Exhibit 99(b)
[LOGO OF SPRINT]
Supplemental Information -- Annex II
------------------------------------
Sprint PCS Group
Combined Financial Information
The PCS Group is an integrated business of Sprint Corporation and does not
constitute a stand-alone entity. The purpose of this combined financial
information is to provide investors additional information to use in analyzing
the results of operations and financial condition of the PCS Group, and this
combined financial information should be read in conjunction with the
consolidated financial statements of Sprint Corporation.
MANAGEMENT REPORT
Sprint Corporation's management is responsible for the integrity and objectivity
of the information contained in this annex. 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 combined financial statements included in this annex have been audited by
Ernst & Young LLP, independent auditors. Their audits were conducted using
auditing standards generally accepted in the United States and their report is
included herein.
The Board of Director's responsibility for these combined 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
II-1
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Sprint Corporation
We have audited the accompanying combined balance sheets of the Sprint PCS Group
(as described in Note 1) as of December 31, 2000 and 1999, and the related
combined statements of operations, comprehensive loss and cash flows for each of
the three years in the period ended December 31, 2000. These financial
statements are the responsibility of the management of Sprint Corporation
(Sprint). Our responsibility is to express an opinion on these financial
statements 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 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, 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 combined financial position of the Sprint PCS Group at December 31, 2000 and
1999, and the combined 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.
As discussed in Note 1 to the combined financial statements, in 2000 the Sprint
PCS Group changed its accounting for activation fee revenues.
The Sprint PCS Group is a fully integrated business of Sprint. Accordingly,
these combined financial statements have been derived from the consolidated
financial statements and accounting records of Sprint and, as discussed in
Note 1, reflect certain assumptions and allocations. As more fully discussed in
Note 1, the combined financial statements of the Sprint PCS Group should be read
together with the audited consolidated financial statements of Sprint.
Ernst & Young LLP
Kansas City, Missouri
February 1, 2001
II-2
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
II-3
COMBINED STATEMENTS OF OPERATIONS Sprint PCS Group
(millions) (an integrated business
of Sprint Corporation)
- ----------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------
Net Operating Revenues $ 6,341 $ 3,373 $ 1,294
- ----------------------------------------------------------------------------------------------------------------
Operating Expenses
Costs of services and products 3,942 3,150 1,758
Selling, general and administrative 2,426 1,937 1,138
Depreciation 1,339 1,060 670
Amortization 538 463 119
Merger related costs 24 - -
Acquired in-process research and development costs - - 179
- ----------------------------------------------------------------------------------------------------------------
Total operating expenses 8,269 6,610 3,864
- ----------------------------------------------------------------------------------------------------------------
Operating Loss (1,928) (3,237) (2,570)
Interest expense (933) (698) (491)
Other partners' loss in Sprint PCS - - 1,251
Minority interest - 20 145
Other income (expense), net (11) 46 34
- ----------------------------------------------------------------------------------------------------------------
Loss before income tax benefit and extraordinary items (2,872) (3,869) (1,631)
Income tax benefit 1,004 1,388 541
- ----------------------------------------------------------------------------------------------------------------
Loss before Extraordinary Items (1,868) (2,481) (1,090)
Extraordinary items, net (3) (21) (31)
- ----------------------------------------------------------------------------------------------------------------
Net Loss $ (1,871) $ (2,502) $ (1,121)
==========================================
See accompanying Notes to Combined Financial Statements.
II-4
COMBINED STATEMENTS OF COMPREHENSIVE LOSS Sprint PCS Group
(millions) (an integrated business
of Sprint Corporation)
- -----------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------
Net Loss $ (1,871) $ (2,502) $ (1,121)
- -----------------------------------------------------------------------------------------------------------------
Other Comprehensive Loss
Unrealized holding gains on securities 5 8 -
Income tax expense (2) (3) -
- -----------------------------------------------------------------------------------------------------------------
Net unrealized holding gains on securities during the period 3 5 -
Reclassification adjustment for gains included in net loss (8) - -
- -----------------------------------------------------------------------------------------------------------------
Total net unrealized holding gains (losses) on securities (5) 5 -
Foreign currency translation adjustments 3 - -
- -----------------------------------------------------------------------------------------------------------------
Total other comprehensive income (loss) (2) 5 -
- -----------------------------------------------------------------------------------------------------------------
Comprehensive Loss $ (1,873) $ (2,497) $ (1,121)
=================================================
See accompanying Notes to Combined Financial Statements.
II-5
COMBINED BALANCE SHEETS Sprint PCS Group
(millions) (an integrated business
of Sprint Corporation)
- -------------------------------------------------------------------------------------------------------------------------
December 31, 2000 1999
- -------------------------------------------------------------------------------------------------------------------------
Assets
Current assets
Cash and equivalents $ 117 $ 16
Accounts receivable, net of allowance for doubtful
accounts of $96 and $46 902 572
Inventories 515 336
Prepaid expenses 90 89
Current tax benefit receivable from the FON Group 26 293
Other 200 9
- -------------------------------------------------------------------------------------------------------------------------
Total current assets 1,850 1,315
Property, plant and equipment
Network equipment 7,540 5,817
Construction work in progress 1,713 1,692
Buildings and leasehold improvements 2,108 1,235
Other 756 667
- -------------------------------------------------------------------------------------------------------------------------
Total property, plant and equipment 12,117 9,411
Accumulated depreciation (2,595) (1,415)
- -------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 9,522 7,996
Investments in affiliates 148 -
- -------------------------------------------------------------------------------------------------------------------------
Intangible assets
Goodwill 4,548 4,522
PCS licenses 3,059 3,060
Customer base 747 726
Microwave relocation costs 411 377
Other 46 54
- -------------------------------------------------------------------------------------------------------------------------
Total intangible assets 8,811 8,739
Accumulated amortization (1,077) (551)
- -------------------------------------------------------------------------------------------------------------------------
Net intangible assets 7,734 8,188
Other assets 509 425
- -------------------------------------------------------------------------------------------------------------------------
Total $ 19,763 $ 17,924
==================================
Liabilities and Combined Attributed Net Assets
Current liabilities
Current maturities of long-term debt $ 244 $ 185
Accounts payable 687 450
Construction obligations 997 1,039
Accrued taxes 203 130
Payables to the FON Group 296 136
Other 965 638
- -------------------------------------------------------------------------------------------------------------------------
Total current liabilities 3,392 2,578
Long-term debt and capital lease obligations 14,136 11,304
Deferred credits and other liabilities
Deferred income taxes 90 582
Other 253 140
- -------------------------------------------------------------------------------------------------------------------------
Total deferred credits and other liabilities 343 722
Redeemable preferred stock 526 526
Combined attributed net assets 1,366 2,794
- -------------------------------------------------------------------------------------------------------------------------
Total $ 19,763 $ 17,924
===================================
See accompanying Notes to Combined Financial Statements.
II-6
COMBINED STATEMENTS OF CASH FLOWS Sprint PCS Group
(millions) (an integrated business
of Sprint Corporation)
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net loss $ (1,871) $ (2,502) $ (1,121)
Adjustments to reconcile net loss to net cash used by
operating activities:
Extraordinary items, net 3 21 31
Equity in net loss of affiliate 55 - 840
Acquired in-process research and development costs - - 179
Depreciation and amortization 1,877 1,523 121
Deferred income taxes (591) (553) 68
Current tax benefit used by the FON Group - - (460)
Net gains on sales of assets (47) (25) -
Changes in assets and liabilities, excluding
the PCS Restructuring in 1998:
Accounts receivable, net (324) (241) (1)
Inventories and other current assets (304) (237) -
Accounts payable and other current liabilities 647 363 386
Current tax benefit receivable from the FON Group 267 (123) (170)
Affiliate receivables and payables, net 155 35 101
Noncurrent assets and liabilities, net 77 13 (102)
Other, net 48 34 (31)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used by operating activities (8) (1,692) (159)
- ------------------------------------------------------------------------------------------------------------------------------------
Investing Activities
Capital expenditures (3,047) (2,580) (1,072)
Proceeds from sales of assets 207 153 -
Investments in affiliates (203) - -
Cash acquired in the PCS Restructuring - - 244
Investments in Sprint PCS - - (33)
Other, net (11) (82) -
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (3,054) (2,509) (861)
- ------------------------------------------------------------------------------------------------------------------------------------
Financing Activities
Proceeds from long-term debt 3,269 5,901 4,428
Payments on long-term debt (407) (2,734) (3,434)
Advances from (to) the FON Group (17) - 64
Proceeds from common stock issued 121 905 85
Dividends paid (15) (15) -
Net assets transferred to the FON Group - - (340)
Current tax benefit used by the FON Group - - 460
Other, net 212 (13) (70)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 3,163 4,044 1,193
- ------------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash and Equivalents 101 (157) 173
Cash and Equivalents at Beginning of Year 16 173 -
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and Equivalents at End of Year $ 117 $ 16 $ 173
==================================================================
See accompanying Notes to Combined Financial Statements.
II-7
NOTES TO COMBINED FINANCIAL STATEMENTS Sprint PCS Group
(an integrated business
of 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, 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.
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.
Basis of Combination and Presentation
The PCS Group is an integrated business of Sprint Corporation and does not
constitute a stand-alone entity. The purpose of this combined financial
information is to provide investors additional information to use in analyzing
the results of operations and financial condition of the PCS Group, and this
combined financial information should be read in conjunction with the
consolidated financial statements of Sprint.
Investors in PCS stock are shareholders of Sprint and are subject to the risks
related to an equity investment in Sprint and all of Sprint's businesses, assets
and liabilities. The assets and liabilities allocated by Sprint's Board to the
PCS Group remain assets and liabilities of Sprint and are therefore subject to
the claims of Sprint's creditors generally. In the event of the liquidation or
winding up of Sprint Corporation, assets of Sprint remaining for distribution to
Sprint's common shareholders will be distributed to holders of PCS stock based
on the liquidation value of such shares as provided in Sprint's ariticles of
incorporation, which may differ from the Board's allocation of assets and
liabilities among the Groups. The Board of Directors of Sprint may, subject to
the restrictions in Sprint's articles of incorporation, change the allocation of
the assets and liabilities that comprise each of the PCS Group and the FON Group
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 combined PCS Group financial statements, together with the combined FON
Group financial statements, include all the accounts included in Sprint's
consolidated financial statements prior to inter-group eliminations.
Investments in entities in which the PCS Group exercises significant influence,
but does not control, are accounted for using the equity method (see Note 3).
The PCS Group entities are commonly controlled companies and are wholly owned by
Sprint.
II-8
Transactions between the PCS Group and the FON Group have not been eliminated in
the combined financial statements of either group.
As a result, the PCS Group combined financial statements should be read along
with Sprint's consolidated financial statements and the FON Group combined
financial statements.
Sprint PCS' results of operations for 1998 have been consolidated for the entire
year. The Cable Partners' share of losses through the PCS Restructuring date has
been reflected as "Other partners' loss in Sprint PCS" in the Combined
Statements of Operations. Sprint PCS financial position has been reflected on a
consolidated basis at year-end 1998. Before 1998, Sprint's investment in Sprint
PCS was accounted for using the equity method. The PCS Group's cash flows
include Sprint PCS' cash flows only after the PCS Restructuring date.
The PCS Group combined financial statements are prepared using accounting
principles generally accepted in the United States. These principles require
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities, and
the reported amounts of revenues and expenses. Actual results could differ from
those estimates.
Certain prior-year amounts have been reclassified to conform to the current-year
presentation. These reclassifications had no effect on the results of operations
or combined attributed net assets as previously reported.
Classification of Operations
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
nationwide service 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.
Allocation of Shared Services
Sprint directly assigns, where possible, certain general and administrative
costs to the FON Group and the PCS Group based on their actual use of those
services. Where direct assignment of costs is not possible, or practical, Sprint
uses indirect methods, including time studies, to estimate the assignment of
costs to each group. 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. The
allocation of shared services may change at the discretion of Sprint and does
not require shareholder approval.
II-9
Allocation of Federal and State Income Taxes
Sprint files a consolidated federal income tax return and certain state income
tax returns which include FON Group and PCS Group results. In connection with
the PCS Restructuring, Sprint adopted a tax sharing agreement which provides for
the allocation of income taxes between the two groups. The PCS Group's income
taxes reflect the PCS Group's incremental cumulative impact on Sprint's
consolidated income taxes. Intergroup tax payments are satisfied on the date
Sprint's related tax payment is due to or the refund is received from the
applicable tax authority. The PCS Group accrued current income tax benefits in
accordance with the tax sharing agreement totaling $605 million in 2000, $887
million in 1999 and $190 million in 1998.
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.
Allocation of Group Financing
Financing activities for the groups are managed by Sprint on a centralized
basis. Debt incurred by Sprint on behalf of the groups is specifically allocated
to and reflected in the financial statements of the applicable group. Interest
expense is allocated to the PCS Group based on an interest rate that is
substantially equal to the rate it would be able to obtain from third parties as
a direct or indirect wholly owned Sprint subsidiary, but without the benefit of
any guaranty by Sprint or any member of the FON Group. That interest rate is
higher than the rate Sprint obtains on borrowings. The difference between
Sprint's actual interest rate and the rate charged to the PCS Group is reflected
as a reduction in the FON Group's interest expense.
Under Sprint's centralized cash management program, one group may advance funds
to the other group. These advances are accounted for as short-term borrowings
between the groups and bear interest at a market rate that is substantially
equal to the rate that group would be able to obtain from third parties on a
short-term basis.
The allocation of group financing activities may change at the discretion of
Sprint and does not require shareholder approval.
Income Taxes
The PCS Group records deferred income taxes based on temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and their tax bases.
Revenue Recognition
The PCS Group recognizes operating revenues as services are rendered or as
products are delivered to customers. Service activation fees are deferred and
amortized over the average life of the service.
The PCS Group implemented SEC Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements," during the fourth quarter of 2000,
effective 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 deferral. The effect of the change on the nine months ended
September 30, 2000 was to decrease revenues and expenses by $68 million.
Cash and Equivalents
Cash equivalents generally include highly liquid investments with original
maturities of three months or less. They are stated at cost, which approximates
market value. Sprint uses controlled disbursement banking arrangements as part
of its cash management program. Outstanding checks in excess of cash balances
for the PCS Group were included in accounts payable. These amounts totaled $22
million at year-end 2000 and $30 million at year-end 1999. The PCS Group had
sufficient funds available to fund these outstanding checks when they were
presented for payment.
Inventories
Inventories are stated at the lower of cost (principally first-in, first-out
method) or replacement value.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Generally, ordinary asset
retirements and disposals are charged against accumulated depreciation with no
gain or loss recognized. Property, plant and equipment is depreciated on a
straight-line basis over estimated economic useful lives. Repair and maintenance
costs are expensed as incurred.
Capitalized Interest
The PCS Group capitalizes interest costs related to network buildout and PCS
licenses, which totaled $153 million in 2000, $108 million in 1999 and $64
million in 1998. In addition, Sprint capitalized interest
II-10
costs related to the PCS Group's network buildout. This capitalized interest
totaled $61 million for 1998 and was contributed to, and is being amortized by,
the PCS Group.
Intangible Assets
The PCS Group evaluates the recoverability of intangible assets when events or
circumstances indicate that such assets might be impaired. The PCS Group
determines impairment by comparing the undiscounted future cash flows estimated
to be generated by these assets to their respective carrying value. In the event
impairment exists, a loss is recognized based on the amount by which the
carrying value exceeds the fair value of the asset.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the
net assets acquired in business combinations accounted for as purchases.
Goodwill is being amortized over 40 years using the straight-line method.
Accumulated amortization totaled $231 million at year-end 2000 and $116 million
at year-end 1999.
PCS Licenses
The PCS Group acquired licenses from the Federal Communications Commission (FCC)
to operate as a PCS service provider. These licenses are granted for up to
10-year terms with renewals for additional 10-year terms if license obligations
are met. These licenses are recorded at cost and are amortized on a
straight-line basis over 40 years when service begins in a specific geographic
area. Accumulated amortization totaled $206 million at year-end 2000 and $130
million at year-end 1999.
Customer Base
The PCS Group capitalized the fair value of Sprint PCS' customer base acquired
in the PCS Restructuring and the fair value of Cox PCS' customer base when the
remaining minority interest in Cox PCS was acquired in the 1999 second quarter.
The customer base is being amortized over 30 months using the straight-line
method. Accumulated amortization totaled $596 million at year-end 2000 and $277
million at year-end 1999.
Microwave Relocation Costs
The PCS Group has incurred costs related to microwave relocation in constructing
the PCS network. Microwave relocation costs are being amortized over the
remaining lives of the PCS licenses. Accumulated amortization totaled $24
million at year-end 2000 and $15 million at year-end 1999.
II-11
Stock-based Compensation
The PCS Group participates in the incentive-based stock option plans and
employee stock purchase plan administered by Sprint for executives and other
employees. Sprint adopted the pro forma disclosure requirements under Statement
of Financial Accounting Standards (SFAS) No. 123, "Stock-based Compensation,"
and continues to apply Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations to its stock option
and employee stock purchase plans. Had the PCS Group applied SFAS 123, pro forma
net loss would have been $2,135 million in 2000, $2,578 million in 1999 and
would not have changed materially from the Recapitalization date through
year-end 1998. See Note 13 of Sprint's Notes to Consolidated Financial
Statements for more information about Sprint's stock-based compensation and the
PCS Group's pro forma net loss and loss per share.
In 1997, Sprint granted performance-based stock options to certain key
executives. The PCS Group expensed $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 $10 million of expense related to these options was included in
"Merger related costs" in the Combined Statements of Operations.
- ---------------------------------------------------------
2. Business Combinations
- ---------------------------------------------------------
Cox PCS
In the 1999 second quarter, Cox Communications, Inc. exercised a put option
requiring Sprint to purchase the remaining 40.8% interest in Cox PCS. Sprint's
existing 59.2% interest in Cox PCS was reflected in the PCS Group combined
financial statements on a combined basis. Sprint issued 24.3 million shares of
low-vote PCS stock (pre-split basis) in exchange for the remaining interest. The
shares were valued at $1.1 billion. Sprint accounted for the transaction as a
purchase.
The excess of the purchase price over the fair value of the net liabilities
acquired was allocated as follows:
- ---------------------------------------------------------
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.
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.
II-12
Sprint PCS Group Pro Forma Results
The following unaudited pro forma combined results of operations for the PCS
Group assume the PCS Restructuring, Recapitalization, Top-up and the write-off
of acquired IPR&D costs occurred 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 $ 1,294
===========
Loss before
extraordinary items $ (1,847)
===========
Net loss $ (1,878)
===========
- --------------------------------------------------------------------------------
3. Investment
- --------------------------------------------------------------------------------
During the 2000 second quarter, the PCS Group made an investment in Pegaso
Telecomunicaciones, S.A. de C.V., a wireless PCS operation in Mexico. The PCS
Group accounts for this investment using the equity method. Unaudited,
summarized financial information (100% basis) of this entity was as follows:
- --------------------------------------------------------------------
2000
- --------------------------------------------------------------------
(millions)
Results of operations
Net operating revenues $ 104
==========
Operating loss $ (177)
==========
Net loss $ (192)
==========
Financial position
Current assets $ 77
Noncurrent assets 716
- --------------------------------------------------------------------
Total $ 793
==========
Current liabilities $ 367
Noncurrent liabilities 327
Owners' equity 99
- --------------------------------------------------------------------
Total $ 793
==========
- --------------------------------------------------------------------------------
4. Merger Termination
- --------------------------------------------------------------------------------
On July 13, 2000, Sprint and WorldCom, Inc. announced that the boards of
directors of both companies terminated their merger agreement, previously
announced in October 1999, as a result of regulatory opposition to the merger.
In the 2000 second quarter, the PCS Group recognized a one-time, pre-tax charge
of $24 million for costs associated with the terminated merger.
- --------------------------------------------------------------------------------
5. Employee Benefit Plans
- --------------------------------------------------------------------------------
Defined Benefit Pension Plan
Effective January 1999, most PCS Group employees became eligible to participate
in Sprint's pension plans. Pension benefits are based on years of service and
the participants' compensation.
Sprint's policy is to make plan contributions equal to an actuarially determined
amount consistent with federal tax regulations. The funding objective is to
accumulate funds at a relatively stable rate over the participants' working
lives so benefits are fully funded at retirement.
Amounts included in the Combined Balance Sheets for the plan were accrued
pension costs of $12 million at year-end 2000 and $5 million at year-end 1999.
Net pension costs are determined for the PCS Group based on a direct calculation
of service costs. The PCS Group recorded net pension costs of $7 million in 2000
and $5 million in 1999.
Defined Contribution Plan
Prior to January 1999, Sprint PCS sponsored a savings and retirement program for
certain employees. Sprint PCS matched contributions equal to 50% of the
contribution of each participant, up to the first 6% that the employee elected
to contribute. Expense under the savings plan was $7 million in 1998. Effective
January 1999, the PCS Group employees began making contributions to Sprint's
defined contribution plan. The existing assets of the Sprint PCS savings plan
were rolled over to Sprint's defined contribution plan in early 1999. The PCS
Group recorded expense of $17 million in 2000 and $10 million in 1999 for
Sprint's matching contributions to the Sprint defined contribution plans. At
year-end 2000, Sprint's defined contribution plans held 34 million FON shares
and 31 million PCS shares.
II-13
Postretirement Benefits
Effective January 1999, most PCS Group employees also became eligible for
postretirement benefits (principally medical and life insurance benefits).
Retiring employees are eligible for benefits on a shared-cost basis. Sprint
funds the accrued costs as benefits are paid.
Amounts included in the Combined Balance Sheets at year-end were accrued
postretirement benefits costs of $1 million in 2000 and 1999.
Net postretirement benefits costs are determined for the PCS Group based on a
direct calculation of service costs. The PCS Group recorded net postretirement
benefits costs of $0.2 million in 2000 and $1 million in 1999.
- -------------------------------------------------------------------------
6. Income Taxes
- -------------------------------------------------------------------------
Income tax benefits allocated to continuing operations consisted of the
following:
- -------------------------------------------------------------------------
2000 1999 1998
- -------------------------------------------------------------------------
(millions)
Current income tax
benefit
Federal $ (405) $ (810) $ (579)
State (8) (25) (30)
- -------------------------------------------------------------------------
Total current (413) (835) (609)
- -------------------------------------------------------------------------
Deferred income tax
expense (benefit)
Federal (511) (479) 83
State (80) (74) (15)
- -------------------------------------------------------------------------
Total deferred (591) (553) 68
- -------------------------------------------------------------------------
Total $ (1,004) $ (1,388) $ (541)
=================================
The differences that caused the PCS Group's effective income tax rates to vary
from the 35% federal statutory rate for income taxes related to continuing
operations were as follows:
- -----------------------------------------------------------------------
2000 1999 1998
- -----------------------------------------------------------------------
(millions)
Income tax benefit at $ (1,005) $ (1,354) $ (571)
the statutory rate
Effect of:
State income
taxes,
net of federal
income tax
effect (57) (64) (29)
Goodwill
amortization 38 34 3
Equity in losses
of foreign
joint venture 23 - -
Write-off of in-
process
research and
development - - 63
costs
Other, net (3) (4) (7)
- -----------------------------------------------------------------------
Income tax benefit $ (1,004) $ (1,388) $ (541)
==================================
Effective income tax
rate 35.0% 35.9% 33.2%
==================================
II-14
Income tax expense (benefit) allocated to other items was as follows:
- ----------------------------------------------------------------------------
2000 1999 1998
- ----------------------------------------------------------------------------
(millions)
Extraordinary items $ (2) $ (11) $ (20)
Unrealized holding
gains (losses) on
investments/(1)/ (3) 3 -
Stock ownership,
purchase and
options
arrangements/(1)/ (148) (31) -
- ----------------------------------------------------------------------------
/(1)/ These amounts have been recorded directly to "Combined attributed net
assets."
The PCS Group recognizes deferred income taxes for the temporary differences
between the carrying amounts of its assets and liabilities for financial
statement purposes and their tax bases. The sources of the differences that give
rise to the deferred income tax assets and liabilities at year-end 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 $ - $ 1,156
Intangibles - 386
Capitalized interest - 114
Reserves and allowances 39 -
Operating loss
carryforwards 1,794 -
Tax credit carryforwards 127 -
Other, net 18 -
- ----------------------------------------------------------------------------
1,978 1,656
Less valuation allowance 325 -
- ----------------------------------------------------------------------------
Total $ 1,653 $ 1,656
===============================
- -----------------------------------------------------------------------------
1999 Deferred Income Tax
--------------------------------
Assets Liabilities
- -----------------------------------------------------------------------------
(millions)
Property, plant and
equipment $ - $ 811
Intangibles - 453
Capitalized interest - 108
Operating loss
carryforwards 1,006 -
Tax credit carryforwards 53 -
Other, net 21 -
- -----------------------------------------------------------------------------
1,080 1,372
Less valuation allowance 283 -
- -----------------------------------------------------------------------------
Total $ 797 $ 1,372
================================
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 $42
million in 2000 and $38 million in 1999.
In 1998, the PCS Group acquired approximately $229 million of potential tax
benefits related to net operating loss carryforwards in the PCS Restructuring
which are subject to certain realization restrictions under various tax laws. A
valuation allowance was provided for the total of these benefits. If these
benefits are subsequently recognized, they will reduce the goodwill or other
noncurrent intangible assets resulting from the PCS Restructuring.
In connection with the PCS Restructuring, the PCS Group is required to reimburse
the FON Group and the Cable Partners for net operating loss and tax credit
carryforward benefits generated prior to the PCS Restructuring if realization by
the PCS Group produces a cash benefit that would not otherwise have been
realized. The reimbursement will equal 60% of the net cash benefit received by
the PCS Group and will be made to the FON Group in cash and to the Cable
Partners in shares of Series 2 PCS stock. The carryforward benefits subject to
this requirement totaled $259 million, which includes the $229 million acquired
in the PCS Restructuring.
At year-end 2000, the PCS Group had federal operating loss carryforwards of
approximately $4.2 billion and state operating loss carryforwards of
approximately $7.2 billion. Related to these loss carryforwards are federal tax
benefits of $1.5 billion and state tax benefits of $519 million. In addition,
the PCS Group 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.
II-15
- --------------------------------------------------------------------------------
7. 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.
II-16
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
15).
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 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 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 extraordinary loss.
In 1998, Sprint redeemed, prior to scheduled maturities, $3.3 billion of PCS
Group debt with a weighted average interest rate of 8.3%. This resulted in a $31
million after-tax extraordinary loss for the PCS Group.
Other
Sprint, including the PCS Group, had complied with all restrictive or financial
covenants relating to its debt arrangements at year-end 2000.
II-17
- --------------------------------------------------------------------------------
8. 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 and
preferred intergroup interest -
Stated value $1,000
per share, 525,989
shares, voting,
cumulative $6.73
quarterly dividend rate $ 526 $ 526
================================================================================
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. Additionally,
as part of the PCS Restructuring, the FON Group received a preferred intergroup
interest with terms equivalent to the Seventh series preferred stock in exchange
for interim financing provided to Sprint PCS before the PCS Restructuring.
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.
- --------------------------------------------------------------------------------
9. Combined Attributed Net Assets
- --------------------------------------------------------------------------------
- -----------------------------------------------------------------------------
2000 1999 1998
- -----------------------------------------------------------------------------
(millions)
Beginning balance $ 2,794 $ 3,229 $ 1,386
Net loss (1,871) (2,502) (1,121)
Dividends (14) (15) (2)
Common stock
issued 230 2,064 3,285
Tax benefit of
stock compensation 148 31 -
Contributions from
the FON Group - - 146
Equity transfers to -
the FON Group - (460)
Other comprehensive
income (loss) (2) 5 -
Other, net 81 (18) (5)
- -----------------------------------------------------------------------------
Ending balance $ 1,366 $ 2,794 $ 3,229
=================================
- --------------------------------------------------------------------------------
10. Commitments and Contingencies
- --------------------------------------------------------------------------------
Litigation, Claims and Assessments
PCS shareholders are subject to all of the risks related to an investment in
Sprint and the PCS Group, including the effects of any legal proceedings and
claims against the FON Group.
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 the PCS Group combined 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.
Operating Leases
The PCS Group's minimum rental commitments at year-end 2000 for all
noncancelable operating leases, consisting mainly of leases for cell and switch
sites and office space, are as follows:
- --------------------------------------------------------------------------------
(millions)
2001 $ 205
2002 157
2003 108
2004 70
2005 26
Thereafter 63
- --------------------------------------------------------------------------------
The PCS Group's gross rental expense totaled $400 million in 2000, $315 million
in 1999 and $256 million in 1998. 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.
II-18
- ---------------------------------------------------------
11. Financial Instruments
- ---------------------------------------------------------
Fair Value of Financial Instruments
Sprint estimates the fair value of the PCS Group's financial instruments using
available market information and appropriate valuation methodologies. As a
result, the following estimates do not necessarily represent the values the PCS
Group could realize in a current market exchange. Although management is not
aware of any factors that would affect the year-end 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 the PCS Group's financial
instruments at year-end were as follows:
- ---------------------------------------------------------
2000
------------------------------
Carrying Estimated
Amount Fair Value
- ---------------------------------------------------------
(millions)
Cash and equivalents $ 117 $ 117
Long-term debt and capital
lease obligations 14,380 13,741
Redeemable preferred stock 526 802
- ---------------------------------------------------------
- ---------------------------------------------------------
1999
------------------------------
Carrying Estimated
Amount Fair Value
- ---------------------------------------------------------
(millions)
Cash and equivalents $ 16 $ 16
Investment in equity
securities 9 9
Long-term debt and capital
lease obligations 11,489 11,054
Redeemable preferred stock 526 777
- ---------------------------------------------------------
The carrying amounts of the PCS Group'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
the PCS Group's long-term debt was based on quoted market prices for publicly
traded issues. The estimated fair value of all other issues was based on 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
The PCS Group's accounts receivable are not subject to any concentration of
credit risk.
Interest Rate Swap Agreements
In 1998, Sprint deferred losses from the termination of interest rate swap
agreements used to hedge a portion of a $5.0 billion debt offering. These
losses, totaling $75 million, were allocated to the PCS Group and are being
amortized to interest expense using the effective interest method over the term
of the debt. At year-end 2000, the remaining unamortized deferred loss totaled
$61 million.
- --------------------------------------------------------------
12. Additional Financial Information
- --------------------------------------------------------------
Supplemental Cash Flows Information
The PCS Group's cash paid (received) for interest and income taxes was as
follows:
- --------------------------------------------------------------
2000 1999 1998
- --------------------------------------------------------------
(millions)
Interest (net of
capitalized
interest) $ 909 $ 632 $ -
============================================
Income taxes $ (872) $ (764) $ (20)
============================================
II-19
Noncash activities for the PCS Group included the following:
- ---------------------------------------------------------------
2000 1999 1998
- ---------------------------------------------------------------
(millions)
Tax benefit from
stock options
exercised $ 148 $ 31 $ -
=====================================
Stock received for
stock options
exercised $ 40 $ 40 $ -
=====================================
Common stock
issued under
employee
benefit stock
plans $ 149 $ 49 $ -
=====================================
Capital lease
obligations $ - $ 36 $ 460
=====================================
Common stock
issued for Cox
PCS
acquisition $ - $ 1,146 $ -
=====================================
Common stock
issued to the
Cable Partners
to purchase $ - $ - $ 3,200
Sprint PCS
=====================================
Preferred stock
issued to the
Cable Partners
in exchange for
interim
financing $ - $ - $ 247
=====================================
Conversion of
interim
financing to
preferred
intergroup
interest $ - $ - $ 279
=====================================
See Note 2 for more details about the assets and liabilities acquired in the Cox
PCS purchase and the PCS Restructuring.
Intergroup Investments and Transactions
Sprint FON Group Investments in the Sprint PCS Group
The following table reflects the FON Group's investments in the PCS Group, which
have been eliminated in Sprint's consolidated financial statements:
- ---------------------------------------------------------
2000 1999
- ---------------------------------------------------------
(millions)
Common and preferred
intergroup interest $ 260 $ 262
Investment in debt securities 188 169
- ---------------------------------------------------------
Total $ 448 $ 431
=======================
Common Intergroup Interest
The FON Group received a 1% intergroup interest in the PCS Group at the time of
the PCS Restructuring and Recapitalization. Subsequently, PCS shares
representing the intergroup interest were issued to FON Group employees,
exhausting the FON Group's interest in the PCS Group in January 2000.
The FON Group's share of the PCS Group's net loss totaled $13 million in 1999
and $6 million from the date of the PCS Restructuring to year-end 1998 and was
included in "Other income, net" in the Sprint FON Group Combined Statements of
Operations. As the intergroup interest was exhausted in 2000, no additional PCS
Group losses were recognized by the FON Group in 2000.
Preferred Intergroup Interest
The FON Group provided Sprint PCS and the PCS Group with interim financing from
the date the PCS Restructuring agreement was signed in May 1998 until it was
completed in November 1998. As part of the PCS Restructuring, Sprint converted
this financing, totaling $279 million, into an intergroup interest representing
0.3 million shares of 10-year PCS preferred stock convertible into a PCS common
intergroup interest. The PCS Group paid the FON Group dividends on the preferred
intergroup interest of $8 million in 2000 and 1999 and $1 million in 1998.
Long-term Loans
Sprint provided Sprint PCS with additional interim financing of $180 million
from May 1998 through November 1998. This loan was repaid in 1999.
Intergroup Interest Expense
The difference between Sprint's actual interest costs and the interest costs
charged to the PCS Group on allocated debt totaled $235 million in 2000, $167
million in 1999 and $11 million in 1998. Additionally, 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 "Interest expense" in the Sprint
PCS Group Combined Statements of Operations. See Note 1 for a more detailed
description of how Sprint allocates interest expense to each of the groups.
Intergroup Transactions
The PCS Group uses the long distance operation as its interexchange carrier and
purchases wholesale
II-20
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.
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.
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.
Related Party Transactions
Sprint PCS Group
The Cable Partners advanced PhillieCo $26 million in 1998. These advances were
repaid in the 1999 first quarter.
Sprint PCS
The following discussion reflects related party transactions between Sprint and
Sprint PCS prior to the PCS Restructuring:
Sprint provided Sprint PCS with billing and operator services, and switching
equipment. Sprint PCS also used the long distance 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.
Major Customer
The PCS Group markets its products through multiple distribution channels,
including its own retail stores as well as other retail outlets. Equipment sales
to one retail chain and the subsequent service revenues generated by sales to
its customers accounted for 25% of net operating revenues in 2000, 28% in 1999
and 25% in 1998.
- -----------------------------------------------
13. 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 the PCS Group's combined 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
the PCS Group's combined financial statements.
II-21
- --------------------------------------------------------------
14. Quarterly Financial Data (Unaudited)
- --------------------------------------------------------------
Quarter
---------------------------------------------------------------
2000 1st 2nd 3rd 4th
- -------------------------------------------------------------------------------------------------------------
(millions, except per share data)
Net operating revenues/(1)/ $ 1,220 $ 1,476 $ 1,707 $ 1,938
Operating loss (602) (469) (367) (490)
Loss before extraordinary items (510) (456) (390) (512)
Net loss (513) (456) (390) (512)
Quarter
---------------------------------------------------------------
1999 1st 2nd 3rd 4th
- -------------------------------------------------------------------------------------------------------------
(millions, except per share data)
Net operating revenues/(1)/ $ 637 $ 780 $ 901 $ 1,055
Operating loss (827) (708) (790) (912)
Loss before extraordinary items (605) (555) (615) (706)
Net loss (626) (555) (615) (706)
/(1)/ Certain reclassifications were made between net operating revenues and
operating expenses from amounts reported in the 2000 quarterly reports on
Form 10-Q to conform to industry events or practices. These
reclassifications had no impact on operating loss as previously reported.
Additionally, in the 2000 fourth quarter, the PCS Group 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 unchanged in the 2000
first quarter and reduced by $32 million in the 2000 second quarter and
$36 million in the 2000 third quarter.
- --------------------------------------------------------------
15. Subsequent Event (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.
II-22
MANAGEMENT'S DISCUSSION OF Sprint PCS Group
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (an integrated business
of Sprint Corporation)
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Forward-looking Information
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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.
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Sprint PCS Group
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General
The PCS Group includes Sprint's wireless personal communication services (PCS)
operations. It operates the only 100% digital PCS wireless network in the United
States with licenses to provide service nationwide using a single frequency and
a single technology. At year-end 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
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.
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.
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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 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.
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Results of Operations
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2000 1999 1998
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(millions)
Net operating revenues $ 6,341 $ 3,373 $ 1,294
Operating expenses 8,269 6,610 3,864
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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.
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.
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2000 1999 1998
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(millions)
Net operating revenues $ 6,341 $ 3,373 $ 1,294
Operating expenses
Costs of services
and products 3,942 3,150 1,758
Selling, general
and administrative 2,426 1,937 1,138
Depreciation and
amortization 1,877 1,523 1,038
Merger related costs 24 - -
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Total operating
expenses 8,269 6,610 3,934
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Operating loss $ (1,928) $ (3,237) $ (2,640)
===============================
Capital expenditures
(including capital
lease obligations) $ 3,047 $ 2,616 $ 2,904
===============================
Net Operating Revenues
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2000 1999 1998
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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
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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.
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.
Selling, general and administrative (SG&A) expense mainly includes marketing
costs to promote products and services as well as salary and benefit costs. SG&A
expense increased 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.
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Nonoperating Items
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Interest Expense
The effective interest rates in the following table reflect interest expense on
long-term debt only. Interest costs on short-term borrowings classified as
long-term debt, intergroup borrowings and deferred compensation plans have been
excluded so as not to distort the PCS Group's effective interest rates on
long-term debt.
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2000 1999 1998
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Effective interest rate
on long-term debt/(1)/ 8.7% 8.7% 9.4%
==============================
/(1)/ The effective interest rate on long-term debt for 1998 is on a pro forma
basis as if Sprint PCS' long-term debt had been included in the PCS
Group's outstanding long-term debt balance all year.
The decrease in the PCS Group's effective interest rate from 1998 mainly
reflects increased borrowings with lower interest rates.
Effective with the PCS Restructuring, interest expense on borrowings incurred by
Sprint and allocated to the PCS Group is based on rates the PCS Group would be
able to obtain from third parties as a direct or indirect wholly owned Sprint
subsidiary, but without the benefit of any guaranty by Sprint or any member of
the FON Group. The PCS Group's interest expense includes $235 million in 2000,
$167 million in 1999 and $11 million in 1998 resulting from the difference
between Sprint's actual interest rates and the rates charged to the PCS Group.
These costs are derived from both long-term and short-term allocated borrowings.
Only the long-term portion of these costs are included in the effective interest
rates above.
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 Combined
Statements of Operations.
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Other Income (Expense), Net
Other income (expense) consisted of the following:
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2000 1999 1998
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(millions)
Equity in net loss of
affiliate $ (55) $ - $ -
Gains on sales of
assets 47 25 -
Other, net (3) 21 34
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Total $ (11) $ 46 $ 34
==================================
Other expense for 2000 mainly includes the PCS Group's share of losses of Pegaso
and gains on sales of assets including certain customers and associated network
infrastructure and certain other investments. Other income for 1999 mainly
includes a gain on the sale of network infrastructure totaling $25 million and
$13 million from the FON Group's interest in the PCS Group's loss. Other income
for 1998 consisted mainly of interest income totaling $34 million, reflecting
interest earned on partner contributions from the Sprint PCS partners prior to
the PCS Restructuring.
Income Taxes
The PCS Group's effective tax rates were 35.0% in 2000, 35.9% in 1999 and 33.2%
in 1998. See Note 6 of Notes to Combined Financial Statements for information
about the differences that caused the effective income tax rates to vary from
the statutory federal rate for income taxes related to loss before extraordinary
items.
Extraordinary Items, Net
In 2000, Sprint redeemed, 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, Sprint redeemed, prior to scheduled maturities, $2.2 billion of the PCS
Groups revolving credit facilities and other borrowings. These borrowings had
interest rates ranging from 5.6% to 8.3%. This resulted in a $21 million
after-tax extraordinary loss. These short-term borrowings were repaid with
proceeds from long-term financing.
In 1998, Sprint redeemed, prior to scheduled maturities, $3.3 billion of PCS
Group debt with a weighted average interest rate of 8.3%. This resulted in a $31
million after-tax extraordinary loss.
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Financial Condition
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2000 1999
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(millions)
Combined assets $ 19,763 $ 17,924
=======================
Net property, plant and equipment increased $1.5 billion in 2000 reflecting
capital expenditures to support the PCS network buildout, partly offset by
depreciation and network asset sales.
Net intangibles decreased $454 million mainly reflecting amortization of the
customer base and goodwill. See "Liquidity and Capital Resources" for more
information about changes in the Combined Balance Sheets.
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Liquidity and Capital Resources
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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.
The PCS Group's cash flows for 1998 include Sprint PCS' cash flows only after
the PCS Restructuring date.
Operating Activities
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2000 1999 1998
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(millions)
Cash flows used by
operating activities $ (8) $ (1,692) $ (159)
=================================
Cash flows used by operating activities decreased $1.7 billion in 2000 and
increased $1.5 billion in 1999. The 2000 decrease mainly reflects decreased
operating losses for the PCS Group and a decrease in working capital. The 1999
increase mainly reflects increased operating losses and an increase in working
capital.
Investing Activities
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2000 1999 1998
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(millions)
Cash flows used by
investing activities $ (3,054) $ (2,509) $ (861)
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The PCS Group's main use of cash in 2000, 1999 and 1998 was to fund capital
expenditures for the PCS network buildout. Capital expenditures for the PCS
Group totaled $3.0 billion in 2000, $2.6 billion in 1999 and $1.1 billion in
1998. Investing activities also include sales of assets of $207 million in 2000
and $153 in 1999. "Investments in affiliates" mainly reflects the PCS Group's
investment in Pegaso.
Financing Activities
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2000 1999 1998
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(millions)
Cash flows provided
by financing
activities $ 3,163 $ 4,044 $ 1,193
=================================
Financing activities reflect net proceeds from long-term debt allocated from
Sprint of $2.9 billion in 2000, $3.2 billion in 1999 and $1 billion in 1998. In
addition, the PCS Group received $121 million in 2000 and $905 million in 1999
from stock issuances, including stock option exercises. These proceeds were
primarily used to fund the PCS Group's capital expenditures and operating
losses.
Also included in the 2000 financing activities is $80 million received from the
FON Group to compensate for the net amount of PCS stock-based compensation
granted to FON Group employees and FON stock-based compensation granted to PCS
Group employees. In addition, the PCS Group received $132 million of proceeds
from Sprint's employee stock purchase plan in 2000.
In connection with the PCS Restructuring, Sprint adopted a tax sharing agreement
that provides for the allocation of income taxes between the FON Group and PCS
Group. Sprint expects the FON Group to continue to make significant payments to
the PCS Group under this agreement because of expected PCS Group operating
losses in the near future and from using the PCS Group's net operating loss
carryforwards. These payments will reflect the PCS Group's incremental
cumulative effect on Sprint's consolidated federal and state tax liability and
tax credit position. The PCS Group 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 Combined Financial Statements, "Allocation of Federal and State
Income Taxes," for more details.
Capital Requirements
The PCS Group's 2001 investing activities, mainly consisting of capital
expenditures and investments in affiliates, are expected to be between $3.7 and
$4.0 billion. Capital expenditures are expected to range between $3.3 and $3.5
billion, and investments in affiliates are expected to be between $350 and $450
million.
PCS preferred stock dividend payments are expected to total $15 million,
including payments to the FON Group for its preferred intergroup interest. See
Note 12 of Notes to Combined Financial Statements for a more detailed discussion
of the FON Group's preferred intergroup interest in the PCS Group.
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Regulatory Developments
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The FCC sets rules, regulations and policies to, among other things:
. grant licenses for PCS frequencies and license renewals,
. rule on assignments and transfers of control of PCS licenses,
. govern the interconnection of PCS networks with other wireless and
wireline carriers,
. establish access and universal service funding provisions,
. impose fines and forfeitures for violations of any of the FCC's rules,
and
. regulate the technical standards of PCS networks.
The FCC currently prohibits a single entity from having a combined attributable
interest (20% or greater interest in any license) in broadband PCS, cellular and
specialized mobile radio licenses totaling more than 45 megahertz (MHz) in any
geographic area except that in rural service areas no licensee may have an
attributable interest in more than 55 MHz of commercial mobile radio service
(CMRS) spectrum.
PCS License Transfers and Assignments
The FCC must approve any substantial changes in ownership or control of a PCS
license. Noncontrolling interests in an entity that holds a PCS license or
operates PCS networks generally may be bought or sold without prior FCC
approval. In addition, 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
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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
The Communications Assistance for Law Enforcement Act (CALEA) was enacted in
1994 to preserve electronic surveillance capabilities by law enforcement
officials in the face of rapidly changing telecommunications technology.
This act 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.
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.
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