chain and the subsequent service revenues generated by sales to
its customers accounted for 25% of net operating revenues in 2000, 28% in 1999
and 25% in 1998.
Income (loss) from continuing operations as presented in the above table
includes nonrecurring items. In the 2000 fourth quarter, Sprint completed
analyses of the valuation of various FON Group assets and equity method
investments resulting from its reassessment of the FON Group's business
strategies in response to changes in the overall telecommunications industry.
These analyses resulted in nonrecurring charges of $152 million primarily
related to a write-down of goodwill associated with the FON Group's Paranet
operations, which declined significantly, $87 million for the write-down of the
FON Group's equity method investment in Call-Net, which had an other than
temporary decline in market value, and $22 million for the write-down of certain
FON Group investment securities, which had an other than temporary decline in
market value.
The 2000 nonrecurring items also include charges of $121 million for costs
associated with the terminated WorldCom merger, net gains of $44 million from
the sale of an independent directory publishing operation and investment
activities in the FON Group, and an $18 million gain from the sale of customers
and network infrastructure to a PCS affiliate. 1999 includes a gain of $35
million from investment activities in the FON Group. 1998 includes a charge to
write-off $179 million of acquired in-process research and development costs
related to the PCS restructuring, and a gain of $62 million mainly from the sale
of local exchanges by the FON group.
--------------------------------------------------------------------------------
Segmental Results of Operations
--------------------------------------------------------------------------------
Beginning in 2000, the FON Group combined its long distance operation, Sprint
ION, broadband fixed wireless services and certain other ventures into one
division, global markets, to align financial reporting with changes in how
Sprint manages operations and assesses performance. The global markets division
now includes four major revenue streams: voice, data, Internet and other. In
connection with the resegmentation, the FON Group shifted the recognition of
consumer long distance revenues and expenses associated with customers in its
local franchise territories from the global markets division to the local
division. Prior periods have been restated to reflect these changes.
Global Markets Division
------------------------------------------------------------------------
2000 1999 1998
------------------------------------------------------------------------
(millions)
Net operating revenues
Voice $ 7,094 $ 7,445 $ 7,079
Data 1,937 1,696 1,396
Internet 920 615 434
Other 577 552 632
-----------------------------------------------------------------------
Total net operating
revenues 10,528 10,308 9,541
-----------------------------------------------------------------------
Operating expenses
Costs of services
and products 5,558 4,947 4,784
Selling, general and
administrative 3,026 3,141 2,639
Depreciation and
amortization 1,121 1,045 928
Asset write-down 238 - -
-----------------------------------------------------------------------
Total operating
expenses 9,943 9,133 8,351
-----------------------------------------------------------------------
Operating income $ 585 $ 1,175 $ 1,190
================================
Operating margin 5.6% 11.4% 12.5%
================================
Capital expenditures $ 2,294 $ 1,774 $ 1,518
================================
Net Operating Revenues
Net operating revenues increased 2% in 2000 and 8% in 1999. The increases mainly
reflect strong data communications services revenue growth. A more competitive
pricing environment and a change in the mix of products sold more than offset
minute growth of 18% in 2000. Strong minute growth of 22% in 1999 was partly
offset by a more competitive pricing environment and a change in the mix of
products sold. The minute growth in 2000 was also offset by a reduction in
access cost pass-throughs resulting from the implementation of the Coalition for
Affordable Local and Long Distance Service proposal (CALLS).
Voice Revenues
Voice revenues decreased 5% in 2000 and increased 5% in 1999. The 2000 decrease
was largely due to a decline in consumer voice revenues as a result of a more
competitive pricing environment, lower calling card usage due to the increased
use of wireless phones, and the implementation of CALLS. The 1999 increase
mainly reflects increased wholesale voice revenues due to strong minute growth
mainly from international calls and increased inbound and outbound toll-free
calls.
18
Data Revenues
Data revenues reflect sales of current-generation data services including
asynchronous transfer mode and frame relay services. These revenues increased
14% in 2000 and 21% in 1999 due to increased sales as a result of an increase
emphasis on these services.
Internet Revenues
Internet revenues increased 50% in 2000 and 42% in 1999 due to strong growth in
dial-up Internet service provider-related revenues and dedicated service
revenues. Internet revenues showed strong growth because of continued demand and
increased use of the Internet.
Other Revenues
Other revenues increased 5% in 2000 and decreased 13% in 1999. The 2000 increase
was due to sales of capacity on transoceanic cable and the inclusion of a full
year of revenues from the cable TV service operations of the broadband fixed
wireless companies purchased in 1999 largely offset by a decline in legacy data
services. The 1999 decrease was due to a decline in legacy data services.
Costs of Services and Products
Costs of services and products include interconnection costs paid to local phone
companies, other domestic service providers and foreign phone companies to
complete calls made by the division's domestic customers, costs to operate and
maintain the long distance network, costs of equipment and transmission capacity
sales, and costs related to the development and deployment of Sprint ION. These
costs increased 12% in 2000 and 3% in 1999.
Interconnection costs remained flat in 2000 and increased 3% in 1999. Reductions
in per-minute international access costs as well as domestic access costs offset
the impact of increased calling volumes in 2000. Increased calling volumes in
1999 were partly offset by reductions in per-minute costs for both domestic and
international access. The domestic rate reductions were generally due to the
FCC-mandated access rate reductions that took effect in January and July 1998,
July 1999 and July 2000. The access rate reductions in July 2000 included the
implementation of CALLS.
All other costs of services and products increased 42% in 2000 and 5% in 1999.
The 2000 increase was largely due to the expansion of Sprint ION business
services nationwide and the launch of consumer services in select markets as
well as increased sales of capacity on transoceanic cable. Increased costs of
services and products in both 2000 and 1999 were driven by growth in data
services. The 1999 increase was also impacted by increases in network equipment
operating leases expense.
Total costs of services and products for global markets were 52.8% of net
operating revenues in 2000, 48.0% in 1999 and 50.1% in 1998.
Selling, General and Administrative Expense
Selling, general and administrative (SG&A) expense decreased 4% in 2000 and
increased 19% in 1999. The 2000 decrease is due to a strong emphasis on cost
control. The 1999 increase mainly reflects the overall growth of the business as
well as increased marketing and promotions to support products and services,
including the rollout of an airline alliance program which enabled customers to
earn frequent flyer miles when they used Sprint's services.
SG&A expense includes costs associated with the continued development and
deployment activities for Sprint ION, including costs for systems and operations
development, product development and advertising associated with market
launches. SG&A expense for Sprint ION was $281 million in 2000, $320 million in
1999 and $138 million in 1998.
Total SG&A expense for the global markets division was 28.7% of net operating
revenues in 2000, 30.5% in 1999 and 27.7% in 1998.
Depreciation and Amortization Expense
Depreciation and amortization expense increased 7% in 2000 and 13% in 1999. The
increases mainly reflect a rapidly increasing asset base for Sprint ION as well
as an increased asset base to enhance network reliability, meet increased demand
for voice and data-related services and upgrade capabilities for providing new
products and services. Depreciation and amortization expense was 10.6% of net
operating revenues in 2000, 10.1% in 1999 and 9.7% in 1998.
19
Local Division
--------------------------------------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------
(millions)
Net operating revenues
Local service $ 2,846 $ 2,677 $ 2,469
Network access 1,987 1,918 1,894
Toll service 717 611 503
Other 605 752 733
--------------------------------------------------------------------------------
Total net operating
revenues 6,155 5,958 5,599
--------------------------------------------------------------------------------
Operating expenses
Costs of services
and products 1,965 2,016 1,889
Selling, general and
administrative 1,288 1,320 1,325
Depreciation and
amortization 1,139 1,069 984
--------------------------------------------------------------------------------
Total operating
expenses 4,392 4,405 4,198
--------------------------------------------------------------------------------
Operating income $ 1,763 $ 1,553 $ 1,401
=================================
Operating margin 28.6% 26.1% 25.0%
=================================
Capital expenditures $ 1,371 $ 1,354 $ 1,374
=================================
Beginning in July 2000, 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." In addition, Sprint's local division
transferred a customer service and telemarketing organization to the PCS Group
at the beginning of the 2000 second quarter and sold approximately 81,000 access
lines in Illinois in November 1998. For comparative purposes, the following
discussion of local division results assumes the transfer pricing change, the
transfer of the customer service and telemarketing organization, and the sale of
exchanges occurred at the beginning of 1998. Adjusting for these changes,
operating margins would have been 28.4% in 2000, 25.7% in 1999 and 24.4% in
1998.
Net Operating Revenues
Net operating revenues increased 5% in 2000 and 7% in 1999. These increases
mainly reflect increased sales of network-based services such as Caller ID and
Call Waiting, increased long distance revenues, and customer access line growth.
Sales of network-based services and long distance services increased due to
strong demand for bundled services which combine local service, network-based
features and long distance calling. Customer access lines increased 4% in 2000
and 5% in 1999. Net operating revenues were $6.1 billion in 2000, $5.8 billion
in 1999 and $5.5 billion in 1998.
Local Service Revenues
Local service revenues, derived from local exchange services, grew 6% in 2000
and 9% in 1999 because of continued demand for network-based services, customer
access line growth and growth in data products. Revenue growth in 1999 also
reflects increased revenues from maintaining customer wiring and equipment.
Network Access Revenues
Network access revenues, derived from long distance phone companies using the
local network to complete calls, increased 4% in 2000 and 2% in 1999. These
revenues reflect increased revenues from special access services and a 2% and 4%
increase in minutes of use in 2000 and 1999, respectively. These increases were
offset by FCC-mandated access rate reductions. Access rate reductions took
effect in January and July 1998, July 1999 and July 2000.
Toll Service Revenues
Toll service revenues are mainly derived from providing consumer long distance
services to customers within Sprint's local franchise territories and other long
distance services within specified regional calling areas, or LATAs, that are
beyond the local calling area. These revenues increased 17% in 2000 and 22% in
1999. These increases reflect the success of bundled services which include long
distance calling.
Other Revenues
Other revenues decreased 11% in 2000 and 1% in 1999. The decrease in 2000 was
mainly due to a decrease in equipment sales as a result of a planned shift in
focus to selling higher margin products.
Costs of Services and Products
Costs of services and products include costs to operate and maintain the local
network and costs of equipment sales. These costs decreased 1% in 2000 and
increased 6% in 1999. The 2000 decrease was due to a decline in equipment sales
and the success of cost control initiatives. The 1999 increase was driven by
customer access line growth, an increased emphasis on service levels and storm
related costs. Costs of services and products were 31.9% of net operating
revenues in 2000, 33.8% in 1999 and 34.1% in 1998.
20
Selling, General and Administrative Expense
SG&A expenses decreased 1% in 2000 and remained flat in 1999. The 2000 decrease
was due to a strong emphasis on cost control. In 1999, increased marketing costs
to promote new products and services and increased customer service costs
related to customer access line growth was offset by a strong emphasis on cost
control. SG&A expense was 21.0% of net operating revenues in 2000, 22.3% in 1999
and 23.6% in 1998.
Depreciation and Amortization Expense
Depreciation and amortization expense increased 7% in 2000 and 9% in 1999,
mainly from increased capital expenditures in switching and transport
technologies which have shorter asset lives. Depreciation and amortization
expense was 18.7% of net operating revenues in 2000, 18.2% in 1999 and 17.9% in
1998.
Product Distribution and Directory Publishing Businesses
--------------------------------------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------
(millions)
Net operating
revenues $ 1,936 $ 1,758 $ 1,709
------------------------------------------------------------------------------
Operating expenses
Costs of services
and products 1,460 1,345 1,330
Selling, general and
administrative 176 154 135
Depreciation and
amortization 16 17 13
------------------------------------------------------------------------------
Total operating
expenses 1,652 1,516 1,478
------------------------------------------------------------------------------
Operating income $ 284 $ 242 $ 231
===============================
Operating margin 14.7% 13.8% 13.5%
===============================
Capital expenditures $ 8 $ 36 $ 9
===============================
Net operating revenues increased 10% in 2000 and 3% in 1999. Nonaffiliated
revenues accounted for over 60% of revenues in 2000 and 1999. These revenues
increased 11% in 2000 and 12% in 1999. The increase in nonaffiliated revenues in
2000 was mainly due to the consolidation of a directory publishing partnership.
In the second half of 2000, the directory publishing partnership, previously
accounted for as an equity method investment, was fully consolidated due to a
restructuring in the partnership management. Sales to affiliates increased 8% in
2000 and decreased 10% in 1999 due to changes in the local division's capital
program.
Costs of services and products increased 9% in 2000 and increased 1% in 1999
reflecting increased equipment sales. The 2000 increase was also due to the
consolidation of the directory publishing partnership. SG&A expense increased
14% in 2000 and 1999. The 2000 increase was due to costs related to the
transformation of the product distribution business to a web-enabled business as
well as the consolidation of the directory publishing partnership. The 1999
increase was the result of staffing demands related to nonaffiliated sales
growth.
PCS Group
-----------------------------------------------------------------------------
2000 1999 1998
-----------------------------------------------------------------------------
(millions)
Net operating revenues $ 6,341 $ 3,373 $ 1,294
Operating expenses 8,269 6,610 3,864
-----------------------------------------------------------------------------
Operating loss $ (1,928) $ (3,237) $ (2,570)
==============================
Loss from continuing
operations $ (1,868) $ (2,481) $ (1,090)
==============================
Capital expenditures $ 3,047 $ 2,580 $ 1,072
==============================
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. (See "Pro Forma
Sprint PCS Group" section below for a discussion of pro forma results of
operations.)
In 2000, operating expenses include a nonrecurring charge of $24 million for
costs associated with the terminated WorldCom merger. This charge increased the
loss from continuing operations by $16 million. Also included in the 2000 loss
from continuing operations is a nonrecurring gain of $18 million from the sale
of customers and network infrastructure to a PCS affiliate. In 1998, operating
expenses and loss from continuing operations 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.
The PCS Group markets its products through multiple distribution channels,
including its own retail stores as well as other retail outlets. Equipment sales
to one retail chain and the subsequent service revenues generated by sales to
its customers accounted for 25% of net operating revenues in 2000, 28% in 1999
and 25% in 1998.
21
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 on a pro forma
basis and assumes the PCS Restructuring and the write-off of acquired in-process
research and development costs occurred prior to 1998.
--------------------------------------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------
(millions)
Net operating
revenues $ 6,341 $ 3,373 $ 1,294
Operating
expenses 8,269 6,610 3,934
-------------------------------------------------------------------------------
Operating loss $ (1,928) $ (3,237) $ (2,640)
=================================
Capital expenditures
(including capital
lease obligations) $ 3,047 $ 2,616 $ 2,904
==================================
Net Operating Revenues
----------------------------------------------------------------------------
2000 1999 1998
----------------------------------------------------------------------------
Customers at year-end
(millions) 9.5 5.7 2.6
===========================
Average monthly
service revenue
per user (ARPU) $ 59 $ 58 $ 60
===========================
Net operating revenues include subscriber revenues and sales of handsets and
accessory equipment. Subscriber revenues consist of monthly recurring charges,
usage charges and activation fees. Subscriber revenues increased 94% in 2000
mainly reflecting an increase in the average number of customers. The PCS Group
added 3.8 million customers in 2000 to end the year with over 9.5 million
customers in more than 300 metropolitan markets nationwide. The increase in ARPU
in 2000 was partly due to the implementation of activation charges in the second
quarter. Subscriber revenues were also aided by the increase in resale
customers. The companies that the PCS Group serves on a wholesale basis added
238,000 customers in 2000, ending the year with approximately 310,000 customers.
In 2000, the customer churn rate improved to 2.8% from 3.4% in 1999 and 3.3% in
1998. The improvement reflects expanded network coverage and the success of
several customer retention initiatives.
Revenues from sales of handsets and accessories were approximately 14% of net
operating revenues in 2000, 17% in 1999 and 18% in 1998. As part of the PCS
Group's marketing plans, handsets are normally sold at prices below the PCS
Group's cost.
22
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 25% in 2000 and 79% in 1999 reflecting the significant growth in
customers and expanded market coverage, partly offset by a reduction in handset
unit costs.
SG&A expense mainly includes marketing costs to promote products and services as
well as salary and benefit costs. SG&A expense increased 25% in 2000 and 70% in
1999 reflecting an expanded workforce to support subscriber growth and increased
marketing and selling costs.
Acquisition costs per gross customer addition, including equipment subsidies and
marketing costs, have improved approximately 19% in 2000 and 26% 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 was $35 in 2000, $48
in 1999 and $73 in 1998. The improvements reflect successful expense management
and scale benefits resulting from the increased customer base.
Depreciation and amortization expense consists mainly of depreciation of network
assets and amortization of intangible assets. The intangible assets include
goodwill, PCS licenses, customer base, microwave relocation costs and assembled
workforce.
Depreciation and amortization expense increased 23% in 2000 and 47% in 1999
mainly reflecting depreciation of the network assets placed in service during
2000 and 1999. The increases also reflects amortization of intangible assets
acquired in the Cox PCS purchase in the 1999 second quarter.
23
--------------------------------------------------------------------------------
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.
-----------------------------------------------------------------------------
2000 1999 1998
-----------------------------------------------------------------------------
Effective interest
rate on long-term debt/(1)/ 6.9% 7.0% 8.6%
=========================
/(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 Sprint's
outstanding long-term debt balance all year.
Sprint's effective interest rate on long-term debt decreased in 1999 and 2000.
In the 1998 fourth quarter, Sprint refinanced $3.3 billion of the PCS Group's
debt with borrowings which have lower interest rates. The decreases also reflect
additional borrowings with lower interest rates.
Other Partners' Loss in Sprint PCS
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.
Other Income (Expense), Net
Other income (expense) consisted of the following:
------------------------------------------------------------------------------
2000 1999 1998
------------------------------------------------------------------------------
(millions)
Dividend and interest
income $ 30 $ 23 $ 93
Equity in net losses
of affiliates (236) (73) (41)
Gains on sales of
assets 92 102 156
Net losses from
investments (102) (15) -
Other, net (1) 38 (37)
------------------------------------------------------------------------------
Total $ (217) $ 75 $ 171
========================================
Dividend and interest income for all years reflects dividends earned on cost
method investments and interest earned on temporary investments. For 1998, it
also reflects interest earned on loans to unconsolidated affiliates, interest
earned on partner contributions from the Sprint PCS partners prior to the PCS
Restructuring and interest earned on short-term investments following Sprint's
$5.0 billion debt offering in late 1998.
Equity in net losses of affiliates mainly includes losses from Intelig,
Call-Net, EarthLink and Pegaso. The 2000 increase is mainly due to increased
Intelig losses and losses from Pegaso after the PCS Group's 2000 second quarter
initial investment.
Gain on sales of assets in 2000 include the sale of an independent publishing
operation and the sale of certain wireless customers and associated network
infrastructure. The 1999 gains include a gain on the sale of an investment
security and a gain on the sale of network infrastructure. The 1998 gains mainly
reflect net gains on sales of local exchanges. Net losses from investments in
2000 mainly include write-downs of certain equity investments.
Income Taxes
Sprint's consolidated effective tax rates were 17.9% in 2000, 30.5% in 1999 and
43.7% in 1998. See Note 9 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
In the 2000 first quarter, Sprint sold its interest in Global One to France
Telecom and Deutsche Telekom AG. Sprint received $1.1 billion in cash and was
repaid $276 million for advances for its entire stake in Global One. As a result
of Sprint's sale of its interest in Global One, Sprint's gain on sale and its
equity share of the results of Global One have been reported as a discontinued
operation for all periods presented.
In 2000, Sprint recorded an after-tax gain related to the sale of its interest
in Global One of $675 million. Sprint recorded after-tax losses related to
Global One of $130 million in 1999 and $135 million in 1998.
Extraordinary Items, Net
In 2000, Sprint redeemed, prior to scheduled maturities, $25 million of debt
allocated to the FON Group and $127 million of debt allocated to the PCS Group.
These borrowings had interest rates ranging from 7.8% to 9.7%. This resulted in
a $4 million after-tax extraordinary loss for Sprint.
24
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 revolving credit facilities and other borrowings allocated to the PCS
Group. 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 debt
allocated to the FON Group and $3.3 billion of debt allocated to the PCS Group.
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
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
2000 1999
--------------------------------------------------------------------------------
(millions)
Consolidated assets $ 42,601 $ 39,250
============================
Sprint's consolidated assets increased $3.4 billion in 2000. Net property, plant
and equipment increased $3.3 billion reflecting capital expenditures to support
the PCS network buildout, long distance and local network enhancements, and
Sprint ION development and hardware deployment, partly offset by depreciation
and network asset sales. Investments in affiliates and other assets increased
$715 million, mainly reflecting capital contributions to Sprint's equity method
investees, partly offset by equity in net losses of those affiliates and the
write-down of certain equity method investments. Offsetting decreases in
Sprint's consolidated assets primarily include the exchange of investments in
equity securities for certain notes payable, the write-down of goodwill and the
sale of the net assets of the Global One discontinued operation. Sprint's
debt-to-capital ratio, including redeemable preferred stock, was 57.3% at year-
end 2000 versus 55.3% at year-end 1999. See "Liquidity and Capital Resources"
for more information about changes in Sprint's Consolidated Balance Sheets.
--------------------------------------------------------------------------------
Liquidity and Capital Resources
--------------------------------------------------------------------------------
Sprint's Board exercises discretion regarding the liquidity and capital resource
needs of each group. This includes the ability to prioritize the use of capital
and debt capacity, to determine cash management policies and to make decisions
regarding the timing and amount of capital expenditures. The actions of the
Board of Directors are subject to its fiduciary duties to all shareholders of
Sprint and not just to the holders of a particular class of common stock. Given
the Board's discretion in these matters, it may be difficult to assess each
group's liquidity and capital resource needs and future prospects based on past
performance.
Consolidated cash flows for 1998 include Sprint PCS' cash flows only after the
PCS Restructuring date.
25
Operating Activities
--------------------------------------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------
(millions)
FON Group $ 4,323 $ 3,713 $ 3,915
PCS Group (8) (1,692) (159)
Intergroup
eliminations - (69) 443
--------------------------------------------------------------------------------
Cash flows
provided by
operating
activities $ 4,315 $ 1,952 $ 4,199
===================================
Operating cash flows increased $2.4 billion in 2000 and decreased $2.2 billion
in 1999. The 2000 increase reflects decreases in working capital requirements in
both the FON Group and the PCS Group and improved operating results in the PCS
Group. The 1999 decrease mainly reflects increases in working capital in both
the FON Group and the PCS Group and the increased operating losses of the PCS
Group, partly offset by the FON Groups improved operating results.
Investing Activities
--------------------------------------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------
(millions)
FON Group $ (3,336) $ (4,349) $ (3,366)
PCS Group (3,054) (2,509) (861)
Intergroup
eliminations (17) (299) (259)
--------------------------------------------------------------------------------
Cash flows used
by investing
activities $ (6,407) $ (7,157) $ (4,486)
===================================
The FON Group's capital expenditures totaled $4.1 billion in 2000, $3.5 billion
in 1999 and $3.2 billion in 1998. Global markets division capital expenditures
were incurred mainly to enhance network reliability, meet increased demand for
voice and data-related services, upgrade capabilities for providing new products
and services and to continue development and hardware deployment of Sprint ION.
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. Other FON Group capital
expenditures were incurred mainly for Sprint's World Headquarters Campus. PCS
Group capital expenditures, totaling $3.0 billion in 2000, $2.6 billion in 1999
and $1.1 billion in 1998, were incurred to support the PCS network buildout.
In 2000, investing activities include $1.4 billion of proceeds from the sale of
the FON Group's interest in Global One. Investing activities also include
proceeds from sales of other assets totaling $258 million in 2000, $243 million
in 1999 and $230 million in 1998. In 1999, Sprint purchased several broadband
fixed wireless companies for $618 million excluding assumed debt.
"Investments in and loans to affiliates, net" were $889 million in 2000, $135
million in 1999 and $423 million in 1998. These amounts were for investments in
affiliates accounted for using the equity method, primarily EarthLink, Intelig
and Pegaso. Amounts for 1998 also include contributions and advances to Sprint
PCS prior to the PCS Restructuring.
Financing Activities
--------------------------------------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------
(millions)
FON Group $ (969) $ 308 $ (219)
PCS Group 3,163 4,044 1,193
Intergroup
eliminations 17 368 (184)
--------------------------------------------------------------------------------
Cash flows
provided by
financing
activities $ 2,211 $ 4,720 $ 790
====================================
Financing activities reflect net proceeds from long-term debt of $2.3 billion in
2000, $4.0 billion in 1999 and $1.4 billion in 1998. These net proceeds were
used mainly for capital investments and to fund the PCS Group's operating
losses. Sprint paid dividends of $448 million in 2000, $441 million in 1999 and
$430 million in 1998.
Also included in financing activities is proceeds from Sprint's employee stock
purchase plan of $182 million in 2000, $136 million in 1999 and $24 million in
1998.
Capital Requirements
Sprint's 2001 investing activities, mainly consisting of capital expenditures
and investments in affiliates, are expected to require cash of $9.7 to $10.0
billion. FON Group capital expenditures are expected to be $5.9 billion, and PCS
Group capital expenditures are expected to be between $3.3 and $3.5 billion.
Investments in affiliates are expected to be between $450 and $550 million.
Dividend payments are expected to approximate $455 million in 2001.
In connection with the PCS Restructuring, Sprint adopted a tax sharing agreement
that provides for the allocation of income taxes between the FON Group and the
PCS Group. Sprint expects the FON Group to continue to make significant payments
to the PCS
26
Group under this agreement because of expected PCS Group operating losses in the
near future and from using the PCS Group's net operating loss carryforwards.
These payments reflect the PCS Group's incremental cumulative effect on Sprint's
consolidated federal and state tax liability and tax credit position. The PCS
Group received payments from the FON Group totaling $872 million in 2000, $764
million in 1999 and $20 million in 1998. See Note 1 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.
Sprint also intends to sell $3 billion of PCS common stock in an underwritten
public offering when market or other conditions indicate that such a course of
action is advisable.
Sprint currently has revolving credit facilities with syndicates of domestic and
international banks totaling $5 billion; $3 billion of which is a 364 day
facility, renewed in August 2000, expiring in 2001, and $2 billion is a 5 year
facility expiring in 2003. Commercial paper and certain bank notes 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 2000,
Sprint had total unused lines of credit of $1.8 billion.
In June 2000, Sprint issued $1.25 billion of debt securities under its $4
billion shelf registration statement with the SEC. These borrowings mature in
2002 and have interest rates ranging from 6.9% to 7.6%. At year-end 2000, Sprint
had issued a total of $2 billion of debt securities under the shelf. In January
2001, Sprint issued debt securities using the remainder of the shelf. See Note
19 of Notes to Consolidated Financial Statements.
In June 1999, Sprint entered into a $1 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 2000, Sprint had borrowed $900 million with a weighted average interest
rate of 6.9% under this agreement. These borrowings mature in 2002.
Any borrowings Sprint may incur are ultimately limited by certain debt
covenants. Sprint could borrow up to an additional $9.6 billion at year-end 2000
under the most restrictive of its debt covenants.
--------------------------------------------------------------------------------
Regulatory Developments
--------------------------------------------------------------------------------
See "Regulatory Developments" in Part I. of this filing.
--------------------------------------------------------------------------------
Financial Strategies
--------------------------------------------------------------------------------
General Hedging Policies
Sprint selectively enters into interest rate swap and cap agreements to manage
its exposure to interest rate changes on its debt. Sprint also enters into
forward contracts and options in foreign currencies to reduce the impact of
changes in foreign exchange rates. Sprint seeks to minimize counterparty credit
risk through stringent credit approval and review processes, the selection of
only the most creditworthy counterparties, continual review and monitoring of
all counterparties, and thorough legal review of contracts. Sprint also controls
exposure to market risk by regularly monitoring changes in foreign exchange and
interest rate positions under normal and stress conditions to ensure they do not
exceed established limits.
Sprint's derivative transactions are used for hedging purposes only and comply
with Board-approved policies. Senior management receives frequent status updates
of all outstanding derivative positions.
Interest Rate Risk Management
Sprint's interest rate risk management program focuses on minimizing exposure to
interest rate movements, setting an optimal mixture of floating- and fixed-rate
debt, and minimizing liquidity risk. Sprint uses simulation analysis to assess
its interest rate exposure and establish the desired ratio of floating- and
fixed-rate debt. To the extent possible, Sprint manages interest rate exposure
and the floating-to-fixed ratio through its borrowings, but sometimes uses
interest rate swaps and caps to adjust its risk profile.
Foreign Exchange Risk Management
Sprint's foreign exchange risk management program focuses on hedging transaction
exposure to optimize consolidated cash flow. Sprint's main transaction exposure
results from net payments made to
27
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 2000. In addition, foreign currency transaction gains and losses were
not material to Sprint's 2000 results of operations. Sprint has not entered into
any significant foreign currency forward contracts or other derivative
instruments to hedge the effects of adverse fluctuations in foreign exchange
rates. As a result, Sprint was not subject to material foreign exchange risk.
--------------------------------------------------------------------------------
Recently Issued Accounting Pronouncements
--------------------------------------------------------------------------------
See Note 17 of Notes to Consolidated Financial Statements for a discussion of
recently issued accounting pronouncements.
--------------------------------------------------------------------------------
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
--------------------------------------------------------------------------------
Sprint's exposure to market risk--through derivative financial instruments,
other financial instruments, such as investments in marketable securities and
long-term debt, from changes in interest rates and from changes in foreign
currency exchange rates--is not material.
--------------------------------------------------------------------------------
Item 8. Financial Statements and Supplementary Data
--------------------------------------------------------------------------------
The information required by Item 8 is incorporated by reference to the section
beginning on page F-1.
--------------------------------------------------------------------------------
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
--------------------------------------------------------------------------------
No reportable items.
28
Part III
--------------------------------------------------------------------------------
Item 10. Directors and Executive Officers of the Registrant
--------------------------------------------------------------------------------
Pursuant to Instruction G(3) to Form 10-K, the information relating to Directors
of Sprint required by Item 10 is incorporated by reference from Sprint's
definitive proxy statement which is to be filed pursuant to Regulation 14A
within 120 days after the end of Sprint's fiscal year ended December 31, 2000.
For information pertaining to Executive Officers of Sprint, as required by
Instruction 3 of Paragraph (b) of Item 401 of Regulation S-K, refer to the
"Executive Officers of the Registrant" section of Part I of this document.
Pursuant to Instruction G(3) to Form 10-K, the information relating to
compliance with Section 16(a) required by Item 10 is incorporated by reference
from Sprint's definitive proxy statement which is to be filed pursuant to
Regulation 14A within 120 days after the end of Sprint's fiscal year ended
December 31, 2000.
--------------------------------------------------------------------------------
Item 11. Executive Compensation
--------------------------------------------------------------------------------
Pursuant to Instruction G(3) to Form 10-K, the information required by Item 11
is incorporated by reference from Sprint's definitive proxy statement which is
to be filed pursuant to Regulation 14A within 120 days after the end of Sprint's
fiscal year ended December 31, 2000.
--------------------------------------------------------------------------------
Item 12. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------------------------
Pursuant to Instruction G(3) to Form 10-K, the information required by Item 12
is incorporated by reference from Sprint's definitive proxy statement which is
to be filed pursuant to Regulation 14A within 120 days after the end of Sprint's
fiscal year ended December 31, 2000.
--------------------------------------------------------------------------------
Item 13. Certain Relationships and Related Transactions
--------------------------------------------------------------------------------
Pursuant to Instruction G(3) to Form 10-K, the information required by Item 13
is incorporated by reference from Sprint's definitive proxy statement which is
to be filed pursuant to Regulation 14A within 120 days after the end of Sprint's
fiscal year ended December 31, 2000.
29
Part IV
--------------------------------------------------------------------------------
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
--------------------------------------------------------------------------------
(a) 1. The consolidated financial statements of Sprint filed as part of this
report are listed in the Index to Financial Statements, Financial
Statement Schedule and Exhibits.
2. The consolidated financial statement schedule of Sprint filed as part
of this report are listed in the Index to Financial Statements,
Financial Statement Schedule and Exhibits.
3. The following exhibits are filed as part of this report:
EXHIBITS
(3) Articles of Incorporation and Bylaws:
(a) Articles of Incorporation, as amended (filed as Exhibit 3(a)
to Sprint Corporation's Quarterly Report on Form 10-Q for
the quarter ended March 31, 2000 and incorporated herein by
reference).
(b) Bylaws, as amended (filed as Exhibit 3(b) to Sprint
Corporation's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2000 and incorporated herein by reference).
(4) Instruments defining the Rights of Sprint's Security Holders:
(a) The rights of Sprint's equity security holders are defined
in the Fifth, Sixth, Seventh and Eighth Articles of Sprint's
Articles of Incorporation. See Exhibit 3(a).
(b) Rights Agreement dated as of November 23, 1998, between
Sprint Corporation and UMB Bank, n.a. (filed as Exhibit 4.1
to Amendment No. 1 to Sprint Corporation's Registration
Statement on Form 8-A relating to Sprint's PCS Group Rights,
filed November 25, 1998, and incorporated herein by
reference).
(c) Tracking Stock Policies of Sprint Corporation (filed as
Exhibit 4D to Post-Effective Amendment No. 2 to Sprint
Corporation's Registration Statement on Form S-3 (No. 33-
58488) and incorporated herein by reference).
(d) Amended and Restated Standstill Agreement dated November 23,
1998, by and among Sprint Corporation, France Telecom and
Deutsche Telekom AG (filed as Exhibit 4E to Post-Effective
Amendment No.2 to Sprint Corporation's Registration
Statement on Form S-3 (No. 33-58488) and incorporated herein
by reference) as amended by the Master Transfer Agreement
dated January 21, 2000 between and among France Telecom,
Deutsche Telekom AG, NAB Nordamerika Beteiligungs Holding
GmbH, Atlas Telecommunications, S.A., Sprint Corporation,
Sprint Global Venture, Inc. and the JV Entities set forth in
Schedule II thereto (filed as Exhibit 2 to Sprint
Corporation's Current Report on Form 8-K dated January 26,
2000 and incorporated herein by reference).
(e) Indenture, dated as of October 1, 1998, among Sprint Capital
Corporation, Sprint Corporation and Bank One, N.A., as
Trustee (filed as Exhibit 4(b) to Sprint Corporation's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998, and incorporated herein by reference).
(f) First Supplemental Indenture, dated as of January 15, 1999,
among Sprint Capital Corporation, Sprint Corporation and
Bank One, N.A., as Trustee (filed as Exhibit 4(b) to Sprint
Corporation Current Report on Form 8-K dated February 2,
1999 and incorporated herein by reference).
30
(g) Indenture, dated as of October 1, 1998, between Sprint
Corporation and Bank One, N.A., as Trustee (filed as Exhibit
4(a) to Sprint Corporation's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998, and incorporated
herein by reference).
(h) First Supplemental Indenture, dated as of January 15, 1999,
between Sprint Corporation and Bank One, N.A., as Trustee
(filed as Exhibit 4(a) to Sprint Corporation Current Report
on Form 8-K dated February 2, 1999 and incorporated herein
by reference).
(10) Material Agreements
(a) Amended and Restated Stockholders' Agreement among France
Telecom, Deutsche Telekom AG and Sprint Corporation, dated
as of November 23, 1998 (filed as Exhibit 10(c) to Sprint
Corporation Annual Report on Form 10-K for the year ended
December 31, 1998 and incorporated herein by reference) as
amended by the Master Transfer Agreement dated January 21,
2000 between and among France Telecom, Deutsche Telekom AG,
NAB Nordamerika Beteiligungs Holding GmbH, Atlas
Telecommunications, S.A., Sprint Corporation, Sprint Global
Venture, Inc. and the JV Entities set forth in Schedule II
thereto (filed as Exhibit 2 to Sprint Corporation's Current
Report on Form 8-K dated January 26, 2000 and incorporated
herein by reference).
(b) Amended and Restated Registration Rights Agreement, dated as
of November 23, 1998, among Sprint Corporation, France
Telecom and Deutsche Telekom A.G. (filed as Exhibit 10.1 to
Amendment No. 1 to Sprint Corporation Registration Statement
on Form S-3 (No. 333-64241) and incorporated herein by
reference) as amended by the Master Transfer Agreement dated
January 21, 2000 between and among France Telecom, Deutsche
Telekom AG, NAB Nordamerika Beteiligungs Holding GmbH, Atlas
Telecommunications, S.A., Sprint Corporation, Sprint Global
Venture, Inc. and the JV Entities set forth in Schedule II
thereto (filed as Exhibit 2 to Sprint Corporation's Current
Report on Form 8-K dated January 26, 2000 and incorporated
herein by reference) and as further amended by the Offering
Process Agreement dated as of February 20, 2001 between and
among France Telecom, Deutsche Telekom AG, NAB Nordamerika
Beteiligungs Holding GmbH and Sprint Corporation (filed as
Exhibit 10(b) to Sprint Corporation's Annual Report on Form
10-K for the year ended December 31, 2000 and incorporated
herein by reference).
(c) Registration Rights Agreement, dated as of November 23,
1998, among Sprint Corporation, Tele-Communications, Inc.,
Comcast Corporation and Cox Communications, Inc. (filed as
Exhibit 10.2 to Amendment No. 1 to Sprint Corporation
Registration Statement on Form S-3 (No. 333-64241) and
incorporated herein by reference).
(d) Standstill Agreements, dated May 26, 1996, between Sprint
Corporation and each of Tele-Communications, Inc., Comcast
Corporation and Cox Communications, Inc. (filed as Exhibit
10(g) to Sprint Corporation Annual Report on Form 10-K for
the year ended December 31, 1998 and incorporated herein by
reference).
(e) 364-Day Credit Agreement, dated as of August 4, 2000, among
Sprint Corporation and Sprint Capital Corporation, as
Borrowers, and the initial Lenders named therein, as Initial
Lenders, and Citibank, N.A., as Administrative Agent, and
Salomon Smith Barney Inc., as Book Manager and Arranger, and
Morgan Guaranty Trust Company of New York, as Syndication
Agent, and Bank of America, N.A. and The Chase Manhattan
Bank, as Documentation Agents (filed as Exhibit 10(a) to
Sprint Corporation's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2000 and incorporated herein by
reference).
(f) Five-Year Credit Agreement, dated as of August 7, 1998,
among Sprint Corporation and Sprint Capital Corporation, as
Borrowers, and the initial Lenders named therein, as Initial
Lenders, and Citibank, N.A., as Administrative Agent, and
Morgan Guaranty Trust Company of New York, as Syndication
Agent, and Bank of America National Trust and Savings
Association and The Chase Manhattan Bank, as Documentation
Agents (filed as Exhibit 10.24 to Sprint Corporation
Registration Statement on Form S-3 (No. 333-64241) and
incorporated herein by reference).
31
(10) Executive Compensation Plans and Arrangements:
(g) 1990 Stock Option Plan, as amended (filed as Exhibit 10(g)
to Sprint Corporation's Annual Report on Form 10-K for the
year ended December 31, 2000 and incorporated herein by
reference).
(h) 1990 Restricted Stock Plan, as amended (filed as Exhibit
10(h) to Sprint Corporation Annual Report on Form 10-K for
the year ended December 3, 1999 and incorporated herein by
reference).
(i) Executive Deferred Compensation Plan, as amended (filed as
Exhibit 10(i) to Sprint Corporation Annual Report on Form
10-K for the year ended December 31, 1999 and incorporated
herein by reference). Summary of Amendments to the Executive
Deferred Compensation Plan (filed as Exhibit 10(i) to Sprint
Corporation's Annual Report on Form 10-K for the year ended
December 31, 2000 and incorporated herein by reference).
(j) Management Incentive Stock Option Plan, as amended (filed as
Exhibit 10(j) to Sprint Corporation's Annual Report on Form
10-K for the year ended December 31, 2000 and incorporated
herin by reference).
(k) 1997 Long-Term Stock Incentive Program, as amended (filed as
Exhibit 10(d) to Sprint Corporation Quarterly Report on Form
10-Q for the quarter ended September 30, 2000 and
incorporated herein by reference).
(l) Sprint Supplemental Executive Retirement Plan (filed as
Exhibit (10)(i) to Sprint Corporation Quarterly Report on
Form 10-Q for the quarter ended September 30, 1995 and
incorporated herein by reference).
(m) Amended and Restated Centel Directors Deferred Compensation
Plan (filed as Exhibit 10(m) to Sprint Corporation Annual
Report on Form 10-K for the year ended December 31, 1999 and
incorporated herein by reference).
(n) Restated Memorandum Agreements Respecting Supplemental
Pension Benefits between Sprint Corporation (formerly United
Telecommunications, Inc.) and two of its current and former
executive officers (filed as Exhibit 10(i) to Sprint
Corporation Annual Report on Form 10-K for the year ended
December 31, 1992, and incorporated herein by reference).
(o) Executive Long-Term Incentive Plan (filed as Exhibit 10(j)
to Sprint Corporation Annual Report on Form 10-K for the
year ended December 31, 1993 and incorporated herein by
reference).
(p) Executive Management Incentive Plan (filed as Exhibit 10(k)
to Sprint Corporation Annual Report on Form 10-K for the
year ended December 31, 1993 and incorporated herein by
reference).
(q) Long-Term Incentive Compensation Plan, as amended (filed as
Exhibit 10(i) to Sprint Corporation Quarterly Report on Form
10-Q for the quarter ended September 30, 1996, and
incorporated herein by reference).
(r) Management Incentive Plan, as amended (filed as Exhibit
10(r) to Sprint Corporation's Annual Report on Form 10-K for
the year ended December 31, 2000 and incorporated herein by
reference).
(s) Retirement Plan for Directors, as amended (filed as Exhibit
(10)(u) to Sprint Corporation Annual Report on Form 10-K for
the year ended December 31, 1996 and incorporated herein by
reference).
(t) Key Management Benefit Plan, as amended (filed as Exhibit
10(g) to Sprint Corporation Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996 and incorporated
herein by reference).
32
(u) Agreements Regarding Special Compensation and Post
Employment Restrictive Covenants between Sprint Corporation
and certain of its Executive Officers (filed as Exhibit
10(d) to Sprint Corporation Quarterly Report on Form 10-Q
for the quarter ended September 30, 1994, Exhibit 10(h) to
Sprint Corporation Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996, Exhibit 10(w) to Sprint
Corporation Annual Report on Form 10-K for the year ended
December 31, 1997, Exhibit 10(b) to Sprint Corporation
Quarterly Report on Form 10-Q for the quarter ended June
30, 1998, and Exhibit 10.4 to Sprint Spectrum L.P.
Quarterly Report on Form 10-Q for the quarter ended March
31, 1997 and incorporated herein by reference).
(v) Director's Deferred Fee Plan, as amended (filed as Exhibit
10 (v) to Sprint Corporation Annual Report on Form 10-K for
the year ended December 31, 1999 and incorporated herein by
reference).
(w) Form of Contingency Employment Agreements between Sprint
Corporation and certain of its executive officers (filed as
Exhibit 10(h) to Sprint Corporation Quarterly Report on
Form 10-Q for the quarter ended September 30, 2000 and
incorporated herein by reference).
(x) Form of Indemnification Agreements between Sprint
Corporation (formerly United Telecommunications, Inc.) and
its Directors and Officers (filed as Exhibit 10(s) to
Sprint Corporation Annual Report on Form 10-K for the year
ended December 31, 1991, and incorporated herein by
reference).
(y) Summary of Executive Officer Benefits and Board of
Directors Benefits and Fees (filed as Exhibit 10(y) to
Sprint Corporation's Annual Report on Form 10-K for the
year ended December 31, 2000 and incorporated herein by
reference).
(z) Amended and Restated Centel Director Stock Option Plan
(filed as Exhibit 10(aa) to Sprint Corporation Annual
Report on Form 10-K for the year ended December 31, 1993,
and incorporated herein by reference).
(aa) Special Incentive Plan (filed as Exhibit 10(g) to Sprint
Corporation Quarterly Report on Form 10-Q for the quarter
ended September 30, 2000 and incorporated herein by
reference).
(bb) Employment Agreements dated as of February 26, 2001 by and
among Sprint Corporation, Sprint/United Management Company
and William T. Esrey and Ronald T. LeMay (filed as Exhibit
10(bb) to Sprint Corporation's Annual Report on Form 10-K
for the year ended December 3, 2000 and incorporated herein
by reference).
(12) Computation of Ratio of Earnings to Fixed Charges
(21) Subsidiaries of Registrant
(23) (a) Consent of Ernst & Young LLP
(b) Consent of Deloitte & Touche LLP
(99) Supplementary Information
(a) Annex I - Sprint FON Group Combined Financial Information
(b) Annex II - Sprint PCS Group Combined Financial Information
Sprint will furnish to the Securities and Exchange Commission, upon request, a
copy of the instruments defining the rights of holders of its long-term debt.
The total amount of securities authorized under any of said instruments (other
than those listed above) does not exceed 10% of the total assets of Sprint.
33
(b) Reports on Form 8-K
On October 17, 2000, Sprint filed a Current Report on Form 8-K dated
October 17, 2000, in which it reported that it had announced that its
Board of Directors had approved a proposal to offer employees a choice
to cancel certain stock options granted to them in 2000 in exchange for
new options, to be granted six months and one day from the date the old
options are cancelled, to purchase an equal number of the same class of
shares.
On February 20, 2001, Sprint filed a Current Report on Form 8-K dated
December 13, 2000, in which it reported that it had announced fourth
quarter 2000 and calendar year 2000 results. It also reported that, on
December 13, 2000, a shareholder had filed a derivative action
purportedly on behalf of Sprint against certain of its current and
former officers and directors.
The news release regarding fourth quarter 2000 and calendar year 2000
results, which was included in the Current Report, included the
following financial information:
FON Group Combined Statements of Operations
FON Group Selected Operating Results
FON Group Proforma Financial Information
FON Group Supplemental Operating Information
FON Group Condensed Combined Balance Sheets
FON Group Condensed Combined Cash Flow Information
PCS Group Combined Statements of Operations
PCS Group Supplemental Operating Information
PCS Group Net Customer Additions
PCS Group Condensed Combined Balance Sheets
PCS Group Condensed Combined Cash Flow Information
Sprint Corporation Condensed Consolidated Balance Sheets
Sprint Corporation Condensed Consolidated Cash Flow Information
(c) Exhibits are listed in Item 14(a).
34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SPRINT CORPORATION
------------------------------------
(Registrant)
By /s/ W. T. Esrey
------------------------------------
William T. Esrey
Chairman and Chief Executive Officer
Date: May 15, 2001
35
--------------------------------------------------------------------------------
Index to Financial Statements, Financial Statement Schedule and Exhibits
--------------------------------------------------------------------------------
Sprint Corporation Page Reference
------------------ --------------
Consolidated Financial Statements (including Consolidating Information)
Management Report F-2
Report of Independent Auditors F-3
Consolidated Statements of Operations for each of the three years ended December 31, 2000 F-4
Consolidated Statements of Comprehensive Income (Loss) for each of the three years ended F-6
December 31, 2000
Consolidated Balance Sheets as of December 31, 2000 and 1999 F-7
Consolidated Statements of Cash Flows for each of the three years ended December 31, 2000 F-9
Consolidated Statements of Shareholders' Equity for each of the three years ended December 31, 2000 F-10
Notes to Consolidated Financial Statements F-12
Financial Statement Schedule
Schedule II--Consolidated Valuation and Qualifying Accounts for each of the three years ended F-39
December 31, 2000
Exhibits
(12) - Computation of Ratio of Earnings to Fixed Charges
(21) - Subsidiaries of Registrant
(23) (a) - Consent of Ernst & Young LLP
(23) (b) - Consent of Deloitte & Touche LLP
(99)(a) - Supplementary Information - Annex I - FON Group
(99)(b) - Supplementary Information - Annex II - PCS Group
F-1
MANAGEMENT REPORT
Sprint Corporation's management is responsible for the integrity and objectivity
of the information contained in this document. Management is responsible for the
consistency of reporting this information and for ensuring that accounting
principles generally accepted in the United States are used.
In discharging this responsibility, management maintains a comprehensive system
of internal controls and supports an extensive program of internal audits, has
made organizational arrangements providing appropriate divisions of
responsibility and has established communication programs aimed at assuring that
its policies, procedures and principles of business conduct are understood and
practiced by its employees.
The financial statements included in this document have been audited by Ernst &
Young LLP, independent auditors. Their audits were conducted using auditing
standards generally accepted in the United States and their reports are included
herein.
The Board of Director's responsibility for these financial statements is pursued
mainly through its Audit Committee. The Audit Committee, composed entirely of
directors who are not officers or employees of Sprint, meets periodically with
the internal auditors and independent auditors, both with and without management
present, to assure that their respective responsibilities are being fulfilled.
The internal and independent auditors have full access to the Audit Committee to
discuss auditing and financial reporting matters.
/s/ W. T. Esrey
-----------------------------------------------------
William T. Esrey
Chairman and Chief Executive Officer
/s/ Arthur B. Krause
-----------------------------------------------------
Arthur B. Krause
Executive Vice President and Chief Financial Officer
F-2
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, 2000 and 1999, 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, 2000. Our audits also included the financial statement schedule
listed in the Index to Financial Statements, Financial Statement Schedule and
Exhibits. 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 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 revenues of $1.2 billion for the year
ended December 31, 1998. 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 revenues for Sprint Spectrum Holding Company, L.P., 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
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Sprint at December 31, 2000 and 1999, and
the consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 2000, 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 discussed in Note 7 to the consolidated financial statements, in 2000 Sprint
changed its accounting for service activation and certain installation fee
revenues.
Ernst & Young LLP
Kansas City, Missouri
February 1, 2001
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 statements of operations and cash flows of
Sprint Spectrum Holding Company, L.P. and subsidiaries for the year ended
December 31, 1998. Our audit also included the 1998 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the results of operations and cash flows of Sprint Spectrum
Holding Company, L.P. and subsidiaries for the year ended December 31,1998, in
conformity with generally accepted accounting principles. Also, in our opinion,
Schedule II, when considered in relation to the basic 1998 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-3
CONSOLIDATED STATEMENTS OF OPERATIONS
(millions) Sprint Corporation
----------------------------------------------------
Consolidated
--------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998
--------------------------------------------------------------------------------------------------------------------
Net Operating Revenues $ 23,613 $ 20,265 $ 17,144
--------------------------------------------------------------------------------------------------------------------
Operating Expenses
Costs of services and products 11,620 10,363 8,813
Selling, general and administrative 6,919 6,557 5,252
Depreciation 3,538 3,146 2,548
Amortization 606 506 162
Asset write down and merger related costs 425 - -
Acquired in-process research and
development costs - - 179
--------------------------------------------------------------------------------------------------------------------
Total operating expenses 23,108 20,572 16,954
--------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) 505 (307) 190
Interest expense (990) (860) (718)
Other partners' loss in Sprint PCS - - 1,251
Minority interest - 20 145
Other income (expense), net (217) 75 171
--------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes (702) (1,072) 1,039
Income tax (expense) benefit 126 327 (454)
--------------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations (576) (745) 585
Discontinued operation, net 675 (130) (135)
Extraordinary items, net (4) (60) (36)
Cumulative effect of change in
accounting principle, net (2) - -
--------------------------------------------------------------------------------------------------------------------
Net Income (Loss) 93 (935) 414
--------------------------------------------------------------------------------------------------------------------
Preferred stock dividends (paid) received (7) (8) (2)
--------------------------------------------------------------------------------------------------------------------
Earnings (loss) applicable to common stock $ 86 $ 943 $ 412
====================================================
Eliminations/Reclassifications Sprint FON Group Sprint PCS Group
---------------------------------- ----------------------------------- ------------------------------------
2000 1999 1998 2000 1999 1998 (1) 2000 1999 1998 (1)
---------------------------------- ----------------------------------- ------------------------------------
$ (416) $ (268) $ (108) $ 17,688 $ 17,160 $ 15,958 $ 6,341 $ 3,373 $ 1,294
---------------------------------- ----------------------------------- ------------------------------------
(416) (268) (108) 8,094 7,481 7,163 3,942 3,150 1,758
- - - 4,493 4,620 4,114 2,426 1,937 1,138
- - - 2,199 2,086 1,878 1,339 1,060 670
- - - 68 43 43 538 463 119
- - - 401 - - 24 - -
- - - - - - - - 179
---------------------------------- ----------------------------------- ------------------------------------
(416) (268) (108) 15,255 14,230 13,198 8,269 6,610 3,864
---------------------------------- ----------------------------------- ------------------------------------
- - - 2,433 2,930 2,760 (1,928) (3,237) (2,570)
19 20 16 (76) (182) (243) (933) (698) (491)
- - - - - - - - 1,251
- - - - - - - 20 145
(19) (20) (16) (187) 49 153 (11) 46 34
---------------------------------- ----------------------------------- ------------------------------------
- - - 2,170 2,797 2,670 (2,872) (3,869) (1,631)
- - - (878) (1,061) (995) 1,004 1,388 541
---------------------------------- ----------------------------------- ------------------------------------
1,292 1,736 1,675 (1,868) (2,481) (1,090)
- - - 675 (130) (135) - - -
- - - (1) (39) (5) (3) (21) (31)
- - - (2) - - - - -
---------------------------------- ----------------------------------- ------------------------------------
- - - 1,964 1,567 1,535 (1,871) (2,502) (1,121)
---------------------------------- ----------------------------------- ------------------------------------
- - - 7 7 N/M (14) (15) N/M
---------------------------------- ----------------------------------- ------------------------------------
$ - $ - $ - $ 1,971 $ 1,574 N/M $ (1,885) $ (2,517) N/M
================================== =================================== ====================================
N/M - Not Meaningful
(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.
See accompanying Notes to Consolidated Financial Statements
F-4
CONSOLIDATED STATEMENTS OF OPERATIONS (continued) Sprint Corporation
(millions, except per share data)
-------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998/(1)/
-------------------------------------------------------------------------------------------------------------------
FON COMMON STOCK
Earnings applicable to common stock $ 1,971 $ 1,574 $ 118
==============================================
Diluted Earnings per Common Share/(2)/
Continuing operations $ 1.45 $ 1.97 $ 0.18
Discontinued operation 0.76 (0.15) (0.04)
Extraordinary items - (0.04) -
-------------------------------------------------------------------------------------------------------------------
Total $ 2.21 $ 1.78 $ 0.14
==============================================
Diluted weighted average common shares 892.4 887.2 869.0
==============================================
Basic Earnings per Common Share/(2)/
Continuing operations $ 1.47 $ 2.01 $ 0.18
Discontinued operation 0.77 (0.15) (0.04)
Extraordinary items - (0.05) -
-------------------------------------------------------------------------------------------------------------------
Total $ 2.24 $ 1.81 $ 0.14
==============================================
Basic weighted average common shares 880.9 868.0 855.2
==============================================
PCS COMMON STOCK
Loss applicable to common stock $ (1,885) $ (2,517) $ (559)
==============================================
Basic and Diluted Loss per Common Share/(2)/
Continuing operations $ (1.95) $ (2.71) $ (0.63)
Extraordinary items - (0.02) (0.04)
-------------------------------------------------------------------------------------------------------------------
Total $ (1.95) $ (2.73) $ (0.67)
==============================================
Basic and diluted weighted average common shares 966.5 920.4 831.6
==============================================
SPRINT COMMON STOCK
Earnings applicable to common stock $ 853
===============
Diluted Earnings per Common Share
Continuing operations $ 2.19
Discontinued operation (0.23)
Extraordinary items (0.01)
--------------------------------------------------------------------- ---------------
Total $ 1.95
===============
Diluted weighted average common shares 438.6
===============
Basic Earnings per Common Share
Continuing operations $ 2.23
Discontinued operation (0.24)
Extraordinary items (0.01)
--------------------------------------------------------------------- ---------------
Total $ 1.98
===============
Basic weighted average common shares 430.8
===============
DIVIDENDS PER COMMON SHARE
FON common stock/(2)/ $ 0.50 $ 0.50 $ 0.125
==============================================
Class A common stock $ 0.50 $ 0.625 $ 1.00
==============================================
Sprint common stock $ 0.75
===============
/(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 the 2000 first quarter, Sprint effected a two-for-one stock split of
its PCS common stock. In the 1999 second quarter, Sprint effected a two-
for-one stock 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.
See accompanying Notes to Consolidated Financial Statements.
F-5
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(millions) Sprint Corporation
-------------------------------------------------
Consolidated
-----------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998
-----------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 93 $ (935) $ 414
-----------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss)
Unrealized holding gains (losses)
on securities (64) 54 21
Income tax (expense) benefit 23 (20) (8)
-----------------------------------------------------------------------------------------------------------------
Net unrealized holding gains (losses) on
securities during the period (41) 34 13
Reclassification adjustment for gains
included in net income (10) (57) -
-----------------------------------------------------------------------------------------------------------------
Total net unrealized holding gains (losses)
on securities (51) (23) 13
Foreign currency translation adjustments (9) - (2)
-----------------------------------------------------------------------------------------------------------------
Total other comprehensive income (loss) (60) (23) 11
-----------------------------------------------------------------------------------------------------------------
Comprehensive Income (Loss) $ 33 $ (958) $ 425
=================================================
Eliminations/Reclassifications Sprint FON Group Sprint PCS Group
---------------------------------------- -------------------------------------- --------------------------------------
2000 1999 1998 2000 1999 1998 2000 1999 1998
---------------------------------------- -------------------------------------- --------------------------------------
$ - $ - $ - $ 1,964 $ 1,567 $ 1,535 $ (1,871) $ (2,502) $ (1,121)
---------------------------------------- -------------------------------------- --------------------------------------
- 13 (7) (69) 33 28 5 8 -
- (5) 2 25 (12) (10) (2) (3) -
---------------------------------------- -------------------------------------- --------------------------------------
- 8 (5) (44) 21 18 3 5 -
- - - (2) (57) - (8) - -
---------------------------------------- -------------------------------------- --------------------------------------
- 8 (5) (46) (36) 18 (5) 5 -
- - - (12) - (2) 3 - -
---------------------------------------- -------------------------------------- --------------------------------------
- 8 (5) (58) (36) 16 (2) 5 -
---------------------------------------- -------------------------------------- --------------------------------------
$ - $ 8 $ (5) $ 1,906 $ 1,531 $ 1,551 $ (1,873) $ (2,497) $ (1,121)
======================================== ====================================== ======================================
See accompanying Notes to Consolidated Financial Statements.
F-6
CONSOLIDATED BALANCE SHEETS
(millions) Sprint Corporation
-----------------------------------
Consolidated
-------------------------------------------------------------------------------------------------------------------------
December 31, 2000 1999
-------------------------------------------------------------------------------------------------------------------------
Assets
Current assets
Cash and equivalents $ 239 $ 120
Accounts receivable, net of consolidated allowance for doubtful accounts of
$389 and $274 4,028 3,408
Inventories 949 777
Prepaid expenses 366 340
Income tax receivable - 411
Investments in equity securities - 317
Receivable from the PCS Group - -
Current tax benefit receivable from the FON Group - -
Other 391 207
-------------------------------------------------------------------------------------------------------------------------
Total current assets 5,973 5,580
Property, plant and equipment
FON Group 30,998 27,687
PCS Group 12,117 9,411
-------------------------------------------------------------------------------------------------------------------------
Total property, plant and equipment 43,115 37,098
Accumulated depreciation (17,799) (15,129)
-------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 25,316 21,969
Investments in and advances to affiliates 607 452
Intangible assets
Goodwill 5,425 5,745
PCS licenses 3,059 3,060
PCS customer base 747 726
PCS microwave relocation costs 411 377
Other 430 350
-----------------------------------------------------------------------------------------------------------------------
Total intangible assets 10,072 10,258
Accumulated amortization (1,134) (691)
-----------------------------------------------------------------------------------------------------------------------
Net intangible assets 8,938 9,567
Net assets of discontinued operation - 394
Other assets 1,767 1,288
-----------------------------------------------------------------------------------------------------------------------
Total $ 42,601 $ 39,250
================================
Eliminations/Reclassifications Sprint FON Group Sprint PCS Group
------------------------------------- ----------------------------------- -----------------------------------
2000 1999 2000 1999 2000 1999
------------------------------------- ----------------------------------- -----------------------------------
$ - $ - $ 122 $ 104 $ 117 $ 16
- - 3,126 2,836 902 572
- - 434 441 515 336
- - 276 251 90 89
- 411 - - - -
- 1 - 316 - -
(361) (136) 361 136 - -
(26) (293) - - 26 293
(2) - 193 198 200 9
------------------------------------- ----------------------------------- ------------------------------
(389) (17) 4,512 4,282 1,850 1,315
- - 30,998 27,687 - -
- - - - 12,117 9,411
------------------------------------- ----------------------------------- ------------------------------
- - 30,998 27,687 12,117 9,411
(39) (29) (15,165) (13,685) (2,595) (1,415)
------------------------------------- ----------------------------------- ------------------------------
(39) (29) 15,833 14,002 9,522 7,996
(383) (431) 842 883 148 -
- - 877 1,223 4,548 4,522
- - - - 3,059 3,060
- - - - 747 726
- - - - 411 377
- - 384 296 46 54
------------------------------------- ----------------------------------- ------------------------------
- - 1,261 1,519 8,811 8,739
- - (57) (140) (1,077) (551)
------------------------------------- ----------------------------------- ------------------------------
- - 1,204 1,379 7,734 8,188
- - - 394 - -
- - 1,258 863 509 425
------------------------------------- ----------------------------------- ------------------------------
$ (811) $ (477) $ 23,649 $ 21,803 $ 19,763 $ 17,924
===================================== =================================== ==============================
See accompanying Notes to Consolidated Financial Statements.
F-7
CONSOLIDATED BALANCE SHEETS (continued)
(millions, except per share data) Sprint Corporation
-----------------------------------
Consolidated
-------------------------------------------------------------------------------------------------------------------------
December 31, 2000 1999
-------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities
Current maturities of long-term debt $ 1,205 $ 1,087
Accounts payable 2,285 1,462
Construction obligations 997 1,039
Accrued interconnection costs 547 683
Accrued taxes 440 410
Advance billings 607 323
Payroll and employee benefits 498 638
Accrued interest 255 264
Payables to the FON Group - -
Other 1,134 926
-------------------------------------------------------------------------------------------------------------------------
Total current liabilities 7,968 6,832
Long-term debt and capital lease obligations 17,514 15,685
Deferred credits and other liabilities
Deferred income taxes and investment tax credits 1,360 1,511
Postretirement and other benefit obligations 1,077 1,064
Other 710 589
-------------------------------------------------------------------------------------------------------------------------
Total deferred credits and other liabilities 3,147 3,164
Redeemable preferred stock 256 256
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, 798.8 and 788.0
shares issued and 798.4 and 788.0 shares outstanding 1,598 1,576
PCS, par value $1.00 per share, 2,350.0 shares authorized, 933.1 and 910.4
shares issued and outstanding 933 910
Capital in excess of par or stated value 9,380 8,569
Retained earnings 1,578 1,961
Treasury stock, at cost, 0.4 and 0.0 shares (10) (2)
Accumulated other comprehensive income 21 81
Other - 2
Combined attributed net assets - -
----------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 13,716 13,313
----------------------------------------------------------------------------------------------------------------------
Total $ 42,601 39,250
==============================
Eliminations/Reclassifications Sprint FON Group Sprint PCS Group
------------------------------------ ----------------------------------- -----------------------------------
2000 1999 2000 1999 2000 1999
------------------------------------ ----------------------------------- -----------------------------------
$ (65) $ - $ 1,026 $ 902 $ 244 $ 185
- - 1,598 1,012 687 450
- - - - 997 1,039
- - 547 683 - -
(27) 118 264 162 203 130
- - 462 323 145 -
- - 377 557 121 81
- - 136 144 119 120
(296) (136) - - 296 136
(40) (29) 594 518 580 437
------------------------------------ ----------------------------------- -----------------------------------
(428) (47) 5,004 4,301 3,392 2,578
(104) (150) 3,482 4,531 14,136 11,304
(6) (6) 1,276 935 90 582
- - 1,077 1,064 - -
- 1 457 448 253 140
------------------------------------ ----------------------------------- -----------------------------------
(6) (5) 2,810 2,447 343 722
(280) (280) 10 10 526 526
216 216 - - - -
1,598 1,576 - - - -
933 910 - - - -
9,380 8,569 - - - -
1,578 1,961 - - - -
(10) (2) - - - -
21 81 - - - -
- 2 - - - -
(13,709) (13,308) 12,343 10,514 1,366 2,794
-----------------------------------------------------------------------------------------------------------------
7 5 - - - -
------------------------------------ ----------------------------------- -----------------------------------
$ (811) $ (477) $ 23,649 $ 21,803 $ 19,763 $ 17,924
==================================== =================================== ===================================
See accompanying Notes to Consolidated Financial Statements.
F-8
CONSOLIDATED STATEMENTS OF CASH FLOWS
(millions) Sprint Corporation
----------------------------------------------------
Consolidated
-----------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998
-----------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income (loss) $ 93 $ (935) $ 414
Adjustments to reconcile net income (loss) to net cash provided
(used) by operating activities:
Discontinued operation, net (675) 130 135
Extraordinary items, net 4 60 32
Equity in net losses of affiliates 256 70 892
Depreciation and amortization 4,144 3,652 2,042
Acquired in-process research and development costs - - 179
Deferred income taxes and investment tax credits (205) (333) 127
Current tax benefit used by the FON Group - - -
Net gains on sales of assets (130) (183) (104)
Net losses on write-down of assets 365 102 -
Changes in assets and liabilities:
Accounts receivable, net (640) (700) 101
Inventories and other current assets 146 (778) (189)
Accounts payable and other current liabilities 947 906 733
Current tax benefit receivable from the FON Group - - -
Affiliate receivables and payables, net - - -
Noncurrent assets and liabilities, net (26) (63) (126)
Other, net 36 24 (37)
-----------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 4,315 1,952 4,199
-----------------------------------------------------------------------------------------------------------------------
Investing Activities
Capital expenditures (7,152) (6,114) (4,231)
Repayments from (investments in and loans to) Sprint PCS - - -
Investments in and loans to other affiliates, net (889) (135) (423)
Net proceeds from sales of assets 258 243 230
Purchase of broadband fixed wireless companies,
net of cash acquired - (618) -
Advances to (from) the PCS Group - - -
Net assets transferred from the PCS Group - - -
Cash acquired in the PCS Restructuring - - -
Investments in Sprint PCS - - -
Other, net (27) (149) 206
-----------------------------------------------------------------------------------------------------------------------
Net cash used by continuing operations (7,810) (6,773) (4,218)
Proceeds from sale of investment in Global One 1,403 - -
Net investing activities of discontinued operation - (384) (268)
-----------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (6,407) (7,157) (4,486)
-----------------------------------------------------------------------------------------------------------------------
Financing Activities
Proceeds from long-term debt 3,613 6,921 5,213
Payments on long-term debt (1,356) (2,949) (3,822)
Proceeds from common stock issued 269 957 85
Proceeds from treasury stock issued 12 134 60
Advances from (to) the FON Group - - -
Dividends paid (448) (441) (430)
Treasury stock purchased (61) (48) (321)
Net assets transferred to the FON Group - - -
Current tax benefit used by the FON Group - - -
Other, net 182 146 5
-----------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 2,211 4,720 790
-----------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash and Equivalents 119 (485) 503
Cash and Equivalents at Beginning of Period 120 605 102
-----------------------------------------------------------------------------------------------------------------------
Cash and Equivalents at End of Period $ 239 $ 120 $ 605
====================================================
See accompanying Notes to Consolidated Financial Statements.
Eliminations/Reclassifications Sprint FON Group Sprint PCS Group
----------------------------------------- ----------------------------- ------------------------------
2000 1999 1998 2000 1999 1998 2000 1999 1998
----------------------------------------- ----------------------------- ------------------------------
$ - $ - $ - $ 1,964 $ 1,567 $ 1,535 $ (1,871) $(2,502) $ (1,121)
- - - (675) 130 135 - - -
- - - 1 39 1 3 21 31
- - - 201 70 52 55 - 840
- - - 2,267 2,129 1,921 1,877 1,523 121
- - - - - - - - 179
- - (1) 386 220 60 (591) (553) 68
- - 460 - - - - - (460)
- - - (83) (158) (104) (47) (25) -
- - - 365 102 - - - -
- - - (316) (459) 102 (324) (241) (1)
411 (411) (170) 39 (130) (19) (304) (237) -
(411) 391 - 711 152 347 647 363 386
(267) 123 170 - - - 267 (123) (170)
267 (123) (17) (422) 88 (84) 155 35 101
- - - (103) (76) (24) 77 13 (102)
- (49) 1 (12) 39 (7) 48 34 (31)
----------------------------------------- ----------------------------- ------------------------------
- (69) 443 4,323 3,713 3,915 (8) (1,692) (159)
----------------------------------------- ----------------------------- ------------------------------
- - -
- (314) 154 (4,105) (3,534) (3,159) (3,047) (2,580) (1,072)
- - (187) - 314 (154) - - -
- - - (686) (135) (236) (203) - -
51 90 230 207 153 -
- - -
(17) - 64 - (618) - - - -
- - (340) 17 - (64) - - -
- - (244) - - 340 - - -
- - 33 - - - - - 244
- 15 261 - - - - - (33)
(16) (82) (55) (11) (82) -
----------------------------------------- ----------------------------- ------------------------------
(17) (299) (259) (4,739) (3,965) (3,098) (3,054) (2,509) (861)
- - - 1,403 - - - - -
- - - - (384) (268) - - -
----------------------------------------- ----------------------------- ------------------------------
(17) (299) (259) (3,336) (4,349) (3,366) (3,054) (2,509) (861)
----------------------------------------- ----------------------------- ------------------------------
- - - 344 1,020 785 3,269 5,901 4,428
- 314 - (949) (529) (388) (407) (2,734) (3,934)
- - - 148 52 - 121 905 85
- - - 12 134 60 - - -
17 - (64) - - - (17) - 64
- - - (433) (426) (430) (15) (15) -
- - - (61) (48) (321) - - -
- - 340 - - - - - (340)
- - (460) - - - - - 460
- 54 - (30) 105 75 212 (13) (70)
----------------------------------------- ----------------------------- ------------------------------
17 368 (184) (969) 308 (219) 3,163 4,044 1,193
----------------------------------------- ----------------------------- ------------------------------
- - - 18 (328) 330 101 (157) 173
- - - 104 432 102 16 173 -
----------------------------------------- ----------------------------- ------------------------------
$ - $ - $ - $ 122 $ 104 $ 432 $ 117 $ 16 $ 173
========================================= ============================= ==============================
F-9
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Sprint Corporation
(millions)
--------------------------------------------------------------------------------
Capital
Sprint FON PCS In Excess
Common Common Common of Par or Retained Treasury
Stock Stock Stock Stated Value Earnings Stock Other Total
----------------------------------------------------------------------------------------------------------------------------------
Beginning 1998 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
Treasury stock purchased - - - - - (321) - (321)
Treasury stock issued - - - - (24) 188 - 164
Tax benefit from stock compensation - - - 49 - - - 49
Other, net - - - (6) (1) - 24 17
----------------------------------------------------------------------------------------------------------------------------------
Ending 1998 balance 216 701 375 7,586 3,651 (426) 99 12,202
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 compensation - - - 254 - - - 254
Other, net - - - 23 2 - (16) 9
----------------------------------------------------------------------------------------------------------------------------------
Ending 1999 balance 216 1,576 910 8,569 1,961 (2) 83 13,313
Net income - - - - 93 - - 93
FON common stock dividends - - - - (398) - - (398)
Class A common stock dividends - - - - (44) - - (44)
PCS preferred stock dividends - - - - (7) - - (7)
FON Series 1 common stock issued - 22 - 180 - - - 202
PCS Series 1 common stock issued - - 23 207 - - - 230
Treasury stock purchased - - - - - (61) - (61)
Treasury stock issued - - - - (29) 53 - 24
Tax benefit from stock compensation - - - 424 - - - 424
Other, net - - - - 2 - (62) (60)
----------------------------------------------------------------------------------------------------------------------------------
Ending 2000 balance $ 216 $ 1,598 $ 933 $ 9,380 $ 1,578 $ (10) $ 21 $ 13,716
========================================================================================
See accompanying Notes to Consolidated Financial Statements.
F-10
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (continued) Sprint Corporation
(millions)
--------------------------------------------------------------------------------
Sprint FON PCS
Common Common Common
Stock Stock Stock
----------------------------------------------------------------------------------------------------------------
Shares Outstanding
----------------------------------------------------------------------------------------------------------------
Beginning 1998 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
----------------------------------------------------------------------------------------------------------------
Ending 1998 balance 86.2 344.5 372.7
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 86.2 788.0 910.4
FON Series 1 common stock issued - 10.8 -
PCS Series 1 common stock issued - - 22.7
Treasury stock purchased - (2.0) -
Treasury stock issued - 1.6 -
----------------------------------------------------------------------------------------------------------------
Ending 2000 balance 86.2 798.4 933.1
=========================================
See accompanying Notes to Consolidated Financial Statements.
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Sprint Corporation
--------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
--------------------------------------------------------------------------------
Tracking Stock Formation
In November 1998, Sprint's shareholders approved the allocation of all of
Sprint's assets and liabilities into two groups, the FON Group and the PCS
Group, as well as 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 (FT) and Deutsche Telekom AG (DT) 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 voting power in Sprint
(Top-up).
FON common stock and PCS common stock are intended to reflect the financial
results and economic value of the FON and PCS Groups. However, they are classes
of common stock of Sprint, not of the group they are intended to track.
Accordingly, FON and PCS shareholders are subject to the risks related to an
equity investment in Sprint and all of Sprint's businesses, assets and
liabilities. Shares of FON common stock and PCS common stock do not represent a
direct legal interest in the assets and liabilities allocated to either group,
as Sprint owns all of the assets and liabilities of both of the groups. Sprint's
Board may, subject to the restrictions in Sprint's articles of incorporation,
change the allocation of the assets and liabilities that comprise each of the
FON Group and the PCS Group without shareholder approval.
Board Discretion Regarding Tracking Stocks
Sprint's Board has the discretion to, among other things, make operating and
financial decisions that could favor one group over the other and, subject to
the restrictions in Sprint's articles of incorporation, to change the allocation
of the assets and liabilities that comprise each of the FON Group and the PCS
Group without shareholder approval. Under the applicable corporate law, Sprint's
Board owes its fiduciary duties to all of Sprint's shareholders and there is no
board of directors that owes separate duties to the holders of either the FON
common stock or the PCS common stock. The Tracking Stock Policies provide that
the Board, in resolving material matters in which the holders of FON common
stock and PCS common stock have potentially divergent interests, will act in the
best interests of Sprint and all of its commmon shareholders after giving fair
consideration to the potentially divergent interests of the holders of the
separate classes of Sprint common stock. These policies may be changed by the
Board without shareholder approval. Given the Board's discretion in these
matters, it may be difficult to assess the future prospects of each group based
on past performance.
The FON Group and PCS Group are part of Sprint and as a result separate
financial statements for the groups are not required. Sprint has, however,
included as Annex I and Annex II to this Form 10-K/A additional financial
information relating to each group to help investors assess the financial
performance of the tracked businesses.
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.
F-12
Investments in entities in which Sprint exercises significant influence, but
does not control, are accounted for using the equity method (see Note 3).
The consolidated financial statements are prepared using 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
The PCS stock is intended to reflect the performance of Sprint's wireless PCS
operations. The FON stock is intended to reflect the performance of all of
Sprint's other operations. Sprint operates in four lines of business: the global
markets division, the local telecommunications division, the product
distribution and directory publishing businesses and the PCS wireless telephony
products and services business, known as the PCS Group.
Global Markets Division
-----------------------
The global markets division provides a broad suite of communications services
targeted to domestic business and residential customers, multinational
corporations and other communications companies. These services include domestic
and international voice; data communications such as Internet and frame relay
access and transport web hosting, virtual private networks, and managed security
services; and broadband services.
Sprint is deploying integrated communications services, referred to as 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 advanced services in the competitive local service market. Sprint uses
various advanced services last-mile technologies, including dedicated access and
Digital Subscriber Line (xDSL), and expects to use Multipoint Multichannel
Distribution Services (MMDS).
The global markets division also includes the operating results of the cable TV
service operations of the broadband fixed wireless companies after their 1999
acquisition dates. During 2000, Sprint converted several markets served by MMDS
capabilities from cable TV services to high-speed data services. The global
markets division's operating results reflect the development costs and the
operating revenues and expenses of these broadband fixed wireless services.
Sprint intends to provide broadband data and voice services to additional
markets served by these capabilities.
Included in the global markets division are the costs of establishing
international operations beginning in 2000.
This division also includes the FON Group's investments in EarthLink, Inc., an
Internet service provider; Call-Net, a long distance provider in Canada
operating under the Sprint brand name; Intelig, a long distance provider in
Brazil; and certain other telecommunications investments and ventures.
Local Division
--------------
The local division consists mainly of regulated local phone companies serving
approximately 8.3 million access lines in 18 states. It provides local services,
access by phone customers and other carriers to the local network, consumer long
distance services to customers within its franchise territories, sales of
telecommunications equipment, and other long distance services within certain
regional calling areas, or LATAs.
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 PCS Group
----------------
The PCS Group includes Sprint's wireless PCS operations. It operates the only
100% digital PCS wireless network in the United States with licenses to provide
service nationwide using a single frequency and a single technology. At year-end
2000, the PCS Group, together with affiliates, operated PCS systems in over 300
metropolitan markets, including the 50 largest U.S. metropolitan areas.
Intergroup Transactions and Allocations
Intergroup Transactions
The PCS Group uses the long distance operation as its interexchange carrier and
purchases wholesale long distance for resale to its customers. Additionally, the
FON Group provides the PCS Group with Caller ID services and various other goods
and services. Charges to the PCS Group for these items totaled $381 million in
2000, $264 million in 1999 and $21 million from the PCS Restructuring date to
year-end 1998. These amounts are included in FON Group's net operating revenues.
The PCS Group provides the FON Group with access to its network and
telemarketing and various other services. Charges to the FON Group for these
items totaled $35 million in 2000 and $4 million in 1999. These amounts are
included in PCS Group's net operating revenues.
The FON Group provides management, printing, mailing and warehousing services to
the PCS Group. Charges to the PCS Group for these services totaled $150 million
in 2000, $65 million in 1999 and $5 million from the PCS Restructuring date to
year-end 1998. These amounts are included in PCS Group operating expenses.
Related Party Transactions
The Cable Partners advanced PhillieCo, L.P. $26 million in 1998. These advances
were repaid in the 1999 first quarter.
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 operation as its interexchange
carrier. Charges to Sprint PCS for these services totaled $87 million in 1998.
Sprint provided management, printing, mailing and warehousing services to Sprint
PCS. Charges to Sprint PCS for these services totaled $25 million in 1998.
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, which was repaid in the 1999 first quarter.
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. Cost allocation methods other than time studies include
factors (general, marketing or headcount) derived from the operating unit's
relative share of the predefined category referenced (e.g. headcount). 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.
Allocated costs totaled approximately $590 million in 2000, $643 million in 1999
and $547 million in 1998. The percentage of these costs allocated to the PCS
Group were approximately 14% in 2000, 8% in 1999 and less than 1% in 1998 with
the balance remaining in the FON Group. The allocation of shared services may
change at the discretion of Sprint and does not require shareholder approval.
F-13
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 and totaled $235 million in
2000, $167 million in 1999 and $11 million in 1998.
The FON Group earned intergroup interest income and the PCS Group incurred
intergroup interest expense of $19 million in 2000, $20 million in 1999 and $16
million in 1998 primarily related to the FON Group's investment in PCS Group
debt securities. These amounts are included in "Other income, net" in the Sprint
FON Group Combined Statements of Operations and "Interest Expense" in the Sprint
PCS Group Combined Statements of Operations.
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.
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.
The tax sharing agreement applies to tax years ending on or before December 31,
2001. For periods after December 31, 2001, Sprint's board of directors will
adopt a tax sharing arrangement that will be designed to allocate tax benefits
and burdens fairly between the FON Group and the PCS Group.
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.
F-14
Revenue Recognition
Sprint recognizes operating revenues as services are rendered or as products are
delivered to customers. Service activation and certain installation fees are
deferred and amortized over the average life of the service. Sprint's directory
publishing business recognizes revenues for directory services over the life of
the related directory (amortization method).
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 $636 million at year-end 2000
and $204 million at year-end 1999. 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.
Repair and maintenance costs are expensed as incurred.
Capitalized Interest
Capitalized interest totaled $175 million in 2000, $151 million in 1999 and $167
million in 1998. Capitalized interest mainly 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.
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 $259 million at year-end 2000 and $210
million at year-end 1999.
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 $206 million at year-end 2000 and $130 million at year-end
1999.
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 is computed individually for
the FON Group and PCS Group. As a part of the Recapitalization, each Class A
common share owned by FT and DT was reclassified such that each share represents
a right to one share of FON common stock and 1/2 share of PCS common stock. In
order to give effect to this interest when determining earnings per share, the
number of equivalent shares are included in the calculation of the weighted
average FON and PCS common stock outstanding.
In the 2000 first quarter, Sprint effected a two-for-one stock split of its PCS
common stock. In the 1999 second quarter, Sprint effected a two-for-one split of
its FON common stock. As a result, basic and diluted earnings per common share
and weighted average common shares for Sprint FON common stock and Sprint PCS
common stock and dividends for Sprint FON common stock have been restated for
periods prior to these stock splits.
The FON Group's convertible preferred dividends totaled $1 million in 2000 and
1999 and dilutive
F-15
securities (mainly options) totaled 11.5 million shares in 2000 and 19.2 million
shares in 1999. 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 on loss per share because the PCS
Group incurred net losses for 2000, 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. Dilutive securities, such as options, included in the
calculation of diluted weighted average common shares totaled 7.8 million in
1998 through the Recapitalization.
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," and related interpretations to its stock option and
employee stock purchase plans.
--------------------------------------------------------------------------------
2. 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 10).
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 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:
--------------------------------------------------------------------------------
1999
--------------------------------------------------------------------------------
(millions)
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
============
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:
--------------------------------------------------------------------------------
1998
--------------------------------------------------------------------------------
(millions)
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
=================
Goodwill is being amortized on a straight-line basis over 40 years.
F-16
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 (1) the
markets for each product; (2) the completion costs for projects; (3) the
expected cash flows attributable to the IPR&D projects; (4) the risks related to
achieving these cash flows; and (5) 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 consolidated results of operations assume the
PCS Restructuring, Recapitalization, Top-up and the write-off of acquired IPR&D
costs occurred prior to 1998. 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 prior to 1998, nor do they
indicate the results of future operations. Pro forma results were as follows:
--------------------------------------------------------------------------------
1998
--------------------------------------------------------------------------------
(millions,
except per
share data)
Net operating revenues $ 17,144
=========
Loss from continuing operations $ (172)
=========
Net loss $ (343)
=========
Basic and diluted loss per PCS common share:
Loss before extraordinary item $ (2.21)
Extraordinary item (0.04)
--------------------------------------------------------------------------------
Total $ (2.25)
==========
--------------------------------------------------------------------------------
3. Investments
--------------------------------------------------------------------------------
Investments in Securities
The cost of investments in securities was $13 million at year-end 2000 and $154
million at year-end 1999. Gross unrealized holding gains were $53 million at
year-end 2000 and $310 million at year-end 1999.
The accumulated unrealized gains on investments in securities, net of income
taxes and the impact of the related debt instruments, were $33 million at
year-end 2000 and $84 million at year-end 1999 and are included in "Accumulated
other comprehensive income" in the Sprint Consolidated Balance Sheets.
In the 2000 fourth quarter, Sprint recorded a write-down of securities with a
cost basis of $48 million due to a decline in market value that was considered
other than temporary. The $48 million charge was included in "Other income
(expense), net" in Sprint's Consolidated Statements of Operations.
During 2000, Sprint used equity securities with a cost basis of $94 million to
retire debt instruments (see Note 10). Sprint recorded a $45 million gain
associated with the transaction which was included in "Other income (expense),
net" in Sprint's Consolidated Statements of Operations. At year-end 1999, the
fair value of these equity securities were classified as current assets.
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
(expense), net" in Sprint's Consolidated Statements of Operations.
Investments in and Advances to Affiliates
At year-end 2000, investments accounted for using the equity method consisted of
the FON Group's investments in Intelig, EarthLink and other strategic
investments and the PCS Group's investment in Pegaso Telecomunicaciones, S.A. de
C.V., a wireless PCS operation in Mexico. In February 2001, Sprint modified its
relationship with EarthLink which resulted in its investment being accounted for
as a cost method investment beginning that month (see Note 19).
In the 2000 fourth quarter, Sprint completed an analysis of the valuation of its
equity method investments in response to changes in the overall
telecommunications industry. The analysis resulted in an $87 million charge for
the write-down of an equity method investment which was included in "Other
income (expense), net" in Sprint's Consolidated Statements of Operations.
In November 1998, Sprint assumed 100% ownership of Sprint PCS; as a result,
Sprint consolidated Sprint PCS' results in 1998.
F-17
Combined, unaudited, summarized financial information (100% basis) of other
entities accounted for using the equity method was as follows:
--------------------------------------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------
(millions)
Results of operations
Net operating
revenues $ 2,195 $ 1,571 $ 1,242
==================================
Operating
income
(loss) $ (826) $ (192) $ 67
==================================
Net loss $ (1,062) $ (329) $ (145)
==================================
Financial position
Current
assets $ 1,470 $ 1,524 $ 1,038
Noncurrent
assets 2,900 $ 2,749 2,401
--------------------------------------------------------------------------------
Total $ 4,370 $ 4,273 $ 3,439
==================================
Current
liabilities $ 1,102 $ 599 $ 538
Noncurrent
liabilities 533 1,644 1,004
Owners'
equity 2,735 2,030 1,897
--------------------------------------------------------------------------------
Total $ 4,370 $ 4,273 $ 3,439
==================================
--------------------------------------------------------------------------------
4. Asset Write-down
--------------------------------------------------------------------------------
In the 2000 fourth quarter, Sprint completed its analysis of the valuation of
various FON Group assets resulting from its reassessment of the FON Group's
business strategies in response to recent changes within the overall
telecommunications industry. This analysis resulted in a $238 million pre-tax
charge, primarily related to the impairment of goodwill associated with the
global markets division's Paranet operations.
--------------------------------------------------------------------------------
5. Merger Termination
--------------------------------------------------------------------------------
On July 13, 2000, Sprint and WorldCom, Inc. announced that the boards of
directors of both companies terminated their merger agreement, previously
announced in October 1999, as a result of regulatory opposition to the merger.
In the 2000 second quarter, Sprint recognized a one-time, pre-tax charge of $187
million for costs associated with the merger.
F-18
--------------------------------------------------------------------------------
6. Discontinued Operation
--------------------------------------------------------------------------------
In the 2000 first quarter, Sprint sold its interest in Global One to France
Telecom and Deutsche Telekom AG. Sprint received $1.1 billion in cash and was
repaid $276 million for advances for its entire stake in Global One. As a result
of Sprint's sale of its interest in Global One, Sprint's gain on the sale and
equity share of the results of Global One have been reported as a discontinued
operation for all periods presented.
In 2000, Sprint recorded an after-tax gain related to the sale of its interest
in Global One of $675 million. Sprint recorded after-tax losses related to
Global One totaling $130 million in 1999 and $135 million in 1998.
--------------------------------------------------------------------------------
7. Cumulative Effect of Change in Accounting Principle
--------------------------------------------------------------------------------
Sprint implemented SEC Staff Accounting Bulletin No. 101, "Revenue Recognition
in Financial Statements," during the fourth quarter of 2000, effective as of the
beginning of the year. This bulletin requires activation and installation fee
revenues that do not represent a separate earnings process to be deferred and
recognized over the estimated service period. Associated incremental direct
costs may also be deferred, but only to the extent of revenues subject to
referral. The FON Group recorded a $2 million charge for the cumulative effect
of change in accounting principle in 2000. The effect of the change on the nine
months ended September 30, 2000 was to decrease revenues and expenses by $68
million.
--------------------------------------------------------------------------------
8. 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:
--------------------------------------------------------------------------------
2000 1999
--------------------------------------------------------------------------------
(millions)
Beginning balance $ 2,401 $ 2,579
Service cost 77 86
Interest cost 194 177
Amendments 8 7
Actuarial (gain) loss 90 (326)
Benefits paid (136) (122)
--------------------------------------------------------------------------------
Ending balance $ 2,634 $ 2,401
==========================
The following table shows the changes in plan assets:
--------------------------------------------------------------------------------
2000 1999
--------------------------------------------------------------------------------
(millions)
Beginning balance $ 3,669 $ 3,169
Actual return on plan assets (157) 622
Benefits paid (136) (122)
--------------------------------------------------------------------------------
Ending balance $ 3,376 $ 3,669
==========================
At year-end, the funded status and amounts recognized in the Consolidated
Balance Sheets for the plan were as follows:
--------------------------------------------------------------------------------
2000 1999
--------------------------------------------------------------------------------
(millions)
Plan assets in excess of
the projected benefit
obligation $ 742 $ 1,268
Unrecognized net gains (396) (1,016)
Unrecognized prior
service cost 96 100
Unamortized transition
asset (47) (72)
--------------------------------------------------------------------------------
Prepaid pension cost $ 395 $ 280
==========================
Discount rate 8.00% 8.25%
==========================
Expected blended rate of
future pay raises 4.50% 5.25%
==========================
F-19
The net pension credit consisted of the following:
--------------------------------------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------
(millions)
Service cost --
benefits earned
during the year $ 77 $ 86 $ 72
Interest on
projected
benefit obligation 194 177 165
Expected return on
plan assets (336) (300) (265)
Amortization of
unrecognized
transition asset (25) (25) (25)
Recognition of prior
service cost 12 12 11
Recognition of
actuarial gains (37) (8) (4)
--------------------------------------------------------------------------------
Net pension credit $ (115) $ (58) $ (46)
==================================
Discount rate 8.25% 7.00% 7.25%
==================================
Expected long-term
rate of return on
plan assets 10.00% 10.00% 10.00%
==================================
Expected blended
rate of future
pay raises 5.25% 4.00% 4.25%
==================================
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 $112 million in 2000, $83
million in 1999 and $54 million in 1998. At year-end 2000, the plans held 34
million FON shares and 31 million PCS shares.
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.
The following table shows the changes in the accumulated postretirement benefit
obligation:
--------------------------------------------------------------------------------
2000 1999
--------------------------------------------------------------------------------
(millions)
Beginning balance $ 876 $ 864
Service cost 17 21
Interest cost 71 59
Actuarial gains (2) (30)
Benefits paid (52) (38)
--------------------------------------------------------------------------------
Ending balance $ 910 $ 876
======================
Amounts included in the Consolidated Balance Sheets at year-end were as follows:
--------------------------------------------------------------------------------
2000 1999
--------------------------------------------------------------------------------
(millions)
Accumulated
postretirement benefit
obligation $ 910 $ 876
Unrecognized prior
service cost 74 53
Unrecognized net gains 75 120
--------------------------------------------------------------------------------
Accrued postretirement
benefits cost $ 1,059 $ 1,049
======================
Discount rate 8.00% 8.25%
======================
The assumed 2001 annual health care cost trend rates are 9.0% before Medicare
eligibility and 9.5% 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 2000 accumulated postretirement benefit obligation by an estimated
$161 million. A 1% decrease would have reduced the obligation by an estimated
$119 million.
F-20
The net postretirement benefits cost consisted of the following:
--------------------------------------------------------
2000 1999 1998
--------------------------------------------------------
(millions)
Service cost --
benefits earned
during the year $ 17 $ 21 $ 20
Interest on
accumulated
postretirement
benefit 71 59 58
obligation
Recognition of
prior service (9) (8) (6)
cost
Recognition of
actuarial gains (17) (17) (21)
--------------------------------------------------------
Net postretirement
benefits cost $ 62 $ 55 $ 51
====================================
Discount rate 8.25% 7.00% 7.25%
====================================
For measurement purposes, the assumed 2000 weighted average annual health care
cost trend rates were 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 2000 postretirement benefits
service and interest costs by an estimated $17 million. A 1% decrease would have
reduced the 2000 postretirement benefits service and interest costs by an
estimated $12 million.
--------------------------------------------------------------------------------
9. Income Taxes
--------------------------------------------------------------------------------
Income tax expense (benefit) allocated to continuing operations consists of the
following:
--------------------------------------------------------
2000 1999 1998
--------------------------------------------------------
(millions)
Current income tax
expense (benefit)
Federal $ 24 $ (34) $ 283
State 55 40 44
--------------------------------------------------------
Total current 79 6 327
--------------------------------------------------------
Deferred income tax
expense (benefit)
Federal (173) (309) 120
State (32) (24) 7
--------------------------------------------------------
Total deferred (205) (333) 127
--------------------------------------------------------
Total $ (126) $ (327) $ 454
===================================
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:
---------------------------------------------------------
2000 1999 1998
---------------------------------------------------------
(millions)
Income tax expense
(benefit) at the
federal statutory $ (246) $ (375) $ 364
rate
Effect of:
State income taxes,
net of federal
income tax effect 15 10 33
Equity in losses
of foreign joint
ventures 48 18 6
Write down of
equity method
investment 30 - -
Write-off of
in-process
research and
development costs - - 63
Goodwill
amortization 52 37 3
Other, net (25) (17) (15)
---------------------------------------------------------
Income tax expense
(benefit) $ (126) $ (327) $ 454
==================================
Effective income tax
rate 17.9% 30.5% 43.7%
==================================
Income tax expense (benefit) allocated to other items was as follows:
---------------------------------------------------------
2000 1999 1998
---------------------------------------------------------
(millions)
Discontinued operation $ 370 $ (111) $ (62)
Extraordinary items (3) (34) (23)
Unrealized holding
gains (losses) on
investments/(1)/ (29) (13) 8
Stock ownership,
purchase and
options
arrangements/(2)/ (424) (254) (49)
---------------------------------------------------------
/(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.
F-21
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 differences that give rise to
the deferred income tax assets and liabilities at year-end 2000 and 1999, along
with the income tax effect of each, were as follows:
---------------------------------------------------------
2000 Deferred Income Tax
------------------------------
Assets Liabilities
---------------------------------------------------------
(millions)
Property, plant and
equipment $ - $ 3,161
Intangibles - 386
Postretirement and other
benefits 428 -
Reserves and allowances 214 -
Unrealized holding gains
on investments - 19
Operating loss
carryforwards 2,011 -
Tax credit carryforwards 127 -
Other, net 162 -
---------------------------------------------------------
2,942 3,566
Less valuation allowance 598 -
---------------------------------------------------------
Total $ 2,344 $ 3,566
===========================
---------------------------------------------------------
1999 Deferred Income Tax
------------------------------
Assets Liabilities
------------------------------
(millions)
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 1,203 -
Tax credit carryforwards 75 -
Other, net 177 -
---------------------------------------------------------
2,026 2,973
Less valuation allowance 480 -
---------------------------------------------------------
Total $ 1,546 $ 2,973
===========================
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 $118
million in 2000 and $231 million in 1999.
In 1999, Sprint acquired approximately $193 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 2000, Sprint had federal operating loss carryforwards of
approximately $4.7 billion and state operating loss carryforwards of
approximately $8.1 billion. Related to these loss carryforwards are federal tax
benefits of $1.6 billion and state tax benefits of $575 million. In addition,
Sprint had available for income tax purposes federal alternative minimum tax
credit carryforwards of $33 million, state alternative minimum tax credit
carryforwards of $5 million, federal alternative minimum tax net operating loss
carryforwards of $2.2 billion and state alternative minimum tax net operating
loss carryforwards of $682 million. The loss carryforwards expire in varying
amounts through 2020.
F-22
--------------------------------------------------------------------------------
10. Long-term Debt and Capital Lease Obligations
--------------------------------------------------------------------------------
Sprint's consolidated long-term debt and capital lease obligations at year-end
was as follows:
--------------------------------------------------------------------------------------------------------------------
2000 1999
------------------------------------ ------------------------------------
Sprint Sprint Sprint Sprint
FON PCS FON PCS
Maturing Group Group Consolidated Group Group Consolidated
--------------------------------------------------------------------------------------------------------------------
(millions)
Senior notes
5.7% to 7.6%/(1)/ 2001 to 2028 $ 1,105 $ 9,395 $ 10,500 $ 1,105 $ 8,145 $ 9,250
8.1% to 9.8% 2000 to 2003 382 - 382 632 - 632
11.0% to 12.5%/(2)/ 2001 to 2006 - 776 607 - 734 584
Debentures and notes
5.8% to 9.6% 2000 to 2022 500 - 500 565 - 565
Notes payable and
commercial paper - 157 3,797 3,954 294 1,971 2,265
First mortgage bonds
5.9% to 9.9% 2000 to 2025 1,085 - 1,085 1,295 - 1,295
Capital lease obligations
5.2% to 14.0% 2000 to 2008 61 408 469 69 486 555
Revolving credit
facilities Variable rates 2002 900 - 900 900 - 900
Other
2.0% to 10.0% 2000 to 2006 318 4 322 573 153 726
--------------------------------------------------------------------------------------------------------------------
4,508 14,380 18,719 5,433 11,489 16,772
Less: current maturities/(2)/ 1,026 244 1,205 902 185 1,087
--------------------------------------------------------------------------------------------------------------------
Long-term debt and
capital lease
obligations/(2)/ $ 3,482 $ 14,136 $ 17,514 $ 4,531 $ 11,304 $ 15,685
============================================================================
/(1)/ These borrowings were incurred by Sprint and allocated to the applicable
group. Sprint's weighted average interest rate related to these borrowings
was 6.7% at year-end 2000 and 6.6% at year-end 1999. The weighted average
interest rate related to the borrowings allocated to the PCS Group was
approximately 8.8% at year-end 2000 and 8.7% at year-end 1999. See Note 1
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 $169 million
at year-end 2000, including $65 million classified as current, and $150
million at year-end 1999.
F-23
Scheduled principal payments, excluding reclassified short-term borrowings,
during each of the next five years are as follows:
------------------------------------------------------
Sprint Sprint
FON PCS
Group Group Sprint
------------------------------------------------------
(millions)
2001/(1)/ $ 1,026 $ 258 $ 1,214
2002 1,339 1,309 2,648
2003 372 1,060 1,432
2004 144 1,062 1,206
2005 122 61 183
------------------------------------------------------
/(1)/ The 2001 scheduled principal payments do not equal current maturities as
these amounts reflect the maturity value of the scheduled payment on the
PCS Group's Senior Discount notes.
Included in the above schedule are payments on PCS Group debt that are to be
made in Japanese yen. The yen needed to satisfy the obligations is currently
held on deposit by the PCS Group and included in "Other assets" on the PCS
Group's Combined Balance Sheets. The scheduled yen payments included in the
above schedule are $1 million in 2003, $20 million in 2004 and $43 million in
2005.
Sprint
Short-term Borrowings
Sprint had bank notes payable totaling $676 million at year-end 2000 and $670
million at year-end 1999. In addition, Sprint had commercial paper borrowings
totaling $3.3 billion at year-end 2000 and $1.6 billion at year-end 1999. 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 to refinance
these borrowings on a long-term basis through unused credit facilities and
unissued debt under Sprint's shelf registration.
Sprint currently has revolving credit facilities with syndicates of domestic and
international banks totaling $5 billion; $3 billion of which is a 364 day
facility, renewed in August 2000, expiring in 2001, and $2 billion is a 5 year
facility expiring in 2003. Commercial paper and certain bank notes 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 2000,
Sprint had total unused lines of credit of $1.8 billion.
Bank notes outstanding had weighted average interest rates of 7.1% at year-end
2000 and 6.3% at year-end 1999. The weighted average interest rate of commercial
paper was 7.5% at year-end 2000 and 6.4% at year-end 1999.
Long-term Debt
In June 2000, Sprint issued $1.25 billion of debt securities under its $4
billion shelf registration statement with the SEC. These borrowings mature in
2002 and have interest rates ranging from 6.9% to 7.6%. At year-end 2000, Sprint
had issued a total of $2 billion of debt securities under the shelf. In January
2001, Sprint issued securities using the remaining amount of the shelf (see Note
19).
In June 1999, Sprint entered into a $1 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 2000, Sprint had borrowed $900 million with a weighted average interest
rate of 6.9% under this agreement. These borrowings mature in 2002.
Sprint FON Group
In 2000, the FON Group received an allocation of $344 million of debt from
Sprint. This debt was mainly used to repay existing debt and to fund new capital
investments. See Note 1 for a more detailed description of how Sprint allocates
debt to the groups.
In the 2000 fourth quarter, Sprint redeemed, prior to scheduled maturities, $25
million of FON Group debt with a weighted average interest rate of 9.6%. This
resulted in a $1 million after-tax extraordinary loss for the FON Group.
In the 2000 first quarter, Sprint exchanged 6.6 million common shares of SBC
Communications, Inc. for certain notes payable of the FON Group. The notes had a
market value of $275 million on the maturity date and $316 million at year-end
1999. The notes had an interest rate of 8.3%.
In the 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
F-24
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 $16.1 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 2000, Sprint allocated $3.3 billion of debt to the PCS Group. This debt was
mainly used to fund new capital investments and to repay existing debt.
In the 2000 first quarter, Sprint repaid, prior to scheduled maturities, $127
million of the PCS Group's notes payable to the FCC. These notes had an interest
rate of 7.8%. This resulted in a $3 million after-tax extraordinary loss.
In 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.
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
2000.
--------------------------------------------------------------------------------
11. Redeemable Preferred Stock
--------------------------------------------------------------------------------
The redeemable preferred stock outstanding, at year-end, is as follows:
2000 1999
----------------------------------------------------------------------------------------------------------------------
(millions, except per share
and share data)
Seventh series preferred stock - Stated value $1,000 per share, 246,766 shares,
voting, cumulative $6.73 quarterly dividend rate $ 246 $ 246
Fifth series preferred stock - stated value $100,000 per share, shares - 95,
voting, cumulative 6% annual dividend rate 10 10
----------------------------------------------------------------------------------------------------------------------
$ 256 $ 256
============================
Seventh Series 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. Shares of
Seventh series preferred stock are generally not redeemable before the third
anniversary of the PCS Restructuring. If not converted by the holder or earlier
redeemed by Sprint, the Seventh series preferred stock will become mandatorily
redeemable on the tenth anniversary of the PCS Restructuring.
Fifth Series Preferred Stock
Sprint's Fifth series preferred stock must be redeemed in full in 2003. If less
than full dividends have been paid for four consecutive dividend periods, or if
dividends in arrears exceed an amount equal to the dividends for six dividend
periods, the Fifth series preferred shareholders may elect a majority of
directors standing for election until all dividends in arrears have been paid.
F-25
--------------------------------------------------------------------------------
12. 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 Sprint 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.
All share, earnings per share and dividends per share amounts have been restated
to reflect the stock splits.
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. Shares issued at year-end 2000 were 710.2 million
and 507.4 million, respectively. Shares outstanding at year-end 2000
were 709.8 million and 507.4 million, respectively.
. 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. PCS shares issued and
outstanding at year-end 2000 were 355.4 million. No FON shares have
been issued.
. Series 3 FON stock and Series 3 PCS stock
-----------------------------------------
To maintain their voting power, 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
could 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. Shares issued and outstanding at year-end 2000 were 88.6 million
and 70.3 million, respectively.
At year-end 1999, Sprint had 22 thousand PCS treasury shares, which were
recorded at cost. The PCS shares were held by the FON Group and represented an
intergroup interest in the PCS Group which was 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 19% of Sprint's voting power at year
end 2000. Sprint declared and paid Class A common dividends of 50 cents per
share in 2000, 62.5 cents per share in 1999 and $1.00 per share in 1998.
In February 1999, FT and DT purchased an aggregate of 12.2 million Series 3 PCS
shares for $169 million in conjunction with the registered public offering of
48.8 million shares of Series 1 PCS stock .
During 1999, FT and DT purchased an aggregate of 1.2 million shares of Series 3
FON shares and 1.6 million additional Series 3 PCS shares for $100 million to
maintain their voting power.
Additionally, during 1999, FT and DT bought Series 1 FON and Series 1 PCS shares
on the open market to maintain their voting power. These shares converted into
Series 3 FON and Series 3 PCS shares. FT and DT did not purchase any FON or PCS
shares from Sprint or on the open market during 2000.
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 voting power in Sprint
by purchasing an additional 10.2 million Series 3 PCS shares for $85 million.
FT and DT may purchase additional shares of FON stock and PCS stock from Sprint
to maintain their current ownership level. 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
F-26
standstill agreement also contains customary provisions restricting FT and DT
from initiating or participating in any proposal with respect to the control of
Sprint. In February 2001, a registration statement covering the FON shares FT
and DT own was filed with the SEC for public sale (see Note 19).
Common Stock Reserved for Future Grants
At year-end 2000, common stock reserved for future grants under stock option
plans or for future issuances under various other arrangements was as follows:
Sprint FON Group
--------------------------------------------------------
Shares
--------------------------------------------------------
(millions)
Employees Stock Purchase Plan 10.5
Employee savings plans 5.4
Automatic Dividend Reinvestment Plan 2.3
Officer and key employees' and directors'
stock options 22.1
Other 1.4
--------------------------------------------------------
41.7
=============
Sprint PCS Group
--------------------------------------------------------
Shares
--------------------------------------------------------
(millions)
Employees Stock Purchase Plan 3.7
Employee savings plans 2.3
Officer and key employees' and directors'
stock options 19.8
Warrants issued to Cable Partners 24.9
Conversion of preferred stock and other 18.5
--------------------------------------------------------
69.2
=============
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:
. 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 2000 or 1999.
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, $545 million of those subsidiaries' $1.6 billion
total retained earnings was restricted at year-end 2000. The flow of cash in the
form of advances from the subsidiaries to Sprint is generally not restricted.
--------------------------------------------------------------------------------
13. Stock-based Compensation
--------------------------------------------------------------------------------
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 Employee Stock
Purchase Plan (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.
During 2000, the FON Group paid $80 million to the PCS Group to compensate for
the net amount of PCS stock-based compensation granted to FON Group employees
and FON stock-based compensation granted to PCS Group employees. The value paid
for stock-based compensation is determined at the time of the grants.
During 2000, options outstanding for more than one year at the date of
shareholder approval of Sprint's proposed merger with WorldCom became fully
vested as of that date.
During 2000, the Sprint Board of Directors approved an Exchange Program to give
Sprint employees a choice to cancel stock options granted to them in
F-27
2000 in exchange for an equal number of new options in the future. The new
options will be granted on May 11, 2001, and the exercise price will be the
market price on that date. No members of Sprint's Board of Directors were
eligible for the Exchange Program. Options cancelled on November 10, 2000 under
the terms of the Exchange Program were 16.2 million FON options and 13.1 million
PCS options.
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 2000, authorized FON shares under this plan approximated 27.4 million
and authorized PCS shares approximated 16.8 million. The authorized number of
shares was increased by approximately 7.2 million FON shares and 7.8 million PCS
shares on January 1, 2001.
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 2000,
authorized FON shares under this plan approximated 54.8 million and authorized
PCS shares approximated 42.6 million.
In 2000, Sprint granted special stock options (Retention) to executives who
agreed to defer the benefit of the accelerated vesting of stock options until
the close or cancellation of the proposed WorldCom merger. These options were
designed to retain these executives following Sprint's special meeting of
shareholders in connection with the proposed WorldCom merger. In addition,
Sprint granted a portion of the annual options grants (Accelerated) normally
expected to be made in early 2001 to officers and key employees. The granting of
these options was accelerated to help retain employees.
In 1997, Sprint granted performance-based stock options to certain key
executives. The FON Group expensed $5 million in 2000, $9 million in 1999 and
$14 million in 1998 and the PCS Group expensed $3 million in 2000, $5 million in
1999 and $1 million in 1998 related to these performance-based stock options.
The 2000 amount reflects expense through the date of the shareholder approval of
the proposed WorldCom merger. At that time, all of these options became vested.
An additional $29 million of expense related to these options was included in
"Asset write-down and merger related costs" in Sprint's Consolidated Statements
of Operations.
Employees Stock Purchase Plan
Under Sprint's ESPP, employees may elect to purchase FON common stock or PCS
common stock at a price equal to 85% of the market value on the grant or
exercise date, whichever is less. At year-end 2000, authorized FON shares under
this plan approximated 12.1 million and authorized PCS shares approximated 7.6
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 vested 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 became exercisable, based
on the vesting requirements of the converted units. At the end of 2000, all
replacement options and shares were fully vested.
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. 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.
F-28
Sprints pro forma net loss was $467 million for 2000 and $1,144 million for
1999. From the Recapitalization date through year-end 1998, Sprint's pro forma
net loss was $453 million.
Prior to the Recapitalization date, Sprint's pro forma net income was $785
million in 1998 and pro forma diluted earnings per share was $1.79 in 1998.
The FON Group's pro forma net income was $1,668 million for 2000 and $1,434
million for 1999 and pro forma diluted EPS was $1.88 for 2000 and $1.63 for
1999. 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 2000 and 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.
The PCS Group's pro forma net loss was $2,135 million in 2000 and $2,578 million
in 1999 and pro forma diluted loss per share was $2.22 in 2000 and $2.82 in
1999. 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.
Fair Value Disclosures
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
------------------------------------------------------
2000 MISOP SOP
------------------------------------------------------
Fair value on grant date $ 24.24 $ 23.86
Risk-free interest rate 6.8% 6.1%
Expected volatility 26.7% 26.6%
Expected dividend yield 0.8% 0.8%
Expected life (years) 6 6
------------------------------------------------------
2000 Accelerated Retention
------------------------------------------------------
Fair value on grant date $ 13.77 $ 22.92
Risk-free interest rate 6.1% 6.6%
Expected volatility 33.2% 26.7%
Expected dividend yield 1.4% 0.8%
Expected life (years) 6 6
------------------------------------------------------
1999 MISOP SOP
------------------------------------------------------
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
PCS Common Stock
------------------------------------------------------
2000 MISOP SOP
------------------------------------------------------
Fair value on grant date $ 33.06 $ 33.93
Risk-free interest rate 6.8% 6.1%
Expected volatility 63.2% 67.7%
Expected dividend yield - -
Expected life (years) 6 6
F-29
------------------------------------------------------
2000 Accelerated Retention
------------------------------------------------------
Fair value on grant date $ 35.30 $ 34.83
Risk-free interest rate 6.1% 6.6%
Expected volatility 63.8% 63.2%
Expected dividend yield - -
Expected life (years) 6 6
------------------------------------------------------
1999 MISOP SOP
------------------------------------------------------
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
------------------------------------------------------
1998 SOP
------------------------------------------------------
Fair value on grant date $ 5.44
Risk-free interest rate 4.4%
Expected volatility 75.0%
Expected dividend yield -
Expected life (years) 6
Sprint Common Stock
------------------------------------------------------
1998 MISOP SOP
------------------------------------------------------
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
Employees Stock Purchase Plan
During 2000, FON Group and PCS Group employees elected to purchase 2.3 million
FON and 5.4 million PCS ESPP shares. Using the Black-Scholes pricing model, the
weighted average fair value was $12.99 per share for each FON election and
$20.68 per share for each PCS election.
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 was $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.
Stock Options
Stock option plan activity was as follows:
FON Common Stock
---------------------------------------------------------
Weighted
Average
Sprint per Share
FON Exercise
Shares Price
---------------------------------------------------------
(millions)
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
Granted 24.3 58.61
Exercised (11.5) 26.32
Forfeited/Expired (20.0) 58.48
---------
Outstanding, year-end 2000 44.8 $ 33.12
==========================
PCS Common Stock
---------------------------------------------------------
Weighted
Average
Sprint per Share
PCS Exercise
Shares Price
---------------------------------------------------------
(millions)
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
Granted 19.1 52.68
Exercised (16.2) 10.84
Forfeited/Expired (15.8) 52.08
---------
Outstanding, year-end 2000 26.9 $ 17.43
===========================
Sprint Common Stock
---------------------------------------------------------
Weighted
Average
per Share
Sprint Exercise
Shares Price
---------------------------------------------------------
(millions)
Outstanding, beginning
of 1998 18.7 $ 37.85
Granted 9.1 59.73
Exercised (3.4) 33.54
Forfeited/
Expired (0.6) 47.28
-----------
F-30
Converted in
November 1998 23.8 $ 46.60
===============================
The following tables summarize outstanding and exercisable options at year-end
2000:
FON Common Stock
---------------------------------------------------------
Options Outstanding
----------------------------------------
Weighted
Average Weighted
Remaining Average
Range of Number Contractual Exercise
Exercise Prices Outstanding Life Price
---------------------------------------------------------
(millions) (years)
$ 5.00 -$ 9.99 0.2 0.5 $ 8.67
10.00 - 19.99 8.1 5.2 16.62
20.00 - 29.99 14.4 6.8 24.73
30.00 - 39.99 14.8 8.0 38.51
40.00 - 49.99 2.3 5.9 44.64
50.00 - 59.99 0.7 5.5 53.63
60.00 - 69.99 3.9 7.9 64.71
70.00 - 79.99 0.4 5.6 74.02
---------------------------------------------------------
---------------------------------------------------------
Options Exercisable
---------------------------
Weighted
Average
Range of Number Exercise
Exercise Prices Exercisable Price
---------------------------------------------------------
(millions)
$ 5.00 -$ 9.99 0.2 $ 8.67
10.00 - 19.99 8.1 16.62
20.00 - 29.99 14.3 24.71
30.00 - 39.99 13.9 38.63
40.00 - 49.99 1.4 45.60
50.00 - 59.99 0.4 52.08
60.00 - 69.99 1.5 64.73
70.00 - 79.99 0.4 74.02
---------------------------------------------------------
PCS Common Stock
---------------------------------------------------------
Options Outstanding
----------------------------------------
Weighted
Average Weighted
Remaining Average
Range of Number Contractual Exercise
Exercise Prices Outstanding Life Price
---------------------------------------------------------
(millions) (years)
$ 2.00 -$ 9.99 11.5 6.2 $ 5.26
10.00 - 19.99 10.6 8.0 15.60
20.00 - 29.99 0.3 5.8 26.59
30.00 - 39.99 0.3 6.4 33.16
40.00 - 49.99 0.4 6.3 46.44
50.00 - 59.99 3.4 8.4 53.07
60.00 - 69.99 0.4 7.3 62.82
---------------------------------------------------------
---------------------------------------------------------
Options Exercisable
---------------------------
Weighted
Average
Range of Number Exercise
Exercise Prices Exercisable Price
---------------------------------------------------------
(millions)
$ 2.00 - $ 9.99 11.5 $ 5.26
10.00 - 19.99 10.6 15.60
20.00 - 29.99 0.2 27.10
30.00 - 39.99 0.2 32.78
40.00 - 49.99 0.2 45.88
50.00 - 59.99 1.4 52.32
---------------------------------------------------------
--------------------------------------------------------------------------------
14. Commitments and Contingencies
--------------------------------------------------------------------------------
Litigation, Claims and Assessments
In December 2000, Amalgamated Bank, an institutional shareholder, filed a
derivative action purportedly on behalf of Sprint against certain of its current
and former officers and directors in the Jackson County, Missouri, Circuit
Court. The complaint alleges that the individual defendants breached their
fiduciary duties to Sprint and were unjustly enriched by making undisclosed
amendments to Sprint's stock option plans, by failing to disclose certain
information concerning regulatory approval of the proposed merger of Sprint and
WorldCom, and by overstating Sprint's earnings for the first quarter of 2000.
The plaintiff seeks damages, to be paid to Sprint, in an unspecified amount. Two
additional, substantially identical, derivative actions by other shareholders
have been filed.
Various other suits arising in the ordinary course of business are pending
against Sprint. Management cannot predict the final outcome of these actions but
believes they will not be material to Sprint's consolidated financial
statements.
Commitments
The PCS Group has purchase commitments with various vendors to purchase handsets
and other equipment through 2001. Outstanding commitments at year-end 2000 were
approximately $830 million. Purchases under these commitments during 2000
totaled approximately $2 million.
F-31
Operating Leases
Sprint's minimum rental commitments at year-end 2000 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:
------------------------------------------------------
(millions)
2001 $ 577
2002 409
2003 283
2004 194
2005 119
Thereafter 364
------------------------------------------------------
Sprint's gross rental expense totaled $1.0 billion in 2000, $890 million in 1999
and $730 million in 1998. 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.
--------------------------------------------------------------------------------
15. 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 2000 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 2000 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:
---------------------------------------------------------
2000
------------------------------
Carrying Estimated
Amount Fair Value
---------------------------------------------------------
(millions)
Cash and equivalents $ 239 $ 239
Investments in securities 66 66
Long-term debt and
capital lease obligations 18,719 17,823
Redeemable preferred
stock 256 385
---------------------------------------------------------
F-32
---------------------------------------------------------
1999
------------------------------
Carrying Estimated
Amount Fair Value
---------------------------------------------------------
(millions)
Cash and equivalents $ 120 $ 120
Investments in securities 464 464
Long-term debt and
capital lease obligations 16,772 16,126
Redeemable preferred
stock 256 374
---------------------------------------------------------
The carrying amounts of Sprint's cash and equivalents approximate fair value at
year-end 2000 and 1999. 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 either the Black-Scholes
pricing model or 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 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 $1.0
billion outstanding at year-end 2000 and $598 million outstanding at year-end
1999. Net interest expense related to interest rate swap agreements was $2
million in 2000, $1 million in 1999 and $0.1 million in 1998.
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 2000, the
remaining unamortized deferred loss totaled $61 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 $23 million at year-end 2000 and $14 million at year-end
1999. Sprint had outstanding open purchase option contracts to call various
foreign currencies of $1 million at year-end 1999. There were no such contracts
open at year-end 2000. 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
2000 and 1999 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. Including hedge costs, a net gain of $0.4 million was recorded
in 2000, a net loss of $0.3 million was recorded in 1999, and a net loss of $0.6
million was recorded in 1998.
F-33
--------------------------------------------------------------------------------
16. Additional Financial Information
--------------------------------------------------------------------------------
Segment Information
Sprint's business is divided into four lines of business: the global markets
division, the local division, the product distribution and directory publishing
businesses and the PCS wireless telephony products and services business, also
known as the PCS Group.
Sprint manages its segments to the operating income (loss) level of reporting.
Items below that level are held at a corporate level and only attributed to the
group level. That reconciliation is shown on the face of the Consolidated
Statements of Operations in the consolidation information.
Sprint generally accounts for transactions between segments based on fully
distributed costs, which Sprint believes approximates fair value.
Beginning in 2000, Sprint aligned financial reporting with changes in how
management operates and assesses performance. Using several factors, Sprint
combined its long distance operation, Sprint ION, broadband fixed wireless
services and certain other ventures into one division, global markets. The
global markets division now includes four major revenue streams: voice, data,
Internet and other. Additionally, Sprint shifted the recognition of consumer
long distance revenues and expenses associated with customers in its local
franchise territories from the global markets division to the local division.
The product distribution and directory publishing business segment is an
aggregation of product and service lines that are provided to similar customers.
The PCS Group is managed based on the products and services it provides to the
market.
Prior periods have been restated to reflect these changes.
Segment financial information was as follows:
---------------------------------------------------------------------------------------------------------------------------
Product
Global Distribution & Corporate
Markets Directory PCS and
Division Local Division Publishing Group Eliminations/(1)/ Consolidated
---------------------------------------------------------------------------------------------------------------------------
(millions)
2000
Net operating revenues $ 10,528 $ 6,155 $ 1,936 $ 6,341 $ (1,347) $ 23,613
Affiliated revenues 424 194 694 35 (1,347) -
Depreciation and
amortization 1,121 1,139 16 1,877 (9) 4,144
Operating expenses 9,943 4,392 1,652 8,269 (1,148) 23,108
Operating income (loss) 585 1,763 284 (1,928) (199) 505
Operating margin 5.6% 28.6% 14.7% NM - 2.1%
Equity in earnings (losses)
of affiliates (200) 9 10 (55) - (236)
Capital expenditures 2,294 1,371 8 3,047 432 7,152
Total assets 12,042 9,219 845 19,763 732 42,601
1999
Net operating revenues $ 10,308 $ 5,958 $ 1,758 $ 3,373 $ (1,132) $ 20,265
Affiliated revenues 290 197 641 4 (1,132) -
Depreciation and
amortization 1,045 1,069 17 1,523 (2) 3,652
Operating expenses 9,133 4,405 1,516 6,610 (1,092) 20,572
Operating income (loss) 1,175 1,553 242 (3,237) (40) (307)
Operating margin 11.4% 26.1% 13.8% NM - NM
Equity in earnings (losses) of
affiliates (97) 7 17 - - (73)
Capital expenditures 1,774 1,354 36 2,580 370 6,114
Total assets 10,661 8,641 651 17,924 1,373 39,250
1998
Net operating revenues $ 9,541 $ 5,599 $ 1,709 $ 1,294 $ (999) $ 17,144
Affiliated revenues 146 142 711 - (999) -
Depreciation and
amortization 928 984 13 789 (4) 2,710
Operating expenses 8,351 4,198 1,478 3,864 (937) 16,954
Operating income (loss) 1,190 1,401 231 (2,570) (62) 190
Operating margin 12.5% 25.0% 13.5% NM - 1.1%
Other partners' loss in
Sprint PCS - - - 1,251 - 1,251
Equity in earnings (losses) of
affiliates (67) 10 16 - - (41)
Capital expenditures 1,518 1,374 9 1,072 258 4,231
Total assets 8,008 8,176 612 15,165 1,296 33,257
NM = Not meaningful
/(1)/ Revenues eliminated in consolidation consist primarily of local access
charged to the global markets division, equipment purchases from the
product distribution business, interexchange services provided to the
local division, long distance services provided to the PCS Group for
resale to PCS customers and for internal business use, caller ID services
provided by the local division and access to the PCS network. In 2000,
corporate operating loss includes a $163 million charge for the FON Group
costs associated with the terminated WorldCom merger. The PCS Group
operating expenses include a $24 million charge for merger termination
costs. Corporate capital expenditures were incurred mainly for Sprint's
World Headquarters Campus.
More than 95% of Sprint's revenues are from domestic customers located within
the United States.
Equipment sales to one retail chain and the subsequent service revenues
generated by sales to its customers represent approximately 25% of the PCS
Group's net operating revenues in 2000, 28% in 1999 and 25% in 1998.
F-34
Net operating revenues by product and services were as follows:
----------------------------------------------------------------------------------------------------------------------
Product
Global Distribution &
Markets Directory
Division Local Division Publishing PCS Group Eliminations Consolidated
----------------------------------------------------------------------------------------------------------------------
(millions)
2000
Voice $ 7,094 $ - $ - $ - $ (424) $ 6,670
Data 1,937 - - - - 1,937
Internet 920 - - - - 920
Local service - 2,846 - - (2) 2,844
Network access - 1,987 - - (138) 1,849
Toll service - 717 - - - 717
Product distribution - - 1,468 - (694) 774
Directory publishing - - 468 - - 468
Wireless services - - - 6,341 (35) 6,306
Other 577 605 - - (54) 1,128
----------------------------------------------------------------------------------------
Total net operating revenues $ 10,528 $ 6,155 $ 1,936 $ 6,341 $ (1,347) $ 23,613
----------------------------------------------------------------------------------------
1999
Voice $ 7,445 $ - $ - $ - $ (290) $ 7,155
Data 1,696 - - - - 1,696
Internet 615 - - - - 615
Local service - 2,677 - - (2) 2,675
Network access - 1,918 - - (132) 1,786
Toll service - 611 - - - 611
Product distribution - - 1,350 - (641) 709
Directory publishing - - 408 - - 408
Wireless services - - - 3,373 (4) 3,369
Other 552 752 - - (63) 1,241
----------------------------------------------------------------------------------------
Total net operating revenues $ 10,308 $ 5,958 $ 1,758 $ 3,373 $ (1,132) $ 20,265
----------------------------------------------------------------------------------------
1998
Voice $ 7,079 $ - $ - $ - $ (146) $ 6,933
Data 1,396 - - - - 1,396
Internet 434 - - - - 434
Local service - 2,469 - - (1) 2,468
Network access - 1,894 - - (127) 1,767
Toll service - 503 - - - 503
Product distribution - - 1,315 - (711) 604
Directory publishing - - 394 - - 394
Wireless services - - - 1,294 - 1,294
Other 632 733 - - (14) 1,351
----------------------------------------------------------------------------------------
Total net operating revenues $ 9,541 $ 5,599 $ 1,709 $ 1,294 $ (999) $ 17,144
----------------------------------------------------------------------------------------
F-35
Supplemental Cash Flows Information
Sprint's cash paid (received) for interest and income taxes was as follows:
-------------------------------------------------------
2000 1999 1998
-------------------------------------------------------
(millions)
Interest (net of
capitalized
interest) $ 1,022 $ 714 $ 217
================================
Income taxes $ (386) $ (131) $ 307
================================
Sprint's noncash activities included the following:
-------------------------------------------------------
2000 1999 1998
-------------------------------------------------------
(millions)
Tax benefit from
stock options
exercised $ 424 $ 254 $ 49
================================
Stock received
for stock options
exercised $ 69 $ 118 $ 18
================================
Noncash
extinguish-
ment of debt $ 275 $ 78 $ -
================================
Common stock
issued under
Sprint's
employee
benefit stock
plans $ 255 $ 144 $ 99
================================
Capital lease
obligations $ - $ 77 $ 460
================================
Common stock
issued for
Cox PCS
acquisition $ - $ 1,146 $ -
================================
Debt assumed in
the broadband
fixed wireless
acquisitions $ - $ 575 $ -
================================
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
================================
See Note 2 for more details about the assets and liabilities acquired in
business combinations.
Related Party Transactions
The Cable Partners advanced PhillieCo $26 million in 1998. This advance was
repaid in the 1999 first quarter.
--------------------------------------------------------------------------------
17. Recently Issued Accounting Pronouncements
--------------------------------------------------------------------------------
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 is used
and whether it qualifies for hedge accounting. When this statement was adopted
in January 2001, it had no material impact on Sprint's consolidated financial
statements.
In September 2000, the Financial Accounting Standards Board issued SFAS No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities--a replacement of FASB Statement No. 125." This statement revises
the standards for accounting for securitizations and other transfers of
financial assets and provides consistent standards for distinguishing transfers
from sales and secured borrowings. This statement is effective for transactions
occurring after March 31, 2001 and is not expected to have a material impact on
Sprint's consolidated financial statements.
F-36
--------------------------------------------------------------------------------
18. Quarterly Financial Data (Unaudited)
--------------------------------------------------------------------------------
Quarter
---------------------------------------------------------
2000 1/st/ 2/nd/ 3/rd/ 4/th(1)/
----------------------------------------------------------------------------------------------------------------
(millions, except per share data)
Net operating revenues/(2),(3)/ $ 5,529 $ 5,821 $ 6,040 $ 6,223
Operating income (loss) 156 122 357 (130)
Loss from continuing operations (65) (91) (6) (414)
Net income (loss)/(3)/ 605 (91) (6) (415)
Earnings (Loss) per common share from
continuing operations
FON common stock
Diluted 0.50 0.41 0.43 0.11
Basic 0.51 0.42 0.44 0.11
PCS common stock
Diluted and Basic (0.54) (0.48) (0.41) (0.53)
----------------------------------------------------------------------------------------------------------------
Quarter
---------------------------------------------------------
1999 1/st/ 2/nd/ 3/rd/ 4/th/
----------------------------------------------------------------------------------------------------------------
(millions, except per share data)
Net operating revenues/(2)/ $ 4,735 $ 4,982 $ 5,158 $ 5,390
Operating income (loss) (90) 28 (64) (181)
Loss from continuing operations (171) (103) (196) (275)
Net loss (220) (169) (256) (290)
Earnings (Loss) per common share from
continuing operations/(4),(5)/
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)
----------------------------------------------------------------------------------------------------------------
/(1)/ See Notes 3 and 4 of Notes to Consolidated Financial Statements for
information about nonrecurring charges recorded in the 2000 fourth
quarter.
/(2)/ Certain reclassifications were made between net operating revenues and
operating expenses from amounts reported in the 2000 reports on Form 10-Q
to conform to industry events or practices. These reclassifications had
no impact on operating income (loss) as previously reported.
/(3)/ In the 2000 first quarter, Sprint adopted SEC Staff Accounting Bulletin
No. 101, "Revenue Recognition in Financial Statements," (SAB 101). As
required by SAB 101, 2000 net operating revenues have been restated from
amounts reported in the 2000 quarterly reports on Form 10-Q. Net
operating revenues were reduced by $4 million in the 2000 first quarter,
$31 million in the 2000 second quarter and $33 million in the 2000 third
quarter. Sprint also restated the 2000 first quarter net income by
recording a $2 million loss for the cumulative effect of change in
accounting principle at the effective adoption date of SAB 101.
/(4)/ 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.
/(5)/ In the 2000 first quarter, 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-37
--------------------------------------------------------------------------------
19. Subsequent Events (Unaudited)
--------------------------------------------------------------------------------
In January 2001, Sprint issued $2.4 billion of debt securities. Sprint had $2
billion of unissued securities under its existing shelf registration statement
with the SEC, and registered an additional $400 million prior to the issuance.
These borrowings have interest rates ranging from 7.1% to 7.6% and have
scheduled maturities in 2006 and 2011. The proceeds were allocated to the PCS
Group and used mainly to repay existing debt.
In February 2001, Sprint agreed to end its exclusive alliance with EarthLink and
relinquished its seats on EarthLink's Board of Directors. As a result of these
changes, Sprint will now treat its investment in EarthLink as a cost method
investment.
In February 2001, Sprint filed a registration statement with the SEC for a
secondary offering of 174.8 million shares of FON stock (including 22.8 million
shares to cover over-allotments) owned by FT and DT, including the FON stock
underlying the Class A common stock. Sprint will not receive any of the proceeds
from the sale of this stock.
In February 2001, 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, 2001.
F-38
SPRINT CORPORATION
SCHEDULE II--CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2000, 1999 and 1998
Additions (Deductions)
-------------------------------------------
Balance Charged to Balance
Beginning PCS Charged to Other Other End of
of Year Restructuring Income Accounts Deductions Year
----------------------------------------------------------------------------------------------------------------------
(millions)
2000
Allowance for
doubtful accounts $ 274 $ - $ 666 $ 8 $ (559)/(1)/ $ 389
==========================================================================================
Valuation allowance -
deferred income
tax assets $ 480 $ - $ 115 $ 3 $ - $ 598
==========================================================================================
1999
Allowance for
doubtful accounts $ 182 $ - $ 584 $ 7 $ (499)/(1)/ $ 274
==========================================================================================
Valuation allowance -
deferred income
tax assets $ 249 $ - $ 47 $ 193/(4)/ $ (9) $ 480
==========================================================================================
1998
Allowance for
doubtful accounts $ 147 $ 8/(2)/ $ 367 $ 3 $ (343)/(1)/ $ 182
==========================================================================================
Valuation allowance -
deferred income
tax assets $ 12 $ 229/(3)/ $ - $ 16 $ (8) $ 249
==========================================================================================
/(1)/ Accounts written off, net of recoveries.
/(2)/ As discussed in Note 2, 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-39