-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MbpbVRGpJcQ735MC8m2EzNZt8t14E3XokIOdTkoMGQ3t5doFSOkKyaF7vlkMJt4y YzUzQYQ51S7tnIZJKBulTQ== 0000912057-00-025214.txt : 20000517 0000912057-00-025214.hdr.sgml : 20000517 ACCESSION NUMBER: 0000912057-00-025214 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20000516 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 20000516 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WORLDCOM INC/GA// CENTRAL INDEX KEY: 0000723527 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 581521612 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-10415 FILM NUMBER: 638101 BUSINESS ADDRESS: STREET 1: 500 CLINTON CENTER DRIVE CITY: CLINTON STATE: MS ZIP: 39056 BUSINESS PHONE: 6014605600 FORMER COMPANY: FORMER CONFORMED NAME: MCI WORLDCOM INC DATE OF NAME CHANGE: 19980914 FORMER COMPANY: FORMER CONFORMED NAME: WORLDCOM INC /GA/ DATE OF NAME CHANGE: 19970127 FORMER COMPANY: FORMER CONFORMED NAME: LDDS COMMUNICATIONS INC /GA/ DATE OF NAME CHANGE: 19930916 8-K 1 FORM 8-K - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): May 16, 2000 WorldCom, Inc. (f/k/a MCI WORLDCOM, Inc.) (Exact Name of Registrant as Specified in its Charter) Georgia 0-11258 58-1521612 (State or Other (Commission File (IRS Employer Jurisdiction of Number) Identification Number) Incorporation) 500 Clinton Center Drive Clinton, Mississippi 39056 (Address of Principal Executive Office) Registrant's telephone number, including area code: (601) 460-5600 - -------------------------------------------------------------------------------- Item 5. OTHER EVENTS On October 5, 1999, WorldCom, Inc. ("WorldCom" or the "Company") announced that it had entered into an Agreement and Plan of Merger dated as of October 4, 1999, which was amended and restated on March 8, 2000 (the "Sprint Merger Agreement"), between WorldCom and Sprint Corporation ("Sprint"). Under the terms of the Sprint Merger Agreement, Sprint will merge with and into WorldCom (the "Sprint Merger"). Sprint is a diversified telecommunications company, providing long distance, local and wireless communications services. Sprint's business is organized in two groups: the Sprint PCS group and Sprint FON group. Sprint built and operates the United States' first nationwide all-digital, fiber-optic network and is a leader in advanced data communications services. In 1999, Sprint had $20 billion in annual revenues and served more than 20 million business and residential customers. Under the Sprint Merger Agreement, each outstanding share of Sprint FON common stock will be exchanged for $76.00 of WorldCom common stock, par value $.01 per share ("Common Stock"), subject to a collar. In addition, each share of Sprint PCS common stock will be exchanged for one share of a new WorldCom PCS tracking stock and 0.116025 shares of Common Stock. The terms of the WorldCom PCS tracking stock will be virtually identical to the terms of Sprint's PCS common stock and will be designed to track the performance of the PCS business of the surviving company in the Sprint Merger. Holders of Sprint class A stock will receive that amount of Common Stock and WorldCom PCS tracking stock as if such class A stock had been converted into Sprint FON common stock and Sprint PCS common stock immediately before the Sprint Merger. Holders of the other classes or series of Sprint capital stock will receive one share of a class or series of the Company's capital stock with virtually identical terms, which will be established in connection with the Sprint Merger, for each share of Sprint capital stock that they own. Sprint has announced that it will redeem for cash each outstanding share of the Sprint first and second series preferred stock on May 25, 2000. The Sprint Merger will be accounted for as a purchase and will be tax-free to Sprint stockholders. The actual number of shares of Common Stock to be exchanged for each share of Sprint FON common stock will be determined based on the average trading prices of Common Stock prior to the closing, but will not be less than 1.4100 shares (if the average trading price of Common Stock equals or exceeds $53.9007) or more than 1.8342 shares (if the average trading price of Common Stock equals or is less than $41.4350). Consummation of the Sprint Merger is subject to various conditions set forth in the Sprint Merger Agreement, including the adoption of the Sprint Merger Agreement by stockholders of Sprint, the approval of the Sprint Merger by shareholders of WorldCom, the approval of the issuance of WorldCom capital stock in the Sprint Merger by shareholders of WorldCom, certain U.S. and foreign regulatory approvals and other customary conditions. On April 28, 2000, special meetings of the shareholders of WorldCom and Sprint were held and the merger proposals were adopted and approved. It is anticipated that the Sprint Merger will close in the second half of 2000. INFORMATION ABOUT SPRINT The following information related to Sprint was previously reported in Sprint's quarterly report on Form 10-Q (File No. 1-04721) for the quarterly period ended March 31, 2000 (the "Sprint Form 10-Q") and has not been updated to reflect changes since March 31, 2000. The following information has been extracted from the Sprint Form 10-Q and does not include all sections of the Sprint Form 10-Q. To the extent that any of the following information differs from the information reported in Sprint's Form 10-Q, the Sprint Form 10-Q shall control. Item 7. Financial Statements, Pro Forma Financial Information and Exhibits (a) Financial Statement of Business Acquired. The financial statements of the business to be acquired, Sprint, required by this item (and related Management's Discussion and Analysis of Financial Condition and Results of Operations) are contained in the financial statements and footnotes thereto listed in the Index on Page F-1 herein and incorporated by reference herein. Note: the above financial information for the quarterly period ended March 31, 2000 related to Sprint was previously filed in the Sprint Form 10-Q and has not been updated to reflect changes since March 31, 2000. To the extent the above financial information differs from the financial information reported in the Sprint Form 10-Q, the Sprint Form 10-Q shall control. (2) The consolidated financial statements of WorldCom for the quarterly period ended March 31, 2000 are contained in its Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2000 (File no. 0-11258) and incorporated by reference herein. (b) Pro Forma Financial Information. The pro forma financial information required by this item are contained in the financial statements and footnotes thereto listed in the Index on page F-1 and incorporated by reference herein. (c) Exhibits. See Exhibit Index (3) SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Dated: May 16, 2000 WorldCom, Inc. By: /s/ Scott D. Sullivan ------------------------------------ Scott D. Sullivan Chief Financial Officer (4) INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
SPRINT CORPORATION Consolidated Statements of Operations for each of the quarters ended March 31, 2000 and March 31, 1999................................................................. F-2 Consolidated Statements of Comprehensive Income (Loss) for each of the quarters ended March 31, 2000 and March 31, 1999............................................................ F-4 Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999.................................. F-5 Consolidated Statements of Cash Flows for each of the quarters ended March 31, 2000 and March 31, 1999................................................................. F-7 Consolidated Statement of Shareholders' Equity for the quarter ended March 31, 2000.................................................................................... F-8 Condensed Notes to Consolidated Financial Statements.................................................... F-9 Management's Discussion and Analysis of Financial Condition and Results of Operations................... F-12 SPRINT FON GROUP Combined Statements of Operations for each of the quarters ended March 31, 2000 and March 31, 1999.................................................................. F-19 Combined Statements of Comprehensive Income for each of the quarters ended March 31, 2000 and March 31, 1999.................................................................. F-20 Combined Balance Sheets as of March 31, 2000 and December 31, 1999...................................... F-21 Combined Statements of Cash Flows for each of the quarters ended March 31, 2000 and March 31, 1999.................................................................. F-22 Condensed Notes to Combined Financial Statements........................................................ F-23 Management's Discussion and Analysis of Financial Condition and Results of Operations................... F-27 SPRINT PCS GROUP Combined Statements of Operations for each of the quarters ended March 31, 2000 and March 31, 1999.................................................................. F-34 Combined Statements of Comprehensive Loss for each of the quarters ended March 31, 2000 and March 31, 1999.................................................................. F-35 Combined Balance Sheets as of March 31, 2000 and December 31, 1999...................................... F-36 Combined Statements of Cash Flows for each of the quarters ended March 31, 2000 and March 31, 1999.................................................................. F-37 Condensed Notes to Combined Financial Statements........................................................ F-38 Management's Discussion and Analysis of Financial Condition and Results of Operations................... F-41 WORLDCOM, INC. Unaudited Pro Forma Condensed Combined Financial Statements............................................. F-45 Unaudited Pro Forma Condensed Combined Balance Sheet as of March 31, 2000............................... F-46 Unaudited Pro Forma Condensed Combined Statement of Operations for the three months ended March 31, 2000................................................................. F-47 Unaudited Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 1999................................................................... F-48 Notes to Unaudited Pro Forma Condensed Combined Financial Statements.................................... F-49
F-1
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Sprint Corporation (millions) - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Quarters Ended March 31, 2000 1999 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Net Operating Revenues $ 5,479 $ 4,652 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Operating Expenses Costs of services and products 2,839 2,519 Selling, general and administrative 1,518 1,367 Depreciation and amortization 966 856 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Total operating expenses 5,323 4,742 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Operating Income (Loss) 156 (90) Interest expense (254) (191) Other income, net 28 33 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Loss from continuing operations before income taxes (70) (248) Income tax benefit 5 77 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Loss from Continuing Operations (65) (171) Discontinued operation, net 675 (28) Extraordinary items, net (3) (21) - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Net Income (Loss) $ 607 $ (220) -- ------------- --- -------------
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited). F-2
CONSOLIDATED STATEMENTS OF OPERATIONS (continued) Sprint Corporation (Unaudited)(millions, except per share data) - -------------------------------------------------------- -- ----------- --- ---------- --- --- ---------- --- ----------- Quarters Ended March 31, 2000 1999 2000 1999 - -------------------------------------------------------- ----------------------------- --- ------------------------------ FON Common Stock PCS Common Stock ----------------------------- ------------------------------ Earnings (Loss) Applicable to Common Stock $ 1,122 $ 408 $ (517) $ (630) -- ----------- --- ---------- --- --- ---------- --- ----------- Diluted Earnings (Loss) per Common Share Continuing operations $ 0.50 $ 0.49 $ (0.54) $ (0.71) Discontinued operation 0.75 (0.03) - - Extraordinary items - - - (0.02) - -------------------------------------------------------- -- ----------- --- ---------- --- --- ---------- --- ----------- Total $ 1.25 $ 0.46 $ (0.54) $ (0.73) -- ----------- --- ---------- --- --- ---------- --- ----------- Diluted weighted average common shares 894.7 880.9 956.3 863.4 -- ----------- --- ---------- --- --- ---------- --- ----------- Basic Earnings (Loss) per Common Share Continuing operations $ 0.51 $ 0.50 $ (0.54) $ (0.71) Discontinued operation 0.77 (0.03) - - Extraordinary items - - - (0.02) - -------------------------------------------------------- -- ----------- --- ---------- --- --- ---------- --- ----------- Total $ 1.28 $ 0.47 $ (0.54) $ (0.73) -- ----------- --- ---------- --- --- ---------- --- ----------- Basic weighted average common shares 875.6 863.2 956.3 863.4 -- ----------- --- ---------- --- --- ---------- --- ----------- DIVIDENDS PER COMMON SHARE FON common stock $ 0.125 $ 0.125 N/A N/A -- ----------- --- ---------- --- --- ---------- --- -----------
Note: In the 2000 first quarter, Sprint effected a two-for-one stock split of its PCS common stock. In the 1999 second quarter, Sprint effected a two-for-one stock split of its FON common stock. As a result, 1999 basic and diluted earnings (loss) per common share, weighted average common shares and dividends per common share have been restated for periods prior to these splits. N/A = Not applicable See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited). F-3
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) Sprint Corporation (Unaudited)(millions) - --------------------------------------------- ----------------- ----------------- ---------------- ----------------- Quarters Ended March 31, 2000 1999 - --------------------------------------------- ----------------- ----------------- ---------------- ----------------- Net Income (Loss) $ 607 $ (220) - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Other Comprehensive Loss Unrealized holding losses on securities - (6) Income tax benefit - 2 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Net unrealized holding losses on securities during the period - (4) Reclassification adjustment for gains included in net income (32) - - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Total other comprehensive loss (32) (4) - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Comprehensive Income (Loss) $ 575 $ (224) -- ------------- --- -------------
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited). F-4
CONSOLIDATED BALANCE SHEETS Sprint Corporation (millions) - ------------------------------------------------------------------------------------------------------------------------- March 31, December 31, 2000 1999 - ------------------------------------------------------------------------------------------------------------------------- (Unaudited) Assets Current assets Cash and equivalents $ 250 $ 120 Accounts receivable, net of allowance for doubtful accounts of $267 and $285 3,440 3,408 Inventories 750 777 Prepaid expenses 411 340 Income tax receivable - 411 Investments in equity securities - 317 Other 137 207 - ------------------------------------------------------------------------------------------------------------------------- Total current assets 4,988 5,580 Investments in securities 127 147 Property, plant and equipment FON Group 28,365 27,687 PCS Group 9,948 9,411 - ------------------------------------------------------------------------------------------------------------------------- Total property, plant and equipment 38,313 37,098 Accumulated depreciation (15,881) (15,129) - ------------------------------------------------------------------------------------------------------------------------- Net property, plant and equipment 22,432 21,969 Investments in and advances to affiliates 492 452 Intangible assets Goodwill 5,743 5,745 PCS licenses 3,060 3,060 Other 1,553 1,453 - ------------------------------------------------------------------------------------------------------------------------- Total intangible assets 10,356 10,258 Accumulated amortization (827) (691) - ------------------------------------------------------------------------------------------------------------------------- Net intangible assets 9,529 9,567 Net assets of discontinued operation - 394 Other 1,146 1,141 - ------------------------------------------------------------------------------------------------------------------------- Total $ 38,714 $ 39,250 -----------------------------------
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited). F-5
CONSOLIDATED BALANCE SHEETS (continued) Sprint Corporation (millions, except per share data) - ------------------------------------------------------------------------------------------------------------------------- March 31, December 31, 2000 1999 - ------------------------------------------------------------------------------------------------------------------------- (Unaudited) Liabilities and Shareholders' Equity Current liabilities Current maturities of long-term debt $ 609 $ 1,087 Accounts payable 1,467 1,462 Construction obligations 951 1,039 Accrued interconnection costs 578 683 Accrued taxes 337 410 Advance billings 319 323 Payroll and employee benefits 429 638 Other 1,302 1,190 - ------------------------------------------------------------------------------------------------------------------------- Total current liabilities 5,992 6,832 Long-term debt and capital lease obligations 15,099 15,685 Deferred credits and other liabilities Deferred income taxes and investment tax credits 1,737 1,511 Postretirement and other benefit obligations 1,067 1,064 Other 596 598 - ------------------------------------------------------------------------------------------------------------------------- Total deferred credits and other liabilities 3,400 3,173 Shareholders' equity Common stock Class A, par value $2.50 per share, 200.0 shares authorized, 86.2 shares issued and outstanding (each share represents the right to one FON share and1/2PCS share) 216 216 FON, par value $2.00 per share, 4,200.0 shares authorized, 790.4 and 788.0 shares issued and outstanding 1,581 1,576 PCS, par value $1.00 per share, 2,350.0 shares authorized, 915.2 and 910.4 shares issued and outstanding 915 910 PCS preferred stock, no par, 0.3 shares authorized, 0.2 shares issued and outstanding 247 247 Capital in excess of par or stated value 8,756 8,569 Retained earnings 2,458 1,961 Treasury stock, at cost - (2) Accumulated other comprehensive income 49 81 Other 1 2 - ------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 14,223 13,560 - ------------------------------------------------------------------------------------------------------------------------- Total $ 38,714 $ 39,250 -----------------------------------
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited). F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Sprint Corporation (millions) - ------------------------------------------------------------------ ----------------- ----------------- ---------------- Quarters Ended March 31, 2000 1999 - ------------------------------------------------------------------ ----------------- ----------------- ---------------- Operating Activities Net income (loss) $ 607 $ (220) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Discontinued operation, net (675) 28 Extraordinary items, net 3 21 Equity in net losses of affiliates 25 9 Depreciation and amortization 966 856 Deferred income taxes and investment tax credits 298 (20) Changes in assets and liabilities: Accounts receivable, net (32) (160) Inventories and other current assets 371 (270) Accounts payable and other current liabilities (594) 152 Noncurrent assets and liabilities, net 22 (49) Other, net (61) 10 - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Net cash provided by operating activities 930 357 - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Investing Activities Capital expenditures (1,451) (1,318) Investments in affiliates, net (130) (67) Proceeds from sale of investment in Global One 1,403 - Other, net 122 (87) - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Net cash used by investing activities (56) (1,472) - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Financing Activities Proceeds from long-term debt - 1,703 Payments on long-term debt (751) (1,836) Proceeds from common stock issued 66 914 Dividends paid (109) (104) Treasury stock purchased - (45) Other, net 50 26 - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Net cash provided (used) by financing activities (744) 658 - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Increase (Decrease) in Cash and Equivalents 130 (457) Cash and Equivalents at Beginning of Period 120 605 - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Cash and Equivalents at End of Period $ 250 $ 148 --- ------------- -- -------------
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited). F-7
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Unaudited) Sprint Corporation (millions) - ---------------------------------------------------------------------------------------------------------------------- Quarter Ended March 31, 2000 - ---------------------------------------------------------------------------------------------------------------------- PCS Capital Common In Excess Sprint FON and of Par or Common Common Preferred Stated Retained Treasury Stock Stock Stock Value Earnings Stock Other Total - ---------------------------------------------------------------------------------------------------------------------- Beginning 2000 balance $ 216 $ 1,576 $ 1,157 $ 8,569 $ 1,961 $ (2) $ 83 $ 13,560 Net income - - - - 607 - - 607 FON common stock dividends - - - - (99) - - (99) Class A common stock dividends - - - - (11) - - (11) PCS preferred stock dividends - - - - (2) - - (2) FON Series 1 common stock issued - 5 - 43 - - - 48 PCS Series 1 common stock issued - - 5 60 - - - 65 Treasury stock issued - - - - 3 2 - 5 Tax benefit from stock options exercised - - - 81 - - - 81 Other, net - - - 3 (1) - (33) (31) - ---------------------------------------------------------------------------------------------------------------------- March 2000 balance $ 216 $ 1,581 $ 1,162 $ 8,756 $ 2,458 $ - $ 50 $ 14,223 -------------------------------------------------------------------------------------- Shares Outstanding - ------------------------------------------------------------------ Beginning 2000 balance 86.2 788.0 910.6 FON Series 1 common stock issued - 2.4 - PCS Series 1 common stock issued - - 4.8 ------------------------------- March 2000 balance 86.2 790.4 915.4 -------------------------------
See accompanying Condensed Notes to Consolidated Financial Statements (Unaudited). F-8 CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Sprint Corporation - -------------------------------------------------------------------------------- The information in this Form 10-Q has been prepared according to Securities and Exchange Commission (SEC) rules and regulations. In our opinion, the consolidated interim financial statements reflect all adjustments, consisting only of normal recurring accruals, needed to fairly present Sprint Corporation's consolidated financial position, results of operations, cash flows and comprehensive income (loss). Certain information and footnote disclosures normally included in consolidated financial statements prepared according to accounting principles generally accepted in the United States have been condensed or omitted. As a result, you should read these financial statements along with Sprint Corporation's 1999 Form 10-K. Operating results for the 2000 year-to-date period do not necessarily represent the results that may be expected for the year ending December 31, 2000. - -------------------------------------------------------------------------------- 1. Merger - -------------------------------------------------------------------------------- In October 1999, Sprint announced a definitive merger agreement with WorldCom, Inc. (WorldCom). Under the agreement, each share of Sprint FON stock will be exchanged for $76 of WorldCom common stock, subject to a collar. In addition, each share of Sprint PCS stock will be exchanged for one share of a new WorldCom PCS tracking stock and 0.116025 shares of WorldCom common stock. The terms of the WorldCom PCS tracking stock will be equivalent to those of Sprint's PCS common stock and will track the performance of the company's personal communication services (PCS) business. Sprint and WorldCom shareholders have approved the merger. The merger is subject to approvals from the Federal Communications Commission (FCC), the Justice Department, various state government bodies and foreign regulatory authorities. The companies anticipate that the merger will close in the second half of 2000. - -------------------------------------------------------------------------------- 2. Basis of Consolidation and Presentation - -------------------------------------------------------------------------------- The consolidated financial statements include the accounts of Sprint and its wholly owned and majority-owned subsidiaries. The PCS stock is intended to reflect the performance of Sprint's domestic wireless PCS operations. The FON stock is intended to reflect the performance of all of Sprint's other operations. Investments in entities in which Sprint exercises significant influence, but does not control, are accounted for using the equity method (see Note 4). The consolidated financial statements are prepared using accounting principles generally accepted in the United States. These principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Actual results could differ from those estimates. Certain prior-year amounts have been reclassified to conform to the current-year presentation. These reclassifications had no effect on the results of operations or shareholders' equity as previously reported. - -------------------------------------------------------------------------------- 3. Discontinued Operation - -------------------------------------------------------------------------------- In January 2000, Sprint reached a definitive agreement with France Telecom S.A. (FT) and Deutsche Telekom AG (DT) to sell its interest in Global One. In February 2000, Sprint received $1.1 billion in cash and was repaid $276 million for advances for its entire stake in Global One. Sprint recorded an after-tax gain related to the sale of its interest in Global One of $675 million in the first quarter of 2000. Sprint recorded after-tax losses related to its share of losses from Global One of $28 million in the first quarter of 1999. - -------------------------------------------------------------------------------- 4. Investments - -------------------------------------------------------------------------------- At the end of March 2000, investments accounted for using the equity method consisted of the FON Group's investments in EarthLink, Call-Net and other strategic investments. Combined, unaudited, summarized financial information (100% basis) of entities accounted for using the equity method was as follows: Quarters Ended March 31, ----------------------- 2000 1999 - ------------------ -- --------- - --------- -- -------- (millions) Results of operations Net operating revenues $ 481 $ 397 - --------- -- -------- Operating loss $ (60) $ (32) - --------- -- -------- Net loss $ (137) $ (35) - --------- -- -------- Equity in net losses of affiliates $ (25) $ (9) - --------- -- -------- F-9 - -------------------------------------------------------------------------------- 5. Income Taxes - -------------------------------------------------------------------------------- The differences that caused Sprint's effective income tax rates to vary from the 35% federal statutory rate for income taxes related to continuing operations were as follows: Quarters Ended March 31, ----------------------- 2000 1999 - --------------------------------------------------------- (millions) Income tax benefit at the federal statutory rate $ (25) $ (87) Effect of: State income taxes, net of federal income tax effect 2 3 Equity in losses of foreign joint ventures 10 1 Goodwill amortization 12 7 Other, net (4) (1) - --------------------------------------------------------- Income tax benefit $ (5) $ (77) ----------------------- Effective income tax rate 7.1% 31.0% ----------------------- - -------------------------------------------------------------------------------- 6. Long-term Debt and Capital Lease Obligations - -------------------------------------------------------------------------------- During the 2000 first quarter, Sprint's notes payable and commercial paper decreased $488 million. Sprint used a portion of the proceeds from the sale of its investment in Global One to repay the borrowings. In the 2000 first quarter, Sprint exchanged 6.6 million common shares of SBC Communications, Inc. for certain notes payable of the FON Group. The notes had a market value of $275 million on the maturity date and $316 million at year-end 1999. The notes had an interest rate of 8.3%. In March 2000, Sprint repaid, prior to scheduled maturities, $127 million of the PCS Group's notes payable to the FCC. These notes had an interest rate of 7.8%. This resulted in a $3 million after-tax extraordinary loss. - -------------------------------------------------------------------------------- 7. Stock Splits - -------------------------------------------------------------------------------- In December 1999, Sprint's Board of Directors authorized a two-for-one stock split of Sprint's PCS common stock in the form of a stock dividend which was distributed on February 4, 2000 to the PCS shareholders. A comparable dividend was paid on the Class A common stock owned by FT and DT. PCS Group loss per share and weighted average common shares for the prior periods have been restated to reflect the stock split. In April 1999, Sprint's Board of Directors authorized a two-for-one stock split of Sprint's FON common stock in the form of a stock dividend which was distributed on June 4, 1999 to the FON shareholders. A comparable dividend was paid on the Class A common stock owned by FT and DT. FON Group earnings per common share, dividends per common share and weighted average common shares for the prior periods have been restated to reflect the stock split. - -------------------------------------------------------------------------------- 8. Litigation, Claims and Assessments - -------------------------------------------------------------------------------- Various suits arising in the ordinary course of business are pending against Sprint. Management cannot predict the final outcome of these actions but believes they will not be material to Sprint's consolidated financial statements. - -------------------------------------------------------------------------------- 9. Segment Information - -------------------------------------------------------------------------------- The FON Group operates in five business segments, based on services and products: the long distance division, the local division, the product distribution and directory publishing businesses, activities to develop and deploy Sprint ION(SM) -- Integrated On-Demand Network, and other ventures. See Note 9 of Sprint FON Group Condensed Notes to Combined Financial Statements for more information about the FON Group's business segments. The PCS Group businesses operate in a single segment. F-10
Industry segment financial information was as follows: - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- Sprint Sprint Intergroup Quarters Ended March 31, FON Group PCS Group Eliminations Consolidated - -------------------------------------------------------------------------------------------------------------------- (millions) 2000 Net operating revenues $ 4,397 $ 1,177 $ (95) $ 5,479 Intergroup revenues 91 4 (95) - Operating income (loss) 758 (602) - 156 1999 Net operating revenues $ 4,107 $ 604 $ (59) $ 4,652 Intergroup revenues 59 - (59) - Operating income (loss) 737 (827) - (90) - --------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 10. Supplemental Cash Flows Information - -------------------------------------------------------------------------------- Sprint's cash paid (received) for interest and income taxes was as follows: Quarters Ended March 31, ------------------------- 2000 1999 - ------------------------------------------------------- (millions) Interest (net of capitalized interest) $ 115 $ 113 ------------------------- Income taxes $ (414) $ 21 ------------------------- Sprint's noncash activities included the following: Quarters Ended March 31, ------------------------- 2000 1999 - ------------------------------------------------------- (millions) Debt redeemed with investments in equity securities $ 275 $ - ------------------------- Tax benefit from stock options exercised $ 81 $ 51 ------------------------- Common stock issued under employee stock benefit plans $ 49 $ 24 ------------------------- Stock received for stock option exercises $ 19 $ 23 ------------------------- Capital lease obligations $ - $ 46 ------------------------- - -------------------------------------------------------------------------------- 11. Subsequent Events - -------------------------------------------------------------------------------- In April 2000, Sprint's Board of Directors declared dividends of 12.5 cents per share on the Sprint FON common stock and Class A common stock. Dividends will be paid June 30, 2000. In May 2000, Sprint announced that it would purchase an additional 26 million shares of EarthLink, Inc. for $431 million. The purchase will increase Sprint's interest in EarthLink, Inc. to 26.7%. - -------------------------------------------------------------------------------- 12. Recently Issued Accounting Pronouncement - -------------------------------------------------------------------------------- In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101). In March 2000, the SEC issued an amendment to SAB 101 which delayed the effective date for registrants with fiscal years that begin between December 12, 1999 and March 15, 2000. The effective date for Sprint will be for the quarter ending June 30, 2000. The deferral of telecommunication service activation fees and certain related costs are specifically addressed in SAB 101 and Sprint is in the process of determining the impact of SAB 101 on its financial statements. Based on a preliminary analysis, SAB 101 is not expected to have a material impact on Sprint's consolidated financial statements. F-11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF Sprint Corporation FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- General - -------------------------------------------------------------------------------- In October 1999, Sprint announced a definitive merger agreement with WorldCom, Inc. (WorldCom). Under the agreement, each share of Sprint FON stock will be exchanged for $76 of WorldCom common stock, subject to a collar. In addition, each share of Sprint PCS stock will be exchanged for one share of a new WorldCom PCS tracking stock and 0.116025 shares of WorldCom common stock. The terms of the WorldCom PCS tracking stock will be equivalent to those of Sprint's PCS common stock and will track the performance of the company's personal communication services (PCS) business. Sprint and WorldCom shareholders have approved the merger. The merger is subject to approvals from the Federal Communications Commission (FCC), the Justice Department, various state government bodies and foreign regulatory authorities. The companies anticipate that the merger will close in the second half of 2000. In January 2000, Sprint reached a definitive agreement with France Telecom S.A. (FT) and Deutsche Telekom AG (DT) to sell its interest in Global One. In February 2000, Sprint received $1.1 billion in cash and was repaid $276 million for advances for its entire stake in Global One. Sprint's equity share of the results of Global One has been reported as a discontinued operation for all periods presented. The PCS stock is intended to reflect the performance of Sprint's domestic wireless PCS operations. These operations are referred to as the PCS Group. The FON stock is intended to reflect the performance of all of Sprint's other operations. These operations are referred to as the FON Group and include the following: - Core businesses - Long distance division - Local division - Product distribution and directory publishing businesses - Activities to develop and deploy Sprint ION(SM), Integrated On-Demand Network - Other strategic ventures. FON and PCS shareholders are subject to the risks related to all of Sprint's businesses, assets and liabilities. Owning FON or PCS shares does not represent a direct legal interest in the assets and liabilities of the Groups. Rather, shareholders remain invested in Sprint and continue to vote as a single voting class for Board member elections and most other company matters. FON Group or PCS Group events affecting Sprint's consolidated statements of operations and balance sheets could, in turn, affect the other Group's financial statements or stock price. Net losses of either Group, and dividends or distributions on, or repurchases of, PCS stock or FON stock, will reduce Sprint funds legally available for dividends on both Groups' stock. Sprint does not expect to pay dividends on the PCS shares in the foreseeable future. Sprint's "Management's Discussion and Analysis of Financial Condition and Results of Operations" (MD&A) should be read along with the FON Group's MD&A and the PCS Group's MD&A. - -------------------------------------------------------------------------------- General Overview of the Sprint FON Group - -------------------------------------------------------------------------------- Core Businesses Long Distance Division The long distance division is the nation's third-largest long distance phone company. It operates a nationwide, all-digital long distance communications network that uses fiber-optic and electronic technology. The division mainly provides domestic and international voice, video and data communications services. Local Division The local division consists of regulated local phone companies serving more than 8.1 million access lines in 18 states. It provides local phone services, access by phone customers and other carriers to its local network, sales of telecommunications equipment, and long distance services within certain regional calling areas. Product Distribution and Directory Publishing Businesses The product distribution business provides wholesale distribution services of telecommunications products. The directory publishing business publishes and markets white and yellow page phone directories. F-12 Sprint ION(SM) Sprint is developing and deploying new integrated communications services, referred to as Sprint ION. Sprint ION extends Sprint's existing network capabilities to the customer and enables Sprint to provide the network infrastructure to meet customers' demands for advanced services including integrated voice, data, Internet and video. It is also expected to be the foundation for Sprint to provide new competitive local service. Beginning in 2000, the Sprint ION segment includes costs to develop high-speed data services and Sprint ION services for the Multipoint Multichannel Distribution Services broadband fixed wireless platform. Other Ventures The "other ventures" segment includes the cable TV service operations of the broadband fixed wireless companies acquired in the second half of 1999. This segment also includes the FON Group's investments in EarthLink, Inc., an Internet service provider; Call-Net, a long distance provider in Canada operating under the Sprint brand name; and certain other telecommunications investments and ventures. All of the investments and ventures are accounted for on the equity basis. - -------------------------------------------------------------------------------- General Overview of the Sprint PCS Group - -------------------------------------------------------------------------------- The PCS Group includes Sprint's domestic wireless PCS operations. It operates the only 100% digital PCS wireless network in the United States with licenses to provide service nationwide using a single frequency and a single technology. At the end of March 2000, the PCS Group operated PCS systems in more than 300 metropolitan markets, including the 50 largest U.S. metropolitan areas. The PCS Group has licenses to serve more than 270 million people in all 50 states, Puerto Rico and the U.S. Virgin Islands. The service offered by the PCS Group and its affiliates now reaches more than 190 million people. The PCS Group provides nationwide service through: - operating its own digital network in major U.S. metropolitan areas, - affiliating with other companies, mainly in and around smaller U.S. metropolitan areas, - roaming on other providers' analog cellular networks using dual-band/dual-mode handsets, and - roaming on other providers' digital PCS networks that use code division multiple access. - -------------------------------------------------------------------------------- Results of Operations - -------------------------------------------------------------------------------- Consolidated Total net operating revenues were as follows: Quarters Ended March 31, ------------------------ 2000 1999 - ------------------------------------------------------- (millions) FON Group $ 4,397 $ 4,107 PCS Group 1,177 604 Intergroup eliminations (95) (59) - ------------------------------------------------------- Net operating revenues $ 5,479 $ 4,652 ------------------------ Income (Loss) from continuing operations was as follows: Quarters Ended March 31, ------------------------ 2000 1999 - ------------------------------------------------------- (millions) FON Group $ 445 $ 434 PCS Group (510) (605) - ------------------------------------------------------- Loss from continuing operations $ (65) (171) ------------------------ Sprint FON Group Quarters Ended March 31, ------------------------ 2000 1999 - ------------------------------------------------------- (millions) Net operating revenues $ 4,397 $ 4,107 Operating expenses 3,639 3,370 - ------------------------------------------------------- Operating income $ 758 $ 737 ------------------------ Operating margin 17.2% 17.9% ------------------------ Net Operating Revenues Net operating revenues were $4.4 billion for the 2000 first quarter, an increase of 7% from $4.1 billion for the same 1999 period. The increase mainly reflects growth in the FON Group's long distance and local divisions. Long Distance Division Net operating revenues increased 7% in the 2000 first quarter from the same 1999 period. This increase mainly reflects strong data services revenue growth. Calling volumes increased 17%, but were largely offset by a more competitive pricing environment. Business and data market revenues increased 11% in the 2000 first quarter from the same 1999 period. The increase mainly reflects growth in data services. F-13 Residential market revenues decreased 4% in the 2000 first quarter from the same 1999 period. This decrease reflects lower international and phone card revenues. Wholesale market revenues increased 9% in the 2000 first quarter from the same 1999 period. Approximately one-third of the increase is the result of sales of capacity on Sprint's transoceanic cable in the 2000 first quarter. The remainder of the increase is primarily due to growth in private line services. Local Division Local division revenues increased 4% in the 2000 first quarter from the same 1999 period. This increase mainly reflects customer access line growth and increased sales of network-based services such as Caller ID and Call Waiting. Customer access lines increased 5% during the past 12 months. Sales of network-based services increased due to strong demand for bundled services which combine local service, network-based features and long distance calling. Local service revenues grew 9% in the 2000 first quarter from the same 1999 period because of customer access line growth and strong demand for bundled services. Revenue growth also reflects increased sales of data products and revenues from maintaining customer wiring and equipment. Network access revenues increased 7% in the 2000 first quarter from the same 1999 period reflecting a 9% increase in minutes of use, the continued implementation of local number portability charges and increased special access services. These increases were partly offset by FCC-mandated access rate reductions. Toll service revenues decreased 23% in the 2000 first quarter from the same 1999 period, reflecting increased competition, which is expected to continue, in the intraLATA long distance market. The decrease also reflects the success of sales of bundled services which shift intraLATA customers to Sprint's long distance division. Despite the losses realized by the local division, Sprint's overall intraLATA long distance market share in the local division's territories has remained steady at approximately 65% from the 1999 first quarter to the 2000 first quarter. Other revenues decreased 12% in the 2000 first quarter from the same 1999 period mainly due to a decrease in equipment sales. Product Distribution & Directory Publishing Businesses The product distribution and directory publishing businesses' revenues increased 7% in the 2000 first quarter from the same 1999 period. Nonaffiliated revenues accounted for over one-half of revenues in both periods and increased 17% in the 2000 first quarter compared with the same 1999 period, but were partly offset by a decrease in product sales to affiliates The increase in nonaffiliated revenues is mainly due to certain customers accelerating equipment purchases in the 2000 first quarter. The change in the mix of the local division's capital program to more electronics and software, which is more frequently purchased directly from manufacturers, caused the decline in affiliate sales. Operating Expenses The FON Group's operating expenses increased 8% in the 2000 first quarter from the same 1999 period. Long Distance Division Long distance division operating expenses increased 6% in the 2000 first quarter from the same 1999 period. Interconnection costs increased 2% reflecting increased calling volumes and costs related to growth in non-minute driven revenues, partly offset by reductions in per-minute costs for both domestic and international access. The domestic rate reductions were generally due to FCC-mandated access rate reductions that took effect in July 1999. Lower international per minute costs reflect continued competition. Sprint expects government deregulation and competitive pressures to add to the trend of declining unit costs for international interconnection. Operations expense increased 24% in the 2000 first quarter mainly due to an increase in equipment sales. Selling, general and administrative (SG&A) expense increased 5% mainly reflecting increased marketing and promotions in the business market. Depreciation and amortization expense decreased 1% due to an adjustment to increase the depreciable lives of certain assets, largely offset by an increased asset base. Local Division Local division operating expenses increased 1% in the 2000 first quarter from the same 1999 period. Costs of services and products decreased 1% reflecting a decline in equipment sales and the success of cost control initiatives. F-14 SG&A decreased 2% due to continued emphasis on cost control partly offset by increased customer service costs related to customer access line growth and increased marketing costs to promote core products and services. Depreciation and amortization expense increased 7% reflecting increased capital expenditures in switching and transport technologies which have shorter asset lives. Product Distribution & Directory Publishing Businesses Operating expenses increased 5% in the 2000 first quarter compared to the same 1999 period reflecting increased costs of services and products related to increased equipment sales. Sprint ION(SM) Operating expenses for Sprint ION in the 2000 first quarter reflect continued development and deployment activities including costs for network research and testing, systems and operations development, product development, and advertising. Depreciation and amortization expense increased due to a rapidly increasing asset base. Other Ventures The "other ventures" segment includes the operating results of the cable TV service operations of the broadband fixed wireless companies acquired in the second half of 1999. The equity in losses of affiliates increased due to increased losses from Call-Net which include a restructuring charge in the 2000 first quarter. Sprint PCS Group Quarters Ended March 31, ---------------------- 2000 1999 - ------------------------------------------------------ (millions) Net operating revenues $ 1,177 $ 604 Operating expenses 1,779 1,431 - ------------------------------------------------------ Operating loss $ (602) $ (827) ---------------------- The PCS Group markets its products through multiple distribution channels, including its own retail stores as well as other retail outlets. Equipment sales to one retail chain and the subsequent service revenues generated by sales to its customers accounted for 25% of net operating revenues in the 2000 first quarter and 28% in the 1999 first quarter. Net Operating Revenues The PCS Group's net operating revenues include subscriber revenues and sales of handsets and accessory equipment. Subscriber revenues consist of monthly recurring charges and usage charges. Subscriber revenues increased 113% in the 2000 first quarter reflecting a 107% increase in the average number of customers. The PCS Group added 831,000 customers in the 2000 first quarter and ended the quarter with over 6.5 million customers in more than 300 metropolitan markets nationwide. Average monthly service revenue per user (ARPU) was $54 for the 2000 first quarter compared to $52 for the same 1999 period. Revenues from sales of handsets and accessories were approximately 15% of net operating revenues in the 2000 first quarter and 20% in the 1999 first quarter. As part of the PCS Group's marketing plans, handsets are normally sold at prices below the PCS Group's cost. Operating Expenses The PCS Group's costs of services and products mainly include handset and accessory costs, switch and cell site expenses and other network-related costs. These costs increased 26% in the 2000 first quarter from the 1999 first quarter reflecting the significant growth in customers and expanded market coverage, partly offset by a reduction in handset unit costs. SG&A expense mainly includes marketing costs to promote products and services as well as salary and benefit costs. SG&A expense increased 25% in the 2000 first quarter from the 1999 first quarter reflecting an expanded workforce to support subscriber growth and increased marketing and selling costs. Depreciation and amortization expense consists mainly of depreciation of network assets and amortization of intangible assets. The intangible assets include goodwill, PCS licenses, customer base, microwave relocation costs and assembled workforce, which are being amortized over 30 months to 40 years. Depreciation and amortization expense increased 21% in the 2000 first quarter from the 1999 first quarter reflecting amortization of intangible assets acquired in the Cox PCS purchase in the 1999 second quarter. It also reflects depreciation of the network assets placed in service during 2000 and 1999. F-15 - -------------------------------------------------------------------------------- Nonoperating Items - -------------------------------------------------------------------------------- Interest Expense Sprint's effective interest rate on long-term debt was 6.9% in the 2000 first quarter and 7.2% in the 1999 first quarter. The decrease mainly reflects increased borrowings with lower interest rates. Interest costs on short-term borrowings classified as long-term debt, deferred compensation plans and customer deposits have been excluded so as not to distort the effective interest rate on long-term debt. Other Income, Net Other income (expense) consisted of the following: Quarters Ended March 31, ---------------------- 2000 1999 - ---------------------------------------------------- (millions) Dividend and interest income $ 7 $ 8 Equity in net losses of affiliates (25) (9) Net gains from investments 26 - Gain on sale of assets 28 - Minority interest for Cox PCS - 20 Other, net (8) 14 - ---------------------------------------------------- Total $ 28 $ 33 ---------------------- Net gains from investments are the result of the gain realized on the exchange of SBC Communications Inc. common stock for certain FON Group notes payable, partly offset by losses related to the sale of an investment. Gain on sale of assets is the result of the sale of certain PCS Group customers and associated network infrastructure. Income Taxes See Note 5 of Condensed Notes to Consolidated Financial Statements for information about the differences that caused the effective income tax rates to vary from the federal statutory rate for income taxes related to continuing operations. Discontinued Operation, Net As a result of Sprint's sale of its interest in Global One to FT and DT, Sprint's gain on sale and its equity share of the results of Global One have been reported as a discontinued operation for all periods presented. Sprint recorded an after-tax gain related to the sale of its interest in Global One of $675 million in the first quarter of 2000. Sprint recorded after-tax losses related to its share of losses from Global One of $28 million in the first quarter of 1999. Extraordinary Items, Net In the 2000 first quarter, Sprint repaid, prior to scheduled maturities, $127 million of the PCS Group's notes payable to the FCC. These notes had an interest rate of 7.8%. This resulted in a $3 million after-tax extraordinary loss for the PCS Group. In the 1999 first quarter, Sprint terminated some of the PCS Group's revolving credit facilities and repaid, prior to scheduled maturities, the related outstanding balance of $1.7 billion. These facilities had a weighted average interest rate equal to the London Inter-Bank Offered Rate plus 40 basis points. This resulted in a $21 million after-tax extraordinary loss for the PCS Group. - -------------------------------------------------------------------------------- Financial Condition - -------------------------------------------------------------------------------- March 31, December 31, 2000 1999 - ----------------------------------------------------- (millions) Consolidated assets $ 38,714 $ 39,250 -------------------------------- Consolidated assets decreased due to using most of the cash from the sale of the net assets of the Global One discontinued operation and the receipt of an income tax refund to repay debt. Consolidated assets also decreased due to the exchange of investments in equity securities for certain notes payable. Net property, plant and equipment increased $463 million in the 2000 first quarter reflecting capital expenditures to support the PCS network buildout and expansion, core long distance and local network enhancements, and Sprint ION development and hardware deployment. See "Liquidity and Capital Resources" for more information about changes in Sprint's Consolidated Balance Sheets. - -------------------------------------------------------------------------------- Liquidity and Capital Resources - -------------------------------------------------------------------------------- Operating Activities Quarters Ended March 31, ------------------------------- 2000 1999 - ------------------------------------------------------ (millions) Cash flows provided by operating activities $ 930 $ 357 ------------------------------- Operating cash flows increased $573 million mainly reflecting a $414 million income tax refund received in the 2000 first quarter and decreased operating losses for the PCS Group. F-16 Investing Activities Quarters Ended March 31, ------------------------------- 2000 1999 - ------------------------------------------------------ (millions) Cash flows used by investing activities $ (56) $ (1,472) ------------------------------- In February 2000, Sprint received $1.4 billion from the sale of its interest in Global One. The proceeds were used to repay existing debt and fund the PCS Group's capital expenditures. The FON Group's capital expenditures totaled $758 million in the 2000 first quarter and $806 million in the 1999 first quarter. Long distance capital expenditures were incurred mainly to enhance network reliability, meet increased demand for data-related services and upgrade capabilities for providing new products and services. The local division incurred capital expenditures to accommodate access line growth and expand capabilities for providing enhanced services. Sprint ION capital expenditures were incurred for development and hardware deployment. PCS Group capital expenditures were $693 million in the 2000 first quarter and $512 million in the 1999 first quarter. Capital expenditures in both years were mainly for the continued buildout and expansion of the PCS network. "Investments in affiliates, net" consisted of capital contributions to EarthLink and other affiliates accounted for using the equity method. Financing Activities Quarters Ended March 31, ------------------------------- 2000 1999 - ------------------------------------------------------ (millions) Cash flows provided (used) by financing activities $ (744) $ 658 ------------------------------- Financing activities in the 2000 first quarter mainly reflect payments on long-term debt. Financing activities in the 1999 first quarter mainly reflect proceeds from common stock issuances. Sprint paid cash dividends of $109 million in the 2000 first quarter and $104 million in the 1999 first quarter. Capital Requirements Sprint's 2000 investing activities, mainly consisting of capital expenditures and investments in affiliates, are expected to require cash of $7.7 to $8.3 billion. FON Group capital expenditures are expected to range between $4.0 and $4.3 billion. Including the investments in broadband fixed wireless facilities, Sprint ION is expected to require $900 million to $1 billion of this amount. PCS Group capital expenditures are expected to be between $2.9 and $3.1 billion. Additional funds will be required to fund the PCS Group's expected operating losses, working capital and debt service requirements. Investments in affiliates are expected to require cash of $800 to $900 million. Dividend payments are expected to total $450 million in 2000. Sprint's tax sharing agreement provides for the allocation of income taxes between the FON Group and the PCS Group. Sprint expects the FON Group to continue to make significant payments to the PCS Group under this agreement because of expected PCS Group operating losses. Liquidity In July 1999, Sprint filed a shelf registration statement with the SEC covering $4.0 billion of senior unsecured debt securities to be used mainly to repay debt and for general purposes, including working capital requirements, acquisitions, and new capital investments. At March 31, 2000, Sprint had issued $750 million of these registered securities. Borrowings during the remainder of 2000 will be allocated to the FON Group or the PCS Group based on their cash requirements. Any borrowings Sprint may incur are ultimately limited by certain debt covenants. Sprint could borrow up to $13.8 billion at the end of March 2000 under the most restrictive of its debt covenants. - -------------------------------------------------------------------------------- Financial Strategies - -------------------------------------------------------------------------------- General Hedging Policies Sprint selectively enters into interest rate swap and cap agreements to manage its exposure to interest rate changes on its debt. Sprint also enters into forward contracts and options in foreign currencies to reduce the impact of changes in foreign exchange rates. Sprint seeks to minimize counterparty credit risk through stringent credit approval and review processes, the selection of only the most creditworthy counterparties, continual review and monitoring of all counterparties, and thorough legal review of contracts. Sprint also controls exposure to market risk by regularly monitoring changes in foreign exchange and interest rate positions under normal and stress conditions to ensure they do not exceed established limits. F-17 Sprint's derivative transactions are used for hedging purposes only and comply with Board-approved policies. Senior management receives frequent status updates of all outstanding derivative positions. Interest Rate Risk Management Sprint's interest rate risk management program focuses on minimizing exposure to interest rate movements, setting an optimal mixture of floating- and fixed-rate debt, and minimizing liquidity risk. Sprint uses simulation analysis to assess its interest rate exposure and establish the desired ratio of floating- and fixed-rate debt. To the extent possible, Sprint manages interest rate exposure and the floating-to-fixed ratio through its borrowings, but sometimes uses interest rate swaps and caps to adjust its risk profile. Foreign Exchange Risk Management Sprint's foreign exchange risk management program focuses on hedging transaction exposure to optimize consolidated cash flow. Sprint's main transaction exposure results from net payments made to overseas telecommunications companies for completing international calls made by Sprint's domestic customers. These international operations were not material to the consolidated financial position at March 31, 2000 or results of operations or cash flows for the quarter ended March 31, 2000. In addition, foreign currency transaction gains and losses were not material to Sprint's year-to-date 2000 results of operations. Sprint has not entered into any significant foreign currency forward contracts or other derivative instruments to hedge the effects of adverse fluctuations in foreign exchange rates. As a result, Sprint was not subject to material foreign exchange risk. - -------------------------------------------------------------------------------- Forward-looking Information - -------------------------------------------------------------------------------- Sprint includes certain estimates, projections and other forward-looking statements in its reports, in presentations to analysts and others, and in other publicly available material. Future performance cannot be ensured. Actual results may differ materially from those in the forward-looking statements. Some factors that could cause actual results to differ include: - the effects of vigorous competition in the markets in which Sprint operates; - the costs and business risks related to entering and expanding new markets necessary to provide seamless services and new services; - the ability of the PCS Group to continue to grow its market presence; - the risks related to Sprint's investments in joint ventures; - the impact of any unusual items resulting from ongoing evaluations of Sprint's business strategies; - regulatory risks, including the impact of the Telecommunications Act of 1996; - unexpected results of litigation filed against Sprint; - uncertainties associated with the pending merger of Sprint and WorldCom; - the possibility of one or more of the markets in which Sprint competes being impacted by changes in political, economic or other factors such as monetary policy, legal and regulatory changes or other external factors over which Sprint has no control; and - other risks referenced from time to time in Sprint's filings with the Securities and Exchange Commission. The words "estimate," "project," "intend," "expect," "believe" and similar expressions are intended to identify forward-looking statements. Forward-looking statements are found throughout MD&A. The reader should not place undue reliance on forward-looking statements, which speak only as of the date of this report. Sprint is not obligated to publicly release any revisions to forward-looking statements to reflect events after the date of this report or unforeseen events. F-18
COMBINED STATEMENTS OF OPERATIONS (Unaudited) Sprint FON Group (millions, except per share data) - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Quarters Ended March 31, 2000 1999 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Net Operating Revenues $ 4,397 $ 4,107 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Operating Expenses Costs of services and products 2,031 1,861 Selling, general and administrative 1,063 1,002 Depreciation and amortization 545 507 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Total operating expenses 3,639 3,370 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Operating Income 758 737 Interest expense (39) (42) Other income, net 7 9 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Income from continuing operations before income taxes 726 704 Income tax expense (281) (270) - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Income from Continuing Operations 445 434 Discontinued operation, net 675 (28) - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Net Income 1,120 406 Preferred stock dividends received 2 2 - ------------------------------------------------- ------------- -- -------------- -- ------------- --- ------------- Earnings applicable to common stock $ 1,122 $ 408 -- ------------- --- ------------- Diluted Earnings per Common Share(1) Continuing operations $ 0.50 $ 0.49 Discontinued operation 0.75 (0.03) - --------------------------------------------------------------- -- -------------- -- ------------- --- ------------- Total $ 1.25 $ 0.46 -- ------------- --- ------------- Diluted weighted average common shares(1) 894.7 880.9 -- ------------- --- ------------- Basic Earnings per Common Share(1) Continuing operations $ 0.51 $ 0.50 Discontinued operation 0.77 (0.03) - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Total $ 1.28 $ 0.47 -- ------------- --- ------------- Basic weighted average common shares(1) 875.6 863.2 -- ------------- --- ------------- Dividends per Common Share(1) $ 0.125 $ 0.125 -- ------------- --- -------------
(1) In the 1999 second quarter, Sprint effected a two-for-one stock split of its FON common stock. As a result, 1999 basic and diluted earnings per common share, weighted average common shares and dividends per common share have been restated for periods prior to the split. See accompanying Condensed Notes to Combined Financial Statements (Unaudited). F-19
COMBINED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) Sprint FON Group (millions) - --------------------------------------------- ----------------- ----------------- ---------------- ----------------- Quarters Ended March 31, 2000 1999 - --------------------------------------------- ----------------- ----------------- ---------------- ----------------- Net Income $ 1,120 $ 406 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Other Comprehensive Loss Unrealized holding losses on securities (3) (5) Income tax benefit 1 2 - --------------------------------------------------------------- -- -------------- -- ------------- --- ------------- Net unrealized holding losses on securities during the period (2) (3) Reclassification adjustment for gains included in net income (32) - - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Total other comprehensive loss (34) (3) - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Comprehensive Income $ 1,086 $ 403 -- ------------- --- -------------
See accompanying Condensed Notes to Combined Financial Statements (Unaudited). F-20
COMBINED BALANCE SHEETS Sprint FON Group (millions) - ------------------------------------------------------------------------------------------------------------------------- March 31, December 31, 2000 1999 - ------------------------------------------------------------------------------------------------------------------------- (Unaudited) Assets Current assets Cash and equivalents $ 195 $ 104 Accounts receivable, net of allowance for doubtful accounts of $210 and $228 2,867 2,836 Inventories 430 441 Prepaid expenses 288 251 Receivables from the PCS Group 1,152 136 Investments in equity securities - 316 Other 137 198 - ------------------------------------------------------------------------------------------------------------------------- Total current assets 5,069 4,282 Investments in securities 114 139 Property, plant and equipment Long distance division 9,960 9,824 Local division 16,141 15,828 Other 2,264 2,035 - ------------------------------------------------------------------------------------------------------------------------- Total property, plant and equipment 28,365 27,687 Accumulated depreciation (14,184) (13,685) - ------------------------------------------------------------------------------------------------------------------------- Net property, plant and equipment 14,181 14,002 Investments in and loans to the PCS Group 432 431 Investments in and advances to other affiliates 492 452 Intangible assets Goodwill 1,213 1,223 Other 375 296 - ------------------------------------------------------------------------------------------------------------------------- Total intangible assets 1,588 1,519 Accumulated amortization (146) (140) - ------------------------------------------------------------------------------------------------------------------------- Net intangible assets 1,442 1,379 Net assets of discontinued operation - 394 Other 736 724 - ------------------------------------------------------------------------------------------------------------------------- Total $ 22,466 $ 21,803 ----------------------------------- Liabilities and Group Equity Current liabilities Current maturities of long-term debt $ 551 $ 902 Accounts payable 1,037 1,012 Accrued interconnection costs 578 683 Accrued taxes 647 162 Advance billings 319 323 Payroll and employee benefits 354 557 Other 684 662 - ------------------------------------------------------------------------------------------------------------------------- Total current liabilities 4,170 4,301 Long-term debt and capital lease obligations 4,183 4,531 Deferred credits and other liabilities Deferred income taxes and investment tax credits 1,100 935 Postretirement and other benefit obligations 1,067 1,064 Other 441 458 - ------------------------------------------------------------------------------------------------------------------------- Total deferred credits and other liabilities 2,608 2,457 Group equity 11,505 10,514 - ------------------------------------------------------------------------------------------------------------------------- Total $ 22,466 $ 21,803 -----------------------------------
See accompanying Condensed Notes to Combined Financial Statements (Unaudited). F-21
COMBINED STATEMENTS OF CASH FLOWS (Unaudited) Sprint FON Group (millions) - ------------------------------------------------------------------ ----------------- ----------------- ---------------- Quarters Ended March 31, 2000 1999 - ------------------------------------------------------------------ ----------------- ----------------- ---------------- Operating Activities Net income $ 1,120 $ 406 Adjustments to reconcile net income to net cash provided by operating activities: Discontinued operation, net (675) 28 Equity in net losses of affiliates 25 9 Depreciation and amortization 545 507 Deferred income taxes and investment tax credits 238 24 Changes in assets and liabilities: Accounts receivable, net (31) (110) Inventories and other current assets (22) (10) Accounts payable and other current liabilities (82) 21 Affiliate receivables and payables, net (88) (91) Noncurrent assets and liabilities, net 5 (38) Other, net (45) (6) - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Net cash provided by operating activities 990 740 - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Investing Activities Capital expenditures (758) (806) Investments in other affiliates, net (130) (67) Proceeds from sale of investment in Global One 1,403 - Advances to the PCS Group (1,014) - Repayments from Sprint PCS - 134 Other, net - (5) - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Net cash used by investing activities (499) (744) - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Financing Activities Allocation of long-term debt to the PCS Group - (278) Payments on long-term debt (381) (12) Dividends paid (105) (100) Proceeds from common stock issued 36 72 Treasury stock purchased - (45) Other, net 50 18 - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Net cash used by financing activities (400) (345) - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Increase (Decrease) in Cash and Equivalents 91 (349) Cash and Equivalents at Beginning of Period 104 432 - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Cash and Equivalents at End of Period $ 195 $ 83 --- ------------- -- -------------
See accompanying Condensed Notes to Combined Financial Statements (Unaudited). F-22 CONDENSED NOTES TO COMBINED FINANCIAL STATEMENTS (Unaudited) Sprint FON Group The information in this Form 10-Q has been prepared according to Securities and Exchange Commission (SEC) rules and regulations. In our opinion, the combined interim financial statements reflect all adjustments, consisting only of normal recurring accruals, needed to fairly present the FON Group's combined financial position, results of operations, cash flows and comprehensive income. Certain information and footnote disclosures normally included in combined financial statements prepared according to accounting principles generally accepted in the United States have been condensed or omitted. As a result, you should read these financial statements along with Sprint Corporation's 1999 Form 10-K. Operating results for the 2000 year-to-date period do not necessarily represent the results that may be expected for the year ending December 31, 2000. - -------------------------------------------------------------------------------- 1. Merger - -------------------------------------------------------------------------------- In October 1999, Sprint announced a definitive merger agreement with WorldCom, Inc. (WorldCom). Under the agreement, each share of Sprint FON stock will be exchanged for $76 of WorldCom common stock, subject to a collar. In addition, each share of Sprint PCS stock will be exchanged for one share of a new WorldCom PCS tracking stock and 0.116025 shares of WorldCom common stock. The terms of the WorldCom PCS tracking stock will be equivalent to those of Sprint's PCS common stock and will track the performance of the company's personal communication services (PCS) business. Sprint and WorldCom shareholders have approved the merger. The merger is subject to approvals from the Federal Communications Commission, the Justice Department, various state government bodies and foreign regulatory authorities. The companies anticipate that the merger will close in the second half of 2000. - -------------------------------------------------------------------------------- 2. Basis of Combination and Presentation - -------------------------------------------------------------------------------- The PCS stock is intended to reflect the performance of Sprint's domestic wireless PCS operations. The FON stock is intended to reflect the performance of all of Sprint's other operations. The combined FON Group financial statements, together with the combined PCS Group financial statements, include all the accounts in Sprint's consolidated financial statements. The combined financial statements for each Group were prepared on a basis that management believes is reasonable and proper and include: - the combined historical balance sheets, results of operations and cash flows for each of the Groups, with all significant intragroup amounts and transactions eliminated, - an allocation of Sprint's debt, including the related effects on results of operations and cash flows, and - an allocation of corporate overhead. The FON Group entities are commonly controlled companies. Transactions between the PCS Group and the FON Group have not been eliminated in the combined financial statements of either Group. The FON Group combined financial statements provide FON shareholders with financial information about the FON Group operations. Investors in FON stock and PCS stock are Sprint shareholders and are subject to risks related to all of Sprint's businesses, assets and liabilities. Sprint retains ownership and control of the assets and operations of each Group. Financial effects of either Group that affect Sprint's results of operations or financial condition could affect the results of operations or financial position of the other Group or the market price of the other Group's stock. Net losses of either Group, and dividends or distributions on, or repurchases of, PCS stock or FON stock, will reduce Sprint funds legally available for dividends on both Groups' stock. As a result, the FON Group combined financial statements should be read along with Sprint's consolidated financial statements and the PCS Group's combined financial statements. The FON Group combined financial statements are prepared using accounting principles generally accepted in the United States. These principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Actual results could differ from those estimates. Certain prior-year amounts have been reclassified to conform to the current-year presentation. These reclassifications had no effect on the results of operations or group equity as previously reported. Investments in entities in which the FON Group exercises significant influence, but does not control, are accounted for using the equity method (see Note 4). F-23 - -------------------------------------------------------------------------------- 3. Discontinued Operation - -------------------------------------------------------------------------------- In January 2000, Sprint reached a definitive agreement with France Telecom S.A. (FT) and Deutsche Telekom AG (DT) to sell its interest in Global One. In February 2000, Sprint received $1.1 billion in cash and was repaid $276 million for advances for its entire stake in Global One. The FON Group recorded an after-tax gain related to the sale of Sprint's interest in Global One of $675 million in the first quarter of 2000. The FON Group recorded after-tax losses related to its share of losses from Global One of $28 million in the first quarter of 1999. - -------------------------------------------------------------------------------- 4. Investments - -------------------------------------------------------------------------------- At the end of March 2000, investments accounted for using the equity method consisted of the FON Group's investments in EarthLink, Call-Net and other strategic investments. Combined, unaudited, summarized financial information (100% basis) of entities accounted for using the equity method was as follows: Quarters Ended March 31, ----------------------- 2000 1999 - ------------------------------------------------------- (millions) Results of operations Net operating revenues $ 481 $ 397 ----------------------- Operating loss $ (60) $ (32) ----------------------- Net loss $ (137) $ (35) ----------------------- Equity in net losses of affiliates $ (25) $ (9) ----------------------- - -------------------------------------------------------------------------------- 5. Income Taxes - -------------------------------------------------------------------------------- The differences that caused the FON Group's effective income tax rates to vary from the 35% federal statutory rate for income taxes related to continuing operations were as follows: Quarters Ended March 31, ------------------------- 2000 1999 - ------------------------------------------------------- (millions) Income tax expense at the federal statutory rate $ 254 $ 246 Effect of: State income taxes, net of federal income tax 19 22 effect Equity in losses of foreign joint ventures 10 1 Goodwill amortization 2 - Other, net (4) 1 - ------------------------------------------------------- Income tax expense $ 281 $ 270 ------------------------- Effective income tax rate 38.7% 38.4% ------------------------- - -------------------------------------------------------------------------------- 6. Long-term Debt and Capital Lease Obligations - -------------------------------------------------------------------------------- During the 2000 first quarter, the FON Group's notes payable and commercial paper decreased $295 million. The FON Group used a portion of the proceeds from the sale of its interest in Global One to repay the borrowings. In March 2000, the FON Group exchanged 6.6 million common shares of SBC Communications, Inc. for certain notes payable. The notes had a market value of $275 million on the maturity date and $316 million at year-end 1999. The notes had an interest rate of 8.3%. - -------------------------------------------------------------------------------- 7. Group Equity - -------------------------------------------------------------------------------- Quarter Ended March 31, 2000 - ------------------------------------------------------- (millions) Beginning balance $ 10,514 Net income 1,120 Dividends (108) Equity issued 48 Other, net (69) - ------------------------------------------------------- Ending balance $ 11,505 ------------------ F-24 - -------------------------------------------------------------------------------- 8. Litigation, Claims and Assessments - -------------------------------------------------------------------------------- FON shareholders are subject to all of the risks related to an investment in Sprint and the FON Group, including the effects of any legal proceedings and claims against the PCS Group. Various suits arising in the ordinary course of business are pending against Sprint. Management cannot predict the final outcome of these actions but believes they will not be material to the FON Group's combined financial statement. - -------------------------------------------------------------------------------- 9. Segment Information - -------------------------------------------------------------------------------- The FON Group operates in five business segments, based on services and products: the long distance division, the local division, the product distribution and directory publishing businesses, activities to develop and deploy Sprint ION(SM) -- Integrated On-Demand Network, and other ventures.
Industry segment financial information was as follows: - ----------------------------------------------------------------------------------------------------------------------- Product Corporate Long Distribution and Sprint Quarters Ended Distance Local & Directory Sprint Other Elim- FON March 31, Division Division Publishing ION Ventures inations Group - ----------------------------------------------------------------------------------------------------------------------- (millions) 2000 Net operating revenues $ 2,737 $ 1,432 $ 454 $ 1 $ 18 $ (245) $ 4,397 Affiliated revenues 84 92 160 - - (245) 91 Operating income (loss) 431 416 67 (136) (13) (7) 758 1999 Net operating revenues $ 2,560 $ 1,371 $ 426 $ - $ - $ (250) $ 4,107 Affiliated revenues 63 72 174 - - (250) 59 Operating income (loss) 388 363 56 (52) (6) (12) 737 - -----------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 10. Supplemental Cash Flows Information - -------------------------------------------------------------------------------- The FON Group's cash paid (received) for interest and income taxes was as follows: Quarters Ended March 31, ------------------------- 2000 1999 - ------------------------------------------------------- (millions) Interest (net of capitalized interest) $ 71 $ 28 ------------------------- Income taxes $ (149) $ 185 ------------------------- The FON Group's noncash activities included the following: Quarters Ended March 31, ------------------------- 2000 1999 - ------------------------------------------------------- (millions) Debt redeemed with investments in equity securities $ 275 $ - ------------------------- Tax benefit from stock options exercised $ 51 $ 51 ------------------------- Common stock issued under employee stock benefit plans $ 16 $ 24 ------------------------- Stock received for stock options exercised $ 13 $ 23 ------------------------- F-25 - -------------------------------------------------------------------------------- 11. Subsequent Events - -------------------------------------------------------------------------------- In April 2000, Sprint's Board of Directors declared dividends of 12.5 cents per share on the Sprint FON common stock and Class A common stock. Dividends will be paid June 30, 2000. In May 2000, Sprint announced that it would purchase an additional 26 million shares of EarthLink, Inc. for $431 million. The purchase will increase the FON Group's interest in EarthLink, Inc. to 26.7%. - -------------------------------------------------------------------------------- 12. Recently Issued Accounting Pronouncement - -------------------------------------------------------------------------------- In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101). In March 2000, the SEC issued an amendment to SAB 101 which delayed the effective date for registrants with fiscal years that begin between December 12, 1999 and March 15, 2000. The effective date for Sprint will be for the quarter ending June 30, 2000. The deferral of telecommunication service activation fees and certain related costs are specifically addressed in SAB 101 and the FON Group is in the process of determining the impact of SAB 101 on its financial statements. Based on a preliminary analysis, SAB 101 is not expected to have a material impact on the FON Group's combined financial statements. F-26 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Sprint FON Group - -------------------------------------------------------------------------------- Recent Developments - -------------------------------------------------------------------------------- In October 1999, Sprint announced a definitive merger agreement with WorldCom, Inc. (WorldCom). Under the agreement, each share of Sprint FON stock will be exchanged for $76 of WorldCom common stock, subject to a collar. In addition, each share of Sprint PCS stock will be exchanged for one share of a new WorldCom PCS tracking stock and 0.116025 shares of WorldCom common stock. The terms of the WorldCom PCS tracking stock will be equivalent to those of Sprint's PCS common stock and will track the performance of the company's personal communication services business. Sprint and WorldCom shareholders have approved the merger. The merger is subject to approvals from the Federal Communications Commission (FCC), the Justice Department, various state government bodies and foreign regulatory authorities. The companies anticipate that the merger will close in the second half of 2000. In January 2000, Sprint reached a definitive agreement with France Telecom S.A. (FT) and Deutsche Telekom AG (DT) to sell its interest in Global One. In February 2000, Sprint received $1.1 billion in cash and was repaid $276 million for advances for its entire stake in Global One. The FON Group's equity share of the results of Global One has been reported as a discontinued operation for all periods presented. - -------------------------------------------------------------------------------- Sprint FON Group - -------------------------------------------------------------------------------- Core Businesses Long Distance Division The long distance division is the nation's third-largest long distance phone company. It operates a nationwide, all-digital long distance communications network that uses fiber-optic and electronic technology. The division mainly provides domestic and international voice, video and data communications services. Local Division The local division consists of regulated local phone companies serving more than 8.1 million access lines in 18 states. It provides local phone services, access by phone customers and other carriers to its local network, sales of telecommunications equipment, and long distance services within certain regional calling areas. Product Distribution and Directory Publishing Businesses The product distribution business provides wholesale distribution services of telecommunications products. The directory publishing business publishes and markets white and yellow page phone directories. Sprint ION(SM) Sprint is developing and deploying new integrated communications services, referred to as Sprint ION. Sprint ION extends Sprint's existing network capabilities to the customer and enables Sprint to provide the network infrastructure to meet customers' demands for advanced services including integrated voice, data, Internet and video. It is also expected to be the foundation for Sprint to provide new competitive local service. Beginning in 2000, the Sprint ION segment includes costs to develop high-speed data services and Sprint ION services for the Multipoint Multichannel Distribution Services broadband fixed wireless platform. Other Ventures The "other ventures" segment includes the cable TV service operations of the broadband fixed wireless companies acquired in the second half of 1999. This segment also includes the FON Group's investment in EarthLink, Inc., an Internet service provider; Call-Net, a long distance provider in Canada operating under the Sprint brand name; and certain other telecommunications investments and ventures. All of the investments and ventures are accounted for on the equity basis. - -------------------------------------------------------------------------------- Results of Operations - -------------------------------------------------------------------------------- Net operating revenues were $4.4 billion for the 2000 first quarter, an increase of 7% from $4.1 billion for the same 1999 period. Net income was $1.1 billion for the 2000 first quarter compared to $406 million for the same 1999 period. Net income for the 2000 first quarter includes a $675 million gain related to the sale of the FON Group's interest in Global One. See Note 3 of Notes to Combined Financial Statements. F-27 Core Businesses The FON Group's core businesses generated improved first quarter net operating revenues and operating income compared to the same 1999 period. Core businesses exclude results from Sprint ION and other ventures. First quarter 2000 long distance calling volumes increased 17% from the same 1999 period. Access lines served by the local division increased 5% during the past 12 months. - -------------------------------------------------------------------------------- Segmental Results of Operations - -------------------------------------------------------------------------------- Long Distance Division
Selected Operating Results --------------------------------------------------------------------- Quarters Ended March 31, Variance ---------------------------------- ------------------------------- 2000 1999 $ % - ---------------------------------------------- ---------------- ----------------- -- ------------- ----------------- (millions) Net operating revenues $ 2,737 $ 2,560 $ 177 6.9% - ---------------------------------------------- -- ------------- -- -------------- -- ------------- ----------------- Operating expenses Interconnection 964 943 21 2.2% Operations 434 349 85 24.4% Selling, general and administrative 672 642 30 4.7% Depreciation and amortization 236 238 (2) (0.8)% - ---------------------------------------------- -- ------------- -- -------------- -- ------------- Total operating expenses 2,306 2,172 134 6.2% - ---------------------------------------------- -- ------------- -- -------------- -- ------------- Operating income $ 431 $ 388 $ 43 11.1% -- ------------- -- -------------- -- ------------- Operating margin 15.7% 15.2% -- ------------- -- --------------
Net Operating Revenues Net operating revenues increased 7% in the 2000 first quarter from the same 1999 period. The increase mainly reflects strong data services revenue growth. Calling volumes increased 17%, but were largely offset by a more competitive pricing environment. Future revenue and operating income growth may be impacted by the continuing pricing pressures being experienced by the long distance division. Business and Data Market Business and data market revenues increased 11% in the 2000 first quarter from the same 1999 period. Data services showed strong growth because of continued demand and an increased use of the Internet. Residential Market Residential market revenues decreased 4% in the 2000 first quarter from the same 1999 period due to lower volumes and more competitive pricing in the international markets. Additionally, revenues decreased due to the loss of a major Local Exchange Carrier calling card contract. However, Sprint has entered into another calling card contract that will partially replace the lost revenues. Domestic residential calling volumes increased compared with the prior year period, but were partly offset by price reductions. Wholesale Market Wholesale market revenues increased 9% in the 2000 first quarter from the same 1999 period. Approximately one-third of the increase is the result of sales of capacity on Sprint's transoceanic cable in the 2000 first quarter. The remainder of the increase is primarily due to growth in private line services. Interconnection Costs Interconnection costs consist of amounts paid to local phone companies, other domestic service providers and foreign phone companies to complete calls made by the division's domestic customers. These costs increased 2% in the 2000 first quarter from the same 1999 period reflecting increased calling volumes and costs related to growth in non-minute driven revenues, partly offset by reductions in per-minute costs for both domestic and international access. The domestic rate reductions were generally due to FCC-mandated access rate reductions that took effect in July 1999. Lower international per minute costs reflect continued competition. Sprint expects government deregulation and competitive pressures to add to the F-28 trend of declining unit costs for international interconnection. Interconnection costs were 35.2% of net operating revenues in the 2000 first quarter compared to 36.8% for the same period a year ago. Operations Expense Operations expense includes costs to operate and maintain the long distance network and costs of equipment sales. It also includes costs to provide operator, public payphone and video teleconferencing services as well as telecommunications services for the hearing-impaired. Operations expense increased 24% in the 2000 first quarter from the same 1999 period mainly due to an increase in equipment sales. Operations expense was 15.9% of net operating revenues in the 2000 first quarter compared to 13.6% for the same period a year ago. Selling, General and Administrative Expense Selling, general and administrative (SG&A) expense increased 5% in the 2000 first quarter from the same 1999 period. This increase mainly reflects increased marketing and promotions in the business market. SG&A expense was 24.5% of net operating revenues in the 2000 first quarter compared to 25.1% for the same period a year ago. Depreciation and Amortization Expense Depreciation and amortization expense decreased 1% in the 2000 first quarter from the same period a year ago. This decrease was generally due to an adjustment to increase the depreciable lives of certain assets, largely offset by an increased asset base. Depreciation and amortization expense was 8.7% of net operating revenues in the 2000 first quarter compared to 9.3% for the 1999 first quarter. Local Division
Selected Operating Results --------------------------------------------------------------------- Quarters Ended March 31, Variance ----------------------------------- ------------------------------- 2000 1999 $ % - --------------------------------------------- ----------------- ----------------- -- ------------- ----------------- (millions) Net operating revenues $ 1,432 $ 1,371 $ 61 4.4% - --------------------------------------------- --- ------------- -- -------------- -- ------------- Operating expenses Costs of services and products 467 473 (6) (1.3)% Selling, general and administrative 270 275 (5) (1.8)% Depreciation and amortization 279 260 19 7.3% - --------------------------------------------- --- ------------- -- -------------- -- ------------- Total operating expenses 1,016 1,008 8 0.8% - --------------------------------------------- --- ------------- -- -------------- -- ------------- Operating income $ 416 $ 363 $ 53 14.6% --- ------------- -- -------------- -- ------------- Operating margin 29.1% 26.5% --- ------------- -- --------------
Net Operating Revenues Net operating revenues increased 4% in the 2000 first quarter from the same 1999 period. This increase mainly reflects customer access line growth and increased sales of network-based services such as Caller ID and Call Waiting. Customer access lines increased 5% during the past 12 months. Sales of network-based services increased due to strong demand for bundled services which combine local service, network-based features and long distance calling. Local Service Revenues Local service revenues, derived from local exchange services, grew 9% in the 2000 first quarter from the same 1999 period because of customer access line growth and strong demand for bundled services. Revenue growth also reflects increased sales of data products and revenues from maintaining customer wiring and equipment. Network Access Revenues Network access revenues, derived from long distance phone companies using the local network to complete calls, increased 7% in the 2000 first quarter from the same 1999 period. The 2000 first quarter revenues reflect a 9% increase in minutes of use, the continued implementation of local number portability charges and increased special access F-29 services. These increases were partly offset by FCC-mandated access rate reductions. Toll Service Revenues Toll service revenues are mainly derived from providing long distance services within specified regional calling areas, or LATAs, that are beyond the local calling area. These revenues decreased 23% in the 2000 first quarter from the same 1999 period, reflecting increased competition, which is expected to continue, in the intraLATA long distance market. The decrease also reflects the success of sales of bundled services which shift intraLATA customers to Sprint's long distance division. Despite the losses realized by the local division, Sprint's overall intraLATA long distance market share in the local division's territories has remained steady at approximately 65% from the 1999 first quarter to the 2000 first quarter. Other Revenues Other revenues decreased 12% in the 2000 first quarter from the same 1999 period mainly due to a decrease in equipment sales. Costs of Services and Products Costs of services and products includes costs to operate and maintain the local network and costs of equipment sales. These costs decreased 1% in the 2000 first quarter compared to the same 1999 period due to a decline in equipment sales and the success of cost control initiatives. Costs of services and products was 32.6% of net operating revenues in the 2000 first quarter compared to 34.5% for the same period a year ago. Selling, General and Administrative Expense SG&A expense decreased 2% in the 2000 first quarter compared to the same 1999 period. This decrease is mainly due to continued emphasis on cost control partly offset by increased customer service costs related to customer access line growth and increased marketing costs to promote core products and services. SG&A expense was 18.9% of net operating revenues in the 2000 first quarter compared to 20.1% for the same period a year ago. Depreciation and Amortization Expense Depreciation and amortization expense increased 7% in the 2000 first quarter compared to the same 1999 period, mainly because of increased capital expenditures in switching and transport technologies which have shorter asset lives. Depreciation and amortization expense was 19.4% of net operating revenues in the 2000 first quarter compared to 18.9% for the same period a year ago. Product Distribution and Directory Publishing Businesses
Selected Operating Results --------------------------------------------------------------------- Quarters Ended March 31, Variance ----------------------------------- ------------------------------- 2000 1999 $ % - --------------------------------------------- ----------------- ----------------- -- ------------- ----------------- (millions) Net operating revenues $ 454 $ 426 $ 28 6.6% - --------------------------------------------- --- ------------- -- -------------- -- ------------- Operating expenses Costs of services and products 351 334 17 5.1% Selling, general and administrative 32 32 - - Depreciation and amortization 4 4 - - - --------------------------------------------- --- ------------- -- -------------- -- ------------- Total operating expenses 387 370 17 4.6% - --------------------------------------------- --- ------------- -- -------------- -- ------------- Operating income $ 67 $ 56 $ 11 19.6% --- ------------- -- -------------- -- ------------- Operating margin 14.8% 13.1% --- ------------- -- --------------
Net operating revenues increased 7% in the 2000 first quarter compared to the same 1999 period. Nonaffiliated revenues accounted for over one-half of revenues in both the 2000 and 1999 first quarters. Nonaffiliated revenues increased 17% in the 2000 first quarter compared to the same 1999 period, but were partly offset by a decrease in product sales to affiliates. The increase in nonaffiliated revenues is mainly due to certain customers accelerating equipment purchases in the 2000 first quarter. The change in the mix of the local division's capital program to more electronics and software, which is F-30 more frequently purchased directly from manufacturers, caused the decline in affiliate sales. Operating expenses increased 5% in the 2000 first quarter compared to the same 1999 period reflecting increased costs of services and products related to increased equipment sales. Sprint ION(SM) Quarters Ended March 31, ------------------------ 2000 1999 - --------------------------------------------------------- (millions) Net operating revenues $ 1 $ - ------------------------ Total operating expenses $ 137 $ 52 ------------------------ Operating loss $ (136) $ (52) ------------------------ Operating expenses for Sprint ION in the 2000 first quarter reflect continued development and deployment activities including costs for network research and testing, systems and operations development, product development, and advertising. Depreciation and amortization expense increased to $26 million in the 2000 first quarter from $6 million for the same period a year ago due to a rapidly increasing asset base. Other Ventures Quarters Ended March 31, ----------------------- 2000 1999 - ----------------------------------------------------- (millions) Net operating revenues $ 18 $ - ----------------------- Total operating expenses $ 31 $ 6 ----------------------- Operating loss $ (13) $ (6) ----------------------- Equity in losses of affiliates $ (37) $ (15) ----------------------- This segment includes the operating results of the cable TV service operations of the broadband fixed wireless companies acquired in the second half of 1999. The increase in equity in losses of affiliates reflects increased losses from Call-Net, which include a restructuring charge in the 2000 first quarter. - -------------------------------------------------------------------------------- Nonoperating Items - -------------------------------------------------------------------------------- Interest Expense, Net The FON Group's effective interest rate on long-term debt was 7.6% in the 2000 first quarter and 8.0% in the 1999 first quarter. The decrease mainly reflects increased borrowings with lower interest rates. Interest costs on short-term borrowings classified as long-term debt, intergroup borrowings, deferred compensation plans and customer deposits have been excluded so as not to distort the effective interest rate on long-term debt. Interest expense on borrowings incurred by Sprint and allocated to the PCS Group is based on rates the PCS Group would be able to obtain from third parties as a direct or indirect wholly owned Sprint subsidiary, but without the benefit of any guaranty by Sprint or any member of the FON Group. The difference between Sprint's actual interest rates and the rates charged to the PCS Group is reflected as a reduction in the FON Group's interest expense. These reductions, which totaled $45 million in the 2000 first quarter and $30 million in the 1999 first quarter, have also been excluded in computing the effective interest rates above. Other Income, Net Other income (expense) consisted of the following: Quarters Ended March 31, ----------------------- 2000 1999 - ------------------------------------------------------ (millions) Dividend and interest income $ 11 $ 9 Equity in net losses of affiliates (25) (9) Net gains from investments 26 - Other, net (5) 9 - ------------------------------------------------------ Total $ 7 $ 9 ----------------------- Net gains from investments are the result of the gain realized on the exchange of SBC Communications Inc. common stock for certain FON Group notes payable, partly offset by losses related to the sale of an investment. Income Taxes See Note 5 of Condensed Notes to Combined Financial Statements for information about the differences that caused the effective income tax rates to vary from the federal statutory rate for income taxes related to continuing operations. Discontinued Operation, Net As a result of Sprint's sale of its interest in Global One to FT and DT, the FON Group's gain on sale and its equity share of the results of Global One have been reported as a discontinued operation for all periods presented. The FON Group recorded an after-tax gain related to the sale of Sprint's interest in Global One of $675 million in the first quarter of 2000. The FON Group F-31 recorded after-tax losses related to its share of losses from Global One of $28 million in the first quarter of 1999. - -------------------------------------------------------------------------------- Financial Condition - -------------------------------------------------------------------------------- March 31, December 31, 2000 1999 - ------------------------------------------------------ (millions) Combined assets $ 22,466 $ 21,803 -------------------------------- See "Liquidity and Capital Resources" for information about changes in the Combined Balance Sheets. - -------------------------------------------------------------------------------- Liquidity and Capital Resources - -------------------------------------------------------------------------------- Operating Activities Quarters Ended March 31, ------------------------------- 2000 1999 - ------------------------------------------------------ (millions) Cash flows provided by operating activities $ 990 $ 740 ------------------------------- Operating cash flows increased $250 million mainly reflecting changes in cash flows related to income taxes and an increase in operating income, partly offset by an increase in working capital. In the 2000 first quarter, the FON Group received a $149 million income tax refund from the PCS Group in accordance with the tax sharing agreement. In the 1999 first quarter, the FON Group paid $185 million for income taxes. Investing Activities Quarters Ended March 31, ------------------------------- 2000 1999 - ------------------------------------------------------ (millions) Cash flows used by investing activities $ (499) $ (744) ------------------------------- In February 2000, the FON Group received $1.4 billion from the sale of its investment in Global One. Most of the proceeds were advanced to the PCS Group and were used to fund its cash requirements. The remainder was used to repay existing FON Group debt. Capital expenditures totaled $758 million in the 2000 first quarter and $806 million in the 1999 first quarter. Long distance capital expenditures were incurred mainly to enhance network reliability, meet increased demand for data-related services and upgrade capabilities for providing new products and services. The local division incurred capital expenditures to accommodate access line growth and expand capabilities for providing enhanced services. Sprint ION capital expenditures were incurred for development and hardware deployment. Cash flows for the 1999 first quarter also include the repayment of loans made to Sprint PCS prior to the Sprint restructuring. "Investments in other affiliates, net" includes the FON Group's investment in EarthLink and other affiliates accounted for using the equity method. Financing Activities Quarters Ended March 31, ------------------------------- 2000 1999 - ------------------------------------------------------ (millions) Cash flows used by financing activities $ (400) $ (345) ------------------------------- Financing activities in the 2000 first quarter mainly reflect payments on long-term debt. Financing activities in the 1999 first quarter mainly reflect net debt allocated to the PCS Group of $278 million. The FON Group paid cash dividends of $105 million in the 2000 first quarter compared to $100 million in the 1999 first quarter. Capital Requirements The FON Group's 2000 investing activities, mainly consisting of capital expenditures and investments in affiliates, are expected to require cash of $4.6 to $5.0 billion. FON Group capital expenditures are expected to range between $4.0 and $4.3 billion in 2000. The long distance and local divisions will require the majority of this total. Including the investments in broadband fixed wireless facilities, Sprint ION is expected to require $900 million to $1 billion for capital expenditures in 2000. Investments in affiliates are expected to require cash of $600 to $700 million. Dividend payments are expected to total $435 million. Sprint's tax sharing agreement provides for the allocation of income taxes between the FON Group and the PCS Group. Sprint expects the FON Group to continue to make significant payments to the PCS Group under this agreement because of expected PCS Group operating losses. Liquidity See Sprint's "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity" for a discussion of liquidity. F-32 - -------------------------------------------------------------------------------- Financial Strategies - -------------------------------------------------------------------------------- Financial strategies are determined by Sprint on a centralized basis. See Sprint's "Management's Discussion and Analysis of Financial Condition and Results of Operations--Financial Strategies." - -------------------------------------------------------------------------------- Forward-looking Information - -------------------------------------------------------------------------------- See Sprint's "Management's Discussion and Analysis of Financial Condition and Results of Operations--Forward-looking Information" for a discussion of forward-looking information. F-33
COMBINED STATEMENTS OF OPERATIONS (Unaudited) Sprint PCS Group (millions, except per share data) - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Quarters Ended March 31, 2000 1999 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Net Operating Revenues $ 1,177 $ 604 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Operating Expenses Costs of services and products 903 717 Selling, general and administrative 455 365 Depreciation and amortization 421 349 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Total operating expenses 1,779 1,431 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Operating Loss (602) (827) Interest expense (220) (151) Other income, net 26 26 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Loss before income taxes and extraordinary items (796) (952) Income tax benefit 286 347 - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Loss before Extraordinary Items (510) (605) Extraordinary items, net (3) (21) - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Net Loss (513) (626) Preferred stock dividends (4) (4) - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Loss applicable to common stock $ (517) $ (630) -- ------------- --- ------------- Basic and Diluted Loss per Common Share(1) Continuing operations $ (0.54) $ (0.71) Extraordinary items - (0.02) - --------------------------------------------- --- ------------- -- ------------- -- ------------- --- ------------- Total $ (0.54) $ (0.73) -- ------------- --- ------------- Basic and diluted weighted average common shares(1) 956.3 863.4 -- ------------- --- -------------
(1) In February 2000, Sprint effected a two-for-one stock split of its PCS common stock. As a result, 1999 basic and diluted loss per common share and weighted average common shares have been restated. See accompanying Condensed Notes to Combined Financial Statements (Unaudited). F-34
COMBINED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited) Sprint PCS Group (millions) - --------------------------------------------- ----------------- ----------------- ---------------- ----------------- Quarters Ended March 31, 2000 1999 - --------------------------------------------- ----------------- ----------------- ---------------- ----------------- Net Loss $ (513) $ (626) - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Other Comprehensive Income Unrealized holding gains on securities 3 - Income tax expense (1) - - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Net unrealized holding gains on securities 2 - - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Total other comprehensive income 2 - - --------------------------------------------- --- ------------- -- -------------- -- ------------- --- ------------- Comprehensive Loss $ (511) $ (626) -- ------------- --- -------------
See accompanying Condensed Notes to Combined Financial Statements (Unaudited). F-35
COMBINED BALANCE SHEETS Sprint PCS Group (millions) - ------------------------------------------------------------------------------------------------------------------------- March 31, December 31, 2000 1999 - ------------------------------------------------------------------------------------------------------------------------- (Unaudited) Assets Current assets Cash and equivalents $ 55 $ 16 Accounts receivable, net of allowance for doubtful accounts of $57 573 572 Inventories 320 336 Prepaid expenses 123 89 Current tax benefit receivable from the FON Group 447 293 Other - 9 - ------------------------------------------------------------------------------------------------------------------------- Total current assets 1,518 1,315 Property, plant and equipment Network equipment 6,186 5,817 Construction work in progress 1,729 1,692 Buildings and leasehold improvements 1,340 1,235 Other 693 667 - ------------------------------------------------------------------------------------------------------------------------- Total property, plant and equipment 9,948 9,411 Accumulated depreciation (1,664) (1,415) - ------------------------------------------------------------------------------------------------------------------------- Net property, plant and equipment 8,284 7,996 Intangible assets Goodwill 4,530 4,522 PCS licenses 3,060 3,060 Customer base 735 726 Microwave relocation costs 398 377 Other 45 54 - ------------------------------------------------------------------------------------------------------------------------- Total intangible assets 8,768 8,739 Accumulated amortization (681) (551) - ------------------------------------------------------------------------------------------------------------------------- Net intangible assets 8,087 8,188 Other 423 425 - ------------------------------------------------------------------------------------------------------------------------- Total $ 18,312 $ 17,924 ----------------------------------- Liabilities and Group Equity Current liabilities Current maturities of long-term debt $ 58 $ 185 Accounts payable 430 450 Construction obligations 951 1,039 Accrued taxes 137 130 Accrued interest 239 120 Payables to the FON Group 1,152 136 Other 486 518 - ------------------------------------------------------------------------------------------------------------------------- Total current liabilities 3,453 2,578 Long-term debt and capital lease obligations 11,070 11,304 Deferred credits and other liabilities Deferred income taxes 644 582 Other 156 140 - ------------------------------------------------------------------------------------------------------------------------- Total deferred credits and other liabilities 800 722 Group equity 2,989 3,320 - ------------------------------------------------------------------------------------------------------------------------- Total $ 18,312 $ 17,924 -----------------------------------
See accompanying Condensed Notes to Combined Financial Statements (Unaudited). F-36
COMBINED STATEMENTS OF CASH FLOWS (Unaudited) Sprint PCS Group (millions) - ------------------------------------------------------------------ ----------------- ----------------- ---------------- Quarters Ended March 31, 2000 1999 - ------------------------------------------------------------------ ----------------- ----------------- ---------------- Operating Activities Net loss $ (513) $ (626) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 421 349 Deferred income taxes 60 64 Extraordinary items, net 3 21 Changes in assets and liabilities: Accounts receivable, net (1) (50) Inventories and other current assets (18) (69) Accounts payable and other current liabilities 53 97 Current tax benefit receivable from the FON Group (154) (265) Receivables from and payables to the FON Group, net 88 91 Noncurrent assets and liabilities, net 17 (10) Other, net (16) 26 - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Net cash used by operating activities (60) (372) - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Investing Activities Capital expenditures (693) (512) Proceeds from sale of assets 122 - Purchase of PrimeCo Hawaii - (82) - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Net cash used by investing activities (571) (594) - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Financing Activities Proceeds from long-term debt - 1,980 Payments on long-term debt (370) (1,958) Dividends paid (4) (4) Proceeds from common stock issued 30 842 Advances from the FON Group 1,014 - Other, net - (2) - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Net cash provided by financing activities 670 858 - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Increase (Decrease) in Cash and Equivalents 39 (108) Cash and Equivalents at Beginning of Period 16 173 - ------------------------------------------------------------------ --- ------------- --- ------------- -- ------------- Cash and Equivalents at End of Period $ 55 $ 65 --- ------------- -- -------------
See accompanying Condensed Notes to Combined Financial Statements (Unaudited). F-37 CONDENSED NOTES TO COMBINED FINANCIAL STATEMENTS (Unaudited) Sprint PCS Group The information in this Form 10-Q has been prepared according to Securities and Exchange Commission (SEC) rules and regulations. In our opinion, the combined interim financial statements reflect all adjustments, consisting only of normal recurring accruals, needed to fairly present the PCS Group's combined financial position, results of operations, cash flows and comprehensive loss. Certain information and footnote disclosures normally included in combined financial statements prepared according to accounting principles generally accepted in the United States have been condensed or omitted. As a result, you should read these financial statements along with Sprint Corporation's 1999 Form 10-K. Operating results for the 2000 year-to-date period do not necessarily represent the results that may be expected for the year ending December 31, 2000. - -------------------------------------------------------------------------------- 1. Merger - -------------------------------------------------------------------------------- In October 1999, Sprint announced a definitive merger agreement with WorldCom, Inc. (WorldCom). Under the agreement, each share of Sprint FON stock will be exchanged for $76 of WorldCom common stock, subject to a collar. In addition, each share of Sprint PCS stock will be exchanged for one share of a new WorldCom PCS tracking stock and 0.116025 shares of WorldCom common stock. The terms of the WorldCom PCS tracking stock will be equivalent to those of Sprint's PCS common stock and will track the performance of the company's personal communication services (PCS) business. Sprint and WorldCom shareholders have approved the merger. The merger is subject to approvals from the Federal Communications Commission (FCC), the Justice Department, various state government bodies and foreign regulatory authorities. The companies anticipate that the merger will close in the second half of 2000. - -------------------------------------------------------------------------------- 2. Basis of Combination and Presentation - -------------------------------------------------------------------------------- The PCS stock is intended to reflect the performance of Sprint's domestic wireless PCS operations. The FON stock is intended to reflect the performance of all of Sprint's other operations. The combined PCS Group financial statements, together with the combined FON Group financial statements, include all the accounts in Sprint's consolidated financial statements. The combined financial statements for each Group were prepared on a basis that management believes is reasonable and proper and include: - the combined historical balance sheets, results of operations and cash flows for each of the Groups, with all significant intragroup amounts and transactions eliminated, - an allocation of Sprint's debt, including the related effects on results of operations and cash flows, and - an allocation of corporate overhead. The PCS Group entities are commonly controlled companies and are wholly owned by Sprint. Transactions between the PCS Group and the FON Group have not been eliminated in the combined financial statements of either Group. The PCS Group combined financial statements provide PCS shareholders with financial information about the PCS Group operations. Investors in FON stock and PCS stock are Sprint shareholders and are subject to risks related to all of Sprint's businesses, assets and liabilities. Sprint retains ownership and control of the assets and operations of each Group. Financial effects of either Group that affect Sprint's results of operations or financial condition could affect the results of operations or financial position of the other Group or the market price of the other Group's stock. Net losses of either Group, and dividends or distributions on, or repurchases of, PCS stock or FON stock, will reduce Sprint funds legally available for dividends on both Groups' stock. As a result, the PCS Group combined financial statements should be read along with Sprint's consolidated financial statements and the FON Group's combined financial statements. The PCS Group combined financial statements are prepared using accounting principles generally accepted in the United States. These principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Actual results could differ from those estimates. Certain prior-year amounts have been reclassified to conform to the current-year presentation. These reclassifications had no effect on the results of operations or group equity as previously reported. F-38 - -------------------------------------------------------------------------------- 3. Income Taxes - -------------------------------------------------------------------------------- The differences that caused the PCS Group's effective income tax rates to vary from the 35% federal statutory rate for income taxes related to continuing operations were as follows: Quarters Ended March 31, ------------------------- 2000 1999 - ------------------------------------------------------- (millions) Income tax benefit at the federal statutory rate $ (279) $ (333) Effect of: State income taxes, net of federal income tax effect (17) (19) Goodwill amortization 10 7 Other, net - (2) - ------------------------------------------------------- Income tax benefit $ (286) $ (347) ------------------------- Effective income tax rate 35.9% 36.4% ------------------------- - -------------------------------------------------------------------------------- 4. Long-term Debt and Capital Lease Obligations - -------------------------------------------------------------------------------- During the 2000 first quarter, the PCS Group's notes payable and commercial paper decreased $193 million. The PCS Group used advances from the FON Group to repay the borrowings. In the 2000 first quarter, Sprint repaid, prior to scheduled maturities, $127 million of the PCS Group's notes payable to the FCC. These notes had an interest rate of 7.8%. This resulted in a $3 million after-tax extraordinary loss. - -------------------------------------------------------------------------------- 5. Group Equity - -------------------------------------------------------------------------------- Quarter Ended March 31, 2000 - ------------------------------------------------------- (millions) Beginning balance $ 3,320 Net loss (513) Dividends (4) Common stock issued 65 Other, net 121 - ------------------------------------------------------- Ending balance $ 2,989 ------------------ - -------------------------------------------------------------------------------- 6. Litigation, Claims and Assessments - -------------------------------------------------------------------------------- PCS shareholders are subject to all of the risks related to an investment in Sprint and the PCS Group, including the effects of any legal proceedings and claims against the FON Group. Various suits arising in the ordinary course of business are pending against Sprint. Management cannot predict the final outcome of these actions but believes they will not be material to the PCS Group's combined financial statements. - -------------------------------------------------------------------------------- 7. Supplemental Cash Flows Information - -------------------------------------------------------------------------------- The PCS Group's cash paid (received) for interest and income taxes was as follows: Quarters Ended March 31, ------------------------- 2000 1999 - ------------------------------------------------------- (millions) Interest (net of capitalized interest) $ 44 $ 85 ------------------------- Income taxes $ (265) $ (164) ------------------------- The PCS Group's noncash activities included the following: Quarters Ended March 31, ------------------------- 2000 1999 - ------------------------------------------------------- (millions) Common stock issued under employee stock benefit plans $ 33 $ - ------------------------- Tax benefit from stock option exercises $ 30 $ - ------------------------- Stock received for stock options exercised $ 6 $ - ------------------------- Capital lease obligations $ - $ 46 ------------------------- F-39 - -------------------------------------------------------------------------------- 8. Recently Issued Accounting Pronouncement - -------------------------------------------------------------------------------- In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101). In March 2000, the SEC issued an amendment to SAB 101 which delayed the effective date for registrants with fiscal years that begin between December 12, 1999 and March 15, 2000. The effective date for Sprint will be for the quarter ending June 30, 2000. The deferral of telecommunication service activation fees and certain related costs are specifically addressed in SAB 101 and the PCS Group is in the process of determining the impact of SAB 101 on its financial statements. Based on a preliminary analysis, SAB 101 is not expected to have a material impact on the PCS Group's combined financial statements. F-40 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Sprint PCS Group - -------------------------------------------------------------------------------- Recent Developments - -------------------------------------------------------------------------------- In October 1999, Sprint announced a definitive merger agreement with WorldCom, Inc.(WorldCom). Under the agreement, each share of Sprint FON stock will be exchanged for $76 of WorldCom common stock, subject to a collar. In addition, each share of Sprint PCS stock will be exchanged for one share of a new WorldCom PCS tracking stock and 0.116025 shares of WorldCom common stock. The terms of the WorldCom PCS tracking stock will be equivalent to those of Sprint PCS stock and will track the performance of the company's personal communication services (PCS) business. Sprint and WorldCom shareholders have approved the merger. The merger is subject to approvals from the Federal Communications Commission (FCC), the Justice Department, various state government bodies and foreign regulatory authorities. The companies anticipate that the merger will close in the second half of 2000. - -------------------------------------------------------------------------------- Sprint PCS Group - -------------------------------------------------------------------------------- The PCS Group includes Sprint's domestic wireless PCS operations. It operates the only 100% digital PCS wireless network in the United States with licenses to provide service nationwide using a single frequency and a single technology. At the end of March 2000, the PCS Group operated PCS systems in more than 300 metropolitan markets, including the 50 largest U.S. metropolitan areas. The PCS Group has licenses to serve more than 270 million people in all 50 states, Puerto Rico and the U.S. Virgin Islands. The service offered by the PCS Group and its affiliates now reaches more than 190 million people. The PCS Group provides nationwide service through: - operating its own digital network in major U.S. metropolitan areas, - affiliating with other companies, mainly in and around smaller U.S. metropolitan areas, - roaming on other providers' analog cellular networks using dual-band/dual-mode handsets, and - roaming on other providers' digital PCS networks that use code division multiple access. The wireless industry typically generates a higher number of subscriber additions and handset sales in the fourth quarter of each year compared to the remaining quarters. This is due to the use of retail distribution, which is dependent on the holiday shopping season; the timing of new products and service introductions; and aggressive marketing and sales promotions. - -------------------------------------------------------------------------------- Results of Operations - --------------------------------------------------------------------------------
Selected Operating Results --------------------------------------------------------------------- Quarters Ended March 31, Variance ---------------------------------- ------------------------------- 2000 1999 $ % - ---------------------------------------------- ---------------- ----------------- -- ------------- ----------------- (millions) Net operating revenues $ 1,177 $ 604 $ 573 94.9% - ---------------------------------------------- -- ------------- -- -------------- -- ------------- Operating expenses Costs of services and products 903 717 186 25.9% Selling, general and administrative 455 365 90 24.7% Depreciation and amortization 421 349 72 20.6% - ---------------------------------------------- -- ------------- -- -------------- -- ------------- Total operating expenses 1,779 1,431 348 24.3% - ---------------------------------------------- -- ------------- -- -------------- -- ------------- Operating loss $ (602) $ (827) $ 225 27.2% -- ------------- -- -------------- -- ------------- Operating loss before depreciation and amortization $ (181) $ (478) $ 297 62.1% -- ------------- -- -------------- -- -------------
F-41 The PCS Group markets its products through multiple distribution channels, including its own retail stores as well as other retail outlets. Equipment sales to one retail chain and the subsequent service revenues generated by sales to its customers accounted for 25% of net operating revenues in the 2000 first quarter and 28% in the 1999 first quarter. Net Operating Revenues Net operating revenues include subscriber revenues and sales of handsets and accessory equipment. Subscriber revenues consist of monthly recurring charges and usage charges. Subscriber revenues increased 113% in the 2000 first quarter mainly reflecting a 107% increase in the average number of customers. The PCS Group added 831,000 customers in the 2000 first quarter and ended the quarter with over 6.5 million customers in more than 300 metropolitan markets nationwide. Average monthly service revenue per user (ARPU) was $54 for the 2000 first quarter compared to $52 for the same 1999 period. Customer churn rates have improved from the 1999 first quarter and are currently in the low-3% range. The improvement reflects increased services and the success of several churn reduction initiatives implemented in the second half of 1999. Revenues from sales of handsets and accessories were approximately 15% of net operating revenues in the 2000 first quarter and 20% in the 1999 first quarter. As part of the PCS Group's marketing plans, handsets are normally sold at prices below the PCS Group's cost. Operating Expenses Costs of services and products mainly include handset and accessory costs, switch and cell site expenses and other network-related costs. These costs increased 26% in the 2000 first quarter from the 1999 first quarter reflecting the significant growth in customers and expanded market coverage, partly offset by a reduction in handset unit costs. Selling, general and administrative (SG&A) expense mainly includes marketing costs to promote products and services as well as salary and benefit costs. SG&A expense increased 25% in the 2000 first quarter from the 1999 first quarter reflecting an expanded workforce to support subscriber growth and increased marketing and selling costs. Acquisition costs per gross customer addition, including equipment subsidies and marketing costs, have improved from the high-$400 range in the 1999 first quarter to the high-$300 range in 2000. Lower handset unit costs and scale benefits from greater customer additions have contributed to the improvement. Cash costs per user (CCPU) consists of costs of service revenues, service delivery and other general and administrative costs. CCPU decreased more than 30% in the 2000 first quarter from the 1999 first quarter. The improvements reflect successful expense management and scale benefits resulting from the increased customer base. Depreciation and amortization expense consists mainly of depreciation of network assets and amortization of intangible assets. The intangible assets include goodwill, PCS licenses, customer base, microwave relocation costs and assembled workforce, which are being amortized over 30 months to 40 years. Depreciation and amortization expense increased 21% in the 2000 first quarter from the 1999 first quarter mainly reflecting amortization of intangible assets acquired in the Cox PCS purchase in the 1999 second quarter. It also reflects depreciation of the network assets placed in service during 2000 and 1999. - -------------------------------------------------------------------------------- Nonoperating Items - -------------------------------------------------------------------------------- Interest Expense The PCS Group's effective interest rate on long-term debt was 8.6% for both the 2000 and 1999 first quarters. Interest costs on short-term borrowings classified as long-term debt and intergroup borrowings have been excluded so as not to distort the PCS Group's effective interest rate on long-term debt. Interest expense on borrowings incurred by Sprint and allocated to the PCS Group is based on rates the PCS Group would be able to obtain from third parties as a direct or indirect wholly owned Sprint subsidiary, but without the benefit of any guaranty by Sprint or any member of the FON Group. The PCS Group's interest expense includes $45 million in the 2000 first quarter and $30 million in the 1999 first quarter resulting from the difference between Sprint's actual interest rates and the rates charged to the PCS Group. These costs are reflected in the effective interest rates above. Other Income, Net Other income mainly includes a gain on the sale of customers and associated network infrastructure of $28 million in the 2000 first quarter. Other income F-42 for the 1999 first quarter primarily includes minority interest in Cox PCS of $20 million. Income Taxes See Note 3 of Condensed Notes to Combined Financial Statements for the differences that caused the effective income tax rates to vary from the federal statutory rate for income taxes related to continuing operations. Extraordinary Items, Net In the 2000 first quarter, Sprint repaid, prior to scheduled maturities, $127 million of the PCS Group's notes payable to the FCC. These notes had an interest rate of 7.8%. This resulted in a $3 million after-tax extraordinary loss. In the 1999 first quarter, Sprint terminated some of the PCS Group's revolving credit facilities and repaid, prior to scheduled maturities, the related outstanding balance of $1.7 billion. These facilities had a weighted average interest rate equal to the London Inter-Bank Offered Rate plus 40 basis points. This resulted in a $21 million after-tax extraordinary loss. - -------------------------------------------------------------------------------- Financial Condition - -------------------------------------------------------------------------------- March 31, December 31, 2000 1999 - ------------------------------------------------------ (millions) Combined assets $ 18,312 $ 17,924 -------------------------------- Net property, plant and equipment increased $288 million since year-end mainly reflecting capital expenditures to support the PCS network buildout and expansion, partly offset by year-to-date depreciation. Sprint's tax sharing agreement provides for the allocation of income taxes between the FON Group and the PCS Group. The current tax benefit receivable from the FON Group increased $154 million reflecting the PCS Group's 2000 year-to-date current income tax benefit recognized, offset by payments from the FON Group during the period. - -------------------------------------------------------------------------------- Liquidity and Capital Resources - -------------------------------------------------------------------------------- Operating Activities Quarters Ended March 31, ------------------------------- 2000 1999 - ------------------------------------------------------ (millions) Cash flows used by operating activities $ (60) $ (372) ------------------------------- Cash flows used by operating activities decreased $312 million in the 2000 first quarter primarily reflecting decreased operating losses for the PCS Group. Investing Activities Quarters Ended March 31, ------------------------------- 2000 1999 - ------------------------------------------------------ (millions) Cash flows used by investing activities $ (571) $ (594) ------------------------------- Capital expenditures, which are the PCS Group's largest investing activity, totaled $693 million in the 2000 first quarter, compared to $512 million in the 1999 first quarter. Capital expenditures in both years were mainly for the buildout and expansion of the PCS network. In the 2000 first quarter, the PCS Group sold a portion of its customer base and the associated network infrastructure to an affiliate for $122 million. In the 1999 first quarter, the PCS Group purchased PCS operations in Hawaii for $82 million. Financing Activities Quarters Ended March 31, ------------------------------- 2000 1999 - ------------------------------------------------------ (millions) Cash flows provided by financing activities $ 670 $ 858 ------------------------------- In the 2000 first quarter, financing activities reflect advances from the FON Group used mainly to fund capital expenditures and repay existing debt. In the 1999 first quarter, the PCS Group received $842 million of net proceeds from PCS common stock issuances. The proceeds were used mainly to fund capital requirements and operating losses. Capital Requirements The PCS Group's 2000 investing activities, mainly consisting of capital expenditures and investments in affiliates, are expected to be between $3.1 and $3.3 billion. Additional funds will be required to fund expected operating losses, working capital and debt service requirements of the PCS Group. Investments in affiliates are expected to require cash of $200 million. PCS preferred stock dividend payments are expected to total $15 million in 2000, including payments to the FON Group for its preferred intergroup interest. F-43 Liquidity See Sprint's "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity" for a discussion of liquidity. - -------------------------------------------------------------------------------- Financial Strategies - -------------------------------------------------------------------------------- Financial strategies are determined by Sprint on a centralized basis. See Sprint's "Management's Discussion and Analysis of Financial Condition and Results of Operations--Financial Strategies." - -------------------------------------------------------------------------------- Forward-looking Information - -------------------------------------------------------------------------------- See Sprint's "Management's Discussion and Analysis of Financial Condition and Results of Operations--Forward-looking Information" for a discussion of forward-looking information. F-44 UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS The following unaudited pro forma condensed combined financial statements give effect to the merger of WorldCom and Sprint under the purchase method of accounting. These pro forma statements are presented for illustrative purposes only. The pro forma adjustments are based upon available information and assumptions that management believes are reasonable. The pro forma condensed combined financial statements do not purport to represent what the results of operations or financial position of WorldCom would actually have been if the merger had in fact occurred on such dates, nor do they purport to project the results of operations or financial position of WorldCom for any future period or as of any date, respectively. Under the purchase method of accounting, tangible and identifiable intangible assets acquired and liabilities assumed are recorded at their estimated fair values. The excess of the purchase price, including estimated fees and expenses related to the merger, over the net assets acquired is classified as goodwill on the accompanying unaudited pro forma condensed combined balance sheet. The estimated fair values and useful lives of assets acquired and liabilities assumed are based on a preliminary valuation and are subject to final valuation adjustments which may cause some of the intangibles to be amortized over a shorter life than the goodwill amortization period of 20 years. WorldCom intends to undertake a study to determine the allocation of the total purchase price to the various assets acquired, including in-process research and development, and the liabilities assumed. WorldCom's management currently believes that amounts allocated to goodwill will be amortized over a life not to exceed 25 years while other intangibles may be amortized over shorter periods, which would reduce net income reported by WorldCom. The unaudited pro forma condensed combined balance sheet as of March 31, 2000 was prepared by combining the balance sheet at March 31, 2000 for WorldCom with the balance sheet at March 31, 2000 for Sprint, giving effect to the merger as though it had been completed on March 31, 2000. The unaudited pro forma condensed combined statement of operations for the three months ended March 31, 2000 and for the year ended December 31, 1999, were prepared by combining WorldCom's statement of operations for the three months ended March 31, 2000 and for the year ended December 31, 1999, respectively, with Sprint's statement of operations for the three months ended March 31, 2000 and for the year ended December 31, 1999, respectively, giving effect to the merger as though it had occurred on January 1, 1999. This unaudited pro forma condensed combined financial data does not give effect to any restructuring costs or to any potential cost savings or other operating efficiencies that could result from the Sprint merger. The consolidated historical financial statements of Sprint as of and for the three months ended March 31, 2000, are derived from unaudited consolidated financial statements contained in this Current Report on Form 8-K. The consolidated historical finanical statements of Sprint for the year ended December 31, 1999 are derived from the audited financial statements contained in WorldCom's Current Report on Form 8-K-2 dated April 11, 2000, which is incorporated by reference herein. The consolidated financial statements of WorldCom for the three months ended March 31, 2000 and the year ended December 31, 1999, are contained in WorldCom's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2000 and WorldCom's Annual Report on Form 10-K for the year ended December 31, 1999, respectively, which reports are incorporated by reference herein. You should read the financial information in this section along with WorldCom's and Sprint's historical consolidated financial statements and accompanying notes incorporated by reference or contained in this Current Report on Form 8-K. F-45 UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET (1) As of March 31, 2000 (In millions)
WORLDCOM SPRINT WORLDCOM HISTORICAL HISTORICAL PRO FORMA PRO FORMA (2) (2) ADJUSTMENTS COMBINED ---------- ---------- ----------- --------- Current assets ..................................... $11,110 $ 4,988 $ -- $ 16,098 Property, plant and equipment, net ................. 30,909 22,432 -- 53,341 Goodwill and PCS licenses, net ..................... 42,865 8,406(3) (8,406)(3) 150,467 107,602 (3) Other intangibles, net ............................. 4,304 1,123 -- 5,427 Other assets ....................................... 5,324 1,765 -- 7,089 ------- ------- -------- -------- Total assets ............................. $94,512 $38,714 $ 99,196 $232,422 ======= ======= ======== ======== Current liabilities ................................ $17,654 $ 5,992 $ -- $ 23,646 Long-term debt ..................................... 13,514 15,099 -- 28,613 Other liabilities .................................. 6,612 3,390 -- 10,002 Minority interests ................................. 2,882 -- -- 2,882 Mandatorily redeemable preferred stock ............. 798 10 (10)(4) 808 10 (5) Shareholders' equity Preferred stock ............................... -- -- -- -- Common stock .................................. 29 -- 15 (5) 44 Class A common stock .......................... -- 216 (216)(4) -- FON common stock .............................. -- 1,581 (1,581)(4) -- PCS common stock .............................. -- 915 (915)(4) 958 958 (5) PCS preferred stock ........................... -- 247 (247)(4) 247 247 (5) Paid in capital .................................... 52,340 8,756 (8,756)(4) 164,539 112,199 (5) Retained earnings .................................. 356 2,458 (2,458)(4) 356 Other .............................................. 327 50 (50)(4) 327 -- (5) ------- ------- -------- -------- Total shareholders' equity ............... 53,052 14,223 99,196 166,471 ------- ------- -------- -------- Total liabilities and shareholders' equity $94,512 $38,714 $ 99,196 $232,422 ======= ======= ======== ========
The accompanying notes are an integral part of this statement. F-46 UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (1) For the Three Months Ended March 31, 2000 (In millions, except per share data)
SPRINT SPRINT WORLDCOM WORLDCOM FON WORLDCOM PCS PCS HISTORICAL HISTORICAL PRO FORMA PRO FORMA HISTORICAL PRO FORMA PRO FORMA (2) (2) ADJUSTMENTS COMBINED (2) ADJUSTMENTS COMBINED ---------- ---------- ----------- --------- ---------- ----------- --------- Revenues $ 9,978 $ 4,397 $ (133)(6) $ 14,242 $1,177 $ -- $ 1,177 Operating expenses: Line costs 4,092 2,031 (133)(6) 5,990 903 -- 903 Selling, general and administrative 2,299 1,063 -- 3,362 455 -- 455 Goodwill and PCS licenses amortization 311 10 (10)(9) 1,052 47 (47)(9) 604 741 (8) 604 (8) Depreciation and other amortization 836 535 -- 1,371 374 -- 374 ------- ------- ------- -------- ------ ------- ------- Operating income (loss) 2,440 758 (731) 2,467 (602) (557) (1,159) Other income (expense): Interest expense (218) (39) -- (257) (220) -- (220) Other 111 7 -- 118 26 -- 26 ------- ------- ------- -------- ------ ------- ------- Income (loss) before income taxes and minority interests 2,333 726 (731) 2,328 (796) (557) (1,353) Provision (benefit) for income taxes 953 281 -- 1,234 (286) -- (286) ------- ------- ------- -------- ------ ------- ------- Income (loss) before minority interests 1,380 445 (731) 1,094 (510) (557) (1,067) Minority interests (79) -- -- (79) -- -- -- ------- ------- ------- -------- ------ ------- ------- Income (loss) before dis- continued operations and extraordinary items 1,301 445 (731) 1,015 (510) (557) (1,067) Distributions on subsidiary trust mandatorily redeemable preferred securities 16 -- -- 16 -- -- -- Preferred dividend requirements 1 (2) -- (1) 4 -- 4 ------- ------- ------- -------- ------ ------- ------- Net income (loss) applicable to common shareholders before discontinued operations and extra- ordinary items $ 1,284 $ 447 $ (731) $ 1,000 $ (514) $ (557) $(1,071) ======= ======= ======= ======== ====== ======= ======= Weighted average number of shares issued and outstanding: Basic: 2,852 876 1,508 4,360 956 956 956 ======= ======= ======= ======== ====== ======= ======= Diluted 2,921 895 1,538 4,459 956 956 956 ======= ======= ======= ======== ====== ======= ======= Earnings (loss) per share (10): Basic $ 0.45 $ 0.51 $ 0.23 $(0.54) $ (1.12) ======= ======= ======== ====== ======= Diluted $ 0.44 $ 0.50 $ 0.22 $(0.54) $ (1.12) ======= ======= ======== ====== ======= INTERGROUP WORLDCOM ELIMINATIONS CONSOLIDATED ------------ ------------ Revenues $ (95)(7) $ 15,324 Operating expenses: Line costs (95)(7) 6,798 Selling, general and administrative -- 3,817 Goodwill and PCS licenses amortization -- 1,656 Depreciation and other amortization -- 1,745 ------- -------- Operating income (loss) -- 1,308 Other income (expense): Interest expense 5 (7) (472) Other (5)(7) 139 ------- -------- Income (loss) before income taxes and minority interests -- 975 Provision (benefit) for income taxes -- 948 ------- -------- Income (loss) before minority interests -- 27 Minority interests -- (79) ------- -------- Income (loss) before dis- continued operations and extraordinary items -- (52) Distributions on subsidiary trust mandatorily redeemable preferred securities -- 16 Preferred dividend requirements -- 3 ------- -------- Net income (loss) applicable to common shareholders before discontinued operations and extra- ordinary items $ -- $ (71) ======= ======== Weighted average number of shares issued and outstanding: Basic: Diluted Earnings (loss) per share (10): Basic Diluted
The accompanying notes are an integral part of this statement. F-47 UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (1) For the Year Ended December 31, 1999 (In millions, except per share data)
SPRINT SPRINT WORLDCOM WORLDCOM FON WORLDCOM PCS PCS HISTORICAL HISTORICAL PRO FORMA PRO FORMA HISTORICAL PRO FORMA PRO FORMA (2) (2) ADJUSTMENTS COMBINED (2) ADJUSTMENTS COMBINED ---------- ---------- ----------- --------- ---------- ----------- --------- Revenues $ 37,120 $ 17,016 $ (536)(6) $ 53,600 $ 3,180 $ -- $ 3,180 Operating expenses: Line costs 15,951 7,724 (536)(6) 23,139 3,150 -- 3,150 Selling, general and administrative 8,935 4,233 -- 13,168 1,744 -- 1,744 Goodwill and PCS licenses amortization 1,207 42 (42)(9) 4,172 184 (184)(9) 2,416 2,965(8) 2,416 (8) Depreciation and other amortization 3,147 2,087 -- 5,234 1,339 -- 1,339 In-process research and development and other charges (8) -- -- (8) -- -- -- -------- -------- ------- -------- ------- ------- ------- Operating income (loss) 7,888 2,930 (2,923) 7,895 (3,237) (2,232) (5,469) Other income (expense): Interest expense (966) (182) -- (1,148) (698) -- (698) Other 242 49 -- 291 46 -- 46 -------- -------- ------- -------- ------- ------- ------- Income (loss) before income taxes and minority interests 7,164 2,797 (2,923) 7,038 (3,889) (2,232) (6,121) Provision (benefit) for income taxes 2,965 1,061 -- 4,026 (1,388) -- (1,388) -------- -------- ------- -------- ------- ------- ------- Income (loss) before minority interests 4,199 1,736 (2,923) 3,012 (2,501) (2,232) (4,733) Minority interests 186 -- -- 186 (20) -- (20) -------- -------- ------- -------- ------- ------- ------- Income (loss) before dis- continued operations and extraordinary items 4,013 1,736 (2,923) 2,826 (2,481) (2,232) (4,713) Distributions on subsidiary trust mandatorily redeemable preferred securities 63 -- -- 63 -- -- -- Preferred dividend requirements 9 (7) -- 2 15 -- 15 -------- -------- ------- -------- ------- ------- ------- Net income (loss) applicable to common shareholders before discontinued operations and extra- ordinary items $ 3,941 $ 1,743 $(2,923) $ 2,761 $(2,496) $(2,232) $(4,728) ======== ======== ======= ======== ======= ======= ======= Weighted average number of shares issued and outstanding: Basic: 2,821 868 1,492 4,313 920 920 920 ======== ======== ======= ======== ======= ======= ======= Diluted 2,925 887 1,522 4,447 920 920 920 ======== ======== ======= ======== ======= ======= ======= Earnings (loss) per share (10): Basic $ 1.40 $ 2.01 $ 0.64 $ (2.71) $ (5.14) ======== ======== ======== ======= ======= Diluted $ 1.35 $ 1.97 $ 0.62 $ (2.71) $ (5.14) ======== ======== ======== ======= ======= INTERGROUP WORLDCOM ELIMINATIONS CONSOLIDATED ------------ ------------ Revenues $ (268)(7) $ 56,512 Operating expenses: Line costs (268)(7) 26,021 Selling, general and administrative -- 14,912 Goodwill and PCS licenses amortization -- 6,588 Depreciation and other amortization -- 6,573 In-process research and development and other charges -- (8) ------- -------- Operating income (loss) -- 2,426 Other income (expense): Interest expense 20(7) (1,826) Other (20)(7) 317 ------- -------- Income (loss) before income taxes and minority interests -- 917 Provision (benefit) for income taxes -- 2,638 ------- -------- Income (loss) before minority interests -- (1,721) Minority interests -- 166 ------- -------- Income (loss) before dis- continued operations and extraordinary items -- (1,887) Distributions on subsidiary trust mandatorily redeemable preferred securities -- 63 Preferred dividend requirements -- 17 ------- -------- Net income (loss) applicable to common shareholders before discontinued operations and extra- ordinary items $ -- $ (1,967) ======= ======== Weighted average number of shares issued and outstanding: Basic: Diluted Earnings (loss) per share (10): Basic Diluted
The accompanying notes are an integral part of this statement. F-48 Notes to Unaudited Pro Forma Condensed Combined Financial Statements 1. The unaudited pro forma financial data do not give effect to any restructuring costs or to any potential cost savings or other operating efficiencies that could result from the merger. WorldCom is in the process of developing its plan to integrate the operations of Sprint which may include exit costs. As a result of this plan, a charge, or increase to purchase cost, which may be material but which cannot be quantified at the date of this Current Report on Form 8-K, is expected to be recognized in the period in which such exit plan has been approved by the appropriate level of management. Furthermore, the unaudited pro forma financial data do not reflect any expense of intangible assets attributable to the value of any in-process research and development projects of Sprint at the time of the merger. However, WorldCom intends to undertake a study to determine the allocation of the total purchase price to the various assets acquired, including in-process research and development, and the liabilities assumed. To the extent that a portion of the purchase price is allocated to in-process research and development projects of Sprint, a charge would be recognized in the period in which the merger occurs. The unaudited pro forma financial data are not necessarily indicative of the operating results or financial position that would have occurred had the merger been completed at the dates indicated, nor are they necessarily indicative of future operating results or financial position. The purchase accounting adjustments made in connection with the development of the unaudited pro forma condensed combined financial statements are preliminary and have been made solely for purposes of developing such pro forma financial information. 2. These columns represent historical results of operations and financial position. In November 1998, Sprint stockholders approved the formation of the Sprint FON Group and the Sprint PCS Group and the creation of the Sprint FON common stock and the Sprint PCS common stock. The Sprint PCS common stock was designed to reflect the performance of Sprint's domestic wireless personal communication services (PCS) operations. The Sprint FON common stock was designed to reflect the performance of all other Sprint operations. The following table presents a reconciliation of Sprint's consolidated results of operations for the three months ended March 31, 2000 (in millions):
SPRINT SPRINT FON PCS INTERGROUP SPRINT GROUP GROUP ELIMINATIONS CONSOLIDATED ------- -------- ------------ ------------ Revenues $ 4,397 $ 1,177 $(95) $ 5,479 Line costs 2,031 903 (95) 2,839 Selling, general and administrative 1,063 455 -- 1,518 Goodwill and PCS licenses amortization 10 47 -- 57 Depreciation and other amortization 535 374 -- 909 ------- ------- ---- ------- Operating income (loss) 758 (602) -- 156 ------- ------- ---- ------- Other income (expense): Interest expense (39) (220) 5 (254) Other 7 26 (5) 28 ------- ------- ---- ------- Income (loss) before income taxes 726 (796) -- (70) Provision (benefit) for income taxes 281 (286) -- (5) ------- ------- ---- ------- Income (loss) before discontinued operations and extraordinary items 445 (510) -- (65) Preferred dividends (2) 4 -- 2 ------- ------- ---- ------- Net income (loss) applicable to common shareholders before discontinued operations and extraordinary items $ 447 $ (514) $-- $ (67) ======= ======= ==== =======
F-49 The following table presents a reconciliation of Sprint's consolidated results of operations for the year ended December 31, 1999 (in millions):
SPRINT SPRINT FON PCS INTERGROUP SPRINT GROUP GROUP ELIMINATIONS CONSOLIDATED ------- -------- ------------ ------------ Revenues $ 17,016 $ 3,180 $(268) $ 19,928 Line costs 7,724 3,150 (268) 10,606 Selling, general and administrative 4,233 1,744 -- 5,977 Goodwill and PCS licenses amortization 42 184 -- 226 Depreciation and other amortization 2,087 1,339 -- 3,426 -------- ------- ----- -------- Operating income (loss) 2,930 (3,237) -- (307) -------- ------- ----- -------- Other income (expense): Interest expense (182) (698) 20 (860) Other 49 46 (20) 75 -------- ------- ----- -------- Income (loss) before income taxes and minority interests 2,797 (3,889) -- (1,092) Provision (benefit) for income taxes 1,061 (1,388) -- (327) Minority interests -- 20 -- 20 -------- ------- ----- -------- Income (loss) before discontinued operations and extraordinary items 1,736 (2,481) -- (745) Preferred dividends (7) 15 -- 8 -------- ------- ----- -------- Net income (loss) applicable to common shareholders before discontinued operations and extraordinary items $ 1,743 $(2,496) $-- $ (753) ======== ======= ===== ========
3. This adjustment reflects the excess of consideration over net assets acquired. The following is a calculation (in millions, except per share data): Sprint FON common stock outstanding at March 31, 2000 ....................... 790 Shares issuable upon conversion of Sprint FT/DT class A stock outstanding at March 31, 2000 (represents the right to one share of Sprint series 3 FON common stock) ................................. 86 Shares issuable upon conversion of Sprint first and second series preferred stock ............................................................ 2 --------- Sprint FON common stock assumed outstanding at March 31, 2000 ....................................................................... 878 Assumed FON exchange ratio per share ........................................ 1.5960 --------- WorldCom group common stock assumed to be issuable for Sprint FON common stock ............................................................... 1,401 --------- Sprint PCS common stock outstanding at March 31, 2000 915 Shares issuable upon conversion of Sprint FT/DT class A stock outstanding at March 31, 2000 (represents the right to one- half share of one share of Sprint series 3 PCS common stock) ............... 43 Shares issuable upon conversion of Sprint seventh series preferred stock ............................................................ 16 Shares issuable upon conversion of Sprint first and second series preferred stock ............................................................ 1 --------- Sprint PCS common stock assumed outstanding at March 31, 2000 ............... 975 PCS exchange ratio per share ................................................ 0.116025 --------- WorldCom group common stock assumed to be issuable for Sprint PCS common stock ............................................................... 113 --------- Total WorldCom group common stock assumed to be issuable .................... 1,514
F-50 WorldCom group common stock assumed average price based on the WorldCom Common Stock average closing price before and after the merger was announced ................................................... $ 47.6181 --------- $ 72,094 Fair value of FON options ................................................... 2,600 --------- 74,694 --------- Total WorldCom PCS group common stock assumed to be issuable ................ 975 WorldCom PCS group common stock assumed average price based on the average closing price of Sprint series 1 PCS common stock before and after the merger was announced .................................. $ 37.235 --------- $ 36,304 Fair value of PCS options ................................................... 2,171 --------- 38,475 Estimated transaction costs ................................................. 250 --------- Total consideration ......................................................... 113,419 Elimination of Sprint's historical goodwill and PCS licenses at March 31, 2000 ............................................................. 8,406 Historical net book value at March 31, 2000 of Sprint net assets acquired ............................................................ (14,223) --------- Excess of consideration over net assets acquired ............................ $ 107,602 =========
The determination of the fair value for Sprint capital stock has been based upon the assumed FON exchange ratio. The actual FON exchange ratio may vary as described in Current Report on Form 8-K-1 dated April 11, 2000 (filed April 11, 2000)(File No. 0-11258) and incorporated by reference in this Current Report Form 8-K. For securities other than the Sprint FON common stock and the Sprint PCS common stock, their fair values were determined based upon the securities into which they convert. The total consideration will be allocated to the assets and liabilities of Sprint based on their estimated fair values. The excess of consideration over the historical book value of Sprint's net assets acquired has been preliminarily allocated to goodwill. A final allocation of the purchase price to the assets acquired and liabilities assumed of Sprint is dependent upon valuations and studies that have not progressed to a stage where there is sufficient information to make such an allocation in the accompanying pro forma financial information. These valuations are expected to be completed around the effective date of the merger. WorldCom's management believes the consideration in excess of the historical book value of Sprint's net assets acquired primarily comprises goodwill and other intangible assets. To the extent that a portion of the purchase price is allocated to in-process research and development projects for which technological feasibility has not been established and the technology has no future alternative use, a charge would be recognized in the period in which the merger occurs (See Note 1). Additionally, the merger agreement provides that, in several circumstances, WorldCom or Sprint may be required to pay the other party a termination fee of $2.5 billion. If such a payment is made it would be reflected in the financial statements in the period in which such an event occurs. Concurrent with the merger agreement the companies have also entered into various commercial agreements enabling Sprint to purchase WorldCom's international communications products and services, providing for the purchase by the parties of local access and transport services from each other and allowing WorldCom to offer Sprint's PCS services. The accounting for those relationships will be reflected in the operations of the respective company when the services are provided and disclosed, if material, in the footnotes to the financial statements. Before the execution of the merger agreement, Sprint entered into contingency employment and non-compete agreements with certain key employees that provide various benefits, including compensation payments if employment is involuntarily terminated following a change of control. A change of control is deemed to occur if a third party acquires 20% or more of the outstanding voting stock of Sprint or if there is a change of a majority of the Sprint board of directors within a two-year period. Amounts contingently payable under these agreements not currently reflected in the pro forma data could approximate $100 million. Should these amounts become payable, the amounts would be included in the allocation of the purchase price. F-51 4. These adjustments represent the elimination of Sprint's shareholders' equity accounts and the Sprint first series preferred stock and the Sprint second series preferred stock. 5. These adjustments represent the issuance of: (a) approximately 1,514 million shares of WorldCom group common stock at an assumed FON exchange ratio of 1.5960 shares of WorldCom group common stock for each share of Sprint FON common stock outstanding and each share of Sprint FT/DT class A stock outstanding, 0.116025 shares of WorldCom group common stock for each share of Sprint PCS common stock outstanding and 0.0580125 shares of WorldCom group common stock for each share of Sprint FT/DT class A stock outstanding. The actual FON exchange ratio may vary as described in WorldCom's Current Report on Form 8-K-1 dated April 11, 2000 (filed April 11, 2000) (File No. 0-11258) and incorporated by reference in this Current Report on Form 8-K. (b) approximately 958 million shares of WorldCom PCS group common stock for the shares of Sprint PCS common stock outstanding and one-half of a share of WorldCom PCS group common stock for each share of Sprint FT/DT class A stock outstanding. (c) approximately 95 shares of WorldCom series 5 preferred stock for the shares of Sprint fifth series preferred stock outstanding. (d) approximately 247,000 shares of WorldCom series 7 preferred stock for the shares of Sprint seventh series preferred stock outstanding. 6. These estimated adjustments eliminate the revenues and corresponding line costs attributable to the intercompany transactions between WorldCom and Sprint. 7. These adjustments eliminate the intergroup transactions between Sprint's FON and PCS groups. 8. This entry reflects the adjustment to amortization for the effect of the excess of consideration over net assets acquired in the merger. For purposes of the unaudited pro forma condensed combined financial statements, the excess consideration has been amortized over an estimated life of 20 years. WorldCom's management currently believes that amounts allocated to goodwill will be amortized over a life not to exceed 25 years while other intangible assets may be amortized over shorter periods, consequently reducing net income reported by WorldCom. Assuming an estimated useful life of 10 years, each $1 billion of consideration allocated to intangible assets other than goodwill would have the effect of decreasing net income by approximately $12 million annually. A final determination of the lives attributable to the intangible assets has not yet been made (See Note 1). As discussed in Note 3, a portion of the excess consideration may be allocated to in-process research and development projects. To the extent amounts are allocated to in-process research and development projects, pro forma amortization expense would be ratably reduced accordingly. For example, if $500 million were allocated to in-process research and development projects, it would have the effect of increasing net income in subsequent periods by approximately $25 million. Excess consideration and the related amortization expense was allocated between Sprint's FON and PCS groups based upon the amount of consideration to be issued to each group and their respective net assets at March 31, 2000. Additionally, since the value of WorldCom group common stock to be exchanged for Sprint FON common stock is subject to a collar, the final determination of the value of WorldCom group common stock to be exchanged may not be known until completion of the merger. However, any impact on the total consideration exchanged for the shares of Sprint FON common stock due to a movement of the WorldCom common stock price outside the collar described below is not expected to significantly impact the purchase price. For purposes of the unaudited pro forma condensed combined financial statements, the total consideration and related amortization is based upon a value of $76.00 per share for each share of Sprint FON common stock exchanged, which represents the value of the WorldCom group common stock to be exchanged if the average closing price of WorldCom common stock is greater than $41.4350 and less than $53.9007 before the completion of merger. If the average closing price per share of WorldCom common stock equals or exceeds $53.9007, the FON exchange ratio will be 1.4100; and if it equals or is less than $41.4350, the FON exchange ratio will be 1.8342. 9. These entries represent the estimated elimination of Sprint's historical goodwill and PCS licenses amortization. 10. Pro forma per share data are based on the number of shares of WorldCom common and common equivalent shares that would have been outstanding had the merger occurred on January 1, 1999. F-52 EXHIBIT INDEX Exhibit No. Description of Exhibit - ----------- ---------------------- 2.1 Amended and Restated Agreement and Plan of Merger dated as of March 8, 2000, between WorldCom, Inc. and Sprint Corporation filed as Annex 1 to the Proxy Statement/Prospectus dated March 9, 2000 included in WorldCom's Registration statement on Form S-4, Registration No. 333-90421 and incorporated herein by reference* 99.1 WorldCom, Inc. financial statements and related notes as of and for the three months ended March 31, 2000 (incorporated herein by reference to WorldCom's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2000 (File No. 0-11258)) 99.2 WorldCom, Inc. financial statements and related notes as of and for the year ended December 31, 1999 (incorporated herein by reference to WorldCom's Annual Report on Form 10-K for the period ended December 31, 1999 (File No. 0-11258)) 99.3 Sprint Corporation financial statements and related notes as of and for the year ended December 31, 1999 (incorporated herein by reference to WorldCom's Current Report on Form 8-K-2 dated April 11, 2000 (File No. 0-11258)) * The Registrant hereby agrees to furnish supplementally a copy of omitted schedules to this Agreement to the Securities and Exchange Commission upon its request. 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