UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1996
-----------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 333-06609-01
SPRINT SPECTRUM L.P.
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(Exact name of registrant as specified in its charter)
DELAWARE 48-1165245
(State or other jurisdiction of incorporation (IRS Employer
or organization) Identification No.)
4900 Main Street, Kansas City, Missouri, 64112
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(Address of principal executive offices)
(816) 559-1000
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
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
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SPRINT SPECTRUM L.P.
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FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1996
INDEX
Page
Number
-------------
Part I - Financial Information................................... 1 - 8
Item 1. Financial Statements............................... 1 - 3
Consolidated Condensed Balance Sheets................... 1
Consolidated Condensed Statements of Operations......... 2
Consolidated Condensed Statements of Cash Flows......... 3
Notes to Consolidated Condensed Financial Statements.... 4 - 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 9 - 12
Part II - Other Information
Item 1. Legal Proceedings.................................. 13
Item 2. Changes in Securities.............................. 13
Item 3. Defaults On Senior Securities...................... 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information.................................. 13
Item 6. Exhibits and Reports on Form 8-K................... 13 - 14
Signature........................................................ 15
Exhibits
PART I.
Item 1.
SPRINT SPECTRUM L.P.
(As Reorganized)
(A Development Stage Enterprise)
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)
September 30, December 31,
1996 1995
-------------- --------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................................... $ 460,296 $ 1,123
Receivable from affiliates........................................ 8,124 340
Other receivables................................................. 1,176 -
Prepaid expenses and other assets................................. 7,889 188
----------------- -----------------
Total current assets............................................ 477,485 1,651
INVESTMENT IN PCS LICENSES........................................... 2,124,594 2,124,594
INVESTMENT IN UNCONSOLIDATED PARTNERSHIP............................. - 85,546
NOTE RECEIVABLE--UNCONSOLIDATED PARTNERSHIP........................... - 655
PROPERTY, PLANT AND EQUIPMENT, Net................................... 1,087,111 31,897
MICROWAVE RELOCATION COSTS, Net...................................... 72,039 -
OTHER ASSETS......................................................... 15,035 -
================= =================
TOTAL ASSETS......................................................... $ 3,776,264 $ 2,244,343
================= =================
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Current maturities of long-term debt--affiliate.................... $ 5,000 $ -
Current maturities of long-term debt--other........................ 48 -
Accounts payable.................................................. 87,208 47,503
Accrued expenses.................................................. 25,890 1,700
Accrued interest--affiliate........................................ 460 214
----------------- -----------------
Total current liabilities....................................... 118,606 49,417
DEFERRED COMPENSATION................................................ 8,981 1,856
NOTE PAYABLE--AFFILIATE............................................... - 5,000
SENIOR NOTES PAYABLE................................................. 250,000 -
SENIOR DISCOUNT NOTES PAYABLE, net of unamortized discount of
$222,984 at September 30, 1996................................... 277,016 -
CONSTRUCTION OBLIGATIONS............................................. 700,990 -
OTHER LONG TERM DEBT................................................. 706 -
COMMITMENTS AND CONTINGENCIES
LIMITED PARTNER INTEREST IN CONSOLIDATED
SUBSIDIARY........................................................ 5,000 5,000
PARTNERS' CAPITAL AND ACCUMULATED DEFICIT:
Partners' capital................................................. 2,781,383 2,296,806
Deficit accumulated during the development stage.................. (366,418) (113,736)
----------------- -----------------
Total partners' capital......................................... 2,414,965 2,183,070
================= =================
TOTAL LIABILITIES AND PARTNERS' CAPITAL.............................. $ 3,776,264 $ 2,244,343
================= =================
See accompanying notes to consolidated condensed financial statements.
PART I.
Item 1.
SPRINT SPECTRUM L.P.
(As Reorganized)
(A Development Stage Enterprise)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
(In Thousands)
Cumulative
Period from
October 24,
1994 (date of
inception) to
Three Months Ended September 30, Nine Months Ended September 30, September 30,
------------------------------------------------------------------------------------
1996 1995 1996 1995 1996
- -------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Operating expenses............... $ 3,850 $ - $ 6,949 $ - $ 6,949
Selling, general and
administrative................ 82,088 11,782 156,227 19,927 223,830
Depreciation..................... 1,197 62 1,835 161 2,084
--------------- ---------------- --------------- -------------- ---------------
Total operating expenses....... 87,135 11,844 165,011 20,088 232,863
LOSS FROM OPERATIONS................ (87,135) (11,844) (165,011) (20,088) (232,863)
OTHER INCOME (EXPENSE):
Interest income.................. 3,545 - 4,485 - 4,768
Interest expense................. (100) - (442) - (442)
Other income..................... 355 (161) 570 306 608
Equity in loss of unconsolidated
partnership.................... (11,152) (7,483) (92,284) (16,213) (138,489)
--------------- ---------------- --------------- -------------- ---------------
Total other income (expense)... (7,352) (7,644) (87,671) (15,907) (133,555)
--------------- ---------------- --------------- -------------- ---------------
NET LOSS............................ $ (94,487) $ (19,488) $ (252,682) $ (35,995) $ (366,418)
=============== ================ =============== ================ ===============
See accompanying notes to consolidated condensed financial statements.
Part I.
Item 1.
SPRINT SPECTRUM L.P.
(As Reorganized)
(A Development Stage Enterprise)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In Thousands)
Cumulative
Period from
October 24,
1994 (date of
Nine Months Ended inception) to
September 30, September 30,
-------------------------------------------------
1996 1995 1996
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................ $ (252,682) $ (35,995) $ (366,418)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Equity in loss of unconsolidated partnership.......... 92,284 16,213 138,489
Depreciation and amortization........................ 5,541 161 5,791
Loss on equipment..................................... - 31 31
Changes in assets and liabilities:
Receivables, prepaid expenses and other assets...... (19,052) (1,083) (19,580)
Accounts payable and accrued expenses............... 64,141 15,649 113,558
Deferred compensation............................... 7,125 - 8,981
--------------- ---------------- ---------------
Net cash used in operating activities............. (102,643) (5,024) (119,148)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................................... (356,059) (10,483) (388,273)
Proceeds on sale of equipment........................... - 37 37
Microwave relocation costs.............................. (72,039) - (72,039)
Purchase of PCS licenses................................ - (2,006,156) (2,124,594)
Investment in unconsolidated partnership................ - (117,407) (131,752)
Loan to unconsolidated partnership...................... (172,000) - (172,655)
--------------- ---------------- ---------------
Net cash used by investing activities............. (600,098) (2,134,009) (2,889,276)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt................ 524,200 - 524,200
Payments on long-term debt.............................. (11) (11)
Debt issuance costs..................................... (12,769) - (12,769)
Limited partner interest in consolidated subsidiary..... - 5,000 5,000
Borrowings from affiliates.............................. - 5,000 5,000
Partner capital contributions........................... 669,509 2,125,125 2,966,315
Dividends paid.......................................... (19,015) - (19,015)
--------------- ---------------- ---------------
Net cash provided by financing activities......... 1,161,914 2,135,125 3,468,720
INCREASE (DECREASE) IN CASH AND CASH --------------- ---------------- ---------------
EQUIVALENTS............................................. 459,173 (3,908) 460,296
CASH AND CASH EQUIVALENTS, Beginning of period............. 1,123 5,014 -
=============== ================ ===============
CASH AND CASH EQUIVALENTS, End of period................... $ 460,296 $ 1,106 $ 460,296
=============== ================ ===============
NON-CASH INVESTING ACTIVITIES
- The interest in an unconsolidated subsidiary of
$165,917 was transferred to Sprint Spectrum Holding
Company on August 31, 1996
- Capital expenditures of $356,059 for the nine months
ended September 30, 1996 are net of construction
obligations of $700,990 to be financed
See accompanying notes to consolidated condensed financial statements.
PART I.
Item 1.
SPRINT SPECTRUM L.P.
(As Reorganized)
(A Development Stage Enterprise)
Notes to Consolidated Condensed Financial Statements (Unaudited)
The information contained in this Form 10-Q for the three and nine-month interim
periods ended September 30, 1996 and 1995 and the cumulative period from October
24, 1994 (date of inception) to September 30, 1996 has been prepared in
accordance with instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In
the opinion of management, all adjustments considered necessary, consisting only
of normal recurring accruals, to present fairly the consolidated financial
position, results of operations, and cash flows for such interim periods have
been made (See Note 1).
Certain information and footnote disclosures normally included in consolidated
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The results of operations for the
nine months ended September 30, 1996 are not necessarily indicative of the
operating results that may be expected for the year ended December 31, 1996.
1. Basis of Presentation
Prior to July 1, 1996, substantially all wireless operations of Sprint Spectrum
L.P. and subsidiaries and Sprint Spectrum Holding Company, L.P. and subsidiaries
("Holdings") were conducted at Holdings and substantially all operating assets
and liabilities, with the exception of the interest in an unconsolidated
subsidiary and the ownership interest in PCS licenses, were held at Holdings. As
of July 1, 1996, Holdings transferred these net assets, and assigned agreements
related to the wireless operations to which it was a party to Sprint Spectrum
L.P. (the "Reorganization").
For purposes of these financial statements, these transactions have been treated
as transactions between entities under common control and accounted for in a
manner similar to a pooling of interest ("As Reorganized").
Accordingly, for periods prior to July 1, 1996, Sprint Spectrum L.P.'s
historical financial statements have been restated to reflect those operations
of Holdings that were transferred on July 1, 1996 on a pooled basis. Information
with respect to the financial position and results of operations of the separate
operations pooled herein is as follows (in thousands):
Sprint
Spectrum L.P. Holdings Combined
Total Assets
December 31, 1995........................................ $ 2,211,918 $ 2,244,343 $ 2,244,343
June 30, 1996............................................ 2,268,805 2,561,328 2,561,328
Partners' Capital & Accumulated Deficit
December 31, 1995........................................ 2,201,704 2,178,069 2,183,070
June 30, 1996............................................ 2,258,426 2,469,529 2,472,384
Net Loss
December 31, 1995........................................ (49,531) (110,429) (110,428)
June 30, 1996............................................ (81,278) (158,195) (158,195)
The Partnership, as used in these financial statements, refers to Sprint
Spectrum L.P. and subsidiaries inclusive of those operations of Holdings
combined therewith through June 30, 1996.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. In addition, the Partnership estimates its share of the losses in an
unconsolidated partnership based on expected allocation percentages. Actual
results could differ from those estimates.
Paging Services: The Company has commenced paging services pursuant to
agreements with Paging Network Equipment Company ("PageNet") and Sprint
Communications Company, L.P. ("Sprint"). Through September 30, 1996, paging
revenues were approximately $2,502,000 and were offset in Other Income by an
equal amount of operating expenses and management fees paid to Sprint.
2. Organization
Sprint Spectrum L.P. is a limited partnership formed in Delaware on March 28,
1995, by Sprint Spectrum Holding Company, L.P. ("Holdings") and MinorCo, L.P.
both of which were formed by Sprint Enterprises, L.P., TCI Telephony Services,
Inc. (as successor in interest to TCI Network Services), Comcast Telephony
Services and Cox Telephony Partnership (collectively, the "Partners"). The
Partners are subsidiaries of, respectively, Sprint Corporation ("Sprint"),
Tele-Communications, Inc. ("TCI"), Comcast Corporation ("Comcast") and Cox
Communications, Inc. ("Cox", and together with Sprint, TCI and Comcast, the
"Parents"). The Partnership was formed pursuant to a reorganization of the
operations of an existing partnership, WirelessCo, L.P. In March 1995, the
partners of WirelessCo, L.P. transferred their interest in WirelessCo, L.P. to
Holdings. The Partnership and certain other affiliated partnerships are doing
business as Sprint Spectrum and will offer services as Sprint PCS.
On May 15, 1996, Sprint Spectrum Equipment Company, L.P. ("EquipmentCo") and
Sprint Spectrum Realty Company, L.P. ("RealtyCo") were organized as subsidiaries
of Sprint Spectrum L.P. and MinorCo, L.P. for the purpose of holding PCS
network-related assets. On May 20, 1996, an additional subsidiary of Sprint
Spectrum L.P., Sprint Spectrum Finance Corporation ("FinCo"), was also formed to
be a co-obligor of the debt obligations discussed in Note 4.
The Partnership is consolidated with its subsidiaries, WirelessCo, L.P.,
EquipmentCo, RealtyCo and FinCo. These entities are development stage
enterprises. The partners of Sprint Spectrum L.P. have the following ownership
interests as of December 31, 1995:
Sprint Spectrum Holding Company, L.P. (general partner)........greater than 99%
MinorCo, L.P. (limited partner)....................................less than 1%
The Partnership and its subsidiaries are development stage enterprises. The
success of their development is dependent on a number of business factors,
including securing financing to complete network construction and fund initial
operations, successfully deploying the PCS network and attaining profitable
levels of market demand for Partnership products and services. The Partnership
and its subsidiaries have not yet generated operating revenues from PCS
services.
3. Investment in Unconsolidated Partnership
On January 9, 1995, WirelessCo, L.P., acquired a 49% limited partnership
interest in American PCS, L.P. ("APC"). American Personal Communications, Inc.
("APC, Inc.") holds a 51% partnership interest in APC and is the general
managing partner. Effective August 31, 1996, WirelessCo's partnership interest
in APC, the existing loans to APC, and obligations to provide additional funding
to APC were transferred to Holdings pursuant to an amendment to the partnership
agreement.
August 31, 1996 December 31, 1995
------------------ ------------------
Total assets........................ $ 293,914 $ 237,326
Total liabilities................... 341,432 171,180
Total revenues...................... 41,555 5,153
Net loss............................ 120,547 51,551
4. Senior Notes and Senior Discount Notes
In August 1996, Sprint Spectrum L.P. and Sprint Spectrum Finance Corporation
(together, the "Issuers") issued $250 million aggregate principal amount of 11%
Senior Notes due 2006 ("the Senior Notes"), and $500 million aggregate principal
amount at maturity of 12 1/2% Senior Discount Notes due 2006 (the "Senior
Discount Notes" and, together with the Senior Notes, the "Notes"). The Senior
Discount Notes were issued at a discount to their aggregate principal amount at
maturity and generated proceeds of approximately $273 million. Cash interest on
the Senior Notes will accrue at a rate of 11% per annum and is payable
semi-annually in arrears on each February 15 and August 15, commencing February
15, 1997. Cash interest will not accrue or be payable on the Senior Discount
Notes prior to August 15, 2001. Thereafter, cash interest on the Senior Discount
Notes will accrue at a rate of 12 1/2% per annum and will be payable
semi-annually in arrears on each February 15 and August 15, commencing February
15, 2002.
On August 15, 2001, the Issuers will be required to redeem an amount equal to
$384.772 per $1,000 principal amount at maturity of each Senior Discount Note
then outstanding ($192 million in aggregate principal amount at maturity,
assuming all of the Senior Discount Notes remain outstanding at such date).
The Senior Notes and Senior Discount Notes are redeemable at the option of the
Issuers, in whole or in part, at any time on or after August 15, 2001 at the
redemption prices set forth below, respectively, plus accrued and unpaid
interest, if any, to the redemption date, if redeemed during the 12 month period
beginning on August 15 of the years indicated below:
Senior Discount
Senior Notes Notes
Year Redemption Price Redemption Price
------ ---------------- ----------------
2001 105.500% 110.000%
2002 103.667% 106.500%
2003 101.833% 103.250%
2004 and thereafter 100.000% 100.000%
In addition, prior to August 15, 1999, the Issuers may redeem up to 35% of the
originally issued principal amount of Senior Notes and Senior Discount Notes (at
maturity). The redemption price of the Senior Notes is equal to 111.0% of the
principal amount of the Senior Notes so redeemed, plus accrued and unpaid
interest, if any to the redemption date with the net proceeds of one or more
public equity offerings (as defined), provided that at least 65% of the
originally issued principal amount of Senior Notes would remain outstanding
immediately after giving effect to such redemption. The redemption price of the
Senior Discount Notes is equal to 112.5% of the accreted value at the redemption
date of the Senior Discount Notes so redeemed, with the net proceeds of one or
more public equity offerings (as defined), provided that at least 65% of the
originally issued principal amount at maturity of the Senior Discount Notes
would remain outstanding immediately after giving effect to such redemption.
The Notes contain certain restrictive covenants, including (among other
requirements) limitations on additional indebtedness, limitations on restricted
payments, limitations on liens, and limitations on dividends and other payment
restrictions affecting restricted subsidiaries (as defined).
5. Commitments
Handset Purchase Agreement: In September 1996, the Company entered into a
three-year contract for the purchase of handsets totaling more than $600
million. Under the terms of this agreement, the purchase of handsets will
commence on or after April 1, 1997.
6. Subsequent Events
Vendor Financing: As of October 2, 1996, the Company entered into financing
agreements with Northern Telecom Inc. ("Nortel") and Lucent Technologies Inc.
("Lucent", and together with Nortel, the "Vendors") for multiple drawdown term
loan facilities totaling $1.3 billion and $1.8 billion, respectively. The
proceeds of such facilities are to be used to finance the purchase of goods and
services provided by the Vendors.
Nortel has committed to provide financing in two phases. During the first phase,
Nortel will finance up to $800 million. Once the full $800 million has been
utilized and the Company obtains additional equity commitments and/or
subordinated unsecured loans of at least $400 million and achieves certain
operating conditions, Nortel will finance up to an additional $500 million. In
addition, the Company will be obligated to pay origination fees on the date of
the initial draw down loan under the first and second phases. The Nortel
agreement terminates on the earliest of (a) the date the availability under the
commitments is reduced to zero, (b) December 31, 2000, or (c) March 31, 1997 if
no borrowings under the agreements have been drawn.
Lucent has committed to financing up to $1 billion through December 31, 1996, up
to $1.5 billion through December 31, 1997, and up to an aggregate of $1.8
billion thereafter; however, availability will be limited to $1 billion if the
Standard & Poor's rating of the Senior and Senior Discount Notes is lower than B
at any time prior to January 1, 1997. The Company pays a facility fee on the
daily amount of loans outstanding under the agreement, payable quarterly. The
Lucent agreement terminates June 30, 2001.
The principal amounts of the loans drawn under both the Nortel and Lucent
agreements are due in twenty consecutive quarterly installments, commencing on
the date which is thirty-nine months after the last day of such "Borrowing Year"
(defined in the agreements as any one of the five consecutive 12-month periods
following the date of the initial drawdown of the loan). The aggregate amount
due each year is equal to the percentages below multiplied by the total
principal amount of loans during each Borrowing Year:
Year Percentage
4 10%
5 15
6 20
7 25
8 30
The agreements provide two borrowing rate options. During the first phase of the
Nortel agreement and throughout the term of the Lucent agreement "ABR Loans"
bear interest at the greater of the prime rate, or 0.5% plus the Federal Funds
effective rate, plus 2%. "Eurodollar Loans" bear interest at the London
interbank (LIBOR) rate (any one of the 30-, 60- or 90-day rates, at the
discretion of the Company), plus 3%. During the second phase of the Nortel
agreement, ABR Loans bear interest at the greater of the prime rate, or 0.5%
plus the Federal Funds effective rate, plus 1.5%; and Eurodollar loans bear
interest at the LIBOR rate plus 2.5%. Interest from the date of each loan
through one year after the last day of the Borrowing Year is added to the
principal amount of each loan. Thereafter, interest is payable quarterly.
Bank Credit Facility: Sprint Spectrum L.P. entered into an agreement with The
Chase Manhattan Bank ("Chase") as agent for a group of lenders for a $2 billion
bank credit facility dated October 2, 1996. The proceeds of this facility are to
be used to finance working capital needs, subscriber acquisition costs, capital
expenditures and other general partnership purposes.
The facility consists of a revolving credit commitment of $1.7 billion and a
$300 million term loan commitment, $150 million of which was drawn down upon
closing and $150 million of which is to be drawn down within 90 days after
closing. The amount available under the revolving credit facility was $450
million on October 11, 1996. The availability will be increased upon the
achievement of certain financial and operating conditions as defined in the
agreement. Commitment fees for the revolving portion of the agreement are
payable quarterly based on average unused revolving commitments.
The revolving credit commitment expires July 13, 2005. Availability will be
reduced in quarterly installments ranging from $75 million to $175 million
commencing January 11, 2002. In addition, beginning January 1, 2000, the Company
will be required to apply a portion of excess cash flow (as defined) to equally
and ratably reduce commitments and loans under the agreement.
The term loans are due in sixteen consecutive quarterly installments beginning
January 11, 2002 in aggregate principal amounts of $125,000 for each of the
first fifteen payments with the remaining aggregate outstanding principal amount
of the term loans due as the last installment.
Interest on the term loans and/or the revolving credit loans is at the
applicable LIBOR rate plus 2.5% ("Eurodollar Loans"), or the greater of the
prime rate, or 0.5% plus the Federal Funds effective rate, plus 1.5% ("ABR
Loans"), at the Company's option. The interest rate may be adjusted downward for
improvements in the bond rating and/or leverage ratios. Interest on ABR Loans
and Eurodollar Loans with interest period terms in excess of 3 months is payable
quarterly. Interest on Eurodollar Loans with interest period terms of less than
3 months is payable on the last day of the interest period.
Common Terms of Vendor Financing and Bank Credit Facility: The term "Secured
Financing," as used herein, refers to the Vendor Financing and Bank Credit
Facility.
Borrowings under the Secured Financing are secured by the partnership interests
in WirelessCo, RealtyCo and EquipmentCo and certain other personal and real
property (the "Shared Lien"). The Shared Lien equally and ratably secures the
Secured Financing and certain other indebtedness of the Company. The Secured
Financing is jointly and severally guaranteed by WirelessCo, RealtyCo and
EquipmentCo. The Secured Financing is non-recourse to the Parents and the
Partners.
The Secured Financing agreements contain certain restrictive financial and
operating covenants, including (among other requirements) maximum debt ratios
(including debt to total capitalization), limitations on capital expenditures,
and limitations on additional indebtedness. The loss of the right to use the
Sprint trademark, the termination or non-renewal of any FCC license that reduces
population coverage below specified limits, or changes in controlling interest
in the Company, as defined, among other provisions, constitute events of
default.
PART I.
Item 2.
SPRINT SPECTRUM L.P.
(As Reorganized)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with Sprint
Spectrum's (As Reorganized) consolidated financial statements and notes thereto.
The term "Company" refers to Sprint Spectrum L.P. and its direct and indirect
subsidiaries, including Sprint Spectrum Finance Corporation ("FinCo"),
WirelessCo, L.P. ("WirelessCo"), Sprint Spectrum Realty Company, L.P.
("RealtyCo") and Sprint Spectrum Equipment Company, L.P. ("EquipmentCo"). The
Company's consolidated financial information has not been separately included
for the period presented because it would not reflect the financial condition of
the Company following the transfer of all of Sprint Spectrum Holding Company,
L.P.'s ("Holdings") assets used in the Company's PCS business and the
distribution of the Company's interest in APC to Holdings. The Sprint Spectrum
(As Reorganized) financial information that is presented reflects the transfer
of the operations of Holdings to the Company which took place on July 1, 1996.
The Company includes certain estimates, projections and other forward-looking
statements in its reports as well as in presentations to analysts and others and
in other material disseminated to the public. There can be no assurances of
future performance and actual results may differ materially from those in the
forward-looking statements. Factors which could cause actual results to differ
materially from estimates or projections contained in forward-looking statements
include:
- the effects of vigorous competition in the markets in which the
Company will operate;
- the cost of entering new markets necessary to provide services;
- the impact of any unusual items resulting from ongoing evaluations
of the Company's business strategies;
- requirements imposed on the Company and its competitors by
the Federal Communications Commission ("FCC") and state regulatory
commissions under the Telecommunications Act of 1996;
- the possibility of one or more of the markets in which the Company
will compete being impacted by variations in political, economic
or other factors over which the Company has no control; and
- unexpected results in litigation.
General
The Company is a development stage enterprise formed for the purpose of
establishing a nationwide personal communications service ("PCS") wireless
telecommunications network. The Company acquired PCS licenses in the FCC's A
Block and B Block PCS auction, which concluded in March 1995, to provide service
to 29 major trading areas ("MTAs") covering 150.3 million Pops. Additionally,
Cox has agreed to contribute to the Company, upon FCC approval, which is
pending, a PCS license for the Omaha MTA. The Company has also affiliated and
expects to continue to affiliate with other PCS providers. Pursuant to
affiliation agreements, each affiliated PCS service provider will use the
Sprint(R) (a registered trademark of Sprint Communications Company, L.P.) brand
name. Holdings owns a 49% limited partnership interest in American PCS, L.P.
("APC"), which owns a PCS license for, and operates a broadband GSM PCS system
in, the Washington D.C./Baltimore MTA. APC has affiliated with the Company and
is marketing its products and services under the Sprint brand name. Holdings
also expects to acquire a 49% limited partnership interest in Cox Communication
PCS, L.P., a partnership that will be formed to hold a PCS license for the Los
Angeles-San Diego MTA covering 21.5 million Pops. Cox, which currently owns this
license, has agreed to contribute the license to Cox Communication PCS, L.P. and
will manage and control Cox Communication PCS, L.P. The Company expects to sign
an affiliation agreement with Cox Communication PCS, L.P. during the fourth
quarter of 1996. At the same time, the Company also expects to affiliate with,
and provide various services to, PhillieCo, L.P. ("PhillieCo"), a limited
partnership organized by and among subsidiaries of Sprint, TCI and Cox that owns
a PCS license for the Philadelphia MTA covering 9.1 million Pops. In addition,
Sprint is currently participating in the FCC's D and E Block auction and is
actively bidding on licenses for markets where the Company does not currently
have
license coverage. The Company expects to enter into affiliation agreement(s)
with Sprint to provide service in license areas where Sprint successfully
obtains PCS licenses.
To date, the Company has incurred expenditures in conjunction with PCS license
acquisitions, initial design and construction of the PCS network, engineering,
marketing, administrative and other start up related expenses. The Company has
not yet commenced commercial operations for its PCS services and, as a result,
has not yet generated operating revenue or earnings. The Company intends to
initiate the commercial launch of its service in the fourth quarter of 1996 with
service in most MTAs by the end of the first half of 1997. Pop coverage at the
end of the initial launch period (approximately the end of the first half of
1997) is expected to reach approximately 57% of the Pops in all of the Company's
license areas with coverage in the individual license areas ranging from 19% to
90%. The timing of launch in individual markets will be determined by various
factors, principally zoning and microwave relocation factors, equipment delivery
schedules and local market and competitive considerations. The Company intends
to continue to expand its coverage in its PCS markets in its existing license
areas based on actual market experience, customer demand, and reductions in the
cost of technology. The extent to which the Company is able to generate
operating revenue and earnings is dependent on a number of business factors,
including securing financing to complete network construction and fund initial
operations and operating losses, successfully deploying the PCS network and
attaining profitable levels of market demand for the Company's products and
services.
Liquidity and Capital Resources
The buildout of the Company's PCS network and the marketing and distribution of
the Company's PCS products and services will require substantial capital. The
Company currently estimates that its capital requirements (capital expenditures,
the cost of its existing licenses, working capital, debt service requirements
and anticipated operating losses) for the period from inception through the end
of 1998 (based on the Company's current plans for its network buildout in its
current license areas) will total approximately $8.9 billion (of which
approximately $3.0 billion had been expended as of September 30, 1996). The
Company will also require substantial additional capital for new license
acquisitions or investments in entities making license acquisitions (if any)
and, after 1998, for coverage expansion, volume-driven network capacity and
other capital expenditures for existing and new license areas (if any), working
capital, debt service requirements and anticipated further operating losses.
Costs associated with the network buildout include switches, base stations,
towers, antennae, radio frequency engineering, cell site construction and
microwave relocation. Management estimates that capital expenditures associated
with the buildout will total approximately $3.8 billion through 1997, including
$2.1 billion in 1996. Estimated capital expenditures have increased due to
changes in the nature of certain network elements, actual construction
experience to date and additional network capacity requirements. Actual amounts
of the funds required may vary materially from these estimates and additional
funds would be required in the event of significant departures from the current
business plan, new license acquisitions, unforeseen delays, cost overruns,
unanticipated expenses, regulatory changes, engineering design changes and other
technological risks.
The Company currently has no sources of revenue to meet its capital requirements
and has relied upon capital contributions and advances from Holdings and third
party and public debt. Holdings also requires capital for its affiliate
investments and other partnership purposes. The Partners have agreed to
contribute up to an aggregate of $4.2 billion of equity to Holdings (to the
extent required by the annual budgets of Holdings as approved by the Partners)
through fiscal 1999. As of September 30, 1996, approximately $3.0 billion had
been contributed to Holdings, of which $2.7 billion had been contributed to the
Company and the remaining $0.3 billion had been contributed or advanced to APC.
The Company currently intends to obtain up to $0.9 billion of additional equity
following September 30, 1996, resulting in $3.6 billion in aggregate invested
equity capital in the Company, although there can be no assurance that any
additional capital will be obtained in the form of equity from the Parents or
otherwise. The Parents have committed to make available to the Company or cause
Holdings to make available to the Company up to $1.0 billion of such additional
equity, to the extent required by the Company to fund any projected cash
shortfall, under a Capital Contribution Agreement among the Company and the
Parents that provides for $1.0 billion in aggregate equity commitments (less,
subject to certain exceptions, amounts of cash equity contributed to the Company
after December 31, 1995). The Company's business plan and the financial
covenants and other terms of the Secured Financing (defined below) will require
such additional
equity financing prior to the end of 1998, absent a new financing source. The
$1.0 billion portion of the $4.2 billion not invested in the Company that may be
available to Holdings from the Partners may be used by Holdings to fund
Holdings' other affiliate commitments, to make other wireless investments and/or
to make new license acquisitions. Amounts budgeted by the Partners in future
years will determine the extent to which the commitments will actually be
utilized.
The Company has entered into financing agreements for up to an aggregate of $5.1
billion of senior secured loans from certain third parties. Nortel has committed
to provide up to $1.3 billion in senior secured loans to finance purchases of
Nortel's PCS equipment and related services, Lucent has committed to provide up
to $1.8 billion in senior secured loans (together with the Nortel commitment,
the "Vendor Financing"). Under the related procurement contracts with Lucent and
Nortel, the Company is required to purchase minimum amounts of equipment and
services from each vendor. The Company will use the proceeds from the Vendor
Financing to fund the purchase of the equipment and software manufactured by the
vendors as well as substantially all of the construction and ancillary equipment
(e.g., towers, antennae, cable) required to construct the Company's PCS network.
These facilities will serve as the primary financing mechanism for the buildout
of the network. The Company has entered into a credit agreement with The Chase
Manhattan Bank ("Chase") in which Chase has committed to provide a fully
underwritten $2.0 billion bank credit facility (the "Bank Credit Facility" and,
together with the Vendor Financing, the "Secured Financing") to finance working
capital, capital expenditures, operating losses and other partnership purposes.
In August 1996, the Issuers issued $250 million aggregate principal amount of
the 11% Senior Notes and $500 million aggregate principal amount at maturity of
12 1/2% Senior Discount Notes. The Senior Discount Notes were issued at a
discount to their aggregate principal amount at maturity and generated proceeds
of approximately $273 million. Cash interest on the Senior Notes will accrue at
a rate of 11% per annum and is payable semi-annually in arrears on each February
15 and August 15, commencing February 15, 1997. Cash interest will not accrue or
be payable on the Senior Discount Notes prior to August 15, 2001. Thereafter,
cash interest on the Senior Discount Notes will accrue at a rate of 12 1/2% per
annum and will be payable semi-annually in arrears on each February 15 and
August 15, commencing February 15, 2002. On August 15, 2001, the Issuers will be
required to redeem an amount equal to $384.772 per $1,000 principal amount at
maturity of each Senior Discount Note then outstanding ($192 million in
aggregate principal amount at maturity, assuming all of the Senior Discount
Notes remain outstanding at such date). The proceeds of approximately $509
million from the issuance of the Notes (net of approximately $14 million of
underwriting discounts, commissions, and offering expenses) will be used to fund
capital expenditures, including the buildout of the nationwide PCS network, to
fund working capital as required, to fund operating losses and for other
partnership purposes.
Sources of funding for the Company's further financing requirements may include
additional vendor financing, public offerings or private placements of equity
and/or debt securities, commercial bank loans and/or capital contributions from
Holdings or the Partners. There can be no assurance that any additional
financing can be obtained on a timely basis and on terms acceptable to the
Company and within limitations contained in the Note indentures, the agreements
governing the Secured Financing and any new financing arrangements. Failure to
obtain any such financing could result in the delay or abandonment of the
Company's development and expansion plans and expenditures or the failure to
meet regulatory requirements. It also could impair the Company's ability to meet
its debt service requirements and could have a material adverse effect on its
business.
For the year-to-date period ended September 30, 1996, Sprint Spectrum (As
Reorganized) used cash of $103 million in operating activities, which consisted
of the operating loss of $253 million which is offset, in part, by the equity in
the loss of APC and increased payables and other accruals. Cash used in
investing activities totaled $600 million, consisting of capital expenditures
and microwave relocation costs of $428 million and advances to APC of $172
million.
Results of Operations
For the Three Months Ended September 30, 1996
Sprint Spectrum (As Reorganized) incurred a loss of $94 million for the three
months ended September 30, 1996, which includes equity in APC loss of $11
million through August 31, 1996. There was no amortization of licenses during
the period as PCS service had not been launched commercially.
For the Nine Months Ended September 30, 1996
Sprint Spectrum (As Reorganized) incurred a loss of $253 million for the nine
months ended September 30, 1996, which includes equity in APC loss of $92
million. There was no amortization of licenses during the period as PCS service
had not been launched commercially.
PART II.
Other Information
Item 1. Legal Proceedings
There were no reportable events during the quarter ended September 30,
1996.
Item 2. Changes in Securities
There were no reportable events during the quarter ended September 30,
1996.
Item 3. Defaults On Senior Securities
There were no reportable events during the quarter ended September 30,
1996.
Item 4. Submission of Matters to Votes of Security Holders
There were no reportable events during the quarter ended September 30,
1996.
Item 5. Other Information
As of September 17, 1996, the Company entered into an agreement
with Samsung Electronics Co., Ltd. ("Samsung") pursuant to which
Samsung will provide handsets to the Company for a three-year term
commencing on or around April 1, 1997, for an aggregate purchase price
of approximately $600 million.
As of September 10, 1996, the Company entered into a 10-year
agreement with Sprint Communications Company, L.P. and Tandy
Corporation, acting by and through its Radio Shack division ("Radio
Shack"), pursuant to which Radio Shack will provide a nationwide
distribution outlet for Sprint and Sprint PCS products and services.
The agreement may be terminated after three years', with six months'
prior notice.
As of July 15, 1996, the Company entered into an amendment to its
procurement and services agreement with Lucent Technologies Inc.
("Lucent") pursuant to which the Company agrees to purchase additional
equipment and services, including related software, from Lucent for
approximately $14 million.
Copies of the foregoing agreements have been filed as exhibits to
this Form 10-Q for the period ended September 30, 1996. The foregoing
summaries of certain provisions of the agreements do not purport to be
complete and are subject to, and qualified in their entirety by
reference to, all of the provisions of such respective agreements.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report:
3.1 Certificate of Limited Partnership of Sprint Spectrum L.P.
(incorporated by reference to Form S-1 Registration State- ment,
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 Form S-1 Registration
Statement, Registration No. 333-06609, filed on June 21, 1996).
4.1 Senior Note Indenture, dated August 23, 1996, between Sprint Spectrum
L.P., Sprint Spectrum Finance Corporation, and The Bank of New York,
as Trustee.
4.2 Form of Senior Note (included in Exhibit 4.1)
4.3 Senior Discount Note Indenture, dated August 23, 1996, between Sprint
Spectrum L.P., Sprint Spectrum Finance Corporation, and The Bank of
New York, as Trustee.
4.4 Form of Senior Discount Note (included in Exhibit 4.3).
10.1 Amendment No. 2 to the Lucent Technologies/Sprint Spectrum Procurement
and Services Contract, dated as of July 15, 1996 between Sprint
Spectrum Equipment Company, L.P. and Lucent Technologies, Inc. The
omitted portions indicated by brackets have been separately filed with
the Securities and Exchnage Commission pursuant to a request for con-
fidential treatment under Rule 24b-2 of the Securities and Exchange
Act of 1934, as amended.
10.2 First Amendment to Amended and Restated Trademark License Agreement,
dated as of September 26, 1996, between Sprint Communications Company,
L.P. and Sprint Spectrum Holding Company, L.P.
10.3 Assignment and Acceptance Agreement (regarding the Amended and
Restated Trademark License Agreement, as amended) dated as of
September 30, 1996 between Sprint Spectrum Holding Company, L.P. and
Sprint Spectrum L.P.
10.4 Amended and Restated Assignment and Assumption Agreement (Leases),
dated as of July 1, 1996, between Sprint Spectrum Holding Company,
L.P., Sprint Spectrum L.P. and Sprint Spectrum Realty Company, L.P.
10.5 Employment Agreement, dated as of July 29, 1996, between Sprint
Spectrum Holding Company, L.P. and Andrew Sukawaty (incorporated by
reference to Form S-1 Registration Statement, Registration No.
333-06609, filed on August 12, 1996).
10.6 Registration Rights Agreement, dated as of August 23, 1996 among
Sprint Spectrum L.P., Sprint Spectrum Finance Corporation and Sprint
Corporation.
10.7 Amended and Restated Capital Contribution Agreement, dated as of
October 2, 1996, among Sprint Corporation, Tele-communications, Inc.,
Comcast Corporation, Cox Communications, Inc. and Sprint Spectrum L.P.
10.8 Letter Agreement, dated as of August 31, 1996, between American PCS,
L.P., American Personal Communications Inc., WirelessCo, L.P., Sprint
Spectrum L.P. and Sprint Spectrum Holding Company, L.P. [Exhibits
omitted] (incorporated by reference to Form 10-Q, filed on September
26, 1996).
10.9 Subscriber Unit Equipment Purchase and Supply Agreement, dated as of
September 17, 1996, between Sprint Spectrum L.P. and Samsung
Electronics Co., Ltd. The omitted portions indicated by brackets have
been separately filed with the Securities and Exchange Commission pur-
suant to a request for confidential treatment under Rule 24b-2 of the
Securities Exchange Act of 1934, as amended.
10.10 Letter Agreement dated as of September 17, 1996, from Sprint Spectrum
L.P. to Samsung Electronics Co., Ltd. and Samsung Electronics Co.,
Ltd/Samsung Telecommunications America, Inc.
10.11 Master Agreement, dated as of September 1996, between Sprint
Communications Company, L.P., Sprint Spectrum L.P., Sprint United
Management Company and Tandy Corporation, a Delaware corporation
acting by and through its Radio Shack division. The omitted por-
tions indicated by brackets have been separately filed with the Secu-
rities and Exchange Commission pursuant to a request for confidential
treatment under Rule 24b-2 of the Securities Exchange Act of 1934, as
amended.
27 Financial data schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September
30, 1996.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPRINT SPECTRUM L.P.
(Registrant)
By /s/ John W. Meyer
John W. Meyer
Vice President and Controller
Dated: February 7, 1997