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SPRINT CAPITAL CORP; 424B5
November 2, 1998
Company Information
Address: WESTWOOD, Kansas, 66205
CIK: 0000907246
SIC Code: 4813 - Telephone communications, exc. radio
Filing Data
SEC File Number: 333-65649-01
Accession Number: 0000950130-98-005201
Contents
Subject Stock Info
Table of Contents
Prospectus Summary
Risk Factors
Ratio of Earnings
The Offering
Financial Data
FINANCIAL DATA 2
RISK FACTORS 2
Competition
Forward Look
Proceed Use
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SPRINT CAPITAL CORP; 424B5
Capitalization
FINANCIAL DATA 3
FINANCIAL DATA 4
FINANCIAL DATA 5
FINANCIAL DATA 6
Business
Securities Description
Taxation
Underwriting
Legal Matters
Experts
Financial Statements
Auditors Opinion
AUDITORS OPINION 2
Income Statement
Balance Sheet
Cash Flow
Stockholders Equity
Notes to Financial Statement
Certain Transactions
AUDITORS OPINION 3
INCOME STATEMENT 2
BALANCE SHEET 2
CASH FLOW 2
CERTAIN TRANSACTIONS 2
AUDITORS OPINION 4
INCOME STATEMENT 3
BALANCE SHEET 3
CASH FLOW 3
CERTAIN TRANSACTIONS 3
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SPRINT CAPITAL CORP; 424B5
AUDITORS OPINION 5
BALANCE SHEET 4
INCOME STATEMENT 4
STOCKHOLDERS EQUITY 2
CASH FLOW 4
More Information
PROCEED USE 2
SECURITIES DESCRIPTION 2
SECURITIES DESCRIPTION 3
Validity
Distribution Plan
Text
RULE NO. 424(b)(5)
REGISTRATION NO. 333-65649
333-65649-01
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND MAY BE +
+CHANGED. WE WILL DELIVER A FINAL PROSPECTUS SUPPLEMENT AND PROSPECTUS TO +
+PURCHASERS OF THESE SECURITIES. THIS PROSPECTUS SUPPLEMENT AND THE +
+ACCOMPANYING PROSPECTUS ARE NOT AN OFFER TO SELL THESE SECURITIES NOR ARE +
+THEY SEEKING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE +
+OFFER OR SALE IS NOT PERMITTED. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS SUPPLEMENT
(To Prospectus Dated October 23, 1998)
$
SPRINT CAPITAL CORPORATION
$ % NOTES DUE
$ % NOTES DUE
$ % NOTES DUE
$ % NOTES DUE
UNCONDITIONALLY GUARANTEED BY
SPRINT CORPORATION
The Notes will mature on , the Notes will mature on , the
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SPRINT CAPITAL CORP; 424B5
Notes will mature on and the Notes will mature on .
Interest on the Notes is payable semiannually on and , beginning
, 1999. Sprint Capital may redeem some or all of the Notes at any time.
The redemption price is described under the heading "Description of Notes--Optional Redemption" on page S-35 of this Prospectus Supplement. There is nosinking fund. Sprint Capital has applied to list the longest maturity Notes onthe New York Stock Exchange.
INVESTING IN THE NOTES INVOLVES CERTAIN RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE S-10 OF THIS PROSPECTUS SUPPLEMENT.
Neither the Securities and Exchange Commission nor any state securitiescommission has approved or disapproved these securities or determined if thisProspectus Supplement or the related Prospectus is truthful or complete. Anyrepresentation to the contrary is a criminal offense.
PUBLIC
OFFERING PROCEEDS TO
PRICE UNDERWRITING DISCOUNTS SPRINT
------------ ---------------------- ------------
Per Note % % %
Total $ $ $
Per Note % % %
Total $ $ $
Per Note % % %
Total $ $ $
Per Note % % %
Total $ $ $
Combined Total $ $ $
(before expenses)
Interest on the Notes will accrue from , 1998 to the date of delivery.
The Underwriters are offering the Notes subject to various conditions. The
Underwriters expect to deliver the Notes to purchasers on or about ,
1998.
SALOMON SMITH BARNEY
CREDIT SUISSE FIRST BOSTON
J.P. MORGAN & CO.
WARBURG DILLON READ LLC
CHASE SECURITIES INC.
LEHMAN BROTHERS
NATIONSBANC MONTGOMERY SECURITIES LLC
, 1998
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SPRINT CAPITAL CORP; 424B5
SUBJECT TO COMPLETION, DATED OCTOBER 30, 1998
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BYREFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE RELATED PROSPECTUS. WE HAVE NOTAUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT MAKINGAN OFFER OF THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER IS NOTPERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN ORINCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE RELATEDPROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THISPROSPECTUS SUPPLEMENT.
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TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary............................................. S-3
Risk Factors ............................................................. S-10
Special Note Regarding Forward-Looking Statements ........................ S-18
Use of Proceeds........................................................... S-19
Capitalization of Sprint Corporation...................................... S-20
Capitalization of the FON Group........................................... S-21
Capitalization of the PCS Group........................................... S-21
Sprint Corporation Selected Financial Data................................ S-22
FON Group Selected Financial Data......................................... S-23
Historical PCS Group Selected Financial Data.............................. S-24
Sprint Spectrum Holding Company Combined with MinorCo and PhillieCo
Selected Financial Data.................................................. S-25
Sprint Corporation........................................................ S-26
Description of Notes...................................................... S-35
United States Federal Income Tax Considerations........................... S-41
Underwriting.............................................................. S-44
Legal Matters............................................................. S-45
Experts................................................................... S-46
Glossary.................................................................. G-1
Index to Financial Statements............................................. F-1
Annex A--The Tracking Stock Proposal and Related Information.............. A-1
PROSPECTUS
Where You Can Find More Information....................................... 2
Sprint Capital Corporation................................................ 3
Sprint Corporation........................................................ 3
Use of Proceeds........................................................... 4
Ratios of Earnings to Fixed Charges....................................... 4
Description of Debt Securities............................................ 4
Description of Guarantees................................................. 13
Validity of the Debt Securities and Guarantees............................ 13
Experts................................................................... 13
Plan of Distribution...................................................... 14
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PROSPECTUS SUPPLEMENT SUMMARY
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SPRINT CAPITAL CORP; 424B5
The following summary highlights selected information from this ProspectusSupplement and may not contain all of the information that you should considerbefore investing in the Notes. This Prospectus Supplement, the accompanyingProspectus and the documents incorporated by reference include specific termsof the Notes, as well as information regarding our business and detailedfinancial data. We encourage you to read this Prospectus Supplement, theaccompanying Prospectus and the documents incorporated by reference.Capitalized terms that are not defined in the text have the meanings given tothem in the Glossary.
SPRINT CORPORATION
Sprint Corporation is a diversified telecommunications service provider. Ourprincipal activities include long distance service, local service, wirelesspersonal communications services ("PCS"), product distribution and directorypublishing activities, and other telecommunications activities, investments andalliances.
At a special meeting of stockholders to be held November 13, 1998, we areasking our stockholders to vote upon and approve our tracking stock proposal,which provides for, among other things:
. the creation of the PCS Group and the FON Group, which are describedbelow;
. Sprint's acquisition of 100% of the ownership and control of the wirelesstelephony businesses currently operating under the Sprint PCS(R) brandname, other than a 40.8% minority interest in the wireless telephonebusiness that serves the Los Angeles, San Diego and Las Vegas areas;
. the recapitalization of Sprint's outstanding publicly-traded common stockinto two new classes of common stock of Sprint: PCS Stock and FON Stock(together with a similar recapitalization of Sprint's outstanding Class Acommon stock); and
. subject to market conditions, the issuance of additional PCS Stock in anunderwritten IPO.
Pursuant to the tracking stock proposal, Sprint may elect to complete eitherthe IPO or the recapitalization at the closing of the acquisition describedabove. Sprint has decided to delay the IPO due to current general marketconditions. Therefore, at the closing of the acquisition, Sprint will completethe recapitalization of its outstanding common stock and Class A common stock.Sprint will continue to evaluate market conditions and may proceed with the IPOat a later date. There is no assurance that the IPO will be completed.
The trading price of the PCS Stock should reflect separately the performanceof the PCS Group. The trading price of the FON Stock should reflect separatelythe performance of the FON Group. We refer to the transactions described aboveas the "Tracking Stock Proposal." Details about the Tracking Stock Proposal andother information relating to the Tracking Stock Proposal can be found in Annex
A. The Notes offering is not conditioned upon completion of the transactionscontemplated by the Tracking Stock Proposal.
S-3
THE FON GROUP
The FON Group consists of all of Sprint's businesses and assets not includedin the PCS Group.
Sprint's long distance division is the nation's third-largest provider oflong distance telephone services. In this division, Sprint operates anationwide, all-digital long distance telecommunications network that usesstate-of-the-art fiber-optic and electronic technology. This division providesdomestic and international voice, video and data communications services.
Sprint's local telecommunications division consists primarily of regulatedlocal exchange carriers serving more than 7.5 million access lines in 18states. This division provides local services and access for telephonecustomers and
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SPRINT CAPITAL CORP; 424B5
other carriers to our local exchange facilities and sellstelecommunications equipment and long distance services within specifiedgeographical areas.
Sprint's product distribution and directory publishing businesses consist ofwholesale distribution of telecommunications equipment and publishing andmarketing white and yellow page telephone directories.
Other telecommunications activities of the FON Group include
. emerging businesses, which consist of the development of new integratedcommunications services, integration management and support services forcomputer networks and international development activities outside thescope of Global One;
. Sprint's interest in the Global One international strategic alliance, ajoint venture with France Telecom S.A. and
THE PCS GROUP
The PCS Group markets its wireless telephony products and services under theSprint(R) and Sprint PCS(R) brand names. The PCS Group operates the only 100%digital PCS wireless network in the United States with licenses to provideservice nationwide utilizing a single frequency band and a single technology.The PCS Group owns licenses to provide service to the entire United Statespopulation, including Puerto Rico and the U.S. Virgin Islands. As of October30, 1998, the PCS Group operates PCS systems in 176 metropolitan markets withinthe United States, including 39 of the 50 largest metropolitan areas. By theend of the first half of 1999, the PCS Group expects to operate PCS systems inall of the 50 largest metropolitan areas and 80 of the 100 largest metropolitanareas in the United States.
The PCS Group currently provides nationwide service through a combination of
. operating its own digital network in major metropolitan areas;
. affiliating with other companies, primarily in and around smallermetropolitan areas;
. roaming on analog cellular networks of other providers using Dual-Band/Dual-Mode Handsets; and
. roaming on digital PCS networks of other CDMA-based providers.
Since launching the first commercial PCS service in the United States inNovember 1995, the PCS Group has experienced rapid customer growth, providingservice to more than 1.75 million customers as of September 30, 1998.
S-4
Deutsche Telekom AG (France Telecom and Deutsche Telekom are Europeantelephone companies with a combined 20% equity investment in Sprint); and
. other telecommunications investments and alliances, such as Sprint'sinvestment in EarthLink Network, Inc., an Internet service provider.
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RISK FACTORS
You should consider carefully all of the information set forth in thisProspectus Supplement and the accompanying Prospectus and, in particular, theinformation set forth under "Risk Factors" before deciding to invest in theNotes.
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RATIOS OF EARNINGS TO FIXED CHARGES
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SPRINT CAPITAL CORP; 424B5
The ratio of earnings to fixed charges for Sprint was 5.70 for the ninemonths ended September 30, 1998 and 6.41 for the year ended December 31, 1997.
The supplemental ratio of earnings to fixed charges for Sprint, on a proforma basis giving effect to the restructuring of the PCS Group, but not to therefinancing of existing indebtedness with the proceeds from the Notes offering,was 1.49 for the year ended December 31, 1997. Pro forma earnings, as adjusted,were inadequate to cover fixed charges by $217.3 million for the nine monthsended September 30, 1998.
The ratio of earnings to fixed charges for Sprint, on a pro forma basisgiving effect to the assumed refinancing of existing indebtedness with theproceeds from the Notes offering (see "Use of Proceeds"), but not to therestructuring of the PCS Group, was for the nine months ended September 30,1998 and for the year ended December 31, 1997.
The above ratios were computed by dividing fixed charges into the sum ofearnings (after certain adjustments) and fixed charges. Earnings include incomefrom continuing operations before taxes, plus equity in the net losses ofentities that are less than 50% owned by Sprint, less capitalized interest.Fixed charges include (1) interest on all debt of continuing operations(including amortization of debt issuance costs), (2) the interest component ofoperating rents, and (3) the pre-tax cost of subsidiary preferred stockdividends.
S-5
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THE OFFERING
Issuer...................... Sprint Capital Corporation
Guarantor................... Sprint Corporation
Notes Offered............... principal amount of % Notes due
principal amount of % Notes due
principal amount of % Notes due
principal amount of % Notes due
Interest.................... Interest will accrue on the Notes from ,
1998 and will be payable on and of
each year, beginning , 1999.
Sinking Fund................ None
Optional Redemption......... The Notes will be redeemable, as a whole or
in part, at the option of Sprint Capital, at
any time or from time to time. The redemption
prices will be equal to the greater of (1)
100% of the principal amount of the Notes to
be redeemed or (2) the sum of the present
values of the remaining scheduled principal
and interest payments discounted, on a
semiannual basis, at a rate equal to the sum
of the Treasury rate and:
. basis points for the Notes
. basis points for the Notes
. basis points for the Notes
. basis points for the Notes
In the case of clauses (1) and (2), accrued
interest will be payable to the redemption
date.
Ranking..................... The Notes will be senior unsecured
obligations of Sprint Capital and will rank
equally with all other senior unsecured and
unsubordinated indebtedness of Sprint
Capital. The Guarantees will be senior
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SPRINT CAPITAL CORP; 424B5
unsecured obligations of Sprint and will rank
equally with all other senior unsecured and
unsubordinated indebtedness of Sprint.
S-6
Use of Proceeds............. The net proceeds to Sprint Capital from the
Notes offering will be approximately $ .
Sprint intends that such proceeds will be
used to repay existing indebtedness.
Under the policies adopted by the Sprint
Board, loans from Sprint or the FON Group to
the PCS Group must be made at interest rates
and on other terms and conditions
substantially equivalent to the interest
rates and other terms and conditions that the
PCS Group would be able to obtain from third
parties (including the public markets) as a
direct or indirect wholly-owned subsidiary of
Sprint, but without the benefit of any
guaranty by Sprint or any member of the FON
Group. Sprint or the FON Group will make
loans to the PCS Group on the basis set forth
above regardless of the interest rates and
other terms and conditions on which Sprint or
the FON Group may have acquired the subject
funds. These provisions will apply before
December 31, 2001 and cannot be modified,
suspended or rescinded, nor can any exception
be made to such provisions, prior to December
31, 2001. The Sprint Board currently does not
expect to amend these policies in any
material way after December 31, 2001. See
"The Tracking Stock Proposal and Related
Information-- Tracking Stock Policies" in
Annex A.
S-7
SPRINT CORPORATION
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SUMMARY FINANCIAL DATA
The following unaudited table sets forth summary financial data of Sprint. Itis important that you read the summary financial data presented below alongwith the Sprint Consolidated Financial Statements and notes thereto includedelsewhere in this Prospectus Supplement. The summary financial data at December31, 1997, 1996, 1995, 1994 and 1993, and for each of the five years in theperiod ended December 31, 1997, were prepared using the consolidated financialstatements of Sprint, which have been audited by Ernst & Young LLP, independentauditors. The summary financial data at September 30, 1998, and for the ninemonths ended September 30, 1998 and 1997, were prepared using the unauditedconsolidated financial statements of Sprint. The unaudited consolidatedfinancial
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SPRINT CAPITAL CORP; 424B5
statements of Sprint have been prepared on the same basis as Sprint'saudited consolidated financial statements and, in the opinion of management,contain all adjustments, consisting of only normal recurring accruals,necessary for a fair presentation of the financial position and results ofoperations for these periods. Results for the nine months ended September 30,1998 are not necessarily indicative of the results that may be expected for theentire year.
AT OR FOR THE
NINE MONTHS AT OR FOR THE
ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------- -------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- --------- ---------
(IN MILLIONS, EXCEPT PER SHARE DATA)
RESULTS OF OPERATIONS
DATA
Net operating revenues.. $11,940.3 $11,024.9 $14,873.9 $13,887.5 $12,735.3 $11,964.8 $10,894.9
Operating income(1)..... 2,017.9 1,840.9 2,451.4 2,267.2 1,834.3 1,690.7 1,214.1
Income from continuing
operations(1)(2)....... 669.3 757.6 952.5 1,190.9 946.1 899.2 517.1
Earnings per common
share from continuing
operations(1)(2)
Basic.................. 1.55 1.76 2.21 2.82 2.71 2.59 1.51
Diluted................ 1.52 1.74 2.18 2.79 2.69 2.56 1.49
Dividends per common
share.................. 0.75 0.75 1.00 1.00 1.00 1.00 1.00
Basic weighted average
common shares.......... 430.7 430.3 430.2 421.7 348.7 346.1 341.0
CASH FLOW DATA
Net cash from operating
activities--continuing
operations(3).......... $ 2,950.0 $ 2,410.7 $ 3,379.0 $ 2,403.6 $ 2,609.6 $ 2,339.6 $ 2,007.8
Capital expenditures.... 2,992.1 1,903.9 2,862.6 2,433.6 1,857.3 1,751.6 1,429.8
BALANCE SHEET DATA
Total assets............ $20,453.8 $18,184.8 $16,826.4 $15,074.3 $14,425.2 $13,781.8
Property, plant and
equipment, net......... 13,502.2 11,494.1 10,464.1 9,715.8 10,258.8 9,883.1
Total debt (including
construction
obligations and short-
term borrowings)....... 5,549.4 3,879.6 3,273.9 5,668.9 4,927.7 5,084.1
Redeemable preferred
stock.................. 9.5 11.5 11.8 32.5 37.1 38.6
Common stock and other
stockholders' equity... 9,302.3 9,025.2 8,519.9 4,642.6 4,524.8 3,918.3
SPRINT ADOPTED STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128, "EARNINGSPER SHARE" ("EPS"), AT YEAR-END 1997 (SEE NOTE 12 OF NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS). EPS AMOUNTS HAVE BEEN RESTATED TO COMPLY WITH THIS NEWSTANDARD. ALL EPS AMOUNTS DISCUSSED HEREIN REPRESENT "BASIC" EPS AS DEFINED INTHE NEW STANDARD.
CERTAIN PRIOR-YEAR AMOUNTS HAVE BEEN RECLASSIFIED TO CONFORM TO THE CURRENT-YEAR PRESENTATION. THESE RECLASSIFICATIONS HAD NO EFFECT ON THE RESULTS OFOPERATIONS OR STOCKHOLDERS' EQUITY AS PREVIOUSLY REPORTED.
(1) During the nine months ended September 30, 1997 and the year ended December31, 1996, Sprint recorded nonrecurring charges of $20 and $60 million,respectively, related to litigation within the long distance division.These charges reduced income from continuing operations by $13 million($0.03 per share) for the nine months ended September 30, 1997 and the yearended December 31, 1997 and $36 million ($0.09 per share) for the yearended December 31, 1996.During 1995, Sprint recorded a nonrecurring charge of $88 million related toa restructuring
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SPRINT CAPITAL CORP; 424B5
within the local telecommunications division, which reducedincome from continuing operations by $55 million ($0.16 per share).During 1993, Sprint recorded nonrecurring charges of $293 million related to
(a) transaction costs from the merger with Centel Corporation and expensesof integrating and restructuring the operations of the two companies and (b)a realignment and restructuring within the long distance division. Thesecharges reduced income from continuing operations by $193 million ($0.57 pershare).
(2) During 1997, Sprint recognized gains of $45 million on sales of localexchanges and a $26 million gain on the sale of an equity investment in anequipment provider. These gains increased income from continuing operationsby $27 million ($0.06 per share) and $17 million ($0.04 per share),respectively.During 1994, Sprint recognized a $35 million gain on the sale of equitysecurities, which increased income from continuing operations by $22 million($0.06 per share).During 1993, due to the enactment of the Revenue Reconciliation Act of 1993,Sprint adjusted its deferred income tax assets and liabilities to reflectthe increased tax rate. This adjustment reduced income from continuingoperations by $11 million ($0.03 per share).
(3) The 1996 amount was reduced by $600 million for cash required to terminatean accounts receivable sales agreement.
S-8
SPRINT CORPORATION
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SUMMARY PRO FORMA FINANCIAL DATA
The following unaudited table sets forth summary pro forma statement ofincome data of Sprint for the year ended December 31, 1997 and the nine monthsended September 30, 1998 and summary pro forma balance sheet data at September30, 1998. The summary pro forma data were prepared using the unaudited proforma condensed combined financial statements of Sprint included elsewhere inthis Prospectus Supplement. The pro forma statement of income data are intendedto give you a better picture of what Sprint's business might have looked likeif the following transactions had occurred on January 1, 1997: (1) therestructuring of the PCS Group, including the sale of shares of PCS Stock toFrance Telecom and Deutsche Telekom in connection with the restructuring of thePCS Group, and (2) the recapitalization of Sprint's common stock. The pro formabalance sheet data are intended to give you a better picture of what Sprint'sbusiness might have looked like if the following transactions had occurred onSeptember 30, 1998: (1) the restructuring of the PCS Group, including the saleof shares of PCS Stock to France Telecom and Deutsche Telekom in connectionwith the restructuring of the PCS Group, and (2) the recapitalization ofSprint's common stock. It is important that you read the summary pro forma datapresented below along with the Sprint Corporation Unaudited Pro Forma CondensedCombined Financial Statements and related notes thereto included elsewhere inthis Prospectus Supplement. The following pro forma information is notnecessarily indicative of (1) the results that Sprint would have reported ifsuch events had actually occurred on the dates specified or (2) the financialresults of Sprint after the restructuring of the PCS Group. Further, pro formaresults for the nine months ended September 30, 1998 are not necessarilyindicative of the results that may be expected for the entire year.
NINE MONTHS YEAR ENDED
ENDED SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------------ -----------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
STATEMENT OF INCOME DATA
Net operating revenues............. $12,728.2 $15,131.9
Operating income................... 373.2 823.3
Earnings (loss) from continuing op-
erations applicable to common
stock:
FON Group........................ $ 1,132.0 $ 1,373.6
PCS Group........................ (1,187.0) (1,186.1)
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SPRINT CAPITAL CORP; 424B5
--------- ---------
Total Sprint..................... $ (55.0) $ 187.5
========= =========
Basic earnings (loss) per common
share from continuing operations
FON Group........................ $ 2.63 $ 3.19
PCS Group........................ $ (2.86) $ (2.86)
Basic weighted average common
shares
FON Group........................ 430.7 430.2
PCS Group........................ 415.4 415.1
Diluted earnings (loss) per common
share from continuing operations
FON Group........................ $ 2.58 $ 3.15
PCS Group........................ $ (2.86) $ (2.86)
Diluted weighted average common
shares
FON Group........................ 438.7 436.5
PCS Group........................ 415.4 415.1
AT SEPTEMBER 30, 1998
---------------------
(IN MILLIONS)
BALANCE SHEET DATA
Total assets............................................. $31,950.5
Property, plant and equipment, net....................... 18,034.1
Total debt (including construction obligations and short-
term borrowings)........................................ 12,091.0
Common stock and other stockholders' equity.............. 12,897.0
S-9
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RISK FACTORS
An investment in the Notes offered hereby involves certain risks. You shouldconsider the following risk factors and the other information in thisProspectus Supplement carefully before purchasing any of the Notes. See"Special Note Regarding Forward-Looking Statements."
SUBSTANTIAL CAPITAL REQUIREMENTS AND EXPENDITURES
The FON Group and the PCS Group will continue to require substantialadditional capital after the Notes offering. Sprint estimates that the FONGroup's capital expenditures for 1999 will total between $3.7 and $4.2 billion,with additional capital requirements for investments in affiliates. Sprintcurrently estimates that the PCS Group's capital expenditures during the periodfrom July 1, 1998 through December 31, 1999 will total approximately $3.2 to$4.0 billion. Sprint expects that such expenditures will fund further networkbuildout and marketing and distribution costs. Actual amounts required may varymaterially from these estimates. Additional funds could be required in theevent of significant departures from either Group's current business plan,unforeseen delays, cost overruns, unanticipated expenses, regulatory changes,engineering design changes and technological and other factors. The PCS Groupmay require substantial additional capital for, among other uses, license orsystem acquisitions, system development, volume-driven network capacity, andtechnological developments or issues. In addition, Cox Communications, Inc. has"put" rights with respect to its remaining interest in Cox Communications PCS,L.P. pursuant to which Cox may elect to require Sprint to purchase all or aportion of Cox's remaining interest in Cox PCS, which could involve significantcash requirements. See "The Tracking Stock Proposal and Related Information--Amendments to the Cox PCS Agreements" in Annex A. Sprint may not be able toarrange additional financing to fund its capital requirements on termsacceptable to Sprint and may not be willing or able to provide
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SPRINT CAPITAL CORP; 424B5
such financingto the PCS Group. Failure to obtain any such financing could result in thedelay or abandonment of the PCS Group's development or expansion plans or thefailure to meet regulatory buildout requirements.
SIGNIFICANT INCREASE IN INDEBTEDNESS
Sprint will have significant outstanding indebtedness after it completes therestructuring of the PCS Group and the Notes offering. As of September 30,1998, Sprint had approximately $5.5 billion of indebtedness. If Sprint hadcompleted the restructuring of the PCS Group as of September 30, 1998, then ona pro forma basis Sprint would have had approximately $12.1 billion ofindebtedness at that time, an increase of approximately $6.6 billion. Sprintintends to incur significant additional indebtedness in the future as itimplements the business plans of the PCS Group and the FON Group. A portion ofSprint's future cash flow from operations will be required for the payment ofprincipal and interest on its indebtedness, which would reduce the fundsavailable for its operations, including acquisitions, capital investments andbusiness expenses. This could hinder its ability to adjust to changing marketand economic conditions. In addition, if Sprint incurs significantindebtedness, its credit rating could be adversely affected. As a resultSprint's borrowing costs would likely increase.
Both the FON Group and the PCS Group have substantial indebtedness. The PCSGroup's ability to make scheduled payments of principal and interest on or torefinance its indebtedness depends on its future performance and successfulimplementation of its business plan, which is
S-10
subject not only to its own actions but also to general economic, financial,competitive, legislative, regulatory and other factors beyond its control. ThePCS Group's business may not generate sufficient cash flow from operations andfuture credit may not be available to enable the PCS Group to service itsindebtedness. In addition, Sprint may not be able to arrange additionalfinancing to fund the PCS Group's debt service on terms acceptable to Sprintand may not be willing to provide such financing itself.
PCS GROUP OPERATING LOSSES AND NEGATIVE CASH FLOW FROM OPERATIONS
As of September 30, 1998, the entities that comprise the PCS Group hadincurred more than $3.9 billion in pre-tax cumulative losses. Sprint expectsthat the PCS Group will continue to incur significant operating losses and togenerate significant negative cash flow from operating activities during thenext several years while it continues to build its network and customer base.The PCS Group may never achieve or sustain operating profitability or positivecash flow from operating activities. If the PCS Group does not achieve andmaintain positive cash flow from operating activities and operatingprofitability on a timely basis, the PCS Group may be unable to make capitalexpenditures necessary to implement its business plan, meet its debt servicerequirements or otherwise conduct its business in an effective and competitivemanner. Such events could have a material adverse effect on the financialcondition of the PCS Group and Sprint as a whole.
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COMPETITION
There is substantial competition in the telecommunications industry. Thetraditional dividing lines between long distance, local, wireless and Internetservices are increasingly becoming blurred. Through mergers and various serviceintegration strategies, all major players, including Sprint, are striving toprovide integrated solutions both within and across all geographical markets.
Sprint expects competition to intensify as a result of the entrance of newcompetitors and the rapid development of new technologies, products andservices. Sprint cannot predict which of many possible future technologies,products or services will be important to maintain its competitive position orwhat expenditures will be required to develop and provide such technologies,products or services. Sprint's ability to compete successfully will depend onmarketing and on its ability to anticipate and respond to various competitivefactors affecting the industry, including new
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services that may be introduced,changes in consumer preferences, demographic trends, economic conditions anddiscount pricing strategies by competitors.
PCS Group. Each of the markets in which the PCS Group competes is served byother two-way wireless service providers, including cellular and PCS operatorsand resellers. A majority of markets will have five or more CMRS serviceproviders, and each of the top 50 metropolitan markets have at least one otherPCS competitor in addition to two cellular incumbents. Many of thesecompetitors have been operating for a number of years, currently serve asubstantial subscriber base, have significantly greater financial and technicalresources than those available to the PCS Group and offer attractive pricingoptions for service and a wider variety of handset options. A major competitorrecently introduced a nationwide flat-rate pricing plan that may be viewed asmore attractive than the PCS Group plans. Competition also may increase to theextent that licenses are transferred from
S-11
smaller stand-alone operations to larger, better capitalized and moreexperienced wireless communications operations that may be able to offercustomers network features not offered by the PCS Group.
The PCS Group is relying on agreements to provide automatic roamingcapability to PCS Group customers in many of the areas of the United States notserved by the PCS Group's network, which primarily serves metropolitan areas.Certain competitors may be able to offer coverage in areas not served by thePCS network or, because of their call volumes or their affiliations with, orownership of, wireless providers, may be able to offer roaming rates that arelower than those offered by the PCS Group. For a discussion of the technologyrisks associated with roaming and handsets, see "--PCS Group Technology Risks.
The PCS Group also expects that existing cellular providers, some of whichhave an infrastructure in place and have been operating for a number of years,will upgrade their systems and provide expanded and digital services to competewith the PCS Group's PCS system. Many of these wireless providers require theircustomers to enter into long term contracts, which may make it more difficultfor the PCS Group to attract these customers away from such wireless providers.In addition, the PCS Group does not require its customers to enter into longterm contracts, which may make it easier for other wireless providers toattract these customers away from the PCS Group.
The PCS Group anticipates that market prices for two-way wireless servicesgenerally will decline in the future based upon increased competition. Thesignificant competition among wireless providers, including from new entrants,is expected to continue to drive service and equipment prices lower. The PCSGroup also expects that there will be increases in advertising and promotionspending, along with increased demands on access to distribution channels. Allof this may lead to greater choices for customers, possible consumer confusionand increasing churn.
FON Group. The long distance division, as the nation's third largest providerof long distance services, competes with AT&T and MCI WorldCom, as well as ahost of smaller competitors. Recently, a class of new entrants has emerged(such as Qwest Communications International Inc. and Level 3 Communications,Inc.) that are building high-capacity fiber-optic networks capable ofsupporting tremendous amounts of bandwidth. Although these new entrants havenot captured significant market share, they and others with a strategy ofutilizing Internet-based networks claim certain cost structure advantageswhich, among other factors, may position them well for the future. In anyevent, the significant increase in capacity resulting from such new networksmay drive prices down further. Trials of low-cost, low-price Internet-basedlong distance services are currently being conducted by the FON Group and othertelecommunications companies.
Although the Telecommunications Act of 1996 (the "Telecom Act") allows theRegional Bell Operating Companies ("RBOCs") to provide long distance servicesin their respective regions if certain conditions are met, to date none of themhave been found to meet the criteria necessary for entry. Once approved, theRBOCs could prove to be formidable long distance competitors due to, amongother things, geographic coverage and customer loyalty.
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Because Sprint's local division operations are largely in rural markets,competition in the local division's markets is occurring more gradually. Thereis already significant competition in urban areas served by the FON Group andfor business customers located in all areas. Certain proposed
S-12
combinations involving competitors, such as the proposed merger of AT&T andTele-Communications, Inc. ("TCI"), would likely accelerate competition in theareas served by the FON Group. The merger with TCI would enable AT&T to bypassthe local exchange company and reach local customers through the cable of TCI.In addition, wireless services will continue to grow as an alternative towireline services as a means of reaching local customers.
PCS GROUP TECHNOLOGY RISKS
CDMA technology has only recently been deployed in the United States andinternationally. Although the PCS Group has selected CDMA technology because itbelieves such technology will offer several advantages over other technologies,CDMA may not provide the advantages expected by the PCS Group.
Existing analog cellular and other digital networks are not compatible withthe PCS Group's network. The PCS Group's network operates at a differentfrequency or uses a different technology than analog cellular or other digitalsystems. For the PCS Group's customers to access automatically anotherprovider's analog cellular or digital system, that provider must agree to allowthe PCS Group's customers to roam on its network, and customers roaming onanalog systems are required to utilize Dual-Mode/Dual-Band Handsets compatiblewith that system to take advantage of roaming agreements. Generally, Dual-Mode/Dual-Band Handsets are more costly than single- mode/single-band handsetsbecause of the need for two radios rather than one radio, and currently thesmallest Dual-Mode/Dual-Band Handset is larger and heavier than the smallestsingle-mode/single-band handset. Roaming agreements with other providers maynot be obtained or maintained on terms acceptable to the PCS Group. The PCSGroup's network does not allow for call hand-off between the PCS Group'snetwork and another wireless network, thus requiring a customer to end a callin progress and initiate a new call when leaving the PCS Group's network andentering another wireless network. In addition, the quality of the serviceprovided by a network provider during a roaming call may not approximate thequality of the service provided by the PCS Group and its affiliated companies,the price of a roaming call may not be competitive with prices of otherwireless companies for such call and the PCS Group customer may not be able touse any of the advanced features (e.g., voicemail notification) the customerenjoys when making calls from within the PCS Group network.
PCS GROUP BUSINESS RISKS MAY ADVERSELY AFFECT OVERALL SPRINT PERFORMANCE
PCS Group Network Buildout. The PCS Group has significant buildout activitiesto complete, including in the SprintCom markets. The SprintCom markets includeChicago, Houston and Atlanta. As the PCS Group continues the buildout of itsPCS network, it must:
. obtain rights to a large number of cell and switch sites;
. obtain zoning variances or other approvals or permits for networkconstruction;
. complete the radio frequency design, including cell site design,frequency planning and network optimization, for each of its remainingmarkets; and
. complete the fixed network implementation, which includes designing andinstalling network switching systems, radio systems, interconnectingfacilities and systems, and operating support systems.
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These events may not occur at the times that the PCS Group has scheduled,when the FCC requires, at the cost that the PCS Group has scheduled, or at all.Additionally, problems in vendor equipment availability or performance coulddelay the launch of operations in new markets or result in increased costs inall markets. Failure or delay to complete the buildout of the network andlaunch operations, or increased costs of such buildout and launch
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ofoperations, could have a material adverse effect on the operations andfinancial condition of the PCS Group or Sprint as a whole.
Maintenance, Expansion and Integration of PCS Group Internal SupportSystems. The successful expansion of the PCS Group's network is dependent onits ability to expand and maintain customer care, network management, billingand other financial and management systems (collectively referred to as"Internal Support Systems"), some of which are provided by third party vendors.In the past, vendors have often not had systems available to fully meet the PCSGroup's requirements. The failure to maintain, expand, integrate or deploythese Internal Support Systems in a timely manner could have a material adverseeffect on the PCS Group's competitive position and its ability to grow, retainand service its customer base, collect revenues from its customers, and providecritical management and financial information on a timely and accurate basis.
For example, increases in the capacity of the PCS Group's billing system aredependent upon the timely development and deployment of future softwarereleases. Assuming that a fourth quarter 1998 software release, which iscurrently in testing, meets expectations, management estimates that the PCSGroup's billing system will have sufficient capacity for anticipated customergrowth through mid-year 1999. Additional software releases are scheduled to bedelivered and installed by mid-year 1999, which are expected to meet estimatedbilling capacity requirements through mid-year 2000. Although contingency plansexist in the event that these releases are late, do not perform as planned orare delayed due to other business priorities, these contingency plans may notbe adequate. Ensuring adequate billing system capacity is dependent on a numberof factors including forecasts of customer growth and usage patterns andadequate software releases from third-party vendors. In addition, the rapidexpansion of the PCS Group's operations has placed increasing demands on thePCS Group's customer care systems and processes as well as managementinformation and financial systems and controls. For example, American PCS, L.P.was experiencing certain internal control problems prior to the time that thePCS Group acquired management control.
The rapid expansion of the PCS Group's business and the PCS Group's relianceon third-party vendors for a significant number of important functions andcomponents of its Internal Support Systems could have a material adverse effecton the PCS Group or Sprint as a whole.
Limited PCS Operating History in the United States; Significant Change inWireless Industry. PCS systems have a limited operating history in the UnitedStates, so it is difficult to estimate the potential demand in the PCS Group'smarkets with any degree of certainty. The wireless telecommunications industryis experiencing significant technological change, including ongoingimprovements in the capacity and quality of digital technology, which causesuncertainty about future customer demand for the PCS Group's services. There isalso uncertainty as to the extent to which airtime charges and monthlyrecurring charges may continue to decline. As a result, the future prospects ofthe wireless industry and the PCS Group and the success of PCS and othercompetitive services remain uncertain. Also, these rapid changes may lead tothe development of wireless
S-14
telecommunications service or alternative service that consumers prefer overPCS. The PCS Group's limited operating history and the industry's rapidtechnological developments may have a material adverse effect on the PCS Groupor Sprint as a whole.
Customer Churn, Dependence on Fourth Quarter Results and Radio FrequencyEmissions. The PCS Group has experienced a higher rate of customer churn ascompared to cellular industry averages. Although the PCS Group has implementedand plans to implement strategies to address customer churn, such strategies maynot be successful and the rate of customer churn may not decline. Additionally,the PCS Group and the wireless industry as a whole have experienced a trend ofgenerating a significantly higher number of customer additions and handset salesin the fourth quarter of each year as compared to the other three fiscalquarters. Strong fourth quarter results for customer additions and handset salesmay not continue for the PCS Group or the wireless industry. Finally, mediareports have suggested that certain radio frequency emissions from wirelesshandsets may be linked to various health concerns and may interfere with variouselectronic medical devices. Although management does not
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believe radio frequencyemissions raise health concerns, concerns over radio frequency emissions maydiscourage the use of wireless handsets or expose Sprint to litigation.
A high rate of customer churn, failure to significantly improve upon customeradditions and handset sales in the fourth quarter, and concerns over radiofrequency emissions could all have a material adverse effect on the operationsand financial condition of the PCS Group or Sprint as a whole.
GOVERNMENT REGULATION
PCS Group. The licensing, construction, operation, sale and interconnectionarrangements of wireless telecommunications systems are regulated to varyingdegrees by the Federal Communications Commission (the "FCC") and, depending onthe jurisdiction, state and local regulatory agencies. In addition, the FCC, inconjunction with the Federal Aviation Administration (the "FAA"), regulatestower marking and lighting. The FCC, the FAA or those state agencies havingjurisdiction over the PCS Group's business may adopt regulations or take otheractions that would adversely affect the business of the PCS Group.
FCC licenses to provide PCS services are subject to renewal and revocation.The PCS Group's MTA licenses will expire in 2005 and the BTA licenses willexpire in 2007. There may be competition for the licenses held by the PCS Groupupon their expiration, and the PCS Group's licenses might not be renewed. FCCrules require all PCS licensees to meet certain buildout requirements. The PCSGroup may not be able to obtain the requisite coverage in each market. Failureto comply with these requirements in a given license area could causerevocation or forfeiture of the PCS Group's PCS license for that license areaor the imposition of fines on the PCS Group by the FCC.
FON Group. The Telecom Act is designed to eliminate certain barriers to entryinto local telephone markets. In accordance with the Telecom Act, the FCC hasadopted numerous rules relating to competition, including rules regardinginterconnection to incumbent local networks by new market entrants. Many ofthese rules and certain provisions of the Telecom Act have been
S-15
challenged in court and, at least initially, struck down. Most of the decisionshave been appealed and in some cases the decision of the lower court has beenoverturned. The impact of the Telecom Act on Sprint remains unclear because therules for competition are still being decided by regulators and courts.Decisions by the FCC or courts may impose material costs on Sprint's efforts toenter new markets.
The Telecom Act also requires incumbent local exchange carriers ("ILECs"),among other things, to allow local resale at wholesale rates, negotiateinterconnection agreements, provide nondiscriminatory access to unbundlednetwork elements and allow collocation of interconnection equipment bycompetitors. Sprint owns ILECs operating in 18 states. In those areas in whichSprint is the ILEC, management expects local competition to result in loss ofmarket share. The extent of market share that will be lost cannot be estimatedat this time.
YEAR 2000 RISK
Failure by either the FON Group, the PCS Group or any of Sprint's significantthird-party service providers to be Year 2000 compliant in a timely mannercould have a material adverse effect on Sprint's operations. The "Year 2000"issue affects Sprint's installed computer systems, network elements, softwareapplications, and other business systems that have time sensitive programs thatmay not properly reflect or recognize the year 2000. Because many computers andcomputer applications define dates by the last two digits of the year, "00" maynot be properly identified as the year 2000. This error could result inmiscalculations or system errors. The Year 2000 issue may also affect thesystems and applications of Sprint's customers, vendors, resellers or otherservice providers.
PCS Group. The PCS Group is undertaking an inventory of its computer systems,network elements, software applications, products and other business systems.These inventories are targeted to be completed by year-end 1998. Once an itemis identified through the inventory process, its Year 2000 impact is assessedand a plan is developed to address any required renovation. The PCS Group isusing both internal and external resources to
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identify, correct or reprogram,and test its systems for Year 2000 compliance. The PCS Group is planning thatYear 2000 compliance for these critical systems will be achieved in 1999. ThePCS Group is also contacting third parties with whom it conducts business toreceive the appropriate warranties and assurances that those third parties areor will be Year 2000 compliant. However, full compliance may not be achieved asplanned by the PCS Group and such third parties, and the PCS Group may notreceive warranties and assurances from such third parties. The PCS Group relieson third-party vendors for a significant number of its important operating andcomputer system functions and therefore is highly dependent on such third-partyvendors for the remediation of network elements, computer systems, softwareapplications, and other business systems. In addition, the PCS Group usespublicly-available services that are acquired without contract (e.g., globalpositioning system timing signal) that may be subject to the Year 2000 issue.While management believes these systems will be Year 2000 compliant, the PCSGroup has no contractual or other right to compel compliance. Based uponmanagement's evaluations to date, it believes that the total cost ofmodifications and conversions of the PCS Group's systems will not be material,but such cost could become material because of the various reasons describedabove, many of which are out of the PCS Group's control.
S-16
FON Group. The FON Group started a program in 1996 to identify and addressthe Year 2000 issue. It has completed an inventory and Year 2000 assessment ofits principal computer systems, network elements, software applications andother business systems. Sprint expects to substantially complete the renovationof these computer systems, software applications and the majority of thenetwork elements and other business systems by year end 1998. Year 2000 testingcommenced in the third quarter of 1998 and will be completed during 1999. TheFON Group is using both internal and external sources to identify, correct orreprogram, and test its systems for Year 2000 compliance. The FON Group is alsocontacting others with whom it conducts business to receive the appropriatewarranties and assurances that those third parties are, or will be, Year 2000compliant.
Sprint expects to incur approximately $250 million in 1998 and 1999 tocomplete its Year 2000 compliance program. Although Sprint intends to developand implement, if necessary, appropriate contingency plans to mitigate to theextent possible the effects of any Year 2000 noncompliance, such plans may notbe adequate and the cost of Year 2000 compliance may be higher than $250million.
Affiliates. Sprint's results of operations and financial condition could alsobe materially adversely affected by the failure of its affiliates, includingGlobal One, to achieve Year 2000 compliance in a timely manner.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus Supplement includes and incorporates by reference "forward-looking statements" within the meaning of the securities laws. All statementsregarding the expected financial position, business and financing plans ofSprint, the FON Group and the PCS Group and statements that are not historicalfacts are "forward-looking statements." Such forward-looking statements,including statements relating to the future business prospects, revenues,working capital, liquidity, capital needs, PCS network buildout, interest costsand income, in each case relating to Sprint; Sprint Spectrum Holding Company,L.P. and MinorCo, L.P., together with their subsidiaries (collectively, "SprintSpectrum Holdings"); SprintCom, Inc. and SprintCom Equipment Company, L.P.(collectively, "SprintCom"); PhillieCo Partners I, L.P. and PhillieCo PartnersII, L.P., together with their subsidiaries ("PhillieCo"); the FON Group; andthe PCS Group, are estimates and projections reflecting the best judgment ofthe senior management of Sprint and Sprint Spectrum, L.P. and its subsidiaries("Sprint Spectrum") and involve a number of risks and uncertainties that couldcause actual results to differ materially from those suggested by the forward- looking statements. Although Sprint believes that the estimates and projectionsreflected in the forward-looking statements are reasonable, such expectationsmay prove to be incorrect. Important factors that could cause actual results todiffer materially from estimates or projections contained in the forward-looking statements include:
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. the effects of vigorous competition in the markets in which these entitiesoperate;
. the costs and business risks associated with entering new marketsnecessary to provide nationwide services and providing new services;
. the ability of the PCS Group to establish a significant market presence;
. the uncertainties related to Sprint's investments in Global One and otherjoint ventures;
. the impact of any unusual items resulting from ongoing evaluations of thebusiness strategies of these entities;
. requirements imposed on these entities or latitude allowed to theircompetitors by the FCC or state regulatory commissions under the TelecomAct or other applicable laws and regulations;
. unexpected results of litigation filed against these entities;
. the impact of the Year 2000 issue and any related non-compliance;
. the possibility of one or more of the markets in which these entitiescompete being impacted by changes in political, economic or other factorssuch as monetary policy, legal and regulatory changes or other externalfactors over which these entities have no control; and
. those factors listed in this Prospectus Supplement under "Risk Factors."See "Risk Factors."
The words "estimate," "project," "intend," "expect," "believe" and similarexpressions identify forward-looking statements. These forward-lookingstatements are found at various places throughout this Prospectus Supplementand the other documents incorporated by reference in this ProspectusSupplement. You should not place undue reliance on these forward-lookingstatements, which speak only as of the date of this Prospectus Supplement.Sprint has no obligation to revise these forward-looking statements to reflectevents or circumstances after the date of this Prospectus Supplement or toreflect the occurrence of unanticipated events. Moreover, in the future,Sprint, through senior management, may make forward-looking statements aboutthe matters described in this Prospectus Supplement or other matters concerningSprint, Sprint Spectrum Holdings, SprintCom, PhillieCo, the FON Group or thePCS Group.
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USE OF PROCEEDS
The net proceeds to Sprint Capital from the Notes offering will beapproximately $ billion. Sprint intends that such proceeds will be used torepay existing indebtedness bearing interest at annual rates from % to %,with maturities ranging from to . Sprint has used the amounts of suchexisting indebtedness that were borrowed in the past 12 months for workingcapital, capital expenditures, funding of affiliates and other purposes,including funding the buildout of the PCS network.
A portion of the net proceeds may be loaned to the PCS Group. Such loans willbe made at interest rates and on other terms and conditions substantiallyequivalent to those that the PCS Group would be able to obtain from thirdparties (including the public markets) as a wholly-owned subsidiary of Sprint,but without the benefit of any guaranty by Sprint or any member of the FONGroup. Accordingly, such interest rates are expected to be higher than theinterest rates for the Notes. The difference in the rates between the Notes andthe rate charged to the PCS Group will accrue to the benefit of the FON Group.See "The Tracking Stock Proposal and Related Information-- Tracking StockPolicies" in Annex A.
Certain of the underwriters or their affiliates are lenders under creditfacilities that may be repaid with net proceeds from the Notes offering. See"Underwriting."
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CAPITALIZATION OF SPRINT CORPORATION
The following table sets forth as of September 30, 1998 (1) the historicalconsolidated capitalization of Sprint; (2) the consolidated capitalization ofSprint on a pro forma basis to give effect to (a) the restructuring of the PCSGroup, including the sale of shares of PCS Stock to France Telecom andDeutsche Telekom in connection with the restructuring of the PCS Group and (b)the recapitalization of Sprint's common stock; and (3) the consolidatedcapitalization of Sprint on a pro forma basis, as adjusted to give effect tothe Notes offering and the application of the net proceeds of the offering.See "Use of Proceeds" and the Sprint Corporation Unaudited Pro Forma CondensedCombined Financial Statements and related notes thereto included elsewhere inthis Prospectus Supplement.
SEPTEMBER 30, 1998
------------------------------------
PRO FORMA
HISTORICAL PRO FORMA AS ADJUSTED
---------- --------- -----------
(IN MILLIONS)
Cash and equivalents...................... $ 47.7 $ 346.5 $
========= ========= =======
Short-term debt (includes current maturi-
ties of long-term debt).................. $ 80.6 $ 205.1 $
Long-term debt
Notes ............................. -- --
Notes ............................. -- --
Notes ............................. -- --
Notes ............................. -- --
Other long-term debt..................... 5,039.8 10,881.2
--------- --------- -------
Total.................................... 5,039.8 10,881.2 1,004.7
Construction obligations.................. 429.0 1,004.7 957.5
Redeemable preferred stock................ 9.5 9.5 9.5
Common stock, $2.50 par value, 1.0 billion
shares authorized, 344.5 million shares
outstanding (Historical), 0 shares
outstanding (Pro Forma and Pro Forma As
Adjusted)................................ 875.7 -- --
Class A common stock, $2.50 par value,
500.0 million shares authorized
(Historical), 200.0 million shares
authorized (Pro Forma and Pro Forma As
Adjusted), 86.2 million shares issued and
outstanding (Historical, Pro Forma and
Pro Forma As Adjusted) .................. 215.6 215.6(1) 215.6(1)
FON Stock, $2.00 par value, 4.2 billion
shares authorized, 0 shares outstanding
(Historical), 350.3 million shares issued
and 344.5 million shares outstanding (Pro
Forma and Pro Forma As Adjusted)......... -- 700.6(1) 700.6(1)
PCS Stock, $1.00 par value, 2.35 billion
shares authorized, 0 shares outstanding
(Historical), 375.1 million shares issued
and outstanding (Pro Forma and Pro Forma
As Adjusted)............................. -- 375.1(1) 375.1(1)
PCS preferred stock....................... -- 240.0 240.0
Capital in excess of par or stated value.. 4,490.8 7,663.1 7,663.1
Retained earnings......................... 4,012.7 4,010.7
Treasury stock, at cost................... (396.1) (396.1) (396.1)
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Other..................................... 103.6 88.0 88.0
--------- --------- -------
Total capitalization..................... $14,861.2 $24,997.5 $
========= ========= =======
(1) After the recapitalization, each share of Class A common stock willrepresent an equity interest in the FON Group and an equity interest inthe PCS Group, together with a right to cause Sprint to initially issueone share of FON Stock and 1/2 share of PCS Stock. The FON Stock and PCSStock shown in the table do not include such shares issuable to FranceTelecom and Deutsche Telekom.
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CAPITALIZATION OF THE FON GROUP
The following table sets forth as of September 30, 1998 (1) the historicalcapitalization of the FON Group; (2) the capitalization of the FON Group on apro forma basis to give effect to the restructuring of the PCS Group; and (3)the capitalization of the FON Group on a pro forma basis, as adjusted to giveeffect to the Notes offering and the application of the net proceeds of theoffering. See "Use of Proceeds" and the FON Group Unaudited Pro Forma CondensedCombined Financial Statements and related notes thereto included elsewhere inthis Prospectus Supplement.
SEPTEMBER 30, 1998
--------------------------------
PRO FORMA
HISTORICAL PRO FORMA AS ADJUSTED
---------- --------- -----------
(IN MILLIONS)
Cash and equivalents.......................... $ 47.7 $ 21.2 $
========= ========= =====
Short-term debt (includes current maturities
of long-term debt)........................... $ 38.1 $ 38.1 $
Long-term debt................................ 4,651.6 4,651.6
Group equity.................................. 8,471.3 8,604.8
--------- --------- -----
Total capitalization......................... $13,161.0 $13,294.5 $
========= ========= =====
CAPITALIZATION OF THE PCS GROUP
The following table sets forth as of September 30, 1998 (1) the historicalcapitalization of the PCS Group; (2) the capitalization of the PCS Group on apro forma basis to give effect to the restructuring of the PCS Group, includingthe sale of shares of PCS Stock to France Telecom and Deutsche Telekom inconnection with the restructuring of the PCS Group; and (3) the capitalizationof the PCS Group on a pro forma basis, as adjusted to give effect to the Notesoffering and the application of the net proceeds of the offering. See "Use ofProceeds" and the PCS Group Unaudited Pro Forma Condensed Combined FinancialStatements and related notes thereto included elsewhere in this ProspectusSupplement.
SEPTEMBER 30, 1998
----------------------------------------
PRO FORMA
HISTORICAL PRO FORMA AS ADJUSTED
---------- ---------------- -----------
(IN MILLIONS)
Cash and equivalents.................. $ -- $ 325.3 $
======== ================ ====
Short-term debt (includes current
maturities of long-term debt)........ $ 42.5 $ 167.0 $
Capital lease obligations............. 388.2 6,367.6
Construction obligations.............. 429.0 1,004.7
Group equity.......................... 831.0 4,578.4
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-------- ---------------- ----
Total capitalization................ $1,690.7 $ 12,117.7 $
======== ================ ====
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SPRINT CORPORATION
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SELECTED FINANCIAL DATA
The following unaudited table sets forth the selected financial data ofSprint. It is important that you read the selected financial data presentedbelow along with the Sprint Consolidated Financial Statements and notesthereto included elsewhere in this Prospectus Supplement. The selectedfinancial data at December 31, 1997, 1996, 1995, 1994 and 1993, and for eachof the five years in the period ended December 31, 1997, were prepared usingthe consolidated financial statements of Sprint, which have been audited byErnst & Young LLP, independent auditors. The selected financial data atSeptember 30, 1998, and for the nine months ended September 30, 1998 and 1997,were prepared using the unaudited consolidated financial statements of Sprint.The unaudited consolidated financial statements of Sprint have been preparedon the same basis as Sprint's audited consolidated financial statements and,in the opinion of management, contain all adjustments, consisting of onlynormal recurring accruals, necessary for a fair presentation of the financialposition and results of operations for these periods. Results for the ninemonths ended September 30, 1998 are not necessarily indicative of the resultsthat may be expected for the entire year.
AT OR FOR THE
NINE MONTHS AT OR FOR THE
ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------- -------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- --------- ---------
(IN MILLIONS, EXCEPT PER SHARE DATA)
RESULTS OF OPERATIONS
DATA
Net operating revenues.. $11,940.3 $11,024.9 $14,873.9 $13,887.5 $12,735.3 $11,964.8 $10,894.9
Operating income(1)..... 2,017.9 1,840.9 2,451.4 2,267.2 1,834.3 1,690.7 1,214.1
Income from continuing
operations(1)(2)....... 669.3 757.6 952.5 1,190.9 946.1 899.2 517.1
Earnings per common
share from continuing
operations(1)(2)
Basic.................. 1.55 1.76 2.21 2.82 2.71 2.59 1.51
Diluted................ 1.52 1.74 2.18 2.79 2.69 2.56 1.49
Dividends per common
share.................. 0.75 0.75 1.00 1.00 1.00 1.00 1.00
Basic weighted average
common shares.......... 430.7 430.3 430.2 421.7 348.7 346.1 341.0
CASH FLOW DATA
Net cash from operating
activities--continuing
operations(3).......... $ 2,950.0 $ 2,410.7 $ 3,379.0 $ 2,403.6 $ 2,609.6 $ 2,339.6 $ 2,007.8
Capital expenditures.... 2,992.1 1,903.9 2,862.6 2,433.6 1,857.3 1,751.6 1,429.8
BALANCE SHEET DATA
Total assets............ $20,453.8 $18,184.8 $16,826.4 $15,074.3 $14,425.2 $13,781.8
Property, plant and
equipment, net......... 13,502.2 11,494.1 10,464.1 9,715.8 10,258.8 9,883.1
Total debt (including
construction
obligations and short-
term borrowings)....... 5,549.4 3,879.6 3,273.9 5,668.9 4,927.7 5,084.1
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SPRINT CAPITAL CORP; 424B5
Redeemable preferred
stock.................. 9.5 11.5 11.8 32.5 37.1 38.6
Common stock and other
stockholders' equity... 9,302.3 9,025.2 8,519.9 4,642.6 4,524.8 3,918.3
SPRINT ADOPTED STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128,"EARNINGS PER SHARE" ("EPS"), AT YEAR-END 1997 (SEE NOTE 12 OF NOTES TOCONSOLIDATED FINANCIAL STATEMENTS). EPS AMOUNTS HAVE BEEN RESTATED TO COMPLYWITH THIS NEW STANDARD. ALL EPS AMOUNTS DISCUSSED HEREIN REPRESENT "BASIC" EPSAS DEFINED IN THE NEW STANDARD.
CERTAIN PRIOR-YEAR AMOUNTS HAVE BEEN RECLASSIFIED TO CONFORM TO THE CURRENT-YEAR PRESENTATION. THESE RECLASSIFICATIONS HAD NO EFFECT ON THE RESULTS OFOPERATIONS OR STOCKHOLDERS' EQUITY AS PREVIOUSLY REPORTED.
(1) During the nine months ended September 30, 1997 and the year endedDecember 31, 1996, Sprint recorded nonrecurring charges of $20 and $60million, respectively, related to litigation within the long distancedivision. These charges reduced income from continuing operations by $13million ($0.03 per share) for the nine months ended September 30, 1997 andthe year ended December 31, 1997 and $36 million ($0.09 per share) for theyear ended December 31, 1996.During 1995, Sprint recorded a nonrecurring charge of $88 million relatedto a restructuring within the local telecommunications division, whichreduced income from continuing operations by $55 million ($0.16 per share).During 1993, Sprint recorded nonrecurring charges of $293 million relatedto (a) transaction costs from the merger with Centel Corporation andexpenses of integrating and restructuring the operations of the twocompanies and (b) a realignment and restructuring within the long distancedivision. These charges reduced income from continuing operations by $193million ($0.57 per share).
(2) During 1997, Sprint recognized gains of $45 million on sales of localexchanges and a $26 million gain on the sale of an equity investment in anequipment provider. These gains increased income from continuingoperations by $27 million ($0.06 per share) and $17 million ($0.04 pershare), respectively.During 1994, Sprint recognized a $35 million gain on the sale of equitysecurities, which increased income from continuing operations by $22million ($0.06 per share).During 1993, due to the enactment of the Revenue Reconciliation Act of1993, Sprint adjusted its deferred income tax assets and liabilities toreflect the increased tax rate. This adjustment reduced income fromcontinuing operations by $11 million ($0.03 per share).
(3) The 1996 amount was reduced by $600 million for cash required to terminatean accounts receivable sales agreement.
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FON GROUP
Return to Contents
SELECTED FINANCIAL DATA
The following unaudited table sets forth selected financial data of the FONGroup. It is important that you read the selected financial data presentedbelow along with the FON Group Combined Financial Statements and notes theretoincluded elsewhere in this Prospectus Supplement. The selected financial dataat December 31, 1997 and 1996, and for each of the three years in the periodended December 31, 1997, were prepared using the FON Group combined financialstatements, which have been audited by Ernst & Young LLP, independent auditors.The selected financial data at December 31, 1995, 1994 and 1993, at September30, 1998, for each of the two years in the period ended December 31, 1994 andfor the nine months ended September 30, 1998 and 1997, were prepared using theunaudited FON Group combined financial statements. The unaudited FON Groupcombined financial statements have been prepared on the same basis as theaudited FON Group combined financial statements and, in the opinion ofmanagement, contain all adjustments, consisting of only normal recurringaccruals, necessary for a fair presentation of the financial position andresults of operations for these periods. Results for the nine months endedSeptember 30, 1998 are not necessarily indicative of the results that may beexpected for the entire year.
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AT OR FOR THE
NINE MONTHS AT OR FOR THE
ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------- -------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- --------- ---------
(IN MILLIONS)
RESULTS OF OPERATIONS
DATA
Net operating revenues.. $11,940.3 $11,024.9 $14,873.9 $13,887.5 $12,735.3 $11,964.8 $10,894.9
Operating income(1)..... 2,097.9 1,848.3 2,469.9 2,267.7 1,834.3 1,690.7 1,214.1
Income from continuing
operations(1) (2)...... 1,141.1 1,014.9 1,371.6 1,310.6 966.0 899.2 517.1
CASH FLOW DATA
Net cash from operating
activities--continuing
operations(3).......... $ 2,791.4 $ 2,033.0 $ 2,906.8 $ 2,267.3 $ 2,590.1 $ 2,339.6 $ 2,007.8
Capital expenditures.... 2,320.0 1,835.7 2,708.9 2,433.6 1,857.3 1,751.6 1,429.8
BALANCE SHEET DATA
Total assets............ $18,369.6 $16,491.7 $15,566.6 $14,100.6 $14,374.1 $13,781.8
Property, plant and
equipment, net......... 12,175.0 11,316.8 10,464.1 9,715.8 10,258.8 9,883.1
Total debt (including
short-term borrowings). 4,689.7 3,879.6 3,273.9 5,668.9 4,927.7 5,084.1
Group equity............ 8,471.3 7,639.3 7,332.3 3,676.9 4,473.7 3,918.3
(1) During the nine months ended September 30, 1997 and the year ended December31, 1996, the FON Group recorded nonrecurring charges of $20 and $60million, respectively, related to litigation within the long distancedivision. These charges reduced income from continuing operations by $13million for the nine months ended September 30, 1997 and the year endedDecember 31, 1997 and $36 million for the year ended December 31, 1996.During 1995, the FON Group recorded a nonrecurring charge of $88 millionrelated to a restructuring within the local telecommunications division,which reduced income from continuing operations by $55 million.During 1993, the FON Group recorded nonrecurring charges of $293 millionrelated to (a) transaction costs from the merger with Centel Corporationand expenses of integrating and restructuring the operations of the twocompanies and (b) a realignment and restructuring within the long distancedivision. These charges reduced income from continuing operations by $193million.
(2) During 1997, the FON Group recognized gains of $45 million on sales oflocal exchanges and a $26 million gain on the sale of an equity investmentin an equipment provider. These gains increased income from continuingoperations by $27 million and $17 million, respectively.During 1994, the FON Group recognized a $35 million gain on the sale ofequity securities, which increased income from continuing operations by $22million.During 1993, due to the enactment of the Revenue Reconciliation Act of1993, the FON Group adjusted its deferred income tax assets and liabilitiesto reflect the increased tax rate. This adjustment reduced income fromcontinuing operations by $11 million.
(3) The 1996 amount was reduced by $600 million for cash required to terminatean accounts receivable sales agreement.
S-23
HISTORICAL PCS GROUP
Return to Contents
SELECTED FINANCIAL DATA
The following unaudited table sets forth historical selected financial dataof SprintCom and Sprint's investments in Sprint Spectrum Holdings andPhillieCo. The investments in Sprint Spectrum Holdings (which includes
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itssubsidiaries, Sprint Spectrum, Cox PCS and APC) and PhillieCo during theperiods shown below have been accounted for on the equity basis. See "SprintCorporation--The PCS Group." The results of SprintCom, a wholly- ownedsubsidiary of Sprint, are accounted for on a consolidated basis. After therestructuring of the PCS Group, the results of Sprint Spectrum Holdings andPhillieCo will be accounted for on the consolidated basis in the PCS Groupcombined financial statements. It is important that you read the selectedfinancial data presented below along with the PCS Group Combined FinancialStatements and notes thereto included elsewhere in this Prospectus Supplement.The selected financial data at December 31, 1997 and 1996 and for each of thethree years in the period ended December 31, 1997, were prepared using the PCSGroup combined financial statements, which have been audited by Ernst & YoungLLP, independent auditors. The selected financial data at December 31, 1995 and1994, at September 30, 1998, for the year ended December 31, 1994 and for thenine months ended September 30, 1998 and 1997, were prepared using theunaudited PCS Group combined financial statements. The unaudited PCS Groupcombined financial statements have been prepared on the same basis as theaudited PCS Group combined financial statements and, in the opinion ofmanagement, contain all adjustments, consisting of only normal recurringaccruals, necessary for a fair presentation of the financial position andresults of operations for these periods. Results for the nine months endedSeptember 30, 1998 are not necessarily indicative of the results that may beexpected for the entire year.
AT OR FOR THE
NINE MONTHS
ENDED SEPTEMBER AT OR FOR THE
30, YEAR ENDED DECEMBER 31,
----------------- -----------------------------------
1998 1997 1997 1996 1995 1994(1)
-------- ------- -------- -------- ------ -------
(IN MILLIONS)
RESULTS OF OPERATIONS
DATA
Operating loss.......... $ (80.0) $ (7.4) $ (18.5) $ (0.5) $ -- $ --
Equity in loss of Sprint
Spectrum Holdings and
PhillieCo.............. (686.5) (410.6) (659.6) (191.8) (31.4) --
Net loss................ (471.8) (257.3) (419.1) (119.7) (19.9) --
CASH FLOW DATA
Net cash provided (used)
by operating
activities............. $ (193.0) $ 25.8 $ 37.5 $ (0.5) $ -- $ --
Capital expenditures.... 672.1 68.2 153.7 -- -- --
Purchase of PCS
licenses............... -- 460.1 460.1 84.0 -- --
Investment in Sprint
Spectrum Holdings and
PhillieCo, net......... 193.5 255.5 405.9 297.5 910.9 51.1
BALANCE SHEET DATA
Total assets............ $2,494.2 $1,693.1 $1,259.8 $973.7 $51.1
Property, plant and
equipment, net......... 1,327.2 177.3 -- -- --
Investment in Sprint
Spectrum Holdings and
PhillieCo.............. 475.4 968.4 1,175.8 973.7 51.1
Construction and capital
lease obligations
(including short-term
borrowings)............ 859.7 -- -- -- --
Group equity............ 831.0 1,385.9 1,187.6 965.7 51.1
(1) The PCS Group had no operations prior to 1994.
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SPRINT SPECTRUM HOLDING COMPANY COMBINED WITH MINORCO AND PHILLIECO
Return to Contents
SELECTED FINANCIAL DATA
The following unaudited table sets forth selected financial data of SprintSpectrum Holdings, MinorCo and PhillieCo. It is important that you read theselected financial data presented below along with the Sprint Spectrum Holdingscombined with MinorCo and PhillieCo Financial Statements and notes theretoincluded elsewhere in this Prospectus Supplement. The selected financial dataat December 31, 1997 and 1996 and for each of the three years in the periodended December 31, 1997 were prepared using the Sprint Spectrum Holdingscombined with MinorCo and PhillieCo financial statements, which have beenaudited by Deloitte & Touche LLP, independent auditors. The selected financialdata at December 31, 1995 and 1994, at September 30, 1998, for the year endedDecember 31, 1994, and for the nine months ended September 30, 1998 and 1997,were prepared using the unaudited Sprint Spectrum Holdings combined withMinorCo and PhillieCo financial statements. The unaudited Sprint SpectrumHoldings combined with MinorCo and PhillieCo financial statements have beenprepared on the same basis as the audited Sprint Spectrum Holdings combinedwith MinorCo and PhillieCo financial statements and, in the opinion ofmanagement, contain all adjustments, consisting of only normal recurringaccruals, necessary for a fair presentation of the financial position andresults of operations for these periods. Results for the nine months endedSeptember 30, 1998 are not necessarily indicative of the results that may beexpected for the entire year.
AT OR FOR THE
NINE MONTHS AT OR FOR THE
ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------- --------------------------------------
1998 1997 1997 1996 1995 1994(1)
--------- --------- --------- -------- -------- -------
(IN MILLIONS)
RESULTS OF OPERATIONS
DATA
Net operating revenues.. $ 788.0 $ 110.5 $ 258.0 $ 4.2 $ -- $ --
Operating loss.......... (1,455.8) (869.0) (1,379.7) (357.6) (66.9) (3.3)
Net loss................ (1,692.0) (1,021.5) (1,632.7) (444.6) (112.7) (3.3)
CASH FLOW DATA
Net cash used in
operating activities... $ 1,301.4 $ 606.4 $ 848.2 $ 172.4 $ 16.9 $ 0.5
Capital expenditures.... 1,107.7 1,632.8 2,124.6 1,419.2 31.8 0.5
Purchase of PCS
licenses............... -- -- -- -- 2,085.8 118.4
BALANCE SHEET DATA
Total assets............ $ 8,526.4 $ 7,057.9 $4,443.6 $2,329.3 $123.9
Property, plant and
equipment, net......... 4,531.9 3,538.2 1,441.6 32.0 0.4
Long-term debt and
construction
obligations (including
short-term borrowings). 6,701.4 4,273.8 1,401.2 -- --
(1) Sprint Spectrum Holding Company, MinorCo and PhillieCo had no operationsprior to 1994.
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SPRINT CORPORATION
Sprint is a diversified telecommunications company, providing long distance,local and wireless communications services. Its local and long distanceoperations serve more than 16 million business and residential
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customers.Sprint also has product distribution and directory publishing activities andother telecommunications activities, investments and alliances.
TELECOMMUNICATIONS INDUSTRY OVERVIEW
BACKGROUND: THE ADVENT OF COMPETITION
The 1984 break-up of the old Bell System was a significant step toward atruly competitive telecommunications services market. By creating independentRBOCs and separating AT&T as a long distance provider, the divestiture laid thefoundation for the eventual elimination of monopoly dominance of themarketplace.
The divestiture of the RBOCs from AT&T was intended to encourage direct, opencompetition in the long distance segment. Since the divestiture, hundreds oflong distance providers have entered the marketplace. This competitiondecreased prices, which led to growth in the market. In addition, initiativessuch as Sprint's decision to build a nationwide fiber-optic network spurredother carriers to upgrade their infrastructures at a faster pace. As a result,telecommunications users experienced an unprecedented stream of innovativeproducts and services.
As the long distance market has grown, wireless communications, the Internetand other technologies have also grown and offered a new range of choices totelecommunications users. Regulatory policies that enabled competition played acritical role in the emergence of these new sectors.
CURRENT LANDSCAPE: AN INDUSTRY IN TRANSITION
Sprint divides today's telecommunications environment into five basicsectors: local exchange, long distance, wireless, Internet access services andinternational service.
Local Exchange Services. In general, local exchange carriers provide localservice, including the local portion of most long distance calls. Divestitureof the RBOCs did not create competition in the local exchange market. However,several factors have served to promote competition in the years that followed,including: (1) customer desire for an alternative to the ILECs, including theRBOCs; (2) technological advances in the transmission of data and videorequiring greater capacity and reliability than ILEC networks could provide;and (3) the significant fees, called "access charges," that long distancecarriers are required to pay to ILECs for the use of their networks, whichencourage development of alternative means for reaching end user customers.
These pressures for a more competitive market have created a number ofresponses in the marketplace and on the part of legislators and regulatorybodies:
. The mid-1980s saw the emergence of Competitive Access Providers ("CAPs").Most of the early CAPs were entrepreneurial enterprises that operatedlimited networks that provided dedicated, unswitched connections to longdistance carriers and large businesses. These connections allowed high-volume users to avoid the relatively high prices charged by ILECs fordedicated, unswitched connections or for switched access.
. During the late 1980s and the 1990s, certain federal and state regulatoryagencies issued rulings which favored competition and were intended toopen local markets to new entrants. This pro-competitive trend continuedwith passage of the Telecom Act, which provides a legal framework forintroducing competition to local telecommunications markets across theUnited States.
. The FCC is in the process of reforming access charges by removing certainsubsidies paid by long distance companies for local exchange service.
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Growth in local markets is already strong, driven by expansion of secondlines to homes for Internet access, among other factors. With new entrants tothe market, Sprint anticipates effects similar to those that have occurred incompetitive long distance markets, including increased choice of products andservices and lower prices. In response to competitive pressures, certain of theILECs have merged.
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Long Distance Services. The United States long distance industry is large andcontinues to grow. According to Atlantic-ACM, total long distance industryrevenues have grown 7% a year on average since 1984. For the year 1997,according to Atlantic-ACM, total domestic long distance revenues wereapproximately $92.1 billion. In addition to growth caused by price declines andimprovements in service, long distance growth is also attributable to theworldwide trend toward deregulation and privatization, technologicalimprovements, the expansion of telecommunications infrastructure and theglobalization of the world's economies. Recently, a class of new entrants hasemerged that are building high-capacity fiber-optic networks capable ofsupporting tremendous amounts of bandwidth. Although these new entrants havenot captured significant market share, they and others with a strategy ofutilizing Internet-based networks claim certain cost structure advantageswhich, among other factors, may position them well for the future. In anyevent, the significant increase in capacity resulting from such new networksmay drive prices down further. Trials of low-cost, low-price Internet-basedlong distance services are currently being conducted by the FON Group and othertelecommunications companies. Once the RBOCs receive approval to provide longdistance services in their respective regions, they could prove to beformidable competitors.
Wireless Service. As of December 31, 1997, according to the CellularTelecommunications Industry Association ("CTIA"), there were 55.3 millionwireless telephone subscribers in the United States, representing an overallwireless penetration rate of 20.6% and subscriber growth of 25.6% from December31, 1996.
In the wireless communications industry there are two principal serviceslicensed by the FCC for transmitting two- way, real-time voice and data signals:
"cellular" and "PCS." Cellular is the predominant form of wireless voicecommunications service utilized by carriers established in the early 1980s.Cellular systems are predominantly analog-based systems, although digitaltechnology has been introduced into most metropolitan markets. PCS differs fromtraditional analog cellular service principally in that PCS systems operate ata higher frequency and employ advanced digital technology. Digital systemsachieve greater frequency reuse than analog systems, resulting in greatercapacity than analog systems. This enhanced capacity, along with enhancementsin digital protocols, allows digital-based wireless technologies (whether usingPCS or cellular frequencies) to offer greater clarity, better security, new andenhanced services and more robust data transmission (such as facsimile,electronic mail and connection of notebook computers to computer/datanetworks).
The following table sets forth certain statistics for the domestic wirelesstelephone industry as a whole, as published by the CTIA:
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
Total Service Revenues (in billions)... $ 27.5 $ 23.6 $ 19.1 $ 14.2 $ 10.9
Ending Wireless Subscribers (in
millions)............................. 55.3 44.0 33.8 24.1 16.0
Subscriber Growth...................... 25.6% 30.4% 40.0% 50.8% 45.1%
Average Monthly Revenue per Subscriber. $41.12 $44.66 $47.59 $51.48 $58.74
Ending Penetration..................... 20.6% 16.5% 12.8% 9.2% 6.2%
Paul Kagan Associates estimates that the number of cellular and PCS wirelessservice subscribers will reach 89 million by the year 2000. Sprint believesthat a significant portion of the predicted growth for wireless communicationswill result from declines in costs of service, increased functionalversatility, and increased awareness of the productivity, convenience andprivacy benefits offered by PCS providers, which are the first direct wirelesscompetitors of cellular providers to offer all-digital mobile networks. Sprintalso believes that the rapid growth of notebook computers and personal digitalassistants, combined with emerging software applications for delivery ofelectronic mail, fax and database searching, will contribute to the growingdemand for wireless service.
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Internet Access Services. The networks that comprise the Internet areconnected in a variety of ways, including by the public switched telephonenetworks and by high-speed, dedicated leased lines. Communications on theInternet are enabled by Internet Protocol, an inter-networking standard thatenables communication across the Internet regardless of the hardware andsoftware used and facilitates rapid technological developments.
In the mid-1990s, thousands of providers known as Internet Service Providers("ISPs") became prevalent. ISPs offer access, electronic mail, customizedcontent and other specialized services and products to more easily allow bothcommercial and residential customers to obtain information from, transmitinformation to, and utilize resources available on the Internet.
According to a report issued by the U.S. Department of Commerce, traffic onthe Internet doubled every 100 days in 1997. Sprint anticipates continued rapidgrowth in this sector.
International Market. In many countries, traditional telecommunicationsservices are provided by a monopoly provider, frequently controlled by thenational government. In recent years, there has been a trend towardliberalization in many of these markets (as well as privatization of theproviders), particularly in Europe. In early 1998, 70 countries (representingover 90% of the world's telecommunications traffic) entered into the WorldTrade Organization Basic Telecommunications Agreement, which containscommitments to open markets to competition and remove foreign ownershiprestrictions. Led by the introduction of competition in the United Kingdom, theEuropean Union mandated open competition as of January 1998. Similar trends areemerging, although more slowly, in Asia. Multinational companies continue todrive growth in international traffic.
CONVERGENCE: THE TREND TOWARD INTEGRATED COMMUNICATIONS
Although the telecommunications industry is experiencing growth in allsectors in its current form, Sprint believes that the stage has been set foreven stronger expansion in the years ahead. Sprint believes this will occur dueto two main driving forces: 1) a continuation of the substantial growth in datacommunications traffic, and 2) the emergence of new service delivery modelsbased on packaged and integrated communications offerings. Data communicationstraffic is already rapidly increasing, changing the mix of traffic ontelecommunications networks. Sprint believes that deregulation of local marketsand technological developments will accelerate the disappearance ofdistinctions between long distance, local, wireless and other means ofcommunications.
CREATION OF THE FON GROUP AND PCS GROUP
At a special meeting of stockholders to be held November 13, 1998 (the"Special Meeting"), Sprint is asking its stockholders to vote upon and approveSprint's Tracking Stock Proposal, which provides for, among other things:
. the creation of the PCS Group and the FON Group;
. Sprint's acquisition of 100% of the ownership and control of thebusinesses currently operating under the Sprint PCS brand name, other thanCox Communications PCS, L.P. which is 59.2% owned by Sprint SpectrumHolding Company, L.P. (the "PCS Restructuring"), pursuant to theRestructuring and Merger Agreement, dated as of May 26, 1998, amongSprint, Tele-Communications, Inc. ("TCI"), Comcast Corporation("Comcast"), Cox Communications, Inc. ("Cox," and together with TCI andComcast, the "Cable Parents") and various subsidiaries of such parties(the "Restructuring Agreement");
. the recapitalization of Sprint's outstanding publicly-traded common stock(the "Existing Common Stock") into (A) PCS Common Stock--Series 1 ("Series1 PCS Stock") and (B) FON Common Stock--Series 1 (the "Series 1 FONStock") (together with a similar recapitalization of Sprint's outstandingClass A common stock (the "Existing Class A Common Stock"), the"Recapitalization"); and
. subject to market conditions, the issuance of Series 1 PCS Stock in anunderwritten IPO.
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Pursuant to the Tracking Stock Proposal, Sprint may elect to complete eitherthe IPO or the Recapitalization at the closing of the PCS Restructuring. Sprinthas decided to delay the IPO due to current general market conditions.Therefore, at the closing of the PCS Restructuring, Sprint will complete theRecapitalization of the Existing Common Stock and the Existing Class A CommonStock. Sprint will continue to evaluate market conditions and may proceed withthe IPO at a later date. There is no assurance that the IPO will be completed.
The trading price of the PCS Stock should reflect separately the performanceof the PCS Group. The trading price of the FON Stock should reflect separatelythe performance of the FON Group. We refer to the transactions described aboveas the "Tracking Stock Proposal."
You should refer to Annex A for further detail concerning the PCSRestructuring and policies adopted by the Sprint Board in connection with theTracking Stock Proposal. The Notes offering is not conditioned upon completionof the transactions contemplated by the Tracking Stock Proposal.
THE FON GROUP
The FON Group consists of all of Sprint's businesses and assets not includedin the PCS Group. The principal activities of the FON Group include:
. the FON Group's core businesses, consisting of its long distanceservices, local services, and product distribution and directorypublishing activities;
. the FON Group's emerging businesses, which consist of the development ofnew integrated communications services, integration management and supportservices for computer networks ("Sprint Paranet") and internationaldevelopment activities outside the scope of Global One ("SprintInternational");
. the FON Group's interest in the Global One international strategicalliance, a joint venture with France Telecom S.A. ("FT") and DeutscheTelekom AG ("DT"); and
. the FON Group's other telecommunications investments and alliances.
Return to Contents
CORE BUSINESSES
Long Distance Division
The FON Group's long distance division ("LDD") is the nation's third-largestprovider of long distance telephone services. LDD operates a nationwide, all-digital long distance telecommunications network that uses state-of-the- artfiber-optic and electronic technology. LDD provides domestic and internationalvoice, video and data communications services.
Strategy. To achieve profitable market share growth in an increasinglycompetitive long distance communications environment, LDD intends to leverageits principal strategic assets, including: its national brand, innovativemarketing and pricing plans, its reputation for superior customer service, itsstate-of-the-art technology, and its partnerships with other FON Groupoperating divisions and the PCS Group. LDD's growth strategies include thefollowing:
. expand its presence in the high-growth data communications markets forservices such as ATM and Frame Relay;
. become the provider of choice for delivery of end-to-end service tocompanies with complex distributed computing environments;
. continue to deploy network and systems infrastructure which providesindustry-leading reliability, cost effectiveness and technologicalimprovements; and
. solidify the linkage of LDD with Sprint's other operations (including thelocal telecommunications division, Sprint Paranet, the Global One allianceand the PCS Group), in the areas of sales support, marketing, integrationof
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systems and the development of common products and services to createintegrated product offerings for the FON Group's customers.
S-29
Local Telecommunications Division
The local telecommunications division ("LTD") consists primarily of regulatedLECs serving more than 7.5 million access lines in 18 states. LTD provideslocal services and access for telephone customers and other carriers to LTD'slocal exchange facilities and sells telecommunications equipment and longdistance services within specified geographical areas.
Customers. AT&T is LTD's largest customer for network access services. In1997 and 1996, services provided to AT&T (mainly network access services)accounted for 13% of the division's net operating revenues compared with 15% in1995. On a consolidated basis, revenues from AT&T were 5% of Sprint's revenuesin 1997 and 1996 and 6% in 1995. AT&T is a significant customer, but LTD doesnot believe that the division's revenues are dependent on AT&T, since any longdistance provider must pay access charges to LTD related to inter-LATA longdistance telephone service.
Strategy. LTD has embarked on a growth strategy whereby it plans toaggressively market Sprint's entire product portfolio to its local customers aswell as its core product line of advanced network features and data products.
LTD has reorganized around its principal market segments:
. Consumer and Small Business Markets ("CSB");
. Business Markets; and
. Carrier Markets.
Sprint believes this new structure provides a more efficient and focusedapproach to sales and service for these market segments. Along with this marketfocus, LTD has centralized the management of support organizations to provideoperational efficiencies and to enhance support of LTD's end-users.
CSB focuses on increasing voice and data product penetration in the consumerand small business markets, including small office/home office customers.Consumer initiatives (including aggressive marketing of advanced networkfeatures such as Caller ID, Caller ID-based telephone sets, and usage-sensitivefeatures) strongly contributed to growth in 1997. CSB is developing as a full-service provider and currently sells the Sprint portfolio of products andservices in each state in which LTD operates. LTD offers its customers whoestablish new local service with LTD a "bundle" of products and services,including traditional local service, vertical services, long distance service,Internet access, paging and wireless service, where available.
Business Markets focuses on (1) selling high-capacity data networkingsolutions such as ATM and Frame Relay, and (2) marketing the network's SONETsurvivability characteristics. Business Markets is partnering with LDD toprovide end-to-end solutions for medium to large business customers.
Carrier Markets sells and markets LTD's network to emerging resellers oflocal telephone services as well as wireless and interexchange carriers.Efforts are under way to leverage existing strengths, including database,Signaling System 7, and billing and collection services, to increase revenues.Carrier Markets is also focusing on growing in the recently deregulated payphone business.
Product Distribution and Directory Publishing
The product distribution and directory publishing businesses consist ofSprint North Supply Company ("North Supply") and Sprint Publishing andAdvertising ("SPA").
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North Supply is one of the nation's largest distributors oftelecommunications equipment to wireline and wireless service companies, cableTV operators, and system resellers. SPA publishes and markets white and yellowpage telephone directories in certain of LTD's local exchange areas, as well asin the greater metropolitan areas of Milwaukee, Wisconsin and Chicago,Illinois.
S-30
EMERGING BUSINESSES
The FON Group's emerging businesses consist of National Integrated Services("NIS"), Sprint Paranet and Sprint International.
NIS. The objective of NIS is to enable the FON Group to be a nationalprovider of fully integrated telecommunications services across all customersegments. Its efforts are directed toward the development and deployment of anIntegrated On-demand Network ("ION") which is expected to extend the FONGroup's existing advanced network capabilities to customer premises and enablethe FON Group to (1) provide the network infrastructure to meet demands fordata, Internet, and video use and (2) provide the foundation for competitivelocal service. NIS believes that this integrated services capability willgenerate increased demand for the FON Group's products and services, while atthe same time substantially reducing the costs to provide such services. Theincremental capital expenditures required to develop this capability areprojected to approximate $400 million through 1999. Cisco Systems and Bellcorewill be contributing their expertise and assisting in the funding of theseefforts. In addition to the capital for development, the initial deployment ofION is expected to require approximately $400 million for network upgradesthrough 1999.
In implementing ION, Sprint intends to rely substantially on the transmissioninfrastructure of the LDD and to a lesser extent on the transmissioninfrastructure of the LTD. Where Sprint facilities currently do not exist,Sprint will evaluate whether facilities should be built, leased or acquired forION. Because a significant amount of future investment will be associated withspecific customer contracts, Sprint believes it will be able to manage itsinvestment in ION to be consistent with customer demand.
Sprint Paranet. In September 1997, Sprint acquired Paranet, Inc., a leadingprovider of integration, management, and support services for distributedcomputing environments. Sprint believes the acquisition strengthens Sprint'sposition as a leading data carrier by augmenting its wide area network dataproducts and services with Paranet's expertise in local area networks anddistributed network systems.
Sprint International. Sprint International ("SI") was established to pursuebusiness opportunities in key countries and markets around the world outsidethe scope of Sprint's Global One alliance. Complementing the strategies ofGlobal One will continue to be an important component in selectingopportunities.
SI is a 25% owner of Barak, an Israeli joint venture that was awarded alicense for the Israeli international long distance market and has sincecaptured approximately 20% of that market. In China, SI has invested in TianjinGlobal Communications, a fixed wireline network operator, and is pursuing otheropportunities. In Europe, SI is concentrating on developing opportunities withSprint's Global One partners, FT and DT, in several markets outside France andGermany.
GLOBAL ONE
Sprint is a partner in Global One, a joint venture with FT and DT whichprovides global telecommunications services to business, consumer and carriermarkets worldwide. Sprint is a one-third partner in Global One's operatinggroup serving Europe (excluding France and Germany) and a 50% partner in GlobalOne's operating group for the worldwide activities outside the United Statesand Europe.
Global One's strategic objective is to be the premier provider of globaltelecommunications services. To achieve this objective, the Global One businessstrategy is designed to achieve maximum global coverage and seamless globalconnectivity. Under a single global brand and through a single interface tocustomers in each country, Global
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One offers a comprehensive array of state-of-the-art telecommunications services, delivered through its advanced globalnetwork infrastructure.
Global One currently has a sales presence in 65 countries; more than 1,400points of presence (switching centers) outside of Germany, France and theUnited States; four network management sites monitoring traffic on the globalbackbone networks; and 29 customer service centers. Global One's 1997 revenueswere in excess of $1.1 billion. Sprint's proportional share of these revenueswas $474 million.
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OTHER INVESTMENTS AND ALLIANCES
Sprint's other investments and alliances include the following:
. a 3.7% interest in Iridium LLC, a satellite-based mobile communicationsprovider;
. a 25% equity interest in Call-Net Enterprises, Inc., a long distancetelecommunications company in Canada operating under the Sprint brand namewhich, at the end of 1997, had a 10% share of the long distance market inCanada; and
. a 50% interest in a joint venture with Telefonos de Mexico, the dominanttelecommunications provider in Mexico, that markets international longdistance services between the U.S. and Mexico with products and servicestailored to the Hispanic community.
In addition, in June 1998, Sprint entered into a long-term strategic alliancewith EarthLink Network, Inc., a leading Internet service provider. As part ofthe transaction, Sprint purchased an approximate 30% economic interest inEarthLink and contributed to EarthLink all of Sprint's 130,000 Sprint InternetPassport customers. EarthLink will manage the operations, customer service,technical support and product development for the unified Internet service.Leveraging the brands of both companies, EarthLink and Sprint will worktogether on product development, sales and marketing.
THE PCS GROUP
The PCS Group markets its wireless telephony products and services under theSprint and Sprint PCS brand names. The PCS Group operates the only 100% digitalPCS wireless network in the United States with licenses to provide servicenationwide utilizing a single frequency band and a single technology. The PCSGroup owns licenses to provide service to the entire United States population,including Puerto Rico and the U.S. Virgin Islands. As of October 30, 1998, thePCS Group operates PCS systems in 176 metropolitan markets within the UnitedStates, including 39 of the 50 largest metropolitan areas. By the end of thefirst half of 1999, the PCS Group expects to operate PCS systems in all of the50 largest metropolitan areas and 80 of the 100 largest metropolitan areas inthe United States.
The PCS Group currently provides nationwide service through a combination of
. operating its own digital network in major metropolitan areas;
. affiliating with other companies, primarily in and around smallermetropolitan areas;
. roaming on analog cellular networks of other providers using Dual-Band/Dual-Mode Handsets; and
. roaming on digital PCS networks of other CDMA-based providers.
Since launching the first commercial PCS service in the United States inNovember 1995, the PCS Group has experienced rapid customer growth, providingservice to more than 1.75 million customers as of September 30, 1998.
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The PCS Group consists of the following entities: (1) Sprint Spectrum HoldingCompany, L.P. and MinorCo, L.P., together with their subsidiaries(collectively, "Sprint Spectrum Holdings"), including Sprint Spectrum, L.P. andits subsidiaries ("Sprint Spectrum") and American PCS, L.P. and itssubsidiaries ("APC"), as well as a 59.2% interest in Cox Communications PCS,L.P. and its subsidiaries ("Cox PCS"); (2) PhillieCo Partners I, L.P. andPhillieCo Partners II, L.P., together with their subsidiaries (collectively,"PhillieCo"); and (3) SprintCom, Inc. and SprintCom Equipment Company, L.P.(collectively, "SprintCom"). Sprint Spectrum Holding Company, L.P. and MinorCo,L.P. have no independent operations other than through their subsidiaries andare the general partner and limited partner, respectively, of Sprint Spectrumand APC.
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The chart below sets forth certain information concerning the PCS Group(after giving effect to the Tracking Stock Proposal), including the number ofPops covered by licenses held by the PCS Group:
POPS (1) SPRINT
ENTITY OWNERSHIP (2) LICENSES
------ ------------- ------------- --------
(IN MILLIONS)
Sprint Spectrum Holdings
Sprint Spectrum........ 155.9 100.0% 30 MTAs
Cox PCS(3)............. 21.0 59.2 Los Angeles-San Diego-Las Vegas MTA
APC.................... 8.3 100.0 Washington D.C.-Baltimore MTA
PhillieCo............... 9.2 100.0 Philadelphia MTA
SprintCom............... 74.9 100.0 139 BTAs
-----
Total................... 269.3
=====
(1) Based upon 1997 population data supplied by Equifax Inc.
(2) Assumes that the transactions contemplated by the Tracking Stock Proposalare completed. See "The Tracking Stock Proposal and Related Information"in Annex A.
(3) Pops data for Cox PCS includes 100% of its Pops, not the PCS Group'sproportional interest. Sprint Spectrum Holdings' current 59.2% ownershipinterest in Cox PCS will not be affected by the Tracking Stock Proposal.Sprint Spectrum Holdings and Cox, the holder of the remaining 40.8%partnership interest in Cox PCS, have entered into an arrangement wherebyCox may require Sprint Spectrum Holdings to purchase Cox's remainingpartnership interest in Cox PCS. Commencing in 2001, Sprint SpectrumHoldings will have the right to require that Cox sell all of its remainingpartnership interest in Cox PCS to Sprint Spectrum Holdings. See "TheTracking Stock Proposal and Related Information--Amendments to the Cox PCSAgreements" in Annex A.
STRATEGY OF THE PCS GROUP
The business objective of the PCS Group is to expand network coverage andincrease market penetration by aggressively marketing competitively priced PCSservices and products under the Sprint PCS and Sprint brand names, offeringenhanced services and seeking to provide superior customer service. Theprincipal elements of the PCS Group's strategy for achieving these goals are:
Operate a Nationwide Digital Wireless Network. The PCS Group is the only PCSprovider in the United States with a 100% digital PCS wireless network withlicenses to provide services nationwide utilizing a single frequency band anda single technology. Management believes that the PCS Group's all-digitalnetwork provides its customers with consistency of service and features in allof its markets. The scope of its network also allows the PCS Group to provideits customers with flexible pricing and promotions on a national basis whileretaining local flexibility. In addition, the operating scale of the PCSGroup's network is expected to result in significant cost advantages
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inpurchasing power, operations and marketing. The PCS Group plans to completethe initial phase of construction in its SprintCom markets, including Chicago,Atlanta and Houston, by the end of the first half of 1999.
Leverage Sprint's National Brand. Management believes that using theestablished Sprint brand contributes significantly to consumer confidence in,and acceptance of, the PCS Group's products and services. As competition inthe wireless industry intensifies, management believes that the power of astrong national brand will play an increasingly important role in consumers'purchase decisions.
Utilize State-of-the-Art CDMA Technology. The PCS Group utilizes a state-of-the-art PCS network using CDMA digital technology which, management believes,provides significant operating and customer benefits relative to analog andother digital technologies. Management believes, based on studies by CDMAmanufacturers, that its implementation of CDMA digital technology willeventually provide system capacity that is approximately 7 to 10 times greaterthan that of analog technology and approximately 3 times greater than that ofTDMA and GSM systems, resulting in significant operating and cost efficiencieswhich can be passed on to customers. Additionally, management believes thatCDMA technology provides call quality that is superior to that of otherwireless technologies.
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Deliver Superior Value to its Customers. In marketing its services, the PCSGroup emphasizes the superior voice quality and functional capabilities of itswireless service compared to that of analog cellular service. In addition, thePCS Group bundles its basic service offering with a package of sophisticatedfeatures which either cannot be offered by analog cellular providers or forwhich they typically charge their customers separately. The PCS Group alsooffers several innovative pricing plans that allow its customers to selectbilling plans that suit their usage patterns, none of which requires customersto sign a long-term service contract. The PCS Group recently introduced newall-inclusive nationwide service plans that offer a single rate for local andlong distance calls to anywhere in the United States made on the Sprint PCSnetwork. Management believes that its ability to provide wireless service atcompetitive prices without long-term contracts is an important marketingadvantage.
Grow Customer Base Using Multiple Distribution Channels. The PCS Group seeksto maximize customer growth in each market by utilizing multiple distributionchannels. As of October 5, 1998, the PCS Group had its products for sale inapproximately 6,385 third-party retail locations nationwide, includingretailers such as RadioShack, Circuit City and Best Buy. The PCS Group plans tohave approximately 8,000 third-party retail locations by the end of the firsthalf of 1999. The PCS Group also seeks innovative distribution channels throughwhich to market its products, such as the Sprint Store-Within-A-Store atRadioShack which includes an exclusive arrangement pursuant to which the onlyPCS products offered by RadioShack-owned stores in the markets in which thePCS Group has launched operations are the PCS Group's products. In addition, asof September 30, 1998, the PCS Group operated 135 Sprint PCS retail locations.The PCS Group plans to operate approximately 200 Sprint PCS retail locations bythe end of the first half of 1999. The PCS Group also uses telemarketing,direct sales and cross-marketing and continually evaluates other alternativedistribution channels including sales agency, resale and other arrangements.
Continue Network Expansion. The PCS Group plans to continue the expansion ofits existing network. In addition, the PCS Group is expanding its wirelesscoverage, primarily in and around smaller metropolitan areas in the UnitedStates where it does not intend to serve customers with its own network, bypursuing affiliation arrangements with other companies. These companies willbuild networks in portions of the PCS Group's licensed coverage area at suchcompanies' own expense. Such networks are expected to be built using the sametechnological standards as those of the PCS Group network. These companies willsell PCS Group services under the Sprint PCS brand name in exchange for a feeand will be required to maintain certain quality standards to be established bythe PCS Group. As of October 20, 1998, the PCS Group had entered intoagreements with 10 companies covering an aggregate of approximately 24.5million Pops in 18 states.
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DESCRIPTION OF NOTES
The Notes, the Notes, the Notes, and the Notes will beissued as separate series of Debt Securities under an Indenture, dated as ofOctober 1, 1998 (the "Sprint Capital Indenture"), among Sprint Capital, Sprintand Bank One, N.A., as trustee (the "Trustee"). The provisions of the SprintCapital Indenture are more fully described under "Description of DebtSecurities" and "Description of Guarantees" in the accompanying Prospectus.Capitalized terms not otherwise defined in this section have the meanings givento them in the accompanying Prospectus and the Sprint Capital Indenture. As ofthe date of this Prospectus Supplement, no Debt Securities have been previouslyissued under the Sprint Capital Indenture.
GENERAL
The Notes will have the following terms:
Principal Amount Interest Rate Maturity Date
---------------- ------------- -------------
Notes $ % ,
Notes $ % ,
Notes $ % ,
Notes $ % ,
In each case, interest will accrue from , 1998, or from the most recentinterest payment date to which interest has been paid or duly provided for.Interest will be payable semiannually on and of each year, commencing, 1999, to the persons in whose names the Notes are registered at the closeof business on the or , as the case may be, next preceding suchinterest payment date. Interest will be calculated on the basis of a 360-dayyear of twelve 30-day months.
The Notes will not have the benefit of a sinking fund.
RANKING
The Notes will be senior unsecured obligations of Sprint Capital and willrank equally with all other senior unsecured and unsubordinated indebtedness ofSprint Capital. The Guarantees will be senior unsecured obligations of Sprintand will rank equally with all other senior unsecured and unsubordinatedindebtedness of Sprint.
The Notes and the Guarantees will be effectively subordinated to any securedindebtedness of Sprint Capital or Sprint, as the case may be, to the extent ofthe value of the assets securing such indebtedness. The Sprint CapitalIndenture permits Sprint and its Restricted Subsidiaries to incur or permit tobe outstanding secured indebtedness plus attributable debt with respect to anysale and leaseback transaction in an aggregate amount not exceeding 15% of theConsolidated Net Tangible Assets of Sprint and its subsidiaries, in addition toPermitted Liens, all as described under "Description of Debt Securities--Restrictive Covenant--Sprint" in the accompanying Prospectus. Sprint's assetsconsist principally of the stock of and advances to its subsidiaries. Almostall the operating assets of Sprint and its consolidated subsidiaries are ownedby such subsidiaries and Sprint relies primarily on interest and dividends fromsuch subsidiaries to meet its obligations for payment of principal and intereston its outstanding debt obligations, including guarantees, and corporateexpenses. The Notes and the Guarantees will be structurally subordinated to allobligations, including trade payables, of subsidiaries of Sprint Capital orSprint, as the case may be.
OPTIONAL REDEMPTION
The Notes will be redeemable, as a whole or in part, at the option of SprintCapital, at any time or from time to time, on at least 30 days, but not morethan 60 days, prior notice mailed to the registered address of each holder ofNotes. The redemption prices will be equal to the greater of (1) 100% of theprincipal amount of
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the Notes to be redeemed or (2) the sum of the present values of the RemainingScheduled Payments (as defined below) discounted, on a semiannual basis(assuming a 360-day year consisting of twelve 30-day months), at a rate equalto the sum of the Treasury Rate (as defined below) and:
. basis points for the Notes
. basis points for the Notes
. basis points for the Notes
. basis points for the Notes
In the case of each of clause (1) and (2), accrued interest will be payable tothe redemption date.
"Treasury Rate" means, with respect to any redemption date, the rate perannum equal to the semiannual equivalent yield to maturity (computed as of thesecond business day immediately preceding such redemption date) of theComparable Treasury Issue, assuming a price for the Comparable Treasury Issue(expressed as a percentage of its principal amount) equal to the ComparableTreasury Price for such redemption date.
"Comparable Treasury Issue" means the United States Treasury securityselected by an Independent Investment Banker as having a maturity comparable tothe remaining term of the Notes, the Notes, the Notes or theNotes, as the case may be, to be redeemed that would be utilized, at thetime of selection and in accordance with customary financial practice, inpricing new issues of corporate debt securities of comparable maturity to theremaining term of such Notes. "Independent Investment Banker" means one of theReference Treasury Dealers appointed by Sprint Capital.
"Comparable Treasury Price" means, with respect to any redemption date, (1)the average of the Reference Treasury Dealer Quotations for such redemptiondate after excluding the highest and lowest of such Reference Treasury DealerQuotations, or (2) if the Trustee obtains fewer than five such ReferenceTreasury Dealer Quotations, the average of all such quotations. "ReferenceTreasury Dealer Quotations" means, with respect to each Reference TreasuryDealer and any redemption date, the average, as determined by the Trustee, ofthe bid and asked prices for the Comparable Treasury Issue (expressed in eachcase as a percentage of its principal amount) quoted in writing to the Trusteeby such Reference Treasury Dealer at 3:30 p.m., New York City time, on thethird business day preceding such redemption date.
"Reference Treasury Dealer" means each of Salomon Smith Barney Inc., CreditSuisse First Boston Corporation, J.P. Morgan Securities Inc., Warburg DillonRead LLC, Chase Securities Inc., Lehman Brothers, Inc. and NationsBancMontgomery Securities LLC and their respective successors. If any of theforegoing shall cease to be a primary U.S. Government securities dealer (a"Primary Treasury Dealer"), Sprint Capital shall substitute another nationallyrecognized investment banking firm that is a Primary Treasury Dealer.
"Remaining Scheduled Payments" means, with respect to each Note to beredeemed, the remaining scheduled payments of principal of and interest on suchNote that would be due after the related redemption date but for suchredemption. If such redemption date is not an interest payment date withrespect to such Note, the amount of the next succeeding scheduled interestpayment on such Note will be reduced by the amount of interest accrued on suchNote to such redemption date.
On and after the redemption date, interest will cease to accrue on the Notesor any portion of the Notes called for redemption (unless Sprint Capitaldefaults in the payment of the redemption price and accrued interest). On orbefore the redemption date, Sprint Capital will deposit with a paying agent (orthe Trustee) money sufficient to pay the redemption price of and accruedinterest on the Notes to be redeemed on such date. If less than all of theNotes of any series are to be redeemed, the Notes to be redeemed shall beselected by the Trustee by such method as the Trustee shall deem fair andappropriate.
GLOBAL CLEARANCE AND SETTLEMENT PROCEDURES
Investors in the Global Securities representing any of the Debt Securitiesissued under the Prospectus may hold a beneficial interest in such GlobalSecurities through DTC, CEDEL S.A. or Euroclear (as defined below) or throughparticipants. The Global Securities may be traded as home market instruments inboth the European
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and U.S. domestic markets. Initial settlement and all secondary trades willsettle as set forth below or in the accompanying Prospectus under "Descriptionof Debt Securities--Same-Day Settlement and Payment."
CEDEL is incorporated under the laws of Luxembourg as a professionaldepository. CEDEL holds securities for its participating organizations andfacilitates the clearance and settlement of securities transactions betweenCEDEL participants through electronic book-entry changes in accounts of CEDELparticipants, thereby eliminating the need for physical movement ofcertificates. Transactions may be settled in CEDEL in any of 28 currencies,including United States dollars. CEDEL provides to its participants, amongother things, services for safekeeping, administration, clearance, andsettlement of internationally traded securities and securities lending andborrowing. CEDEL interfaces with domestic markets in several countries. As aprofessional depository, CEDEL is subject to regulation by the LuxembourgMonetary Institute. CEDEL participants are recognized financial institutionsaround the world, including underwriters, securities brokers and dealers,banks, trust companies, clearing corporations, and certain other organizationsand may include the underwriters named in this Prospectus Supplement. Indirectaccess to CEDEL is also available to others, such as banks, brokers, dealers,and trust companies that clear through or maintain a custodial relationshipwith a CEDEL participant, either directly or indirectly.
The Euroclear System was created in 1968 to hold securities for participantsof the Euroclear System and to clear and settle transactions between Euroclearparticipants through simultaneous electronic book-entry delivery againstpayment, eliminating the need for physical movement of certificates and anyrisk from lack of simultaneous transfers of securities and cash. Transactionsmay now be settled in any of 32 currencies, including United States dollars.The Euroclear System includes various other services, including securitieslending and borrowing, and interfaces with domestic markets in severalcountries generally similar to the arrangements for cross-market transfers withDTC. The Euroclear System is operated by Morgan Guaranty Trust Company of NewYork, Brussels, Belgium office (the "Euroclear Operator" or "Euroclear"), undercontract with Euroclear Clearance System S.C., a Belgian cooperativecorporation (the "Cooperative"). All operations are conducted by the EuroclearOperator, and all Euroclear securities clearance accounts and Euroclear cashaccounts are accounts with the Euroclear Operator, not the Cooperative. TheCooperative establishes policy for the Euroclear System on behalf of Euroclearparticipants. Euroclear participants include banks (including central banks),securities brokers and dealers, and other professional financial intermediariesand may include the underwriters. Indirect access to the Euroclear System isalso available to other firms that clear through or maintain a custodialrelationship with a Euroclear participant, either directly or indirectly.
The Euroclear Operator is a member bank of the Federal Reserve System. Assuch, it is regulated and examined by the Federal Reserve Board and the NewYork State Banking Department, as well as the Belgian Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear Operatorare governed by the Terms and Conditions Governing Use of Euroclear and therelated Operating Procedures of the Euroclear System, and applicable Belgianlaw (collectively, the "Terms and Conditions"). The Terms and Conditions governtransfers of securities and cash within the Euroclear System, withdrawals ofsecurities and cash from the Euroclear System, and receipts of payments withrespect to securities in the Euroclear System. All securities in the EuroclearSystem are held on a fungible basis without attribution of specificcertificates to specific securities clearance accounts. The Euroclear Operatoracts under the Terms and Conditions only on behalf of Euroclear participants,and has no record of or relationship with persons holding through Euroclearparticipants.
Principal, premium, if any, and interest payments with respect to DebtSecurities held through CEDEL or Euroclear will be credited to the cashaccounts of CEDEL participants or Euroclear participants in accordance with therelevant system's rules and procedures, to the extent received by itsdepository. Such distributions will be subject to tax reporting in accordancewith relevant United States tax laws and regulations as described below. CEDELor the Euroclear Operator, as the case may be, will take any other actionpermitted to be taken by a holder under the Sprint Capital Indenture on behalfof a CEDEL participant or Euroclear participant only in accordance with
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itsrelevant rules and procedures and subject to its depository's ability to effectsuch actions on its behalf through DTC, as Depositary.
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INITIAL SETTLEMENT
All Global Securities will be registered in the name of Cede & Co. as nomineeof DTC. Investors' interests in the Global Securities will be representedthrough financial institutions acting on their behalf as direct and indirectparticipants in the Depositary. As a result, CEDEL and Euroclear will holdpositions on behalf of their participants through their respectivedepositories, Citibank, N.A. ("Citibank") and Morgan Guaranty Trust Company ofNew York ("Morgan"), which in turn will hold such positions in accounts asparticipants of DTC.
Global Securities held through DTC will follow the settlement practicesdescribed under "Description of Debt Securities--Same Day Settlement andPayment" in the accompanying Prospectus. Investor securities custody accountswill be credited with their holdings against payment on the settlement date.Global Securities held through CEDEL or Euroclear accounts will follow thesettlement procedures applicable to conventional eurobonds, except that therewill be no temporary global security and no "lock-up" or restricted period.Global Securities will be credited to the securities custody accounts on thesettlement date against payment.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important toestablish at the time of the trade where both the purchaser's and seller'saccounts are located to ensure that settlement can be made on the desired valuedate.
Trading between DTC Participants. Secondary market trading between DTCparticipants will be settled using the procedures described under "Descriptionof Debt Securities--Same Day Settlement and Payment" in the accompanyingProspectus.
Trading between CEDEL and/or Euroclear Participants. Secondary market tradingbetween CEDEL participants and/or Euroclear participants will be settled usingthe procedures applicable to conventional eurobonds.
Trading between DTC Seller and CEDEL or Euroclear Purchaser. When beneficialinterests in the Global Securities are to be transferred from the account of aDTC participant to the account of a CEDEL participant or a Euroclearparticipant, the purchaser will send instructions to CEDEL or Euroclear througha participant at least one business day prior to settlement. CEDEL or Euroclearwill instruct Citibank or Morgan, as the case may be, to receive a beneficialinterest in the Global Securities against payment. Unless otherwise set forthin this Prospectus Supplement, payment will include interest accrued on thebeneficial interest in the Global Securities so transferred from and includingthe last coupon payment date to and excluding the settlement date, on the basison which interest is calculated on the Debt Securities. For transactionssettling on the 31st of the month, payment will include interest accrued to andexcluding the first day of the following month. Payment will then be made byCitibank or Morgan to the DTC participant's account against delivery of thebeneficial interest in the Global Securities. After settlement has beencompleted, the beneficial interest in the Global Securities will be credited tothe respective clearing system and by the clearing system, in accordance withits usual procedures, to the CEDEL or Euroclear participant's account. Thesecurities credit will appear the next day (European time) and the cash debitwill be back-valued to, and the interest on the beneficial interest in GlobalSecurities will accrue from, the value date (which would be the preceding daywhen settlement occurred in New York). If settlement is not completed on theintended value date (that is, the trade fails), the CEDEL or Euroclear cashdebit will be valued instead as of the actual settlement date.
CEDEL participants and Euroclear participants will need to make available tothe respective clearing systems the funds necessary to process same-day fundssettlement. The most direct means of doing so is to preposition funds forsettlement, either from cash on hand or existing lines of credit, as they wouldfor any settlement occurring within CEDEL or Euroclear. Under this approach,they may take on credit exposure to CEDEL or Euroclear until the GlobalSecurities are credited to their accounts one day later.
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As an alternative, if CEDEL or Euroclear has extended a line of credit tothem, participants can elect not to preposition funds and allow that creditline to be drawn upon to finance settlement. Under this procedure, CEDELparticipants or Euroclear participants purchasing a beneficial interest in theGlobal Securities would incur overdraft charges for one day, assuming theycleared the overdraft when the beneficial interests in the Global Securitieswere credited to their accounts. However, interest on the beneficial interestsin the Global Securities would accrue from the value date. Therefore, in manycases the investment income on the Global Securities earned during that one-dayperiod may substantially reduce or offset the amount of such overdraft charges,although this result will depend on each participant's particular cost offunds.
Since the settlement is taking place during New York business hours, DTCparticipants can employ their usual procedures for sending a beneficialinterest in the Global Securities to Citibank or Morgan for the benefit ofCEDEL participants or Euroclear participants. The sale proceeds will beavailable to the DTC seller on the settlement date. Thus, to the DTCparticipant a cross-market transaction will settle no differently than a tradebetween two DTC participants.
Trading between CEDEL or Euroclear Seller and DTC Purchaser. Due to time zonedifferences in their favor, CEDEL and Euroclear participants may employ theircustomary procedures in transactions in which the beneficial interest in theGlobal Securities is to be transferred by the respective clearing system,through Citibank or Morgan, to a DTC participant. The seller will sendinstructions to CEDEL or Euroclear through a participant at least one businessday prior to settlement. In these cases, CEDEL or Euroclear will instructCitibank or Morgan, as appropriate, to deliver the beneficial interest in theGlobal Securities to the DTC participant's account against payment. Paymentwill include interest accrued on the beneficial interests in the GlobalSecurities from and including the last coupon payment date to and excluding thesettlement date on the basis on which interest is calculated on the GlobalSecurities. For transactions settling on the 31st of the month, payment willinclude interest accrued to and excluding the first day of the following month.The payment will then be reflected in the account of the CEDEL or Euroclearparticipant the following day, and receipt of the cash proceeds in the CEDEL orEuroclear participant's account would be back-valued to the value date (whichwould be the preceding day, when settlement occurred in New York). Should theCEDEL or Euroclear participant have a line of credit with its respectiveclearing system and elect to be in debit in anticipation of receipt of the saleproceeds in its account, the back-valuation will extinguish any overdraftcharges incurred over that one-day period. If settlement is not completed onthe intended value date (that is, the trade fails), receipt of the cashproceeds in the CEDEL or Euroclear participant's account would instead bevalued as of the actual settlement date.
Finally, day traders that use CEDEL or Euroclear and that purchase beneficialinterests in Global Securities from DTC participants for credit to CEDELparticipants or Euroclear participants should note that these trades wouldautomatically fail on the sale side unless affirmative action is taken. Atleast three techniques should be readily available to eliminate this potentialproblem:
(1) borrowing through CEDEL or Euroclear for one day (until the purchaseside of the day trade is reflected in their CEDEL or Euroclear accounts) inaccordance with the clearing system's customary procedures;
(2) borrowing beneficial interests in the Global Securities in the UnitedStates from a DTC participant no later than one day prior to settlement,which would give beneficial interests in the Global Securities sufficienttime to be reflected in the appropriate CEDEL or Euroclear account in orderto settle the sale side of the trade; or
(3) staggering the value dates for the buy and sell sides of the trade sothat the value date for the purchase from the DTC participant is at leastone day prior to the value date for the sale to the CEDEL participant orEuroclear participant.
Although the DTC, CEDEL, and Euroclear have agreed to the foregoingprocedures in order to facilitate transfers of beneficial interests in GlobalSecurities among participants of the DTC, CEDEL, and Euroclear, they are underno obligation to perform or continue to perform such procedures and suchprocedures may be discontinued at any time.
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YEAR 2000
The following information has been provided by DTC:
DTC management is aware that some computer applications, systems, and thelike for processing data ("Systems") that are dependent upon calendar dates,including dates before, on, and after January 1, 2000, may encounter "Year 2000problems." DTC has informed its participants and other members of the financialcommunity (the "Industry") that it has developed and is implementing a programso that its Systems, as the same relate to the timely payment of distributions(including principal and income payments) to securityholders, book-entrydeliveries, and settlement of trades within DTC ("DTC Services"), continue tofunction appropriately. This program includes a technical assessment and aremediation plan, each of which is complete. Additionally, DTC's plan includesa testing phase, which is expected to be completed within appropriate timeframes.
DTC's ability to perform properly its services is also dependent upon otherparties, including but not limited to issuers and their agents, as well asthird party vendors from whom DTC licenses software and hardware, and thirdparty vendors on whom DTC relies for information or the provision of services,including telecommunication and electrical utility service providers, amongothers. DTC has informed the Industry that it is contacting (and will continueto contact) third party vendors from whom DTC acquires services to: (i) impressupon them the importance of such services being Year 2000 complaint; and (ii)determine the extent of their efforts for Year 2000 remediation (and, asappropriate, testing) of their services. In addition, DTC is in the process ofdeveloping such contingency plans as it deems appropriate.
According to DTC, the foregoing information with respect to DTC has beenprovided to the Industry for informational purposes only and is not intended toserve as a representation, warranty, or contract modification of any kind.
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UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material United States federal income taxconsequences of the purchase, ownership and disposition of Notes by personsthat acquire Notes pursuant to the initial public offering of Notes. Unlessotherwise stated, this summary deals only with Notes held as capital assets byU.S. Holders (as defined below). It does not deal with special classes ofholders such as banks, thrifts, real estate investment trusts, regulatedinvestment companies, insurance companies, dealers in securities or currency ortax-exempt investors. This summary also does not address the tax consequencesto persons that have a functional currency other than the U.S. Dollar, personsthat hold Notes as part of a straddle, hedging, constructive sale or conversiontransaction, or shareholders, partners or beneficiaries of a holder of Notes.It also does not include any description of any alternative minimum taxconsequences or the tax laws of any state or local government or of any foreigngovernment that may be applicable to the Notes. This summary is based on theInternal Revenue Code of 1986, as amended (the "Code"), Treasury regulationsunder the Code (the "Treasury Regulations") and administrative and judicialinterpretations of the Code, as of the date of this Prospectus Supplement, allof which are subject to change, possibly on a retroactive basis.
As used in this section, the term "U.S. Holder" means any beneficial owner ofNotes that is, for United States federal income tax purposes, (i) a citizen orresident of the United States, (ii) a corporation or other entity taxable as acorporation or partnership created or organized in or under the laws of theUnited States, any state thereof or the District of Columbia (other than apartnership that is not treated as a United States person under any applicableTreasury Regulations), (iii) an estate the income of which is subject to UnitedStates federal income taxation regardless of its source, or (iv) a trust if (A)a court within the United States is able to exercise primary supervision overthe administration of the trust and (B) one or more United States persons havethe authority to control all substantial decisions of the trust.Notwithstanding the preceding sentence, to the extent provided in
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TreasuryRegulations, certain trusts in existence on August 20, 1996 and treated asUnited States persons prior to such date that elect to continue to be treatedas United States persons also will be U.S. Holders. As used herein, the term"Non-U.S. Holder" means a beneficial owner of Notes that is not a U.S. Holder.
INTEREST INCOME
Interest on a Note will be includible in a U.S. Holder's gross income asordinary U.S. source interest income at the time it is accrued or received inaccordance with the U.S. Holder's method of accounting for United Statesfederal income tax purposes.
SALE, EXCHANGE OR RETIREMENT OF NOTES
Upon sale, exchange or retirement of a Note, a U.S. Holder generally willrecognize gain or loss equal to the difference between the U.S. Holder'sadjusted tax basis in the Note and the amount realized on such sale, exchangeor retirement, except to the extent such amount represents accrued interest. AU.S. Holder's adjusted tax basis in a Note generally will equal the U.S.Holder's purchase price for such Note (net of accrued interest) less anyprincipal payments received by the U.S. Holder. Gain or loss so recognized willbe capital gain or loss and will be long-term capital gain or loss, if, at thetime of the sale, exchange or retirement, the Note was held for more than oneyear. Under current law, net capital gains of individuals are, under certaincircumstances, taxed at lower rates than items of ordinary income. Thededuction of capital losses is subject to certain limitations.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
In general, information reporting requirements will apply to payments ofprincipal, premium, if any, and interest on a Note and the proceeds of the saleof a Note and a 31% backup withholding tax may apply to such payments to anoncorporate U.S. Holder if such U.S. Holder (i) fails to furnish or certifyhis correct taxpayer identification number to the payor in the manner required,
(ii) is notified by the IRS that he has failed to report
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payments of interest and dividends properly, or (iii) under certaincircumstances, fails to certify that he has not been notified by the IRS thathe is subject to backup withholding for failure to report interest payments.Any amounts withheld under the backup withholding rules from a payment to aU.S. Holder will be allowed as a credit against such U.S. Holder's UnitedStates federal income tax and may entitle the holder to a refund, provided thatthe required information is furnished to the IRS.
NON-U.S. HOLDERS
The rules governing United States federal income taxation of a beneficialowner of Notes that, for United States federal income tax purposes, is a Non-U.S. Holder are complex and no attempt will be made in this ProspectusSupplement to provide more than a summary of such rules. NON-U.S. HOLDERSSHOULD CONSULT WITH THEIR OWN TAX ADVISORS TO DETERMINE THE EFFECT OF FEDERAL,STATE, LOCAL AND FOREIGN INCOME TAX LAWS, AS WELL AS TREATIES, WITH REGARD TOAN INVESTMENT IN THE NOTES, INCLUDING ANY REPORTING REQUIREMENTS.
Interest Income. Generally, interest income of a Non-U.S. Holder that is noteffectively connected with a United States trade or business will be subject toa withholding tax at a 30% rate (or, if applicable, a lower tax rate specifiedby a treaty). However, interest income earned on the Notes by a Non-U.S. Holderwill qualify for the "portfolio interest" exemption and therefore will not besubject to United States federal income tax or withholding tax, provided thatsuch interest income is not effectively connected with a United States trade orbusiness of the Non- U.S. Holder and provided that (i) the Non-U.S. Holder doesnot actually or constructively own 10% or more of the total combined votingpower of all classes of stock of Sprint Capital or Sprint entitled to vote,
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(ii) the Non-U.S. Holder is not a controlled foreign corporation that isrelated to Sprint Capital or Sprint through stock ownership, (iii) the Non-U.S.Holder is not a bank which acquired the Notes in consideration for an extensionof credit made pursuant to a loan agreement entered into in the ordinary courseof business and (iv) either (A) the Non- U.S. Holder certifies to Sprint Capitalor its agent, under penalties of perjury, that it is not a U.S. Holder andprovides its name and address or (B) a securities clearing organization, bankor other financial institution that holds customer securities in the ordinarycourse of its trade or business (a "Financial Institution"), and holds Notes insuch capacity, certifies to Sprint Capital or its agent, under penalties ofperjury, that such statement has been received from the beneficial owner by itor by a Financial Institution between it and the beneficial owner and furnishesSprint Capital or its agent with a copy of such certification.
Recently finalized Treasury Regulations would modify the certificationrequirements on payments of interest made after December 31, 1998. In Notice98-16, the IRS announced that the Treasury Department and the IRS intend toamend these regulations by delaying the effective date, so that the regulationswill apply to payments made after December 31, 1999, subject to certaintransition rules. Prospective investors should consult their own tax advisorsas to the effect, if any, of the final regulations and Notice 98-16 on theirpurchase, ownership and disposition of the Notes.
Except to the extent that an applicable treaty otherwise provides, a Non-U.S.Holder generally will be taxed in the same manner as a U.S. Holder with respectto interest if the interest income is effectively connected with a UnitedStates trade or business of the Non-U.S. Holder. Effectively connected interestreceived or accrued by a corporate Non-U.S. Holder may also, under certaincircumstances, be subject to an additional "branch profits" tax at a 30% rate(or, if applicable, a lower tax rate specified by a treaty). Even though sucheffectively connected interest is subject to income tax, and may be subject tothe branch profits tax, it is not subject to withholding tax if the holderdelivers a properly executed IRS Form 4224 (or successor form) to the payor.
Sales, Exchange or Retirement of Notes. A Non-U.S. Holder of Notes generallywill not be subject to United States federal income tax or withholding tax onany gain realized on the sale, exchange or retirement of Notes unless (i) thegain is effectively connected with a United States trade or business of theNon-U.S. Holder, (ii) in the case of a Non-U.S. Holder who is an individual,such holder is present in the United States for a period or periods aggregating183 days or more during the taxable year of the disposition, and either such
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holder has a "tax home" in the United States or the disposition is attributableto an office or other fixed place of business maintained by such holder in theUnited States or (iii) the Non-U.S. Holder is subject to tax pursuant to theprovisions of the Code applicable to certain United States expatriates.
Information Reporting and Backup Withholding Tax. Sprint Capital must reportannually to the IRS and to each Non- U.S. Holder the amount of any interest paidon the Notes in such year and the amount of tax withheld, if any, with respectto such payments. Copies of those information returns also may be madeavailable, under the provisions of a specific treaty or agreement, to thetaxing authorities of the country in which the Non-U.S. Holder resides or isincorporated. United States information reporting requirements and backupwithholding tax will not apply to payments of interest on Notes to a Non-U.S.Holder if the statement described in "--Interest Income" is duly provided bysuch holder, provided that the payor does not have actual knowledge that theholder is a U.S. Holder.
Information reporting requirements and backup withholding tax will not applyto any payment of the proceeds of the sale of Notes effected outside the UnitedStates by a foreign office of a "broker" (as defined in applicable TreasuryRegulations), unless such broker (i) is a United States person, (ii) is aforeign person that derives 50% or more of its gross income for certain periodsfrom the conduct of a trade or business in the United States, or (iii) is acontrolled foreign corporation for United States federal income tax purposes.Payment of the proceeds of any such sale effected outside the United States bya foreign office of any broker that is described in (i), (ii) or (iii) of thepreceding sentence will not be subject to backup withholding tax, but will besubject to information reporting requirements, unless such broker hasdocumentary evidence in its records that the beneficial owner is a Non- U.S.Holder and certain other conditions are met, or the beneficial owner otherwiseestablishes an exemption.
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Payment of the proceeds of any such sale to orthrough the United States office of a broker is subject to informationreporting and backup withholding requirements unless the beneficial owner ofthe Notes provides the statement described in "--Interest Income" or otherwiseestablishes an exemption.
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UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement(the "Underwriting Agreement"), among Sprint Capital, Sprint and Salomon SmithBarney Inc., Credit Suisse First Boston Corporation, J.P. Morgan SecuritiesInc., Warburg Dillon Read LLC, Chase Securities Inc., Lehman Brothers, Inc.and NationsBanc Montgomery Securities LLC on behalf of themselves and theothers named in the table below (the "Underwriters"), Sprint Capital hasagreed to sell to each of the Underwriters, and each of the Underwriters hasseverally agreed to purchase, the principal amount of the Notes (including theaccompanying Guarantees issued by Sprint) set forth opposite its name below.See "Plan of Distribution" in the accompanying Prospectus.
PRINCIPAL AMOUNT OF PRINCIPAL AMOUNT OF PRINCIPAL AMOUNT OF PRINCIPAL AMOUNT OF
UNDERWRITER NOTES NOTES NOTES NOTES
----------- ------------------- ------------------- ------------------- -------------------
Salomon Smith Barney
Inc. ..................
Credit Suisse First
Boston Corporation.....
J.P. Morgan Securities
Inc. ..................
Warburg Dillon Read LLC.
Chase Securities Inc. ..
Lehman Brothers, Inc. ..
NationsBanc Montgomery
Securities LLC.........
ABN AMRO Incorporated...
Deutsche Bank Securities
Inc. ..................
Fleet Securities Inc. ..
RBC Dominion Securities
Inc. ..................
WestLB Westdeutsche
Landesbank
Girozentrale...........
Wheat First Securities
Inc. ..................
---- ---- ---- ----
Total................. $ $ $ $
==== ==== ==== ====
Sprint Capital has been advised by the Underwriters that they proposeinitially to offer the Notes to the public at the public offering prices setforth on the cover page of this Prospectus Supplement, and to certain dealersat such price less a concession not in excess of:
. % of the principal amount in the case of the Notes
. % of the principal amount in the case of the Notes
. % of the principal amount in the case of the Notes
. % of the principal amount in the case of the Notes
The Underwriters may allow, and such dealers may reallow, a concession tocertain other dealers not in excess of:
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. % of the principal amount in the case of the Notes
. % of the principal amount in the case of the Notes
. % of the principal amount in the case of the Notes
. % of the principal amount in the case of the Notes
After the initial public offering, the public offering prices and suchconcessions may be changed from time to time. In addition to underwritingdiscounts, Sprint Capital and Sprint estimate they will have expenses of $in connection with the offering of the Notes.
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The Notes are a new issue of securities with no established trading market.Sprint Capital does not presently intend to list the Notes on any securitiesexchange, except for the Notes. Sprint Capital has applied for listing ofthe Notes on the New York Stock Exchange. Sprint Capital has been advisedby the Underwriters that they intend to make a market in the Notes, but theUnderwriters are not obligated to do so and may discontinue any market makingat any time without notice. No assurance can be given as to the liquidity ofthe trading market for the Notes.
The Underwriting Agreement provides that the obligations of the Underwritersare subject to certain conditions precedent and that the Underwriters willpurchase all the Notes if any are purchased.
In connection with the offering, certain Underwriters and their respectiveaffiliates may engage in transactions that stabilize, maintain or otherwiseaffect the market price of the Notes. Such transactions may includestabilization transactions effected in accordance with Rule 104 of RegulationM, pursuant to which such persons may bid for or purchase Notes for the purposeof stabilizing their market price. The Underwriters also may create a shortposition for the account of the Underwriters by selling more Notes inconnection with the offering than they are committed to purchase from SprintCapital, and in such case may purchase Notes in the open market followingcompletion of this offering to cover such short position. Any of thetransactions described in this paragraph may result in the maintenance of theprice of the Notes at a level above that which might otherwise prevail in theopen market. None of the transactions described in this paragraph are required,and, if they are undertaken, they may be discontinued at any time.
Under Rule 2710(c)(8) of the Conduct Rules of the National Association ofSecurities Dealers, Inc. (the "NASD"), special considerations apply to a publicoffering of debt securities where more than 10% of the net proceeds thereofwill be paid to members of the NASD that are participating in the offering, orpersons affiliated or associated with such members. Because Sprint Capitalexpects that more than 10% of the proceeds of the offering will be used torepay money lent to Sprint or a member of the FON Group or the PCS Group underexisting credit facilities by , which are affiliates of , respectively,the offering will be conducted in conformity with Rule 2710(c)(8).
Certain of the Underwriters or their affiliates have provided banking andother financial services to Sprint or its affiliates for which they havereceived customary compensation. Sprint has retained Salomon Smith Barney Inc.and Warburg Dillon Read LLC to act as financial advisors in connection with therestructuring of the PCS Group. Certain of the Underwriters or their affiliateswill in the future continue to provide banking and other financial services toSprint or its affiliates for which they will receive customary compensation.Harold S. Hook, a director of Sprint, is a director of The Chase ManhattanCorporation and The Chase Manhattan Bank, affiliates of Chase Securities Inc.
The Underwriting Agreement provides that Sprint Capital and Sprint willindemnify the Underwriters against certain liabilities, including liabilitiesunder the Securities Act of 1933, or contribute to payments the Underwritersmay be required to make in respect of such liabilities.
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LEGAL MATTERS
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Don A. Jensen, Esq., Vice President and Secretary of Sprint, will issue anopinion about the validity of the Notes for Sprint and Sprint Capital. King &Spalding, New York, New York will also issue an opinion for Sprint and SprintCapital. Cravath, Swaine & Moore, New York, New York will issue an opinion forthe underwriters. As of September 30, 1998, Mr. Jensen beneficially ownedapproximately 31,000 shares of Sprint common stock and had options to purchasein excess of 60,000 shares of Sprint common stock.
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EXPERTS
The consolidated financial statements of Sprint and the combined financialstatements of the FON Group and the PCS Group as of December 31, 1997 and 1996and for each of the three years in the period ended December 31, 1997 appearingin this Prospectus Supplement have been audited by Ernst & Young LLP,independent auditors, as set forth in their reports thereon appearing elsewhereherein which, as to the year 1997 for the consolidated financial statements ofSprint and the years 1997, 1996, and 1995 for the combined financial statementsof the PCS Group, are based in part on the reports of Deloitte & Touche LLP,independent auditors. The financial statements referred to above are includedin reliance upon such reports given upon the authority of such firms as expertsin accounting and auditing.
The combined financial statements of Sprint Spectrum Holding Company, L.P.and subsidiaries, MinorCo, L.P. and subsidiaries, PhillieCo Partners I, L.P.and subsidiaries and PhillieCo Partners II, L.P. and subsidiaries as ofDecember 31, 1997 and 1996 and for each of the three years in the period endedDecember 31, 1997, included in this Prospectus Supplement have been audited byDeloitte & Touche LLP, independent auditors, as stated in their reportappearing herein (which expresses an unqualified opinion and includes anexplanatory paragraph referring to the emergence from the development stage)and has been so included in reliance upon the report of such firm given upontheir authority as experts in accounting and auditing.
The consolidated financial statements of Sprint Spectrum Holding Company,L.P. and subsidiaries as of December 31, 1997 and 1996, not separatelypresented in this Prospectus Supplement, incorporated in the accompanyingProspectus by reference to the Sprint Corporation Annual Report on Form 10-Kfor the year ended December 31, 1997, have been audited by Deloitte & ToucheLLP, independent auditors, as stated in their report (which expresses anunqualified opinion and includes an explanatory paragraph referring to theemergence from the development stage) appearing herein, and have been soincorporated by reference in reliance upon the report of such firm given upontheir authority as experts in accounting and auditing.
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GLOSSARY
"ATM" means Asynchronous Transfer Mode, a high speed transmission technology.ATM is a high bandwidth, low- delay connection-oriented packet-like switchingand multiplexing technique used to transfer voice, video, images and character-based data.
"BTA" means Basic Trading Area, a wireless telecommunications term. TheUnited States is broken down into 493 BTAs for economic purposes. These areaswere defined by the FCC for the purpose of issuing licenses for PCS. SeveralBTAs make up each MTA.
"CDMA" means Code Division Multiple Access, a digital spread-spectrumwireless technology which allows a large number of users to access a singlefrequency band that assigns a code to all speech bits, sends a scrambledtransmission of the encoded speech over the air and reassembles the speech intoits original format.
"CMRS" means Commercial Mobile Radio Service provider, an FCC term forcellular and PCS providers.
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"CLEC" means a competitive local exchange carrier, a company that competeswith local exchange carriers in the local services market.
"Dual-Band Handset" means a handset that will transmit and receive on eitherthe 800 MHz or 1,900-MHz frequencies.
"Dual-Mode Handset" means a handset that will transmit and receive for bothanalog and digital telecommunications systems.
"ESMR" means Enhanced Specialized Mobile Radio communications services,supplied by converting analog SMR services into an integrated, digitaltransmission system providing for call hand-off, frequency reuse and wide- calldelivery networks.
"Frame Relay" means a service which employs a form of packet switchingsimilar to a streamlined version of X.25 networks. The packets are in the formof "frames" which vary in length and is completely protocol independent.Because the "frame" is undisturbed and the conversions are the responsibilityof the user, the transmission speed is faster, up to 1.544 mbps, and lessexpensive.
"GSM" means Global System for Mobile Communications or Groupe Special Mobile,an international digital cellular radio standard first developed in WesternEurope. The GSM standard defines the components of the cellular radio networkinfrastructure, including base stations, switching centers, signaling systemand interfaces and the radio access protocol. In Europe, GSM operates in the900 MHz frequency range. It has been upgraded to function in the 1.8 GHz (DCN)and 1.9 GHz (PCS-1900) frequency ranges.
"ILEC" means an Incumbent Local Exchange Carrier, a company historicallyproviding local telephone service. Often refers to one of the Regional BellOperating Companies (RBOCs) or GTE. Often referred to as "LEC" (Local ExchangeCarrier).
"LATA" means Local Access Transport Area, a geographic area in the UnitedStates within which a local telephone company may offer telecommunicationsservices.
"LEC" means a local exchange carrier, a company providing local telephone
service.
"MTA" means Metropolitan Trading Area, an area defined by the FCC for the
purpose of issuing licenses for PCS. Each MTA consists of several BTAs. TheUnited States is broken down into 51 MTAs.
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"PCS" means personal communications service. In Canada and the United States,PCS spectrum has been allocated for use by public systems at the 1.9 GHzfrequency range. It is expected that PCS will initially consist primarily ofenhanced voice, two-way data and text messaging services. Such PCS applicationsare expected to be followed over time by services offering integrated voice,data, image and eventually perhaps video capability. PCS systems operate in asimilar manner to cellular systems.
"Pops" means population equivalent. One person residing in a license areaequals one Pop.
"RBOC" means Regional Bell Operating Company, the five remaining localtelephone companies (formerly part of AT&T) established as a result of the AT&TDivestiture.
"SONET" means an electronics and network architecture for variable bandwidthproducts which enables transmission of voice, data and video (multimedia) atvery high speeds. SONET ring architecture provides for virtually instantaneousrestoration of service in the event of a fiber cut by automatically reroutingtraffic in the opposite direction around the ring.
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"Signaling System 7" means a sophisticated network signaling system thatutilizes out-of-band signaling where signaling information is sent over aseparate channel than the call itself. Improves call processing set-up timesand frees circuits for voice, data and video transmissions.
"TDMA" means Time Division Multiple Access, a digital spread-spectrumtechnology which allocates a discrete amount of frequency bandwidth to eachuser in order to permit more than one simultaneous conversation on a single RFchannel.
"X.25" means a standard protocol suite for packet-switched networks, withwhich mainframe computers, word processors, mini-computers, VDUs,microcomputers and a wide variety of specialized terminal equipment from manymanufacturers can be made to work.
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INDEX TO FINANCIAL STATEMENTS
SPRINT CORPORATION
Report of Independent Auditors.......................................... F-2
Independent Auditors' Report............................................ F-3
Consolidated Statements of Income for the nine months ended September
30, 1998 and 1997 and for the years ended December 31, 1997, 1996 and
1995................................................................... F-4
Consolidated Balance Sheets as of September 30, 1998 and December 31,
1997 and 1996.......................................................... F-5
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1998 and 1997 and for the years ended December 31, 1997,
1996 and 1995.......................................................... F-6
Consolidated Statements of Common Stock and Other Stockholders' Equity
for the nine months ended September 30, 1998 and for the years ended
December 31, 1997, 1996 and 1995....................................... F-7
Notes to Consolidated Financial Statements.............................. F-8
Unaudited Pro Forma Condensed Combined Financial Statements............. F-30
FON GROUP
Report of Independent Auditors.......................................... F-37
Combined Statements of Income for the nine months ended September 30,
1998 and 1997 and for the years ended December 31, 1997, 1996 and 1995. F-38
Combined Balance Sheets as of September 30, 1998 and December 31, 1997
and 1996............................................................... F-39
Combined Statements of Cash Flows for the nine months ended September
30, 1998 and 1997 and for the years ended December 31, 1997, 1996 and
1995................................................................... F-40
Notes to Combined Financial Statements.................................. F-41
Unaudited Pro Forma Condensed Combined Financial Statements............. F-57
PCS GROUP
Report of Independent Auditors.......................................... F-62
Combined Statements of Operations for the nine months ended September
30, 1998 and 1997 and for the years ended December 31, 1997, 1996 and
1995................................................................... F-63
Combined Balance Sheets as of September 30, 1998 and December 31, 1997
and 1996............................................................... F-64
Combined Statements of Cash Flows for the nine months ended September
30, 1998 and 1997 and for the years ended December 31, 1997, 1996 and
1995................................................................... F-65
Notes to Combined Financial Statements.................................. F-66
Unaudited Pro Forma Condensed Combined Financial Statements............. F-72
SPRINT SPECTRUM HOLDING COMPANY COMBINED WITH MINORCO AND PHILLIECO
Independent Auditors' Report............................................ F-79
Combined Balance Sheets as of September 30, 1998 and December 31, 1997
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and 1996............................................................... F-80
Combined Statements of Operations for the nine months ended September
30, 1998 and 1997 and for the years ended December 31, 1997, 1996 and
1995................................................................... F-81
Combined Statements of Changes in Partners' Capital for the nine months
ended September 30, 1998 and 1997 and for the years ended December 31,
1997, 1996 and 1995.................................................... F-82
Combined Statements of Cash Flows for the nine months ended September
30, 1998 and 1997 and for the years ended December 31, 1997, 1996 and
1995................................................................... F-83
Notes to Combined Financial Statements.................................. F-84
F-1
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REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Sprint Corporation
We have audited the accompanying consolidated balance sheets of SprintCorporation ("Sprint") as of December 31, 1997 and 1996, and the relatedconsolidated statements of income, cash flows, and common stock and otherstockholders' equity for each of the three years in the period ended December31, 1997. These financial statements are the responsibility of the managementof Sprint. Our responsibility is to express an opinion on these financialstatements based on our audits. The 1997 financial statements of SprintSpectrum Holding Company, L.P., a partnership in which Sprint has a 40%interest, have been audited by other auditors whose report has been furnishedto us; insofar as our opinion on the 1997 consolidated financial statementsrelates to data included for Sprint Spectrum Holding Company, L.P., it isbased solely on their report. In the consolidated financial statements,Sprint's equity in Sprint Spectrum Holding Company, L.P. is stated at $749million at December 31, 1997, and Sprint's equity in the net loss of SprintSpectrum Holding Company, L.P. is stated at $625 million for the year thenended.
We conducted our audits in accordance with generally accepted auditingstandards. Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits and the report of otherauditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of Sprint at December31, 1997 and 1996, and the consolidated results of its operations and its cashflows for each of the three years in the period ended December 31, 1997, inconformity with generally accepted accounting principles.
As discussed in Note 14 to the consolidated financial statements, Sprintdiscontinued accounting for the operations of its local telecommunicationsdivision in accordance with Statement of Financial Accounting Standards No.71, "Accounting for the Effects of Certain Types of Regulation," in 1995.
Ernst & Young LLP
Kansas City, Missouri
February 3, 1998, except for Note 1, as
to which the date is May 26, 1998
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F-2
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INDEPENDENT AUDITORS' REPORT
Partners of Sprint Spectrum Holding Company, L.P.Kansas City, Missouri
We have audited the consolidated balance sheets of Sprint Spectrum HoldingCompany, L.P. and subsidiaries ("the Partnership") as of December 31, 1997 and1996, and the related consolidated statements of operations, changes inpartners' capital and cash flows for the three years in the period endedDecember 31, 1997. These financial statements are the responsibility of thePartnership's management. Our responsibility is to express an opinion on theseconsolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditingstandards. Those standards require that we plan and perform the audits toobtain reasonable assurance about whether the consolidated financialstatements are free of material misstatement. An audit includes examining, ona test basis, evidence supporting the amounts and disclosures in theconsolidated financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, inall material respects, the consolidated financial position of Sprint SpectrumHolding Company, L.P. and subsidiaries at December 31, 1997 and 1996, and theresults of their operations and their cash flows for the three years thenended, in conformity with generally accepted accounting principles.
The Partnership was in the development stage at December 31, 1996; duringthe year ended December 31, 1997, the Partnership completed its developmentactivities and commenced its planned principal operations.
Deloitte & Touche LLP
Kansas City, Missouri
February 3, 1998
F-3
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SPRINT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS, EXCEPT PER SHARE DATA)
NINE MONTHS YEAR ENDED
ENDED SEPTEMBER 30, DECEMBER 31,
-------------------- -------------------------------
1998 1997 1997 1996 1995
--------- --------- --------- --------- ---------
(UNAUDITED)
NET OPERATING REVENUES.. $11,940.3 $11,024.9 $14,873.9 $13,887.5 $12,735.3
OPERATING EXPENSES
Costs of services and
products............. 5,691.3 5,523.7 7,451.0 6,912.9 6,504.9
Selling, general and
administrative....... 2,802.0 2,395.1 3,245.2 3,116.4 2,842.1
Depreciation and
amortization......... 1,429.1 1,265.2 1,726.3 1,591.0 1,466.4
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Restructuring costs... -- -- -- -- 87.6
--------- --------- --------- --------- ---------
Total operating
expenses............. 9,922.4 9,184.0 12,422.5 11,620.3 10,901.0
--------- --------- --------- --------- ---------
OPERATING INCOME........ 2,017.9 1,840.9 2,451.4 2,267.2 1,834.3
Interest expense........ (185.6) (133.3) (187.2) (196.7) (260.7)
Equity in loss of Global
One.................... (120.0) (88.3) (162.1) (82.1) (22.9)
Equity in loss of Sprint
Spectrum Holdings and
PhillieCo.............. (686.5) (410.6) (659.6) (191.8) (31.4)
Other income (expense),
net.................... 48.6 51.8 140.5 115.3 (38.9)
--------- --------- --------- --------- ---------
Income from continuing
operations before
income taxes........... 1,074.4 1,260.5 1,583.0 1,911.9 1,480.4
Income taxes............ (405.1) (502.9) (630.5) (721.0) (534.3)
--------- --------- --------- --------- ---------
INCOME FROM CONTINUING
OPERATIONS............. 669.3 757.6 952.5 1,190.9 946.1
Discontinued operation,
net.................... -- -- -- (2.6) 14.5
Extraordinary items,
net.................... (4.4) -- -- (4.5) (565.3)
--------- --------- --------- --------- ---------
NET INCOME.............. 664.9 757.6 952.5 1,183.8 395.3
Preferred stock
dividends.............. (0.8) (0.8) (1.0) (1.3) (2.6)
--------- --------- --------- --------- ---------
Earnings applicable to
common stock........... $ 664.1 $ 756.8 $ 951.5 $ 1,182.5 $ 392.7
========= ========= ========= ========= =========
BASIC EARNINGS PER
COMMON SHARE
Continuing operations. $ 1.55 $ 1.76 $ 2.21 $ 2.82 $ 2.71
Discontinued
operation............ -- -- -- (0.01) 0.04
Extraordinary items... (0.01) -- -- (0.01) (1.62)
--------- --------- --------- --------- ---------
Total................... $ 1.54 $ 1.76 $ 2.21 $ 2.80 $ 1.13
========= ========= ========= ========= =========
Basic weighted average
common shares.......... 430.7 430.3 430.2 421.7 348.7
========= ========= ========= ========= =========
DILUTED EARNINGS PER
COMMON SHARE
Continuing operations. $ 1.52 $ 1.74 $ 2.18 $ 2.79 $ 2.69
Discontinued
operation............ -- -- -- (0.01) 0.04
Extraordinary items... (0.01) -- -- (0.01) (1.61)
--------- --------- --------- --------- ---------
Total................... $ 1.51 $ 1.74 $ 2.18 $ 2.77 $ 1.12
========= ========= ========= ========= =========
Diluted weighted average
common shares.......... 438.7 436.1 436.5 427.0 351.3
========= ========= ========= ========= =========
DIVIDENDS PER COMMON
SHARE.................. $ 0.75 $ 0.75 $ 1.00 $ 1.00 $ 1.00
========= ========= ========= ========= =========
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See accompanying Notes to Consolidated Financial Statements.
F-4
Return to Contents
SPRINT CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
------------- --------------------
1998 1997 1996
------------- --------- ---------
(UNAUDITED)
ASSETS
Current assets
Cash and equivalents..................... $ 47.7 $ 101.7 $ 1,150.6
Accounts receivable, net of allowance for
doubtful accounts of $166.0 (unaudited),
$146.7 and $117.4....................... 2,515.8 2,495.6 2,343.6
Inventories.............................. 349.9 352.0 305.3
Prepaid expenses......................... 216.3 159.1 150.0
Notes and other receivables.............. 407.8 443.4 101.9
Other.................................... 206.4 199.6 181.5
--------- --------- ---------
Total current assets................... 3,743.9 3,751.4 4,232.9
Investments in equity securities........... 420.2 303.0 254.5
Property, plant and equipment
Long distance communications services.... 9,133.0 8,245.5 7,467.8
Local communications services............ 14,817.2 14,011.5 13,368.7
Other.................................... 2,309.2 953.9 574.3
--------- --------- ---------
Total property, plant and equipment...... 26,259.4 23,210.9 21,410.8
Less accumulated depreciation............ 12,757.2 11,716.8 10,946.7
--------- --------- ---------
Net property, plant and equipment...... 13,502.2 11,494.1 10,464.1
Investment in and advances to Sprint
Spectrum Holdings and PhillieCo........... 610.1 989.6 1,242.9
Investments in and advances to other
affiliates................................ 634.0 459.1 284.2
Other assets............................... 1,543.4 1,187.6 347.8
--------- --------- ---------
Total.................................. $20,453.8 $18,184.8 $16,826.4
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt..... $ 80.6 $ 131.0 $ 99.1
Short-term borrowings.................... -- -- 200.0
Accounts payable......................... 1,099.0 1,100.1 1,026.7
Accrued interconnection costs............ 564.7 672.7 709.0
Accrued taxes............................ 399.2 270.7 189.2
Advance billings......................... 213.3 202.9 199.7
Other.................................... 849.0 699.4 770.6
--------- --------- ---------
Total current liabilities.............. 3,205.8 3,076.8 3,194.3
Construction obligations................... 429.0 -- --
Long-term debt............................. 5,039.8 3,748.6 2,974.8
Deferred credits and other liabilities
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Deferred income taxes and investment tax
credits................................. 1,029.2 1,016.5 846.9
Postretirement and other benefit
obligations............................. 1,067.4 947.4 919.7
Other.................................... 370.8 358.8 359.0
--------- --------- ---------
Total deferred credits and other
liabilities........................... 2,467.4 2,322.7 2,125.6
Redeemable preferred stock................. 9.5 11.5 11.8
Common stock and other stockholders' equity
Common stock, par value $2.50 per share,
1,000.0 shares authorized, 350.3 shares
issued, and 344.5 (unaudited), 343.8 and
343.9 shares outstanding................ 875.7 875.7 875.7
Class A common stock, par value $2.50 per
share, 500.0 shares authorized, 86.2
shares issued and outstanding........... 215.6 215.6 215.6
Capital in excess of par or stated value. 4,490.8 4,457.7 4,425.9
Retained earnings........................ 4,012.7 3,693.1 3,222.4
Treasury stock, at cost, 5.8 (unaudited),
6.5 and 6.4 shares...................... (396.1) (292.9) (262.2)
Other.................................... 103.6 76.0 42.5
--------- --------- ---------
Total common stock and other
stockholders' equity.................. 9,302.3 9,025.2 8,519.9
--------- --------- ---------
Total.................................. $20,453.8 $18,184.8 $16,826.4
========= ========= =========
See accompanying Notes to Consolidated Financial Statements.
F-5
Return to Contents
SPRINT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
NINE MONTHS
ENDED SEPTEMBER YEAR ENDED
30, DECEMBER 31,
------------------ ----------------------------
1998 1997 1997 1996 1995
-------- -------- -------- -------- --------
(UNAUDITED)
OPERATING ACTIVITIES
Net income.................. $ 664.9 $ 757.6 $ 952.5 $1,183.8 $ 395.3
Adjustments to reconcile net
income to net cash provided
by operating activities:
Equity in net losses of
affiliates............... 824.9 506.9 843.7 273.7 39.1
Extraordinary items, net.. 1.1 -- -- 4.9 565.3
Depreciation and
amortization............. 1,429.1 1,265.2 1,726.3 1,591.0 1,466.4
Deferred income taxes and
investment tax credits... 20.8 217.2 165.7 (10.3) 5.8
Net (gains) losses on
sales of assets.......... -- -- (93.2) 7.5 4.2
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Changes in assets and
liabilities:
Accounts receivable,
net.................... (20.2) (92.9) (127.0) (982.1) (135.4)
Inventories and other
current assets......... (28.0) (37.2) (94.4) 15.7 (38.6)
Accounts payable and
other current
liabilities............ 124.1 (195.5) 18.0 362.0 178.1
Noncurrent assets and
liabilities, net....... (69.0) (14.3) (18.4) (25.5) 123.0
Other, net................ 2.3 3.7 5.8 (17.1) 6.4
-------- -------- -------- -------- --------
Net cash provided by
continuing operations...... 2,950.0 2,410.7 3,379.0 2,403.6 2,609.6
Net cash provided (used) by
cellular division.......... -- -- -- (0.1) 162.5
-------- -------- -------- -------- --------
Net cash provided by
operating activities....... 2,950.0 2,410.7 3,379.0 2,403.5 2,772.1
-------- -------- -------- -------- --------
INVESTING ACTIVITIES
Capital expenditures........ (2,992.1) (1,903.9) (2,862.6) (2,433.6) (1,857.3)
Purchase of PCS licenses.... -- (460.1) (460.1) (84.0) --
Investments in and loans to
Sprint Spectrum Holdings
and PhillieCo.............. (307.1) (410.0) (706.3) (561.0) (954.1)
Investments in and advances
to other affiliates, net... (395.3) (98.5) (385.5) (81.4) (37.8)
Paranet acquisition......... -- (375.0) (375.0) -- --
Proceeds from sales of
assets..................... -- -- 292.3 2.1 6.7
Other, net.................. (14.0) 33.8 (2.3) 42.4 (17.1)
-------- -------- -------- -------- --------
Net cash used by continuing
operations................. (3,708.5) (3,213.7) (4,499.5) (3,115.5) (2,859.6)
Repayment by cellular
division of intercompany
advances................... -- -- -- 1,400.0 --
Net cash used by cellular
division................... -- -- -- (140.7) (324.6)
-------- -------- -------- -------- --------
Net cash used by investing
activities................. (3,708.5) (3,213.7) (4,499.5) (1,856.2) (3,184.2)
-------- -------- -------- -------- --------
FINANCING ACTIVITIES
Payments on long-term debt.. (246.7) (110.6) (135.0) (433.1) (630.0)
Proceeds from long-term
debt....................... 945.6 -- 866.5 9.4 260.7
Change in construction
obligations................ 429.0 -- -- -- --
Net change in short-term
borrowings................. -- 194.7 (200.0) (1,986.8) 1,109.5
Proceeds from Class A common
stock issued............... -- -- -- 3,661.3 --
Dividends paid.............. (291.6) (274.5) (430.0) (419.6) (351.5)
Treasury stock purchased.... (235.4) (128.8) (144.5) (407.2) --
Other, net.................. 103.6 81.0 114.6 55.1 33.9
-------- -------- -------- -------- --------
Net cash provided (used) by
financing activities....... 704.5 (238.2) 71.6 479.1 422.6
-------- -------- -------- -------- --------
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Increase (Decrease) in Cash
and Equivalents............ (54.0) (1,041.2) (1,048.9) 1,026.4 10.5
Cash and Equivalents at
Beginning of Period........ 101.7 1,150.6 1,150.6 124.2 113.7
-------- -------- -------- -------- --------
Cash and Equivalents at End
of Period.................. $ 47.7 $ 109.4 $ 101.7 $1,150.6 $ 124.2
======== ======== ======== ======== ========
See accompanying Notes to Consolidated Financial Statements.
F-6
Return to Contents
SPRINT CORPORATION
CONSOLIDATED STATEMENTS OF COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY
CAPITAL IN
EXCESS OF
COMMON CLASS A PAR OR
SHARES COMMON COMMON STATED RETAINED TREASURY
OUTSTANDING STOCK STOCK VALUE EARNINGS STOCK OTHER TOTAL
----------- ------- ------- ---------- --------- -------- ------- ---------
(IN MILLIONS)
BEGINNING 1995 BALANCE.. 348.3 $ 871.4 $ -- $ 942.9 $ 2,730.6 $ (9.6) $ (10.5) $ 4,524.8
Net income.............. -- -- -- -- 395.3 -- -- 395.3
Common stock dividends.. -- -- -- -- (348.9) -- -- (348.9)
Common stock issued..... 0.6 1.4 -- 13.5 -- -- -- 14.9
Treasury stock issued... 0.3 -- -- -- (3.5) 9.6 -- 6.1
Change in unrealized
holding gains on
investments, net....... -- -- -- -- -- -- 54.6 54.6
Other, net.............. -- 0.1 -- 3.6 (0.6) -- (7.3) (4.2)
----- ------- ------- --------- --------- -------- ------- ---------
ENDING 1995 BALANCE..... 349.2 872.9 -- 960.0 2,772.9 -- 36.8 4,642.6
Net income.............. -- -- -- -- 1,183.8 -- -- 1,183.8
Common stock dividends.. -- -- -- -- (346.1) -- -- (346.1)
Class A common stock and
preference stock
dividends.............. -- -- -- -- (74.9) -- -- (74.9)
Common stock issued..... 1.1 2.5 -- 17.5 -- -- -- 20.0
Class A common stock
issued................. 86.2 -- 215.6 3,436.3 -- -- -- 3,651.9
Treasury stock
purchased.............. (10.1) -- -- -- -- (407.2) -- (407.2)
Treasury stock issued... 3.7 -- -- -- (52.9) 145.0 -- 92.1
Spinoff of cellular
division............... -- -- -- -- (260.2) -- -- (260.2)
Other, net.............. -- 0.3 -- 12.1 (0.2) -- 5.7 17.9
----- ------- ------- --------- --------- -------- ------- ---------
ENDING 1996 BALANCE..... 430.1 875.7 215.6 4,425.9 3,222.4 (262.2) 42.5 8,519.9
Net income.............. -- -- -- -- 952.5 -- -- 952.5
Common stock dividends.. -- -- -- -- (343.3) -- -- (343.3)
Class A common stock
dividends.............. -- -- -- -- (86.2) -- -- (86.2)
Treasury stock
purchased.............. (3.0) -- -- -- -- (144.5) -- (144.5)
Treasury stock issued... 2.9 -- -- -- (48.8) 113.8 -- 65.0
Tax benefit from stock
options exercised...... -- -- -- 26.2 -- -- -- 26.2
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SPRINT CAPITAL CORP; 424B5
Other, net.............. -- -- -- 5.6 (3.5) -- 33.5 35.6
----- ------- ------- --------- --------- -------- ------- ---------
ENDING 1997 BALANCE..... 430.0 875.7 215.6 4,457.7 3,693.1 (292.9) 76.0 9,025.2
Net income (unaudited).. -- -- -- -- 664.9 -- -- 664.9
Common stock dividends
(unaudited)............ -- -- -- -- (258.6) -- -- (258.6)
Class A common stock
dividends (unaudited).. -- -- -- -- (64.7) -- -- (64.7)
Treasury stock purchased
(unaudited)............ (3.9) -- -- -- -- (260.2) -- (260.2)
Treasury stock issued
(unaudited)............ 4.6 -- -- 0.5 (12.8) 149.4 -- 137.1
Other, net (unaudited).. -- -- -- 32.6 (9.2) 7.6 27.6 58.6
----- ------- ------- --------- --------- -------- ------- ---------
SEPTEMBER 30, 1998
BALANCE (unaudited).... 430.7 $ 875.7 $ 215.6 $ 4,490.8 $ 4,012.7 $ (396.1) $ 103.6 $ 9,302.3
===== ======= ======= ========= ========= ======== ======= =========
See accompanying Notes to Consolidated Financial Statements.
F-7
SPRINT CORPORATION
Return to Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. RESTRUCTURING AND RECAPITALIZATION PLANS
Sprint Corporation ("Sprint") has entered into a restructuring agreementwith Tele-Communications, Inc. ("TCI"), Comcast Corporation ("Comcast") andCox Communications, Inc. ("Cox," and together with TCI and Comcast the "CableParents") to restructure Sprint's wireless personal communications services("PCS") operations (the "PCS Restructuring"). Sprint will acquire the jointventure interests of TCI, Comcast and Cox in Sprint Spectrum Holding Company,L.P. and MinorCo, L.P. (together, "Sprint Spectrum Holdings") and the jointventure interests of TCI and Cox in PhillieCo Partners I, L.P. and PhillieCoPartners II, L.P. (together, "PhillieCo"). In exchange for these joint ventureinterests, Sprint will issue to the Cable Parents a newly created class ofSprint Common Stock (the "PCS Stock"). The PCS Stock is intended to reflectseparately the performance of these joint ventures and the domestic PCSoperations of Sprint's wholly-owned subsidiaries, SprintCom, Inc. andSprintCom Equipment Company, L.P. (together, "SprintCom"). These operations,which after the PCS Restructuring will be 100% owned by Sprint (subject to a40.8% minority interest in the entity holding the PCS license for andconducting operations in the Los Angeles/San Diego/Las Vegas MTA), will bereferred to as the PCS Group.
The FON Stock, which will be created in the Recapitalization, is intended toreflect the performance of all of Sprint's other operations, including itslong distance, local telecommunications and product distribution and directorypublishing divisions, emerging businesses and its interest in Global One.These operations will be referred to as the FON Group.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation and Presentation
The consolidated financial statements include the accounts of Sprint and itswholly-owned and majority-owned subsidiaries. Investments in entities in whichSprint exercises significant influence, but does not control, are accountedfor using the equity method (see Note 3).
The consolidated financial statements are prepared according to generallyaccepted accounting principles ("GAAP"). These principles require managementto make estimates and assumptions that affect the reported amounts of
Page 57 of 189
SPRINT CAPITAL CORP; 424B5
assetsand liabilities, the disclosure of contingent assets and liabilities, and thereported amounts of revenues and expenses. Actual results could differ fromthose estimates.
The unaudited interim financial information presented has been preparedaccording to GAAP and the rules and regulations of the Securities and ExchangeCommission. In management's opinion, the information presented reflects alladjustments (consisting only of normal recurring accruals) necessary topresent fairly Sprint's consolidated financial position, results of operationsand cash flows.
Certain prior-year amounts have been reclassified to conform to the current-year presentation. These reclassifications had no effect on the results ofoperations or stockholders' equity as previously reported.
Sprint applied Statement of Financial Accounting Standards ("SFAS") No. 71,"Accounting for the Effects of Certain Types of Regulation," to its financialstatements until December 1995. Under SFAS 71, revenues and related net incomeresulting from transactions between Sprint's nonregulated operations and itsregulated local exchange carriers were not eliminated from the consolidatedfinancial statements. Revenues from these intercompany transactions were $262million in 1995. All other significant intercompany transactions have beeneliminated.
Classification of Operations
FON GROUP
The principal activities of the FON Group include (i) its core businessesconsisting of domestic and international long distance communications, localexchange communications, and product distribution and
F-8
SPRINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
directory publishing activities, (ii) its emerging businesses, which consistof the development of new integrated communications services, consumerinternet access services, Sprint Paranet and Sprint International and (iii)Sprint's Global One strategic international alliance, as well as othertelecommunications investments and partnerships.
PCS GROUP
The PCS Group includes Sprint's domestic wireless mobile telephonyactivities and any other domestic PCS services, which include (i) theinvestment in Sprint Spectrum Holdings and the investment in PhillieCo, bothof which are reflected on the equity basis and (ii) SprintCom. Upon completionof the PCS Restructuring, the results of Sprint Spectrum Holdings andPhillieCo will be reflected on the consolidated basis in the PCS GroupCombined Financial Statements.
Revenue Recognition
Sprint recognizes operating revenues as services are rendered or as productsare delivered to customers. Sprint records operating revenues net of anestimate for uncollectible accounts.
Cash and Equivalents
Cash equivalents generally include highly liquid investments with originalmaturities of three months or less. They are stated at cost, whichapproximates market value. Sprint uses controlled disbursement bankingarrangements as part of its cash management program. Outstanding checks inexcess of cash balances, which were included in accounts payable, totaled $225million at year-end 1997 and $127 million at year-end 1996. Sprint hadsufficient funds available to fund these outstanding checks when they werepresented for payment.
Investments in Debt and Equity Securities
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SPRINT CAPITAL CORP; 424B5
Investments in debt and equity securities are classified as available forsale and reported at fair value (estimated based on quoted market prices).Gross unrealized holding gains and losses are reflected as adjustments to"Common stock and other stockholders' equity--Other," net of related incometaxes.
Inventories
Inventories are stated at the lower of cost (principally first-in, first-outmethod) or market.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Generally, ordinary assetretirements and disposals are charged against accumulated depreciation with nogain or loss recognized. Repairs and maintenance costs are expensed asincurred.
Depreciation
The cost of property, plant and equipment is generally depreciated on astraight-line basis over estimated economic useful lives. Prior to Sprint'sdiscontinued use of SFAS 71 at year-end 1995, the cost of property, plant andequipment for the local division had been generally depreciated on a straight-line basis over lives prescribed by regulatory commissions.
Income Taxes
Sprint records deferred income taxes based on certain temporary differencesbetween the carrying amounts of assets and liabilities for financial reportingpurposes and amounts used for tax purposes. Investment tax credits
F-9
SPRINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
related to regulated telephone property, plant and equipment have beendeferred and are being amortized over the estimated useful lives of therelated assets.
Capitalized Interest
Sprint capitalizes interest costs related to constructing capital assets,and to its investments in Sprint Spectrum Holdings and affiliates and itsdirectly owned PCS licenses. Sprint stopped capitalizing interest on itsinvestment in Sprint Spectrum Holdings and affiliates in July 1997 becauseSprint Spectrum Holdings and affiliates no longer qualified as development-stage companies. Capitalized interest totaled $93 million in 1997, $104million in 1996 and $57 million in 1995.
3. INVESTMENTS
INVESTMENTS IN EQUITY SECURITIES
The cost of investments in equity securities was $105 million at year-end1997 and 1996. Gross unrealized holding gains were $198 million at year-end1997 and $149 million at year-end 1996.
INVESTMENTS IN AND LOANS TO AFFILIATES
Investments accounted for using the equity method mainly consist of Sprint'sinvestments in Sprint Spectrum Holdings, PhillieCo and Global One.
Sprint is a 40% partner in Sprint Spectrum Holdings, a partnership with TCI,Comcast and Cox and a 47.1% partner in PhillieCo, a partnership with TCI andCox. Sprint Spectrum Holdings and PhillieCo are building the
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SPRINT CAPITAL CORP; 424B5
nation's firstsingle-technology, state-of-the-art wireless network to provide PCS across theUnited States. See Note 1 for more information regarding the PCSRestructuring, which will result in Sprint acquiring the interests of TCI,Comcast and Cox in Sprint Spectrum Holdings and TCI and Cox in PhillieCo.
Combined, summarized financial information (100% basis) for Sprint SpectrumHoldings and PhillieCo accounted for using the equity method is as follows (inmillions):
NINE MONTHS AT OR FOR THE
ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------- ----------------------------
1998 1997 1997 1996 1995
--------- --------- --------- -------- -------
(UNAUDITED)
Results of operations
Net operating revenues.... $ 788.0 $ 110.5 $ 258.0 $ 4.2 $ --
========= ========= ========= ======== =======
Operating loss............ $(1,455.8) $ (869.0) $(1,379.7) $ (357.6) $ (66.9)
========= ========= ========= ======== =======
Net loss.................. $(1,692.0) $(1,021.5) $(1,632.7) $ (444.6) $(112.7)
========= ========= ========= ======== =======
Financial position
Current assets............ $ 417.9 $ 401.8
Noncurrent assets......... 6,640.0 4,041.8
--------- --------
Total..................... $ 7,057.9 $4,443.6
========= ========
Current liabilities....... $ 834.5 $ 471.2
Noncurrent liabilities.... 4,289.4 1,412.5
Partners' equity.......... 1,934.0 2,559.9
--------- --------
Total..................... $ 7,057.9 $4,443.6
========= ========
F-10
SPRINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At year-end 1997 and 1996, Sprint's investment in Sprint Spectrum Holdings,including advances and a vendor financing loan, totaled $1.2 billion.
In 1996, Sprint purchased $183 million (face value) of Sprint SpectrumSenior Discount notes for $100 million. The bonds mature in 2006. At year-end1997 and 1996, the accreted cost of the notes was $118 and $104 million andgross unrealized holding gains totaled $24 and $18 million, respectively. Thisinvestment has been included in "Current assets--Other" on the ConsolidatedBalance Sheets.
Sprint is also a partner in Global One, a joint venture with France TelecomS.A. ("FT") and Deutsche Telekom AG ("DT") formed to provide seamless globaltelecommunications services to business, residential and carrier marketsworldwide. Sprint is a one-third partner in Global One's operating groupserving Europe (excluding France and Germany), and is a 50% partner in GlobalOne's operating group for the worldwide activities outside the United Statesand Europe. At year-end 1997, Sprint's share of underlying equity in GlobalOne's net assets exceeded the carrying value of Sprint's investment in GlobalOne by $158 million. This difference is being amortized through January 2001.
Combined, summarized financial information (100% basis) for Global One andall other affiliates accounted for using the equity method is as follows (inmillions):
NINE MONTHS
ENDED SEPTEMBER AT OR FOR THE
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SPRINT CAPITAL CORP; 424B5
30, YEAR ENDED DECEMBER 31,
------------------ --------------------------
1998 1997 1997 1996 1995
-------- -------- -------- -------- ------
(UNAUDITED)
Results of operations
Net operating revenues........ $1,680.6 $1,535.4 $1,937.6 $1,723.7 $779.5
======== ======== ======== ======== ======
Operating income (loss)....... $ (375.9) $ (473.1) $ (782.5) $ (436.4) $ 8.6
======== ======== ======== ======== ======
Net income (loss)............. $ (495.4) $ (494.4) $ (826.3) $ (399.7) $ 22.1
======== ======== ======== ======== ======
Financial position
Current assets................ $1,913.6 $ 958.9
Noncurrent assets............. 4,221.0 2,737.5
-------- --------
Total......................... $6,134.6 $3,696.4
======== ========
Current liabilities........... $1,965.7 $ 714.3
Noncurrent liabilities........ 2,105.8 629.6
Partners' equity.............. 2,063.1 2,352.5
-------- --------
Total......................... $6,134.6 $3,696.4
======== ========
Sprint's investment in Global One, including advances, totaled $93 and $38million at year-end 1997 and 1996, respectively.
4. EMPLOYEE BENEFIT PLANS
DEFINED BENEFIT PENSION PLAN
Substantially all Sprint employees are covered by a noncontributory definedbenefit pension plan. Benefits for plan participants represented by collectivebargaining units are based on negotiated schedules of defined amounts. Forparticipants not covered by collective bargaining agreements, the planprovides pension benefits based on years of service and participants'compensation.
F-11
SPRINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Sprint's policy is to make annual plan contributions equal to an actuariallydetermined amount consistent with applicable federal tax regulations. Thefunding objective is to accumulate funds at a relatively stable rate over theparticipants' working lives so benefits are fully funded at retirement. Atyear-end 1997, the plan's assets consisted mainly of investments in corporateequity securities and U.S. government and corporate debt securities.
The net pension cost (credit) consists of the following:
1997 1996 1995
------- ------- -------
(IN MILLIONS)
Service cost--benefits earned during the period..... $ 61.7 $ 65.4 $ 51.8
Interest cost on projected benefit obligation....... 148.9 138.5 129.7
Actual return on plan assets........................ (448.5) (353.0) (472.1)
Net amortization and deferral....................... 240.0 159.4 287.9
------- ------- -------
Net pension cost (credit)........................... $ 2.1 $ 10.3 $ (2.7)
======= ======= =======
Discount rate....................................... 7.75% 7.25% 8.50%
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SPRINT CAPITAL CORP; 424B5
Expected long-term rate of return on plan assets.... 9.50% 9.50% 9.50%
Anticipated composite rate of future compensation
increases.......................................... 4.75% 4.25% 5.00%
At year-end, the funded status and amounts recognized in the ConsolidatedBalance Sheets for the plan were as follows:
1997 1996
--------- ---------
(IN MILLIONS)
Actuarial present value of benefit obligations
Vested benefit obligation.............................. $(1,966.7) $(1,713.6)
========= =========
Accumulated benefit obligation......................... $(2,129.6) $(1,864.1)
========= =========
Projected benefit obligation............................. $(2,240.9) $(1,967.0)
Plan assets at fair value................................ 2,929.4 2,584.2
--------- ---------
Plan assets in excess of the projected benefit
obligation.............................................. 688.5 617.2
Unrecognized net gains................................... (585.2) (481.8)
Unrecognized prior service cost.......................... 105.4 100.4
Unamortized transition asset............................. (122.1) (147.1)
--------- ---------
Prepaid pension cost..................................... $ 86.6 $ 88.7
========= =========
Discount rate............................................ 7.25% 7.75%
Anticipated composite rate of future compensation
increases............................................... 4.25% 4.75%
DEFINED CONTRIBUTION PLANS
Sprint sponsors defined contribution employee savings plans coveringsubstantially all employees. Participants may contribute portions of their payto the plans. For employees represented by collective bargaining units, Sprintmatches contributions based on negotiated amounts. Sprint also matchescontributions of employees not covered by collective bargaining agreements.For those participants, Sprint matches their contributions in Sprint commonstock. The matching is equal to 50% of participants' contributions up to 6% oftheir pay. In addition, Sprint may, at the discretion of the Board ofDirectors, provide matching contributions based on the performance of Sprintcommon stock compared to other telecommunications companies' stock. Sprint'smatching contributions were $54 million in 1997, $56 million in 1996 and $51million in 1995. At year-end 1997, the plans held 20 million Sprint commonshares.
F-12
SPRINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
POSTRETIREMENT BENEFITS
Sprint provides postretirement benefits (principally medical benefits) tosubstantially all employees. Employees retiring before certain dates areeligible for benefits at no cost, or at a reduced cost. Employees retiringafter certain dates are eligible for benefits on a shared-cost basis. Sprintfunds the accrued costs as benefits are paid.
The net postretirement benefits cost consists of the following:
1997 1996 1995
----- ----- -----
(IN MILLIONS)
Service cost--benefits
earned during the year. $20.8 $21.7 $22.2
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SPRINT CAPITAL CORP; 424B5
Interest on accumulated
postretirement benefit
obligation............. 52.3 49.9 58.7
Net amortization and
deferral............... (19.4) (13.7) (9.4)
----- ----- -----
Net postretirement
benefits cost.......... $53.7 $57.9 $71.5
===== ===== =====
Discount rate........... 7.75% 7.25% 8.50%
For measurement purposes, the assumed 1997 weighted average annual healthcare cost trend rate was 9%, gradually decreasing to an ultimate level of 5%by 2005. A 1% increase in the rate would have increased the 1997 netpostretirement benefits cost by an estimated $12 million.
Amounts included in the Consolidated Balance Sheets at year-end are asfollows:
1997 1996
------ ------
(IN MILLIONS)
Accumulated postretirement benefit obligation
Retirees...................................................... $328.3 $277.9
Active plan participants--
Fully eligible.............................................. 145.2 127.6
Other....................................................... 269.9 320.7
------ ------
743.4 726.2
Unrecognized prior service benefit.............................. 5.4 5.7
Unrecognized net gains.......................................... 190.0 178.7
------ ------
Accrued postretirement benefits cost............................ $938.8 $910.6
====== ======
Discount rate................................................... 7.25% 7.75%
The assumed 1998 annual health care cost trend rate was 8.5%, graduallydecreasing to an ultimate level of 5% by 2005. A 1% increase in the rate wouldhave increased the 1997 accumulated postretirement benefit obligation by anestimated $61 million.
F-13
SPRINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. INCOME TAXES
Income tax expense allocated to continuing operations consists of thefollowing:
1997 1996 1995
------ ------ ------
(IN MILLIONS)
Current income tax expense
Federal............................................... $385.9 $655.4 $437.4
State................................................. 78.9 75.9 91.1
------ ------ ------
Total current........................................... 464.8 731.3 528.5
------ ------ ------
Deferred income tax expense (benefit)
Federal............................................... 174.3 (22.2) 45.9
State................................................. (4.8) 23.5 (23.6)
Amortization of deferred investment tax credits......... (3.8) (11.6) (16.5)
------ ------ ------
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Total deferred.......................................... 165.7 (10.3) 5.8
------ ------ ------
Total................................................... $630.5 $721.0 $534.3
====== ====== ======
The differences that caused Sprint's effective income tax rates to vary fromthe statutory federal rate of 35% were as follows:
1997 1996 1995
------ ------ ------
(IN MILLIONS)
Income tax expense at the statutory rate............... $554.1 $669.2 $518.1
Less investment tax credits included in income......... 3.8 11.6 16.5
------ ------ ------
Expected federal income tax expense after investment
tax credits........................................... 550.3 657.6 501.6
Effect of state income taxes, net of federal income tax
effect................................................ 48.2 64.6 43.9
Equity in losses of foreign joint ventures............. 36.4 8.6 --
Other, net............................................. (4.4) (9.8) (11.2)
------ ------ ------
Income tax expense, including investment tax credits... $630.5 $721.0 $534.3
====== ====== ======
Effective income tax rate.............................. 39.8% 37.7% 36.1%
====== ====== ======
Income tax expense (benefit) allocated to other items was as follows:
1997 1996 1995
------ ------ -------
(IN MILLIONS)
Discontinued operation................................ $ -- $ 7.0 $ 31.2
Extraordinary items................................... -- (2.9) (437.4)
Unrealized holding gains on investments (1)........... 4.4 1.7 30.7
Stock ownership, purchase and options arrangements
(1).................................................. (26.2) (14.1) (7.5)
(1) These amounts have been recorded directly to "Common stock and otherstockholders' equity--Other."
F-14
SPRINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Sprint recognizes deferred income taxes for the temporary differencesbetween the carrying amounts of its assets and liabilities for financialstatement purposes and their tax bases. The sources of the differences thatgive rise to the deferred income tax assets and liabilities at year-end 1997and 1996, along with the income tax effect of each, were as follows:
1997 DEFERRED 1996 DEFERRED
INCOME TAX INCOME TAX
------------------ ------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ -----------
(IN MILLIONS)
Property, plant and equipment............. $ -- $1,488.8 $ -- $1,304.3
Postretirement and other benefits......... 376.1 -- 360.3 --
Reserves and allowances................... 111.3 -- 115.6 --
Unrealized holding gains on investments... -- 61.7 -- 57.3
Other, net................................ 108.5 -- 106.8 --
------ -------- ------ --------
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595.9 1,550.5 582.7 1,361.6
Less valuation allowance.................. 11.8 -- 13.7 --
------ -------- ------ --------
Total..................................... $584.1 $1,550.5 $569.0 $1,361.6
====== ======== ====== ========
The valuation allowance related to deferred income tax assets decreased $2million in 1997 and $4 million in 1996 and 1995.
Management believes it is more likely than not that these deferred incometax assets, net of the allowance, will be realized based on current income taxlaws and expectations of future taxable income stemming from the reversal ofexisting deferred tax liabilities or ordinary operations. Uncertaintiessurrounding income tax law changes, shifts in operations between state taxingjurisdictions, and future operating income levels may, however, affect theultimate realization of all or some of these deferred income tax assets.
At year-end 1997, Sprint had available for income tax purposes $4 million ofstate alternative minimum tax credit carryforwards to offset state income taxpayable in future years. In addition, Sprint had tax benefits of $49 millionrelated to state operating loss carryforwards. The loss carryforwards expirein varying amounts per year from 1998 through 2012.
F-15
SPRINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. BORROWINGS
LONG-TERM DEBT
Long-term debt at year-end was as follows:
MATURING 1997 1996
------------ -------- --------
(IN MILLIONS)
Corporate
Senior notes
8.1% to 9.8%............................... 1998 to 2002 $ 475.3 $ 475.3
9.5%....................................... 2003 to 2007 200.0 200.0
Debentures
9.0% to 9.3%............................... 2019 to 2022 350.0 350.0
Notes payable and commercial paper -- 866.5 --
Other
5.4% to 8.9% (1)........................... 1998 to 2006 237.5 194.9
Long Distance Division
Vendor financing agreements
7.4% to 8.9%............................... 1997 to 1999 23.8 44.8
Other
6.2% to 8.4%............................... 1997 to 2007 16.5 23.1
Local Telecommunications Division
First mortgage bonds
2.0% to 7.8%............................... 1997 to 2002 452.3 487.0
4.0% to 7.8%............................... 2003 to 2007 346.0 346.8
6.9% to 9.8%............................... 2008 to 2012 116.7 116.7
6.9% to 8.8%............................... 2013 to 2017 169.6 169.8
8.8% to 9.9%............................... 2018 to 2022 244.9 245.7
7.1% to 8.4%............................... 2023 to 2027 145.0 145.0
Debentures and notes
5.8% to 9.6%............................... 1998 to 2020 237.0 275.3
Other
2.0% to 9.8%............................... 1998 to 2006 4.6 6.2
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Unamortized debt discount...................... (6.1) (6.7)
-------- --------
3,879.6 3,073.9
Less current maturities........................ 131.0 99.1
-------- --------
Long-term debt................................. $3,748.6 $2,974.8
======== ========
(1) Notes may be exchanged at maturity for Southern New EnglandTelecommunications Corporation ("SNET") common shares owned by Sprint, orfor cash. Based on SNET's closing market price, had the notes matured atyear-end 1997, they could have been exchanged for 3.8 million SNET shares.At year-end 1997, Sprint held 4.2 million SNET shares, which have beenincluded in "Investments in equity securities" on the Consolidated BalanceSheets.
F-16
SPRINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Long-term debt maturities, excluding reclassified short-term borrowings,during each of the next five years are as follows (in millions):
1998............................................................... $131.0
1999............................................................... 33.4
2000............................................................... 693.3
2001............................................................... 40.8
2002............................................................... 354.5
Property, plant and equipment with a total cost of $12.9 billion is eitherpledged as security for first mortgage bonds and certain notes or isrestricted for use as mortgaged property.
During 1996, Sprint redeemed, prior to scheduled maturities, $190 million ofdebt with interest rates ranging from 6.0% to 9.5%. This resulted in a $5million after-tax extraordinary loss.
SHORT-TERM BORROWINGS
At year-end 1997, Sprint had borrowed $618 million of bank notes payable and$249 million of commercial paper. Though these borrowings are renewable atvarious dates throughout the year, they have been classified as long- term debtbecause of Sprint's intent and ability, through unused credit facilities, torefinance these borrowings. Commercial paper and certain bank notes payableare supported by Sprint's revolving credit facility with a syndicate ofdomestic and international banks. Other notes payable relate to a separaterevolving credit facility that Sprint executed with a bank in 1997. At year-end 1997, Sprint's unused lines of credit totaled $1.1 billion.
Bank notes outstanding at year-end 1997 and 1996 had weighted averageinterest rates of 6.1% and 5.9%, respectively. At year-end 1997, the weightedaverage interest rate of commercial paper was 6.8%.
OTHER
Sprint was in compliance with all restrictive or financial covenantsrelating to its debt arrangements at year-end 1997.
7. REDEEMABLE PREFERRED STOCK
Sprint has approximately 22 million authorized preferred shares, includingnonredeemable preferred stock. The redeemable preferred stock outstanding, atyear-end, is as follows:
1997 1996
----- -----
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SPRINT CAPITAL CORP; 424B5
(IN
MILLIONS,
EXCEPT PER
SHARE AND
SHARE DATA)
Fifth series--stated value $100,000 per share, shares--95, voting,
cumulative 6% annual dividend rate................................ $ 9.5 $ 9.5
Other--stated value $100 per share, shares--19,493 and 22,800, 4.7%
annual dividend rate.............................................. 2.0 2.3
----- -----
Total.......................................................... $11.5 $11.8
===== =====
Sprint's Fifth series preferred stock must be redeemed in full in 2003. Ifless than full dividends have been paid for four consecutive dividend periods,or if dividends in arrears exceed an amount equal to the dividends for sixdividend periods, the Fifth series preferred stockholder may elect a majorityof directors standing for election until all dividends in arrears have beenpaid.
F-17
SPRINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. COMMON STOCK
COMMON STOCK
At year-end 1997, common stock reserved for future grants under stock optionplans or for future issuances under various other arrangements was as follows:
SHARES
-------------
(IN MILLIONS)
Employees Stock Purchase Plan............................... 6.4
Employee savings plans...................................... 3.4
Automatic Dividend Reinvestment Plan........................ 1.2
Officer and key employees' and directors' stock options..... 8.2
Conversion of preferred stock and other..................... 1.4
----
Total................................................... 20.6
====
Under a Shareholder Rights Plan, one preferred stock purchase right isattached to each common and Class A common share. Each right is exercisableonly if certain takeover events occur. Each right will initially entitle theholder to purchase 1/1000 of a share (a "Unit") of a no par Preferred Stock-Sixth Series, Junior Participating (Preferred Stock) at $225 per Unit or, incertain cases, common stock. The Preferred Stock is voting, cumulative andaccrues dividends on a quarterly basis generally equal to the greater of $100per share or 1,000 times the total per share amount of all common dividends.No Preferred Stock shares were issued or outstanding at year-end 1997. Therights may be redeemed by Sprint at $0.01 per right and will expire in June2007, unless extended. On June 29, 1998, the Sprint Board approved anamendment to Sprint's Shareholder Rights Plan to be effective on the fillingof the PCS Stock Amendment with the Kansas Secretary of State. See Note 1 fora discussion of the PCS Restructuring, which necessitated the PCS StockAmendment.
During 1997, 1996 and 1995, Sprint declared and paid annual common stockdividends of $1.00 per share. The most restrictive covenant related to commondividends results from Sprint's $1.5 billion revolving credit agreement. Amongother restrictions, this agreement requires Sprint to maintain specifiedlevels of consolidated net worth. Due to this requirement, $2.7 billion ofSprint's $3.7 billion consolidated retained earnings was effectivelyrestricted from the payment of dividends at year-end 1997. The indentures andfinancing agreements of certain of Sprint's
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SPRINT CAPITAL CORP; 424B5
subsidiaries contain provisionslimiting cash dividend payments on subsidiary common stock held by Sprint. Asa result, $567 million of those subsidiaries' $1.3 billion total retainedearnings was restricted at year-end 1997. The flow of cash in the form ofadvances from the subsidiaries to Sprint is generally not restricted.
During 1990, the Savings Plan Trust, an employee savings plan, acquiredcommon stock from Sprint in exchange for a $75 million promissory note payableto Sprint. The note bears interest at 9% and is to be repaid from common stockdividends received by the plan and contributions made to the plan by Sprintaccording to plan provisions. The remaining $34 million note receivablebalance at year-end 1997 is reflected as a reduction to "Common stock andother stockholders' equity--Other."
CLASS A COMMON STOCK
In January 1996, FT and DT acquired shares of a new class of convertiblepreference stock for a combined total of $3.0 billion. This resulted in FT andDT each holding 7.5% of Sprint's voting power. In April 1996, following thespinoff of Sprint's cellular division ("Cellular") (see Note 15), thepreference stock was converted into Class A common stock, and FT and DT eachacquired additional Class A common shares. Following their combined investmentof $3.7 billion, FT and DT each own Class A common shares with 10% of Sprint'svoting power. During 1997, Sprint declared and paid Class A common dividendsof $1.00 per share. During 1996, preference dividends totaled $0.16 per share,and Class A common dividends totaled $0.75 per share.
F-18
SPRINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FT and DT, as Class A common stockholders, have the right in mostcircumstances to proportionate representation on Sprint's Board of Directors.They may also purchase additional Class A common shares from Sprint to keeptheir ownership level at 10% each. FT and DT have entered into a standstillagreement with Sprint restricting their ability to acquire Sprint votingshares (other than as intended by their investment agreement with Sprint andrelated agreements). The standstill agreement also contains customaryprovisions restricting FT and DT from initiating or participating in anyproposal with respect to the control of Sprint.
9. STOCK-BASED COMPENSATION
Sprint's Management Incentive Stock Option Plan ("MISOP") provides for thegranting of stock options to employees who are eligible to receive annualincentive compensation. Eligible employees are entitled to receive stockoptions in lieu of a portion of the target incentive under Sprint's managementincentive plans. The options generally become exercisable on December 31 ofthe year granted and have a maximum term of 10 years. MISOP options aregranted with exercise prices equal to the market price of Sprint's commonstock on the grant date. At year-end 1997, authorized shares under this planapproximated 11 million. This amount increased by approximately 3 millionshares on January 1, 1998.
The Sprint Corporation Stock Option Plan ("SOP") provides for the grantingof stock options to officers and key employees. The options generally becomeexercisable at the rate of 25% per year, beginning one year from the grantdate, and have a maximum term of 10 years. SOP options are granted withexercise prices equal to the market price of Sprint's common stock on thegrant date. At year-end 1997, authorized shares under this plan approximated20 million.
Every two years, the Employees Stock Purchase Plan ("ESPP") offers allemployees the election to purchase Sprint common stock at a price equal to 85%of the market value on the grant or exercise date, whichever is less. At year- end 1997, authorized shares under this plan approximated 18 million.
In 1996, Sprint adopted the pro forma disclosure requirements under SFAS No.123, "Accounting for Stock-based Compensation," and continued to applyAccounting Principles Board ("APB") Opinion No. 25, "Accounting for
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SPRINT CAPITAL CORP; 424B5
StockIssued to Employees," to its stock option and employee stock purchase plans.Under APB 25, Sprint has recognized no compensation expense related to theseplans.
Pro forma net income and earnings per share ("EPS") have been determined asif Sprint had used the fair value method of accounting for its stock optiongrants and ESPP share elections after 1994. Under this method, compensationexpense is recognized over the applicable vesting periods and is based on theshares under option and their related fair values on the grant date.
The following pro forma information will not likely represent theinformation reported in future years because options granted and ESPP shareselected after 1994 will continue to vest over the next several years. Inaddition, compensation expense resulting from the spinoff of Cellular (the"Spinoff") (see Note 15) will decline over the next several years.
Sprint's pro forma net income and EPS were as follows:
1997(1) 1996(1) 1995
------- ------- -----
(IN MILLIONS, EXCEPT
PER SHARE DATA)
Pro forma net income...................................... $ 908 $1,158 $ 388
===== ====== =====
Pro forma basic EPS....................................... $2.11 $ 2.74 $1.11
===== ====== =====
(1) Pro forma net income was reduced by $3 million ($0.01 per share) in 1997and $6 million ($0.01 per share) in 1996 due to additional compensationresulting from modifications to terms of options and ESPP share electionsmade in connection with the Spinoff.
F-19
SPRINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During 1996, Sprint employees elected to purchase 2.8 million ESPP shareswith a weighted average fair value (using the Black-Scholes pricing model) of$10.06 per share. No ESPP shares were offered in 1997 or 1995.
The following tables reflect the weighted average fair value per optiongranted during the year, as well as the significant weighted averageassumptions used in determining those fair values using the Black-Scholespricing model:
MISOP SOP
----- ------
1997
Fair value on grant date....................................... $9.66 $11.74
Risk-free interest rate........................................ 6.2% 6.2%
Expected volatility............................................ 22.8% 22.8%
Expected dividend yield........................................ 2.3% 2.3%
Expected life (years).......................................... 4 6
1996
Fair value on grant date....................................... $9.17 $10.96
Risk-free interest rate........................................ 5.2% 5.2%
Expected volatility............................................ 23.3% 23.3%
Expected dividend yield........................................ 2.5% 2.5%
Expected life (years).......................................... 4 6
1995
Fair value on grant date....................................... $6.67 $ 8.73
Risk-free interest rate........................................ 6.9% 7.2%
Expected volatility............................................ 23.3% 23.3%
Expected dividend yield........................................ 2.5% 2.5%
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SPRINT CAPITAL CORP; 424B5
Expected life (years).......................................... 4 6
Stock option plan activity was as follows:
WEIGHTED AVERAGE
PER SHARE
SHARES (1) EXERCISE PRICE (1)
---------- ------------------
(IN MILLIONS, EXCEPT
PER SHARE DATA)
Outstanding, beginning of 1995.............. 9.3 $24.67
Granted................................... 4.3 24.69
Exercised................................. (0.8) 19.81
Forfeited/Expired......................... (0.5) 27.06
----
Outstanding, year-end 1995.................. 12.3 24.88
Granted................................... 4.9 36.94
Exercised................................. (2.6) 22.28
Forfeited/Expired......................... (1.0) 29.22
----
Outstanding, year-end 1996.................. 13.6 29.42
Granted................................... 9.4 46.14
Exercised................................. (3.4) 27.17
Forfeited/Expired......................... (0.9) 38.10
----
Outstanding, year-end 1997.................. 18.7 $37.85
==== ======
(1) Due to the Spinoff, the shares and related exercise prices have beenadjusted to maintain both the total fair market value of common stockunderlying the options, and the relationship between the market value ofSprint's common stock and the option's exercise price.Outstanding options held by Cellular employees were converted into optionsand grants to purchase Cellular common stock and are not included in theabove table.
F-20
SPRINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
After adjustment for the Spinoff, options exercisable at year-end 1996 and1995 were 8.4 and 6.4 million, respectively. At year-end 1996, the weightedaverage exercise price for exercisable options was $27.77. The following tablesummarizes outstanding and exercisable options at year-end 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------- ----------------------
WEIGHTED
AVERAGE
NUMBER REMAINING WEIGHTED WEIGHTED
OUTSTANDING CONTRACTUAL AVERAGE NUMBER AVERAGE
RANGE OF (IN LIFE EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES MILLIONS) (IN YEARS) PRICE (IN MILLIONS) PRICE
--------------- ----------- ----------- -------- ------------- --------
$11.92--$14.96 0.1 2.2 $14.31 0.1 $14.31
$15.18--$19.24 0.1 3.7 17.91 0.1 17.91
$20.08--$24.50 2.7 6.2 23.71 1.7 23.30
$25.11--$29.96 1.8 4.7 27.38 1.4 26.80
$30.22--$39.94 5.0 7.6 35.16 3.0 34.28
$40.06--$49.88 7.3 8.5 44.88 1.9 43.33
$50.31--$58.38 1.7 7.4 51.92 0.1 51.69
10. COMMITMENTS AND CONTINGENCIES
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LITIGATION, CLAIMS AND ASSESSMENTS
In December 1996, an arbitration panel entered a $61 million award in favorof Network 2000 Communications Corporation ("Network 2000") on its breach ofcontract claim against Sprint. The arbitrators directed Sprint to pay one-halfof this award to Network 2000. The remainder was directed to be paid to theMissouri state court in which a proposed class action by Network 2000'sindependent marketing representatives against Network 2000 and Sprint ispending.
Sprint filed an action in federal district court seeking to have thearbitration panel's award struck down, modified, or corrected, and asking thecourt to enter an order regarding the distribution of the award. In April1997, the court denied Sprint's request that the arbitration award be struckdown and granted Network 2000's request that the award be confirmed.
In June 1997, Sprint recorded an additional $20 million charge in connectionwith the settlement of both the class action lawsuit against Sprint andNetwork 2000 and the related claims of Network 2000 against Sprint. In June1998, the court approved the class action settlement; however, a number ofpotential class members have decided not to participate in the settlement andanother group of potential class members have appealed from the orderapproving the class action settlement.
Various other suits arising in the ordinary course of business are pendingagainst Sprint. Management cannot predict the final outcome of these actionsbut believes they will not result in a material effect on Sprint'sconsolidated financial statements.
CONTINGENCIES
On January 1, 1998, a "Deadlock Event" occurred due to the failure of theSprint Spectrum Holdings partnership board to approve the proposed SprintSpectrum Holdings budget and business plan. Under the partnership agreement,if a partner refers the issue for resolution pursuant to specified proceduresand it remains unresolved, buy/sell provisions can be triggered, which couldresult in Sprint either increasing or selling its partnership interest.Discussions among the partners about restructuring their interests in SprintSpectrum Holdings have resulted in the partners entering into a restructuringagreement (see Note 1).
F-21
SPRINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
OPERATING LEASES
Minimum rental commitments at year-end 1997 for all noncancelable operatingleases, consisting mainly of leases for data processing equipment and realestate, are as follows (in millions):
1998............................................................... $324.1
1999............................................................... 276.4
2000............................................................... 174.2
2001............................................................... 119.1
2002............................................................... 97.1
Thereafter......................................................... 243.7
Gross rental expense totaled $410 million in 1997, $401 million in 1996 and$402 million in 1995. Rental commitments for subleases, contingent rentals andexecutory costs were not significant.
11. FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
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Sprint estimates the fair value of its financial instruments using availablemarket information and appropriate valuation methodologies. As a result, thefollowing estimates do not necessarily represent the values Sprint couldrealize in a current market exchange. Although management is not aware of anyfactors that would affect the estimated fair values presented at year-end1997, those amounts have not been comprehensively revalued for purposes ofthese financial statements since that date. Therefore, estimates of fair valueafter year-end 1997 may differ significantly from the amounts presented below.The carrying amounts and estimated fair values of Sprint's financialinstruments at year-end were as follows:
1997 1996
-------------------- --------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(IN MILLIONS)
Financial assets
Cash and equivalents............... $ 101.7 $ 101.7 $1,150.6 $1,150.6
Investment in affiliate debt
securities........................ 142.4 142.4 122.5 122.5
Investments in equity securities... 303.0 303.0 254.5 254.5
Financial liabilities
Short-term borrowings.............. -- -- 200.0 200.0
Long-term debt
Corporate........................ 2,129.3 2,301.8 1,220.2 1,348.9
Long distance division........... 40.3 41.7 67.9 69.0
Local telecommunications
division........................ 1,710.0 1,812.3 1,785.8 1,846.9
Other financial instruments
Interest rate swap agreements...... -- 0.3 -- 0.2
Foreign currency contracts......... (0.6) (0.6) (0.5) (0.5)
The carrying values of Sprint's cash and equivalents approximate fair valueat year-end 1997 and 1996. The estimated fair value of Sprint's investments indebt and equity securities is based on quoted market prices. The estimatedfair value of Sprint's long-term debt is based on quoted market prices forpublicly traded issues. The estimated fair value of all other issues is basedon the present value of estimated future cash flows using a discount ratebased on the risks involved. The estimated fair value of interest rate swapagreements is the amount Sprint would receive to terminate the swap agreementsat year-end 1997 and 1996, taking into account the then-current interestrates. The estimated fair value of foreign currency contracts is thereplacement cost of the contracts at year- end 1997 and 1996, taking intoaccount the then-current foreign currency exchange rates.
F-22
SPRINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONCENTRATIONS OF CREDIT RISK
Sprint's accounts receivable are not subject to any concentration of creditrisk. Sprint controls credit risk of its interest rate swap agreements andforeign currency contracts through credit approvals, dollar exposure limitsand internal monitoring procedures. In the event of nonperformance by thecounterparties, Sprint's accounting loss would be limited to the net amount itwould be entitled to receive under the terms of the applicable interest rateswap agreement or foreign currency contract. However, Sprint does notanticipate nonperformance by any of the counterparties related to theseagreements.
INTEREST RATE SWAP AGREEMENTS
Sprint uses interest rate swap agreements as part of its interest rate riskmanagement program. Net interest paid or received related to these agreementsis recorded using the accrual method and is recorded as an adjustment
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SPRINT CAPITAL CORP; 424B5
tointerest expense. Sprint had interest rate swap agreements with notionalamounts of $150 and $350 million outstanding at year-end 1997 and 1996,respectively. Net interest expense (income) related to interest rate swapagreements was $(200,000) in 1997, $2 million in 1996 and $(400,000) in 1995.There were no deferred gains or losses related to any terminated interest rateswap agreements at year-end 1997, 1996 or 1995.
FOREIGN CURRENCY CONTRACTS
As part of its foreign currency exchange risk management program, Sprintpurchases and sells over-the-counter forward contracts and options in variousforeign currencies. Sprint had outstanding $29 and $46 million of open forwardcontracts to buy various foreign currencies at year-end 1997 and 1996,respectively. Sprint had $14 and $3 million of outstanding open purchaseoption contracts to call various foreign currencies at year-end 1997 and 1996,respectively. The premium paid for an option is expensed as incurred. The fairvalue of an option is recorded as an asset at the end of each period. Theforward contracts and options open at year-end 1997 and 1996 all had originalmaturities of six months or less. The net gain or loss recorded to reflect thefair value of these contracts is recorded in the period incurred. Total netlosses of $40,000 in 1997, $400,000 in 1996 and $1 million in 1995 wererecorded related to foreign currency transactions and contracts.
12. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issuedSFAS No. 128, "Earnings per Share." This new standard simplifies the EPScalculation and makes the U.S. standard for computing EPS more consistent withinternational accounting standards. Sprint adopted SFAS 128 at year-end 1997.EPS for prior years has been restated to comply with SFAS 128.
Under SFAS 128, primary EPS was replaced with a simpler calculation calledbasic EPS. Basic EPS is calculated by dividing income available to commonstockholders by the weighted average common shares outstanding. Previously,primary EPS was based on the weighted average of both outstanding and issuableshares assuming all dilutive options had been exercised. Under SFAS 128, fullydiluted EPS has not changed significantly, but has been renamed diluted EPS.Diluted EPS includes the effect of all potentially dilutive securities, suchas options and convertible preferred stock.
Sprint's convertible preferred stock dividends were $0.5 million in 1997,1996 and 1995. Dilutive securities, such as options (see Note 9), included inthe calculation of diluted weighted average common shares were 6.3 millionshares in 1997, 5.3 million shares in 1996 and 2.6 million shares in 1995.Dilutive securities represented 8.0 and 5.8 million shares (unaudited) for thenine months ended September 30, 1998 and 1997, respectively.
F-23
SPRINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. PARANET ACQUISITION
On September 30, 1997, Sprint paid $375 million to purchase the net assetsof Houston-based Paranet, Inc., a provider of integration, management andsupport services for computer networks. Sprint could pay up to an additional$70 million if Sprint Paranet meets certain financial targets through 1998.
The transaction was accounted for using the purchase method of accounting.As a result, Sprint's financial statements reflect Sprint Paranet's results ofoperations beginning in October 1997.
The excess of the purchase price over the tangible net assets acquired was$357 million. This excess was allocated to noncompete agreements and goodwill,and will be amortized on a straight-line basis over four to 10 years.
14. ADOPTION OF ACCOUNTING PRINCIPLES FOR A COMPETITIVE MARKETPLACE
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SPRINT CAPITAL CORP; 424B5
At year-end 1995, Sprint determined that its local telecommunicationsdivision no longer met the criteria necessary for the continued use of SFAS
71. As a result, 1995 operating results included a noncash, extraordinarycharge of $565 million, net of income tax benefits of $437 million. Thedecision to discontinue using SFAS 71 was based on changes in the regulatoryframework and the convergence of competition in the telecommunicationsindustry.
The 1995 extraordinary charge recognized when Sprint discontinued using SFAS71 consisted of the following:
PRETAX AFTER-TAX
-------- ---------
(IN MILLIONS)
Increase in accumulated depreciation.................. $ 979.1 $607.9
Recognition of switch software asset.................. (99.5) (61.7)
Elimination of other net regulatory asset............. 123.1 76.3
-------- ------
Total............................................. $1,002.7 622.5
========
Tax-related net regulatory liabilities................ (43.9)
Accelerated amortization of investment tax credits.... (13.3)
------
Extraordinary charge.................................. $565.3
======
15. SPINOFF OF CELLULAR DIVISION
In March 1996, Sprint completed the tax-free spinoff of Cellular to Sprintcommon stockholders. To complete the Spinoff, Sprint distributed all Cellularcommon shares at a rate of one share for every three Sprint common sharesheld. In addition, Cellular repaid $1.4 billion of its intercompany debt owedto Sprint. Sprint also contributed to Cellular's equity capital $185 millionof debt owed by Cellular in excess of the amount repaid.
F-24
SPRINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Cellular's net operating results, as summarized below, were separatelyclassified as a discontinued operation in the Consolidated Statements ofIncome. Interest expense was allocated to Cellular based on the assumedrepayment of intercompany debt to Sprint by Cellular. The operating expensesas presented below do not include Cellular's share of Sprint's generalcorporate overhead expenses. These expenses, totaling $2 million in 1996 and$13 million in 1995, were reallocated to Sprint's other operating segments.
1996(1) 1995
------- -------
(IN MILLIONS)
Net operating revenues.................................. $190.2 $ 834.4
Operating expenses...................................... 156.0 675.6
------ -------
Operating income........................................ 34.2 158.8
Interest expense........................................ (21.5) (124.0)
Other income (expense), net............................. (8.3) 10.9
------ -------
Income before income taxes.............................. 4.4 45.7
Income taxes............................................ (7.0) (31.2)
------ -------
Income (Loss) from cellular division.................... $ (2.6) $ 14.5
====== =======
(1) 1996 reflects Cellular's operating results only through the date of theSpinoff.
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16. SEGMENT INFORMATION
The FON Group operates in four industry segments: the long distancedivision, the local telecommunications division, the product distribution anddirectory publishing division and emerging businesses. Sprint's corporateassets mainly included investments and loans to affiliates, cash and temporaryinvestments and general corporate assets. In 1995, corporate assets alsoincluded the net assets of the discontinued cellular division. The longdistance division provides domestic and international voice, video and datacommunications services. The local telecommunications division provides localexchange services, access to Sprint's local exchange facilities, sales oftelecommunications equipment and long distance within specified geographicalareas. The product distribution and directory publishing division provideswholesale distribution services of telecommunications products and publishesand markets white and yellow page telephone directories. Emerging businesses,which consists of the development of new integrated communications services,consumer Internet access services, Sprint Paranet and Sprint International.
The businesses comprising the PCS Group operate in a single segment. The PCSGroup is building the nation's first single-technology, all-digital, state-of-the-art wireless network to provide PCS across the United States. PCS usesdigital technology, which has sound quality superior to existing cellulartechnology and is less susceptible to interference and eavesdropping. PCS alsooffers features such as voice mail and Caller ID.
F-25
SPRINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Industry segment financial information follows:
PRODUCT
DISTRIBUTION
LONG LOCAL & DIRECTORY
DISTANCE TELECOMMUNICATIONS PUBLISHING EMERGING
INTERSEGMENT
DIVISION DIVISION DIVISION BUSINESSES PCS CORPORATE
ELIMINATIONS TOTAL
-------- ------------------ ------------ ---------- ------- --------- ---------
--- ---------
(IN MILLIONS)
1997
Net operating
revenues(1)........... $8,954.8 $5,290.2 $1,454.3 $ 57.4 $ -- $ --
$(882.8) $14,873.9
Depreciation and
amortization.......... 716.7 934.1 8.2 23.3 -- 44.0 --
1,726.3
Operating expenses..... 7,857.3 3,896.2 1,274.4 221.9 18.5 --
(845.8) 12,422.5
Operating income(loss). 1,097.5 1,394.0 179.9 (164.5) (18.5) --
(37.0) 2,451.4
Operating margin....... 12.3% 26.4% 12.4% -- -- -- --
16.5%
Capital expenditures... 1,218.1 1,258.4 10.5 79.6 153.7 142.3 --
2,862.6
Identifiable assets.... 6,464.6 7,609.7 519.0 585.9 1,693.1 1,312.5 --
18,184.8
1996
Net operating
revenues(2)........... $8,302.1 $5,126.8 $1,225.4 $ 0.5 $ -- $ --
$(767.3) $13,887.5
Depreciation and
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SPRINT CAPITAL CORP; 424B5
amortization.......... 633.3 909.1 7.2 0.5 -- 40.9 --
1,591.0
Operating expenses..... 7,378.1 3,789.8 1,123.8 63.8 0.5 --
(735.7) 11,620.3
Operating income(loss). 924.0 1,337.0 101.6 (63.3) (0.5) --
(31.6) 2,267.2
Operating margin....... 11.1% 26.1% 8.3% -- -- -- --
16.3%
Capital expenditures... 1,133.7 1,142.6 9.4 49.9 -- 98.0 --
2,433.6
Identifiable assets.... 5,997.7 7,425.4 446.1 54.3 1,259.8 1,643.1 --
16,826.4
1995
Net operating
revenues(3)........... $7,277.4 $4,690.0 $1,147.6 $ -- $ -- $ --
$(379.7) $12,735.3
Depreciation and
amortization.......... 581.6 835.6 7.4 -- -- 41.8 --
1,466.4
Operating expenses..... 6,570.6 3,649.2 1,060.9 -- -- --
(379.7) 10,901.0
Operating income....... 706.8 1,040.8 86.7 -- -- -- --
1,834.3
Operating margin....... 9.7% 22.2% 7.6% -- -- -- --
14.4%
Capital expenditures... 861.7 950.8 7.8 -- -- 37.0 --
1,857.3
Identifiable assets.... 4,799.0 6,962.0 395.4 -- 973.7 1,944.2 --
15,074.3
(1) Includes intercompany revenues eliminated in consolidation in 1997 of $3.3million, $309.0 million and $570.5 million for the long distance division,local telecommunications division and product distribution and directorypublishing division, respectively.
(2) Includes intercompany revenues eliminated in consolidation in 1996 of$30.9 million, $410.5 million and $325.9 million for the long distancedivision, local telecommunications division and product distribution anddirectory publishing division, respectively.
(3) Includes intercompany revenues eliminated in consolidation in 1995 of$38.9 million, $266.4 million and $336.8 million for the long distancedivision, local telecommunications division and product distribution anddirectory publishing division, respectively. Also included in 1995 wereintercompany revenues of $262.4 million not eliminated under SFAS 71.
Operating income (loss) represents sales and other revenues less operatingexpenses, and excludes interest expense, equity in losses of unconsolidatedventures, other income (expense) and income taxes.
Beginning in July 1997, Sprint changed its transfer pricing for certaintransactions between affiliates to more accurately reflect market pricing. Themain effect of the pricing change was to reduce "net operating revenues" ofthe local telecommunications division and reduce "operating expenses" of theproduct distribution and directory publishing division. Had this change beeneffective as of January 1, 1995, the operating income for the localtelecommunications division would have been $1.3 billion, $1.2 billion and$1.1 billion in 1997, 1996 and 1995, respectively. The operating income forthe product distribution and directory publishing division would have been$228 million, $198 million and $180 million in 1997, 1996 and 1995,respectively.
F-26
SPRINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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SPRINT CAPITAL CORP; 424B5
17. ADDITIONAL FINANCIAL INFORMATION
SUPPLEMENTAL CASH FLOWS INFORMATION (IN MILLIONS)
NINE MONTHS YEAR ENDED
ENDED SEPTEMBER 30, DECEMBER 31,
------------------- --------------------
1998 1997 1997 1996 1995
--------- --------- ------ ------ ------
(UNAUDITED)
Cash paid for:
Interest (net of amounts
capitalized)
Continuing operations............. $ 174.1 $ 133.2 $197.9 $212.1 $263.5
========= ========= ====== ====== ======
Cellular division................. $ -- $ -- $ -- $ 21.5 $124.0
========= ========= ====== ====== ======
Income taxes........................ $ 279.1 $ 288.5 $365.8 $695.3 $532.8
========= ========= ====== ====== ======
Noncash activities:
Capital lease obligations........... $ 438.1 $ 30.1 $ 30.1 $ -- $ --
========= ========= ====== ====== ======
Tax benefit from stock options
exercised.......................... $ 37.8 $ 19.5 $ 26.2 $ 14.1 $ 7.5
========= ========= ====== ====== ======
Net book value of assets and
liabilities contributed to Global
One................................ $ -- $ -- $ -- $ 73.3 $ --
========= ========= ====== ====== ======
Common stock issued under Sprint's
ESPP............................... $ 73.8 $ -- $ 5.2 $ 65.2 $ 3.0
========= ========= ====== ====== ======
During 1996, Sprint completed the Spinoff (see Note 15) which had noimmediate effect on cash flows other than Cellular's repayment of $1.4 billionin intercompany debt owed to Sprint.
Return to Contents
SUPPLEMENTAL RELATED PARTY TRANSACTIONS
Sprint provided various voice, data and administrative services to GlobalOne totaling $415 million in 1997 and $361 million in 1996. In addition,Global One provided data and administrative services to Sprint totaling $114million in 1997 and $130 million in 1996. At year-end 1997 and 1996, Sprint'sreceivable from Global One was $154 and $163 million, respectively, andSprint's payable to Global One was $104 and $49 million, respectively.
RESTRUCTURING CHARGE
In 1995, Sprint's local telecommunications division recorded an $88 millionrestructuring charge, which reduced income from continuing operations by $55million ($0.16 per share). The restructuring plan included the plannedelimination over several years of approximately 1,600 positions, mainly in thenetwork and finance functions. Through 1997, most of the positions have beeneliminated resulting in termination benefit payments of $42 million, with theremainder to be paid in 1998 and 1999.
18. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments ofan Enterprise and Related Information." This new standard requires companiesto disclose segment data based on how management makes decisions aboutallocating resources to segments and how it measures segment performance. SFAS131 requires companies to disclose a measure of segment profit or loss(operating income, for example), segment assets, and
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SPRINT CAPITAL CORP; 424B5
reconciliations toconsolidated totals. It also requires entity-wide disclosures about acompany's products and services, its major customers and the materialcountries in which it holds assets and reports revenues. Sprint will adoptSFAS 131 in its 1998 year-end financial statements. This statement is notexpected to have a significant effect on Sprint's reported segments.
F-27
SPRINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosuresabout Pensions and Other Postretirement Benefits." SFAS 132 standardizes thedisclosure requirements for pensions and postretirement benefits wherepractical. It also eliminates certain disclosures and requires additionalinformation on changes in benefit obligations and fair values of plan assets.Sprint will adopt SFAS 132 in its 1998 year-end financial statements. SFAS 132is not expected to have a significant effect on Sprint's pension andpostretirement benefit plan disclosures.
In June 1998, the FASB issued SFAS No. 133, "Accounting for DerivativeInstruments and Hedging Activities." SFAS 133 requires all derivatives to berecorded on the balance sheet as either assets or liabilities and measured atfair value. Gains or losses resulting from changes in the values of thederivatives would be accounted for depending on the use of the derivative andwhether it qualifies for hedge accounting. Sprint will adopt SFAS 133beginning January 1, 2000. This statement is not expected to have a materialimpact on Sprint.
19. SUBSEQUENT EVENTS (UNAUDITED)
BORROWINGS
During the first nine months of 1998, Sprint increased its short-termborrowings by $946 million. These borrowings, however, have been classified aslong-term debt because of Sprint's intent and ability, through unused creditfacilities, to refinance them on a long-term basis. The borrowings haveweighted average interest rates of 5.8%. Sprint also increased itsconstruction obligations by $429 million since year-end 1997.
In August 1998, Sprint entered into new revolving credit facilities withsyndicates of banks totaling $5.0 billion. These facilities support Sprint'scommercial paper operations and replace its previous $1.5 billion revolvingcredit facility. At September 30, 1998, $3.6 billion was available under thesefacilities.
In October 1998, Sprint filed a shelf registration statement with the SECfor $8.0 billion of debt securities. This replaced $1.0 billion of Sprint'sprevious shelf registration statements totaling $1.1 billion. Sprint currentlyexpects to offer up to $3 billion under the new shelf at approximately thesame time as the PCS Restructuring.
OTHER
In April 1998, Sprint signed an agreement to sell approximately 80,000residential and business access lines in rural Illinois. Sprint expects tocomplete the sale of these properties, which is subject to regulatoryapproval, and record the related gain in November 1998.
In October 1998, Sprint's Board of Directors declared common and Class Acommon stock dividends of $0.25 per share payable December 28, 1998.
20. COMPREHENSIVE INCOME (UNAUDITED)
In 1998, Sprint adopted SFAS No. 130, "Reporting Comprehensive Income." SFAS130 establishes standards for the reporting and display of comprehensiveincome and its components. Comprehensive income includes all changes in equityduring a period except those due to owner investments and distributions. Itincludes items such as foreign currency translation adjustments, andunrealized gains and losses on available-for-sale securities. This
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SPRINT CAPITAL CORP; 424B5
standarddoes not change the display or components of present-day net income; rather,comprehensive income is displayed as a separate statement in the ConsolidatedStatements of Comprehensive Income and as an additional component in theConsolidated Balance Sheets, and the Consolidated Statement of Common Stockand Other Shareholders' Equity.
Total comprehensive income amounted to $671 million during the first ninemonths of 1998 and $770 million during the first nine months of 1997.
F-28
SPRINT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
21. QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTER
-----------------------------------
1ST 2ND 3RD 4TH
-------- -------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE
DATA)
1997
Net operating revenues(1)................ $3,578.5 $3,667.5 $3,778.9 $3,849.0
Operating income(1), (2)................. 604.7 595.5 640.7 610.5
Income before extraordinary items(2),
(3)..................................... 290.0 255.9 211.7 194.9
Net income............................... 290.0 255.9 211.7 194.9
EPS from income before extraordinary
items(4)
Basic.................................. $ 0.67 $ 0.59 $ 0.49 $ 0.45
Diluted................................ $ 0.67 $ 0.59 $ 0.49 $ 0.45
QUARTER
-----------------------------------
1ST 2ND 3RD 4TH
-------- -------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE
DATA)
1996
Net operating revenues(1)................ $3,335.3 $3,471.3 $3,502.5 $3,578.4
Operating income(1), (2)................. 574.9 580.9 598.9 512.5
Income before extraordinary items(2)..... 309.3 316.8 316.2 246.0
Net income............................... 309.3 316.8 312.4 245.3
EPS from income before extraordinary
items(4)
Basic.................................. $ 0.78 $ 0.74 $ 0.73 $ 0.57
Diluted................................ $ 0.77 $ 0.73 $ 0.73 $ 0.56
(1) Consolidated net operating revenues and operating expenses reflect certainreclassifications to conform to the current presentation. Thesereclassifications had no effect on operating income or net income.
(2) In the 1997 second quarter and the 1996 fourth quarter, Sprint recordednonrecurring charges of $20 and $60 million, respectively, related tolitigation within the long distance division. These charges reduced incomefrom continuing operations by $13 million ($0.03 per share) and $36million ($0.09 per share), respectively (see Note 10).
(3) In the 1997 fourth quarter, Sprint recognized gains of $45 million onsales of local exchanges and a $26 million gain on the sale of an equityinvestment in an equipment provider. These gains increased income fromcontinuing operations by $27 million ($0.06 per share) and $17 million($0.04 per share), respectively.
(4) Sprint adopted SFAS 128 at year-end 1997 (see Note 12). All EPS amountscomply with this new standard.
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SPRINT CAPITAL CORP; 424B5
F-29
SPRINT CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statementsare presented to give effect to (1) the PCS Restructuring, whereby Sprint willacquire the joint venture interests of the Cable Parents in Sprint SpectrumHoldings and the joint venture interests of TCI and Cox in PhillieCo, inexchange for shares of PCS Common Stock--Series 2 ("Series 2 PCS Stock") andthe exercise of equity purchase rights by FT and DT in connection with the PCSRestructuring and (2) the tax-free Recapitalization of Sprint's common stockto be effected by reclassifying each share of Sprint's Existing Common Stockinto 1/2 share of Series 1 PCS Stock and one share of Series 1 FON Stock andby reclassifying each share of Class A common stock so that each sharerepresents an equity interest in the FON Group and an equity interest in thePCS Group, together with a right to cause Sprint to initially issue one shareof FON Common Stock--Series 3 ("Series 3 FON Stock") and 1/2 share of PCSCommon Stock--Series 3 ("Series 3 PCS Stock"). The acquisitions of the CableParents' interests in Sprint Spectrum Holdings and PhillieCo will be accountedfor using the purchase method of accounting. The pro forma condensed combinedfinancial statements included herein do not give effect to the Notes offeringor the IPO of Series 1 PCS Stock.
The unaudited pro forma condensed combined statements of income include thehistorical results of Sprint and the historical combined results of SprintSpectrum Holdings and PhillieCo for the year ended December 31, 1997 and thenine months ended September 30, 1998, and include the effect of the PCSRestructuring, the exercise of equity purchase rights by FT and DT inconnection with the PCS Restructuring and the Recapitalization as though suchtransactions had occurred on January 1, 1997. The unaudited pro formacondensed combined balance sheet is based upon the historical balance sheet ofSprint and the historical combined balance sheet of Sprint Spectrum Holdingsand PhillieCo as of September 30, 1998. The historical balance sheet amountshave been adjusted to reflect the PCS Restructuring, the exercise of equitypurchase rights by FT and DT in connection with the PCS Restructuring and theRecapitalization as though such transactions had occurred on September 30,1998. Certain historical amounts have been reclassified to conform to the proforma presentation. These reclassifications had no effect on the results ofoperations or stockholders' equity as previously reported.
The pro forma condensed combined statements of income are not necessarilyindicative of what actual results of operations would have been had thetransactions occurred at the beginning of the periods presented nor do theypurport to indicate the results of future operations. The unaudited pro formacondensed combined financial statements should be read in conjunction with thehistorical financial statements of Sprint and the historical combinedfinancial statements of Sprint Spectrum Holdings and PhillieCo includedelsewhere in this Prospectus Supplement.
F-30
SPRINT CORPORATION
PRO FORMA CONDENSED COMBINED BALANCE SHEET
SEPTEMBER 30, 1998
(Unaudited, in millions)
HISTORICAL COMBINED PRO FORMA ADJUSTMENTS
HISTORICAL SPRINT SPECTRUM ------------------------------
SPRINT HOLDINGS AND PCS
CORP. PHILLIECO RESTRUCTURING RECAPITALIZATION PRO FORMA
---------- ------------------- ------------- ---------------- ---------
ASSETS
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SPRINT CAPITAL CORP; 424B5
Current assets
Cash and equivalents... $ 47.7 $ 325.3 $ (26.5)A $ 346.5
Accounts receivable,
net................... 2,515.8 195.3 (47.1)D 2,664.0
Inventories............ 349.9 177.8 527.7
Notes and other
receivables........... 407.8 -- 407.8
Prepaid expenses and
other current assets.. 422.7 44.1 (153.6)C 313.2
--------- -------- -------- ---------
Total current assets... 3,743.9 742.5 (227.2) 4,259.2
Investments in equity
securities............ 420.2 -- 420.2
Property, plant and
equipment, net........ 13,502.2 4,531.9 18,034.1
Investment in and
advances to Sprint
Spectrum Holdings and
PhillieCo............. 610.1 -- (293.4)B --
(182.0)B
(134.7)E
Investments in and
advances to other
affiliates............ 634.0 -- 634.0
Intangibles, net
PCS licenses........... 544.5 2,829.1 3,373.6
Customer base.......... -- -- 500.0 A 500.0
Goodwill............... 346.6 -- 3,127.6 A 3,474.2
Other assets........... 652.3 422.9 182.0 B 1,255.2
(2.0)I
--------- -------- -------- -------- ---------
Total.................. $20,453.8 $8,526.4 $2,970.3 $ -- $31,950.5
========= ======== ======== ======== =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of
long-term debt........ $ 80.6 $ 124.5 $ 205.1
Partner advances....... -- 185.0 $ (134.7)E 50.3
Accounts payable....... 1,099.0 287.1 1,386.1
Accrued interconnection
costs................. 564.7 -- 564.7
Accrued taxes.......... 399.2 -- 399.2
Advance billings....... 213.3 -- 213.3
Other.................. 849.0 476.4 (47.1)D 1,278.3
--------- -------- -------- ---------
Total current
liabilities........... 3,205.8 1,073.0 (181.8) 4,097.0
Construction
obligations........... 429.0 575.7 1,004.7
Long-term debt......... 5,039.8 6,001.2 60.5 A 10,881.2
(138.0)C
(82.3)F
Deferred credits and
other liabilities
Deferred income taxes
and investment tax
credits............... 1,029.2 -- 443.0 A 1,472.2
Postretirement and
other benefit
obligations........... 1,067.4 -- 1,067.4
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SPRINT CAPITAL CORP; 424B5
Other.................. 370.8 84.9 455.7
--------- -------- -------- ---------
Total deferred credits
and other liabilities. 2,467.4 84.9 443.0 2,995.3
Redeemable preferred
stock................. 9.5 -- 9.5
Limited partner
interest in
consolidated
subsidiary............ -- 65.8 65.8
Common stock and other
stockholders' equity
Common stock
Common stock.......... 875.7 -- $ (875.7)H --
Class A common stock.. 215.6 -- 215.6
FON Group............. -- -- 700.6 H 700.6
PCS Group............. -- -- 195.1 A 175.1 H 375.1
4.9 F
Preferred stock........ -- -- 240.0 G 240.0
Capital in excess of
par or stated value... 4,490.8 4,611.0 3,094.9 A 7,663.1
(2,526.6)A
(1,844.4)B
77.4 F
(240.0)G
Retained earnings...... 4,012.7 (3,885.2) 2,334.2 A 4,010.7
1,551.0 B
(2.0)I
Treasury stock, at
cost.................. (396.1) -- (396.1)
Other.................. 103.6 -- (15.6)C 88.0
--------- -------- -------- -------- ---------
Total common stock and
other stockholders'
equity................ 9,302.3 725.8 2,868.9 -- 12,897.0
--------- -------- -------- -------- ---------
Total.................. $20,453.8 $8,526.4 $2,970.3 $ -- $31,950.5
========= ======== ======== ======== =========
See accompanying Notes to Unaudited Pro Forma Condensed Combined FinancialStatements.
F-31
SPRINT CORPORATION
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1998
(Unaudited, in millions, except per share data)
HISTORICAL
COMBINED
SPRINT PRO FORMA ADJUSTMENTS
HISTORICAL SPECTRUM ------------------------------
SPRINT HOLDINGS AND PCS
CORP. PHILLIECO RESTRUCTURING RECAPITALIZATION PRO FORMA
---------- ------------ ------------- ---------------- ---------
NET OPERATING REVENUES.. $11,940.3 $ 787.9 $12,728.2
OPERATING EXPENSES
Costs of services and
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SPRINT CAPITAL CORP; 424B5
products............... 5,691.3 783.0 6,474.3
Selling, general and
administrative......... 2,802.0 931.6 3,733.6
Depreciation and amor-
tization............... 1,429.1 529.2 $ 5.2 J 2,147.1
58.6 K
125.0 L
--------- --------- ------ ---------
Total operating ex-
penses................. 9,922.4 2,243.8 188.8 12,355.0
--------- --------- ------ ---------
OPERATING INCOME
(LOSS)................. 2,017.9 (1,455.9) (188.8) 373.2
Interest expense........ (185.6) (358.3) 5.1 M (486.8)
36.0 N
11.2 O
4.8 P
Equity in loss of
Global One............. (120.0) -- (120.0)
Equity in loss of
Sprint Spectrum Hold-
ings and PhillieCo..... (686.5) -- 681.3 J --
5.2 J
Other income............ 48.6 23.2 (11.2)O 60.6
Minority interest....... -- 99.0 99.0
--------- --------- ------ ---------
Income (loss) before
income taxes and
extraordinary item..... 1,074.4 (1,692.0) 543.6 (74.0)
Income taxes............ (405.1) -- 399.0 Q 25.2
31.3 R
--------- --------- ------ ---------
INCOME (LOSS) FROM
CONTINUING OPERATIONS.. 669.3 (1,692.0) 973.9 (48.8)
Preferred stock divi-
dends.................. (0.8) -- (5.4)S (6.2)
--------- --------- ------ ---------
Earnings (loss) appli-
cable to common stock.. $ 668.5 $(1,692.0) $968.5 $ (55.0)
========= ========= ====== =========
Earnings (loss) appli-
cable to common stock:
Sprint Corporation..... $ 668.5 $ --
FON Group.............. -- 1,132.0
PCS Group.............. -- (1,187.0)
--------- ---------
$ 668.5 $ (55.0)
========= =========
BASIC EARNINGS (LOSS)
PER COMMON SHARE FROM
CONTINUING OPERATIONS:
Sprint Corporation..... $ 1.55 $ --
========= =========
FON Group.............. $ -- $ 2.63
========= =========
PCS Group.............. $ -- $ (2.86)
========= =========
Basic weighted average
common shares:
Page 83 of 189
SPRINT CAPITAL CORP; 424B5
Sprint Corporation..... 430.7 -- T
========= =========
FON Group.............. -- 430.7 U
========= =========
PCS Group.............. -- 415.4 V
========= =========
DILUTED EARNINGS (LOSS)
PER COMMON SHARE FROM
CONTINUING OPERATIONS:
Sprint Corporation..... $ 1.52 $ --
========= =========
FON Group.............. $ -- $ 2.58
========= =========
PCS Group.............. $ -- $ (2.86)
========= =========
Diluted weighted aver-
age common shares:
Sprint Corporation..... 438.7 -- T
========= =========
FON Group.............. -- 438.7 U
========= =========
PCS Group.............. -- 415.4 V
========= =========
See accompanying Notes to Unaudited Pro Forma Condensed Combined FinancialStatements.
F-32
SPRINT CORPORATION
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1997
(Unaudited, in millions, except per share data)
HISTORICAL COMBINED PRO FORMA ADJUSTMENTS
SPRINT SPECTRUM ------------------------------
HISTORICAL HOLDINGS AND PCS
SPRINT CORP. PHILLIECO RESTRUCTURING RECAPITALIZATION PRO FORMA
------------ ------------------- ------------- ---------------- ---------
NET OPERATING REVENUES.. $14,873.9 $ 258.0 $15,131.9
OPERATING EXPENSES
Costs of services and
products............... 7,451.0 574.3 8,025.3
Selling, general and
administrative......... 3,245.2 747.1 3,992.3
Depreciation and
amortization........... 1,726.3 316.3 $ 3.5 J 2,291.0
78.2 K
166.7 L
--------- --------- ------ ---------
Total operating
expenses............... 12,422.5 1,637.7 248.4 14,308.6
--------- --------- ------ ---------
OPERATING INCOME (LOSS). 2,451.4 (1,379.7) (248.4) 823.3
Interest expense........ (187.2) (123.5) 7.5 M (270.7)
12.6 N
13.5 O
Page 84 of 189
SPRINT CAPITAL CORP; 424B5
6.4 P
Equity in loss of Global
One.................... (162.1) -- (162.1)
Equity in loss of Sprint
Spectrum Holdings and
PhillieCo.............. (659.6) -- 656.1 J --
3.5 J
Equity in loss of
unconsolidated
partnership............ -- (168.9) (168.9)
Other income............ 140.5 39.4 (13.5) O 166.4
--------- --------- ------ ---------
Income (loss) before
income taxes........... 1,583.0 (1,632.7) 437.7 388.0
Income taxes............ (630.5) -- 383.1 Q (192.3)
55.1 R
--------- --------- ------ --- ---------
NET INCOME (LOSS)....... 952.5 (1,632.7) 875.9 195.7
Preferred stock
dividends.............. (1.0) -- (7.2) S (8.2)
--------- --------- ------ ---------
Earnings applicable to
common stock........... $ 951.5 $(1,632.7) $868.7 $ 187.5
========= ========= ====== =========
Earnings (loss)
applicable to common
stock:
Sprint Corporation...... $ 951.5 $ --
FON Group............... -- 1,373.6
PCS Group............... -- (1,186.1)
--------- ---------
$ 951.5 $ 187.5
========= =========
BASIC EARNINGS (LOSS)
PER COMMON SHARE:
Sprint Corporation...... $ 2.21 $ --
========= =========
FON Group............... $ -- $ 3.19
========= =========
PCS Group............... $ -- $ (2.86)
========= =========
Basic weighted average
common shares:
Sprint Corporation ..... 430.2 -- T
========= =========
FON Group............... -- 430.2 U
========= =========
PCS Group............... -- 415.1 V
========= =========
DILUTED EARNINGS (LOSS)
PER COMMON SHARE:
Sprint Corporation...... $ 2.18 $ --
========= =========
FON Group............... $ -- $ 3.15
========= =========
PCS Group............... $ -- $ (2.86)
========= === =========
Diluted weighted average
Page 85 of 189
SPRINT CAPITAL CORP; 424B5
common shares:
Sprint Corporation...... 436.5 -- T
========= =========
FON Group............... -- 436.5 U
========= =========
PCS Group............... -- 415.1 V
========= =========
See accompanying Notes to Unaudited Pro Forma Condensed Combined FinancialStatements.
F-33
SPRINT CORPORATION
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
The following adjustments have been made in the preparation of the unauditedpro forma condensed combined financial statements:
Pro Forma Balance Sheet Adjustments
A To record the purchase of the remaining 60% of Sprint Spectrum Holdings and52.9% of PhillieCo. The consideration given in connection with the purchasewill be shares of Series 2 PCS Stock (195.1 million shares, par value$1.00) and warrants to purchase additional shares of Series 2 PCS Stock.The preliminary purchase price is based on the estimated market value ofthe PCS Group and will be updated at the time of the PCS Restructuring. Themarket value of the PCS Group will be determined based on the market valueof the securities issued in the Recapitalization. The excess of thepurchase price over the fair value of net assets to be acquired has beenpreliminarily calculated as follows (in millions):
Preliminary purchase price....................................... $3,290.0
Transaction costs................................................ 26.5
Net assets to be acquired........................................ (192.4)
Customer base.................................................... (500.0)
Step-up in long-term debt to fair value.......................... 60.5
Deferred taxes on acquired assets and liabilities................ 443.0
--------
Goodwill......................................................... $3,127.6
========
The carrying amounts of the assets to be acquired and liabilities to beassumed are assumed for purposes of the preliminary purchase priceallocation to approximate fair market value, except for certain long-termdebt of Sprint Spectrum that has been recorded at fair value. A portion ofthe purchase price was attributed to the customers acquired in the SprintSpectrum Holdings and PhillieCo acquisitions. In addition, deferred taxeshave been recorded for the difference in the book and tax bases of theassets acquired and liabilities assumed. The above assumptions as to thefair value of the net assets acquired are based upon information availableat the time of the preparation of these pro forma condensed combinedfinancial statements.
A final allocation of the purchase price to the assets acquired andliabilities assumed is dependent on a study and analysis of the fair valueof such assets and liabilities, including such items as the PCS licensesand in-process research and development projects, as well as the size ofthe customer base at the closing date. Management expects the onlyassumptions that could potentially be subject to material change are thoseregarding customer base and in-process research and development. The amountof the purchase price allocated to the customer base in the pro formacondensed combined financial statements is based on the size of thecustomer base at September 30, 1998. To the extent the customer base at theclosing date exceeds the size of the customer base at September 30, 1998,the purchase price allocated to the customer base will likely increasealong with a corresponding increase in
Page 86 of 189
SPRINT CAPITAL CORP; 424B5
the amortization of the customerbase. Based on current projections of an increase in the customer base atNovember 30, 1998, pro forma net income (loss) from continuing operationsfor the nine months ended September 30, 1998 and the year ended December31, 1997 would be $(60.5) million and $180.0 million, respectively, and therespective loss per share of the PCS Group would be $(2.89) and $(2.90) forthe same periods. Sprint is undertaking an analysis to determine whetherin-process research and development projects acquired in the PCSRestructuring should be capitalized or expensed. This analysis is expectedto be finalized prior to the completion of the final purchase priceallocation. To the extent that it is determined through this analysis thatsome of the in-process research and development projects should beexpensed, a portion of the purchase price will be allocated to these in-process research and development projects and a nonrecurring, noncashcharge will be recognized in the period in which the charge
F-34
SPRINT CORPORATION
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
occurs. Sprint is unable to determine the potential amount of such chargeat this time. However, such a charge could be material to Sprint's resultsof operations for the period in wich the charge occurs. Such a write-offwould reduce the amount of purchase price allocated to goodwill, whichwould result in lower amortization expense being recognized over the lifeassigned to the goodwill. Such a write-off would not impact future cashflows. At the present time, Sprint anticipates completing its finalpurchase price allocation prior to year-end 1998.
B To eliminate Sprint's historical investment in Sprint Spectrum Holdings andPhillieCo, accounted for by Sprint on the equity method of accounting($293.4 million), and to reclassify interest capitalized as part of thatinvestment to other assets ($182.0 million).
C To eliminate Sprint's investment in Sprint Spectrum bonds ($153.6 million)and the related unrealized gain ($15.6 million).
D To eliminate Sprint's payable to Sprint Spectrum Holdings.
E To eliminate Sprint's advances to PhillieCo.
F To record the exercise of equity purchase rights by FT and DT (4.9 millionshares, par value $1.00). As a result of the issuance of Series 2 PCS Stockto the Cable Parents in exchange for their interests in Sprint SpectrumHoldings and PhillieCo, the sale of these additional shares is required inorder for FT and DT to maintain their combined 20% voting interest inSprint. The net proceeds are assumed to reduce the long-term debt of SprintSpectrum Holdings.
G To reflect PCS Preferred Stock issued to the Cable Parents in exchange forfunding provided between the date of the Restructuring Agreement (May 26,1998) and September 30, 1998. See "The Tracking Stock Proposal--Funding ofthe PCS Group Prior to Closing; The PCS Preferred Stock" in the ProxyStatement/Prospectus incorporated by reference into the accompanyingProspectus.
H To record the effects of the Recapitalization of Sprint's Existing CommonStock into one share of Series 1 FON Stock, par value $2.00 (350.3 millionshares) and 1/2 share of Series 1 PCS Stock, par value $1.00 (175.1 millionshares).
I To write off deferred financing costs associated with the assumed repaymentof Sprint Spectrum Holdings debt with proceeds from the exercise of equitypurchase rights by FT and DT in connection with the PCS Restructuring.
Pro Forma Statement of Income Adjustments
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SPRINT CAPITAL CORP; 424B5
J To eliminate Sprint's equity in the losses of Sprint Spectrum Holdings andPhillieCo, historically accounted for by Sprint on the equity method ofaccounting ($681.3 million for the nine months ended September 30, 1998 and$656.1 million for the year ended December 31, 1997). The amortization ofinterest previously capitalized on Sprint's equity investment in SprintSpectrum Holdings and PhillieCo has been reclassified to depreciation andamortization expense ($5.2 million for the nine months ended September 30,1998 and $3.5 million for the year ended December 31, 1997).
K To reflect the amortization of the goodwill recorded in connection with thepurchase of the remaining interests in Sprint Spectrum Holdings andPhillieCo, which is being amortized over 40 years. The goodwill associatedwith the acquisition of the remaining interests in Sprint Spectrum Holdingsand PhillieCo is directly related to both the acquisition of the PCSlicenses and the ongoing ability of the businesses to provide wirelesstelecommunications services using these licenses. The 40-year life forgoodwill is consistent with the 40-year amortization period being used forthe PCS licenses.
F-35
SPRINT CORPORATION
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
L To reflect the amortization of the customer base recorded in connectionwith the purchase of the remaining interests in Sprint Spectrum Holdingsand PhillieCo, which is being amortized over three years.
M To record a reduction in interest expense and amortization of deferredfinancing costs as a result of the assumed repayment of debt with theproceeds from the exercise of equity purchase rights by FT and DT inconnection with the PCS Restructuring. The APC senior secured facilities,which had weighted-average interest rates of 7.89% for the nine monthsended September 30, 1998 and 8.70% for the year ended December 31, 1997,are assumed to be repaid with these proceeds.
N To reduce interest expense resulting from the utilization of increasedcurrent tax benefits (related to the acquisition of the remaining interestin Sprint Spectrum Holdings and PhillieCo and the resulting consolidationof these entities). The increased current tax benefits are assumed toreduce Sprint's tax liability and Sprint's required borrowings. Thecomputation of the current tax benefit is performed on a quarterly basis,and the resulting amount is applied to reduce the debt balance and,therefore, interest expense, from that date forward. Interest expense iscomputed using the weighted-average interest rate on the debt assumed to berepaid, or not incurred, as appropriate. Such debt would have amounted to$762.1 million and $375.3 million as of September 30, 1998 and December 31,1997, respectively.
O To eliminate interest income recorded by Sprint and interest expenserecorded by Sprint Spectrum Holdings related to Sprint's investment inSprint Spectrum bonds.
P To reflect the amortization of the purchase price adjustment related tolong-term debt (see Note A).
Q To record the income tax benefit, using the statutory income tax rate,relating to the consolidation of the remaining interests in Sprint SpectrumHoldings and PhillieCo.
R To record the impact on income taxes of pro forma adjustments L through P,using the statutory income tax rate.
S To reflect dividends at an assumed annual rate of 3% on PCS Preferred Stockissued to the Cable Parents. As of September 30, 1998, $240.0 million offunding by the Cable Parents between the date of the RestructuringAgreement (May 26, 1998) and September 30, 1998 was assumed to be exchangedfor shares of PCS Preferred Stock. For a discussion of how the actualdividend rate will be determined, see "Description of Capital Stock--Description of PCS Preferred Stock; Preferred Inter-Group Interest" in theProxy Statement/Prospectus incorporated by reference into the accompanyingProspectus.
Page 88 of 189
SPRINT CAPITAL CORP; 424B5
T The weighted average common shares outstanding for Sprint are eliminated inthe Recapitalization.
U The weighted average common shares outstanding for the FON Group reflectthe Recapitalization of Sprint's Existing Common Stock into shares ofSeries 1 FON Stock on a share for share basis, including the FON Stockattributes of the Class A common stock.
V The weighted average common shares outstanding for the PCS Group reflect
(1) the issuance of Series 2 PCS Stock to the Cable Parents in the PCSRestructuring (195.1 million shares), (2) the Recapitalization of Sprint'sExisting Common Stock into 1/2 share of Series 1 PCS Stock, including thePCS Stock attributes of the Class A common stock (215.4 million shares forthe nine months ended September 30, 1998 and 215.1 million shares for theyear ended December 31, 1997) and (3) the exercise of equity purchaserights by FT and DT in connection with the PCS Restructuring (4.9 millionshares).
F-36
Return to Contents
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Sprint Corporation
We have audited the accompanying combined balance sheets of the FON Group(as described in Note 2) as of December 31, 1997 and 1996, and the relatedcombined statements of income and cash flows for each of the three years inthe period ended December 31, 1997. These financial statements are theresponsibility of the management of Sprint Corporation ("Sprint"). Ourresponsibility is to express an opinion on these financial statements based onour audits.
We conducted our audits in accordance with generally accepted auditingstandards. Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.
In our opinion, the combined financial statements referred to above presentfairly, in all material respects, the combined financial position of the FONGroup at December 31, 1997 and 1996, and the combined results of itsoperations and its cash flows for each of the three years in the period endedDecember 31, 1997, in conformity with generally accepted accountingprinciples.
As discussed in Note 12 to the combined financial statements, the FON Groupdiscontinued accounting for the operations of its local telecommunicationsdivision in accordance with Statement of Financial Accounting Standards No.71, "Accounting for the Effects of Certain Types of Regulation," in 1995.
As more fully discussed in Note 2, the combined financial statements of theFON Group should be read in connection with the audited consolidated financialstatements of Sprint.
Ernst & Young LLP
Kansas City, Missouri
February 3, 1998, except for Note 1,
as to which the date is May 26, 1998
Page 89 of 189
SPRINT CAPITAL CORP; 424B5
F-37
Return to Contents
FON GROUP
COMBINED STATEMENTS OF INCOME
(IN MILLIONS)
NINE MONTHS YEAR ENDED
ENDED SEPTEMBER 30, DECEMBER 31,
-------------------- -------------------------------
1998 1997 1997 1996 1995
--------- --------- --------- --------- ---------
(UNAUDITED)
NET OPERATING REVENUES.. $11,940.3 $11,024.9 $14,873.9 $13,887.5 $12,735.3
OPERATING EXPENSES
Costs of services and
products............. 5,691.3 5,523.7 7,451.0 6,912.9 6,504.9
Selling, general and
administrative....... 2,723.8 2,387.7 3,226.7 3,115.9 2,842.1
Depreciation and
amortization......... 1,427.3 1,265.2 1,726.3 1,591.0 1,466.4
Restructuring costs... -- -- -- -- 87.6
--------- --------- --------- --------- ---------
Total operating
expenses........... 9,842.4 9,176.6 12,404.0 11,619.8 10,901.0
--------- --------- --------- --------- ---------
OPERATING INCOME........ 2,097.9 1,848.3 2,469.9 2,267.7 1,834.3
Interest expense........ (185.6) (133.3) (187.2) (196.7) (260.7)
Equity in loss of Global
One.................... (120.0) (88.3) (162.1) (82.1) (22.9)
Other income (expense),
net.................... 48.6 51.8 140.5 115.3 (38.9)
--------- --------- --------- --------- ---------
Income from continuing
operations before
income
taxes.................. 1,840.9 1,678.5 2,261.1 2,104.2 1,511.8
Income taxes............ (699.8) (663.6) (889.5) (793.6) (545.8)
--------- --------- --------- --------- ---------
INCOME FROM CONTINUING
OPERATIONS............. 1,141.1 1,014.9 1,371.6 1,310.6 966.0
Discontinued operation,
net.................... -- -- -- (2.6) 14.5
Extraordinary items,
net.................... (4.4) -- -- (4.5) (565.3)
--------- --------- --------- --------- ---------
NET INCOME.............. $ 1,136.7 $ 1,014.9 $ 1,371.6 $ 1,303.5 $ 415.2
========= ========= ========= ========= =========
See accompanying Notes to Combined Financial Statements.
F-38
Return to Contents
FON GROUP
COMBINED BALANCE SHEETS
Page 90 of 189
SPRINT CAPITAL CORP; 424B5
(IN MILLIONS)
SEPTEMBER 30, DECEMBER 31,
------------- -------------------
1998 1997 1996
------------- --------- ---------
(UNAUDITED)
ASSETS
Current assets
Cash and equivalents..................... $ 47.7 $ 101.7 $ 1,150.6
Accounts receivable, net of allowance for
doubtful accounts of $166.0 (unaudited),
$146.7 and $117.4....................... 2,515.8 2,495.6 2,343.6
Inventories.............................. 349.9 352.0 305.3
Prepaid expenses......................... 183.5 156.2 150.0
Notes and other receivables.............. 407.8 464.6 101.9
Advance to the PCS Group................. 410.0 -- --
Other.................................... 206.4 199.6 181.5
--------- --------- ---------
Total current assets................... 4,121.1 3,769.7 4,232.9
Investments in equity securities........... 420.2 303.0 254.5
Property, plant and equipment
Long distance communications services.... 9,133.0 8,245.5 7,467.8
Local communications services............ 14,817.2 14,011.5 13,368.7
Other.................................... 980.2 776.6 574.3
--------- --------- ---------
Total property, plant and equipment...... 24,930.4 23,033.6 21,410.8
Less accumulated depreciation............ 12,755.4 11,716.8 10,946.7
--------- --------- ---------
Net property, plant and equipment........ 12,175.0 11,316.8 10,464.1
Investments in and advances to affiliates.. 768.7 459.1 351.3
Other assets............................... 884.6 643.1 263.8
--------- --------- ---------
Total.................................. $18,369.6 $16,491.7 $15,566.6
========= ========= =========
LIABILITIES AND GROUP EQUITY
Current liabilities
Current maturities of long-term debt..... $ 38.1 $ 131.0 $ 99.1
Short-term borrowings.................... -- -- 200.0
Accounts payable......................... 1,078.8 1,082.3 1,026.7
Accrued interconnection costs............ 564.7 672.7 709.0
Accrued taxes............................ 399.2 270.7 189.2
Advance billings......................... 213.3 202.9 199.7
Other.................................... 794.6 659.6 770.6
--------- --------- ---------
Total current liabilities.............. 3,088.7 3,019.2 3,194.3
Long-term debt............................. 4,651.6 3,748.6 2,974.8
Deferred credits and other liabilities
Deferred income taxes and investment tax
credits................................. 724.4 767.2 774.7
Postretirement and other benefit
obligations............................. 1,067.4 947.4 919.7
Other.................................... 366.2 370.0 370.8
--------- --------- ---------
Total deferred credits and other
liabilities............................. 2,158.0 2,084.6 2,065.2
Group equity............................... 8,471.3 7,639.3 7,332.3
--------- --------- ---------
Total.................................. $18,369.6 $16,491.7 $15,566.6
========= ========= =========
See accompanying Notes to Combined Financial Statements.
Page 91 of 189
SPRINT CAPITAL CORP; 424B5
F-39
Return to Contents
FON GROUP
COMBINED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
NINE MONTHS
ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1998 1997 1997 1996 1995
--------- --------- --------- --------- ---------
(UNAUDITED)
OPERATING ACTIVITIES
Net income.............. $ 1,136.7 $ 1,014.9 $ 1,371.6 $ 1,303.5 $ 415.2
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Equity in net losses
of affiliates........ 138.4 96.3 184.1 81.9 7.7
Extraordinary items,
net.................. 1.1 -- -- 4.9 565.3
Depreciation and
amortization......... 1,427.3 1,265.2 1,726.3 1,591.0 1,466.4
Deferred income taxes
and investment tax
credits.............. (36.1) 26.0 (10.0) (74.5) (2.2)
Net (gains) losses on
sales of assets...... -- -- (93.2) 7.5 4.2
Changes in assets and
liabilities:
Accounts receivable,
net................ (20.2) (92.9) (127.0) (982.1) (135.4)
Inventories and
other current
assets............. 1.9 (35.0) (91.5) 15.7 (38.6)
Accounts payable and
other current
liabilities........ 107.1 (230.9) (39.6) 362.0 178.1
Noncurrent assets
and liabilities,
net................ 32.9 (14.3) (19.7) (25.5) 123.0
Other, net.......... 2.3 3.7 5.8 (17.1) 6.4
--------- --------- --------- --------- ---------
Net cash provided by
continuing operations.. 2,791.4 2,033.0 2,906.8 2,267.3 2,590.1
Net cash provided (used)
by cellular division... -- -- -- (0.1) 162.5
--------- --------- --------- --------- ---------
Net cash provided by
operating activities... 2,791.4 2,033.0 2,906.8 2,267.2 2,752.6
--------- --------- --------- --------- ---------
INVESTING ACTIVITIES
Capital expenditures.... (2,320.0) (1,835.7) (2,708.9) (2,433.6) (1,857.3)
Investments in and loans
to Sprint Spectrum
Holdings and PhillieCo. (113.6) (154.5) (300.4) (263.5) (43.2)
Page 92 of 189
SPRINT CAPITAL CORP; 424B5
Advance to the PCS
Group.................. (410.0) -- -- -- --
Equity transfer from
(to) the PCS Group..... 124.6 (406.1) (547.5) (245.2) (891.4)
Investments in and loans
to other affiliates,
net.................... (395.3) (98.5) (385.5) (81.4) (37.8)
Paranet acquisition..... -- (375.0) (375.0) -- --
Proceeds from sales of
assets................. -- -- 292.3 2.1 6.7
Other, net.............. (14.0) 33.8 (2.3) 42.4 (17.1)
--------- --------- --------- --------- ---------
Net cash used by
continuing operations.. (3,128.3) (2,836.0) (4,027.3) (2,979.2) (2,840.1)
Repayment by cellular
division of
intercompany advances.. -- -- -- 1,400.0 --
Net cash used by
cellular division...... -- -- -- (140.7) (324.6)
--------- --------- --------- --------- ---------
Net cash used by
investing activities... (3,128.3) (2,836.0) (4,027.3) (1,719.9) (3,164.7)
--------- --------- --------- --------- ---------
FINANCING ACTIVITIES
Payments on long-term
debt................... (239.3) (110.6) (135.0) (433.1) (630.0)
Proceeds from long-term
debt................... 945.6 194.7 866.5 9.4 260.7
Net change in short-term
borrowings............. -- -- (200.0) (1,986.8) 1,109.5
Dividends............... (291.6) (274.5) (430.0) (419.6) (351.5)
Other net change in
group equity........... (235.4) (128.8) (144.5) 3,254.1 --
Other, net.............. 103.6 81.0 114.6 55.1 33.9
--------- --------- --------- --------- ---------
Net cash provided (used)
by financing
activities............. 282.9 (238.2) 71.6 479.1 422.6
--------- --------- --------- --------- ---------
INCREASE (DECREASE) IN
CASH AND EQUIVALENTS... (54.0) (1,041.2) (1,048.9) 1,026.4 10.5
CASH AND EQUIVALENTS AT
BEGINNING OF PERIOD.... 101.7 1,150.6 1,150.6 124.2 113.7
--------- --------- --------- --------- ---------
CASH AND EQUIVALENTS AT
END OF PERIOD.......... $ 47.7 $ 109.4 $ 101.7 $ 1,150.6 $ 124.2
========= ========= ========= ========= =========
See accompanying Notes to Combined Financial Statements.
F-40
FON GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
1. RESTRUCTURING AND RECAPITALIZATION PLANS
Sprint Corporation (and with its subsidiaries "Sprint") has entered into arestructuring agreement with Tele- Communications, Inc. ("TCI"), ComcastCorporation ("Comcast") and Cox Communications, Inc. ("Cox," and together withTCI and Comcast the "Cable Parents") to restructure Sprint's wireless personalcommunications
Page 93 of 189
SPRINT CAPITAL CORP; 424B5
services ("PCS") operations (the "PCS Restructuring"). Sprintwill acquire the joint venture interests of TCI, Comcast and Cox in SprintSpectrum Holding Company, L.P. and MinorCo, L.P. (together, "Sprint SpectrumHoldings") and the joint venture interests of TCI and Cox in PhillieCoPartners I, L.P. and PhillieCo Partners II, L.P. (together, "PhillieCo"). Inexchange for these joint venture interests, Sprint will issue to the CableParents a newly created class of Sprint Common Stock (the "PCS Stock"). ThePCS Stock is intended to reflect separately the performance of these jointventures and the domestic PCS operations of Sprint's wholly-ownedsubsidiaries, SprintCom, Inc. and SprintCom Equipment Company, L.P. (together,"SprintCom"). These operations will be referred to as the PCS Group.
The FON Stock, which will be created in the Recapitalization, is intended toreflect the performance of all of Sprint's other operations, including itslong distance, local telecommunications and product distribution and directorypublishing divisions, emerging businesses and its interest in Global One.These operations will be referred to as the FON Group.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Combination and Presentation
The Combined Financial Statements of the FON Group together with theCombined Financial Statements of the PCS Group (the "Groups") comprise all ofthe accounts included in the corresponding Consolidated Financial Statementsof Sprint. The entities which comprise the FON Group are commonly controlledcompanies. Investments in entities in which the FON Group exercisessignificant influence, but does not control, are accounted for using theequity method (see Note 3). The separate Group financial statements giveeffect to the accounting policies that will be applicable upon implementationof the PCS Restructuring. The separate Groups' Combined Financial Statementshave been prepared on a basis that management believes to be reasonable andappropriate and include: (i) the combined historical balance sheets, resultsof operations and cash flows of the businesses that comprise each of theGroups with all significant intragroup amounts and transactions eliminated and
(ii) in the case of the FON Group Combined Financial Statements, corporateassets and liabilities and related transactions of Sprint. Transactionsbetween the FON Group and the PCS Group have not been eliminated.
The Combined Financial Statements of the FON Group provide holders of FONStock with financial information regarding the underlying businesses of theFON Group. Notwithstanding the allocation of assets and liabilities (includingcontingent liabilities) and stockholders' equity between the FON Group and thePCS Group for the purpose of preparing the respective financial statements ofsuch Groups, investors in FON Stock and PCS Stock are stockholders of Sprintand are subject to risks associated with an investment in a single company andall of Sprint's businesses, assets and liabilities. Sprint retains allbeneficial ownership and control of the assets and operations of the FON Groupand, after the PCS Restructuring, the PCS Group (subject to a minorityinterest). Financial effects arising from either Group that affect Sprint'sresults of operations or financial condition could affect the results ofoperations or financial position of the other Group or market price of theclass of common stock relating to the other Group. Any net losses of the FONGroup or the PCS Group, and dividends or distributions on, or repurchases of,FON Stock or PCS Stock, will reduce the funds of Sprint legally available forpayment of dividends on both the FON Stock and the PCS Stock. Accordingly, theFON Group Combined Financial Statements should be read in conjunction withSprint's Consolidated Financial Statements and the PCS Group CombinedFinancial Statements.
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FON GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The FON Group Combined Financial Statements are prepared according togenerally accepted accounting principles ("GAAP"). These principles requiremanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities, the disclosure of contingent assets andliabilities, and the reported amounts of revenues and expenses. Actual resultscould differ from those estimates.
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The unaudited interim financial information presented has been preparedaccording to GAAP and the rules and regulations of the Securities and ExchangeCommission for interim reporting. In management's opinion, the informationpresented reflects all adjustments (consisting only of normal recurringaccruals) necessary to present fairly the interim combined financial position,results of operations and cash flows of the FON Group.
The FON Group applied Statement of Financial Accounting Standards ("SFAS")No. 71, "Accounting for the Effects of Certain Types of Regulation," to itsfinancial statements until December 1995. Under SFAS 71, revenues and relatednet income resulting from transactions between the FON Group's nonregulatedoperations and its regulated local exchange carriers were not eliminated fromthe combined financial statements. Revenues from these intragroup transactionswere $262 million in 1995. All other significant intragroup transactions havebeen eliminated.
Classification of Operations
The long distance division provides domestic and international voice, videoand data communications services. The division offers its services to thepublic subject to varying levels of state and federal regulation, but ratesare generally not subject to rate-base regulation.
The local telecommunications division consists of regulated telephonecompanies. These operations provide local exchange services, access bytelephone customers and other carriers to local exchange facilities, sales oftelecommunications equipment and long distance services within specifiedgeographical areas.
The product distribution and directory publishing division provideswholesale distribution services of telecommunications products, and publishesand markets white and yellow page telephone directories.
Emerging businesses consists of the development of new integratedcommunications services, consumer Internet access services, Sprint Paranet andSprint International.
Revenue Recognition
The FON Group recognizes operating revenues as services are rendered or asproducts are delivered to customers. The FON Group records operating revenuesnet of an estimate for uncollectible accounts.
Earnings Per Share
Historical earnings per share are omitted from the combined statements ofincome because the FON Stock was not part of the capital structure of Sprintfor the periods presented. See the Sprint Consolidated Financial Statementsfor information regarding earnings per share based on Sprint's existingcapital structure. Following implementation of the PCS Restructuring and theRecapitalization, the method of calculating earnings per share for the FONGroup will reflect the terms of the proposed amendments to Sprint's articles.Earnings per share will be computed by dividing the net income of the FONGroup by the weighted average number of shares of FON Stock and dilutivesecurities, such as convertible preferred stock and options, outstandingduring the applicable period.
Cash and Equivalents
Cash equivalents generally include highly liquid investments with originalmaturities of three months or less. They are stated at cost, whichapproximates market value. Sprint uses controlled disbursement bankingarrangements as part of its cash management program. Outstanding checks inexcess of cash balances, which
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FON GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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were included in accounts payable, totaled $225 million at December 31, 1997and $127 million at December 31, 1996. The FON Group had sufficient fundsavailable to fund these outstanding checks when they were presented forpayment.
Investments in Debt and Equity Securities
Investments in debt and equity securities are classified as available forsale and reported at fair value (estimated based on quoted market prices).Gross unrealized holding gains and losses are reflected as adjustments to"Group equity," net of related income taxes.
Inventories
Inventories are stated at the lower of cost (principally first-in, first-outmethod) or market.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Generally, ordinary assetretirements and disposals are charged against accumulated depreciation with nogain or loss recognized. Repairs and maintenance costs are expensed asincurred.
Depreciation
The cost of property, plant and equipment is generally depreciated on astraight-line basis over estimated economic useful lives. Prior to the FONGroup's discontinued use of SFAS 71 at December 31, 1995, the cost ofproperty, plant and equipment for the local division had been generallydepreciated on a straight-line basis over lives prescribed by regulatorycommissions.
Income Taxes
The operations of the FON Group are included in the consolidated federalincome tax return of Sprint. Federal income tax is calculated by the FON Groupas if it had filed a separate return. The FON Group's state income tax iscomputed using methodology consistent with that used to compute federal incometax.
The FON Group records deferred income taxes based on certain temporarydifferences between the carrying amounts of assets and liabilities forfinancial reporting purposes and amounts used for tax purposes.
Investment tax credits related to regulated telephone property, plant andequipment have been deferred and are being amortized over the estimated usefullives of the related assets.
Capitalized Interest
The FON Group capitalized interest costs related to constructing capitalassets of $23 million for year-end 1997, $8 million for year-end 1996, and $14million for year-end 1995.
The FON Group also capitalized interest costs related to Sprint'sinvestments in Sprint Spectrum Holdings and PhillieCo. The FON Group stoppedcapitalizing this interest in July 1997 because Sprint Spectrum Holdings andPhillieCo no longer qualified as development-stage companies. The capitalizedinterest on the investments in Sprint Spectrum Holdings and PhillieCo,totaling $46 million, $96 million and $43 million for the years ended December31, 1997, 1996 and 1995, respectively, was contributed to and is beingamortized by the PCS Group.
In addition, Sprint capitalized interest costs related to the buildout ofthe SprintCom network. This capitalized interest totaled $24 million in 1997and was contributed to and will be amortized by the PCS Group.
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NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
3. INVESTMENTS
INVESTMENTS IN EQUITY SECURITIES
The cost of investments in equity securities was $105 million at year-end1997 and 1996. Gross unrealized holding gains were $198 million at December31, 1997 and $149 million at year-end 1996.
INVESTMENTS IN AND ADVANCES TO AFFILIATES
Sprint is a partner in Global One, a joint venture with France Telecom S.A.("FT") and Deutsche Telekom AG ("DT") formed to provide seamless globaltelecommunications services to business, residential and carrier marketsworldwide. Sprint is a one-third partner in Global One's operating groupserving Europe (excluding France and Germany), and is a 50% partner in GlobalOne's operating group for the worldwide activities outside the United Statesand Europe. At year-end 1997, Sprint's share of underlying equity in GlobalOne's net assets exceeded the carrying value of Sprint's investment in GlobalOne by $158 million. This difference is being amortized through January 2001.
Combined, summarized financial information (100% basis) of Global One andall other entities accounted for using the equity method by the FON Group isas follows (in millions):
NINE MONTHS
ENDED SEPTEMBER AT OR FOR THE YEAR ENDED
30, DECEMBER 31,
------------------ --------------------------
1998 1997 1997 1996 1995
-------- -------- -------- -------- ------
(UNAUDITED)
Results of operations
Net operating revenues......... $1,680.6 $1,535.4 $1,937.6 $1,723.7 $779.5
======== ======== ======== ======== ======
Operating loss................. $ (375.9) $ (473.1) $ (782.5) $ (436.4) $ 8.6
======== ======== ======== ======== ======
Net loss....................... $ (495.4) $ (494.4) $ (826.3) $ (399.7) $ 22.1
======== ======== ======== ======== ======
Financial position
Current assets................. $1,913.6 $ 958.9
Noncurrent assets.............. 4,221.0 2,737.5
-------- --------
Total........................ $6,134.6 $3,696.4
======== ========
Current liabilities............ $1,965.7 $ 714.3
Noncurrent liabilities......... 2,105.8 629.6
Owners' equity................. 2,063.1 2,352.5
-------- --------
Total........................ $6,134.6 $3,696.4
======== ========
The FON Group's investment in Global One, including advances, totaled $93and $38 million at year-end 1997 and 1996, respectively.
4. EMPLOYEE BENEFIT PLANS
DEFINED BENEFIT PENSION PLAN
Substantially all Sprint employees are covered by a noncontributory definedbenefit pension plan. Benefits for plan participants represented by collectivebargaining units are based on negotiated schedules of defined amounts. Forparticipants not covered by collective bargaining agreements, the planprovides pension benefits based on years of service and participants'compensation.
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Sprint's policy is to make annual plan contributions equal to an actuariallydetermined amount consistent with applicable federal tax regulations. Thefunding objective is to accumulate funds at a relatively stable rate over theparticipants' working lives so benefits are fully funded at retirement. AtDecember 31, 1997, the plan's assets consisted mainly of investments incorporate equity securities and U.S. government and corporate debt securities.
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FON GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The net pension cost (credit) consists of the following for the FON Group:
1997 1996 1995
------- ------- -------
(IN MILLIONS)
Service cost--benefits earned during the period..... $ 61.7 $ 65.4 $ 51.8
Interest cost on projected benefit obligation....... 148.9 138.5 129.7
Actual return on plan assets........................ (448.5) (353.0) (472.1)
Net amortization and deferral....................... 240.0 159.4 287.9
------- ------- -------
Net pension cost (credit)........................... $ 2.1 $ 10.3 $ (2.7)
======= ======= =======
Discount rate....................................... 7.75% 7.25% 8.50%
Expected long-term rate of return on plan assets.... 9.50% 9.50% 9.50%
Anticipated composite rate of future compensation
increases.......................................... 4.75% 4.25% 5.00%
At December 31, the funded status and amounts recognized in the FON GroupCombined Balance Sheets for the plan were as follows:
1997 1996
--------- ---------
(IN MILLIONS)
Actuarial present value of benefit obligations
Vested benefit obligation.............................. $(1,966.7) $(1,713.6)
========= =========
Accumulated benefit obligation......................... $(2,129.6) $(1,864.1)
========= =========
Projected benefit obligation............................. $(2,240.9) $(1,967.0)
Plan assets at fair value................................ 2,929.4 2,584.2
--------- ---------
Plan assets in excess of the projected benefit
obligation.............................................. 688.5 617.2
Unrecognized net gains................................... (585.2) (481.8)
Unrecognized prior service cost.......................... 105.4 100.4
Unamortized transition asset............................. (122.1) (147.1)
--------- ---------
Prepaid pension cost..................................... $ 86.6 $ 88.7
========= =========
Discount rate............................................ 7.25% 7.75%
Anticipated composite rate of future compensation
increases............................................... 4.25% 4.75%
DEFINED CONTRIBUTION PLANS
Sprint sponsors defined contribution employee savings plans coveringsubstantially all employees. Participants may contribute portions of their payto the plans. For employees represented by collective bargaining units, Sprintmatches contributions based on negotiated amounts. Sprint also matchescontributions of employees not covered by collective bargaining agreements.For those participants, Sprint matches their contributions in Sprint commonstock. The matching is equal to 50% of participants' contributions up to 6% oftheir pay. In addition, Sprint
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may, at the discretion of the Board ofDirectors, provide matching contributions based on the performance of Sprintcommon stock compared to other telecommunications companies' stock. The FONGroup's matching contributions were $54 million in 1997, $56 million in 1996and $51 million in 1995. At December 31, 1997, the plans held 20 millionSprint common shares.
POSTRETIREMENT BENEFITS
Sprint provides postretirement benefits (principally medical benefits) tosubstantially all employees. Employees retiring before certain dates areeligible for benefits at no cost, or at a reduced cost. Employees retiringafter certain dates are eligible for benefits on a shared-cost basis. The FONGroup funds the accrued costs as benefits are paid.
F-45
FON GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The net postretirement benefits cost consists of the following for the FONGroup:
1997 1996 1995
------ ------ -----
(IN MILLIONS)
Service cost--benefits earned during the year........... $ 20.8 $ 21.7 $22.2
Interest on accumulated postretirement benefit
obligation............................................. 52.3 49.9 58.7
Net amortization and deferral........................... (19.4) (13.7) (9.4)
------ ------ -----
Net postretirement benefits cost........................ $ 53.7 $ 57.9 $71.5
====== ====== =====
Discount rate........................................... 7.75% 7.25% 8.50%
For measurement purposes, the assumed 1997 weighted average annual healthcare cost trend rate was 9%, gradually decreasing to an ultimate level of 5%by 2005. A 1% increase in the rate would have increased the 1997 netpostretirement benefits cost by an estimated $12 million.
Amounts included in the FON Group Combined Balance Sheets at year-end are asfollows:
1997 1996
------ ------
(IN MILLIONS)
Accumulated postretirement benefit obligation
Retirees...................................................... $328.3 $277.9
Active plan participants--
Fully eligible.............................................. 145.2 127.6
Other....................................................... 269.9 320.7
------ ------
743.4 726.2
Unrecognized prior service benefit.............................. 5.4 5.7
Unrecognized net gains.......................................... 190.0 178.7
------ ------
Accrued postretirement benefits cost............................ $938.8 $910.6
====== ======
Discount rate................................................... 7.25% 7.75%
The assumed 1998 annual health care cost trend rate was 8.5%, graduallydecreasing to an ultimate level of 5% by 2005. A 1% increase in the rate wouldhave increased the 1997 accumulated postretirement benefit obligation by anestimated $61 million.
5. INCOME TAXES
Income tax expense allocated to continuing operations consists of thefollowing:
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1997 1996 1995
------ ------ ------
(IN MILLIONS)
Current income tax expense
Federal............................................... $800.0 $778.2 $453.7
State................................................. 99.5 89.9 94.3
------ ------ ------
Total current........................................... 899.5 868.1 548.0
------ ------ ------
Deferred income tax expense (benefit)
Federal............................................... (12.7) (81.6) 40.1
State................................................. 6.5 18.7 (25.8)
Amortization of deferred investment tax credits......... (3.8) (11.6) (16.5)
------ ------ ------
Total deferred.......................................... (10.0) (74.5) (2.2)
------ ------ ------
Total................................................... $889.5 $793.6 $545.8
====== ====== ======
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FON GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The differences that cause the effective income tax rate to vary from thestatutory federal rate of 35% were as follows:
1997 1996 1995
------- ------- -------
(IN MILLIONS)
Income tax expense at the statutory rate............ $ 791.4 $ 736.5 $ 529.1
Less investment tax credits included in income...... 3.8 11.6 16.5
------- ------- -------
Expected federal income tax expense after investment
tax credits........................................ 787.6 724.9 512.6
Effect of
State income taxes, net of federal income tax
effect........................................... 68.9 70.6 44.6
Equity in losses of foreign joint ventures........ 36.4 8.6 --
Other, net........................................ (3.4) (10.5) (11.4)
------- ------- -------
Income tax expense, including investment tax
credits............................................ $ 889.5 $ 793.6 $ 545.8
======= ======= =======
Effective income tax rate........................... 39.3% 37.7% 36.1%
======= ======= =======
Income tax expense (benefit) allocated to other items was as follows:
1997 1996 1995
------ ------ -------
(IN MILLIONS)
Discontinued operation.. $ -- $ 7.0 $ 31.2
Extraordinary items..... -- (2.9) (437.4)
Unrealized holding gains
on investments(1)...... 4.4 1.7 30.7
Stock ownership,
purchase and options
arrangements(1)........ (26.2) (14.1) (7.5)
(1) These amounts have been recorded directly to "Group equity."
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The FON Group recognizes deferred income taxes for the temporary differencesbetween the carrying amounts of its assets and liabilities for financialstatement purposes and their tax bases. The sources of the differences thatgive rise to the deferred income tax assets and liabilities at December 31,1997 and 1996, along with the income tax effect of each, were as follows:
1997 DEFERRED 1996 DEFERRED
INCOME TAX INCOME TAX
------------------ ------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ -----------
(IN MILLIONS)
Property, plant and equipment............. $ -- $1,278.0 $ -- $1,275.8
Postretirement and other benefits......... 376.1 -- 360.3 --
Reserves and allowances................... 103.1 -- 113.4 --
Unrealized holding gains on investments... -- 61.7 -- 57.3
Other, net................................ 153.8 -- 152.7 --
------ -------- ------ --------
633.0 1,339.7 626.4 1,333.1
Less valuation allowance.................. 11.8 -- 13.7 --
------ -------- ------ --------
Total................................... $621.2 $1,339.7 $612.7 $1,333.1
====== ======== ====== ========
The valuation allowance related to deferred income tax assets decreased $2million in 1997 and $4 million in 1996 and 1995.
Management believes it is more likely than not that these deferred incometax assets, net of the allowance, will be realized based on current income taxlaws and expectations of future taxable income stemming from the reversal ofexisting deferred tax liabilities or ordinary operations. Uncertaintiessurrounding income tax law
F-47
FON GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
changes, shifts in operations between state taxing jurisdictions, and futureoperating income levels may, however, affect the ultimate realization of allor some of these deferred income tax assets.
At December 31, 1997, the FON Group had available for income tax purposes $4million of state alternative minimum tax credit carryforwards to offset stateincome tax payable in future years. In addition, the FON Group had taxbenefits of $12 million related to state operating loss carryforwards. Theloss carryforwards expire in varying amounts per year from 1998 through 2012.
6. BORROWINGS
All of Sprint's borrowings have been allocated to the FON Group and arereflected on the FON Group Combined Balance Sheets.
LONG-TERM DEBT
Sprint's long-term debt at year-end was as follows:
MATURING 1997 1996
------------ -------- --------
(IN MILLIONS)
Corporate
Senior notes
8.1% to 9.8%............................... 1998 to 2002 $ 475.3 $ 475.3
9.5%....................................... 2003 to 2007 200.0 200.0
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Debentures
9.0% to 9.3%............................... 2019 to 2022 350.0 350.0
Notes payable and commercial paper........... -- 866.5 --
Other
5.4% to 8.9%(1)............................ 1998 to 2006 237.5 194.9
Long Distance Division
Vendor financing agreements
7.4% to 8.9%............................... 1997 to 1999 23.8 44.8
Other
6.2% to 8.4%............................... 1997 to 2007 16.5 23.1
Local Telecommunications Division
First mortgage bonds
2.0% to 7.8%............................... 1997 to 2002 452.3 487.0
4.0% to 7.8%............................... 2003 to 2007 346.0 346.8
6.9% to 9.8%............................... 2008 to 2012 116.7 116.7
6.9% to 8.8%............................... 2013 to 2017 169.6 169.8
8.8% to 9.9%............................... 2018 to 2022 244.9 245.7
7.1% to 8.4%............................... 2023 to 2027 145.0 145.0
Debentures and notes
5.8% to 9.6%............................... 1998 to 2020 237.0 275.3
Other
2.0% to 9.8%............................... 1998 to 2006 4.6 6.2
Unamortized debt discount...................... (6.1) (6.7)
-------- --------
3,879.6 3,073.9
Less current maturities........................ 131.0 99.1
-------- --------
Long-term debt................................. $3,748.6 $2,974.8
======== ========
(1) Notes may be exchanged at maturity for Southern New EnglandTelecommunications Corporation ("SNET") common shares owned by Sprint, orfor cash. Based on SNET's closing market price, had the notes matured atDecember 31, 1997, they could have been exchanged for 3.8 million SNETshares. At December 31, 1997, Sprint held 4.2 million SNET shares, whichhave been included in "Investments in equity securities" on the FON GroupCombined Balance Sheets.
F-48
FON GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Sprint's long-term debt maturities, excluding reclassified short-termborrowings, during each of the next five years are as follows (in millions):
1998.............................. $131.0
1999.............................. 33.4
2000.............................. 693.3
2001.............................. 40.8
2002.............................. 354.5
Property, plant and equipment with a total cost of $12.9 billion is eitherpledged as security for first mortgage bonds and certain notes or isrestricted for use as mortgaged property.
During 1996, Sprint redeemed, prior to scheduled maturities, $190 million ofdebt with interest rates ranging from 6.0% to 9.5%. This resulted in a $5million after-tax extraordinary loss that was reflected on the FON GroupCombined Statements of Income.
SHORT-TERM BORROWINGS
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At December 31, 1997, Sprint had borrowed $618 million of bank notes payableand $249 million of commercial paper. Though these borrowings are renewable atvarious dates throughout the year, they have been classified as long-term debtbecause of Sprint's intent and ability, through unused credit facilities, torefinance these borrowings. Commercial paper and certain bank notes payableare supported by Sprint's revolving credit facility with a syndicate ofdomestic and international banks. Other notes payable relate to a separaterevolving credit facility that Sprint executed with a bank in 1997. AtDecember 31, 1997, Sprint's unused lines of credit totaled $1.1 billion.
Sprint's bank notes outstanding at December 31, 1997 and 1996 had weightedaverage interest rates of 6.1% and 5.9%, respectively. At December 31, 1997,the weighted average interest rate of commercial paper was 6.8%.
OTHER
Sprint was in compliance with all restrictive or financial covenantsrelating to its debt arrangements at December 31, 1997.
7. FON GROUP EQUITY
Following is a reconciliation of the FON Group's equity (in millions):
NINE MONTHS YEAR ENDED
ENDED SEPTEMBER
30, DECEMBER 31,
------------------ -----------------------------
1998 1997 1997 1996 1995
-------- -------- --------- -------- --------
(UNAUDITED)
Balance at beginning of
period..................... $7,639.3 $7,332.3 $ 7,332.3 $3,676.8 $4,473.7
Net income................ 1,136.7 1,014.9 1,371.6 1,303.5 415.2
Dividends................. (323.3) (323.2) (429.5) (421.0) (348.9)
Equity issuances.......... 137.1 49.1 65.0 3,764.0 21.0
Equity repurchases........ (260.2) (128.8) (144.5) (407.2) --
Spinoff of cellular
division (Cellular)...... -- -- -- (260.2) --
Other, net................ 58.6 40.7 61.8 17.9 50.4
Contributions to the PCS
Group.................... (268.5) (804.3) (1,052.1) (478.3) (954.1)
Equity transfer from the
PCS Group................ 351.6 351.9 434.7 136.8 19.5
-------- -------- --------- -------- --------
Balance at end of period.... $8,471.3 $7,532.6 $ 7,639.3 $7,332.3 $3,676.8
======== ======== ========= ======== ========
F-49
FON GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
8. STOCK-BASED COMPENSATION
Since the FON Stock was not part of the capital structure of Sprint for theperiods presented, there were no stock options outstanding. See the SprintConsolidated Financial Statements and Notes thereto set forth in Annex I forinformation regarding stock incentive plans.
9. COMMITMENTS AND CONTINGENCIES
LITIGATION, CLAIMS AND ASSESSMENTS
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The holders of FON Stock will be shareholders of Sprint and will continue tobe subject to all of the risks associated with an investment in Sprint,including any legal proceedings and claims affecting the PCS Group.
In December 1996, an arbitration panel entered a $61 million award in favorof Network 2000 Communications Corporation ("Network 2000") on its breach ofcontract claim against Sprint. The arbitrators directed Sprint to pay one-halfof this award to Network 2000. The remainder was directed to be paid to theMissouri state court in which a proposed class action by Network 2000'sindependent marketing representatives against Network 2000 and Sprint ispending.
Sprint filed an action in federal district court seeking to have thearbitration panel's award struck down, modified, or corrected, and asking thecourt to enter an order regarding the distribution of the award. In April1997, the court denied Sprint's request that the arbitration award be struckdown and granted Network 2000's request that the award be confirmed.
In June 1997, the FON Group recorded an additional $20 million charge inconnection with the settlement of both the class action lawsuit against Sprintand Network 2000 and the related claims of Network 2000 against Sprint. InJune 1998, the court approved the class action settlement; however, a numberof potential class members have decided not to participate in the settlementand another group of potential class members have appealed from the orderapproving the class action settlement.
Various other suits arising in the ordinary course of business are pendingagainst Sprint. Management cannot predict the final outcome of these actionsbut believes they will not result in a material effect on the FON GroupCombined Financial Statements.
OPERATING LEASES
Minimum rental commitments at year-end 1997 for all noncancelable operatingleases, consisting mainly of leases for data processing equipment and realestate, are as follows (in millions):
1998.............................. $305.2
1999.............................. 263.1
2000.............................. 160.8
2001.............................. 105.7
2002.............................. 89.1
Thereafter........................ 238.6
Gross rental expense totaled $406 million in 1997, $401 million in 1996 and$402 million in 1995. Rental commitments for subleases, contingent rentals andexecutory costs were not significant.
10. FINANCIAL INSTRUMENTS
All of Sprint's financial instruments have been allocated to the FON Group,the carrying amounts of which are reflected on the FON Group Combined BalanceSheets.
F-50
FON GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The FON Group estimates the fair value of its financial instruments usingavailable market information and appropriate valuation methodologies. As aresult, the following estimates do not necessarily represent the values theFON Group could realize in a current market exchange. Although management isnot aware of any factors that would affect the estimated fair values presentedat year-end 1997, those amounts have not been comprehensively revalued forpurposes of these financial statements since that date. Therefore, estimatesof fair value after year-end
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1997 may differ significantly from the amountspresented below. The carrying amounts and estimated fair values of the FONGroup's financial instruments at December 31 were as follows:
1997 1996
-------------------- --------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(IN MILLIONS)
Financial assets
Cash and equivalents................ $ 101.7 $ 101.7 $1,150.6 $1,150.6
Investment in affiliate debt
securities......................... 142.4 142.4 122.5 122.5
Investments in equity securities.... 303.0 303.0 254.5 254.5
Financial liabilities
Short-term borrowings............... -- -- 200.0 200.0
Long-term debt
Corporate......................... 2,129.3 2,301.8 1,220.2 1,348.9
Long distance division............ 40.3 41.7 67.9 69.0
Local telecommunications division. 1,710.0 1,812.3 1,785.8 1,846.9
Other financial instruments
Interest rate swap agreements....... -- 0.3 -- 0.2
Foreign currency contracts.......... (0.6) (0.6) (0.5) (0.5)
The carrying values of the FON Group's cash and equivalents approximate fairvalue at year-end 1997 and 1996. The estimated fair value of the FON Group'sinvestments in debt and equity securities is based on quoted market prices.The estimated fair value of the FON Group's long-term debt is based on quotedmarket prices for publicly traded issues. The estimated fair value of allother issues is based on the present value of estimated future cash flowsusing a discount rate based on the risks involved. The estimated fair value ofinterest rate swap agreements is the amount the FON Group would receive toterminate the swap agreements at year-end 1997 and 1996, taking into accountthe then-current interest rates. The estimated fair value of foreign currencycontracts is the replacement cost of the contracts at year-end 1997 and 1996,taking into account the then-current foreign currency exchange rates.
CONCENTRATIONS OF CREDIT RISK
The FON Group's accounts receivable are not subject to any concentration ofcredit risk. The FON Group controls credit risk of its interest rate swapagreements and foreign currency contracts through credit approvals, dollarexposure limits and internal monitoring procedures. In the event ofnonperformance by the counterparties, the FON Group's accounting loss would belimited to the net amount it would be entitled to receive under the terms ofthe applicable interest rate swap agreement or foreign currency contract.However, the FON Group does not anticipate nonperformance by any of thecounterparties related to these agreements.
INTEREST RATE SWAP AGREEMENTS
The FON Group uses interest rate swap agreements as part of its interestrate risk management program. Net interest paid or received related to theseagreements is recorded using the accrual method and is recorded as
F-51
FON GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
an adjustment to interest expense. The FON Group had interest rate swapagreements with notional amounts of $150 and $350 million outstanding at year-end 1997 and 1996, respectively. Net interest expense (income) related tointerest rate swap agreements included on the FON Group's Combined Statementsof Income was $(200,000) in 1997, $2 million in 1996 and $(400,000) in 1995.There were no deferred gains or losses related to any terminated interest rateswap agreements at year-end 1997, 1996 or 1995.
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FOREIGN CURRENCY CONTRACTS
As part of its foreign currency exchange risk management program, the FONGroup purchases and sells over-the- counter forward contracts and options invarious foreign currencies. The FON Group had outstanding $29 and $46 millionof open forward contracts to buy various foreign currencies at year-end 1997and 1996, respectively. The FON Group had $14 and $3 million of outstandingopen purchase option contracts to call various foreign currencies at year-end1997 and 1996, respectively. The premium paid for an option is expensed asincurred. The fair value of an option is recorded as an asset at the end ofeach period. The forward contracts and options open at year-end 1997 and 1996all had original maturities of six months or less. The net gain or lossrecorded to reflect the fair value of these contracts is recorded in theperiod incurred. Total net losses of $40,000 in 1997, $400,000 in 1996 and $1million in 1995 related to foreign currency transactions and contracts wererecorded and included on the FON Group Combined Statements of Income.
11. PARANET ACQUISITION
On September 30, 1997, Sprint paid $375 million to purchase the net assetsof Houston-based Paranet, Inc., a provider of integration, management andsupport services for computer networks. Sprint could pay up to an additional$70 million if Sprint Paranet meets certain financial targets through 1998.
The transaction was accounted for using the purchase method of accounting.As a result, the FON Group's combined financial statements reflect SprintParanet's results of operations beginning in October 1997.
The excess of the purchase price over the tangible net assets acquired was$357 million. This excess was allocated to noncompete agreements and goodwill,and will be amortized on a straight-line basis over four to 10 years.
12. ADOPTION OF ACCOUNTING PRINCIPLES FOR A COMPETITIVE MARKETPLACE
At year-end 1995, the FON Group determined that its local telecommunicationsdivision no longer met the criteria necessary for the continued use of SFAS
71. As a result, 1995 operating results included a noncash, extraordinarycharge of $565 million, net of income tax benefits of $437 million. Thedecision to discontinue using SFAS 71 was based on changes in the regulatoryframework and the convergence of competition in the telecommunicationsindustry.
The 1995 extraordinary charge recognized when the FON Group discontinuedusing SFAS 71 consisted of the following:
PRETAX AFTER-TAX
-------- ---------
(IN MILLIONS)
Increase in accumulated depreciation.................. $ 979.1 $607.9
Recognition of switch software asset.................. (99.5) (61.7)
Elimination of other net regulatory asset............. 123.1 76.3
-------- ------
Total............................................... $1,002.7 622.5
========
Tax-related net regulatory liabilities................ (43.9)
Accelerated amortization of investment tax credits.... (13.3)
------
Extraordinary charge................................ $565.3
======
F-52
FON GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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13. SPINOFF OF CELLULAR DIVISION
In March 1996, Sprint completed the tax-free spinoff of Cellular to Sprintcommon stockholders (the "Spinoff"). To complete the Spinoff, Sprintdistributed all Cellular common shares at a rate of one share for every threeSprint common shares held. In addition, Cellular repaid $1.4 billion of itsintercompany debt owed to Sprint. Sprint also contributed to Cellular's equitycapital $185 million of debt owed by Cellular in excess of the amount repaid.
Cellular's net operating results, as summarized below, were separatelyclassified as a discontinued operation in the FON Group Combined Statements ofIncome. Interest expense was allocated to Cellular based on the assumedrepayment of intercompany debt to Sprint by Cellular. The operating expensesas presented below do not include Cellular's share of Sprint's generalcorporate overhead expenses. These expenses, totaling $2 million in 1996 and$13 million in 1995, were reallocated to Sprint's other operating segments.
1996(1) 1995
------- ------
(IN MILLIONS)
Net operating revenues......................................... $190.2 $834.4
Operating expenses............................................. 156.0 675.6
------ ------
Operating income............................................... 34.2 158.8
Interest expense............................................... (21.5) (124.0)
Other income (expense), net.................................... (8.3) 10.9
------ ------
Income before income taxes..................................... 4.4 45.7
Income taxes................................................... (7.0) (31.2)
------ ------
Income (Loss) from cellular division........................... $ (2.6) $ 14.5
====== ======
(1) 1996 reflects Cellular's operating results only through the date of theSpinoff.
14. ADDITIONAL FINANCIAL INFORMATION
SEGMENT INFORMATION
The FON Group operates in four industry segments: the long distancedivision, the local telecommunications division, the product distribution anddirectory publishing division and emerging businesses. Sprint's corporateassets mainly include investments and loans to affiliates, cash and temporaryinvestments and general corporate assets. In 1995, corporate assets alsoincluded the net assets of the discontinued cellular division. The longdistance division provides domestic and international voice, video and datacommunications services. The local telecommunications division provides localexchange services, access to Sprint's local exchange facilities, sales oftelecommunications equipment and long distance within specified geographicalareas. The product distribution and directory publishing division provideswholesale distribution services of telecommunications products and publishesand markets white and yellow page telephone directories. Emerging businessesconsists of the development of new integrated communications services,consumer Internet access services, Sprint Paranet and Sprint International.
F-53
FON GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Industry segment financial information follows:
PRODUCT
DISTRIBUTION
LONG LOCAL & DIRECTORY
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DISTANCE TELECOMMUNICATIONS PUBLISHING EMERGING INTERSEGMENT
TOTAL FON
DIVISION DIVISION DIVISION BUSINESSES CORPORATE ELIMINATIONS
GROUP
-------- ------------------ ------------ ---------- --------- ------------ ----
-----
(IN MILLIONS)
1997
Net operating
revenues(1)........... $8,954.8 $5,290.2 $1,454.3 $ 57.4 $ -- $(882.8)
$14,873.9
Depreciation and
amortization.......... 716.7 934.1 8.2 23.3 44.0 --
1,726.3
Operating expenses..... 7,857.3 3,896.2 1,274.4 221.9 -- (845.8)
12,404.0
Operating income
(loss)................ 1,097.5 1,394.0 179.9 (164.5) -- (37.0)
2,469.9
Operating margin....... 12.3% 26.4% 12.4% -- -- --
16.6%
Capital expenditures... 1,218.1 1,258.4 10.5 79.6 142.3 --
2,708.9
Identifiable assets.... 6,464.6 7,609.7 519.0 585.9 1,312.5 --
16,491.7
1996
Net operating
revenues(2)........... $8,302.1 $5,126.8 $1,225.4 $ 0.5 $ -- $(767.3)
$13,887.5
Depreciation and
amortization.......... 633.3 909.1 7.2 0.5 40.9 --
1,591.0
Operating expenses..... 7,378.1 3,789.8 1,123.8 63.8 -- (735.7)
11,619.8
Operating income
(loss)................ 924.0 1,337.0 101.6 (63.3) -- (31.6)
2,267.7
Operating margin....... 11.1% 26.1% 8.3% -- -- --
16.3%
Capital expenditures... 1,133.7 1,142.6 9.4 49.9 98.0 --
2,433.6
Identifiable assets.... 5,997.7 7,425.4 446.1 54.3 1,643.1 --
15,566.6
1995
Net operating
revenues(3)........... $7,277.4 $4,690.0 $1,147.6 $ -- -- $(379.7)
$12,735.3
Depreciation and
amortization.......... 581.6 835.6 7.4 -- 41.8 --
1,466.4
Operating expenses..... 6,570.6 3,649.2 1,060.9 -- -- (379.7)
10,901.0
Operating income....... 706.8 1,040.8 86.7 -- -- --
1,834.3
Operating margin....... 9.7% 22.2% 7.6% -- -- --
14.4%
Capital expenditures... 861.7 950.8 7.8 -- 37.0 --
1,857.3
Identifiable assets.... 4,799.0 6,962.0 395.4 -- 1,944.2 --
14,100.6
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SPRINT CAPITAL CORP; 424B5
(1) Includes intercompany revenues eliminated in consolidation in 1997 of $3.3million, $309.0 million and $570.5 million for the long distance division,local telecommunications division and product distribution and directorypublishing division, respectively.
(2) Includes intercompany revenues eliminated in consolidation in 1996 of$30.9 million, $410.5 million and $325.9 million for the long distancedivision, local telecommunications division and product distribution anddirectory publishing division, respectively.
(3) Includes intercompany revenues eliminated in consolidation in 1995 of$38.9 million, $266.4 million and $336.8 million for the long distancedivision, local telecommunications division and product distribution anddirectory publishing division, respectively. Also included in 1995 wereintercompany revenues of $262.4 million not eliminated under SFAS 71.Operating income (loss) represents sales and other revenues less operatingexpenses, and excludes interest expense, equity in losses of unconsolidatedventures, other income (expense) and income taxes.
Beginning in July 1997, Sprint changed its transfer pricing for certaintransactions between affiliates to more accurately reflect market pricing. Themain effect of the pricing change was to reduce "net operating revenues" ofthe local telecommunications division and reduce "operating expenses" of theproduct distribution and directory publishing division. Had this change beeneffective as of January 1, 1995, the operating income for the localtelecommunications division would have been $1.3 billion, $1.2 billion and$1.1 billion in 1997, 1996 and 1995, respectively. The operating income forthe product distribution and directory publishing division would have been$228 million, $198 million and $180 million in 1997, 1996 and 1995,respectively.
F-54
FON GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
SUPPLEMENTAL CASH FLOWS INFORMATION (IN MILLIONS)
NINE MONTHS
ENDED YEAR ENDED DECEMBER
SEPTEMBER 30, 31,
------------- --------------------
1998 1997 1997 1996 1995
------ ------ ------ ------ ------
(UNAUDITED)
Cash paid for:
Interest (net of amounts capitalized)
Continuing operations................... $174.1 $133.2 $197.9 $212.1 $263.5
====== ====== ====== ====== ======
Cellular division....................... $ -- $ -- $ -- $ 21.5 $124.0
====== ====== ====== ====== ======
Income taxes.............................. $279.1 $288.5 $365.8 $695.3 $532.8
====== ====== ====== ====== ======
Noncash activities:
Capital lease obligations................. $ -- $ 30.1 $ 30.1 $ -- $ --
====== ====== ====== ====== ======
Noncash activity in Group Equity.......... $111.6 $ 19.5 $ 31.4 $ 79.3 $ 10.5
====== ====== ====== ====== ======
Net book value of assets and liabilities
contributed to
Global One............................... $ -- $ -- $ -- $ 73.3 $ --
====== ====== ====== ====== ======
During 1996, Sprint completed the Spinoff (see Note 13) which had noimmediate effect on the FON Group's cash flows other than Cellular's repaymentof $1.4 billion in intercompany debt owed to Sprint.
Return to Contents
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SPRINT CAPITAL CORP; 424B5
SUPPLEMENTAL RELATED PARTY TRANSACTIONS
The FON Group has a vendor financing loan to Sprint Spectrum Holdings for$300 million at December 31, 1997 as well as advances to PhillieCo of $67million at year-end 1996. The FON Group also has advances to PhillieCo for $21million at year-end 1997. In 1996, Sprint purchased $183 million (face value)of Sprint Spectrum Senior Discount notes for $100 million. The bonds mature in2006. At December 31, 1997 and 1996, the accreted cost of the notes was $118and $104 million and gross unrealized holding gains totaled $24 and $18million, respectively. This investment has been included in "Current assets--Other" on the FON Group Combined Balance Sheets.
The FON Group provided various voice, data and administrative services toGlobal One totaling $415 million in 1997 and $361 million in 1996. Inaddition, Global One provided data and administrative services to the FONGroup totaling $114 million in 1997 and $130 million in 1996. At year-end 1997and 1996, the FON Group's receivable from Global One was $154 and $163million, respectively, and the FON Group's payable to Global One was $104 and$49 million, respectively.
Certain members of the FON Group also provide management, printing/mailingand warehousing services to the PCS Group. Charges to the PCS Group for suchactivities totaled $17 million, $12 million and $3 million for the years endedDecember 31, 1997, 1996 and 1995.
RESTRUCTURING CHARGE
In 1995, the FON Group's local telecommunications division recorded an $88million restructuring charge, which reduced income from continuing operationsby $55 million. The restructuring plan included the planned elimination overseveral years of approximately 1,600 positions, mainly in the network andfinance functions. Through 1997, most of the positions have been eliminatedresulting in termination benefit payments of $42 million, with the remainderto be paid in 1998 and 1999.
15. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS131, "Disclosures about Segments of an Enterprise and Related Information."This new standard requires companies to disclose segment data based on howmanagement makes decisions about allocating resources to segments and how itmeasures segment performance. SFAS 131 requires companies to disclose ameasure of segment profit or loss (operating
F-55
FON GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
income, for example), segment assets, and reconciliations to consolidatedtotals. It also requires entity-wide disclosures about a company's productsand services, its major customers and the material countries in which it holdsassets and reports revenues. The FON Group will adopt SFAS 131 in its 1998year-end financial statements. This statement is not expected to have asignificant effect on the FON Group's reported segments.
In February 1998, the FASB issued SFAS 132, "Employers' Disclosures aboutPensions and Other Postretirement Benefits." SFAS 132 standardizes thedisclosure requirements for pensions and postretirement benefits wherepractical. It also eliminates certain disclosures and requires additionalinformation on changes in benefit obligations and fair values of plan assets.The FON Group will adopt SFAS 132 in its 1998 year-end financial statements.SFAS 132 is not expected to have a significant effect on the FON Group'spension and postretirement benefit plan disclosures.
In June 1998, the FASB issued SFAS 133, "Accounting for DerivativeInstruments and Hedging Activities." SFAS 133 requires all derivatives to berecorded on the balance sheet as either assets or liabilities and measured atfair value. Gains or losses resulting from changes in the values of thederivatives would be accounted for depending on
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SPRINT CAPITAL CORP; 424B5
the use of the derivative andwhether it qualifies for hedge accounting. Sprint will adopt SFAS 133beginning January 1, 2000. This statement is not expected to have a materialimpact on Sprint.
16. SUBSEQUENT EVENTS (UNAUDITED)
BORROWINGS
During the first nine months of 1998, Sprint increased its short-termborrowings by $946 million. These borrowings, however, have been classified aslong-term debt because of Sprint's intent and ability, through unused creditfacilities, to refinance them on a long-term basis. The borrowings haveweighted average interest rates of 5.8%.
In August 1998, Sprint entered into new revolving credit facilities withsyndicates of banks totaling $5.0 billion. These facilities support Sprint'scommercial paper operations and replace its previous $1.5 billion revolvingcredit facility. At September 30, 1998, $3.6 billion was available under thesefacilities.
In October 1998, Sprint filed a shelf registration statement with the SECfor $8.0 billion of debt securities. This replaced $1.0 billion of Sprint'sprevious shelf registration statements totaling $1.1 billion. Sprint currentlyexpects to offer up to $3 billion under the new shelf at approximately thesame time as the PCS Restructuring.
OTHER
In April 1998, Sprint signed an agreement to sell approximately 80,000residential and business access lines of the FON Group in rural Illinois.Sprint expects to complete the sale of these properties, which is subject toregulatory approval, and record the related gain in November 1998.
In October 1998, Sprint's Board of Directors declared common and Class Acommon stock dividends of $0.25 per share payable December 28, 1998.
17. COMPREHENSIVE INCOME (UNAUDITED)
In 1998, Sprint adopted SFAS No. 130, "Reporting Comprehensive Income." SFAS130 establishes standards for the reporting and display of comprehensiveincome and its components. Comprehensive income includes all changes in equityduring a period except those due to owner investments and distributions. Itincludes items such as foreign currency translation adjustments, andunrealized gains and losses on available-for-sale securities. This standarddoes not change the display or components of present-day net income; rather,comprehensive income is displayed as a separate statement in the ConsolidatedStatements of Comprehensive Income and as an additional component in theConsolidated Balance Sheets, and the Consolidated Statement of Common Stockand Other Shareholders' Equity.
Total comprehensive income for the FON Group amounted to $1.1 billion duringthe first nine months of 1998 and $1.0 billion during the first nine months of1997.
F-56
FON GROUP
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statementsare presented to give effect to (1) the PCS Restructuring, whereby Sprint willacquire the joint venture interests of the Cable Parents in Sprint SpectrumHoldings and the joint venture interests of TCI and Cox in PhillieCo, inexchange for shares of Series 2 PCS Stock and (2) the tax-freeRecapitalization of Sprint's common stock to be effected by reclassifying eachshare of Sprint's Existing Common Stock into 1/2 share of Series 1 PCS Stockand one share of Series 1 FON Stock and by reclassifying each share of Class Acommon stock so that each share represents an equity interest in the FON Groupand an equity interest in the PCS Group, together with a right to cause Sprintto initially issue one share of
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SPRINT CAPITAL CORP; 424B5
Series 3 FON Stock and 1/2 share of Series 3PCS Stock. The pro forma condensed combined financial statements includedherein do not give effect to the Notes offering or the IPO of Series 1 PCSStock.
The unaudited pro forma condensed combined statements of income include thehistorical results of the FON Group for the year ended December 31, 1997 andthe nine months ended September 30, 1998, and include the effect of the PCSRestructuring and the Recapitalization as though such transactions hadoccurred on January 1, 1997. The unaudited pro forma condensed combinedbalance sheet is based upon the historical balance sheet of the FON Group asof September 30, 1998. The historical balance sheet amounts have been adjustedto reflect the PCS Restructuring and the Recapitalization as though suchtransactions had occurred on September 30, 1998.
The pro forma condensed combined statements of income are not necessarilyindicative of what actual results of operations would have been had thetransactions occurred at the beginning of the periods presented nor do theypurport to indicate the results of future operations. The unaudited pro formacondensed combined financial statements should be read in conjunction with thehistorical financial statements of the FON Group included elsewhere in thisProspectus Supplement.
F-57
FON GROUP
PRO FORMA CONDENSED COMBINED BALANCE SHEET
SEPTEMBER 30, 1998
(Unaudited, in millions)
PRO FORMA ADJUSTMENTS
------------------------------
HISTORICAL PCS
FON GROUP RESTRUCTURING RECAPITALIZATION PRO FORMA
---------- ------------- ---------------- ---------
ASSETS
Current assets
Cash and equivalents..... $ 47.7 $(26.5)A $ 21.2
Accounts receivable, net. 2,515.8 2,515.8
Inventories.............. 349.9 349.9
Notes and other
receivables............. 407.8 407.8
Advance to the PCS Group. 410.0 (110.6)B 299.4
Prepaid expenses and
other current assets.... 389.9 389.9
--------- ------ ---------
Total current assets..... 4,121.1 (137.1) 3,984.0
Investments in equity
securities............... 420.2 420.2
Property, plant and
equipment, net........... 12,175.0 12,175.0
Investments in and
advances to affiliates... 768.7 768.7
Preferred inter-group
interest in the PCS
Group.................... -- 270.6 B 270.6
Other assets.............. 884.6 884.6
--------- ------ ---- ---------
Total..................... $18,369.6 $133.5 $-- $18,503.1
========= ====== ==== =========
LIABILITIES AND GROUP
EQUITY
Current liabilities
Current maturities of
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SPRINT CAPITAL CORP; 424B5
long-term debt.......... $ 38.1 $ 38.1
Accounts payable......... 1,078.8 1,078.8
Accrued interconnection
costs................... 564.7 564.7
Accrued taxes............ 399.2 399.2
Advance billings......... 213.3 213.3
Other.................... 794.6 794.6
--------- ---------
Total current
liabilities............. 3,088.7 3,088.7
Long-term debt............ 4,651.6 4,651.6
Deferred credits and other
liabilities
Deferred income taxes and
investment tax credits.. 724.4 724.4
Postretirement and other
benefit obligations..... 1,067.4 1,067.4
Other.................... 366.2 366.2
--------- ---------
Total deferred credits
and other liabilities... 2,158.0 2,158.0
Group equity.............. 8,471.3 $(26.5)A 8,604.8
160.0 B
--------- ------ ---- ---------
Total..................... $18,369.6 $133.5 $-- $18,503.1
========= ====== ==== =========
See accompanying Notes to Unaudited Pro Forma Condensed Combined FinancialStatements.
F-58
FON GROUP
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1998
(Unaudited, in millions, except per share data)
PRO FORMA ADJUSTMENTS
------------------------------
HISTORICAL PCS
FON GROUP RESTRUCTURING RECAPITALIZATION PRO FORMA
---------- ------------- ---------------- ---------
NET OPERATING REVENUES... $11,940.3 $11,940.3
OPERATING EXPENSES
Costs of services and
products................ 5,691.3 5,691.3
Selling, general and
administrative.......... 2,723.8 2,723.8
Depreciation and
amortization............ 1,427.3 1,427.3
--------- ---------
Total operating expenses. 9,842.4 9,842.4
--------- ---------
OPERATING INCOME......... 2,097.9 2,097.9
Interest expense......... (185.6) $(24.1)C (209.7)
Equity in loss of Global
One..................... (120.0) (120.0)
Other income............. 48.6 48.6
--------- ------ ---------
Income from continuing
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SPRINT CAPITAL CORP; 424B5
operations before income
taxes................... 1,840.9 (24.1) 1,816.8
Income taxes............. (699.8) 9.7 D (690.1)
--------- ------ ---------
INCOME FROM CONTINUING
OPERATIONS.............. 1,141.1 (14.4) 1,126.7
Preferred stock
dividends............... (0.8) (0.8)
Dividends received on
preferred inter-group
interest................ -- 6.1 E 6.1
--------- ------ ---------
Earnings applicable to
common stock............ $ 1,140.3 $ (8.3) $ 1,132.0
========= ====== =========
BASIC EARNINGS PER COMMON
SHARE FROM CONTINUING
OPERATIONS.............. $ 2.63
=========
Basic weighted average
common shares........... 430.7 F
=========
DILUTED EARNINGS PER
COMMON SHARE FROM
CONTINUING OPERATIONS... $ 2.58
=========
Diluted weighted average
common shares........... 438.7 F
=========
See accompanying Notes to Unaudited Pro Forma Condensed Combined FinancialStatements.
F-59
FON GROUP
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1997
(Unaudited, in millions, except per share data)
PRO FORMA ADJUSTMENTS
------------------------------
HISTORICAL PCS
FON GROUP RESTRUCTURING RECAPITALIZATION PRO FORMA
---------- ------------- ---------------- ---------
NET OPERATING REVENUES... $14,873.9 $14,873.9
OPERATING EXPENSES
Costs of services and
products................ 7,451.0 7,451.0
Selling, general and
administrative.......... 3,226.7 3,226.7
Depreciation and
amortization............ 1,726.3 1,726.3
--------- ---------
Total operating expenses. 12,404.0 12,404.0
--------- ---------
OPERATING INCOME......... 2,469.9 2,469.9
Interest expense......... (187.2) $ (8.4) C (195.6)
Equity in loss of Global
One..................... (162.1) (162.1)
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SPRINT CAPITAL CORP; 424B5
Other income............. 140.5 140.5
--------- ------- ---------
Income before income
taxes................... 2,261.1 (8.4) 2,252.7
Income taxes............. (889.5) 3.3 D (886.2)
--------- ------- ---------
NET INCOME............... 1,371.6 (5.1) 1,366.5
Preferred stock
dividends............... (1.0) (1.0)
Dividends received on
preferred inter-group
interest................ -- 8.1 E 8.1
--------- ------- ---------
Earnings applicable to
common stock............ $ 1,370.6 $ 3.0 $ 1,373.6
========= ======= =========
BASIC EARNINGS PER COMMON
SHARE................... $ 3.19
=========
Basic weighted average
common shares........... 430.2 F
=========
DILUTED EARNINGS PER
COMMON SHARE............ $ 3.15
=========
Diluted weighted average
common shares........... 436.5 F
=========
See accompanying Notes to Unaudited Pro Forma Condensed Combined FinancialStatements.
F-60
FON GROUP
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
The following adjustments have been made in the preparation of the unauditedpro forma condensed combined financial statements:
Pro Forma Balance Sheet Adjustments
A Cash to fund the transaction costs related to the PCS Restructuring will becontributed by the FON Group to the PCS Group.
B To reflect the Preferred Inter-Group Interest in the PCS Group issued bythe PCS Group to the FON Group in exchange for funding provided to the PCSGroup between the date of the Restructuring Agreement (May 26, 1998) andSeptember 30, 1998. See "The Tracking Stock Proposal--Funding of the PCSGroup Prior to Closing; The PCS Preferred Stock" in the ProxyStatement/Prospectus incorporated by reference into the accompanyingProspectus.
Pro Forma Statement of Income Adjustments
C To increase interest expense resulting from the tax sharing agreementbetween the FON Group and the PCS Group. Under this agreement, the FONGroup will "pay" the PCS Group for the use of its current tax benefits thatthe FON Group is able to utilize, thereby reducing funds available to theFON Group and increasing its required borrowings. The computation of thecurrent tax benefit of the PCS Group utilized by the FON Group is performedon a quarterly basis, and the resulting amount is applied to increase thedebt balance and, therefore, interest expense, from that date forward.Interest expense is computed using the weighted-average interest rate onthe debt assumed
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SPRINT CAPITAL CORP; 424B5
to be incurred. Such debt would have amounted to $509.2million and $352.0 million, on a pro forma basis, as of September 30, 1998and December 31, 1997, respectively.
D To record the impact on income taxes of pro forma adjustment C, using thestatutory income tax rate.
E To reflect dividends received from the PCS Group on the FON Group'sPreferred Inter-Group Interest in the PCS Group, at an assumed annual rateof 3%. The FON Group had provided $270.6 million of funding between thedate of the Restructuring Agreement (May 26, 1998) and September 30, 1998,which was assumed to be exchanged for a Preferred Inter-Group Interest. Fora discussion of how the actual dividend rate will be determined, see"Description of Capital Stock--Description of PCS Preferred Stock;Preferred Inter-Group Interest" in the Proxy Statement/Prospectusincorporated by reference into the accompanying Prospectus.
F The weighted average common shares outstanding for the FON Group reflectthe Recapitalization of Sprint's Existing Common Stock into shares ofSeries 1 FON Stock on a share for share basis, including the FON Stockattributes of the Class A common stock.
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REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Sprint Corporation
We have audited the accompanying combined balance sheets of the PCS Group(as described in Note 2) as of December 31, 1997 and 1996, and the relatedcombined statements of operations and cash flows for each of the three yearsin the period ended December 31, 1997. These financial statements are theresponsibility of the management of Sprint Corporation ("Sprint"). Ourresponsibility is to express an opinion on these financial statements based onour audits. The combined financial statements of Sprint Spectrum HoldingCompany, L.P., MinorCo., L.P., PhillieCo Partners I, L.P. and PhillieCoPartners II, L.P., (the "Partnerships") have been audited by other auditorswhose report has been furnished to us; insofar as our opinion on the combinedfinancial statements of the PCS Group relates to data included for thePartnerships, it is based solely on their report. The PCS Group has a 40%interest in Sprint Spectrum Holding Company, L.P. and MinorCo., L.P. and a47.1% interest in PhillieCo Partners I, L.P. and PhillieCo Partners II, L.P.In the combined financial statements, the PCS Group's combined equity in thePartnerships is stated at $781 million and $1,032 million at December 31, 1997and 1996, respectively, and the PCS Group's combined equity in the net loss ofSprint Spectrum Holding Company, L.P. and PhillieCo, L.P. is stated at $656million, $192 million and $31 million for the years ended December 31, 1997,1996 and 1995, respectively.
We conducted our audits in accordance with generally accepted auditingstandards. Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits and the report of otherauditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, thecombined financial statements referred to above present fairly, in allmaterial respects, the combined financial position of the PCS Group atDecember 31, 1997 and 1996, and the combined results of its operations and itscash flows for each of the three years in the period ended December 31, 1997,in conformity with generally accepted accounting principles.
As more fully discussed in Note 2, the combined financial statements of thePCS Group should be read in connection with the audited consolidated financialstatements of Sprint.
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Ernst & Young LLP
Kansas City, Missouri
May 26, 1998
F-62
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PCS GROUP
COMBINED STATEMENTS OF OPERATIONS
(IN MILLIONS)
NINE MONTHS
ENDED SEPTEMBER YEAR ENDED DECEMBER
30, 31,
---------------- ------------------------
1998 1997 1997 1996 1995
------- ------- ------- ------- ------
(UNAUDITED)
OPERATING EXPENSES
Selling, general and
administrative expenses.......... $ 78.2 $ 7.4 $ 18.5 $ 0.5 $ --
Depreciation and amortization..... 1.8 -- -- -- --
------- ------- ------- ------- ------
Total operating expenses......... 80.0 7.4 18.5 0.5 --
------- ------- ------- ------- ------
OPERATING LOSS..................... (80.0) (7.4) (18.5) (0.5) --
Equity in loss of Sprint Spectrum
Holdings and PhillieCo............ (686.5) (410.6) (659.6) (191.8) (31.4)
------- ------- ------- ------- ------
Loss before income taxes........... (766.5) (418.0) (678.1) (192.3) (31.4)
Income tax benefit................. 294.7 160.7 259.0 72.6 11.5
------- ------- ------- ------- ------
NET LOSS .......................... $(471.8) $(257.3) $(419.1) $(119.7) $(19.9)
======= ======= ======= ======= ======
See accompanying Notes to Combined Financial Statements.
F-63
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PCS GROUP
COMBINED BALANCE SHEETS
(IN MILLIONS)
SEPTEMBER 30, DECEMBER 31,
------------- -----------------
1998 1997 1996
------------- -------- --------
(UNAUDITED)
ASSETS
Prepaid expenses and other current assets...... $ 32.8 $ 2.9 $ --
Property, plant and equipment, net............. 1,327.2 177.3 --
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Investments in Sprint Spectrum Holdings and
PhillieCo..................................... 475.4 968.4 1,175.8
Investment in PCS licenses..................... 544.5 544.5 84.0
Other noncurrent assets ....................... 114.3 -- --
-------- -------- --------
Total...................................... $2,494.2 $1,693.1 $1,259.8
======== ======== ========
LIABILITIES AND GROUP EQUITY
Current liabilities
Current maturities of long-term debt ........ $ 42.5 $ -- $ --
Accounts payable............................. 20.2 17.8 --
Advance from the FON Group................... 410.0 -- --
Payable to Sprint Spectrum Holdings.......... 47.1 19.0 --
Accrued expenses and other current
liabilities................................. 7.3 20.8 --
-------- -------- --------
Total current liabilities.................. 527.1 57.6 --
Construction obligations....................... 429.0 -- --
Capital lease obligations...................... 388.2 -- --
Deferred income taxes and other liabilities.... 318.9 249.6 72.2
Group equity................................... 831.0 1,385.9 1,187.6
-------- -------- --------
Total...................................... $2,494.2 $1,693.1 $1,259.8
======== ======== ========
See accompanying Notes to Combined Financial Statements.
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PCS GROUP
COMBINED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
------------------ ----------------------------
1998 1997 1997 1996 1995
-------- -------- --------- -------- -------
(UNAUDITED)
OPERATING ACTIVITIES
Net loss..................... $ (471.8) $ (257.3) $ (419.1) $ (119.7) $ (19.9)
Adjustments to reconcile net
loss to net cash provided
(used) by operating
activities:
Equity in net losses of
affiliates................ 686.5 410.6 659.6 191.8 31.4
Depreciation and
amortization.............. 1.8 -- -- -- --
Deferred income taxes...... 56.9 191.2 175.7 64.2 8.0
Current tax benefit
utilized by the FON Group. (351.6) (351.9) (434.7) (136.8) (19.5)
Changes in assets and
liabilities:
Prepaid expenses and
other current assets.... (29.9) (2.2) (2.9) -- --
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Accounts payable and
other current
liabilities............. 17.0 35.4 57.6 -- --
Noncurrent assets and
liabilities, net........ (101.9) -- 1.3 -- --
-------- -------- --------- -------- -------
Net cash provided (used) by
operating activities........ (193.0) 25.8 37.5 (0.5) --
-------- -------- --------- -------- -------
INVESTING ACTIVITIES
Capital expenditures......... (672.1) (68.2) (153.7) -- --
Purchase of PCS licenses..... -- (460.1) (460.1) (84.0) --
Investments in and loans to
Sprint Spectrum Holdings and
PhillieCo................... (193.5) (255.5) (405.9) (297.5) (910.9)
-------- -------- --------- -------- -------
Net cash used by investing
activities.................. (865.6) (783.8) (1,019.7) (381.5) (910.9)
-------- -------- --------- -------- -------
FINANCING ACTIVITIES
Advance from the FON Group... 410.0 -- -- -- --
Contributions from (to) the
FON Group................... (124.6) 406.1 547.5 245.2 891.4
Current tax benefit utilized
by the FON Group............ 351.6 351.9 434.7 136.8 19.5
Change in construction
obligations................. 429.0 -- -- -- --
Other........................ (7.4) -- -- -- --
-------- -------- --------- -------- -------
Net cash provided by
financing activities........ 1,058.6 758.0 982.2 382.0 910.9
-------- -------- --------- -------- -------
INCREASE (DECREASE) IN CASH
AND EQUIVALENTS............. -- -- -- -- --
CASH AND EQUIVALENTS AT
BEGINNING OF PERIOD......... -- -- -- -- --
-------- -------- --------- -------- -------
CASH AND EQUIVALENTS AT END
OF PERIOD................... $ -- $ -- $ -- $ -- $ --
======== ======== ========= ======== =======
NONCASH INVESTING AND
FINANCING ACTIVITIES
Assets acquired under a
capital lease obligation.... $ 438.1 $ -- $ -- $ -- $ --
======== ======== ========= ======== =======
See accompanying Notes to Combined Financial Statements.
F-65
PCS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
1. RECAPITALIZATION PLAN
Sprint Corporation (and with its subsidiaries "Sprint") has entered into arestructuring agreement with Tele- Communications, Inc. ("TCI"), ComcastCorporation ("Comcast") and Cox Communications, Inc. ("Cox," and together withTCI and Comcast the "Cable Parents") to restructure Sprint's wireless personalcommunications services ("PCS") operations (the "PCS Restructuring"). Sprintwill acquire the joint venture interests of TCI, Comcast
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and Cox in SprintSpectrum Holding Company, L.P. and MinorCo, L.P. (together, "Sprint SpectrumHoldings") and the joint venture interests of TCI and Cox in PhillieCoPartners I, L.P. and PhillieCo Partners II, L.P. (together, "PhillieCo"). Inexchange for these joint venture interests, Sprint will issue to the CableParents a newly created class of Sprint Common Stock (the "PCS Stock"). ThePCS Stock is intended to reflect separately the performance of these jointventures and the domestic PCS operations of Sprint's wholly-ownedsubsidiaries, SprintCom, Inc. and SprintCom Equipment Company, L.P. (together,"SprintCom"). These operations will be referred to as the PCS Group.
The FON Stock, which will be created in the Recapitalization, is intended toreflect the performance of all of Sprint's other operations, including itslong distance, local telecommunications and product distribution and directorypublishing divisions, emerging businesses and its interest in Global One.These operations will be referred to as the FON Group.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Combination and Presentation
The Combined Financial Statements of the PCS Group together with theCombined Financial Statements of the FON Group (the "Groups") comprise all ofthe accounts included in the corresponding Consolidated Financial Statementsof Sprint. The entities which comprise the PCS Group are commonly controlledcompanies. Investments in entities in which the PCS Group exercisessignificant influence, but does not control, are accounted for using theequity method (see Note 3). The separate Group Combined Financial Statementsgive effect to the accounting policies that will be applicable uponimplementation of the PCS Restructuring. The separate Groups' CombinedFinancial Statements have been prepared on a basis that management believes tobe reasonable and appropriate and include: (i) the combined historical balancesheets, results of operations and cash flows of the businesses that compriseeach of the Groups with all significant intragroup amounts and transactionseliminated and (ii) in the case of the FON Group Combined FinancialStatements, corporate assets and liabilities and related transactions ofSprint. Transactions between the PCS Group and the FON Group have not beeneliminated.
The Combined Financial Statements of the PCS Group provide holders of PCSStock with financial information regarding the underlying businesses of thePCS Group. Notwithstanding the allocation of assets and liabilities (includingcontingent liabilities) and stockholders' equity between the PCS Group and theFON Group for the purpose of preparing the respective financial statements ofsuch Groups, investors in PCS Stock and FON Stock are stockholders of Sprintand are subject to risks associated with an investment in a single company andall of Sprint's businesses, assets and liabilities. Sprint retains allbeneficial ownership and control of the assets and operations of the FON Groupand, after the PCS Restructuring, the PCS Group (subject to a minorityinterest). Financial effects arising from either Group that affect Sprint'sresults of operations or financial condition could affect the results ofoperations or financial position of the other Group or market price of theclass of common stock relating to the other Group. Any net losses of the PCSGroup or the FON Group, and dividends or distributions on, or repurchases of,PCS Stock or FON Stock, will reduce the funds of Sprint legally available forpayment of dividends on both the PCS Stock and the FON Stock. Accordingly, thePCS Group Combined Financial Statements should be read in conjunction withSprint's Consolidated Financial Statements and the FON Group CombinedFinancial Statements.
F-66
PCS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The PCS Group Combined Financial Statements are prepared according togenerally accepted accounting principles ("GAAP"). These principles requiremanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities, the disclosure of contingent assets andliabilities, and the reported amounts of revenues and expenses. Actual resultscould differ from those estimates.
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The unaudited interim financial information presented has been preparedaccording to GAAP and the rules and regulations of the Securities and ExchangeCommission for interim reporting. In management's opinion, the informationpresented reflects all adjustments (consisting only of normal recurringaccruals) necessary to present fairly the interim combined financial position,results of operations and cash flows of the PCS Group.
Classification of Operations
The PCS Group includes Sprint's domestic wireless mobile telephonyactivities and any other domestic PCS services, which includes (i) theinvestment in Sprint Spectrum Holdings and the investment in PhillieCo, bothof which are reflected on the equity basis and (ii) SprintCom. Upon completionof the PCS Restructuring, the results of Sprint Spectrum Holdings andPhillieCo will be reflected on a consolidated basis in the PCS Group CombinedFinancial Statements.
Sprint Spectrum Holdings, PhillieCo and SprintCom are building the nation'sfirst single-technology, all digital, state- of-the-art wireless network toprovide PCS across the United States operating on one frequency. PCS usesdigital technology, which has sound quality superior to analog cellulartechnology and is less susceptible to interference and eavesdropping. PCS alsooffers features such as voicemail and Caller ID.
Earnings Per Share
Historical earnings per share are omitted from the Combined Statements ofOperations because the PCS Stock was not part of the capital structure ofSprint for the periods presented. See the Sprint Consolidated FinancialStatements for information regarding earnings per share based on Sprint'sexisting capital structure. Following implementation of the PCS Restructuring,the method of calculating earnings per share for the PCS Group will reflectthe terms of the proposed amendments to Sprint's articles of incorporation.Earnings per share will be computed by dividing the net income or loss of thePCS Group by the weighted average number of shares of PCS Stock and dilutivesecurities, such as warrants and options, outstanding during the applicableperiod.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost and consists primarily ofconstruction work in progress. Generally, ordinary asset retirements anddisposals are charged against accumulated depreciation with no gain or lossrecognized. Repairs and maintenance costs are expensed as incurred. Onceoperations of SprintCom commence, property, plant and equipment will bedepreciated on a straight-line basis over their estimated economic usefullives. The PCS Group expects to launch service in certain of the SprintCommarkets during the third quarter of 1998.
Investment in PCS Licenses
The PCS Group has acquired licenses from the Federal CommunicationsCommission ("FCC") to operate as a PCS service provider. These licenses arerecorded at cost and will be amortized over a 40-year period commencing withthe initiation of service in a specific geographic area. The FCC grantslicenses for terms of up to ten years, and generally grants renewals foradditional 10-year terms if the licensee has complied with its licenseobligations. The PCS Group believes it will be able to secure renewal of thePCS licenses that are held by the entities comprising the PCS Group. The PCSGroup expects to launch service in certain of the SprintCom markets during thethird quarter of 1998.
F-67
PCS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes
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The PCS Group records deferred income taxes based on certain temporarydifferences between the carrying amounts of assets and liabilities forfinancial reporting purposes and amounts used for tax purposes.
The operations of the PCS Group are included in the consolidated federalincome tax return of Sprint. The PCS Group's federal income tax represents thedifference between the Sprint consolidated federal income tax and the FONGroup's federal income tax. The related current tax benefits generated fromthe inclusion of the PCS Group operating losses in the Sprint consolidatedfederal income tax return have been reflected as contributions from the FONGroup to the PCS Group in the PCS Group combined statements of cash flow. ThePCS Group's state tax is computed using a methodology consistent with thatused to compute federal income tax.
Capitalized Interest
Sprint capitalized interest costs related to its investments in SprintSpectrum Holdings and PhillieCo until July 1997, at which time Sprint SpectrumHoldings and PhillieCo no longer qualified as development-stage companies.Amounts capitalized totaled $46 million, $96 million, and $43 million atDecember 31, 1997, 1996, and 1995, respectively. The capitalized interest onthe investments in Sprint Spectrum Holdings and PhillieCo was contributed toand is being amortized by the PCS Group.
In addition, Sprint capitalizes interest costs associated with the networkbuildout of SprintCom. Interest capitalized for the year ended December 31,1997 was $24 million. Such interest was also contributed to and will beamortized by the PCS Group.
3. INVESTMENTS IN SPRINT SPECTRUM HOLDINGS AND PHILLIECO
Sprint has a 40% interest in Sprint Spectrum Holdings and a 47.1% interestin PhillieCo, respectively. These investments are accounted for using theequity method. Combined, summarized financial information (100% basis) ofthese entities is as follows (in millions):
NINE MONTHS AT OR FOR THE
ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------- ----------------------------
1998 1997 1997 1996 1995
--------- --------- --------- -------- -------
(UNAUDITED)
Results of operations
Net operating
revenues............. $ 788.0 $ 110.5 $ 258.0 $ 4.2 $ --
========= ========= ========= ======== =======
Operating loss........ $(1,455.8) $ (869.0) $(1,379.7) $ (357.6) $ (66.9)
========= ========= ========= ======== =======
Net loss.............. $(1,692.0) $(1,021.5) $(1,632.7) $ (444.6) $(112.7)
========= ========= ========= ======== =======
Financial position
Current assets........ $ 417.9 $ 401.8
Noncurrent assets..... 6,640.0 4,041.8
--------- --------
Total................. $ 7,057.9 $4,443.6
========= ========
Current liabilities... $ 834.5 $ 471.2
Noncurrent
liabilities.......... 4,289.4 1,412.5
Partners' equity...... 1,934.0 2,559.9
--------- --------
Total................. $ 7,057.9 $4,443.6
========= ========
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NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
4. INCOME TAXES
Income tax benefit consists of the following:
1997 1996 1995
------- ------- ------
(IN MILLIONS)
Current income tax benefit
Federal...................................... $(414.1) $(122.8) $(16.3)
State........................................ (20.6) (14.0) (3.2)
------- ------- ------
Total current.................................. (434.7) (136.8) (19.5)
------- ------- ------
Deferred income tax expense (benefit)
Federal...................................... 187.0 59.4 5.8
State........................................ (11.3) 4.8 2.2
------- ------- ------
Total deferred................................. 175.7 64.2 8.0
------- ------- ------
Total income tax benefit....................... $(259.0) $ (72.6) $(11.5)
======= ======= ======
The differences that caused the effective income tax rates to vary from thestatutory federal rate of 35% were as follows:
1997 1996 1995
------- ------ ------
(IN MILLIONS)
Income tax benefit at the statutory rate........ $(237.3) $(67.3) $(11.0)
Effect of
State income taxes, net of federal income tax
effect....................................... (20.7) (6.0) (0.7)
Other, net.................................... (1.0) 0.7 0.2
------- ------ ------
Income tax benefit.............................. $(259.0) $(72.6) $(11.5)
======= ====== ======
Effective income tax rate....................... 38.2% 37.8% 36.6%
======= ====== ======
The PCS Group recognizes deferred income taxes for the temporary differencesbetween the carrying amounts of its assets and liabilities for financialstatement purposes and their tax bases and for its share of similar temporarydifferences of Sprint Spectrum Holdings and PhillieCo. The sources of thedifferences that give rise to the deferred income tax assets and liabilitiesat December 31, 1997 and 1996, along with the income tax effect of each, wereas follows:
1997 DEFERRED 1996 DEFERRED
INCOME TAX INCOME TAX
------------------ ------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ -----------
(IN MILLIONS)
Property, plant and equipment.......... $ -- $183.0 $ -- $28.5
Capitalized interest................... -- 83.6 -- 55.8
Reserves and allowances................ 8.2 -- 2.2 --
Operating loss carryforwards........... 24.1 -- 8.9 --
Other, net............................. -- 13.6 1.0 --
----- ------ ----- -----
Total.................................. $32.3 $280.2 $12.1 $84.3
===== ====== ===== =====
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Management believes it is more likely than not that the deferred income taxasset will be realized based on current income tax laws and expectations offuture taxable income stemming from the reversal of the existing
F-69
PCS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
deferred tax liability. Uncertainties surrounding income tax law changes,shifts in operations between state taxing jurisdictions, and future operatingincome levels may, however, affect the ultimate realization of all or some ofthis deferred income tax asset.
At December 31, 1997, the PCS Group had recorded tax benefits of $37 millionrelated to state operating loss carryforwards. The loss carryforwards expirein varying amounts per year from 2000 through 2012.
5. PCS GROUP EQUITY
Following is a reconciliation of the PCS Group's equity (in millions):
NINE MONTHS
ENDED SEPTEMBER YEAR ENDED
30, DECEMBER 31,
------------------ --------------------------
1998 1997 1997 1996 1995
-------- -------- -------- -------- ------
(UNAUDITED)
Balance at beginning of
period..................... $1,385.9 $1,187.6 $1,187.6 $ 965.8 $ 51.1
Net loss.................... (471.8) (257.3) (419.1) (119.7) (19.9)
Contributions from the FON
Group...................... 268.5 804.3 1,052.1 478.3 954.1
Equity transfers to the FON
Group...................... (351.6) (351.9) (434.7) (136.8) (19.5)
-------- -------- -------- -------- ------
Balance at end of period.... $ 831.0 $1,382.7 $1,385.9 $1,187.6 $965.8
======== ======== ======== ======== ======
6. COMMITMENTS AND CONTINGENCIES
Litigation, Claims and Assessments
The holders of PCS Stock will be stockholders of Sprint and will continue tobe subject to all of the risks associated with an investment in Sprint,including any legal proceedings and claims affecting the FON Group.
Various suits arising in the ordinary course of business are pending againstSprint. Management cannot predict the final outcome of these actions butbelieves they will not result in a material effect on the PCS Group's CombinedFinancial Statements.
Commitments
In the third and fourth quarters of 1997, SprintCom entered into procurementand services contracts with Motorola and Nortel, respectively, for equipment,software and certain engineering services. These contracts provide for aninitial term of five years with renewals for additional one-year periods.Pricing for the initial equipment, software and engineering services has beenestablished in the procurement contracts. The procurement contracts providefor payment terms based on delivery dates and various acceptance milestones.In the event of delay in delivering equipment or services, the procurementcontracts provide for certain amounts to be paid to SprintCom by the vendor.The minimum commitments for the initial term are approximately $300 millionand $200 million for Motorola and Nortel, respectively, for PCS CDMA 1900 MHzequipment and software.
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Sprint and the Cable Parents have agreed to loan up to $400 million, basedon respective ownership interests, to fund the capital requirements of SprintSpectrum Holdings from the date of the signing of the Restructuring Agreementthrough the closing date of the PCS Restructuring. The PhillieCo Partners haveagreed to lend up to $50 million to PhillieCo to fund operating and workingcapital requirements and capital expenditures prior to closing. Sprint hasalso agreed to loan up to $110.6 million to fund SprintCom's capitalrequirements during the same period. Sprint has been financing SprintCom withcash from operations, commercial paper borrowings and leases on specificequipment. Sprint intends to continue to fund the buildout of the SprintCommarkets through the closing of this transaction. The above mentioned loans toSprint Spectrum Holdings and SprintCom totaling $510.6 million, may be repaidfrom the proceeds of an anticipated IPO, but only to the extent the netproceeds of the IPO exceed $500 million. It is Sprint's intent to complete theIPO concurrently with the PCS Restructuring.
F-70
PCS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
There can be no assurance that the IPO will occur. In the event the loansremain outstanding after the IPO, the remaining balance will be converted into10-year preferred stock convertible into PCS Stock (or, in the case or Sprint,a preferred inter-group interest.)
Operating Leases
Minimum rental commitments at December 31, 1997 for all non-cancelableoperating leases, consisting mainly of leases for cell and switch sites andoffice space, are as follows (in millions):
1998................................................................ $18.9
1999................................................................ 13.3
2000................................................................ 13.4
2001................................................................ 13.4
2002................................................................ 8.0
Thereafter.......................................................... 5.1
Gross rental expense aggregated $4 million for the year ended December 31,1997. Certain cell and switch site leases contain renewal options (generallyfor terms of five years) that may be exercised from time to time and areexcluded from the above amounts.
7. ADDITIONAL FINANCIAL INFORMATION
Return to Contents
Related Party Transactions
Sprint Spectrum L.P. provides general management, engineering, procurement,accounting and other related services to SprintCom. Sprint Spectrum L.P. iscurrently building out the network infrastructure in certain BTA markets whereSprintCom was awarded licenses. For the year ended December 31, 1997, SprintSpectrum L.P. provided $29 million in services to SprintCom, the majority ofwhich are capitalized as property, plant and equipment within the CombinedBalance Sheets of the PCS Group.
Certain members of the FON Group provide management, printing/mailing andwarehousing services to the PCS Group. Charges to the PCS Group for suchservices totaled $17 million, $12 million, and $3 million, for the years endedDecember 31, 1997, 1996 and 1995, respectively.
8. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issuedStatement of Financial Accounting Standards ("SFAS") No. 131, "Disclosuresabout Segments of an Enterprise and Related Information." This new
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SPRINT CAPITAL CORP; 424B5
standardrequires companies to disclose segment data based on how management makesdecisions about allocating resources to segments and how it measures segmentperformance. SFAS 131 requires companies to disclose a measure of segmentprofit or loss (operating income, for example), segment assets, andreconciliations to consolidated totals. It also requires entity-widedisclosures about a company's products and services, its major customers andthe material countries in which it holds assets and reports revenues. Sprintwill adopt SFAS 131 in its December 31, 1998 financial statements. Thisstatement is not expected to have a significant effect on the PCS Group, as itonly operates within one segment under the new standard.
9. SUBSEQUENT EVENTS (UNAUDITED)
Subsequent to December 31, 1997, SprintCom entered into leveraged leasearrangements for certain telecommunications equipment. The leveraged leasesare accounted for as capital leases. Lease obligations of $438 million havebeen recorded under these arrangements as of September 30, 1998. The PCS Grouphas also increased its construction obligations by $429 million since December31, 1997.
In October 1998, Sprint filed a shelf registration statement with the SECfor $8.0 billion of debt securities. This replaced $1.0 billion of Sprint'sprevious shelf registration statements totaling $1.1 billion. Sprint currentlyexpects to offer up to $3 billion under the new shelf at approximately thesame time as the PCS Restructuring.
F-71
PCS GROUP
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statementsare presented to give effect to (1) the PCS Restructuring, whereby Sprint willacquire the joint venture interests of the Cable Parents in Sprint SpectrumHoldings and the joint venture interests of TCI and Cox in PhillieCo, inexchange for shares of Series 2 PCS Stock, and the exercise of equity purchaserights by FT and DT in connection with the PCS Restructuring and (2) the tax-free Recapitalization of Sprint's common stock to be effected by reclassifyingeach share of Sprint's Existing Common Stock into 1/2 share of Series 1 PCSStock and one share of Series 1 FON Stock and by reclassifying each share ofClass A common stock so that each share represents an equity interest in theFON Group and an equity interest in the PCS Group, together with a right tocause Sprint to initially issue one share of Series 3 FON Stock and 1/2 shareof Series 3 PCS Stock. The acquisitions of the Cable Parents' interests inSprint Spectrum Holdings and PhillieCo will be accounted for using thepurchase method of accounting. The pro forma condensed combined financialstatements included herein do not give effect to the Notes offering or the IPOof Series 1 PCS Stock.
The unaudited pro forma condensed combined statements of operations includethe historical results of the PCS Group and the historical combined results ofSprint Spectrum Holdings and PhillieCo for the year ended December 31, 1997and the nine months ended September 30, 1998, and include the effect of thePCS Restructuring, the exercise of equity purchase rights by FT and DT inconnection with the PCS Restructuring and the Recapitalization as though suchtransactions had occurred on January 1, 1997. The unaudited pro formacondensed combined balance sheet is based upon the historical balance sheet ofthe PCS Group and the historical combined balance sheet of Sprint SpectrumHoldings and PhillieCo as of September 30, 1998. The historical balance sheetamounts have been adjusted to reflect the PCS Restructuring, the exercise ofequity purchase rights by FT and DT in connection with the PCS Restructuringand the Recapitalization as though such transactions had occurred on September30, 1998. The historical PCS Group amounts include Sprint's investment inSprint Spectrum Holdings and its investment in PhillieCo, both of which arereflected on the equity basis, and SprintCom.
The pro forma condensed combined statements of operations are notnecessarily indicative of what actual results of operations would have beenhad the transactions occurred at the beginning of the periods presented nor dothey purport to indicate the results of future operations. The unaudited proforma condensed combined financial statements should be read in conjunctionwith the historical financial statements of the PCS Group and the
Page 126 of 189
SPRINT CAPITAL CORP; 424B5
historicalcombined financial statements of Sprint Spectrum Holdings and PhillieCoincluded elsewhere in this Prospectus Supplement.
F-72
PCS GROUP
PRO FORMA CONDENSED COMBINED BALANCE SHEET
SEPTEMBER 30, 1998
(Unaudited, in millions)
PRO FORMA ADJUSTMENTS
-------------------------------
HISTORICAL
COMBINED
SPRINT
SPECTRUM
HISTORICAL HOLDINGS AND PCS
PCS GROUP PHILLIECO RESTRUCTURING RECAPITALIZATION PRO FORMA
---------- ------------ ------------- ---------------- ---------
ASSETS
Current assets
Cash and equivalents...... $ -- $ 325.3 $ 325.3
Accounts receivable, net.. -- 195.3 $ (47.1) C 148.2
Inventories............... -- 177.8 177.8
Other..................... 32.8 44.1 76.9
-------- -------- -------- ---------
Total current assets...... 32.8 742.5 (47.1) 728.2
Property, plant and
equipment, net............ 1,327.2 4,531.9 5,859.1
Investments in Sprint
Spectrum Holdings and
PhillieCo ................ 475.4 -- (293.4) B --
(182.0) B
Intangibles, net
PCS licenses.............. 544.5 2,829.1 3,373.6
Customer base............. -- -- 500.0 A 500.0
Goodwill.................. -- -- 3,127.6 A 3,127.6
Other assets............... 114.3 422.9 182.0 B 717.2
(2.0) F
-------- -------- -------- ------- ---------
Total...................... $2,494.2 $8,526.4 $3,285.1 $ -- $14,305.7
======== ======== ======== ======= =========
LIABILITIES AND
GROUP EQUITY
Current liabilities
Current maturities of
long-term debt........... $ 42.5 $ 124.5 $ 167.0
Partner advances.......... -- 185.0 185.0
Accounts payable.......... 20.2 287.1 307.3
Advance from the FON
Group.................... 410.0 -- $ (110.6) E 299.4
Payable to Sprint Spectrum
Holdings................. 47.1 -- (47.1) C --
Accrued expenses and other
current liabilities...... 7.3 476.4 483.7
-------- -------- -------- ---------
Page 127 of 189
SPRINT CAPITAL CORP; 424B5
Total current liabilities. 527.1 1,073.0 (157.7) 1,442.4
Construction obligations... 429.0 575.7 1,004.7
Long-term debt............. 388.2 6,001.2 60.5 A 6,367.6
(82.3) D
Deferred income taxes and
other liabilities......... 318.9 84.9 443.0 A 846.8
Limited partner interest in
consolidated subsidiary .. -- 65.8 65.8
Group equity............... 831.0 725.8 3,124.1 A 4,578.4
(293.4) B
82.3 D
510.6 E
(400.0) E
(2.0) F
-------- -------- -------- ------- ---------
Total...................... $2,494.2 $8,526.4 $3,285.1 $ -- $14,305.7
======== ======== ======== ======= =========
See accompanying Notes to Unaudited Pro Forma Condensed Combined FinancialStatements.
F-73
PCS GROUP
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(Unaudited, in millions, except per share data)
HISTORICAL
COMBINED
SPRINT PRO FORMA ADJUSTMENTS
SPECTRUM ------------------------------
HISTORICAL HOLDINGS AND PCS
PCS GROUP PHILLIECO RESTRUCTURING RECAPITALIZATION PRO FORMA
---------- ------------ ------------- ---------------- ---------
NET OPERATING REVENUES.. $ -- $ 787.9 $ 787.9
OPERATING EXPENSES
Costs of services and
products............... -- 783.0 783.0
Selling, general and
administrative......... 78.2 931.6 1,009.8
Depreciation and
amortization........... 1.8 529.2 $ 5.2 G 719.8
58.6 H
125.0 I
------- --------- ------- ---------
Total operating ex-
penses................. 80.0 2,243.8 188.8 2,512.6
------- --------- ------- ---------
OPERATING LOSS.......... (80.0) (1,455.9) (188.8) (1,724.7)
Interest expense........ -- (358.3) 5.1 J (288.3)
60.1 K
4.8 L
Equity in loss of Sprint
Spectrum Holdings and
PhillieCo.............. (686.5) -- 681.3 G --
5.2 G
Other income............ -- 23.2 23.2
Page 128 of 189
SPRINT CAPITAL CORP; 424B5
Minority interest ...... -- 99.0 99.0
------- --------- ------- ---------
Loss before income
taxes.................. (766.5) (1,692.0) 567.7 (1,890.8)
Income tax benefit...... 294.7 -- 399.0 M 715.3
21.6 N
------- --------- ------- ---------
NET LOSS................ (471.8) (1,692.0) 988.3 (1,175.5)
Preferred stock divi-
dends.................. -- -- (11.5)O (11.5)
------- --------- ------- ---------
Loss applicable to com-
mon stock.............. $(471.8) $(1,692.0) $ 976.8 $(1,187.0)
======= ========= ======= =========
BASIC AND DILUTED LOSS
PER
COMMON SHARE........... $ (2.86)
=========
Weighted average common
shares................. 415.4 P
=========
See accompanying Notes to Unaudited Pro Forma Condensed Combined FinancialStatements.
F-74
PCS GROUP
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(Unaudited, in millions, except per share data)
PRO FORMA ADJUSTMENTS
------------------------------
HISTORICAL
COMBINED
SPRINT
SPECTRUM
HISTORICAL HOLDINGS AND PCS
PCS GROUP PHILLIECO RESTRUCTURING RECAPITALIZATION PRO FORMA
---------- ------------ ------------- ---------------- ---------
NET OPERATING REVENUES.. $ -- $ 258.0 $ 258.0
OPERATING EXPENSES
Costs of services and
products............... -- 574.3 574.3
Selling, general and ad-
ministrative........... 18.5 747.1 765.6
Depreciation and amorti-
zation................. -- 316.3 $ 3.5 G 564.7
78.2 H
166.7 I
------- --------- ------ ---------
Total operating ex-
penses................. 18.5 1,637.7 248.4 1,904.6
------- --------- ------ ---------
OPERATING LOSS.......... (18.5) (1,379.7) (248.4) (1,646.6)
Interest expense........ -- (123.5) 7.5 J (88.6)
21.0 K
6.4 L
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SPRINT CAPITAL CORP; 424B5
Equity in loss of Sprint
Spectrum Holdings and
PhillieCo.............. (659.6) -- 656.1 G --
3.5 G
Equity in loss of
unconsolidated
partnership............ -- (168.9) (168.9)
Other income............ -- 39.4 39.4
------- --------- ------ ---------
Loss before income tax-
es..................... (678.1) (1,632.7) 446.1 (1,864.7)
Income tax benefit...... 259.0 -- 383.1 M 693.9
51.8 N
------- --------- ------ ---------
NET LOSS................ (419.1) (1,632.7) 881.0 (1,170.8)
Preferred stock divi-
dends.................. -- -- (15.3)O (15.3)
------- --------- ------ --- ---------
Loss applicable to com-
mon stock.............. $(419.1) $(1,632.7) $865.7 $(1,186.1)
======= ========= ====== === =========
BASIC AND DILUTED LOSS
PER COMMON SHARE....... $ (2.86)
=========
Weighted average common
shares................. 415.1 P
=========
See accompanying Notes to Unaudited Pro Forma Condensed Combined FinancialStatements.
F-75
PCS GROUP
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following adjustments have been made in the preparation of the unauditedpro forma condensed combined financial statements:
Pro Forma Balance Sheet Adjustments
A To record the purchase of the remaining 60% of Sprint Spectrum Holdings and52.9% of PhillieCo. The consideration given in connection with the purchasewill be shares of Series 2 PCS Stock and warrants to purchase additionalshares of Series 2 PCS Stock. The preliminary purchase price is based onthe estimated market value of the PCS Group and will be updated at the timeof the PCS Restructuring. The market value of the PCS Group will bedetermined based on the market value of the securities issued in theRecapitalization. The excess of the purchase price over the fair value ofnet assets to be acquired has been preliminarily calculated as follows (inmillions):
Preliminary purchase price..................................... $3,290.0
Transaction costs.............................................. 26.5
Net assets to be acquired...................................... (192.4)
Customer base.................................................. (500.0)
Step-up in long-term debt to fair value........................ 60.5
Deferred taxes on acquired assets and liabilities.............. 443.0
--------
Goodwill....................................................... $3,127.6
========
The carrying amounts of the assets to be acquired and liabilities to beassumed are assumed for purposes of the preliminary purchase priceallocation to approximate fair market value, except for certain long-termdebt of Sprint
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SPRINT CAPITAL CORP; 424B5
Spectrum that has been recorded at fair value. A portion ofthe purchase price was attributed to the customers acquired in the SprintSpectrum Holdings and PhillieCo acquisitions. In addition, deferred taxeshave been recorded for the difference in the book and tax bases of theassets acquired and liabilities assumed. Cash to fund the transaction costswill be contributed by the FON Group to the PCS Group. The aboveassumptions as to the fair value of the net assets acquired are based uponinformation available at the time of the preparation of these pro formacondensed combined financial statements.
A final allocation of the purchase price to the assets acquired andliabilities assumed is dependent on a study and analysis of the fair valueof such assets and liabilities, including such items as the PCS licensesand in-process research and development projects, as well as the size ofthe customer base at the closing date. Management expects the onlyassumptions that could potentially be subject to material change are thoseregarding customer base and in-process research and development. The amountof the purchase price allocated to the customer base in the pro formacondensed combined financial statements is based on the size of thecustomer base at September 30, 1998. To the extent the customer base at theclosing date exceeds the size of the customer base at September 30, 1998,the purchase price allocated to the customer base will likely increasealong with a corresponding increase in the amortization of the customerbase. Based on current projections of an increase in the customer base atNovember 30, 1998, pro forma net loss for the nine months ended September30, 1998 and the year ended December 31, 1997 would be $1,187.2 million and$1,186.5 million, respectively, and the respective loss per share would be$2.89 and $2.90 for the same periods. Sprint is undertaking an analysis todetermine whether in-process research and development projects acquired inthe PCS Restructuring should be capitalized or expensed. This analysis isexpected to be finalized prior to the completion of the final purchaseprice allocation. To the extent that it is determined through this analysisthat some of the in-process research and development projects should beexpensed, a portion of the purchase price will be allocated to these in-process research and development projects and a nonrecurring, noncashcharge will be recognized in the period in which the charge occurs. Sprintis unable
F-76
PCS GROUP
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
to determine the potential amount of such a charge at this time. However,such a charge could be material to the PCS Group's results of operationsfor the period in which the charge occurs. Such a write-off would reducethe amount of purchase price allocated to goodwill, which would result inlower amortization expense being recognized over the life assigned to thegoodwill. Such a write-off would not impact future cash flows. At thepresent time, Sprint anticipates completing its final purchase priceallocation prior to year-end 1998.
B To eliminate the PCS Group's historical investment in Sprint SpectrumHoldings and PhillieCo, accounted for by the PCS Group on the equity methodof accounting ($293.4 million), and to reclassify interest capitalized aspart of that investment to other assets ($182.0 million).
C To eliminate the PCS Group's payable to Sprint Spectrum Holdings.
D To record the exercise of equity purchase rights by FT and DT. As a resultof the issuance of Series 2 PCS Stock to the Cable Parents in exchange fortheir interests in Sprint Spectrum Holdings and PhillieCo, the sale ofthese additional shares is required in order for FT and DT to maintaintheir combined 20% voting interest in Sprint. The proceeds are assumed toreduce the long-term debt of Sprint Spectrum Holdings.
E To reflect PCS Preferred Stock ($240.0 million) and Preferred Inter-GroupInterest ($270.6 million) issued to the Cable Parents and the FON Group,respectively, in exchange for funding provided between the date of theRestructuring Agreement (May 26, 1998) and September 30, 1998. See "TheTracking Stock Proposal--Funding
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SPRINT CAPITAL CORP; 424B5
of the PCS Group Prior to Closing; The PCSPreferred Stock" in the Proxy Statement/Prospectus incorporated byreference into the accompanying Prospectus.
F To write off deferred financing costs associated with the assumed repaymentof Sprint Spectrum Holdings debt with proceeds from the exercise of equitypurchase rights by FT and DT in connection with the PCS Restructuring.
Pro Forma Statement of Operations Adjustments
G To eliminate Sprint's equity in the losses of Sprint Spectrum Holdings andPhillieCo, historically accounted for by the PCS Group on the equity methodof accounting ($681.3 million for the nine months ended September 30, 1998and $656.1 million for the year ended December 31, 1997). The amortizationof interest previously capitalized on the investment in Sprint SpectrumHoldings and PhillieCo has been reclassified to depreciation andamortization expense ($5.2 million for the nine months ended September 30,1998 and $3.5 million for the year ended December 31, 1997).
H To reflect the amortization of the goodwill recorded in connection with thepurchase of the remaining interests in Sprint Spectrum Holdings andPhillieCo, which is being amortized over 40 years. The goodwill associatedwith the acquisition of the remaining interests in Sprint Spectrum Holdingsand PhillieCo is directly related to both the acquisition of the PCSlicenses and the ongoing ability of the businesses to provide wirelesstelecommunications services using these licenses. The 40-year life forgoodwill is consistent with the 40-year amortization period being used forthe PCS licenses.
I To reflect the amortization of the customer base recorded in connectionwith the purchase of the remaining interests in Sprint Spectrum Holdingsand PhillieCo, which is being amortized over three years.
J To record a reduction in interest expense and amortization of deferredfinancing costs as a result of the assumed repayment of Sprint SpectrumHoldings debt with the proceeds from the exercise of equity purchase rightsby FT and DT in connection with the PCS Restructuring. The APC seniorsecured facilities, which had weighted-average interest rates of 7.89% forthe nine months ended September 30, 1998 and 8.70% for the year endedDecember 31, 1997, are assumed to be repaid with these proceeds.
F-77
PCS GROUP
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
K To reduce interest expense resulting from the tax sharing agreement betweenthe PCS Group and the FON Group. Under this agreement, the FON Group will"pay" the PCS Group for the use of its current tax benefits that the FONGroup is able to utilize, thereby providing funds to the PCS Group andreducing the PCS Group's required borrowings. The computation of thecurrent tax benefit is performed on a quarterly basis and the resultingamount is applied to reduce the debt balance and, therefore, interestexpense, from that date forward. Interest expense is computed using theweighted-average interest rate on the debt assumed to be repaid, or notincurred, as appropriate. Such debt would have amounted to $1,271.3 millionand $727.3 million as of September 30, 1998 and December 31, 1997,respectively.
L To reflect the amortization of the purchase price adjustment related tolong-term debt (see Note A).
M To record the income tax benefit, using the statutory income tax rate,relating to the consolidation of the remaining interests in Sprint SpectrumHoldings and PhillieCo.
N To record the impact on income taxes of pro forma adjustments I through Lusing the statutory income tax rate.
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SPRINT CAPITAL CORP; 424B5
O To reflect dividends at an assumed annual rate of 3% on PCS Preferred Stockand Preferred Inter-Group Interest issued to the Cable Parents and the FONGroup, respectively. As of September 30, 1998, $510.6 million of funding bythe Cable Parents and the FON Group between the date of the RestructuringAgreement (May 26, 1998) and September 30, 1998 was assumed to be exchangedfor shares of PCS Preferred Stock or Preferred Inter-Group Interest. For adiscussion of how the actual dividend rate will be determined, see"Description of Capital Stock-- Description of PCS Preferred Stock;Preferred Inter-Group Interest" in the Proxy Statement/Prospectusincorporated by reference into the accompanying Prospectus.
P The weighted average common shares outstanding reflect (1) the issuance ofSeries 2 PCS Stock to the Cable Parents in the PCS Restructuring (195.1million shares), (2) the Recapitalization of Sprint's Existing Common Stockinto 1/2 share of Series 1 PCS Stock, including the PCS Stock attributes ofthe Class A common stock (215.4 million shares for the nine months endedSeptember 30, 1998 and 215.1 million shares for the year ended December 31,1997) and (3) the exercise of equity purchase rights by FT and DT inconnection with the PCS Restructuring (4.9 million shares).
F-78
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INDEPENDENT AUDITORS' REPORT
Partners of Sprint Spectrum Holding Company, L.P., MinorCo, L.P., PhillieCoPartners I, L.P. and PhillieCo
Partners II, L.P.
Kansas City, Missouri
We have audited the accompanying combined balance sheets of Sprint SpectrumHolding Company, L.P. and subsidiaries, MinorCo, L.P. and subsidiaries,PhillieCo Partners I, L.P. and subsidiaries, and PhillieCo Partners II, L.P.and subsidiaries (the "Partnerships") as of December 31, 1997 and 1996, andthe related combined statements of operations, changes in partners' capital,and cash flows for the three years in the period ended December 31, 1997.These financial statements are the responsibility of the Partnerships'management. Our responsibility is to express an opinion on these combinedfinancial statements based on our audits.
We conducted our audits in accordance with generally accepted auditingstandards. Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.
In our opinion, such combined financial statements present fairly, in allmaterial respects, the financial position of the Partnerships at December 31,1997 and 1996, and the results of their operations and their cash flows forthe three years in the period ended December 31, 1997, in conformity withgenerally accepted accounting principles.
The Partnerships were in the development stage at December 31, 1996; duringthe year ended December 31, 1997, the Partnerships completed their developmentactivities and commenced their planned principal operations.
Deloitte & Touche LLP
Kansas City, Missouri
May 26, 1998
(August 6, 1998 as to Note 4)
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SPRINT CAPITAL CORP; 424B5
F-79
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SPRINT SPECTRUM HOLDING COMPANY COMBINED WITH MINORCO AND PHILLIECO
COMBINED BALANCE SHEETS
(in thousands)
SEPTEMBER 30, DECEMBER 31,
------------- -----------------------
1998 1997 1996
------------- ----------- ----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............. $ 325,325 $ 124,886 $ 71,098
Accounts receivable, net............... 165,508 116,415 3,315
Receivable from affiliates............. 29,754 43,006 13,375
Inventory.............................. 177,859 103,894 72,414
Prepaid expenses and other assets, net. 44,077 29,648 14,951
Note receivable--unconsolidated
partnership........................... -- -- 226,670
----------- ----------- ----------
Total current assets.................. 742,523 417,849 401,823
INVESTMENT IN PCS LICENSES, net......... 2,829,087 2,386,799 2,207,903
INVESTMENTS IN UNCONSOLIDATED
PARTNERSHIP(S)......................... -- 273,541 179,086
PROPERTY, PLANT AND EQUIPMENT, net...... 4,531,850 3,538,238 1,441,627
MICROWAVE RELOCATION COSTS, net......... 325,602 271,612 135,802
MINORITY INTEREST....................... -- 56,667 --
OTHER ASSETS, net....................... 97,310 113,153 77,403
----------- ----------- ----------
TOTAL ASSETS............................ $ 8,526,372 $ 7,057,859 $4,443,644
=========== =========== ==========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Advances from partners................. $ 185,000 $ 45,000 $ 167,819
Accounts payable....................... 287,082 446,263 214,205
Payable to affiliate................... 1,648 11,933 5,626
Accrued interest....................... 95,132 59,605 34,057
Accrued expenses....................... 379,638 237,123 49,482
Current maturities of long-term debt... 124,491 34,562 49
----------- ----------- ----------
Total current liabilities............. 1,072,991 834,486 471,238
CONSTRUCTION OBLIGATIONS................ 575,725 705,280 714,934
LONG-TERM DEBT, net..................... 6,001,217 3,533,954 686,192
OTHER NONCURRENT LIABILITIES............ 84,835 50,103 11,356
COMMITMENTS AND CONTINGENCIES
LIMITED PARTNER INTEREST IN CONSOLIDATED
SUBSIDIARY............................. 65,777 -- --
PARTNERS' CAPITAL AND ACCUMULATED
DEFICIT:
Partners' capital...................... 4,611,025 4,127,244 3,120,479
Accumulated deficit.................... (3,885,198) (2,193,208) (560,555)
----------- ----------- ----------
Total partners' capital............... 725,827 1,934,036 2,559,924
----------- ----------- ----------
TOTAL LIABILITIES AND PARTNERS' CAPITAL. $ 8,526,372 $ 7,057,859 $4,443,644
=========== =========== ==========
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SPRINT CAPITAL CORP; 424B5
See notes to combined financial statements.
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SPRINT SPECTRUM HOLDING COMPANY COMBINED WITH MINORCO AND PHILLIECO
COMBINED STATEMENTS OF OPERATIONS
(in thousands)
NINE MONTHS YEAR ENDED
ENDED SEPTEMBER 30, DECEMBER 31,
------------------------ ---------------------------------
1998 1997 1997 1996 1995
----------- ----------- ----------- --------- ---------
(UNAUDITED)
OPERATING REVENUES...... $ 787,953 $ 110,528 $ 258,029 $ 4,175 $ --
OPERATING EXPENSES:
Cost of revenues........ 783,023 308,292 574,343 36,824 --
Selling, general and
administrative......... 931,606 481,290 747,084 313,629 66,719
Depreciation and
amortization........... 529,166 189,924 316,276 11,297 211
----------- ----------- ----------- --------- ---------
Total operating
expenses............ 2,243,795 979,506 1,637,703 361,750 66,930
----------- ----------- ----------- --------- ---------
LOSS FROM OPERATIONS.... (1,455,842) (868,978) (1,379,674) (357,575) (66,930)
OTHER INCOME (EXPENSE):
Interest income........ 24,467 24,636 27,817 8,593 476
Interest expense....... (358,321) (55,568) (123,490) (323) --
Other income (expense). (1,268) 3,907 5,108 1,586 (19)
Equity in loss of
unconsolidated
partnerships.......... -- (125,455) (168,935) (96,850) (46,206)
----------- ----------- ----------- --------- ---------
Total other expense.. (335,122) (152,480) (259,500) (86,994) (45,749)
----------- ----------- ----------- --------- ---------
NET LOSS BEFORE MINORITY
INTEREST............... (1,790,964) (1,021,458) (1,639,174) (444,569) (112,679)
MINORITY INTEREST....... 98,974 -- 6,521 -- --
----------- ----------- ----------- --------- ---------
NET LOSS................ $(1,691,990) $(1,021,458) $(1,632,653) $(444,569) $(112,679)
=========== =========== =========== ========= =========
See notes to combined financial statements.
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SPRINT SPECTRUM HOLDING COMPANY COMBINED WITH MINORCO AND PHILLIECO
COMBINED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(in thousands)
NINE MONTHS YEAR ENDED
ENDED SEPTEMBER 30, DECEMBER 31,
---------------------- ----------------------------------
Page 135 of 189
SPRINT CAPITAL CORP; 424B5
1998 1997 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
PARTNERS' CAPITAL:
Balance at beginning of
period................. $4,127,244 $3,120,479 $3,120,479 $2,391,801 $ 128,795
Contributions of
capital................ 483,781 648,728 1,018,500 728,678 2,263,006
Return of capital....... -- (11,735) (11,735) -- --
---------- ---------- ---------- ---------- ----------
Balance at end of
period................. 4,611,025 3,757,472 4,127,244 3,120,479 2,391,801
ACCUMULATED DEFICIT:
Balance at beginning of
period................. (2,193,208) (560,555) (560,555) (115,986) (3,307)
Net loss................ (1,691,990) (1,021,458) (1,632,653) (444,569) (112,679)
---------- ---------- ---------- ---------- ----------
Balance at end of
period................. (3,885,198) (1,582,013) (2,193,208) (560,555) (115,986)
---------- ---------- ---------- ---------- ----------
TOTAL PARTNERS' CAPITAL. $ 725,827 $2,175,459 $1,934,036 $2,559,924 $2,275,815
========== ========== ========== ========== ==========
See notes to combined financial statements.
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SPRINT SPECTRUM HOLDING COMPANY COMBINED WITH MINORCO AND PHILLIECO
COMBINED STATEMENTS OF CASH FLOWS
(in thousands)
NINE MONTHS YEAR ENDED
ENDED SEPTEMBER 30, DECEMBER 31,
------------------------ -----------------------------------
1998 1997 1997 1996 1995
----------- ----------- ----------- ---------- ----------
(UNAUDITED)
CASH FLOWS FROM OPERAT-
ING ACTIVITIES:
Net loss............... $(1,691,990) $(1,021,458) $(1,632,653) $ (444,569) $ (112,679)
Adjustments to recon-
cile net loss to net
cash provided by
(used in) operating
activities:
Equity in loss of
unconsolidated
partnership prior to
acquisition........... -- 125,455 168,935 96,850 46,206
Minority interest...... (98,974) -- (6,521) -- --
Loss on disposition of
non-network
equipment............. 2,161 -- -- -- --
Depreciation and
amortization.......... 529,166 189,924 316,854 11,278 242
Amortization of debt
discount and issuance
costs................. 40,694 35,328 49,061 14,008 --
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SPRINT CAPITAL CORP; 424B5
Changes in assets and
liabilities, net of
effects of
acquisition of APC:
Receivables.......... (7,004) (83,003) (132,026) (16,350) (147)
Inventory............ (64,293) (9,374) (27,398) (72,413) --
Prepaid expenses and
other assets........ (1,120) (10,130) (12,965) (22,513) (178)
Accounts payable and
accrued expenses.... (44,798) 153,182 389,740 251,791 47,836
Other noncurrent
liabilities......... 34,733 13,652 38,747 9,500 1,856
----------- ----------- ----------- ---------- ----------
Net cash used in
operating
activities......... (1,301,425) (606,424) (848,226) (172,418) (16,864)
CASH FLOWS FROM
INVESTING ACTIVITIES:
Capital expenditures... (1,107,684) (1,632,828) (2,124,556) (1,419,216) (31,806)
Microwave relocation
costs, net............ (45,254) (104,411) (123,816) (135,828) --
Purchase of PCS
licenses.............. -- -- -- -- (2,085,794)
Purchase of APC, net of
cash acquired......... (28,906) -- (6,764) -- --
Purchase of Cox PCS,
net of cash acquired.. (28,300) -- -- -- --
Investment in
unconsolidated
partnerships.......... -- (112,695) (191,171) (190,390) (131,752)
Loan to unconsolidated
partnership........... -- (81,114) (111,468) (231,964) (655)
Payment received on
loan to unconsolidated
partnership........... -- 246,670 246,670 5,949 --
----------- ----------- ----------- ---------- ----------
Net cash used in
investing
activities......... (1,210,144) (1,684,378) (2,311,105) (1,971,449) (2,250,007)
CASH FLOWS FROM
FINANCING ACTIVITIES:
Advances from partners. 140,000 45,000 45,000 167,819 --
Net borrowing under
revolving credit
agreement............. 1,018,571 370,000 605,000 -- --
Proceeds from issuance
of long-term debt..... 1,314,242 1,327,553 1,763,045 674,200 --
Change in construction
obligations........... (183,193) 176,383 (9,654) 714,934 --
Payments on long-term
debt.................. (61,393) (169,308) (170,809) (24) --
Debt issuance costs.... -- (20,000) (20,000) (71,791) --
Partner capital
contributions......... 483,781 642,499 1,012,272 728,678 2,263,006
Return of capital...... -- (11,735) (11,735) -- --
----------- ----------- ----------- ---------- ----------
Net cash provided by
financing
activities......... 2,712,008 2,360,392 3,213,119 2,213,816 2,263,006
----------- ----------- ----------- ---------- ----------
INCREASE (DECREASE) IN
CASH AND CASH
Page 137 of 189
SPRINT CAPITAL CORP; 424B5
EQUIVALENTS............ 200,439 69,590 53,788 69,949 (3,865)
CASH AND CASH
EQUIVALENTS, beginning
of period.............. 124,886 71,098 71,098 1,149 5,014
----------- ----------- ----------- ---------- ----------
CASH AND CASH
EQUIVALENTS, end of
period................. $ 325,325 $ 140,688 $ 124,886 $ 71,098 $ 1,149
=========== =========== =========== ========== ==========
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION:
. Interest paid, net
of amount capital-
ized................ $ 169,115 $ 12,226 $ 35,629 $ 323 $ --
NON-CASH INVESTING AND
FINANCING ACTIVITIES:
. Accrued interest of
$139,000 and $51,673
related to vendor
financing was con-
verted to long-term
debt during the nine
months ended Septem-
ber 30, 1998 and the
year ended December
31, 1997, respec-
tively.
. A PCS license cover-
ing the Omaha MTA
and valued at $6,229
was contributed to
the Company by Cox
Communications dur-
ing the nine months
ended September 30,
1997 and the year
ended December 31,
1997.
See notes to combined financial statements.
F-83
SPRINT SPECTRUM HOLDING COMPANY COMBINED WITH MINORCO AND PHILLIECO
NOTES TO COMBINED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1998)
1. ORGANIZATION
The accompanying combined financial statements present a combination of theconsolidated financial statements of Sprint Spectrum Holding Company, L.P. andsubsidiaries, MinorCo, L.P. and subsidiaries, PhillieCo Partners I, L.P. andsubsidiaries and PhillieCo Partners II, L.P. and subsidiaries (collectively,the "Company" or the "Partnerships") which offer services as Sprint PCS.
The unaudited interim financial information presented has been preparedaccording to generally accepted accounting principles and the rules andregulations of the Securities and Exchange Commission for interim reporting.In management's opinion, the information presented reflects all adjustments(consisting only of normal
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SPRINT CAPITAL CORP; 424B5
recurring accruals) necessary to present fairly theinterim financial position, results of operations and cash flows of theCompany.
SPRINT SPECTRUM HOLDING COMPANY, L.P.--Sprint Spectrum Holding Company, L.P.("Holdings") is a limited partnership formed in Delaware on March 28, 1995, bySprint Enterprises, L.P., TCI Spectrum Holdings, Inc., Cox TelephonyPartnership and Comcast Telephony Services (together the "Partners"). Holdingswas formed pursuant to a reorganization of the operations of an existingpartnership, WirelessCo, L.P. ("WirelessCo") which transferred certainoperating functions to Holdings. The Partners are subsidiaries of SprintCorporation ("Sprint"), Tele- Communications, Inc. ("TCI"), Cox Communications,Inc. ("Cox"), and Comcast Corporation ("Comcast", and together with Sprint,TCI and Cox, the "Parents"), respectively.
The Partners of Holdings and MinorCo, L.P. have the following ownershipinterests as of December 31, 1997, and 1996 and September 30, 1998:
Sprint Enterprises, L.P.............................................. 40%
TCI Spectrum Holdings, Inc........................................... 30%
Cox Telephony Partnership............................................ 15%
Comcast Telephony Services........................................... 15%
Each Partner's ownership interest consists of a 99% general partner interestand a 1% limited partnership interest.
Holdings is the 99% general partner of, and is consolidated with, itssubsidiaries, including NewTelco, L.P. ("NewTelco") and Sprint Spectrum L.P.,which, in turn, has several subsidiaries. Sprint Spectrum L.P.'s subsidiariesare Sprint Spectrum Equipment Company, L.P. ("EquipmentCo"), Sprint SpectrumRealty Company, L.P. ("RealtyCo"), Sprint Spectrum Finance Corporation("FinCo"), and WirelessCo. On May 15, 1996, EquipmentCo was formed to lease orown wireless communication network equipment, and RealtyCo was formed to leaseor own real property on which wireless communication facilities are to belocated. FinCo was formed on May 20, 1996 to be a co-obligor of the debtobligations discussed in Note 5.
The results of American PCS, L.P. ("APC") are consolidated from November1997, the date the Federal Communications Commission ("FCC") approved Holdingsas the new managing partner (Note 4). APC, through subsidiaries, owns a PCSlicense for and operates a broadband GSM (global system for mobilecommunications) in the Washington D.C./Baltimore Major Trading Area ("MTA"),and has launched a code division multiple access ("CDMA") overlay for nearlyall of its existing GSM PCS system. APC includes American PCS Communications,LLC, APC PCS, LLC, APC Realty and Equipment Company, LLC and American PersonalCommunications Holdings, Inc.
As discussed in Note 4, Holdings became the managing partner of CoxCommunications PCS, L.P. ("Cox PCS") in June 1998. Cox PCS results have beenincluded in the combined statements of operations from January 1, 1998. CoxPCS, through subsidiaries, holds a PCS license for and operates a PCS systemin the Los Angeles-San Diego- Las Vegas MTA. Cox PCS includes Cox PCS License,L.L.C., Cox PCS Assets, L.L.C., and PCS Leasing Co., L.P.
F-84
SPRINT SPECTRUM HOLDING COMPANY COMBINED WITH MINORCO AND PHILLIECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1998)
MINORCO, L.P. ("MINORCO")--MinorCo holds the minority ownership interests of1% in NewTelco, Sprint Spectrum L.P., EquipmentCo, RealtyCo and WirelessCo atSeptember 30, 1998, December 31, 1997 and 1996, and APC at September 30, 1998and December 31, 1997.
PHILLIECO PARTNERS--The consolidated financial statements of PhillieCoPartners I, L.P. ("PhillieCo I") and subsidiaries, included in these combinedfinancial statements, include the accounts of PhillieCo I and its consolidatedsubsidiaries, including PhillieCo Sub, L.P. ("PhillieCo Sub") and PhillieCo,L.P ("PhillieCo").
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SPRINT CAPITAL CORP; 424B5
The consolidated financial statements of PhillieCo Partners II, L.P.("PhillieCo II") and subsidiaries, included in these combined financialstatements, include the accounts of PhillieCo II and its minority investmentinterests in PhillieCo Sub, L.P. and PhillieCo, L.P.
PhillieCo Sub was formed by PhillieCo I and PhillieCo II, both of which wereformed by Sprint Enterprises, L.P., TCI Philadelphia Holdings, Inc. and CoxCommunications Wireless, Inc. (together the "PhillieCo Partners"). PhillieCoSub was formed pursuant to a reorganization under which the PhillieCo Partnerstransferred their ownership interests in PhillieCo, which was formed inDelaware on October 24, 1994, to PhillieCo I and PhillieCo II. The PhillieCoPartners are subsidiaries of Sprint, TCI and Cox, respectively.
The PhillieCo Partners have the following ownership interest as of December31, 1997 and 1996 and September 30, 1998:
Sprint Enterprises, L.P............................................ 47.1%
TCI Philadelphia Holdings, Inc..................................... 35.3%
Cox Communications Wireless, Inc................................... 17.6%
Each PhillieCo partner's ownership interest consists of a 99% generalpartner interest and a 1% limited partnership interest.
VENTURE FORMATION AND AFFILIATED PARTNERSHIPS--A Joint Venture FormationAgreement (the "Formation Agreement"), dated as of October 24, 1994, andsubsequently amended as of March 28, 1995, and January 31, 1996, was enteredinto by the Parents, pursuant to which the Parents agreed to form certainentities to (i) provide national wireless telecommunications services,including acquisition and development of PCS licenses, (ii) develop a PCSwireless system in the Los Angeles-San Diego-Las Vegas MTA, and (iii) takecertain other actions.
On October 24, 1994, WirelessCo was formed and on March 28, 1995, additionalpartnerships were formed consisting of Holdings, MinorCo, NewTelco, and SprintSpectrum L.P. The Partners' ownership interests in WirelessCo were initiallyheld directly by the Partners as of October 24, 1994, the formation date ofWirelessCo, but were subsequently contributed to Holdings and then to SprintSpectrum L.P. on March 28, 1995.
SPRINT SPECTRUM HOLDING COMPANY, L.P. PARTNERSHIP AGREEMENT--The Amended and
Restated Agreement of Limited Partnership of MajorCo, L.P. (now known asHoldings), dated as of January 31, 1996 (the "Holdings Agreement"), amongSprint Enterprises, L.P., TCI Spectrum Holdings, Inc., Comcast TelephonyServices and Cox Telephony Partnership provides that the purpose of Holdingsis to engage in wireless communications services.
The Holdings Agreement generally provides for the allocation of profits andlosses according to each Partner's proportionate percentage interest, aftergiving effect to special allocations. After special allocations, profits areallocated to partners to the extent of and in proportion to cumulative netlosses previously allocated. Losses are allocated, after considering specialallocations, according to each Partner's allocation of net profits previouslyallocated.
F-85
SPRINT SPECTRUM HOLDING COMPANY COMBINED WITH MINORCO AND PHILLIECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1998)
The Holdings Agreement provides for planned capital contributions by thePartners ("Total Mandatory Contributions") of $4.2 billion, which includesagreed upon values attributable to the contributions of certain additional PCSlicenses by a Partner. The Total Mandatory Contributions amount is required tobe contributed in
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SPRINT CAPITAL CORP; 424B5
accordance with capital contribution schedules to be setforth in approved annual budgets. The partnership board of Holdings mayrequest capital contributions to be made in the absence of an approved budgetor more quickly than provided for in an approved budget, but always subject tothe Total Mandatory Contributions limit. The proposed budget for fiscal 1998has not yet been approved by the partnership board, which has resulted in theoccurrence of a Deadlock Event (as defined) under the Holdings Agreement as ofJanuary 1, 1998. If the 1998 proposed budget is not approved throughresolution procedures set forth in the Holdings Agreement, certain specifiedbuy/sell procedures may be triggered which may result in a restructuring ofthe partners' interest in Holdings or, in limited circumstances, liquidationof Holdings. See Note 10 for further discussion regarding a restructuring ofthe partnership structure. As of September 30, 1998 and December 31, 1997,approximately $4.2 billion and $4.0 billion, respectively, of the TotalMandatory Contributions had been contributed by the Partners to Holdings andits affiliated partnerships, of which approximately $3.3 billion had beencontributed to Sprint Spectrum L.P.
PHILLIECO PARTNERSHIP AGREEMENT--The Second Amended and Restated Agreementof Limited Partnership of PhillieCo, L.P., (the "PhillieCo Agreement") datedas of March 12, 1997, among PhillieCo Sub and PhillieCo II provides that thepurpose of PhillieCo is to engage in wireless communications services in thePhiladelphia MTA. The PhillieCo Agreement provides for the governance andadministration of partnership business, allocation of profits and losses(including provisions for special and curative allocations), tax allocations,transactions with partners, disposition of partnership interests and othermatters. The PhillieCo Agreement provides for additional capital contributionsto be made in accordance with capital contribution schedules to be set forthin approved annual budgets.
The PhillieCo Agreement generally provides for the allocation of profits andlosses according to each Partner's proportionate percentage interest, aftergiving effect to special allocations. After special allocations, profits areallocated to partners to the extent of and in proportion to cumulative netlosses previously allocated. Losses are allocated, after considering specialallocations, according to each Partner's allocation of net profits previouslyallocated.
EMERGENCE FROM DEVELOPMENT STAGE COMPANY--Prior to the third quarter of1997, the Company reported its operations as a development stage enterprise.The Company has commenced service in all of the MTAs in which it owns alicense. As a result, the Company is no longer considered a development stageenterprise, and the balance sheets and statements of operations and of cashflows are no longer presented in development stage format.
Management believes that the Company will incur additional losses in 1998and require additional financial resources to support the current level ofoperations and the remaining network buildout for the year ended December 31,1998. Management believes the Company has the ability to obtain the requiredlevels of financing through additional financing arrangements or additionalequity funding from the partners.
DEADLOCK EVENT--The proposed budgets for fiscal year 1998 were not approvedby the Holdings or PhillieCo I partnership boards, which resulted in theoccurrence of a "Deadlock Event" as of January 1, 1998 under the Holdings andPhillieCo I Partnership Agreements. Holdings is the sole general partner ofSprint Spectrum L.P. PhillieCo I is the sole general partner of PhillieCo Sub.Under the Holdings and PhillieCo I Partnership Agreements, if one of thepartners refers the budget issue to the chief executive officers of theParents for resolution pursuant to specified procedures and the issue remainsunresolved, buy/sell provisions would be triggered which may result in thepurchase by one or more of the partners of the interest of the other partners,or, in certain circumstances, the liquidation of Holdings and PhillieCo I andtheir subsidiaries. See further discussions regarding a restructuring of thepartnership structure in Note 10.
F-86
SPRINT SPECTRUM HOLDING COMPANY COMBINED WITH MINORCO AND PHILLIECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1998)
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SPRINT CAPITAL CORP; 424B5
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION--The financial statements are presented on a combinedbasis as the Partnerships are under common management for all periodspresented. The assets, liabilities, results of operations and cash flows ofentities in which the Company has a controlling interest have beenconsolidated. All significant intercompany accounts and transactions have beeneliminated.
MINORITY INTERESTS--In November 1997, concurrent with the APC acquisitiondiscussed in Note 4, American Personal Communications II, L.P. ("APC II")became the minority owner in APC. APC II has been allocated approximately $6.5million in losses in APC since the date of acquisition. Prior to November1997, APC II, as majority owner, had been allocated approximately $50 millionin losses in excess of its investment. At December 31, 1997, afterconsolidation of APC, the total of such losses, approximately $56.7 million,was recorded as minority interest in the Partnerships' combined balance sheet.This treatment reflects that APC II continued to be responsible for fundingits share of losses until January 1, 1998 when Holdings and MinorCo acquiredthe remaining interest in APC.
In addition, in June 1998, concurrent with the Cox PCS acquisition discussedin Note 4, Cox Pioneer Partnership ("CPP") became the minority owner in CoxPCS with CPP's remaining ownership-interest in Cox PCS being recorded asminority interest in the combined balance sheet. CPP has been allocatedapproximately $99.0 million in losses in Cox PCS since the date ofacquisition. Losses attributable to Cox incurred from January 1, 1998 throughMay 1998 are included in minority interest in the combined statements ofoperations.
TRADEMARK AGREEMENT--Sprint(R) is a registered trademark of SprintCommunications Company L.P. and Sprint(R) and Sprint PCS(R) are licensed toHoldings on a royalty-free basis pursuant to a trademark license agreementbetween Holdings and Sprint Communications Company L.P.
REVENUE RECOGNITION--Operating revenues for PCS services are recognized asservice is rendered. Operating revenues for equipment sales are recognized atthe time the equipment is delivered to a customer or an unaffiliated agent.
COST OF EQUIPMENT--The Company uses multiple distribution channels for itsinventory, including third-party retailers, Company-owned retail stores, itsdirect sales force and telemarketing. Cost of equipment varies by distributionchannel and includes the cost of multiple models of handsets, relatedaccessory equipment, and warehousing and shipping expenses.
CASH AND CASH EQUIVALENTS--The Company considers all highly liquidinstruments with original maturities of three months or less to be cashequivalents. The Company maintains cash and cash equivalents in financialinstitutions with the highest credit ratings.
ACCOUNTS RECEIVABLE--Accounts receivable are net of an allowance fordoubtful accounts of approximately $23.9 million, $9.3 million and $0.2million, at September 30, 1998 and December 31, 1997 and 1996, respectively.
INVENTORY--Inventory consists of wireless communication equipment (primarilyhandsets). Inventory is stated at lower of cost (on a first-in, first-outbasis) or replacement value. Any losses on the sales of handsets arerecognized at the time of sale.
PROPERTY, PLANT AND EQUIPMENT--Property, plant and equipment are stated atcost or fair value at the date of acquisition. Construction work in progressrepresents costs incurred to design and construct the PCS network. Repair andmaintenance costs are charged to expense as incurred. When network equipmentis retired, or otherwise disposed of, its book value, net of salvage, ischarged to accumulated depreciation. When non-network equipment is sold,retired or abandoned, or otherwise disposed of, the cost and accumulateddepreciation are relieved and any gain or loss is recognized. Property, plantand equipment are depreciated using the straight-line method based onestimated useful lives of the assets. Depreciable lives range from 3 to 20years.
F-87
SPRINT SPECTRUM HOLDING COMPANY COMBINED WITH MINORCO AND PHILLIECO
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SPRINT CAPITAL CORP; 424B5
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1998)
EQUIPMENT UNDER CAPITAL LEASES--APC leases certain of its office and otherequipment under capital lease agreements. The assets and liabilities undercapital leases are recorded at the lesser of the present value of aggregatefuture minimum lease payments, including estimated bargain purchase options,or the fair value of the assets under lease. Assets under these capital leasesare depreciated over their estimated useful lives of 5 to 7 years.
INVESTMENT IN PCS LICENSES--During 1994 and 1995, the Federal CommunicationsCommission ("FCC") auctioned PCS licenses in specific geographic serviceareas. The FCC grants licenses for terms of up to ten years, and generallygrants renewals in 10-year terms if the licensee has complied with its licenseobligations. The Company believes it will be able to secure renewal of the PCSlicenses held by its subsidiaries. PCS licenses are amortized over estimateduseful lives of 40 years once placed in service. Accumulated amortization forPCS licenses totaled approximately $91.8 million, $46.8 million and $1.7million as of September 30, 1998, December 31, 1997, and 1996, respectively.There was no amortization in 1995.
MICROWAVE RELOCATION COSTS--The Company has also incurred costs associatedwith microwave relocation in the construction of the PCS network. Microwaverelocation costs are amortized over the remaining life of the PCS licenses.Accumulated amortization for microwave relocation costs totaled approximately$10.6 million and $5.3 million as of September 30, 1998 and December 31, 1997,respectively. There was no amortization in 1996 or 1995.
INTANGIBLE ASSETS--The ongoing value and remaining useful life of intangibleassets are subject to periodic evaluation. The Company currently expects thecarrying amounts to be fully recoverable. Impairments of intangibles and long-lived assets are assessed based on an undiscounted cash flow methodology.
CAPITALIZED INTEREST--Interest costs associated with the construction ofcapital assets (including the PCS licenses) incurred during the period ofconstruction are capitalized. The total interest costs capitalized in the ninemonths ended September 30, 1998 was approximately $50.9 million, and wasapproximately $100.0 million and $30.5 million in 1997 and 1996, respectively.There were no amounts capitalized in 1995.
DEBT ISSUANCE COSTS--Included in other assets are costs associated withobtaining financing. Such costs are capitalized and amortized to interestexpense over the term of the related debt instruments using the effectiveinterest method. Accumulated amortization for the nine months ended September30, 1998 was approximately $23.8 million, and was approximately $13.4 millionand $1.9 million for the years ended December 31, 1997 and 1996, respectively.There was no amortization in 1995.
OPERATING LEASES--Rent expense is recognized on the straight-line basis overthe life of the lease agreement, including renewal periods. Lease expenserecognized in excess of cash expended is included in non-current liabilitiesin the combined balance sheet.
MAJOR CUSTOMER--The Company markets its products through multipledistribution channels, including Company-owned retail stores and third-partyretail outlets. The Company's subscribers are disbursed throughout the UnitedStates. Sales to one third-party retail customer represented approximately 21%and 88% of operating revenues in the combined statements of operations for theyears ended December 31, 1997 and 1996, respectively. The Company reviews thecredit history of retailers prior to extending credit and maintains allowancesfor potential credit losses. The Company believes that its risk fromconcentration of credit is limited.
INCOME TAXES--The Company has not provided for federal or state income taxessince such taxes are the responsibility of the individual Partners.
FINANCIAL INSTRUMENTS--The carrying value of the Company's short-termfinancial instruments, including cash and cash equivalents, receivables fromcustomers and affiliates and accounts payable approximates fair value. Thefair value of the Company's long-term debt is based on quoted market pricesfor the same issues or current
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SPRINT CAPITAL CORP; 424B5
rates offered to the Company for similar debt.A summary of the fair value of the Company's long-term debt at December 31,1997 and 1996 is included in Note 5.
F-88
SPRINT SPECTRUM HOLDING COMPANY COMBINED WITH MINORCO AND PHILLIECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1998)
The fair value of the interest rate contracts is the estimated net amountthat APC would pay to terminate the contracts at the balance sheet date. Thefair value of the fixed rate loans is estimated using discounted cash flowanalysis based on APC's current incremental borrowing rate at which similarborrowing agreements would be made under current conditions.
DERIVATIVE FINANCIAL INSTRUMENTS--Derivative financial instruments (interestrate contracts) are utilized by APC to reduce interest rate risk. APC hasestablished a control environment which includes risk assessment andmanagement approval, reporting and monitoring of derivative financialinstrument activities. APC does not hold or issue derivative financialinstruments for trading purposes.
The differentials to be received or paid under interest rate contracts thatare matched against underlying debt instruments and qualify for settlementaccounting are recognized in income over the life of the contracts asadjustments to interest expense. Gains and losses on terminations of interestrate contracts are recognized as other income or expense when terminated inconjunction with the retirement of associated debt. Gains and losses onterminations of interest rate contracts not associated with the retirement ofdebt are deferred and amortized to interest expense over the remaining life ofthe associated debt to the extent that such debt remains outstanding.
COMPREHENSIVE INCOME--In June 1997, the Financial Accounting Standards Boardissued Statement of financial Accounting Standards No. 130, ReportingComprehensive Income, ("SFAS No. 130") which establishes standards forreporting and disclosure of comprehensive income and its components (revenues,expenses, gains and losses). SFAS No. 130 is effective for fiscal yearsbeginning after December 15, 1997 and requires reclassification of financialstatements for earlier periods to be provided for comparative purposes. TheCompany's total comprehensive loss for all periods presented herein did notdiffer from those amounts reported as net loss in the combined statements ofoperations.
USE OF ESTIMATES--The preparation of financial statements in conformity withgenerally accepted accounting principles requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and reported amounts of revenues and expenses during the reportingperiod. Actual results could differ from those estimates.
RECLASSIFICATIONS--Certain reclassifications have been made to the 1996 and1995 combined financial statements to conform to the 1997 combined financialstatement presentation.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at September 30,1998, December 31, 1997 and 1996 (in thousands):
SEPTEMBER 30, DECEMBER 31,
------------- ----------------------
1998 1997 1996
------------- ---------- ----------
(UNAUDITED)
Land.................................. $ 3,288 $ 1,445 $ 905
Buildings and leasehold improvements.. 901,164 641,167 86,496
Fixtures and office furniture......... 309,419 168,301 68,520
Page 144 of 189
SPRINT CAPITAL CORP; 424B5
Network equipment..................... 3,319,669 2,335,965 255,691
Telecommunications plant--construction
work in progress..................... 706,343 653,133 1,039,620
---------- ---------- ----------
5,239,883 3,800,011 1,451,232
Less accumulated depreciation......... (708,033) (261,773) (9,605)
---------- ---------- ----------
$4,531,850 $3,538,238 $1,441,627
========== ========== ==========
F-89
SPRINT SPECTRUM HOLDING COMPANY COMBINED WITH MINORCO AND PHILLIECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1998)
Depreciation expense on property, plant and equipment for the nine monthsended September 30, 1998 was approximately $471.4 million and wasapproximately $251.9 million, $9.6 million, and $0.2 million for the yearsended December 31, 1997, 1996 and 1995, respectively.
4. INVESTMENTS IN PARTNERSHIPS
APC--On January 9, 1995, WirelessCo acquired a 49% limited partnershipinterest in APC. In September 1997, Holdings increased its ownership in APC to58.3% through additional capital contributions of approximately $30 million,and became the managing partner upon FCC approval in November 1997. As ofJanuary 1, 1998, Holdings and MinorCo increased their ownership percentages to99.75% and 0.25%, respectively, of the partnership interests for approximately$30 million.
The acquisition increasing ownership to 58.3% and subsequently to 100% wasaccounted for as a purchase and, accordingly, the operating results of APChave been consolidated since the date of the FCC's approval of theacquisition. In conjunction with the acquisition in November 1997, liabilitieswere assumed as follows with the remaining minority interest acquired onJanuary 1, 1998 (in millions):
Assets acquired.................................................... $503
Cash paid.......................................................... (30)
Minority interest.................................................. 50
----
Liabilities assumed................................................ $523
====
The purchase price was allocated to the assets acquired and the liabilitiesassumed based on an estimate of fair value.
The following unaudited pro forma financial information assumes theacquisition had occurred on January 1 of each year and that Holdings had owned100% of APC and consolidated its results in the financial statements:
1997 1996
----------- ---------
Net sales............................................ $ 364,460 $ 76,013
Net loss (before minority interest).................. (1,716,142) (554,976)
Pro forma data does not purport to be indicative of the results that wouldhave been obtained had these events actually occurred at the beginning of theperiods presented and is not intended to be a projection of future results.
Prior to acquisition of controlling interest, Holdings' investment in APCwas accounted for under the equity method. The partnership agreement betweenHoldings and APC II specified that losses were allocated based on percentageownership interests and certain other factors. In January 1997, Holdings andAPC II amended the APC partnership agreement with respect to the allocation ofprofits and losses. For financial reporting purposes, profits
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SPRINT CAPITAL CORP; 424B5
and losses wereallocated in proportion to Holdings' and APC II's respective partnershipinterests, except for costs related to stock appreciation rights and interestexpense attributable to the FCC interest payments which were allocatedentirely to APC II. Losses of approximately $60 million, $97 million and $46million for the years ended December 31, 1997, 1996 and 1995, respectively,are included in equity in losses of unconsolidated subsidiaries during theperiod prior to the acquisition of controlling interest.
COX PCS--On December 31, 1996, Holdings acquired a 49% limited partnerinterest in Cox PCS. CPP held a 50.5% general and a 0.5% limited partnerinterest and was the general and managing partner. Holdings increased itsownership in Cox PCS to 59.2% through an additional capital contribution ofapproximately $80.6 million and became managing partner upon FCC approval inJune, 1998. This increase in ownership was the result of CPP exercising itsright under the partnership agreement to require that Holdings acquire all orpart of CPP's interest in Cox PCS based on fair market value at the time ofthe transaction. Through December 2008, CPP may put any remaining interest inCox PCS to Holdings.
F-90
SPRINT SPECTRUM HOLDING COMPANY COMBINED WITH MINORCO AND PHILLIECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1998)
The acquisition increasing ownership to 59.2% was accounted for as apurchase. The operating results of Cox PCS have been consolidated sinceJanuary 1, 1998. The following table reflects the value of Cox PCS' assets andliabilities at the date of acquisition:
Assets acquired.............................. $ 724,834
Cash paid.................................... (80,558)
Minority interest............................ (103,780)
---------
Liabilities assumed.......................... $ 540,496
=========
The purchase price was allocated to the assets acquired and the liabilitiesassumed based on an estimate of fair value.
The following unaudited proforma information assumes the acquisition hadoccurred on January 1, 1997, and that Holdings had consolidated the Cox PCSresults in the financial statements:
DECEMBER 31,
1997
------------
Net sales................................. $ 295,395
Net loss (before minority interest)....... (1,757,821)
Pro forma data does not purport to be indicative of the results that wouldhave been obtained had these events actually occurred at the beginning of theperiods presented and is not intended to be a projection of future results.
Prior to the acquisition of controlling interest, Holdings' investment inCox PCS was accounted for under the equity method.
Under the terms of the partnership agreement, CPP and the Company areobligated to, among other things: (a) upon FCC consent to the assumption andrecognition of the license payment obligations by Cox PCS, CPP is obligated tomake capital contributions in an amount equal to such liability and relatedinterest (the PCS license covering the Los Angeles-San Diego MTA wascontributed to Cox PCS in March 1997) (b) Holdings is obligated to makecapital contributions of approximately $368.9 million to Cox PCS; (c) Holdingsis not obligated to make any cash capital contributions upon the assumption byCox PCS of the FCC payment obligations until CPP has contributed cash in anamount equal to the aggregate principal and interest of such obligations; and,
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SPRINT CAPITAL CORP; 424B5
(d) CPP and Holdings are obligated to make additional capital contributions inan amount equal to such partner's percentage interest times the amount ofadditional capital contributions being requested.
As of December 31, 1997, approximately $348.2 million in equity, including$2.45 million to PCS Leasing Co, L.P. ("LeasingCo"), a subsidiary of Cox PCS,had been contributed to Cox PCS by the Company. Through December 31, 1996,$168 million had been contributed to Cox PCS. Losses are allocated to thepartners based on their ownership percentages. Losses of approximately $108million for the year ended December 31, 1997, are included in equity in lossesof unconsolidated partnerships during the year prior to the acquisition ofcontrolling interest. Subsequent to December 31, 1997, Holdings completed itsfunding obligation to Cox PCS under the partnership agreement. Concurrent withthis funding, Holdings paid approximately $33.2 million in interest that hadaccrued on the unfunded capital obligation.
Additionally, Holdings increased its ownership to 59.2% and became generalpartner in LeasingCo. LeasingCo was formed to acquire, construct or otherwisedevelop equipment and other personal property to be leased to Cox PCS.Holdings is not obligated to make additional capital contributions toLeasingCo beyond the initial funding of approximately $2.45 million.
F-91
SPRINT SPECTRUM HOLDING COMPANY COMBINED WITH MINORCO AND PHILLIECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1998)
5. LONG-TERM DEBT AND BORROWING ARRANGEMENTS
Long-term debt consists of the following as of September 30, 1998 andDecember 31, 1997 and 1996 (in thousands):
SEPTEMBER 30, DECEMBER 31,
------------- -------------------
1998 1997 1996
------------- ---------- --------
(UNAUDITED)
11% Senior Notes due in 2006............. $ 250,000 $ 250,000 $250,000
12 1/2% Senior Discount Notes due in
2006, net of unamortized discount of
$147,035 at September 30, 1998; $177,720
and $214,501 at December 31, 1997 and
1996, respectively...................... 352,965 322,280 285,499
Credit Facility--term loans.............. 300,000 300,000 150,000
Credit Facility--revolving credit........ 1,565,000 605,000 --
Vendor Financing......................... 2,527,002 1,612,914 --
APC Senior Secured Term Loan Facility.... 220,000 220,000 --
APC Senior Secured Reducing Revolving
Credit Facility......................... 200,000 141,429 --
APC--Due To FCC, net of unamortized
discount of $8,992 at September 30, 1998
and $11,989 at December 31, 1997........ 77,844 90,355 --
Cox PCS Credit Facility.................. 400,000 -- --
Cox PCS--Due to FCC...................... 213,855 -- --
Other.................................... 19,042 26,538 742
---------- ---------- --------
Total debt............................... 6,125,708 3,568,516 686,241
Less current maturities.................. 124,491 34,562 49
---------- ---------- --------
Long-term debt........................... $6,001,217 $3,533,954 $686,192
========== ========== ========
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SPRINT CAPITAL CORP; 424B5
SENIOR NOTES AND SENIOR DISCOUNT NOTES--In August 1996, Sprint Spectrum L.P.and Sprint Spectrum Finance Corporation (together, the "Issuers") issued $250million aggregate principal amount of 11% Senior Notes due 2006 ("the SeniorNotes"), and $500 million aggregate principal amount at maturity of 12 1/2%Senior Discount Notes due 2006 (the "Senior Discount Notes" and, together withthe Senior Notes, the "Notes"). The Senior Discount Notes were issued at adiscount to their aggregate principal amount at maturity and generatedproceeds of approximately $273 million. Cash interest on the Senior Notesaccrues at a rate of 11% per annum and is payable semi-annually in arrears oneach February 15 and August 15, commencing February 15, 1997. Cash interestwill 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 arate of 12 1/2% per annum and will be payable semi-annually in arrears on eachFebruary 15 and August 15, commencing February 15, 2002.
On August 15, 2001, the Issuers will be required to redeem an amount equalto $384.772 per $1,000 principal amount at maturity of each Senior DiscountNote then outstanding ($192 million in aggregate principal amount at maturity,assuming all of the Senior Discount Notes remain outstanding at such date).
The 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 forthbelow, respectively, plus accrued and unpaid interest, if any, to theredemption date, if redeemed during the 12 month period beginning on August 15of the years indicated below:
SENIOR NOTES SENIOR DISCOUNT 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%
F-92
SPRINT SPECTRUM HOLDING COMPANY COMBINED WITH MINORCO AND PHILLIECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1998)
In addition, prior to August 15, 1999, the Issuers may redeem up to 35% ofthe originally issued principal amount of the Notes with the net proceeds ofone or more public equity offerings, provided that at least 65% of theoriginally issued principal amount at maturity of the Senior Notes and SeniorDiscount Notes would remain outstanding immediately after giving effect tosuch redemption. The redemption price of the Senior Notes is equal to 111.0%of the principal amount of the Senior Notes so redeemed, plus accrued andunpaid interest, if any, to the redemption date. The redemption price of theSenior Discount Notes is equal to 112.5% of the accreted value at theredemption date of the Senior Discount Notes so redeemed.
The Notes contain certain restrictive covenants, including (among otherrequirements) limitations on additional indebtedness, limitations onrestricted payments, limitations on liens, and limitations on dividends andother payment restrictions affecting certain restricted subsidiaries.
BANK CREDIT FACILITY--Sprint Spectrum L.P. (the "Borrower") entered into anagreement with The Chase Manhattan Bank ("Chase") as agent for a group oflenders for a $2 billion bank credit facility dated October 2, 1996. Theproceeds of this facility are to be used to finance working capital needs,subscriber acquisition costs, capital expenditures and other general Borrowerpurposes.
The facility consists of a revolving credit commitment of $1.7 billion and a$300 million term loan commitment. In December 1997, certain terms relating tothe financial and operating conditions were amended. As of September 30, 1998,$1.6 billion had been drawn under the revolving credit facility at a weightedaverage interest rate of 8.19% with $100 million remaining available. As ofDecember 31, 1997, $605 million had been drawn under the revolving creditfacility at a weighted average interest rate of 8.42%, with $1.1 billionremaining available. There were no
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SPRINT CAPITAL CORP; 424B5
borrowings under the revolving creditcommitment as of December 31, 1996. Commitment fees for the revolving portionof the agreement are payable quarterly based on average unused revolvingcommitments.
The revolving credit commitment expires July 13, 2005. Availability will bereduced in quarterly installments ranging from $75 million to $175 millioncommencing January 2002. Further reductions may be required after January 1,2002 to the extent that the Borrower meets certain financial conditions.
The term loans are due in sixteen consecutive quarterly installmentsbeginning January 2002 in aggregate principal amounts of $125,000 for each ofthe first fifteen payments with the remaining aggregate outstanding principalamount of the term loans due as the last installment.
Interest on the term loans and/or the revolving credit loans is at theapplicable LIBOR rate plus 0.625% ("Eurodollar Loans"), or the greater of theprime rate or 0.5% plus the Federal Funds effective rate ("ABR Loans"), at theBorrower's option. The interest rate may be adjusted downward for improvementsin the bond rating and/or leverage ratios. Interest on ABR Loans andEurodollar Loans with interest period terms in excess of 3 months is payablequarterly. Interest on Eurodollar Loans with interest period terms of lessthan 3 months is payable on the last day of the interest period. As ofSeptember 30, 1998, and December 31, 1997 and 1996, the weighted averageinterest rate on the term loans was 8.20%, 8.39% and 8.19%, respectively.
Borrowings under the Bank Credit Facility are secured by the Borrower'sinterests in WirelessCo, RealtyCo and EquipmentCo and certain other personaland real property (the "Shared Lien"). The Shared Lien equally and ratablysecures the Bank Credit Facility, the Vendor Financing agreements (discussedbelow) and certain other indebtedness of the Borrower. The credit facility isjointly and severally guaranteed by WirelessCo, RealtyCo and EquipmentCo andis non-recourse to the Parents and the Partners.
The Bank Credit Facility agreement and Vendor Financing agreements containcertain restrictive financial and operating covenants, including (among otherrequirements) maximum debt ratios (including debt to total
F-93
SPRINT SPECTRUM HOLDING COMPANY COMBINED WITH MINORCO AND PHILLIECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1998)
capitalization), limitations on capital expenditures, limitations onadditional indebtedness and limitations on dividends and other paymentrestrictions affecting certain restricted subsidiaries. The loss of the rightto use the Sprint trademark, the termination or non-renewal of any FCC licensethat reduces population coverage below specified limits, or certain changes incontrolling interest in the Borrower, as defined, among other provisions,constitute events of default.
VENDOR FINANCING--As of October 2, 1996, the Company entered into financingagreements with Northern Telecom, Inc. ("Nortel") and Lucent Technologies,Inc. ("Lucent" and together with Nortel, the "Vendors") for multiple drawdownterm loan facilities totaling $1.3 billion and $1.8 billion, respectively. Theproceeds of such facilities are to be used to finance the purchase of goodsand services provided by the Vendors. Additionally, the commitments allow forthe conversion of accrued interest into additional principal. Such conversionsdo not reduce the availability under the commitments. Interest accruing on thedebt outstanding at December 31, 1997, can be converted into additionalprincipal through February 8, 1999 and March 30, 1999, for Lucent and Nortel,respectively.
In April 1997 and November 1997, the Company amended the terms of itsfinancing agreement with Nortel. The amendments provide for a syndication ofthe financing commitment between Nortel, several banks and other vendors (the"Nortel Lenders"), and the modification of certain operating and financialcovenants. The commitment provides financing in two phases. During the firstphase, the Nortel Lenders will finance up to $800 million. Under the secondphase, the Nortel Lenders will finance up to an additional $500 million uponthe achievement of certain operating and financial conditions, as amended. Asof September 30, 1998, $856.3 million, including converted
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SPRINT CAPITAL CORP; 424B5
accrued interest of$67.2 million, had been borrowed at a weighted average interest rate 8.78%with $510.9 million remaining available. At December 31, 1997, $630 million,including converted accrued interest of $18.6 million, had been borrowed at aweighted average interest rate of 8.98% with $189 million remaining availableunder the first phase. In addition, the Company paid $20 million inorigination fees upon the initial drawdown under the first phase and will beobligated to pay additional origination fees on the date of the initialdrawdown loan under the second phase. There were no borrowings under theNortel facility at December 31, 1996.
In May 1997 and December 1997, the Company amended the terms of itsfinancing agreement with Lucent. The amendments provide for a syndication ofthe financing commitment between Lucent, Sprint and other banks and vendors(the "Lucent Lenders"), and the modification of certain operating andfinancial covenants. The Lucent Lenders have committed to financing up to $1.5billion through December 31, 1997, and up to an aggregate of $1.8 billionthereafter. The Company pays a facility fee on the daily amount of certainloans outstanding under the agreement, payable quarterly. The Lucent agreementterminates June 30, 2001. As of September 30, 1998, the Company had borrowedapproximately $1.7 billion, including converted accrued interest of $123.5million, with $252.8 million remaining available under the Lucent facility, ata weighted average interest rate of 8.70%. As of December 31, 1997, theCompany had borrowed approximately $983 million, including converted accruedinterest of $33.1 million, under the Lucent facility at a weighted averageinterest rate of 8.94%, with $850 million remaining available. There were noborrowings under the Lucent facility at December 31, 1996.
The principal amounts of the loans drawn under both the Nortel and Lucentagreements are due in twenty consecutive quarterly installments, commencing onthe date which is thirty-nine months after the last day of such "BorrowingYear" (defined in the agreements as any one of the five consecutive 12-monthperiods following the date of the initial drawdown of the loan). The aggregateamount due each year is equal to percentages ranging from 10% to 30%multiplied by the total principal amount of loans during each Borrowing Year.
The agreements provide two borrowing rate options. During the first phase ofthe Nortel agreement and throughout the term of the Lucent agreement "ABRLoans" bear interest at the greater of the prime rate or 0.5% plus the FederalFunds effective rate, plus 2%. "Eurodollar Loans" bear interest at the Londoninterbank
F-94
SPRINT SPECTRUM HOLDING COMPANY COMBINED WITH MINORCO AND PHILLIECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1998)
(LIBOR) rate (any one of the 30-, 60- or 90-day rates, at the discretion ofthe Company), plus 3%. During the second phase of the Nortel agreement, ABRLoans bear interest at the greater of the prime rate or 0.5% plus the FederalFunds effective rate, plus 1.5%; and Eurodollar loans bear interest at theLIBOR rate plus 2.5%. Interest from the date of each loan through one yearafter the last day of the Borrowing Year is added to the principal amount ofeach loan. Thereafter, interest is payable quarterly.
Borrowings under the Vendor Financing are secured by the Shared Lien. TheVendor Financing is jointly and severally guaranteed by WirelessCo, RealtyCo,and EquipmentCo and is non-recourse to the Parents and the Partners.
Certain amounts included under construction obligations on the combinedbalance sheets may be financed under the Vendor Financing agreements.
APC DUE TO FCC--The Company is obligated to the FCC for $102 million for thereceipt of the commercial PCS license covering the Washington D.C./BaltimoreMTA. In March 1996, the FCC determined that interest on the amount due wouldbegin to accrue on March 8, 1996, at an interest rate of 7.75%. Beginning withthe first payment due in April 1996, the FCC granted two years of interest-only payments followed by three years of principal and interest payments.Based on the interest and payment provisions determined by the FCC and theCompany's
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SPRINT CAPITAL CORP; 424B5
incremental borrowing rate for similar debt at the time the debt wasissued, the Company has accrued interest beginning upon receipt of the licenseat an effective rate of 13%.
APC SENIOR SECURED CREDIT FACILITIES--As of February 7, 1997, American PCSCommunications, LLC entered into credit facilities of $420 million, consistingof a term loan facility of $220 million and a reducing revolving creditfacility of $200 million (together, the "Credit Agreement"). The CreditAgreement is secured by first priority liens on all the equity interests heldby American PCS Communications LLC in its direct subsidiaries, including theequity interests of the subsidiaries which will hold APC's PCS license andcertain real property interest and equipment and a first priority securityinterest in, and mortgages on, substantially all other intangible and tangibleassets of APC and subsidiaries. The Credit Agreement matures February 7, 2005,with an interest rate of LIBOR plus 2.25%. The interest rate may be steppeddown over the term of the credit agreement based on the ratio of outstandingdebt to earnings before interest, tax, depreciation and amortization. Proceedsfrom the Credit Agreement were used to repay the outstanding financing fromHoldings as of the closing date of the credit agreement, capital expendituresfor the communications systems, general working capital requirements, and netoperating losses.
The Credit Agreement contains covenants which require APC to maintaincertain levels of wireless subscribers, as well as other financial and non-financial requirements.
In January 1998 APC completed negotiations with its lenders to amend theCredit Agreement. As amended, the Credit Agreement contains certain covenantswhich, among other things, contain certain restrictive financial and operatingcovenants including, maximum debt ratios (including debt to totalcapitalization) and limitations on capital expenditures. The covenants requireAmerican PCS Communications, LLC to enter into interest rate contracts on aquarterly basis to protect and limit the interest rate on 40% of its aggregatedebt outstanding.
COX PCS CREDIT FACILITY--On February 25, 1998 Cox PCS entered into a $800million, nine-year revolving and term loan agreement (the "Cox CreditFacility") with a bank syndicate. The Cox Credit Facility consists of arevolving line of credit in an aggregate principal amount of $400 million andtwo term loan facilities with aggregate principal amounts of $200 millioneach. At September 30, 1998, $400 million had been borrowed under the termloan facilities at a weighted average interest rate of 8.13%. The Cox CreditFacility grants Cox PCS an option to expand the credit facility up to anadditional $750 million from time to time, upon Cox PCS meeting certainrequirements. The proceeds from the loan are intended to repay the PCS licensedebt, finance working capital needs, subscriber acquisition costs, capitalexpenditures and other general purposes of Cox PCS.
F-95
SPRINT SPECTRUM HOLDING COMPANY COMBINED WITH MINORCO AND PHILLIECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1998)
Provisions of the Cox Credit Facility required the transfer of certain of CoxPCS' assets into the special purpose subsidiaries of Cox PCS to facilitate thecollateralization of substantially all of Cox PCS' assets.
Furthermore, the amounts advanced under the Cox Credit Facility areguaranteed by each of the special purpose subsidiaries. The Cox CreditFacility also requires that Cox PCS meet certain operational and financialcovenants. Cox PCS is in compliance as of February 25, 1998 (the fundingdate). Amounts borrowed under the facility are to be repaid based on scheduledrepayment dates defined in the credit agreement plus interest at a variablerate (as defined).
COX PCS DUE TO FCC--In conjunction with the assignment of the PCS licensecovering the Los Angeles-San Diego-Las Vegas MTA by CPP to Cox PCS, Cox PCSassumed the related debt payable to the FCC. The debt requires eight interest-only payments beginning April 30, 1996 through January 31, 1998. CommencingApril 30, 1998, the debt requires repayment in equal quarterly installments of$23.7 million representing both principal and
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SPRINT CAPITAL CORP; 424B5
interest. The debt iscollateralized by the PCS license above, bears interest at 7.75% per annum andmatures on January 31, 2001.
OTHER DEBT--At December 31, 1997 and September 30, 1998, other debt includeda note payable to Lucent for the financing of debt issuance costs, a notepayable for certain leasehold improvements, and capital leases acquired in thepurchase of APC. Maturities on the debt range from 3 to 10 years, at interestrates from 8.32% to 21%.
INTEREST RATE CONTRACTS--As of September 30, 1998, APC had entered into teninterest rate contracts with an aggregate notional value of $134 million. Asof December 31, 1997, APC had entered into nine interest rate contracts (swapsand a collar), with an aggregate notional amount of $122 million. Under theagreements APC pays a fixed rate and receives a variable rate such that itwill protect APC against interest rate fluctuations on a portion of itsvariable rate debt. The fixed rates paid by APC on the interest rate swapcontracts range from approximately 5.97% to 6.8%. Option features contained incertain of the swaps operate in a manner such that the interest rateprotection in some cases is effective only when rates are outside a certainrange. Under the collar arrangement, APC will receive 6.19% when LIBOR fallsbelow 6.19% and pay 8% when LIBOR exceeds 8%. The contracts expire in 2001.The fair value of the interest rate contracts at September 30, 1998 andDecember 31, 1997 was an unrealized loss of approximately $4.8 million and$1.3 million, respectively. The notional amounts represent reference balancesupon which payments and receipts are based and consequently are not indicativeof the level of risk or cash requirements under the contracts. APC hasexposure to credit risk to the counterparty to the extent it would have toreplace the interest rate swap contract in the market when and if acounterparty were to fail to meet its obligations. The counterparties to allcontracts are primary dealers that meet APC's criteria for managing creditexposures.
FAIR VALUE--The estimated fair value of the Company's long-term debt atDecember 31, 1997 and 1996 is as follows (in thousands):
1997 1996
------------------- -------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
11% Senior Notes.................... $250,000 $280,650 $250,000 $270,625
12 1/2% Senior Discount Notes....... 322,280 389,300 285,499 337,950
Credit facility--term loans......... 300,000 300,000 150,000 151,343
Credit facility--revolver........... 605,000 605,000 -- --
Vendor facility--Lucent............. 983,299 983,299 -- --
Vendor facility--Nortel............. 629,615 629,615 -- --
APC Senior Secured Term Loan
Facility........................... 220,000 220,000 -- --
APC Senior Secured Reducing
Revolving Credit Facility.......... 141,429 141,429 -- --
FCC debt............................ 90,355 98,470 -- --
F-96
SPRINT SPECTRUM HOLDING COMPANY COMBINED WITH MINORCO AND PHILLIECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1998)
At December 31, 1997, scheduled maturities of long-term debt and capitalleases during each of the next five years are as follows (in thousands):
LONG-TERM DEBT CAPITAL LEASES
-------------- --------------
1998........................................... $ 29,800 $5,411
1999........................................... 40,425 3,667
2000........................................... 53,624 591
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SPRINT CAPITAL CORP; 424B5
2001........................................... 395,291 42
2002........................................... 583,113 --
------
9,711
Less interest.................................. (898)
------
Present value of minimum lease payments........ $8,813
======
6. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES--Minimum rental commitments as of December 31, 1997, forall noncancelable operating leases, consisting principally of leases for celland switch sites and office space, for the next five years, are as follows (inthousands):
1998............................................................ $139,890
1999............................................................ 135,940
2000............................................................ 109,081
2001............................................................ 66,168
2002............................................................ 21,655
Gross rental expense for cell and switch sites aggregated approximately$106.5 million for the nine months ended September 30, 1998, and $97.1 millionand $13.6 million for the years ended December 31, 1997 and 1996,respectively. There was no cell or switch site rental expense for the yearended December 31, 1995. Gross rental expense for office space approximated$37.4 million for the nine months ended September 30, 1998, and $34.1 million,$11.7 million, and $0.7 million for the years ended December 31, 1997, 1996,and 1995, respectively. Certain cell and switch site leases contain renewaloptions (generally for terms of 5 years) that may be exercised from time totime and are excluded from the above amounts.
PROCUREMENT CONTRACTS--On January 31, 1996, the Company entered intoprocurement and services contracts with AT&T Corp. (subsequently assigned toLucent) and Nortel for the engineering and construction of a PCS network. Eachcontract provides for an initial term of ten years with renewals foradditional one-year periods. The Vendors must achieve substantial completionof the PCS network within an established time frame and in accordance withcriteria specified in the procurement contracts. Pricing for the initialequipment, software and engineering services has been established in theprocurement contracts. The procurement contracts provide for payment termsbased on delivery dates, substantial completion dates, and final acceptancedates. In the event of delay in the completion of the PCS network, theprocurement contracts provide for certain amounts to be paid to the Company bythe Vendors. The minimum commitments for the initial term are $0.8 billion and$1.0 billion from Lucent and Nortel, respectively, which include, but are notlimited to, all equipment required for the establishment and installation ofthe PCS network.
On May 8, 1998, the Company amended its procurement and services agreementwith Lucent. The amendment provides for an additional pricing structure forcertain equipment, software and engineering services purchased by the Companyfrom Lucent after January 1, 1998. Major original contract provisions,including but not limited to, the length of the contract and the paymentterms, have not been amended. The minimum commitment under the amendment isapproximately $353 million.
F-97
SPRINT SPECTRUM HOLDING COMPANY COMBINED WITH MINORCO AND PHILLIECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1998)
HANDSET PURCHASE AGREEMENTS--In June, 1996, the Company entered into athree-year purchase and supply agreement with a vendor for the purchase ofhandsets and other equipment totaling approximately $500
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SPRINT CAPITAL CORP; 424B5
million. During 1997and 1996, the Company purchased $332.7 million and $85 million under theagreement, respectively. The total purchase commitment was satisfied duringthe second quarter of 1998.
In September, 1996, the Company entered into another three-year purchase andsupply agreement with a second vendor for the purchase of handsets and otherequipment totaling more than $600 million, with purchases that commenced inApril, 1997. During 1997, the Company purchased $147.6 million under theagreement. The total purchase commitment must be satisfied by April 2000.
SERVICE AGREEMENTS--The Company has entered into an agreement with a vendorto provide PCS call record and retention services. Monthly rates persubscriber are variable based on overall subscriber volume. If subscriber feesare less than specified annual minimum charges, the Company will be obligatedto pay the difference between the amounts paid for processing fees and theannual minimum. Annual minimums range from $20 million to $60 million through2001. The agreement extends through December 31, 2001, with two automatic,two-year renewal periods, unless terminated by the Company. The Company mayterminate the agreement prior to the expiration date, but would be subject tospecified termination penalties.
The Company has also entered into an agreement with a vendor to provideprepaid calling services. Monthly rates per minute of use are based on overallcall volume. If the average minutes of use are less than monthly specifiedminimums, the Company is obligated to pay the difference between the averageminutes used at the applicable rates and the monthly minimum. Monthly minimumsrange from $40,000 to $50,000 during the initial term. Certain installationand setup fees for processing and database centers are also included in theagreement and are dependent upon a need for such centers. The agreementextends through July 1999, with successive one-year term renewals, unlessterminated by the Company. The Company may terminate the agreement prior tothe expiration date, but would be subject to specified termination penalties.
In January 1997, the Company entered into a four and one-half year contractfor consulting services. Under the terms of the agreement, consulting serviceswill be provided at specified hourly rates for a minimum number of hours. Thetotal commitment is approximately $125 million over the term of the agreement.
LITIGATION--The Company is involved in various legal proceedings incidentalto the conduct of its business. While it is not possible to determine theultimate disposition of each of these proceedings, the Company believes thatthe outcome of such proceedings, individually and in the aggregate, will nothave a material adverse effect on the Company's financial condition or resultsof operations.
7. EMPLOYEE BENEFITS
Employees performing services for the Company were employed by Sprintthrough December 31, 1995. Amounts paid to Sprint relating to pension expenseand employer contributions to the Sprint Corporation 401(k) plan for theseemployees approximated $0.3 million in 1995.
The Company maintains short-term and long-term incentive plans. All salariedemployees of Sprint Spectrum L.P. are eligible for the short-term incentiveplan commencing at date of hire. Employees of APC are covered by the APCplans. Short-term incentive compensation is based on incentive targetsestablished for each position based on the Company's overall compensationstrategy. Targets contain both an objective Company component and a personalobjective component. Charges to operations for the short-term planapproximated $20.9 million for the nine months ended September 30, 1998, and$20.3 million, $12.5 million, and $3.5 million for the years ended December31, 1997, 1996, and 1995, respectively.
F-98
SPRINT SPECTRUM HOLDING COMPANY COMBINED WITH MINORCO AND PHILLIECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1998)
Page 154 of 189
SPRINT CAPITAL CORP; 424B5
LONG-TERM COMPENSATION OBLIGATION--The Company has two long-term incentiveplans, the 1996 Plan and the 1997 Plan. Employees meeting certain eligibilityrequirements are considered to be participants in each plan. Participants inthe 1996 Plan will receive 100% of the pre-established targets for the periodfrom July 1, 1995 to June 30, 1996 (the "Introductory Term"). Participants inthe 1996 Plan elected either a payout of the amount due or converted 50% or100% of the award to appreciation units. Unless converted to appreciationunits, payment for the Introductory Term of the 1996 Plan was made in thethird quarter of 1998. Under the 1996 plan, appreciation units vest 25% peryear commencing on the second anniversary of the date of grant and expireafter a term of ten years. The 1997 Plan appreciation units vest 25% per yearcommencing on the first anniversary of the date of the grant and also expireafter ten years. For the nine months ended September 30, 1998, approximately$14.2 million had been expensed under both plans. For the years ended December31, 1997, 1996, and 1995, $18.3 million, $9.5 million, and $1.9 million,respectively, has been expensed under both plans. At December 31, 1997 a totalof approximately 103 million units have been authorized for grant for bothplans. The Company has applied APB Opinion No. 25, "Accounting for StockIssued to Employees" for 1997 and 1996. No significant difference would haveresulted if SFAS No. 123, "Accounting for Stock-Based Compensation" had beenapplied. See Note 10 for further discussion.
SAVINGS PLANS--Effective January, 1996, Holdings established a savings andretirement program (the "Savings Plan") for certain employees, which qualifiesunder Section 401(k) of the Internal Revenue Code. Most permanent full-time,and certain part-time, employees are eligible to become participants in theplan after one year of service or upon reaching age 35, whichever occursfirst. Participants make contributions to a basic before tax account andsupplemental before tax account. The maximum contribution for any participantfor any year is 16% of such participant's compensation. For each eligibleemployee who elects to participate in the Savings Plan and makes acontribution to the basic before tax account, the Company makes a matchingcontribution. The matching contributions equal 50% of the amount of the basicbefore tax contribution of each participant up to the first 6% that theemployee elects to contribute. Contributions to the Savings Plan are invested,at the participant's discretion, in several designated investment funds.Distributions from the Savings Plan generally will be made only uponretirement or other termination of employment, unless deferred by theparticipant. Expense under the Savings Plan approximated $5.2 million for thenine months ended September 30, 1998, and $5.0 million and $1.1 million in1997 and 1996, respectively.
APC also had an employee savings plan that qualified under Section 401(k) ofthe Internal Revenue Code (the "APC Plan"). All APC employees completing oneyear of service were eligible and could contribute up to 15% of their pretaxearnings. APC matched 100% of the first 3% of the employee's contribution.Employees were immediately fully vested in APC's contributions. In addition,APC could make discretionary contributions on behalf of eligible participantsin the amount of 2% of employee's compensation. Expenses relating to theemployee savings plan were not significant since the date of acquisition.
On June 26, 1998, the Partnership Board of Holdings approved the terminationof the APC Plan. The assets of the APC Plan were liquidated, settled and weretransferred to Merrill Lynch Trust Company as trustee of the Plan.Additionally, APC Plan participants became participants in the Savings Plan.
The Cox PCS Savings and Investment Plan (the "Cox PCS Plan") was establishedeffective July 1, 1997. Substantially all Cox PCS employees are eligible toparticipate in the Cox PCS Plan after completing one year of eligible service(as defined) and attaining age 21. Employees may make contributions to the CoxPCS Plan on a pretax basis pursuant to Section 401(k) of the Internal RevenueCode. Cox PCS makes matching contributions equal to 75% of the employee'scontribution up to a maximum amount equal to 4.5% of the employee's annualcompensation. Employee contributions vest immediately, and Cox PCS' matchingcontributions vest over three years of service. Expense under the Cox PCS Planapproximated $0.9 million for the nine months ended September 30, 1998.
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SPRINT SPECTRUM HOLDING COMPANY COMBINED WITH MINORCO AND PHILLIECO
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NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1998)
PROFIT SHARING (RETIREMENT) PLAN--Effective January, 1996, the Companyestablished a profit sharing plan for its employees. Employees are eligible toparticipate in the plan after completing one year of service. Profit sharingcontributions are based on the compensation, age, and years of service of theemployee. Profit sharing contributions are deposited into individual accountsof the Company's retirement plan. Vesting occurs once a participant completesfive years of service. For the years ended December 31, 1997 and 1996, expenseunder the profit sharing plan approximated $2.5 million and $0.7 million,respectively.
DEFERRED COMPENSATION PLAN FOR EXECUTIVES--Effective January, 1997, theCompany established a non-qualified deferred compensation plan which permitscertain eligible executives to defer a portion of their compensation. The planallows the participants to defer up to 80% of their base salary and up to 100%of their annual short-term incentive compensation. The deferred amounts earninterest at the prime rate. Payments will be made to participants uponretirement, disability, death or the expiration of the deferral election underthe payment method selected by the participant.
8. RELATED PARTY TRANSACTIONS
BUSINESS SERVICES--The Company reimburses Sprint for certain accounting anddata processing services, for participation in certain advertising contracts,for certain cash payments made by Sprint on behalf of the Company and othermanagement services. The Company is allocated the costs of such services basedon direct usage. Allocated expenses of approximately $10.5 million, $11.9million, and $2.6 million are included in selling, general and administrativeexpense in the combined statements of operations for 1997, 1996, and 1995,respectively. In addition to the miscellaneous services agreement describedabove, the Company has entered into agreements with Sprint for invoicingservices, operator services, and switching equipment. The Company is alsousing Sprint as its interexchange carrier, with the agreement for suchservices covered under the Holdings partnership agreement. Charges are basedon the volume of services provided, and are similar to those that would beincurred with an unrelated third-party vendor.
APC--Holdings entered into an affiliation agreement with APC in January 1995which provides for the reimbursement of certain allocable costs and payment ofaffiliation fees by APC. For the year ended December 31, 1997, prior toacquisition, the reimbursement of allocable costs of approximately $14.0million is included in selling, general and administrative expenses. Therewere no reimbursements recognized in 1996 or 1995. Additionally, affiliationfees are recognized based on a percentage of APC's net revenues.
COX PCS--Concurrent with the execution of the partnership agreement, theCompany entered into an affiliation agreement with Cox PCS which provides forthe reimbursement of certain allocable costs and payment of affiliate fees byCox PCS. For the years ended December 31, 1997 and 1996, allocable costs ofapproximately $20.0 million and $7.3 million, respectively, are netted againstselling, general and administrative expenses in the accompanying combinedstatements of operations. Of these total allocated costs, approximately $1.6million and $7.3 million were included in receivables from affiliates in therespective combined balance sheets for December 31, 1997 and 1996,respectively. In addition, the Company purchases certain equipment, such ashandsets, on behalf of Cox PCS. Receivables from affiliates for handsets andrelated equipment were approximately $31.2 million and $6 million at December31, 1997 and 1996, respectively.
SPRINTCOM, INC.--The Company provides services to SprintCom, Inc.("SprintCom"), an affiliate of Sprint. The Company is currently building outthe network infrastructure in certain BTA markets where SprintCom was awardedlicenses. Such services include engineering, management, purchasing,accounting and other related services. For the nine months ended September 30,1998 and for the year ended December 31, 1997, costs for services provided of$36.3 million and $29.1 million, respectively were allocated to SprintCom, andare included as a reduction of selling, general and administrative expenses inthe accompanying combined statements of operations. Of the total allocatedcosts, approximately $23.3 million and $14.0 million are included inreceivables from affiliates at September 30, 1998 and December 31, 1997,respectively. No such costs were incurred in 1996.
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SPRINT SPECTRUM HOLDING COMPANY COMBINED WITH MINORCO AND PHILLIECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1998)
PAGING SERVICES--In 1996, the Company commenced paging services pursuant toagreements with Paging Network Equipment Company and Sprint CommunicationsCompany L.P. ("Sprint Communications"). For the nine months ended September30, 1998 and the years ended December 31, 1997 and 1996, Sprint Communicationsreceived agency fees of approximately $6.5 million, $10.6 million and $4.9million, respectively.
ADVANCES FROM PARTNERS TO HOLDINGS--In December 1996, the Partners advancedapproximately $168 million to the Holdings, which was contributed to Cox PCS(Note 4). The advances were repaid in February 1997.
ADVANCES FROM PHILLIECO PARTNERS TO PHILLIECO--At December 31, 1997, thePhillieCo Partners had advanced $45 million to PhillieCo I, for generaloperating purposes. The advances accrue interest at prime. Subsequent toDecember 31, 1997 and through September 30, 1998, the PhillieCo Partnersadvanced an additional $50 million to PhillieCo I. Additionally, during thatsame period, Sprint advanced an additional $90 million to PhillieCo I. Theseadvances accrue interest at rates from prime to prime plus 1 5/8%. All of theabove advances have maturity dates of the earliest of the following events:
(i) the 90th day following the closing date of the restructuring of thepartnership, or (ii) if the restructuring does not occur, the date of theclosing of the buy/sell arrangements that would occur under the partnershipagreement in connection with the deadlock event discussed in Note 1, or (iii)December 31, 1999.
9. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 1997 and 1996 is as follows (inthousands):
1997 FIRST SECOND THIRD FOURTH
---- -------- -------- -------- --------
Operating revenues....................... $ 9,487 $ 25,813 $ 75,228 $147,501
Operating expenses....................... 202,011 310,958 466,537 658,197
Net loss................................. 217,069 338,719 465,670 611,195
1996
----
Operating revenues....................... $ -- $ -- $ -- $ 4,175
Operating expenses....................... 31,029 47,208 87,568 195,945
Net loss................................. 67,505 91,205 102,035 183,824
10. SUBSEQUENT EVENTS
PCS RESTRUCTURING--Sprint has entered into a restructuring agreement withTCI, Comcast, and Cox to restructure Sprint's PCS operations (the "PCSRestructuring") subject to Sprint stockholder and FCC approvals. If the PCSRestructuring occurs as planned, Sprint will acquire the joint ventureinterests of TCI, Comcast and Cox in Sprint PCS and the joint venture interestof TCI and Cox in PhillieCo I and PhillieCo II. In exchange for these jointventure interests, Sprint will issue to TCI, Comcast, and Cox a newly createdclass of Sprint common stock (the "PCS Stock"). The PCS Stock will be intendedto reflect separately the performance of these joint ventures and Sprint'sother PCS interests. The operations will be referred to as the PCS Group.
If the PCS Restructuring occurs as planned, the Partners will convert theiradvances to the Company as of December 31, 1997 to equity. As of September 30,1998, the Partners have loaned $400 million, based on respective ownershipinterests, to fund the capital requirements of Holdings from the date of thesigning of the Restructuring Agreement, May 26, 1998, through the closing dateof the PCS Restructuring. Additionally, as part of the PCS Restructuring,certain of Sprint's equity-based incentive plans are intended to replace theSprint Spectrum Long-Term Incentive Plans.
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ANNEX A
THE TRACKING STOCK PROPOSAL AND RELATED INFORMATION
Definitions of certain terms used in this Annex A and not previously definedare included under the heading "Certain Definitions" below.
GENERAL
At the Special Meeting, Sprint's stockholders are being asked to approve thefollowing in connection with the PCS Restructuring:
A. An amendment to Sprint's existing Articles of Incorporation (the "PCS StockAmendment"), which would, among other things:
. define the "PCS Group," which is intended to consist of all businessconducted by Sprint for offering or providing Domestic Wireless MobileTelephony Services and any other Domestic PCS Services (other than anyactivities of the FON Group pursuant to sales agency, resale or otherarrangements with the PCS Group, which would be implemented pursuant tothe Tracking Stock Policies), as well as all acquisitions of Domestic PCSLicenses, and will initially include the operations of Sprint SpectrumHoldings, SprintCom, PhillieCo and Sprint's majority interest in Cox PCS;
. define the "FON Group," which is intended to consist of Sprint's otheroperations, including its long distance and local telecommunicationsdivisions, its product distribution and directory publishing businesses,its emerging non- PCS businesses, its interest in the Global Oneinternational strategic alliance and other telecommunications investmentsand alliances;
. establish the terms of the PCS Stock, a newly created class of commonstock, to be divided into three series: (1) Series 1 PCS Stock, to beissued to the public; (2) PCS Common Stock--Series 2 (the "Series 2 PCSStock"), to be issued to certain subsidiaries of the Cable Parents in thePCS Restructuring; and (3) PCS Common Stock--Series 3 (the "Series 3 PCSStock"), to be issued to FT and DT;
. establish the terms of a new class of preferred stock of Sprintdesignated "Preferred Stock--Seventh Series, Convertible" (the "PCSPreferred Stock"), convertible into shares of Series 1 PCS Stock or Series2 PCS Stock; and
. reclassify each outstanding share of Existing Class A Common Stock thatis held by DT into one share of Class A Common Stock--Series DT ("DT ClassA Stock").
B. An amendment to Sprint's Articles of Incorporation (the "RecapitalizationAmendment," and together with the PCS Stock Amendment, the "ArticlesAmendment"), which would, among other things:
. reclassify each outstanding share of Existing Common Stock into 1/2 shareof Series 1 PCS Stock and one share of Series 1 FON Stock; and
. reclassify each outstanding share of Existing Class A Common Stock heldby FT and DT Class A Stock held by DT so that each such share willrepresent an equity interest in the FON Group and an equity interest inthe PCS Group, together with a right to cause Sprint to issue a number ofshares of FON Common Stock--Series 3 (the "Series 3 FON Stock") and Series3 PCS Stock.
C. The Restructuring Agreement and the performance by Sprint of itsobligations under the Restructuring Agreement, including:
. Sprint's acquisition from the Cable Parents of their respective interestsin Sprint Spectrum Holdings; and
. Sprint's acquisition from TCI and Cox of their respective interests inPhillieCo.
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D. The following issuances of capital stock by Sprint:
. Series 2 PCS Stock and warrants to acquire shares of Series 2 PCS Stock(the "Warrants") to certain subsidiaries of the Cable Parents asconsideration for the acquisition of the interests in Sprint SpectrumHoldings and PhillieCo acquired from such subsidiaries of the CableParents;
. an underwritten initial public offering of Series 1 PCS Stock (the"IPO");
. PCS Preferred Stock to the Cable Parents to purchase up to $240 millionof indebtedness advanced by the Cable Parents to fund the operations ofSprint Spectrum Holdings;
. Series 3 PCS Stock to FT and DT in connection with the PCS Restructuring,and Series 3 PCS Stock or Series 3 FON Stock to FT and DT from time totime in the future pursuant to certain equity purchase rights; and
. PCS Stock to FT and DT and the Cable Parents (if so elected by the CableParents) upon the exercise of their equity purchase rights in connectionwith the IPO and (subject to certain exceptions) any future issuances ofPCS Stock or creation of an Inter-Group Interest.
We refer to the PCS Stock and the FON Stock as the "Tracking Stocks."
STRATEGIC OBJECTIVES OF THE TRACKING STOCK PROPOSAL
The Tracking Stock Proposal is intended to allow Sprint to achieve certainstrategic objectives, including the following:
Management Control of the PCS Group. Upon consummation of the PCSRestructuring, Sprint will obtain 100% ownership and control of the operationscomprising the PCS Group (subject to the 40.8% equity interest of Cox in CoxPCS).
Greater Market Recognition of the Value of Sprint. The publicly-tradedTracking Stocks will be listed securities that are intended to track theperformance of the PCS Group and FON Group separately and are intended toprovide greater market understanding and recognition of the value (individuallyand collectively) of Sprint and its individual lines of business represented bythe FON Group and the PCS Group.
Financial Flexibility. The Tracking Stocks will assist in meeting the capitalrequirements of the PCS Group by creating an additional publicly-traded equitysecurity that can be used to raise capital and can be issued in connection withacquisitions and investments. However, the use of a tracking stock inconnection with a future acquisition could have adverse effects, such as thepossible inability or increased difficulty of receiving a ruling from the IRSin connection with the acquisition.
Synergies. The Tracking Stocks will retain for Sprint the advantages of doingbusiness under common ownership. Each group can benefit from synergies with theother, including certain strategic, financial and operational benefits thatwould not be available if the FON Group and the PCS Group were not under commonownership. In addition, the single consolidated structure provides certainadvantages of tax consolidation.
CREATION OF THE TRACKING STOCKS
Sprint intends to create two new classes of common stock, the PCS Stock andthe FON Stock. The PCS Stock, the PCS Group, the FON Stock and the FON Groupwill be created in connection with the PCS Restructuring and theRecapitalization by the filing of the Articles Amendment.
The PCS Stock is intended to reflect separately the performance of the PCSGroup. The FON Stock is intended to reflect the performance of the FON Group.Both the PCS Stock and the FON Stock are classes of common stock of
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Sprint andare subject to all of the risks of an equity investment in Sprint and all ofSprint's businesses, assets and liabilities.
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In addition to the Series 1 PCS Stock, Sprint intends to create and issuetwo other series of PCS Stock: Series 2 PCS Stock, to be issued to the CableParents, and Series 3 PCS Stock, to be issued to FT and DT. In addition to theSeries 1 FON Stock, Sprint intends to create two other series of FON Stock: FONCommon Stock--Series 2 ("Series 2 FON Stock"), to be issued only if Sprintconverts the outstanding shares of PCS Stock into shares of FON Stock at a timewhen shares of Series 2 PCS Stock remain outstanding, and Series 3 FON Stock,to be issued to FT and DT. See "--The PCS Restructuring" and "--TheRecapitalization."
THE PCS RESTRUCTURING
Sprint currently conducts a substantial portion of its PCS operations throughits 40% interest in Sprint Spectrum Holdings and its approximately 47% interestin PhillieCo. On May 26, 1998, Sprint entered into the Restructuring Agreement,pursuant to which it agreed to purchase from the Cable Parents all theirrespective interests in Sprint Spectrum Holdings and all the respectiveinterests of TCI and Cox in PhillieCo in exchange for
. shares of Series 2 PCS Stock;
. the Warrants to acquire shares of Series 2 PCS Stock; and
. under certain circumstances described below, shares of PCS PreferredStock.
Pursuant to the Restructuring Agreement, Sprint and the Cable Parents madeloans to finance the operations of Sprint Spectrum Holdings. To the extent thata Cable Parent elects to contribute its portion of such loans to its subsidiaryholding an interest in Sprint Spectrum Holdings prior to the PCS Restructuring,it will receive shares of PCS Preferred Stock as consideration for itscorresponding interest in Sprint Spectrum Holdings at the closing of the PCSRestructuring. If its portion of such loans remains outstanding at the closing,such Cable Parent will receive shares of PCS Preferred Stock in repayment ofsuch loans made by such Cable Parent. The FON Group may also, depending upon anelection to be made by Sprint, receive a preferred inter-group interest withterms similar to those of the PCS Preferred Stock, also convertible into anadditional Inter-Group Interest (the "Preferred Inter-Group Interest") inrepayment of similar loans made by Sprint. For additional information aboutsuch loans, see the Unaudited Pro Forma Condensed Combined Financial Statementsfor Sprint, the FON Group and the PCS Group appearing elsewhere in thisProspectus Supplement.
TIMING OF THE RECAPITALIZATION AND THE IPO
Pursuant to the Tracking Stock Proposal, Sprint may elect to complete eitherthe IPO or the Recapitalization at the closing of the PCS Restructuring. Sprinthas decided to delay the IPO due to current general market conditions.Therefore, at the closing of the PCS Restructuring, Sprint will complete theRecapitalization of the Existing Common Stock and the Existing Class A CommonStock. Sprint will continue to evaluate market conditions and may proceed withthe IPO at a later date. There is no assurance that the IPO will be completed.
INTER-GROUP INTEREST
Sprint has determined the total number of shares of PCS Stock intended totrack the performance of the PCS Group (excluding the shares to be issued inthe IPO and upon the exercise of equity purchase rights in connection with theIPO). At the closing of the PCS Restructuring, Sprint will issue 46.5% of thoseshares to the Cable Parents and 1.2% of those shares to FT and DT. In exchangefor the shares issued to the Cable Parents, Sprint will become the sole ownerof each entity in the PCS Group (subject to Cox's minority ownership interestin Cox PCS). The shares of PCS Stock that are issued to holders of Sprint'sExisting Common Stock and Existing Class A Common Stock in the Recapitalizationor issuable in respect of the Class A common stock held by FT and DT after theRecapitalization ("Class A Common Stock") will represent substantially all ofthe remaining unissued 52.3%, or
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"Inter-Group Interest." The FON Group willcontinue to hold the Preferred Inter-Group Interest immediately after theRecapitalization.
THE RECAPITALIZATION
The filing of the Recapitalization Amendment will result in the tax-freerecapitalization of Sprint's Existing Common Stock and Existing Class A CommonStock. In the Recapitalization, Sprint will (1) reclassify
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each outstanding share of its Existing Common Stock to represent one share ofSeries 1 FON Stock and 1/2 share of Series 1 PCS Stock and (2) reclassify eachshare of its Existing Class A Common Stock held by FT and DT so that each sharerepresents an equity interest in the FON Group and an equity interest in thePCS Group, together with a right to cause Sprint to issue, to each holderthereof, a number of shares of Series 3 FON Stock or Series 3 PCS Stock.
After the Recapitalization, it is intended that the FON Stock will reflectthe performance of the FON Group, and the FON Group's Inter-Group Interest willbe substantially eliminated.
ARRANGEMENTS WITH HOLDERS OF EXISTING CLASS A COMMON STOCK
On May 26, 1998, Sprint entered into a Master Restructuring and InvestmentAgreement (the "Master Agreement") with FT and DT which provides that FT and DTwill purchase from Sprint a sufficient number of shares of Series 3 PCS Stockin connection with the PCS Restructuring and the IPO to maintain theiraggregate voting power of approximately 20% of all Sprint Voting Stock, takinginto account issuances in the IPO, the PCS Restructuring and the exercise bythe Cable Parents of their purchase rights. The Master Agreement also providesthat the existing investment documents among Sprint, FT and DT, including theexisting stockholders agreement and the existing standstill agreement, will beamended to reflect and address the changes provided for by the Tracking StockProposal.
LOANS TO PHILLIECO
Sprint, TCI and Cox (the parents of the PhillieCo partners) have loaned toPhillieCo in proportion to their respective interests in PhillieCo an aggregateof $95 million. Sprint had loaned an additional $90 million to PhillieCo as ofSeptember 30, 1998. Sprint will cause all loans advanced by the parents of thePhillieCo partners or their respective affiliates to PhillieCo prior to theclosing of the PCS Restructuring to be repaid by PhillieCo (together withaccrued interest) on the 90th day following the closing.
AMENDMENTS TO THE COX PCS AGREEMENTS
Cox PCS is organized as a limited partnership with two partners, SprintSpectrum Holdings and a subsidiary of Cox. Sprint Spectrum Holdings holds a59.2% interest in Cox PCS and is the managing partner. The current Cox PCSpartnership agreement contains provisions (i) granting Cox the right to requireSprint Spectrum Holdings to purchase Cox's remaining interest in Cox PCS and
(ii) granting Sprint Spectrum Holdings the right to require Cox to sell suchinterest to Sprint Spectrum Holdings, in each case over a specified period oftime and for cash or additional partnership interest in Sprint SpectrumHoldings. In connection with the Restructuring Agreement, Sprint SpectrumHoldings and Cox have agreed to enter into an amendment to the Cox PCSpartnership agreement (the "Cox PCS Amendment"), effective as of the closing ofthe PCS Restructuring, that will modify these put and call provisions toprovide Cox with the right to require that Sprint Spectrum Holdings acquire,for cash, up to a 10.2% interest in Cox PCS in each of 1998, 1999 and 2000 or,for Series 2 PCS Stock, up to all of its remaining interest in 1998 and 1999.Beginning in 2001, through 2005, Cox has the right to require that SprintSpectrum Holdings acquire up to all of its interest in Cox PCS in exchange forSeries 2 PCS Stock or cash at the election of Sprint Spectrum Holdings.Beginning in 2001, through 2005, Sprint Spectrum Holdings has the right torequire that Cox transfer up to all of its interest in Cox PCS in exchange forSeries 2 PCS Stock or cash at the election of Sprint Spectrum Holdings.Purchases pursuant to the put and call arrangement will
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be based upon anappraised market value. In addition, Sprint and Cox agreed that Cox PCS'sobligation to pay an affiliation fee to Sprint Spectrum Holdings under theaffiliation agreement would terminate effective March 31, 1998. The affiliationfee obligation will be reinstated if the PCS Restructuring is not consummated.
EXPECTED MANNER OF COMPLIANCE WITH VARIOUS REPORTING REQUIREMENTS
After the transactions contemplated by the Tracking Stock Proposal arecompleted, securities law reporting requirements applicable to Sprint and itsofficers and directors will be satisfied in a manner that the Sprint
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Board determines to be appropriate depending upon the nature of therequirement. For example, Sprint expects that the individuals consideredofficers and directors for purposes of filing reports of beneficial ownershipof Sprint securities pursuant to Section 16 of the Securities and Exchange Actof 1934, as amended (the "Exchange Act") will be determined at the corporatelevel rather than by reference to any individual's duties with the FON Group orthe PCS Group. Sprint expects to provide separate market price performanceinformation for the FON Group and the PCS Group in its annual Exchange Actfilings and other filings requiring compliance with Item 201 of Regulation S- K.Sprint will provide, in its Exchange Act filings requiring compliance with Item403 of Regulation S-K, beneficial ownership information concerning the FONStock and the PCS Stock separately for (1) each beneficial owner of more thanfive percent of each of the FON Stock or PCS Stock (including any "group" asthat term is used in Section 13(d)(3) of the Exchange Act) and (2) itsexecutive officers (as that term is defined in Item 402(a)(3) of Regulation S-
K), directors and the directors and executive officers as a group, with theexecutive officers to be determined at the corporate level rather than byreference to any individual's duties with the FON Group or the PCS Group.Executive compensation, biographical data of management, and certainrelationships and related transactions for directors and officers will beprovided in accordance with securities law disclosure requirements and in amanner determined to be most meaningful and practicable depending on variousfactors including the nature of the filing or report.
ACCOUNTING MATTERS
General Accounting Matters. Sprint will prepare financial statements inaccordance with generally accepted accounting principles, consistently applied,for each of the groups, and these financial statements, taken together, willcomprise all of the accounts included in the corresponding consolidatedfinancial statements of Sprint. The financial statements of each of the groupswill principally reflect the financial position, results of operations and cashflows of the businesses included therein.
Allocation of Shared Services. Certain costs relating to Sprint's general andadministrative services will be directly assigned, where possible, by Sprint toeach group based upon actual utilization of such services. If directattribution based upon utilization is not possible or is impracticable, othermethods and criteria will be used that management believes are equitable andprovide a reasonable estimate of the costs attributable to each group,consistent with certain policies adopted by the Sprint Board in connection withthe Tracking Stock Proposal (the "Tracking Stock Policies").
TRACKING STOCK POLICIES
In connection with the PCS Restructuring, Sprint has adopted and intends tofollow the Tracking Stock Policies.
General. The Sprint Board has determined that all material matters as towhich the holders of FON Stock and the holders of PCS Stock may havepotentially divergent interests will be resolved in a manner that the SprintBoard (or the Capital Stock Committee of the Sprint Board acting on its behalf)determines to be in the best interests of Sprint and all of its commonstockholders, after giving fair consideration to the potentially divergentinterests and all other relevant interests of the holders of the separateclasses of Sprint's common stock. Pursuant to the Tracking Stock Policies, therelationship between the FON Group and the PCS Group and the means by which theterms of any material transaction between them will be determined will begoverned by a process of fair dealing. The Sprint Board will not recommend anytransaction that would result in a Change in Control, or any Strategic Merger,without
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a prior determination that the terms of such transaction are fair toholders of PCS Stock, taken as a separate class, and the holders of the FONStock, taken as a separate class.
Capital Stock Committee. The Sprint Board has adopted an amendment to thebylaws of Sprint, to become effective on the Closing Date, establishing acommittee of the Sprint Board to be known as the Capital Stock Committee. TheSprint Board has delegated to the Capital Stock Committee the authority to, andthe Capital Stock Committee will, interpret, make determinations under, andoversee the implementation of the
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Tracking Stock Policies. All material commercial transactions between the FONGroup and the PCS Group, including any transaction that results in a change inthe size of any Inter-Group Interest held by the FON Group in the PCS Group,will be on commercially reasonable terms and will be subject to the review andapproval of the Capital Stock Committee. If such review occurs before thetransaction is undertaken and such transaction is disapproved, the transactionwill not proceed. If such review occurs after such transaction is undertakenand such transaction is disapproved, appropriate actions will be taken toreinstate the pre-existing circumstances to the fullest extent practicable. Inmaking any and all determinations in connection with the Tracking StockPolicies, either directly or by appropriate delegation of authority, themembers of the Sprint Board and the Capital Stock Committee will act in afiduciary capacity and pursuant to legal guidance concerning their respectiveobligations under applicable law. The Sprint Board has also provided theCapital Stock Committee with the authority to engage the services ofaccountants, investment bankers, appraisers, attorneys and other serviceproviders to assist it in discharging its duties.
Each member of the Capital Stock Committee will be an Independent Director ora person who, except for a relationship with FT or DT or a subsidiary thereof,would be an Independent Director. Sprint expects that initially the CapitalStock Committee will consist of each member of the Sprint Board other than Mr.Esrey and Mr. LeMay.
Pursuant to the bylaws amendment, the Capital Stock Committee will have andmay exercise such powers, authority and responsibilities as the Sprint Boardmay delegate to the Capital Stock Committee in connection with the adoption ofgeneral policies governing the relationship between business groups orotherwise, including with respect to, among other things: (i) the business andfinancial relationships between the FON Group and the PCS Group (or anybusiness or subsidiary allocated to the FON Group or the PCS Group,respectively), (ii) dividends in respect of, and transactions by Sprint or theFON Group (or any business or subsidiary allocated to the FON Group) in, sharesof PCS Stock and (iii) any other matters arising in connection with therelationships or transactions described in clauses (i) and (ii).
As part of the Articles Amendment, Sprint's existing Articles ofIncorporation will be amended to provide that the provisions of the Sprintbylaws regarding the Capital Stock Committee will not be amended prior to thefourth anniversary of the closing of the PCS Restructuring by the Sprint Boardwithout (i) the approval of the holders of a majority of the shares of thenoutstanding Common Stock and (ii) the approval of the holders of a majority ofthe shares of then outstanding PCS Stock, voting as a separate class.
Scope of the PCS Group; Allocation of Business Opportunities andOperations. The PCS Stock Amendment sets forth the entities that will comprisethe PCS Group as of the closing of the PCS Restructuring. The Tracking StockPolicies provide that any business conducted by Sprint for offering orproviding (1) Domestic Wireless Mobile Telephony Services and (2) any otherDomestic PCS Services will be allocated to the PCS Group. In addition, theTracking Stock Policies provide that all acquisitions of Domestic PCS Licenseswill be allocated to the PCS Group. To the extent such businesses or licensesare acquired by the FON Group, the Sprint Board will arrange for an allocationor transfer of such assets to the PCS Group as soon as reasonably practicableat a price equivalent to the fair market value of such businesses or licenses.However, in no event will such allocation or transfer be required at a timethat would adversely affect the availability of pooling-of-interestsaccounting. These provisions of the Tracking Stock Policies will not precludethe formation of commercially reasonable contracts or other arrangementsbetween the PCS Group and the FON Group or any Other Group for sales agency,resale, or any other arrangement with respect to businesses conducted by eitherthe FON Group or the PCS Group. Except as
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provided above, the Sprint Board mayallocate business opportunities and operations to the FON Group, the PCS Groupor to any Other Group as it considers in the best interests of Sprint and itsstockholders as a whole.
Relationship Between Groups; Long Distance Pricing. All material commercialtransactions between the FON Group and the PCS Group will be on commerciallyreasonable terms and shall be subject to the review and approval of the CapitalStock Committee. With respect to pricing of long distance services (whetherfrom one calling area to another, or within a calling area) purchased by thePCS Group for purposes of enabling PCS
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Group customers to complete wireless calls (whether billed separately or aspart of other charges), services will be provided at the best price offered bythe FON Group to third parties in similar situations when taking into accountall relevant factors (e.g., volumes, peak/off-peak usage and length ofcommitment). The PCS Group will be permitted to acquire private line capacityfrom the FON Group to self-provision long distance services to the extent thatsuch self- provisioning can be accomplished on terms more favorable to the PCSGroup, and will be at the best price offered by the FON Group to third partiesin similar situations, when taking into account all relevant factors.
Transfers of assets from the FON Group to the PCS Group that are designatedby the Sprint Board to be treated as an equity contribution by the FON Group tothe PCS Group will result in an increase in the Inter-Group Interest held bythe FON Group in the PCS Group in accordance with the Articles Amendment.
Pursuant to the Tracking Stock Policies, the PCS Group will not acquire anInter-Group Interest in the FON Group (or in any Other Group). Transfers ofassets from the PCS Group to the FON Group therefore will not be treated ascreating an Inter-Group Interest of the PCS Group in the FON Group, but may betreated as a reduction of any existing Inter-Group Interest of the FON Group inthe PCS Group, but not below zero.
All other transfers of assets between one group (the "Transferor Group") andanother group (the "Transferee Group"), not designated by the Sprint Board asequity transfers and not pursuant to a contract for the provision of goods orservices between the groups, will be accompanied by (1) the transfer by theTransferee Group to the Transferor Group of other assets, (2) the creation ofinter-group debt owed by the Transferee Group to the Transferor Group, or (3)the reduction of inter-group debt owed by the Transferor Group to theTransferee Group, in each case in an amount having a fair market value, in thejudgment of the Sprint Board, equivalent to the fair market value of the assetstransferred by the Transferor Group.
Notwithstanding the above, the Sprint Board has determined pursuant to theTracking Stock Policies that neither the FON Group nor any Other Group willacquire in one transaction or in a series of related transactions a significantportion of the assets of the PCS Group without receiving the consent of theholders of a majority of the outstanding shares of PCS Stock, voting as aseparate class, and the consent of the holders of a majority of the outstandingshares of FON Stock or stock of such Other Group, voting as a separate class. A"significant portion of the business of the PCS Group" is defined as more than33% of the assets of the PCS Group, based on the fair market value of theassets, both tangible and intangible, of the PCS Group as of the time that theproposed transaction is approved by the Sprint Board.
Any inter-group transaction that results in a change in the size of anyInter-Group Interest held by the FON Group or any Other Group in the PCS Groupwill be subject to the review and approval of the Capital Stock Committee. Ifsuch review occurs before such transaction is undertaken and such transactionis disapproved, the transaction will not proceed. If such review occurs aftersuch transaction is undertaken and such transaction is disapproved, appropriateactions will be taken to reinstate the pre-existing circumstances to thefullest extent practicable.
The Sprint Board has also determined pursuant to the Tracking Stock Policiesthat the FON Group will not engage in any transactions, including mergers,consolidations, recapitalizations, or similar transactions, that have theeffect of circumventing the rights of the holders of PCS Stock with respect tothe time restriction and the benefit of the premium payable or procedure toensure fairness on Sprint's exercise of its right to convert outstanding sharesof PCS Stock to FON Stock, or the benefit of the provisions of the ArticlesAmendment limiting redemptions of the PCS Stock in exchange for shares of asubsidiary (a "spin off" of the PCS Group) for two years following the closingof the
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PCS Restructuring unless approved by the holders of a majority of theoutstanding shares of PCS Stock. These provisions will not apply to anytransaction involving a third party the terms of which have been determined inadvance by either the Sprint Board or the Capital Stock Committee to be fair toholders of PCS Stock, taken as a separate class, and holders of FON Stock,taken as a separate class. The Tracking Stock Policies also provide that Sprintwill not acquire a number of shares of Series 1 PCS Stock such that,immediately after the acquisition, the number of shares of Series 1 PCS Stockoutstanding is
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less than 80% of the sum of (i) the number of shares of Series 1 PCS Stockissued to the public in the Recapitalization and (ii) the number of shares ofSeries 1 PCS Stock issued to the public in any primary initial public offeringof Series 1 PCS Stock that is completed before the Registration RightsCommencement Date (all such numbers being appropriately adjusted for any stocksplit, stock dividend, recapitalization or similar transaction affecting thenumber shares of Series 1 PCS Stock outstanding).
Allocation of Federal and State Income Taxes. Federal and state income taxesincurred by Sprint which are determined on a consolidated, combined, or unitarybasis will be allocated between the groups in accordance with a Tax SharingAgreement to be entered into and undertaken by Sprint. These allocations willbe based principally on the taxable income and tax credits contributed by eachgroup. Such allocations to or from the PCS Group are intended to reflect itsactual incremental cumulative effect (positive or negative) on Sprint's federaland state taxable income and related tax liability and tax credit position,subject to certain adjustments. Tax benefits that cannot be used by a groupgenerating those benefits but can be used on a consolidated basis will becredited to the group that generated such benefits. Accordingly, the amounts oftaxes payable or refundable, which will be allocated\ to each group, may notnecessarily be the same as that which would have been payable or refundable hadthe group filed a separate income tax return. Sprint expects that significantpayments pursuant to the Tax Sharing Agreement will be made from the FON Groupto the PCS Group in the near future, in light of the substantial operatinglosses that the PCS Group is expected to incur during this time. Tax sharingpayments between the groups will be accrued as of the end of the tax period towhich they relate.
The Tax Sharing Agreement includes a procedure pursuant to which tax sharingpayments to or from the PCS Group shall be calculated excluding the effect ofany cumulative combined net loss or credit of (a) all new businesses directlyor indirectly acquired by the FON Group after May 26, 1998 individually havingan acquisition cost in excess of $500 million, taking into account the amountof any liabilities assumed by the acquiror or to which the acquired business issubject, and (b) all Other Groups except to the extent that an Other Groupreflects one or more profitable core business(es) of the FON Group that existson the date of creation of the FON Group (the "Stacking Procedure").
The initial Tax Sharing Agreement (including the Stacking Procedure) willapply to tax years ending on or before December 31, 2001, and shall not bemodified, suspended or rescinded, nor will additions or exceptions be made tothe Tax Sharing Agreement, for such periods. For subsequent periods, the SprintBoard will adopt a tax sharing arrangement that will be designed to allocateSprint's tax benefits and burdens fairly between the PCS Group and the FONGroup. Sprint expects that tax benefits that cannot be used by a groupgenerating those benefits but can be used on a consolidated basis will continueto result in payments to the group that generated such benefits based on thevalue of such benefits to Sprint on a consolidated basis. In addition, Sprintexpects that tax benefits, if any, pertaining to tax loss or tax credit carryforwards generated by a group but not utilized as of the expiration of theinitial Tax Sharing Agreement will continue to result in payments to the groupthat generated such benefits based on the value of such benefits to Sprint on aconsolidated basis when such tax benefits are utilized. Sprint has notdetermined whether or not it will continue to utilize the Stacking Procedurefor tax years ending after December 31, 2001.
Allocation of Group Financing. Loans from Sprint or any member of the FONGroup to any member of the PCS Group shall be made at interest rates and onother terms and conditions substantially equivalent to the interest rates andother terms and conditions that the PCS Group would be able to obtain fromthird parties (including the public markets) as a direct or indirect wholly-owned subsidiary of Sprint, but without the benefit of any guaranty by
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Sprintor any member of the FON Group. This policy contemplates that such loans willbe made on the basis set forth above regardless of the interest rates and otherterms and conditions on which Sprint or members of the FON Group may haveacquired the subject funds. The provisions of this policy will only applybefore December 31, 2001 and will not be modified, suspended or rescinded, norshall any exception be made to such provisions, prior to December 31, 2001.Sprint currently does not expect that the Tracking Stock Policies provisionregarding allocation of debt expense will be amended in any material way afterDecember 31, 2001.
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Dividend Policy. The Sprint Board will periodically consider appropriatedividend policies and practices relating to future dividends on the FON Stockand the PCS Stock. The Sprint Board does not expect to declare any dividends onthe PCS Stock in the foreseeable future.
Pursuant to the Tracking Stock Policies, dividends on FON Stock may bedeclared and paid only out of the lesser of (i) the funds of Sprint legallyavailable therefor and (ii) the FON Group Available Dividend Amount.
Pursuant to the Tracking Stock Policies, dividends on PCS Stock may bedeclared and paid only out of the lesser of (i) the funds of Sprint legallyavailable therefor and (ii) the PCS Group Available Dividend Amount.
As of September 30, 1998, based on their respective financial statements, thefunds of Sprint legally available for the payment of dividends under Kansas lawwould have been at least $8.5 billion and the FON Group Available DividendAmount and the PCS Group Available Dividend Amount (after giving effect to theRecapitalization, the PCS Restructuring and the exercise of equity purchaserights by FT and DT in connection with the PCS Restructuring) would have beenapproximately $7.7 billion and $3.7 billion, respectively. No assurance can bemade as to the continued availability of such amounts. Dividend payments on theFON Stock or on the PCS Stock could be precluded because of the unavailabilityof legally available funds under Kansas law, even if the Available DividendAmount test with respect to the relevant group is met.
Policies May Be Modified or Rescinded at Any Time. Unless otherwise providedabove, the Tracking Stock Policies may be modified, suspended or rescinded, andadditional policies may be adopted, or exceptions made to such policies inconnection with particular facts and circumstances, all as the Sprint Board maydetermine consistent with its fiduciary duties to Sprint and all its commonstockholders at any time with or without the approval of Sprint's stockholders,although Sprint has no present intention to do so and Sprint has agreed withthe Cable Parents that it will not change such policies prior to theRecapitalization. Any determination of the Sprint Board to modify, suspend orrescind such policies, or to make exceptions thereto or adopt additionalpolicies, including any such decision that would have disparate impacts uponholders of FON Stock and PCS Stock, would be made by the Sprint Board in amanner consistent with its fiduciary duties to Sprint and all of its commonstockholders after giving fair consideration to the potentially divergentinterests and all other relevant interests of the holders of the separateclasses of Sprint's common stock, including the holders of FON Stock and theholders of PCS Stock.
CERTAIN DEFINITIONS
The following terms used in this Annex A have the following respectivemeanings:
"Affiliate," as defined in the Restructuring Agreement, means, with respectto any person, any other person that directly, or indirectly through one ormore intermediaries, controls or is controlled by, or is under common controlwith, such person.
"Amended Articles" means the Amended and Restated Articles of Incorporationof Sprint as in effect upon the filing of the Articles Amendment with theKansas Secretary of State.
"Capital Stock Committee" means a committee of the Sprint Board to which theSprint Board has delegated the authority to interpret, make determinationsunder, and oversee the implementation of the Tracking Stock Policies.
"Change of Control," as defined in the Amended Articles, means a:
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(a) decision by the Sprint Board to sell control of Sprint or not tooppose a third party tender offer for Sprint Voting Securities representingmore than 35% of the Voting Power of Sprint; or
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(b) change in the identity of a majority of the Directors due to (i) aproxy contest (or the threat to engage in a proxy contest) or the electionof Directors by the holders of Preferred Stock; or (ii) any unsolicitedtender, exchange or other purchase offer which has not been approved by amajority of the Independent Directors,
provided that a Strategic Merger shall not be deemed to be a Change of Controland provided, further, that any transaction between Sprint and FT and DT orotherwise involving FT and DT and any of their direct or indirect subsidiarieswhich are party to a contract therefor shall not be deemed to be a Change ofControl.
"Controlled Affiliates," as defined in the Restructuring Agreement, means the"Controlled Affiliate" of (i) any person (other than a parent or any subsidiaryof a parent) means the parent of such person as of the date of the PCSRestructuring and each subsidiary of such parent as of the date ofdetermination, and (ii) any parent or its subsidiary means such parent and eachsubsidiary of such parent as of the date of determination.
"Convertible Securities," as defined in the Amended Articles, means anysecurities of Sprint or of any subsidiary thereof (other than shares of FONStock or PCS Stock), including warrants and options, outstanding at such timethat by their terms are convertible into or exchangeable or exercisable for orevidence the right to acquire any shares of any class or series of FON Stock orPCS Stock, whether convertible, exchangeable or exercisable at such time or alater time or only upon the occurrence of certain events, pursuant toantidilution provisions of such securities or otherwise.
"Domestic" means geographically within the 50 states of the United States orthe District of Columbia, Puerto Rico and the U.S. Virgin Islands.
"Domestic PCS License" means a license to use PCS Spectrum within Domesticareas granted by the FCC or other applicable authority.
"Domestic PCS Services" means any services offered or provided within aDomestic geographic area using a Domestic PCS License.
"Domestic Wireless Mobile Telephony Services" means a communications serviceprovided through the use of a wireless connection from the user to a Domesticterrestrial telecommunications network that is capable of and generallyutilized by Sprint for handing-off calls from one wireless cell to another andfrom one wireless sector within a cell to another and which is intended toallow the continuation of a user's single conversation, without interruption,as the user travels between cells and/or sectors within such network.
"Fair Value," as defined in the Amended Articles, means, in the case ofequity securities or debt securities of a class that has previously beenPublicly Traded for a period of at least 15 months, the Market Value thereof(if such value, as so defined, can be determined) or, in the case of an equitysecurity or debt security that has not been Publicly Traded for at least suchperiod, means the fair value per share of stock or per other unit of such othersecurity, on a fully distributed basis, as determined by an independentinvestment banking firm experienced in the valuation of securities selected ingood faith by the Sprint Board; provided, however, that in the case of propertyother than securities, the "Fair Value" thereof shall be determined in goodfaith by the Sprint Board based upon such appraisals or valuation reports ofsuch independent experts as the Sprint Board shall in good faith determine tobe appropriate in accordance with good business practice. Any suchdetermination of Fair Value shall be described in a statement filed with therecords of the actions of the Sprint Board.
"FON Group Available Dividend Amount," on any date, as defined in theTracking Stock Policies, means the amount, if any, by which (1) the fair marketvalue of the total assets attributed to the FON Group less the total amount ofthe liabilities attributed to the FON Group (provided that Preferred Stockshall not be treated as a liability), in each case as of such date anddetermined on a basis consistent with the determination of the
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FON Group Net Earnings (Loss), exceeds (2) the aggregate par value of, or anygreater amount determined in accordance with applicable corporation law to becapital in respect of, all outstanding shares of FON Stock and each class orseries of Preferred Stock attributed to the FON Group.
"FON Group Net Earnings (Loss)," for any period through any date, as definedin the Tracking Stock Policies, means the net income or loss of the FON Groupfor such period (or in respect of fiscal periods of Sprint commencing prior tothe Closing Date, the pro forma net income or loss of the FON Group for suchperiod as if the Closing Date had been the first day of such period) determinedin accordance with generally accepted accounting principles in effect at suchtime, reflecting income and expense of Sprint attributed to the FON Group on abasis substantially consistent with attributions of income and expense made inthe calculation of PCS Group Net Earnings (Loss), including, withoutlimitation, corporate administrative costs, net interest and other financialcosts and income taxes.
"Independent Director," as defined in the Amended Articles, means any memberof the Sprint Board who (a) is not an officer or employee of Sprint, or anyholder of Class A Stock, or any of their respective subsidiaries, (b) is not aformer officer of Sprint, or any holder of Class A Stock, or any of theirrespective subsidiaries, (c) does not, in addition to such person's role as aDirector, act on a regular basis, either individually or as a member orrepresentative of an organization, serving as a professional adviser, legalcounsel or consultant to Sprint, or any holder of Class A Stock, or theirrespective subsidiaries, if, in the opinion of the Compensation Committee ofthe Sprint Board or the Sprint Board if a Compensation Committee is not inexistence, such relationship is material to Sprint, any holder of Class AStock, or the organization so represented or such person, and (d) does notrepresent, and is not a member of the immediate family of, a person who wouldnot satisfy the requirements of the preceding clauses (a), (b) and (c) of thissentence. A person who has been or is a partner, officer or director of anorganization that has customary commercial, industrial, banking or underwritingrelationships with Sprint, any holder of Class A Stock, or any of theirrespective subsidiaries, that are carried on in the ordinary course of businesson an arms- length basis and who otherwise satisfies the requirements set forthin clauses (a), (b), (c) and (d) of the first sentence of this definition, mayqualify as an Independent Director, unless, in the opinion of the CompensationCommittee or the Sprint Board if a Compensation Committee is not in existence,such person is not independent of the management of Sprint, or any holder ofClass A Stock or any of their respective subsidiaries, or the relationshipwould interfere with the exercise of independent judgment as a member of theSprint Board. A person who otherwise satisfies the requirements set forth inclauses (a), (b), (c) and (d) of the first sentence of this definition and who,in addition to fulfilling the customary director's role, also providesadditional services directly for the Sprint Board and is separately compensatedtherefor, would nonetheless qualify as an Independent Director. Notwithstandinganything to the contrary contained in this definition, each Director as of thedate of the execution of the Investment Agreement (as defined in the AmendedArticles) who is not an executive officer of Sprint shall be deemed to be anIndependent Director hereunder.
"Inter-Group Interest" means an interest of the FON Group in the PCS Groupinitially determined as follows: Sprint has determined the total number ofshares of PCS Stock intended to track the performance of the PCS Group (withoutconsidering the shares to be issued in the IPO). At the closing of the PCSRestructuring, Sprint will issue 46.5% of those shares to the Cable Parents and1.2% of those shares to FT and DT (before giving effect to the IPO and theissuances of PCS Stock to FT and DT and the Cable Parents in connection withthe IPO). In exchange for the shares to be issued to the Cable Parents, Sprintwill become the sole owner of each entity in the PCS Group (subject to Cox'sminority ownership interest in Cox PCS). The shares of PCS Stock that areissued to holders of the Existing Common Stock in the Recapitalization orissuable in respect of the Class A Common Stock held by FT and DT after theRecapitalization will represent substantially all of the remaining unissued52.3%, or "Inter-Group Interest." Any remaining Inter-Group Interest and anyInter-Group Interest created in the future will be represented on the FON Groupfinancial statements as an ownership interest of the FON Group in the PCSGroup. This interest will be similar to the FON Group holding tracking stock ofthe PCS Group. Because Sprint cannot own stock in itself, Sprint will accountfor this remaining equity interest in the PCS Group as an Inter-Group Interest.
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"Market Value" of a share of any class or series of capital stock of Sprinton any day (as defined in the Amended Articles) means the average of the highand low reported sales prices regular way of a share of such class or series onsuch day (if such day is a Trading Day, and if such day is not a Trading Day,on the Trading Day immediately preceding such day) or, in case no such reportedsale takes place on such Trading Day, the average of the reported closing bidand asked prices regular way of a share of such class or series on such TradingDay, in either case as reported on the NYSE Composite Tape or, if the shares ofsuch class or series are not listed or admitted to trading on such exchange onsuch Trading Day, on the principal national securities exchange in the UnitedStates on which the shares of such class or series are listed or admitted totrading or, if not listed or admitted to trading on any national securitiesexchange on such Trading Day, on the National Market tier of The Nasdaq StockMarket or, if the shares of such class or series are not listed or admitted totrading on any national securities exchange or quoted on such National MarketSystem on such Trading Day, the average of the closing bid and asked prices ofa share of such class or series in the over-the-counter market on such TradingDay as furnished by any NYSE member firm selected from time to time by theSprint Board or, if such closing bid and asked prices are not made available byany such NYSE member firm on such Trading Day, the Fair Value of a share ofsuch class or series; provided that, for purposes of determining the MarketValue of a share of any class or series of capital stock for any period,
(i) the "Market Value" of a share of capital stock on any day prior toany "ex-dividend" date or any similar date occurring during such period forany dividend or distribution (other than any dividend or distributioncontemplated by clause (ii)(B) of this definition) paid or to be paid withrespect to such capital stock shall be reduced by the Fair Value of the pershare amount of such dividend or distribution and
(ii) The "Market Value" of any share of capital stock on any day prior to(A) the effective date of any subdivision (by stock split or otherwise) orcombination (by reverse stock split or otherwise) of outstanding shares ofsuch period or (B) any "ex-dividend" date or any similar date occurringduring such period for any dividend or distribution with respect to suchcapital stock to be made in shares of such class or series of capital stockor Convertible Securities that are convertible, exchangeable or exercisablefor such class or series of capital stock shall be appropriately adjusted,as determined by the Sprint Board, to reflect such subdivision,combination, dividend or distribution.
"Number Of Shares Issuable With Respect To The DT Class A Equity Interest InThe FON Group," as defined in the Amended Articles, means, as of the date theAmended Articles become effective, a number equal to the aggregate number ofoutstanding shares of DT Class A Stock as of the date the Amended Articlesbecome effective; provided, however, that such number shall from time to timethereafter be:
(A) adjusted, on an equivalent Per Class A FON Share Basis, to reflectany subdivision (by stock split or otherwise) or combination (by reversestock split or otherwise) of the FON Stock or any reclassification of FONStock; and
(B) decreased (but to not less than zero), if before such decrease suchnumber is greater than zero, by the number of certain shares of Series 1FON Stock or Series 3 FON Stock issued in accordance with the AmendedArticles and any reduction required to reflect the redemption of SharesIssuable With Respect To The Class A Equity Interest In The FON Group tothe extent allocated to shares of DT Class A Stock; and
(C) adjusted by the Sprint Board to properly reflect any other necessarychanges on an equivalent Per Class A FON Share Basis.
"Number Of Shares Issuable With Respect To The DT Class A Equity Interest InThe PCS Group," as defined in the Amended Articles, means, as of the date theAmended Articles become effective, a number (rounded up to the nearest wholeshare) equal to one-half of the aggregate number of outstanding shares of DTClass A Stock as of the date the Amended Articles become effective; provided,however, that such number shall from time to time thereafter be:
(A) adjusted, on an equivalent Per Class A PCS Share Basis, to reflectany subdivision (by stock split or otherwise) or combination (by reversestock split or otherwise) of the PCS Stock or any reclassification of PCSStock; and
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(B) decreased (but to not less than zero), if before such decrease suchnumber is greater than zero, by action of the Sprint Board by (1) theamount of certain payments made to the holders of DT Class A Stock dividedby the corresponding redemption price per share of PCS Stock, (2) anyreduction required to reflect the redemption of Shares Issuable WithRespect To The Class A Equity Interest In The PCS Group to the extentallocated to shares of DT Class A Stock, (3) the amount necessary toreflect the conversion of some or all of this number into a Number OfShares Issuable With Respect To The DT Class A Equity Interest In The FONGroup, and (4) the amount necessary to reflect the redemption thereof inexchange for the issuance of shares of common stock of one or more wholly-owned subsidiaries of Sprint that hold directly or indirectly all of theassets and liabilities attributed to the PCS Group; and
(C) decreased (but to not less than zero), if before such decrease suchnumber is greater than zero, by the number of certain shares of Series 1PCS Stock or Series 3 PCS Stock issued by Sprint; and
(D) adjusted by the Sprint Board to properly reflect any other necessarychanges on an equivalent Per Class A PCS Share Basis.
"Number Of Shares Issuable With Respect To The FON Group Inter-GroupInterest," as defined in the Amended Articles, means, as of the date theAmended Articles become effective, a number equal to 220,000,000 less the sumof (i) the Number Of Shares Issuable With Respect To The Existing Class ACommon Equity Interest In The PCS Group, (ii) the Number Of Shares IssuableWith Respect To The DT Class A Equity Interest In The PCS Group, (iii) one-halfof the number of shares of Common Stock, par value $2.50 per share, outstandingimmediately prior to the date the Amended Articles become effective, and (iv)one-half of the number of shares of Common Stock, par value $2.50 per share,held as treasury shares by Sprint immediately prior to the date the AmendedArticles become effective; provided, however, that such number shall from timeto time thereafter be:
(A) adjusted, as determined by the Sprint Board to be appropriate toreflect equitably any subdivision (by stock split or otherwise) orcombination (by reverse stock split or otherwise) of the PCS Stock or anydividend or other distribution of shares of PCS Stock to holders of sharesof PCS Stock or any reclassification of PCS Stock;
(B) decreased (but to not less than zero), if before such decrease suchnumber is greater than zero, by action of the Sprint Board by (1) thenumber of shares of PCS Stock issued or sold by Sprint that, immediatelyprior to such issuance or sale, were included (as determined by the SprintBoard pursuant to paragraph (C) of this definition) in the Number Of SharesIssuable With Respect To The FON Group Inter-Group Interest, (2) the numberof shares of PCS Stock issued upon conversion, exchange or exercise ofConvertible Securities that, immediately prior to the issuance or sale ofsuch Convertible Securities, were included in the Number Of Shares IssuableWith Respect To The FON Group Inter-Group Interest, (3) the number ofshares of PCS Stock issued by Sprint as a dividend or other distribution
(including in connection with any reclassification or exchange of shares)
to holders of FON Stock and Class A Common Stock (but only with respect toany Shares Issuable With Respect To The Class A Equity Interest In The FONGroup) or shares of FON Preferred Stock, as the case may be, (4) the numberof shares of PCS Stock issued upon the conversion, exchange or exercise ofany Convertible Securities issued by Sprint as a dividend or otherdistribution (including in connection with any reclassification or exchangeof shares) to holders of FON Stock or Class A Common Stock (but only withrespect to any Shares Issuable With Respect To The Class A Equity InterestIn The FON Group) or shares of FON Preferred Stock, as the case may be, (5)the quotient of (a) the aggregate Fair Value of any PCS Preferred Stock (orConvertible Securities convertible into or exchangeable or exercisable forshares of PCS Preferred Stock) issued by Sprint as a dividend or otherdistribution (including in connection with any classification or exchangeof shares) to holders of FON Stock, Class A Common Stock (but only withrespect to any Shares Issuable With Respect To The Class A Equity InterestIn The FON Group), or shares of FON Preferred Stock, as the case may be,divided by (b) the Market Value of one share of PCS Stock as of the date ofissuance of such PCS Preferred Stock (or Convertible Securities), or (6)the number (rounded, if necessary, to the nearest whole number) equal tothe quotient of (a) the aggregate Fair
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Value as of the date of contributionof properties or assets (including cash) transferred from the PCS Group tothe FON Group in consideration
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for a reduction in the Number Of Shares Issuable With Respect To The FONGroup Inter-Group Interest divided by (b) the Market Value of one share ofPCS Stock as of the date of such transfer; and
(C) increased by (1) the number of outstanding shares of PCS Stockrepurchased by Sprint for consideration that had been attributed to the FONGroup, (2) the number (rounded, if necessary, to the nearest whole number)equal to the quotient of (a) the Fair Value of properties or assets(including cash) theretofore attributed to the FON Group that arecontributed, by action of the Sprint Board, to the PCS Group inconsideration of an increase in the Number Of Shares Issuable With RespectTo The FON Group Inter-Group Interest, divided by (b) the Market Value ofone share of PCS Stock as of the date of such contribution and (3) thenumber of shares of PCS Stock into or for which Convertible Securities aredeemed converted, exchanged or exercised pursuant to the Amended Articles;
provided, further, that the Sprint Board may make such subsequent changes tothe calculations made pursuant to subparagraphs (A), (B) and (C) immediatelyabove as may be required for purposes of accurately determining such number.
"Number Of Shares Issuable With Respect To The Existing Class A EquityInterest In The FON Group," as defined in the Amended Articles, means, as ofthe date the Amended Articles become effective, a number equal to the aggregatenumber of outstanding shares of Existing Class A Common Stock as of the datethe Amended Articles becomes effective; provided, however, that such numbershall from time to time thereafter be:
(A) adjusted, on an equivalent Per Class A FON Share Basis, to reflectany subdivision (by stock split or otherwise) or combination (by reversestock split or otherwise) of the FON Stock or any reclassification of FONStock; and
(B) decreased (but to not less than zero), if before such decrease suchnumber is greater than zero, by the number of certain shares of Series 1FON Stock or Series 3 FON Stock issued in accordance with the AmendedArticles and any reduction required to reflect the redemption of SharesIssuable With Respect To The Class A Equity Interest In The FON Group tothe extent allocated to shares of Existing Class A Common Stock; and
(C) adjusted by the Sprint Board to properly reflect any other necessarychanges on an equivalent Per Class A FON Share Basis.
"Number Of Shares Issuable With Respect To The Existing Class A EquityInterest In The PCS Group," as defined in the Amended Articles, as of the datethe Amended Articles become effective, means a number (rounded up to thenearest whole share) equal to one-half of the aggregate number of outstandingshares of Existing Class A Common Stock as of the date the Amended Articlesbecome effective; provided, however, that such number shall from time to timethereafter be:
(A) adjusted, on an equivalent Per Class A PCS Share Basis, to reflectany subdivision (by stock split or otherwise) or combination (by reversestock split or otherwise) of the PCS Stock or any reclassification of PCSStock; and
(B) decreased (but to not less than zero), if before such decrease suchnumber is greater than zero, by action of the Sprint Board by (1) theamount of certain payments made to the holder of Existing Class A CommonStock divided by the corresponding redemption price per share of PCS Stock,
(2) any reduction required to reflect the redemption of Shares IssuableWith Respect To The Class A Equity Interest In The PCS Group to the extentallocated to shares of Existing Class A Common Stock, (3) the amountnecessary to reflect the conversion of some or all of this number into aNumber Of Shares Issuable With Respect To The Existing Class A EquityInterest In The FON Group, and (4) the amount necessary to reflect theredemption thereof in exchange for the issuance of shares of common stockof one or more wholly-owned subsidiaries of Sprint that hold directly orindirectly all of the assets and liabilities attributed to the PCS Group;and
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(C) decreased (but not less than zero), if before such decrease suchnumber is greater than zero, by the number of certain shares of Series 1PCS Stock or Series 3 PCS Stock issued by Sprint; and
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(D) adjusted by the Sprint Board to properly reflect any other necessarychanges on an equivalent Per Class A PCS Share Basis.
"Other Group," as defined in the Tracking Stock Policies, means any trackedgroup that Sprint may designate by future amendment to the Amended Articleswith respect to which Sprint creates or issues tracking stock to which itattributes or allocates any present or future assets or businesses.
"Outstanding PCS Fraction," as defined by the Amended Articles, means thefraction the numerator of which will be the number of shares of PCS Stockoutstanding on such date and the denominator of which will be the sum of (i)the number of shares of PCS Stock outstanding on such date, (ii) the Number ofShares Issuable With Respect To The FON Group Inter-Group Interest on suchdate, (iii) the Number Of Shares Issuable With Respect To The Existing Class AEquity Interest In The PCS Group on such date and (iv) the Number Of SharesIssuable With Respect To The DT Class A Equity Interest In The PCS Group onsuch date. A statement setting forth the Outstanding PCS Fraction as of therecord date for the payment of any dividend or distribution on PCS Stock and asof the end of each fiscal quarter of Sprint shall be filed by Sprint'sCorporate Secretary in the records of the actions of the Board of Directors notlater than fifteen business days after such date.
"PCS Group Available Dividend Amount," on any date, as defined in theTracking Stock Policies, means the amount, if any, by which (1) the product of
(a) the Outstanding PCS Fraction as of such date multiplied by (b) an amountequal to the fair market value of the total assets attributed to the PCS Groupless the total amount of the liabilities attributed to the PCS Group (providedthat Preferred Stock will not be treated as a liability), in each case as ofsuch date and determined on a basis consistent with the determination of thePCS Group Net Earnings (Loss), exceeds (2) the aggregate par value of, or anygreater amount determined in accordance with applicable corporation law to becapital in respect of, all outstanding shares of PCS Stock and each class orseries of Preferred Stock attributed to the PCS Group.
"PCS Group Net Earnings (Loss)," for any period through any date, as definedin the Tracking Stock Policies, means the net income or loss of the PCS Groupfor such period (or in respect of the fiscal periods of Sprint commencing priorto the closing of the PCS Restructuring, the pro forma net income or loss ofthe PCS Group for such period as if the closing of the PCS Restructuring hadbeen the first day of such period) determined in accordance with generallyaccepted accounting principles in effect at such time, reflecting income andexpense of Sprint attributed to the PCS Group on a basis substantiallyconsistent with attributions of income and expense made in the calculation ofthe FON Group Net Earnings (Loss), including, without limitation, corporateadministrative costs, net interest and other financial costs and income taxes.
"PCS Group Percentage Interest," as defined in the Restructuring Agreement,means, with respect to any person, the percentage of the notional equityinterest in the PCS Group owned by such person, taking into account (i) theoutstanding shares of PCS Stock, (ii) the shares of PCS Stock that would beoutstanding if the Inter-Group Interest in the PCS Group then held by the FONGroup were represented by shares of PCS Stock, (iii) after theRecapitalization, the shares of PCS Stock that would be outstanding if all ofthe outstanding shares of Class A Common Stock were converted into Series 3 PCSStock and Series 3 FON Stock pursuant to the Amended Articles, and (iv) themaximum number of shares of PCS Stock that are issuable upon the exercise,conversion or exchange of the PCS Options (or that would be issuable in thecase of a PCS Option represented by an Inter-Group Interest held by the FONGroup in the PCS Group), excluding from clause (iv) any Pre-Closing Options tothe extent reflected as part of the Inter-Group Interest referred to in clause(ii).
"PCS Options," as defined in the Restructuring Agreement, means (i) theoptions, warrants or other securities of Sprint or any of its ControlledAffiliates outstanding at such time that are exercisable or exchangeable for orconvertible into shares of PCS Stock, but excluding (A) any rights of CoxPioneer Partnership or its Affiliates under
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the Agreement of LimitedPartnership of Cox Communications, PCS, L.P., dated as of December 31, 1996, asit is to be amended pursuant to the amendments to the Cox PCS partnershipagreement, (B) the outstanding shares of Class A Common Stock, and (C) any suchoptions, warrants or other
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securities that will be satisfied by Sprint without the allocation of any costor expense to the PCS Group or otherwise economically diluting the PCS GroupPercentage Interest of any Cable Parent, and (ii) the Preferred Inter- GroupInterest and any other Inter-Group Interests held by the FON Group in the PCSGroup that have the same effect as the options, warrants and other securitiesreferred to in clause (i) above.
"PCS Spectrum," means the electromagnetic spectrum between 1850MHz and1910MHz and between 1930MHz and 1990MHz or such other electromagnetic spectrumas the FCC may allocate to license holders of electromagnetic spectrum between1850MHz and 1910MHz and between 1930MHz and 1990MHz in exchange for thesurrender of electromagnetic spectrum within the identified frequencies.
"Per Class A FON Share Basis," as defined in the Amended Articles, means,with respect to Existing Class A Common Stock or DT Class A Stock, an amountper share equal to (X / Y) x Z, where "X" equals the Number Of Shares IssuableWith Respect To The Existing Class A Equity Interest In The FON Group or theNumber Of Shares Issuable With Respect To The DT Class A Equity Interest In TheFON Group, respectively, "Y" equals the number of shares outstanding ofExisting Class A Common Stock or DT Class A Stock, respectively, and "Z" equalsthe per share number of votes or dividend amount, redemption amount or otherpayment paid to the class or series of FON Stock to which the Existing Class ACommon Stock or DT Class A Stock is being compared.
"Per Class A PCS Share Basis," as defined in the Amended Articles, means,with respect to Existing Class A Common Stock or DT Class A Stock, an amountper share equal to (X / Y) x Z, where "X" equals the Number Of Shares IssuableWith Respect To The Existing Class A Equity Interest In The PCS Group or theNumber Of Shares Issuable With Respect To The DT Class A Equity Interest In ThePCS Group, respectively, "Y" equals the number of shares outstanding ofExisting Class A Common Stock or DT Class A Stock, respectively, and "Z" equalsthe per share number of votes or dividend amount, redemption amount or otherpayment paid to the class or series of PCS Stock to which the Existing Class ACommon Stock or DT Class A Stock is being compared.
"Pre-Closing Options," as defined in the Restructuring Agreement, means theoptions, warrants and other securities of Sprint or any of its subsidiariesthat were issued prior to and are outstanding as of the closing of the PCSRestructuring and that are exercisable or exchangeable for or convertible intoshares of Sprint Common Stock, which, in connection with the Recapitalization,will become, in whole or in part, options, warrants or other securities thatare exercisable or exchangeable for or convertible into shares of Series 1 PCSStock (but excluding any PCS Options held by FT or DT).
"Publicly-Traded" with respect to any security, as defined in the AmendedArticles, means (i) registered under Section 12 of the Exchange Act, and (ii)listed for trading on the New York Stock Exchange or the American StockExchange (or any national securities exchange registered under Section 7 of theExchange Act, that is the successor to either such exchange) or quoted in theNational Association of Securities Dealers Inc. Automated Quotations System (orany successor system).
"Registration Rights Commencement Date" means (i) if the IPO is consummatedconcurrently with the closing of the PCS Restructuring, 180 days following theclosing of the PCS Restructuring, (ii) if the IPO is not consummatedconcurrently with the closing of the PCS Restructuring but is consummatedwithin 120 days of the closing of the PCS Restructuring, the later of theninetieth day following the IPO or 180 days following the closing of the PCSRestructuring, or (iii) if the IPO is not consummated concurrently with theclosing of the PCS Restructuring or within 120 days thereafter, the 180th dayfollowing the closing of the PCS Restructuring unless any Cable Parent shalldecide to exercise one of its rights to a demand registration after such 120thday following the closing of the PCS Restructuring but prior to such 180th dayfollowing the closing of the PCS Restructuring in which case the date thedemand notice is given.
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"Shares Issuable With Respect To The Class A Equity Interest In The FONGroup," as defined in the Recapitalization Amendment, means, at any time, theNumber Of Shares Issuable With Respect To The Existing Class A Equity InterestIn The FON Group and the Number Of Shares Issuable With Respect To The DT ClassA Equity Interest In The FON Group.
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"Shares Issuable With Respect To The Class A Equity Interest In The PCSGroup," as defined in the Recapitalization Amendment, means, at any time, theNumber Of Shares Issuable With Respect To The Existing Class A Equity InterestIn The PCS Group and the Number Of Shares Issuable With Respect To The DT ClassA Equity Interest In The PCS Group.
"Strategic Merger," as defined in the Amended Articles, means a merger orother business combination involving Sprint (a) in which the holders of Class AStock are entitled to retain or receive, as the case may be, voting equitysecurities of the surviving parent entity in exchange for or in respect of (byconversion or otherwise) such Class A Stock, with an aggregate Fair MarketValue (as defined in the Amended Articles) equal to at least 75% of the sum of
(i) the Fair Market Value of all consideration which such holders of Class AStock have a right to receive with respect to such merger or other businesscombination, and (ii) if Sprint is the surviving parent entity, the Fair MarketValue of the equity securities of the surviving parent entity which the holdersof Class A Stock are entitled to retain, (b) immediately after which thesurviving parent entity is an entity whose voting equity securities areregistered pursuant to Section 12(b) or Section 12(g) of the Exchange Act orwhich otherwise has any class or series of its voting equity securities held byat least 500 holders and (c) immediately after which no person or group (otherthan the holders of Class A Stock) owns Voting Securities (as defined in theAmended Articles) of such surviving parent entity with Votes equal to more than35 percent of the Voting Power of such surviving parent entity.
"Tax Sharing Agreement" means an agreement to be entered into and undertakenby Sprint pursuant to which Sprint will allocate between the FON Group and thePCS Group federal and state income taxes incurred by Sprint which aredetermined on a consolidated, combined, or unitary basis.
"Trading Day," as defined in the Amended Articles means, with respect to anysecurity, any day on which the principal national securities exchange on whichsuch security is listed or admitted to trading or NASDAQ, if such security islisted or admitted to trading thereon, is open for the transaction of business(unless such trading shall have been suspended for the entire day) or, if suchsecurity is not listed or admitted to trading on any national securitiesexchange or NASDAQ, any day other than a Saturday, Sunday, or a day on whichbanking institutions in the State of New York are authorized or obligated bylaw or executive order to close.
"Vote," as defined in the Amended Articles, means, with respect to anyentity, the ability to cast a vote at a stockholders', members' or comparablemeeting of such entity with respect to the election of directors, managers orother members of such entity's governing body, or the ability to cast a generalpartnership or comparable vote, provided that with respect to Sprint, the term"Vote" means the ability to exercise general voting power (as opposed to theexercise of special voting or disapproval rights such as those set forth in theAmended Articles) with respect to matters other than the election of directorsat a meeting of the stockholders of Sprint.
"Voting Power," as defined in the Amended Articles, means, with respect to anentity, the aggregate number of Votes outstanding as of such date in respect ofsuch entity.
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PROSPECTUS
SPRINT CORPORATION
Debt Securities
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SPRINT CAPITAL CORPORATION
Debt Securities
Unconditionally Guaranteed by
SPRINT CORPORATION
Sprint Corporation and its subsidiary, Sprint Capital Corporation, may offerfrom time to time, in the aggregate, up to $8,000,000,000 principal amount ofunsecured senior Debt Securities. The Debt Securities may be in othercurrencies or currency units in an equivalent amount. In the event DebtSecurities are issued at an original issue discount, the net proceeds from theoffering will not exceed $8,000,000,000. Sprint and/or Sprint Capital willoffer the Debt Securities as separate series, in amounts, at prices and onterms determined at the time of sale.
Sprint will unconditionally guarantee (the "Guarantees") the payment ofprincipal of and any premium and interest on all Debt Securities issued bySprint Capital.
A supplement to this Prospectus will set forth the specific terms of anyseries of Debt Securities that is offered and the terms of offering of suchseries of Debt Securities. The Prospectus Supplement will also containinformation, where applicable, about material United States federal income taxconsiderations relating to, and any listings on a securities exchange of, theDebt Securities covered by such Prospectus Supplement. See "Plan ofDistribution" for the different methods that may be used to offer the DebtSecurities and for possible indemnification arrangements for underwriters,dealers and agents.
The Debt Securities will be represented by one or more Global Securitiesregistered in the name of the nominee of The Depository Trust Company. Unlessotherwise stated in the Prospectus Supplement, Debt Securities in definitiveform will not be issued. See "Description of Debt Securities--Book-EntrySystem."
Neither the Securities and Exchange Commission nor any statesecurities commission has approved or disapproved of thesesecurities or passed upon the adequacy or accuracyof this Prospectus. Any representation to
the contrary is a criminal
offense.
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The date of this Prospectus is October 23, 1998
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WHERE YOU CAN FIND MORE INFORMATION
Sprint files annual, quarterly and special reports, proxy statements andother information with the SEC. You can inspect and copy the RegistrationStatement on Form S-3 of which this Prospectus is a part, as well as reports,proxy statements and other information filed by Sprint, at the publicreference facilities maintained by the SEC at Room 1024, 450 Fifth Street,N.W., Washington, D.C. 20549, and at the following Regional Offices of theSEC: 7 World Trade Center, Suite 1300, New York, New York 10048 and CiticorpCenter, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You canobtain copies of such material from the Public Reference Room of the SEC at450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. You cancall the SEC at 1-800-732-0330 for information regarding the operation of itsPublic Reference Room. The SEC also maintains a site on the World Wide Web athttp://www.sec.gov. that contains reports, proxy statements and otherinformation regarding registrants (like Sprint) that file electronically.
In addition, you can inspect reports, proxy statements and other informationconcerning Sprint at the offices of the New York Stock Exchange, 20 BroadStreet, New York, New York 10005, the Chicago Stock Exchange, 440 SouthLaSalle Street, Chicago, Illinois 60605, and the Pacific Exchange, 301 PineStreet, San Francisco, California 94104, on which exchanges the common stockof Sprint is listed. If the PCS Restructuring is approved by Sprint'sshareholders, Sprint intends to list its FON Stock and PCS Stock only on theNew York Stock Exchange.
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Consequently, once Sprint's existing common stock isrecapitalized, copies of Sprint's reports and proxy statements will no longerbe filed with the Chicago Stock Exchange and the Pacific Exchange andtherefore will not be available for inspection at those exchanges. See thediscussion under "Sprint Corporation" regarding the proposed PCS Restructuringand the recapitalization of Sprint's common stock into FON Stock and PCSStock.
This Prospectus provides you with a general description of the DebtSecurities that we may offer and any related Guarantees. Each time we sellDebt Securities, we will provide a Prospectus Supplement that will containspecific information about the terms of that offering. The ProspectusSupplement may also add, update or change information contained in thisProspectus. You should read both this Prospectus and any ProspectusSupplement, together with the additional information that is incorporated byreference, as described below.
This Prospectus is part of a Registration Statement that we have filed withthe SEC. To see more detail, you should read the exhibits filed with ourRegistration Statement.
The SEC allows this Prospectus to "incorporate by reference" certain otherinformation that Sprint files with them, which means that we can discloseimportant information to you by referring you to those documents. Theinformation incorporated by reference is an important part of this Prospectus,and information that Sprint files later with the SEC will automatically updateand replace this information. We incorporate by reference the documents listedbelow and any future filings made by Sprint with the SEC under Sections 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934 until we sell all ofthe securities that we have registered.
. Sprint's Annual Report on Form 10-K for the year ended December 31, 1997;
. Sprint's Quarterly Reports on Form 10-Q for the quarters ended March 31,1998 and June 30, 1998;
. Sprint's Current Reports on Form 8-K dated May 26, 1998 and June 29,1998; and
. Sprint's Proxy Statement/Prospectus that forms a part of RegistrationStatement No. 333-65173.
If you make a request for such information in writing or by telephone, wewill provide to you, at no cost, a copy of any or all of the informationincorporated by reference in the Registration Statement of which thisProspectus is a part. Requests should be addressed to: Sprint Corporation,2330 Shawnee Mission Parkway, Westwood, Kansas 66205, Attention: InvestorRelations (telephone number: (800) 259-3755).
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SPRINT CAPITAL CORPORATION
Sprint Capital is a wholly-owned subsidiary of Sprint and was incorporatedin Delaware on May 20, 1993. The principal offices of Sprint and SprintCapital are located at 2330 Shawnee Mission Parkway, Westwood, Kansas 66205,and their telephone number is (913) 624-3000.
Sprint Capital's purpose is to engage in financing activities that providefunds for use by Sprint and Sprint's subsidiaries, other than its localexchange telephone subsidiaries ("LECs"). Sprint Capital raises funds throughthe offering and sale of debt securities, and the net proceeds thereof areloaned to or invested in Sprint and its non- LEC subsidiaries. Sprint Capitaldoes not and will not engage in any other business operations.
SPRINT CORPORATION
Sprint is a diversified telecommunications service provider whose principalactivities include long distance service, local service, wireless personalcommunications services ("PCS"), product distribution and directory publishingactivities and other telecommunications activities, investments and alliances.
Sprint's long distance division ("LDD") is the nation's third largestprovider of long distance telephone services. LDD operates a nationwide, all-digital long distance telecommunications network that uses state-of-the-artfiber-optic and
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electronic technology. LDD provides domestic and internationalvoice, video and data communications services. Sprint's localtelecommunications division ("LTD") consists primarily of regulated LECsserving approximately 7.5 million access lines in 19 states. LTD provideslocal services, access by telephone customers and other carriers to LTD'slocal exchange facilities, sales of telecommunications equipment and longdistance services within specified geographic areas. Sprint's productdistribution and directory publishing businesses ("PDDP") consist of wholesaledistribution of telecommunications equipment and publishing and marketingwhite and yellow page telephone directories.
Sprint's other telecommunications activities include (i) emergingbusinesses, which consist of the development of new integrated communicationsservices, integration management and support services for computer networksand international development activities outside the scope of Global One, (ii)Sprint's interest in the Global One international strategic alliance, a jointventure with France Telecom S.A. ("FT") and Deutsche Telekom AG ("DT"), and
(iii) Sprint's other telecommunications investments and alliances, such as itsinvestment in EarthLink Network, Inc., an internet service provider. FT and DTare European telephone companies with a combined 20% strategic equityinvestment in Sprint.
Sprint currently conducts its PCS operations through its 40% interest inSprint Spectrum Holding Company, L.P. and MinorCo, L.P., its approximately 47%interest in PhillieCo Partners I, L.P. and PhillieCo Partners II, L.P., andits wholly-owned subsidiaries, SprintCom, Inc. and SprintCom EquipmentCompany, L.P. These entities market their wireless telephony products andservices under the Sprint(R) and Sprint PCS(R) brand names and, together,operate the only 100% digital PCS wireless network in the United States withlicenses to provide service nationwide utilizing a single frequency band and asingle technology. These entities own licenses to provide service to theentire United States population, including Puerto Rico and the U.S. VirginIslands. At September 30, 1998, they operated PCS systems in 163 metropolitanmarkets within the United States, including 38 of the 50 largest metropolitanareas.
Sprint has entered into a restructuring agreement with Tele-Communications,Inc. ("TCI"), Comcast Corporation ("Comcast") and Cox Communications, Inc.("Cox") (together, the "Cable Parents") to restructure Sprint's PCS operations(the "PCS Restructuring"). Sprint will acquire the joint venture interests ofTCI, Comcast and Cox in Sprint Spectrum Holding Company, L.P. and MinorCo,L.P. and the joint venture interests of TCI and Cox in PhillieCo Partners I,L.P. and PhillieCo Partners II, L.P. In exchange for these joint ventureinterests, Sprint will issue to the Cable Parents a newly created class ofSprint common stock (the "PCS Stock"). The PCS Stock is intended to reflectseparately the performance of these joint ventures and the domestic
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PCS operations of SprintCom, Inc. and SprintCom Equipment Company, L.P. Theseoperations, which after the PCS Restructuring will be 100% owned by Sprint(subject to a 40.8% minority interest in the entity holding the PCS licensefor and conducting operations in the Los Angeles/San Diego/Las Vegas area),will be referred to as the PCS Group. The FON Stock, which will be created ina tax-free recapitalization of Sprint's existing common stock, is intended toreflect the performance of all of Sprint's other operations, including LDD,LTD, PDDP, emerging businesses and its interest in Global One. Theseoperations will be referred to as the FON Group. These transactions aresubject to shareholder approval. The special meeting of Sprint shareholders toobtain approval has been scheduled for November 13, 1998.
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USE OF PROCEEDS
Unless otherwise indicated in a Prospectus Supplement, the net proceeds fromthe sale of the Debt Securities are intended to be used to repay short-termdebt of Sprint and Sprint Capital and long-term obligations of Sprint and itssubsidiaries, including debt obligations of the new PCS Group followingconsummation of the PCS Restructuring.
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The net proceeds are also intended tobe used to provide funds to Sprint and its subsidiaries for general purposes,including working capital requirements and new capital investments.
RATIOS OF EARNINGS TO FIXED CHARGES
Sprint's ratio of earnings to fixed charges was 5.66 for the six monthsended June 30, 1998, 6.41 for the year 1997, 5.94 for the year 1996, 4.32 forthe year 1995, 4.28 for the year 1994 and 2.63 for the year 1993. The ratioswere computed by dividing fixed charges into the sum of earnings (aftercertain adjustments) and fixed charges. Earnings include income fromcontinuing operations before taxes, plus equity in net losses of entities thatare less than 50% owned by Sprint, less capitalized interest. Fixed chargesinclude (i) interest on all debt of continuing operations (includingamortization of debt issuance costs), (ii) the interest component of operatingrents, and (iii) the pre-tax cost of subsidiary preferred stock dividends.
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DESCRIPTION OF DEBT SECURITIES
The Debt Securities issued by Sprint will be issued under an Indenture,dated as of October 1, 1998, between Sprint and Bank One, N.A., as Trustee(the "Sprint Indenture"), and the Debt Securities issued by Sprint Capitalwill be issued under an Indenture, dated as of October 1, 1998, among SprintCapital, Sprint and Bank One, N.A., as Trustee (the "Sprint CapitalIndenture," and together with the Sprint Indenture, the "Indentures"). TheSprint Capital Indenture has similar provisions to the Sprint Indenture,including an identical lien covenant relating to Sprint. Copies of each of theIndentures are filed as exhibits to the Registration Statement of which thisProspectus forms a part.
A summary of certain provisions of the Indentures follows. The summary isnot complete and is qualified in its entirety by express reference to thedetailed provisions of the Indentures, including the definitions in theIndentures of certain terms. All section references below are to sections ofthe applicable Indenture. You should read the Indentures, including thedefinition of terms in the Indentures, for a more complete understanding ofthe provisions and the terms described below.
GENERAL
The Indentures do not limit the amount of indebtedness that may be issuedthereunder. The Indentures provide that Debt Securities may be issued fromtime to time in one or more series. The Debt Securities will be unsecuredobligations of Sprint or Sprint Capital.
The designation of the applicable Indenture, and the title, amount,maturity, interest rate, terms for redemption, terms for sinking fundpayments, and other specific terms of the series of Debt Securities, including
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(i) the currency of payment of principal of and any premium and interest onthe Debt Securities, which may be United States dollars or any other currencyor currency unit, and (ii) any index used to determine the amount of paymentsof principal of and any premium and interest on the Debt Securities, will beset forth or summarized in the Prospectus Supplement.
Unless otherwise provided in the Prospectus Supplement, the Debt Securitieswill be represented by one or more Global Securities. Consequently, thepayment of principal and any premium and interest on the Debt Securities willbe made as described below under "Book-Entry System" and "Same-Day Settlementand Payment," and transfers of the Debt Securities can be made only asdescribed below under "Book-Entry System." In the event that Debt Securitiesin definitive form are issued, the following provisions will apply:
(a) Principal of and any premium and interest on the Debt Securities willbe payable, and transfers of the Debt Securities will be registrable, atthe Corporate Trust Office of the Trustee, provided that at the option ofSprint or Sprint Capital (in the case of Debt Securities issued by SprintCapital) payment of interest may be made by check
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mailed to the address ofthe Person entitled thereto as it appears in the Security Register.(Indentures, Sections 202, 305, and 1002) The Corporate Trust Office ofBank One, N.A., is located at 100 East Broad Street, Columbus, Ohio 43215.
(b) The Debt Securities will be issued only in fully registered formwithout coupons in denominations of $1,000 or any integral multiplethereof. (Indentures, Sections 301 and 302).
No service charge will be made for any registration of transfer or exchangeof Debt Securities, but Sprint or Sprint Capital may require payment of a sumsufficient to cover any tax or other governmental charge payable in connectionwith such transfer or exchange, other than exchanges not involving anytransfer. (Indentures, Section 305)
Securities may be issued as Original Issue Discount Securities to be offeredand sold at a substantial discount below the stated principal amount. Federalincome tax consequences and other special considerations applicable to suchOriginal Issue Discount Securities will be described in the ProspectusSupplement relating to such securities.
RESTRICTIVE COVENANT--SPRINT
Under the Indentures, Sprint and its Restricted Subsidiaries may not create,incur or allow to exist any Lien upon any property or assets now owned orhereafter acquired unless:
. such Lien is a Permitted Lien; or
. the outstanding Debt Securities (or, in the case of Debt Securitiesissued by Sprint Capital, the outstanding Guarantees) are equally andratably secured by such Lien; or
. the aggregate principal amount of indebtedness secured by such Lien andany other Lien (other than Permitted Liens) plus the Attributable Debt inrespect of any Sale and Leaseback Transaction does not exceed 15% of theConsolidated Net Tangible Assets of Sprint and its subsidiaries. (SprintIndenture, Section 1008, Sprint Capital Indenture, Section 1012)
The definitions for capitalized terms used above are as follows:
"Attributable Debt" of a Sale and Leaseback Transaction means, at any date,the total net amount of rent required to be paid under such lease during theremaining term of the lease (excluding any subsequent renewal or otherextension options held by the lessee), discounted from the respective duedates of such amounts to such date of determination at the rate of interestper annum implicit in the terms of such lease, as determined in good faith bySprint, compounded annually. The net amount of rent required to be paid underany such lease for any such period shall be the amount of rent payable by thelessee with respect to such period, after excluding amounts
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required to be paid on account of maintenance and repairs, insurance, taxes,assessments, water rates and similar charges and contingent rents.
"Capital Lease Obligations" means indebtedness represented by obligationsunder a lease that is required to be capitalized for financial reportingpurposes in accordance with generally accepted accounting principles. Theamount of such indebtedness shall be the capitalized amount of suchobligations determined in accordance with generally accepted accountingprinciples consistently applied.
"Consolidated Net Tangible Assets" of Sprint and its subsidiaries means theconsolidated total assets of Sprint and its subsidiaries as reflected inSprint's most recent balance sheet preceding the date of determinationprepared in accordance with generally accepted accounting principlesconsistently applied, less (i) current liabilities (excluding currentmaturities of long-term debt and Capital Lease Obligations) and (ii) goodwill,tradenames, trademarks, patents, minority interests of others, unamortizeddebt discount and expense and other similar intangible assets
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(excluding anyinvestments in permits or licenses issued, granted or approved by the FederalCommunications Commission).
"Lien" means any mortgage or deed of trust, pledge, hypothecation,assignment, deposit arrangement, security interest, lien, charge, easement orzoning restriction, encumbrance, preference, priority or other securityagreement or preferential arrangement of any kind or nature whatsoever on orwith respect to property including any Capital Lease Obligation, conditionalsale or other title retention agreement having substantially the same economiceffect as any of the foregoing or any Sale and Leaseback Transaction.
"Permitted Liens" means:
(i) Liens existing on October 1, 1998;
(ii) Liens on property existing at the time of acquisition of suchproperty or to secure the payment of all or any part of the purchase priceof such property or to secure any indebtedness incurred prior to, at thetime of or within 270 days after the acquisition of such property for thepurpose of financing all or any part of the purchase price of suchproperty;
(iii) Liens securing indebtedness owing by a Restricted Subsidiary toSprint or any wholly-owned subsidiary of Sprint;
(iv) Liens on property of any entity, or on the stock, indebtedness orother obligations of such entity, existing at the time (a) such entitybecomes a Restricted Subsidiary, (b) such entity is merged into orconsolidated with Sprint or a Restricted Subsidiary or (c) Sprint or aRestricted Subsidiary acquires all or substantially all of the assets ofsuch entity, as long as no such Lien extends to any other property ofSprint or any other Restricted Subsidiary;
(v) Liens on property to secure any indebtedness incurred to providefunds for all or any part of the cost of development of or improvements tosuch property;
(vi) Liens on the property of Sprint or any of its RestrictedSubsidiaries securing (a) nondelinquent performance of bids or contracts(other than for borrowed money, obtaining of advances or credit or thesecuring of debt), (b) contingent obligations on surety and appeal bondsand (c) other nondelinquent obligations of a similar nature, in each case,incurred in the ordinary course of business;
(vii) Liens securing Capital Lease Obligations, provided that (a) anysuch Lien attaches to the property within 270 days after the acquisitionthereof and (b) such Lien attaches solely to the property so acquired;
(viii) Liens arising solely by virtue of any statutory or common lawprovision relating to banker's liens, rights of set-off or similar rightsand remedies as to deposit accounts or other funds, as long as such depositaccount is not a dedicated cash collateral account and is not subject torestrictions against access by Sprint or such Restricted Subsidiary, asapplicable, in excess of those set forth by regulations promulgated by theFederal Reserve Board and such deposit account is not intended by Sprint orsuch Restricted Subsidiary to provide collateral to the depositoryinstitution;
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(ix) pledges or deposits under worker's compensation laws, unemploymentinsurance laws or similar legislation;
(x) statutory and tax Liens for sums not yet due or delinquent or whichare being contested or appealed in good faith by appropriate proceedings;
(xi) Liens arising solely by operation of law, such as mechanics',materialmen's, warehouseman's and carriers' Liens and Liens of landlords orof mortgages of landlords, on fixtures and movable property located onpremises leased in the ordinary course of business;
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(xii) Liens on personal property, other than shares of stock orindebtedness of any Restricted Subsidiary, to secure loans maturing notmore than one year from the date of the creation thereof and on accountsreceivable associated with a receivables financing program of Sprint or anyof its Restricted Subsidiaries;
(xiii) any Lien created by or resulting from litigation or otherproceeding against, or upon property of, Sprint or a Restricted Subsidiary,or any lien for workmen's compensation awards or similar awards, so long asthe finality of such judgment or award is being contested and executionthereon is stayed or such Lien relates to a final unappealable judgmentwhich is satisfied within 30 days of such judgment or any Lien incurred bySprint or any Restricted Subsidiary for the purpose of obtaining a stay ordischarge in the course of any litigation or other proceeding, as long assuch judgment or award does not constitute an Event of Default under clause
(e) of "Events of Default" below;
(xiv) Liens on the real property of Sprint or a Restricted Subsidiarywhich constitute minor survey exceptions, minor encumbrances, easements orreservations of, or rights of others for, rights of way, sewers, electriclines, telegraph and telephone lines and other similar purposes, or zoningor other restrictions as to the use of such real property, as long as allof the liens referred to in this clause (xiv) in the aggregate do not atany time materially detract from the value of such real property ormaterially impair its use in the operation of the business of Sprint andits subsidiaries;
(xv) Liens on property of Sprint or a Restricted Subsidiary securingindebtedness or other obligations issued by the United States of America orany state or any department, agency or instrumentality or politicalsubdivision of the United States of America or any state, or by any othercountry or any political subdivision of any other country, for the purposeof financing all or any part of the purchase price of (or, in the case ofreal property, the cost of construction on or improvement of) any propertyor assets subject to such Liens (including Liens incurred in connectionwith pollution control, industrial revenue or similar financings); and
(xvi) any renewal, extension or replacement (in whole or in part) of anyLien permitted pursuant to (i), (ii), (iv), (v), (vii) and (xv) above or ofany indebtedness secured by any such Lien, as long as such extension,renewal or replacement Lien is limited to all or any part of the sameproperty that secured the Lien extended, renewed or replaced (plusimprovements on such property) and the principal amount of indebtednesssecured by such Lien and not otherwise authorized by clauses (i), (ii),
(iv), (v), (vii) and (xv) does not exceed the principal amount ofindebtedness plus any premium or fee payable in connection with any suchrenewal, extension or replacement so secured at the time of such renewal,extension or replacement.
"Receivables Subsidiary" means a special purpose wholly-owned subsidiarycreated in connection with any transactions that may be entered into by Sprintor any of its subsidiaries pursuant to which Sprint or any of its subsidiariesmay sell, convey, grant a security interest in or otherwise transfer undividedpercentage interests in its receivables.
"Restricted Subsidiary" means any subsidiary of Sprint (other than aReceivables Subsidiary or Sprint Capital) if:
(i) such subsidiary has substantially all of its property in the UnitedStates (other than its territories and possessions); and
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(ii) at the end of the most recent fiscal quarter of Sprint preceding thedate of determination, the aggregate amount, determined in accordance withgenerally accepted accounting principles consistently applied, ofsecurities of, loans and advances to, and other investments in, suchsubsidiary held by Sprint and its other subsidiaries, less any securitiesof, loans and advances to, and other investments in Sprint and Sprint'sother subsidiaries held by such subsidiary or any of its subsidiaries,exceeded 15% of Sprint's Consolidated Net Tangible Assets.
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"Sale and Leaseback Transaction" means any direct or indirect arrangementpursuant to which property is sold or transferred by Sprint or a RestrictedSubsidiary and is thereafter leased back from the purchaser or transferee bySprint or such Restricted Subsidiary.
Unless otherwise indicated in the Prospectus Supplement, the covenantscontained in the Indentures and in the Debt Securities and Guarantees wouldnot necessarily afford holders protection in the event of a highly leveragedor other transaction involving Sprint that may adversely affect holders.
RESTRICTIVE COVENANTS--SPRINT CAPITAL
Sprint Capital may not create, issue, assume or guarantee any unsecuredFunded Debt ranking prior to the Debt Securities issued by Sprint Capital.
(Sprint Capital Indenture, Section 1009)
Unless otherwise indicated in the Prospectus Supplement, Sprint Capital maynot create, assume or suffer to exist any Lien (as defined above) upon any ofits property or assets, now owned or hereafter acquired, without makingeffective provision whereby the outstanding Debt Securities issued by SprintCapital shall be secured by such Lien equally and ratably with any and allother obligations and indebtedness thereby secured, with certain specifiedexceptions. (Sprint Capital Indenture, Section 1008)
EVENTS OF DEFAULT
Each of the following is an Event of Default under the Indentures withrespect to Debt Securities of any series:
(a) failure to pay principal of or any premium on any Debt Security ofthat series at maturity;
(b) failure to pay any interest on any Debt Security of that series whendue, continued for 30 days;
(c) failure to deposit any sinking fund payment, when due, in respect ofany Debt Security of that series;
(d) failure to perform any other covenant or warranty in the applicableIndenture (other than a covenant included solely for the benefit of seriesof Debt Securities other than that series), continued for 60 days afterwritten notice as provided in such Indenture;
(e) default resulting in acceleration of more than $50,000,000 inaggregate principal amount of any indebtedness for money borrowed by Sprintor Sprint Capital or any other subsidiary of Sprint under the terms of theinstrument under which such indebtedness is issued or secured, if suchindebtedness is not discharged or such acceleration is not rescinded orannulled within 10 days after written notice as provided in the Indentures;
(f) certain events of bankruptcy, insolvency or reorganization; and
(g) any other Event of Default provided with respect to Debt Securitiesof that series. (Indentures, Section 501)
If an Event of Default with respect to Debt Securities of any series at thetime outstanding occurs and is continuing, either the Trustee with respect tosuch Debt Securities or the holders of at least 25% in principal amount of theoutstanding Debt Securities of that series may declare the principal amount(or, if any of the Debt
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Securities of that series are Original Issue Discount Securities, such portionof the principal amount as may be specified in the terms of that series) ofall the Debt Securities of that series to be due and payable immediately bywritten notice as provided in the applicable Indenture.
At any time after a declaration of acceleration with respect to DebtSecurities of any series has been made and before a judgment or decree forpayment of the money due based on acceleration has been obtained, the holdersof
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a majority in principal amount of the outstanding Debt Securities of thatseries may, in accordance with the applicable Indenture, rescind and annulsuch acceleration. (Indentures, Section 502)
Each Indenture provides that the Trustee will be under no obligation,subject to the duty of the Trustee during default to act with the requiredstandard of care, to exercise any of its rights or powers under the Indentureat the request or direction of any of the holders, unless such holders offerreasonable indemnity to the Trustee. (Indentures, Sections 601 and 603)Subject to such provisions for indemnification of the Trustee, the holders ofa majority in principal amount of the outstanding Debt Securities of anyseries will have the right (in accordance with applicable law) to direct thetime, method and place of conducting any proceeding for any remedy availableto the Trustee, or exercising any trust or power conferred on the Trustee,with respect to the Debt Securities of that series. (Indentures, Section 512)
Sprint and Sprint Capital will be required to furnish to the Trusteeannually a statement as to the performance by it of certain of its obligationsunder the applicable Indenture and as to any default in such performance.
(Indentures, Section 1004)
MODIFICATION AND WAIVER
Modifications and amendments of the Sprint Indenture may be made by Sprintand the Trustee, in most cases with the consent of the holders of a majorityin principal amount of the outstanding Debt Securities of each series affectedby such modification or amendment. Modifications and amendments of the SprintCapital Indenture may be made by Sprint, Sprint Capital and the Trustee, inmost cases with the consent of the holders of a majority in principal amountof the outstanding Debt Securities of each series affected by suchmodification or amendment.
Each Indenture provides that, without the consent of the holder of eachoutstanding Debt Security affected thereby, no such modification or amendmentmay
(a) change the date specified in the Debt Security for the payment ofthe principal of, or any installment of principal of or interest on, suchDebt Security,
(b) reduce the principal amount of, or any premium or interest on, anyDebt Security,
(c) reduce the amount of principal of an Original Issue DiscountSecurity or any other Debt Security payable upon acceleration of thematurity of such Debt Security,
(d) change the place or currency of payment of principal of, or anypremium or interest on, any Debt Security,
(e) impair the right to institute suit for the enforcement of anypayment on or with respect to any Debt Security or
(f) reduce the percentage in principal amount of outstanding DebtSecurities of any series, the consent of whose holders is required forany supplemental indenture amending or modifying the Indenture or forwaiver of compliance with certain provisions of the Indenture or forwaiver of certain defaults. (Indentures, Section 902)
In addition, the Sprint Capital Indenture provides that, without the consentof the holder of each outstanding Debt Security affected thereby, no suchmodification or amendment may modify or affect in any manner adverse
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to the holders the terms and conditions and obligations of the Guarantor inrespect of the Guarantees of any Debt Securities.
The holders of a majority in principal amount of the outstanding DebtSecurities of any series issued under the Sprint Indenture and the SprintCapital Indenture may on behalf of the holders of all Debt Securities of thatseries waive, insofar as that series is concerned, compliance by Sprint (orSprint and Sprint Capital, in the case of the Sprint Capital Indenture) withcertain restrictive provisions of the Indentures. (Sprint Indenture,
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Section 1009, Sprint Capital Indenture, Sections 1010 and 1013) The holders ofa majority in principal amount of the outstanding Debt Securities of anyseries may on behalf of the holders of all Debt Securities of that serieswaive any past default under the applicable Indenture with respect to thatseries, except a default in the payment of the principal of or any premium orinterest on any Debt Security of that series or in respect of a covenant orprovision which under the Indentures cannot be modified or amended without theconsent of the holder of each outstanding Debt Security of that seriesaffected. (Indentures, Section 513)
CONSOLIDATION, MERGER AND CONVEYANCES
Sprint (and, in the case of the Sprint Capital Indenture, Sprint Capital),without the consent of any holders of outstanding Debt Securities, mayconsolidate with or merge with or into, or transfer or lease its propertiesand assets substantially as an entirety to, any corporation, partnership ortrust, or may acquire or lease the assets of any Person, provided that (i) thecorporation, partnership or trust formed by such consolidation or into whichSprint or Sprint Capital is merged or which acquires or leases the assets ofSprint or Sprint Capital substantially as an entirety is organized under thelaws of any United States jurisdiction and assumes the obligations of Sprintor Sprint Capital, as applicable, under the Debt Securities or the Guarantees,as the case may be, and under the Indentures, (ii) after giving effect to thetransaction no Event of Default, and no event which, after notice or lapse oftime or both, would become an Event of Default, has happened and iscontinuing, and (iii) certain other conditions specified in the Indentures aremet. Thereafter, all such obligations of Sprint or Sprint Capital, as the casemay be, terminate. (Indentures, Sections 801 and 802)
DEFEASANCE
Unless otherwise indicated in the Prospectus Supplement, the followingdefeasance provisions will apply to the Debt Securities.
The Indentures provide that Sprint (or Sprint and Sprint Capital, in thecase of Debt Securities issued under the Sprint Capital Indenture) may electeither (A) to defease and be discharged from any and all obligations withrespect to such Debt Securities and the Guarantees of such Debt Securities(with certain limited exceptions described below) ("defeasance") or (B) to bereleased from its obligations with respect to such Debt Securities underSections 501(5) and 1008 of the Sprint Indenture and Sections 501(5), 1008,1009 and 1012 of the Sprint Capital Indenture (being the cross-defaultprovision described in clause (e) under "Events of Default" and therestriction described under "Restrictive Covenant--Sprint" and, in the case ofthe Sprint Capital Indenture, the restrictions described under "RestrictiveCovenants--Sprint Capital") and certain other obligations, includingobligations under covenants provided for the specific benefit of DebtSecurities of that series ("covenant defeasance").
In order to accomplish defeasance or covenant defeasance, Sprint or SprintCapital must deposit with the Trustee (or other qualifying trustee), in trustfor such purpose, money and/or U.S. Government Obligations which through thepayment of principal and interest in accordance with their terms will providemoney in an amount sufficient to pay the principal of and any premium andinterest on such Debt Securities on the scheduled due dates therefor. Such atrust may be established only if, among other things, Sprint or Sprint Capitalhas delivered to the Trustee an opinion of counsel to the effect that theholders of such Debt Securities will not recognize gain or loss for Federalincome tax purposes as a result of such defeasance or covenant defeasance andwill be subject to Federal income tax on the same amounts, in the same mannerand at the same times as would have been the case if such defeasance orcovenant defeasance had not occurred. Such opinion, in the case of defeasanceunder
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clause (A) above, must refer to and be based upon a ruling of the InternalRevenue Service or a change in applicable Federal income tax law occurringafter October 1, 1998. The obligations which are not discharged in adefeasance under clause (A) above are those relating to the rights of holdersof outstanding Debt Securities to receive, solely from the trust funddescribed above, payments in respect of the principal of and any premium andinterest on Debt Securities when due as set forth in Section 1304 of theIndentures, and obligations to register the transfer or exchange of such DebtSecurities, to replace temporary or mutilated, destroyed, lost or stolen
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DebtSecurities, to maintain an office or agency in respect of the Debt Securities,to hold moneys for payment in trust and to compensate, reimburse and indemnifythe Trustee. (Indentures, Article Thirteen)
The Prospectus Supplement may further describe additional provisions, ifany, permitting defeasance or covenant defeasance with respect to the DebtSecurities of a particular series.
REGARDING THE TRUSTEE
Sprint has a normal business banking relationship with the Trustee,including the maintenance of an account and the borrowing of funds. TheTrustee may own Debt Securities.
GOVERNING LAW
New York law (without regard to principles of conflicts of law) will governthe Indentures, the Debt Securities and the Guarantees.
GLOBAL SECURITIES
Unless otherwise provided in the Prospectus Supplement, each series of theDebt Securities will be issued in the form of one or more Global Securitiesthat will be deposited with, or on behalf of, The Depository Trust Company, asDepositary. Interests in the Global Securities will be issued only indenominations of $1,000 or integral multiples thereof. Unless and until it isexchanged in whole or in part for Debt Securities in definitive form, a GlobalSecurity may not be transferred except as a whole to a nominee of theDepositary for such Global Security, or by a nominee of the Depositary to theDepositary or another nominee of the Depositary, or by the Depositary or anysuch nominee to a successor Depositary or a nominee of such successorDepositary.
BOOK-ENTRY SYSTEM
Initially, the Debt Securities will be registered in the name of Cede & Co.,the nominee of the Depositary. Accordingly, beneficial interests in the DebtSecurities will be shown on, and transfers of the Debt Securities will beeffected only through, records maintained by the Depositary and itsparticipants.
The Depositary has advised Sprint, Sprint Capital and any underwriters,dealers or agents as follows: the Depositary is a limited-purpose trustcompany organized under the New York Banking Law, a "banking organization"within the meaning of the New York Banking Law, a member of the United StatesFederal Reserve System, a "clearing corporation" within the meaning of the NewYork Uniform Commercial Code and a "clearing agency" registered pursuant tothe provisions of Section 17A of the Securities Exchange Act of 1934, asamended. The Depositary holds securities that its participants ("DirectParticipants") deposit with the Depositary. The Depositary also facilitatesthe settlement among Direct Participants of securities transactions, such astransfers and pledges, in deposited securities through electronic computerizedbook-entry changes in such Direct Participants' accounts, thereby eliminatingthe need for physical movement of securities certificates. Direct Participantsinclude securities brokers and dealers (including any underwriters, dealers oragents), banks, trust companies, clearing corporations, and certain otherorganizations. The Depositary is owned by a number of its Direct Participantsand by the New York Stock Exchange, Inc., the American Stock Exchange, Inc.and the National Association of Securities Dealers, Inc. Access to theDepositary's book-entry system is also available to others such as securitiesbrokers and dealers, banks and trust companies that clear through or maintaina custodial relationship with a Direct Participant, either directly orindirectly ("Indirect Participants"). The rules applicable to the Depositaryand its Direct and Indirect Participants are on file with the SEC.
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The Depositary advises that its established procedures provide that (i) uponissuance of the Debt Securities, the Depositary will credit the accounts ofDirect and Indirect Participants designated by the Underwriters with theprincipal amounts of the Debt Securities purchased by the Underwriters and
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(ii) ownership of interest in the Global Securities will be shown on, and thetransfer of the ownership will be effected only through, records maintained bythe Depositary, the Direct Participants and the Indirect Participants. Thelaws of some states require that certain persons take physical delivery indefinitive form of securities which they own. Consequently, the ability totransfer beneficial interest in the Global Securities is limited to suchextent.
So long as a nominee of the Depositary is the registered owner of the GlobalSecurities, such nominee for all purposes will be considered the sole owner orholder of such Global Securities under the applicable Indenture. Except asprovided below, owners of beneficial interests in the Global Securities willnot be entitled to have Debt Securities registered in their names, will notreceive or be entitled to receive physical delivery of Debt Securities indefinitive form and will not be considered the owners or holders of the DebtSecurities under the applicable Indenture.
Neither Sprint, Sprint Capital, the Trustee, any paying agent nor theregistrar will have any responsibility or liability for any aspect of therecords relating to or payments made on account of beneficial ownershipinterests in the Global Securities, or for maintaining, supervising orreviewing any records relating to such beneficial ownership interests.
Principal and interest payments on the Debt Securities registered in thename of the Depositary's nominee will be made in immediately available fundsto the Depositary's nominee as the registered owner of the Global Securities.Under the terms of the Debt Securities, Sprint, Sprint Capital and the Trusteewill treat the persons in whose names the Debt Securities are registered asthe owners of such Debt Securities for the purpose of receiving payment ofprincipal and interest on such Debt Securities and for all other purposes.Therefore, neither Sprint, Sprint Capital, the Trustee nor any paying agenthas any direct responsibility or liability for the payment of principal orinterest on the Debt Securities to owners of beneficial interests in theGlobal Securities. The Depositary has advised Sprint, Sprint Capital and theTrustee that its current practice is upon receipt of any payment of principalor interest, to credit Direct Participants' accounts on the payment date inaccordance with their respective holdings of beneficial interests in theGlobal Securities as shown on the Depositary's records, unless the Depositaryhas reason to believe that it will not receive payment on the payment date.Payments by Direct and Indirect Participants to owners of beneficial interestin the Global Securities will be governed by standing instructions andcustomary practices, as is the case with securities held for the accounts ofcustomers in bearer form or registered in "street name," and will be theresponsibility of such Direct and Indirect Participants and not of theDepositary, the Trustee, Sprint or Sprint Capital, subject to any statutoryrequirements that may be in effect from time to time. Payment of principal andinterest to the Depositary is the responsibility of the issuer of the DebtSecurities or the Trustee. Disbursement of such payments to the owners ofbeneficial interests in the Global Securities shall be the responsibility ofthe Depositary and Direct and Indirect Participants.
Debt Securities represented by a Global Security will be exchangeable forDebt Securities in definitive form of like tenor as such Global Security indenominations of $1,000 and in any greater amount that is an integral multipleif the Depositary notifies Sprint or Sprint Capital that it is unwilling orunable to continue as Depositary for such Global Security, or if at any timethe Depositary ceases to be a clearing agency registered under applicable lawand a successor depositary is not appointed by Sprint or Sprint Capital, asapplicable, within 90 days, or Sprint or Sprint Capital, as applicable, in itsdiscretion at any time determines not to require all of the Debt Securities tobe represented by a Global Security and notifies the Trustee of such decision.Any Debt Securities that are exchangeable pursuant to the preceding sentenceare exchangeable for Debt Securities issuable in authorized denominations andregistered in such names as the Depositary shall direct. Subject to theforegoing, a Global Security is not exchangeable, except for a Global Securityor Global Securities of the same aggregate denominations to be registered inthe name of the Depositary or its nominee.
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SAME-DAY SETTLEMENT AND PAYMENT
Settlement for the Debt Securities will be made by any underwriters, dealersor agents in immediately available funds. So long as the Depositary continuesto make its Same-Day Funds Settlement System available to Sprint or
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SprintCapital, as applicable, all payments of principal and interest on the DebtSecurities will be made by Sprint or Sprint Capital, as applicable, inimmediately available funds.
Secondary trading in long-term notes and debentures of corporate issuers isgenerally settled in clearing-house or next-day funds. In contrast, the DebtSecurities will trade in the Depositary's Same-Day Funds Settlement Systemuntil maturity, and secondary market trading activity in the Debt Securitieswill therefore be required by the Depositary to settle in immediatelyavailable funds. No assurance can be given as to the effect, if any, ofsettlement in immediately available funds on trading activity in the DebtSecurities.
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DESCRIPTION OF GUARANTEES
Sprint will unconditionally guarantee the due and punctual payment of theprincipal, any premium and interest on the Debt Securities issued by SprintCapital when and as the same shall become due and payable, whether at maturityor otherwise. (Sprint Capital Indenture, Section 311) The Guarantees will rankequally with all other unsecured and unsubordinated obligations of Sprint. TheGuarantees provide that in the event of a default in payment of principal, anypremium or interest on a Debt Security, the Holder of the Debt Security mayinstitute legal proceedings directly against Sprint to enforce the Guaranteewithout first proceeding against Sprint Capital. The Sprint Capital Indentureprovides that Sprint may under certain circumstances assume all rights andobligations of Sprint Capital under the Sprint Capital Indenture with respectto a series of Debt Securities issued by Sprint Capital.
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VALIDITY OF THE DEBT SECURITIES AND GUARANTEES
The validity of the Debt Securities and the Guarantees will be passed uponfor Sprint Capital and Sprint by Don A. Jensen, Esq., Vice President andSecretary of Sprint Capital and Sprint, and for any underwriters by Cravath,Swaine & Moore, Worldwide Plaza, 825 Eighth Avenue, New York, New York 10019.As of September 30, 1998, Mr. Jensen was the beneficial owner of approximately31,000 shares of Sprint common stock and had options to purchase in excess of60,000 shares of Sprint common stock.
EXPERTS
The consolidated financial statements and consolidated financial statementschedule of Sprint appearing in Sprint's Annual Report (Form 10-K) for theyear ended December 31, 1997, have been audited by Ernst & Young LLP,independent auditors, as set forth in their report thereon included thereinand incorporated herein by reference which, as to the year 1997, is based inpart on the report of Deloitte & Touche LLP, independent auditors. Suchconsolidated financial statements and consolidated financial statementschedule are incorporated herein by reference in reliance upon such reportsgiven upon the authority of such firms as experts in accounting and auditing.
The consolidated financial statements of Sprint and the combined financialstatements of the FON Group and the PCS Group appearing in Sprint's ProxyStatement/Prospectus that forms a part of Registration Statement No. 333- 65173have been audited by Ernst & Young LLP, independent auditors, as set forth intheir reports thereon included therein and incorporated herein by referencewhich, as to the year 1997 for the consolidated financial statements of Sprintand the years 1997, 1996 and 1995 for the combined financial statements of thePCS Group, are based in part on the reports of Deloitte & Touche LLP,independent auditors. Such consolidated financial statements of Sprint andcombined financial statements of the FON Group and the PCS Group are
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incorporated herein by reference in reliance upon such reports given upon theauthority of such firms as experts in accounting and auditing.
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The combined financial statements of Sprint Spectrum Holding Company, L.P.and subsidiaries, MinorCo, L.P. and subsidiaries, PhillieCo Partners I, L.P.and subsidiaries and PhillieCo Partners II, L.P. and subsidiaries as ofDecember 31, 1997 and 1996 and for each of the three years in the period endedDecember 31, 1997, incorporated in this Prospectus by reference from theSprint Corporation Registration Statement No. 333-65173 and the relatedcombined financial statement schedule included in this Registration Statementhave been audited by Deloitte & Touche LLP, independent auditors, as stated intheir reports (which express an unqualified opinion and include an explanatoryparagraph referring to the emergence from the development stage) which isincluded or incorporated herein by reference in reliance upon the reports ofsuch firm given upon their authority as experts in accounting and auditing.
The consolidated financial statements and the related financial statementschedule, incorporated in this Prospectus by reference from the SprintSpectrum L.P. and Sprint Spectrum Finance Corporation Annual Reports on Form10-K for the year ended December 31, 1997, have been audited by Deloitte &Touche LLP, independent auditors, as stated in their reports (which express anunqualified opinion and include an explanatory paragraph referring to theemergence from the development stage) which are incorporated herein byreference, and have been so incorporated in reliance upon the reports of suchfirm given upon their authority as experts in accounting and auditing.
The consolidated financial statements and the related financial statementschedule of Sprint Spectrum Holding Company, L.P. and subsidiaries as ofDecember 31, 1997 and 1996, not separately presented in this Prospectus,incorporated in this Prospectus by reference from the Sprint CorporationAnnual Report on Form 10-K for the year ended December 31, 1997, have beenaudited by Deloitte & Touche LLP, independent auditors, as stated in theirreport (which expresses an unqualified opinion and includes an explanatoryparagraph referring to the emergence from the development stage) which isincorporated herein by reference in reliance upon the report of such firmgiven their authority as experts in accounting and auditing.
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PLAN OF DISTRIBUTION
With respect to the offering of the Debt Securities, the following summaryof the plan of distribution will be supplemented by a description of suchoffering, including the particular terms and conditions of such offering, setforth in the applicable Prospectus Supplement relating to such DebtSecurities.
Sprint and Sprint Capital may sell Debt Securities in any of three ways: (i)through underwriters or dealers; (ii) directly to one or a limited number ofinstitutional purchasers; or (iii) through agents. Each Prospectus Supplementwith respect to a series of Debt Securities will set forth the terms of theoffering of such Debt Securities, including the name or names of anyunderwriters or agents, the price of such Debt Securities and the net proceedsto Sprint or Sprint Capital, as the case may be, from such sale, anyunderwriting discounts, commissions or other items constituting underwriters'or agents' compensation, any discount or concessions allowed or reallowed orpaid to dealers and any securities exchanges on which such Debt Securities maybe listed.
If underwriters are used in the sale, the Debt Securities will be acquiredby the underwriters for their own account and may be resold from time to timein one or more transactions, including negotiated transactions, at a fixedpublic offering price or at varying prices determined at the time of sale. TheDebt Securities may be offered to the public either through underwritingsyndicates of investment banking firms represented by managing underwriters,or directly by one or more such investment banking firms or others, asdesignated. Unless otherwise set forth in the applicable ProspectusSupplement, the obligations of the underwriters to purchase the DebtSecurities will be subject to certain conditions precedent and theunderwriters will be obligated to purchase all
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of the Debt Securities offered thereby if any are purchased. Any initialpublic offering price and any discounts or concessions allowed or reallowed orpaid to dealers may be changed from time to time.
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Debt Securities may be sold directly by Sprint or Sprint Capital to one ormore institutional purchasers, or through agents designated by Sprint orSprint Capital from time to time. Any agent involved in the offer or sale ofthe Debt Securities will be named, and any commissions payable by Sprint orSprint Capital, as the case may be, to such agent will be set forth, in theapplicable Prospectus Supplement. Unless otherwise indicated in suchProspectus Supplement, any such agent will be acting on a best efforts basisfor the period of its appointment.
If so indicated in the applicable Prospectus Supplement, Sprint or SprintCapital, as the case may be, will authorize agents, underwriters or dealers tosolicit offers by certain specified institutions to purchase the DebtSecurities from Sprint or Sprint Capital, as the case may be, at the publicoffering price set forth in such Prospectus Supplement plus accrued interest,if any, pursuant to delayed delivery contracts providing for payment anddelivery on one or more specified dates in the future. Institutions with whichsuch contracts may be made include commercial and saving banks, insurancecompanies, pension funds, investment companies, educational and charitableinstitutions and others, but in all such cases such institutions must beapproved by Sprint or Sprint Capital, as the case may be. Such contracts willbe subject only to those conditions set forth in such Prospectus Supplementand such Prospectus Supplement will set forth the commission payable forsolicitation of such contracts.
Agents, underwriters and dealers may be entitled under agreements enteredinto with Sprint or Sprint and Sprint Capital to indemnification by Sprint orSprint and Sprint Capital against certain civil liabilities, includingliabilities under the Securities Act of 1933, as amended, or to contributionwith respect to payments which the agents, underwriters or dealers may berequired to make in respect of such civil liabilities.
Agents, underwriters and dealers may engage in transactions with or performservices for Sprint and Sprint Capital in the ordinary course of business.
The Debt Securities will be new issues of Debt Securities with noestablished trading market. Underwriters and agents to whom Debt Securitiesare sold by Sprint or Sprint Capital for public offering and sale may make amarket in such Debt Securities, but such underwriters and agents will not beobligated to do so and may discontinue any market making at any time withoutnotice. No assurance can be given as to the liquidity of the trading marketfor the Debt Securities.
15
$
SPRINT CAPITAL CORPORATION
$ % NOTES DUE
$ % NOTES DUE
$ % NOTES DUE
$ % NOTES DUE
UNCONDITIONALLY GUARANTEED BY
SPRINT CORPORATION
[LOGO] Sprint
PROSPECTUS SUPPLEMENT
, 1998
(Including Prospectus dated October 23, 1998)
SALOMON SMITH BARNEY
CREDIT SUISSE FIRST BOSTON
J.P. MORGAN & CO.
Page 189 of 189
SPRINT CAPITAL CORP; 424B5
WARBURG DILLON READ LLC
CHASE SECURITIES INC.
LEHMAN BROTHERS
NATIONSBANC MONTGOMERY SECURITIES LLC
Classification
Subject: COMMON STOCK (90%); STOCK INDEXES (89%); STOCK EXCHANGES (89%); STOCK REDEMPTIONS (79%); SECURITIES LAW (79%)
Company: SPRINT NEXTEL CORP (93 93%%)
EDGAR Online
End of Document
- SPRINT CAPITAL CORP; 424B5
- Bookmark_EFX_SUBJECT_STOCK_INFO
- Bookmark_EFX_TABLE_OF_CONTENTS
- Bookmark_EFX_PROSPECTUS_SUMMARY
- Bookmark_EFX_RISK_FACTORS
- Bookmark_EFX_RATIO_OF_EARNINGS
- Bookmark_EFX_THE_OFFERING
- Bookmark_EFX_FINANCIAL_DATA
- Bookmark_EFX_FINANCIAL_DATA_2
- Bookmark_EFX_RISK_FACTORS_2
- Bookmark_EFX_COMPETITION
- Bookmark_EFX_FORWARD_LOOK
- Bookmark_EFX_PROCEED_USE
- Bookmark_EFX_CAPITALIZATION
- Bookmark_EFX_FINANCIAL_DATA_3
- Bookmark_EFX_FINANCIAL_DATA_4
- Bookmark_EFX_FINANCIAL_DATA_5
- Bookmark_EFX_FINANCIAL_DATA_6
- Bookmark_EFX_BUSINESS
- Bookmark_EFX_SECURITIES_DESCRIPTION
- Bookmark_EFX_TAXATION
- Bookmark_EFX_UNDERWRITING
- Bookmark_EFX_LEGAL_MATTERS
- Bookmark_EFX_EXPERTS
- Bookmark_EFX_FINANCIAL_STATEMENTS
- Bookmark_EFX_AUDITORS_OPINION
- Bookmark_EFX_AUDITORS_OPINION_2
- Bookmark_EFX_INCOME_STATEMENT
- Bookmark_EFX_BALANCE_SHEET
- Bookmark_EFX_CASH_FLOW
- Bookmark_EFX_STOCKHOLDERS_EQUITY
- Bookmark_EFX_NOTES_TO_FINANCIAL_STATEMEN
- Bookmark_EFX_CERTAIN_TRANSACTIONS
- Bookmark_EFX_AUDITORS_OPINION_3
- Bookmark_EFX_INCOME_STATEMENT_2
- Bookmark_EFX_BALANCE_SHEET_2
- Bookmark_EFX_CASH_FLOW_2
- Bookmark_EFX_CERTAIN_TRANSACTIONS_2
- Bookmark_EFX_AUDITORS_OPINION_4
- Bookmark_EFX_INCOME_STATEMENT_3
- Bookmark_EFX_BALANCE_SHEET_3
- Bookmark_EFX_CASH_FLOW_3
- Bookmark_EFX_CERTAIN_TRANSACTIONS_3
- Bookmark_EFX_AUDITORS_OPINION_5
- Bookmark_EFX_BALANCE_SHEET_4
- Bookmark_EFX_INCOME_STATEMENT_4
- Bookmark_EFX_STOCKHOLDERS_EQUITY_2
- Bookmark_EFX_CASH_FLOW_4
- Bookmark_EFX_MORE_INFORMATION
- Bookmark_EFX_PROCEED_USE_2
- Bookmark_EFX_SECURITIES_DESCRIPTION_2
- Bookmark_EFX_SECURITIES_DESCRIPTION_3
- Bookmark_EFX_VALIDITY
- Bookmark_EFX_DISTRIBUTION_PLAN
- Classification
