UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
333-06609-01
Commission file number 333-06609-02
SPRINT SPECTRUM L.P.
SPRINT SPECTRUM FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 48-1165245
DELAWARE 43-1746537
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Nos.)
6160 Sprint Parkway, Overland Park, Kansas 66251
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (800) 829-0965
Securities registered pursuant to Section 12(b) and 12(g) of the Act: None
The registrants meet the conditions set forth in General Instruction I (1) (a)
and (b) of Form 10-K and are therefore filing this Form with the reduced
disclosure format.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No______
Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
At March 1, 2001 Sprint Spectrum Finance Corporation had 100 common shares
outstanding.
Documents Incorporated by Reference: None
SPRINT SPECTRUM L.P.
SPRINT SPECTRUM FINANCE CORPORATION
SECURITIES AND EXCHANGE COMMISSION
ANNUAL REPORT ON FORM 10-K
Part I
- --------------------------------------------------------------------------------
Item 1. Business
- --------------------------------------------------------------------------------
Sprint Spectrum L.P. is a Delaware limited partnership formed in March 1995.
Sprint Spectrum refers to Sprint Spectrum L.P. and its subsidiaries.
The general partner of Sprint Spectrum is Sprint Spectrum Holding Company, L.P.
(Holdings), and the limited partner is MinorCo, L.P. (MinorCo). Both Holdings
and MinorCo are Delaware limited partnerships. In November 1998, Sprint Spectrum
became an indirect wholly owned subsidiary of Sprint Corporation when Sprint
acquired the remaining ownership interests of Tele-Communications, Inc., Cox
Communications, Inc., and Comcast Corporation in Holdings and MinorCo.
Sprint Spectrum is a provider of wireless personal communication services (PCS)
in the United States. Sprint Spectrum's 30 wholly owned markets cover 156
million population equivalents (Pops) and include the New York, San Francisco,
Detroit, Dallas/Fort Worth and Boston/Providence major trading areas. Sprint
Spectrum, together with certain affiliates, has licenses to provide service to
the entire U.S. population, including Puerto Rico and the U.S. Virgin Islands.
Sprint Spectrum is subject to the jurisdiction of the Federal Communications
Commission (FCC).
Each of the markets in which Sprint Spectrum competes is served by other two-way
wireless service providers, including cellular and PCS operators and resellers.
A majority of the markets have five or more commercial mobile radio service
providers. Each of the top 50 metropolitan markets has at least one other PCS
competitor in addition to two cellular incumbents. Many of these competitors
have been operating for a number of years and currently serve a significant
subscriber base.
Sprint Spectrum Finance Corporation (FinCo), a Delaware corporation formed in
May 1996, is a wholly owned subsidiary of Sprint Spectrum L.P. FinCo has nominal
assets and does not conduct any operations. It was formed to be a co-obligor of
certain securities issued by Sprint Spectrum. Because FinCo is a co-obligor,
certain institutional investors, who might otherwise be limited in their ability
to invest in securities issued by partnerships due to legal investment laws in
their states of organization or their charter documents, may be able to invest
in Sprint Spectrum's securities.
- --------------------------------------------------------------------------------
Item 2. Properties
- --------------------------------------------------------------------------------
Sprint Spectrum's properties consist mainly of network equipment, construction
work in progress and buildings and leasehold improvements. The following table
summarizes Sprint Spectrum's major assets as a percentage of total property,
plant and equipment at year-end 2000.
Property, plant and equipment
Network equipment 63.1%
Buildings and leasehold improvements
16.6%
Construction work in progress 14.7%
Other 5.6%
- ----------------------------------------------------------
100.0%
-------------
- --------------------------------------------------------------------------------
Item 3. Legal Proceedings
- --------------------------------------------------------------------------------
Sprint Spectrum has been involved in legal proceedings in various states
concerning the suspension of the processing or approval of permits and other
issues arising in connection with tower siting. There can be no assurance that
such litigation and similar actions taken by others seeking to block the
construction of individual cell sites of Sprint Spectrum's network will not, in
the aggregate, significantly delay further expansion of Sprint Spectrum's
network coverage.
Sprint Spectrum is involved in various other legal proceedings incidental to the
conduct of its business. While it is not possible to determine the ultimate
disposition of each of these proceedings, management believes that the outcome
of such proceedings, individually or in the aggregate, will not have a material
adverse effect on Sprint Spectrum's financial condition or results of
operations.
- --------------------------------------------------------------------------------
Item 4. Submission of Matters to a Vote of Security Holders
- --------------------------------------------------------------------------------
Omitted under the provisions of General Instruction I.
Part II
- --------------------------------------------------------------------------------
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- --------------------------------------------------------------------------------
At year-end 2000, Sprint Spectrum had no common equity and there is no market
for the common equity of FinCo.
- --------------------------------------------------------------------------------
Item 6. Selected Financial Data
- --------------------------------------------------------------------------------
Omitted under the provisions of General Instruction I.
- --------------------------------------------------------------------------------
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
For information required by Item 7, refer to the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" section of the
Financial Statements and Financial Statement Schedule filed as part of this
document and incorporated by reference herein.
- --------------------------------------------------------------------------------
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
- --------------------------------------------------------------------------------
Sprint Spectrum's exposure to market risk--through derivative financial
instruments and other financial instruments, such as long-term debt, from
changes in interest rates--is not material.
- --------------------------------------------------------------------------------
Item 8. Financial Statements and Supplementary Data
- --------------------------------------------------------------------------------
For information required by Item 8, refer to Sprint Spectrum's consolidated
financial statements and FinCo's financial statements, included in the Financial
Statements and Financial Statement Schedule sections, filed as part of this
document and incorporated by reference herein.
- --------------------------------------------------------------------------------
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
- --------------------------------------------------------------------------------
No reportable items.
Part III
- --------------------------------------------------------------------------------
Item 10. Directors and Executive Officers of the Registrants
- --------------------------------------------------------------------------------
Omitted under the provisions of General
Instruction I.
- --------------------------------------------------------------------------------
Item 11. Executive Compensation
- --------------------------------------------------------------------------------
Omitted under the provisions of
General Instruction I.
- --------------------------------------------------------------------------------
Item 12. Security Ownership of Certain Beneficial Owners and Management
- --------------------------------------------------------------------------------
Omitted under the provisions of General
Instruction I.
- --------------------------------------------------------------------------------
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------------------------------
Omitted under the provisions of General
Instruction I.
Part IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K
(a) 1. The consolidated financial statements of Sprint Spectrum and
financial statements of FinCo filed as part of this report are listed
in the Index to Financial Statements and Financial Statement Schedule.
2. The consolidated financial statement schedule of Sprint Spectrum filed
as part of this report is listed in the Index to Financial Statements
and Financial Statement Schedule.
3. The following Exhibits are part of this report.
EXHIBITS
Articles of Incorporation and Bylaws:
(3.1)Certificate of Limited Partnership of Sprint Spectrum L.P.
(incorporated by reference to Exhibit 3.2 to Sprint Spectrum's
Form S-1 Registration Statement, Registration No. 333-06609,
filed on June 21, 1996).
(3.2)Agreement of Limited Partnership of MajorCo Sub, L.P. (renamed
Sprint Spectrum L.P.), dated as of March 28, 1995, among MajorCo,
L.P. and MinorCo, L.P. (incorporated by reference to Exhibit 3.6
to Sprint Spectrum's Form S-1 Registration Statement,
Registration No. 333-06609, filed on June 21, 1996).
(3.3)First Amendment to Agreement of Limited Partnership of Sprint
Spectrum L.P., effective as of February 29, 2000 (incorporated by
reference to Exhibit 3.3 to Sprint Spectrum's Annual Report on
Form 10-K for the year ended December 31, 1999).
(3.4)Certificate of Incorporation of Sprint Spectrum Finance
Corporation (incorporated by reference to Exhibit 3.3 to Sprint
Spectrum's Form S-1 Registration Statement, Registration No.
333-06609, filed on June 21, 1996).
(3.5)Bylaws of Sprint Spectrum Finance Corporation (incorporated by
reference to Exhibit 3.4 to Sprint Spectrum's Form S-1
Registration Statement, Registration No. 333-06609, filed on June
21, 1996).
Instruments Defining the Rights of Security Holders
(4.1)Senior Note Indenture (including form of Senior Note), dated
August 23, 1996, between Sprint Spectrum L.P., Sprint Spectrum
Finance Corporation, and The Bank of New York, as Trustee
(incorporated by reference to Exhibit 4.1 to Sprint Spectrum's
Form 10-Q for the quarter ended September 30, 1996).
(4.2)Senior Discount Note Indenture (including form of Senior
Discount Note), dated August 23, 1996, between Sprint Spectrum
L.P., Sprint Spectrum Finance Corporation, and The Bank of New
York, as Trustee (incorporated by reference to Exhibit 4.3 to
Sprint Spectrum's Form 10-Q for the quarter ended September 30,
1996).
(4.3)Loans from Sprint Corporation to Sprint Spectrum L.P. are
governed by Sprint's Tracking Stock Policies (incorporated by
reference to Exhibit 4D to Post-Effective Amendment No. 2 to
Sprint Corporation's Form S-3 Registration Statement,
Registration No. 33-58488, filed on December 3, 1998).
Executive Compensation Arrangements
(10.1) Employment Agreement dated as of September 29, 1995, between
Sprint Spectrum Holding Company, L.P. and Joseph M. Gensheimer
(incorporated by reference to Exhibit 10.11 to Amendment No. 3 to
Sprint Spectrum's Form S-1 Registration Statement, Registration
No. 333-06609, filed on July 30, 1996).
(10.2) Employment Agreement dated January 21, 1997, between Sprint
Spectrum L.P. and Charles E. Levine (incorporated by reference to
Exhibit 10.4 to Sprint Spectrum's Form 10-Q for the quarter ended
March 31, 1997).
Sprint Spectrum will furnish to the Securities and Exchange Commission, upon
request, a copy of the instruments (other than those listed above) defining the
rights of holders of its long-term debt.
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed in the 2000 fourth quarter.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SPRINT SPECTRUM L.P.
---------------------------------------------------
(Registrant)
/s/ Charles E. Levine
---------------------------------------------------
Charles E. Levine
President
Date: March 28, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on the 28th day of March, 2001.
/s/ Charles E. Levine
---------------------------------------------------
Charles E. Levine
President
(Principal Executive Officer)
/s/ William J. Gunter
---------------------------------------------------
William J. Gunter
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ Eric R. Slusser
---------------------------------------------------
Eric R. Slusser
Controller
SIGNATURES
SPRINT SPECTRUM L.P.
---------------------------------------------------
(Registrant)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on the 28th day of March, 2001.
/s/ J. Richard Devlin
---------------------------------------------------
J. Richard Devlin, Director
SWV Six, Inc., a general partner of Sprint Spectrum
Holding Company, L.P., a limited partnership that
is general partner of Sprint Spectrum L.P.
/s/ Tom Gerke
---------------------------------------------------
Tom Gerke, Director
SWV Six, Inc., a general partner of Sprint Spectrum
Holding Company, L.P., a limited partnership that
is general partner of Sprint Spectrum L.P.
/s/ Arthur B. Krause
---------------------------------------------------
Arthur B. Krause, Director
SWV Six, Inc., a general partner of Sprint Spectrum
Holding Company, L.P., a limited partnership that
is general partner of Sprint Spectrum L.P.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SPRINT SPECTRUM FINANCE CORPORATION
---------------------------------------------------
(Registrant)
/s/ Charles E. Levine
---------------------------------------------------
Charles E. Levine
President
Date: March 28, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on the 28th day of March, 2001.
/s/ Charles E. Levine
---------------------------------------------------
Charles E. Levine
President
(Principal Executive Officer)
/s/ William J. Gunter
---------------------------------------------------
William J. Gunter
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ Eric R. Slusser
---------------------------------------------------
Eric R. Slusser
Controller
/s/ Michael T. Hyde
---------------------------------------------------
Michael T. Hyde
Director
/s/ Tom Gerke
---------------------------------------------------
Tom Gerke
Director
/s/ Laura L. Ozenberger
---------------------------------------------------
Laura L. Ozenberger
Director
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Page
Reference
-------------------
SPRINT SPECTRUM L.P.
Management's Discussion and Analysis of Financial Condition and Results of Operations
F-2
Consolidated Financial Statements
Report of Independent Auditors F-4
Consolidated Statements of Operations F-6
Consolidated Balance Sheets F-7
Consolidated Statements of Cash Flows F-8
Consolidated Statements of Changes in Partners' Capital F-9
Notes to Consolidated Financial Statements F-10
Financial Statement Schedule
Schedule II F-15
SPRINT SPECTRUM FINANCE CORPORATION
Management's Discussion and Analysis of Financial Condition and Results of Operations
F-16
Financial Statements
Balance Sheets F-17
Note to Balance Sheets F-18
F-1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Sprint Spectrum L.P.
- --------------------------------------------------------------------------------
General
- --------------------------------------------------------------------------------
Sprint Spectrum L.P., with its wholly owned subsidiaries (Sprint Spectrum),
began commercial code division multiple access operations late in the 1996
fourth quarter. Sprint Spectrum is wholly owned by Sprint Corporation (Sprint).
In November 1998, Sprint purchased the remaining ownership interests in Sprint
Spectrum Holding Company, L.P. and MinorCo, L.P. from Tele-Communications, Inc.,
Comcast Corporation and Cox Communications, Inc. At that time, Sprint created
the Sprint PCS Group, which consists of Sprint's wireless personal communication
services (PCS), including Sprint Spectrum. Sprint Spectrum Holding Company, L.P.
is the general partner of Sprint Spectrum L.P. and MinorCo, L.P. is the limited
partner.
- --------------------------------------------------------------------------------
Forward-Looking Information
- --------------------------------------------------------------------------------
Sprint Spectrum includes certain estimates, projections and other
forward-looking statements in its reports, in presentations to analysts and
others, and in other publicly available material. Future performance cannot be
ensured. Actual results may differ materially from those in the forward-looking
statements. Some factors that could cause actual results to differ include:
o the effects of vigorous competition in the markets in which Sprint
Spectrum operates;
o the costs and business risks associated with providing new services
and entering and expanding markets necessary to provide seamless
services;
o the ability of Sprint Spectrum to continue to grow a significant
market presence;
o the effects of mergers and consolidations within the
telecommunications industry;
o the impact of any unusual items resulting from ongoing evaluations of
Sprint Spectrum's business strategies;
o unexpected results of litigation filed against Sprint Spectrum;
o the possibility of one or more of the markets in which Sprint Spectrum
competes being impacted by changes in political, economic or other
factors such as monetary policy, legal and regulatory changes or other
external factors over which Sprint Spectrum has no control; and
o other risks referenced from time to time in Sprint's or Sprint
Spectrum'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 Spectrum is not obligated to publicly release any revisions to
forward-looking statements to reflect events after the date of this report or
unforeseen events.
- --------------------------------------------------------------------------------
Results of Operations
- --------------------------------------------------------------------------------
- --------------------------------------------------------
2000 1999 1998
- --------------------------------------------------------
(millions)
Net operating
revenues $ 3,942 $ 2,258 $ 961
- --------------------------------------------------------
Operating expenses
Costs of
services and 1,822 1,451 925
products
Selling, general
and
administrative 1,896 1,502 1,063
Depreciation and
amortization 918 747 592
- --------------------------------------------------------
Total operating
expenses 4,636 3,700 2,580
- --------------------------------------------------------
Operating loss $ (694) $ (1,442) $ (1,619)
-----------------------------------
Loss before
extraordinary $ (1,337) $ (1,965)$ (1,996)
items
-----------------------------------
Capital expenditures $ (1,957) $ (1,712) $ (1,248)
-----------------------------------
Sprint Spectrum 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 approximately 25% of net operating revenues in 2000,
28% in 1999 and 25% in 1998.
Net Operating Revenues
Net operating revenues include subscriber revenues and sales of handsets and
accessory equipment. Subscriber revenues consist of monthly recurring charges,
usage charges and activation fees. Subscriber revenues increased 79% in 2000
mainly reflecting an increase in the average number of customers. Subscriber
revenues increased 141% in 1999 mainly reflecting the launch of new markets and
an increase in the average number of customers.
Average monthly customer churn rates have improved to the upper 2% range in 2000
from the mid 3% range during 1999 and 1998. The improvement reflects expanded
network coverage and the success of several customer retention initiatives.
Average monthly service revenue per user (ARPU) increased slightly in 2000
partly due to the implementation of activation charges in the second quarter.
ARPU decreased in 1999 due to a wider acceptance of lower-priced, bundled minute
rate plans.
F-2
Revenues from the sales of handsets and accessories were approximately 14% of
net operating revenues in 2000, 17% in 1999 and 19% in 1998. As part of Sprint
Spectrum's marketing plans, handsets are normally sold at prices below Sprint
Spectrum'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 26% in 2000 and 57% 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 26% in 2000 and 41% 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 to the mid-$300 range in 2000 from the mid-$400
range in 1999 and low-$600 range in 1998. Lower handset unit costs and scale
benefits from greater customer additions have contributed to the improvement.
Monthly cash cost per user (CCPU) consists of costs of service revenues, service
delivery and other general and administrative costs. CCPU decreased
approximately 30% in 2000 and 1999. 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 PCS
licenses, customer base and microwave relocation costs, which are being
amortized over 30 months to 40 years. Depreciation and amortization expense
increased 23% in 2000 and 26% in 1999. The increase in depreciation and
amortization expense reflects an increased property and customer base.
- --------------------------------------------------------------------------------
Nonoperating Items
- --------------------------------------------------------------------------------
Interest Expense
Sprint Spectrum's effective interest rate on long-term debt was 8.9% in 2000,
9.0% in 1999 and 9.4% in 1998. The decrease in the effective interest rate from
1998 mainly reflects increased borrowings with lower interest rates.
Extraordinary Items
In 1999, Sprint Spectrum terminated its revolving credit facilities and repaid,
prior to scheduled maturities, the related outstanding balance of $1.7 billion.
These facilities had interest rates ranging from 5.6% to 6.3%. These repayments
resulted in a $33 million extraordinary loss. These short-term borrowings were
repaid with proceeds from long-term financing provided by Sprint.
In 1998, Sprint Spectrum redeemed, prior to scheduled maturities, $2.9 billion
of vendor financing and term loans with a weighted average interest rate of
8.4%. This resulted in a $43 million extraordinary loss. The debt was repaid
using proceeds from senior notes allocated from Sprint.
- --------------------------------------------------------------------------------
Liquidity and Capital Resources
- --------------------------------------------------------------------------------
Sprint Spectrum's liquidity and capital resources are managed by Sprint. Sprint
funds the Sprint PCS Group's (including Sprint Spectrum's) operating losses,
working capital and debt service requirements.
- --------------------------------------------------------------------------------
Recently Issued Accounting Pronouncements
- --------------------------------------------------------------------------------
See Note 6 of Notes to Consolidated Financial Statements for a discussion of
recently issued accounting pronouncements.
F-3
REPORT OF INDEPENDENT AUDITORS
Partners of Sprint Spectrum L.P.
We have audited the accompanying consolidated balance sheets of Sprint Spectrum
L.P. and subsidiaries (Sprint Spectrum) as of December 31, 2000 and 1999, and
the related consolidated statements of operations, cash flows and changes in
partners' capital for the years then ended. Our audits also included the
financial statement schedule listed in the Index to Financial Statements and
Financial Statement Schedule. These financial statements and the schedule are
the responsibility of Sprint Spectrum's management. Our responsibility is to
express an opinion on these consolidated financial statements and the schedule
based on our audits.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Sprint
Spectrum L.P. and subsidiaries at December 31, 2000 and 1999, and the results of
their operations and their cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
Ernst & Young LLP
Kansas City, Missouri
February 1, 2001
F-4
REPORT OF INDEPENDENT AUDITORS
Partners of Sprint Spectrum L.P.
We have audited the consolidated statements of operations and cash flows of
Sprint Spectrum L.P. and subsidiaries (Sprint Spectrum) 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 Sprint Spectrum's 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 their operations and their cash flows of
Sprint Spectrum for the year ended December 31, 1998, in conformity with
generally accepted accounting principles. Also, in our opinion, Schedule II,
when considered in relation to the basic 1998 consolidated financial statements
taken as a whole, presents fairly in all material respects the information set
forth therein.
Deloitte & Touche LLP
Kansas City, Missouri
February 2, 1999
F-5
CONSOLIDATED STATEMENTS OF OPERATIONS Sprint Spectrum L.P.
(millions)
- -------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------
Net Operating Revenues $ 3,942 $ 2,258 $ 961
- -------------------------------------------------------------------------------------------------------------------
Operating Expenses
Costs of services and products 1,822 1,451 925
Selling, general and administrative 1,896 1,502 1,063
Depreciation 855 686 531
Amortization 63 61 61
- -------------------------------------------------------------------------------------------------------------------
Total operating expenses 4,636 3,700 2,580
- -------------------------------------------------------------------------------------------------------------------
Operating Loss (694) (1,442) (1,619)
Interest expense (689) (536) (387)
Other income, net 46 13 10
- -------------------------------------------------------------------------------------------------------------------
Loss before Extraordinary Items (1,337) (1,965) (1,996)
Extraordinary items - (33) (43)
- -------------------------------------------------------------------------------------------------------------------
Net Loss $ (1,337) $ (1,998) $ (2,039)
----------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
F-6
CONSOLIDATED BALANCE SHEETS Sprint Spectrum L.P.
(millions)
- -------------------------------------------------------------------------------------------------------------------------
December 31, 2000 1999
- -------------------------------------------------------------------------------------------------------------------------
Assets
Current assets
Cash and equivalents $ 117 $ 16
Accounts receivable, net of allowance for doubtful
accounts of $57 and $28 567 361
Affiliate receivable 161 142
Inventories 493 310
Prepaid expenses and other assets 103 54
- -------------------------------------------------------------------------------------------------------------------------
Total current assets 1,441 883
Property, plant and equipment
Network equipment 4,973 3,838
Construction work in progress 1,161 1,151
Buildings and leasehold improvements 1,305 873
Other 439 381
- -------------------------------------------------------------------------------------------------------------------------
Total property, plant and equipment 7,878 6,243
Accumulated depreciation (2,143) (1,447)
- -------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 5,735 4,796
Intangible assets
PCS licenses 2,129 2,137
Microwave relocation costs 344 314
Customer base 13 -
- -------------------------------------------------------------------------------------------------------------------------
Total intangible assets 2,486 2,451
Accumulated amortization (234) (171)
- -------------------------------------------------------------------------------------------------------------------------
Net intangible assets 2,252 2,280
Other assets 82 71
- -------------------------------------------------------------------------------------------------------------------------
Total $ 9,510 $ 8,030
-----------------------------------
Liabilities and Partners' Capital
Current liabilities
Current maturities of long-term debt $ 183 $ 5
Accounts payable 612 418
Affiliated payables to Sprint 465 274
Construction obligations 589 664
Accrued advertising 97 97
Accrued expenses and other current liabilities 601 405
- -------------------------------------------------------------------------------------------------------------------------
Total current liabilities 2,547 1,863
Long-term debt 9,656 7,960
Other noncurrent liabilities 145 89
Partners' capital and accumulated deficit:
Partners' capital 4,495 4,114
Accumulated deficit (7,333) (5,996)
- -------------------------------------------------------------------------------------------------------------------------
Total partners' capital and accumulated deficit (2,838) (1,882)
- -------------------------------------------------------------------------------------------------------------------------
Total $ 9,510 $ 8,030
-----------------------------------
See accompanying Notes to Consolidated Financial Statements.
F-7
CONSOLIDATED STATEMENTS OF CASH FLOWS Sprint Spectrum L.P.
(millions)
- -----------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
Operating Activities
Net loss $ (1,337) $ (1,998) $ (2,039)
Adjustments to reconcile net loss to net cash used by operating
activities:
Depreciation and amortization 918 747 592
Extraordinary loss - 33 43
Gain on sale of assets (34) - -
Amortization of debt discount and issuance costs 59 56 54
Changes in assets and liabilities:
Accounts receivable, net (206) (135) (129)
Affiliated receivables and payables, net 180 312 (113)
Inventories and other current assets (189) (232) 9
Accounts payable and other current liabilities 269 216 211
Other noncurrent assets and liabilities 32 34 25
- -----------------------------------------------------------------------------------------------------------------------
Net cash used by operating activities (308) (967) (1,347)
- -----------------------------------------------------------------------------------------------------------------------
Investing Activities
Capital expenditures (1,957) (1,712) (1,248)
Proceeds from sale of assets 165 - -
- -----------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (1,792) (1,712) (1,248)
- -----------------------------------------------------------------------------------------------------------------------
Financing Activities
Proceeds from long-term debt 1,822 4,074 5,234
Payments on long-term debt - (1,875) (2,889)
Partners' capital contributions 379 426 253
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,201 2,625 2,598
- -----------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash and Equivalents 101 (54) 3
Cash and Equivalents at Beginning of Year 16 70 67
- -----------------------------------------------------------------------------------------------------------------------
Cash and Equivalents at End of Year $ 117 $ 16 $ 70
----------------- ---------------- ----------------
See accompanying Notes to Consolidated Financial Statements.
F-8
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL Sprint Spectrum L.P.
(millions)
- ---------------------------------------------------------------------------------------------------------------------
Partners' Accumulated
Capital Deficit Total
- ---------------------------------------------------------------------------------------------------------------------
Beginning 1998 balance $ 3,437 $ (1,959) $ 1,478
Capital contributions 253 - 253
Net loss - (2,039) (2,039)
- ---------------------------------------------------------------------------------------------------------------------
Ending 1998 balance 3,690 (3,998) (308)
Capital contributions 426 - 426
Net loss - (1,998) (1,998)
Other, net (2) - (2)
- ---------------------------------------------------------------------------------------------------------------------
Ending 1999 balance 4,114 (5,996) (1,882)
Capital contributions 379 - 379
Net loss - (1,337) (1,337)
Other, net 2 - 2
- ---------------------------------------------------------------------------------------------------------------------
Ending 2000 balance $ 4,495 $ (7,333) $ (2,838)
----------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Sprint Spectrum L.P.
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
- --------------------------------------------------------------------------------
Tracking Stock Formation
Sprint Spectrum L.P., with its wholly owned subsidiaries (Sprint Spectrum),
began commercial code division multiple access operations late in the 1996
fourth quarter. Sprint Spectrum is wholly owned by Sprint Corporation (Sprint).
In November 1998, Sprint purchased the remaining ownership interests in Sprint
Spectrum Holding Company, L.P. (Holdings) and MinorCo, L.P. from
Tele-Communications, Inc., Comcast Corporation and Cox Communications, Inc. (the
Cable Partners). This transaction is referred to as the PCS Restructuring. At
that time, Sprint created the Sprint PCS Group, which consists of Sprint's
wireless personal communication services (PCS). The Sprint PCS Group includes
Sprint Spectrum, American PCS, L.P. (APC), PhillieCo, L.P. (PhillieCo),
SprintCom, Inc. (SprintCom) and Cox Communications PCS, L.P. (Cox PCS).
Sprint's PCS stock, which is a separate class of Sprint common stock, is
intended to reflect the performance of the PCS Group.
Basis of Consolidation and Presentation
The consolidated financial statements include the accounts of Sprint Spectrum
and its subsidiaries.
The consolidated financial statements are prepared using accounting principles
generally accepted in the United States. These principles require management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities, and the
reported amounts of revenues and expenses. Actual results could differ from
those estimates.
Certain prior-year amounts have been reclassified to conform to the current-year
presentation. These reclassifications had no effect on the results of operations
or partners' capital as previously reported.
Allocation of Shared Services
Sprint directly assigns, where possible, certain general and administrative
costs to Sprint Spectrum based on its 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 Sprint Spectrum.
Sprint believes that the costs allocated are comparable to the costs that would
be incurred if Sprint Spectrum would have been operating on a stand-alone basis.
The allocation of shared services may change at the discretion of Sprint.
Allocation of Financing
Financing activities for Sprint Spectrum are managed by Sprint on a centralized
basis. Debt incurred by Sprint on behalf of Sprint Spectrum is specifically
allocated to and reflected in Sprint Spectrum's consolidated financial
statements. Interest expense is allocated to Sprint Spectrum 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.
Under Sprint's centralized cash management program, Sprint and Sprint Spectrum
may advance funds to each other. These advances are accounted for as short-term
borrowings between the companies and bear interest at a market rate that is
substantially equal to the rate that the companies would be able to obtain from
third parties on a short-term basis.
The allocation of financing may change at the discretion of Sprint.
Income Taxes
Sprint Spectrum has not provided for federal or state income taxes since taxes
are the responsibility of the partners.
Revenue Recognition
Sprint Spectrum 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.
Sprint Spectrum 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 $60 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 Spectrum uses controlled disbursement banking arrangements
as part of its cash management program. Outstanding checks in excess of cash
balances were included in accounts payable. These amounts totaled $17 million at
year-end 2000 and $22 million at year-end 1999. Sprint Spectrum had sufficient
funds available to fund these outstanding checks when they were presented for
payment.
F-10
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
Sprint Spectrum capitalizes interest costs related to network buildout and PCS
licenses, which totaled $99 million in 2000, $71 million in 1999 and $36 million
in 1998.
Intangible Assets
Sprint Spectrum evaluates the recoverability of intangible assets when events or
circumstances indicate that such assets might be impaired. Sprint Spectrum
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.
PCS Licenses
Sprint Spectrum 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 $205 million at year-end 2000 and $152
million at year-end 1999.
Microwave Relocation Costs
Sprint Spectrum 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
$27 million at year-end 2000 and $19 million at year-end 1999.
Customer Base
Sprint Spectrum capitalized the fair value of $13 million for the customer base
acquired in 2000. The customer base is being amortized over 30 months using the
straight-line method. Accumulated amortization totaled $2 million at year-end
2000.
Advertising Costs
Sprint Spectrum expenses costs of advertising as incurred. Advertising costs
totaled $456 million in 2000, $371 million in 1999 and $212 million in 1998.
Stock-based Compensation
Sprint Spectrum participates in the incentive-based stock option plans and
employee stock purchase plan administered by Sprint for executives and other
employees. Sprint Spectrum 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 Sprint Spectrum applied
SFAS 123, pro forma net loss would have been $1,522 million in 2000, $2,051
million in 1999 and would not have changed materially for the year ended 1998.
Trademark Agreement
Sprint(R) is a registered trademark of Sprint and Sprint PCSSM is a registered
service mark of Sprint. Sprint Spectrum uses these on a royalty-free basis under
trademark license agreements.
- --------------------------------------------------------------------------------
2. Employee Benefit Plans
- --------------------------------------------------------------------------------
Defined Benefit Pension Plan
Effective January 1999, most Sprint Spectrum 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.
Net pension costs are determined for Sprint Spectrum based on a direct
calculation of service costs. Sprint Spectrum recorded net pension costs of
approximately $5 million in 2000 and $4 million in 1999.
Defined Contribution Plan
Prior to January 1999, Sprint Spectrum sponsored a savings and retirement
program for certain employees. Sprint Spectrum matched contributions equal to
50% of the contribution of each participant, up to the first 6% of compensation
that the employee elected to contribute. Expense under the savings plan was $6
million in 1998. Effective January 1999, Sprint Spectrum employees began making
contributions to Sprint's defined contribution plan. The existing assets of the
Sprint Spectrum savings plan were rolled over to Sprint's defined contribution
plan in early 1999. Sprint Spectrum recorded expense of approximately $14
million in 2000 and $9 million in 1999 for matching contributions to the Sprint
defined contribution plans.
Postretirement Benefits
Effective January 1999, most Sprint Spectrum 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.
Net postretirement benefits costs are determined for Sprint Spectrum based on a
direct calculation of service costs. Sprint Spectrum recorded net postretirement
benefits costs of $0.2 million in 2000 and $1 million in 1999.
F-11
Long-term Incentive Plan
Sprint Spectrum employees meeting certain eligibility requirements were included
in its long-term incentive plan (LTIP). Under this plan, participants received
appreciation units based on independent appraisals. Appreciation on the units
was based on annual independent appraisals. The 1997 plan year appreciation
units vest 25% per year beginning one year from the grant date and expire after
10 years.
In connection with the PCS Restructuring, Sprint discontinued the Sprint
Spectrum LTIP. The appreciation units were converted to shares of Sprint PCS
stock and options to buy PCS stock based on a formula designed to replace the
appreciated value of the units at the beginning of July 1998. For vested units
at year-end 1998, participants could elect to receive the appreciation in cash,
or in shares and options. Most elected to receive shares and options.
In 1999, Sprint began issuing the shares and the options have become
exercisable, based on the vesting requirements of the converted units.
- --------------------------------------------------------------------------------
3. Long term Debt
- --------------------------------------------------------------------------------
Sprint Spectrum's long-term debt at year-end was as follows:
- ------------------------------------------------------------------------------------------------------------------
Maturing 2000 1999
- ------------------------------------------------------------------------------------------------------------------
(millions)
Senior notes
7.6% to 9.5% (1) 2004 to 2028 $ 6,331 $ 5,331
11.0% to 12.5% 2001 to 2006 714 661
Notes payable and commercial paper (1) - 1,945 1,124
Intercompany notes with Sprint
8.4% 2006 844 844
Other
6.5% 2001 5 5
- ------------------------------------------------------------------------------------------------------------------
9,839 7,965
Less: current maturities 183 5
- ------------------------------------------------------------------------------------------------------------------
Long-term debt $ 9,656 $ 7,960
-----------------------------------
(1) These borrowings were incurred by Sprint and allocated to Sprint Spectrum. See Note 1 for a more detailed description of how
Sprint allocates financing to Sprint Spectrum.
Scheduled principal payments, excluding reclassified short-term borrowings,
during each of the next five years are as follows:
- ------------------------------------------------------
(millions)
2001 $ 183
2002 1,000
2003 -
2004 1,406
2005 -
- ------------------------------------------------------
Short-term Borrowings
Sprint allocated a portion of its notes payable and commercial paper to Sprint
Spectrum. Though Sprint's borrowings are renewable at various dates throughout
the year, they were classified as long-term debt because of Sprint's intent and
ability, through unused credit facilities, to refinance these borrowings on a
long-term basis. The weighted average interest rate charged to Sprint Spectrum
was 8.3% at year-end 2000 and 7.8% at year-end 1999.
In the 1999 first quarter, Sprint Spectrum terminated its revolving credit
facilities and repaid, prior to scheduled maturities, the related outstanding
balance of $1.7 billion. These facilities had interest rates ranging from 5.6%
to 6.3%. These repayments resulted in a $33 million extraordinary loss. These
short-term borrowings were repaid with the long-term financing provided by
Sprint.
Long-term Debt
Sprint Spectrum had borrowings allocated from Sprint totaling $8.3 billion at
year-end 2000 and $6.5 billion at year-end 1999. Sprint Spectrum used the
proceeds from debt allocated from Sprint and other borrowings from Sprint to
fund new capital investments, repay existing debt and fund operating losses and
working capital requirements.
Sprint loaned Sprint Spectrum $844 million in 1999 and $180 million in 1998.
Sprint Spectrum repaid $180 million in 1999.
In 1998, Sprint Spectrum redeemed, prior to scheduled maturities, $2.9 billion
of vendor financing and term loans with a weighted average interest rate of
8.4%. This resulted in a $43 million extraordinary loss. The debt was repaid
using proceeds from senior notes allocated from Sprint.
Sprint Spectrum's Senior Discount notes are recorded net of unamortized
discounts totaling $36 million at year-end 2000 and $89 million at year-end
1999.
F-12
Other
Sprint Spectrum had complied with all restrictive or financial covenants
relating to its debt arrangements at year-end 2000.
Sprint Spectrum estimates the fair value of its long-term debt using available
market information and appropriate valuation methodologies. As a result, the
following estimates do not necessarily represent the values Sprint Spectrum
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.
The estimated fair value of Sprint Spectrum's long-term debt is based on quoted
market prices for publicly traded issues. The estimated fair value of all other
issues is based on the present value of estimated future cash flows using a
discount rate based on the risks involved. The estimated fair value of Sprint
Spectrum's long-term debt was $9.5 billion at year-end 2000 and $7.8 billion at
year-end 1999.
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. A portion of
these losses totaling $65 million were allocated to Sprint Spectrum and are
being amortized to interest expense using the effective interest method over the
term of the debt. At year-end 2000, Sprint Spectrum's share of the remaining
unamortized deferred loss totaled $53 million.
- --------------------------------------------------------------------------------
4. Commitments and Contingencies
- --------------------------------------------------------------------------------
Litigation, Claims and Assessments
Various suits arising in the ordinary course of business are pending against
Sprint Spectrum. Management cannot predict the final outcome of these actions
but believes they will not be material to the consolidated financial statements.
Commitments
At year-end 2000, Sprint Spectrum has purchase commitments with various vendors
to purchase handsets and other equipment through 2001. Outstanding commitments
at year-end totaled approximately $830 million.
Sprint Spectrum has an agreement with a vendor to provide PCS call record and
retention services. Annual minimum commitments range from $40 to $60 million
through 2004. The agreement may be extended beyond 2004 at one-year intervals
with consent of both parties. Termination of the agreement is permissible with
cause.
Operating Leases
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 $ 101
2002 69
2003 53
2004 35
2005 11
Thereafter 34
- ------------------------------------------------------
Gross rental expense totaled $234 million in 2000, $172 million in 1999 and $139
million in 1998. Rental commitments for subleases were not significant. The
table excludes renewal options related to certain cell and switch site leases.
These renewal options generally have five-year terms and may be exercised from
time to time.
- --------------------------------------------------------------------------------
5. Additional Financial Information
- --------------------------------------------------------------------------------
Supplemental Cash Flows Information
Sprint Spectrum paid cash for interest, net of capitalized interest, totaling
$562 million in 2000, $409 million in 1999 and $189 million in 1998.
Noncash activities for Sprint Spectrum included $154 million of accrued interest
converted to long-term debt in 1998.
Related Party Transactions
Sprint
Sprint Spectrum is using Sprint's global markets division as its interexchange
carrier and purchasing wholesale long distance for resale to its customers.
Additionally, Sprint provided Sprint Spectrum with Caller ID services and
various other goods and services. Charges to Sprint Spectrum for these items
totaled $238 million in 2000, $164 million in 1999 and $125 million in 1998.
Sprint Spectrum provides Sprint with access to its network and telemarketing and
various other services. Charges to Sprint for these items totaled $21 million in
2000 and $2 million in 1999.
Sprint provided management, printing, mailing and warehousing services to Sprint
Spectrum totaling $103 million in 2000, $40 million in 1999 and $25 million in
1998.
The difference between Sprint's actual interest costs and the interest costs
charged to Sprint Spectrum on allocated debt totaled $130 million in 2000, $108
million in 1999 and $9 million in 1998. See Note 1 for a more detailed
description of how Sprint allocates financing to Sprint Spectrum. Additionally,
Sprint had an investment in Sprint Spectrum's Senior Discount notes totaling
$169 million at year-end 2000 and $150 million at year-end 1999. The related
interest expense totaled $19 million in 2000, $16 million in 1999 and $15
million in 1998.
F-13
Interest expense related to the intercompany notes with Sprint totaled $70
million in 2000, $60 million in 1999 and $26 million in 1998.
APC
APC reimburses Sprint Spectrum for certain allocated costs. APC provides PCS
services in the Washington, DC -- Baltimore major trading area (MTA). In
addition, APC pays affiliation fees to Sprint Spectrum. Reimbursement costs
totaled $62 million in 2000, $60 million in 1999 and $15 million in 1998. Sprint
Spectrum earned $10 million in 2000, $6 million in 1999 and $4 million in 1998
for affiliation fees. Sprint Spectrum had a receivable from APC totaling $37
million at year-end 2000 and $8 million at year-end 1999.
PhillieCo
Sprint Spectrum provides various services and charges affiliation fees to
PhillieCo, which provides PCS services in the Philadelphia MTA. These charges
totaled $66 million in 2000, $47 million in 1999 and $21 million in 1998. Sprint
Spectrum had a receivable from PhillieCo totaling $15 million at year-end 2000
and $5 million at year-end 1999.
SprintCom
In 1997, Sprint Spectrum began building SprintCom's PCS network. These services
include engineering, management, purchasing, accounting and other related
services and totaled $518 million in 2000, $395 million in 1999 and $100 million
in 1998. Sprint Spectrum had a receivable from SprintCom totaling $86 million at
year-end 2000 and $98 million at year-end 1999.
Cox PCS
Cox PCS, which provides PCS services in the Los Angeles--San Diego--Las Vegas
MTAs, reimburses Sprint Spectrum for certain allocated costs and participates in
certain handset agreements. Allocated costs totaled $159 million in 2000, $121
million in 1999 and $34 million in 1998. Sprint Spectrum had a receivable from
Cox PCS totaling $23 million at year-end 2000 and $30 million at year-end 1999.
Major Customer
Sprint Spectrum 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 approximately 25% of net operating revenues in 2000,
28% in 1999 and 25% in 1998
Concentrations of Credit Risk
Sprint Spectrum's accounts receivable are not subject to any concentration of
credit risk.
- --------------------------------------------------------------------------------
6. 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 was used
and whether it qualified for hedge accounting. When adopted in January 2001,
this statement had no material impact on Sprint Spectrum's consolidated
financial statements.
In September 2000, the Financial Accounting Standards Board issued SFAS No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities--a replacement of FASB Statement No. 125." This statement revises
the standards for accounting for securitizations and other transfers of
financial assets and provides consistent standards for distinguishing transfers
from sales and secured borrowings. This statement is effective for transactions
occurring after March 31, 2001 and is not expected to have a material impact on
Sprint Spectrum's consolidated financial statements.
- --------------------------------------------------------------------------------
7. Subsequent Event (Unaudited)
- --------------------------------------------------------------------------------
In January 2001, Sprint issued $2.4 billion of debt securities and allocated
$750 million of debt maturing in 2006 to Sprint Spectrum at an interest rate of
8.2%. The allocated debt was used mainly to repay commercial paper.
F-14
SPRINT SPECTRUM L.P.
SCHEDULE II -- CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2000, 1999 and 1998
Additions
---------------------------
Balance Charged to Balance
Beginning Charged to Other Other End of
of Year Income Accounts Deductions Year
- ----------------------------------------------------------------------------------------------------------------------
(millions)
2000
Allowance for doubtful accounts $ 28 $ 142 $ - $ (113)(1) $ 57
--------------------------------------------------------------------------
1999
Allowance for doubtful accounts $ 10 $ 123 $ - $ (105)(1) $ 28
--------------------------------------------------------------------------
1998
Allowance for doubtful accounts $ 9 $ 52 $ - $ (51)(1) $ 10
--------------------------------------------------------------------------
(1) Accounts written off, net of recoveries.
All other schedules are omitted because they are not applicable or because the required information is contained in the consolidated
financial statements or notes thereto included in this document.
F-15
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Sprint Spectrum
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Finance Corporation
Sprint Spectrum Finance Corporation (FinCo), a wholly owned subsidiary of Sprint
Spectrum L.P., was formed to be a co-obligor of certain securities issued by
Sprint Spectrum. FinCo has nominal assets and does not conduct any operations.
F-16
- --------------------------------------------------------------------------------------------------------------------
BALANCE SHEETS (Unaudited) Sprint Spectrum Finance Corporation
- --------------------------------------------------------------------------------------------------------------------
December 31, 2000 1999
- --------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholder's Deficit
Payable to Sprint Spectrum $ 1,497 $ 1,497
- --------------------------------------------------------------------------------------------------------------------
Shareholder's deficit
Common stock, $1.00 par value; 1,000 shares authorized;
100 shares issued and outstanding 100 100
Accumulated deficit (1,597) (1,597)
- --------------------------------------------------------------------------------------------------------------------
Total shareholder's deficit (1,497) (1,497)
- --------------------------------------------------------------------------------------------------------------------
Total $ - $ -
-------------------------------
See accompanying Note to Balance Sheets.
F-17
- --------------------------------------------------------------------------------
NOTE TO BALANCE SHEETS (Unaudited) Sprint Spectrum Finance Corporation
FinCo, a wholly owned subsidiary of Sprint Spectrum L.P., was formed to be a
co-obligor of certain securities issued by Sprint Spectrum. FinCo has nominal
assets and had no operations or cash flows for the years ended December 31,
2000, 1999 and 1998. At year-end 2000, FinCo was a co-obligor of $714 million of
Sprint Spectrum's senior notes. See Note 3 of Sprint Spectrum's Notes to
Consolidated Financial Statements for more information.
F-18